þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Maryland | 20-1676382 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) | |
2555 East Camelback Road, Suite 400 | (602) 778-8700 | |
Phoenix, Arizona, 85016 | (Registrants telephone number, including area code) | |
(Address of principal executive offices; zip code) |
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if smaller reporting company) |
2
3
September 30, 2011 | December 31, 2010 | |||||||
ASSETS |
||||||||
Investment in real estate assets: |
||||||||
Land |
$ | 860,950 | $ | 833,833 | ||||
Buildings and improvements, less accumulated depreciation of $223,552
and $178,906, respectively |
1,966,924 | 1,943,307 | ||||||
Real estate assets under direct financing leases, less unearned income of
$13,827 and $15,284, respectively |
36,236 | 36,946 | ||||||
Acquired intangible lease assets, less accumulated amortization of $120,493
and $97,387, respectively |
330,008 | 340,606 | ||||||
Total investment in real estate assets, net |
3,194,118 | 3,154,692 | ||||||
Investment in mortgage notes receivable, net |
77,529 | 79,778 | ||||||
Total investment in real estate and mortgage assets, net |
3,271,647 | 3,234,470 | ||||||
Cash and cash equivalents |
54,584 | 45,791 | ||||||
Restricted cash |
11,245 | 8,345 | ||||||
Marketable securities pledged as collateral |
| 81,995 | ||||||
Investment in unconsolidated joint ventures |
22,683 | 38,324 | ||||||
Rents and tenant receivables, less allowance for doubtful accounts of
$429 and $646, respectively |
53,111 | 45,616 | ||||||
Prepaid expenses and other assets |
3,359 | 3,866 | ||||||
Deferred financing costs, less accumulated amortization of $16,310
and $13,599, respectively |
24,427 | 26,928 | ||||||
Total assets |
$ | 3,441,056 | $ | 3,485,335 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Notes payable and line of credit |
$ | 1,750,417 | $ | 1,673,243 | ||||
Repurchase agreement |
| 54,312 | ||||||
Accounts payable and accrued expenses |
20,053 | 15,597 | ||||||
Due to affiliates |
2,391 | 1,496 | ||||||
Acquired below market lease intangibles, less accumulated amortization of
$40,138 and $32,095, respectively |
133,378 | 140,797 | ||||||
Distributions payable |
10,782 | 11,097 | ||||||
Deferred rental income, derivative and other liabilities |
15,505 | 16,181 | ||||||
Total liabilities |
1,932,526 | 1,912,723 | ||||||
Commitments and contingencies |
||||||||
Redeemable common stock |
14,474 | 12,237 | ||||||
STOCKHOLDERS EQUITY: |
||||||||
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued
and outstanding |
| | ||||||
Common stock, $0.01 par value; 240,000,000 shares authorized,
210,110,006 and 209,317,346 shares issued and outstanding, respectively |
2,101 | 2,093 | ||||||
Capital in excess of par value |
1,882,431 | 1,878,118 | ||||||
Accumulated distributions in excess of earnings |
(385,899 | ) | (332,547 | ) | ||||
Accumulated other comprehensive (loss) income |
(4,577 | ) | 12,711 | |||||
Total stockholders equity |
1,494,056 | 1,560,375 | ||||||
Total liabilities and stockholders equity |
$ | 3,441,056 | $ | 3,485,335 | ||||
4
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Rental and other property income |
$ | 63,613 | $ | 59,304 | $ | 187,449 | $ | 178,257 | ||||||||
Tenant reimbursement income |
3,568 | 3,590 | 12,261 | 10,716 | ||||||||||||
Earned income from direct financing leases |
486 | 498 | 1,457 | 1,569 | ||||||||||||
Interest income on mortgage notes receivable |
1,604 | 1,664 | 4,836 | 5,011 | ||||||||||||
Interest income on marketable securities |
| 1,928 | 2,459 | 5,721 | ||||||||||||
Total revenue |
69,271 | 66,984 | 208,462 | 201,274 | ||||||||||||
Expenses: |
||||||||||||||||
General and administrative expenses |
2,237 | 1,740 | 6,180 | 5,633 | ||||||||||||
Property operating expenses |
5,346 | 5,233 | 16,813 | 15,497 | ||||||||||||
Property and asset management expenses |
4,238 | 3,970 | 12,700 | 12,347 | ||||||||||||
Acquisition related expenses |
382 | 1,226 | 2,700 | 1,851 | ||||||||||||
Depreciation |
15,077 | 14,131 | 44,646 | 42,175 | ||||||||||||
Amortization |
6,989 | 6,599 | 21,463 | 21,655 | ||||||||||||
Impairment of real estate assets |
| | | 4,500 | ||||||||||||
Total operating expenses |
34,269 | 32,899 | 104,502 | 103,658 | ||||||||||||
Operating income |
35,002 | 34,085 | 103,960 | 97,616 | ||||||||||||
Other income (expense): |
||||||||||||||||
Equity in income of unconsolidated joint ventures
and other income |
36 | 85 | 572 | 171 | ||||||||||||
Gain on sale of marketable securities |
| | 15,587 | | ||||||||||||
Gain on sale of unconsolidated joint venture interests |
5,111 | | 5,111 | | ||||||||||||
Interest expense |
(27,197 | ) | (25,783 | ) | (80,616 | ) | (76,633 | ) | ||||||||
Total other expense |
(22,050 | ) | (25,698 | ) | (59,346 | ) | (76,462 | ) | ||||||||
Net income |
$ | 12,952 | $ | 8,387 | $ | 44,614 | $ | 21,154 | ||||||||
Weighted average number of common shares
outstanding: |
||||||||||||||||
Basic |
209,827,734 | 207,962,270 | 209,567,498 | 206,654,619 | ||||||||||||
Diluted |
209,827,734 | 207,962,270 | 209,567,498 | 206,655,254 | ||||||||||||
Net income per common share: |
||||||||||||||||
Basic and diluted |
$ | 0.06 | $ | 0.04 | $ | 0.21 | $ | 0.10 | ||||||||
Distributions declared per common share |
$ | 0.16 | $ | 0.16 | $ | 0.47 | $ | 0.47 | ||||||||
5
Accumulated | Accumulated | |||||||||||||||||||||||
Common Stock | Capital in | Distributions | Other | Total | ||||||||||||||||||||
Number of | Excess of | in Excess of | Comprehensive | Stockholders | ||||||||||||||||||||
Shares | Par Value | Par Value | Earnings | Income (Loss) | Equity | |||||||||||||||||||
Balance, January 1, 2011 |
209,317,346 | $ | 2,093 | $ | 1,878,118 | $ | (332,547 | ) | $ | 12,711 | $ | 1,560,375 | ||||||||||||
Issuance of common stock |
5,408,465 | 54 | 44,885 | | | 44,939 | ||||||||||||||||||
Distributions to investors |
| | | (97,966 | ) | | (97,966 | ) | ||||||||||||||||
Redemptions of common stock |
(4,615,805 | ) | (46 | ) | (38,335 | ) | | | (38,381 | ) | ||||||||||||||
Redeemable common stock |
| | (2,237 | ) | | | (2,237 | ) | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
| | | 44,614 | | 44,614 | ||||||||||||||||||
Unrealized loss on marketable securities |
| | | | (1,713 | ) | (1,713 | ) | ||||||||||||||||
Reclassification of previous unrealized
gain on marketable securities into net
income |
| | | | (14,654 | ) | (14,654 | ) | ||||||||||||||||
Unrealized loss on interest rate swaps |
| | | | (921 | ) | (921 | ) | ||||||||||||||||
Total comprehensive income |
27,326 | |||||||||||||||||||||||
Balance, September 30, 2011 |
210,110,006 | $ | 2,101 | $ | 1,882,431 | $ | (385,899 | ) | $ | (4,577 | ) | $ | 1,494,056 | |||||||||||
6
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 44,614 | $ | 21,154 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
44,646 | 42,175 | ||||||
Amortization of intangible lease assets and below market lease intangibles, net |
16,626 | 15,282 | ||||||
Amortization of deferred financing costs |
5,106 | 5,050 | ||||||
Amortization of premiums on mortgage notes receivable |
527 | 512 | ||||||
Accretion of discount on marketable securities |
(846 | ) | (1,900 | ) | ||||
Amortization of fair value adjustments of mortgage notes payable assumed |
1,397 | 1,370 | ||||||
Bad debt recovery |
(73 | ) | (106 | ) | ||||
Stock compensation expense |
| 7 | ||||||
Impairment of real estate assets |
| 4,500 | ||||||
Equity in income of unconsolidated joint ventures |
(407 | ) | (74 | ) | ||||
Return on investment from unconsolidated joint ventures |
452 | 2,120 | ||||||
Property condemnation and easement gain |
(92 | ) | | |||||
Gain on sale of marketable securities |
(15,587 | ) | | |||||
Gain on sale of unconsolidated joint venture interests |
(5,111 | ) | | |||||
Changes in assets and liabilities: |
||||||||
Rents and tenant receivables |
(7,422 | ) | (8,659 | ) | ||||
Prepaid expenses and other assets |
507 | 673 | ||||||
Accounts payable and accrued expenses |
4,756 | (504 | ) | |||||
Due to affiliates, deferred rental income and other liabilities |
(1,629 | ) | (3,207 | ) | ||||
Net cash provided by operating activities |
87,464 | 78,393 | ||||||
Cash flows from investing activities: |
||||||||
Investment in real estate and related assets and other capital expenditures |
(109,175 | ) | (69,853 | ) | ||||
Proceeds from sale of marketable securities |
82,061 | | ||||||
Proceeds from sale of unconsolidated joint venture interests |
19,100 | | ||||||
Principal
repayments from mortgage notes receivable and real estate assets under direct financing leases |
2,432 | 2,061 | ||||||
Return of investment from unconsolidated joint ventures |
1,989 | | ||||||
Refund of property escrow deposits |
1,340 | | ||||||
Payment of property escrow deposits |
(1,340 | ) | | |||||
Proceeds from easement of real estate assets |
247 | 5 | ||||||
Change in restricted cash |
(2,900 | ) | 415 | |||||
Net cash used in investing activities |
(6,246 | ) | (67,372 | ) | ||||
Cash flows from financing activities: |
||||||||
Redemptions of common stock |
(38,381 | ) | (11,350 | ) | ||||
Distributions to investors |
(53,342 | ) | (50,479 | ) | ||||
Offering costs on issuance of common stock |
| (2 | ) | |||||
Proceeds from notes payable, line of credit and repurchase agreement |
203,796 | 303,029 | ||||||
Repayment of notes payable, line of credit and repurchase agreement |
(182,331 | ) | (229,387 | ) | ||||
Refund of loan deposits |
| 2,145 | ||||||
Payment of loan deposits |
| (2,145 | ) | |||||
Deferred financing costs paid |
(2,167 | ) | (2,561 | ) | ||||
Net cash (used in) provided by financing activities |
(72,425 | ) | 9,250 | |||||
Net increase in cash and cash equivalents |
8,793 | 20,271 | ||||||
Cash and cash equivalents, beginning of period |
45,791 | 28,417 | ||||||
Cash and cash equivalents, end of period |
$ | 54,584 | $ | 48,688 | ||||
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Fair Value Measurement of | ||||||||||||||||||||
Re-measured | Reporting Data Using | Total | ||||||||||||||||||
Description: | Balance | Level 1 | Level 2 | Level 3 | Losses | |||||||||||||||
Investment in real estate assets |
$ | 3,523 | $ | | $ | | $ | 3,523 | $ | 4,500 |
11
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Balance as of | Identical Assets | Observable Inputs | Inputs | |||||||||||||
September 30, 2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Liabilities: |
||||||||||||||||
Interest rate swaps |
$ | 4,577 | $ | | $ | 4,577 | $ | | ||||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Balance as of | Identical Assets | Observable Inputs | Inputs | |||||||||||||
December 31, 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: |
||||||||||||||||
Marketable securities |
$ | 81,995 | $ | | $ | | $ | 81,995 | ||||||||
Liabilities: |
||||||||||||||||
Interest rate swaps |
$ | 3,656 | $ | | $ | 3,656 | $ | | ||||||||
12
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Balance at beginning of period |
$ | 81,995 | $ | 56,366 | ||||
Total gains or losses |
||||||||
Realized gain included in earnings |
15,587 | | ||||||
Reclassification of previous unrealized gain out of other
comprehensive income |
(14,654 | ) | | |||||
Unrealized (loss) gain included in other comprehensive income |
(1,713 | ) | 12,503 | |||||
Purchases, issuances, settlements, sales and accretion |
||||||||
Purchases |
| | ||||||
Issuances |
| | ||||||
Settlements |
(82,061 | ) | | |||||
Accretion of discount |
846 | 1,900 | ||||||
Balance at end of period |
$ | | $ | 70,769 | ||||
September 30, 2011 | December 31, 2010 | |||||||
Minimum lease payments receivable |
$ | 22,209 | $ | 24,376 | ||||
Estimated residual value of leased assets |
27,854 | 27,854 | ||||||
Unearned income |
(13,827 | ) | (15,284 | ) | ||||
Total |
$ | 36,236 | $ | 36,946 | ||||
September 30, 2011 | ||||
Land |
$ | 27,272 | ||
Building and improvements |
50,203 | |||
Acquired in-place leases |
13,043 | |||
Acquired above-market leases |
805 | |||
Acquired below-market leases |
(1,232 | ) | ||
Total purchase price |
$ | 90,091 | ||
13
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Pro Forma Basis: |
||||||||||||||||
Revenue |
$ | 69,416 | $ | 69,204 | $ | 211,663 | $ | 207,934 | ||||||||
Net income |
$ | 13,003 | $ | 9,479 | $ | 48,093 | $ | 21,852 |
September 30, 2010 | ||||
Land |
$ | 16,547 | ||
Building and improvements |
42,213 | |||
Acquired in-place leases |
7,557 | |||
Acquired above-market leases |
110 | |||
Acquired below-market leases |
(3,550 | ) | ||
Total purchase price |
$ | 62,877 | ||
14
Amortized Cost Basis | Unrealized (Loss) Gain | Total | ||||||||||
Marketable securities as of December 31, 2010 |
$ | 65,628 | $ | 16,367 | $ | 81,995 | ||||||
Accretion of discounts on marketable
securities |
846 | | 846 | |||||||||
Decrease in fair value of marketable
securities |
| (1,713 | ) | (1,713 | ) | |||||||
Decrease due to sale of marketable securities |
(66,474 | ) | (14,654 | ) | (81,128 | ) | ||||||
Marketable securities as of September 30,
2011 |
$ | | $ | | $ | | ||||||
15
Fair Value of Liability | ||||||||||||||||||||||||||||
Balance Sheet | Notional | Interest | Effective | Maturity | September 30, | December 31, | ||||||||||||||||||||||
Location | Amount | Rate(1) | Date | Date | 2011 | 2010 | ||||||||||||||||||||||
Derivatives designated as hedging instruments | ||||||||||||||||||||||||||||
Interest Rate Swap |
Deferred rent, derivative and other liabilities | $ | 32,000 | 6.2 | % | 11/4/2008 | 10/31/2012 | $ | (2,091 | ) | $ | (1,767 | ) | |||||||||||||||
Interest Rate Swap |
Deferred rent, derivative and other liabilities | 38,250 | 5.6 | % | 12/10/2008 | 9/26/2011 | | (571 | ) | |||||||||||||||||||
Interest Rate Swap |
Deferred rent, derivative and other liabilities | 15,043 | 6.2 | % | 6/12/2009 | 6/11/2012 | (533 | ) | (531 | ) | ||||||||||||||||||
Interest Rate Swap |
Deferred rent, derivative and other liabilities | 7,200 | 5.8 | % | 2/20/2009 | 3/1/2016 | (405 | ) | (210 | ) | ||||||||||||||||||
Interest Rate Swap |
Deferred rent, derivative and other liabilities | 30,000 | 6.0 | % | 11/24/2009 | 10/16/2012 | (266 | ) | (577 | ) | ||||||||||||||||||
Interest Rate Swap |
Deferred rent, derivative and other liabilities | 111,111 | 4.9 | %(2) | 2/28/2011 | 11/30/2013 | (1,122 | ) | | |||||||||||||||||||
Interest Rate Swap |
Deferred rent, derivative and other liabilities | 38,250 | 3.5 | % | 9/26/2011 | 9/26/2014 | (160 | ) | | |||||||||||||||||||
$ | 271,854 | $ | (4,577 | ) | $ | (3,656 | ) | |||||||||||||||||||||
(1) | The interest rate consists of the underlying index swapped to a fixed rate and the applicable interest rate spread. |
(2) | The interest rate swap fixes LIBOR at 1.44%. The applicable spread is based on the Companys overall leverage. |
Amount of Loss Recognized in Other Comprehensive Income | ||||||||||||||||
on Derivative | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Derivatives in Cash Flow Hedging Relationships | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Interest Rate Swaps (1) |
$ | (224 | ) | $ | (467 | ) | $ | (921 | ) | $ | (1,642 | ) |
(1) | There were no portions of the change in the fair value of the interest rate swap agreements that were considered ineffective during the three and nine months ended September 30, 2011 and 2010. No previously effective portion of gains or losses that were recorded in accumulated other comprehensive income during the term of the hedging relationship was reclassified into earnings during the three and nine months ended September 30, 2011 and 2010. |
16
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Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Supplemental Disclosures of Non-Cash Investing and Financing Activities: |
||||||||
Distributions declared and unpaid |
$ | 10,782 | $ | 10,706 | ||||
Common stock issued through the DRIP Offering |
$ | 44,939 | $ | 46,266 | ||||
Net unrealized (loss) gain on marketable securities |
$ | (1,713 | ) | $ | 12,503 | |||
Reclassification of unrealized gain on marketable securities into net income |
$ | 14,654 | $ | | ||||
Net unrealized loss on interest rate swaps |
$ | (921 | ) | $ | (1,642 | ) | ||
Decrease in earnout liability |
$ | | $ | 983 | ||||
Accrued capital expenditures |
$ | 598 | $ | 559 | ||||
Accrued deferred financing costs |
$ | 545 | $ | | ||||
Accrued real
estate commission |
$ | 382 | $ | | ||||
Supplemental Cash Flow Disclosures: |
||||||||
Interest paid |
$ | 73,932 | $ | 70,374 |
18
19
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Acquisitions and Operations: |
||||||||||||||||
Acquisition and advisory fees and expenses |
$ | 280 | $ | 867 | $ | 2,103 | $ | 1,327 | ||||||||
Asset management fees and expenses |
$ | 2,285 | $ | 2,090 | $ | 6,584 | $ | 6,341 | ||||||||
Property management and leasing fees and
expenses |
$ | 1,870 | $ | 1,806 | $ | 5,839 | $ | 5,839 | ||||||||
Operating expenses |
$ | 385 | $ | 288 | $ | 1,172 | $ | 1,134 | ||||||||
Financing coordination fees |
$ | 1,055 | $ | 610 | $ | 2,136 | $ | 1,020 |
20
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
23
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
NET INCOME |
$ | 12,952 | $ | 8,387 | $ | 44,614 | $ | 21,154 | ||||||||
Depreciation of real estate assets |
15,077 | 14,131 | 44,646 | 42,175 | ||||||||||||
Amortization of lease related costs |
6,989 | 6,599 | 21,463 | 21,655 | ||||||||||||
Depreciation and amortization of real estate assets in
unconsolidated joint ventures |
263 | 823 | 1,094 | 2,470 | ||||||||||||
Impairment on real estate assets |
| | | 4,500 | ||||||||||||
Gain on sale of unconsolidated joint venture interests |
(5,111 | ) | | (5,111 | ) | | ||||||||||
Gain on sale of easement |
| | (92 | ) | | |||||||||||
Funds from operations (FFO) |
30,170 | 29,940 | 106,614 | 91,954 | ||||||||||||
Acquisition related expenses |
382 | 1,226 | 2,700 | 1,851 | ||||||||||||
Modified funds from operations (MFFO) |
$ | 30,552 | $ | 31,166 | $ | 109,314 | $ | 93,805 | ||||||||
| During the nine months ended September 30, 2011, we sold six CMBS bonds for $82.1 million, and realized a gain on the sale of $15.6 million, of which $14.7 million had previously been recorded in other comprehensive income. No sales of CMBS bonds occurred during the nine months ended September 30, 2010. | ||
| In order to recognize revenues on a straight-line basis over the terms of the respective leases, we recognized additional revenue by straight-lining rental revenue of $2.9 million and $8.3 million for both the three and nine months ended September 30, 2011 and 2010, respectively. In addition, related to our unconsolidated joint ventures, straight-line revenue of $3,000 and $17,000 for the three and nine months ended September 30, 2011, respectively and $18,000 and $42,000 during the three and nine months ended September 30, 2010 is included in equity in income of unconsolidated joint ventures. | ||
| Amortization of deferred financing costs and amortization of fair value adjustments of mortgage notes assumed totaled $2.2 million and $6.5 million during the three and nine months September 30, 2011, respectively and $2.0 million and $6.4 million during the three and nine months September 30, 2010. In addition, related to our unconsolidated joint ventures, amortization of deferred financing costs and amortization of fair value adjustments of mortgage notes assumed totaled $55,000 and $197,000, respectively, which is included in equity in income of unconsolidated joint ventures for the three and nine months September 30, 2011, respectively and $262,000 and $771,000 during the three and nine months September 30, 2010. |
29
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31
Payments due by period(1) (2) (3) | ||||||||||||||||||||
Less Than 1 | More Than 5 | |||||||||||||||||||
Total | Year | 1-3 Years | 4-5 Years | Years | ||||||||||||||||
Principal payments fixed rate debt (4) |
$ | 1,485,801 | $ | 76,909 | $ | 210,894 | $ | 973,917 | $ | 224,081 | ||||||||||
Interest payments fixed rate debt (5) |
432,736 | 85,437 | 231,703 | 104,334 | 11,262 | |||||||||||||||
Principal payments variable rate debt |
4,250 | | 4,250 | | | |||||||||||||||
Interest payments variable rate debt (6) |
380 | 127 | 253 | | | |||||||||||||||
Principal payments credit facility |
271,111 | | 271,111 | | | |||||||||||||||
Interest payments credit facility (5) (7) |
25,921 | 11,695 | 14,226 | | | |||||||||||||||
Total |
$ | 2,220,199 | $ | 174,168 | $ | 732,437 | $ | 1,078,251 | $ | 235,343 | ||||||||||
(1) | The table does not include amounts due to our advisor or its affiliates pursuant to our advisory agreement because such amounts are not fixed and determinable. | |
(2) | Principal paydown amounts are included in payments due by period. | |
(3) | The table above does not include loan amounts associated with the unconsolidated joint venture, with a face amount totaling $34.1 million, which matures in January 2012 and has an extension option to January 2019. | |
(4) | Principal payment amounts reflect actual payments based on face amount of notes payable. As of September 30, 2011, the fair value adjustment, net of amortization, of mortgage notes assumed was $10.7 million. | |
(5) | As of September 30, 2011, we had $233.6 million of Variable Rate Debt and Credit Facility borrowings fixed through the use of interest rate swaps. We used the fixed rates under the swap agreement to calculate the debt payment obligations in future periods. | |
(6) | A rate of 2.99% was used to calculate the variable rate debt payment obligations in future periods. This was the rate effective as of September 30, 2011. | |
(7) | Payment obligations for the Term Loan and the Revolving Loans outstanding under the Credit Facility calculated based on interest rates of 4.94% and 3.73%, respectively, in effect as of September 30, 2011. |
32
33
| Investment in and Valuation of Real Estate and Related Assets; | ||
| Allocation of Purchase Price of Real Estate and Related Assets; | ||
| Investment in Direct Financing Leases; | ||
| Investment in Mortgage Notes Receivable; | ||
| Investment in Marketable Securities; | ||
| Investment in Unconsolidated Joint Ventures; | ||
| Revenue Recognition; | ||
| Income Taxes; and | ||
| Derivative Instruments and Hedging Activities. |
| Issuance of shares of common stock through our DRIP Offering; and | ||
| Redemption of shares of common stock. |
34
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 4. | Controls and Procedures |
35
Item 1. | Legal Proceedings |
Item 1A. | Risk Factors |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Total Number | Purchased as Part | Shares that May Yet Be | ||||||||||||||
of Shares | Average Price | of Publicly Announced | Purchased Under the | |||||||||||||
Redeemed | Paid per Share | Plans or Programs | Plans or Programs | |||||||||||||
July 2011 |
| $ | | | (1 | ) | ||||||||||
August 2011 |
1,548,630 | $ | 9.21 | 1,548,630 | (1 | ) | ||||||||||
September 2011 |
| $ | | | (1 | ) | ||||||||||
Total |
1,548,630 | 1,548,630 | (1 | ) | ||||||||||||
(1) | A description of the maximum number of shares that may be purchased under our redemption program is included in the narrative preceding this table. |
36
Item 3. | Defaults Upon Senior Securities |
Item 4. | [Removed and Reserved] |
Item 5. | Other Information |
Item 6. | Exhibits |
37
Cole Credit Property Trust II, Inc. (Registrant) |
||||
By: | /s/ Simon J. Misselbrook | |||
Name: | Simon J. Misselbrook | |||
Title: | Vice President of Accounting (Principal Accounting Officer) |
38
Exhibit No. | Description | |||
3.1 | Fifth Articles of Amendment and Restatement, as corrected
(Incorporated by reference to Exhibit 3.1 to the Companys
Annual Report on Form 10-K (File No. 333-121094), filed on
March 23, 2006). |
|||
3.2 | Amended and Restated Bylaws (Incorporated by reference to
Exhibit 99.1 to the Companys Current Report on Form 8-K (File
No. 333-121094), filed on September 6, 2005). |
|||
3.3 | Articles of Amendment to Fifth Articles of Amendment and
Restatement (Incorporated by reference to Exhibit 3.3 to the
Companys Form S-11 (File No. 333-138444), filed on November
6, 2006). |
|||
31.1 | * | Certification of the Chief Executive Officer of the Company
pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
||
31.2 | * | Certification of the Chief Financial Officer of the Company
pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
||
32.1 | ** | Certification of the Chief Executive Officer and Chief
Financial Officer of the Company pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
||
101.INS | *** | XBRL Instance Document. |
||
101.SCH | *** | XBRL Taxonomy Extension Schema Document. |
||
101.CAL | *** | XBRL Taxonomy Extension Calculation Linkbase Document. |
||
101.DEF | *** | XBRL Taxonomy Extension Calculation Linkbase Document. |
||
101.LAB | *** | Taxonomy Extension Label Linkbase Document. |
||
101.PRE | *** | EXBRL Taxonomy Extension Presentation Linkbase Document. |
* | Filed herewith. | |
** | In accordance with Item 601(b) (32) of Regulation S-K, this Exhibit is not deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. | |
*** | XBRL (Extensible Business Reporting Language) information is deemed not filed or a part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections. |
39
1. | I have reviewed this Quarterly Report on Form 10-Q of Cole Credit Property Trust II, Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
Cole Credit Property Trust II, Inc. |
||||
Date: November 14, 2011 | By: | /s/ Christopher H. Cole | ||
Name: | Christopher H. Cole | |||
Title: | Chief Executive Officer and President (Principal Executive Officer) | |||
1. | I have reviewed this Quarterly Report on Form 10-Q of Cole Credit Property Trust II, Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
Cole Credit Property Trust II, Inc. |
||||
Date: November 14, 2011 | By: | /s/ D. Kirk McAllaster, Jr. | ||
Name: | D. Kirk McAllaster, Jr. | |||
Title: | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) | |||
Cole Credit Property Trust II, Inc. |
||||
By: | /s/ Christopher H. Cole | |||
Name: | Christopher H. Cole | |||
Title: | Chief Executive Officer and President (Principal Executive Officer) | |||
By: | /s/ D. Kirk McAllaster, Jr. | |||
Name: | D. Kirk McAllaster, Jr. | |||
Date: November 14, 2011 | Title: | Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) | ||
Document and Entity Information | 9 Months Ended | |
---|---|---|
Sep. 30, 2011 | Nov. 14, 2011 | |
Document and Entity Information [Abstract] | ||
Entity Registrant Name | Cole Credit Property Trust II Inc | |
Entity Central Index Key | 0001308606 | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2011 | |
Amendment Flag | false | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q3 | |
Current Fiscal Year End Date | --12-31 | |
Entity Well-known Seasoned Issuer | No | |
Entity Voluntary Filers | No | |
Entity Current Reporting Status | Yes | |
Entity Filer Category | Non-accelerated Filer | |
Entity Common Stock, Shares Outstanding | 209,634,299 |
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Investment In Mortgage Notes Receivable | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Investment In Mortgage Notes Receivable [Abstract] | |
INVESTMENT IN MORTGAGE NOTES RECEIVABLE |
NOTE 6 — INVESTMENT IN MORTGAGE NOTES RECEIVABLE
As of September 30, 2011, the Company owned 69 mortgage notes receivable, which were secured
by 43 restaurant properties and 26 single-tenant retail properties (each, a “Mortgage Note”, and
collectively, the “Mortgage Notes”). As of September 30, 2011, the Mortgage Notes balance of $77.5
million consisted of the face amount of the Mortgage Notes of $71.2 million, a $6.9 million
premium, $2.0 million of acquisition costs, and was net of accumulated amortization of premium and
acquisition costs of $2.6 million. As of December 31, 2010, the Mortgage Notes balance of $79.8
million consisted of the face amount of the Mortgage Notes of $73.0 million, a $6.9 million
premium, $2.0 million of acquisition costs, and was net of accumulated amortization of premium and
acquisition costs of $2.1 million. The premium and acquisition costs are amortized into interest
income over the term of each of the Mortgage Notes using the effective interest rate method. The
Mortgage Notes mature on various dates from August 1, 2020 to January 1, 2021. Interest and
principal are due each month at interest rates ranging from 8.60% to 10.47% per annum with a
weighted average interest rate of 9.88%. There were no amounts past due as of September 30, 2011.
The Company evaluates the collectability of both interest and principal on each Mortgage Note
to determine whether it is collectible, primarily through the evaluation of credit quality
indicators, such as underlying collateral and payment history. No impairment losses or allowances
were recorded related to the Mortgage Notes for the three and nine months ended September 30, 2011
or 2010.
|
Commitments and Contingencies | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Commitments and Contingencies [Abstract] | |
COMMITMENTS AND CONTINGENCIES |
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims.
The Company is not aware of any pending legal proceedings of which the outcome is reasonably likely
to have a material effect on its results of operations, financial condition or liquidity.
Environmental Matters
In connection with the ownership and operation of real estate, the Company potentially may be
liable for costs and damages related to environmental matters. The Company owns certain properties
that are subject to environmental remediation. In each case, the seller of the property, the tenant
of the property and/or another third party has been identified as the responsible party for
environmental remediation costs related to the respective property. Additionally, in connection
with the purchase of certain of the properties, the respective sellers and/or tenants have
indemnified the Company against future remediation costs. In addition, the Company carries
environmental liability insurance on its properties that provides limited coverage for remediation
liability and pollution liability for third-party bodily injury and property damage claims. The
Company does not believe that the environmental matters identified at such properties will have a
material effect on its results of operations, financial condition or liquidity, nor is it aware of
any environmental matters at other properties which it believes will have a material effect on its
results of operations financial condition or liquidity.
|
Summary of Significant Accounting Policies | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Summary of Significant Accounting Policies [Abstract] | |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The condensed consolidated unaudited financial statements of the Company have been prepared in
accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and
Article 10 of Regulation S-X, and do not include all of the information and footnotes required by
GAAP for complete financial statements. In the opinion of management, the statements for the
interim periods presented include all adjustments, which are of a normal and recurring nature,
necessary to present a fair presentation of the results for such periods. Results for these
interim periods are not necessarily indicative of full year results. The information included in
this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited
consolidated financial statements as of and for the year ended December 31, 2010, and related notes
thereto set forth in the Company’s Annual Report on Form 10-K.
The accompanying condensed consolidated unaudited financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
The Company is required to continually evaluate its variable interest entity (“VIE”)
relationships and consolidate investments in these entities when it is determined to be the primary
beneficiary of their operations. A VIE is broadly defined as an entity where either (i) the equity
investors as a group, if any, lack the power through voting or similar rights to direct the
activities of an entity that most significantly impact the entity’s economic performance or (ii)
the equity investment at risk is insufficient to finance that entity’s activities without
additional subordinated financial support.
A variable interest holder is considered to be the primary beneficiary of a VIE if it has the
power to direct the activities of a variable interest entity that most significantly impact the
entity’s economic performance and has the obligation to absorb losses of, or the right to receive
benefits from, the entity that could potentially be significant to the VIE. The Company
qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of
various factors include, but are not limited to, the Company’s ability to direct the activities
that most significantly impact the entity’s economic performance, its form of ownership interest,
its representation on the entity’s governing body, the size and seniority of its investment, its
ability and the rights of other investors to participate in policy making decisions and to replace
the manager of and/or liquidate the entity.
The Company continually evaluates the need to consolidate joint ventures based on standards
set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 810, Consolidation (“ASC 810”). In determining whether the Company has a controlling
interest in a joint venture and the requirement to consolidate the accounts of that entity,
management considers factors such as ownership interest, power to make decisions and contractual
and substantive participating rights of the partners/members as well as whether the entity is a
variable interest entity for which the Company is the primary beneficiary.
Valuation of Real Estate and Related Assets
The Company continually monitors events and changes in circumstances that could indicate that
the carrying amounts of its real estate and related intangible assets may not be recoverable.
Impairment indicators that the Company considers include, but are not limited to, bankruptcy or
other credit concerns of a property’s major tenant, such as a history of late payments, rental
concessions, and other factors, a significant decrease in a property’s revenues due to lease
terminations, vacancies, co-tenancy clauses, reduced lease rates or other circumstances. When
indicators of impairment are present, the Company assesses the recoverability of the assets by
determining whether the carrying value of the assets will be recovered through the undiscounted
future operating cash flows expected from the Company’s use of the assets and the eventual
disposition of such assets. In the event that such expected undiscounted future cash flows do not
exceed the carrying value, the Company will adjust the real estate and related intangible assets to
their respective fair values and recognize an impairment loss.
The Company continues to monitor certain properties for which it has identified impairment
indicators. As of September 30, 2011, the Company had seven properties with an aggregate book value
of $54.1 million for which it had assessed the recoverability of the carrying values. For each of
these properties, the undiscounted future operating cash flows expected from the use of these
properties and their eventual disposition continued to exceed the carrying value of these assets
and their related intangible assets as of September 30, 2011. Should the conditions related to any
of these, or any of the Company’s other properties change, the underlying assumptions used to
determine the expected undiscounted future operating cash flows may change and adversely affect the
recoverability of the carrying values related to such properties. No impairment losses were
recorded during the three and nine months ended September 30, 2011. The Company recorded an
impairment loss on one property of $4.5 million during the nine months ended September 30, 2010.
Projections of expected future cash flows require the Company to use estimates such as current
market rental rates on vacant properties, future market rental income amounts subsequent to the
expiration of current lease agreements, property operating expenses, terminal capitalization and
discount rates, the expected number of months it takes to re-lease the property, required tenant
improvements and the number of years the property will be held for investment. The use of
alternative assumptions in the future cash flow analysis could result in a different determination
of the property’s future cash flows and a different conclusion regarding the existence of an
impairment, the extent of such loss, if any, as well as the carrying value of the real estate and
related intangible assets.
Restricted Cash and Escrows
Restricted cash of $11.2 million and $8.3 million as of September 30, 2011 and December 31,
2010, respectively, held by lenders in escrow accounts for tenant and capital improvements, leasing
commissions, repairs and maintenance and other lender reserves for certain properties, in
accordance with the respective lender’s loan agreement.
Concentration of Credit Risk
As of September 30, 2011, the Company had cash on deposit, including restricted cash, in five
financial institutions, four of which had deposits in excess of federally insured levels totaling
$18.5 million; however, the Company has not experienced any losses in such accounts. The Company
limits significant cash holdings to accounts held by financial institutions with high credit
standing; therefore, the Company believes it is not exposed to any significant credit risk on its
cash deposits.
Investment in Unconsolidated Joint Ventures
Investment in unconsolidated joint ventures as of September 30, 2011 consisted of the
Company’s non-controlling majority interest in a joint venture that owns a multi-tenant property in
Independence, Missouri. As of December 31, 2010, investment in unconsolidated joint ventures also
consisted of a non-controlling majority interest in a joint venture that owned and operated a
ten-property storage facility portfolio, which was sold on September 30, 2011, as discussed in Note
5 to these condensed consolidated unaudited financial statements. Consolidation of these
investments is not required as the entities do not meet the requirements for consolidation, as
defined in ASC 810. Both the Company and the joint venture partner
must approve decisions about the entity’s activities that
significantly influence the economic performance of the entity. As of September 30, 2011, the aggregate carrying value of assets held within
the unconsolidated joint venture were $60.4 million and the face value of the non-recourse mortgage
note payable was $34.1 million. As of December 31, 2010, the aggregate carrying value of assets
held within the unconsolidated joint ventures was $148.6 million and the face value of the
non-recourse mortgage notes payable was $111.6 million.
The Company accounts for unconsolidated joint ventures using the equity method of accounting
per guidance established under ASC 323, Investments — Equity Method and Joint Ventures (“ASC
323”). The equity method of accounting requires investments to be initially recorded at cost and
subsequently adjusted for the Company’s share of equity in the
joint venture’s earnings and
distributions. The Company evaluates the carrying amount of its investments for impairment in
accordance with ASC 323. The unconsolidated joint ventures are
evaluated for potential impairment if
the carrying amount of the investment exceeds its fair value. To determine whether impairment is
other-than-temporary, the Company considers whether it has the ability and intent to hold the
investment until the carrying value is fully recovered. The evaluation of an investment in a joint
venture for potential impairment requires the Company’s management to exercise significant judgment
and to make certain assumptions. The use of different judgments and assumptions could result in different
conclusions. No impairment losses were recorded related to the unconsolidated joint ventures for
the three and nine months ended September 30, 2011 or 2010. The
Company recognizes gains on the sale of interests in joint ventures
to the extent the economic substance of the transaction is a sale.
Redeemable Common Stock
The Company’s share redemption program provides that the Company will not redeem in excess of
3% of the weighted average number of shares outstanding during the prior calendar year (including
shares requested for redemption upon the death of a stockholder), and the cash available for
redemptions (including those upon death or qualifying disability) is limited to the net proceeds
from the sale of shares pursuant to the DRIP Offering. In addition, the Company will redeem shares
on a quarterly basis, at the rate of one-fourth of 3% of the weighted average number of shares
outstanding during the prior calendar year (including shares requested for redemption upon the
death of a stockholder). Funding for redemptions for each quarter (including those upon death or
qualifying disability of a stockholder) will also be limited to the net proceeds the Company
receives from the sale of shares during such quarter from the DRIP Offering. As of September 30,
2011 and December 31, 2010, the Company had redeemed approximately 13.4 million and approximately
8.8 million shares of common stock, respectively, for an aggregate price of $120.6 million and
$82.2 million, respectively. Redeemable common stock is recorded at the greater of the carrying
amount or redemption value each reporting period. Changes in the value from period to period are
recorded as an adjustment to capital in excess of par value.
The redemption price per share is dependent on the length of time the shares are held and the
estimated share value. For purposes of establishing the redemption price per share, estimated
share value means the most recently disclosed estimated value of the Company’s shares of common
stock, as determined by the Company’s board of directors, including a majority of the Company’s
independent directors (the “Estimated Share Value”). As of September 30, 2011, the Estimated Share
Value was $9.35 per share, as determined by the Company’s board of directors on July 27, 2011 and
disclosed in the Company’s Form 8-K filed on such date.
|
Derivative Instruments and Hedging Activities | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Instruments and Hedging Activities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
NOTE 8 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Company uses certain types of derivative instruments for
the purpose of managing or hedging its interest rate risks. The table below summarizes the notional
amount and fair value of the Company’s derivative instruments (in thousands):
Additional disclosures related to the fair value of the Company’s derivative instruments
are included in Note 3 of these condensed consolidated financial statements. The notional amount
under the agreements is an indication of the extent of the Company’s involvement in each
instrument, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended
use and the designation of the derivative instrument. The change in fair value of the effective
portion of the derivative instrument that is designated as a hedge is recorded as other
comprehensive income or loss. The Company designated the interest rate swaps as cash flow hedges,
to hedge the variability of the anticipated cash flows on its variable rate notes payable.
The following table summarizes the unrealized gains and losses on the Company’s derivative
instruments and hedging activities (in thousands):
The Company has agreements with each of its derivative counterparties that contain a provision
whereby, if the Company defaults on certain of its unsecured indebtedness, then the Company could
also be declared in default on its derivative obligations resulting in an acceleration of payment.
In addition, the Company is exposed to credit risk in the event of non-performance by its
derivative counterparties. The Company believes it mitigates its credit risk by entering into
agreements with credit-worthy counterparties. The Company records counterparty credit risk
valuation adjustments on its interest rate swap derivatives in order to properly reflect the credit
quality of the counterparty. In addition, the Company’s fair value of interest rate swap derivative
liabilities is adjusted to reflect the impact of the Company’s credit quality. As of September 30,
2011 and December 31, 2010, there have been no termination events or events of default related to
the interest rate swaps.
|
Economic Dependency | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Economic Dependency [Abstract] | |
ECONOMIC DEPENDENCY |
NOTE 13 — ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged or will engage Cole Advisors II and its
affiliates to provide certain services that are essential to the Company, including asset
management services, supervision of the management and leasing of properties owned by the Company,
asset acquisition and disposition decisions, the sale of shares of the Company’s common stock
available for issuance, as well as other administrative responsibilities for the Company, including
accounting services and investor relations. As a result of these relationships, the Company is
dependent upon Cole Advisors II and its affiliates. In the event that these companies are unable to
provide the Company with these services, the Company would be required to find alternative
providers of these services.
|
Notes Payable, Line of Credit and Repurchase Agreement | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Notes Payable, Line of Credit and Repurchase Agreement [Abstract] | |
NOTES PAYABLE, LINE OF CREDIT AND REPURCHASE AGREEMENT |
NOTE 9 — NOTES PAYABLE, LINE OF CREDIT AND REPURCHASE AGREEMENT
As of September 30, 2011, the Company had $1.8 billion of debt outstanding, consisting of (i)
$1.5 billion in fixed rate mortgage loans (the “Fixed Rate Debt”), (ii) $4.3 million in variable
rate mortgage loans (the “Variable Rate Debt”), and (iii) $271.1 million outstanding under a senior
unsecured line of credit entered into on December 17, 2010 (the “Credit Facility”). The aggregate
balance of gross real estate assets and marketable securities, net of gross intangible lease
liabilities, securing the Fixed Rate Debt and the Variable Rate Debt was $2.5 billion as of
September 30, 2011. Additionally, the combined weighted average interest rate was 5.60% and the
weighted average years to maturity was 4.5 years as of September 30, 2011.
The Credit Facility and certain notes payable contain customary affirmative, negative and
financial covenants, including requirements for minimum net worth and debt service coverage ratios,
in addition to limits on the Company’s overall leverage ratios and Variable Rate Debt. Based on the
Company’s analysis and review of its results of operations and financial condition, as of September
30, 2011, the Company believes it was in compliance with the covenants of the Credit Facility and
such notes payable.
Notes Payable
The Fixed Rate Debt has annual interest rates ranging from 3.52% to 7.22%, with a weighted
average annual interest rate of 5.85%, and various maturity dates ranging from December 2011
through August 2031. The Variable Rate Debt has an annual interest rate of LIBOR plus 275 basis
points, and matures in September 2014. The notes payable are secured by properties in the
portfolio and their related tenant leases, as well as other real estate related assets on which the
debt was placed. During the nine months ended September 30, 2011, the Company repaid $95.3 million
of fixed and variable rate debt, including monthly principal payments on amortizing loans.
Additionally, during the nine months ended September 30, 2011, the Company refinanced a $42.5
million variable rate loan which matured in September 2011. The refinanced loan is interest only
and bears interest at the one month LIBOR plus 275 basis points and matures in September 2014. Of
the total $42.5 million loan amount, $38.3 million has been effectively fixed at an interest rate
of 3.52% pursuant to a swap agreement. Refer to Note 8 to these condensed consolidated unaudited
financial statements for further details of the new interest rate swap agreement.
Line of Credit
The Credit Facility provides for up to $350.0 million of unsecured borrowings, and allows the
Company to borrow up to $238.9 million in revolving loans (the “Revolving Loans”) and $111.1
million in a term loan (the “Term Loan”). The Credit Facility matures on December 17, 2013.
During the nine months ended September 30, 2011, the Company borrowed $193.1 million and
repaid $22.0 million under the Credit Facility. As of September 30, 2011, the Company had $111.1
million outstanding under the Term Loan and an additional $160.0 million in Revolving Loans.
Additionally, the Company has established a letter of credit in the amount of $476,000 from the
Credit Facility lenders to support an escrow agreement between a certain property and that
property’s lender. This letter of credit reduces the amount of borrowings available under the
Credit Facility. The Company executed an interest rate swap agreement on February 24, 2011, which
fixed LIBOR for amounts outstanding under the Term Loan to 1.44%. The all-in rate for the Term
Loan includes a spread of 275 to 400 basis points, as determined by the leverage ratio of the
Company, which was equal to a spread of 350 basis points as of September 30, 2011. Revolving Loans
outstanding as of September 30, 2011 bore interest at 3.73%.
Repurchase Agreement
During the nine months ended September 30, 2011, the Company borrowed $10.7 million under the
Repurchase Agreement and repaid the total amount outstanding of $65.0 million under the Repurchase
Agreement in connection with the sale of all of the Company’s CMBS bonds (refer to Note 7 of these
condensed consolidated unaudited financial statements). As of September 30, 2011, there were no
amounts outstanding under the Repurchase Agreement.
|
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M"3BBH(9I$,NM"K<9_4PQ:I"]I=@?U"@R[BW-XX=S-*W4JRVEF7+O/,U4$$*Z
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MW3!JZA1:7GW8@PZ6>=-!6_4,'#NNO'-:]A059F+3<(GYQ2M`RJ2`\T8.3@V:
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M_H]&WQ2N`$IN-LIUD
=\BV4GO2N%IDH'J^HD_><`=G&88%"7
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M`587NX4=W3C0382WVEFP+WF^6JB++CT`AF=
Marketable Securities | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Marketable Securities [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
MARKETABLE SECURITIES |
NOTE 7 — MARKETABLE SECURITIES
During the nine months ended September 30, 2011, the Company sold all of its CMBS bonds for
total proceeds of $82.1 million, and realized a gain on the sale of $15.6 million, of which $14.7
million had previously been recorded in other comprehensive income. Prior to the sale, the
securities were pledged as collateral under a repurchase agreement (the “Repurchase Agreement”),
which provided secured borrowings (refer to Note 9 of these condensed consolidated unaudited
financial statements). Realized gains and losses from the sale of available-for-sale securities
are determined on a specific identification basis. The following provides the activity for the CMBS
bonds during the nine months ended September 30, 2011 (in thousands):
Each of the CMBS bonds were in an unrealized gain position as of December 31, 2010.
|
Fair Value Measurements | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
FAIR VALUE MEASUREMENTS |
NOTE 3 — FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value, establishes a
framework for measuring fair value in GAAP and expands disclosures about fair value measurements.
ASC 820 emphasizes that fair value is intended to be a market-based measurement, as opposed to a
transaction-specific measurement.
Fair value is defined by ASC 820 as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement
date. Depending on the nature of the asset or liability, various techniques and assumptions can be
used to estimate the fair value. Assets and liabilities are measured using inputs from three levels
of the fair value hierarchy, as follows:
Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date. An active market is
defined as a market in which transactions for the assets or liabilities occur with sufficient
frequency and volume to provide pricing information on an ongoing basis.
Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active
(markets with few transactions), inputs other than quoted prices that are observable for the asset
or liability (i.e. interest rates, yield curves, etc.), and inputs that are derived principally
from or corroborated by observable market data correlation or other means (market corroborated
inputs).
Level 3 — Unobservable inputs, only used to the extent that observable inputs are not
available, reflect the Company’s assumptions about the pricing of an asset or liability.
During the nine months ended September 30, 2011, there were no real estate assets measured at
fair value on a non-recurring basis. A summary of the Company’s real estate assets measured at fair
value on a non-recurring basis during the nine months ended September 30, 2010 is as follows (in
thousands):
During the nine months ended September 30, 2010, real estate assets with a carrying amount of
$8.0 million related to one property were deemed to be impaired and their carrying values were
reduced to their estimated fair value of $3.5 million, resulting in an impairment charge of $4.5
million, which is included in impairment on real estate assets on the condensed consolidated
unaudited statement of operations for the nine months ended September 30, 2010.
The Company used a discounted cash flow analysis and recent comparable sales transactions to
estimate the fair value of real estate assets. The discounted cash flow analysis utilized
internally prepared probability-weighted cash flow estimates, which
included estimated future market rental income, property operating
expenses, the expected number of months to re-lease the property and
estimated tenant improvements. The discounted cash flow analysis
utilized discount rate ranges
and terminal capitalization rates, which were within historical average ranges and gathered for
specific geographic areas based on available information obtained from third-party service
providers and reports.
The following describes the methods the Company uses to estimate the fair value of the
Company’s financial assets and liabilities:
Cash and cash equivalents, restricted cash, rents and tenant receivables, and accounts payable
and accrued expenses — The Company considers the carrying values of these financial instruments to
approximate fair value because of the short period of time between origination of the instruments
and their expected realization.
Mortgage notes receivable — The fair value is estimated by discounting the expected cash
flows on the notes at rates at which management believes similar loans would be made as of
September 30, 2011 and December 31, 2010. The estimated fair value of these notes was $84.4 million
and $83.9 million as of September 30, 2011 and December 31, 2010, respectively, as compared to the
carrying value of $77.5 million and $79.8 million as of
September 30, 2011 and December 31, 2010, respectively.
Notes payable, line of credit and repurchase agreement — The fair value is estimated using a
discounted cash flow technique based on estimated borrowing rates available to the Company as of
September 30, 2011 and December 31, 2010. The estimated fair value of the notes payable, line of
credit and repurchase agreement was $1.8 billion and $1.7 billion as of September 30, 2011 and
December 31, 2010, respectively, which was equal to the carrying value as of such dates.
Marketable securities — As of September 30, 2011, the Company did not own any marketable
securities. As of December 31, 2010, the Company owned six marketable securities. The Company’s
marketable securities, including those pledged as collateral, are carried at fair value and are
valued using Level 3 inputs. The Company primarily uses estimated non-binding quoted market prices
from the trading desks of financial institutions that are dealers in such bonds, where available,
for similar commercial mortgage backed securities (“CMBS”) tranches that actively participate in
the CMBS market, adjusted for industry benchmarks, such as the CMBX Index, where applicable. Market
conditions, such as interest rates, liquidity, trading activity and credit spreads, may cause
significant variability to the received quotes. If the Company is unable to obtain quotes from
third parties or if the Company believes quotes received are inaccurate, the Company would estimate
fair value using internal models that primarily consider the CMBX Index, expected cash flows, known
and expected defaults and rating agency reports. Changes in market conditions, as well as changes
in the assumptions or methodology used to estimate fair value, could result in a significant
increase or decrease in the recorded amount of the securities. No marketable securities were
valued using internal models. Significant judgment is involved in valuations and different
judgments and assumptions used in management’s valuation could result in different valuations. If
the Company acquires additional marketable securities and if there continues to be significant
disruptions to the financial markets, the Company’s estimates of fair value may have significant
volatility.
Derivative Instruments — The Company’s derivative instruments represent interest rate swaps.
All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair
value of these instruments is determined using interest rate market pricing models. The Company
includes the impact of credit valuation adjustments on derivative instruments measured at fair
value.
Considerable judgment is necessary to develop estimated fair values of financial instruments.
Accordingly, the estimates presented herein are not necessarily indicative of the amounts the
Company could realize, or be liable for, on disposition of the financial instruments.
In accordance with the fair value hierarchy described above, the following table shows the
fair value of the Company’s financial liabilities that are required to be measured at fair value on
a recurring basis as of September 30, 2011 (in thousands):
In accordance with the fair value hierarchy described above, the following table shows the
fair value of the Company’s financial assets and liabilities that are required to be measured at
fair value on a recurring basis as of December 31, 2010 (in thousands):
The following table shows a reconciliation of the change in fair value of the Company’s
financial assets and liabilities with significant unobservable inputs (Level 3) for the nine months
ended September 30, 2011 and 2010 (in thousands):
|
Investment In Direct Financing Leases | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment In Direct Financing Leases [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
INVESTMENT IN DIRECT FINANCING LEASES |
NOTE 4 — INVESTMENT IN DIRECT FINANCING LEASES
The components of investment in direct financing leases as of September 30, 2011 and December
31, 2010 were as follows (in thousands):
|
Related-Party Transactions and Arrangements | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Related-Party Transactions and Arrangements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS |
NOTE 12 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
The Company has incurred commissions, fees and expenses payable to Cole Advisors II and its
affiliates in connection with the Offerings, and has incurred and will continue to incur
commissions, fees and expenses in connection with the acquisition, management and sale of the
assets of the Company.
DRIP Offering
During the three and nine months September 30, 2011 and 2010, the Company did not pay any
amounts to Cole Advisors II for selling commissions, dealer manager fees, or other organization and
offering expense reimbursements incurred in connection with the DRIP Offering.
Acquisitions and Operations
Cole Advisors II or its affiliates receive acquisition and advisory fees of up to 2.0% of the
contract purchase price of each asset for the acquisition, development or construction of
properties, and are reimbursed for acquisition expenses incurred in the process of acquiring
properties, so long as the total acquisition fees and expenses relating to the transaction do not
exceed 4.0% of the contract purchase price.
The Company paid, and expects to continue to pay, Cole Advisors II an annualized asset
management fee of 0.25% of the aggregate asset value of the Company’s aggregate invested assets, as
reasonably estimated by the Company’s board of directors. The Company also reimburses certain costs
and expenses incurred by Cole Advisors II in providing asset management services.
The Company paid, and expects to continue to pay, Cole Realty Advisors, Inc. (“Cole Realty
Advisors”), its affiliated property manager, up to (i) 2.0% of gross revenues received from the
Company’s single tenant properties and (ii) 4.0% of gross revenues received from the Company’s
multi-tenant properties, plus leasing commissions at prevailing market rates; provided however,
that the aggregate of all property management and leasing fees paid to affiliates plus all payments
to third parties will not exceed the amount that other nonaffiliated management and leasing
companies generally charge for similar services in the same geographic location. Cole Realty
Advisors may subcontract certain of its duties for a fee that may be less than the fee provided for
in the property management agreement. The Company will also reimburse Cole Realty Advisors’ costs
of managing and leasing the properties.
The Company will reimburse Cole Advisors II for all expenses it paid or incurred in connection
with the services provided to the Company, subject to the limitation that the Company will not
reimburse Cole Advisors II for any amount by which its operating expenses (including the Asset
Management Fee) at the end of the four preceding fiscal quarters exceeds the greater of (i) 2% of
average invested assets, or (ii) 25% of net income other than any additions to reserves for
depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of
assets for that period, unless the Company’s independent directors find that a higher level of
expense is justified for that year based on unusual and non-recurring factors. The Company will
not reimburse Cole Advisors II for personnel costs in connection with services for which Cole
Advisors II receives acquisition fees and real estate commissions.
If Cole Advisors II provides services in connection with the origination or refinancing of any
debt financing obtained by the Company that is used to acquire properties or to make other
permitted investments, or that is assumed, directly or indirectly, in connection with the
acquisition of properties, the Company will pay Cole Advisors II or its affiliates a financing
coordination fee equal to 1% of the amount available under such financing; provided however, that
Cole Advisors II or its affiliates shall not be entitled to a financing coordination fee in
connection with the refinancing of any loan secured by any particular property that was previously
subject to a refinancing in which Cole Advisors II or its affiliates received such a fee.
Financing coordination fees payable from loan proceeds from permanent financing are paid to Cole
Advisors II or its affiliates as the Company acquires and/or assumes such permanent financing.
The Company recorded fees and expense reimbursements as shown in the table below for services
provided by Cole Advisors II and its affiliates related to the services described above during the
period indicated (in thousands):
Liquidation/Listing
If Cole Advisors II or its affiliates provides a substantial amount of services, as determined
by the Company’s independent directors, in connection with the sale of one or more properties,
including those held indirectly through joint ventures, the Company will pay Cole Advisors II up to
one-half of the brokerage commission paid, but in no event to exceed an amount equal to 2% of the
sales price of each property sold (the “Real Estate Commission”). In no event will the combined
real estate commission paid to Cole Advisors II, its affiliates and unaffiliated third parties
exceed 6% of the contract sales price.
Upon liquidation of the Company’s portfolio, after investors have received a return of their
net capital contributions and an 8% annual cumulative, non-compounded return, then Cole Advisors II
is entitled to receive 10% of the remaining net sale proceeds.
Upon listing of the Company’s common stock on a national securities exchange, a fee equal to
10% of the amount by which the market value of the Company’s outstanding stock plus all
distributions paid by the Company prior to listing, exceeds the sum of the total amount of capital
raised from investors and the amount of cash flow necessary to generate an 8% annual cumulative,
non-compounded return to investors will be paid to Cole Advisors II (the “Subordinated Incentive
Listing Fee”).
Upon termination of the advisory agreement with Cole Advisors II, other than termination by
the Company because of a material breach of the advisory agreement by Cole Advisors II, a
performance fee of 10% of the amount, if any, by which (i) the appraised asset value at the time of
such termination plus total distributions paid to stockholders through the termination date exceeds
(ii) the aggregate capital contribution contributed by investors less distributions from sale
proceeds plus payment to investors of an 8% annual, cumulative, non-compounded return on capital.
No subordinated performance fee will be paid to the extent that the Company has already paid or
become obligated to pay Cole Advisors II a subordinated participation in net sale proceeds or the
Subordinated Incentive Listing Fee.
During the nine months ended September 30, 2011, the Company incurred a Real Estate Commission
of $382,000, for services provided by Cole Advisors II and its affiliates in connection with the
sale of the Company’s interest in an unconsolidated joint venture.
Other
As of September 30, 2011 and December 31, 2010, $2.4 million and $1.5 million, respectively,
had been incurred, primarily for property and asset management fees and expenses, real estate commission, finance coordination fees, and general and administrative expenses, by
Cole Advisors II and its affiliates, but had not yet been reimbursed by the Company and were
included in due to affiliates on the condensed consolidated unaudited balance sheets.
|
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Real Estate [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
REAL ESTATE |
NOTE 5 — REAL ESTATE
2011 Property Acquisitions
During the nine months ended September 30, 2011, the Company acquired a 100% interest in 26
commercial properties for an aggregate purchase price of $90.1 million (the “2011 Acquisitions”).
The Company purchased the 2011 Acquisitions with a combination of proceeds from the DRIP Offering
and net proceeds from borrowings. The Company allocated the purchase price of these properties to
the fair value of the assets acquired and liabilities assumed. The following table summarizes the
purchase price allocation (in thousands):
The Company recorded revenue for the three and nine months ended September 30, 2011 of $2.1
million and $3.5 million, respectively, related to the 2011 Acquisitions. The Company recorded net
income for the three months ended September 30, 2011 of $1.0 million and a net loss for the nine
months ended September 30, 2011 of $203,000 related to the 2011 Acquisitions. In addition, the
Company expensed $382,000 and $2.7 million of acquisition costs for the three and nine months ended
September 30, 2011, respectively.
The following information summarizes selected financial information from the combined results
of operations of the Company, as if all of the 2011 Acquisitions were completed on January 1, 2010
for each period presented below. The table below presents the Company’s estimated revenue and net
income, on a pro forma basis, for the three and nine months September 30, 2011 and 2010,
respectively (in thousands):
The pro forma information is presented for informational purposes only and may not be
indicative of what actual results of operations would have been had the transactions occurred at
the beginning of each year, nor does it purport to represent the results of future operations.
2011 Other Investment in Real Estate
During the nine months ended September 30, 2011, the Company paid a tenant improvement
allowance of $12.0 million for an expansion and improvements to an existing property, including the
conversion of an existing warehouse into office space and the construction of a parking area, for
which the Company will receive additional rents. Such costs were capitalized to buildings and
improvements and will be depreciated over their estimated useful life.
2011 Disposition
On September 30, 2011, the Company sold 100% of its interest in an unconsolidated joint
venture that owned and operated ten self-storage properties located in Arizona for cash proceeds of
$19.1 million. The Company recorded a gain on the sale of $5.1 million for the three and nine
months ended September 30, 2011.
2010 Property Acquisitions
During the nine months ended September 30, 2010, the Company acquired a 100% interest in 11
commercial properties for an aggregate purchase price of $62.9 million (the “2010 Acquisitions”).
The Company financed the 2010 Acquisitions with a combination of proceeds from the Offerings, cash
flows from operations, available cash, and net proceeds from borrowings. The Company allocated the
purchase price of these properties to the fair value of the assets acquired and liabilities
assumed. The following table summarizes the purchase price allocation (in thousands):
The Company recorded revenue for the three and nine months ended September 30, 2010
of $543,000 and $682,000, respectively, and net losses for the three and nine months ended
September 30, 2010 of $847,000 and $1.4 million, respectively, related to the 2010 Acquisitions.
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Independent Directors' Stock Option | 9 Months Ended |
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Sep. 30, 2011 | |
Independent Directors' Stock Option [Abstract] | |
INDEPENDENT DIRECTORS' STOCK OPTION PLAN |
NOTE 15 — INDEPENDENT DIRECTORS’ STOCK OPTION PLAN
The Company has a stock option plan, the Independent Director’s Stock Option Plan (the
“IDSOP”), which authorizes the grant of non-qualified stock options to the Company’s independent
directors, subject to the absolute discretion of the board of directors and the applicable
limitations of the IDSOP. The term of the IDSOP is ten years, at which time any outstanding
options will be forfeited. The exercise price for the options granted under the IDSOP was $9.15 per
share for 2005 and 2006, and $9.10 per share for 2007, 2008 and 2009. The Company does not intend
to continue to grant options under the IDSOP; however, the exercise price for any future options
granted under the IDSOP will be at least 100% of the fair market value of the Company’s common
stock as of the date the option is granted. As of September 30, 2011, the Company had granted
options to purchase 50,000 shares at a weighted average exercise price of $9.12 per share, of which
options to purchase 45,000 shares remained outstanding with a weighted average contractual
remaining life of six years. Options to purchase 5,000 shares were exercised at a price of $9.10
per share in 2009. A total of 1,000,000 shares have been authorized and reserved for issuance
under the IDSOP.
During the three and nine months ended September 30, 2011, the Company did not record any
stock-based compensation charges, as all stock-based compensation charges related to unvested
share-based compensation awards granted under the IDSOP had previously been recognized. In
addition, the Company did not record any stock-based compensation expense during the three months
ended September 30, 2010 and recorded stock based compensation expense of $7,000 during the nine
months ended September 30, 2010. Stock-based compensation expense is based on awards ultimately
expected to vest and reduced for estimated forfeitures. Forfeitures are estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. The Company’s calculations assume no forfeitures.
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Condensed Consolidated Statement of Stockholders' Equity (Unaudited) (USD $) In Thousands, except Share data | Total | Common Stock | Capital in Excess of Par Value | Accumulated Distributions in Excess of Earnings | Accumulated Other Comprehensive Income (Loss) |
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Beginning balance at Dec. 31, 2010 | $ 1,560,375 | $ 2,093 | $ 1,878,118 | $ (332,547) | $ 12,711 |
Beginning balance, shares at Dec. 31, 2010 | 209,317,346 | 209,317,346 | |||
Issuance of common stock, shares | 5,408,465 | ||||
Issuance of common stock | 44,939 | 54 | 44,885 | ||
Distributions to investors | (97,966) | (97,966) | |||
Redemptions of common stock, shares | (4,615,805) | ||||
Redemptions of common stock | (38,381) | (46) | (38,335) | ||
Redeemable common stock | (2,237) | (2,237) | |||
Comprehensive income: | |||||
Net income | 44,614 | 44,614 | |||
Unrealized loss on marketable securities | (1,713) | (1,713) | |||
Reclassification of previous unrealized gain on marketable securities into net income | (14,654) | (14,654) | |||
Unrealized loss on interest rate swaps | (921) | (921) | |||
Total comprehensive income | 27,326 | ||||
Ending balance at Sep. 30, 2011 | $ 1,494,056 | $ 2,101 | $ 1,882,431 | $ (385,899) | $ (4,577) |
Ending balance, shares at Sep. 30, 2011 | 210,110,006 | 210,110,006 |
Subsequent Events | 9 Months Ended |
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Sep. 30, 2011 | |
Subsequent Events [Abstract] | |
SUBSEQUENT EVENTS |
NOTE 16 — SUBSEQUENT EVENTS
Issuance of shares of common stock through DRIP Offering
Subsequent to September 30, 2011, the Company issued approximately 1.1 million shares of
common stock pursuant to the DRIP Offering, resulting in proceeds of $9.9 million. No selling
commissions or dealer manager fees were paid in connection with the issuance of these shares.
Redemption of Shares of Common Stock
Subsequent to September 30, 2011, the Company redeemed approximately 1.5 million shares for $14.2 million at an average price per share of $9.27.
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Organization and Business | 9 Months Ended |
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Sep. 30, 2011 | |
Organization and Business [Abstract] | |
ORGANIZATION AND BUSINESS |
NOTE 1 — ORGANIZATION AND BUSINESS
Cole Credit Property Trust II, Inc. (the “Company”) is a Maryland corporation formed on
September 29, 2004, that has elected to be taxed, and currently qualifies, as a real estate
investment trust (“REIT”) for federal income tax purposes. Substantially all of the Company’s
business is conducted through Cole Operating Partnership II, LP (“Cole OP II”), a Delaware limited
partnership. The Company is the sole general partner of and owns a 99.99% partnership interest in
Cole OP II. Cole REIT Advisors II, LLC (“Cole Advisors II”), the affiliate advisor to the Company,
is the sole limited partner and owner of an insignificant non-controlling partnership interest of
less than 0.01% of Cole OP II.
As of September 30, 2011, the Company owned 751 properties comprising 21.1 million rentable
square feet of single and multi-tenant retail and commercial space located in 45 states and the
U.S. Virgin Islands. As of September 30, 2011, the rentable space at these properties was 96%
leased. As of September 30, 2011, the Company also owned 69 mortgage notes receivable secured by 43
restaurant properties and 26 single-tenant retail properties, each of which is subject to a net
lease. Through an unconsolidated joint venture, the Company had a non-controlling majority interest
in a 386,000 square foot multi-tenant retail building in Independence, Missouri as of September 30,
2011.
The Company ceased offering shares of common stock in its initial primary offering (the
“Initial Offering”) on May 22, 2007, and ceased offering shares of common stock in its follow-on
offering (the “Follow-on Offering”) on January 2, 2009. The Company continues to issue shares of
common stock under its dividend reinvestment plan (the “DRIP Offering”, and collectively with the
Initial Offering and the Follow-on Offering, the “Offerings”). As of September 30, 2011, the
Company had issued approximately 223.5 million shares of common stock in its Offerings for
aggregate gross proceeds of $2.2 billion (including proceeds from the issuance of shares pursuant
to the DRIP Offering of $254.6 million), before share redemptions of $120.6 million. As of
September 30, 2011, the Company had incurred an aggregate of $188.3 million in offering costs,
selling commissions, and dealer manager fees in the Offerings.
The Company’s stock is not currently listed on a national securities exchange. The Company may
seek to list its common stock for trading on a national securities exchange only if a majority of
its independent directors believes listing would be in the best interest of its stockholders. The
Company disclosed in its prospectus a targeted liquidity event by May 22, 2017 and in the event it
does not obtain listing prior to such date, its charter requires that it either (1) seek
stockholder approval of an extension or elimination of this listing deadline; or (2) seek
stockholder approval to adopt a plan of liquidation. If neither proposal is approved, the Company
may continue to operate as before. On June 28, 2011, the Company disclosed that its sponsor, Cole
Real Estate Investments, is actively exploring options to successfully exit the Company’s portfolio
within the next 12 months, and that the potential exit strategies it is evaluating include, but are
not limited to, a sale of the portfolio or a listing of the portfolio on a public stock exchange.
Such targeted date has not yet occurred, and the Company has not had a liquidity event.
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Supplemental Cash Flow Disclosures | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Supplemental Cash Flow Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SUPPLEMENTAL CASH FLOW DISCLOSURES |
NOTE 10 — SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the nine months ended September 30, 2011 and 2010 are
as follows (in thousands):
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New Accounting Pronouncements | 9 Months Ended |
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Sep. 30, 2011 | |
New Accounting Pronouncements [Abstract] | |
NEW ACCOUNTING PRONOUNCEMENTS |
NOTE 14 — NEW ACCOUNTING PRONOUNCEMENTS
In December 2010, FASB issued (“ASU”) ASU 2010-29, Disclosure of Supplementary Pro Forma
Information for Business Combinations, (“ASU 2010-29”), which clarifies the manner in which pro
forma disclosures are calculated and provides additional disclosure requirements regarding material
nonrecurring adjustments recorded as a result of a business combination. ASU 2010-29 was effective
for the Company beginning on January 1, 2011, and its provisions were applied to the pro forma
information presented in Note 5. The adoption of ASU 2010-29 has not had a material impact on the
Company’s consolidated financial statements.
In May 2011, FASB issued ASU 2011-04, Fair Value Measurements and Disclosures (Topic 820):
Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and
IFRS, (“ASU 2011-04”), which converges guidance between GAAP and International Financial Reporting
Standards (“IFRS”) on how to measure fair value and on what disclosures to provide about fair value
measurements. ASU 2011-04 is effective for the Company on January 1, 2012. The adoption of ASU
2011-04 is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2011, FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income, (“ASU 2011-05”), which improves the comparability, consistency and
transparency of financial reporting and increases the prominence of items reported in other
comprehensive income. ASU 2011-05 is effective for the Company on January 1, 2012. The adoption
of ASU 2011-05 is not expected to have a material impact on the Company’s consolidated financial statements.
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