10-Q 1 bhr-3312013x10q.htm 10-Q BHR-3.31.2013-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
 
[Mark One]
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended March 31, 2013
OR 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from  _________ to _________                    
Commission File Number: 000-51293
Behringer Harvard REIT I, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
68-0509956
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer
Identification No.)
 
17300 Dallas Parkway, Suite 1010, Dallas, Texas 75248
(Address of principal executive offices)
(Zip code)
 
(972) 931-4300
(Registrant’s telephone number, including area code) 
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 ý  No o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 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 ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No ý
 
As of April 30, 2013, Behringer Harvard REIT I, Inc. had 299,621,421 shares of common stock, $.0001 par value, outstanding.


BEHRINGER HARVARD REIT I, INC.
FORM 10-Q
Quarter Ended March 31, 2013
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2

PART I
FINANCIAL INFORMATION
Item 1.                                 Financial Statements
Behringer Harvard REIT I, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
 
March 31, 2013
 
December 31, 2012
Assets
 

 
 

Real estate
 

 
 

Land
$
378,205

 
$
392,736

Buildings and improvements, net
2,110,847

 
2,230,283

Real estate under development
13,327

 
5,950

Total real estate
2,502,379

 
2,628,969

Cash and cash equivalents
40,726

 
9,746

Restricted cash
71,289

 
78,166

Accounts receivable, net
108,343

 
111,950

Prepaid expenses and other assets
10,593

 
7,302

Investments in unconsolidated entities
44,687

 
52,948

Deferred financing fees, net
13,930

 
16,251

Lease intangibles, net
190,055

 
205,587

Other intangible assets, net
3,499

 
3,657

Assets associated with real estate held for sale
—

 
10,718

Total assets
$
2,985,501

 
$
3,125,294

Liabilities and equity
 

 
 

Liabilities
 

 
 

Notes payable
$
2,012,268

 
$
2,107,380

Accounts payable
1,442

 
1,652

Payables to related parties
1,398

 
1,398

Acquired below-market leases, net
48,099

 
51,218

Accrued liabilities
108,330

 
135,072

Deferred tax liabilities
1,702

 
2,192

Other liabilities
17,831

 
17,914

Obligations associated with real estate held for sale
—

 
18,383

Total liabilities
2,191,070

 
2,335,209

Commitments and contingencies


 


Series A Convertible Preferred Stock
2,700

 
2,700

Equity
 

 
 

Preferred stock, $.0001 par value per share; 17,490,000 shares authorized, none outstanding
—

 
—

Convertible stock, $.0001 par value per share; 1,000 shares authorized, none outstanding
—

 
—

Common stock, $.0001 par value per share; 382,499,000 shares authorized, 299,191,861 shares issued and outstanding
30

 
30

Additional paid-in capital
2,646,104

 
2,645,994

Cumulative distributions and net loss attributable to common stockholders
(1,858,625
)
 
(1,862,591
)
Accumulated other comprehensive loss
(1,419
)
 
(1,676
)
Stockholders’ equity
786,090

 
781,757

Noncontrolling interests
5,641

 
5,628

Total equity
791,731

 
787,385

Total liabilities and equity
$
2,985,501

 
$
3,125,294

See Notes to Condensed Consolidated Financial Statements.

3

Behringer Harvard REIT I, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share amounts)
(unaudited)
 
Three Months Ended
 
March 31, 2013
 
March 31, 2012
Rental revenue
$
106,029

 
$
106,213

Expenses
 

 
 

Property operating expenses
32,627

 
32,204

Interest expense
30,433

 
31,920

Real estate taxes
15,275

 
16,183

Property management fees
3,089

 
3,144

Asset management fees
—

 
4,581

General and administrative
4,636

 
2,393

Depreciation and amortization
43,165

 
47,682

Total expenses
129,225

 
138,107

Interest and other income (expense)
533

 
(19
)
Gain on troubled debt restructuring
—

 
201

Loss from continuing operations before income taxes, equity in losses of investments and gain on sale or transfer of assets
(22,663
)
 
(31,712
)
Benefit (provision) for income taxes
38

 
(407
)
Equity in losses of investments
(798
)
 
(116
)
Loss from continuing operations before gain on sale or transfer of assets
(23,423
)
 
(32,235
)
Discontinued operations
 

 
 

Income from discontinued operations
7,569

 
2,014

Gain on sale or transfer of discontinued operations
3,730

 
2,019

Income from discontinued operations
11,299

 
4,033

Gain on sale or transfer of assets
16,102

 
362

Net income (loss)
3,978

 
(27,840
)
Net income (loss) attributable to noncontrolling interests
 
 
 
Noncontrolling interests in continuing operations
4

 
47

Noncontrolling interests in discontinued operations
(16
)
 
(6
)
Net income (loss) attributable to common stockholders
$
3,966

 
$
(27,799
)
Basic and diluted weighted average common shares outstanding
299,191,861

 
297,645,524

Basic and diluted income (loss) per common share:
 

 
 

Continuing operations
$
(0.02
)
 
$
(0.10
)
Discontinued operations
0.03

 
0.01

Basic and diluted income (loss) per common share
$
0.01

 
$
(0.09
)
Net income (loss) attributable to common stockholders:
 

 
 

Continuing operations
$
(7,317
)
 
$
(31,826
)
Discontinued operations
11,283

 
4,027

Net income (loss) attributable to common stockholders
$
3,966

 
$
(27,799
)
Comprehensive income (loss):
 

 
 

Net income (loss)
$
3,978

 
$
(27,840
)
Other comprehensive income (loss): unrealized gain (loss) on interest rate derivatives
258

 
(443
)
Comprehensive income (loss)
4,236

 
(28,283
)
Comprehensive (income) loss attributable to noncontrolling interests
(13
)
 
41

Comprehensive income (loss) attributable to common stockholders
$
4,223

 
$
(28,242
)
See Notes to Condensed Consolidated Financial Statements.

4

Behringer Harvard REIT I, Inc.
Condensed Consolidated Statements of Changes in Equity
(in thousands)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
Cumulative
Distributions
and
Net Loss Attributable to Common Stockholders
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
Convertible Stock
 
Common Stock
 
Additional
 
 
 
 
 
 
 
Number
 
Par
 
Number
 
Par
 
Paid-in
 
 
 
Noncontrolling Interests
 
Total Equity
 
of Shares
 
Value
 
of Shares
 
Value
 
Capital
 
 
 
 
For the three months ended March 31, 2013
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at January 1, 2013
—

 
$
—

 
299,192

 
$
30

 
$
2,645,994

 
$
(1,862,591
)
 
$
(1,676
)
 
$
5,628

 
$
787,385

Net income
—

 
—

 
—

 
—

 
—

 
3,966

 
—

 
12

 
3,978

Unrealized gain on interest rate derivatives
—

 
—

 
—

 
—

 
—

 
—

 
257

 
1

 
258

Amortization of restricted shares
—

 
—

 
—

 
—

 
110

 
—

 
—

 
—

 
110

Balance at March 31, 2013
—

 
$
—

 
299,192

 
$
30

 
$
2,646,104

 
$
(1,858,625
)
 
$
(1,419
)
 
$
5,641

 
$
791,731

For the three months ended March 31, 2012
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Balance at January 1, 2012
1

 
$
—

 
297,256

 
$
30

 
$
2,639,720

 
$
(1,683,153
)
 
$
(905
)
 
$
6,299

 
$
961,991

Net loss
—

 
—

 
—

 
—

 
—

 
(27,799
)
 
—

 
(41
)
 
(27,840
)
Unrealized loss on interest rate derivatives
—

 
—

 
—

 
—

 
—

 
—

 
(443
)
 
—

 
(443
)
Redemption of common stock
—

 
—

 
(221
)
 
—

 
(1,024
)
 
—

 
—

 
—

 
(1,024
)
Distributions declared
—

 
—

 
—

 
—

 
—

 
(7,439
)
 
—

 
(11
)
 
(7,450
)
Shares issued pursuant to Distribution Reinvestment Plan
—

 
—

 
707

 
—

 
3,278

 
—

 
—

 
—

 
3,278

Cost of share issuance
—

 
—

 
—

 
—

 
(4
)
 
—

 
—

 
—

 
(4
)
Balance at March 31, 2012
1

 
$
—

 
297,742

 
$
30

 
$
2,641,970

 
$
(1,718,391
)
 
$
(1,348
)
 
$
6,247

 
$
928,508

 
See Notes to Condensed Consolidated Financial Statements.


5

Behringer Harvard REIT I, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended
 
March 31, 2013
 
March 31, 2012
Cash flows from operating activities
 

 
 

Net income (loss)
$
3,978

 
$
(27,840
)
Adjustments to reconcile net income (loss) to net cash flows used in operating activities:
 

 
 

Gain on sale or transfer of assets
(16,102
)
 
(362
)
Gain on sale or transfer of discontinued operations
(3,730
)
 
(2,019
)
Gain on troubled debt restructuring
(7,693
)
 
(3,587
)
Loss on derivatives
73

 
3

Amortization of restricted shares
110

 
—

Depreciation and amortization
43,984

 
50,688

Amortization of lease intangibles
79

 
236

Amortization of above/below market rent
(2,272
)
 
(3,338
)
Amortization of deferred financing and mark-to-market costs
1,738

 
1,933

Equity in losses of investments
798

 
116

Ownership portion of management and financing fees from unconsolidated companies
563

 
103

Distributions from investments
—

 
114

Change in accounts receivable
(4,486
)
 
(6,833
)
Change in prepaid expenses and other assets
(3,386
)
 
(3,859
)
Change in lease commissions
(2,800
)
 
(3,295
)
Change in other lease intangibles
(1,411
)
 
(1,112
)
Change in accounts payable
(492
)
 
(476
)
Change in accrued liabilities
(20,137
)
 
(12,324
)
Change in other liabilities
(9
)
 
923

Change in payables to related parties
—

 
590

Cash used in operating activities
(11,195
)
 
(10,339
)
Cash flows from investing activities
 

 
 

Return of investments
8,400

 
2,234

Investments in unconsolidated entities
(1,500
)
 
(370
)
Capital expenditures for real estate
(17,578
)
 
(7,656
)
Capital expenditures for real estate under development
(6,035
)
 
—

Proceeds from sale of discontinued operations
74,840

 
—

Change in restricted cash
7,384

 
10,800

Cash provided by investing activities
65,511

 
5,008

Cash flows from financing activities
 

 
 

Financing costs
—

 
(21
)
Proceeds from notes payable
19,000

 
26,500

Payments on notes payable
(42,336
)
 
(8,284
)
Payments on capital lease obligations
—

 
(22
)
Redemptions of common stock
—

 
(1,024
)
Offering costs
—

 
(4
)
Distributions to common stockholders
—

 
(4,158
)
Distributions to noncontrolling interests
—

 
(11
)
Cash (used in) provided by financing activities
(23,336
)
 
12,976

Net change in cash and cash equivalents
30,980

 
7,645

Cash and cash equivalents at beginning of period
9,746

 
12,073

Cash and cash equivalents at end of period
$
40,726

 
$
19,718

See Notes to Condensed Consolidated Financial Statements.

6

Behringer Harvard REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
 
1.             Business
 
Organization
 
Behringer Harvard REIT I, Inc. (which, along with our subsidiaries, may be referred to herein as the “Company,” “we,” “us” or “our”) was incorporated in June 2002 as a Maryland corporation and has elected to be taxed, and currently qualifies, as a real estate investment trust, or REIT, for federal income tax purposes.  We primarily own institutional quality office properties located in metropolitan cities and select suburban markets that we believe have premier business addresses, are of high quality construction, offer personalized amenities, and are primarily leased to highly creditworthy commercial tenants.  We also develop institutional quality office properties.  As of March 31, 2013, we owned interests in 48 properties located in 18 states and the District of Columbia. 
 
Substantially all of our business is conducted through Behringer Harvard Operating Partnership I LP (“Behringer OP”), a Texas limited partnership.  Our wholly-owned subsidiary, BHR, Inc., a Delaware corporation, is the sole general partner of Behringer OP.  Our direct and indirect wholly-owned subsidiaries, BHR Business Trust, a Maryland business trust, and BHR Partners, LLC, a Delaware limited liability company, are limited partners owning substantially all of Behringer OP.
 
Our common stock is not listed on a national securities exchange. However, prior to February 2017, management and our board anticipates either listing our common stock on a national securities exchange or commencing liquidation of our assets. Our management and board continue to review various alternatives that may create future liquidity for our stockholders. In the event we do not obtain listing of our common stock on or before February 2017, our charter requires us to liquidate our assets unless a majority of the board of directors extends such date.
 
2.             Basis of Presentation and Significant Accounting Policies
 
Interim Unaudited Financial Information
 
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and 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, 2012, which was filed with the Securities and Exchange Commission (“SEC”) on March 7, 2013.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from 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 sheets as of March 31, 2013, and December 31, 2012, and condensed consolidated statements of operations and comprehensive loss, changes in equity, and cash flows for the periods ended March 31, 2013 and 2012, 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 present fairly our financial position as of March 31, 2013, and December 31, 2012, and our results of operations and our cash flows for the periods ended March 31, 2013 and 2012.  These adjustments are of a normal recurring nature.
 
We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements.

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.
 

7

Real Estate
 
As of March 31, 2013, and December 31, 2012, the cost basis and accumulated depreciation and amortization related to our consolidated real estate properties and related lease intangibles were as follows (in thousands):
 
 
 
 
 
Lease Intangibles
 
 
 
 
Assets
 
Liabilities
 
 
 
 
 
 
Acquired
 
Acquired
 
 
Buildings and
 
Other Lease
 
Above-Market
 
Below-Market
as of March 31, 2013
 
Improvements
 
Intangibles
 
Leases
 
Leases
Cost
 
$
2,728,816

 
$
393,986

 
$
25,061

 
$
(120,542
)
Less: accumulated depreciation and amortization
 
(617,969
)
 
(213,079
)
 
(15,913
)
 
72,443

Net
 
$
2,110,847

 
$
180,907

 
$
9,148

 
$
(48,099
)
 
 
 
 
 
Lease Intangibles
 
 
 
 
Assets
 
Liabilities
 
 
 
 
 
 
Acquired
 
Acquired
 
 
Buildings and
 
Other Lease
 
Above-Market
 
Below-Market
as of December 31, 2012
 
Improvements
 
Intangibles
 
Leases
 
Leases
Cost
 
$
2,823,672

 
$
420,399

 
$
27,539

 
$
(124,060
)
Less: accumulated depreciation and amortization
 
(593,389
)
 
(224,705
)
 
(17,646
)
 
72,842

Net
 
$
2,230,283

 
$
195,694

 
$
9,893

 
$
(51,218
)
 
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 tenants’ respective initial lease terms 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 an ending date of April 2013 to an ending date of November 2025.  Anticipated amortization associated with the acquired lease intangibles for each of the following five years is as follows (in thousands):
April - December 2013
$
13,832

2014
$
15,443

2015
$
10,675

2016
$
7,878

2017
$
4,632

 
Accounts Receivable, net
 
The following is a summary of our accounts receivable as of March 31, 2013, and December 31, 2012 (in thousands):
 
March 31,
 
December 31,
 
2013
 
2012
Straight-line rental revenue receivable
$
97,327

 
$
102,789

Tenant receivables
10,252

 
9,374

Non-tenant receivables
1,942

 
1,050

Allowance for doubtful accounts
(1,178
)
 
(1,263
)
Total
$
108,343

 
$
111,950

 






8

Deferred Financing Fees, net

The following is a summary of our deferred financing fees as of March 31, 2013, and December 31, 2012 (in thousands):
 
March 31,
 
December 31,
 
2013
 
2012
Cost
$
34,795

 
$
36,101

Less: accumulated amortization
(20,865
)
 
(19,850
)
Net
$
13,930

 
$
16,251


 Other Intangible Assets, net
 
Other intangible assets include our license to use the Behringer Harvard name and logo and a ground lease on one of our properties.  As of March 31, 2013, and December 31, 2012, the cost basis and accumulated amortization related to our consolidated other intangibles assets were as follows (in thousands):
 
March 31,
 
December 31,

2013
 
2012
Cost
$
4,422

 
$
4,422

Less: accumulated depreciation and amortization
(923
)
 
(765
)
Net
$
3,499

 
$
3,657

 
We amortize the value of other intangible assets to expense over their estimated remaining useful lives which range from an ending date of June 2015 to an ending date of January 2050.   Anticipated amortization associated with other intangible assets for each of the following five years is as follows (in thousands):
April - December 2013
$
472

2014
$
629

2015
$
374

2016
$
119

2017
$
119

 
Revenue Recognition
 
We recognize rental income generated from all leases of consolidated real estate assets on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  The total net increase to rental revenues due to straight-line rent adjustments for the three months ended March 31, 2013 and 2012, was approximately $2.8 million and $7.4 million, respectively, and includes amounts recognized in discontinued operations.  As discussed above, our rental revenue also includes amortization of acquired above- and below-market leases.  The total net increase to rental revenues due to the amortization of acquired above- and below-market leases for the three months ended March 31, 2013 and 2012, was approximately $2.3 million and $3.3 million, respectively, and includes amounts recognized in discontinued operations. Revenues relating to lease termination fees are recognized on a straight-line basis amortized from the time that a tenant’s right to occupy the leased space is modified through the end of the revised lease term.  We recognized lease termination fees of approximately $0.2 million and $0.6 million for the three months ended March 31, 2013 and 2012, respectively, which includes amounts recognized in discontinued operations. 

Income Taxes
 
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and have qualified as a REIT since the year ended December 31, 2004.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income (excluding net capital gains) to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level (except to the extent we distribute less than 100% of our taxable income and/or net taxable capital gains).
 
We acquired IPC (US), Inc. on December 12, 2007, and have elected that it be taxed as a REIT for federal income tax purposes since the tax year ended December 31, 2008.  We believe IPC (US), Inc. is organized and operates in a manner to qualify for this election.  Prior to acquisition, IPC (US), Inc. was a taxable C-corporation, and for the balance of the year ended December 31, 2007, IPC (US), Inc. was treated as a taxable REIT subsidiary of the Company for federal income tax purposes.

9

 
As of March 31, 2013, we have deferred tax liabilities of approximately $1.7 million and deferred tax assets, net of related valuation allowances, of approximately $0.2 million related to various state taxing jurisdictions.  At December 31, 2012, we had deferred tax liabilities of approximately $2.2 million and deferred tax assets, net of related valuation allowances, of approximately $0.5 million related to various state taxing jurisdictions.
 
We recognize in our financial statements the impact of our tax return positions if it is more likely than not that the tax position will be sustained upon examination (defined as a likelihood of more than fifty percent of being sustained upon audit, based on the technical merits of the tax position). Tax positions that meet the more likely than not threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. We recognize the tax implications of the portion of a tax position that does not meet the more likely than not threshold together with the accrued interest and penalties in the financial statements as a component of the provision for income taxes. For the three months ended March 31, 2013 we recognized a benefit from income taxes, including amounts recognized in discontinued operations, of less than $0.1 million. For the three months ended March 31, 2012 we recognized a provision for income taxes, including amounts recognized in discontinued operations, of approximately $0.4 million related to certain state and local income taxes. 
 
3.             New Accounting Pronouncements
 
In February 2013, the Financial Accounting Standards Board (“FASB”) issued further clarification on how to report the effect of significant reclassifications out of accumulated other comprehensive income (loss) (“OCI”). This guidance was effective for the first interim or annual period beginning on or after December 15, 2012.  The adoption of this guidance did not have a material impact on our financial statements or disclosures.
 
In February 2013, the FASB issued updated guidance for the measurement and disclosure of obligations.  The guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in the update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. This guidance is effective for the first interim or annual period beginning on or after December 15, 2013.  The adoption of this guidance is not expected to have a material impact on our financial statements or disclosures.

4.             Fair Value Measurements
 
Fair value, as defined by GAAP, is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be 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 fair value hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the fair value hierarchy) has been established.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Derivative financial instruments
 
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 of the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.  The fair values of interest rate swaps and caps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
 
We incorporate credit valuation adjustments (“CVAs”) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
 

10

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 CVAs associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counterparties.  However, as of March 31, 2013, we have assessed the significance of the impact of the CVAs on the overall valuation of our derivative positions and have determined that they are not significant.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.  Unrealized gains or losses on derivatives are recorded in OCI within equity at each measurement date.

Our derivative financial instruments are included in “prepaid expenses and other assets” and “other liabilities” on our condensed consolidated balance sheets.
 
The following table sets forth our financial assets and liabilities measured at fair value on a recurring basis, which equals book value, by level within the fair value hierarchy as of March 31, 2013, and December 31, 2012 (in thousands).
 
 
 
 
Basis of Fair Value Measurements
 
 
 
Quoted Prices In Active
Markets for
Identical Items (Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Description
Total Fair Value
 
 
 
as of March 31, 2013
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Derivative financial instruments
$
—

 
$
—

 
$
—

 
$
—

Liabilities:
 

 
 

 
 

 
 

Derivative financial instruments
$
(1,243
)
 
$
—

 
$
(1,243
)
 
$
—

 
 
 
 
Basis of Fair Value Measurements
 
 
 
Quoted Prices In Active
Markets for
Identical Items (Level 1)
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
Description
Total Fair Value
 
 
 
as of December 31, 2012
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Derivative financial instruments
$
—

 
$
—

 
$
—

 
$
—

Liabilities:
 

 
 

 
 

 
 

Derivative financial instruments
$
(1,427
)
 
$
—

 
$
(1,427
)
 
$
—


Fair Value Disclosures
 
Financial Instruments not Reported at Fair Value
 
Financial instruments held at March 31, 2013, and December 31, 2012, but not measured at fair value on a recurring basis include cash and cash equivalents, restricted cash, accounts receivable, notes payable, accounts payable, payables to related parties, accrued liabilities and other liabilities.  With the exception of notes payable, the financial statement carrying amounts of these items approximate their fair values due to their short-term nature. Estimated fair values for notes payable have been determined using recent trading activity and/or bid-ask spreads and are classified as Level 2 in the fair value hierarchy. Carrying amounts and the related estimated fair value of our notes payable as of March 31, 2013, and December 31, 2012, are as follows (in thousands):
 
 
March 31, 2013
 
December 31, 2012
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Amount
 
Value
 
Amount
 
Value
Notes Payable
$
2,012,268

 
$
2,059,167

 
$
2,107,380

 
$
2,128,724

 





11

5.             Real Estate Activities
 
Dispositions
 
On February 15, 2013, we sold our 600 & 619 Alexander Road property to an unaffiliated third party for a contract sales price of approximately $9.6 million resulting in a gain on sale of less than $0.1 million. All of the approximately $9.1 million proceeds were used to pay off the associated debt at a discount resulting in a gain on troubled debt restructuring of approximately $7.7 million. 600 & 619 Alexander Road is located in Princeton, New Jersey, and consists of approximately 97,000 rentable square feet.

On March 22, 2013, we sold our 5 & 15 Wayside property to an unaffiliated third party for a contract sales price of $69.3 million resulting in a gain on sale of approximately $3.7 million. The sale generated proceeds of $65.7 million, of which $27.3 million was used to pay down the credit facility. 5 & 15 Wayside is located in Burlington, Massachusetts, and consists of approximately 270,000 rentable square feet. 

6.             Investments in Unconsolidated Entities
 
Investments in unconsolidated entities consists of our noncontrolling interests in certain properties. On January 8, 2013, we sold our Paces West property to a joint venture in which we own a 10% noncontrolling interest. The contract sales price of the property was approximately $82.3 million, and the acquiring joint venture assumed the approximately $82.3 million collateralized debt from us. The property was deconsolidated and a gain of approximately $16.1 million was recognized in continuing operations.

The following is a summary of our investments in unconsolidated entities as of March 31, 2013, and December 31, 2012 (in thousands):
 
March 31, 2013
 
December 31, 2012
 
 
 
 
Property Name
Ownership
Interest
 
Ownership
Interest
 
March 31, 2013
 
December 31, 2012
Wanamaker Building
60.00
%
 
60.00
%
 
$
39,770

 
$
49,332

Paces West
10.00
%
 
100.00
%
 
1,354

 
—

200 South Wacker
9.87
%
 
9.87
%
 
3,563

 
3,616

Total
 

 
 

 
$
44,687

 
$
52,948

 
For the three months ended March 31, 2013 and 2012, we recorded approximately $0.8 million and $0.1 million in equity in losses of investments, respectively.  For the three months ended March 31, 2013 and 2012, we recorded approximately $8.4 million and $2.3 million of distributions from our investments in unconsolidated entities.  Our equity in losses of investments for the three months ended March 31, 2013 and 2012, represents our proportionate share of the combined losses from these investments for the period of our ownership. 
 
7.             Noncontrolling Interests
 
Noncontrolling interests consists of our third-party partners’ proportionate share of equity in certain consolidated real estate properties, limited partnership units issued to third parties, and preferred stock issued by IPC (US), Inc.  The following is a summary of our noncontrolling interests as of March 31, 2013, and December 31, 2012 (in thousands):
 
 
March 31, 2013
 
December 31, 2012
Noncontrolling interests in real estate properties
$
4,937

 
$
4,929

Limited partnership units
714

 
709

IPC (US), Inc. preferred shares
(10
)
 
(10
)
Total
$
5,641

 
$
5,628

 

8.             Real Estate Under Development
 
We capitalize interest, property taxes, insurance and direct construction costs on our real estate under development, which includes the development of a new commercial office building at Two BriarLake Plaza in Houston, Texas (“Two BriarLake Plaza”). 

12

For the three month period ended March 31, 2013, we capitalized a total of approximately $7.4 million for the development of Two BriarLake Plaza, including approximately $0.1 million in interest.  We had no capitalized costs associated with real estate under development for the three months ended March 31, 2012. Total real estate under development at March 31, 2013, was approximately $13.3 million, which includes previously purchased land of approximately $2.5 million.
 
9.             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.  Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements.  To accomplish this objective, we have used interest rate caps and swaps as part of our interest rate risk management strategy.  Our interest rate caps and swaps involve the receipt of variable rate amounts from counterparties in exchange for us making capped rate or fixed rate payments over the life of the agreements without exchange of the underlying notional amount.  Our 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.
 
As of March 31, 2013, we have interest rate cap and swap agreements.  The following table summarizes the notional values of these derivative financial instruments (in thousands) as of March 31, 2013.  The notional values provide an indication of the extent of our involvement in these instruments at March 31, 2013, but do not represent exposure to credit, interest rate, or market risks:
 
Type/Description
 
Notional Value
 
Index
 
Strike Rate
 
Maturity
Interest rate cap - cash flow hedge
 
$
90,000

 
one-month LIBOR
 
1.75% - 2.00%
 
August 15, 2013
Interest rate cap - cash flow hedge
 
$
70,000

 
one-month LIBOR
 
1.75% - 2.00%
 
August 15, 2013
Interest rate swap - cash flow hedge
 
$
150,000

 
one-month LIBOR
 
0.79%
 
October 25, 2014
 
The table below presents the fair value of our derivative financial instruments, included in “other liabilities” on our condensed consolidated balance sheets, as of March 31, 2013, and December 31, 2012 (in thousands): 
 
 
Derivative Liabilities
Derivatives designated as hedging instruments:
 
March 31, 2013
 
December 31, 2012
Interest rate caps
 
$
—

 
$
—

Interest rate swaps
 
(1,243
)
 
(1,427
)
Total derivatives
 
$
(1,243
)
 
$
(1,427
)
 

13

The tables below present the effect of the change in fair value of our derivative financial instruments in our condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2013 and 2012 (in thousands):

Derivatives in Cash Flow Hedging Relationship
Gain (loss) recognized in OCI on derivative (effective portion)
 
 
 
 
Three Months Ended
 
March 31, 2013
 
March 31, 2012
Interest rate caps
$
73

 
$
(21
)
Interest rate swap
185

 
(422
)
Total
$
258

 
$
(443
)
 
 
 
 
Amount reclassified from OCI into income (effective portion)
 
Three Months Ended
Location
March 31, 2013
 
March 31, 2012
Interest expense (1)
$
293

 
$
200

Total
$
293

 
$
200

__________
(1) Increases in fair value as a result of accrued interest associated with our swap and cap transactions are recorded in accumulated OCI and subsequently reclassified into income.  Such amounts are shown net in the condensed consolidated statements of changes in equity and offset dollar for dollar.
     
Approximately $1.0 million of the unrealized loss held in accumulated OCI at March 31, 2013, will be reclassified to earnings over the next 12 months.

10.          Notes Payable
 
Our notes payable was approximately $2.0 billion and $2.1 billion in principal amount at March 31, 2013, and December 31, 2012, respectively.  As of March 31, 2013, all of our debt is fixed rate debt, with the exception of $360.0 million in debt which bears interest at variable rates.  Approximately $310.0 million of this variable rate debt has been effectively fixed or capped through the use of interest rate hedges.
 
At March 31, 2013, the stated annual interest rates on our notes payable, excluding mezzanine financing, ranged from 3.10% to 6.65%. We also have mezzanine loans related to two properties with stated annual interest rates of 9.55% and 9.80%, respectively. The effective weighted average annual interest rate for all of our borrowings is approximately 5.54%. For each of our loans that are in default, as detailed below, we incur default interest rates that are 400 to 500 basis points higher than their stated interest rate, which results in an overall effective weighted average annual interest rate of approximately 5.80%.
 
Our loan agreements generally require us to comply with certain reporting and financial covenants.  As of March 31, 2013, we were in default on four non-recourse property loans with a combined outstanding balance of approximately $110.2 million secured by seven of our properties, including two properties for which receivers have been appointed.  We believe each of the loans may be resolved by marketing the collateralized property for sale on behalf of the lender or negotiating agreements conveying these properties to the lenders.  At March 31, 2013, other than the defaults discussed above, we believe we were in compliance with the debt covenants under each of our other loan agreements.  At March 31, 2013, our notes payable had maturity dates that range from August 2013 to August 2021.
 

14

The following table summarizes our notes payable as of March 31, 2013 (in thousands):
Principal payments due in: (1)
 
April - December 2013
$
221,889

2014
254,632

2015
458,232

2016
855,826

2017
130,021

Thereafter
91,741

Unamortized discount
(73
)
Total
$
2,012,268

 ____________
(1)  Approximately $110.2 million of non-recourse loans secured by seven of our properties are in default and have scheduled maturity dates after April 1, 2013, but as of March 31, 2013, we have received notification from these lenders demanding immediate payment.  The table above reflects the required principal payments of these loans using the original maturity dates.  If these loans were shown as payable in full on April 1, 2013, the principal payments in 2013 would increase by approximately $108.3 million, while principal payments in 2014, 2015 and 2016 would decrease by approximately $1.4 million, $47.2 million, and $59.7 million, respectively.
 
Credit Facility
 
On October 25, 2011, through our operating partnership, Behringer OP, we entered into a secured credit agreement providing for borrowings of up to $340.0 million, available as a $200.0 million term loan and $140.0 million as a revolving line of credit (subject to increase by up to $110.0 million in the aggregate upon lender approval and payment of certain activation fees to the agent and lenders).  The borrowings are supported by collateral (the “Collateral Properties”) owned by certain of our subsidiaries, each of which has guaranteed the credit facility and granted a first mortgage or deed of trust on its real property as security for the credit facility.  Effective March 22, 2013, we exercised our right to release our 5&15 Wayside property from the Collateral Properties in order to complete the sale of this property. Correspondingly, the total borrowings provided for under the credit agreement were reduced to $311.0 million, available as a $200.0 million term loan and $111.0 million as a revolving line of credit. The credit facility matures in October 2014, with two one-year renewal options available.  The annual interest rate on the credit facility is equal to either, at our election, (1)the “base rate” (calculated as the greatest of (i) the agent’s “prime rate”; (ii) 0.5% above the Federal Funds Effective Rate; or (iii) LIBOR for an interest period of one month plus 1.0%) plus the applicable margin or (2) LIBOR plus the applicable margin.  The applicable margin for base rate loans is 2.0%; the applicable margin for LIBOR loans is 3.0%.  In connection with the credit agreement, we entered into a three year swap agreement to effectively fix the annual interest rate at 3.79% on $150.0 million of the borrowings under the term loan.  As of March 31, 2013, the term loan was fully funded, but no draws were outstanding under the revolving line of credit.  As of March 31, 2013, we had approximately $84.1 million of available borrowings under our revolving line of credit of which approximately $11.5 million may only be used for leasing and capital expenditures at the Collateral Properties.  As of March 31, 2013, the weighted average annual interest rate for borrowings under the credit agreement, inclusive of the swap, was approximately 3.64%.
 
Troubled Debt Restructuring

In the three months ended March 31, 2013, we sold 600 & 619 Alexander Road. The proceeds were used to fully settle the related debt at a discount and resulted in gain on troubled debt restructuring in discontinued operations of approximately $7.7 million, or $0.03 per common share, on both a basic and diluted income per share basis.
 
In the three months ended March 31, 2012, pursuant to foreclosures, we transferred ownership of Minnesota Center and our ownership interest in St. Louis Place to the associated lenders. These transactions were accounted for as a full settlement of debt and resulted in gain on troubled debt restructuring of approximately $3.6 million, or $0.01 per common share, on both a basic and diluted income per share basis. These totals include gains on troubled debt restructuring recorded in both continuing operations and discontinued operations.
 
11.          Stockholders’ Equity

Capitalization
 
As of March 31, 2013, we had 299,191,861 shares of our common stock outstanding, which includes 271,352,628 shares issued through our primary offerings, 5,521,002 shares issued as a result of a stock dividend, 35,239,357 shares issued through distribution reinvestment, and 22,000 shares issued to Behringer Harvard Holdings, LLC, offset by 12,943,126 shares repurchased.  As of March 31, 2013 we had outstanding options to purchase 97,250 shares of our common stock at a weighted average exercise

15

price of $7.17 per share.   At March 31, 2013, Behringer OP had 432,586 units of limited partnership interest held by third parties.  These units of limited partnership interest are convertible into an equal number of shares of our common stock.
 
On August 31, 2012, we became self-managed and as a result we perform certain functions, including the advisory function, previously provided to us by Behringer Advisors, LLC (“Behringer Advisors”). In connection with this transaction, we issued 10,000 shares of Series A participating, voting, convertible preferred stock (the “Series A Convertible Preferred Stock”) to Behringer Harvard REIT I Services Holdings, LLC for an aggregate price of $1.00.  Each share of the Series A Convertible Preferred Stock will participate in dividends and other distributions on par with each share of our common stock.  In addition, the Series A Convertible Preferred Stock may be converted into shares of our common stock, reducing the percentage of our common stock owned by stockholders prior to conversion.  In general, the Series A Convertible Preferred Stock will convert into shares of our common stock: (1) automatically in connection with a listing of our common stock on a national exchange; (2) automatically upon a change of control; or (3) upon election by the holder during the period ending August 31, 2017.  The determination of the number of shares of our common stock into which the Series A Convertible Preferred Stock may be converted generally will be based upon 10% of the excess of our “company value” plus total distributions in excess of the current distribution rate after the issuance of the shares and through the date of the event triggering conversion, over the aggregate value of our common stock outstanding as of the issuance date of the shares.  If the shares of Series A Convertible Preferred Stock are not otherwise converted into common stock prior to August 31, 2017, then they will be redeemed for $100,000 which represents $10.00 per share.  Since the number of shares of common stock that would be issued upon conversion of the Series A Convertible Preferred Stock cannot be determined prior to the conversion date and may exceed the currently available number of unissued shares of common stock, the settlement of these shares is considered to be outside the control of the Company. Therefore, as required by GAAP, the shares of Series A Convertible Preferred Stock were recorded at fair value and classified as temporary equity, outside the stockholders’ equity section, on our condensed consolidated balance sheets.  Management estimated the fair value of the shares to be approximately $2.7 million at the date of issuance.  In estimating the fair value of these shares, management considered various potential outcomes for the conversion of the shares within the context of a probability weighted expected returns model.  The maximum redemption value of the Series A Convertible Preferred Stock at March 31, 2013, is not greater than the fair value of these shares at the date of issuance. Therefore, no adjustment to the book value of these shares has been recorded subsequent to their issuance.
 
Stock Plans
 
Our stockholders have approved and adopted the 2005 Incentive Award Plan which allows for equity-based incentive awards to be granted to our Employees and Key Personnel (as defined in the plan).  The 2005 Incentive Award Plan replaced the Non-Employee Director Stock Option Plan, the Non-Employee Director Warrant Plan and the 2002 Employee Stock Option Plan, each of which was terminated upon the approval of the 2005 Incentive Award Plan.  Prior to an amendment to the 2005 Incentive Award Plan on August 31, 2012, each non-employee director was automatically granted an option to purchase 5,000 shares of common stock on the date he first becomes a director and upon each reelection as a director.  As of March 31, 2013, we had outstanding options to purchase 97,250 shares of our common stock at a weighted average exercise price of $7.17 per share. These options have a maximum term of 10 years.  For the grants made in 2005, 2006 and 2007 under the 2005 Incentive Award Plan, the options are exercisable as follows:  25% during 2011, 25% during 2012 and 50% during 2013.  For the grants made in 2008 and thereafter under the 2005 Incentive Award Plan, the options become exercisable one year after the date of grant.  The options were anti-dilutive to earnings per share for each period presented.

On February 14, 2013, 429,560 shares of restricted stock were granted to Employees. Restrictions on these shares lapse in 25% increments annually over the four-year period following the grant date. Compensation cost is measured at the grant date, based on the estimated fair value of the award ($4.01 per share) and will be recognized as expense over the service period based on the tiered lapse schedule and estimated forfeiture rates. No shares had been forfeited and no restrictions had lapsed as of March 31, 2013.
 

16

12.          Related Party Arrangements
 
We purchase certain services from Behringer Advisors, such as human resources, shareholder services and information technology. On August 31, 2012, we became self-managed and as a result we perform certain functions, including the advisory function, previously provided to us by Behringer Advisors and we no longer pay asset management fees, acquisition fees or debt financing fees to Behringer Advisors (except for acquisition and debt financing fees related to the previously committed development of Two BriarLake Plaza).  HPT Management Services, LLC (“HPT Management”) provides property management services for our properties. Current or former board members, Messrs. Robert M. Behringer, Robert S. Aisner and M. Jason Mattox, serve as officers and are partial owners of the ultimate parent entity of Behringer Advisors and HPT Management.

The following is a summary of the related party fees we incurred with these entities during the three months ended March 31, 2013 and 2012 (in thousands):
 
Three Months Ended
 
March 31, 2013
 
March 31, 2012
Behringer Advisors, acquisition fees (1)
$
158

 
$
—

Behringer Advisors, asset management fee
—

 
5,018

Behringer Advisors, other fees and reimbursement for services provided
620

 
938

HPT Management, property and construction management fees
3,492

 
3,345

HPT Management, reimbursement of costs and expenses
5,630

 
6,025

    Total
$
9,900

 
$
15,326

 
 
 
 
Expensed
$
9,351

 
$
15,326

Capitalized to real estate under development
158

 
—

Capitalized to building and improvements, net
391

 
—

    Total
$
9,900

 
$
15,326

______________
(1) Acquisition fees relate to the development of Two BriarLake Plaza.

At both March 31, 2013, and December 31, 2012, we had payables to related parties of approximately $1.4 million, consisting primarily of expense reimbursements payable to Behringer Advisors and property management fees payable to HPT Management. 

13.          Commitments and Contingencies
 
As of March 31, 2013, we had commitments of approximately $51.9 million for future tenant improvements and leasing commissions.
 
Effective as of September 1, 2012, we entered into Employment Agreements (collectively, the “Employment Agreements”) with each of the following executive officers: Scott W. Fordham, our President and Chief Financial Officer; William J. Reister, our Chief Investment Officer and Executive Vice President; Telisa Webb Schelin, our Senior Vice President - Legal, General Counsel and Secretary; Thomas P. Simon, our Senior Vice President - Finance and Treasurer; and James E. Sharp, our Chief Accounting Officer.  The term of each Employment Agreement commenced on September 1, 2012, and ends on December 31, 2015, provided that the term will automatically continue for an additional one year period unless either party provides 60 days written notice of non-renewal prior to the expiration of the initial term.  The agreements provide for lump sum payments and an immediate lapse of restrictions on compensation received under the long-term incentive plan upon termination of employment without cause.  As a result, in the event the Company terminated all of these agreements as of March 31, 2013, we would recognize approximately $6.2 million in compensation expense (without regard to any potential reductions required under the Employment Agreements for amounts in excess of thresholds set forth in Section 280G of the Code).
 
We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters, individually or in the aggregate, will not have a material adverse effect on our results of operations or financial condition.


17

On each of September 17 and November 28, 2012, lawsuits seeking class action status were filed in the United States District Court for the Northern District of Texas (Dallas Division).  On January 4, 2013, these two lawsuits were consolidated by the Court. The plaintiffs purport to file the suit individually and on behalf of all others similarly situated, referred to herein as “Plaintiffs.”
Plaintiffs named us, Behringer Harvard Holdings, LLC, our previous sponsor, as well as the directors at the time of the allegations: Robert M. Behringer, Robert S. Aisner, Ronald Witten, Charles G. Dannis and Steven W. Partridge (individually a “Director” and collectively the “Directors”) and Scott W. Fordham, the Company’s President and Chief Financial Officer, and James E. Sharp, the Company’s Chief Accounting Officer (collectively, the “Officers”), as defendants. In the amended complaint filed on February 1, 2013, the Officers were dismissed from the consolidated suit.
Plaintiffs allege that the Directors each individually breached various fiduciary duties purportedly owed to Plaintiffs.  Plaintiffs allege that the Directors violated Sections 14(a) and (e) and Rules 14a-9 and 14e-2(b) of and under federal securities law in connection with (1) the recommendations made to the shareholders in response to certain tender offers made by CMG Partners, LLC and its affiliates and (2) the solicitation of proxies for our annual meeting of shareholders held on June 24, 2011. Plaintiffs further allege that the defendants were unjustly enriched by the purported failures to provide complete and accurate disclosure regarding, among other things, the value of our common stock and the source of funds used to pay distributions.
Plaintiffs seek the following relief: (1) that the court declare the proxy to be materially false and misleading; (2) that the filings on Schedule 14D-9 were false and misleading; (3) that the defendants’ conduct be declared to be in violation of law; (4) that the authorization secured pursuant to the proxy be found null and void and that we be required to re-solicit a shareholder vote pursuant to court supervision and court approved proxy materials; (5) that the defendants have violated their fiduciary duties to the shareholders who purchased our shares from February 19, 2003, to the present; (6) that the defendants be required to account to Plaintiffs for damages suffered by Plaintiffs; and (7) that Plaintiffs be awarded costs of the action including reasonable allowance for attorneys and experts fees. Neither we nor any of the other defendants believe the consolidated suit has merit and each intend to defend it vigorously. 
14.          Supplemental Cash Flow Information
 
Supplemental cash flow information is summarized below for the three months ended March 31, 2013 and 2012 (in thousands):
 
Three Months Ended
 
March 31, 2013
 
March 31, 2012
Interest paid, net of amounts capitalized
$
25,341

 
$
31,081

Income taxes paid
$
189

 
$
136

Non-cash investing activities:
 

 
 

Property and equipment additions in accounts payable and accrued liabilities
$
11,316

 
$
14,906

Transfer of real estate and lease intangibles through cancellation of debt
$
—

 
$
24,571

Transfer of investment through cancellation of debt
$
—

 
$
4,259

Sale of real estate and lease intangibles to unconsolidated joint venture
$
60,660

 
$
—

Non-cash financing activities:
 

 
 

Common stock issued in distribution reinvestment plan
$
—

 
$
3,278

Accrual for distributions declared
$
—

 
$
2,485

Assumption of debt by unconsolidated joint venture
$
82,291

 
$
—

Cancellation of debt through transfer of real estate
$
—

 
$
30,814

Cancellation of debt through discounted payoff
$
5,857

 
$
—

 


18

15.          Discontinued Operations
 
During the three months ended March 31, 2013, we sold all of our interests in two consolidated properties. During the year ended December 31, 2012, we sold all of our interests in three consolidated properties and transferred ownership of two consolidated properties to their respective lenders pursuant to foreclosures. The results of operations for each of these properties have been reclassified to discontinued operations in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2013 and 2012, as summarized in the following table (in thousands):
 
Three Months Ended
 
March 31, 2013
 
March 31, 2012
Rental revenue
$
2,047

 
$
8,122

Expenses
 

 
 

Property operating expenses
814

 
2,287

Interest expense
236

 
2,537

Real estate taxes
261

 
1,247

Property and asset management fees
41

 
638

Depreciation and amortization
819

 
3,006

Total expenses
2,171

 
9,715

Gain on troubled debt restructuring
7,693

 
3,386

Interest and other income
—

 
221

Income from discontinued operations
$
7,569

 
$
2,014



16.     Subsequent Event

On May 2, 2013, we sold our Riverview Tower property to an unaffiliated third party for a contract sales price of $24.3 million. Riverview Tower is located in Knoxville, Tennessee, and contains approximately 334,000 rentable square feet. Prior to the sale, a receiver had been appointed to manage Riverview Tower.

*****

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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 condensed consolidated financial statements 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 REIT I, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to rent space on favorable terms, our ability to address debt maturities and fund our capital requirements, our intentions to sell certain properties, our need to modify certain property loans in order to justify further investment, the value of our assets, our anticipated capital expenditures, the amount and timing of any anticipated future cash distributions to our stockholders 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 “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 7, 2013, and the factors described below:
•
market and economic challenges experienced by the U.S. economy or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;

•
our ability to renew expiring leases and lease vacant spaces at favorable rates or at all;

•
the inability of tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business; 

•
the availability of cash flow from operating activities to fund distributions and capital expenditures;

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

•
our ability to strategically dispose of assets on favorable terms;

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

•
our ability to retain our executive officers and other key personnel;

•
the increase in our direct overhead, as a result of becoming a self-managed company;

•
conflicts of interest and competing demands faced by certain of our directors;

•
limitations on our ability to terminate our property management agreement and certain services under our administrative services agreement;

•
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 or false.  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

20

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.
Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate these estimates, including investment impairment.  These estimates are based on management’s 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.
 
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.  The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities and asset retirement obligations.  Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships.  Identified intangible liabilities generally consist of below-market leases.  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 the 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.  Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.

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

21

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 intangibles related to that tenant would be charged to expense.
 
In allocating the purchase price of each of our properties, management makes assumptions and uses various estimates, including, but not limited to, the estimated useful lives of the assets, the cost of replacing certain assets, discount rates used to determine present values, market rental rates per square foot and the period required to lease the property up to its occupancy at acquisition as if it were vacant.  Many of these estimates are obtained from independent third party appraisals.  However, management is responsible for the source and use of these estimates.  A change in these estimates and assumptions could result in the various categories of our real estate assets and/or related intangibles being overstated or understated which could result in an overstatement or understatement of depreciation and/or amortization expense and/or rental revenue.  These variances could be material to our financial statements. 

Impairment of Real Estate Related Assets
 
For our consolidated real estate assets, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted cash flows expected to be generated over the life of the asset including its eventual disposition, to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted cash flows and also exceeds the fair value of the asset, we recognize an impairment loss to adjust the carrying amount of the asset to its estimated fair value. Our process to estimate the fair value of an asset involves using third-party broker valuation estimates, bona fide purchase offers or the expected sales price of an executed sales agreement, which would be considered Level 1 or Level 2 assumptions within the fair value hierarchy. To the extent that this type of third-party information is unavailable, we estimate projected cash flows and a risk-adjusted rate of return that we believe would be used by a third party market participant in estimating the fair value of an asset. This is considered a Level 3 assumption within the fair value hierarchy. These projected cash flows are prepared internally by the Company’s asset management professionals and are updated quarterly to reflect in place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s Chief Financial Officer, Chief Investment Officer and Chief Accounting Officer review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions which are consistent with market data or with assumptions that would be used by a third party market participant and assume the highest and best use of the real estate investment.

For our unconsolidated real estate assets, including those we own through an investment in a joint venture or other similar investment structure, at each reporting date we compare the estimated fair value of our investment to the carrying amount.  An impairment charge is recorded to the extent the fair value of our investment is less than the carrying amount and the decline in value is determined to be other than a temporary decline. 
 
In evaluating our investments for impairment, management makes several estimates and assumptions, including, but not limited to, the projected date of disposition and sales price for each property, the estimated future cash flows of each property during our estimated ownership period, and for unconsolidated investments, the estimated future distributions from the investment.  A change in these estimates and assumptions could result in understating or overstating the carrying amount of our investments which could be material to our financial statements.
 
We undergo continuous evaluations of property level performance, credit market conditions and financing options.  If our assumptions regarding the cash flows expected to result from the use and eventual disposition of our properties decrease or our expected hold periods decrease, we may incur future impairment charges on our real estate related assets.  In addition, we may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the asset upon classification as held for sale exceeds the estimated fair value, less costs to sell.
Overview
At March 31, 2013, we owned interests in 48 operating properties with approximately 19.8 million rentable square feet.  At March 31, 2012, we owned interests in 55 operating properties with approximately 21.4 million rentable square feet. Substantially all of our business is conducted through our operating partnership, Behringer OP. 

22

As an owner of real estate, the majority of our income and cash flow is derived from rental revenue received pursuant to tenant leases for space at our properties. Our earnings were negatively impacted by the economic downturn that began in 2008, and in order to remain competitive in retaining current tenants and attracting new tenants we have (1) leased space at lower rental rates than the rates in place for previous leases in certain of our markets and (2) provided significant concessions (including free rent) to our tenants in connection with leasing activity, and we may continue to do so as we rebuild our overall portfolio occupancy.

The United States economy has been recovering, but the recovery has been slow and uncertain, prolonged by global economic events such as the European debt crisis and its potential impact on the world’s financial markets. Uncertainty about a continued economic recovery has impacted and may continue to impact our tenants’ businesses, including their decisions about long-term lease commitments. As a result, we have operated, and continue to operate, under a strategic plan that includes conserving cash, refinancing or restructuring debt, strategically selling assets, leasing space to increase occupancy and pursuing property and company level capital and other strategic opportunities.

Cash Conservation.  At March 31, 2013, we had cash and cash equivalents of approximately $40.7 million and restricted cash of approximately $71.3 million.  Restricted cash includes restricted money market accounts, as required by our lenders or under certain lease agreements, which may only be used to fund tenant improvements and pay leasing commissions, property taxes and property insurance. As of March 31, 2013, we had approximately $84.1 million of available borrowings under our revolving line of credit of which approximately $11.5 million may only be used for leasing and capital expenditures at the collateral properties as defined in our credit facility agreement. Given the approximate $51.9 million of commitments we have for future tenant improvements and leasing commissions as of March 31, 2013, we expect our cash and cash equivalents and restricted cash to decline in future quarters, excluding cash increases that we may realize from strategic asset sales and draws under our credit facility. Over the last few years, in order to conserve cash, we have reduced and then suspended paying distributions and limited and then suspended share redemptions in comparison to amounts funded in 2008. We have also re-bid vendor contracts, continued to challenge asset valuations assessed by taxing authorities which impacts our real estate taxes owed on an annual basis, and structured leases to conserve capital.
Refinance and Restructure Debt. Substantially all of our assets are currently subject to mortgages, generally for property level non-recourse debt incurred. Excluding debt of approximately $110.2 million that has an accelerated maturity because it is in default, we have approximately $206.2 million and $235.6 million of debt maturing in the remainder of 2013 and 2014, respectively. Certain loans maturing in those periods will likely require additional equity to be invested in the collateralized property upon refinancing, such as our One Financial Place property in Chicago, Illinois. The reduction in our property net operating income, as well as the increased costs of retaining and attracting new tenants, coupled with increases in vacancy rates and cap rates, has caused us to reconsider our initial long-term strategy for certain of our properties, especially a limited number of properties where we believe the principal balance of the debt encumbering the property exceeds the value of the asset under current market conditions. In those cases where we believe the value of a property is not likely to recover, our board of directors has decided to redeploy our capital to what they believe are more effective uses by reducing the amount of monies we fund as capital expenditures and leasing costs or having us cease making debt service payments on certain property level non-recourse debt, resulting in defaults or events of default under the related loan agreements. See “Liquidity and Capital Resources - Notes Payable” for a more detailed discussion. We are in active negotiations with certain lenders, and we believe that some of these loans may be resolved by marketing the property for sale on behalf of the lender or negotiating agreements conveying the properties to the lender.
Strategic Asset Sales. In general, we believe it makes economic sense to sell properties in today’s market in certain instances, such as when we believe the value of the leases in place at a property will significantly decline over the remaining lease term, when we have limited or no equity in the particular property, when we believe the projected returns on our invested equity do not justify further investment or when we believe the equity in a property can be redeployed within the portfolio in order to achieve better returns or other strategic goals. For example, in the first quarter of 2013, we sold two properties which resulted in combined cash proceeds of approximately $74.8 million, of which approximately $36.4 million was used to pay existing indebtedness.
Leasing. Leasing continues to be a key area of focus for us. In certain markets, we continue to experience a significant level of concessions required to acquire a new tenant, including a combination of more free rent, increased tenant improvement allowances, lower rental rates, or other financial incentives. Also, a number of current tenants are leveraging the current economic environment to negotiate lease renewals or extensions with similar increased concessions.

In the following discussion, our leasing and occupancy amounts reflect our ownership interest of our properties.  Our 48 properties are comprised of approximately 19.8 million rentable square feet in total and, after adjustment for our ownership interest, equate to approximately17.9 million rentable square feet.
 

23

During the three months ended March 31, 2013, expiring leases comprised approximately 0.7 million square feet.  We executed renewals, expansions and new leases totaling approximately 0.9 million square feet at weighted average net rental rates that exceeded expiring rents by approximately $0.46 per square foot per year, or 3%. During the three months ended March 31, 2012, expiring leases comprised approximately 0.7 million square feet, and we executed renewals, expansions and new leases totaling approximately 0.9 million square feet at weighted average net rental rates that exceeded expiring rents by approximately $1.03 per square foot per year, or 7%. 

The weighted average leasing costs for renewals, expansions and new leases executed in the three months ended March 31, 2013, was approximately $25.75 per square foot as compared to approximately $36.41 per square foot for the three months ended March 31, 2012. The weighted average lease term for renewals, expansions and new leases executed in the three months ended March 31, 2013, was approximately 6.1 years as compared to approximately 7.7 years for the three months ended March 31, 2012.

During the three months ended March 31, 2013, renewals were approximately 0.5 million square feet with weighted average leasing costs of approximately $19.33 per square foot and a weighted average lease term of approximately 5.5 years. Expansions were approximately 0.2 million square feet with weighted average leasing costs of approximately $27.67 per square foot and a weighted average lease term of approximately 6.7 years. New leases totaled approximately 0.2 million square feet with weighted average leasing costs of approximately $37.27 per square foot and a weighted average lease term of approximately 6.6 years. During the three months ended March 31, 2013, our lease renewals represented 51% of expiring leases and 67% of expiring square feet.

Our portfolio occupancy was 87% at March 31, 2013, as compared to 86% at December 31, 2012. We have approximately 1.3 million square feet of scheduled lease expirations for the remainder of 2013. We will continue to focus on leasing with the objective of increasing occupancy as we seek to overcome lease expirations.
 
Property and Company Level Capital Sources.  We believe that the value for most of our properties may be increased by holding them until market conditions improve.  Rather than selling these assets before market conditions improve, we are exploring opportunities to raise both property level and company level capital.  For example, in January 2013 we completed a joint venture arrangement with a third party for our Paces West property that provided the necessary capital to restructure the property’s debt while retaining a 10% ownership interest. Further, in October 2011 we obtained a $340.0 million credit facility (reduced to $311.0 million in March 2013). Obtaining additional property or company level capital may, however, result in dilution of our interest in a property or our existing stockholders’ equity interests.
 
Other Strategic Opportunities. Although our primary purpose for conserving cash, strategically selling certain assets and identifying other property and company level capital sources is to have the necessary capital resources available for leasing space in our portfolio, we may also be able to use those resources to capitalize on certain other strategic investment opportunities, such as an acquisition or development of a property that may be uniquely attractive and accretive. For example, we are currently developing Two BriarLake Plaza, a 333,000 square foot Class A commercial office building in the Westchase district of Houston, Texas, because we believe it will be accretive. The development has an approximate targeted completion date of second quarter 2014.

 If market conditions stabilize or improve and we are successful with our efforts under our strategic plan, we believe we can achieve an increase in our estimated value per share and an increase in distributable cash flow, which are important objectives to us for our stockholders. Further, our management and board continue to review various alternatives that may create future liquidity for our stockholders. In the event we do not obtain listing of our common stock on or before February 2017, our charter requires us to liquidate our assets unless a majority of the board of directors extends such date.
Results of Operations

During the three months ended March 31, 2013, we sold all of our interests in two consolidated properties. During the year ended December 31, 2012, we sold all of our interests in three consolidated properties and transferred ownership of two consolidated properties to their respective lenders pursuant to foreclosures. The results of operations for each of these properties have been reclassified to discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2013 and 2012, and are excluded from the discussions below.
Three months ended March 31, 2013, as compared to the three months ended March 31, 2012
Rental Revenue.  Rental revenue for the three months ended March 31, 2013, was approximately $106.0 million as compared to approximately $106.2 million for the three months ended March 31, 2012, and was generated by our consolidated

24

real estate properties.  The $0.2 million decrease was primarily attributable a decrease of approximately $2.5 million related to the deconsolidation of Paces West as a result of a partial sale in 2013, a decrease in the straight-line rent adjustment of approximately $2.2 million and a decrease in net above- and below-market lease adjustments of approximately $1.0 million. These decreases were partially offset by increases of approximately $3.4 million primarily due to an increase in revenue from our property leases and an increase in tenant recovery income of approximately $2.2 million.
Property Operating Expenses. Property operating expenses for the three months ended March 31, 2013, were approximately $32.6 million as compared to approximately $32.2 million for the three months ended March 31, 2012, and were comprised of property operating expenses from our consolidated real estate properties. The $0.4 million increase was primarily attributable to an increase of approximately $2.2 million in expenses, including utilities and other general expenses, partially offset by a decrease of approximately $1.1 million in bad debt expense and a decrease of approximately $0.7 million related to the deconsolidation of Paces West as a result of a partial sale in 2013.
Interest Expense.  Interest expense for the three months ended March 31, 2013, was approximately $30.4 million as compared to approximately $31.9 million for the three months ended March 31, 2012, and was comprised of interest expense, amortization of deferred financing fees and interest rate mark-to-market adjustments related to our notes payable associated with our consolidated real estate properties, credit facility and interest rate cap and swap agreements. The $1.5 million decrease was primarily attributable to the deconsolidation of Paces West as a result of a partial sale in 2013.
Real Estate Taxes.  Real estate taxes for the three months ended March 31, 2013, were approximately $15.3 million as compared to approximately $16.2 million for the three months ended March 31, 2012, and were comprised of real estate taxes from our consolidated real estate properties. The $0.9 million decrease was primarily due to tax refunds received in the current year.
Property Management Fees. Property management fees were approximately $3.1 million for each of three months ended March 31, 2013 and 2012, and were comprised of property management fees related to consolidated properties and, in 2012, our tenant-in-common investment properties.
Asset Management Fees. We had no asset management fees for the three months ended March 31, 2013, as compared to approximately $4.6 million for the three months ended March 31, 2012. As a result of becoming self-managed, we no longer pay asset management fees to Behringer Advisors, effective as of August 31, 2012.
General and Administrative Expenses.  General and administrative expenses for the three months ended March 31, 2013, were approximately $4.6 million as compared to approximately $2.4 million for the three months ended March 31, 2012, and were comprised of corporate general and administrative expenses including directors’ and officers’ insurance premiums, audit and tax fees, legal fees, other administrative expenses and, in 2012, reimbursement of certain expenses of Behringer Advisors before we became self-managed.  In 2013, we incurred new expenses that had previously been paid by Behringer Advisors, such as payroll and benefit costs.  The $2.2 million increase in general and administrative expenses is primarily due to approximately $1.4 million of added payroll and benefit costs, approximately $0.4 million for increased expense related to services provided to us by Behringer Advisors and approximately $0.3 million of increased legal expenses.
Depreciation and Amortization Expense. Depreciation and amortization expense for the three months ended March 31, 2013, was approximately $43.2 million as compared to approximately $47.7 million for the three months ended March 31, 2012, and was comprised of depreciation and amortization expense from each of our consolidated real estate properties.  The $4.5 million decrease is primarily related to overall lower depreciation and amortization expense of approximately $3.3 million, primarily due to lower lease intangible amortization and approximately $1.2 million attributable to the deconsolidation of Paces West as a result of a partial sale in 2013.
Equity in Losses of Investments.  Equity in losses of investments for the three months ended March 31, 2013, was approximately $0.8 million as compared to approximately $0.1 million for three months ended March 31, 2012, and was comprised of our share of equity in the losses of unconsolidated investments.  The $0.7 million change is primarily related to increased expenses at the Wanamaker Building.
Gain on Sale or Transfer of Assets. Gain on sale or transfer of assets was approximately $16.1 million for the three months ended March 31, 2013, and was related to the partial sale of Paces West. Gain on sale or transfer of assets was approximately $0.4 million for three months ended March 31, 2012, and was related to the transfer of our tenant-in-common interest in St. Louis Place to the lender associated with this property.



25

Cash Flow Analysis
Three months ended March 31, 2013, as compared to three months ended March 31, 2012
Cash flows used in operating activities were approximately $11.2 million for the three months ended March 31, 2013, as compared to approximately $10.3 million for the three months ended March 31, 2012.  The $0.9 million increase in cash flows used in operating activities is attributable to (1) the timing of receipt of revenues and payment of expenses which resulted in approximately $6.5 million more net cash outflows from working capital assets and liabilities in 2013 compared to 2012; (2) the factors discussed in our analysis of results of operations for the three months ended March 31, 2013, compared to March 31, 2012, which resulted in approximately $5.4 million more cash received from the results of our consolidated real estate property operations, net of interest expense, asset management fees and general and administrative expenses;  and (3) a decrease in cash paid for lease commissions and other lease intangibles of approximately $0.2 million. 
Cash flows provided by investing activities for the three months ended March 31, 2013, were approximately $65.5 million and were primarily comprised of proceeds from the sale of properties of approximately $74.8 million, a change in restricted cash of approximately $7.4 million and return of investments of approximately $8.4 million, partially offset by monies used to fund capital expenditures for existing real estate and real estate under development of approximately $23.6 million.  During the three months ended March 31, 2012, cash flows provided by investing activities were approximately $5.0 million and were primarily comprised of a change in restricted cash of approximately $10.8 million and return of investment of approximately $2.2 million, partially offset by monies used to fund capital expenditures for existing real estate of approximately $7.7 million.
Cash flows used in financing activities for the three months ended March 31, 2013, were approximately $23.3 million and were comprised primarily of net payments on, and proceeds from, notes payable.  During the three months ended March 31, 2012, cash flows provided by financing activities were approximately $13.0 million and were comprised primarily of net proceeds from, and payments on, notes payable of approximately $18.2 million, distributions to our common stockholders of approximately $4.2 million and redemptions of common stock of approximately $1.0 million.
Funds from Operations (“FFO”) and Modified Funds from Operations (“MFFO”)

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 for evaluating operating performance.  FFO is a non-GAAP financial measure that is widely recognized as a measure of a REIT’s operating performance.  We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) in the April 2002 “White Paper on Funds From Operations” which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, 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 related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests.  The determination of whether impairment charges have been incurred is based partly on anticipated operating performance and hold periods.  Estimated undiscounted cash flows from a property, derived from estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows are taken into account in determining whether an impairment charge has been incurred.  While impairment charges for depreciable real estate are excluded from net income (loss) in the calculation of FFO as described above, impairments reflect a decline in the value of the applicable property which we may not recover.
 
We believe that the use of FFO, together with the required GAAP presentations, is helpful to our stockholders and our management in understanding our operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, impairments of depreciable real estate assets, and extraordinary items, and as a result, when compared period to period, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income.  Factors that impact FFO include fixed costs, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on debt financing and operating expenses.
 

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Since FFO was promulgated, several new accounting pronouncements have been issued, such that management, industry investors and analysts have considered the presentation of FFO alone to be insufficient to evaluate operating performance.  Accordingly, in addition to FFO, we use MFFO, as defined by the Investment Program Association (“IPA”).  The IPA definition of MFFO excludes from FFO the following items:

(1)
acquisition fees and expenses;
(2)
straight line rent amounts, both income and expense;
(3)
amortization of above- or below-market intangible lease assets and liabilities;
(4)
amortization of discounts and premiums on debt investments;
(5)
impairment charges on real estate related assets to the extent not already excluded from net income in the calculation of FFO, such as impairments of non-depreciable properties, loans receivable, and equity and debt investments;
(6)
gains or losses from the early extinguishment of debt;
(7)
gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our operations;
(8)
gains or losses related to fair value adjustments for interest rate swaps and other derivatives not qualifying for hedge accounting, foreign exchange holdings and other securities;
(9)
gains or losses related to consolidation from, or deconsolidation to, equity accounting;
(10)
gains or losses related to contingent purchase price adjustments; and
(11)
adjustments related to the above items for unconsolidated entities in the application of equity accounting.

We believe that MFFO is a helpful measure of operating performance because it excludes certain non-operating activities and certain recurring non-cash operating adjustments as outlined above.  Accordingly, we believe that MFFO can be a useful metric to assist management, stockholders and analysts in assessing the sustainability of operating performance.
 
As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following economic considerations:
 
•
Acquisition fees and expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analyses differentiate costs to acquire the investment from the operations derived from the investment. GAAP requires acquisition costs related to business combinations and investments be expensed. We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for our real estate investments and is consistent with management’s analysis of the investing and operating performance of our properties.  Acquisition expenses include those paid to Behringer Advisors or third parties.
 
•
Adjustments for straight line rents and amortization of discounts and premiums on debt investments.  In the application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application will result in income recognition that could be significantly different than the underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance.
 
•
Adjustments for amortization of above- or below-market intangible lease assets.  Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes predictably over time and that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of our real estate assets and aligns results with management’s analysis of operating performance.

•
Impairment charges and gains or losses related to fair value adjustments for derivatives not qualifying for hedge accounting.  Each of these items relates to a fair value adjustment, which, in part, is based on the impact of current market fluctuations and underlying assessments of general market conditions, which may not be directly attributable to our current operating performance. As these gains or losses relate to underlying long-term assets and liabilities where we are not speculating or trading assets, management believes MFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals rather than changes that may reflect anticipated gains or losses. In particular, because in most circumstances GAAP impairment charges are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, we believe MFFO provides useful supplemental

27

information related to current consequences, benefits and sustainability related to rental rates, occupancy and other core operating fundamentals.
 
•
Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price.  Similar to extraordinary items excluded from FFO, these adjustments are not related to our continuing operations.  By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.
 
By providing MFFO, we believe we are presenting useful information that assists stockholders in better aligning their analysis with management’s analysis of long-term core operating activities.  Many of these adjustments are similar to adjustments required by SEC rules for the presentation of pro forma business combination disclosures, particularly acquisition expenses, gains or losses recognized in business combinations and other activity not representative of future activities.
 
MFFO also provides useful information in analyzing comparability between reporting periods that also assists stockholders and analysts in assessing the sustainability of our operating performance.  MFFO is primarily affected by the same factors as FFO, but without certain non-operating activities and certain recurring non-cash operating adjustments; therefore, we believe fluctuations in MFFO are more indicative of changes and potential changes in operating activities.  MFFO is also more comparable in evaluating our performance over time.  We also believe that MFFO is a recognized measure of sustainable operating performance by the real estate industry and is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies that do not have a similar level of involvement in acquisition activities or are not similarly affected by impairments and other non-operating charges.
 
FFO or MFFO should neither be considered as an alternative to net income (loss), nor as indications of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make distributions.  Additionally, the exclusion of impairments limits the usefulness of FFO and MFFO as historical operating performance measures since an impairment charge indicates that operating performance has been permanently affected.  FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.  Both FFO and MFFO are non-GAAP measurements and should be reviewed in connection with other GAAP measurements.  Our FFO attributable to common stockholders and MFFO attributable to common stockholders as presented may not be comparable to amounts calculated by other REITs that do not define these terms in accordance with the current NAREIT or IPA definitions or that interpret those definitions differently.
 
    

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The following section presents our calculations of FFO attributable to common stockholders and MFFO attributable to common stockholders for the three months ended March 31, 2013 and 2012, and provides additional information related to our FFO attributable to common stockholders and MFFO attributable to common stockholders. The table below is presented in thousands, except per share amounts: 
 
Three Months Ended
 
March 31, 2013
 
March 31, 2012
Net income (loss)
$
3,978

 
$
(27,840
)
Net (income ) loss attributable to noncontrolling interests
(12
)
 
41

Adjustments (1):
 

 
 

Real estate depreciation and amortization from consolidated properties
43,857

 
50,688

Real estate depreciation and amortization from unconsolidated properties
1,493

 
1,989

Gain on sale or transfer of depreciable real estate
(19,832
)
 
(2,381
)
Noncontrolling interests share of above adjustments
(205
)
 
(253
)
FFO attributable to common stockholders
$
29,279

 
$
22,244

Acquisition expenses
95

 
—

Straight-line rent adjustment
(3,197
)
 
(7,618
)
Amortization of above- and below-market rents, net
(2,408
)
 
(3,540
)
Gain on troubled debt restructuring and early extinguishment of debt
(7,660
)
 
(3,587
)
Noncontrolling interests share of above adjustments
19

 
21

MFFO attributable to common stockholders
$
16,128

 
$
7,520

Weighted average common shares outstanding - basic
299,192

 
297,646

Weighted average common shares outstanding - diluted (2)
299,425

 
297,659

Net income (loss) per common share - basic and diluted (2)
$
0.01

 
$
(0.09
)
FFO per common share - basic and diluted
$
0.10

 
$
0.07

MFFO per common share - basic and diluted
$
0.05

 
$
0.03

_____________
(1)
Reflects the adjustments of continuing operations, as well as discontinued operations.
(2)
There are no dilutive securities for purposes of calculating the net income (loss) per common share.
FFO attributable to common stockholders for the three months ended March 31, 2013, was approximately $29.3 million as compared to approximately $22.2 million for the three months ended March 31, 2012, an increase of approximately $7.1 million.  This increase is primarily related to lower asset management fees of approximately $5.0 million, increases in gains on troubled debt restructuring of approximately $4.1 million and lower interest expense of $3.8 million in first quarter 2013 as compared to first quarter 2012. These were partially offset by reductions in revenue less property operating expenses, real estate taxes and property management fees of approximately $3.1 million, higher general and administrative expense of $2.2 million and increases in losses from equity investments of approximately $0.7 million in first quarter 2013 as compared to first quarter 2012,
MFFO attributable to common stockholders for the three months ended March 31, 2013, was approximately $16.1 million as compared to approximately $7.5 million for the three months ended March 31, 2012, an increase of approximately $8.6 million. This increase is primarily related to reductions in asset management fees of $5.0 million and interest expense of $3.8 million and an increase in revenue (excluding the impact of non-cash adjustments, such as straight-line rent and amortization of above- and below-market lease intangibles) less property operating expenses, real estate taxes and property management fees of $2.4 million in the first quarter 2013 as compared to first quarter 2012. These were partially offset by increases in general and administrative expense of $2.2 million and increases in losses from equity investments of $0.7 million in first quarter 2013 as compared to first quarter 2012.
Liquidity and Capital Resources 
General

Our business requires continued access to capital to fund our operations. Our principal demands for funds on a short-term and long-term basis have been and will continue to be to fund property operating expenses, general and administrative expenses, payment of principal and interest on our outstanding indebtedness, capital improvements to our properties including

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commitments for future tenant improvements, and repaying or refinancing our outstanding indebtedness. Our foremost priorities for the near term are preserving and generating cash sufficient to fund our liquidity needs. Given the uncertainty in the economy, as well as property specific issues, such as vacancies and lease terminations, management believes that access to any additional outside source of cash other than our credit facility may be challenging and is planning accordingly. We anticipate that becoming self-managed, effective August 31, 2012, will continue to result in substantial cost savings. In particular, we anticipate annual savings in the range of approximately $10.0 million to $12.0 million beginning in 2013. The cost savings result primarily from the fact that we no longer are required to pay asset management fees to Behringer Advisors. For the three months ended March 31, 2013, these savings were approximately $2.7 million. There is no assurance, however, that additional savings will be realized. On December 19, 2012, our board of directors made a determination to suspend all distributions and redemptions until further notice. Based on the most recent distribution rate and previously budgeted redemptions for 2012, this has generated cash savings of approximately $5.2 million for the three months ended March 31, 2013, and is expected to result in annual cash savings in excess of $20.0 million.
 
Current Liquidity

As of March 31, 2013, we had cash and cash equivalents of $40.7 million and restricted cash of approximately $71.3 million.  We have deposits in certain financial institutions in excess of federally insured levels.  We have diversified our cash accounts with numerous banking institutions in an attempt to minimize exposure to any one of these institutions.  We regularly monitor the financial stability of these financial institutions, and we believe that we have placed our deposits with creditworthy financial institutions.
 
We anticipate our liquidity requirements to be approximately $535.0 million for April 2013 through March 2014. At current operating levels, we anticipate that revenue from our properties over the same period will generate approximately $391.3 million and the remainder of our short-term liquidity requirements will be funded by cash and cash equivalents, restricted cash, borrowings and proceeds from the sale of properties. We will also need to generate additional funds for long-term liquidity requirements.
Liquidity Strategies
    
Our expected actual and potential liquidity sources are, among others, cash and cash equivalents, restricted cash, revenue from our properties, proceeds from our available borrowings under our credit facility and additional secured or unsecured debt financings and refinancings, proceeds from asset dispositions, proceeds received from contributing existing assets to joint ventures and proceeds from public or private issuances of debt or equity securities.

One of our liquidity strategies is to sell or otherwise dispose of certain properties. We believe that selling or otherwise disposing of certain properties located in non-core markets and certain other non-strategic properties can help us to either (1) generate cash when we believe the property being disposed has equity value above the mortgage debt or (2) preserve cash through the sale or other disposition of properties with negative cash flow or other potential near-term cash outlay requirements. In the first quarter of 2013 we sold two properties resulting in combined net proceeds of approximately $74.8 million. There can be no assurance that future dispositions will occur, or, if they occur, that they will help us to achieve these objectives.
We may seek to generate capital by contributing one or more of our existing assets to a joint venture with a third party. For example, we completed a joint venture arrangement with a third party for our Paces West property in January 2013 that provided the necessary capital to restructure the property’s debt. Investments in joint ventures may, under certain circumstances, involve risks not present when a third party is not involved. Our ability to successfully identify, negotiate and complete joint venture transactions on acceptable terms or at all is uncertain in the current economic environment.
We are exploring opportunities and working with various entities to generate both property level and company level capital. There is, however, no assurance that we will be able to realize any capital from these initiatives.
Notes Payable

Our notes payable was approximately $2.0 billion and $2.1 billion in principal amount at March 31, 2013, and December 31, 2012, respectively. As of March 31, 2013, all of our debt is fixed rate debt, with the exception of $360.0 million in debt which bears interest at variable rates.  Approximately $310.0 million of this variable rate debt has been effectively fixed or capped through the use of interest rate hedges.
 
At March 31, 2013, the stated annual interest rates on our notes payable, excluding mezzanine financing, ranged from 3.10% to 6.65%. We also have mezzanine loans related to two properties with stated annual interest rates of 9.55% and 9.80%, respectively. The effective weighted average annual interest rate for all of our borrowings is approximately 5.54%. For each of

30

our loans that are in default, as detailed below, we incur default interest rates that are 400 to 500 basis points higher than their stated interest rate, which results in an overall effective weighted average annual interest rate of approximately 5.80%.

Our loan agreements generally require us to comply with certain reporting and financial covenants.  As of March 31, 2013, we were in default on four non-recourse property loans with a combined outstanding balance of approximately $110.2 million secured by seven of our properties, including two properties for which receivers have been appointed.  These four loans have scheduled maturity dates after 2013, but we have received notification from the lenders demanding immediate payment. We believe each of these loans may be resolved by marketing the collateralized property for sale on behalf of the lender or negotiating agreements conveying these properties to the lenders.  At March 31, 2013, other than the defaults discussed above, we believe we were in compliance with the debt covenants under each of our other loan agreements.  At March 31, 2013, our notes payable had maturity dates that range from August 2013 to August 2021. 

Credit Facility
 
On October 25, 2011, through our operating partnership, Behringer OP, we entered into a secured credit agreement providing for borrowings of up to $340.0 million, available as a $200.0 million term loan and $140.0 million as a revolving line of credit (subject to increase by up to $110.0 million in the aggregate upon lender approval and payment of certain activation fees to the agent and lenders).  The borrowings are supported by collateral (the “Collateral Properties”) owned by certain of our subsidiaries, each of which has guaranteed the credit facility and granted a first mortgage or deed of trust on its real property as security for the credit facility. Effective March 22, 2013, we exercised our right to release our 5&15 Wayside property from the Collateral Properties in order to complete the sale of this property. Correspondingly, the total borrowings provided for under the credit agreement were reduced to $311.0 million, available as a $200.0 million term loan and $111.0 million as a revolving line of credit. The credit facility matures in October 2014 with two one-year renewal options available.  The annual interest rate on the credit facility is equal to either, at our election (1) the “base rate” (calculated as the greatest of (i) the agent’s “prime rate,” (ii) 0.5% above the Federal Funds Effective Rate or (iii) LIBOR for an interest period of one month plus 1.0%) plus the applicable margin or (2) LIBOR plus the applicable margin. The applicable margin for base rate loans is 2.0%; the applicable margin for LIBOR loans is 3.0%. In connection with the credit agreement, we entered into a three-year swap agreement to effectively fix the annual interest rate at 3.79% on $150.0 million of the borrowings under the term loan.  As of March 31, 2013, the term loan was fully funded, but no draws were outstanding under the revolving line of credit. As of March 31, 2013, we had approximately $84.1 million of available borrowings under our revolving line of credit of which approximately $11.5 million may only be used for leasing and capital expenditures at the Collateral Properties. As of March 31, 2013, the weighted average annual interest rate for borrowings under the credit agreement, inclusive of the swap, was approximately 3.64%.

Troubled Debt Restructuring
 
In the three months ended March 31, 2013, we sold 600 & 619 Alexander Road. The proceeds were used to fully settle the related debt at a discount and resulted in gain on troubled debt restructuring in discontinued operations of approximately $7.7 million, or $0.03 per common share, on both a basic and diluted income per share basis.
 
In the three months ended March 31, 2012, pursuant to foreclosures, we transferred ownership of Minnesota Center and our ownership interest in St. Louis Place to the associated lenders. These transactions were accounted for as a full settlement of debt and resulted in gain on troubled debt restructuring of approximately $3.6 million, or $0.01 per common share, on both a basic and diluted income per share basis. These totals include gains on troubled debt restructuring recorded in both continuing operations and discontinued operations.

Share Redemption Program

Our board of directors previously authorized a share redemption program to provide limited interim liquidity to stockholders.  In 2009, the board made a determination to suspend redemptions other than those submitted in respect of a stockholder’s death, disability or confinement to a long-term care facility (referred to herein as “exceptional redemptions”).  The board set funding limits for exceptional redemptions considered in 2011 and 2012, and on December 19, 2012, the board of directors made a determination to suspend all redemptions until further notice. Our board maintains its right to reinstate the share redemption program, subject to the limits set forth in the program, if it deems it to be in the best interest of the Company and its stockholders.  Our board also reserves the right in its sole discretion at any time and from time to time to (1) reject any request for redemption; (2) change the purchase price for redemptions; (3) limit the funds to be used for redemptions or otherwise change the limitations on redemption; or (4) amend, suspend (in whole or in part) or terminate the program.


31

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 decisions are also influenced, in substantial part, by the requirements necessary to maintain our REIT status. On December 19, 2012, the board of directors approved the suspension of monthly distribution payments to stockholders. Operating performance cannot be accurately predicted due to numerous factors including the financial performance of our investments in the current uncertain real estate environment and the types and mix of investments in our portfolio. There is no assurance that distributions will be declared again in any future periods or at any particular rate.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to interest rate changes primarily as a result of our debt. Our interest rate risk management objectives 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 borrow primarily at fixed rates or variable rates with what we believe are the lowest margins available and in some cases, the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate 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 have entered into derivative financial instruments to mitigate our interest rate risk on certain financial instruments and as a result have effectively fixed or capped the interest rate on certain of our variable rate debt.

As of March 31, 2013, all of our approximate $2.0 billion debt is fixed rate debt, with the exception of approximately $360.0 million in debt which bears interest at a variable rate.  Approximately $310.0 million of this variable rate debt has been effectively fixed or capped through the use of interest rate hedges.  A 100 basis point increase in interest rates would result in a net increase in total annual interest incurred of approximately $0.8 million.  A 100 basis point decrease in interest rates would result in a net decrease in total annual interest incurred of approximately $0.1 million.
 
A 100 basis point increase in interest rates would result in a net increase in the fair value of our interest rate caps and swaps of approximately $2.2 million. A 100 basis point decrease in interest rates would result in a net decrease in the fair value of our interest rate caps and swaps of approximately $0.6 million. 
 
We do not have any foreign operations and thus we are not directly exposed to foreign currency fluctuations.

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 President and Chief Financial Officer, evaluated as of March 31, 2013, 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 President and Chief Financial Officer, concluded that our disclosure controls and procedures, as of March 31, 2013, were effective for the purpose of ensuring 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 management, including the President 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 have been no changes in internal control over financial reporting that occurred during the quarter ended March 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

32

PART II
OTHER INFORMATION
Item 1. Legal Proceedings.

We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters, individually or in the aggregate, will not have a material adverse effect on our results of operations or financial condition.
On each of September 17 and November 28, 2012, lawsuits seeking class action status were filed in the United States District Court for the Northern District of Texas (Dallas Division).  On January 4, 2013, these two lawsuits were consolidated by the Court. The plaintiffs purport to file the suit individually and on behalf of all others similarly situated, referred to herein as “Plaintiffs.”
Plaintiffs named us, Behringer Harvard Holdings, LLC, our previous sponsor, as well as the directors at the time of the allegations: Robert M. Behringer, Robert S. Aisner, Ronald Witten, Charles G. Dannis and Steven W. Partridge (individually a “Director” and collectively the “Directors”); and Scott W. Fordham, the Company’s President and Chief Financial Officer, and James E. Sharp, the Company’s Chief Accounting Officer (collectively, the “Officers”), as defendants. In the amended complaint filed on February 1, 2013, the Officers were dismissed from the consolidated suit.
Plaintiffs allege that the Directors each individually breached various fiduciary duties purportedly owed to Plaintiffs.  Plaintiffs also allege that the Directors violated Sections 14(a) and (e) and Rules 14a-9 and 14e-2(b) of and under federal securities law in connection with (1) the recommendations made to the shareholders in response to certain tender offers made by CMG Partners, LLC and its affiliates; and (2) the solicitation of proxies for our annual meeting of shareholders held on June 24, 2011. Plaintiffs further allege that the defendants were unjustly enriched by the purported failures to provide complete and accurate disclosure regarding, among other things, the value of our common stock and the source of funds used to pay distributions.
Plaintiffs seek the following relief: (1) that the court declare the proxy to be materially false and misleading; (2) that the filings on Schedule 14D-9 were false and misleading; (3) that the defendants’ conduct be declared to be in violation of law; (4) that the authorization secured pursuant to the proxy be found null and void and that we be required to re-solicit a shareholder vote pursuant to court supervision and court approved proxy materials; (5) that the defendants have violated their fiduciary duties to the shareholders who purchased our shares from February 19, 2003, to the present; (6) that the defendants be required to account to Plaintiffs for damages suffered by Plaintiffs; and (7) that Plaintiffs be awarded costs of the action including reasonable allowance for attorneys and experts fees. Neither we nor any of the other defendants believe the consolidated suit has merit and each intend to defend it vigorously. 
Item 1A. Risk Factors.
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.
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.

33

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 REIT I, INC.
Dated: May 3, 2013
By:
/s/ James E. Sharp
 
 
James E. Sharp
 
 
Chief Accounting Officer
 
 
(Principal Accounting Officer)

34

Index to Exhibit
Exhibit Number
 
Description
3.1
 
Ninth Articles of Amendment and Restatement (previously filed and incorporated by reference to Form 8-K filed on June 28, 2011)
3.1.1
 
Behringer Harvard REIT I, Inc. Articles Supplementary (previously filed and incorporated by reference to Form 8-K filed on September 6, 2012)
3.2
 
Second Amended and Restated Bylaws (previously filed and incorporated by reference to Form 10-Q filed on August 8, 2011)
3.2.1
 
Amendment to the Second Amended and Restated Bylaws (previously filed and incorporated by reference to Form 8-K filed on February 5, 2013)
4.1
 
Second Amended and Restated Distribution Reinvestment Plan of the Registrant (previously filed and incorporated by reference to Form 10-Q filed on November 13, 2009)
4.2
 
Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (previously filed and incorporated by reference to Exhibit 4.4 to Registrant’s Post-Effective Amendment No. 8 to Registration Statement on Form S-11 filed on April 24, 2008)
10.1
 
Administrative Services Agreement, dated as of August 31, 2012, by and between Behringer Harvard REIT I, Inc. and Behringer Advisors, LLC (previously filed and incorporated by reference to Form 8-K/A filed on January 3, 2013) ***
10.2
 
Termination of Interim CEO Consulting Agreement and Resignation of Robert S. Aisner, dated as of February 5, 2013 (previously filed and incorporated by reference to Form 8-K filed on February 5, 2013)
31.1
 
Rule 13a-14(a) or Rule 15d-14(a) Certification (filed herewith)
32.1*
 
Section 1350 Certifications (filed herewith)
101 **
 
The following financial information from Behringer Harvard REIT I, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Changes in Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.
 _______________________________________________________________

*                 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 certification will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
 
**          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.

*** Confidential treatment has been requested for certain portions of this exhibit. These portions were omitted from the Form 8-K/A and submitted separately to the Securities and Exchange Commission pursuant to a Confidential Treatment Request under Rule 24b-2 of the Exchange Act.

 



35