Real Estate

9 Months Ended

Sep. 30, 2011

Real Estate [Abstract]

Real Estate

NOTE 2. REAL ESTATE

Acquisitions

As noted above, as part of the Formation Transactions, we acquired the controlling interests in the Waikiki Beach Walk entities and the Solana Beach Centre entities for Operating Partnership units and common shares with a value of approximately $33.9 million. The contribution or acquisition by merger of interests in these entities was accounted for as an acquisition under the acquisition method of accounting and recognized at the estimated fair value of acquired assets and assumed liabilities on the date of such contribution or acquisition. Prior to acquisition, our Predecessor had an 80% noncontrolling interest in the Waikiki Beach Walk entities and a 50% noncontrolling interest in the Solana Beach Centre entities. Upon acquisition, we remeasured the assets and liabilities at fair value and recorded gains of $4.8 million and $41.6 million on the Waikiki Beach Walk entities and the Solana Beach Centre entities, respectively, which are classified as gain on acquisition in the accompanying statement of operations. These gains were calculated based on the difference between the fair value of our Predecessor's ownership interests of $31.3 million and $26.0 million compared to the Predecessor's historical cost interests of $26.5 million and $(15.6) million in the Waikiki Beach Walk entities and Solana Beach Centre entities, respectively.

The fair values assigned to identifiable intangible assets acquired were based on estimates and assumptions determined by management. Using information available at the time the acquisition closed, we allocated the total consideration to tangible assets and liabilities and identified intangible assets and liabilities.

The allocation of the consideration paid for the acquired assets and liabilities was as follows (in thousands):

	Solana Beach Towne Centre		Solana Beach Corporate Centre			Waikiki Beach Walk Retail and Hotel			Total
Land	$	40,980	$	14,896		$	76,635		$	132,511
Building		35,605		42,094			122,985			200,684
Land improvements		1,750		974			2,276			5,000
Tenant improvements		1,487		1,919			1,801			5,207
Furniture and fixtures		—		—			7,910			7,910
Total real estate		79,822		59,883			211,607			351,312
Cash and cash equivalents		957		718			13,547			15,222
Restricted cash		282		200			1,297			1,779
Accounts receivable, net		67		—			2,168			2,235
Lease intangibles		6,995		5,536			15,997			28,528
Prepaid expenses and other assets		22		45			266			333
Total assets	$	88,145	$	66,382		$	244,882		$	399,409
Secured notes payable	$	39,738	$	49,252		$	198,618		$	287,608
Fair market favorable debt value		—		(600	)		(19,000	)		(19,600	)
Notes payable to affiliates		—		—			14,824			14,824
Accounts payable and accrued expenses		924		542			6,520			7,986
Security deposits payable		238		320			861			1,419
Lease intangibles		11,390		125			3,530			15,045
Other liabilities and deferred credits		192		331			442			965
Total liabilities	$	52,482	$	49,970		$	205,795		$	308,247

We have included the results of operations for each of these acquired entities in our consolidated statements of operations from January 19, 2011, the date of acquisition. For the period January 19, 2011 through September 30, 2011, the acquired entities contributed $42.6 million to total revenue, $35.3 million to operating expenses, $7.3 million to operating income and $(5.3) million to net income (loss).

On March 11, 2011, we acquired an approximately 364,000 square foot, 16-story, LEED Platinum certified office building located at 100 SW Main Street, in Portland, Oregon ("First & Main"). The purchase price for First & Main was approximately $128.9 million, excluding closing costs of approximately $0.1 million, which are included in other income (expense), net on the statement of operations. The purchase was funded using cash on hand and structured to accommodate a reverse tax deferred exchange in conjunction with the sale of Valencia Corporate Center pursuant to the provisions of Section 1031 of the Code and applicable state revenue and taxation code sections.

On July 1, 2011, we acquired the Lloyd District Portfolio, consisting of approximately 600,000 rentable square feet on more than 16 acres located in the Lloyd District of Portland, Oregon. The Lloyd District Portfolio is comprised of six office buildings within four contiguous blocks, including (i) a condominium interest in the 20-story Lloyd Tower, (ii) the 16-story Lloyd 700 Building and (iii) four low-rise landmark buildings within Oregon Square. The purchase price was approximately $91.6 million, excluding closing costs of approximately $0.1 million, which are included in other income (expense), net on the statement of operations. The purchase was funded using cash on hand. The acquisition was structured to accommodate a possible tax deferred exchange pursuant to the provisions of Section 1031 of the Code and applicable state revenue and taxation code sections.

On September 20, 2011, we acquired the Solana Beach – Highway 101 property, consisting of approximately 1.7 acres located in Solana Beach, California. The property consists primarily of land held for future development. The purchase price was approximately $6.8 million, excluding closing costs of approximately $0.2 million, which are included in other income (expense), net on the statement of operations. The purchase was funded through cash on hand.

The fair values assigned to identifiable intangible assets acquired were based on estimates and assumptions determined by management. Using information available at the time the acquisition closed, we allocated the total consideration to tangible assets and liabilities and identified intangible assets and liabilities. We may adjust the preliminary purchase price allocation after obtaining more information about asset valuations and liabilities assumed. The allocation of the purchase price for First & Main, Lloyd District Portfolio and Solana Beach – Highway 101 was as follows (in thousands):

	First & Main		Lloyd District Portfolio		Solana Beach – Highway 101		Total
Land	$	14,697	$	18,660	$	6,692	$	40,049
Building		102,597		53,325		107		156,029
Land improvements		151		1,444		—		1,595
Tenant improvements		6,991		5,909		11		12,911
Construction in progress		—		723		—		723
Total real estate		124,436		80,061		6,810		211,307
Accounts receivable, net		153		—		—		153
Lease intangibles		9,578		13,164		40		22,782
Prepaid expenses and other assets		296		10		—		306
Total assets	$	134,463	$	93,235	$	6,850	$	234,548
Accounts payable and accrued expenses	$	387	$	188	$	12	$	587
Security deposits payable		—		426		6		432
Other liabilities and deferred credits		—		519		—		519
Lease intangibles		5,199		502		—		5,701
Total liabilities	$	5,586	$	1,635	$	18	$	7,239

We have included the results of operations for First & Main, Lloyd District Portfolio and Solana Beach – Highway 101 in our consolidated statements of operations from the date of acquisition. For the period of acquisition through September 30, 2011, First & Main, Lloyd District Portfolio and Solana Beach – Highway 101 contributed $9.6 million to total revenue, $7.9 million to operating expenses, $1.7 million to operating income and $0.5 million to net income.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of the Waikiki Beach Walk entities, Solana Beach Centre entities, First & Main, Lloyd District Portfolio and Solana Beach – Highway 101 with the historical results of operations of the Company/Predecessor on a pro forma basis, as though the entities had been acquired on January 1, 2010. The pro forma financial information for the nine months ended September 30, 2010, also includes the pro forma results of operations for The Landmark at One Market, which was acquired by the Predecessor on June 30, 2010, as though the entity had been acquired on January 1, 2010. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place on January 1, 2010. The pro forma financial information includes adjustments to depreciation expense for acquired property and equipment, adjustments to amortization charges for acquired intangible assets and liabilities, adjustments to straight-line rent revenue and the removal of the gain on acquisition of the controlling interests of the Solana Beach Centre entities and Waikiki Beach Walk entities for the nine months ended September 30, 2011 and The Landmark at One Market for the nine months ended September 30, 2010.

The following table summarizes the unaudited pro forma financial information (in thousands):

	Nine months ended September 30,
	2011			2010
Total revenue	$	166,575		$	158,003
Total operating expenses		120,689			109,312
Operating income		45,886			48,691
Net loss	$	(26,159	) (1)	$	(993	)

(1) The net loss for the nine months ended September 30, 2011 includes one-time expenses for the early extinguishment of debt and loan transfer and consent fees but excludes the gain on acquisition of the controlling interests in the Solana Beach Centre entities and the Waikiki Beach Walk entities.

Dispositions

On August 30, 2011, we sold Valencia Corporate Center for a sales price of $31.0 million. The property is located in Santa Clarita, California. The decision to sell Valencia Corporate Center was a result of our desire to focus resources on our core, high-barrier-to-entry markets. The sale was completed as a reverse tax deferred exchange in conjunction with the acquisition of First & Main pursuant to the provisions of Section 1031 of the Code and applicable state revenue and taxation code sections. As a result of the sale, Valencia Corporate Center no longer serves as a borrowing base property under our revolving credit facility.

We determined that Valencia Corporate Center became a discontinued operation in the third quarter of 2011. We have, therefore, classified Valencia Corporate Center's net assets, liabilities and operating results as discontinued operations on our balance sheets and our statements of operations for all periods prior to the sale.

Net revenue and net income from the property's discontinued operations were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Net revenue from discontinued operations	$	767	$	1,107	$	3,099	$	3,314
Results from discontinued operations
Net income from discontinued operations		327		44		1,119		232
Gain on sale of real estate from discontinued operations		3,981		—		3,981		—
Total net income from discontinued operations	$	4,308	$	44	$	5,100	$	232