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EX-31.2 - EX-31.2 - HINES REAL ESTATE INVESTMENT TRUST INC | h83502exv31w2.htm |
EX-31.1 - EX-31.1 - HINES REAL ESTATE INVESTMENT TRUST INC | h83502exv31w1.htm |
EX-32.1 - EX-32.1 - HINES REAL ESTATE INVESTMENT TRUST INC | h83502exv32w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - HINES REAL ESTATE INVESTMENT TRUST INC | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
or
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: 000-50805
Hines Real Estate Investment Trust, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland (State or Other Jurisdiction of Incorporation or Organization) |
20-0138854 (I.R.S. Employer Identification No.) |
|
2800 Post Oak Boulevard Suite 5000 Houston, Texas (Address of principal executive offices) |
77056-6118 (Zip code) |
Registrants telephone number, including area code:
(888) 220-6121
(888) 220-6121
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes 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 accelerated filer and
large accelerated filer 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 3, 2011, 226.0 million shares of the registrants common stock were outstanding.
TABLE OF CONTENTS
SIGNATURES
Certification
Certification
Certification of CEO & CFO pursuant to Section 906
Certification
Certification
Certification of CEO & CFO pursuant to Section 906
1
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands, except per share amounts) |
||||||||
ASSETS |
||||||||
Investment property, net |
$ | 1,965,951 | $ | 2,213,212 | ||||
Investments in unconsolidated entities |
348,215 | 373,798 | ||||||
Cash and cash equivalents |
147,074 | 64,592 | ||||||
Restricted cash |
110,135 | 3,852 | ||||||
Distributions receivable |
2,487 | 2,236 | ||||||
Tenant and other receivables |
66,568 | 53,469 | ||||||
Intangible lease assets, net |
182,567 | 220,981 | ||||||
Deferred leasing costs, net |
107,591 | 101,467 | ||||||
Deferred financing costs, net |
7,914 | 7,401 | ||||||
Other assets |
4,832 | 109,008 | ||||||
TOTAL ASSETS |
$ | 2,943,334 | $ | 3,150,016 | ||||
LIABILITIES: |
||||||||
Accounts payable and accrued expenses |
$ | 63,081 | $ | 81,971 | ||||
Due to affiliates |
5,507 | 6,171 | ||||||
Intangible lease liabilities, net |
55,520 | 72,465 | ||||||
Other liabilities |
14,901 | 17,661 | ||||||
Interest rate swap contracts |
89,101 | 85,301 | ||||||
Participation interest liability |
69,152 | 73,333 | ||||||
Distributions payable |
29,460 | 29,426 | ||||||
Notes payable |
1,327,966 | 1,521,544 | ||||||
Total liabilities |
1,654,688 | 1,887,872 | ||||||
Commitments and contingencies (Note 12) |
| | ||||||
EQUITY: |
||||||||
Preferred shares, $.001 par value;
500,000 preferred shares authorized,
none issued or outstanding as of June
30, 2011 and December 31, 2010 |
| | ||||||
Common shares, $.001 par value;
1,500,000 common shares authorized as
of June 30, 2011 and December 31,
2010; 224,764 and 222,795 common
shares issued and outstanding as of
June 30, 2011 and December 31, 2010,
respectively |
225 | 223 | ||||||
Additional paid-in capital |
1,553,612 | 1,590,488 | ||||||
Retained deficit |
(271,579 | ) | (340,610 | ) | ||||
Accumulated other comprehensive income |
6,388 | 12,043 | ||||||
Shareholders equity |
1,288,646 | 1,262,144 | ||||||
Noncontrolling interests |
| | ||||||
Total equity |
1,288,646 | 1,262,144 | ||||||
TOTAL
LIABILITIES AND EQUITY |
$ | 2,943,334 | $ | 3,150,016 | ||||
See notes to the condensed consolidated financial statements.
2
Table of Contents
HINES REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three and Six Months Ended June 30, 2011 and 2010
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three and Six Months Ended June 30, 2011 and 2010
(UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Revenues: |
||||||||||||||||
Rental revenue |
$ | 65,783 | $ | 63,743 | $ | 129,276 | $ | 131,989 | ||||||||
Other revenue |
5,857 | 5,494 | 11,271 | 11,307 | ||||||||||||
Total revenues |
71,640 | 69,237 | 140,547 | 143,296 | ||||||||||||
Expenses: |
||||||||||||||||
Property operating expenses |
19,277 | 19,536 | 38,647 | 40,007 | ||||||||||||
Real property taxes |
7,506 | 6,775 | 16,438 | 15,643 | ||||||||||||
Property management fees |
1,651 | 1,602 | 3,204 | 3,226 | ||||||||||||
Depreciation and amortization |
24,142 | 25,187 | 47,548 | 50,737 | ||||||||||||
Asset management and acquisition fees |
(4,312 | ) | 7,623 | 3,331 | 15,278 | |||||||||||
General and administrative |
1,865 | 2,426 | 3,478 | 3,789 | ||||||||||||
Total expenses |
50,129 | 63,149 | 112,646 | 128,680 | ||||||||||||
Income from continuing operations before other income (expenses),
provision for income taxes and equity in earnings (losses) of
unconsolidated entities, net |
21,511 | 6,088 | 27,901 | 14,616 | ||||||||||||
Other income (expenses): |
||||||||||||||||
Loss on derivative instruments, net |
(8,996 | ) | (24,374 | ) | (3,800 | ) | (30,227 | ) | ||||||||
Interest expense |
(20,394 | ) | (20,260 | ) | (40,285 | ) | (40,491 | ) | ||||||||
Interest income |
88 | 63 | 143 | 144 | ||||||||||||
Loss from continuing operations before provision for income taxes and
equity in earnings (losses) of unconsolidated entities, net |
(7,791 | ) | (38,483 | ) | (16,041 | ) | (55,958 | ) | ||||||||
Provision for income taxes |
(136 | ) | (111 | ) | (218 | ) | (240 | ) | ||||||||
Equity in earnings (losses) of unconsolidated entities, net |
(19,299 | ) | 11,297 | (21,126 | ) | 9,579 | ||||||||||
Loss from continuing operations |
(27,226 | ) | (27,297 | ) | (37,385 | ) | (46,619 | ) | ||||||||
Income from discontinued operations, net of taxes |
107,908 | 18,878 | 108,784 | 25,264 | ||||||||||||
Net income (loss) |
80,682 | (8,419 | ) | 71,399 | (21,355 | ) | ||||||||||
Less: Net income attributable to noncontrolling interests |
(1,217 | ) | (1,205 | ) | (2,368 | ) | (2,334 | ) | ||||||||
Net income (loss) attributable to common shareholders |
$ | 79,465 | $ | (9,624 | ) | $ | 69,031 | $ | (23,689 | ) | ||||||
Basic and diluted loss per common share |
$ | 0.35 | $ | (0.04 | ) | $ | 0.31 | $ | (0.11 | ) | ||||||
Distributions declared per common share |
$ | 0.12 | $ | 0.15 | $ | 0.25 | $ | 0.30 | ||||||||
Weighted average number of common shares outstanding |
224,764 | 220,421 | 224,292 | 219,548 | ||||||||||||
Net comprehensive income (loss): |
||||||||||||||||
Net income (loss) |
$ | 80,682 | $ | (8,419 | ) | $ | 71,399 | $ | (21,355 | ) | ||||||
Other comprehensive loss: |
||||||||||||||||
Foreign currency translation adjustment |
(7,718 | ) | (28,208 | ) | (5,655 | ) | (41,072 | ) | ||||||||
Net comprehensive income (loss) |
72,964 | (36,627 | ) | 65,744 | (62,427 | ) | ||||||||||
Net comprehensive income attributable
to noncontrolling interests |
(1,217 | ) | (1,205 | ) | (2,368 | ) | (2,334 | ) | ||||||||
Net comprehensive income (loss) attributable to common shareholders |
$ | 71,747 | $ | (37,832 | ) | $ | 63,376 | $ | (64,761 | ) | ||||||
See notes to the condensed consolidated financial statements.
3
Table of Contents
HINES REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Six Months Ended June 30, 2011 and 2010
(In thousands)
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Six Months Ended June 30, 2011 and 2010
(In thousands)
(UNAUDITED)
Hines Real Estate Investment Trust, Inc. | ||||||||||||||||||||||||||||
Accumulated Other | ||||||||||||||||||||||||||||
Additional Paid-in | Comprehensive | Noncontrolling | ||||||||||||||||||||||||||
Common Shares | Amount | Capital | Accumulated Deficit | Income | Total | Interests | ||||||||||||||||||||||
BALANCE,
January 1, 2011 |
222,795 | $ | 223 | $ | 1,590,488 | $ | (340,610 | ) | $ | 12,043 | $ | 1,262,144 | $ | | ||||||||||||||
Issuance of
common shares |
2,626 | 3 | 25,151 | | | 25,154 | | |||||||||||||||||||||
Redemption of
common shares |
(657 | ) | (1 | ) | (5,936 | ) | | | (5,937 | ) | | |||||||||||||||||
Distributions declared |
| | (56,057 | ) | | | (56,057 | ) | (2,368 | ) | ||||||||||||||||||
Other offering costs, net |
| | (34 | ) | | | (34 | ) | | |||||||||||||||||||
Net loss |
| | | 69,031 | | 69,031 | 2,368 | |||||||||||||||||||||
Foreign currency
translation adjustment |
| | | | 3,236 | 3,236 | | |||||||||||||||||||||
Foreign currency
translation adjustment
included in income |
| | | | (8,891 | ) | (8,891 | ) | | |||||||||||||||||||
BALANCE
June 30, 2011 |
224,764 | $ | 225 | $ | 1,553,612 | $ | (271,579 | ) | $ | 6,388 | $ | 1,288,646 | $ | | ||||||||||||||
Accumulated Other | ||||||||||||||||||||||||||||
Additional Paid-in | Comprehensive | Noncontrolling | ||||||||||||||||||||||||||
Common Shares | Amount | Capital | Accumulated Deficit | Income (Loss) | Total | Interests | ||||||||||||||||||||||
BALANCE,
January 1, 2010 |
217,237 | $ | 217 | $ | 1,661,006 | $ | (300,703 | ) | $ | 48,408 | $ | 1,408,928 | $ | | ||||||||||||||
Issuance of
common shares |
3,565 | 3 | 34,190 | | | 34,193 | | |||||||||||||||||||||
Redemption of
common shares |
(380 | ) | | (6,240 | ) | | | (6,240 | ) | | ||||||||||||||||||
Distributions declared |
| | (65,887 | ) | | | (65,887 | ) | (2,334 | ) | ||||||||||||||||||
Selling commissions
and dealer manager fees |
| | (119 | ) | | | (119 | ) | | |||||||||||||||||||
Net income (loss) |
| | | (23,689 | ) | | (23,689 | ) | 2,334 | |||||||||||||||||||
Foreign currency
translation adjustment |
| | | | (3,920 | ) | (3,920 | ) | | |||||||||||||||||||
Foreign currency
translation adjustment
included in income |
| | | | (37,152 | ) | (37,152 | ) | | |||||||||||||||||||
BALANCE
June 30, 2010 |
220,422 | $ | 220 | $ | 1,622,950 | $ | (324,392 | ) | $ | 7,336 | $ | 1,306,114 | $ | | ||||||||||||||
See notes to the condensed consolidated financial statements.
4
Table of Contents
HINES REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2011 and 2010
(UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2011 and 2010
(UNAUDITED)
2011 | 2010 | |||||||
(In thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | 71,399 | $ | (21,355 | ) | |||
Adjustments to reconcile net income (loss) to cash from operating activities: |
||||||||
Depreciation and amortization |
53,900 | 55,448 | ||||||
Gain on sale of investment property |
(107,241 | ) | (22,537 | ) | ||||
Equity in earnings (losses) of unconsolidated entities |
21,126 | (9,579 | ) | |||||
Distributions received from unconsolidated entities |
1,655 | 862 | ||||||
Loss on derivative instruments, net |
3,800 | 30,227 | ||||||
Net change in operating accounts |
(50,373 | ) | (27,561 | ) | ||||
Net cash from operating activities |
(5,734 | ) | 5,505 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Distributions received from unconsolidated entities in excess of equity in earnings |
4,709 | 5,519 | ||||||
Investments in property |
(2,782 | ) | (3,023 | ) | ||||
Proceeds from sale of land and improvements, net |
128,709 | 130,052 | ||||||
Change in cash collateral on notes payable |
106,248 | | ||||||
Change in restricted cash |
(106,283 | ) | 2,661 | |||||
Net cash from investing activities |
130,601 | 135,209 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Change in other liabilities |
340 | 46 | ||||||
Proceeds from issuance of common stock |
| 1,569 | ||||||
Redemption of common shares |
(6,016 | ) | (3,474 | ) | ||||
Payments of selling commissions and dealer manager fees |
| (166 | ) | |||||
Payment of organizational and offering expenses |
(32 | ) | | |||||
Distributions paid to shareholders and noncontrolling interests |
(33,237 | ) | (34,808 | ) | ||||
Proceeds from notes payable |
43,000 | 94,000 | ||||||
Payments on notes payable |
(44,073 | ) | (169,250 | ) | ||||
Additions to deferred financing costs |
(2,291 | ) | (2,002 | ) | ||||
Net cash from financing activities |
(42,309 | ) | (114,085 | ) | ||||
Effect of exchange rate changes on cash |
(76 | ) | 735 | |||||
Net change in cash and cash equivalents |
82,482 | 27,364 | ||||||
Cash and cash equivalents, beginning of period |
64,592 | 41,577 | ||||||
Cash and cash equivalents, end of period |
$ | 147,074 | $ | 68,941 | ||||
See notes to the condensed consolidated financial statements.
5
Table of Contents
HINES REAL ESTATE INVESTMENT TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2011 and 2010
(UNAUDITED)
For the Three and Six Months Ended June 30, 2011 and 2010
(UNAUDITED)
1. Organization
The accompanying interim unaudited condensed consolidated financial information has been
prepared according to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
have been condensed or omitted according to such rules and regulations. For further information,
refer to the financial statements and footnotes for the year ended December 31, 2010 included in
Hines Real Estate Investment Trust, Inc.s Annual Report on Form 10-K. In the opinion of
management, all adjustments and eliminations, consisting only of normal recurring adjustments,
necessary to present fairly and in conformity with GAAP the financial position of Hines Real Estate
Investment Trust, Inc. as of June 30, 2011 and December 31, 2010, and the results of operations for
the three and six months ended June 30, 2011 and 2010 and cash flows for the six months ended June
30, 2011 and 2010 have been included. The results of operations for such interim periods are not
necessarily indicative of the results for the full year.
Hines Real Estate Investment Trust, Inc., a Maryland corporation (Hines REIT and, together
with its consolidated subsidiaries, the Company), was formed on August 5, 2003 under the General
Corporation Law of the state of Maryland for the purpose of engaging in the business of investing
in and owning interests in real estate. Beginning with its taxable year ended December 31, 2004,
the Company operated and intends to continue to operate in a manner to qualify as a real estate
investment trust (REIT) for federal income tax purposes. The Company is structured as an umbrella
partnership REIT under which substantially all of the Companys current and future business is and
will be conducted through its majority-owned subsidiary, Hines REIT Properties, L.P. (the
Operating Partnership). Hines REIT is the sole general partner of the Operating Partnership.
Subject to certain restrictions and limitations, the business of the Company is managed by Hines
Advisors Limited Partnership (the Advisor), an affiliate of Hines Interests Limited Partnership
(Hines), pursuant to the advisory agreement between the Company and the Advisor.
Public Offerings
Hines REIT commenced its initial public offering on June 18, 2004, through which it raised
$527.5 million. The Company commenced its second public offering (the Second Offering) on June
19, 2006, through which it raised $1.5 billion of gross proceeds.
The Company commenced its third public offering (the Third Offering) on July 1, 2008,
pursuant to which it offered up to $3.5 billion in shares of common stock including $500.0 million
in shares of common stock under its dividend reinvestment plan. In consideration of market
conditions and other factors, the Companys board of directors determined to cease sales of its
shares to new investors pursuant to the Third Offering as of January 1, 2010. The Companys board
of directors determined to continue sales of its shares under its dividend reinvestment plan
pursuant to the Third Offering. As of December 31, 2010, Hines REIT had raised $506.9 million in
proceeds through the Third Offering. The Third Offering expired as of December 31, 2010. The
Company commenced a new $150.0 million offering of shares of its common stock under its dividend
reinvestment plan (the DRP Offering) on July 1, 2010. From inception through June 30, 2011, Hines
REIT had received gross offering proceeds of $54.3 million from the sale of 5.7 million shares
through the DRP Offering. Based on market conditions and other considerations, the Company does not
currently expect to commence any future offerings other than those related to shares issued under
its dividend reinvestment plan. On July 1, 2011, Hines REIT received gross offering proceeds of
$12.2 million from the sale of 1.6 million shares through its dividend reinvestment plan.
Hines REIT contributes all net proceeds from its public offerings to the Operating Partnership
in exchange for partnership units in the Operating Partnership. As of June 30, 2011 and December
31, 2010, Hines REIT owned a 95.8% and 96.1%, respectively, general partner interest in the
Operating Partnership.
Noncontrolling Interests
Hines 2005 VS I LP, an affiliate of Hines, owned a 0.5% interest in the Operating Partnership
as of both June 30, 2011 and December 31, 2010. In addition, another affiliate of Hines, HALP
Associates Limited Partnership (HALP) owned a 3.7% and 3.4% limited partnership interest in the
Operating Partnership as of June 30, 2011 and December 31, 2010, respectively, which is a profits
interest (the Participation Interest). See Notes 9 and 13 for additional information regarding
the Participation Interest.
6
Table of Contents
Investment Property
As of June 30, 2011, the Company owned direct and indirect investments in 58 properties. These
properties consisted of 44 U.S. office properties, one industrial property in Dallas, Texas, one
industrial property in Brazil and a portfolio of 12 grocery-anchored shopping centers located in
five states primarily in the southeastern United States (the Grocery-Anchored Portfolio).
The Company has made investments directly through entities wholly-owned by the Operating
Partnership, or indirectly through other entities, such as through its investment in Hines US Core
Office Fund LP (the Core Fund) in which it owns a 26.8% non-managing general partner interest.
The Company also owns a 70% interest in the Grocery-Anchored Portfolio indirectly through a joint
venture with Weingarten Realty Investors and a 50% interest in Distribution Park Rio, an industrial
property in Rio de Janeiro, Brazil, indirectly through a joint venture with a Hines affiliate. The
Company accounts for each of these investments using the equity method of accounting. See Note 5
for additional information regarding the Companys investments in unconsolidated entities.
2. Summary of Significant Accounting Policies
Described below are certain of the Companys significant accounting policies. The disclosures
regarding several of the policies have been condensed or omitted in accordance with interim
reporting regulations specified by Form 10-Q. Please see the Companys Annual Report on Form 10-K
for a complete listing of all of its significant accounting policies.
Use of Estimates
The Companys condensed consolidated financial statements have been prepared in accordance
with GAAP. The preparation of the consolidated financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities and contingencies
as of the date of the financial statements and the reported amounts of revenues and expenses during
the reporting periods. The Company evaluates its assumptions and estimates on an ongoing basis. The
Company bases its estimates on historical experience and on various other assumptions that the
Company believes to be reasonable under the circumstances. Additionally, application of the
Companys accounting policies involves exercising judgments regarding assumptions as to future
uncertainties. Actual results may differ from these estimates.
Basis of Presentation
The condensed consolidated financial statements of the Company included in this quarterly
report include the accounts of Hines REIT, the Operating Partnership (over which Hines REIT
exercises financial and operating control) and the Operating Partnerships wholly-owned
subsidiaries (see Note 5), as well as the noncontrolling interests. All intercompany balances and
transactions have been eliminated in consolidation.
International Operations
The Canadian dollar is the functional currency for the Companys subsidiaries operating in
Toronto, Ontario and the Brazilian real is the functional currency for the Companys subsidiary
operating in Brazil. The Companys foreign subsidiaries translated their financial statements into
U.S. dollars for reporting purposes. Assets and liabilities were translated at the exchange rate in
effect as of the balance sheet date. Income statement amounts were translated using the average
exchange rate for the period and significant nonrecurring transactions using the rate on the
transaction date. These translation gains or losses were included in accumulated other
comprehensive income as a separate component of shareholders equity. Upon disposal of these
subsidiaries, the Company removed the accumulated translation adjustment from equity and included
it as part of the gain or loss on disposal in its consolidated statement of operations. As of June
30, 2011, the Company has $6.4 million included in accumulated other comprehensive income related
to its investment in Distribution Park Rio, which is accounted for using the equity method.
Impairment of Investment Property
Real estate assets are reviewed for impairment each reporting period if events or changes in
circumstances indicate that the carrying amount of the individual property may not be recoverable.
In such an event, a comparison will be made of the current and projected operating cash flows of
each property on an undiscounted basis to the carrying amount of such property. Such carrying
amount would be adjusted, if necessary, to estimated fair values to reflect impairment in the value
of the asset. In estimating fair value, management uses appraisals, management estimates, contract
sale prices, and discounted cash flow calculations which utilize inputs from a marketplace
participants perspective.
At June 30, 2011, management believes no such impairment has occurred for the Companys
directly-owned assets (see discussion of the Core Funds impairment of five of its properties in
Note 5 Unconsolidated Entities below). If market conditions deteriorate or if managements plans
for certain properties change, impairment charges could be required in the future.
Sale of Investment Property
The Company recognizes gain on the sale of real estate when the following conditions are met: (i) the sale is
consummated, (ii) the buyers initial and continuing investments are adequate to demonstrate a commitment to pay
for the property, (iii) the Companys receivable is not subject
to future subordination and (iv) the Company has
transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale
and does not have a substantial continuing involvement with the property.
7
Table of Contents
Restricted Cash
As of June 30, 2011 and December 31, 2010, the Company had restricted cash of $110.1 million
and $3.9 million. In May 2011, the Company replaced the HSH Nordbank Collateral deposit with a
letter of credit from the Bank of Montreal. As collateral for the letter of credit, the Company
posted a cash deposit of $107.0 million with the Bank of Montreal, which is classified as
restricted cash in the condensed consolidated balance sheet. See Other Assets discussion below for
additional details. The remaining balance for each period is related to escrow accounts required by
certain of the Companys mortgage agreements.
Tenant and Other Receivables
Receivable balances outstanding consist primarily of base rents, tenant reimbursements and
receivables attributable to straight-line rent. An allowance for the uncollectible portion of
tenant and other receivables is determined based upon an analysis of the tenants payment history,
the financial condition of the tenant, business conditions in the industry in which the tenant
operates and economic conditions in the area in which the property is located. Tenant and other
receivables are shown at cost in the condensed consolidated balance sheets, net of allowance for
doubtful accounts of $6.6 million and $4.0 million, at June 30, 2011 and December 31, 2010,
respectively.
Deferred Leasing Costs
Deferred leasing costs primarily consist of direct leasing costs such as third-party leasing
commissions and tenant inducements. Deferred leasing costs are capitalized and amortized over the
life of the related lease. Tenant inducement amortization is recorded as a reduction to rental
revenue and the amortization of other direct leasing costs is recorded as a component of
amortization expense. The Company had additions of direct leasing costs of $20.8 million during the
six months ended June 30, 2011, due to leases executed at several of the Companys properties which
contained significant tenant inducements.
Tenant inducement amortization was $3.3 million and $2.0 million for the three months ended
June 30, 2011 and 2010, respectively. In addition, the Company recorded $1.4 million and $1.2
million as amortization expense related to other direct leasing costs for the three months ended
June 30, 2011 and 2010, respectively.
Tenant inducement amortization was $6.1 million and $3.7 million for the six months ended June
30, 2011 and 2010, respectively, and was recorded as an offset to rental revenue. In addition, the
Company recorded $3.0 million and $2.2 million as amortization expense related to other direct
leasing costs for the six months ended June 30, 2011 and 2010, respectively.
Deferred Financing Costs
Deferred financing costs consist of direct costs incurred in obtaining debt financing
including the financing fees paid to our Advisor (see Note 9 Related Party Transactions). These
costs are amortized into interest expense on a straight-line basis, which approximates the
effective interest method, over the terms of the obligations. For the three months ended June 30,
2011 and 2010, approximately $918,000 and $732,000, respectively, was amortized into interest
expense in the accompanying condensed consolidated statements of operations. For the six months
ended June 30, 2011 and 2010, $1.6 million and $1.5 million, respectively, was amortized into
interest expense in the accompanying condensed consolidated statements of operations.
Other Assets
Other assets included the following (in thousands):
June 30, 2011 | December 31, 2010 | |||||||
Prepaid insurance |
$ | 2,185 | $ | 911 | ||||
Prepaid/deferred taxes |
1,874 | (1) | 994 | |||||
Cash collateral for HSH mortgage facility |
| 106,251 | (2) | |||||
Other |
773 | 852 | ||||||
Total |
$ | 4,832 | $ | 109,008 | ||||
(1) | At June 30, 2011 prepaid/deferred taxes consist primarily of prepaid property taxes. | |
(2) | During the fourth quarter of 2009, the Company made collateral deposits totaling $106.1 million to HSH Nordbank in order to rebalance the collateral for the properties under the Companys pooled mortgage facility. The increase in the cash collateral since that time is due to interest earned on these deposits, which accrue to the Company and is reflected as an increase in the balance. In May 2011, the Company replaced the HSH Nordbank Collateral deposit with a letter of credit from the Bank of Montreal. As collateral for the letter of credit, the Company posted a cash deposit of $107.0 million with the Bank of Montreal, which is classified as restricted cash in the condensed consolidated balance sheet. |
8
Table of Contents
Revenue Recognition
Rental payments are generally paid by the tenants prior to the beginning of each month. As of
June 30, 2011 and December 31, 2010, respectively, the Company recorded liabilities of $8.0
million, and $9.3 million related to prepaid rental payments which were included in other
liabilities in the accompanying condensed consolidated balance sheet. The Company recognizes rental
revenue on a straight-line basis over the life of the lease including rent holidays, if any.
Straight-line rent receivable was $48.1 million and $47.2 million as of June 30, 2011 and December
31, 2010, respectively. Straight-line rent receivable consisted of the difference between the
tenants rents calculated on a straight-line basis from the date of acquisition or lease
commencement over the remaining terms of the related leases and the tenants actual rents due under
the lease agreements and is included in tenant and other receivables in the accompanying condensed
consolidated balance sheets. Revenues associated with operating expense recoveries are recognized
in the period in which the expenses are incurred based upon the tenant lease provisions. Revenues
relating to lease termination fees are generally recognized at the time that a tenants right to
occupy the space is terminated and when the Company has satisfied all obligations under the
agreement.
Other revenues consist primarily of parking revenue and tenant reimbursements. Parking revenue
represents amounts generated from contractual and transient parking and is recognized in accordance
with contractual terms or as services are rendered. Other revenues relating to tenant
reimbursements are recognized in the period that the expense is incurred.
Redemption of Common Stock
Financial instruments that represent a mandatory obligation of the Company to repurchase
shares are required to be classified as liabilities and reported at settlement value. Management
believes that shares tendered for redemption by the holder under the Companys share redemption
program do not represent a mandatory obligation until such redemptions are approved. At such time,
the Company reclassifies such obligations from equity to an accrued liability based upon their
respective settlement values. The Company has recorded liabilities of $2.9 million in accounts
payable and accrued expenses in the accompanying condensed consolidated balance sheets as of both
June 30, 2011 and December 31, 2010 related to shares tendered for redemption and approved by the
board of directors, but which were not redeemed until the subsequent month. Such amounts have been
included in redemption of common shares in the accompanying condensed consolidated statements of
equity. Effective November 30, 2009, the Company suspended its share redemption program except for
redemption requests made in connection with the death or disability of a shareholder.
Per Share Data
Net income/loss per common share is calculated by dividing the net income/loss attributable to
common shareholders for each period by the weighted average number of common shares outstanding
during such period. Net income/loss per common share on a basic and diluted basis is the same
because the Company has no potentially dilutive common shares outstanding.
Recent Accounting Pronouncements
In May 2011, FASB issued guidance on fair value measurements. This guidance results in a
consistent definition of fair value and common requirements for measurement of and disclosure about
fair value between GAAP and IFRS (International Financial Reporting Standards). The adoption of
this guidance is effective prospectively for interim and annual periods beginning after December
15, 2011. Management is currently evaluating this guidance and its potential impact on the Company.
In June 2011, FASB issued guidance on the presentation of comprehensive income. This guidance
eliminates the current option to report other comprehensive income and its components in the
statement of changes in equity. The adoption of this guidance is effective for interim and annual
periods beginning after December 15, 2011 and is not expected to have a material effect on the
Companys financial statements.
9
Table of Contents
3. Real Estate Investments
The following table provides summary information regarding the properties in which the Company
owned interests as of June 30, 2011. All assets which are 100% owned by the Company are referred to
as directly-owned properties. All other properties are owned indirectly through investments in
the Core Fund, the Grocery-Anchored Portfolio and Distribution Park Rio.
Date | Leasable | Percent | Effective | |||||||||||||
Property | City | Acquired | Square Feet | Leased | Ownership (1) | |||||||||||
Directly-owned Properties |
||||||||||||||||
321 North Clark
|
Chicago, Illinois | 04/2006 | 888,837 | 75 | % | 100 | % | |||||||||
Citymark
|
Dallas, Texas | 08/2005 | 219,117 | 84 | % | 100 | % | |||||||||
4050/4055 Corporate Drive
|
Dallas, Texas | 05/2008 | 643,429 | 100 | % | 100 | % | |||||||||
JPMorgan Chase Tower
|
Dallas, Texas | 11/2007 | 1,253,353 | 84 | % | 100 | % | |||||||||
345 Inverness Drive
|
Denver, Colorado | 12/2008 | 175,287 | 98 | % | 100 | % | |||||||||
Arapahoe Business Park
|
Denver, Colorado | 12/2008 | 309,450 | 88 | % | 100 | % | |||||||||
Raytheon/DIRECTV Buildings
|
El Segundo, California | 03/2008 | 550,579 | 100 | % | 100 | % | |||||||||
2100 Powell
|
Emeryville, California | 12/2006 | 344,433 | 100 | % | 100 | % | |||||||||
Williams Tower
|
Houston, Texas | 05/2008 | 1,479,764 | 87 | % | 100 | % | |||||||||
2555 Grand
|
Kansas City, Missouri | 02/2008 | 595,607 | 100 | % | 100 | % | |||||||||
One Wilshire
|
Los Angeles, California | 08/2007 | 661,553 | 95 | % | 100 | % | |||||||||
3 Huntington Quadrangle
|
Melville, New York | 07/2007 | 407,912 | 60 | % | 100 | % | |||||||||
Airport Corporate Center
|
Miami, Florida | 01/2006 | 1,018,428 | 82 | % | 100 | % | |||||||||
Minneapolis Office/Flex Portfolio
|
Minneapolis, Minnesota | 09/2007 | 768,648 | 85 | % | 100 | % | |||||||||
3400 Data Drive
|
Rancho Cordova, California | 11/2006 | 149,703 | 100 | % | 100 | % | |||||||||
Daytona Buildings
|
Redmond, Washington | 12/2006 | 251,313 | 100 | % | 100 | % | |||||||||
Laguna Buildings
|
Redmond, Washington | 01/2007 | 460,661 | 85 | % | 100 | % | |||||||||
1515 S Street
|
Sacramento, California | 11/2005 | 349,740 | 99 | % | 100 | % | |||||||||
1900 and 2000 Alameda
|
San Mateo, California | 06/2005 | 254,145 | 92 | % | 100 | % | |||||||||
Seattle Design Center
|
Seattle, Washington | 06/2007 | 390,684 | 74 | % | 100 | % | |||||||||
5th and Bell
|
Seattle, Washington | 06/2007 | 197,135 | 99 | % | 100 | % | |||||||||
Total for Directly-Owned Properties
|
11,369,778 | 88 | % | |||||||||||||
Indirectly-owned
Properties |
||||||||||||||||
Core Fund Properties |
||||||||||||||||
One Atlantic Center
|
Atlanta, Georgia | 07/2006 | 1,100,312 | 90 | % | 22 | % | |||||||||
The Carillon Building
|
Charlotte, North Carolina | 07/2007 | 472,895 | 85 | % | 22 | % | |||||||||
Charlotte Plaza
|
Charlotte, North Carolina | 06/2007 | 625,026 | 92 | % | 22 | % | |||||||||
One North Wacker
|
Chicago, Illinois | 03/2008 | 1,373,754 | 94 | % | 22 | % | |||||||||
Three First National Plaza
|
Chicago, Illinois | 03/2005 | 1,429,804 | 92 | % | 18 | % | |||||||||
333 West Wacker
|
Chicago, Illinois | 04/2006 | 855,712 | 77 | % | 18 | % | |||||||||
One Shell Plaza
|
Houston, Texas | 05/2004 | 1,230,395 | 99 | % | 11 | % | |||||||||
Two Shell Plaza
|
Houston, Texas | 05/2004 | 565,573 | 95 | % | 11 | % | |||||||||
425 Lexington Avenue
|
New York, New York | 08/2003 | 700,034 | 100 | % | 11 | % | |||||||||
499 Park Avenue
|
New York, New York | 08/2003 | 291,515 | 92 | % | 11 | % | |||||||||
Renaissance Square
|
Phoenix, Arizona | 12/2007 | 965,508 | 83 | % | 22 | % | |||||||||
Riverfront Plaza
|
Richmond, Virginia | 11/2006 | 951,616 | 97 | % | 22 | % | |||||||||
Johnson Ranch Corporate Centre
|
Roseville, California | 05/2007 | 179,990 | 41 | % | 18 | % | |||||||||
Roseville Corporate Center
|
Roseville, California | 05/2007 | 111,418 | 62 | % | 18 | % | |||||||||
Summit at Douglas Ridge
|
Roseville, California | 05/2007 | 185,128 | 74 | % | 18 | % | |||||||||
Olympus Corporate Centre
|
Roseville, California | 05/2007 | 193,178 | 51 | % | 18 | % | |||||||||
Douglas Corporate Center
|
Roseville, California | 05/2007 | 214,606 | 89 | % | 18 | % | |||||||||
Wells Fargo Center
|
Sacramento, California | 05/2007 | 502,365 | 93 | % | 18 | % | |||||||||
525 B Street
|
San Diego, California | 08/2005 | 449,180 | 96 | % | 22 | % | |||||||||
The KPMG Building
|
San Francisco, California | 09/2004 | 379,328 | 88 | % | 22 | % | |||||||||
101 Second Street
|
San Francisco, California | 09/2004 | 388,370 | 92 | % | 22 | % | |||||||||
720 Olive Way
|
Seattle, Washington | 01/2006 | 300,710 | 85 | % | 18 | % | |||||||||
1200 19th Street
|
Washington, D.C. | 08/2003 | 337,486 | 83 | % | 11 | % | |||||||||
Warner Center
|
Woodland Hills, California | 10/2006 | 808,274 | 89 | % | 18 | % | |||||||||
Total for Core Fund Properties
|
14,612,177 | 90 | % |
10
Table of Contents
Date | Leasable | Percent | Effective | |||||||||||||
Property | City | Acquired | Square Feet | Leased | Ownership (1) | |||||||||||
Grocery-Anchored Portfolio |
||||||||||||||||
Cherokee Plaza
|
Atlanta, Georgia | 11/2008 | 99,749 | 86 | % | 70 | % | |||||||||
Bellaire Boulevard Center
|
Bellaire, Texas | 11/2008 | 35,081 | 100 | % | 70 | % | |||||||||
Thompson Bridge Commons
|
Gainesville, Georgia | 03/2009 | 92,587 | 93 | % | 70 | % | |||||||||
Champions Village
|
Houston, Texas | 11/2008 | 384,581 | 88 | % | 70 | % | |||||||||
Kings Crossing
|
Kingwood, Texas | 11/2008 | 126,397 | 97 | % | 70 | % | |||||||||
Sandy Plains Exchange
|
Marietta, Georgia | 02/2009 | 72,784 | 93 | % | 70 | % | |||||||||
Commons at Dexter Lakes
|
Memphis, Tennessee | 11/2008 | 228,796 | 78 | % | 70 | % | |||||||||
Mendenhall Commons
|
Memphis, Tennessee | 11/2008 | 88,108 | 96 | % | 70 | % | |||||||||
University Palms Shopping Center
|
Oviedo, Florida | 11/2008 | 99,172 | 93 | % | 70 | % | |||||||||
Shoppes at Parkland
|
Parkland, Florida | 03/2009 | 145,652 | 96 | % | 70 | % | |||||||||
Oak Park Village
|
San Antonio, Texas | 11/2008 | 64,287 | 100 | % | 70 | % | |||||||||
Heritage Station
|
Wake Forest, North Carolina | 01/2009 | 68,641 | 98 | % | 70 | % | |||||||||
Total for Grocery-Anchored Portfolio
|
1,505,835 | 90 | % | |||||||||||||
Other |
||||||||||||||||
Distribution Park Rio
|
Rio de Janeiro, Brazil | 07/2007 | 693,115 | 100 | % | 50 | % | |||||||||
Total for All Properties
|
28,180,905 | 89 | %(2) |
(1) | This percentage shows the effective ownership of the Operating Partnership in the properties listed. On June 30, 2011, Hines REIT owned a 95.8% interest in the Operating Partnership as its sole general partner. Affiliates of Hines owned the remaining 4.2% interest in the Operating Partnership. In addition, the Company owned an approximate 26.8% non-managing general partner interest in the Core Fund as of June 30, 2011. The Core Fund does not own 100% of these properties; its ownership interest in its properties ranges from 40.6% to 83.0%. | |
(2) | This amount represents the percentage leased assuming the Company owns a 100% interest in each of these properties. The percentage leased based on the Companys effective ownership interest in each property is 89%. |
On June 1, 2011, the Company sold Atrium on Bay, a mixed-use office and retail complex located
in the Downtown North submarket of the central business district of Toronto, Canada. The contract
sale price for Atrium on Bay was $344.8 million CAD ($353 million USD, based on the exchange rate
in effect on the date of sale), exclusive of transaction costs. The net proceeds received from
this sale were $128.7 million after transaction costs, assumption of related mortgage debt by the
purchaser and local taxes.
Investment Property, net
Investment property consisted of the following (in thousands):
June 30, 2011 | December 31, 2010 | |||||||
Buildings and improvements |
$ | 1,763,195 | $ | 1,953,741 | ||||
Less: accumulated depreciation |
(180,084 | ) | (176,263 | ) | ||||
Buildings and improvements, net |
1,583,111 | 1,777,478 | ||||||
Land |
382,840 | 435,734 | ||||||
Investment property, net |
$ | 1,965,951 | $ | 2,213,212 | ||||
11
Table of Contents
Lease Intangibles
As of June 30, 2011, the cost basis and accumulated amortization related to lease
intangibles was as follows (in thousands):
Lease Intangibles | ||||||||||||
Out-of-Market | Out-of-Market | |||||||||||
In-Place Leases | Lease Assets | Lease Liabilities | ||||||||||
Cost |
$ | 320,179 | $ | 53,446 | $ | 106,820 | ||||||
Less: accumulated amortization |
(166,612 | ) | (24,446 | ) | (51,300 | ) | ||||||
Net |
$ | 153,567 | $ | 29,000 | $ | 55,520 | ||||||
As of December 31, 2010, the cost basis and accumulated amortization related to lease
intangibles was as follows (in thousands):
Lease Intangibles | ||||||||||||
Out-of-Market Lease | Out-of-Market Lease | |||||||||||
In-Place Leases | Assets | Liabilities | ||||||||||
Cost |
$ | 361,367 | $ | 57,637 | $ | 130,892 | ||||||
Less: accumulated amortization |
(173,860 | ) | (24,163 | ) | (58,427 | ) | ||||||
Net |
$ | 187,507 | $ | 33,474 | $ | 72,465 | ||||||
Amortization expense of in-place leases was $11.9 million and $13.8 million for the three
months ended June 30, 2011 and 2010, respectively, and amortization of out-of-market leases, net,
was an increase to rental revenue of $2.5 million and $3.2 million, respectively. Amortization
expense of in-place leases was $23.5 million and $28.9 million for the six months ended June 30,
2011 and 2010, respectively, and amortization of out-of-market leases, net, was an increase to
rental revenue of $5.3 million and $6.4 million, respectively.
Expected future amortization of in-place leases and out-of-market leases, net, including
out-of-market ground leases for the period from July 1 through December 31, 2011 and for each of
the years ended December 31, 2012 through 2015 is as follows (in thousands):
Out-of-Market | ||||||||
In-Place Leases | Leases, Net | |||||||
July 1 through December 31, 2011 |
$ | 17,837 | $ | (3,239 | ) | |||
2012 |
29,638 | (6,854 | ) | |||||
2013 |
24,497 | (6,666 | ) | |||||
2014 |
19,149 | (4,371 | ) | |||||
2015 |
17,332 | (3,460 | ) |
Leases
In connection with its directly-owned properties, the Company has entered into non-cancelable
lease agreements with tenants for space. As of June 30, 2011, the approximate fixed future minimum
rentals for the period from July 1 through December 31, 2011 and for each of the years ended
December 31, 2012 through 2015 and thereafter are as follows (in thousands):
Fixed Future Minimum | ||||
Rentals | ||||
July 1 through December 31, 2011 |
$ | 100,277 | ||
2012 |
187,465 | |||
2013 |
160,406 | |||
2014 |
136,992 | |||
2015 |
128,988 | |||
Thereafter |
472,490 | |||
Total |
$ | 1,186,618 | ||
During the six months ended June 30, 2011 and 2010, the Company did not earn more than 10% of
its revenue from any individual tenant.
12
Table of Contents
4. Discontinued Operations
On January 22, 2010, the Company sold Distribution Park Araucaria, an industrial property
located in Curitiba, Brazil, which it acquired in December 2008. The sales price was $38.4 million
(69.9 million BRL translated at a rate of R$1.818 per USD). On April 22, 2010, the Company sold
Distribution Parks Elouveira and Vinhedo, two industrial properties located in Sao Paulo, Brazil,
which it acquired in December 2008. The sales price was $102.5 million (181.0 million BRL
translated at a rate of R$1.765 per USD). The Brazilian real was the functional currency of the
Companys subsidiaries that operated in Brazil. The financial statements of these subsidiaries were
translated into U.S. dollars for reporting purposes. Gains or losses resulting from translation
were included in accumulated and other comprehensive income as a separate component of
shareholders equity. Upon disposal of these subsidiaries the Company removed the accumulated
translation adjustment from equity and included it as part of the gain or loss on disposal in its
consolidated statement of operations.
On June 1, 2011, the Company sold Atrium on Bay, a mixed-use office and retail complex located
in the Downtown North submarket of the central business district of Toronto, Canada, which the
Company acquired in February 2007. The sales price for Atrium on Bay was $344.8 million CAD ($353
million USD, based on the exchange rate in effect on the date of sale). The Canadian dollar was the
functional currency of the Companys subsidiaries that operated in Canada. The financial statements
of these subsidiaries were translated into U.S. dollars for reporting purposes. Gains or losses
resulting from translation were included in accumulated and other comprehensive income as a
separate component of shareholders equity. Upon disposal of these subsidiaries, the Company
removed the accumulated translation adjustment from equity and included it as part of the gain or
loss on disposal in its condensed consolidated statement of operations. The results of operations
of Distribution Parks Araucaria, Elouveira, Vinhedo and Atrium on Bay and the gain realized on the
disposition of these properties are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Revenues: |
||||||||||||||||
Rental revenue |
$ | 6,996 | $ | 9,781 | $ | 17,298 | $ | 22,648 | ||||||||
Other revenue |
1,025 | 1,516 | 2,365 | 2,780 | ||||||||||||
Total revenues |
8,021 | 11,297 | 19,663 | 25,428 | ||||||||||||
Expenses: |
||||||||||||||||
Property operating expenses |
2,313 | 3,144 | 5,332 | 6,072 | ||||||||||||
Real property taxes |
1,650 | 2,626 | 4,225 | 5,204 | ||||||||||||
Property management fees |
194 | 259 | 475 | 561 | ||||||||||||
Depreciation and amortization |
1,497 | 2,185 | 3,770 | 5,510 | ||||||||||||
Total expenses |
5,654 | 8,214 | 13,802 | 17,347 | ||||||||||||
Income from discontinued operations before
interest income (expense), taxes and gain on sale |
2,367 | 3,083 | 5,861 | 8,081 | ||||||||||||
Interest expense |
(1,791 | ) | (2,532 | ) | (4,426 | ) | (5,033 | ) | ||||||||
Interest income |
16 | 16 | 33 | 89 | ||||||||||||
(Provision) benefit for income taxes |
75 | | 75 | (410 | ) | |||||||||||
Income from discontinued operations before gain
on sale |
667 | 567 | 1,543 | 2,727 | ||||||||||||
Gain on sale of properties |
107,241 | 18,311 | 107,241 | 22,537 | ||||||||||||
Income from discontinued operations |
$ | 107,908 | $ | 18,878 | $ | 108,784 | $ | 25,264 | ||||||||
The tables below show income (loss) and income (loss) per share attributable to common shareholders allocated between
continuing operations and discontinued operations: |
||||||||||||||||
Loss from continuing operations attributable
to common shareholders |
$ | (23,984 | ) | $ | (27,841 | ) | $ | (35,260 | ) | $ | (48,078 | ) | ||||
Income from discontinued operations attributable
to common shareholders |
103,449 | 18,217 | 104,291 | 24,389 | ||||||||||||
Net income (loss) attributable to common
shareholders |
$ | 79,465 | $ | (9,624 | ) | $ | 69,031 | $ | (23,689 | ) | ||||||
Basic and diluted income (loss) per share
attributable to common shareholders |
||||||||||||||||
Loss from continuing operations |
$ | (0.11 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.22 | ) | ||||
Income from discontinued operations |
$ | 0.46 | $ | 0.08 | $ | 0.46 | $ | 0.11 |
13
Table of Contents
5. Investments in Unconsolidated Entities
The table below presents the activity of the Companys unconsolidated entities as of and for
the periods presented (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Beginning balance |
$ | 369,456 | $ | 373,320 | $ | 373,798 | $ | 379,057 | ||||||||
Distributions declared |
(3,357 | ) | (3,028 | ) | (6,616 | ) | (6,370 | ) | ||||||||
Equity in losses |
(19,299 | ) | 11,297 | (21,126 | ) | 9,579 | ||||||||||
Effect of exchange rate |
1,415 | (375 | ) | 2,159 | (1,052 | ) | ||||||||||
Ending balance |
$ | 348,215 | $ | 381,214 | $ | 348,215 | $ | 381,214 | ||||||||
The Company has concluded its investment in the Grocery-Anchored Portfolio qualifies as a
variable interest entity (VIE). The Grocery-Anchored Portfolio is financed with a $100 million
secured note, which is solely guaranteed by the Companys joint venture partner (the JV Partner).
The JV Partner is the manager of the investment properties, which provides it with the power to
direct the activities of the VIE that most significantly impact the VIEs financial performance.
Based upon the loan guarantees and the JV Partners ability to direct the activities that
significantly impact the economic performance of the VIE, the Company has determined that it is not
the primary beneficiary of this VIE. The Companys maximum loss exposure is expected to change in
future periods as a result of income earned, distributions received and contributions made. During
the period of its involvement with the VIE, the Company has not provided financial or other support
to the Grocery-Anchored Portfolio, which it was not previously contractually required to provide.
The table below includes the Companys maximum loss exposure related to this investment as of June
30, 2011 and December 31, 2010, which is equal to the carrying value of its investment in the joint
venture reflected in the balance sheet line item Investments in unconsolidated entities for each
period. Amounts are in thousands:
Investment in Grocery | ||||||||
Period | -Anchored Portfolio (1) | Maximum Risk of Loss | ||||||
June 30, 2011 |
$ | 63,033 | $ | 63,033 | ||||
December 31, 2010 |
$ | 66,123 | $ | 66,123 |
(1) | Represents the carrying amount of the investment in the Grocery-Anchored Portfolio, which includes the net effect of contributions made, distributions received and the Companys share of equity in earnings. |
Investment in the Core Fund
Condensed consolidated financial information of the Core Fund is presented below:
Condensed Consolidated Balance Sheets of the Core Fund
June 30, 2011 | December 31, 2010 | |||||||
(In thousands) | ||||||||
ASSETS |
||||||||
Cash |
$ | 113,624 | $ | 131,353 | ||||
Investment property, net |
3,138,274 | 3,265,193 | ||||||
Other assets |
779,781 | 725,498 | ||||||
Total Assets |
$ | 4,031,679 | $ | 4,122,044 | ||||
LIABILITIES AND EQUITY |
||||||||
Debt |
$ | 2,455,876 | $ | 2,463,920 | ||||
Other liabilities |
306,010 | 260,922 | ||||||
Redeemable noncontrolling interests |
415,931 | 454,036 | ||||||
Partners equity |
853,862 | 943,166 | ||||||
Total Liabilities and Equity |
$ | 4,031,679 | $ | 4,122,044 | ||||
14
Table of Contents
Condensed Consolidated Statements of Operations of the Core Fund
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Revenues, other income and interest income |
$ | 117,119 | $ | 116,320 | $ | 234,573 | $ | 238,588 | ||||||||
Property operating expenses |
(54,507 | ) | (46,164 | ) | (110,213 | ) | (103,444 | ) | ||||||||
Interest expense |
(33,414 | ) | (35,944 | ) | (66,710 | ) | (69,281 | ) | ||||||||
Depreciation and amortization |
(35,934 | ) | (40,608 | ) | (73,669 | ) | (82,386 | ) | ||||||||
Impairment
loss |
(101,057 | ) | | (101,057 | ) | | ||||||||||
Income tax expense |
(106 | ) | (105 | ) | (213 | ) | (195 | ) | ||||||||
Income from discontinued operations |
| 107,844 | | 108,838 | ||||||||||||
(Income) loss allocated to redeemable
noncontrolling interests |
33,784 | (64,061 | ) | 34,561 | (62,833 | ) | ||||||||||
Net income (loss) |
$ | (74,115 | ) | $ | 37,282 | $ | (82,728 | ) | $ | 29,287 | ||||||
During
the second quarter of 2011, the Core Fund recorded an impairment loss of $101.1
million related to five of its properties located in suburban Sacramento. This resulted in an
increase in the Companys equity in losses of the Core Fund for the six months ended June 30, 2011
of $18.0 million.
Three First National Plaza
In June 2011, the Core Fund entered into a contract to sell its interest in Three First
National Plaza, an office building located in Chicago, Illinois. This sale is
expected to close during the third quarter of 2011. However, there can be no assurance the sale
will be completed.
One North Wacker
In July 2011, the Core Fund entered into a contract to sell 49% of its interest in One North
Wacker, an office building located in Chicago, Illinois. This sale is expected
to close by the fourth quarter of 2011. However, there can be no assurance the sale will be
completed.
Investment in Distribution Park Rio
Condensed consolidated financial information of Distribution Park Rio is presented below:
Condensed Consolidated Balance Sheets of Distribution Park Rio
June 30, 2011 | December 31, 2010 | |||||||
(In thousands) | ||||||||
ASSETS |
||||||||
Cash |
$ | 141 | $ | 55 | ||||
Investment property, net |
67,134 | 62,476 | ||||||
Other assets |
1,560 | 2,505 | ||||||
Total Assets |
$ | 68,835 | $ | 65,036 | ||||
LIABILITIES AND EQUITY |
||||||||
Total liabilities |
$ | 495 | $ | 378 | ||||
Partners equity |
68,340 | 64,658 | ||||||
Total Liabilities and Equity |
$ | 68,835 | $ | 65,036 | ||||
15
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Condensed Consolidated Statements of Operations of Distribution Park Rio
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Total revenues and interest income |
$ | 2,303 | $ | 2,067 | $ | 4,556 | $ | 4,432 | ||||||||
Total expenses |
(954 | ) | (1,006 | ) | (2,061 | ) | (1,968 | ) | ||||||||
Net income |
$ | 1,349 | $ | 1,061 | $ | 2,495 | $ | 2,464 | ||||||||
Investment in the Grocery-Anchored Portfolio
Condensed consolidated financial information of the Grocery-Anchored Portfolio is presented
below:
Condensed Consolidated Balance Sheets of WRI HR Retail Venture I LLC
June 30, 2011 | December 31, 2010 | |||||||
(In thousands) | ||||||||
ASSETS |
||||||||
Cash |
$ | 2,913 | $ | 2,454 | ||||
Investment property, net |
166,522 | 167,909 | ||||||
Other assets |
23,125 | 27,701 | ||||||
Total Assets |
$ | 192,560 | $ | 198,064 | ||||
LIABILITIES AND EQUITY |
||||||||
Debt |
$ | 126,903 | $ | 127,334 | ||||
Other liabilities |
6,683 | 7,335 | ||||||
Members equity |
58,974 | 63,395 | ||||||
Total Liabilities and Equity |
$ | 192,560 | $ | 198,064 | ||||
Condensed Consolidated Statements of Operations of WRI HR Retail Venture I LLC
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Total revenues and interest income |
$ | 5,883 | $ | 6,068 | $ | 11,884 | $ | 12,268 | ||||||||
Total expenses |
(5,399 | ) | (5,496 | ) | (10,889 | ) | (11,197 | ) | ||||||||
Net income |
$ | 484 | $ | 572 | $ | 995 | $ | 1,071 | ||||||||
16
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6. Debt Financing
The following table includes all of the Companys outstanding notes payable balances as of
June 30, 2011 and December 31, 2010 (in thousands, except interest rates):
Principal | Principal | |||||||||||||||
Outstanding | Outstanding | |||||||||||||||
Maturity | Interest | at June 30, | at December 31, | |||||||||||||
Description | Date | Rate | 2011 | 2010 | ||||||||||||
SECURED MORTGAGE DEBT |
||||||||||||||||
Metropolitan Life Insurance Company 1515 S. Street |
9/1/2011 | 5.680 | % | $ | 45,000 | (1) | $ | 45,000 | ||||||||
Wells Fargo Bank, N.A. Airport Corporate Center |
3/11/2012 | Variable | 64,109 | (2) | 64,454 | |||||||||||
The Prudential Insurance Company of America One
Wilshire |
11/1/2012 | 5.980 | % | 159,500 | 159,500 | |||||||||||
New York State Teachers Retirement System 2555
Grand |
5/1/2013 | 5.375 | % | 86,000 | 86,000 | |||||||||||
New York State Teachers Retirement System
Williams Tower |
6/1/2013 | 5.500 | % | 165,000 | 165,000 | |||||||||||
Artesia Mortgage Capital Corporation Arapahoe
Business Park I |
6/11/2015 | 5.330 | % | 9,622 | 9,687 | |||||||||||
Artesia Mortgage Capital Corporation Arapahoe
Business Park II |
11/11/2015 | 5.530 | % | 10,140 | 10,215 | |||||||||||
IXIS Real Estate Capital Inc. Raytheon/ DIRECTV
Buildings |
12/5/2016 | 5.675 | % | 51,648 | 52,069 | |||||||||||
Artesia Mortgage Capital Corporation
345 Inverness Drive |
12/11/2016 | 5.850 | % | 15,220 | 15,317 | |||||||||||
Capmark Finance, Inc. (3) Atrium on Bay |
02/26/2017 | 5.330 | % | | 190,019 | |||||||||||
HSH POOLED MORTGAGE FACILITY |
||||||||||||||||
HSH Nordbank Citymark, 321 North Clark, 1900 and
2000 Alameda |
8/1/2016 | 5.8575 | % | 185,000 | 185,000 | |||||||||||
HSH Nordbank 3400 Data Drive, Watergate Tower IV |
1/12/2017 | 5.2505 | % | 98,000 | 98,000 | |||||||||||
HSH Nordbank Daytona and Laguna Buildings |
5/2/2017 | 5.3550 | % | 119,000 | 119,000 | |||||||||||
HSH Nordbank 3 Huntington Quadrangle |
7/19/2017 | 5.9800 | % | 48,000 | 48,000 | |||||||||||
HSH Nordbank Seattle Design Center/5th and Bell |
8/14/2017 | 6.0300 | % | 70,000 | 70,000 | |||||||||||
MET LIFE SECURED MORTGAGE FACILITY |
||||||||||||||||
Met Life JPMorgan Chase Tower/
Minneapolis Office/Flex Portfolio |
1/1/2013 | 5.70 | % | 205,000 | 205,000 | |||||||||||
OTHER NOTES PAYABLE |
||||||||||||||||
KeyBank Revolving Credit Facility |
2/3/2013 | Variable | | (4) | | |||||||||||
Atrium Note Payable (3) |
10/1/2011 | 7.390 | % | | 2,896 | |||||||||||
TOTAL PRINCIPAL OUTSTANDING |
1,331,239 | 1,525,157 | ||||||||||||||
Unamortized Discount (5) |
(3,273 | ) | (3,613 | ) | ||||||||||||
NOTES PAYABLE |
$ | 1,327,966 | $ | 1,521,544 | ||||||||||||
(1) | The Company has loan with a Metropolitan Life Insurance with an outstanding principal amount of $45.0 million as of June 30, 2011, which was scheduled to mature on August 1, 2011. In June 2011, the Company executed a loan application and paid a good faith deposit for a new, amortizing five-year loan with Metropolitan Life Insurance to be secured by 1515 S. Street. In addition, the Company received an extension from the lender extending the maturity date on its existing loan to September 1, 2011. The Company expects the new amortizing loan to have an origination date on or before September 1, 2011, with a principal amount of $41.0 million, an interest rate of 4.25% and a maturity date of September 1, 2016. | |
(2) | In August 2011, the Company executed a mortgage agreement with John Hancock Life Insurance (USA) and retired the existing $64.1 million note payable. The new mortgage is a 10-year, $79.0 million loan with a fixed rate of 5.14% and is secured by our interest in Airport Corporate Center. The mortgage requires interest payments for the first two years, at which time the mortgage begins amortizing until its maturity. | |
(3) | Atrium on Bay was sold on June 1, 2011. All related mortgages and notes payable were assumed by the purchaser. See Note 4 Discontinued Operations for additional information. |
17
Table of Contents
(4) | The Company entered into a new $45.0 million revolving line of credit with KeyBank pursuant to a Credit Agreement dated February 3, 2011 and a Promissory Note dated February 3, 2011. The facility (as amended) provided for an original expiration date of August 3, 2011, subject to extension at the Companys election for an additional 18-month period. Interest at the Companys election, will be determined based on (i) the Prime Rate, (ii) the Federal Funds Rate or (iii) LIBOR plus a margin of at least 3.25%. On August 2, 2011, the Company exercised its option to extend the maturity date to February 3, 2013. | |
(5) | The Company assumed notes payable in connection with various acquisitions, which were recorded at their estimated fair value as of the date of acquisition. The difference between the fair value at acquisition and the principal outstanding is amortized over the term of the related note. |
The following table summarizes required principal payments on the Companys outstanding notes
payable for the period from July 1, 2011 through December 31, 2011, for each of the years ended
December 31, 2012 through December 31, 2015 and for the period thereafter (in thousands):
Principal Payments due by Period | ||||||||||||||||||||||||
July 1, 2011 | ||||||||||||||||||||||||
December | ||||||||||||||||||||||||
31, 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | |||||||||||||||||||
Notes Payable |
$ | 46,019 | $ | 224,638 | $ | 457,480 | $ | 1,567 | $ | 19,995 | $ | 581,540 |
The Company is not aware of any instances of noncompliance with financial covenants as of June
30, 2011.
7. Derivative Instruments
The Company has several interest rate swap transactions with HSH Nordbank AG, New York Branch
(HSH Nordbank). These swap transactions were entered into as economic hedges against the
variability of future interest rates on the Companys variable interest rate borrowings with HSH
Nordbank. The Company has not designated any of its derivative instruments as hedging instruments
for accounting purposes. The interest rate swaps have been recorded at their estimated fair value
in the accompanying condensed consolidated balance sheets and changes in the fair value were
recorded in loss on derivative instruments, net in the Companys condensed consolidated statements
of operations. See Note 13 Fair Value Disclosures for additional information regarding fair
value measurements.
In addition, the Company entered into a foreign currency contract related to the disposition
of Distribution Park Araucaria, an industrial property located in Curitiba, Brazil. The contract
was entered into as an economic hedge against the variability of the foreign currency exchange rate
related to the Companys sales proceeds and was settled on February 24, 2010.
The tables below provide additional information regarding each of the Companys derivative
instruments (all amounts are in thousands):
Derivatives not designated as | ||||||||
hedging instruments for accounting | Liability Derivatives Fair Value | |||||||
purposes: | June 30, 2011 | December 31, 2010 | ||||||
Interest rate swap contracts |
$ | (89,101 | ) | $ | (85,301 | ) | ||
Total derivatives |
$ | (89,101 | ) | $ | (85,301 | ) | ||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Loss on interest rate swap (1) |
$ | (8,996 | ) | $ | (24,374 | ) | $ | (3,800 | ) | $ | (30,227 | ) | ||||
Loss on foreign currency swap (2) |
| | | (110 | ) | |||||||||||
Total |
$ | (8,996 | ) | $ | (24,374 | ) | $ | (3,800 | ) | $ | (30,337 | ) | ||||
(1) | Amounts represent the loss on interest rate swaps due to changes in fair value and are recorded in loss on derivative instruments, net in the condensed consolidated statements of operations. |
18
Table of Contents
(2) | Amount represents the loss on the Companys foreign currency swap described above. This amount is recorded in income from discontinued operations, net of taxes in the condensed consolidated statements of operations. |
8. Distributions
With the authorization of its board of directors, the Company has declared distributions
monthly and aggregated and paid such distributions quarterly. The Company intends to continue this
distribution policy for so long as its board of directors decides this policy is in the best
interests of its shareholders. Beginning July 1, 2010, the annual distribution rate was decreased
from 6% to 5% (based on the Companys prior primary offering share price of $10.08 per share, and
the assumption that such distribution rate would be maintained for a twelve-month period). The
Company continued to declare distributions in the amount of $0.00138082 per share per day through
June 30, 2011.
The Company declared distributions for the months of July and August 2011. These distributions
will be calculated based on shareholders of record each day during each month in an amount equal to
$0.00138082 per share, per day and will be paid on October 1, 2011 in cash or reinvested in stock
for those participating in the Companys dividend reinvestment plan. Of the amount described above
for the July 2011 and August 2011 distribution, $0.00041425 of the per share, per day distribution
will be designated by the Company as a special distribution which will be a return of a portion of
the shareholders invested capital and, as such, will reduce their remaining investment in the
Company. The special distribution represents a portion of the proceeds from sales of investment
property. The above designations of a portion of the distribution as a special distribution will
not impact the tax treatment of the distributions to the Companys shareholders.
The table below outlines the Companys total distributions declared to shareholders and
noncontrolling interests for each of the quarters during 2011 and 2010, including the breakout
between the distributions paid in cash and those reinvested pursuant to the Companys dividend
reinvestment plan (all amounts are in thousands).
Noncontrolling | ||||||||||||||||
Shareholders | Interests | |||||||||||||||
Distributions for the Three | Cash | Distributions | ||||||||||||||
Months Ended | Distributions | Reinvested | Total Declared | Total Declared | ||||||||||||
2011 |
||||||||||||||||
June 30, 2011 |
$ | 15,995 | $ | 12,248 | $ | 28,243 | $ | 1,217 | ||||||||
March 31, 2011 |
$ | 15,491 | $ | 12,324 | $ | 27,815 | $ | 1,151 | ||||||||
Total |
$ | 31,486 | $ | 24,572 | $ | 56,058 | $ | 2,368 | ||||||||
2010 |
||||||||||||||||
December 31, 2010 |
$ | 15,473 | $ | 12,830 | $ | 28,303 | $ | 1,123 | ||||||||
September 30, 2010 |
$ | 14,986 | $ | 13,172 | $ | 28,158 | $ | 1,067 | ||||||||
June 30, 2010 |
$ | 17,226 | $ | 16,011 | $ | 33,237 | $ | 1,205 | ||||||||
March 31, 2010 |
$ | 16,480 | $ | 16,170 | $ | 32,650 | $ | 1,129 | ||||||||
Total |
$ | 64,165 | $ | 58,183 | $ | 122,348 | $ | 4,524 |
19
Table of Contents
9. Related Party Transactions
The table below outlines fees and expense reimbursements incurred that are payable to Hines,
the Advisor and Hines Real Estate Investments, Inc. (the Dealer Manager) for the three and six
months ended June 30, 2011 and 2010 and outstanding as of June 30, 2011 and December 31, 2010 (all
amounts are in thousands).
Incurred | Incurred | Unpaid as of | ||||||||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, | June 30, | June 30, | December 31, | |||||||||||||||||||||
Type and Recipient | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||
Participation Interest in the
Operating Partnership HALP
Associates Limited Partnership |
$ | (8,065 | ) | $ | 3,864 | $ | (4,181 | ) | $ | 7,741 | $ | 69,152 | $ | 73,333 | ||||||||||
Due to Affiliates | ||||||||||||||||||||||||
Selling Commissions the Dealer
Manager |
$ | | $ | | $ | | $ | 89 | $ | | $ | | ||||||||||||
Dealer Manager Fee the Dealer
Manager |
| | | 29 | | | ||||||||||||||||||
Issuer Costs the Advisor |
34 | | 34 | | | 9 | ||||||||||||||||||
Asset Management Fee the Advisor |
3,753 | 3,759 | 7,511 | 7,537 | 3,753 | 3,759 | ||||||||||||||||||
Disposition Fee the Advisor |
| 1,025 | | 1,410 | | | ||||||||||||||||||
Debt Financing Fee the Advisor |
| | | 650 | | | ||||||||||||||||||
Other the Advisor (1) |
904 | 1,120 | 1,705 | 1,699 | 405 | 785 | ||||||||||||||||||
Property Management Fee Hines |
1,830 | 1,810 | 3,664 | 3,681 | 108 | 12 | ||||||||||||||||||
Leasing Fee Hines |
318 | 361 | 1,663 | 849 | 1,002 | 958 | ||||||||||||||||||
Tenant Construction Management
Fees Hines |
18 | 1 | 27 | 1 | 9 | 15 | ||||||||||||||||||
Expense Reimbursements Hines
(with respect to management and
operation of the Companys
properties) |
4,245 | 4,454 | 8,673 | 8,769 | 230 | 633 | ||||||||||||||||||
Due to Affiliates |
$ | 5,507 | $ | 6,171 | ||||||||||||||||||||
(1) | Includes amounts the Advisor paid on behalf of the Company such as general and administrative expenses. These amounts are generally reimbursed to the Advisor during the month following the period in which they are incurred. |
10. Changes in Assets and Liabilities
The effect of the changes in asset and liability accounts on cash flows
from operating activities for the six months ended June 30, 2011 and
2010 is as follows (in thousands):
2011 | 2010 | |||||||
Change in other assets |
$ | (2,139 | ) | $ | (2,145 | ) | ||
Change in tenant and other receivables |
(6,168 | ) | (195 | ) | ||||
Change in deferred leasing costs |
(20,833 | ) | (12,053 | ) | ||||
Change in accounts payable and accrued expenses |
(16,651 | ) | (15,105 | ) | ||||
Change in participation interest liability |
(4,180 | ) | 7,741 | |||||
Change in other liabilities |
241 | (750 | ) | |||||
Change in due to affiliates |
(643 | ) | (5,054 | ) | ||||
Changes in assets and liabilities |
$ | (50,373 | ) | $ | (27,561 | ) | ||
11. Supplemental Cash Flow Disclosures
Supplemental cash flow disclosures for the six months ended June 30, 2011 and 2010 are as follows (in thousands):
2011 | 2010 | |||||||
Supplemental Disclosure of Cash Flow Information |
||||||||
Cash paid for interest |
$ | 42,237 | $ | 42,750 | ||||
Cash paid for income taxes |
$ | 1,211 | $ | 1,352 | ||||
Supplemental Schedule of Non-Cash Activities |
||||||||
Distributions declared and unpaid |
$ | 29,460 | $ | 34,442 | ||||
Distributions reinvested |
$ | 25,154 | $ | 32,862 | ||||
Loan transferred upon disposition of investment property |
$ | 199,278 | $ | |
20
Table of Contents
12. Commitments and Contingencies
On December 8, 2006, Norwegian Cruise Line (NCL) signed a lease renewal for its space in
Airport Corporate Center, an office property located in Miami, Florida. In connection with this
renewal, the Company committed to fund $10.4 million of construction costs related to NCLs
expansion and refurbishment of its space, to be paid in future periods. As of June 30, 2011, $2.2
million of this commitment remained unfunded and was recorded in accounts payable and accrued
expenses in the accompanying condensed consolidated balance sheet.
On July 1, 2010, Deloitte LLP (Deloitte) signed a lease renewal for its space in JPMorgan
Chase Tower, an office property located in Dallas, Texas. In connection with this renewal, the
Company committed to fund $18.1 million of construction costs related to Deloittes expansion and
refurbishment of its space, to be paid in future periods. As of June 30, 2011, $5.7 million of this
commitment remained unfunded and is recorded in accounts payable and accrued expenses in the
accompanying condensed consolidated balance sheet.
The Company is subject to various legal proceedings and claims that arise in the ordinary
course of business. These matters are generally covered by insurance. While the resolution of these
matters cannot be predicted with certainty, management believes the final outcome of such matters
will not have a material adverse effect on the Companys condensed consolidated financial
statements.
13. Fair Value Disclosures
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Derivative Instruments
The valuation of these instruments is determined based on assumptions that management believes
market participants would use in pricing, using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each derivative. This analysis
reflects the contractual terms of the derivatives, including the period to maturity, and uses
observable market-based inputs, including interest rate curves and implied volatilities. The fair
values of interest rate contracts have been determined using the market standard methodology of
netting the discounted future fixed cash receipts (or payments) and the discounted expected
variable cash payments (or receipts). The variable cash payments (or receipts) are based on an
expectation of future interest rates (forward curves) derived from observable market interest rate
curves.
Although the Company has determined the majority of the inputs used to value its derivatives
fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with
its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the
likelihood of default by the Company and its counterparty, HSH Nordbank. In adjusting the fair
values of its derivative contracts for the effect of nonperformance risk, the Company has
considered the impact of netting and any applicable credit enhancements, such as collateral
postings, thresholds and guarantees. However, as of June 30, 2011, the Company has assessed the
significance of the impact of the credit valuation adjustments on the overall valuation of its
derivative positions and has determined that the credit valuation adjustments are not significant
to the overall valuations of its derivatives. As a result, the Company has determined its
derivative valuations are classified in Level 2 of the fair value hierarchy.
The following tables set forth the Companys interest rate swaps which are measured at fair
value on a recurring basis by level within the fair value hierarchy as of June 30, 2011 and
December 31, 2010, (in thousands):
Basis of Fair Value Measurements | ||||||||||||||||
Quoted Prices In | Significant Other | |||||||||||||||
Active Markets for | Observable | Significant | ||||||||||||||
Identical Items | Inputs | Unobservable Inputs | ||||||||||||||
Description | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
June 30, 2011 |
$ | (89,101 | ) | $ | | $ | (89,101 | ) | $ | | ||||||
December 31, 2010 |
$ | (85,301 | ) | $ | | $ | (85,301 | ) | $ | |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Participation Interest
The Company records a liability related to the Participation Interest based on the estimated
settlement value in the accompanying condensed consolidated balance sheets which is remeasured at
fair value at each balance sheet date. The fair value of the Operating Partnership interest
underlying the Participation Interest liability is determined based on the redemption price in
place under the Companys share redemption program as of each balance sheet date. Adjustments
required to record this liability at fair value are included in asset management and acquisition fees in the accompanying condensed consolidated
statements of operations. On May 24,
21
Table of Contents
2011, the Companys board of directors established a new estimated value per share and new per share redemption price of $7.78, which was reduced from the
prior redemption price of $9.15. As a result, the fair value of the Participation Interest
liability as of June 30, 2011 was reduced by $12.2 million resulting in a reduction of the asset
management fee expense for the period.
Other Financial Instruments
As of June 30, 2011, management estimated that the fair value of notes payable, which had a
carrying value of $1.3 billion, was $1.3 billion. As of December 31, 2010, management estimated
that the fair value of notes payable, which had a carrying value of approximately $1.5 billion, was
$1.5 billion. The discount rates used approximate current lending rates for loans or groups of
loans with similar maturities and credit quality, assumes the debt is outstanding through maturity
and considers the debts collateral (if applicable). Management has utilized market information as
available or present value techniques to estimate the amounts required to be disclosed. Since such
amounts are estimates that are based on limited available market information for similar
transactions, there can be no assurance that the disclosed values could be realized.
Other financial instruments not measured at fair value on a recurring basis include cash and
cash equivalents, restricted cash, distributions receivable, tenant and other receivables, accounts
payable and accrued expenses, other liabilities and distributions payable. The carrying value of
these items reasonably approximates their fair value based on their highly-liquid nature and/or
short-term maturities.
14. Reportable Segments
The Companys investments in real estate are geographically diversified and management
evaluates the operating performance of each at an individual property level. The Company has
determined it has four reportable segments: 1) office properties, 2) a domestic industrial
property, 3) domestic retail properties and 4) an international industrial property. The office
properties segment consists of 20 office properties that the Company owns directly as well as 24
office properties that are owned indirectly through the Companys investment in the Core Fund. The
domestic industrial property segment consists of one directly-owned industrial property located in
Dallas, Texas. The domestic retail segment consists of 12 grocery-anchored shopping centers that
are owned indirectly through the Companys investment in a joint venture with Weingarten. The
international industrial property segment consists of one industrial property located in Rio de
Janeiro, Brazil, that is owned indirectly through the Companys investment in a joint venture with
a Hines affiliate.
The Companys indirect investments are accounted for using the equity method of accounting. As
such, the activities of these investments are reflected in investments in unconsolidated entities
in the condensed consolidated balance sheets and equity in losses of unconsolidated entities, net
in the condensed consolidated statements of operations.
The tables below provide additional information related to each of the Companys segments (in
thousands) and a reconciliation to the Companys net income or loss, as applicable.
Corporate-Level Accounts includes amounts incurred by the corporate-level entities which are not
allocated to any of the reportable segments.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total revenue |
||||||||||||||||
Office properties |
$ | 70,489 | $ | 68,139 | $ | 138,261 | $ | 141,100 | ||||||||
Domestic industrial property |
1,151 | 1,098 | 2,286 | 2,196 | ||||||||||||
Total revenue |
$ | 71,640 | $ | 69,237 | $ | 140,547 | $ | 143,296 | ||||||||
Net operating income (1) |
||||||||||||||||
Office properties (1) |
$ | 42,320 | $ | 40,450 | $ | 80,489 | $ | 82,683 | ||||||||
Domestic industrial property (1) |
886 | 874 | 1,769 | 1,737 | ||||||||||||
Total segment net operating income |
$ | 43,206 | $ | 41,324 | $ | 82,258 | $ | 84,420 | ||||||||
Equity in earnings (losses) of unconsolidated entities |
||||||||||||||||
Equity in losses of domestic office properties |
$ | (19,977 | ) | $ | 10,602 | $ | (22,392 | ) | $ | 8,200 | ||||||
Equity in losses of domestic retail properties |
(11 | ) | 36 | (10 | ) | 31 | ||||||||||
Equity in earnings of international industrial property |
689 | 659 | 1,276 | 1,348 | ||||||||||||
Total
equity in earnings (losses) of unconsolidated entities |
$ | (19,299 | ) | $ | 11,297 | $ | (21,126 | ) | $ | 9,579 | ||||||
June 30, 2011 | December 31, 2010 | |||||||
Total assets |
||||||||
Office properties |
$ | 2,314,862 | $ | 2,592,579 | ||||
Domestic industrial property |
40,796 | 41,650 | ||||||
Investment
in unconsolidated entities |
||||||||
Office properties |
251,103 | 275,372 | ||||||
Domestic retail properties |
63,033 | 66,123 | ||||||
International industrial property |
34,079 | 32,303 | ||||||
Corporate
level accounts (2) |
239,461 | 141,989 | ||||||
Total assets |
$ | 2,943,334 | $ | 3,150,016 | ||||
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Reconciliation to net income (loss) |
||||||||||||||||
Total segment net operating income |
$ | 43,206 | $ | 41,324 | $ | 82,258 | $ | 84,420 | ||||||||
Depreciation and amortization |
(24,142 | ) | (25,187 | ) | (47,548 | ) | (50,737 | ) | ||||||||
Asset management and acquisition fees |
4,312 | (7,623 | ) | (3,331 | ) | (15,278 | ) | |||||||||
General and administrative |
(1,865 | ) | (2,426 | ) | (3,478 | ) | (3,789 | ) | ||||||||
Loss on derivative instruments, net |
(8,996 | ) | (24,374 | ) | (3,800 | ) | (30,227 | ) | ||||||||
Interest expense |
(20,394 | ) | (20,260 | ) | (40,285 | ) | (40,491 | ) | ||||||||
Interest income |
88 | 63 | 143 | 144 | ||||||||||||
Provision for income taxes |
(136 | ) | (111 | ) | (218 | ) | (240 | ) | ||||||||
Equity in earnings (losses) of unconsolidated entities, net |
(19,299 | ) | 11,297 | (21,126 | ) | 9,579 | ||||||||||
Income from discontinued operations, net of tax |
107,908 | 18,878 | 108,784 | 25,264 | ||||||||||||
Net income (loss) |
$ | 80,682 | $ | (8,419 | ) | $ | 71,399 | $ | (21,355 | ) | ||||||
(1) | Revenues less property operating expenses, real property taxes and property management fees. | |
(2) | This amount primarily consists of the Companys $107.0 million cash collateral deposit related to the letter of credit with the Bank of Montreal (see Note 2 Summary of Significant Accounting Policies Restricted Cash for additional information) and cash and cash equivalents at the corporate level, which includes proceeds from the sale of Atrium on Bay. |
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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 unaudited condensed consolidated financial statements and
the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following
discussion should also 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.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements include statements concerning future financial performance
and distributions, future debt and financing levels, acquisitions and investment objectives,
payments to Hines Advisors Limited Partnership (the Advisor), and its affiliates and other plans
and objectives of management for future operations or economic performance, or assumptions or
forecasts related thereto as well as all other statements that are not historical statements. These
statements are only predictions. We caution that forward-looking statements are not guarantees.
Actual events or our investments and results of operations could differ materially from those
expressed or implied in forward-looking statements. Forward-looking statements are typically
identified by the use of terms such as may, should, expect, could, intend, plan,
anticipate, estimate, believe, continue, predict, potential or the negative of such
terms and other comparable terminology.
The forward-looking statements included in this Quarterly Report on Form 10-Q are based on our
current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other
things, future economic, competitive and market conditions, the availability of future financing
and future business decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Any of the assumptions underlying forward-looking statements
could be inaccurate. To the extent that our assumptions differ from actual results, our ability to
meet such forward-looking statements, including our ability to generate positive cash flow from
operations, pay distributions to our shareholders and maintain the value of the real estate
properties in which we hold an interest, may be significantly hindered.
The following are some of the risks and uncertainties, which could cause actual results to
differ materially from those presented in certain forward-looking statements:
| The potential need to fund tenant improvements, lease-up costs or other capital expenditures, as well as increases in property operating expenses and costs of compliance with environmental matters or discovery of previously undetected environmentally hazardous or other undetected adverse conditions at our properties; | ||
| Risks associated with debt; | ||
| Competition for tenants, including competition with affiliates of Hines Interests Limited Partnership (Hines); | ||
| Risks associated with adverse changes in general economic or local market conditions, including terrorist attacks and other acts of violence, which may affect the markets in which we and our tenants operate; | ||
| Catastrophic events, such as hurricanes, earthquakes, tornadoes and terrorist attacks; and our ability to secure adequate insurance at reasonable and appropriate rates; | ||
| Risks associated with the currency exchange rate related to our international investments; | ||
| Risks associated with our international investments, including the burden of complying with a wide variety of foreign laws and the uncertainty of such laws, the tax treatment of transaction structures, political and economic instability, foreign currency fluctuations, and inflation and governmental measures to curb inflation may adversely affect our operations and our ability to make distributions; | ||
| The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and make additional investments; | ||
| Changes in governmental, tax, real estate and zoning laws and regulations and the related costs of compliance and increases in our administrative operating expenses, including expenses associated with operating as a public company; |
24
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| Risks relating to our investment in Hines US Core Office Fund LP (the Core Fund), such as its reliance on Hines for its operations and investments, and our potential liability for Core Fund obligations; | ||
| The lack of liquidity associated with our assets; | ||
| Our reliance on our Advisor, Hines and affiliates of Hines for our day-to-day operations and our Advisors ability to attract and retain high-quality personnel who can provide service at a level acceptable to us; | ||
| Risks associated with conflicts of interests that result from our relationship with our Advisor and Hines, as well as conflicts of interests certain of our officers and directors face relating to the positions they hold with other entities; and | ||
| Our ability to continue to qualify as a real estate investment trust (REIT) for federal income tax purposes. |
These risks are more fully discussed in, and all forward-looking statements should be read in
light of, all of the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on
Form 10-K for the year ended December 31, 2010.
You are cautioned not to place undue reliance on any forward-looking statements included in
this Form 10-Q. All forward-looking statements are made as of the date of this Form 10-Q and the
risk that actual results will differ materially from the expectations expressed in this Form 10-Q
may increase with the passage of time. In light of the significant uncertainties inherent in the
forward-looking statements included in this Form 10-Q, the inclusion of such forward-looking
statements should not be regarded as a representation by us or any other person that the objectives
and plans set forth in this Form 10-Q will be achieved. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by reference to these risks and uncertainties. Each forward-looking
statement speaks only as of the date of the particular statement, and we do not undertake to update
any forward-looking statement.
Executive Summary
Hines Real Estate Investment Trust, Inc. (Hines REIT and, together with its consolidated
subsidiaries, we, us or the Company) and its subsidiary, Hines REIT Properties, L.P. (the
Operating Partnership) were formed in August 2003 for the purpose of investing in and owning
interests in real estate. We have invested in real estate to satisfy our primary investment
objectives including preserving invested capital, paying regular cash distributions and achieving
modest capital appreciation of our assets over the long term. We have made investments directly
through entities wholly owned by the Operating Partnership or indirectly through other entities
such as through our investment in the Core Fund. As of June 30, 2011, we had direct and indirect
interests in 58 properties. These properties consist of 44 office properties located throughout the
United States, one industrial property in Dallas, Texas, one industrial property in Brazil and a
portfolio of 12 grocery-anchored shopping centers located primarily in five states in the
Southeastern United States (the Grocery-Anchored Portfolio).
In order to provide capital for these investments, we raised over $2.5 billion through public
offerings of our common stock since we commenced our initial public offering in June 2004. In
consideration of market conditions and other factors, our board of directors determined to cease
sales of our shares to new investors pursuant to the third public offering as of January 1, 2010.
However, we have continued to sell shares under our dividend reinvestment plan. Based on market
conditions and other considerations, we do not currently expect to commence any future offerings
other than those related to shares issued under our dividend reinvestment plan.
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As we have disclosed previously, we were required to revalue our common shares 18 months after
the close of our primary offering. Hines REIT was closed to new investors as of January 1, 2010.
Accordingly, after considering many factors, effective May 24, 2011, our board of directors
established the new estimated value per share of $7.78. The primary driver in the decrease in our
estimated share value was the economic environments impact on the commercial real estate markets
during the global recession. The financial services sector, which represents the second largest
tenant concentration in our portfolio, was one of the hardest hit in this downturn, and
institutions such as banks, insurance companies and mortgage companies were forced to reduce
expenditures and cut staff. Many had to reduce space or move to lesser-quality space to save on
rent.
The rise in vacancies combined with lower market rental rates and reduced investment sales
activity have resulted in lower valuations of properties. Additionally, our notes payable
valuations were lower due to the current low interest rate environment and the shorter terms
remaining on our loans. Lower property values, together with lower debt valuations, resulted in the
lower estimated value of our shares.
We pay distributions to our shareholders on a quarterly basis. Beginning July 1, 2010, the
annual distribution rate was decreased from 6% to 5% (based on our prior primary offering share
price of $10.08 per share, and the assumption that such distribution rate would be maintained for a
twelve-month period). We continued to declare distributions at an annual rate of 5% per share
through June 30, 2011.
Additionally, the board has declared distribution rates for the months of July 2011 and August
2011 at $0.00138082 per share, per day, the same amount as has been declared since July 1, 2010,
which represents an annual distribution rate of 6.5% on our new estimated share value of $7.78
(assuming the current distribution rate is maintained for a twelve-month period). These
distributions will be paid from two sources. Approximately 70% will be paid from funds generated by
our operations and approximately 30% will be a special distribution from the proceeds on sales of
certain properties. This special distribution represents a return of our shareholders invested
capital.
Economic Update
Although U.S. real gross domestic product (GDP) has grown for eight consecutive quarters,
the economic recovery appears to have slowed. In fact, GDP was only up 0.4% and 1.3% in the first
quarter and second quarter, respectively. While GDP has shown some growth, unemployment remains
high and increased slightly during the last quarter. However, the U.S. economy has added jobs in
nine consecutive months and jobs are up on a net basis since its employment lows in February 2010.
Additionally, concerns and uncertainty resulting from raising the debt ceiling in the U.S. and
confusion about Europes strategy to fight its worsening debt crisis appear to have diminished
investor confidence in the global economy and have caused instability in the U.S. markets.
Commercial real estate is starting to show signs of recovery following the global financial
crisis. The NCREIF Property Index (NPI) reported a positive total return of 3.9% in second quarter
2011, which was its sixth consecutive quarter of positive total return. Additionally, NCREIF is
reporting that average occupancy is 88.8%, which is up 3.8% from December 31, 2010 and up 4.3% from
its lows at September 30, 2010. Although real estate fundamentals have improved, the lasting
effects of the recession are still being felt and have had an adverse impact on tenant demand,
overall occupancies, leasing velocity, rental rates, subletting and tenant defaults.
As with most commercial real estate, our portfolio of assets has not been immune to the
effects of a recession; however, due to the quality and diversification of our portfolio, we
continue to believe that our portfolio is relatively well-positioned to recover from the negative
impact from the recent down cycle. In spite of the challenges presented by the uncertain economy
and markets, our portfolio was 89% leased as of both June 30, 2011 and December 31, 2010. Our
management closely monitors the portfolios lease expirations, which range from 5.5% to 8.2% of
leasable square feet per year from now through the end of 2012. We believe this level of
expirations is manageable, and we will remain focused on filling tenant vacancies with high-quality
tenants in each of the markets in which we operate. Although we continue to be leased to a diverse
tenant base over a variety of industries, our portfolio is approximately 17% leased to over 100
companies in the legal industry, approximately 14% leased to over 200 companies in the financial
and insurance industries, approximately 13% leased to over 50 companies in the manufacturing
industry and approximately 12% leased to over 100 companies in the information technology industry.
Although debt capital was more difficult and expensive to obtain during the economic downturn,
the debt markets have shown signs of improvement and financing has become more readily available at
attractive pricing for well-located, high quality assets. See Financial Condition, Liquidity and
Capital Resources Cash Flows From Financing Activities Debt Financings for further
discussion on current financing activity in our portfolio. We have managed our portfolio to date
in an effort to minimize our exposure to volatility in the debt capital markets. We have done this
by using moderate levels of long-term fixed-rate debt and minimizing our exposure to short-term
variable-rate debt which is more likely to be impacted by market volatility. Our portfolio was 55%
leveraged as of June 30, 2011, with 87% of our debt in the form of fixed-rate mortgage loans (some
of which are effectively fixed through the use of interest rate swaps) which expire in more than
one year. This leverage percentage is calculated using the estimated aggregate value
of our real estate investments (including our pro rata share of real estate assets and related
debt owned through our investments in other entities such as the Core Fund), cash and cash
equivalents and restricted cash on hand as of that date.
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As discussed above, while Hines REIT has not been isolated from these and other challenges, we
believe the fundamentals of our high-quality portfolio remain intact. We are optimistic that the
portfolio will benefit in the coming years as the broader economic and real estate recovery takes
hold. We have already seen improved property values in some markets, and we believe we are
well-positioned to benefit in the future from improving market conditions and rising values.
Critical Accounting Policies
Each of our critical accounting policies involves the use of estimates that require management
to make assumptions that are subjective in nature. Management relies on its experience, collects
historical and current market data, and analyzes these assumptions in order to arrive at what it
believes to be reasonable estimates. In addition, application of these accounting policies involves
the exercise of judgments regarding assumptions as to future uncertainties. Actual results could
materially differ from these estimates. A disclosure of our critical accounting policies is
included in our Annual Report on Form 10-K for the year ended December 31, 2010 in Managements
Discussion and Analysis of Financial Condition and Results of Operations. There have been no
significant changes to our policies during 2011.
Financial Condition, Liquidity and Capital Resources
General
Our principal cash requirements are for property-level operating expenses, capital
improvements and leasing costs, debt service, corporate-level general and administrative expenses,
distributions and redemptions. We have four primary sources of capital for meeting our cash
requirements:
| proceeds from our dividend reinvestment plan; | ||
| debt financings, including secured or unsecured facilities; | ||
| proceeds from the sale of our properties; and | ||
| cash flow generated by our real estate investments and operations. |
We expect that our operating cash needs will primarily be met through cash flow generated by
our properties and unconsolidated entities. Additionally, we are continually evaluating the hold
period for each of our investments to determine the appropriate time to sell assets in order to
achieve attractive total returns and provide additional liquidity to the Company. During the year
ended December 31, 2010, we received proceeds of $141.9 million from the sale of three industrial
properties in Brazil and a land parcel in Houston, Texas.
On June 1, 2011, we sold Atrium on Bay, a mixed-use office and retail complex located in the
Downtown North submarket of the central business district of Toronto, Canada. The contract sales
price for Atrium on Bay was $344.8 million CAD ($353 million USD, based on the exchange rate in
effect on the date of sale), exclusive of transaction costs. The net proceeds received from this
sale were $128.7 million after transaction costs, assumption of related mortgage debt by the
purchaser and local taxes.
We have one mortgage loan with $45.0 million of outstanding principal secured by our interest
in 1515 S. Street, which will mature in September 2011. In June 2011, we executed a loan
application and paid a good faith deposit for a new five-year amortizing loan with Metropolitan
Life Insurance in order to refinance this maturing loan. We expect the amortizing loan to have an
origination date on or before September 1, 2011 with a principal amount of $41.0 million, an
interest rate of 4.25% and a maturity date of September 1, 2016. Additionally, in June 2011, we
exercised our option to extend the maturity date of our $45.0 million revolving line of credit with
KeyBank for 18-months to February 3, 2013.
In August 2011, we executed a mortgage agreement with John Hancock Life Insurance Company
(USA) to refinance a maturing $64.1 million mortgage, which is secured by our interest in Airport
Corporate Center. The new mortgage is a 10-year, $79.0 million mortgage with a fixed rate of 5.14%.
The mortgage requires interest payments for the first two years, at which time the mortgage begins
amortizing until its maturity.
In addition to the mortgages described above, we have one mortgage loan expiring in 2012 and
three expiring in 2013 with outstanding principal balances totaling $159.5 million and $456.0
million, respectively. We expect to refinance these mortgages, but if we are unable to refinance or
are required to make principal payments upon refinancing, we expect to use cash flows from
operating activities, proceeds from the sale of other real estate investments or proceeds from our
revolving line of credit. Additionally, we could be required to post additional collateral or
provide certain leasing or capital guarantees under our secured credit facility with HSH Nordbank in future periods. See Managements Discussion and Analysis of Financial Condition and Results of
Operations Cash Flows from Financing Activities Debt Financings in our Annual Report on Form 10-K for the
year ended December 31, 2010 for additional information.
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Table of Contents
Cash Flows from Operating Activities
Our direct investments in real estate assets generate cash flow in the form of rental
revenues, which are reduced by interest payments, direct leasing costs and property-level operating
expenses. Property-level operating expenses consist primarily of salaries and wages of property
management personnel, utilities, cleaning, insurance, security and building maintenance costs,
property management and leasing fees, and property taxes. Additionally, we incur corporate-level
debt service, general and administrative expenses, asset management and acquisition fees. In
general, cash flows from operating activities are lower in the first half of each year due to the
payment of annual property taxes incurred by many of our properties. Net cash used in operating
activities was $5.7 million for the six months ended June 30, 2011 compared to net cash provided by
operating activities of $5.5 million for the six months ended June 30, 2010. The decrease in cash
flows from operating activities between 2011 and 2010 is due to increased deferred leasing costs,
adverse effects of the economic recession on commercial real estate fundamentals and our net
operating income in addition to the sale of our Brazilian industrial properties during 2010.
Cash Flows from Investing Activities
Net cash from investing activities was approximately $130.6 million and $135.2 million for the
six months ended June 30, 2011 and 2010, respectively. On June 1, 2011, we received net proceeds of
$128.7 million related to the sale of Atrium on Bay, a mixed-use property located in Toronto,
Ontario. During the six months ended June 30, 2010, we received proceeds of $130.1 million related
to the sale of three Brazilian industrial properties.
During the fourth quarter of 2009, we made collateral payments totaling $106.1 million to HSH
Nordbank in order to rebalance the collateral for the properties under the Companys pooled
mortgage facility. The increase in the cash collateral since that time is due to interest earned on
these payments, which accrue to us and is reflected as an increase in the balance. In May 2011, we
replaced the HSH Nordbank Collateral deposit with a letter of credit from the Bank of Montreal. As
collateral for the letter of credit, the Company posted a cash deposit of $107.0 million with the
Bank of Montreal, which is classified as restricted cash in the condensed consolidated balance
sheet.
Cash Flows from Financing Activities
Distributions
In order to meet the requirements for being treated as a REIT under the Internal Revenue Code
of 1986 and to pay regular cash distributions to our shareholders, which is one of our investment
objectives, we have declared and expect to continue to declare distributions to shareholders (as
authorized by our board of directors) as of daily record dates and aggregate and pay such
distributions quarterly. With the authorization of its board of directors, we have declared
distributions monthly and aggregated and paid such distributions quarterly. We intend to continue
this distribution policy for so long as our board of directors decides this policy is in our best
interests. Beginning July 1, 2010, the annual distribution rate was decreased from 6% to 5% (based
on our prior primary offering share price of $10.08 per share, and the assumption that such
distribution rate would be maintained for a twelve-month period). We continued to declare
distributions in the amount of $0.00138082 per share, per day through June 30, 2011.
In addition, we declared distributions for the months of July and August 2011. These
distributions will be calculated based on shareholders of record each day during each month in an
amount equal to $0.00138082 per share, per day and will be paid on October 1, 2011 in cash or
reinvested in stock for those participating in our dividend reinvestment plan. Of the amount
described above for each of the July 2011 and August 2011 distributions, $0.00041425 of the per
share, per day distribution will be designated by us as a special distribution, which will be a
return of a portion of the shareholders invested capital and, as such, will reduce their remaining
investment in the Company. The special distribution represents a portion of the proceeds from sales
of investment property. The above designations of a portion of the distribution as a special
distribution will not impact the tax treatment of the distributions to our shareholders.
The table below outlines our total distributions declared to shareholders and noncontrolling
interests for each of the quarters during 2011 and 2010, including the breakout between the
distributions paid in cash and those reinvested pursuant to our dividend reinvestment plan (all
amounts are in thousands).
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Shareholders | Noncontrolling | |||||||||||||||
Distributions | Interests | |||||||||||||||
Distributions for the Three Months Ended | Cash Distributions | Reinvested | Total Declared | Total Declared | ||||||||||||
2011 |
||||||||||||||||
June 30, 2011 |
$ | 15,995 | $ | 12,248 | $ | 28,243 | $ | 1,217 | ||||||||
March 31, 2011 |
$ | 15,491 | $ | 12,324 | $ | 27,815 | $ | 1,151 | ||||||||
Total |
$ | 31,486 | $ | 24,572 | $ | 56,058 | $ | 2,368 | ||||||||
2010 |
||||||||||||||||
December 31, 2010 |
$ | 15,473 | $ | 12,830 | $ | 28,303 | $ | 1,123 | ||||||||
September 30, 2010 |
$ | 14,986 | $ | 13,172 | $ | 28,158 | $ | 1,067 | ||||||||
June 30, 2010 |
$ | 17,226 | $ | 16,011 | $ | 33,237 | $ | 1,205 | ||||||||
March 31, 2010 |
$ | 16,480 | $ | 16,170 | $ | 32,650 | $ | 1,129 | ||||||||
Total |
$ | 64,165 | $ | 58,183 | $ | 122,348 | $ | 4,524 |
For the six months ended June 30, 2011 and 2010, we funded our cash distributions with
distributions received from our unconsolidated investments and proceeds from the sales of our real
estate investments.
Redemptions
During the six months ended June 30, 2011 and 2010, we funded redemptions of $6.0 million and $3.5
million, respectively, pursuant to the terms of our share redemption program.
Debt Financings
We use debt financing from time to time for property improvements, tenant improvements,
leasing commissions and other working capital needs. Most of our debt is in the form of secured
mortgage loans, which we entered into at the time each real estate asset was acquired.
On March 11, 2010, we refinanced Airport Corporate Centers $77.9 million mortgage with
Westdeutsche Immobilienbank AG and we made a principal payment of $12.9 million. The new mortgage
loan was a $65.0 million, two-year, amortizing loan with a variable interest rate equal to LIBOR
plus 5.50% that was scheduled to mature in March 2012. In August 2011, we executed a mortgage
agreement with John Hancock Life Insurance Company (USA) to refinance this mortgage. The new
mortgage is a 10-year, $79.0 million mortgage with a fixed rate of 5.14%. The mortgage requires
interest payments for the first two years, at which time the mortgage begins amortizing until its
maturity.
We have one mortgage loan with $45.0 million of outstanding principal which will mature in
September 2011. In June 2011, we executed a loan application and paid a good faith deposit for a
five-year loan with Metropolitan Life Insurance in order to refinance this maturing loan. We
expect the amortizing loan to have an origination date on or before September 1, 2011 with a
principal amount of $41.0 million and an interest rate of 4.25%.
We entered into a new $45.0 million revolving line of credit with KeyBank on February 3, 2011.
This facility (as amended) provided for an original expiration date of August 3, 2011, subject to
an extension at the Companys election for an additional 18-month period. On August 2, 2011, we
exercised our option to extend the maturity date to February 3, 2013.
For the six months ended June 30, 2011, we received debt proceeds of $43.0 million and made
payments of $43.0 million related to borrowings under our revolving credit facility. For the six
months ended June 30, 2010, we received debt proceeds of $29.0 million and made payments of $90.5
million related to borrowings under our revolving credit facility. We generally use proceeds from
our revolving credit facility to fund general working capital needs.
29
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Results of Operations
RESULTS OF OUR DIRECTLY-OWNED PROPERTIES |
We owned 21 properties directly that were 88% leased as of June 30, 2011 compared to 22
properties that were 89% leased as of
June 30, 2010. The table below includes revenues and expenses of our directly-owned properties
for the three and six months ended June 30, 2011 and 2010. Please note, the following analysis
excludes the activity of one property sold during 2011 and three properties which were sold during
2010. All amounts in thousands, except for percentages:
Three Months Ended June 30, | Change | |||||||||||||||
2011 | 2010 | $ | % | |||||||||||||
Property revenues |
$ | 71,640 | $ | 69,237 | $ | 2,403 | 3.5 | % | ||||||||
Less: Property expenses (1) |
28,570 | 28,024 | 546 | 1.9 | % | |||||||||||
Total property revenues in excess of expenses |
$ | 43,070 | $ | 41,213 | $ | 1,857 | 4.5 | % | ||||||||
Interest and Depreciation/Amortization |
||||||||||||||||
Depreciation and amortization |
$ | 24,142 | $ | 25,187 | $ | (1,045 | ) | (4.1 | )% | |||||||
Interest expense |
$ | 20,394 | $ | 20,260 | $ | 134 | 0.7 | % | ||||||||
Interest income |
$ | 88 | $ | 63 | $ | 25 | 39.7 | % |
Six Months Ended June 30, | Change | |||||||||||||||
2011 | 2010 | $ | % | |||||||||||||
Property revenues |
$ | 140,547 | $ | 143,296 | $ | (2,749 | ) | (1.9 | )% | |||||||
Less: Property expenses (1) |
58,507 | 59,116 | (609 | ) | (1.0 | )% | ||||||||||
Total property revenues in excess of expenses |
$ | 82,040 | $ | 84,180 | $ | (2,140 | ) | (2.5 | )% | |||||||
Interest and Depreciation/Amortization |
||||||||||||||||
Depreciation and amortization |
$ | 47,548 | $ | 50,737 | $ | (3,189 | ) | (6.3 | )% | |||||||
Interest expense |
$ | 40,285 | $ | 40,491 | $ | (206 | ) | (0.5 | )% | |||||||
Interest income |
$ | 143 | $ | 144 | $ | (1 | ) | (0.7 | )% |
(1) | Property expenses include property operating expenses, real property taxes, property management fees and income taxes. |
Revenues from the operation of our properties for the six months ended June 30, 2011 declined
as compared to the same period in 2010. Property revenues decreased during this period primarily
due to adverse effects of the economic recession on commercial real estate fundamentals. For
example, decreases in tenant demand and leasing velocity have led to declining rental rates and
increased tenant incentives on lease renewals. We have also experienced increases in tenant
defaults and a reduction of out-of-market lease intangible amortization, both of which have
negatively impacted our revenues between the periods.
Depreciation and amortization decreased during the three and six months ended June 30, 2011 as
compared to the same periods in 2010 due to fully amortized lease intangibles.
Discontinued Operations
On January 22, 2010, we sold Distribution Park Araucaria, an industrial property located in
Curitiba, Brazil, which we acquired in December 2008. The sales price was $38.4 million (69.9
million BRL translated at a rate of R$1.818 per USD, the exchange rate in effect on the date of
sale). On April 22, 2010, we sold Distribution Parks Elouveira and Vinhedo, two industrial
properties located in Sao Paulo, Brazil, which it acquired in December 2008. The sales price was
$102.5 million (181.0 million BRL translated at a rate of R$1.765 per USD, the exchange rate in
effect on the date of sale).
On June 1, 2011, we sold Atrium on Bay, a mixed-use office and retail complex located in the
Downtown North submarket of the central business district of Toronto, Canada, which we acquired in
February 2007. The contract sales price for Atrium on Bay was $344.8 million CAD ($353 million
USD, based on the exchange rate in effect on the date of sale). The results of operations of
Distribution Parks Araucaria, Elouveira, Vinhedo and Atrium on Bay and the gain realized on the
disposition of these properties are as follows:
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands) | ||||||||||||||||
Revenues: |
||||||||||||||||
Rental revenue |
$ | 6,996 | $ | 9,781 | $ | 17,298 | $ | 22,648 | ||||||||
Other revenue |
1,025 | 1,516 | 2,365 | 2,780 | ||||||||||||
Total revenues |
8,021 | 11,297 | 19,663 | 25,428 | ||||||||||||
Expenses: |
||||||||||||||||
Property operating expenses |
2,313 | 3,144 | 5,332 | 6,072 | ||||||||||||
Real property taxes |
1,650 | 2,626 | 4,225 | 5,204 | ||||||||||||
Property management fees |
194 | 259 | 475 | 561 | ||||||||||||
Depreciation and amortization |
1,497 | 2,185 | 3,770 | 5,510 | ||||||||||||
Total expenses |
5,654 | 8,214 | 13,802 | 17,347 | ||||||||||||
Income from discontinued operations
before interest income (expense), taxes
and gain on sale |
2,367 | 3,083 | 5,861 | 8,081 | ||||||||||||
Interest expense |
(1,791 | ) | (2,532 | ) | (4,426 | ) | (5,033 | ) | ||||||||
Interest income |
16 | 16 | 33 | 89 | ||||||||||||
(Provision) benefit for income taxes |
75 | | 75 | (410 | ) | |||||||||||
Income from discontinued operations
before gain on sale |
667 | 567 | 1,543 | 2,727 | ||||||||||||
Gain on sale of properties |
107,241 | 18,311 | 107,241 | 22,537 | ||||||||||||
Income from discontinued operations |
$ | 107,908 | $ | 18,878 | $ | 108,784 | $ | 25,264 | ||||||||
RESULTS FOR OUR INDIRECTLY-OWNED PROPERTIES
Our Interest in the Core Fund
As of June 30, 2011, we owned a 26.8% non-managing general partner interest in the Core Fund,
which held interests in 24 properties that were 90% leased. As of June 30, 2010, we owned a 28.7%
non-managing general partner interest in the Core Fund, which held interests in 24 properties that
were 87% leased. Our equity in losses related to our investment in the Core Fund for the three
months ended June 30, 2011 was $20.0 million compared to our equity in earnings of $10.6 million
for the three months ended June 30, 2010. Our equity in losses related to our investment in the
Core Fund for the six months ended June 30, 2011 was $22.4 million compared to equity in earnings
of $8.2 million for the six months ended June 30, 2010. The change in our equity in earnings
(losses) for the three and six months ended June 30, 2011 primarily resulted from our portion of a
$101.1 million impairment charge recorded at five of the Core Funds properties located in suburban
Sacramento and our portion of a $106.9 million gain on the sale of 600 Lexington Avenue during the
second quarter of 2010.
Our Interest in the Grocery-Anchored Portfolio
We own a 70% non-managing interest in the Grocery-Anchored Portfolio, a portfolio of 12
grocery-anchored shopping centers located in five states primarily in the southeastern United
States. Our equity in earnings related to our investment in the Grocery-Anchored Portfolio were
insignificant for both the three and six months ended June 30, 2011 and 2010.
Our Interest in Distribution Park Rio
We own a 50% non-managing interest in Distribution Park Rio, an industrial property located in
Rio de Janeiro, Brazil. Our equity in earnings related to our investment in Distribution Park Rio
for the three months ended June 30, 2011 and 2010 was approximately $689,000 and $659,000,
respectively. Our equity in earnings related to our investment in Distribution Park Rio for the six
months ended June 30, 2011 and 2010 was $1.3 million and $1.3 million, respectively.
CORPORATE-LEVEL ACTIVITIES
Corporate-level activities include results related to derivative instruments, asset management
and acquisition fees, general and administrative expenses as well as other expenses which are not
directly related to our property operations.
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Derivative Instruments
We have entered into several interest rate swap transactions with HSH Nordbank as economic
hedges against the variability of
future interest rates on our variable interest rate borrowings. We have not designated any of
these contracts as cash flow hedges for accounting purposes. The interest rate swaps have been
recorded at their estimated fair value in the accompanying consolidated balance sheets as of June
30, 2011 and December 31, 2010. The loss on derivative instruments recorded during the six months
ended June 30, 2011 and 2010 is primarily the result of changes in the fair value of interest rate
swaps during each period. In addition, we entered into a foreign currency swap in February 2010 in
relation to our sale of Distribution Park Araucaria. We recognized a loss of approximately $110,000
related to this swap, which was recorded in income from discontinued operations in our condensed
consolidated statements of operations. See Item 3. Quantitative and Qualitative Disclosures About
Market Risk included elsewhere in this Quarterly Report on Form 10-Q for additional information
regarding certain risks related to our derivatives, such as the risk of counterparty
non-performance.
Other Corporate-level Activities
The tables below provide detail relating to our asset management and acquisition fees and general and administrative
expenses. All amounts in thousands, except percentages:
Three Months Ended June 30, | Change | |||||||||||||||
2011 | 2010 | $ | % | |||||||||||||
Asset management and acquisition fees |
$ | (4,312 | ) | $ | 7,623 | $ | (11,935 | ) | (156.6) | % | ||||||
General and administrative expenses |
$ | 1,865 | $ | 2,426 | $ | (561 | ) | (23.1) | % |
Six Months Ended June 30, | Change | |||||||||||||||
2011 | 2010 | $ | % | |||||||||||||
Asset management and acquisition fees |
$ | 3,331 | $ | 15,278 | $ | (11,947 | ) | (78.2) | % | |||||||
General and administrative expenses |
$ | 3,478 | $ | 3,789 | $ | (311 | ) | (8.2) | % |
We pay monthly asset management fees to our Advisor based on the amount of net equity capital
invested in real estate investments and pay acquisition fees to our Advisor based on the purchase
prices of our real estate investments. In addition, we record a liability related to the
Participation Interest component of these fees, which is based on the estimated settlement value in
the accompanying condensed consolidated balance sheets and remeasured at fair value at each balance
sheet date. The fair value of the Operating Partnership interest underlying the Participation
Interest liability is determined based on the redemption price in place under the Companys share
redemption program as of each balance sheet date. Adjustments required to remeasure this liability
at fair value are included in asset management and acquisition fees in the accompanying condensed
consolidated statements of operations.
As described previously, on May 24, 2011, the board of directors established a new estimated
value per share and new per share redemption price of $7.78, which was reduced from the prior
redemption price of $9.15. Accordingly, the fair value of the Participation Interest liability as
of June 30, 2011 was reduced by $12.2 million resulting in a reduction of the asset management fee
expense for the three and six months then ended.
General and administrative expenses include legal and accounting fees, insurance costs, costs
and expenses associated with our board of directors and other administrative expenses. The decrease
in general and administrative expenses for the six months ended June 30, 2011 was primarily due to
expenses incurred in the second quarter of 2010 in relation to a potential equity offering that we
decided not to pursue.
Net Income Attributable to Noncontrolling Interests
As of June 30, 2011 and 2010, affiliates of Hines owned a 4.2% and 3.6% noncontrolling
interest in the Operating Partnership, respectively. During each of the three months ended June 30,
2011 and 2010, we allocated income of approximately $1.2 million to these affiliates. During the
six months ended June 30, 2011 and 2010, we allocated income of approximately $2.4 million and $2.3
million, respectively, to these affiliates.
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) widely recognized by investors and
analysts as one measure of operating performance of a real estate company. FFO 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
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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
historical cost accounting 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 historical 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, management uses modified funds from operations (MFFO) as defined by the
Investment Program Association (IPA) as a non-GAAP supplemental financial performance measure to
evaluate our operating performance. MFFO includes funds generated by the operations of our real
estate investments and funds used in our corporate-level operations. MFFO is based on FFO, but
includes certain additional adjustments which we believe are appropriate. Some of these adjustments
relate to changes in the accounting and reporting rules under GAAP that have been put into effect
since the establishment of NAREITs definition of FFO. These changes have prompted a significant
increase in the magnitude of non-cash and non-operating items included in FFO, as defined. Such
items include amortization of out-of-market lease intangible assets and liabilities and certain
tenant incentives, the effects of straight-line rent revenue recognition, fair value adjustments to
derivative instruments that do not qualify for hedge accounting treatment, non-cash impairment
charges and certain other items as described in the footnotes below. Management uses MFFO to
evaluate the financial performance of our investment portfolio. In addition, management uses MFFO
to evaluate and establish our distribution policy and the sustainability thereof. Further, we
believe MFFO is one of several measures that may be useful to investors in evaluating the potential
performance of our portfolio.
FFO and MFFO should not be considered as alternatives to net income (loss) or to cash flows
from operating activities, but rather should be reviewed in conjunction with these and other GAAP
measurements. In addition, FFO and MFFO are not intended to be used as liquidity measures
indicative of cash flow available to fund our cash needs. Please see the limitations listed below
associated with the use of MFFO:
| MFFO excludes gains (losses) related to changes in estimated values of derivative instruments related to our interest rate swaps. Although we expect to hold these instruments to maturity, if we were to settle these instruments currently, it would have an impact on our operating performance. | |
| MFFO excludes impairment charges related to long-lived assets that have been written down to current market valuations. Although these losses are included in the calculation of net income (loss), we have excluded them from MFFO because we believe doing so more appropriately presents the operating performance of our real estate investments on a comparative basis. | |
| Our FFO and MFFO as presented may not be comparable to amounts calculated by other REITs. | |
| Our business is subject to volatility in the real estate markets and general economic conditions, and adverse changes in those conditions could have a material adverse impact on our business, results of operations and MFFO. Accordingly, the predictive nature of MFFO is uncertain and past performance may not be indicative of future results. |
The following section presents our calculation of FFO and MFFO and provides additional
information related to our operations (in thousands, except per share amounts).
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 80,682 | $ | (8,419 | ) | $ | 71,399 | $ | (21,355 | ) | ||||||
Depreciation and amortization (1) |
25,639 | 27,372 | 51,318 | 56,247 | ||||||||||||
Gain on sale of investment property (2) |
(107,316 | ) | (18,311 | ) | (107,316 | ) | (22,537 | ) | ||||||||
Adjustments to equity in earnings from
unconsolidated entities, net (3) |
26,894 | (2,715 | ) | 35,757 | 7,871 | |||||||||||
Adjustments for noncontrolling interests (4) |
(1,070 | ) | 74 | (2,072 | ) | (675 | ) | |||||||||
Funds from operations |
24,829 | (1,999 | ) | 49,086 | 19,551 | |||||||||||
Loss on derivative instruments (5) |
8,996 | 24,374 | 3,800 | 30,227 | ||||||||||||
Other components of revenues and expenses (6) |
(515 | ) | (1,709 | ) | (2,687 | ) | (4,881 | ) | ||||||||
Adjustments to equity in earnings (losses) from
unconsolidated entities, net (3) |
144 | (94 | ) | 230 | 78 | |||||||||||
Adjustments for noncontrolling interests (4) |
(356 | ) | (790 | ) | (67 | ) | (886 | ) | ||||||||
Modified Funds From Operations |
33,098 | 19,782 | 50,362 | 44,089 | ||||||||||||
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic and Diluted Loss Per Common Share |
$ | 0.35 | $ | (0.04 | ) | $ | 0.31 | $ | (0.11 | ) | ||||||
Funds From Operations Per Common Share |
$ | 0.11 | $ | (0.01 | ) | $ | 0.22 | $ | 0.09 | |||||||
Modified Funds From Operations Per Common Share |
$ | 0.15 | $ | 0.09 | $ | 0.22 | $ | 0.20 | ||||||||
Weighted Average Shares Outstanding |
224,764 | 220,421 | 224,292 | 219,548 |
1) | Represents the depreciation and amortization of various real estate assets. Historical cost accounting for real estate assets 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, we believe that such depreciation and amortization may be of limited relevance in evaluating current operating performance and, as such, these items are excluded from our determination of FFO. This amount includes $1.5 million and $2.2 million of depreciation and amortization related to discontinued operations for the three months ended June 30, 2011 and 2010, respectively. This amount includes $3.8 million and $5.5 million of depreciation and amortization related to discontinued operations for the six months ended June 30, 2011 and 2010, respectively. | ||
2) | Represents the gain on disposition of certain real estate investments. Although this gain is included in the calculation of net income (loss), we have excluded it from FFO because we believe doing so more appropriately presents the operating performance of our real estate investments on a comparative basis. | ||
3) | Includes adjustments to equity in earnings (losses) of unconsolidated entities, net, similar to those described in Notes 1, 2, and 6 for our unconsolidated entities, which are necessary to convert our share of income (loss) from unconsolidated entities to FFO and MFFO. | ||
4) | Includes income attributable to noncontrolling interests and all adjustments to eliminate the noncontrolling interests share of the adjustments to convert our net income (loss) to FFO and MFFO. | ||
5) | Represents components of net income (loss) related to the estimated changes in the values of our interest rate swap derivatives. We have excluded these changes in value from our evaluation of our operating performance and MFFO because we expect to hold the underlying instruments to their maturity and accordingly the interim gains or losses will remain unrealized. | ||
6) | Includes the following components of revenues and expenses that we do not consider in evaluating our operating performance and determining MFFO (in thousands): |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Straight-line rent adjustment (a) |
$ | (1,540 | ) | $ | (724 | ) | $ | (3,890 | ) | $ | (2,701 | ) | ||||
Amortization of lease incentives (b) |
3,275 | 1,958 | 6,089 | 3,746 | ||||||||||||
Amortization of out-of-market leases (b) |
(2,461 | ) | (3,156 | ) | (5,310 | ) | (6,352 | ) | ||||||||
Other |
211 | 213 | 424 | 426 | ||||||||||||
$ | (515 | ) | $ | (1,709 | ) | $ | (2,687 | ) | $ | (4,881 | ) | |||||
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a) | Represents the adjustments to rental revenue as required by GAAP to recognize minimum lease payments on a straight-line basis over the respective lease terms. We have excluded these adjustments from our evaluation of the operating performance of the Company and in determining MFFO because we believe that the rent that is billable during the current period is a more relevant measure of the Companys operating performance for such period. | ||
b) | Represents the amortization of lease incentives and out-of-market leases. As stated in Note 1 above, historical cost accounting for real estate assets 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, we believe that such amortization may be of limited relevance in evaluating current operating performance and, as such, these items are excluded from our determination of MFFO. |
Set forth below is additional information relating to certain items excluded from the analysis
above which may be helpful in assessing our operating results:
| Pursuant to the terms of the Grocery Anchored Portfolio joint venture agreement, for the three months ended June 30, 2011 and 2010, we received distributions of approximately $743,000 and $723,000 in excess of our pro-rata share of the joint ventures MFFO, respectively. For both the six months ended June 30, 2011 and 2010, we received distributions of $1.4 million in excess of our pro-rata share of the joint ventures MFFO, respectively. | ||
| On January 22, 2010, we sold Distribution Park Araucaria, an industrial property located in Curitiba, Brazil, which we acquired in December 2008 for $33.0 million. Net proceeds from the sale after deducting transaction costs, fees and taxes were $34.6 million. | ||
| On April 22, 2010, we sold Distributions Park Elouveira and Vinhedo, two industrial properties located in Sao Paulo, Brazil, which we acquired in December 2008 for $83.1 million. Net proceeds from the sale after deducting transaction costs, fees and taxes were $93.3 million. | ||
| On May 22, 2010, the Core Fund sold 600 Lexington, an office property located in New York, New York, which it acquired in February 2004. The Core Funds total cost basis in 600 Lexington was approximately $103.8 million and the net proceeds from the sale after deducting transaction costs, taxes and fees were approximately $185.9 million. Our effective ownership in this asset on the date of sale was 11.67%. | ||
| On June 1, 2011, we sold Atrium on Bay, a mixed-use office and retail complex located in the Downtown North submarket of the central business district of Toronto, Canada. The contract sales price for Atrium on Bay was $344.8 million CAD ($353 million USD, based on the exchange rate in effect on the date of sale), exclusive of transaction costs. The net proceeds received from this sale were $128.7 million after transaction costs, assumption of related mortgage debt by the purchaser and local taxes. | ||
| Amortization of deferred financing costs was approximately $918,000 and $732,000 for the three months ended June 30, 2011 and 2010, respectively, and was deducted in determining MFFO. Amortization of deferred financing costs was $1.6 and $1.5 million for the six months ended June 30, 2011 and 2010, respectively, and was deducted in determining MFFO. | ||
| A portion of our acquisition and asset management fees are paid in equity through the Participation Interest. For the three and six months ended June 30, 2010, we incurred expenses of $3.9 million and $7.7 million, respectively, related to the Participation Interest. As described previously, we recorded a gain of $12.2 million resulting from the remeasurement of the Participation Interest liability in June 2011. As a result, for the three and six months ended June 30, 2011, we recorded income of $8.1 million and $4.2 million, respectively, related to the Participation Interest. |
Related-Party Transactions and Agreements
We have entered into agreements with the Advisor, Dealer Manager and Hines or its affiliates,
whereby we pay certain fees and reimbursements to these entities, including acquisition fees,
selling commissions, dealer manager fees, asset and property management fees, leasing fees,
construction management fees, debt financing fees, re-development construction management fees,
reimbursement of organizational and offering expenses, and reimbursement of certain operating
costs, as described elsewhere in this Quarterly Report on Form 10-Q and previously in our Annual
Report on Form 10-K for the year ended December 31, 2010. During June 2011, our Advisor agreed to
waive one-third of the cash asset management fees it receives from us for the period from July 1,
2011 through the end of 2012. For the six months ended June 30, 2011, we paid the Advisor a
disposition fee in connection with our dispositions of
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properties in Brazil. See Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations Results of Operations Results for our Directly-Owned Properties -
Discontinued Operations in our Annual Report on Form 10-K for the year ended December 31, 2010 for
additional information
Off-Balance Sheet Arrangements
As of June 30, 2011 and December 31, 2010, we had no off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency
exchange rates and equity prices. Interest rate risk is the primary risk in pursuing our business
plan.
As of June 30, 2011, we had $520.0 million of debt outstanding under our HSH Credit Facility,
which is a variable-rate pooled mortgage facility. However, as a result of the interest rate swap
agreements entered into with HSH Nordbank, these borrowings effectively bear interest at fixed
rates ranging from 5.25% to 6.03%. We are exposed to credit risk of the counterparty to these
interest rate swap agreements in the event of non-performance under the terms of the derivative
contracts. In the event of non-performance by the counterparty, we would be subject to the
variability of interest rates on the debt outstanding under the HSH Credit Facility to which our
outstanding interest rate swaps relate. Please see Debt Financings above for more information
concerning our outstanding debt.
Item 4. Controls and Procedures.
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under
the supervision and with the participation of management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
June 30, 2011, to provide reasonable assurance that information required to be disclosed in our
reports filed or submitted under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms, and (ii) accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
No change occurred in our internal controls over financial reporting (as defined in Rule
13a-15(f) of the Exchange Act) during the quarter ended June 30, 2011 that has materially affected,
or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time in the ordinary course of business, the Company or its subsidiaries may
become subject to legal proceedings, claims or disputes. As of August 15, 2011, neither the Company
nor any of its subsidiaries was a party to any material pending legal proceedings.
Item 1A. Risk Factors.
We are subject to a number of risks and uncertainties, which are discussed in Part I, Item 1A
of our 2010 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended June 30, 2011, we did not sell or issue any equity securities
that were not registered under the Securities Act.
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All eligible requests for redemptions received by the Company were redeemed using proceeds
from our dividend reinvestment plan. The following table lists shares we redeemed under our share
redemption program during the period covered by this report.
Total | ||||||||||||||||
Number of | Maximum | |||||||||||||||
Shares | Number of | |||||||||||||||
Purchased as | Shares that | |||||||||||||||
Part of | May Yet be | |||||||||||||||
Total | Average | Publicly | Purchased | |||||||||||||
Number of | Price | Announced | Under the | |||||||||||||
Shares | Paid per | Plans or | Plans or | |||||||||||||
Period | Purchased | Share | Programs | Programs (2) | ||||||||||||
April 1, 2011 to June 30, 2011 (1) |
337,283 | $ | 9.15 | 337,283 | 1,339,263 | |||||||||||
Total |
337,283 | 337,283 | ||||||||||||||
(1) | All shares were redeemed on April 1, 2011. | |
(2) | Our share redemption program is currently limited to requests made in connection with the death or disability of a stockholder. If we determine to redeem shares, we redeem shares on a quarterly basis and such redemptions will be limited to the lesser of the amount required to redeem 10% of the shares outstanding as of the same date in the prior calendar year or the amount of proceeds received from our dividend reinvestment plan in the quarter prior to the quarter in which the redemption request was received. This amount represents the number of shares available for redemption on July 1, 2011. For more information regarding our share redemption program, please see Item 5 of our 2010 Annual Report on Form 10-K. |
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Removed and Reserved.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
The exhibits required by this item are set forth on the Exhibit Index attached hereto.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HINES REAL ESTATE INVESTMENT TRUST, INC. |
||||
August 15, 2011 | By: | /s/ CHARLES N. HAZEN | ||
Charles N. Hazen | ||||
President and Chief Executive Officer | ||||
August 15, 2011 | By: | /s/ SHERRI W. SCHUGART | ||
Sherri W. Schugart | ||||
Chief Financial Officer |
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EXHIBIT INDEX
Exhibit No. |
Description | |
3.1
|
| Second Amended and Restated Articles of Incorporation of Hines Real Estate Investment Trust, Inc. (filed as Exhibit 3.1 to the registrants Current Report on Form 8-K on July 13, 2007 and incorporated by reference herein). |
3.2
|
| Second Amended and Restated Bylaws of Hines Real Estate Investment Trust, Inc. (filed as Exhibit 3.1 to the registrants Current Report on Form 8-K on August 3, 2006 and incorporated by reference herein). |
31.1*
|
| Certification. |
31.2*
|
| Certification. |
32.1*
|
| Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be filed. |
101**
|
The following materials from Hines Real Estate Investment Trust, Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed on August [ ], 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements. |
* | Filed herewith | |
** | In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and 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, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing. |
40