UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 4, 2013
PARKWAY PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland | 1-11533 | 74-2123597 | ||
(State or other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
Bank of America Center, Suite 2400, 390 North Orange Avenue, Orlando FL |
32801 | |
(Address of Principal Executive Offices, including zip code) | (Zip code) |
Registrants telephone number, including area code: (407) 650-0593
Not Applicable
(Former name or former address if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
x | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 8.01 Other Events
As previously disclosed, on September 4, 2013, Parkway Properties, Inc., a Maryland corporation (Parkway), Parkway Properties LP, a Delaware limited partnership (Parkway LP), PKY Masters LP, a Delaware limited partnership and a wholly owned subsidiary of Parkway LP (Merger Sub), Thomas Properties Group, Inc., a Delaware corporation (TPGI), and Thomas Properties Group, L.P. (TPG LP), a Maryland limited partnership, entered into a definitive Agreement and Plan of Merger (the Merger Agreement). Pursuant to the Merger Agreement, TPGI will merge with and into Parkway (the Parent Merger) with Parkway continuing as the surviving entity, and Merger Sub will merge with and into TPG LP (the Partnership Merger and, together with the Parent Merger, the Mergers) with TPG LP continuing as the surviving entity and a wholly owned subsidiary of Parkway LP after the Mergers.
Parkway is filing this Current Report on Form 8-K to provide certain financial information with respect to the proposed Mergers. Specifically, this Current Report on Form 8-K provides: (1) TPGIs audited consolidated financial statements and notes thereto as of December 31, 2012 and 2011, and for each of the years in the three year period ended December 31, 2012, attached herewith as Exhibit 99.1, (2) TPGIs unaudited consolidated financial statements as of June 30, 2013 and for the three and six month periods ended June 30, 2013 and 2012, attached herewith as Exhibit 99.2 and (3) Parkways unaudited pro forma financial statements as of and for the six month period ended June 30, 2013 and for the year ended December 31, 2012, relating to the proposed Mergers, attached herewith as Exhibit 99.3. The information in Exhibits 99.1 and 99.2 was provided by TPGI.
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
The audited consolidated financial statements of Thomas Properties Group, Inc. as of December 31, 2012 and 2011 and for each of the years in the three year period ended December 31, 2012 are filed herewith as Exhibit 99.1 and incorporated in this Item 9.01(a) by reference.
The unaudited consolidated financial statements of Thomas Properties Group, Inc. as of June 30, 2012 and for the three and six month periods ended June 30, 2013 and 2012 are filed herewith as Exhibit 99.2 and incorporated in this Item 9.01(a) by reference.
(b) Pro Forma Financial Information
The unaudited pro forma financial statements of Parkway Properties, Inc. as of and for the six month period ended June 30, 2013 and for the year ended December 31, 2012, giving effect to the Mergers, are filed herewith as Exhibit 99.3 and incorporated in this Item 9.01(b) by reference.
(d) Exhibits
23.1 | Consent of Ernst & Young LLP | |
99.1 | Audited consolidated financial statements of Thomas Properties Group, Inc. as of December 31, 2012 and 2011, and for each of the years in the three year period ended December 31, 2012 | |
99.2 | Unaudited consolidated financial statements of Thomas Properties Group, Inc. as of June 30, 2013 and for the three and six month periods ended June 30, 2013 and 2012 | |
99.3 | Unaudited pro forma financial statements of the Parkway Properties, Inc. as of and for the six month period ended June 30, 2013 and for the year ended December 31, 2012 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: October 4, 2013 | PARKWAY PROPERTIES, INC. | |||||
BY: | /s/ Jeremy R. Dorsett | |||||
Jeremy R. Dorsett | ||||||
Executive Vice President and General Counsel |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use of our report dated March 11, 2013, with respect to the consolidated financial statements of Thomas Properties Group, Inc., included in its Annual Report (Form 10-K) as of December 31, 2012 and 2011, and for each of the years in the three year period ended December 31, 2012, filed with the Securities and Exchange Commission, included herewith and incorporated by reference into this Current Report (Form 8-K) of Parkway Properties, Inc. filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Los Angeles, California
October 3, 2013
Exhibit 99.1
Page | ||
Thomas Properties Group, Inc. and Subsidiaries: |
||
1 | ||
Consolidated Balance Sheets as of December 31, 2012 and 2011 |
2 | |
Consolidated Statements of Operations for the Years ended December 31, 2012, 2011 and 2010 |
3 | |
4 | ||
Consolidated Statements of Cash Flows for the Years ended December 31, 2012, 2011 and 2010 |
5 | |
7 | ||
48 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Thomas Properties Group, Inc.
We have audited the accompanying consolidated balance sheets of Thomas Properties Group, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, equity and noncontrolling interests, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Thomas Properties Group, Inc. and subsidiaries at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Thomas Properties Group, Inc. and subsidiaries internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
March 11, 2013
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
(In thousands, except share data)
December 31, 2012 and 2011
2012 | 2011 | |||||||
ASSETS | ||||||||
Investments in real estate: |
||||||||
Land and improvements |
$ | 33,077 | $ | 33,077 | ||||
Land and improvementsdevelopment properties |
57,944 | 75,067 | ||||||
Buildings and improvements |
321,738 | 308,692 | ||||||
Tenant improvements |
42,917 | 39,004 | ||||||
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|
|
|||||
Total investments in real estate |
455,676 | 455,840 | ||||||
Less accumulated depreciation |
(127,245 | ) | (115,571 | ) | ||||
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|
|||||
Investments in real estate, net |
328,431 | 340,269 | ||||||
Condominium units held for sale |
37,891 | 45,217 | ||||||
Investments in unconsolidated real estate entities |
106,210 | 11,372 | ||||||
Cash and cash equivalents, unrestricted |
76,689 | 79,320 | ||||||
Restricted cash |
11,611 | 10,616 | ||||||
Rents and other receivables, net of allowance for doubtful accounts of $412 and $257 as of December 31, 2012 and 2011, respectively |
1,825 | 1,903 | ||||||
Receivables from unconsolidated real estate entities |
2,347 | 2,918 | ||||||
Deferred rents |
18,994 | 17,866 | ||||||
Deferred leasing and loan costs, net of accumulated amortization of $13,479 and $12,560 as of December 31, 2012 and 2011, respectively |
10,716 | 12,283 | ||||||
Other assets, net |
11,441 | 17,465 | ||||||
Assets associated with land held for sale |
4,837 | 6,294 | ||||||
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Total assets |
$ | 610,992 | $ | 545,523 | ||||
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LIABILITIES AND EQUITY | ||||||||
Liabilities: |
||||||||
Mortgage loans |
$ | 281,375 | $ | 289,523 | ||||
Accounts payable and other liabilities, net |
28,346 | 32,443 | ||||||
Losses and distributions in excess of investments in unconsolidated real estate entities |
10,084 | 2,538 | ||||||
Prepaid rent |
1,784 | 2,116 | ||||||
Deferred revenue |
10,566 | 903 | ||||||
Obligations associated with land held for sale |
| 27 | ||||||
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Total liabilities |
332,155 | 327,550 | ||||||
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Commitments and Contingencies (Note 12) |
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Equity: |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued or outstanding as of December 31, 2012 and 2011 |
| | ||||||
Common stock, $.01 par value, 225,000,000 shares authorized, 46,126,481 and 37,094,995 shares issued and outstanding as of December 31, 2012 and 2011, respectively |
461 | 371 | ||||||
Limited voting stock, $.01 par value, 20,000,000 shares authorized, 12,313,331 shares issued and outstanding as of December 31, 2012 and 2011 |
123 | 123 | ||||||
Additional paid-in capital |
258,780 | 208,473 | ||||||
Retained deficit and dividends, including $- and $20 of other comprehensive income as of December 31, 2012 and 2011, respectively |
(83,635 | ) | (55,472 | ) | ||||
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Total stockholders equity |
175,729 | 153,495 | ||||||
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Noncontrolling interests: |
||||||||
Unitholders in the Operating Partnership |
44,154 | 52,983 | ||||||
Partners in consolidated real estate entities |
58,954 | 11,495 | ||||||
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Total noncontrolling interests |
103,108 | 64,478 | ||||||
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|||||
Total equity |
278,837 | 217,973 | ||||||
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Total liabilities and equity |
$ | 610,992 | $ | 545,523 | ||||
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See accompanying notes to consolidated financial information.
2
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Years Ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Revenues: |
||||||||||||
Rental |
$ | 30,969 | $ | 29,693 | $ | 29,230 | ||||||
Tenant reimbursements |
20,941 | 22,437 | 20,187 | |||||||||
Parking and other |
3,012 | 2,959 | 3,330 | |||||||||
Investment advisory, management, leasing, and development services |
4,583 | 8,520 | 7,703 | |||||||||
Investment advisory, management, leasing, and development servicesunconsolidated real estate entities |
15,688 | 17,862 | 16,470 | |||||||||
Reimbursement of property personnel costs |
5,183 | 5,810 | 5,797 | |||||||||
Condominium sales |
10,240 | 7,700 | 14,984 | |||||||||
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Total revenues |
90,616 | 94,981 | 97,701 | |||||||||
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Expenses: |
||||||||||||
Property operating and maintenance |
24,324 | 24,589 | 25,049 | |||||||||
Real estate and other taxes |
7,536 | 7,469 | 6,914 | |||||||||
Investment advisory, management, leasing, and development services |
12,461 | 12,754 | 12,221 | |||||||||
Reimbursable property personnel costs |
5,183 | 5,810 | 5,797 | |||||||||
Cost of condominium sales |
8,129 | 5,091 | 10,955 | |||||||||
Interest |
16,847 | 17,938 | 19,239 | |||||||||
Depreciation and amortization |
15,701 | 13,622 | 14,128 | |||||||||
General and administrative |
17,749 | 15,434 | 14,224 | |||||||||
Impairment loss |
12,745 | 8,095 | 4,500 | |||||||||
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Total expenses |
120,675 | 110,802 | 113,027 | |||||||||
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Interest income |
74 | 35 | 72 | |||||||||
Equity in net income (loss) of unconsolidated real estate entities |
(3,672 | ) | 19,951 | (1,184 | ) | |||||||
Gain (loss) on sale of real estate |
| 1,258 | | |||||||||
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|||||||
Income (loss) before income taxes and noncontrolling interests |
(33,657 | ) | 5,423 | (16,438 | ) | |||||||
Benefit (provision) for income taxes |
385 | 1,429 | 357 | |||||||||
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|||||||
Net income (loss) |
(33,272 | ) | 6,852 | (16,081 | ) | |||||||
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Noncontrolling interests share of net (income) loss: |
||||||||||||
Unitholders in the Operating Partnership |
7,681 | (1,500 | ) | 4,843 | ||||||||
Partners in consolidated real estate entities |
195 | 508 | (234 | ) | ||||||||
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|||||||
7,876 | (992 | ) | 4,609 | |||||||||
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TPGIs share of net income (loss) |
$ | (25,396 | ) | $ | 5,860 | $ | (11,472 | ) | ||||
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Income (loss) per share-basic and diluted |
$ | (0.61 | ) | $ | 0.16 | $ | (0.34 | ) | ||||
Weighted average common shares outstandingbasic |
41,631,796 | 36,619,558 | 33,684,101 | |||||||||
Weighted average common shares outstandingdiluted |
41,631,796 | 36,865,286 | 33,684,101 |
See accompanying notes to consolidated financial information.
3
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND NONCONTROLLING INTERESTS
(In thousands, except share data)
Years Ended December 31, 2012, 2011 and 2010
Common Stock | Limited Voting Stock | Additional Paid-In |
Accum. | Other Comprehensive |
Noncontrolling | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Income (loss) | Interests | Total | ||||||||||||||||||||||||||||
Balance, December 31, 2009 |
30,878,621 | $ | 308 | 13,813,331 | $ | 138 | $ | 185,344 | $ | (49,320 | ) | $ | (74 | ) | $ | 65,949 | $ | 202,345 | ||||||||||||||||||
Issuance of unvested restricted stock |
100,000 | 1 | | | (1 | ) | | | | | ||||||||||||||||||||||||||
Redemption of operating partnership units |
1,500,000 | 15 | (1,500,000 | ) | (15 | ) | 6,156 | | | (6,156 | ) | | ||||||||||||||||||||||||
Redemption of incentive units |
179,998 | 2 | | | 789 | | | (791 | ) | | ||||||||||||||||||||||||||
Proceeds from sale of common stock, net of offering expenses |
4,284,775 | 43 | | | 15,240 | | | | 15,283 | |||||||||||||||||||||||||||
Amortization of stock-based compensation |
| | | | 477 | | | 195 | 672 | |||||||||||||||||||||||||||
Book-tax difference related to vesting of restricted stock |
| | | | (52 | ) | | | | (52 | ) | |||||||||||||||||||||||||
Other comprehensive income (loss) recognized |
| | | | | | 76 | 31 | 107 | |||||||||||||||||||||||||||
Contributions |
| | | | | | | 5,338 | 5,338 | |||||||||||||||||||||||||||
Net (loss) income |
| | | | | (11,472 | ) | | (4,609 | ) | (16,081 | ) | ||||||||||||||||||||||||
Reimbursement from Noncontrolling interest |
| | | | | | | 179 | 179 | |||||||||||||||||||||||||||
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Balance, December 31, 2010 |
36,943,394 | $ | 369 | 12,313,331 | $ | 123 | $ | 207,953 | $ | (60,792 | ) | $ | 2 | $ | 60,136 | $ | 207,791 | |||||||||||||||||||
Issuance of unvested restricted stock |
151,601 | 2 | | | (2 | ) | | | | | ||||||||||||||||||||||||||
Offering expenses |
| | | | (24 | ) | | | | (24 | ) | |||||||||||||||||||||||||
Amortization of stock-based compensation |
| | | | 546 | | | 185 | 731 | |||||||||||||||||||||||||||
Dividends |
| | | | | (560 | ) | | (186 | ) | (746 | ) | ||||||||||||||||||||||||
Other comprehensive income (loss) recognized |
| | | | | | 18 | 6 | 24 | |||||||||||||||||||||||||||
Contributions |
| | | | | | | 3,345 | 3,345 | |||||||||||||||||||||||||||
Net income (loss) |
| | | | | 5,860 | | 992 | 6,852 | |||||||||||||||||||||||||||
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Balance, December 31, 2011 |
37,094,995 | $ | 371 | 12,313,331 | $ | 123 | $ | 208,473 | $ | (55,492 | ) | $ | 20 | $ | 64,478 | $ | 217,973 | |||||||||||||||||||
Issuance of unvested restricted stock |
199,999 | 2 | | | (2 | ) | | | | | ||||||||||||||||||||||||||
Redemption of incentive units |
135,834 | 1 | | | 531 | | | (532 | ) | | ||||||||||||||||||||||||||
Book-tax difference related to vesting of restricted stock |
| | | | 14 | | | | 14 | |||||||||||||||||||||||||||
Distribution for withholding tax |
| | | | | | | (5 | ) | (5 | ) | |||||||||||||||||||||||||
Proceeds from sale of common stock, net of offering expenses |
8,695,653 | 87 | | | 49,187 | | | | 49,274 | |||||||||||||||||||||||||||
Amortization of stock-based compensation |
| | | | 577 | | | 173 | 750 | |||||||||||||||||||||||||||
Dividends |
| | | | | (2,747 | ) | | (805 | ) | (3,552 | ) | ||||||||||||||||||||||||
Other comprehensive (loss) income recognized |
| | | | | | (20 | ) | 21 | 1 | ||||||||||||||||||||||||||
Contributions |
| | | | | | | 47,654 | 47,654 | |||||||||||||||||||||||||||
Net (loss) income |
| | | | | (25,396 | ) | | (7,876 | ) | (33,272 | ) | ||||||||||||||||||||||||
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Balance, December 31, 2012 |
46,126,481 | $ | 461 | 12,313,331 | $ | 123 | $ | 258,780 | $ | (83,635 | ) | $ | | $ | 103,108 | $ | 278,837 | |||||||||||||||||||
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See accompanying notes to consolidated financial information.
4
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | (33,272 | ) | $ | 6,852 | $ | (16,081 | ) | ||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||||||
Gain on sale of land |
| (1,258 | ) | | ||||||||
Gain on sale of condominiums |
(2,111 | ) | (2,609 | ) | (4,030 | ) | ||||||
Equity in net (income) loss of unconsolidated real estate entities |
3,672 | (19,951 | ) | 1,184 | ||||||||
Deferred rents |
(230 | ) | (150 | ) | (1,428 | ) | ||||||
Deferred taxes (and interest on unrecognized benefits) |
5,710 | (277 | ) | 4,132 | ||||||||
Deferred interest |
25 | 935 | 975 | |||||||||
Depreciation and amortization expense |
15,701 | 13,622 | 14,128 | |||||||||
Allowance for doubtful accounts |
26 | 142 | 626 | |||||||||
Amortization of loan costs |
582 | 750 | 897 | |||||||||
Amortization of above and below market leases, net |
73 | 23 | 2 | |||||||||
Non-cash amortization of share-based compensation |
750 | 731 | 672 | |||||||||
Distributions from operations of unconsolidated real estate entities |
250 | 600 | | |||||||||
Impairment loss |
12,745 | 8,095 | 4,500 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Rents and other receivables |
17 | (331 | ) | (35 | ) | |||||||
Receivables from unconsolidated real estate entities |
571 | 61 | (969 | ) | ||||||||
Deferred leasing costs |
(4,592 | ) | (1,068 | ) | (2,298 | ) | ||||||
Other assets |
(314 | ) | 9 | 871 | ||||||||
Accounts payable and other liabilities |
(4,716 | ) | (2,567 | ) | (3,245 | ) | ||||||
Prepaid rent and deferred revenue |
(233 | ) | 196 | (444 | ) | |||||||
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Net cash provided by (used in) operating activities |
(5,346 | ) | 3,805 | (543 | ) | |||||||
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Cash flows from investing activities: |
||||||||||||
Expenditures for improvements to real estate |
(15,071 | ) | (8,016 | ) | (3,265 | ) | ||||||
Reimbursements of development costs |
| 8,552 | 500 | |||||||||
Proceeds from sale of condominiums |
9,588 | 7,219 | 13,954 | |||||||||
Proceeds from sale of real estate |
2,013 | 4,228 | | |||||||||
Return of capital from unconsolidated real estate entities |
35,639 | 32,267 | 10,970 | |||||||||
Contributions to unconsolidated real estate entities |
(113,340 | ) | (3,763 | ) | (15,575 | ) | ||||||
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Net cash provided by (used in) investing activities |
$ | (81,171 | ) | $ | 40,487 | $ | 6,584 | |||||
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See accompanying notes to consolidated financial information.
5
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(continued)
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
||||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from equity offering, net |
$ | 49,274 | $ | | $ | 15,282 | ||||||
Noncontrolling interest contributions |
47,654 | 3,345 | 5,338 | |||||||||
Payment of dividends to common stockholders and distributions to limited partners of the Operating Partnership |
(3,552 | ) | (746 | ) | | |||||||
Principal payments of mortgage and other secured loans |
(10,693 | ) | (33,196 | ) | (19,091 | ) | ||||||
Proceeds from mortgage and other secured loans |
2,520 | 21,248 | 410 | |||||||||
Payment of loan costs |
(214 | ) | (439 | ) | (268 | ) | ||||||
Change in restricted cash |
(1,103 | ) | 2,453 | (1,284 | ) | |||||||
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Net cash provided by (used in) financing activities |
83,886 | (7,335 | ) | 387 | ||||||||
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|||||||
Net increase (decrease) in cash and cash equivalents |
(2,631 | ) | 36,957 | 6,428 | ||||||||
Cash and cash equivalents at beginning of year |
79,320 | 42,363 | 35,935 | |||||||||
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Cash and cash equivalents at end of year |
$ | 76,689 | $ | 79,320 | $ | 42,363 | ||||||
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Supplemental disclosure of cash flow information: |
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Cash paid for interest, net of capitalized interest of $-, $27 and $-, for the years ended December 31, 2012, 2011 and 2010, respectively |
$ | 16,275 | $ | 16,427 | $ | 17,247 | ||||||
Cash paid for income taxes, net of refunds received, for the years ended December 31, 2012, 2011, and 2010, respectively |
(46 | ) | (219 | ) | 639 | |||||||
Supplemental disclosure of non-cash investing and financing activities: |
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Noncontrolling interest adjustment |
$ | | $ | | $ | (179 | ) | |||||
Investments in real estate included in accounts payable and other liabilities |
570 | 2,906 | (823 | ) | ||||||||
Decrease in investments in real estate and accumulated depreciation for removal of fully amortized improvements |
555 | 736 | 1,041 | |||||||||
Other comprehensive income |
1 | (24 | ) | 107 | ||||||||
Decrease in leasing costs and accumulated amortization for removal of fully amortized leasing costs |
472 | 291 | 1,385 |
See accompanying notes to consolidated financial information.
6
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
Years Ended December 31, 2012, 2011 and 2010
(Tabular amounts in thousands, except share and per share amounts)
1. Organization and Description of Business
The terms Thomas Properties, TPG, us, we, our and the Company as used in this report refer to Thomas Properties Group, Inc. together with our Operating Partnership, Thomas Properties Group, L.P. (the Operating Company).
We own, manage, lease, acquire and develop real estate, consisting primarily of office properties and related parking garages, located in Southern California; Sacramento, California; Philadelphia, Pennsylvania; Northern Virginia; Houston, Texas and Austin, Texas.
We were incorporated in the State of Delaware on March 9, 2004. On October 13, 2004, we completed our initial public offering. Our operations are carried on through our Operating Partnership of which we are the sole general partner. The Operating Partnership holds our direct and indirect interests in real estate properties, and it carries on our investment advisory, property management, leasing and real estate development operations. As of December 31, 2012, we held a 78.7% interest in the Operating Partnership which we consolidate, as we have control over the major decisions of the Operating Partnership.
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7
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
As of December 31, 2012, we were invested in the following real estate properties:
Property |
Type |
Location | ||
Consolidated properties: |
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One Commerce Square |
High-rise office | Philadelphia Central Business District, Pennsylvania (PCBD) | ||
Two Commerce Square |
High-rise office | PCBD | ||
Murano |
Residential condominiums held for sale | PCBD | ||
Four Points Centre (1) |
Suburban office; Undeveloped land; Office/Retail/Research and Development/Hotel/ Residential | Austin, Texas | ||
Campus El Segundo (2) |
Developable land; Site infrastructure complete; Office/Retail/ Research and Development/Hotel | El Segundo, California | ||
Unconsolidated properties: |
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TPG/CalSTRS, LLC (TPG/CalSTRS): |
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City National Plaza |
High-rise office | Los Angeles Central Business District, California | ||
Reflections I |
Suburban office | Reston, Virginia | ||
Reflections II |
Suburban office | Reston, Virginia | ||
San Felipe Plaza |
High-rise office | Houston, Texas | ||
CityWestPlace |
Suburban office and undeveloped land | Houston, Texas | ||
Fair Oaks Plaza |
Suburban office | Fairfax, Virginia | ||
TPG/CalSTRS Austin, LLC (3): |
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San Jacinto Center |
High-rise office | Austin Central Business District, Texas, (ACBD) | ||
Frost Bank Tower |
High-rise office | ACBD | ||
One Congress Plaza |
High-rise office | ACBD | ||
One American Center |
High-rise office | ACBD | ||
300 West 6th Street |
High-rise office | ACBD | ||
Park Centre (4) |
Suburban Office | Austin, Texas | ||
Great Hills Plaza (4) |
Suburban Office | Austin, Texas | ||
Westech 360 I-IV (4) |
Suburban Office | Austin, Texas |
(1) | Certain undeveloped land parcels are being targeted for sale. |
(2) | The Company is under contract to sell all 23.9 acres including a marketing center and athletic facility naming rights. The buyer is performing due diligence, and has the right to cancel the contract. |
(3) | In September 2012, TPG/CalSTRS Austin, LLC acquired eight properties formerly owned by TPG-Austin Portfolio Syndication Partners JV LP (Austin Joint Venture Predecessor), a venture among Lehman Brothers Holdings, Inc (50%), an offshore sovereign wealth fund (25%) and TPG/CalSTRS (25%). See Note 3 Unconsolidated Real Estate Entities for further discussion. |
(4) | These properties are under contract to be sold. The buyer is performing due diligence, and has the right to cancel the contract. |
The City National Plaza property includes an off-site garage that provides parking for City National Plaza and other properties. The office properties typically include on-site parking, retail and storage space.
As of December 31, 2012, we wholly own both Four Points Centre and Campus El Segundo.
8
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
We have the responsibility for the day-to-day operations of the California Environmental Protection Agency (CalEPA) building, but have no ownership interest in the property. We provide investment advisory services for the California State Teachers Retirement System (CalSTRS) with respect to two properties that are wholly owned by CalSTRS 800 South Hope Street (Los Angeles, CA) and 1835 Market Street (Philadelphia, PA). In addition, we provide property management, leasing and development services to 800 South Hope Street and 1835 Market Street; two properties wholly owned by an affiliate of Lehman Brothers Inc., 816 Congress (Austin, TX) and Austin Centre (Austin, TX); and the properties owned by the TPG/CalSTRS and TPG/CalSTRS Austin, LLC joint ventures.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Combination
We evaluate each entity to determine if the entity is deemed a variable interest entity (VIE), and if the Company is the primary beneficiary of the VIE based on whether the Company has both (i) the power to direct those matters that most significantly impact the activities of the VIE and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our determination of the primary beneficiary of a VIE considers all relationships between us and the VIE, including management agreements. When an entity is not deemed to be a VIE, the Company considers the provisions of the accounting standards to determine whether a general partner, or the general partners as a group, controls a limited partnership or similar entity when the limited partners have certain rights. The Company consolidates (i) entities that are VIEs and of which the Company is deemed to be the primary beneficiary and (ii) entities that are non-VIEs and controlled by the Company and in which the limited partners neither have the ability to dissolve the entity or remove the Company without cause nor any substantive participating rights.
We continuously reassess our determination of whether an entity is a VIE and who the primary beneficiary is, and whether or not the limited partners in an entity have substantive rights, more particularly if certain events occur that are likely to cause a change in the original determinations. There have been no changes during 2012 in previous conclusions about whether an entity qualifies as a VIE or whether we are the primary beneficiary of any previously identified VIE.
The equity method of accounting is utilized to account for investments in real estate entities that are VIEs and of which the Company is not deemed to be the primary beneficiary and entities that are non-VIEs which the Company does not control, but over which the Company has the ability to exercise significant influence. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
Commerce SquareBrandywine
During the year ended December 31, 2010, subsidiaries of Thomas Properties and Brandywine Operating Partnership, L.P. (Brandywine) entered into two partnerships with respect to our One Commerce Square and Two Commerce Square properties. Brandywine has contributed $25.0 million of preferred equity in return for a 25% limited partnership interest in each property. As of December 31, 2012, Brandywine had contributed $19.1 million. Subsequent to December 31, 2012, the commitment was fully funded. The preferred equity, which earns a preferred return of 9.25% has been invested in a value-enhancement program designed to increase rental rates and occupancy at Commerce Square. The 25% preferred equity interests in One Commerce Square and Two Commerce Square, owned by Brandywine are reflected under the Noncontrolling Interests caption on our consolidated balance sheets.
One Commerce Square and Two Commerce Square are deemed to be variable interest entities for which we are considered the primary beneficiary. The total amount of anticipated fees earned from the service contracts by our Company is expected to be significant relative to the total amount of the properties anticipated economic performance, and are also expected to absorb a significant amount of the variability associated with the properties anticipated economic performance. Therefore, the benefits our Company receives from the service contracts puts us in a position where the combined economic benefits of our 75% equity interest are significantly greater than our voting interest. We have the power to direct the activities that most significantly impact the economic performance of One Commerce Square and Two Commerce Square and we have the obligation to absorb losses or the right to receive benefits of these properties that could potentially be significant to the properties.
9
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Murano
We also consolidate our Murano residential condominium project which we control. Our unaffiliated partners interest is reflected on our consolidated balance sheets under the Noncontrolling Interests caption. Our partner has a stated ownership interest of 27%. After full repayment of the Murano mortgage loan, which has a balance of $6.9 million at December 31, 2012, net proceeds from the project will be distributed, to the extent available, based on an order of preferences described in the partnership agreement. The Company may receive distributions, if any, in excess of our stated 73% ownership interest if certain return thresholds are met.
AustinMadison International Realty
TPG Austin Partner, LLC was deemed to be variable interest entity because the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by the members, TPG has a controlling financial interest in this entity and the members have disproportionate voting rights. TPG is considered the primary beneficiary because it has the power to direct the activities that most significantly impact the economic performance of entity. The 33.3% equity interest in TPG Austin Partner, LLC owned by Madison International Realty (Madison) is reflected under the Noncontrolling Interests caption on our consolidated balance sheets. We consolidate this entity, which has a 50% interest in TPG/CalSTRS Austin, LLC, and which is further discussed in Note 3, because we have a controlling financial interest.
Refer to Note 3 for discussion of the TPG/CalSTRS, TPG/CalSTRS Austin LLC, and the Austin Portfolio Joint Venture Predecessor, which were determined to be variable interest entities for which we are not considered the primary beneficiary.
Included in total assets on TPGs consolidated balance sheets are the following assets for each listed investment in which a noncontrolling interest is held by an unaffiliated partner. The assets of each listed entity can only be used to settle the liabilities of that entity as follows (in thousands):
As of December 31, | ||||||||
2012 | 2011 | |||||||
One Commerce Square |
$ | 133,987 | $ | 132,470 | ||||
Two Commerce Square |
142,436 | 137,003 | ||||||
Murano |
37,687 | 44,715 | ||||||
TPG Austin Partner, LLC |
106,031 | | ||||||
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$ | 420,141 | $ | 314,188 | |||||
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Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less when acquired.
Restricted Cash
Restricted cash consists of security deposits from tenants and deposits from prospective condominium buyers as well as funds required under the terms of certain secured notes payable. There are restrictions on our ability to withdraw these funds other than for their specified usage. See Note 4 for additional information on restrictions under the terms of certain secured notes payable.
Investments in Real Estate
Investments in real estate are stated at cost, less accumulated depreciation, amortization and impairment charges. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:
Buildings |
40 to 50 years | |
Building improvements |
5 to 40 years | |
Tenant improvements |
Shorter of the useful lives or the terms of the related leases |
10
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Improvements and replacements are capitalized when they extend the useful life, increase capacity or improve the efficiency of the asset. Repairs and maintenance are charged to expense as incurred.
Costs related to the acquisition, development, construction and improvement of properties are capitalized. Interest, real estate taxes, insurance and other development related costs incurred during construction periods are capitalized and depreciated on the same basis as the related assets. Included in investments in real estate is capitalized interest of $6.8 million and $17.1 million as of December 31, 2012 and 2011, respectively. There was $0.03 million interest capitalized for the year ended December 31, 2011. There was no interest capitalized for the year ended December 31, 2012.
FASB ASC 805-10, Business Combinations (ASC 805), requires a company to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity to be measured at their fair values as of the acquisition date. ASC 805-10 also requires companies to recognize the fair value of assets acquired, the liabilities assumed and any noncontrolling interest in acquisitions of less than a one hundred percent interest when the acquisition constitutes a change in control of the acquired entity. In addition, ASC 805-10 requires that acquisition-related costs and restructuring costs be recognized separately from the business combination and expensed as incurred. Refer to Purchase Accounting for Acquisition of Interests in Real Estate Entities elsewhere in this Note 2 for further details.
We consider assets to be held for sale pursuant to the provisions of FASB ASC 360, Property, Plant and Equipment (ASC 360). We evaluate the held for sale classification of real estate owned each quarter.
Unconsolidated Real Estate Entities
Investments in unconsolidated real estate entities are accounted for using the equity method of accounting whereby our investments in partnerships and limited liability companies are recorded at cost and the investment accounts are adjusted for our share of the entities income or loss and for distributions and contributions.
We use the equity method to account for our unconsolidated real estate entities since we have significant influence, but not control over the entities, and we are not considered to be the primary beneficiary.
Impairment of Long-Lived Assets
We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. We use the equity method of accounting to account for investments in real estate entities over which we have significant influence, but not control over major decisions. In these situations, the unit of account for measurement purposes is the equity investment and not the real estate. Accordingly, if our joint venture investments meet the other-than-temporary criteria of FASB ASC 323, InvestmentsEquity Method and Joint Ventures (ASC 323), we would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of our investment.
We generally estimate the fair value of rental properties utilizing a discounted cash flow analysis, which is a level 3 valuation under FASB ASC 820, Fair Value Measurements and Disclosures (ASC 820), that includes projections of future revenues, expenses and capital improvement costs, similar to the income approach that is commonly utilized by appraisers. We also use quoted prices for identical instruments in active markets (level 1), and quoted prices for similar instruments in active and/or inactive markets (level 2) as part of our fair value considerations under ASC 820.
For the year ended December 31, 2012, we recorded a $12.0 million impairment charge to reduce the book value of Campus El Segundo to its estimated fair value which was based on the pending contract price to sell this development project and is considered a level 1 valuation. Additionally, we recorded a $0.7 million impairment charge to reduce the book value of certain Four Points Centre land parcels to estimated net sales proceeds under pending contracts to sell these land parcels which were also considered level 1 valuations.
11
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
For the year ended December 31, 2011, we recorded an $8.0 million impairment charge representing the balance of the capitalized expenditures for the MetroStudio@Lankershim project. This was a potential development site in Los Angeles, California. We received a breakup fee of $9.0 million from NBCU Universal (NBCU) in connection with the termination of this project, which consisted of a $0.5 million credit related to a previous payment by NBCU to TPG and a lump sum payment of $8.5 million paid in the fourth quarter of 2011. Additionally, the consolidated net income for the year ended December 31, 2011 included a $0.1 million impairment charge related to Four Points Centre to reflect the fair value of a retail building that was held for sale. The sale closed in January 2012, and we received net proceeds of $1.1 million.
Included in the consolidated net losses for the year ended December 31, 2010 , are pre-tax, non-cash impairment charges of $4.5 million , related to our Murano condominium project whose units are held for sale. We are required to record the condominium units at the lower of the carrying amount or estimated fair value as the condominium units meet the held for sale criteria of ASC 360. The impairment charge is included in the Impairment loss line item in our consolidated statements of operations. There were no corresponding impairment charges for the Murano for the years ended December 31, 2012 and 2011.
Also included in Equity in net income (loss) of unconsolidated real estate entities in our consolidated statements of operations for the years ended December 31, 2012 and 2011 are pre-tax, non-cash impairment charges of $0.6 million and $5.1 million, respectively, related to our joint venture investments summarized in the table below. There was no corresponding non-cash impairment charge for the year ended December 31, 2010. We recorded our share of the impairment loss at the joint venture level as these investments met the other-than-temporary impairment criteria of ASC 323.
Summary of impairment charges at unconsolidated real estate entities (in thousands except square footage amounts):
Property |
Location | Rentable Square Feet (unaudited) |
Percent Leased |
Thomas Properties Percentage Interest |
Impairment Charge |
Thomas Properties Share of Impairment Charge (1) |
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As of and for the year ended December 31, 2012: |
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Fair Oaks Plaza |
Fairfax, VA | 179,688 | 84.9 | % | 25.0 | % | $ | 2,400 | $ | 600 | ||||||||||||
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As of and for the year ended December 31, 2011: |
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Brookhollow Central IIII (2) |
Houston, TX | 806,004 | 68.2 | % | 25.0 | % | $ | 7,773 | $ | 1,943 | ||||||||||||
Fair Oaks Plaza |
Fairfax, VA | 179,688 | 86.6 | 25.0 | 6,200 | 1,550 | ||||||||||||||||
Reflections II (3) |
Reston, VA | 64,253 | 100.0 | 25.0 | 6,400 | 1,600 | ||||||||||||||||
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$ | 20,373 | $ | 5,093 | |||||||||||||||||||
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(1) | Included in Equity in net income (loss) of unconsolidated real estate entities in the Consolidated Statement of Operations. |
(2) | Property sold in January 2012. |
(3) | The sole tenant that occupied the property in 2011 vacated the building in 2012, and as of December 31, 2012, the property is vacant. |
Deferred Leasing and Loan Costs
Deferred leasing commissions and other direct costs associated with the acquisition of tenants are capitalized and amortized on a straight-line basis over the terms of the related leases. Costs associated with unsuccessful leasing opportunities are expensed. Leasing costs, net of related amortization, totaled $10.0 million and $11.2 million as of December 31, 2012 and 2011, respectively, and are included in deferred leasing and loan costs, net of accumulated amortization, in the accompanying consolidated balance sheets. For the years ended 2012, 2011 and 2010, amortization of leasing costs were $3.0 million, $2.2 million, and $2.3 million respectively.
Loan costs are capitalized and amortized to interest expense over the terms of the related loans using a method that approximates the effective-interest method. Loan costs, net of related amortization, totaled $0.7 million and $1.1 million as of December 31, 2012 and 2011, respectively, and are included in deferred leasing and loan costs, net of accumulated amortization, in the accompanying consolidated balance sheets.
Deferred leasing and loan costs also include the carrying value of acquired in-place leases, which are discussed below.
12
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Purchase Accounting for Acquisition of Interests in Real Estate Entities
Purchase accounting was applied, on a pro rata basis, to the assets and liabilities related to real estate entities for which we acquired interests, based on the percentage interest acquired. For purchases of additional interests that were consummated subsequent to January 1, 2009, the effective date of FASB ASC 805, Business Combinations, the acquired tangible assets, consisting of land, building, tenant and site improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, are recorded based in each case on their fair values.
The fair value of the tangible assets of an acquired property (which includes land, building, tenant and site improvements) is determined by valuing the property as if it were vacant, and the as-if-vacant value is then recorded to land, building, tenant and site improvements based on managements determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute leases including leasing commissions, legal and other related costs.
In recording the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) managements estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values, included in other assets, are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values, included in other liabilities, are accreted as an increase to rental income over the terms in the respective leases. As of December 31, 2012 and 2011, we had an asset related to above market leases of $0.2 million and $0.4 million, respectively, net of accumulated amortization of $1.7 million and $1.5 million, respectively, and a liability related to below market leases of $0.1 million and $0.3 million, respectively, net of accumulated accretion of $1.5 million and $1.5 million, respectively. The weighted average amortization period for our above and below market leases was approximately 1.5 years and 3.2 years, respectively as of December 31, 2012 compared to 2.2 years and 2.4 years for the above and below market leases as of December 31, 2011.
The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is recorded between in-place lease values and tenant relationships based on managements evaluation of the specific characteristics of each tenants lease; however, the value of tenant relationships has not been separated from in-place lease value for the additional interests in real estate entities acquired by us because such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in recording material amounts to the value of tenant relationships, an amount would be separately recorded and amortized over the estimated life of the relationship. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to depreciation and amortization expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off.
The table below presents the expected amortization (accretion) related to the acquired in-place lease value and acquired above and below market leases at December 31, 2012 (in thousands):
2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | ||||||||||||||||||||||
Amortization expense: |
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Acquired in-place lease value |
$ | 313 | $ | 213 | $ | 204 | $ | 191 | $ | 189 | $ | 304 | $ | 1,414 | ||||||||||||||
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Above market leases |
$ | 147 | $ | 26 | $ | 18 | $ | | $ | | $ | | $ | 191 | ||||||||||||||
Below market leases |
(33 | ) | (27 | ) | (23 | ) | (22 | ) | (19 | ) | | (124 | ) | |||||||||||||||
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$ | 114 | $ | (1 | ) | $ | (5 | ) | $ | (22 | ) | $ | (19 | ) | $ | | $ | 67 | ||||||||||
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13
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Noncontrolling Interests and Mandatorily Redeemable Financial Instruments
In accordance with ASC 810, the Company reports arrangements with noncontrolling interests as a component of equity separate from the parents equity. The Company accounts for purchases or sales of equity interests that do not result in a change in control as equity transactions. In addition, net income attributable to the noncontrolling interest is included in consolidated net income on the face of the consolidated statement of operations and, upon a gain or loss of control, the interest purchased or sold, as well as any interest retained, is recorded at its estimated fair value with any gain or loss recognized in earnings.
Accounting for mandatorily redeemable financial instruments, among other things, requires that in specific instances they are classified as liabilities and recorded at their estimated settlement value each reporting period. Certain consolidated joint ventures of the Company have limited-lives and are not considered to be mandatorily redeemable upon final or other specified liquidation events. As of December 31, 2012, the Company has no mandatorily redeemable financial instruments.
Noncontrolling Interests of Unitholders in the Operating Partnership
Noncontrolling interests of unitholders in the Operating Partnership represent the interests in the Operating Partnership units which are held primarily by entities affiliated with Mr. Thomas. The ownership percentage of the noncontrolling interests is determined by dividing the number of Operating Partnership units by the total number of shares of common stock and Operating Partnership units outstanding. Net income (loss) is allocated based on the ownership percentages. The issuance of additional shares of common stock or Operating Partnership units results in changes to the noncontrolling interests of the Operating Partnership percentage as well as the total net assets to the Company. As a result, all common transactions result in an allocation between equity and noncontrolling interests of the Operating Partnership in the accompanying consolidated balance sheets to account for the change in the noncontrolling interests of the Operating Partnership ownership percentage as well as the change in total net assets of the Company.
Noncontrolling Interests of Partners in Consolidated Real Estate Entities
Noncontrolling interest of partners in consolidated real estate entities represents the other partners proportionate share of equity in the partnerships and limited liability companies that we consolidate. Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the partnership and limited liability company agreements.
Revenue Recognition
All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases. The impact of the straight line rent adjustment increased revenue by $0.2 million, $0.1 million, and $1.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. Additionally, the net impact of the amortization of acquired above market leases and acquired below market leases decreased revenue by $72,000, $22,800, and $2,000 for the years ended December 31, 2012, 2011 and 2010, respectively. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in deferred rents in the accompanying consolidated balance sheets and contractually due but unpaid rents are included in rents and other receivables. We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required rent payments. The computation of this allowance is based on the tenants payment history and current credit status, as well as certain industry or specific credit considerations. If estimates of collectability differ from the cash received, then the timing and amount of our reported revenue could be impacted. The credit risk is mitigated by the high quality of the existing tenant base, reviews of prospective tenants risk profiles prior to lease execution and continual monitoring of our tenant portfolio to identify potential problem tenants.
Tenant reimbursements for real estate taxes, common area maintenance and other recoverable costs are recognized in the period that the expenses are incurred. Amounts allocated to tenants based on relative square footage are included in the tenant reimbursements caption on the consolidated statements of operations. Revenues generated from requests from tenants, which result in over-standard usage of services are directly billed to the tenants and are also included in the tenant reimbursements caption on the consolidated statements of operations. Lease termination fees, which are included in other income in the accompanying consolidated statements of operations, are recognized when the related leases are canceled and we have no continuing obligation to provide services to such former tenants.
14
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
We recognize gains on sales of real estate when the recognition criteria in FASB ASC 360-20-40, Property, Plant and Equipment, subsection Real Estate Sales have been met, generally at the time title is transferred and we no longer have substantial continuing involvement with the real estate asset sold. If the criteria for profit recognition under the full-accrual method are not met, we defer gain recognition and account for the continued operations of the property by applying the deposit or percentage of completion method, as appropriate, until the appropriate criteria are met.
TPGs redemption of a 49% partnership interest in 2121 Market Street did not meet the criteria for profit recognition under the full-accrual method as described in FASB ASC 360-20-40-3 as a result of the guarantee provided by TPG of up to $14.0 million on a mortgage loan secured by a first trust deed on the property. As such, a $9.6 million deferred gain related to this transaction is reflected in the Deferred Revenue caption on our consolidated balance sheets.
We have one high-rise condominium project for which we used the percentage of completion accounting method to recognize sales revenue and costs during the construction period, up through and including June 30, 2009. Commencing with the third quarter of 2009, we applied the deposit method of accounting to recognize costs and sales. Under the provisions of FASB ASC 360-20, Property, Plant and Equipment subsection Real Estate and Sales, revenue and costs for projects are recognized when all parties are bound by the terms of the contract, all consideration has been exchanged, any permanent financing for which the seller is responsible has been arranged and all conditions precedent to closing have been performed. This results in profit from the sale of condominium units recognized at the point of settlement as compared to the point of sale. Revenue is recognized on the contract price of individual units. Total estimated costs, net of impairment charges, are allocated to individual units which have closed on a relative value basis. Total estimated revenue and construction costs are reviewed periodically, and any change is applied to current and future periods.
Forfeited customer deposits are recognized as revenue in the period in which we determine that the customer will not complete the purchase of the condominium unit and when we determine that we have the right to keep the deposit. There were no forfeitures in for the years ended December 31, 2012, 2011 and 2010.
Investment advisory fees are based on either a percentage of net operating income earned by a property under management or a percentage of the real estate under management, as measured on a fair value basis, and are recorded on a monthly basis as earned. Property management fees are based on a percentage of the revenue earned by a property under management and are recorded on a monthly basis as earned. Generally, 50% of leasing fees are recognized upon the execution of the lease and the remainder upon tenant occupancy unless significant future contingencies exist. Development fees are recognized as the real estate development services are rendered using the percentage-of-completion method of accounting based on total project costs incurred to total estimated costs.
Equity Offering Costs
Underwriting commissions and costs and expenses from our offerings are reflected as a reduction to additional paid-in-capital. In addition, share registration expenses related to the redemption of incentive units as well as other costs of raising capital are reflected as a reduction to additional paid-in-capital.
Income Taxes
We account for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities, as measured by applying currently enacted tax laws.
FASB ASC 740-10-30-17 Accounting for Income Taxes subsection Initial Measurement requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. Future realization of the deferred tax asset is dependent on the reversal of existing taxable temporary differences, carryback potential, tax-planning strategies and on us generating sufficient taxable income in future years. As of the years ended December 31, 2012 and 2011, the Company recorded a full valuation allowance of $17.7 million and $9.6 million, respectively, on its net deferred tax assets in excess of its liability for unrecognized tax benefits, due to uncertainty of future realization.
FASB ASC 740-10-25 Accounting for Income Taxes subsection Recognition clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements in accordance with FASB ASC 740. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Earnings (loss) per share
Basic earnings per share, or EPS, is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share.
On January 1, 2009, the Company adopted FASB ASC 260-10-45, Earnings Per Share, which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing basic earnings per share under the two-class method. The two-class method is an earnings allocation method for calculating earnings per share when a companys capital structure includes either two or more classes of common stock or common stock and participating securities. Basic earnings per share under the two-class method is calculated based on dividends declared on common shares and other participating securities (distributed earnings) and the rights of participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends accruing during the period. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding participating securities. Basic earnings per share represents the summation of the distributed and undistributed earnings per share class divided by the total number of shares.
Stock-based Compensation
We recognize stock based compensation in accordance with FASB ASC 718, CompensationStock Compensation (ASC 718). In accordance with ASC 718, we determine the fair value of the stock based compensation grants on the respective grant dates, and recognize to expense the fair value of the grants over the employees requisite service periods, which are generally the vesting periods. Our stock based compensation grants include grants of incentive partnership units, restricted stock and stock options. The fair value of incentive partnership units and restricted stock are generally based on the fair value of the Companys common stock price on the date of grant. Certain of our incentive partnership units and restricted stock grants include performance and market based conditions. Performance based targets are based on individual employee and Company targets, and market based conditions are based on the performance of our stock price. We obtain third party valuations to determine the fair values of the respective performance and market condition based grants. We used the Black-Scholes option pricing model to determine the fair value of our stock options granted in prior years.
Managements Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
We have identified certain critical accounting policies that affect managements more significant judgments and estimates used in the preparation of the consolidated financial statements. On an ongoing basis, we evaluate estimates related to critical accounting policies, including those related to revenue recognition and the allowance for doubtful accounts receivable and investments in real estate and asset impairment. The estimates are based on information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances.
We must make estimates related to the collectability of accounts receivable related to minimum rent, deferred rent, expense reimbursements, lease termination fees and other income. We specifically analyze accounts receivable and historical bad debts, tenant concentrations, tenant creditworthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on our net income, because a higher bad debt allowance would result in lower net income.
We are required to make subjective assessments as to the useful lives of the properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate such investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate, including real estate held by the unconsolidated real estate entities accounted for using the equity method. These assessments have a direct impact on our net income because recording an impairment loss results in a negative adjustment to net income.
16
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
We are required to make subjective assessments as to the fair value of assets and liabilities in connection with purchase accounting related to interests in real estate entities acquired by us. These assessments have a direct impact on our net income subsequent to the acquisition of the interests as a result of depreciation and amortization being recorded on these assets and liabilities over the expected lives of the related assets and liabilities. We estimate the fair value of rental properties utilizing a discounted cash flow analysis, which is a level 3 valuation under ASC 820, that includes projections of future revenues, expenses and capital improvement costs, similar to the income approach that is commonly utilized by appraisers.
Recent Accounting Pronouncements
Changes to U.S. generally accepted accounting principles (GAAP) are established by the FASB in the form of accounting standards updates (ASUs) to the FASBs Accounting Standards Codification. We consider the applicability and impact of all ASUs. Newly issued ASUs not listed below are expected to have no impact on our consolidated financial position and results of operations, because either the ASU is not applicable or the impact is expected to be immaterial.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (ASU No. 2011-04). ASU No. 2011-04 provides a consistent definition of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 was effective for the Company beginning January 1, 2012. The adoption of this update did not have a material impact on our financial position or results of operations.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU No. 2011-05). ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of stockholders equity. It requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 (ASU No. 2011-12), to defer the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. All other provisions of this update, which are to be applied retrospectively, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not have any material transactions resulting in reportable comprehensive income (loss).
In December 2011, the FASB issued ASU 2011-10, Derecognition of in Substance Real Estatea Scope Clarification (Topic 360) (ASU 2011-10). This ASU modifies ASC 360-20, which specifies circumstances under which the parent (reporting entity) of an in substance real estate entity derecognizes that in substance real estate. Generally, if the parent ceases to have a controlling financial interest (as described under ASC 810-10) in the subsidiary as a result of a default on the subsidiarys nonrecourse debt, then the subsidiarys in substance real estate and related debt, as well as the corresponding results of operations, will continue to be included in the consolidated financial statements and not be removed from the consolidated results until legal title to the real estate is transferred. ASU 2011-10 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. The adoption of ASU 2011-10 did not have a material effect on our financial position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation for unconsolidated real estate entities and for activity associated with real estate held for disposition, with no effect to previously reported net income and equity.
Segment Disclosure
FASB ASC 280, Segment Reporting, established standards for disclosure about operating segments and related disclosures about products and services, geographic areas and major customers. We currently operate in one operating segment: the acquisition, development, ownership, and management of commercial real estate. Additionally, we operate in one geographic area: the United States.
17
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Our office portfolio includes revenues from the rental of office space to tenants, parking, rental of storage space and other tenant services.
Concentration of Credit Risk
Financial instruments that subject us to credit risk consist primarily of cash and accounts receivable. We maintain our unrestricted cash and restricted cash on deposit with high quality financial institutions. Some account balances exceed Federal Deposit Insurance Corporation (FDIC) insurance coverage or are not eligible for FDIC insurance coverage, and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of or not covered by FDIC insurance. Our cash equivalents are typically invested in AAA-rated short-term instruments, which provide daily liquidity.
We have two operating properties and one unconsolidated operating property located in downtown Philadelphia, Pennsylvania. In addition, the Murano residential high-rise project consists of condominium units held for sale in downtown Philadelphia, Pennsylvania. The ability of the tenants to honor the terms of their respective leases, and the ability of prospective buyers to close on the acquisition of a condominium unit, is dependent upon the economic, regulatory and social factors affecting the communities in which the tenants operate and buyers reside.
We generally require either a security deposit, letter of credit or a guarantee from our tenants. We typically require a 15% cumulative deposit of prospective buyers of our Murano condominium project, which is essentially non-refundable except in cases of our non-performance.
18
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
3. Unconsolidated Real Estate Entities
The unconsolidated real estate entities include our share of the entities that own 2121 Market Street, the TPG/CalSTRS properties, TPG/CalSTRS Austin, LLC properties and the Austin Portfolio Joint Venture Predecessor properties. TPG/CalSTRS owns the following properties as of December 31, 2012:
| City National Plaza (acquired January 2003) |
| Reflections I (acquired October 2004) |
| Reflections II (acquired October 2004) |
| San Felipe Plaza (acquired August 2005) |
| CityWestPlace land (acquired June 2006) |
| CityWestPlace (acquired June 2006) |
| Fair Oaks Plaza (acquired January 2007) |
The following properties were disposed by TPG/CalSTRS during 2011 and 2012:
| Four Falls Corporate Center (acquired March 2005, disposed of October 2011) |
| Oak Hill Plaza (acquired March 2005, disposed of October 2011) |
| Walnut Hill Plaza (acquired March 2005, disposed of October 2011) |
| 2500 CityWest and two adjacent land parcels (acquired August 2005, disposed of November 2011) |
| Centerpointe I and II (acquired January 2007, disposed of December 2011) |
| Brookhollow Central I, II and III (acquired August 2005, disposed of January 2012) |
| CityWestPlace landcertain land parcels (acquired June 2006, disposed of November 2012) |
TPG Austin Partner, LLC, a limited liability company formed in September 2012 by TPG and Madison, owns a 50% interest in TPG/CalSTRS Austin, LLC, which owns the following properties that were acquired from Austin Joint Venture Predecessor:
| San Jacinto Center (acquired September 2012) |
| Frost Bank Tower (acquired September 2012) |
| One Congress Plaza (acquired September 2012) |
| One American Center (acquired September 2012) |
| 300 West 6th Street (acquired September 2012) |
| Park Centre (acquired September 2012) |
| Great Hills Plaza (acquired September 2012) |
| Westech 360 I-IV (acquired September 2012) |
The following properties were disposed by the Austin Joint Venture Predecessor in 2012:
| Research Park Plaza I & II (acquired June 2007, disposed of July 2012) |
| Stonebridge Plaza II (acquired June 2007, disposed of July 2012) |
Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the partnership and limited liability company agreements. Following are the stated ownership percentages, prior to any preferred or special allocations, as of December 31, 2012.
2121 Market Street |
1.0 | % | ||
TPG/CalSTRS Austin, LLC (1) |
50.0 | % | ||
TPG/CalSTRS: |
||||
City National Plaza |
7.9 | % | ||
All properties, excluding City National Plaza |
25.0 | % |
(1) | TPG Austin Partner, LLC, a limited liability company owned by TPG and Madison, a noncontrolling interest partner, owns 50% of TPG/CalSTRS Austin, LLC. The effective ownership of TPG and Madison in the underlying eight properties of TPG/CalSTRS Austin, LLC is 33.3% and 16.7%, respectively. |
19
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
We review the facts and circumstances of each distribution from unconsolidated entities to determine how to classify it on the consolidated statements of cash flows. Distributions received from unconsolidated entities that represent returns on the Companys investment are reported as cash flows from operating activities, consistent with ASC 230-10-45-16. Cash distributions from unconsolidated entities that represent returns of the Companys investment are reported as cash flows from investing activities, consistent with ASC 230-10-45-12.
Distributions are deemed to be returns on the Companys investment, and recorded as operating inflows, unless the cumulative distributions exceed the cumulative equity in earnings recognized by the Company. The excess distributions are deemed to be returns of the investment and are classified as investing cash flows. Distributions received in excess of cumulative contributions are deemed a return on investment and classified as operating cash flows.
We evaluated unconsolidated investments with negative carrying amounts to determine if the equity method of accounting is still appropriate, consistent with ASC 323-10-35-19 through 26. The Companys investment in 2121 Market Street had a negative carrying amount of $0.3 million and $2.5 million as of December 31, 2012 and 2011, respectively. The Company reduced its investment balance below zero due to the receipt of distributions and recording of our share of investee losses in excess of our investment, because we had guaranteed up to a maximum of $14.0 million and $3.3 million of 2121 Market Streets outstanding mortgage loan as December 31, 2012 and 2011, respectively. During the year ended December 31, 2012, we redeemed a 49% interest in 2121 Market Street and retained a 1% limited partnership interest.
With respect to the Companys investment in TPG/CalSTRS, we had a positive carrying amount as of December 31, 2011, of approximately $3.5 million, and a negative carrying amount of approximately $9.8 million as of December 31, 2012. The Company made a commitment to fund tenant improvements, other capital improvements, debt repayment or debt repurchase of properties owned by TPG/CalSTRS up to $10.9 million and $13.9 million as of December 31, 2012 and 2011, respectively. In addition, the Company made a commitment to fund temporary operating cash shortfalls, not more frequently than once a month, up to $1.25 million in the aggregate for all the TPG/CalSTRS properties. Investments in unconsolidated real estate entities as of December 31, 2012 and 2011 are as follows (in thousands):
December 31, 2012 |
December 31, 2011 |
|||||||
ASSETS: |
||||||||
TPG/CalSTRS: |
||||||||
City National Plaza |
$ | | $ | (23,598 | ) | |||
Reflections I |
| 692 | ||||||
Reflections II |
| (225 | ) | |||||
San Felipe Plaza |
| 1,352 | ||||||
Brookhollow Central I, II and III |
| 7,220 | ||||||
CityWestPlace and CityWestPlace Land |
| 16,348 | ||||||
Fair Oaks Plaza |
| (108 | ) | |||||
Austin Portfolio Investor |
| (3,556 | ) | |||||
Austin Portfolio Lender |
| 4,638 | ||||||
TPG/CalSTRS |
| 736 | ||||||
|
|
|
|
|||||
| 3,499 | |||||||
|
|
|
|
|||||
Austin Portfolio Joint Venture Predecessor: |
||||||||
Austin Portfolio Holdings & Syndication Partners |
| 2,602 | ||||||
Frost Bank Tower |
| 559 | ||||||
300 West 6th Street |
| 252 | ||||||
San Jacinto Center |
| 209 |
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
One Congress Plaza |
| 311 | ||||||
One American Center |
| (195 | ) | |||||
Stonebridge Plaza II |
| 502 | ||||||
Park Centre |
| 1,489 | ||||||
Research Park Plaza I & II |
| 280 | ||||||
Westech 360 I-IV |
| 1,045 | ||||||
Great Hills Plaza |
| 819 | ||||||
|
|
|
|
|||||
| 7,873 | |||||||
|
|
|
|
|||||
TPG/CalSTRS Austin, LLC: |
||||||||
Austin Portfolio Holdings & Syndication Partners |
(63 | ) | | |||||
Frost Bank Tower |
30,459 | | ||||||
300 West 6th Street |
19,418 | | ||||||
San Jacinto Center |
10,437 | | ||||||
One Congress Plaza |
13,368 | | ||||||
One American Center |
(3,875 | ) | | |||||
Park Centre |
14,048 | | ||||||
Westech 360 I-IV |
12,673 | | ||||||
Great Hills Plaza |
9,745 | | ||||||
|
|
|
|
|||||
106,210 | | |||||||
|
|
|
|
|||||
Total reflected in investments in unconsolidated real estate entities |
$ | 106,210 | $ | 11,372 | ||||
LIABILITIES: |
||||||||
TPG/CalSTRS: |
||||||||
City National Plaza |
$ | (22,859 | ) | $ | | |||
Reflections I |
545 | | ||||||
Reflections II |
(439 | ) | | |||||
San Felipe Plaza |
1,675 | | ||||||
CityWestPlace and CityWestPlace Land |
11,931 | | ||||||
Fair Oaks Plaza |
(1,046 | ) | ||||||
Austin Portfolio Investor |
(74 | ) | | |||||
Austin Portfolio Lender |
2 | | ||||||
TPG/CalSTRS |
457 | | ||||||
|
|
|
|
|||||
(9,808 | ) | | ||||||
2121 Market Street |
(276 | ) | (2,538 | ) | ||||
|
|
|
|
|||||
Total reflected in losses and distributions in excess of investments in unconsolidated real estate entities |
(10,084 | ) | (2,538 | ) | ||||
|
|
|
|
|||||
Net investments in unconsolidated real estate entities |
$ | 96,126 | $ | 8,834 | ||||
|
|
|
|
21
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
The following is a summary of the net investments in unconsolidated real estate entities for the years ended December 31, 2012, 2011 and 2010 (in thousands):
Net Investment balance, December 31, 2009 |
$ | 14,458 | ||
Contributions |
15,575 | |||
Other comprehensive income |
107 | |||
Equity in net income (loss) of unconsolidated real estate entities |
(1,184 | ) | ||
Distributions |
(10,970 | ) | ||
Redemption of redeemable noncontrolling interest |
(11 | ) | ||
|
|
|||
Net Investment balance, December 31, 2010 |
$ | 17,975 | ||
Contributions |
3,763 | |||
Other comprehensive income |
24 | |||
Equity in net income (loss) of unconsolidated real estate entities |
19,951 | |||
Distributions |
(32,868 | ) | ||
Other |
(11 | ) | ||
|
|
|||
Net Investment balance, December 31, 2011 |
$ | 8,834 | ||
Contributions including $35,054 contributed by Madison |
113,340 | |||
Other comprehensive income |
1 | |||
Equity in net income (loss) of unconsolidated real estate entities |
(3,672 | ) | ||
Distributions |
(35,889 | ) | ||
Redemption of 2121 Market Street interest |
13,524 | |||
Other |
(12 | ) | ||
|
|
|||
Net Investment balance, December 31, 2012 |
$ | 96,126 | ||
|
|
TPG/CalSTRS was formed to acquire office properties on a nationwide basis classified as moderate risk (core plus) and high risk (value add) properties. Core plus properties consist of under-performing properties that we believe can be brought to market potential through improved management. Value-add properties are characterized by unstable net operating income for an extended period of time, occupancy less than 90% and/or physical or management problems which we believe can be positively impacted by introduction of new capital and/or management.
The total capital commitment to TPG/CalSTRS was $511.7 million as of December 31, 2012, of which approximately $2.9 million and $10.9 million was unfunded by CalSTRS and us, respectively.
A buy-sell provision may be exercised by either CalSTRS or us. Under this provision, the initiating party sets a price for its interest in TPG/CalSTRS, and the other party has a specified time to elect to either buy the initiating partys interest or to sell its own interest to the initiating party. Upon the occurrence of certain events, CalSTRS also has a buy-out option to purchase our interest in TPG/CalSTRS. The buyout price is based upon a 3% discount to the appraised fair market value.
On March 6, 2010, an aggregate of $96.5 million in mortgage loans owed by subsidiaries of TPG/CalSTRS (the borrowers) on unconsolidated properties at Four Falls Corporate Center, Oak Hill Plaza, and Walnut Hill Plaza in suburban Philadelphia matured and became due in full. The borrowers elected not to make payment on these loans. These loans were non-recourse to the borrowers and the Company. In June 2011, the Court of Common Pleas of Montgomery County, PA approved the appointment of a Receiver. In October 2011, a foreclosure sale, by stipulation with the lender, occurred whereby TPG/CalSTRS was relieved of the obligation to pay the remaining debt on Oak Hill Plaza, Walnut Hill Plaza and Four Falls Corporate Center. TPG/CalSTRS recognized a $28.7 million gain on extinguishment of debt upon disposition of these properties, of which TPGs share was $7.2 million.
In November 2011, we completed the sale of 2500 CityWest and two adjacent land parcels in Houston, Texas, each a TPG/CalSTRS joint venture property. TPG/ CalSTRS received net proceeds from this transaction of $61.3 million, after closing costs and assumption of mortgage debt, of which TPGs share was $15.3 million. TPG/ CalSTRS recorded a gain on sale of $49.7 million, of which TPGs share was $12.4 million.
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
In December 2011, we completed the sale of Centerpointe I & II whereby TPG/CalSTRS received net proceeds of $54.4 million of which TPGs share was $5.8 million. TPG/CalSTRS recorded a gain on sale of $21.0 million, of which TPGs share was $5.3 million.
In January 2012, we completed the sale of Brookhollow Central I, II and III in Houston, Texas, a TPG/CalSTRS joint venture property. TPG/CalSTRS received net proceeds from this transaction of $30.6 million, after closing costs and repayment of mortgage debt, of which TPGs share was $7.7 million. During the fourth quarter of 2011, TPG/CalSTRS recorded a $7.8 million impairment charge to reduce the book value of the property to the net sales proceeds. TPGs share of the impairment charge was $1.9 million.
As of December 31, 2012 and 2011, we recorded impairment charges of $2.4 million and $6.2 million, respectively, on Fair Oaks Plaza, a TPG/CalSTRS joint venture property, to reduce the book value of the property to the estimated fair value. TPGs share of each impairment charge was $0.6 million and $1.6 million, respectively. As of December 31, 2011, we recorded an impairment charge of $6.4 million to reduce the book value of Reflections II, a TPG/CalSTRS joint venture property, to the estimated fair value. TPGs share of the impairment charge was $1.6 million.
The TPG/CalSTRS joint venture is deemed to be a variable interest entity for which we are not considered to be the primary beneficiary. CalSTRS and TPG acting together are considered to have the power to direct the activities of the joint venture that most significantly impact the joint venture economic performance and therefore neither TPG nor CalSTRS is considered to be the primary beneficiary. We determined the key activities that drive the economic performance of the joint venture to be (1) the acquisition and development of real estate (including capital improvements), (2) financing, and (3) leasing. In connection with these key activities, the TPG/CalSTRS venture agreement requires unanimous approval by the two members.
In connection with TPG/CalSTRS Austin, LLC, TPG Austin Partner, LLC is not considered to be the primary beneficiary due to the fact that the power to direct the activities of the limited liability company is shared with CalSTRS such that no one party has the power to direct the activities that most significantly impact the limited liability companys economic performance. In connection with TPG/CalSTRS Austin, LLC, we determined the key activities that drive the economic performance to be (1) the acquisition and development of real estate (including capital improvements), (2) financing, and (3) leasing. In connection with these key activities, TPG/CalSTRS Austin, LLC agreement requires either unanimous or majority approval of decisions by the respective partners.
In connection with the Austin Portfolio Joint Venture Predecessor, TPG/CalSTRS was not considered to be the primary beneficiary due to the fact that the power to direct the activities of the joint venture was shared among multiple unrelated parties such that no one party had the power to direct the activities of the joint venture that most significantly impact the joint ventures economic performance. In connection with the Austin Portfolio Joint Venture Predecessor, we determined the key activities that determined the economic performance of the joint venture to be (1) the acquisition and development of real estate (including capital improvements), (2) financing, and (3) leasing. In connection with these key activities, the Austin Portfolio Joint Venture Predecessor partnership agreement required either unanimous or majority approval of decisions by the respective partners. We therefore determined the power to direct the activities to be shared amongst the partners so that no one partner had the power to direct the activities that most significantly impact the partnerships economic performance. This portfolio was acquired by TPG/CalSTRS Austin, LLC in September 2012.
As of December 31, 2012, our total maximum exposure to loss to TPG/CalSTRS and the TPG/CalSTRS Austin, LLC is:
(1) | Our net equity investment in the various properties controlled by TPG/CalSTRS and TPG/CalSTRS Austin, LLC as of December 31, 2012, was $96.1 million, as presented earlier in this note. |
(2) | The potential loss of future fee revenues which we earn in connection with the management and leasing agreements with the various properties controlled by the respective limited liability companies. We earn fee revenues in connection with those management and leasing agreements for services such as property management, leasing, asset management and property development. The management and leasing agreements with the various properties generally expire on an annual basis and are automatically renewed for successive periods of one year each, unless we elect not to renew the agreements. As of December 31, 2012, we had total receivables of $1.7 million and $0.5 million related to TPG/CalSTRS and the TPG/CalSTRS Austin, LLC, respectively. |
(3) | Unfunded capital commitments to the TPG/CalSTRS was $10.9 million as of December 31, 2012. |
23
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
(4) | TPG/CalSTRS Austin, LLC owns the eight Austin properties and TPG, together with Madison, have unfunded capital commitments of approximately $14.4 million. Of that amount, TPGs unfunded capital commitment is approximately $9.6 million or 66.67% as of December 31, 2012. |
24
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Following is summarized financial information for the unconsolidated real estate entities as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 (in thousands):
Summarized Balance Sheets
2012 | 2011 | |||||||
ASSETS | ||||||||
Investments in real estate, net |
$ | 1,564,068 | $ | 1,709,601 | ||||
Receivables including deferred rents, net |
67,175 | 82,354 | ||||||
Deferred leasing and loan costs, net |
135,928 | 91,838 | ||||||
Other assets |
51,838 | 52,016 | ||||||
Assets associated with discontinued operations |
219 | 205,584 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,819,228 | $ | 2,141,393 | ||||
|
|
|
|
|||||
LIABILITIES AND OWNERS EQUITY | ||||||||
Mortgage loans |
$ | 1,376,344 | $ | 1,574,071 | ||||
Acquired below market leases, net |
32,229 | 33,333 | ||||||
Prepaid rent and deferred revenue |
6,399 | 9,982 | ||||||
Accounts and interest payable and other liabilities |
66,078 | 61,951 | ||||||
Liabilities associated with discontinued operations |
169 | 154,737 | ||||||
|
|
|
|
|||||
Total liabilities |
1,481,219 | 1,834,074 | ||||||
|
|
|
|
|||||
Owners equity: |
||||||||
Thomas Properties, including $- and $1 of other comprehensive loss as of 2012 and 2011, respectively |
100,451 | 15,267 | ||||||
Other owners, including $- and $21 of other comprehensive loss as of 2012 and 2011, respectively |
237,558 | 292,052 | ||||||
|
|
|
|
|||||
Total owners equity |
338,009 | 307,319 | ||||||
|
|
|
|
|||||
Total liabilities and owners equity |
$ | 1,819,228 | $ | 2,141,393 | ||||
|
|
|
|
Summarized Statements of Operations
2012 | 2011 | 2010 | ||||||||||
Revenues |
$ | 264,698 | $ | 255,509 | $ | 254,364 | ||||||
Expenses: |
||||||||||||
Property operating and maintenance |
107,590 | 100,470 | 98,813 | |||||||||
Real estate taxes |
35,756 | 32,397 | 31,401 | |||||||||
Interest expense |
96,819 | 95,769 | 88,545 | |||||||||
Depreciation and amortization |
88,662 | 92,211 | 89,109 | |||||||||
Impairment loss |
2,400 | 12,600 | | |||||||||
|
|
|
|
|
|
|||||||
Total expenses |
331,227 | 333,447 | 307,868 | |||||||||
|
|
|
|
|
|
|||||||
Income (loss) from continuing operations |
(66,529 | ) | (77,938 | ) | (53,504 | ) | ||||||
Gain (loss) on early extinguishment of debt |
| | 2,266 | |||||||||
Gain (loss) on disposition of real estate |
(45,866 | ) | 621 | 11 | ||||||||
Discontinued operations: |
||||||||||||
Net income (loss) from discontinued operations before gains on disposition of real estate, gain on extinguishment on debt and impairment loss |
237 | 663 | (11,934 | ) | ||||||||
Gain (loss) on disposition of real estate |
142 | 98,752 | | |||||||||
Gain (loss) on extinguishment of debt |
| 6,661 | 9,524 | |||||||||
Impairment loss |
(5,020 | ) | (12,759 | ) | | |||||||
|
|
|
|
|
|
|||||||
Income (loss) from discontinued operations |
(4,641 | ) | 93,317 | (2,410 | ) | |||||||
|
|
|
|
|
|
|||||||
Net income (loss) |
$ | (117,036 | ) | $ | 16,000 | $ | (53,637 | ) | ||||
|
|
|
|
|
|
|||||||
Thomas Properties share of net income (loss) |
$ | (7,864 | ) | $ | 16,441 | $ | (4,659 | ) | ||||
Intercompany eliminations |
4,192 | 3,510 | 3,475 | |||||||||
|
|
|
|
|
|
|||||||
Equity in net income (loss) of unconsolidated real estate entities |
$ | (3,672 | ) | $ | 19,951 | $ | (1,184 | ) | ||||
|
|
|
|
|
|
25
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Included in the preceding summarized balance sheets as of December 31, 2012 and 2011, are the following balance sheets of TPG/CalSTRS, LLC (in thousands) (unaudited):
2012 | 2011 | |||||||
ASSETS | ||||||||
Investments in real estate, net |
$ | 759,512 | $ | 804,961 | ||||
Receivables including deferred rents, net |
63,881 | 64,595 | ||||||
Investments in unconsolidated real estate entities |
659 | 41,278 | ||||||
Deferred leasing and loan costs, net |
51,273 | 55,417 | ||||||
Other assets |
28,347 | 23,660 | ||||||
Assets associated with real estate held for disposition |
116 | 72,635 | ||||||
|
|
|
|
|||||
Total assets |
$ | 903,788 | $ | 1,062,546 | ||||
|
|
|
|
|||||
LIABILITIES AND MEMBERS EQUITY | ||||||||
Mortgage loans |
$ | 747,610 | $ | 768,188 | ||||
Accounts and interest payable and other liabilities |
32,182 | 42,296 | ||||||
Liabilities associated with real estate held for disposition |
25 | 42,141 | ||||||
|
|
|
|
|||||
Total liabilities |
779,817 | 852,625 | ||||||
|
|
|
|
|||||
Members equity: |
||||||||
Thomas Properties, including $- and $1 of other comprehensive loss as of 2012 and 2011, respectively |
(5,580 | ) | 17,137 | |||||
CalSTRS, including $- and $4 of other comprehensive loss as of 2012 and 2011, respectively |
129,551 | 192,784 | ||||||
|
|
|
|
|||||
Total members equity |
123,971 | 209,921 | ||||||
|
|
|
|
|||||
Total liabilities and members equity |
$ | 903,788 | $ | 1,062,546 | ||||
|
|
|
|
Included in the preceding summarized balance sheet as of December 31, 2012 is the following balance sheet of TPG/CalSTRS Austin, LLC (in thousands) (unaudited):
December 31, 2012 |
||||
ASSETS | ||||
Investments in real estate, net |
$ | 804,556 | ||
Receivables including deferred rents, net |
3,295 | |||
Deferred leasing costs, net |
84,655 | |||
Other assets |
20,871 | |||
|
|
|||
Total assets |
$ | 913,377 | ||
|
|
|||
LIABILITIES AND MEMBERS EQUITY | ||||
Mortgage loans |
$ | 628,733 | ||
Accounts and interest payable and other liabilities |
44,281 | |||
Acquired below market leases, net |
28,302 | |||
|
|
|||
Total liabilities |
701,316 | |||
|
|
|||
Members equity |
212,061 | |||
|
|
|||
Total liabilities and members equity |
$ | 913,377 | ||
|
|
26
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Following is summarized financial information by real estate entity for the years ended December 31, 2012, 2011 and 2010 and includes TPG/CalSTRS Austin, LLC from inception, September 11, 2012 (in thousands) :
Year Ended December 31, 2012 | ||||||||||||||||||||||||
2121 Market Street |
TPG/ CalSTRS, LLC |
TPG/ CalSTRS Austin, LLC |
Austin Portfolio Joint Venture Predecessor |
Eliminations | Total | |||||||||||||||||||
Revenues |
$ | | $ | 165,786 | $ | 30,005 | $ | 69,757 | $ | (850 | ) | $ | 264,698 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Expenses: |
||||||||||||||||||||||||
Property operating and maintenance |
| 77,057 | 8,794 | 19,397 | 2,342 | 107,590 | ||||||||||||||||||
Real estate taxes |
| 17,499 | 5,333 | 12,924 | | 35,756 | ||||||||||||||||||
Interest expense |
| 44,390 | 10,849 | 43,664 | (2,084 | ) | 96,819 | |||||||||||||||||
Depreciation and amortization |
| 46,749 | 14,122 | 27,791 | | 88,662 | ||||||||||||||||||
Impairment loss |
| 2,400 | | | | 2,400 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total expenses |
| 188,095 | 39,098 | 103,776 | 258 | 331,227 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from continuing operations |
| (22,309 | ) | (9,093 | ) | (34,019 | ) | (1,108 | ) | (66,529 | ) | |||||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
| (16,504 | ) | | | 16,504 | | |||||||||||||||||
Gain (loss) on disposition of real estate |
| 14,210 | | (59,961 | ) | (115 | ) | (45,866 | ) | |||||||||||||||
Discontinued operations: |
||||||||||||||||||||||||
Net income (loss) from discontinued operations before gains on disposition of real estate, gain on extinguishment on debt and impairment loss |
221 | 690 | | (674 | ) | | 237 | |||||||||||||||||
Gain (loss) on disposition of real estate |
| 66 | | 76 | | 142 | ||||||||||||||||||
Impairment loss |
| | | (5,020 | ) | | (5,020 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from discontinued operations |
221 | 756 | | (5,618 | ) | | (4,641 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | 221 | $ | (23,847 | ) | $ | (9,093 | ) | $ | (99,598 | ) | $ | 15,281 | $ | (117,036 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Thomas Properties share of net income (loss) |
$ | 110 | $ | 2,797 | $ | (4,546 | ) | $ | (6,225 | ) | $ | | $ | (7,864 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Intercompany eliminations |
4,192 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
$ | (3,672 | ) | |||||||||||||||||||||
|
|
Year Ended December 31, 2011 | ||||||||||||||||||||||||
2121 Market Street |
TPG/ CalSTRS, LLC |
TPG/ CalSTRS Austin, LLC |
Austin Portfolio Joint Venture Predecessor |
Eliminations | Total | |||||||||||||||||||
Revenues |
$ | | $ | 161,410 | $ | | $ | 94,749 | $ | (650 | ) | $ | 255,509 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Expenses: |
||||||||||||||||||||||||
Property operating and maintenance |
| 72,451 | | 29,748 | (1,729 | ) | 100,470 | |||||||||||||||||
Real estate taxes |
| 16,014 | | 16,383 | | 32,397 | ||||||||||||||||||
Interest expense |
| 45,675 | | 52,225 | (2,131 | ) | 95,769 | |||||||||||||||||
Depreciation and amortization |
| 47,070 | | 45,140 | 1 | 92,211 | ||||||||||||||||||
Impairment loss |
| 12,600 | | | | 12,600 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total expenses |
| 193,810 | | 143,496 | (3,859 | ) | 333,447 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from continuing operations |
| (32,400 | ) | | (48,747 | ) | 3,209 | (77,938 | ) | |||||||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
| (9,136 | ) | | | 9,136 | | |||||||||||||||||
Gain (loss) on disposition of real estate |
| 621 | | | | 621 |
27
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Discontinued operations: |
||||||||||||||||||||||||
Net income (loss) from discontinued operations before gains on disposition of real estate, gain on extinguishment on debt and impairment loss |
697 | (866 | ) | | 832 | | 663 | |||||||||||||||||
Gain (loss) on disposition of real estate |
| 98,752 | | | | 98,752 | ||||||||||||||||||
Gain (loss) on early extinguishment of debt |
| 6,661 | | | | 6,661 | ||||||||||||||||||
Impairment loss |
| (7,773 | ) | | (4,986 | ) | | (12,759 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from discontinued operations |
697 | 96,774 | | (4,154 | ) | | 93,317 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | 697 | $ | 55,859 | $ | | $ | (52,901 | ) | $ | 12,345 | $ | 16,000 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Thomas Properties share of net income (loss) |
$ | 348 | $ | 19,088 | $ | | $ | (2,995 | ) | $ | | $ | 16,441 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Intercompany eliminations |
3,510 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
$ | 19,951 | ||||||||||||||||||||||
|
|
Year Ended December 31, 2010 | ||||||||||||||||||||||||
2121 Market Street |
TPG/ CalSTRS, LLC |
TPG/ CalSTRS Austin, LLC |
Austin Portfolio Joint Venture Predecessor |
Eliminations | Total | |||||||||||||||||||
Revenues |
$ | | $ | 161,172 | $ | | $ | 93,808 | $ | (616 | ) | $ | 254,364 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Expenses: |
||||||||||||||||||||||||
Property operating and maintenance |
| 70,812 | | 29,643 | (1,642 | ) | 98,813 | |||||||||||||||||
Real estate taxes |
| 15,523 | | 15,878 | | 31,401 | ||||||||||||||||||
Interest expense |
| 39,826 | | 48,721 | (2 | ) | 88,545 | |||||||||||||||||
Depreciation and amortization |
| 46,669 | | 42,440 | | 89,109 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total expenses |
| 172,830 | | 136,682 | (1,644 | ) | 307,868 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from continuing operations |
| (11,658 | ) | | (42,874 | ) | 1,028 | (53,504 | ) | |||||||||||||||
Gain (loss) on early extinguishment of debt |
| 2,266 | | | | 2,266 | ||||||||||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
| (6,924 | ) | | | 6,924 | | |||||||||||||||||
Gain (loss) on disposition of real estate |
| | | 11 | | 11 | ||||||||||||||||||
Discontinued operations: |
||||||||||||||||||||||||
Net income (loss) from discontinued operations before gains on disposition of real estate, gain on extinguishment on debt and impairment loss |
226 | (11,967 | ) | | (193 | ) | | (11,934 | ) | |||||||||||||||
Gain (loss) on early extinguishment of debt |
| 9,524 | | | | 9,524 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income (loss) from discontinued operations |
226 | (2,443 | ) | | (193 | ) | | (2,410 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | 226 | $ | (18,759 | ) | $ | | $ | (43,056 | ) | $ | 7,952 | $ | (53,637 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Thomas Properties share of net income (loss) |
$ | 113 | $ | (2,081 | ) | $ | | $ | (2,691 | ) | $ | | $ | (4,659 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Intercompany eliminations |
3,475 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
$ | (1,184 | ) | |||||||||||||||||||||
|
|
For the year ended December 31, 2012, one tenant accounted for approximately 12.0% of rent and tenant reimbursements (excluding tenant reimbursement for over-standard usage of certain operating expenses) of TPG/CalSTRS. The lease expire in 2021. For the years ended December 31, 2011 and 2010, there were no tenants accounting for 10% or more, of rent and tenant reimbursements of TPG/CalSTRS.
For the year ended December 31, 2012, there were no tenants accounting for 10% or more, of rent and tenant reimbursements (excluding tenant reimbursement for over-standard usage of certain operating expenses) of TPG/CalSTRS Austin, LLC.
28
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Following is a reconciliation of our share of owners equity of the unconsolidated real estate entities as shown above to amounts recorded by us as of December 31, 2012 and 2011:
2012 | 2011 | |||||||
Our share of owners equity recorded by unconsolidated real estate entities |
$ | 100,451 | $ | 15,267 | ||||
Intercompany eliminations and other adjustments |
(4,325 | ) | (6,433 | ) | ||||
|
|
|
|
|||||
Investments in unconsolidated real estate entities |
$ | 96,126 | $ | 8,834 | ||||
|
|
|
|
4. Mortgage Loans
A summary of the outstanding mortgage loans as of December 31, 2012 and 2011 is as follows (in thousands). None of these loans are recourse to us, except that we have guaranteed the Campus El Segundo mortgage loan, partially guaranteed the Four Points Centre mortgage loan, under which our liability is currently limited to a maximum of $12.3 million, and provided a limited guaranty for the Murano mortgage loan. See footnote 5 to the table below for further details regarding the Murano limited guaranty. In connection with some of the loans listed in the table below, our operating partnership is subject to customary non-recourse carve out obligations.
Outstanding Debt | Maturity Date | Maturity Date at End of Extension Options |
||||||||||||||||||
Mortgage Loan |
Interest Rate at December 31, 2012 |
As of December 31, 2012 |
As of December 31, 2011 |
|||||||||||||||||
One Commerce Square (1) |
5.67 | % | $ | 126,869 | $ | 128,529 | 1/6/2016 | 1/6/2016 | ||||||||||||
Two Commerce Square (2) |
6.30 | % | 106,612 | 107,112 | 5/9/2013 | 5/9/2013 | ||||||||||||||
Campus El Segundo (3) |
LIBOR + 3.75 | % | 14,500 | 14,500 | 10/31/2013 | 10/31/2014 | ||||||||||||||
Four Points Centre (4) |
LIBOR + 3.50 | % | 26,453 | 23,908 | 7/31/2014 | 7/31/2015 | ||||||||||||||
Murano (5) |
LIBOR + 3.75 | % | 6,941 | 15,474 | 12/15/2013 | 12/15/2013 | ||||||||||||||
|
|
|
|
|||||||||||||||||
Total mortgage loans |
|
$ | 281,375 | $ | 289,523 | |||||||||||||||
|
|
|
|
The 30 day LIBOR rate for the loans above was 0.21% at December 31, 2012.
(1) | The mortgage loan may be defeased, and is subject to yield maintenance payments for any prepayments prior to October 2015. |
(2) | On March 8, 2013, we entered into a loan agreement with a lender for a new mortgage on Two Commerce Square in the amount of $112.0 million. The loan, which has a fixed interest rate of 3.96% for a ten year term, funded on March 8, 2013. The loan replaced the existing mortgage on the property that had an outstanding balance of $106.6 million as of December 31, 2012, and a maturity date of May 9, 2013, and was open to prepayment without penalty on and after March 8, 2013. |
(3) | The interest rate as of December 31, 2012 was 4.00% per annum. The Campus El Segundo mortgage loan has an October 31, 2013 maturity date with one remaining twelve month extension. A $2.5 million principal paydown is due April 30, 2013. We have guaranteed this loan. We have agreed to certain financial covenants on this loan as the guarantor, which we were in compliance with as of December 31, 2012. |
(4) | The interest rate as of December 31, 2012 was 3.75% per annum. As of December 31, 2012, $4.2 million was available to be drawn to fund tenant improvement costs and certain other project costs related to two office buildings. The loan has a one-year extension option at our election subject to certain conditions. The option to extend is subject to (1) a loan-to-value ratio and a minimum appraised land ratio of 62.5% , and (2) the adjusted net operating income of the property and improvements as a percentage of the outstanding principal balance must be at least 10.0%. If the loan-to-value ratio or the minimum debt yield is not met, we can pay down the principal balance in an amount sufficient to satisfy the requirement. The debt yield is calculated by dividing the net operating income of the property by the outstanding principal balance of the loan. |
29
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Beginning in August, 2014, we are required to pay down the loan balance by $42,000 each month. As of December 31, 2012, the property had a net operating loss. We have guaranteed completion of the tenant improvements and 46.5% of the balance of the outstanding principal balance and interest payable on the loan, which results in a maximum guarantee of $12.3 million as of December 31, 2012. We have agreed to certain financial covenants on this loan as the guarantor, which we were in compliance with as of December 31, 2012. We have also provided additional collateral of fully entitled unimproved land, which is immediately adjacent to the office buildings.
Subsequent to December 31, 2012, we sold certain land parcels at Four Points Centre, resulting in paydowns of $6.9 million on the loan. The remaining collateral of fully entitled unimproved land adjacent to the office buildings is approximately 19.9 acres.
(5) | The interest rate as of December 31, 2012 was 4.00% per annum and the loan matures on December 15, 2013. Repayment of this loan is being made with proceeds from the sales of condominium units. On June 30, 2013, the loan is subject to a maximum balance of $4.3 million. TPG gave the lender a limited guaranty which (i) guarantees repayment of the loan in the event of certain bankruptcy events affecting the borrower, (ii) guarantees payment of the lenders damages from customary bad boy actions of the borrower or TPG (such as fraud, physical waste of the property, misappropriation of funds and similar bad acts); and (iii) guarantees payment of the amount, if any, by which the loan balance at the time exceeds 80.0% of the bulk sale value of the collateral upon an acceleration of the loan triggered by a borrower default. Based on two units that have settled subsequent to December 31, 2012, and five additional units scheduled to settle in February and March, 2013, the loan will be reduced to approximately $3.3 million. |
The loan agreements for One Commerce Square and Two Commerce Square require that all receipts collected from these properties be deposited in lockbox accounts under the control of the lenders to fund reserves such as capital improvements, taxes, insurance, leasing commissions, debt service and operating expenditures. Included in restricted cash on our consolidated balance sheets at December 31, 2012 and 2011, are lockbox, reserve funds and/or security deposits as follows (in thousands):
2012 | 2011 | |||||||
One Commerce Square |
$ | 5,245 | $ | 5,471 | ||||
Two Commerce Square |
6,258 | 5,030 | ||||||
Murano |
108 | 115 | ||||||
|
|
|
|
|||||
Restricted cashconsolidated properties |
$ | 11,611 | $ | 10,616 | ||||
|
|
|
|
As of December 31, 2012, subject to certain extension options exercisable by the Company, principal payments due for the secured outstanding debt are as follows (in thousands):
Amount Due at Original Maturity Date |
Amount Due at Maturity Date After Exercise of Extension Options |
|||||||
2013 |
$ | 136,713 | $ | 136,713 | ||||
2014 |
21,457 | 2,094 | ||||||
2015 |
1,996 | 21,359 | ||||||
2016 |
121,209 | 121,209 | ||||||
2017 |
| | ||||||
Thereafter |
| | ||||||
|
|
|
|
|||||
$ | 281,375 | $ | 281,375 | |||||
|
|
|
|
5. Earnings (Loss) per Share
Under FASB ASC 260-10-45, Earnings Per Share, the Company uses the two-class method to calculate earning per share. Basic earnings per share is calculated based on dividends declared on common shares and other participating securities (distributed earnings) and the rights of common shares and participating securities in any undistributed earnings, which
30
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
represents net income remaining after deduction of dividends accrued during the respective period. Participating securities, which include restricted stock, incentive units and stock options, are included in the computation of earnings per share pursuant to the two-class method. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding securities. Basic earnings per common share and participating securities, including restricted stock, incentive units and stock options, represent the summation of the distributed and undistributed earnings per common share and participating security divided by the total weighted average number of common shares outstanding and the total weighted average number of participating securities outstanding during the respective periods. We only present the earnings per share attributable to the common shareholders.
Net losses, after deducting the dividends to participating securities, are allocated in full to the common shares since the participating security holders do not have an obligation to share in the losses, based on the contractual rights and obligations of the participating securities. Because we incurred losses for the years ended December 31, 2012 and 2010, all potentially dilutive instruments are anti-dilutive and have been excluded from our computation of weighted average dilutive shares outstanding.
In November 2011, the board of directors reinstated dividend payments and a quarterly dividend of $0.015 per common share which was paid in December 2011. During 2012, the board of directors declared and paid three quarterly dividends of $0.015 per common share to common stockholders and a quarterly dividend of $0.02 per common share in the fourth quarter.
The following is a summary of the elements used in calculating basic and diluted income (loss) per share for the years ended December 31, 2012, 2011 and 2010 (in thousands except share and per share amounts):
2012 | 2011 | 2010 | ||||||||||
Net income (loss) attributable to common shares |
$ | (25,396 | ) | $ | 5,860 | $ | (11,472 | ) | ||||
Dividends to participating securities |
||||||||||||
Unvested restricted stock |
| | | |||||||||
Unvested incentive units |
| | | |||||||||
|
|
|
|
|
|
|||||||
Net income (loss) attributable to common shares, net of dividends to participating securities |
$ | (25,396 | ) | $ | 5,860 | $ | (11,472 | ) | ||||
|
|
|
|
|
|
|||||||
Weighted average common shares outstandingbasic |
41,631,796 | 36,619,558 | 33,684,101 | |||||||||
|
|
|
|
|
|
|||||||
Weighted average common shares outstandingdiluted (1) |
41,631,796 | 36,865,286 | 33,684,101 | |||||||||
|
|
|
|
|
|
|||||||
Income (loss) per sharebasic and diluted |
$ | (0.61 | ) | $ | 0.16 | $ | (0.34 | ) | ||||
|
|
|
|
|
|
|||||||
Dividends declared per share |
$ | 0.065 | $ | 0.015 | $ | | ||||||
|
|
|
|
|
|
(1) | Basic and diluted shares are calculated in accordance with GAAP, and include common shares plus dilutive equity instruments, as appropriate. For the years ended December 31, 2012 and 2010, all potentially dilutive instruments have been excluded from the computation of weighted average dilutive shares outstanding because they were anti-dilutive. |
6. Equity
Common Stock and Operating Partnership Units
The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of our common stock vote together as a single class with holders of our limited voting stock on those matters upon which the holders of limited voting stock are entitled to vote. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably any dividends when, if, and as may be declared by the board of directors out of funds legally available for dividend payments. In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive, conversion, subscription or other rights. There are no redemption or sinking fund provisions applicable to the common stock. An Operating Partnership unit and a share of our common stock have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the Operating Partnership. An Operating Partnership unit may be redeemed by the holder in exchange for cash or shares of common stock at our election, on a one-for-one basis. As of December 31, 2012 and 2011, we held a 78.7% and 74.7% interest in the Operating Partnership respectively.
31
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Issuances of Common Stock
In June 2012, the Company sold in a private placement an aggregate of 8,695,653 shares of common stock at a price of $5.75 per share, for aggregate gross proceeds of $50.0 million. The Company did not pay any underwriting discounts or commissions with respect to the sale of the common stock, but the Company agreed to reimburse the investors for certain transaction expenses totaling $0.5 million. In connection with the transaction, on August 2, 2012, the Companys Board of Directors elected Bradley H. Carroll to the Board. The Company also granted certain registration rights to the investor group generally requiring the company to register their shares with the Securities and Exchange Commission within 24 months of May 2012.
In April 2010, we established an at the market (ATM) stock offering program through which we may sell from time to time up to an aggregate of $30.0 million of common stock through a sales agent. During the year ended December 31, 2010, we sold 4.3 million shares of common stock at prices ranging from $3.67 to $5.03 per share in our at-the-market equity offering program. These sales resulted in gross proceeds of $15.9 million and net proceeds of $15.5 million, which were used for general corporate purposes. There were no ATM sales in 2012 and 2011. As of December 31, 2012, the ATM offering program was inactive.
See also Exchange of Noncontrolling Operating Partnership Units below for information regarding a redemption during the years ended December 31, 2012 and 2010.
Limited Voting Stock
Each Operating Partnership unit issued in connection with the formation of our Operating Partnership at the time of our initial public offering in 2004 was paired with one share of limited voting stock. Operating Partnership units issued under other circumstances, including upon the conversion of incentive units granted under the Incentive Plan, are not paired with shares of limited voting stock. These shares of limited voting stock are not transferable separate from the limited partnership units they are paired with, and each Operating Partnership unit is redeemable together with one share of limited voting stock by its holder for cash, or, at our election, one share of our common stock. Each share of limited voting stock entitles its holder to one vote on the election of directors, certain extraordinary transactions, including a merger or sale of our Company, and amendments to our certificate of incorporation. Shares of limited voting stock are not entitled to any regular or special dividend payments or other distributions, including any dividends or other distributions declared or paid with respect to shares of our common stock or any other class or series of our stock, and are not entitled to receive any distributions in the event of liquidation or dissolution of our Company. Shares of limited voting stock have no class voting rights, except to the extent required by Delaware law. Any redemption of a unit in our Operating Partnership will be redeemed together with a share of limited voting stock in accordance with the redemption provisions of the Operating Partnership agreement, and the share of limited voting stock will be canceled and not subject to reissuance. As of December 31, 2012, there were 12,313,331 limited voting stock outstanding.
Incentive Partnership Units
We have issued a total of 1,377,714 incentive units as of December 31, 2012 to certain executives. Incentive units represent a profits interest in the Operating Partnership and generally will be treated as regular Operating Partnership units in the Operating Partnership and rank pari passu with the Operating Partnership units as to payment of distributions, including distributions of assets upon liquidation. Incentive units are subject to vesting, forfeiture and additional restrictions on transfer as may be determined by us as general partner of the Operating Partnership. The holder of an incentive unit has the right to convert all or a part of his vested incentive units into Operating Partnership units, but only to the extent of the incentive units economic capital account balance. As general partner, we may also cause any number of vested incentive units to be converted into Operating Partnership units to the extent of the incentive units economic capital account balance. We had 46,126,481 shares of common stock and 12,313,331 Operating Partnership units outstanding as of December 31, 2012, and 224,100 vested and unvested incentive units outstanding which were issued under our Incentive Plan. The share of the Company owned by the Operating Partnership unit holders is reflected as a separate component under the Noncontrolling Interests caption in the equity section of our consolidated balance sheets.
32
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Exchange of Noncontrolling Operating Partnership Units
During the year ended December 31, 2010, 1.5 million noncontrolling Operating Partnership units were redeemed for shares of the Companys common stock on a one-for-one basis. Neither the Company nor the Operating Partnership received any proceeds from the issuance of the common stock to the noncontrolling Operating Partnership unitholders. For the year ended December 31, 2012, 135,834 vested incentive units were redeemed for the Companys common stock. There were no redemptions during the year ended December 31, 2011.
Stock Compensation
We adopted the 2004 Equity Incentive Plan of Thomas Properties Group, Inc. as amended, (the Incentive Plan) effective upon the closing of our initial public offering and amended it in May 2007 and June 2008 to increase the shares reserved under the plan. The Incentive Plan provides incentives to our employees and is designed to attract, reward and retain personnel. We may issue up to 3,361,906 shares as either stock option awards, restricted stock awards or incentive unit awards of which 411,608, remain available for grant as of December 31, 2012 (see table below for details). In addition, under our Non-Employee Directors Restricted Stock Plan (the Non-Employee Directors Plan) a total of 60,000 shares are reserved for grant, of which 29,065 remain available for grant.
December 31, 2012 |
||||
Total awards authorized for issuance |
3,361,906 | |||
Less: |
||||
Incentive unit grants |
1,377,714 | |||
Restricted stock grants |
1,168,267 | |||
Stock option awards, net of forfeitures |
404,317 | |||
|
|
|||
Awards available for grant |
411,608 | |||
|
|
Restricted Stock
Under our Incentive Plan, we have issued the following restricted shares to executives of the Company:
Grant Date |
Shares | Aggregate Value (in thousands) |
Vesting Status | |||||||
October 2004 |
46,667 | $ | 560 | Fully vested | ||||||
February 2006 |
60,000 | 740 | Fully vested | |||||||
March 2007 |
100,000 | 1,580 | Fully vested | |||||||
March 2008 |
100,000 | 855 | Fully vested | |||||||
January 2009 |
410,000 | (1) | 863 | (4) | Partially vested | |||||
January 2010 |
100,000 | 263 | Fully vested | |||||||
January 2011 |
151,601 | (2) | 398 | (4) | Partially vested | |||||
February 2012 |
199,999 | (3) | 207 | (4) | Not vested | |||||
|
|
|
|
|||||||
Issued from Inception to December 31, 2012 |
1,168,267 | $ | 5,466 | |||||||
|
|
|
|
(1) | In January 2009, we issued 410,000 restricted shares to executives which vest over a period of five years. Fifty percent of the restricted shares vest based on stock performance. The other fifty percent are discretionary vesting shares based on individual and Company goals, which are currently reserved and will be considered granted upon vesting. As of December 31, 2012, there was 82,000 performance based and 123,000 discretionary based shares fully vested and 123,000 performance based and 82,000 discretionary based shares remain unvested. |
(2) | In January 2011, we issued 151,601 restricted shares to executives which vest over a period of two years. Fifty percent of the restricted shares vest based on stock performance. The other fifty percent are discretionary vesting shares based on individual and Company goals, which are currently reserved and will be considered granted upon vesting. As of December 31, 2012, there was 37,898 discretionary based shares fully vested and 75,802 performance based and 37,901 discretionary based shares remain unvested. |
33
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
(3) | In February 1, 2012, we issued 199,999 restricted shares to executives which vest over a period of two years. Fifty percent of the restricted shares vest based on stock performance and had a total fair market value of approximately $0.2 million. The other fifty percent are discretionary vesting shares based on goals determined by the Compensation Committee, which are currently reserved and will be considered granted and fully expensed upon vesting. As of December 31, 2012, there was 100,001 performance based and 99,998 discretionary based shares that remain unvested. |
(4) | Aggregate fair value as of grant date for the shares that vest based on stock performance and discretionary shares that have vested. |
The fair value of the restricted stock grants is determined based on the Companys common stock price at the date of grant. The fair value of restricted stock grants with market conditions is adjusted for the effect of those market conditions; this is estimated by a third-party valuation consultant. Holders of restricted stock have full voting rights and receive any dividends paid.
Under our Non-Employee Directors Plan, we have issued 30,935 shares of outstanding restricted shares to our non-employee directors. These shares are fully vested as of December 31, 2012 and the aggregate value of these shares is $0.4 million.
We recognized non-cash compensation expense and the related income tax benefit for the vesting of restricted stock grants for the years ended December 31, 2012, 2011 and 2010 as follows (in thousands). For the years ended December 31, 2012, 2011, and 2010, a full valuation allowance was recorded against the applicable income tax benefit.
2012 | 2011 | 2010 | ||||||||||
Compensation expense |
$ | 567 | $ | 530 | $ | 552 | ||||||
Income tax benefit |
$ | 220 | $ | 210 | $ | 221 |
The weighted-average grant date fair value of restricted stock granted to executives during the year ended December 31, 2012 was $2.07 per share. No grants of restricted stock were made to non-employee directors during the years ended December 31, 2012 and 2011. As of December 31, 2012, there was $86,000 of total unrecognized compensation cost related to the unvested performance based restricted stock under the Incentive Plan. The unrecognized compensation expense is expected to be recognized over a weighted average period of 0.9 year.
Incentive Partnership Units
Under our Incentive Plan, we have issued the following incentive units to certain executives:
Incentive Units |
Aggregate Value (in thousands) |
Vesting Status | ||||||||||
Issued in October 2004 |
730,003 | $ | 8,443 | Fully vested | ||||||||
Issued in 2006 |
120,000 | 1,463 | Fully vested | |||||||||
Issued in 2007 |
183,333 | 2,728 | Fully vested | |||||||||
Issued in 2008 |
270,000 | (1) | 2,006 | (3) | Fully vested | |||||||
Issued in 2011 |
74,378 | (2) | 194 | (3) | Partially vested | |||||||
|
|
|
|
|||||||||
Issued from Inception to December 31, 2012 |
1,377,714 | $ | 14,834 | |||||||||
|
|
|
|
(1) | During September 2012, the remaining 12,918 incentive units subject to market based performance measures vested. |
(2) | In January 2011, we issued 74,378 incentive units, which vest over a two year period. At issuance date, 37,189 units were subject to market based performance measures and 37,189 units were reserved and would be considered granted upon vesting, which would occur when it was determined that certain individual and Company goals have been met. During February 2012, 18,595 units subject to discretionary measures vested. Of the remaining incentive units, 37,189 units are subject to market based performance measures and 18,594 units are subject to discretionary measures. |
(3) | Aggregate fair value as of grant date for the shares that vest based on stock performance and discretionary shares that have vested. |
34
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
The fair value of the incentive unit grants is determined based on the Companys common stock price at the date of grant and a discount for post-vesting restrictions estimated by a third-party valuation consultant.
For the years ended December 31, 2012, 2011 and 2010, we recorded compensation expense for the vesting of the incentive unit grants totaling $183,000, $199,000 and $90,000, respectively. As of December 31, 2012, compensation expense related to performance based incentive units had been fully expensed.
Stock options
Under our Incentive Plan, we have 373,829 stock options outstanding as of December 31, 2012. There were no stock option grants for the years ended December 31, 2012, 2011 and 2010. The options vest at the rate of one third per year over three years and expire ten years after the date of commencement of vesting. The fair market value of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model. Below is a summary of the methodologies the Company utilized to estimate the assumptions used in the Black-Scholes option pricing model:
Expected TermThe expected term represents the period that the Companys stock-based awards are expected to be outstanding.
Expected Stock Price VolatilityThe Company estimates its volatility factor by using the historical average volatility of its common stock price over a period equal to the expected term.
Expected Dividend YieldThe dividend yield is based on the Companys expected future dividend payments.
Risk-Free Interest RateThe Company bases the risk-free interest rate used on the implied yield currently available on the U.S. Treasury zero-coupon issues with an equivalent remaining term.
Estimated ForfeituresWhen estimating forfeitures, the Company considers voluntary termination behavior as well as an analysis of actual option forfeitures. As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, it should be reduced for estimated forfeitures. FASB ASC 718 CompensationStock Compensation requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated based on historical experience.
35
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
The following is a summary of stock option activity under our Incentive Plan:
Shares | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value (in thousands) |
|||||||||||||
Outstanding at December 31, 2009 |
667,694 | $ | 12.75 | 6.3 | | |||||||||||
|
|
|
|
|||||||||||||
Granted |
| | ||||||||||||||
Forfeitures |
(59,770 | ) | 11.75 | |||||||||||||
Exercised |
| | ||||||||||||||
|
|
|
|
|||||||||||||
Outstanding at December 31, 2010 |
607,924 | 12.85 | 5.4 | | ||||||||||||
|
|
|
|
|||||||||||||
Granted |
| | ||||||||||||||
Forfeitures |
(72,778 | ) | 12.01 | |||||||||||||
Exercised |
| | ||||||||||||||
|
|
|
|
|||||||||||||
Outstanding at December 31, 2011 |
535,146 | 12.97 | 4.3 | | ||||||||||||
|
|
|
|
|||||||||||||
Granted |
| | ||||||||||||||
Forfeitures |
(161,317 | ) | 12.56 | |||||||||||||
Exercised |
| | ||||||||||||||
|
|
|
|
|||||||||||||
Outstanding & exercisable at December 31, 2012 |
373,829 | $ | 13.14 | 3.0 | | |||||||||||
|
|
|
|
|
|
|
|
We recognized compensation expense and the related income tax benefit for stock options for the years ended December 31, 2012, 2011 and 2010 as follows (in thousands). For the years ended December 31, 2011 and 2010, a full valuation allowance was recorded against the applicable income tax benefit.
2012 | 2011 | 2010 | ||||||||||
Compensation expense |
$ | | $ | 2 | $ | 30 | ||||||
Income tax benefit |
$ | | $ | 1 | $ | 12 |
As of December 31, 2012, all stock options have vested and have been fully recognized. There were no stock options granted or exercised during years ended December 31, 2012, 2011 and 2010.
Phantom Shares
During 2011, a Phantom Share Plan was approved by the compensation committee of the board of directors and adopted by the full board of directors. The purpose of the Plan is to reward and retain senior executive officers of the Company. This Plan is an incentive award plan that pays cash or, if the stockholders of the Company approve and authorize the issuance of additional shares, common stock. Generally, the recipient must still be employed with the Company to receive the cash or stock. There were 677,933 phantom shares granted under the plan in 2011 with a total grant date fair value of approximately $1.0 million. Each phantom share award vests upon the earlier of (i) ratably, one-third on each anniversary of the grant date, subject to achievement of (x) with respect to 50% of each award, a Company stock appreciation target rate of up to 12% pro-rated, and (y) with respect to 50% of each award, other goals determined by the Compensation Committee, in each case only to the extent that at or after such time the Companys stockholders have approved the issuance of sufficient shares of common stock under the Companys 2004 Equity Incentive Plan, as amended, or any successor thereto, to settle awards under the Plan in common stock, and (ii) the fifth anniversary of the grant date, subject to such grantees continued employment with the Company and achievement of the Company and other goals. During the first quarter of 2012, an additional 437,950 phantom shares were granted under the plan with the same terms as the 2011 grants with a total grant date fair value of approximately $0.9 million.
We have determined these grants should be treated as liability awards rather than equity awards in accordance with ASC 718 CompensationStock Compensation, and as such, the obligation is reflected in the accounts payable and other liabilities caption on our consolidated balance sheet.
36
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
The fair value of the phantom share grants is estimated by a third-party valuation consultant. Holders of phantom shares do not have voting rights. We reassess the fair value at the end of each quarter. The weighted average grant date fair value of the 2011 and 2012 phantom share grants were approximately $3.05 and $4.32 respectively.
There were no vested, forfeited or expired grants during the year ended December 31, 2012. As of December 31, 2012, there was $2.0 million of unrecognized compensation expense related to phantom shares. The unrecognized compensation expense is expected to be recognized over a weighted average period of 2.3 years.
We recognized non-cash compensation expense and the related income tax benefit for phantom shares for the years ended December 31, 2012, 2011 and 2010 as follows (in thousands). For the years ended December 31, 2012, 2011, and 2010, a full valuation allowance was recorded against the applicable income tax benefit.
2012 | 2011 | 2010 | ||||||||||
Compensation expense |
$ | 655 | $ | 167 | $ | | ||||||
Income tax benefit |
$ | 254 | $ | 66 | $ | |
Noncontrolling Interests
FASB ASC 810-10 Consolidation, provides that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. FASB ASC 810-10 also requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest and requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. In addition, FASB ASC 810-10 establishes a single method of accounting for changes in a parents ownership interest in a subsidiary that does not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. As a result of the issuance of FASB ASC 810-10, the guidance in FASB ASC 480-10, Classification and Measurement of Redeemable Securities, was amended to include redeemable noncontrolling interests within its scope. If noncontrolling interests are determined to be redeemable, they are to be carried at their redemption value as of the balance sheet date and reported as temporary equity.
Noncontrolling InterestsUnitholders in the Operating Partnership
Noncontrolling interestsUnitholders in the Operating Partnership on our consolidated balance sheets relate solely to the partnership and incentive units in the Operating Partnership that are not owned by the Company. In conjunction with the formation of the Company, certain persons and entities contributing interests in properties to the Operating Partnership received Operating Partnership units. In addition, certain employees of the Operating Partnership have received incentive units in connection with services rendered or to be rendered to the Operating Partnership. Limited partners who have been issued incentive units have the right to require the Operating Partnership to redeem part or all of their incentive units upon vesting of the incentive units, if applicable. The Company may elect to acquire those incentive units in exchange for shares of the Companys common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distributions and similar events, or pay cash based upon the fair market value of an equivalent number of shares of the Companys common stock at the time of redemption.
In accordance with FASB ASC 810-10, the Company has determined the Operating Partnership units should be classified as noncontrolling interests within the permanent equity section in the accompanying consolidated balance sheets. The Company periodically evaluates individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity. Any noncontrolling interest that fails to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.
The redemption value of the 224,100 outstanding and not yet redeemed incentive units at December 31, 2012 was approximately $1.2 million based on the closing price of the Companys common stock of $5.41 per share as of December 31, 2012.
37
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Noncontrolling InterestsPartners in Consolidated Real Estate Entities
Noncontrolling interestPartners in Consolidated Real Estate Entities represents the proportionate share of equity in the partnerships and limited liability companies listed below held by non-affiliated partners. Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the partnership and limited liability company agreements. Following are the stated ownership percentages of the unaffiliated partners in these consolidated entities, prior to any preferred or special allocations, as of December 31, 2012.
Non-Affiliated Partner Share |
||||
One Commerce Square |
25.0 | % | ||
Two Commerce Square |
25.0 | % | ||
Murano |
27.0 | % | ||
TPG Austin Partner, LLC |
33.3 | % |
7. Related Party Transactions
We provide certain property management, leasing, development and investment advisory services in connection with service agreements with certain of our consolidated subsidiaries and unconsolidated entities. The following is a summary of fee revenue and expenses related to these services for the years ended December 31, 2012, 2011 and 2010 (in thousands):
Twelve months ended December 31, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Property management, leasing and development services fees |
$ | 21,184 | $ | 21,680 | $ | 22,972 | ||||||
Investment advisory fees |
5,484 | 10,420 | 7,415 | |||||||||
|
|
|
|
|
|
|||||||
Total fees |
26,668 | 32,100 | 30,387 | |||||||||
Investment advisory, management, leasing and development services expenses |
(12,461 | ) | (12,754 | ) | (12,221 | ) | ||||||
|
|
|
|
|
|
|||||||
Net investment advisory, management, leasing and development services income |
$ | 14,207 | $ | 19,346 | $ | 18,166 | ||||||
|
|
|
|
|
|
|||||||
Total fees attributable to third parties and related parties: |
||||||||||||
Total fees attributable to third parties |
$ | 4,583 | $ | 8,520 | $ | 7,703 | ||||||
Total fees attributable to related parties (unconsolidated entities and subsidiaries) |
22,085 | 23,580 | 22,684 | |||||||||
|
|
|
|
|
|
|||||||
Total fees before intercompany transaction eliminations |
$ | 26,668 | $ | 32,100 | $ | 30,387 | ||||||
|
|
|
|
|
|
|||||||
Reconciliation of total fees to consolidated statement of operations: |
||||||||||||
Total fees before intercompany transaction eliminations |
$ | 26,668 | $ | 32,100 | $ | 30,387 | ||||||
Elimination of intercompany fee revenues (subsidiaries and our share of unconsolidated entities) |
(6,397 | ) | (5,718 | ) | (6,214 | ) | ||||||
|
|
|
|
|
|
|||||||
Total fees net of eliminations |
$ | 20,271 | $ | 26,382 | $ | 24,173 | ||||||
|
|
|
|
|
|
38
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Total fees as presented in the consolidated statement of operations: |
||||||||||||
Investment advisory, management, leasing, and development services third parties |
$ | 4,583 | $ | 8,520 | $ | 7,703 | ||||||
Investment advisory, management, leasing, and development services unconsolidated real estate entities (related parties) |
15,688 | 17,862 | 16,470 | |||||||||
|
|
|
|
|
|
|||||||
Total fees |
$ | 20,271 | $ | 26,382 | $ | 24,173 | ||||||
|
|
|
|
|
|
8. Income Taxes
All operations are carried on through the Operating Partnership and its subsidiaries which are pass-through entities that are generally not subject to federal or state income taxation, as all of the taxable income, gains, losses, deductions, and credits are passed through to its partners. However, the Operating Partnership and some of its subsidiaries are subject to income taxes in Texas. We are responsible for our share of taxable income or loss of the Operating Partnership allocated to us in accordance with the Operating Partnerships Agreement of Limited Partnership. As of December 31, 2012, 2011 and 2010, we held a respective 78.7%, 74.7% and 74.7% capital interest in the Operating Partnership. For the years ended December 31, 2012, 2011 and 2010, we were allocated 77.0% , 74.7%, and 70.9%, respectively, of the weighted average income and losses from the Operating Partnership.
Our effective tax rate is 1.1%, 26.4% and 2.2%, respectively, for the years ended December 31, 2012, 2011 and 2010. The resulting tax rate is primarily due to income attributable to the noncontrolling interests as a result of our adoption of FASB ASC 810, reversal of accrued interest relating to unrecognized tax benefits for which the statute of limitations period has lapsed, and change in the valuation allowance primarily related to income (loss) from the Companys interest in the Operating Partnership.
The provision for income taxes is based on reported income before income taxes. Deferred income tax assets and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amount recognized for tax purposes, as measured by applying the currently enacted tax laws.
The benefit (provision) for income taxes consists of the following for the years ended December 31, 2012, 2011 and 2010 (in thousands):
2012 | 2011 | 2010 | ||||||||||
Current income tax benefit (provision): |
||||||||||||
Federal |
$ | 4,694 | $ | (92 | ) | $ | 3,109 | |||||
State |
1,126 | 516 | 250 | |||||||||
|
|
|
|
|
|
|||||||
Total current income tax benefit (provision) |
5,820 | 424 | 3,359 | |||||||||
|
|
|
|
|
|
|||||||
Deferred income tax benefit (provision): |
||||||||||||
Federal |
2,273 | (1,485 | ) | 371 | ||||||||
State |
145 | (726 | ) | 481 | ||||||||
|
|
|
|
|
|
|||||||
Total deferred income tax benefit (provision) |
2,418 | (2,211 | ) | 852 | ||||||||
|
|
|
|
|
|
|||||||
Interest expense, gross of related tax effects |
275 | 728 | 803 | |||||||||
Change in valuation allowance |
(8,128 | ) | 2,488 | (4,657 | ) | |||||||
|
|
|
|
|
|
|||||||
Benefit (provision) for income taxes |
$ | 385 | $ | 1,429 | $ | 357 | ||||||
|
|
|
|
|
|
39
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
A reconciliation of the benefit (provision) for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income (loss) before income taxes for the years ended December 31, 2012, 2011 and 2010 are as follows (in thousands):
2012 | 2011 | 2010 | ||||||||||
Tax benefit (provision) at statutory rate of 35% |
$ | 11,780 | $ | (1,898 | ) | $ | 5,753 | |||||
State income taxes, net of federal tax benefit & reduction in state valuation allowance |
943 | 139 | 459 | |||||||||
Restricted incentive unit compensation |
(49 | ) | (52 | ) | (20 | ) | ||||||
Interest expense, gross of related tax effects |
275 | 728 | 1,129 | |||||||||
Noncontrolling interests |
(2,758 | ) | 348 | (1,631 | ) | |||||||
Valuation allowance |
(8,128 | ) | 2,488 | (4,657 | ) | |||||||
Other |
(1,678 | ) | (324 | ) | (676 | ) | ||||||
|
|
|
|
|
|
|||||||
Benefit (provision) for income taxes |
$ | 385 | $ | 1,429 | $ | 357 | ||||||
|
|
|
|
|
|
|||||||
Effective income tax rate |
1.1 | % | 26.4 | % | 2.2 | % | ||||||
|
|
|
|
|
|
The significant components of the net deferred tax (asset), which is included in other assets on the Companys balance sheet, as of December 31, 2012 and 2011 are as follows (in thousands):
2012 | 2011 | |||||||
Deferred tax (asset): |
||||||||
Net operating loss carry forward |
$ | (22,445 | ) | $ | (7,712 | ) | ||
Stock compensation |
(913 | ) | (629 | ) | ||||
Income (loss) from Operating Partnership |
9,601 | (8,371 | ) | |||||
Impairment loss |
(12,955 | ) | (7,117 | ) | ||||
Valuation allowance |
17,686 | 9,559 | ||||||
Other, net |
999 | 533 | ||||||
|
|
|
|
|||||
Deferred tax (asset), net |
$ | (8,027 | ) | $ | (13,737 | ) | ||
|
|
|
|
FASB ASC 740-10-30-17 Accounting for Income Taxes, requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. Future realization of the deferred tax asset is dependent on the reversal of existing taxable temporary differences, carryback potential, tax-planning strategies and on us generating sufficient taxable income in future years. As of December 31, 2012, a valuation allowance of approximately $17.7 million had been established against the net deferred income tax assets to an amount that will more likely than not be realized. During 2012, the valuation allowance increased by $8.1 million, resulting from an increase in the net deferred tax assets primarily related to income (loss) from the Companys interest in the Operating Partnership. Accordingly, the net deferred tax asset of $8.0 million and $13.7 million, for the years ended December 31, 2012 and 2011 respectively, relates to the Companys uncertain tax positions.
FASB ASC 740-10-25 clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
As of December 31, 2012, 2011 and 2010, the Company has recorded unrecognized tax benefits of approximately $8.0 million, $13.7 million, and $13.4 million, respectively, and if recognized, would not affect our effective tax rate. The Companys policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the years ended December 31, 2012, 2011 and 2010, we recorded $(0.3) million, $(0.7) million, and $(1.1) million, respectively, of interest related to unrecognized tax benefits as a component of income tax expense. Additionally, for the years ended December 31, 2012, 2011 and 2010, we recorded a reversal of accrued interest relating to unrecognized tax benefits for which the statute of limitations period has lapsed in the amount of $0.3 million, $0.8 million, and $1.7 million, respectively, which is recorded as a reduction of income tax expense. As of December 31, 2012, 2011 and 2010, the Company has recorded $0, $0.3 million, and $1.0 million, respectively, of accrued interest with respect to unrecognized tax benefits. We have not recorded any penalties with respect to unrecognized tax benefits.
40
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
A reconciliation of the Companys unrecognized tax benefits as of December 31, 2012, 2011 and 2010 are as follows (in thousands):
2012 | 2011 | 2010 | ||||||||||
Unrecognized Tax BenefitsOpening Balance |
$ | 13,738 | $ | 13,436 | $ | 17,782 | ||||||
Gross increasestax positions in prior period |
| 1,802 | | |||||||||
Gross decreasestax positions in prior period |
(1,891 | ) | (1,500 | ) | (4,346 | ) | ||||||
Gross increasescurrent period tax positions |
| | | |||||||||
Gross decreaseslapse of statute of limitations |
(3,819 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Unrecognized Tax BenefitsEnding Balance |
$ | 8,028 | $ | 13,738 | $ | 13,436 | ||||||
|
|
|
|
|
|
We do not anticipate any significant increases or decreases to the amounts of unrecognized tax benefits and related accrued interest within the next twelve months.
In 2007, an ownership change pursuant to Internal Revenue Code Section 382 (Section 382) occurred. The Companys federal and state net operating loss carryforwards in existence at that time were subject to a gross annual limitation of $9.9 million. Net operating loss carryforwards generated subsequent to the 2007 deemed ownership change were not subject to the Section 382 limitation. On June 12, 2012, as a result of the acquisition of 8,695,653 shares of common stock by affiliates of Madison International Realty, the Company believes a second change in ownership pursuant to Section 382 occurred. Accordingly, as of June 12, 2012, the Companys federal and state net operating loss carryforwards and, potentially, certain post June 12, 2012 deductions and losses (to the extent such losses are considered recognized built-in losses and to the extent of the companys net unrealized built-in loss (if any) under Section 382) are subject to an annual Section 382 limitation of approximately $5.7 million. As the new annual limitation is less than the previous $9.9 million annual limitation imposed on 2007 and prior net operating losses, the new annual limitation of $5.7 million is now applied against all federal and state net operating loss carryforwards in existence as of June 12, 2012. Net operating losses generated after June 12, 2012 are generally not subject to the Section 382 limitation. As of the year ended December 31, 2012, the Company anticipates having net operating loss carryforwards of $54.0 million for federal purposes and $48.0 million for state purposes. The Companys net operating loss carryforwards are subject to varying expirations from 2020 through 2032.
The Company files U.S. federal income tax returns and returns in various state jurisdictions. For federal and state purposes, the years ended December 31, 2009 through 2012 remain subject to examination by the respective tax jurisdictions.
9. Fair Value of Financial Instruments
Our estimates of the fair value of financial instruments as of December 31, 2012 were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability. The hierarchy consists of three broad levels as follows:
1. | Level 1 InputsQuoted prices in active markets for identical assets or liabilities |
2. | Level 2 InputsSignificant other observable inputs (can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as discounts and borrowing rates with similar terms and maturities) |
3. | Level 3 InputsSignificant unobservable inputs (based on an entitys own assumptions, since there is little, if any, related market activity) |
The carrying amounts for cash and cash equivalents, restricted cash, rent and other receivables, accounts payable and other liabilities approximate fair value due to the short-term nature of these instruments.
41
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
The Company uses a discounted cash flow analysis to estimate the fair value of our mortgage loans. The inputs used in preparing the discounted cash flows include actual maturity dates and scheduled interest and principal payments as well as estimates for market loan-to-value ratios and discount rates. The discount rate, which is the most significant input, is estimated based on our knowledge of the market including discussions with market participants. As this input has more attributes of a Level 3 input than a Level 2 input, we classify it as such.
As of December 31, 2012 and December 31, 2011, the book and fair values of our mortgage loans were as follows (in thousands):
December 31, 2012 | December 31, 2011 | |||||||||||||||
Book Value | Fair Value | Book Value | Fair Value | |||||||||||||
Mortgage Loans |
$ | 281,375 | $ | 286,223 | $ | 289,523 | $ | 284,146 |
10. Minimum Future Lease Rentals
We have entered into various lease agreements with tenants as of December 31, 2012. The minimum future cash rents receivable under non-cancelable operating leases in each of the next five years and thereafter are as follows (in thousands):
Year ending December 31, |
||||
2013 |
$ | 30,635 | ||
2014 |
30,106 | |||
2015 |
25,944 | |||
2016 |
20,180 | |||
2017 |
19,364 | |||
Thereafter |
48,082 | |||
|
|
|||
$ | 174,311 | |||
|
|
The leases generally also require reimbursement of the tenants proportional share of common area, real estate taxes and other operating expenses, which are not included in the amounts above.
11. Revenue Concentrations
Rental revenue concentrations
For the year ended December 31, 2012, rental revenue from three tenants represented approximately 13.0%, 14.0%, and 10.0%, respectively, of the Companys total rental revenues and tenant reimbursements (excluding tenant reimbursements for over-standard usage of certain operating expenses). The leases expire in 2015, 2020, and 2022, respectively. For the year ended December 31, 2011, rental revenue and tenant reimbursements from two tenants represented approximately 14.9% and 13.7%, respectively, of the Companys rental revenues and tenant reimbursements (excluding tenant reimbursements for over-standard usage of certain operating expenses). The leases expire in 2020 and 2015, respectively. For year ended December 31, 2010, rental revenue and tenant reimbursements from two tenants represented approximately 16.4% and 14.0%, respectively, of the Companys rental revenues and tenant reimbursements (excluding tenant reimbursements for over-standard usage of certain operating expenses). The leases expire in 2020 and 2015, respectively.
Concentrations related to investment advisory, property management, leasing and development services revenue
Under agreements with CalSTRS, we provide property acquisition, investment advisory, property management, leasing and development services for CalSTRS under a separate account relationship and through a joint venture relationship. At both December 31, 2012 and 2011, there were two office properties subject to the separate account relationship. At December 31, 2012 and 2011, there were 14 and 17 office properties, respectively, subject to the joint venture relationship. We asset manage all of these properties.
Under the separate account relationship, we earn acquisition fees over the first three years after a property is acquired, if the property meets or exceeds the pro forma operating results that were submitted at the time of acquisition and a performance index associated with the region in which the property is located. The two properties under the separate account relationship are no longer eligible for acquisition fees. Under the TPG/CalSTRS joint venture relationship, we are paid acquisition fees at the time a property is acquired, as a percent of the total acquisition price. We did not earn any acquisition fees during the years ended December 31, 2012, 2011 and 2010.
42
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Under the separate account relationship, we earn asset management fees paid on a quarterly basis, based on the annual net operating income of the properties. Under the joint venture relationship, asset management fees are paid on a monthly basis, initially based upon a percentage of a propertys annual appraised value for properties that are unstabilized at the time of acquisition. At the point of stabilization of the property, asset management fees are calculated based on net operating income.
We perform property management and leasing services for two separate account properties and six joint venture properties under agreements between TPG and CalSTRS. We are entitled to property management fees ranging from 2% to 3% of the gross revenues of the particular property, paid on a monthly basis. In addition, we are reimbursed for compensation paid to certain of our employees and direct out-of-pocket expenses. The management and leasing agreements expire on the third anniversary of each propertys acquisition. The agreements are automatically renewed for successive periods of one year each, unless we elect not to renew the agreements.
For properties in which we are responsible for the leasing and development services, we are entitled to receive market leasing commissions and development fees as defined in the agreements with CalSTRS.
For the years ended December 31, 2012, 2011 and 2010, we earned fees under agreements with CalSTRS as follows, which are shown net of elimination for our ownership share (in thousands):
2012 | 2011 | 2010 | ||||||||||
Joint Venture Properties: |
||||||||||||
Asset management fees |
$ | 4,066 | $ | 4,671 | $ | 5,357 | ||||||
Property management fees |
6,897 | 8,182 | 8,043 | |||||||||
Leasing commissions |
4,075 | 3,636 | 3,462 | |||||||||
Development fees |
650 | 1,374 | 601 | |||||||||
|
|
|
|
|
|
|||||||
Subtotalfees before payroll reimbursements |
15,688 | 17,863 | 17,463 | |||||||||
|
|
|
|
|
|
|||||||
Payroll reimbursements (1) |
3,671 | 4,619 | 4,642 | |||||||||
|
|
|
|
|
|
|||||||
Total Joint Venture Properties |
19,359 | 22,482 | 22,105 | |||||||||
|
|
|
|
|
|
|||||||
Separate Account Properties: |
||||||||||||
Asset management fees |
352 | 4,662 | 489 | |||||||||
Property management fees |
477 | 440 | 691 | |||||||||
Leasing commissions |
229 | 50 | 277 | |||||||||
Development fees |
45 | 39 | 86 | |||||||||
|
|
|
|
|
|
|||||||
Subtotalfees before payroll reimbursements |
1,103 | 5,191 | 1,543 | |||||||||
|
|
|
|
|
|
|||||||
Payroll reimbursements (1) |
423 | 455 | 573 | |||||||||
|
|
|
|
|
|
|||||||
Total Separate Account Properties |
1,526 | 5,646 | 2,116 | |||||||||
|
|
|
|
|
|
|||||||
Total Joint Venture and Separate Account Properties |
$ | 20,885 | $ | 28,128 | $ | 24,221 | ||||||
|
|
|
|
|
|
(1) | These reimbursements represent primarily the cost of on-site property management personnel incurred on behalf of the managed properties. |
Under the separate account relationship, we receive incentive compensation based upon performance above a minimum hurdle rate, at which time we begin to participate in cash flow from the relevant property. Incentive compensation is paid at the time an investment is sold. In connection with the ten year anniversary of our separate account relationship with CalSTRS and the final performance accounting for Valencia Town Center, Reflections I and Reflections II, we were paid an incentive fee by CalSTRS of $4.4 million in 2011. No incentive compensation was earned during the years ended December 31, 2012 and 2010.
43
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
Under the joint venture relationship, incentive compensation is based on a minimum return on investment to CalSTRS, following which we participate in cash flow above the stated return, subject to a clawback provision if returns for a property fall below the stated return. We did not earn any incentive compensation under the joint venture agreement during the years ended December 31, 2012, 2011 and 2010.
At December 31, 2012 and 2011, we had accounts receivable, including amounts generated under the above agreements, of $2.7 million and $3.0 million, respectively, including receivables of $1.7 million and $0.5 million related to TPG/CalSTRS and the TPG/CalSTRS Austin, LLC, respectively for 2012 and $2.0 million due from TPG/CalSTRS in 2011.
12. Commitments and Contingencies
Pending Litigation
In June 2012, the Company commenced litigation contesting a consultants claim of approximately $5.1 million for incentive compensation pursuant to a consulting agreement. At the same time, the consultant commenced an action against the Company for breach of contract due to the Companys failure to pay the consultants invoice. The Company intends to vigorously defend against the consultants claim. Management believes that any liability that may potentially result upon resolution of this matter will not have a material adverse effect on our business or financial condition but may have a material adverse effect on our results of operations.
General
We have been named as a defendant in a number of premises liability claims in the ordinary course of business. We believe that the ultimate resolution of these claims will not have a material adverse effect on our financial position and results of operations.
We sponsor a 401(k) plan for our employees. Our contributions were $55,000, $47,000 and $40,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
We are a tenant in City National Plaza through May 2014 and in One Commerce Square through February 2016. For the years ended December 31, 2012, 2011 and 2010, we incurred rent expense of $0.5 million, $0.5 million and $0.5 million, respectively, to City National Plaza. The rent expense related to One Commerce Square is eliminated in consolidation. The minimum future rents payable as of December 31, 2012 are $0.7 million under the City National Plaza lease.
In connection with the ownership, operation and management of the real estate properties, we may be potentially liable for costs and damages related to environmental matters. We have not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of the properties, and we are not aware of any other existing environmental condition with respect to any of the properties that management believes will have a material adverse effect on our assets or results of operations.
A mortgage loan secured by a first trust deed on 2121 Market Street is guaranteed by our Operating Partnership, up to a maximum amount of $14.0 million expiring in December 2022. 2121 Market Street is an unconsolidated real estate entity in which we have a 1.0% limited partnership interest. See Note 4 for disclosure of guarantees related to our consolidated debt.
In connection with our Campus El Segundo mortgage loan (see Note 4), we have guaranteed and promised to pay the principal, interest and any other sum payable under the loan in the event the borrower, a wholly-owned entity of our Operating Partnership, does not do so.
In connection with our Murano construction loan (see Note 4), TPG gave the lender a limited guaranty which (i) guarantees repayment of the loan in the event of certain bankruptcy events affecting the borrower, (ii) guarantees payment of the lenders damages from customary bad boy actions of the borrower or TPG (such as fraud, physical waste of the property, misappropriation of funds and similar bad acts); and (iii) guarantees payment of the amount, if any, by which the loan balance at the time exceeds 80% of the bulk sale value of the collateral upon an acceleration of the loan triggered by a borrower default.
In connection with our Four Points Centre construction loan (see Note 4), we have guaranteed in favor of and promised to pay to the lender 46.5% of the principal, interest and any other sum payable under the loan in the event the borrower, a wholly-owned entity of our Operating Partnership, does not do so. At December 31, 2012, the outstanding balance was $26.5 million,
44
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
which results in a maximum guarantee amount based on 46.5% of $12.3 million. Upon the occurrence of certain events, as defined in the repayment and completion guaranty agreement, our maximum liability as guarantor will be reduced to 31.5% of all sums payable under the loan, and upon the occurrence of even further events, as defined, our maximum liability as guarantor will be reduced to 25.0% of all sums payable under the loan. Furthermore, we agreed to guarantee the completion of the construction improvements including tenant improvements, as defined in the agreement, in the event of any default of the borrower. The borrower has completed the core and shell construction. If the borrower fails to complete the remaining required work, the guarantor agrees to perform timely all of the completion obligations, as defined in the agreement.
Insurance
We maintain general liability insurance with limits of $200 million per occurrence and all risk property and rental value insurance with limits of $1.25 billion per occurrence (except for a limit of $600 million per occurrence for one particular asset grouping), with terrorism limits of $1.15 billion per occurrence (except for a limit of $600 million per occurrence for one particular asset grouping), and flood insurance with a limit of $200 million per occurrence. Our California properties have earthquake insurance with coverage of $200 million per occurrence, subject to a deductible in the amount of 5% of the value of the affected property.
45
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
13. Subsequent Events
In January and March 2013, TPG completed the sale of certain land parcels totaling 17.5 acres and 27.9 acres, respectively, at Four Points Centre in Austin, Texas, for $4.9 million and $6.4 million, respectively. TPG received net proceeds from these two transactions of $1.1 million (after a $3.7 million paydown of the Four Points Centre mortgage debt) and $2.7 million (after a $3.1 million pay down of the loan), respectively.
On March 8, 2013, we entered into a loan agreement with a lender for a new mortgage on Two Commerce Square in the amount of $112.0 million. The loan, which has a fixed interest rate of 3.96% for a ten year term, funded on March 8, 2013. The loan replaced the existing mortgage on the property that had an outstanding balance of $106.6 million as of December 31, 2012, and a maturity date of May 9, 2013, and was open to prepayment without penalty on and after March 8, 2013.
46
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION(Continued)
14. Quarterly Financial InformationUnaudited
The tables below reflect the selected quarterly information for us for the years ended December 31, 2012 and 2011. Certain prior year amounts have been reclassified to conform to the current year presentation (in thousands, except for share and per share amounts).
Three Months Ended | ||||||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||||||
2012 | 2012 | 2012 | 2012 | |||||||||||||
Total revenue |
$ | 26,272 | $ | 22,111 | $ | 20,763 | $ | 21,470 | ||||||||
Income (loss) before gain on sale of real estate, gain (loss) on early extinguishment of debt, interest income, equity in net income (loss) of unconsolidated real estate entities, noncontrolling interests and provision for income tax |
(17,094 | ) | (3,797 | ) | (5,290 | ) | (3,878 | ) | ||||||||
Income (loss) before noncontrolling interests and provision/benefit for income taxes |
(18,131 | ) | (5,555 | ) | (6,076 | ) | (3,895 | ) | ||||||||
Net income (loss) |
(13,387 | ) | (4,085 | ) | (4,804 | ) | (3,120 | ) | ||||||||
Net income (loss) per share-basic and diluted |
$ | (0.29 | ) | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.09 | ) | ||||
Weighted-average shares outstanding-basic |
45,594,590 | 45,517,207 | 38,591,868 | 36,737,276 | ||||||||||||
Weighted-average shares outstanding-diluted |
45,594,590 | 45,517,207 | 38,591,868 | 36,737,276 |
Three Months Ended | ||||||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||||||
2011 | 2011 | 2011 | 2011 | |||||||||||||
Total revenue |
$ | 21,582 | $ | 28,158 | $ | 23,314 | $ | 21,927 | ||||||||
Income (loss) before gain on sale of real estate, gain (loss) on early extinguishment of debt, interest income, equity in net income (loss) of unconsolidated real estate entities, noncontrolling interests and provision for income tax |
(11,258 | ) | 1,697 | (2,831 | ) | (3,429 | ) | |||||||||
Income (loss) before noncontrolling interests and provision/ benefit for income taxes |
11,899 | 1,349 | (3,715 | ) | (4,110 | ) | ||||||||||
Net income (loss) |
10,068 | 2,083 | (3,006 | ) | (3,285 | ) | ||||||||||
Net income (loss) per share-basic and diluted |
$ | 0.27 | $ | 0.06 | $ | (0.08 | ) | $ | (0.09 | ) | ||||||
Weighted-average shares outstanding-basic |
36,647,394 | 36,647,394 | 36,647,394 | 36,534,505 | ||||||||||||
Weighted-average shares outstanding-diluted |
36,865,327 | 36,873,339 | 36,647,394 | 36,534,505 |
47
SCHEDULE IIIINVESTMENTS IN REAL ESTATE
(In thousands)
One Commerce Square |
Two Commerce Square |
Murano | Four Points Centre |
Campus El Segundo |
||||||||||||||||
Property Type |
|
High-rise Office |
|
|
High-rise Office |
|
|
Condominium Units Held for Sale |
|
|
Suburban office; Undeveloped land; Office/ Retail/Hotel/ Development |
|
|
Developable land; Office/ Retail/Hotel/ Development |
| |||||
Location |
Philadelphia, PA | Philadelphia, PA | Philadelphia, PA | Austin, TX | El Segundo, CA | |||||||||||||||
Encumbrances, net |
$ | 126,869 | $ | 106,612 | $ | 6,941 | $ | 26,453 | $ | 14,500 | ||||||||||
Initial cost to the real estate entity that acquired the property: |
||||||||||||||||||||
Land and improvements |
14,259 | 15,758 | 6,213 | 10,523 | 39,937 | |||||||||||||||
Buildings and improvements |
87,653 | 147,951 | | | | |||||||||||||||
Cost capitalized subsequent to acquisition: |
||||||||||||||||||||
Land and improvements |
528 | 706 | 35 | 4,094 | 5,182 | |||||||||||||||
Buildings and improvements |
45,588 | (1) | 39,177 | (1) | | 41,021 | 3,264 | |||||||||||||
Real estate and condominium units held for sale |
| | 31,678 | 4,837 | | |||||||||||||||
Gross amount at which carried at close of period: |
||||||||||||||||||||
Land and improvements |
14,787 | 16,464 | 35 | 14,617 | 45,119 | |||||||||||||||
Buildings and improvements |
133,241 | 187,128 | | 41,021 | 3,264 | |||||||||||||||
Real estate and condominium units held for sale |
| | 37,891 | 4,837 | | |||||||||||||||
Accumulated depreciation and amortization (2) |
(44,463 | ) | (77,792 | ) | (5 | ) | (3,882 | ) | (1,103 | ) | ||||||||||
Date construction completed |
1987 | 1992 | 2008 | see footnote (3) below | N/A | |||||||||||||||
Investments in real estate: |
||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||
Balance, beginning of the year |
$ | 507,351 | $ | 518,542 | $ | 533,506 | ||||||||||||||
Additions during the year: |
||||||||||||||||||||
Improvements |
17,843 | 10,782 | 1,477 | |||||||||||||||||
Deductions during the year: |
||||||||||||||||||||
Cost of real estate sold |
(13,408 | ) | (4,644 | ) | (10,425 | ) | ||||||||||||||
Asset impairment |
(12,745 | ) | (8,095 | ) | (4,500 | ) | ||||||||||||||
Reimbursement of capitalized costs |
| (8,500 | ) | | ||||||||||||||||
Retirements |
(637 | ) | (734 | ) | (1,516 | ) | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Balance, end of the year |
$ | 498,404 | $ | 507,351 | $ | 518,542 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Accumulated depreciation related to investments in real estate: |
||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||
Balance, beginning of the year |
$ | (115,571 | ) | $ | (105,271 | ) | $ | (95,561 | ) | |||||||||||
Additions during the year |
(12,312 | ) | (11,037 | ) | (10,749 | ) | ||||||||||||||
Retirements during the year |
638 | 737 | 1,039 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Balance, end of the year |
$ | (127,245 | ) | $ | (115,571 | ) | $ | (105,271 | ) | |||||||||||
|
|
|
|
|
|
(1) | Included in the total are write-offs for fully depreciated tenant improvements. |
(2) | The depreciable life for buildings ranges from 40 to 50 years, 5 to 40 years for building improvements, and the shorter of the useful lives or the terms of the related leases for tenant improvements. |
(3) | Four Points Centre consists of developable land as well as two office buildings, which were completed in 2008. |
The aggregate gross cost of our investments in real estate for federal income tax purposes approximated $419.9 million as of December 31, 2012 (unaudited).
48
Exhibit 99.2
INDEX TO FINANCIAL STATEMENTS
Page | ||
Thomas Properties Group, Inc. and Subsidiaries: |
||
Consolidated Balance Sheets as of June 30, 2013 (Unaudited) and December 31, 2012 |
1 | |
2 | ||
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2013 and 2012 (Unaudited) |
3 | |
4 |
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
(In thousands, except share data)
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(unaudited) | (audited) | |||||||
ASSETS | ||||||||
Investments in real estate: |
||||||||
Land and improvements |
$ | 32,552 | $ | 32,552 | ||||
Land and improvementsdevelopment properties |
6,331 | 6,403 | ||||||
Buildings and improvements |
320,171 | 318,472 | ||||||
Tenant improvements |
45,857 | 42,917 | ||||||
|
|
|
|
|||||
Total investments in real estate |
404,911 | 400,344 | ||||||
Less accumulated depreciation |
(130,736 | ) | (126,143 | ) | ||||
|
|
|
|
|||||
Investments in real estate, net |
274,175 | 274,201 | ||||||
Condominium units held for sale |
32,095 | 37,891 | ||||||
Investments in unconsolidated real estate entities |
68,429 | 106,210 | ||||||
Cash and cash equivalents, unrestricted |
127,879 | 76,689 | ||||||
Restricted cash |
3,935 | 11,611 | ||||||
Marketable securities |
9,879 | | ||||||
Rents and other receivables, net |
1,401 | 1,825 | ||||||
Receivables from unconsolidated real estate entities |
2,216 | 2,347 | ||||||
Deferred rents |
20,343 | 18,994 | ||||||
Deferred leasing and loan costs, net |
12,556 | 10,716 | ||||||
Other assets, net |
13,667 | 10,222 | ||||||
Assets associated with land held for sale |
| 60,286 | ||||||
|
|
|
|
|||||
Total assets |
$ | 566,575 | $ | 610,992 | ||||
|
|
|
|
|||||
LIABILITIES AND EQUITY | ||||||||
Liabilities: |
||||||||
Mortgage loans |
$ | 261,738 | $ | 259,995 | ||||
Accounts payable and other liabilities, net |
25,299 | 28,346 | ||||||
Losses and distributions in excess of investments in unconsolidated real estate entities |
11,366 | 10,084 | ||||||
Prepaid rent |
2,355 | 1,784 | ||||||
Deferred revenue |
11,250 | 10,566 | ||||||
Mortgage loans associated with land held for sale |
| 21,380 | ||||||
|
|
|
|
|||||
Total liabilities |
312,008 | 332,155 | ||||||
Commitments and Contingencies (Note 9) |
||||||||
Equity: |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued or outstanding as of June 30, 2013 and December 31, 2012 |
| | ||||||
Common stock, $.01 par value, 225,000,000 shares authorized, 46,969,703 and 46,126,481 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively |
470 | 461 | ||||||
Limited voting stock, $.01 par value, 20,000,000 shares authorized, 11,646,949 and 12,313,331 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively |
116 | 123 | ||||||
Additional paid-in capital |
261,833 | 258,780 | ||||||
Retained deficit and dividends including $96 and $- of other comprehensive loss as of June 30, 2013 and December 31, 2012, respectively |
(100,140 | ) | (83,635 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
162,279 | 175,729 | ||||||
|
|
|
|
|||||
Noncontrolling interests: |
||||||||
Unitholders in the Operating Partnership |
37,781 | 44,154 | ||||||
Partners in consolidated real estate entities |
54,507 | 58,954 | ||||||
|
|
|
|
|||||
Total noncontrolling interests |
92,288 | 103,108 | ||||||
|
|
|
|
|||||
Total equity |
254,567 | 278,837 | ||||||
|
|
|
|
|||||
Total liabilities and equity |
$ | 566,575 | $ | 610,992 | ||||
|
|
|
|
See accompanying notes to consolidated financial information.
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenues: |
||||||||||||||||
Rental |
$ | 7,910 | $ | 7,684 | $ | 15,299 | $ | 15,530 | ||||||||
Tenant reimbursements |
5,393 | 4,981 | 10,969 | 10,402 | ||||||||||||
Parking and other |
828 | 745 | 2,208 | 1,485 | ||||||||||||
Investment advisory, management, leasing, and development services |
636 | 733 | 1,528 | 1,664 | ||||||||||||
Investment advisory, management, leasing, and development servicesunconsolidated real estate entities |
3,178 | 4,219 | 6,282 | 8,321 | ||||||||||||
Reimbursement of property personnel costs |
903 | 1,356 | 2,033 | 2,867 | ||||||||||||
Condominium sales |
3,395 | 1,045 | 7,793 | 1,964 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
22,243 | 20,763 | 46,112 | 42,233 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Expenses: |
||||||||||||||||
Property operating and maintenance |
6,505 | 5,751 | 13,123 | 12,015 | ||||||||||||
Real estate and other taxes |
1,942 | 1,965 | 3,937 | 3,885 | ||||||||||||
Investment advisory, management, leasing, and development services |
2,288 | 3,000 | 4,208 | 5,994 | ||||||||||||
Reimbursable property personnel costs |
903 | 1,356 | 2,033 | 2,867 | ||||||||||||
Cost of condominium sales |
2,773 | 721 | 6,411 | 1,393 | ||||||||||||
Interest |
3,303 | 4,216 | 7,244 | 8,454 | ||||||||||||
Depreciation and amortization |
3,920 | 4,152 | 8,112 | 7,662 | ||||||||||||
General and administrative |
4,553 | 4,892 | 12,480 | 9,131 | ||||||||||||
Impairment loss |
| | 753 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total expenses |
26,187 | 26,053 | 58,301 | 51,401 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest income |
91 | 8 | 114 | 13 | ||||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
(3,565 | ) | (794 | ) | (6,321 | ) | (816 | ) | ||||||||
Gain (loss) on sale of land |
141 | | (559 | ) | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes and noncontrolling interests |
(7,277 | ) | (6,076 | ) | (18,955 | ) | (9,971 | ) | ||||||||
Benefit (provision) for income taxes |
(18 | ) | (31 | ) | (40 | ) | (74 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
(7,295 | ) | (6,107 | ) | (18,995 | ) | (10,045 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Noncontrolling interests share of net (income) loss: |
||||||||||||||||
Unitholders in the Operating Partnership |
1,289 | 1,550 | 3,711 | 2,591 | ||||||||||||
Partners in consolidated real estate entities |
455 | (247 | ) | 764 | (470 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
1,744 | 1,303 | 4,475 | 2,121 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
TPGIs share of net income (loss) |
$ | (5,551 | ) | $ | (4,804 | ) | $ | (14,520 | ) | $ | (7,924 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) per share-basic and diluted |
$ | (0.12 | ) | $ | (0.12 | ) | $ | (0.31 | ) | $ | (0.21 | ) | ||||
Weighted average common shares outstandingbasic and diluted |
46,610,859 | 38,591,868 | 46,419,772 | 37,664,573 | ||||||||||||
Dividends declared per share |
$ | 0.02 | $ | 0.015 | $ | 0.04 | $ | 0.03 |
See accompanying notes to consolidated financial information.
2
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Six months ended | ||||||||
June 30, | ||||||||
2013 | 2012 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (18,995 | ) | $ | (10,045 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Loss on sale of land |
559 | | ||||||
Gain on sale of condominiums |
(1,382 | ) | (572 | ) | ||||
Equity in net (income) loss of unconsolidated real estate entities |
6,321 | 816 | ||||||
Deferred rents |
(34 | ) | (355 | ) | ||||
Deferred taxes (and interest on unrecognized benefits) |
| 38 | ||||||
Deferred interest |
| 25 | ||||||
Depreciation and amortization expense |
8,112 | 7,662 | ||||||
Allowance for doubtful accounts |
121 | 75 | ||||||
Amortization of loan costs |
273 | 320 | ||||||
Amortization of above and below market leases, net |
83 | 19 | ||||||
Amortization of share-based compensation |
1,257 | 911 | ||||||
Distributions from operations of unconsolidated real estate entities |
| 250 | ||||||
Impairment loss |
753 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Rents and other receivables |
290 | 475 | ||||||
Receivables from unconsolidated real estate entities |
131 | (470 | ) | |||||
Deferred leasing costs |
(2,541 | ) | (1,875 | ) | ||||
Other assets |
(3,667 | ) | (3,495 | ) | ||||
Accounts payable and other liabilities |
668 | 407 | ||||||
Prepaid rent and deferred revenue |
561 | 427 | ||||||
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
(7,490 | ) | (5,387 | ) | ||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Expenditures for improvements to real estate |
(11,352 | ) | (6,532 | ) | ||||
Proceeds from sale of condominiums |
7,183 | 1,836 | ||||||
Proceeds from sale of real estate |
58,947 | 1,107 | ||||||
Return of capital from unconsolidated real estate entities |
36,742 | 8,640 | ||||||
Contributions to unconsolidated real estate entities |
(4,000 | ) | (199 | ) | ||||
Purchase of marketable securities |
(11,000 | ) | | |||||
Proceeds from sales/redemption of marketable securities |
1,000 | | ||||||
|
|
|
|
|||||
Net cash provided by (used in) investing activities |
77,520 | 4,852 | ||||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Proceeds from equity offering, net |
| 49,409 | ||||||
Contributions from noncontrolling interests |
7,983 | 2,600 | ||||||
Noncontrolling interest distributions |
(11,667 | ) | | |||||
Payment of dividends to common stockholders and distributions to limited partners of the Operating Partnership |
(2,354 | ) | (1,499 | ) | ||||
Principal payments of mortgage and other secured loans |
(135,340 | ) | (2,702 | ) | ||||
Proceeds from mortgage and other secured loans |
115,703 | 404 | ||||||
Payment of loan costs |
(836 | ) | | |||||
Change in restricted cash |
7,671 | 2,874 | ||||||
|
|
|
|
|||||
Net cash provided by (used in) financing activities |
(18,840 | ) | 51,086 | |||||
|
|
|
|
|||||
Net increase (decrease) in cash and cash equivalents |
51,190 | 50,551 | ||||||
Cash and cash equivalents at beginning of period |
76,689 | 79,320 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 127,879 | $ | 129,871 | ||||
|
|
|
|
See accompanying notes to consolidated financial information.
3
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
FOR THE SIX MONTHS END JUNE 30,2013
(Tabular amounts in thousands, except share and per share amounts)
1. Organization and Description of Business
The terms Thomas Properties, TPG, us, we, our and the Company as used in this report refer to Thomas Properties Group, Inc. together with our Operating Partnership, Thomas Properties Group, L.P. (the Operating Partnership).
We own, manage, lease, acquire and develop real estate, consisting primarily of office properties and related parking garages, located in Southern California; Sacramento, California; Philadelphia, Pennsylvania; Northern Virginia; Houston, Texas and Austin, Texas.
We were incorporated in the State of Delaware on March 9, 2004. On October 13, 2004, we completed our initial public offering. Our operations are carried on through our Operating Partnership of which we are the sole general partner. The Operating Partnership holds our direct and indirect interests in real estate properties, and it carries on our investment advisory, property management, leasing and real estate development operations. As of June 30, 2013, we held a 79.8% interest in the Operating Partnership which we consolidate, as we have control over the major decisions of the Operating Partnership.
As of June 30, 2013, we were invested in the following real estate properties:
Property |
Type |
Location | ||
Consolidated properties: |
||||
One Commerce Square |
High-rise office | Philadelphia Central Business District, Pennsylvania (PCBD) | ||
Two Commerce Square |
High-rise office | PCBD | ||
Murano |
Residential condominiums held for sale | PCBD | ||
Four Points Centre (1) |
Suburban office; Undeveloped land; Office/Retail/Research and Development/Hotel/ Residential | Austin, Texas | ||
Unconsolidated properties: |
||||
TPG/CalSTRS, LLC (TPG/CalSTRS): |
||||
City National Plaza |
High-rise office | Los Angeles Central Business District, California | ||
San Felipe Plaza |
High-rise office | Houston, Texas | ||
CityWestPlace |
Suburban office and undeveloped land | Houston, Texas | ||
Reflections I (2) |
Suburban office | Reston, Virginia | ||
Reflections II (2) |
Suburban office | Reston, Virginia | ||
Fair Oaks Plaza (2) |
Suburban office | Fairfax, Virginia | ||
TPG/CalSTRS Austin, LLC: |
||||
San Jacinto Center |
High-rise office | Austin Central Business District, Texas, (ACBD) | ||
Frost Bank Tower |
High-rise office | ACBD | ||
One Congress Plaza |
High-rise office | ACBD | ||
One American Center |
High-rise office | ACBD | ||
300 West 6th Street |
High-rise office | ACBD | ||
2121 Market Street (3) |
Residential and retail | PCBD |
(1) | Project is wholly-owned; certain undeveloped land parcels are being targeted for sale. |
(2) | Property is encumbered by a loan subject to special servicer oversight. |
(3) | The Company has a 1% limited partnership interest in 2121 Market Street. See Note 3. Unconsolidated Real Estate Entities for further details. |
4
The City National Plaza property includes an off-site garage that provides parking for City National Plaza and other properties. Our office properties typically include on-site parking, retail and storage space.
In March 2013, TPG/CalSTRS Austin, LLC completed the sale of Westech 360, Park Centre and Great Hills Plaza, in suburban Austin, Texas. The properties were unencumbered by debt. The sale price for the properties was $76.0 million, which after closing adjustments and prorations, resulted in net proceeds to TPG/CalSTRS Austin, LLC of $73.1 million. TPGs share of the net proceeds was $24.4 million.
We have the responsibility for the day-to-day operations of the California Environmental Protection Agency (CalEPA) building, but have no ownership interest in the property. We provide investment advisory services for the California State Teachers Retirement System (CalSTRS) with respect to two properties that are wholly-owned by CalSTRS 800 South Hope Street (Los Angeles, CA) and 1835 Market Street (Philadelphia, PA). In addition, we provide property management, leasing and development services to 800 South Hope Street and 1835 Market Street, and the properties owned by the TPG/CalSTRS and TPG/CalSTRS Austin, LLC joint ventures. Two properties that we previously managed, which were wholly-owned by an affiliate of Lehman Brothers Inc., 816 Congress and Austin Centre, both in Austin, TX, were sold by Lehman in April 2013.
2. Summary of Significant Accounting Policies
Interim Financial Data
The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2013. The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Companys Annual Report on Form 10-K for the year ended December 31, 2012.
The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions. These estimates and assumptions are subjective and affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Principles of Consolidation
We evaluate each entity to determine if the entity is deemed a variable interest entity (VIE), and if the Company is the primary beneficiary of the VIE based on whether the Company has both (i) the power to direct those matters that most significantly impact the activities of the VIE and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our determination of the primary beneficiary of a VIE considers all relationships between us and the VIE, including management agreements. When an entity is not deemed to be a VIE, the Company considers the provisions of the accounting standards to determine whether a general partner, or the general partners as a group, controls a limited partnership or similar entity when the limited partners have certain rights. The Company consolidates (i) entities that are VIEs and of which the Company is deemed to be the primary beneficiary and (ii) entities that are non-VIEs and controlled by the Company and in which the limited partners neither have the ability to dissolve the entity or remove the Company without cause nor any substantive participating rights.
We continuously reassess our determination of whether an entity is a VIE and who the primary beneficiary is, and whether or not the limited partners in an entity have substantive rights, more particularly if certain events occur that are likely to cause a change in the original determinations. There have been no changes during the six months ended June 30, 2013 in previous conclusions about whether an entity qualifies as a VIE or whether we are the primary beneficiary of any previously identified VIE.
The equity method of accounting is utilized to account for investments in real estate entities that are VIEs and of which the Company is not deemed to be the primary beneficiary and entities that are non-VIEs which the Company does not control, but over which the Company has the ability to exercise significant influence. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
5
Commerce SquareBrandywine
The 25% preferred equity interests in One Commerce Square and Two Commerce Square (beginning December 2010), owned by Brandywine Operating Partnership LP (Brandywine) are reflected under the Noncontrolling Interests caption on our consolidated balance sheets. Our interest in these two partnerships is a variable interest, which we consolidate because we are considered to be the primary beneficiary.
Murano
We also consolidate our Murano residential condominium project which we control. Our unaffiliated partners interest is reflected in our consolidated balance sheets under the Noncontrolling Interests caption. Our partner has a stated ownership interest of 27%. After full repayment of the Murano mortgage loan, (balance of $0.5 million as of June 30, 2013), which occurred subsequent to June 30, 2013, net proceeds from the project will be distributed, based on an order of preferences described in the partnership agreement. The Company anticipates that we will receive distributions, in excess of our stated 73% ownership interest according to these distribution preferences.
AustinMadison International Realty
Refer to Note 3 for discussion of TPG/CalSTRS, TPG/CalSTRS Austin, LLC, and the TPG-Austin Portfolio Syndication Partners JV LP (Austin Joint Venture Predecessor), which were determined to be variable interest entities for which we are not considered the primary beneficiary for the periods presented herein.
The 33.3% equity interest in TPG Austin Partner, LLC owned by Madison International Realty (Madison) is reflected under the Noncontrolling Interests caption on our consolidated balance sheets. We consolidate this venture with Madison, which has a 50% interest in TPG/CalSTRS Austin, LLC, and which is further discussed in Note 3, because we have control.
Included in total assets on TPGs consolidated balance sheets are the following assets for each listed investment in which a noncontrolling interest is held by an unaffiliated partner. The assets of each listed entity can only be used to settle the liabilities of that entity (in thousands):
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
One Commerce Square |
$ | 137,797 | $ | 133,987 | ||||
Two Commerce Square |
150,671 | 142,436 | ||||||
Murano |
32,051 | 37,687 | ||||||
TPG Austin Partner, LLC |
68,717 | 106,031 | ||||||
|
|
|
|
|||||
$ | 389,236 | $ | 420,141 | |||||
|
|
|
|
Impairment of Long-Lived Assets
We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Assets held for sale are reported at the lower of the carrying amount or fair value, less costs to sell. We record the Murano condominium units at the lower of carrying amount or estimated fair value as the condominium units meet the held for sale criteria of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360, Property, Plant, and Equipment.
We use the equity method of accounting to account for investments in real estate entities over which we have significant influence, but not control over major decisions. In these situations, the unit of account for measurement purposes is the equity investment and not the real estate. Accordingly, if our joint venture investments meet the other-than-temporary criteria of FASB ASC 323, InvestmentsEquity Method and Joint Ventures, we would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of our investment.
6
We recorded an impairment charge of $0.8 million related to Campus El Segundo, wholly-owned developable land, for the three months ended March 31, 2013 to reduce the book value of the property to estimated net sales proceeds. In May 2013, the Company sold the remaining 23.9 acres of land including athletic facility naming rights and a building previously used as a marketing center. The Company has no further ownership interest, continued involvement, commitments or obligations related to Campus El Segundo. In the corresponding prior period, we did not record an impairment charge for any real estate assets or equity investments.
Dispositions
In May 2013, the Company sold the remaining 23.9 acres of land in its Campus El Segundo project, including the athletic facility naming rights and a building previously used as a marketing center. The sales price for the land and related assets was $48.5 million. After closing adjustments and prorations, and payment in full of a $14.5 million mortgage loan, the Company received net proceeds of $33.3 million.
In January and March 2013, TPG completed the sale of certain land parcels totaling 17.5 acres and 27.9 acres, respectively, at Four Points Centre in Austin, Texas, for $4.9 million and $6.4 million, respectively. TPG received net proceeds from these two transactions of $1.1 million (after a $3.7 million paydown of the Four Points Centre mortgage debt) and $2.7 million (after a $3.1 million pay down of the loan), respectively.
In March 2013, TPG/CalSTRS Austin, LLC, an unconsolidated real estate entity in which TPG holds an effective ownership interest of 33.3%, completed the sale of Westech 360, Park Centre and Great Hills Plaza, in suburban Austin, Texas. The properties were unencumbered by debt. The sales price for the properties was $76.0 million, which after closing adjustments and prorations, resulted in net proceeds to TPG/CalSTRS Austin, LLC of $73.1 million. TPGs share of the net proceeds of $24.4 million was received in April 2013.
Development Activities
Costs associated with the development and construction of a real estate project are capitalized on our consolidated balance sheets. In addition, interest, loan fees, real estate taxes, and general and administrative expenses that are directly associated with and incremental to our development activities and other costs are capitalized during the period in which activities necessary to get the property ready for its intended use are in progress, including the pre-development and lease-up phases. Once the development and construction of the building shell is completed, the costs capitalized to construction in progress are transferred to operating properties. Cumulative capitalized interest as of June 30, 2013 and December 31, 2012, is $5.5 million and $6.8 million, respectively. There was no interest capitalized for the six months ended June 30, 2013 and 2012.
Revenue RecognitionCondominium Sales
We have one high-rise condominium project, Murano, for which we use the deposit method of accounting to recognize sales revenue and costs. Under the provisions of FASB ASC 360-20, Property, Plant and Equipment subsection Real Estate and Sales, revenue and costs for projects are recognized when all parties are bound by the terms of the contract, all consideration has been exchanged, any permanent financing for which the seller is responsible has been arranged and all conditions precedent to closing have been performed. This results in profit from the sale of condominium units recognized at the point of settlement as compared to the point of sale. Revenue is recognized on the contract price of individual units. Total estimated costs, net of impairment charges, are allocated to individual units which have closed on a relative value basis. Total estimated revenue and construction costs are reviewed periodically, and any change is applied to current and future periods.
Earnings (Loss) Per Share
The computation of basic income (loss) per share is based on net income (loss) and the weighted average number of shares of our common stock outstanding during the period. The computation of diluted income (loss) per share includes the assumed exercise of outstanding stock options and the effect of the vesting of restricted stock and incentive units that have been granted to employees in connection with stock based compensation, all calculated using the treasury stock method. In accordance with FASB ASC 260-10-45, Earnings Per Share, the Companys unvested restricted stock and unvested incentive units are considered to be participating securities and are included in the computation of earnings per share to calculate a two class earnings per share. We only present the earnings per share attributable to the common shareholders. See Note 5Income (Loss) Per Share and Dividends Declared.
7
Marketable Securities
In April 2013, the Company invested $10.0 million in debt securities comprised of U.S. treasury bills, agency securities, corporate bonds and municipal bonds with maturities of less than 4 years.
In accordance with ASC 320, InvestmentsDebt and Equity Securities, and based on our intent and ability regarding these instruments, we classify all of our marketable debt securities as available-for-sale. Marketable debt securities are reported at fair value, with all unrealized gains (losses) reflected net of tax in stockholders equity on our consolidated balance sheets. For details see statement of stockholders equity in Note 6. If we determine that an investment has an other than temporary decline in fair value, we recognize the investment loss in non-operating income, net in the accompanying consolidated statements of operations. We periodically evaluate our investments to determine if impairment charges are required. Comprehensive loss attributable to these marketable securities totaled $0.1 million for the three and six months ended June 30, 2013.
Total as of June 30, 2013 |
||||
(in thousands) | ||||
U.S. treasury bills |
$ | 475 | ||
Agency securities |
4,932 | |||
Corporate bonds |
3,952 | |||
Municipal bonds |
520 | |||
|
|
|||
Total |
$ | 9,879 | ||
|
|
Recent Accounting Pronouncements
Changes to U.S. generally accepted accounting principles (GAAP) are established by the FASB in the form of accounting standards updates (ASUs) to the FASBs Accounting Standards Codification. We consider the applicability and impact of all ASUs. Newly issued ASUs not listed below are expected to have no impact on our consolidated financial position and results of operations, because either the ASU is not applicable or the impact is expected to be immaterial.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation for unconsolidated real estate entities and for activity associated with real estate held for disposition.
3. Unconsolidated Real Estate Entities
The unconsolidated real estate entities include our share of the entities that own 2121 Market Street, the TPG/CalSTRS properties, TPG/CalSTRS Austin, LLC properties and the Austin Portfolio Joint Venture Predecessor properties. TPG/CalSTRS owns the following properties as of June 30, 2013:
| City National Plaza (acquired January 2003) |
| Reflections I (acquired October 2004) |
| Reflections II (acquired October 2004) |
| San Felipe Plaza (acquired August 2005) |
| CityWestPlace land (acquired June 2006) |
| CityWestPlace (acquired June 2006) |
| Fair Oaks Plaza (acquired January 2007) |
TPG Austin Partner, LLC, a limited liability company formed in September 2012 by TPG and Madison, owns a 50% interest in TPG/CalSTRS Austin, LLC, which owns the following properties that were acquired from the Austin Joint Venture Predecessor:
| San Jacinto Center (acquired September 2012) |
| Frost Bank Tower (acquired September 2012) |
8
| One Congress Plaza (acquired September 2012) |
| One American Center (acquired September 2012) |
| 300 West 6th Street (acquired September 2012) |
| Park Centre (acquired September 2012, sold March 2013) |
| Great Hills Plaza (acquired September 2012, sold March 2013) |
| Westech 360 I-IV (acquired September 2012, sold March 2013) |
The following properties were sold by the Austin Joint Venture Predecessor in July 2012 prior to the transaction with TPG/CalSTRS Austin, LLC:
| Research Park Plaza I & II (acquired June 2007, sold July 2012) |
| Stonebridge Plaza II (acquired June 2007, sold July 2012) |
Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the partnership and limited liability company agreements. Following are the stated ownership percentages, prior to any preferred or special allocations, as of June 30, 2013.
2121 Market Street |
1.0 | % | ||
TPG/CalSTRS Austin, LLC (1) |
50.0 | % | ||
TPG/CalSTRS: |
||||
City National Plaza |
7.9 | % | ||
All properties, excluding City National Plaza |
25.0 | % |
(1) | TPG Austin Partner, LLC, a limited liability company owned by TPG and Madison, a noncontrolling interest partner, owns 50% of TPG/CalSTRS Austin, LLC. The effective ownership of TPG and Madison in the underlying five properties of TPG/CalSTRS Austin, LLC is 33.3% and 16.7%, respectively. |
We review the facts and circumstances of each distribution from unconsolidated entities to determine how to classify it on the consolidated statements of cash flows. Distributions received from unconsolidated entities that represent returns on the Companys investment are reported as cash flows from operating activities, consistent with ASC 230-10-45-16. Cash distributions from unconsolidated entities that represent returns of the Companys investment are reported as cash flows from investing activities, consistent with ASC 230-10-45-12.
Distributions are deemed to be returns on the Companys investment, and recorded as operating inflows, unless the cumulative distributions exceed the cumulative equity in earnings recognized by the Company. The excess distributions are deemed to be returns of the investment and are classified as investing cash flows. Distributions received in excess of cumulative contributions are deemed a return on investment and classified as operating cash flows.
We evaluated unconsolidated investments with negative carrying amounts to determine if the equity method of accounting is still appropriate, consistent with ASC 323-10-35-19 through 26. In December 2012, we redeemed a 49% interest in 2121 Market Street and retained a 1% limited partnership interest, which is accounted for on the cost method of accounting. The Companys investment in 2121 Market Street has a negative carrying amount of $0.3 million as of June 30, 2013 and December 31, 2012. The Company reduced its investment balance below zero due to the receipt of distributions and recording of our share of investee losses in excess of our investment, because we have guaranteed up to a maximum of $14.0 million of 2121 Market Streets outstanding mortgage loan.
With respect to the Companys investment in TPG/CalSTRS, we had negative carrying amounts as of June 30, 2013 and December 31, 2012, of approximately $11.1 million and $9.8 million, respectively. The Company has committed to fund tenant improvements, other capital improvements, debt repayment or debt repurchase of properties owned by TPG/CalSTRS up to $10.9 million as of June 30, 2013 and December 31, 2012. In addition, the Company has committed to fund temporary operating cash shortfalls, not more frequently than once a month, up to $1.25 million in the aggregate for all the TPG/CalSTRS properties.
9
Investments in unconsolidated real estate entities as of June 30, 2013 and December 31, 2012 are as follows (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
ASSETS: |
||||||||
TPG/CalSTRS Austin, LLC |
$ | 68,429 | $ | 106,210 | ||||
|
|
|
|
|||||
Total reflected in investments in unconsolidated real estate entities |
68,429 | 106,210 | ||||||
|
|
|
|
|||||
LIABILITIES: |
||||||||
TPG/CalSTRS |
(11,090 | ) | (9,808 | ) | ||||
2121 Market Street |
(276 | ) | (276 | ) | ||||
|
|
|
|
|||||
Total reflected in losses and distributions in excess of investments in unconsolidated real estate entities |
(11,366 | ) | (10,084 | ) | ||||
|
|
|
|
|||||
Net investments in unconsolidated real estate entities |
$ | 57,063 | $ | 96,126 | ||||
|
|
|
|
The following is a summary of the net investments in unconsolidated real estate entities for the six months ended June 30, 2013 (in thousands):
Net investment balance, December 31, 2012 |
$ | 96,126 | ||
Contributions |
4,000 | |||
Equity in net income (loss) of unconsolidated real estate entities |
(6,321 | ) | ||
Distributions |
(36,742 | ) | ||
|
|
|||
Net investment balance, June 30, 2013 |
$ | 57,063 | ||
|
|
TPG/CalSTRS was formed to acquire office properties on a nationwide basis classified as moderate risk (core plus) and high risk (value add) properties. Core plus properties consist of under-performing properties that we believe can be brought to market potential through improved management. Value-add properties are characterized by unstable net operating income for an extended period of time, occupancy less than 90% and/or physical or management problems which we believe can be positively impacted by introduction of new capital and/or management.
The total capital commitment to TPG/CalSTRS was $511.7 million as of June 30, 2013, of which approximately $2.9 million and $10.9 million was unfunded by CalSTRS and us, respectively.
Except to the extent the Liquidation of the TPG/CalSTRS joint venture, as discussed in Note 10Subsequent Event, occurs, CalSTRS and TPG would continue to have the right to exercise an existing buy-sell provision. Under this provision, the initiating party sets a price for its interest in TPG/CalSTRS, and the other party has a specified time to elect to either buy the initiating partys interest or to sell its own interest to the initiating party. Upon the occurrence of certain events, CalSTRS also has a buy-out option to purchase our interest in TPG/CalSTRS. The buyout price is based upon a 3% discount to the appraised fair market value.
The borrower under mortgage loans secured by Reflections I and Reflections II, two properties owned by the TPG/CalSTRS joint venture, ceased making debt service payments in February 2013. The special servicer representing these loans has issued notices of default, but has not taken any further action in response. TPG is in discussions with the special servicer regarding possible resolutions of these loans. The borrowers are accruing interest on these loans at a default rate, which is 10.23% per annum for Reflections I and 10.22% per annum for Reflections II since March 2013. On a net basis, TPGs equity investment balance in these properties is not material.
The borrower under the mortgage loan secured by Fair Oaks Plaza, a property owned by the TPG/CalSTRS joint venture, did not make the debt service payment due on July 9, 2013. The loan has been assigned to a special servicer. The special servicer has issued a notice of default and instituted cash management procedures to establish a restricted account. We are engaged in initial discussions with the special servicer regarding possible resolutions. The default interest rate is 10.52%. TPGs equity investment balance in this unconsolidated property is a deficit balance of approximately $1.2 million.
10
In March 2013, TPG/CalSTRS Austin, LLC, completed the sale of Westech 360, Park Centre and Great Hills Plaza, in suburban Austin, Texas. The properties were unencumbered by debt. The sales price for the properties was $76.0 million, which after closing adjustments and prorations, resulted in net proceeds to TPG/CalSTRS Austin, LLC of $73.1 million. TPGs share of the net proceeds was $24.4 million.
The TPG/CalSTRS joint venture is deemed to be a variable interest entity for which we are not considered to be the primary beneficiary. CalSTRS and TPG acting together are considered to have the power to direct the activities of the joint venture that most significantly impact the joint venture economic performance, and therefore, neither TPG nor CalSTRS is considered to be the primary beneficiary. We determined the key activities that drive the economic performance of the joint venture to be (1) the acquisition and development of real estate (including capital improvements), (2) financing, and (3) leasing. In connection with these key activities, the TPG/CalSTRS venture agreement requires unanimous approval by the two members.
In connection with TPG/CalSTRS Austin, LLC, TPG Austin Partner, LLC is not considered to be the primary beneficiary due to the fact that the power to direct the activities of the limited liability company is shared with CalSTRS such that no one party has the power to direct the activities that most significantly impact the limited liability companys economic performance. In connection with TPG/CalSTRS Austin, LLC, we determined the key activities that drive the economic performance to be (1) the acquisition and development of real estate (including capital improvements), (2) financing, and (3) leasing. In connection with these key activities, TPG/CalSTRS Austin, LLC agreement requires either unanimous or majority approval of decisions by the respective partners.
As of June 30, 2013, our total maximum exposure to loss to TPG/CalSTRS and the TPG/CalSTRS Austin, LLC is:
(1) | Our net equity investment in the various properties controlled by TPG/CalSTRS and TPG/CalSTRS Austin, LLC as of June 30, 2013, was $57.1 million, as presented earlier in this note. |
(2) | The potential loss of future fee revenues which we earn in connection with the management and leasing agreements with the various properties controlled by the respective limited liability companies. We earn fee revenues in connection with those management and leasing agreements for services such as property management, leasing, asset management and property development. The management and leasing agreements with the various properties generally expire on an annual basis and are automatically renewed for successive periods of one year each, unless we elect not to renew the agreements. As of June 30, 2013, we had total receivables of $1.2 million and $0.6 million related to TPG/CalSTRS and the TPG/CalSTRS Austin, LLC, respectively. |
(3) | Unfunded capital commitments to the TPG/CalSTRS was $10.9 million as of June 30, 2013. |
(4) | TPG/CalSTRS Austin, LLC owns the five Austin properties and TPG, together with Madison, have an unfunded capital commitment of approximately $10.4 million. Of that amount, TPGs unfunded capital commitment is approximately $6.9 million or 66.67% as of June 30, 2013. |
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11
Following is the combined balance sheets of our unconsolidated real estate entities as of June 30, 2013 and December 31, 2012.
Summarized Unconsolidated Real Estate Entities Balance Sheets
June 30, 2013 |
December 31, 2012 |
|||||||
(Unaudited) | (Audited) | |||||||
ASSETS | ||||||||
Investments in real estate, net |
$ | 1,479,505 | $ | 1,497,828 | ||||
Receivables including deferred rents, net |
67,912 | 66,491 | ||||||
Deferred leasing and loan costs, net |
117,048 | 128,623 | ||||||
Other assets |
55,623 | 51,329 | ||||||
Assets associated with discontinued operations |
120 | 74,957 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,720,208 | $ | 1,819,228 | ||||
|
|
|
|
|||||
LIABILITIES AND OWNERS EQUITY | ||||||||
Liabilities: |
||||||||
Mortgage loans |
$ | 1,310,474 | $ | 1,376,343 | ||||
Mortgage loanrelated party |
64,082 | | ||||||
Acquired below market leases, net |
27,671 | 32,075 | ||||||
Prepaid rent and deferred revenue |
5,314 | 6,030 | ||||||
Accounts and interest payable and other liabilities |
54,829 | 62,036 | ||||||
Liabilities associated with discontinued operations |
147 | 4,735 | ||||||
|
|
|
|
|||||
Total liabilities |
1,462,517 | 1,481,219 | ||||||
|
|
|
|
|||||
Owners equity: |
||||||||
Thomas Properties |
61,942 | 100,451 | ||||||
Other owners |
195,749 | 237,558 | ||||||
|
|
|
|
|||||
Total owners equity |
257,691 | 338,009 | ||||||
|
|
|
|
|||||
Total liabilities and owners equity |
$ | 1,720,208 | $ | 1,819,228 | ||||
|
|
|
|
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12
Following is the combined statements of operations of our unconsolidated real estate entities for the three and six months ended June 30, 2013 and 2012 (in thousands) (unaudited):
Summarized Unconsolidated Real Estate Entities Statements of Operations
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenues |
$ | 67,439 | $ | 64,634 | $ | 133,156 | $ | 129,668 | ||||||||
Expenses: |
||||||||||||||||
Property operating and maintenance |
25,099 | 27,536 | 49,330 | 53,139 | ||||||||||||
Real estate and other taxes |
8,432 | 9,000 | 16,902 | 16,972 | ||||||||||||
Interest expense |
20,452 | 25,949 | 40,776 | 51,191 | ||||||||||||
Depreciation and amortization |
22,655 | 21,209 | 46,053 | 43,054 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total expenses |
76,638 | 83,694 | 153,061 | 164,356 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from continuing operations |
(9,199 | ) | (19,060 | ) | (19,905 | ) | (34,688 | ) | ||||||||
Gain (loss) on disposition of real estate |
| | (6 | ) | | |||||||||||
Discontinued operations: |
||||||||||||||||
Net income (loss) from discontinued operations before gains on disposition of real estate and impairment loss |
35 | (7,570 | ) | 427 | (6,838 | ) | ||||||||||
Gain (loss) on disposition of real estate |
(79 | ) | 3 | 1,222 | (35 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from discontinued operations |
(44 | ) | (7,567 | ) | 1,649 | (6,873 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | (9,243 | ) | $ | (26,627 | ) | $ | (18,262 | ) | $ | (41,561 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Thomas Properties share of net income (loss) |
$ | (2,873 | ) | $ | (1,384 | ) | $ | (5,399 | ) | $ | (2,602 | ) | ||||
Intercompany eliminations |
467 | 590 | 1,183 | 1,786 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity in net income (loss) of unconsolidated real estate entities |
(2,406 | ) | (794 | ) | (4,216 | ) | (816 | ) | ||||||||
Noncontrolling interests share of TPG Austin Partner |
(1,159 | ) | | (2,105 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
TPGIs share of equity in net income (loss) of unconsolidated real estate entities |
$ | (3,565 | ) | $ | (794 | ) | $ | (6,321 | ) | $ | (816 | ) | ||||
|
|
|
|
|
|
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13
Included in the preceding summarized balance sheets as of June 30, 2013 and December 31, 2012, are the following balance sheets of TPG/CalSTRS, LLC (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
(unaudited) | (audited) | |||||||
ASSETS | ||||||||
Investments in real estate, net |
$ | 749,022 | $ | 759,512 | ||||
Receivables including deferred rents, net |
61,939 | 63,881 | ||||||
Investments in unconsolidated real estate entities |
634 | 659 | ||||||
Deferred leasing and loan costs, net |
49,025 | 51,273 | ||||||
Other assets |
40,349 | 28,347 | ||||||
Assets associated with discontinued operations |
1 | 116 | ||||||
|
|
|
|
|||||
Total assets |
$ | 900,970 | $ | 903,788 | ||||
|
|
|
|
|||||
LIABILITIES AND MEMBERS EQUITY | ||||||||
Liabilities: |
||||||||
Mortgage loans |
$ | 746,156 | $ | 747,610 | ||||
Accounts and interest payable and other liabilities |
36,439 | 32,182 | ||||||
Liabilities associated with discontinued operations |
18 | 25 | ||||||
|
|
|
|
|||||
Total liabilities |
782,613 | 779,817 | ||||||
|
|
|
|
|||||
Members equity: |
||||||||
Thomas Properties |
(6,774 | ) | (5,580 | ) | ||||
CalSTRS |
125,131 | 129,551 | ||||||
|
|
|
|
|||||
Total members equity |
118,357 | 123,971 | ||||||
|
|
|
|
|||||
Total liabilities and members equity |
$ | 900,970 | $ | 903,788 | ||||
|
|
|
|
Included in the preceding summarized balance sheets as of June 30, 2013 and December 31, 2012 are the following balance sheets of TPG/CalSTRS Austin, LLC (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
(unaudited) | (audited) | |||||||
ASSETS | ||||||||
Investments in real estate, net |
$ | 730,483 | $ | 738,316 | ||||
Real estate held for sale |
| 74,182 | ||||||
Receivables including deferred rents, net |
5,972 | 2,611 | ||||||
Deferred leasing costs, net |
68,023 | 77,350 | ||||||
Other assets |
12,672 | 20,361 | ||||||
Assets associated with discontinued operations |
119 | 557 | ||||||
|
|
|
|
|||||
Total assets |
$ | 817,269 | $ | 913,377 | ||||
|
|
|
|
|||||
LIABILITIES AND MEMBERS EQUITY | ||||||||
Liabilities: |
||||||||
Mortgage loans |
$ | 564,318 | $ | 628,733 | ||||
Mortgage loanrelated party |
64,082 | | ||||||
Accounts and interest payable and other liabilities |
26,829 | 39,869 | ||||||
Acquired below market leases, net |
24,545 | 28,148 | ||||||
Liabilities associated with discontinued operations |
61 | 4,566 | ||||||
|
|
|
|
|||||
Total liabilities |
679,835 | 701,316 | ||||||
|
|
|
|
|||||
Members equity |
137,434 | 212,061 | ||||||
|
|
|
|
|||||
Total liabilities and members equity |
$ | 817,269 | $ | 913,377 | ||||
|
|
|
|
14
Following is summarized financial information by real estate entity for the three and six months ended June 30, 2013 and 2012 (in thousands) (unaudited):
Three months ended June 30, 2013 | ||||||||||||||||||||
TPG/ CalSTRS, LLC |
TPG/ CalSTRS Austin, LLC |
Austin Portfolio Joint Venture Predecessor |
Eliminations | Total | ||||||||||||||||
Revenues |
$ | 43,346 | $ | 24,093 | $ | | $ | | $ | 67,439 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Expenses: |
||||||||||||||||||||
Property operating and maintenance |
18,883 | 6,160 | 56 | | 25,099 | |||||||||||||||
Real estate and other taxes |
4,205 | 4,227 | | | 8,432 | |||||||||||||||
Interest expense |
11,050 | 9,402 | | | 20,452 | |||||||||||||||
Depreciation and amortization |
11,485 | 11,170 | | | 22,655 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
45,623 | 30,959 | 56 | | 76,638 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
(2,277 | ) | (6,866 | ) | (56 | ) | | (9,199 | ) | |||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
(4 | ) | | 4 | | |||||||||||||||
Gain (loss) on disposition of real estate |
| | | | | |||||||||||||||
Discontinued operations: |
||||||||||||||||||||
Net income (loss) from discontinued operations before gains on disposition of real estate and impairment loss |
(3 | ) | (1 | ) | 39 | | 35 | |||||||||||||
Gain (loss) on disposition of real estate |
3 | (82 | ) | | | (79 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from discontinued operations |
| (83 | ) | 39 | | (44 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (2,281 | ) | $ | (6,949 | ) | $ | (17 | ) | $ | 4 | $ | (9,243 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Thomas Properties share of net income (loss) |
$ | (556 | ) | $ | (2,316 | ) | $ | (1 | ) | $ | | $ | (2,873 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||||||
Intercompany eliminations |
467 | |||||||||||||||||||
|
|
|||||||||||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
(2,406 | ) | ||||||||||||||||||
Noncontrolling interests share of TPG Austin Partner |
(1,159 | ) | ||||||||||||||||||
|
|
|||||||||||||||||||
TPGIs share of equity in net income (loss) of unconsolidated real estate entities |
$ | (3,565 | ) | |||||||||||||||||
|
|
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15
Three months ended June 30, 2012 | ||||||||||||||||||||
2121 Market Street |
TPG/ CalSTRS, LLC |
Austin Portfolio Joint Venture Predecessor |
Eliminations | Total | ||||||||||||||||
Revenues |
$ | | $ | 39,702 | $ | 24,932 | $ | | $ | 64,634 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Expenses: |
||||||||||||||||||||
Property operating and maintenance |
18,530 | 7,379 | 1,627 | 27,536 | ||||||||||||||||
Real estate and other taxes |
4,079 | 4,921 | | 9,000 | ||||||||||||||||
Interest expense |
11,432 | 15,279 | (762 | ) | 25,949 | |||||||||||||||
Depreciation and amortization |
11,670 | 9,539 | | 21,209 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
| 45,711 | 37,118 | 865 | 83,694 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
| (6,009 | ) | (12,186 | ) | (865 | ) | (19,060 | ) | |||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
| (2,905 | ) | | 2,905 | | ||||||||||||||
Discontinued operations: |
||||||||||||||||||||
Net income (loss) from discontinued operations before gains on disposition of real estate and impairment loss |
(26 | ) | 53 | (7,597 | ) | | (7,570 | ) | ||||||||||||
Gain (loss) on disposition of real estate |
| 3 | | | 3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from discontinued operations |
(26 | ) | 56 | (7,597 | ) | | (7,567 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (26 | ) | $ | (8,858 | ) | $ | (19,783 | ) | $ | 2,040 | $ | (26,627 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Thomas Properties share of net income (loss) |
$ | (12 | ) | $ | (136 | ) | $ | (1,236 | ) | $ | | $ | (1,384 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||||||
Intercompany eliminations |
590 | |||||||||||||||||||
|
|
|||||||||||||||||||
TPGIs share of equity in net income (loss) of unconsolidated real estate entities |
$ | (794 | ) | |||||||||||||||||
|
|
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16
Six months ended June 30, 2013 | ||||||||||||||||||||
TPG/ CalSTRS, LLC |
TPG/ CalSTRS Austin, LLC |
Austin Portfolio Joint Venture Predecessor |
Eliminations | Total | ||||||||||||||||
Revenues |
$ | 84,976 | $ | 48,180 | $ | | $ | | $ | 133,156 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Expenses: |
||||||||||||||||||||
Property operating and maintenance |
36,964 | 12,307 | 59 | | 49,330 | |||||||||||||||
Real estate and other taxes |
8,457 | 8,447 | (2 | ) | | 16,902 | ||||||||||||||
Interest expense |
22,076 | 18,700 | | | 40,776 | |||||||||||||||
Depreciation and amortization |
23,082 | 22,971 | | | 46,053 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
90,579 | 62,425 | 57 | | 153,061 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
(5,603 | ) | (14,245 | ) | (57 | ) | | (19,905 | ) | |||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
(6 | ) | | | 6 | | ||||||||||||||
Gain (loss) on disposition of real estate |
(6 | ) | | | | (6 | ) | |||||||||||||
Discontinued operations: |
||||||||||||||||||||
Net income (loss) from discontinued operations before gains on disposition of real estate and impairment loss |
(5 | ) | 400 | 32 | | 427 | ||||||||||||||
Gain (loss) on disposition of real estate |
4 | 1,218 | | | 1,222 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from discontinued operations |
(1 | ) | 1,618 | 32 | | 1,649 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (5,616 | ) | $ | (12,627 | ) | $ | (25 | ) | $ | 6 | $ | (18,262 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Thomas Properties share of net income (loss) |
$ | (1,189 | ) | $ | (4,208 | ) | $ | (2 | ) | $ | | $ | (5,399 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||||||
Intercompany eliminations |
1,183 | |||||||||||||||||||
|
|
|||||||||||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
(4,216 | ) | ||||||||||||||||||
Noncontrolling interests share of TPG Austin Partner |
(2,105 | ) | ||||||||||||||||||
|
|
|||||||||||||||||||
TPGIs share of equity in net income (loss) of unconsolidated real estate entities |
$ | (6,321 | ) | |||||||||||||||||
|
|
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17
Six months ended June 30, 2012 | ||||||||||||||||||||
2121 Market Street |
TPG/ CalSTRS, LLC |
Austin Portfolio Joint Venture Predecessor |
Eliminations | Total | ||||||||||||||||
Revenues |
$ | | $ | 81,033 | $ | 48,635 | $ | | $ | 129,668 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Expenses: |
||||||||||||||||||||
Property operating and maintenance |
37,039 | 15,079 | 1,021 | 53,139 | ||||||||||||||||
Real estate and other taxes |
8,029 | 8,943 | | 16,972 | ||||||||||||||||
Interest expense |
22,857 | 29,797 | (1,463 | ) | 51,191 | |||||||||||||||
Depreciation and amortization |
23,276 | 19,778 | | 43,054 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
| 91,201 | 73,597 | (442 | ) | 164,356 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations |
| (10,168 | ) | (24,962 | ) | 442 | (34,688 | ) | ||||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
| (5,316 | ) | | 5,316 | | ||||||||||||||
Discontinued operations: |
||||||||||||||||||||
Net income (loss) from discontinued operations before gains on disposition of real estate and impairment loss |
(24 | ) | 272 | (7,086 | ) | | (6,838 | ) | ||||||||||||
Gain (loss) on disposition of real estate |
| (35 | ) | | | (35 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from discontinued operations |
(24 | ) | 237 | (7,086 | ) | | (6,873 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
$ | (24 | ) | $ | (15,247 | ) | $ | (32,048 | ) | $ | 5,758 | $ | (41,561 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Thomas Properties share of net income (loss) |
$ | (11 | ) | $ | (588 | ) | $ | (2,003 | ) | $ | | $ | (2,602 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||||||
Intercompany eliminations |
1,786 | |||||||||||||||||||
|
|
|||||||||||||||||||
TPGIs share of equity in net income (loss) of unconsolidated real estate entities |
$ | (816 | ) | |||||||||||||||||
|
|
Following is a reconciliation of our share of owners equity of the unconsolidated real estate entities as shown above to amounts recorded by us as of June 30, 2013 and December 31, 2012:
June 30, 2013 |
December 31, 2012 |
|||||||
Our share of owners equity recorded by unconsolidated real estate entities |
$ | 61,942 | $ | 100,451 | ||||
Intercompany eliminations and other adjustments |
(4,879 | ) | (4,325 | ) | ||||
|
|
|
|
|||||
Investments in unconsolidated real estate entities |
$ | 57,063 | $ | 96,126 | ||||
|
|
|
|
4. Mortgage Loans
A summary of the outstanding mortgage loans as of June 30, 2013 and December 31, 2012 is as follows (in thousands). None of these loans are recourse to us, except that we have partially guaranteed the Four Points Centre mortgage loan, under which our liability is currently limited to a maximum of $10.8 million. In connection with some of the loans listed in the table below, our operating partnership is subject to customary non-recourse carve out obligations. Campus El Segundo was sold on May 7, 2013 and the remaining mortgage loan balance was paid in full, see footnote 3 below. The Murano mortgage loan was paid off subsequent to June 30, 2013, see footnote 5 below.
18
Outstanding Debt | Maturity Date | |||||||||||||||||||
Mortgage Loan |
Interest Rate at June 30, 2013 |
As of June 30, 2013 |
As of December 31, 2012 |
Maturity Date | at End of Extension Options |
|||||||||||||||
One Commerce Square (1) |
5.67 | % | $ | 125,981 | $ | 126,869 | 1/6/2016 | 1/6/2016 | ||||||||||||
Two Commerce Square (2) |
3.96 | % | 112,000 | 106,612 | 4/5/2023 | 4/5/2023 | ||||||||||||||
Campus El Segundo (3) |
| 14,500 | ||||||||||||||||||
Four Points Centre (4) |
LIBOR + 3.50 | % | 23,276 | 26,453 | 7/31/2014 | 7/31/2015 | ||||||||||||||
Murano (5) |
LIBOR + 3.75 | % | 481 | 6,941 | 12/15/2013 | 12/15/2013 | ||||||||||||||
|
|
|
|
|||||||||||||||||
Total mortgage loans |
$ | 261,738 | $ | 281,375 | ||||||||||||||||
|
|
|
|
The 30 day LIBOR rate for the loans above was 0.19% at June 30, 2013.
(1) | The mortgage loan may be defeased, and is subject to yield maintenance payments for any prepayments prior to October 2015. |
(2) | On March 8, 2013, we entered into a loan agreement with a lender for a mortgage on Two Commerce Square in the amount of $112.0 million, which paid off at par the expiring loan, which had a balance of $106.5 million as of March 8, 2013. The loan has a fixed interest rate of 3.96% for a ten year term. The mortgage loan is subject to interest only payments through March 5, 2018, and thereafter, principal and interest payments are due based on a thirty-year amortization schedule. The loan may be defeased, and is subject to yield maintenance payments for any prepayments made 60 days prior to the maturity date. |
(3) | On May 7, 2013, the Company sold the remaining 23.9 acres of land and related assets, and paid off the mortgage loan balance in full. The prior period amounts have been reclassified as Mortgage loans associated with land held for sale on the consolidated balance sheets. |
(4) | The interest rate as of June 30, 2013 was 3.75% per annum. As of June 30, 2013, $0.5 million was available to be drawn to fund tenant improvement costs and certain other project costs related to two office buildings. The loan has a one-year extension option at our election subject to certain conditions. The option to extend is subject to (1) a loan-to-value ratio and a minimum appraised land ratio of 62.5%, and (2) the adjusted net operating income of the property and improvements as a percentage of the outstanding principal balance must be at least 10.0%. If the loan-to-value ratio or the minimum debt yield is not met, we can pay down the principal balance in an amount sufficient to satisfy the requirement. The debt yield is calculated by dividing the net operating income of the property by the outstanding principal balance of the loan. |
Beginning in August 2014, we are required to pay down the loan balance by $42,000 each month. As of June 30, 2013, the property had a net operating loss. We have guaranteed completion of the tenant improvements and 46.5% of the outstanding principal balance and interest payable on the loan, which results in a maximum guarantee of $10.8 million as of June 30, 2013. We have agreed to certain financial covenants on this loan as the guarantor, which we were in compliance with as of June 30, 2013. We have also provided additional collateral of fully entitled unimproved land, which is immediately adjacent to the office buildings.
During the first quarter of 2013, we sold certain land parcels at Four Points Centre, resulting in paydowns of $6.9 million on the loan. The remaining collateral of fully entitled unimproved land adjacent to the office buildings is approximately 19 acres.
(5) | The interest rate as of June 30, 2013 was 4.00% per annum and the loan was scheduled to mature on December 15, 2013. Repayment of this loan was being made with proceeds from the sales of condominium units.This loan was paid off subsequent to June 30, 2013. |
The loan agreement for One Commerce Square requires that all receipts collected from these properties be deposited in lockbox accounts under the control of the lenders to fund reserves such as capital improvements, taxes, insurance, leasing commissions, debt service and operating expenditures. This requirement was removed from the Two Commerce Square loan when it was refinanced in the current year. Included in restricted cash on our consolidated balance sheets at June 30, 2013 and December 31, 2012, are lockbox and reserve funds for One Commerce Square of $3.4 million and $5.1 million, respectively.
19
As of June 30, 2013, subject to certain extension options exercisable by the Company, principal payments due for the secured outstanding debt are as follows (in thousands):
Amount Due at Original Maturity Date |
Amount Due at Maturity Date After Exercise of Extension Options |
|||||||
2013 |
$ | 1,374 | $ | 1,374 | ||||
2014 |
25,160 | 2,094 | ||||||
2015 |
1,995 | 25,061 | ||||||
2016 |
121,209 | 121,209 | ||||||
2017 |
| | ||||||
Thereafter |
112,000 | 112,000 | ||||||
|
|
|
|
|||||
$ | 261,738 | $ | 261,738 | |||||
|
|
|
|
5. Income (Loss) per Share and Dividends Declared
Under FASB ASC 260-10-45, Earnings Per Share, the Company uses the two-class method to calculate earning per share. Basic earnings per share is calculated based on dividends declared on common shares and other participating securities (distributed earnings) and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends accrued during the respective period. Participating securities, which include restricted stock, incentive units and stock options, are included in the computation of earnings per share pursuant to the two-class method. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding securities. Basic earnings per common share and participating securities, including restricted stock, incentive units and stock options, represent the summation of the distributed and undistributed earnings per common share and participating security divided by the total weighted average number of common shares outstanding and the total weighted average number of participating securities outstanding during the respective periods. We only present the earnings per share attributable to the common shareholders.
Net losses, after deducting the dividends to participating securities, are allocated in full to the common shares since the participating security holders do not have an obligation to share in the losses, based on the contractual rights and obligations of the participating securities. Because we incurred losses for the three and six months ended June 30, 2013 and 2012, all potentially dilutive instruments are anti-dilutive and have been excluded from our computation of weighted average dilutive shares outstanding.
Our board of directors declared and paid two quarterly dividends to common stockholders in the six months ended June 30, 2013 and 2012 of $0.02 and 0.015 per common share, respectively.
20
The following is a summary of the elements used in calculating basic and diluted income (loss) per share for the three and six months ended June 30, 2013 and 2012 (in thousands except share and per share amounts):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income (loss) attributable to common shares |
$ | (5,551 | ) | $ | (4,804 | ) | $ | (14,520 | ) | $ | (7,924 | ) | ||||
Dividends to participating securities: |
||||||||||||||||
Unvested restricted stock |
| | | | ||||||||||||
Unvested incentive units |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) attributable to common shares, net of dividends to participating securities |
$ | (5,551 | ) | $ | (4,804 | ) | $ | (14,520 | ) | $ | (7,924 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average common shares outstandingbasic and diluted (1) |
46,610,859 | 38,591,868 | 46,419,772 | 37,664,573 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) per sharebasic and diluted |
$ | (0.12 | ) | $ | (0.12 | ) | $ | (0.31 | ) | $ | (0.21 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Dividends declared per share |
$ | 0.02 | $ | 0.015 | $ | 0.04 | $ | 0.03 | ||||||||
|
|
|
|
|
|
|
|
(1) | Basic and diluted shares include common shares plus dilutive equity instruments, as appropriate. For the three and six months ended June 30, 2013 and 2012, all potentially dilutive instruments have been excluded from the computation of weighted average dilutive shares outstanding because they were anti-dilutive. |
6. Equity
Common Stock and Operating Partnership Units
The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of our common stock vote together as a single class with holders of our limited voting stock on those matters upon which the holders of limited voting stock are entitled to vote. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably any dividends when, if, and as may be declared by the board of directors out of funds legally available for dividend payments. In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive, conversion, subscription or other rights. There are no redemption or sinking fund provisions applicable to the common stock. An Operating Partnership unit and a share of our common stock have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the Operating Partnership. An Operating Partnership unit may be redeemed by the holder in exchange for cash or shares of common stock at our election, on a one-for-one basis. As of June 30, 2013 and December 31, 2012, we held a 79.8% and 78.7% interest in the Operating Partnership respectively.
Limited Voting Stock
Each Operating Partnership unit issued in connection with the formation of our Operating Partnership at the time of our initial public offering in 2004 was paired with one share of limited voting stock. Operating Partnership units issued under other circumstances, including upon the conversion of incentive units granted under the Incentive Plan, are not paired with shares of limited voting stock. These shares of limited voting stock are not transferable separate from the limited partnership units they are paired with, and each Operating Partnership unit is redeemable together with one share of limited voting stock by its holder for cash, or, at our election, one share of our common stock. Each share of limited voting stock entitles its holder to one vote on the election of directors, certain extraordinary transactions, including a merger or sale of our Company, and amendments to our certificate of incorporation. Shares of limited voting stock are not entitled to any regular or special dividend payments or other distributions, including any dividends or other distributions declared or paid with respect to shares of our common stock or any other class or series of our stock, and are not entitled to receive any distributions in the event of liquidation or dissolution of our Company. Shares of limited voting stock have no class voting rights, except to the extent required by Delaware law. Any redemption of a unit in our Operating Partnership will be redeemed together with a share of limited voting stock in accordance with the redemption provisions of the Operating Partnership agreement, and the share of limited voting stock will be canceled and not subject to reissuance. As of June 30, 2013, there were 11,646,949 shares of limited voting stock outstanding.
21
Incentive Partnership Units
We have issued a total of 1,377,714 incentive units as of June 30, 2013 to certain executives. Incentive units represent a profits interest in the Operating Partnership and generally will be treated as regular Operating Partnership units in the Operating Partnership and rank pari passu with the Operating Partnership units as to payment of distributions, including distributions of assets upon liquidation. Incentive units are subject to vesting, forfeiture and additional restrictions on transfer as may be determined by us as general partner of the Operating Partnership. The holder of an incentive unit has the right to convert all or a part of his vested incentive units into Operating Partnership units, but only to the extent of the incentive units economic capital account balance. As general partner, we may also cause any number of vested incentive units to be converted into Operating Partnership units to the extent of the incentive units economic capital account balance. We had 46,969,703 shares of common stock and 11,646,949 Operating Partnership units outstanding as of June 30, 2013, and 224,100 vested incentive units outstanding which were issued under our Incentive Plan. The share of the Company owned by the Operating Partnership unit holders is reflected as a separate component under the Noncontrolling Interests caption in the equity section of our consolidated balance sheets.
Exchange of Noncontrolling Operating Partnership Units
During the six months ended June 30, 2013, 666,382 noncontrolling Operating Partnership units were redeemed for shares of the Companys common stock on a one-for-one basis, respectively. Neither the Company nor the Operating Partnership received any proceeds from this exchange.
Stock Compensation
We adopted the 2004 Equity Incentive Plan of Thomas Properties Group, Inc. as amended, (the Incentive Plan) effective upon the closing of our initial public offering and amended it in May 2007 and June 2008 to increase the shares reserved under the plan. The Incentive Plan provides incentives to our employees and is designed to attract, reward and retain personnel. We may issue up to 3,361,906 shares as either stock option awards, restricted stock awards or incentive unit awards of which 244,005, remain available for grant as of June 30, 2013 (see table below for details). In addition, under our Non-Employee Directors Restricted Stock Plan (the Non-Employee Directors Plan) a total of 60,000 shares are reserved for grant, of which 29,065 remain available for grant.
June 30, 2013 | ||||
Total awards authorized for issuance |
3,361,906 | |||
Less: |
||||
Incentive unit grants |
1,377,714 | |||
Restricted stock grants |
1,345,107 | |||
Stock option awards, net of forfeitures |
395,080 | |||
|
|
|||
Awards available for grant |
244,005 | |||
|
|
For more information on our stock incentive plan, please refer to the notes to the consolidated financial statements in our 2012 Annual Report on Form 10-K, which was filed with the SEC on March 11, 2013, and our proxy statement, which was filed with the SEC on April 30, 2013.
On January 27, 2013 and February 1, 2012, we granted 176,840 and 199,999 restricted shares, respectively, of which fifty percent vest based on stock performance and had a total grant date fair market value of approximately $0.3 million and $0.2 million, respectively. The other 50% are discretionary vesting shares based on goals determined by the Compensation Committee of the Board of Directors, which are currently reserved and will be considered granted and fully expensed upon vesting.
During the first quarter of 2013, 37,189 incentive units and 207,801 restricted shares, subject to stock performance, vested. During February 2013, 18,594 incentive units and 128,897 restricted shares, subject to discretionary vesting, were approved for vesting by the Compensation Committee.
22
Phantom Shares
During 2011, a Phantom Share Plan was approved by the compensation committee of the board of directors and adopted by the full board of directors. The purpose of the Plan is to reward and retain senior executive officers of the Company. This Plan is an incentive award plan that pays cash or, if the stockholders of the Company approve and authorize the issuance of additional shares, common stock. Generally, the recipient must still be employed with the Company to receive the cash or stock. Each phantom share award vests upon the earlier of (i) ratably, one-third on each anniversary of the grant date, subject to achievement of (x) with respect to 50% of each award, a Company stock appreciation target rate of up to 12% pro-rated, and (y) with respect to 50% of each award, other goals determined by the Compensation Committee, in each case only to the extent that at or after such time the Companys stockholders have approved the issuance of sufficient shares of common stock under the Companys 2004 Equity Incentive Plan, as amended, or any successor thereto, to settle awards under the Plan in common stock, and (ii) the fifth anniversary of the grant date, subject to such grantees continued employment with the Company and achievement of the Company and other goals.
The following is a summary of the phantom shares outstanding as of June 30, 2013:
Grant Date |
Shares Granted | Grant Date Fair Value (in thousands) |
||||||
March 16, 2011 |
677,933 | $ | 1,034 | |||||
February 1, 2012 |
437,950 | 946 | ||||||
January 27, 2013 |
626,977 | 1,477 | ||||||
|
|
|||||||
Total |
1,742,860 | |||||||
|
|
We have determined these grants should be treated as liability awards rather than equity awards in accordance with ASC 718 CompensationStock Compensation, and as such, the obligation is reflected in the accounts payable and other liabilities caption on our consolidated balance sheet.
Compensation Expense
We recognized non-cash compensation expense and the related income tax benefit for the amortization of restricted stock and phantom stock grant expense as well as the remeasurement of the phantom stock awards at fair value for the three and six months ended June 30, 2013 and 2012 as follows (in thousands).
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Restricted Stock : |
||||||||||||||||
Compensation expense |
$ | 74 | $ | 64 | $ | 789 | $ | 439 | ||||||||
Income tax benefit |
29 | 25 | 307 | 174 | ||||||||||||
Phantom Shares: |
||||||||||||||||
Compensation expense |
$ | 229 | $ | 192 | $ | 374 | $ | 380 | ||||||||
Income tax benefit |
89 | 76 | 145 | 151 |
For the three and six months ended June 30, 2013 and 2012, a full valuation allowance was recorded against the income tax benefit.
Noncontrolling Interests
Noncontrolling interests on our consolidated balance sheets relate primarily to the partnership and incentive units in the Operating Partnership of 11,646,949 units and 224,100 units, respectively, that are not owned by the Company. In conjunction with the formation of the Company, certain persons and entities contributing interests in properties to the Operating Partnership received Operating Partnership units. In addition, certain employees of the Operating Partnership have received incentive units in connection with services rendered or to be rendered to the Operating Partnership. Limited partners who have been issued incentive units have the right to require the Operating Partnership to redeem part or all of their incentive units upon vesting of the incentive units, if applicable. The Company may elect to acquire those incentive units in exchange for shares of the Companys common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distributions and similar events, or pay cash based upon the fair market value of an equivalent number of shares of the Companys common stock at the time of redemption.
23
The redemption value of the 224,100 outstanding incentive units at June 30, 2013 was approximately $1.2 million based on the closing price of the Companys common stock of $5.30 per share as of June 30, 2013.
A charge is recorded each period to the consolidated statements of income (loss) for the noncontrolling interests proportionate share of the Companys net income (loss).
Equity is allocated between controlling and noncontrolling interests as follows (in thousands):
Stockholders Equity |
Noncontrolling Interests |
Total Equity |
||||||||||
Balance, December 31, 2012 |
$ | 175,729 | $ | 103,108 | $ | 278,837 | ||||||
Net income (loss) |
(14,520 | ) | (4,475 | ) | (18,995 | ) | ||||||
Redemption of operating partnership units |
2,352 | (2,352 | ) | | ||||||||
Amortization of share-based compensation |
702 | 182 | 884 | |||||||||
Other comprehensive income (loss) recognized |
(96 | ) | (25 | ) | (121 | ) | ||||||
Dividends |
(1,888 | ) | (466 | ) | (2,354 | ) | ||||||
Distributions |
| (11,667 | ) | (11,667 | ) | |||||||
Contributions |
| 7,983 | 7,983 | |||||||||
|
|
|
|
|
|
|||||||
Balance, June 30, 2013 |
$ | 162,279 | $ | 92,288 | $ | 254,567 | ||||||
|
|
|
|
|
|
Noncontrolling InterestsPartners in Consolidated Real Estate Entities
Noncontrolling interestPartners in Consolidated Real Estate Entities represents the proportionate share of equity in the partnerships and limited liability companies listed below held by non-affiliated partners. Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the partnership and limited liability company agreements. Following are the stated ownership percentages of the unaffiliated partners in these consolidated entities, prior to any preferred or special allocations, as of June 30, 2013 and December 31, 2012.
Non-Affiliated Partner Share |
||||
One Commerce Square |
25.0 | % | ||
Two Commerce Square |
25.0 | % | ||
Murano |
27.0 | % | ||
TPG Austin Partner, LLC |
33.3 | % |
7. Income Taxes
All operations are carried on through the Operating Partnership and its subsidiaries. The Operating Partnership is not subject to income tax and all of the taxable income, gains, losses, deductions, and credits are passed through to its partners. However, the Operating Partnership and some of its subsidiaries are subject to income taxes in Texas. We are responsible for our share of the Operating Partnerships taxable income or loss allocated in accordance with the Operating Partnerships Agreement of Limited Partnership. As of June 30, 2013, we held a 79.8% capital interest in the Operating Partnership. For the six months ended June 30, 2013, we were allocated a weighted average of 79.6% of the income and losses from the Operating Partnership.
Our effective tax rate for the three and six months ended June 30, 2013 were (0.25)% and (0.21)%, compared to the federal statutory rate of 35%. The difference from the statutory rate is due primarily to income attributable to the noncontrolling interests and the valuation allowance related to the Companys deferred tax assets for which no benefit could be provided due to their realization not meeting the more-likely-than-not threshold.
24
In 2007, an ownership change pursuant to Internal Revenue Code Section 382 (Section 382) occurred. The Companys federal and state net operating loss carryforwards in existence at that time were subject to a gross annual limitation of $9.9 million. Net operating loss carryforwards generated subsequent to the 2007 deemed ownership change were not subject to the Section 382 limitation. On June 12, 2012, as a result of the acquisition of 8,695,653 shares of common stock by affiliates of Madison International Realty, the Company believes a second change in ownership pursuant to Section 382 occurred. Accordingly, as of June 12, 2012, the Companys federal and state net operating loss carryforwards and, potentially, certain post June 12, 2012 deductions and losses (to the extent such losses are considered recognized built-in losses and to the extent of the companys net unrealized built-in loss (if any) under Section 382) are subject to an annual Section 382 limitation of approximately $5.7 million. As the new annual limitation is less than the previous $9.9 million annual limitation imposed on 2007 and prior net operating losses, the new annual limitation of $5.7 million is now applied against all federal and state net operating loss carryforwards in existence as of June 12, 2012. Net operating losses generated after June 12, 2012, are generally not subject to the Section 382 limitation. As of the year ended December 31, 2012, the Company anticipates having net operating loss carryforwards of $54.0 million for federal purposes and $48.0 million for state purposes. The Companys net operating loss carryforwards are subject to varying expirations from 2018 through 2033.
FASB ASC 740-10-30-17, Accounting for Income Taxes, requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. Future realization of the deferred tax asset is dependent on the reversal of existing taxable temporary differences, carryback potential, tax-planning strategies and on us generating sufficient taxable income in future years. Due to uncertainty of future realization, the Company recorded a valuation allowance on its net deferred tax assets in excess of its liability for unrecognized tax benefits, due to uncertainty of future realization. As such, a net deferred tax asset related solely to uncertain tax positions is included in other assets on the Companys balance sheet.
FASB ASC 740-10-25, Accounting for Income Taxes subsection Recognition clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Companys policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of June 30, 2013, there is no interest or penalty associated with unrecognized tax benefits. We do not anticipate any significant increases or decreases in unrecognized tax benefits within the next twelve months.
8. Fair Value of Financial Instruments
Our estimates of the fair value of financial instruments as of June 30, 2013 were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability. The hierarchy consists of three broad levels as follows:
1. | Level 1 InputsQuoted prices in active markets for identical assets or liabilities |
2. | Level 2 InputsSignificant other observable inputs (can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as discounts and borrowing rates with similar terms and maturities) |
3. | Level 3 InputsSignificant unobservable inputs (based on an entitys own assumptions, since there is little, if any, related market activity) |
The carrying amounts for cash and cash equivalents, restricted cash, rent and other receivables, accounts payable and other liabilities approximate fair value due to the short-term nature of these instruments.
Available-for-sale debt securities
The valuation techniques used to measure the fair values of our investments in marketable debt securities are described above. These assets measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following (in thousands):
25
Fair Value Measurements at the end of June 30, 2013 |
||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||
Available-for-sale debt securities: |
||||||||||||
U.S. treasury bills |
$ | 475 | | | ||||||||
Agency securities |
4,932 | | | |||||||||
Corporate bonds |
| 3,952 | | |||||||||
Municipal bonds |
| 520 | | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 5,407 | $ | 4,472 | | |||||||
|
|
|
|
|
|
Mortgage Loans
The Company uses a discounted cash flow analysis to estimate the fair value of our mortgage loans. The inputs used in preparing the discounted cash flows include actual maturity dates and scheduled interest and principal payments as well as estimates for market loan-to-value ratios and discount rates. The discount rate, which is the most significant input, is estimated based on our knowledge of the market including discussions with market participants. As this input has more attributes of a Level 3 input than a Level 2 input, we classify it as such.
As of June 30, 2013 and December 2012, the book and fair values of our mortgage loans were as follows (in thousands):
June 30, 2013 | December 31, 2012 | |||||||||||||||
Book Value | Fair Value | Book Value (1) | Fair Value | |||||||||||||
Mortgage loans |
$ | 261,738 | $ | 257,431 | $ | 281,375 | $ | 286,223 |
(1) | Included in the book value of mortgage loans above is $14.5 million related to the Campus El Segundo loan that is shown as obligations associated with land held for sale on the consolidated balance sheet as of December 31, 2012. On May 7, 2013, the Company sold the Campus El Segundo project, and paid off the mortgage loan balance in full. |
9. Commitments and Contingencies
Litigation
On May 10, 2013, the Company paid $3.25 million in total satisfaction to settle a certain legal matter. The parties involved mutually released all claims against the other and the litigation was dismissed.
General
We have been named as a defendant in a number of premises liability claims in the ordinary course of business. We believe that the ultimate resolution of these claims will not have a material adverse effect on our financial position and results of operations.
A mortgage loan secured by a first trust deed on 2121 Market Street is guaranteed by our Operating Partnership, up to a maximum amount of $14.0 million expiring in December 2022. 2121 Market Street is an unconsolidated real estate entity in which we have a 1.0% limited partnership interest. See Note 4 for disclosure of guarantees related to our consolidated debt.
Insurance
We maintain general liability insurance with limits of $200 million per occurrence and all risk property and rental value insurance with limits of $1.28 billion per occurrence (except for a limit of $600 million per occurrence for one particular asset grouping), with terrorism limits of $1.15 billion per occurrence (except for a limit of $600 million per occurrence for one particular asset grouping), and flood insurance with a limit of $200 million per occurrence. Our California properties have earthquake insurance with coverage of $200 million per occurrence, subject to a deductible in the amount of 5% of the value of the affected property.
26
10. Subsequent Event
Agreement with CalSTRS
On July 16, 2013, TPG entered into a Redemption and Liquidation Option Agreement (the RL Option Agreement) with CalSTRS and TPG/CalSTRS, which gives TPG the option to either: (i) cause TPG/CalSTRS to redeem CalSTRS interest for $678.3 million, subject to adjustment (the Redemption Option); or (ii) cause a liquidation of TPG/CalSTRS, in which case (a) TPG will make a capital contribution to TPG/CalSTRS of $163.8 million, subject to adjustment (the Contribution Amount), (b) TPG/CalSTRS will make a distribution to CalSTRS of all of the interests in the entities that own City National Plaza, plus cash equal to the Contribution Amount, and (c) TPG/CalSTRS will make a distribution to TPG of all of the interests in the entities that own the other properties (the Liquidation Option).
On July 31, 2013, TPG elected to exercise the Liquidation Option. In connection with the Liquidation Option, on or before September 30, 2013, subject to certain closing conditions, TPG will fund the Contribution Amount to TPG/CalSTRS, and TPG/CalSTRS will distribute to CalSTRS the Contribution Amount and the entities that own City National Plaza, subject to existing mortgage debt, and will distribute to TPG the entities that own CityWestPlace and San Felipe Plaza in Houston and three properties in Northern Virginia, also subject to existing mortgage debt (the Liquidation). Unless waived by CalSTRS, the Liquidation will be subject to CalSTRS having a binding agreement on its own behalf to sell City National Plaza to a third party immediately after the closing of the Liquidation. TPG is evaluating alternatives for financing the Contribution Amount.
27
Exhibit 99.3
INDEX TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
Page | ||||
2 | ||||
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2013 |
4 | |||
5 | ||||
6 | ||||
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements |
7 |
1
PARKWAY PROPERTIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On September 4, 2013, Parkway Properties, Inc., or Parkway, and Thomas Properties Group, Inc., or TPGI, and certain of their respective affiliates, entered into a definitive agreement and plan of merger, which is referred to as the merger agreement, pursuant to which Parkway and TPGI will combine through a merger of TPGI with and into Parkway, with Parkway surviving the merger, which we refer to as the parent merger.
Under the terms of the merger agreement, each share of TPGI common stock will be converted into the right to receive 0.3822 of a newly issued share of Parkway common stock. Following the parent merger, continuing Parkway stockholders will hold approximately 78.7% of the combined company, which we refer to as the Combined Corporation, and former TPGI stockholders will hold approximately 21.3% percent of the issued and outstanding shares of common stock of the Combined Corporation. The parent merger is subject to customary closing conditions, including receipt of the approval of both the Parkway and TPGI stockholders, among other things. The transactions contemplated by the merger agreement, including the parent merger, are expected to close in the fourth quarter of 2013.
The unaudited pro forma condensed consolidated financial statements were prepared using the acquisition method of accounting, with Parkway considered the acquirer of TPGI. See Accounting Treatment of the Mergers. Under the acquisition method of accounting, the purchase price is allocated to the underlying TPGI tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with the excess purchase price, if any, allocated to goodwill.
The pro forma adjustments and the purchase price allocation as presented are based on estimates and certain information that is currently available. The total consideration for the parent merger and the assignment of fair values to TPGIs assets acquired and liabilities assumed has not been finalized, is subject to change, could vary materially from the actual amounts at the time the parent merger is completed. A final determination of the fair value of TPGIs assets and liabilities, including intangible assets with both indefinite or finite lives, will be based on the actual net tangible and intangible assets and liabilities of TPGI that exist as of the closing date of the parent merger and, therefore, cannot be made prior to the completion of the parent merger. In addition, the value of the consideration to be paid by Parkway upon the consummation of the parent merger will be determined based on the closing price of Parkways common stock on the closing date of the parent merger. As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analyses are performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma condensed consolidated financial statements presented below. Parkway estimated the fair value of TPGIs assets and liabilities based on discussions with TPGIs management, preliminary valuation studies, due diligence and information presented in TPGIs public filings. Until the parent merger is completed, both companies are limited in their ability to share certain information. Upon completion of the parent merger, final valuations will be performed. Any increases or decreases in the fair value of relevant balance sheet amounts upon completion of the final valuations will result in adjustments to the pro forma balance sheet and/or pro forma statements of operations. The final purchase price allocation may be different than that reflected in the pro forma purchase price allocation presented herein, and this difference may be material.
The aggregate purchase price for financial statement purposes will be based on the actual closing price per share of Parkway common stock on the closing date, which could differ materially from the assumed value disclosed in the notes to the unaudited pro forma condensed consolidated financial statements. If the actual closing price per share of Parkway common stock on the closing date is higher than the assumed amount, it is expected that the final purchase price will be higher. Conversely, if the actual closing price is lower than the assumed amount, it is expected that the final purchase price will be lower. A hypothetical 10% change in
2
Parkways closing stock price on the closing date of the parent merger would have an approximate $41.0 million impact on the purchase price.
Assumptions and estimates underlying the unaudited adjustments to the unaudited pro forma condensed consolidated financial statements are described in the accompanying notes. The historical consolidated financial statements have been adjusted in the unaudited pro forma condensed consolidated financial statements to give pro forma effect to events that are: (1) directly attributable to the parent merger, (2) factually supportable, and (3) expected to have a continuing impact on the results of operations of the combined company following the parent merger. This information is presented for illustrative purposes only and is not indicative of the combined operating results or financial position that would have occurred if such transactions had occurred on the dates and in accordance with the assumptions described below, nor is it indicative of future operating results or financial position.
The unaudited pro forma condensed consolidated financial statements, although helpful in illustrating the financial characteristics of the combined company under one set of assumptions, do not reflect opportunities to earn additional revenue, or other factors that may result as a consequence of the parent merger and do not attempt to predict or suggest future results. Specifically, the unaudited pro forma combined statements of operations reflect projected operating efficiencies and synergies expected to be achieved as a result of the parent merger. The projected operating synergies are expected to include approximately $13.9 million in combined annual cost synergies. The unaudited pro forma condensed consolidated financial statements also exclude the effects of costs associated with any restructuring or integration activities or asset dispositions resulting from the parent merger as they are currently not known, and to the extent they occur, are expected to be non-recurring and will not have been incurred at the closing date of the parent merger. However, such costs could affect the Combined Corporation following the parent merger in the period the costs are incurred or recorded. Further, the unaudited pro forma condensed consolidated financial statements do not reflect the effect of any regulatory actions that may impact the results of the Combined Corporation following the parent merger.
The unaudited pro forma condensed consolidated financial statements have been developed from and should be read in conjunction with:
| the accompanying notes to the unaudited pro forma condensed consolidated financial statements; |
| the historical audited consolidated financial statements of Parkway as of and for the year ended December 31, 2012, included in Parkways Form 10-K, and the historical unaudited consolidated financial statements as of and for the six months ended June 30, 2013, included in Parkways Form 10-Q, both of which are incorporated by reference in this document; |
| the historical audited consolidated financial statements of TPGI as of and for the year ended December 31, 2012, included in TPGIs Form 10-K, and the historical unaudited consolidated financial statements as of and for the six months ended June 30, 2013, included in TPGIs Form 10-Q, both of which are incorporated by reference in this document; and |
| other information relating to Parkway and TPGI contained in or incorporated by reference into this document. See Where You Can Find More Information, Selected Historical Financial Information of Parkway and Selected Historical Financial Information of TPGI. |
3
PARKWAY PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2013
(Unaudited)
Parkway Historical |
TPGI Historical |
Pro Forma Adjustments |
TPGI Pro Forma |
Parkway Pro Forma |
||||||||||||||||
(In thousands) | ||||||||||||||||||||
Assets |
||||||||||||||||||||
Real estate related investments: |
||||||||||||||||||||
Office and parking properties |
$ | 1,952,276 | $ | 404,911 | $ | 212,701 | (2) | $ | 617,612 | $ | 2,569,888 | |||||||||
Accumulated depreciation |
(223,184 | ) | (130,736 | ) | 130,736 | (3) | | (223,184 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
1,729,092 | 274,175 | 343,437 | 617,612 | 2,346,704 | ||||||||||||||||
Land available for sale |
250 | | | | 250 | |||||||||||||||
Investments in unconsolidated real estate entities |
| 68,429 | (19,949 | )(4) | 48,480 | 48,480 | ||||||||||||||
Condominium units held for sale |
| 32,095 | (495 | )(5) | 31,600 | 31,600 | ||||||||||||||
Receivables and other assets |
155,743 | 50,183 | (27,238 | )(6) | 22,945 | 178,688 | ||||||||||||||
Intangible assets, net |
120,704 | | 75,450 | (7) | 75,450 | 196,154 | ||||||||||||||
Assets held for sale |
9,831 | | | | 9,831 | |||||||||||||||
Management contracts, net |
15,437 | | 4,334 | (8) | 4,334 | 19,771 | ||||||||||||||
Marketable securities |
| 9,879 | | 9,879 | 9,879 | |||||||||||||||
Restricted cash |
| 3,935 | (2,858 | )(9) | 1,077 | 1,077 | ||||||||||||||
Cash and cash equivalents |
30,241 | 127,879 | (93,982 | )(10) | 33,897 | 64,138 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 2,061,298 | $ | 566,575 | $ | 278,699 | $ | 845,274 | $ | 2,906,572 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities |
||||||||||||||||||||
Notes payable to banks |
$ | 313,000 | $ | | $ | | (11) | $ | | $ | 313,000 | |||||||||
Mortgage notes payable |
724,090 | 261,738 | 73,993 | (12) | 335,731 | 1,059,821 | ||||||||||||||
Accounts payable and other liabilities |
62,706 | 38,904 | (12,967 | )(13) | 25,937 | 88,643 | ||||||||||||||
Below market rents |
25,150 | | 54,053 | (14) | 54,053 | 79,203 | ||||||||||||||
Losses and distributions in excess of investments in unconsolidated real estate entities |
| 11,366 | (11,366 | )(15) | | | ||||||||||||||
Liabilities related to assets held for sale |
325 | | | | 325 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
1,125,271 | 312,008 | 103,713 | 415,721 | 1,540,992 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Equity |
||||||||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Common Stock |
69 | 586 | (567 | )(16) | 19 | 88 | ||||||||||||||
Additional paid-in capital |
1,097,788 | 261,833 | 69,459 | (17) | 331,292 | 1,429,080 | ||||||||||||||
Accumulated other comprehensive loss |
(814 | ) | (121 | ) | 121 | (18) | | (814 | ) | |||||||||||
Accumulated deficit |
(375,138 | ) | (100,019 | ) | 100,019 | (19) | | (375,138 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
721,905 | 162,279 | 169,032 | 331,311 | 1,053,216 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Noncontrolling interestsreal estate partnerships |
214,107 | 54,507 | (34,611 | )(20) | 19,896 | 234,003 | ||||||||||||||
Noncontrolling interestsunit holders in operating partnership |
15 | 37,781 | 40,565 | (21) | 78,346 | 78,361 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total equity |
936,027 | 254,567 | 174,986 | 429,553 | 1,365,580 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and equity |
$ | 2,061,298 | $ | 566,575 | $ | 278,699 | $ | 845,274 | $ | 2,906,572 | ||||||||||
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to unaudited pro forma condensed consolidated financial statements.
4
PARKWAY PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2013
(Unaudited)
(in thousands, except per share data)
Parkway Historical |
TPGI Historical |
Pro Forma Adjustments |
TPGI Pro Forma |
Parkway Pro Forma |
||||||||||||||||
Revenues |
||||||||||||||||||||
Income from office and parking properties |
$ | 138,781 | $ | 28,476 | $ | 17,752 | (23) | $ | 46,228 | $ | 185,009 | |||||||||
Management company income |
8,832 | | | | 8,832 | |||||||||||||||
Investment advisory, management, leasing and development services |
| 7,810 | (5,933 | )(24) | 1,877 | 1,877 | ||||||||||||||
Reimbursment of property personnel costs |
| 2,033 | (1,644 | )(25) | 389 | 389 | ||||||||||||||
Condominuium sales |
| 7,793 | | 7,793 | 7,793 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
147,613 | 46,112 | 10,175 | 56,287 | 203,900 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Expenses and other |
||||||||||||||||||||
Property operating expense |
53,573 | 17,060 | 3,273 | (26) | 20,333 | 73,906 | ||||||||||||||
Depreciation and amortization |
60,764 | 8,112 | 15,760 | (27) | 23,872 | 84,636 | ||||||||||||||
Impairment loss on real estate |
| 753 | (753 | )(28) | | | ||||||||||||||
Management company expenses |
8,981 | | | | 8,981 | |||||||||||||||
Investment advisory, management, leasing, and development services |
| 4,208 | (3,343 | )(29) | 865 | 865 | ||||||||||||||
Reimbursable property personnel costs |
| 2,033 | (1,644 | )(30) | 389 | 389 | ||||||||||||||
Cost of condominium sales |
| 6,411 | | 6,411 | 6,411 | |||||||||||||||
General and administrative |
8,905 | 12,480 | (6,950 | )(31) | 5,530 | 14,435 | ||||||||||||||
Acquisition costs |
1,646 | | | (32) | | 1,646 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses and other |
133,869 | 51,057 | 6,343 | 57,400 | 191,269 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating Income (loss) |
13,744 | (4,945 | ) | 3,832 | (1,113 | ) | 12,631 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other income and expenses |
||||||||||||||||||||
Interest and other income |
185 | 114 | | 114 | 299 | |||||||||||||||
Equity in net income (loss) of unconsolidated real estate entities |
| (6,321 | ) | 81 | (33) | (6,240 | ) | (6,240 | ) | |||||||||||
Loss on sale of real estate |
| (559 | ) | 559 | (34) | | | |||||||||||||
Interest expense |
(21,774 | ) | (7,244 | ) | 85 | (35) | (7,159 | ) | (28,933 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loss before income taxes |
(7,845 | ) | (18,955 | ) | 4,557 | (14,398 | ) | (22,243 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income tax benefit (expense) |
891 | (40 | ) | | (40 | ) | 851 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loss from continuing operations |
(6,954 | ) | (18,995 | ) | 4,557 | (14,438 | ) | (21,392 | ) | |||||||||||
Net (income) loss attributable to real estate partnerships and unit holders |
2,306 | 4,475 | (1,145 | )(36) | 3,330 | 5,636 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net loss for Parkway Properties, Inc. |
(4,648 | ) | (14,520 | ) | 3,412 | (11,108 | ) | (15,756 | ) | |||||||||||
Dividends on preferred stock |
(3,433 | ) | | | | (3,433 | ) | |||||||||||||
Dividends on preferred stock redemption |
(6,604 | ) | | | | (6,604 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net loss attributable to common stockholders |
$ | (14,685 | ) | $ | (14,520 | ) | $ | 3,412 | $ | (11,108 | ) | $ | (25,793 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loss from continuing operations attributable to common stockholders per common share: |
||||||||||||||||||||
Basic and diluted |
$ | (0.23 | ) | $ | (0.31 | ) | $ | (0.12 | ) | $ | (0.59 | ) | $ | (0.32 | ) | |||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic and diluted |
62,720 | 46,420 | (27,579 | )(37) | 18,841 | 81,561 |
See the accompanying notes to unaudited pro forma condensed consolidated financial statements.
5
PARKWAY PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2012
(Unaudited)
(in thousands, except per share data)
Parkway Historical |
TPGI Historical |
Pro Forma Adjustments |
TPGI Pro Forma |
Parkway Pro Forma |
||||||||||||||||
Revenues |
||||||||||||||||||||
Income from office and parking properties |
$ | 206,739 | $ | 54,922 | $ | 36,263 | (23) | $ | 91,185 | $ | 297,924 | |||||||||
Management company income |
19,778 | | | | 19,778 | |||||||||||||||
Investment advisory, management, leasing and development services |
| 20,271 | (17,374 | )(24) | 2,897 | 2,897 | ||||||||||||||
Reimbursment of property personnel costs |
| 5,183 | (2,873 | )(25) | 2,310 | 2,310 | ||||||||||||||
Condominuium sales |
| 10,240 | | 10,240 | 10,240 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
226,517 | 90,616 | 16,016 | 106,632 | 333,149 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Expenses and other |
||||||||||||||||||||
Property operating expense |
80,748 | 31,860 | 9,746 | (26) | 41,606 | 122,354 | ||||||||||||||
Depreciation and amortization |
81,537 | 15,701 | 32,044 | (27) | 47,745 | 129,282 | ||||||||||||||
Impairment loss on real estate |
9,200 | 12,745 | (12,745 | )(28) | | 9,200 | ||||||||||||||
Impairment loss on management contracts and goodwill |
41,967 | | | | 41,967 | |||||||||||||||
Change in fair value of contingent consideration |
216 | | | | 216 | |||||||||||||||
Management company expenses |
17,237 | | | | 17,237 | |||||||||||||||
Investment advisory, management, leasing, and development services |
| 12,461 | (11,345 | )(29) | 1,116 | 1,116 | ||||||||||||||
Reimbursable property personnel costs |
| 5,183 | (2,873 | )(30) | 2,310 | 2,310 | ||||||||||||||
Cost of condominium sales |
| 8,129 | | 8,129 | 8,129 | |||||||||||||||
General and administrative |
16,420 | 17,749 | (13,900 | )(31) | 3,849 | 20,269 | ||||||||||||||
Acquisition costs |
2,791 | | 45,400 | (32) | 45,400 | 48,191 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses and other |
250,116 | 103,828 | 46,327 | 150,155 | 400,271 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating loss |
(23,599 | ) | (13,212 | ) | (30,311 | ) | (43,523 | ) | (67,122 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other income and expenses |
||||||||||||||||||||
Interest and other income |
272 | 74 | | 74 | 346 | |||||||||||||||
Equity in net loss of unconsolidated real estate entities |
| (3,672 | ) | (7,306 | )(33) | (10,978 | ) | (10,978 | ) | |||||||||||
Gain on sale of real estate |
48 | | | (34) | | 48 | ||||||||||||||
Recovery of loss on mortgage loan receivable |
500 | | | | 500 | |||||||||||||||
Interest expense |
(35,334 | ) | (16,847 | ) | 1,969 | (35) | (14,878 | ) | (50,212 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loss before income taxes |
(58,113 | ) | (33,657 | ) | (35,648 | ) | (69,305 | ) | (127,418 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income tax benefit (expense) |
(261 | ) | 385 | | 385 | 124 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loss from continuing operations |
(58,374 | ) | (33,272 | ) | (35,648 | ) | (68,920 | ) | (127,294 | ) | ||||||||||
Net loss attributable to real estate partnerships and unit holders |
3,586 | 7,876 | 13,561 | (36) | 21,437 | 25,023 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net loss for Parkway Properties, Inc. |
(54,788 | ) | (25,396 | ) | (22,087 | ) | (47,483 | ) | (102,271 | ) | ||||||||||
Dividends on preferred stock |
(10,843 | ) | | | | (10,843 | ) | |||||||||||||
Dividends on convertible preferred stock |
(1,011 | ) | | | | (1,011 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net loss attributable to common stockholders |
$ | (66,642 | ) | $ | (25,396 | ) | $ | (22,087 | ) | $ | (47,483 | ) | $ | (114,125 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income (loss) from continuing operations attributable to common stockholders per common share: |
||||||||||||||||||||
Basic and diluted |
$ | (2.11 | ) | $ | (0.61 | ) | $ | 0.97 | $ | (2.52 | ) | $ | (2.27 | ) | ||||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic and diluted |
31,542 | 41,632 | (22,791 | )(37) | 18,841 | 50,383 |
See the accompanying notes to unaudited pro forma condensed consolidated financial statements.
6
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
General
The Parkway Properties, Inc. (Parkway) and Thomas Properties Group, Inc. (TPGI) historical amounts include the reclassification of certain historical balances to conform to the pre-merger Parkway presentation of these unaudited pro forma condensed consolidated financial statements, as described below:
Balance Sheet:
| TPGIs balances for land and improvements and land and improvementsdevelopment properties were reclassified into office and parking properties. |
| TPGIs balance for rents and other receivables, previously disclosed as a separate line item, was reclassified into receivables and other assets. |
| TPGIs balance for receivables from unconsolidated real estate entities, previously disclosed as a separate line item, was reclassified into receivables and other assets. |
| TPGIs balance for deferred rents, previously disclosed as a separate line item, was reclassified into receivables and other assets. |
| TPGIs balance for deferred leasing and loan costs, net, previously disclosed as a separate line item, was reclassified into receivables and other assets. |
| TPGIs balance for other assets, net, previously disclosed as a separate line item, was reclassified into receivables and other assets. |
| TPGIs balance for prepaid rent, previously disclosed as a separate line item, was reclassified into accounts payable and other liabilities. |
| TPGIs balance for deferred revenue, previously disclosed as a separate line item, was reclassified into accounts payable and other liabilities. |
| TPGIs balance for partners in consolidated real estate entities, previously disclosed as a separate line item, was reclassified into noncontrolling interestsreal estate partnerships. |
| Parkways balance for below market rents, previously disclosed as accounts payable and other liabilities, was reclassified into below market rents. |
| Parkways balance for unit holders in operating partnership, previously disclosed as noncontrolling interests, was reclassified into noncontrolling interestsunit holders in operating partnership. |
Statement of Operations:
| TPGIs balances for rental, tenant reimbursements, and parking and other, previously disclosed as separate line items of revenue, were reclassified into income from office and parking properties. |
| TPGIs balances for investment advisory, management, leasing, and development services and investment advisory, management, leasing, and development servicesunconsolidated real estate entities were combined into investment advisory, management, leasing, and development services. |
| TPGIs balances for property operating and maintenance expense and real estate and other taxes expense, previously disclosed as separate line items of expenses, were reclassified into property operating expense. |
7
The unaudited pro forma condensed consolidated financial statements are based on Parkways historical consolidated financial statements and TPGIs historical consolidated financial statements, each incorporated by reference in this joint proxy statement/prospectus, and have been adjusted in the statements below to give effect to (i) the mergers, (ii) the sale of One Commerce Square, Two Commerce Square and Four Points Centre, which are expected to occur immediately following the completion of the mergers, (iii) the liquidation of the TPG/CalSTRS, LLC joint venture, which occurred on September 30, 2013 and which included the transfer of City National Plaza, (iv) the sale of Reflections I and Reflections II, and Fair Oaks Plaza on September 27, 2013 by TPG/CalSTRS, and (v) the consolidation of San Felipe Plaza and CityWest Place, which were previously included in the TPG/CalSTRS joint venture, and Murano. Parkway will acquire TPGIs joint venture interest in TPG/CalSTRS Austin, LLC. The unaudited pro forma combined statements of operations for the six months ended June 30, 2013 and the 12 months ended December 31, 2012 give effect to the foregoing transactions as if they had occurred on January 1, 2012, the beginning of the earliest period presented. The unaudited pro forma combined balance sheet as of June 30, 2013 gives effect to the foregoing transactions as if they had occurred on June 30, 2013.
Balance Sheet
General
(1) | Represents adjustments to record the acquisition of TPGI by Parkway based upon the estimated purchase price of approximately $771.3 million. The calculation of the estimated purchase price to be allocated is as follows (in thousands): |
Equity to be issued (a) |
$ | 409,657 | ||
Assumptions of mortgage note payables |
335,731 | |||
Other liabilities |
25,937 | |||
|
|
|||
Estimated purchase price |
$ | 771,325 | ||
|
|
(a) | Assumes 60.9 million shares of TPGI common stock (includes the assumption of phantom shares, restricted shares, options, incentive units and units in the operating partnership) are to be converted to Parkway common shares at a fixed conversion rate of 0.3822 per TPGI share. The per share closing price of Parkways common stock on September 26, 2013 was $17.60. |
8
The purchase price will be adjusted based on the share price of Parkways common stock at closing consistent with the requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 805, Business Combinations. The preliminary purchase price allocation of assets acquired and liabilities assumed is provided throughout these notes. The following provides a summary of the preliminary purchase price allocation by major categories of assets and liabilities in the unaudited pro forma condensed consolidated balance sheet as of June 30, 2013 (in thousands):
Assets: |
||||
Total real estate |
$ | 617,612 | ||
Acquired intangible lease assets |
75,450 | |||
Cash and cash equivalents |
33,897 | |||
Investments in unconsolidated real estate entities |
48,480 | |||
Restricted cash |
1,077 | |||
Management contracts |
4,334 | |||
Marketable securities |
9,879 | |||
Condominium units held for sale |
31,600 | |||
Receivables and other assets |
22,945 | |||
|
|
|||
Total Assets |
$ | 845,274 | ||
Liabilities: |
||||
Mortgage loans |
$ | 335,731 | ||
Accounts payable and other liabilities, net |
9,552 | |||
Below market rents |
54,053 | |||
Prepaid rent and deferred revenue |
16,385 | |||
|
|
|||
Total Liabilities |
$ | 415,721 | ||
Noncontrolling interests |
$ | 19,896 | ||
|
|
|||
Estimated fair value of net assets acquired |
$ | 409,657 | ||
|
|
Assets
(2) | Office and parking properties reflects an adjustment to record the estimated increase over TPGIs historical investment in real estate based upon the preliminary estimated fair value for the tangible real estate assets to be acquired. The final determination of the allocation of the purchase price will be based on the fair value of such assets and liabilities as of the actual consummation date of the parent merger and will be completed after the parent merger is consummated. Such final determination of the purchase price may be significantly different from the preliminary estimates used in the unaudited pro forma condensed consolidated financial statements. |
The estimated values are as follows (in thousands):
TPGI Pro Forma | ||||
Land |
$ | 98,245 | ||
Buildings and Improvements |
473,485 | |||
Tenant Improvements |
45,882 | |||
|
|
|||
Estimated fair value of real estate investments |
$ | 617,612 | ||
|
|
(3) | Accumulated depreciation and amortization was adjusted to eliminate TPGIs historical accumulated depreciation and amortization. |
(4) | Investments in unconsolidated real estate entities were adjusted to eliminate the TPG/CalSTRS joint venture, and to reflect the fair value adjustment related to TPG/CalSTRS Austin, LLC. |
9
(5) | Condominium units held for sale was adjusted to account for expected condominium sales recognized from the balance sheet date of June 30, 2013 through the actual merger consummation date. |
(6) | Receivables and other assets was adjusted to account for the following (in thousands): |
Pro Forma Adjustment |
||||
Elimination of rents and other receivables to reflect only consolidated assets |
$ | (378 | ) | |
Elimination of receivables for unconsolidated entities to reflect only consolidated assets |
(8 | ) | ||
Elimination of deferred rents |
(20,343 | ) | ||
Elimination of deferred leasing costs |
(11,282 | ) | ||
Elimination of deferred loan costs |
(1,273 | ) | ||
Elimination of other assets |
(10,637 | ) | ||
Acquisition of lease costs |
16,683 | |||
|
|
|||
Total pro forma adjustments |
$ | (27,238 | ) | |
|
|
(7) | Intangible assets, net reflects the purchase price allocation of the following items (in thousands): |
TPGI Pro Forma |
||||
In place leases |
$ | 72,830 | ||
Above market rents |
2,620 | |||
|
|
|||
Estimated fair value of intangible assets |
$ | 75,450 | ||
|
|
(8) | Management contracts, net adds the purchase price allocation of the management contracts acquired. |
(9) | Restricted cash was adjusted to reflect the impact of the mergers and the other transactions included in the pro forma adjustment. |
(10) | Cash and cash equivalents was adjusted to reflect the impact of the mergers and the other transactions included in the pro forma adjustment and also includes the amount TPGI was required to contribute to TPG/CalSTRS in connection with its liquidation. The transaction costs of $45.4 million was not reflected in this amount. |
Liabilities
(11) | Notes payable to banks does not reflect the $80 million bridge loan to TPG LP to fund a portion of the capital contribution to the TPG/CalSTRS joint venture in connection with its liquidation. Parkway plans to repay the bridge loan using proceeds from the sale of Four Points Centre, One Commerce Square, and Two Commerce Square. |
(12) | Mortgage notes payable adjustment represents the elimination of the debt related to the previous consolidated assets of One Commerce Square, Two Commerce Square, and Four Points Centre and the assumption of the debt related to the San Felipe Plaza and CityWest Place assets and the associated mortgage premium. |
(13) | Accounts payable and other liabilities adjustments to TPGIs historical balances are as follows (in thousands): |
Pro Forma Adjustment |
||||
Elimination of accounts payable and other liabilities for properties to be sold |
$ | (15,748 | ) | |
Reflection of prepaid and deferred rent for the consolidated assets |
2,781 | |||
|
|
|||
Total pro forma adjustments |
$ | (12,967 | ) | |
|
|
10
(14) | Acquired lease intangible liabilities reflect the purchase price allocation of below market rents. |
(15) | Represents the elimination of losses and distributions in excess of investments in unconsolidated real estate entities. |
Equity
(16) | Common stock represents the adjustment to convert TPGIs historical equity into Parkway common stock. |
(17) | The adjustment to additional paid-in capital is to reflect the adjustment to convert TPGIs historical equity into Parkway common stock. |
(18) | Represents elimination of TPGIs accumulated other comprehensive loss. |
(19) | Represents elimination of TPGIs accumulated deficit. |
(20) | Noncontrolling interestreal estate partnerships was adjusted to reflect the unaffiliated partners interest in Murano and TPG/CalSTRS Austin. |
(21) | Noncontrolling interestunit holders in operating partnership represents the adjustment to convert TPGIs historical units in operating partnership into Parkway units in operating partnership. |
Statements of Operations
General
(22) | Statement of Operations for TPGI and Parkway does not include the impact of discontinued operations. Adjustments reflect the effect on Parkways and TPGIs historical consolidated statement of operations and shares used in computing earnings per share as if the TPGI acquisition occurred on January 1, 2012. |
Revenue
(23) | The TPGI pro forma reflects rental revenue generated on a straight line basis as if TPGI had consummated each of its 2012 and 2013 (through June 30th) property acquisitions on January 1, 2012. The pro forma adjustment is the difference between the TPGI pro forma amount and the TPGI historical amount. The TPGI pro forma rental revenue is calculated as follows (in thousands): |
For the six months ended June 30, 2013 |
For the year ended December 31, 2012 |
|||||||
Contractual rent |
$ | 37,830 | $ | 75,697 | ||||
Straight-line rent adjustment |
2,173 | 2,986 | ||||||
Above and below market lease amortization, net |
6,225 | 12,502 | ||||||
|
|
|
|
|||||
TPGI pro forma rental revenue |
$ | 46,228 | $ | 91,185 | ||||
|
|
|
|
(24) | Investment advisory, management, leasing and development services were adjusted to reflect the pro forma revenue related to the services provided to TPG/CalSTRS Austin. |
(25) | Reimbursement of property personnel costs were adjusted to reflect the pro forma revenues related to the TPG/CalSTRS Austin. |
11
Expense
(26) | Property operating expense was adjusted to reflect the expenses for the consolidation of San Felipe Plaza and CityWest Place. |
(27) | The pro forma adjustment is the difference between the TPGI pro forma amount and the TPGI historical amount. The pro forma depreciation and amortization reflects the revised depreciation and amortization expense as follows (in thousands), based upon the estimated purchase price allocation: |
For the six months ended June 30, 2013 |
For the year ended December 31, 2012 |
|||||||
Buildings and improvements |
$ | 10,780 | $ | 21,562 | ||||
In place lease assets |
11,269 | 22,538 | ||||||
Lease commissions |
1,823 | 3,645 | ||||||
|
|
|
|
|||||
Total depreciation and amortization |
$ | 23,872 | $ | 47,745 | ||||
|
|
|
|
(28) | Impairment losses on real estate were adjusted for impairment losses on assets which will not be acquired in connection with the mergers. |
(29) | Investment advisory, management, leasing, and development services were adjusted to reflect the expenses related to the services provided to TPG/CalSTRS Austin. |
(30) | Reimbursable property personnel costs were adjusted to reflect the expenses related to the TPG/CalSTRS Austin. |
(31) | General and administrative was adjusted to reflect the expected annual cost savings of $13.9 million as a result of the mergers. |
(32) | Acquisition costs represent the estimated transaction costs related to the mergers, including, but not limited to, advisor fees, legal fees, accounting fees, printing fees, and transfer fees. |
(33) | Equity in net income (loss) of unconsolidated real estate entities was adjusted to reflect the impact of the mergers and the other transactions included in the pro forma adjustments. |
(34) | Loss on sale of real estate was eliminated. |
(35) | Interest expense reflects an adjustment to TPGIs historical interest expense to account for the assumption of mortgages of San Felipe Plaza and City West Place, and the related fair value adjustment. |
The adjustment includes the following (in thousands):
For the six months ended June 30, 2013 |
For the year ended December 31, 2012 |
|||||||
Interest on mortgages assumed |
$ | 8,751 | $ | 18,063 | ||||
Mortgage premium amortization |
(1,592 | ) | (3,185 | ) | ||||
|
|
|
|
|||||
Total interest expense |
$ | 7,159 | $ | 14,878 | ||||
|
|
|
|
(36) | Noncontrolling interest was adjusted to reflect the unaffiliated partners interest in Murano and TPG/CalSTRS Austin. |
(37) | Weighted average common shares outstanding reflects the adjustment from TPGIs historical common shares outstanding to the Parkway shares issued at closing. |
12