UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-53964

 

Hines Global REIT, Inc.

(Exact Name of Registrant as Specified in its Charter)

Maryland (State or Other Jurisdiction of Incorporation or Organization)		26-3999995 (I.R.S. Employer Identification No.)
2800 Post Oak Boulevard Suite 5000 Houston, Texas (Address of principal executive offices)		77056-6118 (Zip code)

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 a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of August 8, 2011, approximately 73.7 million shares of the registrant’s common stock were outstanding.

 

 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations and Comprehensive Loss			2
Condensed Consolidated Statements of Equity			3
Condensed Consolidated Statements of Cash Flows			4
Notes to the Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			29
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Defaults Upon Senior Securities			31
Item 4. Removed and Reserved			31
Item 5. Other Information			31
Item 6. Exhibits			31
SIGNATURES
Certification
Certification
Certification of CEO & CFO pursuant to Section 906
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

HINES GLOBAL REIT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

		June 30, 2011				December 31, 2010
		(In thousands, except per share amounts)
ASSETS
Investment property, net		$	597,475			$	449,029
Cash and cash equivalents			250,226				146,953
Restricted cash			3,719				348
Interest rate swap contracts			1,335				2,765
Tenant and other receivables			9,550				7,876
Intangible lease assets, net			215,538				161,036
Deferred leasing costs, net			1,678				622
Deferred financing costs, net			7,694				6,502
Other assets			7,601				553
Total Assets		$	1,094,816			$	775,684
LIABILITIES AND EQUITY
Liabilities:
Accounts payable and accrued expenses		$	18,962			$	13,622
Due to affiliates			3,480				2,167
Intangible lease liabilities, net			7,464				5,926
Other liabilities			11,813				8,020
Interest rate swap contracts			4,879				38
Distributions payable			5,237				3,231
Notes payable			475,434				378,295
Total Liabilities			527,269				411,299
Commitments and contingencies (Note 12)			—				—
Equity:
Stockholders’ 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 stock, $.001 par value; 1,500,000 shares authorized, 68,868 and 41,287 issued and outstanding as of June 30, 2011 and December 31, 2010, respectively			69				41
Additional paid-in capital			578,052				350,561
Accumulated deficit			(49,933	)			(25,873	)
Accumulated other comprehensive income			2,242				1,347
Total stockholders’ equity			530,430				326,076
Noncontrolling interests			37,117				38,309
Total equity			567,547				364,385
Total Liabilities and Equity		$	1,094,816			$	775,684

See notes to the condensed consolidated financial statements.

HINES GLOBAL REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE 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		$	20,135			$	133			$	37,438			$	133
Other revenue			1,727				—				3,264				—
Total revenues			21,862				133				40,702				133
Expenses:
Property operating expenses			4,180				9				8,505				9
Real property taxes			1,696				16				3,290				16
Property management fees			501				2				1,014				2
Depreciation and amortization			12,859				57				23,422				57
Acquisition related expenses			2,132				2,494				3,185				2,583
Asset management and acquisition fees			2,797				425				6,663				425
General and administrative			856				465				1,609				775
Total expenses			25,021				3,468				47,688				3,867
Loss before other income (expenses) and provision for income taxes			(3,159	)			(3,335	)			(6,986	)			(3,734	)
Other income (expenses):
Loss on interest rate swap contracts, net			(8,313	)			—				(6,380	)			—
Other gains (losses)			(4	)			—				22				—
Interest expense			(5,640	)			—				(10,296	)			—
Interest income			36				19				75				25
Loss before provision for income taxes			(17,080	)			(3,316	)			(23,565	)			(3,709	)
Provision for income taxes			(767	)			—				(1,124	)			—
Net loss			(17,847	)			(3,316	)			(24,689	)			(3,709	)
Net loss attributable to noncontrolling interests			1,263				827				629				829
Net loss attributable to common stockholders		$	(16,584	)		$	(2,489	)		$	(24,060	)		$	(2,880	)
Basic and diluted loss per common share:		$	(0.27	)		$	(0.18	)		$	(0.44	)		$	(0.29	)
Distributions declared per common share:		$	0.17			$	0.17			$	0.35			$	0.35
Weighted average number of common shares outstanding			61,540				13,643				54,609				9,785
Net comprehensive income (loss):
Net loss		$	(17,847	)		$	(3,316	)		$	(24,689	)		$	(3,709	)
Other comprehensive income (loss):
Foreign currency translation adjustment			(339	)			28				2,248				28
Net comprehensive loss:			(18,186	)			(3,288	)			(22,441	)			(3,681	)
Net comprehensive income (loss) attributable to noncontrolling interests			(2,687	)			816				(724	)			818
Net comprehensive loss attributable to common stockholders		$	(20,873	)		$	(2,472	)		$	(23,165	)		$	(2,863	)

See notes to the condensed consolidated financial statements.

HINES GLOBAL REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Six Months Ended June 30, 2011 and 2010

(UNAUDITED)

(In thousands)

		Hines Global REIT, Inc.
																		Accumulated
										Additional								Other				Total
										Paid-in				Accumulated				Comprehensive				Stockholders’				Noncontrolling
		Common Shares				Amount				Capital				Deficit				Income				Equity				Interests
Balance as of January 1, 2011			41,287			$	41			$	350,561			$	(25,873	)		$	1,347			$	326,076			$	38,309
Issuance of common shares			27,880				28				277,823				—				—				277,851				—
Distributions declared			—				—				(18,955	)			—				—				(18,955	)			(4	)
Distributions on Convertible Preferred Equity Certificates (“CPEC”)			—				—				—				—				—				—				(1,912	)
Redemption of Common Shares			(299	)			—				(2,656	)			—				—				(2,656	)			—
Selling commissions and dealer manager fees			—				—				(26,425	)			—				—				(26,425	)			—
Issuer costs			—				—				(2,296	)			—				—				(2,296	)			—
Net loss			—				—				—				(24,060	)			—				(24,060	)			(629	)
Foreign currency translation adjustment			—				—				—				—				895				895				1,353
Balance as of June 30, 2011			68,868			$	69			$	578,052			$	(49,933	)		$	2,242			$	530,430			$	37,117

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

																		Accumulated
										Additional								Other				Total
										Paid-in				Accumulated				Comprehensive				Stockholders’				Noncontrolling
		Common Shares				Amount				Capital				Deficit				Income				Equity				Interests
Balance as of January 1, 2010			3,276			$	3			$	26,012			$	(408	)		$	—			$	25,607			$	33
Issuance of common shares			15,190				15				151,362				—				—				151,377				—
Contributions from noncontrolling interests			—				—				—				—				—				—				11,495
Distributions declared			—				—				(3,342	)			—				—				(3,342	)			(7	)
Redemption of common shares			(8	)			—				(95	)			—				—				(95	)			—
Selling commissions and dealer manager fees			—				—				(14,565	)			—				—				(14,565	)			—
Issuer costs			—				—				(1,607	)			—				—				(1,607	)			—
Net loss			—				—				—				(2,880	)			—				(2,880	)			(829	)
Foreign currency translation adjustment			—				—				—				—				17				17				11
Balance as of June 30, 2010			18,458			$	18			$	157,765			$	(3,288	)		$	17			$	154,512			$	10,703

See notes to the condensed consolidated financial statements.

HINES GLOBAL REIT, INC.

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 loss		$	(24,689	)		$	(3,709	)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization			25,705				119
Loss on interest rate swap contracts			6,380				—
Changes in assets and liabilities:
Change in other assets			(825	)			(18	)
Change in tenant and other receivables			(764	)			(18	)
Change in deferred leasing costs			(1,164	)			—
Change in accounts payable and accrued expenses			4,239				2,389
Change in other liabilities			3,360				(170	)
Change in due to affiliates			1,302				444
Net cash from operating activities			13,544				(963	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in property and acquired lease intangibles, net			(217,111	)			(20,172	)
Deposits on investment property			(5,008	)			(34,635	)
Increase in restricted cash			(3,384	)			—
Net cash from investing activities			(225,503	)			(54,807	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock			267,672				148,261
Contribution from noncontrolling interests			—				11,495
Redemption of common shares			(2,832	)			(75	)
Payments of issuer costs			(2,360	)			(2,974	)
Payment of selling commissions and dealer manager fees			(26,649	)			(14,612	)
Distributions paid to stockholders and noncontrolling interests			(9,450	)			(1,074	)
Proceeds from notes payable			92,009				—
Payments on notes payable			(1,010	)			—
Change in security deposit liability			(4	)			—
Deferred financing costs paid			(1,960	)			—
Net cash from financing activities			315,416				141,021
Effect of exchange rate changes on cash			(184	)			29
Net change in cash and cash equivalents			103,273				85,280
Cash and cash equivalents, beginning of period			146,953				28,168
Cash and cash equivalents, end of period		$	250,226			$	113,448

See notes to the condensed consolidated financial statements.

HINES GLOBAL REIT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2011 and 2010

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 Global REIT, 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 Global REIT, Inc. as of June 30, 2011 and December 31, 2010, 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 Global REIT, Inc. (the “Company”), was formed as a Maryland corporation on December 10, 2008 under the General Corporation Law of the state of Maryland for the purpose of engaging in the business of investing in and owning commercial real estate properties and other real estate investments. Beginning with its taxable year ended December 31, 2009, 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 business of the Company is managed by Hines Global REIT Advisors LP (the “Advisor”), an affiliate of Hines Interests Limited Partnership (“Hines”), pursuant to the Advisory Agreement between the Company, the Advisor and the Operating Partnership (defined below).

     On August 5, 2009, the Company commenced its initial public offering of up to $3.5 billion in shares of common stock for sale to the public (the “Offering”) through which it has received gross offering proceeds of $690.5 million from the sale of 69.3 million shares through June 30, 2011. The Company engaged Hines Real Estate Investments, Inc., (the “Dealer Manager”), an affiliate of Hines, to serve as the dealer manager for the Offering. The Dealer Manager is responsible for marketing the Company’s shares being offered pursuant to the Offering. The Company has and intends to continue to invest the net proceeds from the Offering in a diversified portfolio of quality commercial real estate properties and other real estate investments throughout the United States and internationally. Properties purchased by the Company may have varying uses including office, retail, industrial, multi-family residential and hospitality or leisure. The Company may invest in operating properties, properties under development, and undeveloped properties such as land. In addition, the Company may also make other real estate investments including investments in equity or debt interests, which may include securities in other real estate entities and debt related to real estate.

     The Company made its initial real estate investment in June 2010 and owned interests in seven properties as of June 30, 2011. These properties consisted of three U.S. office properties, one mixed-use industrial/flex office park complex in Austin, Texas, one office property in London, England, one mixed-use office and retail complex in Birmingham, England and one industrial complex located in Moscow, Russia. These properties contain, in the aggregate, 3.0 million square feet of leasable space.

     Noncontrolling Interests

     On January 7, 2009, the Company and Hines Global REIT Associates Limited Partnership (“HALP”), an affiliate of the Advisor, formed Hines Global REIT Properties, LP (the “Operating Partnership”). The Company conducts substantially all of its operations through the Operating Partnership. As of June 30, 2011 and December 31, 2010, HALP owned a 0.03% and 0.1% interest in the Operating Partnership, respectively.

     In June 2010, the Operating Partnership and Moorfield Real Estate Fund II GP Ltd. (“Moorfield”) formed Hines Moorfield UK Venture I S.A.R.L., (the “Brindleyplace JV”) and, on July 7, 2010, the Brindleyplace JV acquired several properties located in Birmingham, England (the “Brindleyplace Project”). The Brindleyplace Project consists of five office buildings including ground-floor retail, restaurant and theatre space, and a 903-space multi-story parking garage. The Company owns a 60% interest in the Brindleyplace JV and Moorfield holds the remaining 40% interest.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Described below are certain of the Company’s 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 Company’s

Annual Report on Form 10-K for a complete listing of all of its significant accounting policies.

     Use of Estimates

     The Company’s condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of the condensed 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 Company’s 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 include the accounts of Hines Global REIT, Inc., the Operating Partnership and its wholly-owned subsidiaries and the Brindleyplace JV as well as amounts related to noncontrolling interests. All intercompany balances and transactions have been eliminated in consolidation.

     International Operations

     The British pound (“GBP”) is the functional currency for Company’s subsidiaries operating in the United Kingdom and the Russian rouble (“RUB”) is the functional currency for the Company’s subsidiaries operating in Russia. These subsidiaries have translated their financial statements into U.S. dollars for reporting purposes. During the six months ended June 30, 2011 and 2010, the Company recorded foreign currency translation adjustments of approximately $2.2 million and $28,000, respectively due to the effect of changes in exchange rates between the British pound, Russian rouble and the U.S. dollar.

     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. If the carrying amount exceeds the undiscounted cash flows, it would be written down to the estimated fair value to reflect impairment in the value of the asset. The determination of whether investment property is impaired requires a significant amount of judgment by management and is based on the best information available to management at the time of the evaluation. No impairment charges were recorded during the six months ended June 30, 2011.

     Cash and Cash Equivalents

     The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents.

     Restricted Cash

     As of June 30, 2011 and December 31, 2010, the Company had restricted cash of approximately $3.7 million and $348,000, respectively, related to certain escrows required by several of the Company’s mortgage agreements.

     Tenant and Other Receivables

     Tenant and other receivables are recorded at cost, net of any applicable allowance for doubtful accounts. As of June 30, 2011 and December 31, 2010, no such allowances have been recorded.

     In addition, as of June 30, 2011 and December 31, 2010, respectively, tenant and other receivables included $1.9 million and $1.2 million of receivables from the Company’s transfer agent related to shares of its stock that were issued, but the related proceeds had not yet been released to the Company.

     Deferred Leasing Costs

     Tenant inducement amortization was approximately $33,000 and $97,000 for the three and six months ended June 30, 2011, respectively and was recorded as a reduction to rental revenue. The Company recorded approximately $16,000 and $31,000 as

amortization expense related to other direct leasing costs for the three and six months ended June 30, 2011, respectively.

     Deferred Financing Costs

     Deferred financing costs consist of direct costs incurred in obtaining debt financing, including the financing fees paid to the Advisor (see Note 7 — 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 and six months ended June 30, 2011, approximately $447,000 and $813,000, was amortized into interest expense, respectively.

     Other Assets

     Other assets was primarily made up of prepaid expenses and a $5.0 million deposit on a pending real estate acquisition as of June 30, 2011.

     Revenue Recognition

     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 $2.9 million and $1.6 million as of June 30, 2011 and December 31, 2010, respectively.

     Issuer Costs

     The Company reimburses the Advisor for any issuer costs related to the Offering that it pays on the Company’s behalf. From inception to June 30, 2011, issuer costs incurred by the Advisor on the Company’s behalf totaled $9.4 million, of which approximately $337,000 related to organizational issuer costs.

     Income Taxes

     In connection with the operation of its international properties, the Company has recorded a provision for foreign income taxes of approximately $767,000 and $1.1 million for the three and six months ended June 30, 2011, respectively, in accordance with tax laws and regulations.

     Deferred income taxes result from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of June 30, 2011, the Company had recorded a deferred tax asset of $1.0 million related to net operating loss carry-forwards, which was included in other assets in the accompanying condensed consolidated balance sheet.

     Redemption of Common Stock

     The Company has recorded liabilities of approximately $417,000 and $593,000 in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheet as of June 30, 2011 and December 31, 2010, respectively, 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.

     Per Share Data

     Net loss per common share is calculated by dividing the net loss attributable to common stockholders for each period by the weighted average number of common shares outstanding during such period. Net loss per common share on a basic and diluted basis is the same because the Company has no potentially dilutive common shares outstanding.

     Reclassifications

     The Company made a reclassification in its condensed consolidated statement of cash flows for the six months ended June 30, 2010 to be consistent with the presentation for the six months ended June 30, 2011. Specifically, the Company reclassified $10.3 million of payments from increase in acquired intangible lease assets, net to investments in property and acquired lease intangibles, net. Management believes this change in presentation simplifies the cash flow statement by combining related line items, although it does not believe this change is necessary for the fair presentation of the Company’s financial statements.

     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 Company’s financial statements.

3. INVESTMENT PROPERTY

     The Company makes real estate investments directly through entities wholly-owned by the Operating Partnership, or indirectly through other entities. The table below provides information regarding the properties in which the Company owned interests as of June 30, 2011:

Direct Investments														Effective
Property		Location		Date Acquired		Leasable Square Feet				Percent Leased				Ownership (1)
17600 Gillette		Irvine, California		6/2010			98,925				100	%			100	%
Hock Plaza		Durham, North Carolina		9/2010			327,160				99	%			100	%
Southpark		Austin, Texas		10/2010			372,125				94	%			100	%
Fifty South Sixth		Minneapolis, Minnesota		11/2010			698,783				96	%			100	%
Stonecutter Court		London, England		3/2011			152,808				100	%			100	%
FM Logistic		Moscow, Russia		4/2011			748,578				100	%			100	%
Total for Directly-Owned Properties							2,398,379				98	%
Indirect Investments
Brindleyplace Project		Birmingham, England		7/2010			560,207				96	%			60	%
Total for Indirectly-Owned Properties							560,207				96	%
Total for All Properties							2,958,586				98	%(2)

     Investment property consisted of the following amounts (in thousands):

		June 30, 2011				December 31, 2010
Buildings and improvements		$	593,472			$	443,592
Less: accumulated depreciation			(10,617	)			(3,893	)
Buildings and improvements, net			582,855				439,699
Land			14,620				9,330
Investment property, net		$	597,475			$	449,029

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		$	208,509			$	36,319			$	(9,224	)
Less: accumulated amortization			(25,979	)			(3,311	)			1,760
Net		$	182,530			$	33,008			$	(7,464	)

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				Out-of-Market
		In-Place Leases				Lease Assets				Lease Liabilities
Cost		$	139,561			$	34,000			$	(6,674	)
Less: accumulated amortization			(11,241	)			(1,284	)			748
Net		$	128,320			$	32,716			$	(5,926	)

     Amortization expense of in-place leases was $9.2 million and $16.7 million for the three and six months ended June 30, 2011, respectively. Amortization expense of in-place leases was approximately $46,000 for the three and six months ended June 30, 2010 and amortization of above-market leases was a decrease to rental revenue of approximately $62,000 for the three and six months ended June 30, 2010.

     Amortization of out-of-market leases for the three and six months ended June 30, 2011 was a decrease to rental revenue of approximately $547,000 and $1.1 million, respectively.

     Expected future amortization of in-place leases and out-of-market leases, net, for the following periods are as follows (in thousands):

		In-Place				Out-of-Market
		Leases				Leases, Net
July 1 through December 31, 2011		$	18,205			$	990
2012			27,941				2,659
2013			25,658				2,630
2014			23,797				2,609
2015			21,858				2,735

     Leases

     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 following periods are as follows (in thousands):

		Fixed Future Minimum Rentals
July 1 through December 31, 2011		$	33,337
2012			62,850
2013			61,147
2014			59,047
2015			57,323
Thereafter			208,509
Total		$	482,213

     Of the Company’s total rental revenue for the six months ended June 30, 2011, approximately 18% was earned from a tenant in the accounting industry who has leases that expire in 2016, 2019 and 2024, approximately 13% was earned from a tenant in the legal services industry whose lease expires in 2016, and approximately 12% was earned from a tenant in the education services industry whose lease expires in 2019.

     Recent Acquisitions

     The amounts of real estate assets and lease intangibles recognized for Stonecutter Court and FM Logistic Industrial Park (“FM Logistic”) as of their respective acquisition dates were determined by allocating the purchase price as follows (in thousands):

		Stonecutter Court (1)				FM Logistic
Buildings and improvements		$	90,677			$	51,588
Land			—				5,320
In-place lease intangibles			53,317				15,780
Out-of-market lease intangibles, net			1,598				(1,840	)
Total		$	145,592			$	70,848

     The tables below include the amounts of revenue and net loss of Stonecutter Court and FM Logistic included in the Company’s condensed consolidated results of operations for the three and six months ended June 30, 2011 as well as pro forma information that is presented assuming the Company completed both acquisitions on January 1, 2010. This pro forma information is not necessarily indicative of what the actual results of operations would have been had the Company completed these transactions on January 1, 2010, nor does it purport to represent its future operations (in thousands):

		Results of								Pro forma results				Results of								Pro forma results
		operations for the								of operations for				operations for the								of operations for
		Three Months Ended				Pro forma				the Three Months				Three Months Ended				Pro forma				the Three Months
Stonecutter Court		June 30, 2011				Adjustments				Ended June 30, 2011				June 30, 2010				Adjustments				Ended June 30, 2010
Revenue		$	2,576			$	—			$	2,576			$	—			$	2,576			$	2,576
Net loss		$	(4,579	)		$	—			$	(4,579	)		$	—			$	(2,089	)		$	(2,089	)
Basic and diluted loss per common share										$	(0.07	)										$	(0.15	)

		Results of								Pro forma results				Results of								Pro forma results
		operations for the								of operations for				operations for the								of operations for
		Six Months Ended				Pro forma				the Six Months				Six Months Ended				Pro forma				the Six Months
Stonecutter Court		June 30, 2011				Adjustments				Ended June 30, 2011				June 30, 2010				Adjustments				Ended June 30, 2010
Revenue		$	3,174			$	1,955			$	5,129			$	—			$	5,129			$	5,129
Net loss		$	(5,830	)		$	(3,592	)		$	(9,422	)		$	—			$	(6,828	)		$	(6,828	)
Basic and diluted loss per common share										$	(0.17	)										$	(0.70	)

										Pro forma												Pro forma
		Results of								results of				Results of								results of
		operations for								operations for				operations for								operations for
		the Three								the Three				the Three								the Three
		Months Ended				Pro forma				Months Ended				Months Ended				Pro forma				Months Ended
FM Logistic		June 30, 2011				Adjustments				June 30, 2011				June 30, 2010				Adjustments				June 30, 2010
Revenue		$	1,518			$	607			$	2,125			$	—			$	2,125			$	2,125
Net loss		$	(203	)		$	(81	)		$	(284	)		$	—			$	(284	)		$	(284	)
Basic and diluted loss per common share										$	—											$	(0.02	)

										Pro forma												Pro forma
		Results of								results of				Results of								results of
		operations for								operations for				operations for								operations for
		the Six Months								the Six Months				the Six Months								the Six Months
		Ended June 30,				Pro forma				Ended June 30,				Ended June 30,				Pro forma				Ended June 30,
FM Logistic		2011				Adjustments				2011				2010				Adjustments				2010
Revenue		$	1,518			$	2,709			$	4,227			$	—			$	4,227			$	4,227
Net loss		$	(203	)		$	(362	)		$	(565	)		$	—			$	(565	)		$	(565	)
Basic and diluted loss per common share										$	(0.01	)										$	(0.06	)

     Probable Acquisitions

     Marlborough

          On June 1, 2011, a wholly-owned subsidiary of the Operating Partnership entered into a contract with Bel Marlborough I LLC and Bel Marlborough II LLC to acquire the Marlborough Campus, a complex of four interconnected office buildings located in Marlborough, Massachusetts. The sellers are not affiliated with the Company or its affiliates. Marlborough consists of 532,246 square feet of rentable area that is 100% leased to six tenants. The contract purchase price for Marlborough is expected to be approximately $103.0 million, exclusive of transaction costs, financing fees and working capital reserves. The Company expects to fund the acquisition using proceeds from the Offering along with the assumption of an existing $57.9 million mortgage loan with Bear Stearns Commercial Mortgage, Inc. The mortgage loan has an interest rate of 5.21% and matures in December 2014. The Company funded a nonrefundable $5.0 million earnest money deposit upon the signing of the agreement. The Company expects the closing of this acquisition to occur in the third quarter of 2011, subject to completing the assumption of the existing mortgage as well as a number of other closing conditions.

     Gogolevsky 11

          On July 18, 2011, a wholly-owned subsidiary of the Operating Partnership entered into a contract with Delamore Limited to acquire Gogolevsky 11, a nine-story office building located in Moscow, Russia. The sellers are not affiliated with the Company or its affiliates. Gogolevsky 11 consists of 85,740 square feet of rentable area that is 100% leased to six tenants. The contract purchase price for Gogolevsky 11 is expected to be approximately $96.1 million, exclusive of transaction costs, financing fees and working capital reserves. The Company expects to fund the acquisition using proceeds from its current public offering along with the assumption of an existing $40.0 million mortgage loan with Fibersoft Limited. The mortgage loan has an interest rate of LIBOR plus 6.25% per annum and matures in April 2021. The Company expects the closing of this acquisition to occur in the third quarter of 2011, subject to completing the assumption of a mortgage as well as a number of other closing conditions.

     250 Royall Street

          On August 1, 2011, a wholly-owned subsidiary of the Operating Partnership entered into a contract with Inland American Canton Royall, LLC to acquire 250 Royall Street, an office building located in Canton, Massachusetts. The seller is not affiliated with the Company or its affiliates. 250 Royall Street consists of 185,171 square feet of rentable area that is 100% leased to Computershare Limited. The contract purchase price for 250 Royall Street is expected to be approximately $57.0 million, exclusive of transaction costs, financing fees and working capital reserves. The Company funded a nonrefundable $2.0 million earnest money deposit upon the signing of the agreement. The Company expects to fund the acquisition using proceeds from the Offering. The Company expects the closing of this acquisition to occur in the third quarter of 2011, subject to completing a number of closing conditions.

     There can be no assurance that any of the acquisitions described above will be completed.

4. DEBT FINANCING

     The following table includes the Company’s outstanding notes payable as of June 30, 2011 and December 31, 2010 (in thousands, except interest rates):

		Origination
		or												Principal				Principal
		Assumption				Maturity								Outstanding at				Outstanding at
Description		Date				Date				Interest Rate				June 30, 2011				December 31, 2010
SECURED MORTGAGE DEBT
Brindleyplace Project			07/01/10				07/07/15			Variable(1)				$	193,919			$	187,296
Hock Plaza			09/08/10				12/06/15				5.58	%			79,501				80,000
Southpark			10/19/10				12/06/16				5.67	%			18,000				18,000
Fifty South Sixth			11/04/10				11/04/15			Variable(2)					95,000				95,000
Stonecutter Court			03/11/11				03/11/16			Variable(3)					90,800				—
TOTAL PRINCIPAL OUTSTANDING															477,220				380,296
Unamortized Discount (4)															(1,786	)			(2,001	)
NOTES PAYABLE														$	475,434			$	378,295

     The Company is not aware of any instances of noncompliance with financial covenants on any of its loans as of June 30, 2011.

     Principal Payments on Notes Payable

     The Company is required to make the following principal payments on its outstanding notes payable for the period of July 1, 2011 through December 31, 2011, for each of the years ending December 31, 2012 through December 31, 2015 and for the period thereafter (in thousands):

		July 1 — December 31,			Payments due by Year
		2011				2012				2013				2014				2015				Thereafter
Principal payments		$	1,505			$	3,053			$	3,126			$	3,191			$	366,584			$	99,761

5. DERIVATIVE INSTRUMENTS

     The Company has entered into several interest rate swap contracts as economic hedges against the variability of future interest rates on its variable interest rate borrowings. These swaps effectively fixed the interest rates on each of the loans to which they relate. The Company has not designated any of these contracts as cash flow hedges for accounting purposes.

     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.

     The tables below provide additional information regarding each of the Company’s interest rate swap contracts (in thousands):

										Interest Rate
Effective Date		Expiration Date				Notional Amount				Received				Interest Rate Paid
July 7, 2010		July 7, 2015				$	23,322	(1)		LIBOR					2.29	%
July 7, 2010		July 7, 2015				$	44,770	(1)		LIBOR					2.29	%
July 7, 2010		July 7, 2015				$	20,823	(1)		LIBOR					2.29	%
July 7, 2010		July 7, 2015				$	35,920	(1)		LIBOR					2.29	%
July 7, 2010		July 7, 2015				$	20,602	(1)		LIBOR					2.29	%
November 4, 2010		November 4, 2015				$	95,000			LIBOR					1.37	%
March 11, 2011		March 11, 2016				$	91,303	(1)		LIBOR					2.71	%

		Derivatives Fair Value
Derivatives not designated as hedging instruments for
accounting purposes:		June 30, 2011				December 31, 2010
Interest rate swap contracts- Asset		$	1,335			$	2,765
Interest rate swap contracts- Liability			(4,879	)			(38	)
Total derivatives, net		$	(3,544	)		$	2,727

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2011				2010				2011				2010
Loss on interest rate swap contracts, net		$	(8,313	)		$	—			$	(6,380	)		$	—
Total		$	(8,313	)		$	—			$	(6,380	)		$	—

6. DISTRIBUTIONS

     With the authorization of its board of directors, the Company declared distributions to its stockholders and HALP for the period from October 20, 2009 through September 30, 2011. These distributions were or will be calculated based on stockholders of record for each day in an amount equal to $0.00191781 per share, per day, which based on a purchase price of $10 per share, would equate to a 7% annualized distribution rate if it were maintained every day for a twelve-month period.

     Distributions for the period from October 20, 2009 through February 28, 2010 were paid on March 1, 2010. Distributions for subsequent months have been or will be paid monthly on the first business day following the completion of each month to which they relate. All distributions were or will be paid in cash or reinvested in shares of the Company’s common stock for those participating in its distribution reinvestment plan.

     In addition, the Brindleyplace JV declared distributions in the amount of $1.9 million to Moorfield for the six months ended June 30, 2011, related to the operations of the Brindleyplace Project. The table below outlines the Company’s total distributions declared to stockholders and noncontrolling interests (HALP and Moorfield) for the six months ended June 30, 2011 and for each of the quarters ended during 2010, including the breakout between the distributions paid in cash and those reinvested pursuant to the Company’s distribution reinvestment plan (in thousands):

		Stockholders												Noncontrolling Interests
Distributions for the		Cash				Distributions
quarter ended		Distributions				Reinvested				Total Declared				Total Declared
2011
June 30, 2011		$	4,969			$	5,770			$	10,739			$	932
March 31, 2011			3,769				4,447				8,216				984
Total		$	8,738			$	10,217			$	18,955			$	1,916
2010
December 31, 2010		$	2,806			$	3,386			$	6,192			$	794
September 30, 2010			1,860				2,303				4,163				812
June 30, 2010			977				1,368				2,345				4
March 31, 2010			395				602				997				4
Total		$	6,038			$	7,659			$	13,697			$	1,614

7. RELATED PARTY TRANSACTIONS

     The table below outlines fees and expense reimbursements incurred that are payable to Hines and its affiliates for the periods below (in thousands):

		Incurred								Incurred								Unpaid as of
		Three Months Ended June 30,								Six Months Ended June 30,								June 30,				December 31,
Type and Recipient		2011				2010				2011				2010				2011				2010
Selling Commissions- Dealer Manager		$	10,255			$	6,654			$	19,727			$	10,825			$	637			$	663
Dealer Manager Fee- Dealer Manager			3,482				2,318				6,698				3,740				(82	)			116
Issuer Costs- the Advisor			1,433				485				2,296				1,607				762				826
Acquisition Fee- the Advisor			1,417				407				4,353				407				—				—
Asset Management Fee- the Advisor			1,380				18				2,310				18				1,380				292
Debt Financing Fee- the Advisor			—				—				920				—				—				—
Other (1) — the Advisor			287				232				626				319				193				202
Property Management Fee- Hines			262				2				504				2				28				17
Leasing Fee- Hines			53				—				63				—				53				—
Expense Reimbursement- Hines (with respect to management and operations of the Company’s properties)			523				8				1,040				8				509				51
Due to Affiliates																		$	3,480			$	2,167

     Other Affiliate Transactions

     The Company receives rent under a lease of parking space with an affiliate of Hines at the Brindleyplace Project. Under this agreement, during the three and six months ended June 30, 2011, the Company recorded rental revenues of approximately $518,000 and $982,000, respectively. Further, the Company recorded receivables related to this agreement of approximately $170,000 and $350,000 as of June 30, 2011 and December 31, 2010, respectively, which is recorded in tenant and other receivables.

8. NONCONTROLLING INTERESTS

     On July 7, 2010, the Brindleyplace JV issued capital shares and Series B Convertible Preferred Equity Certificates (“CPEC”) to Moorfield as a result of its contributions. Distributions are declared and paid quarterly to Moorfield based on the distributable income of the Brindleyplace Project and payment of the distributions will be subject to the approval of the board of directors of the Brindleyplace JV. During the six months ended June 30, 2011, the Brindleyplace JV declared approximately $1.9 million of preferred dividends to Moorfield related to the CPECs. This amount was recorded in net loss attributable to noncontrolling interests in the accompanying condensed consolidated statement of operations and comprehensive loss and offsets approximately $2.5 million of net loss that was attributable to Moorfield during the six months ended June 30, 2011, related to the results of operations of the Brindleyplace JV.

9. FAIR VALUE MEASUREMENTS

     Derivative Instruments

     As described in Note 5 — Derivative Instruments, the Company entered into several interest rate swap contracts as economic hedges against the variability of future interest rates on its variable interest rate borrowings. 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 counterparties, Eurohypo, PB Capital Corporation and Landesbank Baden-Württemberg. 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 table sets forth the Company’s interest rate swap contracts 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 (all amounts are in thousands):

				Basis of Fair Value Measurements
				Quoted Prices In		Significant
		Fair Value		Active Markets for		Other		Significant
		of Assets		Identical Items		Observable Inputs		Unobservable
Period		(Liabilities)		(Level 1)		(Level 2)		Inputs (Level 3)
June 30, 2011		$                     (3,544)		$                          —		$                     (3,544)		$                          —
December 31, 2010		$                       2,727		$                          —		$                       2,727		$                          —

Other Items

     Other Financial Instruments

     As of June 30, 2011, the Company estimated that the book values of its notes payable approximate their fair values, as the rates approximate those available to the Company on current terms. Other financial instruments 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.

10. REPORTABLE SEGMENTS

     The Company’s 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 five reportable segments: 1) domestic office properties (three properties), 2) domestic industrial properties (one property), 3) international office properties (one property), 4) international mixed-use properties (Brindleyplace Project) and 5) international industrial properties (one property). During the six months ended June 30, 2011, the Company added the international office properties segment and the international industrial properties segment due to the acquisitions of Stonecutter Court and FM Logistic, respectively.

     The tables below provide additional information related to each of the Company’s segments and a reconciliation to the Company’s net loss, as applicable. “Corporate-Level Accounts” includes amounts incurred by the corporate-level entities which are not allocated to any of the reportable segments (all amounts are in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Total Revenue
Domestic office properties		$	9,071			$	133			$	18,229			$	133
Domestic industrial property			781				—				1,759				—
International office property			2,576				—				3,174				—
International mixed-use property			7,916				—				16,022				—
International industrial property			1,518				—				1,518				—
Total Revenue		$	21,862			$	133			$	40,702			$	133
Net Operating Income (1)
Domestic office properties		$	5,589			$	106			$	11,227			$	106
Domestic industrial property			473				—				1,157				—
International office property			2,261				—				2,784				—
International mixed-use property			5,153				—				10,359				—
International industrial property			1,242				—				1,242				—
Total Segment Net Operating Income		$	14,718			$	106			$	26,769			$	106

		June 30, 2011				December 31, 2010
Total Assets
Domestic office properties		$	300,244			$	308,354
Domestic industrial property			30,507				32,483
International office property			149,157				—
International mixed-use property			301,412				296,805
International industrial property			78,088				—
Corporate-level accounts			235,408				138,042
Total Assets		$	1,094,816			$	775,684