UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

Commission File Number: 000-51961

 

Behringer Harvard Opportunity REIT I, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland		20-1862323
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

15601 Dallas Parkway, Suite 600, Addison, Texas 75001

(Address of Principal Executive Offices) (ZIP Code)

 

Registrant’s Telephone Number, Including Area Code: (866) 655-3600

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 x No ¨

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer ¨			Accelerated filer ¨
Non-accelerated filer þ (Do not check if a smaller reporting company)			Smaller reporting company ¨

 

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

 

As of April 30, 2012, the Registrant had 56,500,472 shares of common stock outstanding.

 

 

BEHRINGER HARVARD OPPORTUNITY REIT I, INC.

FORM 10-Q

Quarter Ended March 31, 2012

 

 

		Page
	PART I
	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2012 and 2011	4
	Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2012 and 2011	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	37
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
Signature		39

 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)

 

	March 31,			December 31,
	2012			2011
Assets
Real estate
Land and improvements, net	$	63,441		$	77,687
Buildings and improvements, net		235,776			261,336
Real estate under development		16,171			16,503
Total real estate		315,388			355,526
Condominium inventory		25,993			29,752
Assets associated with real estate held for sale		43,790			-
Cash and cash equivalents		10,781			13,503
Restricted cash		6,681			8,033
Accounts receivable, net		11,291			8,462
Prepaid expenses and other assets		3,686			3,344
Leasehold interests, net		19,739			19,208
Investments in unconsolidated joint ventures		34,453			34,887
Furniture, fixtures and equipment, net		4,999			5,536
Deferred financing fees, net		2,555			3,078
Notes receivable, net		30,754			31,508
Lease intangibles, net		7,478			11,348
Other intangibles, net		6,825			6,994
Total assets	$	524,413		$	531,179
Liabilities and Equity
Notes payable	$	264,892		$	265,857
Note payable to related parties		1,500			1,500
Accounts payable		1,828			999
Payables to related parties		4,343			4,339
Acquired below-market leases, net		2,496			7,134
Accrued and other liabilities		23,011			21,407
Obligations associated with real estate held for sale		4,298			-
Total liabilities		302,368			301,236
Commitments and contingencies
Equity
Behringer Harvard Opportunity REIT I, Inc. Equity: Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none outstanding		-			-
Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 shares issued and outstanding		-			-
Common stock, $.0001 par value per share; 350,000,000 shares authorized, and 56,500,472 shares issued and outstanding at March 31, 2012 and December 31, 2011		6			6
Additional paid-in capital		502,743			502,743
Accumulated distributions and net loss		(283,388	)		(275,509	)
Accumulated other comprehensive loss		(4,401	)		(4,890	)
Total Behringer Harvard Opportunity REIT I, Inc. equity		214,960			222,350
Noncontrolling interest		7,085			7,593
Total equity		222,045			229,943
Total liabilities and equity	$	524,413		$	531,179

 

See Notes to Condensed Consolidated Financial Statements.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(Unaudited)

 

	Three months ended March 31,
	2012			2011
Revenues
Rental revenue	$	9,312		$	8,325
Hotel revenue		1,106			1,153
Condominium sales		3,323			739
Total revenues		13,741			10,217
Expenses
Property operating expenses		3,817			3,496
Bad debt expense		24			315
Cost of condominium sales		3,374			699
Condominium inventory impairment		438			-
Interest expense		3,797			3,244
Real estate taxes		1,438			1,444
Property management fees		353			352
Asset management fees		924			1,216
General and administrative		1,313			1,102
Depreciation and amortization		4,133			4,749
Total expenses		19,611			16,617
Interest income		8			8
Other income, net		218			6
Loss from continuing operations before income taxes and equity in losses of unconsolidated joint ventures		(5,644	)		(6,386	)
Provision for income taxes		(49	)		(35	)
Equity in losses of unconsolidated joint ventures		(2,667	)		(2,467	)
Loss from continuing operations		(8,360	)		(8,888	)
Income (loss) from discontinued operations		(23	)		(3,785	)
Gain on sale of real estate		-			1,335
Net loss		(8,383	)		(11,338	)
Add: Net loss attributable to the noncontrolling interest
Noncontrolling interest in continuing operations		504			198
Net loss attributable to common shareholders	$	(7,879	)	$	(11,140	)
Weighted average shares outstanding:
Basic and diluted		56,500			56,458
Loss per share attributable to common shareholders:
Basic and diluted:
Continuing operations	$	(0.14	)	$	(0.13	)
Discontinued operations		0.00			(0.07	)
Basic and diluted loss per share	$	(0.14	)	$	(0.20	)
Amounts attributable to common shareholders:
Continuing operations	$	(7,856	)	$	(7,355	)
Discontinued operations		(23	)		(3,785	)
	$	(7,879	)	$	(11,140	)
Comprehensive income (loss):
Net loss	$	(8,383	)	$	(11,338	)
Other comprehensive loss:
Foreign currency translation loss		457			1,327
Unrealized gain (loss) on interest rate derivatives		(8	)		(7	)
Total other comprehensive income (loss)		449			1,320
Comprehensive loss		(7,934	)		(10,018	)
Comprehensive loss attributable to noncontrolling interest		544			179
Comprehensive loss attributable to common shareholders	$	(7,390	)	$	(9,839	)

 

See Notes to Condensed Consolidated Financial Statements.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Statements of Equity

(in thousands, except share amounts)

 

																Accumulated			Accumulated
	Convertible Stock						Common Stock						Additional			Distributions			Other
	Number of			Par			Number of			Par			Paid-In			and			Comprehensive			Noncontrolling			Total
	Shares			Value			Shares			Value			Capital			Net Loss			Income (Loss)			Interest			Equity
Balance at January 1, 2011		1,000		$	-			56,379,760		$	6		$	502,102		$	(185,491	)	$	(3,956	)	$	3,609		$	316,270
Distributions declared on common stock																	(1,410	)								(1,410	)
Contributions from noncontrolling interest																							9,441			9,441
Distributions to non-controlling interest																							(735	)		(735	)
Shares issued pursuant to Distribution Reinvestment Plan, net								120,713						925												925
Comprehensive loss:
Net loss																	(11,140	)					(198	)		(11,338	)
Other comprehensive income:
Foreign currency translation gain (loss)																				1,308			19			1,327
Unrealized gains (losses) on interest rate derivatives																				(7	)		-			(7	)
Total comprehensive loss																							(179	)		(10,018	)
Balance at March 31, 2011		1,000		$	-			56,500,473		$	6		$	503,027		$	(198,041	)	$	(2,655	)	$	12,136		$	314,473
Balance at January 1, 2012		1,000		$	-			56,500,472		$	6		$	502,743		$	(275,509	)	$	(4,890	)	$	7,593		$	229,943
Contributions from noncontrolling interest																							36			36
Comprehensive loss:
Net loss																	(7,879	)					(504	)		(8,383	)
Other comprehensive income:
Foreign currency translation gain (loss)																				497			(40	)		457
Unrealized gains (losses) on interest rate derivatives																				(8	)		-			(8	)
Total comprehensive loss																							(544	)		(7,934	)
Balance at March 31, 2012		1,000		$	-			56,500,472		$	6		$	502,743		$	(283,388	)	$	(4,401	)	$	7,085		$	222,045

 

See Notes to Condensed Consolidated Financial Statements.

 

 

Behringer Harvard Opportunity REIT I, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

	Three months ended March 31,
	2012			2011
Cash flows from operating activities:
Net loss	$	(8,383	)	$	(11,338	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		4,299			5,645
Amortization of deferred financing fees		507			612
Gain on sale of real estate		-			(1,335	)
Impairment charge		438			3,629
Bad debt expense		36			326
Equity in losses of unconsolidated joint ventures		2,667			2,467
Change in operating assets and liabilities:
Accounts receivable		(2,837	)		(2,662	)
Condominium inventory		3,286			15,211
Prepaid expenses and other assets		(367	)		540
Accounts payable		479			598
Accrued and other liabilities		(56	)		(2,646	)
Payables to related parties		4			1,935
Lease intangibles		(298	)		(84	)
Cash provided by (used in) operating activities		(225	)		12,898
Cash flows from investing activities:
Proceeds from sale of real estate		-			5,703
Capital expenditures for real estate under development		(1,260	)		(1,099	)
Additions of property and equipment		(76	)		(4,268	)
Change in restricted cash		1,352			(454	)
Investment in notes receivable		(822	)		(2,074	)
Proceeds from payments on note receivables		-			425
Cash used in investing activities		(806	)		(1,767	)
Cash flows from financing activities:
Financing costs		-			(419	)
Proceeds from notes payable		2,419			7,395
Payments on notes payable		(4,168	)		(21,817	)
Net borrowings (repayments) on senior secured revolving credit facility		-			(741	)
Borrowings on note payable related party		-			1,500
Distributions		-			(485	)
Contributions from noncontrolling interest holders		36			834
Distributions to noncontrolling interest holders		-			(735	)
Cash used in financing activities		(1,713	)		(14,468	)
Effect of exchange rate changes on cash and cash equivalents		22			(102	)
Net change in cash and cash equivalents		(2,722	)		(3,439	)
Cash and cash equivalents at beginning of the period		13,503			9,833
Cash and cash equivalents at end of the period	$	10,781		$	6,394

 

See Notes to Condensed Consolidated Financial Statements.

 

 

1.

Business

 

Behringer Harvard Opportunity REIT I, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”) was incorporated in November 2004 as a Maryland corporation and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

 

We operate commercial real estate or real estate-related assets located in and outside the United States on an opportunistic basis. In particular, we have focused on acquiring properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, or those located in markets and submarkets with higher volatility, lower barriers to entry, and high growth potential. We have acquired a wide variety of properties, including office, retail, hospitality, recreation and leisure, multifamily, and other properties. We have purchased existing and newly constructed properties and properties under development or construction, including multifamily properties. We completed our first property acquisition in March 2006, and, as of March 31, 2012, we wholly owned eight properties including one classified as held for sale on our consolidated condensed balance sheet and consolidated four properties through investments in joint ventures. In addition, we are the mezzanine lender for one multifamily property. We also have noncontrolling, unconsolidated ownership interests in two properties and one investment in a joint venture consisting of 22 properties that are accounted for using the equity method.

 

Our financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business as we proceed through our disposition phase. As is usual for opportunity style real estate investment programs, we are structured as a finite life entity, and have entered the final phase of operations. This phase includes the selling off our assets, liquidating our liabilities, and distributing net proceed to shareholders. We have experienced significant losses and may generate negative cash flows as mortgage note obligations and expenses exceed revenues. If we are unable to sell a property when we determine to do so as contemplated in our business plan, it could have a significant adverse effect on our cash flows that are necessary to meet our mortgage obligations and to satisfy our other liabilities in the normal course of business.

 

Our ability to continue as a going concern is, therefore, dependent upon our ability to sell real estate investments to pay down debt as it matures if extensions or new financings are unavailable, and to fund certain ongoing costs of our company, including our development and operating properties.

 

Substantially all of our business is conducted through Behringer Harvard Opportunity OP I, LP, a Texas limited partnership organized in November 2004 (“Behringer Harvard OP I”), or subsidiaries thereof. Our wholly owned subsidiary, BHO, Inc., a Delaware corporation, owns less than a 0.1% interest in Behringer Harvard OP I as its sole general partner. The remaining interest of Behringer Harvard OP I is held as a limited partnership interest by our wholly owned subsidiary, BHO Business Trust, a Maryland business trust.

 

We are externally managed and advised by Behringer Harvard Opportunity Advisors I, LLC (“Behringer Opportunity Advisors I” or the “Advisor”), a Texas limited liability company formed in June 2007. Behringer Harvard Opportunity Advisors I is responsible for managing our day-to-day affairs and for identifying and making acquisitions, dispositions and investments on our behalf.

 

2.

Interim Unaudited Financial Information

 

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission (“SEC”) on March 29, 2012. 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 in this report on Form 10-Q pursuant to the rules and regulations of the SEC.

 

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated balance sheet and condensed consolidated statement of equity as of March 31, 2012, the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2012 and 2011, and the condensed consolidated statements of cash flows for the three months ended March 31, 2012 and 2011 have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to fairly present our condensed consolidated financial position as of March 31, 2012 and our condensed consolidated results of operations, equity, and cash flows for the periods ended March 31, 2012 and 2011. Such adjustments are normal and recurring in nature.

 

 

We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements.

 

3.

Summary of Significant Accounting Policies

 

Described below are certain of our 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 our Annual Report on Form 10-K for a complete listing of all of our significant accounting policies.

 

Real Estate

 

We amortize the value of in-place leases acquired to expense over the term of the respective leases. The value of tenant relationship intangibles is amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and tenant relationship intangibles would be charged to expense. As of March 31, 2012, the estimated remaining useful lives for acquired lease intangibles range from less than one year to approximately ten years.

 

Anticipated amortization expense associated with the acquired lease intangibles and acquired other intangible assets for each of the following five years as of March 31, 2012 is as follows (in thousands):

 

			Lease / Other Intangibles
	April 1, 2012 - December 31, 2012		$	320
	2013			381
	2014			96
	2015			74
	2016			63

 

Accumulated depreciation and amortization related to our consolidated investments in real estate assets and intangibles were as follows ($ in thousands):

 

										Acquired
	Buildings and			Land and			Lease			Below-Market			Leasehold			Other
March 31, 2012	Improvements			Improvements			Intangibles			Leases			Interest			Intangibles
Cost	$	278,647		$	64,390		$	17,067		$	(6,020	)	$	21,086		$	10,439
Less: depreciation and amortization		(42,871	)		(949	)		(9,589	)		3,524			(1,347	)		(3,614	)
Net	$	235,776		$	63,441		$	7,478		$	(2,496	)	$	19,739		$	6,825

 

										Acquired
	Buildings and			Land and			Lease			Below-Market			Leasehold			Other
December 31, 2011	Improvements			Improvements			Intangibles			Leases			Interest			Intangibles
Cost	$	306,724		$	78,553		$	25,027		$	(17,991	)	$	20,382		$	10,439
Less: depreciation and amortization		(45,388	)		(866	)		(13,679	)		10,857			(1,174	)		(3,445	)
Net	$	261,336		$	77,687		$	11,348		$	(7,134	)	$	19,208		$	6,994

 

Condominium Inventory

 

Condominium inventory is stated at the lower of cost or fair market value, and consists of land acquisition costs, land development costs, construction costs, interest, and real estate taxes, which are capitalized during the period beginning with the commencement of development and ending with the completion of construction. At March 31, 2012, condominium inventory consisted of $13.1 million of finished units and $12.9 million of work in progress. As of December 31, 2011, condominium inventory consisted of $16.9 million of finished units and $12.9 million of work in progress. In February 2011, we received $14.7 million related to the monetization of State of Missouri historic tax credits on the redevelopment of the Chase Park Plaza Hotel located in St. Louis, Missouri, which was recorded as a reduction of our condominium inventory. The proceeds from these historic tax credits were used to pay down the outstanding balance of the Chase Park Plaza Hotel loan.

 

 

For condominium inventory, at each reporting date, management compares the estimated fair value less costs to sell to the carrying value. An adjustment is recorded to the extent that the fair value less costs to sell is less than the carrying value. We determine the estimated fair value of condominiums based on comparable sales in the normal course of business under existing and anticipated market conditions. This evaluation takes into consideration estimated future selling prices, costs incurred to date, estimated additional future costs, and management’s plans for the property.

 

The nationwide downturn in the housing and related condominium market that began during 2007 has resulted in lower than expected sales volume and reduced selling prices. As a result of our evaluations, we recognized a non-cash charge of $0.4 million during the three months ended March 31, 2012 to reduce the carrying value of condominiums at Chase-The Private Residences. This non-cash charge is classified as a condominium inventory impairment charge in the accompanying consolidated statement of operations. There were no impairment charges related to our condominium inventory for the three months ended March 31, 2011. In the event that market conditions continue to decline in the future or the current difficult market conditions extend beyond our expectations, additional adjustments may be necessary.

 

Accounts Receivable

 

Accounts receivable primarily consist of straight-line rental revenue receivables of $8 million and $6.6 million as of March 31, 2012 and December 31, 2011, respectively, and receivables from our hotel operators and tenants related to our other consolidated properties of $3.6 million and $2.3 million as of March 31, 2012 and December 31, 2011, respectively. The allowance for doubtful accounts was $0.3 million and $0.4 million as of March 31, 2012 and December 31, 2011, respectively.

 

Investment Impairment

 

For all of our real estate and real estate related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions. Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at a portion of our properties within a short time period, which may result in asset impairments. When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value. We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

 

We also evaluate our investments in notes receivable as of each reporting date. If we believe that it is probable we will not collect all principal and interest in accordance with the terms of the notes, we consider the loan impaired. When evaluating loans for potential impairment, we compare the carrying amount of the loans to the present value of future cash flows discounted at the loan’s effective interest rate, or, if a loan is collateral dependent, to the estimated fair value of the related collateral net of any senior loans. For impaired loans, a provision is made for loan losses to adjust the reserve for loan losses. The reserve for loan losses is a valuation allowance that reflects our current estimate of loan losses as of the balance sheet date. The reserve is adjusted through the provision for loan losses account on our condensed consolidated statement of operations.

 

In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, planned development and the projected sales price of each of the properties. A future change in these estimates and assumptions could result in understating or overstating the book value of our investments, which could be material to our financial statements.

 

We also evaluate our investments in unconsolidated joint ventures at each reporting date. If we believe there is an other than temporary decline in market value, we will record an impairment charge based on these evaluations. We assess potential impairment by comparing our portion of estimated future undiscounted operating cash flows expected to be generated by the joint venture over the life of the joint venture’s assets to the carrying amount of the joint venture. In the event that the carrying amount exceeds our portion of estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the joint venture to its estimated fair value.

 

 

The value of our properties held for development depends on market conditions, including estimates of the project start date, as well as estimates of future demand for the property type under development. We have analyzed trends and other information related to each potential development and incorporated this information, as well as our current outlook, into the assumptions we use in our impairment analyses. Due to the judgment and assumptions applied in the estimation process with respect to impairments, including the fact that limited market information regarding the value of comparable land exists at this time, it is possible actual results could differ substantially from those estimated.

 

We believe the carrying value of our operating real estate assets, properties under development, investments in unconsolidated joint ventures, and notes receivable is currently recoverable. However, if market conditions worsen beyond our current expectations, or if our assumptions regarding expected future cash flows from the use and eventual disposition of our assets decrease or our expected hold periods decrease, or if changes in our development strategy significantly affect any key assumptions used in our fair value calculations, we may need to take additional charges in future periods for impairments related to existing assets. Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.

 

Real Estate Held for Sale

 

We classify properties as held for sale when certain criteria are met, in accordance with GAAP. We present the assets and obligations of a property held for sale separately on our condensed consolidated balance sheet, and we cease recording depreciation and amortization expense related to that property. Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell. As of March 31, 2012, our Santa Clara 700/750 Joint Venture property was classified as held for sale. On March 16, 2012, we executed an agreement for the sale of Santa Clara 700/750 Joint Venture property. We expect to complete the sale in late May 2012. We had no properties classified as held for sale at December 31, 2011.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include such items as purchase price allocation for real estate acquisitions, impairment of long-lived assets, depreciation and amortization, allowance for doubtful accounts, and allowance for loan losses. Actual results could differ from those estimates.

 

New Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued updated guidance for fair value measurements.  The guidance amends existing guidance to provide common fair value measurements and related disclosure requirements between GAAP and International Financial Reporting Standards.  This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our financial statements except for disclosures. 

 

In June 2011, the FASB issued updated guidance related to comprehensive income.  The guidance requires registrants to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, registrants will be required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our financial statements.

 

 

4.          Assets and Liabilities Measured at Fair Value

 

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.

 

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

Recurring Fair Value Measurements

 

Currently, we use interest rate swaps and caps to manage our interest rate risk. The valuation of these instruments is determined 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, implied volatilities, and foreign currency exchange rates.

 

We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2012 and December 31, 2011, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

The following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 ($ in thousands):

 

March 31, 2012		Level 1				Level 2				Level 3				Total
Assets
Derivative financial instruments		$	-			$	51			$	-			$	51

 

December 31, 2011		Level 1				Level 2				Level 3				Total
Assets
Derivative financial instruments		$	-			$	64			$	-			$	64

 

Derivative financial instruments classified as assets are included in other assets on the balance sheet.

 

Nonrecurring Fair Value Measurements

 

For the three months ended March 31, 2012, we recognized condominium inventory impairment charges of $0.4 million related to Chase - The Private Residences. For the year ended December 31, 2011, we recognized impairment charges of $6.2 million related to Rio Salado and $5.1 million related to Frisco Square. We also recorded a $1.4 million impairment related to our 50% unconsolidated joint venture in Santa Clara 800. We recognized a non-cash charge of $1.9 million to reduce the carrying value of condominiums at Chase - The Private Residences and a $4 million non-cash charge related to our condominium development at Cordillera during the year ended December 31, 2011.

 

 

The inputs used to calculate the fair value of these assets included projected cash flows and a risk-adjusted rate of return that we estimated would be used by a market participant in valuing these assets or by obtaining third-party broker valuation estimates, bona fide purchase offers or the expected sales price of an executed sales agreement. The capitalization rate ranges and discount rate ranges were obtained from third-party service providers, and the capitalization rate ranges were gathered for specific metro areas and applied on a property-by-property basis. These fair value estimates are considered Level 3 under the fair value hierarchy described above.

 

The following fair value hierarchy table presents information about our assets measured at fair value on a nonrecurring basis during the three months ended March 31, 2012 and the year ended December 31, 2011 ($ in thousands):

 

March 31, 2012		Level 1				Level 2				Level 3				Total Fair Value				Gain / (Loss)
Assets
Condominium inventory			-				-			$	13,120			$	13,120			$	(438	)

 

December 31, 2011		Level 1				Level 2				Level 3				Total Fair Value				Gain / (Loss)(1)
Assets
Note receivable, net		$	-			$	-			$	31,280			$	31,280			$	(7,881	)
Land and improvements, net			-				-				37,016				37,016				(993	)
Buildings and improvements, net			-				-				34,151				34,151				(4,095	)
Real estate under development			-				-				14,900				14,900				(6,169	)
Condominium inventory			-				-				29,752				29,752				(5,925	)
Investment in unconsolidated joint venture			-				-				12,524				12,524				(1,425	)
Total		$	-			$	-			$	159,623			$	159,623			$	(26,488	)

 

⁽¹⁾ Excludes $5.2 million in impairment loss of our discontinued operations that was disposed of as of the year ended December 31, 2011.

 

Quantitative Information about Level 3 Fair Value Measurements
($ in thousands)
			Fair Value at March 31, 2012		Valuation Techniques		Unobservable Input		Range (Weighted Average)
Condominium inventory		$	13,120		Market comparable		Amount per condo unit due to limited market comparables		$449 - $3,800

 

There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the three months ended March 31, 2012.

 

5.          Fair Value Measurement of Financial Instruments

 

We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

As of March 31, 2012 and December 31, 2011, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses, other liabilities, payables/receivables from related parties, and distributions payable were at amounts that reasonably approximated their fair value based on their highly liquid nature and/or short-term maturities, and the carrying value of notes receivable reasonably approximated fair value based on expected interest rates for notes to similar borrowers with similar terms and remaining maturities.

 

The notes payable totaling $264.9 million and $265.9 million as of March 31, 2012 and December 31, 2011, respectively, have a fair value of approximately $264.4 million and $265.4 million, respectively, based upon interest rates for mortgages with similar terms and remaining maturities that management believes we could obtain. Interest rate swaps and caps are recorded at their respective fair values in prepaid expenses and other assets. The fair value of the notes payable is categorized as a Level 2 basis.  The fair value is estimated using a discounted cash flow analysis valuation on the borrowing rates currently available for loans with similar terms and maturities.  The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate.

 

 

The fair value estimates presented herein are based on information available to our management as of March 31, 2012 and December 31, 2011. Although our management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these condensed consolidated financial statements since those respective dates, and current estimates of fair value may differ significantly from the amounts presented herein.

 

6.          Real Estate Investments

 

As of March 31, 2012, we wholly owned eight properties (including one property classified as held for sale on our condensed consolidated balance sheet) and consolidated four properties through investments in joint ventures. We are the mezzanine lender for one multifamily property. In addition, we have noncontrolling, unconsolidated ownership interests in two properties and one investment in a joint venture consisting of 22 properties that are accounted for using the equity method. Capital contributions, distributions, and profits and losses of these properties are allocated in accordance with the terms of the applicable partnership agreement.

 

The following table presents certain information about our consolidated properties as of March 31, 2012:

 

Property Name		Location		Approximate Rentable Square Footage		Description		Ownership Interest				Year Acquired
Bent Tree Green		Dallas, Texas		138,000		3-story office building		100		%		2006
Las Colinas Commons		Irving, Texas		239,000		3-building office complex		100		%		2006
5000 S. Bowen Road		Arlington, Texas		87,000		1-story data center campus		100		%		2007
Northpoint Central		Houston, Texas		180,000		9-story office building		100		%		2007
Northborough Tower		Houston, Texas		207,000		14-story office building		100		%		2007
Tanglewood at Voss		Houston, Texas		—		multifamily		100		%		2010
Santa Clara 700/750 Joint Venture	(1)	Santa Clara, California		306,000		2-building office complex		100		%		2007
Rio Salado Business Center		Phoenix, Arizona		—		development property		100		%		2007
Chase Park Plaza		St. Louis, Missouri		—		hotel and condominium development property		95		%		2006
The Lodge & Spa at Cordillera		Edwards, Colorado		—		hotel and development property		94		%		2007
Frisco Square		Frisco, Texas		100,500		mixed-use development (multifamily, retail, office, and restaurant)		94		%		2007
Becket House		London, England		46,000		long-term leasehold interest		80		%		2007

(1)    Classified as held for sale on our condensed consolidated balance sheet as of March 31, 2012. On March 15, 2012, we, through our 50% owned joint venture, executed a purchase and sale agreement to sell the Santa Clara 700/750 building to an unaffiliated third party. The contract sales price is approximately $47.8 million. We expect to close this transaction in late May 2012; however, we can provide no assurance that this sale will occur.

 

Investments in Unconsolidated Joint Ventures

 

The following table presents certain information about our unconsolidated investments as of March 31, 2012 and December 31, 2011 ($ in thousands):

 

						Carrying Value of Investment
Property Name		Interest				March 31, 2012				December 31, 2011
Santa Clara 800 Joint Venture			50.00	%		$	12,399			$	12,525
Central Europe Joint Venture			47.27	%			22,054				22,362
Total						$	34,453			$	34,887

 

 

Our investments in unconsolidated joint ventures as of March 31, 2012 and December 31, 2011 consisted of our proportionate share of the combined assets and liabilities of our investment properties as follows ($ in thousands):

 

		March 31,				December 31,
		2012				2011
Real estate assets, net		$	210,126			$	202,876
Cash and cash equivalents			4,732				5,389
Other assets			6,484				8,764
Total assets		$	221,342			$	217,029
Notes payable		$	197,253			$	189,402
Other liabilities			28,694				26,117
Total liabilities			225,947				215,519
Equity			(4,605	)			1,510
Total liabilities and equity		$	221,342			$	217,029

 

For the three months ended March 31, 2012 and 2011, we recognized $2.7 million and $2.5 million, respectively, of equity in losses. Our equity in losses from these investments is our proportionate share of the combined losses of our unconsolidated joint ventures for the three months ended March 31, 2012 and 2011 as follows ($ in thousands):

 

		Three Months Ended March 31,
		2012				2011
Revenue		$	3,260			$	5,174
Operating expenses:
Operating expenses			1,883				1,233
Property taxes			165				142
Total operating expenses			2,048				1,375
Operating income			1,212				3,799
Non-operating expenses:
Depreciation and amortization			1,430				2,081
Interest and other, net			7,211				8,591
Total non-operating expenses			8,641				10,672
Net loss		$	(7,429	)		$	(6,873	)
Equity in losses of unconsolidated joint ventures		$	(2,667	)(1)		$	(2,467	(1)

 

   (1) Company's share of net loss

 

Held for Sale

 

As of March 31, 2012, our Santa Clara 700/750 Joint Venture property was classified as held for sale on our condensed consolidated balance sheet. We had no properties classified as held for sale at December 31, 2011.

 

7.          Variable Interest Entities

 

GAAP requires the consolidation of variable interest entities (“VIEs”) in which an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

 

Our variable interest in VIEs may be in the form of (1) equity ownership and/or (2) loans provided by us to a VIE, or other partner. We examine specific criteria and use judgment when determining if we are the primary beneficiary of a VIE. Factors considered in determining whether we are the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, level of economic disproportionality between us and the other partner(s), and contracts to purchase assets from VIEs.

 

 

Royal Island

 

In May 2007, for an initial cash investment of $20 million, we acquired an approximate 31% limited partnership interest in a partnership (“Royal Island Partnership”) that was developing a resort hotel, spa, golf course, marina, and residences on three islands located in the Commonwealth of The Bahamas (“Royal Island”).

 

Based on our evaluation, we have determined that the entity meets the criteria of a VIE but that we are not the primary beneficiary because we do not have the power to direct the activities of the Royal Island Partnership that most significantly affect the entity’s economic performance. The power to direct these activities resides with the general partner. Accordingly, we do not consolidate Royal Island Partnership and instead account for our equity investment under the equity method of accounting. On March 22, 2012, we executed an Agreement Regarding Transfer pursuant to which, subject to certain terms and conditions, we would obtain all of the outstanding shares of Royal Island (Australia) Pty Limited, thereby becoming the owner of Royal Island. We expect to close this transaction in May 2012; however, we can provide no assurance this transaction will occur. If we do close this transaction, we will consolidate Royal Island as of the transaction date. See Note 8 - Notes Receivable for further information. At March 31, 2012, there was approximately $32.1 million of real estate assets related to Royal Island.

 

At March 31, 2012 and December 31, 2011, our recorded investment in VIEs that are unconsolidated and our maximum exposure to loss were as follows ($ in thousands):

 

As of March 31, 2012
		Investments in Unconsolidated VIEs				Maximum Exposure to Loss
Royal Island (1)			-				30,526

 

As of December 31, 2011
		Investments in Unconsolidated VIEs				Maximum Exposure to Loss
Royal Island (1)			-				31,280

 

 

(1) Our maximum exposure to loss for Royal Island is limited to our equity investment in the unconsolidated VIE of zero as of March 31, 2012 and December 31, 2011, plus the outstanding balance of our Royal Island notes receivable of $30.5 million and $31.3 million, net of allowance as of March 31, 2012 and December 31, 2011, respectively.

 

8.          Notes Receivable

 

Royal Island Bridge Loan

 

In December 2007, we participated in a bridge loan financing arrangement for the continuing development and construction of Royal Island.  The aggregate principal amount available under the bridge loan was $60 million, consisting of three tranches.  Under the bridge loan, we agreed to lend a tranche of up to $40 million, which is subordinate to the other two tranches.  The bridge loan accrued interest at the one-month LIBOR rate plus 8% per annum with accrued interest and principal payable at the maturity date, December 20, 2008, and was secured by the Royal Island. In June 2009, we purchased the interest in the first of the two superior tranches, the A-1 tranche, for $3.1 million. In March 2010, we purchased the interest in two notes in the A-2 tranche for $2.2 million.

 

Under the terms of the loan documents, the bridge loan could have been extended once for a period of six months upon the satisfaction of certain conditions upon notice given by the borrower by November 20, 2008 and a payment of an extension fee.  At the maturity date, not all of the conditions were satisfied, and as a result, the bridge loan went into default and became a non-performing loan. The balance owed to us at the time of default was $37.7 million, including accrued interest and fees. In accordance with GAAP, from the time the loan went into default until the time that a foreclosure occurs, a satisfactory workout is completed, or the loan is reinstated by the borrower, we do not recognize interest income on the loan.

 

In January 2010, we collected $5.5 million, which was applied to unpaid interest and fees from the borrower, pursuant to the terms of the bridge loan agreement. At December 31, 2010, the loan balance owed to us was $45.6 million, which included $1.5 million of accrued interest and fees included in receivables from related parties at December 31, 2010.

 

 

On September 14, 2010, we entered into a forbearance agreement with the borrower pursuant to which, among other things, the borrower agreed not to contest or oppose any foreclosure, exercise of power of sale, or similar action that we may seek in order to protect our investment. Further, the borrower agreed to fully cooperate to expedite the proceedings should we take such a course of action. The forbearance period expired on May 27, 2011.

 

In January 2011, pursuant to a settlement agreement with Shannon B. Skokos and Theodore C. Skokos (the “Skokoses”), related to a lawsuit filed in December 2008, a new joint venture was created among Behringer Harvard RI Lender, LLC, Behringer Harvard RI A-1 Lender, LLC and the Skokoses to own all of the outstanding notes related to Royal Island (the “Royal Island Debt Partnership”). Each lender contributed its respective note in exchange for a pro rata ownership interest in the joint venture, which resulted in our owning approximately 87% of Royal Island Debt Partnership. As part of this settlement, the Skokos $7 million note was contributed to the partnership in exchange for a 13% ownership interest in the Royal Island Debt Partnership.

 

In the second quarter of 2011, the long-lived assets of Royal Island were evaluated for impairment due to an impairment indicator associated with significant changes to the development and construction plans. As a result of this assessment, it was determined that the net book value could not be recovered through future cash flows based on the then revised development plan. Therefore, Royal Island Partnership recorded an impairment charge of approximately $101 million to bring the assets (which now primarily consist of land) to their fair value. Our portion of the impairment was approximately $31 million, which was recorded in our statement of operations through the equity in losses of unconsolidated joint ventures line item. The equity method losses exceeded the investment balance in the Royal Island Partnership. As a result, our investment was reduced to zero during the second quarter of 2011 and remained zero as of December 31, 2011. In accordance with GAAP, equity method losses that exceed our investment balance are recorded against the basis of other investments the investor had in Royal Island. As such, the excess equity method losses of $22.7 million were recorded as a reduction in our note receivable through the equity in losses for unconsolidated joint ventures. Additionally, we recorded $5.3 million as provision for loan losses against the allowance to record the note to the fair value of the underlying collateral.

 

At March 31, 2012, the carrying value of the note receivable was $30.8 million, net of the allowance. Current market conditions with respect to credit availability and fundamentals within the real estate markets instill significant levels of uncertainty. Accordingly, future adverse developments in market conditions would cause us to re-evaluate our conclusions regarding the collectability of our notes receivable and could result in material provisions for loan loss charges.

 

On March 22, 2012 we executed an Agreement Regarding Transfer with the borrowers and guarantors of our Royal Island note receivable. Under the agreement, we would obtain all of the outstanding shares of Royal Island (Australia) Pty Limited, a parent company of the Royal Island borrowers and a subsidiary of the Royal Island Partnership, for, among other things, the release of the guarantors from their guarantees under the Royal Island notes receivable. We have a 30-day due diligence period, extendable up to 90 days, to review documents and records of the Royal Island partnership. We expect to close this transaction in May 2012; however, we can provide no assurance this transaction will occur.

 

 

 

 

9.          Notes Payable

 

The following table sets forth our notes payable on our consolidated properties, including the debt obligations of properties we consolidate at March 31, 2012 and December 31, 2011 ($ in thousands):

 

			Notes Payable as of					Interest		Maturity
Description			March 31, 2012			December 31, 2011		Rate		Date
BHFS I, LLC (Land)			13,491			13,878		30-day LIBOR + 5%(1)(2)		1/28/2012(3)
BHFS II, LLC			7,547			7,565		30-day LIBOR + 4%(1)(2)		1/28/2012(3)
BHFS III, LLC			8,287			8,338		30-day LIBOR + 4%(1)(2)		1/28/2012(3)
BHFS IV, LLC			14,479			14,480		30-day LIBOR + 4%(1)(2)		1/28/2012(3)
Senior Secured Credit Facility			37,462			37,462		30-day LIBOR + 1.5% or Prime Rate (1)(4)		04/13/12(11)
Bent Tree Green			6,459			6,503		3.45%		05/19/12
BHFS Theatre, LLC			4,647			4,708		30-day LIBOR + 4.5%(1)		7/28/2012(5)
Tanglewood at Voss(6)			38,613			39,025		30-day LIBOR + 4%(1)		08/20/12
Becket House(7)			24,860			23,798		90-day LIBOR + 2.5%(8)		12/31/12
								15%(9)
Santa Clara 700/750 Joint Venture			20,000			20,000		4.75% + Greater of 1% or 30-day LIBOR(1)		06/09/13
Santa Clara 700/750 Joint Venture Mezzanine			5,000			5,000		8.5% + Greater of 1% or 30-day LIBOR(1)		06/09/13
Rio Salado			2,390			1,032		12.0%		09/15/14
Chase Park Plaza Hotel and Chase - The Private Residences			55,316			58,429		30-day LIBOR + 6.75%(1)(10)		12/09/14
Northborough Tower			20,464			20,584		5.67%		01/11/16
Royal Island			5,877			5,055		15.00%		10/10/16
		$	264,892		$	265,857

 

(1)

30-day London Interbank Offer Rate ("LIBOR") was 0.241% at March 31, 2012.

 

(2)

Each of the Frisco Square loans is subject to an increase of 2% (default interest rate) on January 28, 2012.

 

(3)

The BHFS loan matured on January 28, 2012 and we did not pay the outstanding principal balance of the loan. We have been and remain actively working with the lenders to extend the maturity date of the BHFS loan. However, there is no assurance that the lenders will agree to extend the maturity date. We intend to use all options available to us   to defend and protect our interest in the property.

  

(4)

Prime rate was 3.25% at March 31, 2012.

  

(5)

As a result of the maturity default on the BHFS loans, the lenders accelerated the maturity date of the BHFS Theater loan on February 14, 2012.

  

(6)

The Lodge & Spa at Cordillera provides additional collateral support for this loan.

 

(7)

The Becket House loan consists of three loans. The balances of the A, B and Junior loans were $12.8 million, $5.9 million and $6.2 million, respectively at March 31, 2012.

 

(8)

90-day LIBOR was 0.478% at March 31, 2012.

 

(9)

Rate for junior loan.

 

(10)

Interest rate subject to floor of 0.75%.

 

(11)

Loan was fully paid off on May 9, 2012.

  

Our notes payable balance was $264.9 million at March 31, 2012 as compared to $265.9 million at December 31, 2011 and consists of borrowings of debt related to our property acquisitions, loan assumptions, and our borrowings under our senior secured credit facility. Each of our notes payable is collateralized by one or more of our properties.  At March 31, 2012, our notes payable interest rates ranged from 1.7% to 15%, with a weighted average interest rate of approximately 5.1%.  Of our $264.9 million in notes payable at March 31, 2012, $229.7 million represented debt subject to variable interest rates.  At March 31, 2012, our notes payable had maturity dates that ranged from January 2012 to October 2016.  We have unconditionally guaranteed payment of the notes payable related to Bent Tree Green, Tanglewood at Voss, the BHFS loans and the senior secured credit facility.

 

Additionally, our notes payable related to BHFS I, LLC (Land), BHFS II, LLC, BHFS III, LLC, BHFS IV, LLC, BHFS Theatre LLC, the senior secured credit facility, Bent Tree Green, Tanglewood at Voss and Becket House have matured or will mature within the next twelve months. We are working with our lenders to either extend the maturity dates or refinance the loans under different terms. We currently expect to use funds generated by our operating properties, additional borrowings, and proceeds from the disposition of properties to continue making our scheduled debt service payments until: (i) the maturity dates of the loans are extended; (ii) the loans are refinanced or restructured; or (iii) the outstanding balance of the loans are completely paid off. However, there is no guarantee that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans. In the event that the lenders demanded immediate payment of the entire loan balances, we would have to consider all available alternatives, including transferring legal possession of the property to the lender or seek restructuring of the investment.

 

 

As of March 31, 2012, we are not in compliance with covenants related to Becket House, Bent Tree Green, BHFS loans, Tanglewood at Voss and our senior secured credit facility. The Becket House senior loan requires that a hedging arrangement remain in place during the term of the loan. We currently do not have a hedge in place. This is not an event of default unless the lender provides notification and requires us to purchase the hedge. The Bent Tree Green loan requires a debt service coverage ratio of 1.2 that the property does not meet as of March 31, 2012 (actual ratio is 0.9). Under the Bent Tree Green loan agreement, we have a 120 day period to cure the deficiency. We cured the deficiency in April 2012 by obtaining new tenant leases.

 

Loan covenants related to the BHFS loans, Tanglewood at Voss and the senior secured credit facility include covenants that require us to maintain a tangible net worth of $242 million. As of March 31, 2012, our tangible net worth was $209 million. On May 9, 2012 we fully repaid the senior credit facility. We are working with the lenders on the remaining loans to waive the events of noncompliance or modify the covenants so that we are in compliance. However, there is no assurance that the lenders will agree to waive the events of noncompliance or to modify the covenants and may pursue their rights and remedies under the loan agreements.

 

Credit Facility

 

In February 2008, we entered into a senior secured credit facility providing for up to $75 million of secured borrowings. The initial credit facility allowed us to borrow up to $75 million in revolving loans, of which up to $20 million was available for issuing letters of credit. We have unconditionally guaranteed payment of the senior secured credit facility. The availability of credit under the senior secured credit facility is limited by the terms of the credit agreement. As of March 31, 2012 and December 31, 2011, the maximum availability under the senior secured credit facility was fully utilized. Effective February 13, 2012, we reached an agreement with the lenders to extend the maturity date of the loan from February 13, 2012 to April 13, 2012. The loan bears interest at LIBOR plus 4%. The credit facility balance was $37.5 million as of March 31, 2012, and the lenders are holding additional cash collateral of $4.9 million.

 

On May 9, 2012, we obtained new financing of $28 million secured by our Las Colinas Commons and Northpoint properties and used the net proceeds from the new financing, along with $8 million of our cash to repay the senior credit facility in full. The five year loan bears interest at 5.148% and requires monthly principal and interest payments based upon a 30 -year amortization schedule. The loan is nonrecourse except for customary carve-outs.

  

Frisco Square

 

On August 31, 2011, effective as of August 28, 2011, we, through wholly owned subsidiaries of our operating partnership, entered into a Modification and Extension Agreement (the “Frisco Square Loan Extension”) with the Frisco Square lenders for the five BHFS loan tranches associated with our Frisco Square investment (the “BHFS loans”) to extend the maturity date of the BHFS loans to January 28, 2012. The interest rates for the five separate tranches of the Frisco Square Loan Extension were unchanged from the terms of the original BHFS loans, subject to the lender condition that if less than $10 million of lender approved sales contracts were in place by October 28, 2011, the interest rates for each tranche within the Frisco Square Loan Extension would increase by 50 basis points. As of October 28, 2011, $10 million of lender approved sales were not in place. The Frisco Square Loan Extension requires that a principal payment of $0.2 million be made each month and that all excess cash flow after interest and required amortization be placed into a restricted deposit account and held as additional collateral. We have unconditionally guaranteed payment of the BHFS loans.

 

On January 28, 2012, the five loan tranches associated with our Frisco Square property matured and we did not pay the outstanding principal balance of the loan which constituted an event of default. On February 1, 2012, we were notified by the lenders that we were in default of the BHFS Theater loan (the “Theater loan”) as a result of the maturity default of the BHFS loans and that the lenders intended to accelerate the Theater loan if the maturity default of the BHFS loans was not cured by February 9, 2012. We did not cure the default. The outstanding principal balance of the BHFS loan is approximately $43.8 million and the outstanding principal balance of the Theater loan is approximately $4.6 million as of March 31, 2012.

 

 

We are and continue to make payments of interest at the non-default rate and principal payments due on both the BHFS loans and the Theater loan pursuant to the terms of the modified agreement. We also continue to fund operating expenses, tenant improvement expenses and leasing commissions at the property and are current on property taxes with the most recent annual payment having been made on January 31, 2012 in respect of the property’s 2011 property taxes.

 

We have been and remain actively working with the lenders to extend the maturity date of the BHFS loans. However, there is no assurance that the lenders will agree to extend the maturity date and may pursue their rights and remedies under the loan agreements, which may include, among other things, ceasing any funding of escrowed expenses, the appointment of a receiver or foreclosure. We intend to use all options available to us to defend and protect our interest in the property and to that end we have engaged bankruptcy counsel.

 

The following table summarizes our aggregate contractual obligations for principal payments as of March 31, 2012 ($ in thousands):

 

Principal Payments Due:
April 1, 2012 - December 31, 2012		$	114,029
2013			67,382
2014			58,050
2015			365
2016			24,426
Thereafter			-
Unamortized premium			640
		$	264,892

 

10.         Derivative Instruments and Hedging Activities

 

We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of operations.  The hedging strategy of entering into interest rate caps and swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows.  In addition, we may be exposed to foreign currency exchange risk related to our net investments in the Becket House leasehold interest and the Central Europe Joint Venture.

 

In November 2011, we entered into an interest rate cap agreement related to the debt on our Chase Park Plaza Hotel and Chase — The Private Residences. In August 2010, we entered into two interest rate cap agreements related to the debt on our Santa Clara 700/750 buildings. In July 2010, our foreign currency put/call option related to Central Europe Joint Venture expired.

 

Derivative instruments classified as assets were reported at their combined fair values of less than $0.1 million and $0.1 million in prepaid expenses and other assets at March 31, 2012 and December 31, 2011, respectively. We had no derivative instruments classified as liabilities as of March 31, 2012 or December 31, 2011. During the three months ended March 31, 2012 and 2011, we recorded an unrealized loss of less than $0.1 million to accumulated other comprehensive income (“AOCI”) in our statement of equity to adjust the carrying amount of the interest rate swaps and caps qualifying as hedges at March 31, 2012 and March 31, 2011.

 

The following table summarizes the notional values of our derivative financial instruments as of March 31, 2012. The notional values provide an indication of the extent of our involvement in these instruments at March 31, 2012, but do not represent exposure to credit, interest rate, or market risks ($ in thousands):

 

Type / Description		Notional Value (in thousands)				Interest Rate / Strike Rate				Maturity				Fair Value Asset
Cash Flow Hedges
Interest rate cap - Santa Clara 700/750		$	20,000				4.0	%			June 15, 2013			$	1
Interest rate cap - Santa Clara 700/750		$	5,000				4.0	%			June 15, 2013			$	-
Interest rate cap - Chase Park Plaza Hotel and
Chase - The Private Residences		$	59,000				3.0	%			December 9, 2014			$	50

 

 

The table below presents the fair value of our derivative financial instruments, as well as their classification on the condensed consolidated balance sheets as of March 31, 2012 and December 31, 2011 ($ in thousands).

 

					Asset Derivatives
Derivatives designated as hedging instruments:		Balance Sheet Location			Fair Value at March 31, 2012			Fair Value at December 31, 2011
Interest rate derivative  contracts		Prepaid expenses and other assets		$	51		$	64

  

The table below presents the effect of our derivative financial instruments on the condensed consolidated statements of operations as of March 31, 2012 and 2011 ($ in thousands).

 

Derivatives in Cash Flow Hedging Relationships
		Amount of Gain or (Loss) Recognized in AOCI on  Derivative (Effective Portion)
		Three Months Ended March 31,
		2012				2011
Interest rate		$	(8	)		$	(7	)

 

Credit risk and collateral

 

Our credit exposure related to interest rate is represented by the fair value of contracts with a net liability fair value at the reporting date. These outstanding instruments may expose us to credit loss in the event of nonperformance by the counterparties to the agreements. However, we have not experienced any credit loss as a result of counterparty nonperformance in the past. To manage credit risk, we select and will periodically review counterparties based on credit ratings and limit our exposure to any single counterparty. Under our agreement with the counterparty related to our interest rate caps of the Santa Clara 700/750 buildings and Chase Park Plaza Hotel and Chase – The Private Residences, cash deposits may be required to be posted by the counterparty whenever its credit rating falls below certain levels. At March 31, 2012, no collateral has been posted with our counterparties nor have our counterparties posted collateral with us related to our derivative instruments.

 

11.         Distributions

 

We initiated the payment of monthly distributions in August 2006. In April 2007, and through March 2009, the declared distribution rate was a 3% annualized rate of return, calculated on a daily record basis of $0.0008219 per share. Pursuant to our distribution reinvestment plan (the “DRP”), many of our stockholders elected to reinvest any cash distributions in additional shares of common stock. We record all distributions when declared, except that the stock issued through the DRP was recorded when the shares were actually issued.

 

In connection with entering our disposition phase, on March 28, 2011, our board of directors discontinued regular, quarterly distributions in favor of those that may arise from proceeds available to be distributed from the sale of assets. On May 25, 2011, we filed Post-Effective Amendment No. 1 to our registration statement on Form S-3 (File No. 333-146965) (the “S-3 Amendment”) to deregister 2,941,591 unsold shares of common stock being offered pursuant to the DRP. By filing the S-3 Amendment, we terminated the offering of shares under the registration statement.

 

12.         Related Party Transactions

 

Behringer Harvard Opportunity Advisors I and certain of its affiliates receive fees and compensation in connection with the acquisition, financing, management, and sale of our assets.

 

Since our inception, the Advisor or its predecessors have been responsible for managing our day-to-day affairs and for, among other things, identifying and making acquisitions and other investments on our behalf. Our relationship with the Advisor, including the fees paid by us to the Advisor or the reimbursement of expenses by us for amounts paid, or incurred by the Advisor, on our behalf is governed by an advisory management agreement that has been in place since September 20, 2005 and amended at various times thereafter.

 

 

On December 20, 2011, we entered into an amendment to our advisory management agreement pursuant to which the annual asset management fee payable by us to the Advisor was reduced from 0.75% to 0.60% of the aggregate asset value of acquired real estate and real estate related assets effective January 1, 2012. Also on December 20, 2011, we renewed the Amended Agreement, as amended, through December 31, 2012. Other than as described above, the terms of the advisory management agreement remain unchanged.

 

During the three months ended March 31, 2012, Behringer Harvard Opportunity Advisors I received an annual asset management fee of 0.60% of the aggregate asset value of acquired real estate and real estate related assets. The fee is payable monthly in arrears in an amount equal to one-twelfth of 0.60% of the aggregate asset value as of the last day of the month. For the three months ended March 31, 2012 and 2011, we incurred $1 million and $1.2 million, respectively, of asset management fees.

 

Behringer Harvard Opportunity Advisors I, or its affiliates, receives acquisition and advisory fees of 2.5% of the contract purchase price of each asset for the acquisition, development or construction of real property or 2.5% of the funds advanced in respect of a loan. For each of the three months ended March 31, 2012 and 2011, we incurred less than $0.1 million and $0.1 million, respectively, in acquisition and advisory fees.

 

Under the advisory management agreement, the debt financing fee paid to the Advisor for a Loan (as defined in the agreement) will be 1% of the loan commitment amount. Amounts due to the Advisor for a Revised Loan (as defined in the agreement) will be 40 basis points of the loan commitment amount for the first year of any extension (provided the extension is for at least 120 days), an additional 30 basis points for the second year of an extension, and another 30 basis points for the third year of an extension in each case, prorated for any extension period less than a full year. The maximum debt financing fee for any extension of three or more years is 1% of the loan commitment amount. We did not incur any debt financing fees for the three months ended March 31, 2012. For the three months ended March 31, 2011, we incurred $0.5 million in debt financing fees.

 

We reimburse Behringer Harvard Opportunity Advisors I or its affiliates for all expenses paid or incurred by them in connection with the services they provide to us, including direct expenses and the costs of salaries and benefits of persons employed by those entities and performing services for us, subject to the limitation that we will not reimburse for any amount by which our Advisor’s operating expenses (including the asset management fee) at the end of the four fiscal quarters immediately preceding the date reimbursement is sought exceeds the greater of: (1) 2% of our average invested assets or (2) 25% of our net income for that four quarter period other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and any gain from the sale of our assets for that period. Notwithstanding the preceding sentence, we may reimburse the Advisor for expenses in excess of this limitation if a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. The salaries and benefits that we reimburse to our Advisor exclude the salaries and benefits that our Advisor or its affiliates may pay to our named executive officers. For the three months ended March 31, 2012 and 2011, we incurred costs for administrative services of $0.5 million and $0.4 million, respectively.

 

We pay our property manager and affiliate of the Advisor, Behringer Harvard Opportunity Management Services, LLC or its affiliates (collectively, “BH Property Management”), fees for management, leasing, and construction supervision of our properties. Such fees are equal to 4.5% of gross revenues plus leasing commissions based upon the customary leasing commission applicable to the same geographic location of the respective property. In the event that we contract directly with a non-affiliated third-party property manager in respect of a property, we will pay BH Property Management an oversight fee equal to 0.5% of gross revenues of the property managed. In no event will we pay both a property management fee and an oversight fee to BH Property Management with respect to any particular property. In the event we own a property through a joint venture that does not pay BH Property Management directly for its services, we will pay BH Property Management a management fee or oversight fee, as applicable, based only on our economic interest in the property. In each of the three months ended March 31, 2012 and 2011, we incurred property management fees or oversight fees of $0.2 million.

 

To bridge our liquidity needs until asset sales occur, in January 2011, we obtained a deferral from our Advisor of the payment of all asset management fees accruing during the months of May 2010 through March 2011 and all debt financing fees and expense reimbursements accruing during the months of July 2010 through March 2011 until the earlier of January 10, 2013 or such time as the Company has sufficient (a) net sales proceeds, (b) net refinancing proceeds, or (c) cash flow from operations, after establishing appropriate working capital reserves, to enable the Company to make payments thereon. Also in January 2011, BH Property Management deferred our obligation to pay property management oversight fees accruing during the months of July 2010 through March 2011 until the earlier of January 10, 2013 or such time as the Company has sufficient (a) net sales proceeds, (b) net refinancing proceeds, or (c) cash flow from operations, after establishing appropriate working capital reserves, to enable the Company to make payments thereon. The total deferred fees and expenses at March 31, 2012 and December 31, 2011 was $2.9 million.

 

 

On March 29, 2011, we obtained a $2.5 million loan from our Advisor to further bridge our short-term liquidity needs. The $2.5 million loan bears interest at a rate of 5% and has a maturity date of the earliest of (i) March 29, 2013, (ii) the termination without cause of the advisory management agreement, or (iii) the termination without cause of the property management agreement. The balance on the loan at March 31, 2012 and December 31, 2011 was $1.5 million.

 

At March 31, 2012, we had a payable to our Advisor and its affiliates of $5.8 million. This balance consists of accrued and deferred fees during 2011, including asset management fees, administrative service expenses, debt financing fees, acquisition fees, property management fees, a loan of $1.5 million and other miscellaneous costs payable to Behringer Harvard Opportunity Advisors I and BH Property Management. At December 31, 2011, we had a payable to our Advisor and its affiliates of $5.8 million.

 

We are dependent on Behringer Harvard Opportunity Advisors I and BH Property Management for certain services that are essential to us, including asset acquisition and disposition decisions, property management and leasing services, and other general administrative responsibilities. In the event that these companies are unable to provide us with the respective services, we would be required to obtain such services from other sources.

 

On September 26, 2011, we, through a wholly-owned subsidiary of our operating partnership, entered into a lease agreement with Behringer Harvard REIT I, Inc., a real estate investment program sponsored by our sponsor Behringer Harvard Holdings LLC, to lease approximately 14,500 rentable square feet at Bent Tree Green to Behringer Harvard REIT I, Inc. The lease commenced on December 1, 2011 for a 66-month term (the first six months of which are free rent) with scheduled rent increases every 12 months. Our management and board of directors determined that the lease was fair and reasonable to us and on terms and conditions that are no less favorable to us than can be obtained from unaffiliated third parties for comparable transactions or services in the same location.

 

13.

Supplemental Cash Flow Information

 

Supplemental cash flow information is summarized below.

 

		Three months ended March 31,
		2012				2011
Supplemental disclosure:
Interest paid, net of amounts capitalized		$	2,778			$	3,474
Non-cash investing and financing activities:
Property and equipment additions and purchases of real estate in accrued liabilities		$	390			$	195
Capital expenditures for real estate under development in accounts payable and accrued liabilities		$	1,441			$	66
Contribution of notes receivable and accrued interest by noncontrolling interest holder		$	-			$	8,607
Amortization of deferred financing fees in properties under development		$	20			$	-
Common stock issued in distribution reinvestment plan		$	-			$	925
Capitalized deferred financing costs in accrued liabilities		$	-			$	422

 

14.

Discontinued Operations and Real Estate Held for Sale

 

On April 26, 2011, we sold 12600 Whitewater to an unaffiliated third party for $9.6 million. On June 30, 2011, we sold 2603 Augusta to an unaffiliated third party for $24 million. On October 4, 2011, we sold Crossroads to an unaffiliated third party for $27.9 million. On December 21, 2011, we sold Regency Center to an unaffiliated third party for $16.8 million. We have the Santa Clara 700/750 Joint Venture property under contract for sale and therefore, classified as held for sale on our condensed consolidated balance sheet at March 31, 2012.

 

 

We have classified the results of operations for the properties discussed above into discontinued operations in the consolidated statements of operations for the three months ended March 31, 2012 and 2011. The results of these properties are classified as discontinued operations in the accompanying condensed consolidated statements of operations and other comprehensive loss for the three months ended March 31, 2012 and 2011 and summarized in the following table ($ in thousands):

 

		Three Months Ended March 31,
		2012				2011
Revenues
Rental revenue		$	1,310			$	4,038
Expenses
Property operating expenses			76				878
Bad debt expense			12				11
Interest expense			615				874
Real estate taxes			153				534
Impairment charge			-				3,629
Property management fees			12				119
Asset management fees			32				210
General and administrative			1				3
Depreciation and amortization			432				1,565
Total expenses			1,333				7,823
Loss from discontinued operations		$	(23	)		$	(3,785	)

 

During the three months ended March 31, 2012, we sold five of the Chase – The Private Residences condominiums for an aggregate of $3.3 million. These sales are not classified as discontinued operations.

 

15.

Subsequent Events

 

Santa Clara 800 Joint Venture

 

On May 1, 2012, we executed an agreement to sell our 50% equity interest in Santa Clara 800 Joint Venture to our Santa Clara JV partner, which holds the remaining 50% equity in the venture, for approximately $12.4 million. The transaction closed on May 5, 2012.

 

Tanglewood at Voss

 

On May 2, 2012, we signed an agreement to sell Tanglewood at Voss to an unrelated third party. The sale is expected to close in late May 2012.

 

New financings

 

On May 9, 2012, we obtained new financing of $28 million secured by our Las Colinas Commons and Northpoint properties. The five year loan bears interest at 5.148% and requires monthly principal and interest payments based upon a 30-year amortization schedule. The loan is nonrecourse except for customary carve-outs. We used net proceeds from the new financing, along with $8 million of our cash to repay the senior credit facility in full.

 

 

*****

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with the accompanying financial statements of the Company and the notes thereto:

 

Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include discussion and analysis of the financial condition of Behringer Harvard Opportunity REIT I, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “REIT,” “we,” “us,” or “our”), including our ability to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, the value of our assets, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions to our stockholders, the estimated per share value of our common stock and other matters. Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.

 

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 29, 2012 and the factors described below:

 

·

market and economic challenges experienced by the U.S. and global economies or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;

 

·

the availability of cash flow from operating activities for capital expenditures;

 

·

our level of debt and the terms and limitations imposed on us by our debt agreements;

 

·

the availability of credit generally, and any failure to refinance or extend our debt as it comes due or a failure to satisfy the conditions and requirements of that debt;

 

·

the need to invest additional equity in connection with debt financings as a result of reduced asset values and requirements to reduce overall leverage;

 

·

future increases in interest rates;

 

·

our ability to raise capital in the future by issuing additional equity or debt securities, selling our assets or otherwise;

 

·

our ability to retain our executive officers and other key personnel of our Advisor, our property manager and their affiliates;

 

·

impairment charges;

 

·

conflicts of interest arising out of our relationships with our Advisor and its affiliates;

 

·

unfavorable changes in laws or regulations impacting our business or our assets; and

 

·

factors that could affect our ability to qualify as a real estate investment trust.

 

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

 

Cautionary Note

 

The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties or covenants to or with any other parties. Moreover, these representations, warranties or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.

 

 

Executive Overview

 

We are a Maryland corporation that was formed in November 2004 to invest in and operate commercial real estate or real-estate related assets located in or outside the United States on an opportunistic basis. We conduct substantially all of our business through our operating partnership and its subsidiaries. We are organized and qualify as a REIT for federal income tax purposes.

 

We are externally managed and advised by Behringer Harvard Opportunity Advisors I, a Texas limited liability company formed in June 2007. Behringer Harvard Opportunity Advisors I is responsible for managing our day-to-day affairs and for identifying and making acquisitions and investments on our behalf. 

 

As of March 31, 2012, we wholly owned eight properties including one classified as held for sale on our condensed consolidated balance sheet and consolidated four properties through investments in joint ventures. We are the mezzanine lender for one multifamily property. In addition, we have noncontrolling, unconsolidated ownership interests in two properties and one investment in a joint venture consisting of 22 properties that are accounted for using the equity method. Our investment properties are located in Arizona, California, Colorado, Missouri, Nevada, Texas, the Commonwealth of The Bahamas, London, England, the Czech Republic, Poland, Hungary, and Slovakia.

 

Liquidity and Capital Resources

 

Strategic Asset Sales

 

Our management is continually reviewing its overall business plan and revising the strategies necessary to maximize liquidity and value for the Company and its stockholders. To that end, management has identified three distinct sub-portfolios of our investments: a near-term disposition portfolio, a mid-term disposition portfolio and a long-term disposition portfolio. Properties are assigned to and may shift among sub-portfolios based on changes in market conditions, property performance, debt maturities, required capital expenditures or other factors. The near-term disposition portfolio is currently comprised of an office building for which we have executed a purchase and sale agreement with an unaffiliated third party. We have also signed a purchase and sale agreement for our multifamily property. We sold our 50% interest in our Santa Clara 800 unconsolidated joint venture on May 4, 2012. We believe that the majority of the net proceeds from sales occurring in 2012 will be used to provide liquidity to refinance or repay maturing debt, cover operating expenses, and make enhancements to portfolio properties in cases where additional investment is warranted. The mid-term disposition portfolio is currently comprised of eight properties that are either in markets that would benefit from anticipated rental increases and improving local markets before sale, or are in various stages of the stabilization process. As several of the properties stabilize, they may require additional time and capital resources to lease up vacancy, retain key tenants, create value through reinvestment, or sell condominium units or land parcels before their ultimate disposition. The remaining properties in the mid-term portfolio have stabilized and may be refinanced, providing us with more flexibility as to the timing of their dispositions. The long-term liquidation portfolio is currently comprised of four development projects and two notes receivable, and a final exit is contingent upon a stabilized economy and resurgent demand for the respective product types. It is possible that we will invest enough additional capital in two of these sites to make them attractive to market to other developers rather than completing the original development plan. However, there can be no assurance that future dispositions will occur as planned, or, if they occur, that they will help us to meet our liquidity demands. Once we anticipate selling all or substantially all of our assets, we will seek stockholder approval prior to liquidating our entire portfolio.

 

Liquidity Demands

 

The U.S., European and global economies continue to experience the effects of the significant downturn that began more than three years ago. This downturn continues to disrupt the broader financial and credit markets, weaken consumer confidence, weaken financial institutions and adversely impact unemployment rates. While it is unclear when the overall economy will fully recover from these weakened market conditions, we do not expect conditions to improve significantly in the near future. The primary objectives of our current business plan are to continue to preserve capital, as well as sustain and enhance property values, while continuing to focus on the disposition of our properties. Our ability to execute this plan is contingent on our ability to dispose of our properties in an orderly fashion thus providing needed liquidity. The disposal of our properties will be subject to these economic factors, including the ability of potential purchasers to access debt capital financing.

 

 

Our financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business as we proceed through our disposition phase. As is usual for opportunity style real estate investment programs, we are structured as a finite life entity, and have entered the final phase of operations. This phase includes the selling off our assets, liquidating our liabilities, and distributing net proceed to shareholders. We have experienced significant losses and may generate negative cash flows as mortgage note obligations and expenses exceed revenues. If we are unable to sell a property when we determine to do so as contemplated in our business plan, it could have a significant adverse effect on our cash flows that are necessary to meet our mortgage obligations and to satisfy our other liabilities in the normal course of business.

 

Our ability to continue as a going concern is, therefore, dependent upon our ability to sell real estate investments as discussed above in strategic asset sales, to pay down debt as it matures if extensions or new financings are unavailable, and to fund certain ongoing costs of our company, including our development and operating properties.

 

Our principal demands for funds for the next twelve months and beyond will be for the payment of costs associated with the lease-up of available space at our operating properties (including commissions, tenant improvements, and capital improvements), certain ongoing costs at our development properties, Company operating expenses, and interest and principal on our outstanding indebtedness. We expect to fund a portion of these demands by using cash flow from operations of our current investments and borrowings. Additionally, we will use proceeds from our strategic asset sales.

 

To bridge our then liquidity needs until these asset sales occur, in January 2011, we obtained a deferral from our Advisor of the payment of all asset management fees accruing during the months of May 2010 through March 2011 and all debt financing fees and expense reimbursements accruing during the months of July 2010 through March 2011 until the earlier of January 10, 2013 or such time as we have sufficient (a) net sales proceeds, (b) net refinancing proceeds, or (c) cash flow from operations, after establishing appropriate working capital reserves, to enable us to make payments thereon. Also in January 2011, BH Property Management deferred our obligation to pay property management oversight fees accruing during the months of July 2010 through March 2011 until the earlier of January 10, 2013 or such time as we have sufficient (a) net sales proceeds, (b) net refinancing proceeds, or (c) cash flow from operations, after establishing appropriate working capital reserves, to enable us to make payments thereon. The total deferred fees and expenses at March 31, 2012 and December 31, 2011 was $2.9 million.

 

On March 29, 2011, we obtained a $2.5 million loan from our Advisor to further bridge our liquidity needs. The $2.5 million loan bears interest at a rate of 5% and has a maturity date of the earliest of (i) March 29, 2013, (ii) the termination without cause of the advisory management agreement or (iii) the termination without cause of the property management agreement. The balance on the loan at March 31, 2012 and December 31, 2011 was $1.5 million.

 

We continually evaluate our liquidity and ability to fund future operations and debt obligations. As part of those analyses, we consider lease expirations and other factors. As indicated below, leases representing 20% of our annualized base rent will expire by the end of 2013. In the normal course of business, we are pursuing renewals, extensions and new leases. If we are unable to renew or extend the expiring leases under similar terms or is unable to negotiate new leases, it would negatively impact our liquidity and consequently adversely affect our ability to fund our ongoing operations. In addition, our portfolio is concentrated in certain geographic regions and industries, and downturns relating generally to such regions or industries may result in defaults on a number of our investments within a short time period. Such defaults would negatively affect our liquidity and adversely affect our ability to fund our ongoing operations. As of March 31, 2012, 68% and 13% of our 2012 base rent was derived from tenants in Texas and Colorado, respectively, and 19%, 14%, and 11% of the lease agreements a tour consolidated office properties were concentrated in the professional, scientific and technical services industry, finance and insurance industry, other services (except for public administration) industry, respectively.

 

 

Portfolio Lease Expirations

 

The following table presents lease expirations at our consolidated office and industrial properties as of March 31, 2012 ($ in thousands):

 

Year of Expiration				Number of Leases Expiring				Annualized Base Rent(1)				Percent of Portfolio Annualized Base Rent Expiring				Leased Rentable Sq. Ft.				Percent of Portfolio Rentable Sq. Ft. Expiring
	2012				10			$	910				3	%			35,750				3	%
	2013				15				4,282				17	%			272,418				21	%
	2014				11				1,460				6	%			58,734				5	%
	2015				12				1,714				7	%			90,538				7	%
	2016				9				1,343				5	%			54,780				4	%
	Thereafter				28				15,787				62	%			765,271				60	%
	Total				85			$	25,496				100	%			1,277,491				100	%

 

(1) Represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to the expiration multiplied by 12, without consideration of tenant contraction or termination rights. Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges.

 

Geographic Diversification

 

The following table shows the geographic diversification of our real estate portfolio for those properties we consolidate on our financial statements including properties that are classified as discontinued operations for the three months ended March 31, 2012 ($ in thousands):

 

Location				March 31, 2012 Revenue(1)				Percentage of March 31, 2012 Revenue
	Texas			$	5,710				68	%
	Colorado				1,125				13	%
	California				782				9	%
	Missouri				650				8	%
	International				146				2	%
				$	8,413				100	%

 

⁽¹⁾ March 31, 2012 Revenue represents contractual base rental income of our office properties, as well as revenue from our multifamily and hotel properties, without consideration of tenant contraction or termination rights. Tenant reimbursements generally include payment of real estate taxes, operating expenses, and common area maintenance and utility charges.

 

Please see Note 3 to the Condensed Consolidated Financial Statements for information regarding how geographic concentration may be considered in the evaluation of our investments for impairment.

 

 

Tenant Diversification

 

As an opportunistic fund, we utilize a business model driven by investment strategy and expected performance characteristics. Accordingly, we have investments in several types of real estate, including office, hotel, multifamily, condominiums and land held for development. Within our consolidated office properties, we have over 80 tenants who operate in numerous industries including technology, finance and insurance, professional services, and retail. The following table shows the tenant diversification of our real estate portfolio for our consolidated office properties as of March 31, 2012. In addition, we have approximately 460 leases at our multifamily properties. These multifamily leases are short-term in nature. We do not have an industry breakdown of the employers of our multifamily tenants. Therefore, the multifamily leases are not reflected in the tables below ($ in thousands).

 

Tenant Diversification		Leases at March 31, 2012				Percentage of March 31, 2012 Leases				2012 Annualized Base Rent (1)				Percentage of 2012 Annualized Base Rent				Leased Rentable Sq. Ft.				Percentage of Leased Rentable Sq. Ft.
Retail Trade			7				8	%		$	5,781				23	%			206,427				16	%
Professional, Scientific, and Technical Services			16				19	%			3,911				15	%			199,016				16	%
Wholesale Trade			1				0	%			3,556				14	%			306,144				24	%
Finance and Insurance			12				14	%			2,740				11	%			157,663				12	%
Manufacturing			6				7	%			2,113				8	%			94,802				7	%
Management of Companies and Enterprises			4				5	%			1,919				8	%			53,646				4	%
Construction			3				4	%			1,117				4	%			52,854				4	%
Other Services (except Public Adminstration)			9				11	%			1,104				4	%			44,666				3	%
Arts, Entertainment, and Recreation			3				4	%			756				3	%			44,780				4	%
Information			3				4	%			747				3	%			43,570				3	%
Accommodation and Food Services			7				8	%			594				2	%			22,771				2	%
Real Estate and Rental and Leasing			6				7	%			583				2	%			25,775				2	%
Utilities			3				4	%			352				1	%			15,521				1	%
Public Administration			2				2	%			123				1	%			5,752				1	%
Health Care and Social Assistance			2				2	%			83				1	%			3,279				1	%
Mining			1				1	%			17				0	%			825				0	%
			85				100	%		$	25,496				100	%			1,277,491				100	%

 

(1) Represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to the expiration multiplied by 12, without consideration of tenant contraction or termination rights. Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges.

  

Tenant Diversification		Leases at December 31, 2011				Percentage of December 31, 2011 Leases				2011 Annualized Base Rent (1)				Percentage of 2011 Annualized Base Rent				Leased Rentable Sq. Ft.				Percentage of Leased Rentable Sq. Ft.
Retail Trade			8				10	%		$	5,784				23	%			208,201				16	%
Professional, Scientific, and Technical Services			16				19	%			4,015				16	%			204,426				16	%
Wholesale Trade			1				1	%			3,556				14	%			306,144				24	%
Finance and Insurance			10				12	%			2,295				9	%			149,506				12	%
Manufacturing			6				7	%			2,113				8	%			94,802				7	%
Management of Companies and Enterprises			4				5	%			1,888				7	%			53,646				4	%
Other Services (except Public Adminstration)			10				12	%			1,140				5	%			46,492				4	%
Construction			3				4	%			1,117				4	%			52,854				4	%
Arts, Entertainment, and Recreation			4				5	%			854				3	%			52,334				4	%
Information			3				4	%			747				3	%			43,570				3	%
Accommodation and Food Services			6				7	%			591				2	%			20,997				2	%
Real Estate and Rental and Leasing			6				7	%			586				2	%			26,193				2	%
Utilities			3				4	%			352				1	%			15,521				1	%
Public Administration			1				1	%			88				1	%			4,395				1	%
Health Care and Social Assistance			2				2	%			83				1	%			3,279				0	%
Mining			1				0	%			16				1	%			825				0	%
			84				100	%		$	25,225				100	%			1,283,185				100	%

 

(1) Represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to the expiration multiplied by 12, without consideration of tenant contraction or termination rights. Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges.

 

  

Debt Financings

 

One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt, including borrowings under our senior secured credit facility discussed below. The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of March 31, 2012. The table does not represent any extension options ($ in thousands).

 

		Payments Due by Period(1)
		April 1, 2012 -																				After
		December 31, 2012				2013				2014				2015				2016				2016				Total
Principal payments - fixed rate debt		$	6,698			$	327			$	2,734			$	365			$	24,426			$	-			$	34,550
Interest payments - fixed rate debt			1,795				2,316				2,225				1,987				834				-				9,157
Principal payments - variable rate debt			107,331				67,055				55,316				-				-				-				229,702
Interest payments - variable rate debt (based on rates in effect as of March 31, 2012)			6,227				5,047				4,206				-				-				-				15,480
Total		$	122,051			$	74,745			$	64,481			$	2,352			$	25,260			$	-			$	288,889

 

 

(1)

Does not include approximately $0.6 million of unamortized premium related to debt we assumed on our acquisition of Northborough Tower. The BHFS loan matured on January 28, 2012. We are working with the lenders to extend the maturity, but we cannot be assured if a resolution will be reached.

 

The table below provides information regarding our notes payable with scheduled maturities in the twelve months following March 31, 2012, along with extension options, if available. Available extension options that are associated with the notes payable listed below are subject to certain conditions as required under the respective loan agreements ($ in thousands).

 

		Balance at
		March 31,				Maturity				Extension
Description		2012				Date				Options		Recourse to the Company
BHFS I, LLC (Land)			13,491				1/28/2012 (1)			none			100	%
BHFS II, LLC			7,547				1/28/2012 (1)			none			100	%
BHFS III, LLC			8,287				1/28/2012 (1)			none			100	%
BHFS IV, LLC			14,479				1/28/2012 (1)			none			100	%
Senior Secured Revolving Credit Facility			37,462				02/13/12			none			100	%
Bent Tree Green			6,459				05/19/12			Two one-year options			100	%
BHFS Theatre, LLC			4,647				7/28/2012 (2)			none			100	%
Tanglewood at Voss			38,613				08/20/12			One one-year option			100	%
Becket House			24,860				12/31/12			none			n/a
Total due in next twelve months		$	155,845

 

(1) The BHFS Loan matured on January 28, 2012 and we did not pay the outstanding principal balance of the loan. We have been and remain actively working with the lenders to extend the maturity date. However, there is no assurance that the lenders will agree to extend the maturity date.

 

(2) As a result of the maturity default on the BHFS loans, the lenders accelerated the maturity date of the BHFS Theatre loan on February 14, 2012.

 

On January 28, 2012, the loan tranches associated with our Frisco Square property (the “BHFS loan”) matured and we did not pay the outstanding principal balance of the loan, which constituted an event of default. As a result of the maturity default of the BHFS loan, the lenders accelerated the maturity of the loan related to the Frisco Square Theater. We have been and remain actively working with the lenders to extend the maturity date of the BHFS loan. However, there is no assurance that the lenders will agree to extend the maturity date and may pursue their rights and remedies under the loan agreements, which may include, among other things, ceasing any funding of escrowed expenses, the appointment of a receiver or foreclosure. We intend to use all options available to us to defend and protect our interest in the property and to that end have engaged bankruptcy counsel for the BHFS borrowers. The outstanding principal balance of the BHFS loan is approximately $43.8 million and the outstanding principal balance of the Frisco Square Theater loan is approximately $4.6 million as of March 31, 2012.

 

As of March 31, 2012, we are not in compliance with covenants related to Becket House, Bent Tree Green, Frisco Square, Tanglewood at Voss and our senior secured credit facility. The Becket House senior loan requires that a hedging arrangement remain in place during the term of the loan. We currently do not have a hedge in place. This is not an event of default unless the lender provides notification and requires us to purchase the hedge.

 

 

Loan covenants related to BHFS loans, Tanglewood at Voss, and the senior secured credit facility include covenants that require us to maintain a tangible net worth of $242 million. As of March 31, 2012, our tangible net worth was $209 million. On May 9, 2012 we fully repaid the senior credit facility. We are working with the lenders on the remaining loans to waive the events of noncompliance or modify the covenants so that we are in compliance. However, there is no assurance that the lenders will agree to waive the events of noncompliance or to modify the covenants and may pursue their rights and remedies under the loan agreements.

 

We currently expect to use funds generated by our operating properties, additional borrowings, and proceeds from the disposition of properties to continue making our scheduled debt service payments until the maturity dates of the loans are extended, the loans are refinanced, or the outstanding balance of the loans are completely paid off. However, there is no guarantee that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans. In addition, the continued economic downturn and lack of available credit to buyers could delay or inhibit our ability to dispose of our properties in an orderly manner, or cause us to have to dispose of our properties for a lower than anticipated return. To the extent we are unable to reach agreeable terms with respect to extensions or refinancings, we may not have the cash necessary to repay our debt as it matures, which could result in an event of default that could allow lenders to foreclose on the property in satisfaction of the debt, seek repayment of the full amount of the debt outstanding from us or pursue other remedies.

 

Each of our loans is secured by one or more of our properties. At March 31, 2012, our notes payable interest rates ranged from 1.7% to 15%, with a weighted average interest rate of 5.1%. Generally, our notes payable mature at approximately two to nine years from origination and require payments of interest only for approximately two to five years, with all principal and interest due at maturity. Notes payable associated with our Bent Tree Green, Northborough Tower and Frisco Square investments require monthly payments of both principal and interest. Monthly excess cash flow, as defined, from Tanglewood at Voss and the Lodge & Spa at Cordillera is used to make principal payments for the Tanglewood at Voss loan. At March 31, 2012, our notes payable had maturity dates that ranged from January 2012 to October 2016.

  

Credit Facility

 

In February 2008, we entered into a senior secured credit facility providing for up to $75 million of secured borrowings. The initial credit facility allowed us to borrow up to $75 million in revolving loans, of which up to $20 million was available for issuing letters of credit. We have unconditionally guaranteed payment of the senior secured credit facility. The availability of credit under the senior secured credit facility is limited by the terms of the credit agreement. As of March 31, 2012 and December 31, 2011, the maximum availability under the senior secured credit facility was fully utilized. Effective February 13, 2012, we reached an agreement with the lenders to extend the maturity date of the loan from February 13, 2012 to April 13, 2012. The loan bears interest at LIBOR plus 4%. The credit facility balance was $37.5 million as of March 31, 2012, and the lenders are holding additional cash collateral of $4.9 million.

 

On May 9, 2012, we obtained new financing of $28 million secured by our Las Colinas Commons and Northpoint properties and used the net proceeds from the new financing, along with $8 million of our cash to repay the senior credit facility in full. The five year loan bears interest at 5.148% and requires monthly principal and interest payments based upon a 30 -year amortization schedule. The loan is nonrecourse except for customary carve-outs.

  

On April 10, 2012, we executed a term sheet for new financing of $15 million secured by our Bowen Road property. The two year loan bears interest at Libor + 5.5% (with a 7% minimum) and requires interest only payments for the first twelve months, then monthly fixed principal payments of $60,000 thereafter. The loan is nonrecourse except for customary carve-outs. There is no assurance that we will close the new loan.

  

Our ability to fund our liquidity requirements is expected to come from cash and cash equivalents (which total $10.8 million on our consolidated balance sheet as of March 31, 2012) new borrowings, additional borrowings that may become available under our existing loan agreements by satisfying certain terms, and proceeds from the disposition of our properties. As necessary, we may seek alternative sources of financing including using the proceeds from the sale of our properties to achieve our investment objectives.

 

 

 

As of March 31, 2012, restricted cash on the consolidated balance sheet of $6.7 million included amounts set aside as interest reserves totaling $0.6 million and $4.9 million held as additional collateral for our senior secured credit facility. The remaining balance of $1.2 million included amounts set aside related to certain operating properties for tenant improvements and commission reserves, tax reserves, maintenance and capital expenditures reserves, and other amounts as may be required by our lenders.

 

Market Outlook

 

After several months of positive economic reports, March 2012 was a disappointment. Economic data related to employment, housing and manufacturing were below analysts’ expectations. Whether 2012 will be a repeat of the last two years, when the year started off favorably but slowed in the spring, remains to be seen. On the positive side, there are a few differences between this period and the other years. Oil prices, which were a significant cause for last year’s slump, have begun to moderate and with demand down these trends may continue. The European debt crisis continues to weigh on the global economy. Also, the natural disasters that disrupted global supply chains have not reoccurred. As an owner of office real estate properties, the majority of our income and cash flow is derived from rental revenue received pursuant to tenant leases for space at our properties. Over the past several months there has been some improvement in fundamental benchmarks such as occupancy, rental rates and pricing. Continued improvement in these fundamentals is dependent upon sustained economic growth. Occupancy and rental rate stabilization will vary by market and property type.

 

The hospitality industry is beginning to see early signs of a recovering economy. Smith Travel Research indicates that the national overall occupancy rate for hospitality properties in the United States rose from 54.9% in the first quarter of 2011 to 56.8% in the first quarter of 2012. The national overall Average Daily Rate has also risen, from $99.37 in the first quarter of 2011 to $103.54 in the first quarter of 2012. This positive growth in the hospitality industry is expected to continue.

 

We have several projects in various stages of development including land and condominiums. We are continuing to evaluate whether to perform any further substantive development activities on these projects in the near term. Our ability to develop is affected by market and other forces impacting the U.S. economy and the real estate industry as a whole and by the local economic conditions in the markets in which our properties are located, including the dislocations in the credit markets. Tightened underwriting standards and risk adverse capital markets have resulted in less availability and increased cost of debt financing secured by commercial real estate. These conditions have and may continue to materially affect the availability or the terms of financing that we have or may anticipate utilizing for development.

 

Results of Operations

 

As of March 31, 2012, we were invested in 17 assets including eight wholly-owned properties including one asset classified as held for sale on our condensed consolidated balance sheet and four properties consolidated through investments in joint ventures. In addition, we are the mezzanine lender for one multifamily property. We also have noncontrolling, unconsolidated ownership interests in two properties and one investment in a joint venture consisting of 22 properties that are accounted for using the equity method. Our investment properties are located in Arizona, California, Colorado, Missouri, Nevada, Texas, the Commonwealth of The Bahamas, London, England, the Czech Republic, Poland, Hungary, and Slovakia.

 

As of March 31, 2011, we had invested in 22 assets including 11 wholly owned properties; five properties consolidated through investments in joint ventures including two hotel and development properties and one mixed-use property; and a consolidated interest in a note receivable joint venture. In addition, we were the mezzanine lender for one multifamily property. We also had noncontrolling, unconsolidated ownership interests in three properties and one investment in a joint venture consisting of 22 properties that was accounted for using the equity method. Our investment properties were located in Arizona, California, Colorado, Minnesota, Missouri, Nevada, Texas, the Commonwealth of The Bahamas, London, England, the Czech Republic, Poland, Hungary, and Slovakia.

 

Three months ended March 31, 2012 as compared to three months ended March 31, 2011 ($ in thousands)

  

Revenues. Our total revenues increased by $3.5 million to $13.7 million for the three months ended March 31, 2012. The change in revenues was primarily due to:

 

·

an increase in rental revenue of $9.3 million for the three months ended March 31, 2012 compared to $8.3 million for the three months ended March 31, 2011; and

 

·

an increase in condominium sales of $3.3 million for the three months ended March 31, 2012 compared to $0.7 million for the three months ended March 31, 2011. We sold five condominium units at Chase – The Private Residences in the three months ended March 31, 2012 as compared to one unit sold during the three months ended March 31, 2011.

 

  

Cost of Condominium Sales. Cost of condominium sales, relating to the sale of condominium units at Chase – The Private Residences, for the three months ended March 31, 2012 was $3.3 million as compared to $0.7 million for the three months ended March 31, 2011. We closed on the sale of five condominium units at Chase – The Private Residences during the three months ended March 31, 2012. We closed on the sale of one condominium unit during the three months ended March 31, 2011.

 

Condominium inventory impairment. We recognized a non-cash charge of $0.4 million to reduce the carrying value of condominiums at Chase — The Private Residences during the three months ended March 31, 2012, due largely to the nationwide downturn in the housing and related condominium market that began during 2007 and has continued through 2012. This downturn has resulted in lower than expected sales volume and reduced selling prices. There was zero impairment charges related to our condominium inventory for the three months ended March 31, 2011.

 

Cash Flow Analysis

 

Cash used in operating activities for the three months ended March 31, 2012 was $0.2 million, and was comprised of the net loss of $8.4 million adjusted for depreciation and amortization, including amortization of deferred financing fees of $4.8 million, an impairment charge of $0.4 million, equity in losses of our unconsolidated joint venture of $2.7 million, change in condominium inventory of $3.3 million and offset by cash used by working capital and other operating activities of approximately $3 million. Cash provided by operating activities for the three months ended March 31, 2011 was $12.9 million, and was comprised of the net loss of $11.3 million adjusted for depreciation and amortization, including amortization of deferred financing fees of $6.2 million, an impairment charge of $3.6 million, equity in losses of our unconsolidated joint venture of $2.4 million and change in condominium inventory of $15.2 million primarily from the sale of the historic tax credits, offset by the adjustment for gain on sale of real estate of $1.3 million and cash used in working capital and other operating activities of approximately $1.9 million.

 

Cash used in investing activities for the three months ended March 31, 2012 was $0.8 million and was comprised of capital expenditures for real estate under development of $1.3 million, investment in notes receivable of $0.8 million and additions of property and equipment of $0.1 million. This was offset by change in restricted cash of $1.4 million. Cash used in investing activities for the three months ended March 31, 2011 was $1.8 million and was comprised of proceeds from the sale of real estate of $5.7 million and proceeds from notes receivable repayments of $0.4 million. This was offset by cash for expenditures for real estate under development of $1.1 million, additions of property and equipment of $4.3 million, investment in notes receivable of $2.1 million and change in restricted cash of $0.4 million.

 

Cash used in financing activities for the three months ended March 31, 2012 was $1.7 million and was primarily comprised of payments on notes payable of $4.2 million offset by borrowings of $2.4 million. Cash used in financing activities for the three months ended March 31, 2011 was $14.5 million and was comprised of payments on notes payable and credit facility of $22.6 million offset by borrowings, net of financing costs of $8.5 million. Cash distributions were $0.5 million and net contributions from noncontrolling interest holders was $0.1 million.

 

Funds from Operations

 

Funds from operations (“FFO”) is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) in the April 2002 “White Paper of Funds From Operations” which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property and impairments of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership), plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, subsidiaries, and noncontrolling interests as one measure to evaluate our operating performance. In October 2011, NAREIT clarified the FFO definition to exclude impairment charges of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership). We have calculated FFO for all periods presented in accordance with this clarification.

 

Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance.

  

  

We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, impairments of depreciable assets, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income.

 

FFO should not be considered as an alternative to net income (loss), as an indication of our liquidity, nor as an indication of funds available to fund our cash needs, including our ability to make distributions and should be reviewed in connection with other GAAP measurements. Additionally, the exclusion of impairments limits the usefulness of FFO as a historical operating performance measure since an impairment charge indicates that operating performance has been permanently affected. FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO. Our FFO as presented may not be comparable to amounts calculated by other REITs that do not define these terms in accordance with the current NAREIT definition or that interpret the definition differently.

 

Our calculation of FFO for the three months ended March 31, 2012 and 2011 is presented below ($ in thousands except per share amounts):

 

		Three Months Ended March 31,
		2012				2011
Net loss attributable to common shareholders		$	(7,879	)		$	(11,140	)
Adjustments for (1):
Impairment charge(2)			416				3,629
Real estate depreciation and amortization(3)			5,099				7,200
Gain on sale of real estate			-				(1,288	)
Funds from operations (FFO)		$	(2,364	)		$	(1,599	)
GAAP weighted average shares:
Basic and diluted			56,500				56,458
FFO per share		$	(0.04	)		$	(0.03	)
Net loss per share		$	(0.14	)		$	(0.20	)

 

  

(1)

Reflects the adjustments for continuing operations, as well as discontinued operations.

 

(2)

Includes impairment of our investments in unconsolidated entities which resulted from a measurable decrease in the fair value of the depreciable real estate held by the joint venture or partnership.

 

(3)

Real estate depreciation and amortization includes our consolidated real depreciation and amortization expense, as well as our pro rata share of those unconsolidated investments which we account for under the equity method of accounting and the noncontrolling interest adjustment for the third-party partners' share of the real estate depreciation and amortization.

 

Distributions

 

Distributions are authorized at the discretion of our board of directors based on its analysis of our forthcoming cash needs, earnings, cash flow, anticipated cash flow, capital expenditure requirements, cash on hand, general financial condition and other factors that our board deems relevant. The board’s decision will be influenced, in substantial part, by its obligation to ensure that we maintain our status as a REIT. In connection with entering our disposition phase, on March 28, 2011, our board of directors discontinued regular quarterly distributions in favor of those that may arise from proceeds available to be distributed from our asset sales.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Critical Accounting Policies and Estimates  

 

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates, including investment impairment, on a regular basis. These estimates will be based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

 

  

Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

 

Principles of Consolidation and Basis of Presentation

 

Our condensed consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control. All inter-company transactions, balances, and profits have been eliminated in consolidation. Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary. If the interest in the entity is determined not to be a VIE, then the entity will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.  

 

There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether we are the primary beneficiary. The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity. Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses. A change in the judgments, assumptions, and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment using the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.

 

Real Estate

 

Upon the acquisition of real estate properties, we recognize the assets acquired, the liabilities assumed, and any noncontrolling interest as of the acquisition date, measured at their fair values. The acquisition date is the date on which we obtain control of the real estate property. These assets acquired and liabilities assumed may consist of buildings, any assumed debt, identified intangible assets and asset retirement obligations. Identified intangible assets generally consist of the above-market and below-market leases, in-place leases, in-place tenant improvements and tenant relationships. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of identifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired. Acquisition-related costs are expensed in the period incurred.

 

The fair value of the tangible assets acquired, consisting of land and buildings is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings. Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants. The value of buildings is depreciated over the estimated useful life of 25 years using the straight-line method.

 

We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.

 

We determine the value of above-market and below-market leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management’s estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining non-cancelable lease term for above-market leases, or (b) the remaining non-cancelable lease term plus any below-market fixed rate renewal options that, based on a qualitative assessment of several factors, including the financial condition of the lessee, the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, are reasonably assured to be exercised by the lessee for below-market leases. We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the determined lease term.

 

The total value of identified real estate intangible assets acquired is further allocated to in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. The aggregate value for tenant improvements and leasing commissions is based on estimates of these costs incurred at inception of the acquired leases, amortized through the date of acquisition. The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model. The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces considering current market conditions. In estimating the carrying costs that would have otherwise been incurred had the leases not been in place, we include such items as real estate taxes, insurance and other operating expenses as well as lost rental revenue during the expected lease-up period based on current market conditions. The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal fees and tenant improvements as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis.

  

  

We amortize the value of in-place leases, in-place tenant improvements and in-place leasing commissions to expense over the initial term of the respective leases. The tenant relationship values are amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense. The estimated remaining average useful lives for acquired lease intangibles range from less than one year to approximately ten years.

 

Other intangible assets include the value of identified hotel trade names and in-place property tax abatements. These fair values are based on management’s estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods. The value of the trade names is amortized over its respective estimated useful life of 20 years using the straight-line method and the value of the in-place property tax abatement is amortized over its estimated term of 10 years using the straight-line method.

 

Investment Impairments

 

For all of our real estate and real estate related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions. Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at a portion of our properties within a short time period, which may result in asset impairments. When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value. We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

 

We also evaluate our investments in notes receivable as of each reporting date. If we believe that it is probable we will not collect all principal and interest in accordance with the terms of the notes, we consider the loan impaired. When evaluating loans for potential impairment, we compare the carrying amount of the loans to the present value of future cash flows discounted at the loan’s effective interest rate, or, if a loan is collateral dependent, to the estimated fair value of the related collateral net of any senior loans. For impaired loans, a provision is made for loan losses to adjust the reserve for loan losses. The reserve for loan losses is a valuation allowance that reflects our current estimate of loan losses as of the balance sheet date. The reserve is adjusted through the provision for loan losses account on our condensed consolidated statement of operations.

 

In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, planned development and the projected sales price of each of the properties. A future change in these estimates and assumptions could result in understating or overstating the book value of our investments, which could be material to our financial statements.

 

The value of our properties held for development depends on market conditions, including estimates of the project start date, as well as estimates of future demand for the property type under development. We have analyzed trends and other information related to each potential development and incorporated this information, as well as our current outlook, into the assumptions we use in our impairment analyses. Due to the judgment and assumptions applied in the estimation process with respect to impairments, including the fact that limited market information regarding the value of comparable land exists at this time, it is possible actual results could differ substantially from those estimated.

 

  

We believe the carrying value of our operating real estate assets, properties under development, investments in unconsolidated joint ventures, and notes receivable is currently recoverable. However, if market conditions worsen beyond our current expectations, or if our assumptions regarding expected future cash flows from the use and eventual disposition of our assets decrease or our expected hold periods decrease, or if changes in our development strategy significantly affect any key assumptions used in our fair value calculations, we may need to take additional charges in future periods for impairments related to existing assets. Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.

 

Condominium Inventory

 

Condominium inventory is stated at the lower of cost or fair market value. In addition to land acquisition costs, land development costs, and construction costs, costs include interest and real estate taxes, which are capitalized during the period beginning with the commencement of development and ending with the completion of construction.

 

For condominium inventory, at each reporting date, management compares the estimated fair value less costs to sell to the carrying value. An adjustment is recorded to the extent that the fair value less costs to sell is less than the carrying value. We determine the estimated fair value of condominiums based on comparable sales in the normal course of business under existing and anticipated market conditions. This evaluation takes into consideration estimated future selling prices, costs incurred to date, estimated additional future costs, and management’s plans for the property.

 

The nationwide downturn in the housing and related condominium market that began during 2007 and has continued and has resulted in reduced selling prices. As a result of our evaluations, we recognized a non-cash charge of $0.4 million to reduce the carrying value of condominiums at Chase-The Private Residences during the three months ended March 31, 2012. This non-cash charge is classified as condominium inventory impairment charge in the accompanying condensed consolidated statement of operations. We recognized zero non-cash charge during the three months ended March 31, 2011. In the event that market conditions continue to decline in the future or the current difficult market conditions extend beyond our expectations, additional adjustments may be necessary.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Interest Rate Risk

 

We may be exposed to interest rate changes, primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps, or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt. Of our $264.9 million in notes payable at March 31, 2012, $229.7 million represented debt subject to variable interest rates. If our variable interest rates increased 100 basis points, we estimate that total annual interest cost, including interest expensed, interest capitalized, and the effects of the interest rate caps and swaps, would increase by less than $0.1 million.

 

At March 31, 2012, interest rate caps classified as assets were reported at their combined fair value of $0.1 million within prepaid expenses and other assets. A 100 basis point decrease in interest rates would result in a $0.1 million net decrease in the fair value of our interest rate caps and swaps. A 100 basis point increase in interest rates would result in a $0.3 million net increase in the fair value of our interest rate caps and swaps.

 

Foreign Currency Exchange Risk

 

We currently have a leasehold interest in London, England that holds $0.8 million in Euro-denominated accounts at European financial institutions. We also own approximately 47% interest investment in joint venture consisting of 22 properties in the Czech Republic, Poland, Hungary, and Slovakia that holds $3.2 million in Euro-denominated accounts at European financial institutions. As such, we believe that we are not materially exposed to any significant foreign currency fluctuations related to these accounts.

 

Inflation

 

The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. However, we include provisions in the majority of our tenant leases that would protect us from the impact of inflation. These provisions include reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance.

  

 

Item 4.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of March 31, 2012, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2012 to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

 

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in internal control over financial reporting that occurred during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II

 

OTHER INFORMATION

Item 1.

Legal Proceedings.

 

None.

 

Item 1 A.

Risk Factors.

 

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Unregistered Sales of Common Stock

 

During the period covered by this quarterly report, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

 

Share Redemption Program

 

In February 2006, our board of directors authorized a share redemption program for stockholders who held their shares for more than one year. Under the program, our board reserved the right in its sole discretion at any time, and from time to time, to (1) waive the one-year holding period in the event of the death, disability or bankruptcy of a stockholder or other exigent circumstances, (2) reject any request for redemption, (3) change the purchase price for redemptions, or (4) terminate, suspend or amend the share redemption program.

 

On March 30, 2009, our board of directors voted to accept all redemption requests submitted during the first quarter of 2009 from stockholders whose requests were made on circumstances of death, disability, or confinement to a long-term care facility (referred to herein as “Exceptional Redemptions”). However, the board determined to not accept, and to suspend until further notice, redemptions other than Exceptional Redemptions.

 

On January 10, 2011, as is customary for REITs entering the disposition phase, the board suspended the redemption program with respect to all redemption requests until further notice. Therefore, we did not redeem any shares of our common stock during the three months ended March 31, 2012.

 

We have not presented information regarding submitted and unfulfilled redemptions during the three months ended March 31, 2012 as our board of directors suspended all redemptions as of the first quarter of 2011 and we believe many stockholders who may otherwise desire to have their shares redeemed have not submitted a request due to the program’s suspension.

 

Any redemption requests submitted while the program is suspended will be returned to investors and must be resubmitted upon resumption of the share redemption program. If the share redemption program is resumed, we will give all stockholders notice that we are resuming redemptions, so that all stockholders will have an equal opportunity to submit shares for redemption. Upon resumption of the program, any redemption requests will be honored pro rata among all requests received based on funds available. Requests will not be honored on a first come, first served basis.

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

None.

 

Item 5.

Other Information.

 

None.

Item 6.

Exhibits.

 

The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.

 

 

SIGNATURE

 

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.

 

Behringer Harvard Opportunity REIT I, Inc.

 

Dated:  May 14, 2012	By:	/s/ Andrew J. Bruce
	Andrew J. Bruce
	Chief Financial Officer
	(Principal Financial Officer)

 

 

Index to Exhibits 

 

Exhibit Number		Description
3.1		Second Articles of Amendment and Restatement of the Registrant (previously filed in and incorporated by reference to Form 8-K, filed on July 29, 2008)
3.2		Certificate of Correction to Second Articles of Amendment and Restatement of the Registrant (previously filed in and incorporated by reference to Form 8-K, filed on June 9, 2011)
3.3		Amended and Restated Bylaws of the Registrant (previously filed in and incorporated by reference to Form 8-K filed on March 11, 2010)
31.1*		Rule 13a-14(a)/15d-14(a) Certification
31.2*		Rule 13a-14(a)/15d-14(a) Certification
32.1*(1)		Section 1350 Certification
32.2*(1)		Section 1350 Certification
99.1*		Second Amended and Restated Policy for Estimation of Common Stock
101(2)		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed on May 14, 2012, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.

 ______________________

 

*filed herewith

 

(1)   In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

 

(2)   As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.