UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended December 31, 2009 |
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
Commission file number 0-50854
Thomas Properties Group, Inc.
(Exact name of registrant as specified in its charter)
| | |
| Delaware | | 20-0852352 |
(State or other jurisdiction of incorporation or organization) | | (IRS employer identification number) |
| |
515 South Flower Street, Sixth Floor, Los Angeles, CA | | 90071 |
| (Address of principal executive offices) | | Zip Code |
Registrant’s telephone number, including area code
(213) 613-1900
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of Each Class | | Name of Each Exchange on Which Registered |
Common Stock, $0.01 par value | | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| | | | | | |
| Large accelerated filer ¨ | | Accelerated filer ¨ | | Non-accelerated filer x (Do not check if a smaller reporting company) | | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $34,935,916 based on the closing price on the Nasdaq Global Market for such shares on June 30, 2009.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | |
Class | | Outstanding at March 19, 2010 |
Common Stock, $.01 par value per share | | 30,878,621 |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement with respect to its 2010 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the registrant’s fiscal year are incorporated by reference into Part III hereof as noted therein.
THOMAS PROPERTIES GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I
General
The terms “Thomas Properties Group,” “we,” “us” and “our company” refer to Thomas Properties Group, Inc., together with our operating partnership, Thomas Properties Group, L.P. (the “Operating Partnership”). We are a full-service real estate company that owns, acquires, develops and manages primarily office, as well as mixed-use and residential properties on a nationwide basis. Our company’s primary areas of focus are the acquisition and ownership of premier properties, both on a consolidated basis and through strategic joint ventures, property development and redevelopment, and property management activities. Property operations comprise our primary source of cash flow and provide revenue through rental operations, property management, asset management, leasing and other fee income. Our acquisitions program targets properties purchased both for our own account and that of third parties, targeted at core, core plus, and value-add properties. We engage in property development and redevelopment as market conditions warrant. As part of our investment management activities, we earn fees for advising institutional investors on property portfolios.
Our properties are located in Southern California and Sacramento, California; Philadelphia, Pennsylvania; Northern Virginia; Houston, Texas and Austin, Texas. As of December 31, 2009, we own interests in and asset manage 27 operating properties with 13.2 million rentable square feet and provide asset and/or property management services on behalf of third parties for an additional four operating properties with 2.2 million rentable square feet. We also have a development pipeline of approximately 10.0 million square feet of primarily office development and 2,937 residential units.
We were incorporated in the State of Delaware on March 9, 2004. On October 13, 2004, we completed our initial public offering (the “Offering”). Concurrent with the consummation of the Offering, Thomas Properties and the Operating Partnership, together with the partners and members of the affiliated partnerships and limited liability companies comprising our predecessor entities (“TPGI Predecessor”) and other parties which held direct or indirect ownership interests in the properties engaged in certain formation transactions. The formation transactions were designed to (i) continue the operations of TPGI Predecessor, (ii) enable us to raise the necessary capital to acquire increased interests in certain of the properties and repay certain property level indebtedness, (iii) fund joint venture capital commitments, (iv) provide capital for future acquisitions, and (v) fund future development costs at our development properties.
Our operations are carried on through our Operating Partnership. We are the sole general partner in the Operating Partnership. Pursuant to contribution agreements among the owners of TPGI Predecessor and the Operating Partnership, the Operating Partnership received a contribution of interests in the real estate properties, as well as the investment advisory, property management, leasing and real estate development operations of TPGI Predecessor in exchange for limited partnership units (“Units”) in the Operating Partnership issued to the contributors and the assumption of debt and other specified liabilities.
We maintain offices in Los Angeles, Newport Beach and Sacramento, California; Austin and Houston, Texas; Northern Virginia and Philadelphia, Pennsylvania. Our corporate headquarters are located at City National Plaza, 515 South Flower Street, Sixth Floor, Los Angeles, California 90071 and our phone number is (213) 613-1900. Our website is www.tpgre.com. The information contained on our website is not part of this report. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports filed with or furnished to the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after we file them with or furnish them to the SEC. You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room located at 100 F Street NE, Washington, DC 20549. Information on the operations of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. You may also download these materials from the SEC’s website at www.sec.gov.
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Business Focus
Portfolio Enhancement: We focus on increasing net revenues from the properties in which we own an interest or which we manage for third parties through proactive management. As part of portfolio management, we maintain strong tenant relationships through our commitment to service in marketing, lease negotiations, building design and property management.
Property Acquisitions: We seek to acquire “core,” “core plus,” and “value-add” properties for our own account and/or in joint ventures with others where such acquisitions provide us with attractive risk-adjusted returns. 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 revenues for an extended period of time, occupancy less than 90% and/or physical or management problems which we believe can be improved by investing additional capital and/or improving management.
Partnerships and Joint Ventures: We leverage our property acquisition and development expertise through partnerships and joint ventures. These entities provide us with additional capital for investment, shared risk exposure, and earned fees for asset management, property management, leasing and other services. We are the general partner and hold an ownership interest of 25% in TPG/CalSTRS, LLC (“TPG/CalSTRS”), a joint venture with the California State Teachers’ Retirement System (“CalSTRS”), which owns 12 office properties. In addition, TPG/CalSTRS is the general partner and holds a 25% interest in a joint venture between TPG/CalSTRS, an affiliate of Lehman Brothers, Inc. (“Lehman”) and another institutional investor (the “Austin Portfolio Joint Venture”), which owns ten office properties in Austin, Texas. We are also the general partner and hold an interest in the Thomas High Performance Green Fund, L.P. (the “Green Fund”), which was formed to develop, redevelop and invest in high performance, sustainable commercial buildings.
Development and Redevelopment: We develop and redevelop projects in diversified geographic markets using pre-leasing, guaranteed maximum cost construction contracts and other measures to reduce development risk. We have development properties in Los Angeles and El Segundo, California; Philadelphia, Pennsylvania; and Houston and Austin, Texas.
Recent Developments
Loans:During the fourth quarter of 2009, we paid off two mezzanine loans on Two Commerce Square which were scheduled to mature in January 2010. The loans, which had a combined total principal and accrued interest amount of $36.6 million, were paid off for a discounted amount of $25.2 million, resulting in gain from extinguishment of debt of $11.4 million. We issued 5,138,600 shares of our common stock in a registered direct offering to certain institutional investors, resulting in net proceeds to the Company of approximately $13.1 million, to provide partial funding for the loan payoff.
During the fourth quarter of 2009, we modified the $17.0 million Campus El Segundo construction loan. The loan has been extended to July 31, 2011, and has three one-year extension options.
During the fourth quarter of 2009, we modified the Four Points Centre construction loan. The loan has been extended to July 31, 2012 with two one-year extension options. We have committed to pay down the principal in the total amount of $7.8 million in connection with this extension; $3.9 million was paid in October 2009, $1.3 million was paid in January, 2010 and the balance will be paid in two equal installments in June and December 2010.
Subsequent to December 31, 2009, we negotiated on behalf of the California State Teachers’ Retirement System (“CalSTRS”), our partner in City National Plaza, for CalSTRS to acquire all of the property’s mezzanine debt, which has a principal balance of approximately $219.1 million, and is scheduled to mature on July 9, 2010. CalSTRS acquired this debt and will contribute it to the partnership’s equity, reducing the leverage on the property from $568.0 million to $348.9 million, all of which is first mortgage debt. We are in discussions with CalSTRS to obtain an option to participate in the loan purchase, on or after the maturity of the mezzanine debt, based on our current pro rata share of 25% of the existing City National Plaza equity.
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On March 6, 2010, an aggregate of $96.5 million in mortgage loans owed by subsidiaries of TPG/CalSTRS on unconsolidated properties at Four Falls Corporate Center and Oak Hill Plaza/Walnut Hill Plaza matured and became due in full. The borrowers under these loans have not, as of March 18, 2010, made payment on these loans and they are currently in default. These loans are non-recourse to the Company, and we do not anticipate making any payments or equity contributions to support the repayment or refinancing of these loans. The borrowers are currently in discussions with the lenders to restructure the debt or facilitate a sale or other liquidation of these properties. We do not believe that the loss of our equity interests in these properties will have a material effect on our business or results of operations.
Sales:At Murano we entered into contracts to sell an additional 13 condominium residences and closed the sales of 18 others during the fourth quarter of 2009, resulting in a reduction of approximately $8.1 million in our construction loan balance, which had a balance of $37.0 million as of December 31, 2009. Subsequent to December 31, 2009, we entered into contracts to sell an additional ten condominiums.
During the fourth quarter of 2009, we sold a 1.9 acre land parcel adjacent to our Four Points Centre development property in Austin, Texas, which is leased to a 4,200 square foot retail tenant under a ground lease. The land was sold for $2.1 million; we recognized a gain of approximately $1.2 million.
Our Fee Services:In 2009, we were retained by Korean Air, a subsidiary of Hanjin Group, as fee developer for the entitlement, design and redevelopment of the 2.7 acre Wilshire Grand property in downtown Los Angeles, for which we are proposing the development of two buildings to include approximately 1.5 million square feet of office, 560 hotel rooms, and 100 residential condominiums, with supporting retail and restaurant uses, for a total project size of up to approximately 2.5 million gross square feet. We earn a monthly developer fee on this project. We have also been retained by a local government agency in California to provide real estate consulting services for which we will earn fees.
Competition
The real estate business is highly competitive. There are numerous other acquirers, developers, managers and owners of commercial and mixed-use real estate that compete with us nationally, regionally and locally, some of whom may have greater financial resources. They compete with us for acquisition opportunities, management and leasing revenues, land for development, tenants for properties and prospective investors in acquisition or development funds we may establish through our investment advisory business.
Our properties compete for tenants with similar properties primarily on the basis of property quality, location, total occupancy costs (including base rent and operating expenses), services provided, building quality and the design and condition of any planned improvements or tenant improvements we may negotiate. The number and type of competing properties or available rentable space in a particular market or submarket could have a material effect on our ability to lease space and maintain or increase occupancy or rents in our existing properties. We believe, however, that the quality services and individualized attention that we offer our tenants, together with our property management services on site, enhance our ability to attract and retain tenants for the office properties we own an interest in or manage.
In addition, in many of our submarkets, institutional investors and owners and developers of properties (including other real estate operating companies and REITs) compete for the acquisition and development, or redevelopment, of land and space. Many of these entities have substantial resources and experience. We may compete for investors in potential property acquisitions with other property investment managers with larger or more established operations. Additionally, our ability to compete depends upon trends in the economies of our markets in which we operate or own interests in properties, investment alternatives, financial condition and operating results of current and prospective tenants, availability and cost of capital and debt financing, construction and renovation costs, land availability, completion of construction approvals, taxes and governmental regulations.
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Regulatory Issues
Environmental Matters
Under various federal, state and local environmental laws and regulations, a current or previous owner, manager or tenant of real estate may be required to investigate and clean up hazardous or toxic substances at the property, and may be held liable to a government entity or to third parties for property damage and for investigation, clean-up and monitoring costs incurred by the parties in connection with the actual or threatened contamination.
Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos- containing materials and potentially asbestos-containing materials in their building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potentially asbestos-containing materials. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and/or disposal of asbestos-containing materials and potentially asbestos-containing materials when the materials are in poor condition or in the event of construction, remodeling or renovation of a building.
We are aware of potentially environmentally hazardous or toxic materials at two of the properties in which we hold an ownership interest.
With respect to asbestos-containing materials present at our City National Plaza and Brookhollow properties, these materials have been removed or abated from certain tenant and common areas of the building structures. We continue to remove or abate asbestos-containing materials from various areas of the building structures and as of December 31, 2009, have accrued $0.8 million for estimated future costs of such removal or abatement at City National Plaza and Brookhollow.
Americans with Disabilities Act
Our properties must comply with Title III of the Americans with Disabilities Act, or ADA, to the extent that the properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in public areas of our properties where the removal is readily achievable. The obligation to make readily achievable accommodations is an ongoing one, and we assess our properties and make alterations as appropriate.
Insurance
We carry comprehensive liability, fire, flood, extended coverage, wind, earthquake, terrorism, pollution legal liability, business interruption and rental loss insurance under our blanket policy covering all of the properties which we own an interest in or manage for third parties, including our development properties (although we carry only liability insurance for the California Environmental Protection Agency (“CalEPA”) headquarters building under our blanket policy because the tenant has the right to provide all other forms of coverage it deems necessary, and it has elected to do so). We believe the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice. In the opinion of our management team, the properties in our portfolio are adequately insured. Our terrorism insurance is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants, and biological and chemical weapons. We carry earthquake insurance on our properties located in seismically active areas, which includes our Southern California properties, wind insurance on our properties located in “tier 1” wind zones, which includes our Houston, Texas properties, and terrorism insurance on all of our properties, in amounts and with deductibles which we believe are commercially reasonable.
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Foreign Operations
We do not engage in any non-U.S. operations or derive any revenue from sources outside the United States.
Segment Financial Information
We operate in one business segment: the acquisition, development, ownership and management of commercial and mixed-use real estate. Additionally, we operate in one geographic area: the United States. Our office portfolio generates revenues from the rental of office space to tenants, parking, rental of storage space and other tenant services. Our management activities generate revenues from third parties and joint ventures in which the Operating Partnership is a partner from property and asset management fees, acquisition fees and disposition fees. For a further discussion of segment financial information, see the financial statements commencing on page 65.
Employees
As of December 31, 2009, we had 159 employees. None of our employees are subject to a collective bargaining agreement or represented by a union, and we believe that relations with our employees are good. Our executive management team is based in our Los Angeles and Philadelphia offices.
Forward-Looking Statements
Forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated and you should not rely on them as predictions of future events. Although information is based on our current estimates, forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise. You are cautioned not to place undue reliance on this information as we cannot guarantee that any future expectations and events described will happen as described or that they will happen at all. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
Risks Related to Our Business and Our Properties
We generate a significant portion of our revenues from our joint venture and our separate account management agreements with CalSTRS, and if we were to lose these relationships, our financial results would be significantly negatively affected.
Our joint venture and separate account management agreement relationships with CalSTRS provide us with substantial fee revenues. For the years ended December 31, 2009, 2008 and 2007, approximately 20.2%, 15.0% and 29.6%, respectively, of our revenue has been derived from fees earned from these relationships.
We cannot assure you that our joint venture and separate account management relationships with CalSTRS will continue, and, if they do not, we may not be able to replace these relationships with other strategic alliances that would provide comparable revenues. Our interest in the TPG/CalSTRS joint venture is subject to a buy-sell provision, which permits CalSTRS to purchase our interest in TPG/CalSTRS at any time. Under the buy-sell provision either our Operating Partnership or CalSTRS can initiate a buy-out of the other’s interest at any time by delivering a notice to the other specifying a purchase price for all the joint venture’s assets; the other venture partner then has the option to sell its joint venture interest or purchase the interest of the initiating venture partner. The purchase price is based on what each venture partner would receive on liquidation if the joint venture’s assets were sold for the specified price and the joint venture’s liabilities paid and the remaining assets distributed to the joint venture partners.
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In addition, upon the occurrence of certain events of default by the Operating Partnership under the joint venture agreement or related management, development service and leasing agreements, upon bankruptcy of our Operating Partnership, or upon the death or disability of either James A. Thomas, our Chairman, President and CEO, or John R. Sischo, one of our Executive Vice Presidents, or the failure of either of them to devote the necessary time to perform their duties (unless replaced by an individual approved by CalSTRS) (each, a “Buyout Default”), CalSTRS may elect to purchase our joint venture interest based on a three percent discount to the appraised fair market value at the time of the Buyout Default.
The joint venture agreement with CalSTRS also previously prohibited any transfer of securities of the Company or limited partnership units in our Operating Partnership that would result in Mr. Thomas, his immediate family and any entities controlled thereby owning less than 30% of our securities entitled to vote for the election of directors. On October 30, 2009 we entered into an amendment to the TPG/CalSTRS agreement such that in connection with the issuance of additional Company shares in one or more public offerings, Mr. Thomas, his immediate family and controlled entities may reduce their collective ownership interest to no less than 10% of the total common shares and Operating Partnership units and no less than 15.0 million shares and Operating Partnership units on a collective basis.
Most of our fee arrangements under our separate account relationship with CalSTRS are terminable on 30 days’ notice. Termination of either our joint venture or separate account relationship with CalSTRS would adversely affect our revenue and profitability and our ability to achieve our business plan by reducing our fee income and access to co-investment capital to acquire additional properties.
Our joint venture investments may be adversely affected by our lack of control or input on decisions or shared decision-making authority or disputes with our co-venturers.
Many of our operating properties are owned through a joint venture or partnership with other parties. As a result, we do not exercise sole decision-making authority regarding such joint venture properties, including with respect to cash distributions or the sale of such properties. Furthermore, we may co-invest in the future through other partnerships, joint ventures or other entities, acquiring non-controlling interests or sharing responsibility for managing the affairs of a property, partnership or joint venture. Investments in partnerships, joint ventures, funds or other entities may, under certain circumstances, involve risks, including partners who may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. These investments may also have the risk of impasses on significant decisions, because neither we nor our partner or co-venturer would have full control over the partnership or joint venture. Future disputes between us and our partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their full time and effort on our business. In addition, under the principles of agency and partnership law, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers, such as if a partner or co-venturer became bankrupt and defaulted on its reimbursement and contribution obligations to us, subjecting the property owned by the partnership or joint venture to liabilities in excess of those contemplated by the partnership or joint venture agreement, or incurred debts or liabilities on behalf of the partnership or joint venture in excess of the authority granted by the partnership or joint venture agreement. In some joint ventures or other investments we make, if the entity in which we invest is a limited partnership, we have acquired and may acquire in the future all or a portion of our interest in such partnership as a general partner. In such event, we may be liable for all the liabilities of the partnership, although we attempt to limit such liability to our investment in such partnership by investing through a subsidiary.
Our joint venture partners have rights under our joint venture agreements that could adversely affect us.
As of December 31, 2009, we held interests in 22 of our properties through TPG/CalSTRS, 10 of which are held indirectly through TPG/CalSTRS’ interest in the Austin Portfolio Joint Venture. TPG/CalSTRS requires a unanimous vote of the joint venture’s management committee on certain major decisions, including approval of
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annual business plans and budgets, financings and refinancings, and additional capital calls not in compliance with an approved annual plan. The management committee currently consists of two members appointed by CalSTRS and one member appointed by the Operating Partnership. All other decisions, including sales of properties, are made based upon a majority decision of the management committee. Thus CalSTRS has the ability to control certain decisions for the joint venture that may result in an outcome contrary to our interests. The Operating Partnership has the responsibility and authority to carry out day to day management of the joint venture and to implement the annual plans approved by the management committee. In addition to CalSTRS’ ability to control certain decisions relating to the joint venture, our joint venture agreement with CalSTRS includes provisions negotiated for the benefit of CalSTRS that could adversely affect us. Unless otherwise determined by the management committee of the joint venture, we are required to use diligent efforts to sell each joint venture property generally within five years of that property reaching stabilization, except that the holding period for Reflections I and Reflections II, both of which are 100% leased, will be separately determined by the joint venture management committee. With respect to these two properties, we are required to perform a hold/sell analysis at least annually, and make a recommendation to the management committee regarding the appropriate holding period. We have a right of first offer to purchase a joint venture property upon a required sale at a price we propose, and if CalSTRS accepts our offer we must close within 90 days. If we do not exercise the right of first offer and we subsequently fail to effect a sale by the end of the specified holding period, CalSTRS has the right to assume control of the sale process. This may require us to sell one or more of our assets at an inopportune time, or for prices that are lower than could be achieved if we had more flexibility in the timing for effecting sales.
In June 2007, a wholly-owned subsidiary of TPG/CalSTRS, entered into a partnership agreement and syndication agreement with an affiliate of Lehman Brothers, Inc. in relation to the Austin Portfolio Joint Venture. As of December 31, 2009, 33% of the Lehman affiliate’s original 75% equity interest in the Austin Portfolio Joint Venture had been sold to an unrelated institutional investor and the Lehman affiliate held 50% of the equity in the Austin Portfolio Joint Venture. The Lehman affiliate has the right to reduce or eliminate certain fees and payments otherwise payable to TPG/CalSTRS under the partnership agreement. The Lehman affiliate has certain approval rights with respect to major decisions of the Austin Portfolio Joint Venture, although the TPG/CalSTRS subsidiary is in charge of operating, leasing and managing the Austin Portfolio Joint Venture assets within approved budgets and guidelines.
The major decision approval rights of the Lehman affiliate include, but are not limited to, the right to approve annual business plans and budgets, financings and refinancings, sales of properties, additional capital calls not in compliance with an approved annual plan, and agreements with affiliates. The other limited partner in the Austin Portfolio Joint Venture also has approval rights over some of these major decisions.
In addition, as a right specific to the Lehman affiliate, it can require the sale of one Central Business District asset and one suburban asset by the Austin Portfolio Joint Venture at any time after June 1, 2011; further, Lehman and its successors and assigns can require the sale of the balance of the Austin Portfolio Joint Venture assets after June 1, 2012, in each case subject to a right of first offer in favor of the other partners in the Austin Portfolio Joint Venture. The limited partners also have the right to remove the general partner under certain circumstances. These rights could adversely affect TPG/CalSTRS and us.
We may not receive funding from our joint venture partners in connection with proposed acquisitions, which could adversely affect our growth.
We have entered into, and may enter into in the future, certain joint venture acquisition arrangements with third parties in which we identify potential acquisition properties on behalf of the joint venture, and a portion (in some cases, a substantial portion) of the capital required for each project would be funded by our joint venture partners. Although our joint venture partners have committed to fund property acquisitions, such joint venture partners may decide not to fund a particular or any potential acquisition properties for any number of reasons, including such entities may not have the capital necessary to fund projects at the time of the proposed
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acquisition. This may be particularly relevant in light of the liquidity issues that many real estate funding sources have faced during the recent credit crisis. Accordingly, if we identify potential acquisition opportunities in the future for these programs, we may not receive approval and/or funding from joint venture partners, notwithstanding any prior commitments for funding. UBS Wealth Management—North American Property Fund Limited has decided to liquidate and will not fund any of the original commitment that was going to be used to acquire stabilized office properties in the United States. If we do not make any acquisitions under existing or future joint ventures, it could adversely affect our ability to grow our business in accordance with our business plan.
We depend on significant tenants, and their failure to pay rent could seriously harm our operating results and financial condition.
As of December 31, 2009, the 20 largest tenants for properties in which we held an ownership interest collectively leased 31.3% of the rentable square feet of space at properties in which we hold an ownership interest, representing 36.8% of the total annualized rent generated by these properties.
Any of our tenants may experience a downturn in its business, which may weaken such tenant’s financial condition. As a result, tenants may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent, declare bankruptcy or default under their leases. Certain of our tenants also have termination rights under their leases with us, which they might choose to exercise if they experience a downturn in their business. In addition, current economic and market conditions increase the possibility that one or more of our tenants will become insolvent. Any tenant bankruptcy or insolvency, leasing delay, failure to make rental payments when due, or default under a lease could result in the termination of the tenant’s lease and material losses to our Company.
In particular, if any of our significant tenants becomes insolvent, suffers a downturn in its business and decides not to renew its lease or vacates a property, it may seriously harm our business. Failure on the part of a tenant to comply with the terms of a lease may give us the right to terminate the lease, repossess the applicable property and enforce the payment obligations under the lease. In those circumstances, we would be required to find another tenant. We cannot assure you that we would be able to find another tenant without incurring substantial costs, or at all, or that if another tenant were found, we would be able to enter into a new lease on favorable terms to us or at the same rental rates.
Bankruptcy filings by or relating to one of our tenants could bar us from collecting pre-bankruptcy debts from that tenant or their property. A tenant bankruptcy would delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these amounts. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy amounts due under the lease must be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claims in the event of the bankruptcy of a large tenant, which would adversely impact our financial condition.
Our operating results depend upon the regional economies in which our properties are located and the demand for office and other mixed-use space, and unique or disproportionate economic downturns or adverse regulatory or taxation policies in any of these regions could harm our operating results.
Our operating and development properties are located in three geographic regions of the United States: the West Coast, Southwest and Mid-Atlantic regions. Historically, the largest part of our revenues has been derived from our ownership and management of properties consisting primarily of office buildings. A decrease in the
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demand for office space in these geographic regions, and for Class A office space in particular, may have a greater adverse effect on our business and financial condition than if we owned a more diversified real estate portfolio. We are also susceptible to disproportionate or unique adverse developments in these regions and in the national office market generally, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics, terrorist targeting of high-rise structures, infrastructure quality, increases in real estate and other taxes, costs of complying with government regulations or increased regulation, oversupply of or reduced demand for office space, and other factors. Some of the regional issues we face include the more highly regulated and taxed economy of Southern California and high local and municipal taxes for our Philadelphia properties. Any adverse economic or real estate developments in one or more of our regions, or any decrease in demand for office space resulting from the local regulatory environment, business climate or energy or fiscal problems, could adversely impact our revenue and profitability, thereby causing a significant decline in our financial condition, results of operations, cash flow, the trading price of our common stock and impairing our ability to satisfy our debt service obligations.
We have significant debt obligations maturing in 2010, and if we are not successful in extending the terms of this indebtedness or in refinancing this debt on acceptable economic terms or at all, our equity ownership in such properties and overall financial condition could be materially and adversely affected.
As of December 31, 2009, our total consolidated indebtedness was approximately $318.2 million. In addition, we own interests in unconsolidated entities that were subject to total indebtedness of $2.2 billion as of December 31, 2009. Mortgage loans, which comprise a portion of both the consolidated and unconsolidated indebtedness, are secured by first deeds of trust on the related real property. Mezzanine loans and other secured loans are secured by our direct or indirect ownership interests in the entity that owns the related real property.
As of December 31, 2009, we had $17.0 million of consolidated debt related to the Campus El Segundo mortgage loan, which we have guaranteed. This loan has been extended, without any principal payment to the lender, so that it matures on July 31, 2011, and has three one-year extension options at our election subject to us complying with certain loan covenants. The lender has the right to require a $2.5 million principal reduction payment at the time of each extension. We have agreed to certain financial covenants on this loan as the guarantor, which we were in compliance with as of December 31, 2009.
The Four Points Centre construction loan in the maximum commitment amount of $40.5 million, with an amount of $26.2 million outstanding was scheduled to mature in June 2010. We have entered into an agreement with the lender to extend this loan to July 31, 2012 with two one-year extension options at our election subject to certain conditions. We have committed to pay down principal in the total amount of $7.8 million in connection with this extension; $3.9 million was paid in October 2009, $1.3 million was paid in January, 2010 and we will pay the balance in two equal installments in June and December 2010. The construction loan maintains $10.4 million available for the completion of the project. The interest rate has been increased under the extension agreement to LIBOR plus 3.5% per annum. The first extension option is subject to a 75% loan to value test and a minimum debt yield, among other things. The second extension option is subject to a 75% loan to value test, executed leases representing at least 90% of the net rentable area, and a minimum debt yield, among other things. As of January 31, 2011, if the Four Points office buildings are not at least 65% leased on terms consistent with the appraisal pro forma, we must pre-fund 18 months of interest into a restricted cash account with the lender; if the buildings are less than 35% leased at that time, we will also have to pay $2.0 million as a principal reduction of the loan. We have guaranteed the completion of construction, including tenant improvements, and have completed the core and shell of this property. Furthermore, we have guaranteed all of the required principal payments due in 2010 under the extension agreement of $2.6 million (after the $1.3 million payment we made in January 2010) and 46.5% of the balance of the outstanding principal, interest and any other sum payable under this loan. After the remaining $2.6 million principal reductions we will make in 2010, the outstanding balance will be $22.3 million, which results in a maximum guarantee amount based on 46.5% of $10.4 million. Upon the occurrence of certain events our maximum liability as guarantor will be reduced to 31.5% of all sums payable under this loan, and upon the occurrence of further events our maximum liability as guarantor will be reduced to 25% of all sums payable under this loan. We have agreed to certain financial covenants on this loan as the
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guarantor, which we were in compliance with as of December 31, 2009. We have also provided additional collateral of approximately 62.4 acres of fully entitled unimproved land which is immediately adjacent to Four Points Centre office building in Austin, Texas.
The Murano construction loan, with a balance of approximately $37.0 million as of December 31, 2009 matures on July 31, 2010. There are no extension options remaining on this loan. This loan is nonrecourse to the Company, but the Company guarantees the payment of interest on the loan during the term of the loan. We amortize the principal balance of the Murano construction loan with approximately 93% of the sales proceeds as we close on the sale of condominium units. Subsequent to December 31, 2009, we closed on the sale of four units and we have eleven units under contract and expected to close, which will cumulatively reduce the principal balance by approximately $7.6 million. We are in discussions with the lender to extend the loan maturity to 2011, which based on the principal amortization feature of the loan, we believe is achievable. If we are unable to extend or refinance the loan, the lender could repossess the unsold units through foreclosure, which would result in an additional non-cash impairment charge. We have no guarantees on this debt other than the payment of interest through the maturity date. We do not earn any fee revenue from this project.
We have investments in entities owning unconsolidated properties with stated ownership percentages ranging from 6.25% to 50.0%. Our share of the debt owed by these unconsolidated entities that matures in 2010 is approximately $258.2 million (of which approximately $142 million relates to City National Plaza, $54.8 million of which was purchased by CalSTRS in March 2010 and will be contributed to the partnership’s equity by CalSTRS); approximately $28.7 million of which is subject to extension options at our election subject to certain conditions. We are in discussions with the lenders to refinance these loans. With the exception of the Four Falls Corporate Center and Oak Hill Plaza/Walnut Hill Plaza loans which matured on March 6, 2010, and are discussed further below, we believe there is sufficient equity in these properties to refinance the maturing loans. Additional equity contributions may be required on some of these properties to achieve a refinancing of which we and CalSTRS are prepared to make. If we are unable to contribute our pro rata share and CalSTRS contributes it, our ownership interest in the respective asset would be diluted. If we and CalSTRS are unable to extend or refinance these loans, the lender could repossess the property through foreclosure, which would result in a non-cash impairment charge, potential loss of distributable cash flow and a loss of fee revenue for us.
On March 6, 2010, an aggregate of $96.5 million in mortgage loans owed by subsidiaries of TPG/CalSTRS on unconsolidated properties at Four Falls Corporate Center and Oak Hill Plaza/Walnut Hill Plaza matured and became due in full. The borrowers under these loans have not, as of March 18, 2010, made payment on these loans and they are currently in default. These loans are non-recourse to the Company, and we do not anticipate making any payments or equity contributions to support the repayment or refinancing of these loans. The borrowers are currently in discussions with the lenders to restructure the debt or facilitate a sale or other liquidation of these properties. We do not believe that the loss of our equity interests in these properties will have a material effect on our business or results of operations.
Our need for additional debt financing, our existing level of debt and the limitations imposed by our debt agreements could have significant adverse consequences on us.
We may seek to incur additional debt to finance future acquisition and development activities, however debt financing may not be available to us on acceptable terms under current market conditions. In addition, it is possible the required payments of principal and interest on borrowings may leave us with insufficient cash to operate our properties profitably. Our need for debt financing, our existing level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:
| | • | | our cash flow may be insufficient to meet our required principal and interest payments or to pay dividends; |
| | • | | we may be unable to borrow additional funds as needed or on favorable terms; |
| | • | | we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness; |
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| | • | | we may be unable to distribute funds from a property to our Operating Partnership or apply such funds to cover expenses related to another property; |
| | • | | we could be required to dispose of one or more of our properties, possibly on disadvantageous terms and/or at disadvantageous times; |
| | • | | we could default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and leases; |
| | • | | we could violate covenants in our loan documents or our joint venture agreements, including provisions that may limit our ability to further mortgage a property, make distributions, acquire additional properties, repay indebtedness prior to a set date without payment of a premium or other pre-payment penalties, all of which would entitle the lenders to accelerate our debt obligations; |
| | • | | a default under any one of our mortgage loans with cross default provisions could result in a default on other of our indebtedness; and |
| | • | | because we have agreed to use commercially reasonable efforts to maintain certain debt levels to provide the ability for Mr. Thomas and entities controlled by him to guarantee debt of $210 million, including $11 million of debt available for guarantee by Mr. Edward Fox, one of our non-employee directors, and by Mr. Richard Gilchrist, an individual formerly affiliated with Maguire Thomas Partners, we may not be able to refinance our debt when it would otherwise be advantageous to do so or to reduce our indebtedness when our board of directors determines it is prudent. |
If any one or more of these events were to occur, our revenue and profitability could be adversely impacted, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock, and could impair our ability to satisfy our debt service obligations.
Because we have a substantial amount of debt which bears interest at variable rates, our failure to hedge effectively against interest rate changes may adversely affect our results of operations.
As of December 31, 2009, $80.1 million of our consolidated debt and $1.1 billion of our unconsolidated debt was at variable interest rates. As of December 31, 2009, we had purchased interest rate caps covering $0.9 billion of the unconsolidated floating rate loans. Interest rate hedging arrangements we enter into to cap our interest rate exposure involve risks, including that our hedging transactions might not achieve the desired effect in eliminating the impact of interest rate fluctuations, or that counterparties may fail to honor their obligations under these arrangements. As a result, these arrangements may not be effective in reducing our exposure to interest rate fluctuations and this could reduce our revenue, require us to modify our leverage strategy, and adversely affect our expected investment returns.
We may be unable to complete acquisitions necessary to grow our business, and even if consummated, we may fail to successfully operate these acquired properties.
Our planned growth strategy includes the acquisition of additional properties as opportunities arise. We regularly evaluate approximately 20 markets in the United States for strategic opportunities to acquire office, mixed-use and other properties. Our ability to acquire properties on favorable terms and successfully operate them is subject to the following significant risks:
| | • | | we may be unable to generate sufficient cash from operations, or obtain the necessary debt or equity to consummate an acquisition or, if obtainable, such financing may not be on favorable terms; |
| | • | | we may need to spend more than budgeted amounts to make necessary improvements or renovations to acquired properties; |
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| | • | | we may be unable to acquire a desired property because of competition from other real estate investors with more available capital, including other real estate operating companies, real estate investment trusts and investment funds; |
| | • | | competition from other potential acquirers may significantly increase the purchase price, even if we are able to acquire a desired property; |
| | • | | agreements for the acquisition of office properties are typically subject to customary conditions to closing, including satisfactory completion of due diligence investigations, and we may spend significant time and money on a potential acquisition we eventually decide not to pursue; |
| | • | | we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations; |
| | • | | market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and |
| | • | | we may acquire properties subject to liabilities without any recourse, or with only limited recourse, for unknown liabilities such as clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties. |
If we cannot complete property acquisitions on favorable terms or at all, or operate acquired properties to meet our expectations, our revenue and profitability could be adversely impacted.
Any real estate acquisitions that we consummate may result in disruptions to our business as a result of the burden of integrating operations placed on our management.
Our business strategy includes acquisitions and investments in real estate on an ongoing basis as market conditions warrant. These acquisitions may cause disruptions in our operations and divert management’s attention from our other day-to-day operations, which could impair our relationships with our current tenants and employees. If we acquire real estate by acquiring another entity, we may be unable to effectively integrate the operations and personnel of the acquired business. In addition, we may be unable to train, retain and motivate any key personnel from the acquired business. If our management is unable to effectively implement our acquisition strategy, we may experience disruptions to our business, which could harm our results of operations.
We may be unable to successfully complete and operate properties under development, which would impair our financial condition and operating results.
Part of our business is devoted to the development of office, mixed-use and other properties, and the redevelopment of core plus and value-add properties. Our development and redevelopment activities involve the following significant risks:
| | • | | we may be unable to obtain financing on favorable terms or at all; |
| | • | | if we finance projects through construction loans, we may be unable to obtain permanent financing at all or on advantageous terms; |
| | • | | we may not complete projects on schedule or within budgeted amounts; |
| | • | | we may underestimate the expected costs and time necessary to achieve the desired result with a redevelopment project; |
| | • | | we may discover structural, environmental or other feasibility issues with properties acquired as redevelopment projects following our acquisition, which may render the redevelopment as planned not possible; |
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| | • | | we may encounter delays or refusals in obtaining all necessary zoning, land use, building, occupancy, and other required governmental permits and authorizations; |
| | • | | occupancy rates and rents, or condominium prices and absorption rates in the case of the Murano, may fluctuate depending on a number of factors, including market and economic conditions, and may result in our investment not being profitable; |
| | • | | adverse weather that damages the project or causes delays; |
| | • | | unanticipated changes to the plans or specifications; |
| | • | | unanticipated shortages of materials and skilled labor; |
| | • | | unanticipated increases in material and labor costs; and |
| | • | | fire, flooding and other natural disasters. |
If we are not successful in our property development initiatives, it could adversely impact our revenue and profitability, causing a significant downturn in our business, including our financial condition, results of operations, and the trading price of our common stock.
We face significant competition, which may decrease or prevent increases of the occupancy and rental rates of our properties.
We face significant competition from other managers and owners of office and mixed-use real estate, many of which own or manage properties similar to ours in the same regional markets in which our properties are located. We also compete with other diversified real estate companies and companies focused solely on offering property investment management and brokerage services. A number of our competitors are larger and better able to take advantage of efficiencies created by size, have better financial resources, or increased access to capital at lower costs, and may be better known in regional markets in which we compete. Our smaller size as compared to some of our competition may increase our susceptibility to economic downturns and pressures on rents. Our failure to compete successfully in our industry would materially affect our business prospects and operating results.
We may be unable to renew leases, lease vacant space or re-lease space as leases expire resulting in increased vacancy rates, lower revenue and an adverse effect on our operating results.
As of December 31, 2009, leases representing 6.4% and 5.2% of the rentable square feet of the office and mixed-use properties in which we held an ownership interest will expire in 2010 and 2011, respectively. Further, an additional 16.6% of the square feet of these properties was available for lease as of December 31, 2009. Rental rates on existing leases above the current market rate at some of the properties in our office and mixed-use portfolio may require us to renew or re-lease some or all expiring leases at lower rates. Current economic and real estate market conditions have resulted in depressed leasing activity recently as a result of tenant unwillingness to make long term leasing commitments given recent upheaval in the financial markets, and it is unclear how long this market condition may continue. If the rental rates for our properties decrease, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our revenue and profitability could be adversely impacted, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock and impairing our ability to satisfy our debt service obligations.
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Our growth depends on external sources of capital, some of which are outside of our control. If we are unable to access capital from external sources, we may not be able to implement our business strategy.
Our business strategy requires us to rely significantly on third-party sources to fund our capital needs. We may not be able to obtain debt or equity on favorable terms or at all. Since the second half of 2007 we have been affected by a tightening of the credit markets, and we may experience difficulty refinancing existing debt or obtaining new debt to complete acquisitions. Any additional debt we incur will increase our leverage and may impose operating restrictions on us. Any issuance of equity by our company to fund our portion of equity capital requirements will be dilutive to our existing stockholders, and could have a negative impact on our stock price. Our access to third-party sources of capital depends, in part, on:
| | • | | our current debt levels, which were $318.2 million of consolidated debt and $2.2 billion of unconsolidated debt as of December 31, 2009; |
| | • | | our current cash flow from operating activities, which resulted in a use of cash of $6.9 million for the year ended December 31, 2009; |
| | • | | our current and expected future earnings; |
| | • | | the market’s perception of our growth potential; |
| | • | | the market price of our common stock; |
| | • | | the perception of the value of an investment in our common stock; and |
| | • | | general market conditions. |
If we cannot obtain capital from third-party sources when needed, we may not be able to acquire or develop properties when strategic opportunities exist, or to repay existing debt as it matures.
As a result of the limited time which we have to perform due diligence of many of our acquired properties, we may become subject to significant unexpected liabilities and our properties may not meet projections.
When we enter into an agreement to acquire a property or portfolio of properties, we often have limited time to complete our due diligence prior to acquiring the property. To the extent we underestimate or fail to investigate or identify risks and liabilities associated with the properties we acquire, we may incur unexpected liabilities or the properties may fail to perform as we expected. If we do not accurately assess the liabilities associated with properties prior to their acquisition, we may pay a purchase price that exceeds the current fair value of the net identifiable assets of the acquired property. As a result, intangible assets would be required to be recorded, which could result in significant accounting charges in future periods. These charges, in addition to the financial impact of significant liabilities that we may assume, and any failure of properties to perform as expected, could adversely impact our revenue and profitability, causing a significant downturn in our financial condition, results of operations and the trading price of our common stock and impairing our ability to satisfy our debt service obligations.
Our efforts to expand our geographic presence and diversify into other regional real estate markets may not be successful, thereby constraining our growth to markets in which we currently operate.
We intend to expand our business to new geographic regions where we expect the ownership and management of property to result in favorable risk-adjusted investment returns. In order for us to achieve economies of scale, we generally target ownership of 500,000 or more rentable square feet in a market. It may be difficult for us to achieve this level of ownership and our initial entry into a particular market may result in higher administrative expenses for us initially. Presently, we do not possess the same level of familiarity with the development, ownership and management of properties in locations other than the West Coast, Southwest and Mid-Atlantic regions in the United States, which lack of familiarity, could adversely affect our ability to own, manage or develop properties outside these regions successfully or at all or to achieve expected performance.
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As the current or previous owner or operator of real property, we could become subject to liability for environmental contamination, regardless of whether we caused such contamination.
Under various federal, state and local environmental laws, regulations and ordinances, a current or previous owner or operator (e.g., tenant or manager) of real property may be liable for the cost to remove or remediate contamination resulting from the presence or discharge of hazardous or toxic substances, wastes or petroleum products on, under, from or in such property. These costs could be substantial and liability under these laws may attach without regard to fault, or whether the owner or operator knew of, or was responsible for, the presence of the contamination. The liability may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may obtain contributions from other identified, solvent, responsible parties of their fair share toward these costs to the extent such contributions are possible to obtain. In addition, the current or previous owner or operator of property may be subject to damage awards for personal injury or property damage resulting from contamination at or migrating from its property. Previous owners used some of our properties for industrial and retail purposes, so those properties may contain some level of environmental contamination. In addition, the presence of contamination, or the failure to properly remediate contamination on a property may limit the ability of the owner or operator to sell, develop or rent that property or to borrow using the property as collateral, and may cause our investment in that property to decline in value.
As the owner of real property, we could become subject to liability for asbestos-containing building materials in the buildings on our property.
Some of our properties may contain asbestos-containing materials. Environmental laws require that owners or operators of buildings with asbestos-containing building materials properly manage and maintain these materials, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements. In addition, these laws may also allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.
We have removed or abated asbestos-containing building materials from certain tenant and common areas at our City National Plaza and Brookhollow properties. We continue to remove or abate asbestos from various areas of the building structures and as of December 31, 2009, had accrued approximately $0.8 million for estimated future costs of such removal or abatement at these properties.
Our properties may contain or develop harmful mold or suffer from other adverse conditions, which could lead to liability for adverse health effects and costs of remediation.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.
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As the owner of real property, we could become subject to liability for failure to comply with environmental requirements regarding the handling and disposal of regulated substances and wastes or for non-compliance with health and safety requirements.
Environmental laws and regulations regarding the handling of regulated substances and wastes apply to our properties. The properties in our portfolio are also subject to various federal, state and local health and safety requirements, such as state and local fire requirements. If we or our tenants fail to comply with these various requirements, we might incur governmental fines or private damage awards. Moreover, we do not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will materially adversely impact our financial condition, results of operations, cash flow, cash available for distribution, the per share trading price of our common stock and our ability to satisfy our debt service obligations. Environmental noncompliance liability could also affect a tenant’s ability to make rental payments to us.
Tax indemnification obligations that may arise in the event we or our Operating Partnership sell an interest in either of two of our properties could limit our operating flexibility.
We and our Operating Partnership agreed at the time of our public offering to indemnify Mr. Thomas against adverse direct and indirect tax consequences in the event that our Operating Partnership or the underlying property owner directly or indirectly sells, exchanges or otherwise disposes (including by way of merger, sale of assets or otherwise) of any portion of its interests, in a taxable transaction, in either One Commerce Square or Two Commerce Square. These two properties represented 14.8% of annualized rent for properties in which we held an ownership interest as of December 31, 2009. The indemnification obligation currently expires October 13, 2013, which may be further extended to October 13, 2016 provided Mr. Thomas and his controlled entities collectively retain at least 50% of the Operating Partnership units received by them in connection with our formation transactions at the time of our initial public offering.
We also agreed at the time of the initial public offering to use commercially reasonable efforts to make approximately $210 million of debt available to be guaranteed by entities controlled by Mr. Thomas, by Mr. Fox, a non-employee member of our board of directors, and by Mr. Gilchrist, an individual formerly affiliated with Maguire Thomas Partners. We agreed to make this debt available for guarantee in order to assist Mr. Thomas and these other persons in preserving their tax position after their contributions at the time of our initial public offering.
Risks Related to the Real Estate Industry
The current economic environment for real estate companies and the credit crisis may significantly adversely impact our results of operations and business prospects.
The success of our business and profitability of our operations are dependent on continued investment in the real estate markets and access to capital and debt financing. A long term crisis of confidence in real estate investing and lack of available credit for acquisitions would be likely to constrain our business growth. As part of our business goals, we intend to grow our properties portfolio with strategic acquisitions of core properties at advantageous prices, and core plus and value added properties where we believe we can bring necessary expertise to bear to increase property values. In order to pursue acquisitions, we need access to equity capital and also property-level debt financing. Current conditions in the financial markets may adversely impact our ability to refinance existing debt and the availability and cost of credit in the near future. Presently, access to capital and debt financing options continue to be restricted and it is uncertain how long current economic circumstances may last. Any consideration of sales of existing properties or portfolio interests may be tempered by the depressed nature of property values at present. Our ability to make scheduled payments or to refinance our obligations with respect to indebtedness depends on our operating and financial performance, which in turn is subject to prevailing economic conditions.
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Illiquidity of real estate investments and the susceptibility of the real estate industry to economic conditions could significantly impede our ability to respond to adverse changes in the performance of our properties.
Our ability to achieve desired and projected results for growth of our business depends on our ability to generate revenues in excess of expenses, and make scheduled principal payments on debt and fund capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may adversely impact our results of operations and the value of our properties. These events include:
| | • | | vacancies or our inability to rent space on favorable terms; |
| | • | | inability to collect rent from tenants; |
| | • | | difficulty in accessing credit in the present economic environment, in particular for larger mortgage loans; |
| | • | | inability to finance property development and acquisitions on favorable terms; |
| | • | | increased operating costs, including real estate taxes, insurance premiums and utilities; |
| | • | | local oversupply, increased competition or reduction in demand for office space; |
| | • | | costs of complying with changes in governmental regulations; |
| | • | | the relative illiquidity of real estate investments; |
| | • | | changing submarket demographics; and |
| | • | | the significant transaction costs related to property sales, including a high transfer tax rate in the City of Philadelphia. |
In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. If any of these events were to happen, our revenue and profitability could be impaired, causing a significant downturn in our financial condition, results of operations, cash flow, and the trading price of our common stock, and our ability to satisfy our debt service obligations could be impaired.
Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unintended expenditures that adversely impact our financial condition.
All of our commercial properties are required to comply with the Americans with Disabilities Act, or ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. The obligation to make readily achievable accommodations is an ongoing one, and we assess our properties and make alterations as appropriate. Compliance with the ADA requirements could require removal of access barriers.
If one or more of our properties is not in compliance with the ADA, we would be required to incur additional costs to bring the property or properties into compliance. In addition, non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. Typically, we are responsible for changes to a building structure that are required by the ADA, which can be costly. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations. We may be required to make substantial capital expenditures to comply with these requirements thereby limiting the funds available to operate, develop and redevelop our properties and acquire additional properties. As a result, these expenditures could negatively impact our revenue and profitability.
Potential losses to our properties may not be covered by insurance and may result in our inability to repair damaged properties, as a result we could lose invested capital.
We carry comprehensive liability, fire, flood, extended coverage, wind, earthquake, terrorism, pollution legal liability, business interruption and rental loss insurance under our blanket policy covering all of the properties which we own an interest in or manage for third parties, including our development properties
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(although we carry only liability insurance for the California Environmental Protection Agency (“CalEPA”) headquarters building under our blanket policy because the tenant has the right to provide all other forms of coverage it deems necessary, and it has elected to do so). We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice.
We either own or have interests in a number of properties in Southern California, an area especially prone to earthquakes. We carry earthquake insurance on our properties located in seismically active areas, which includes our Southern California properties, wind insurance on our properties located in “tier 1” wind zones, which includes our Houston, Texas properties, and terrorism insurance on all of our properties. Our terrorism insurance is subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants, and biological and chemical weapons as more specifically excluded under the actual terrorism policies. Some of our policies, like those covering losses due to earthquakes and terrorism, are subject to limitations involving deductibles and policy limits which may not be sufficient to cover potential losses.
Under their leases, our tenants are generally required to indemnify us from liabilities resulting from injury to persons, air, water, land or property, on or off the premises due to activities conducted by them on our properties. There is an exception for claims arising from the negligence or intentional misconduct by us or our agents. Additionally, tenants are generally required, with the exception of governmental entities and other entities that are self-insured, to obtain and keep in force during the term of the lease liability and property damage insurance policies issued by companies holding ratings at a minimum level at their own expense.
Although we have not experienced such a loss to date, if we experience a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged property as well as the anticipated future cash flows from that property, including lost revenue from unpaid rent from tenants. In addition, if the damaged property is subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if the property was irreparably damaged. In the event of a significant loss at one or more of the properties covered by our blanket policy, the remaining insurance under our policy, if any, could be insufficient to adequately insure our remaining properties. In this event, securing additional insurance, if possible, could be significantly more expensive than our current policy.
Risks Related to Our Organization and Structure
Our senior management has existing conflicts of interest with us and our public stockholders that could result in decisions adverse to our company.
As of December 31, 2009, Mr. Thomas owned or controlled a significant interest in our Operating Partnership consisting of 13,813,331 units, or a 30.8% interest in the Operating Partnership as of such date. In addition, our senior executive officers, excluding Mr. Thomas, collectively held an interest in Operating Partnership units and incentive units (vested and unvested) representing an aggregate 5.3% equity interest in the Operating Partnership.
Members of senior management could make decisions that could have different implications for our Operating Partnership and for us, our stockholders, and our senior executive officers. For example, dispositions of interests in One Commerce Square or Two Commerce Square could trigger our tax indemnification obligations with respect to Mr. Thomas.
Our success depends on key personnel, the loss of whom could impair our ability to operate our business successfully.
We depend on the efforts of key personnel, particularly Mr. Thomas, our Chairman, Chief Executive Officer, and President. Among the reasons that Mr. Thomas is important to our success is that he has an industry
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reputation developed over more than 30 years in the real estate industry that attracts business and investment opportunities and assists us in negotiations with lenders, existing and potential tenants and industry personnel. If we lost his services, our relationships with these parties could diminish. Mr. Thomas is 73 and, although he has informed us that he does not currently plan to retire, we cannot be certain how long he will continue working on a full-time basis.
Many of our other senior executives also have significant real estate industry experience. Randall L. Scott, our Executive Vice President and Director, has extensive development and management experience on several large-scale projects, including the development, construction and management of One Commerce Square and Two Commerce Square. Mr. Sischo and Mr. Scott are jointly responsible for oversight of our relationship with CalSTRS. Mr. Sischo is responsible for our investment efforts, including acquisition, financing and capital markets relationships. Thomas S. Ricci, our Executive Vice President, has been extensively involved in the development of large, mixed-use and commercial projects. Diana M. Laing, our Chief Financial Officer and Secretary, has served as chief financial officer of two publicly-traded real estate investment trusts. Paul S. Rutter, our Executive Vice President and General Counsel, has extensive experience, both as a real estate lawyer and as an executive in commercial real estate, including acquisitions, financing, joint ventures and leasing of office and mixed use projects. While we believe that we could find acceptable replacements for these executives, the loss of any of their services could materially and adversely affect our operations because of diminished relationships with lenders, existing and prospective tenants and industry personnel. A departure of either Mr. Thomas or Mr. Sischo could also have adverse effects on our joint venture relationship with CalSTRS, including, pursuant to a right granted to CalSTRS in our joint venture agreement with CalSTRS, the possible required sale of our joint venture interest to CalSTRS at 97% of fair value, unless within 180 days the Company names a replacement for such departed executive who is reasonably acceptable to CalSTRS.
We have a holding company structure and rely upon funds received from our Operating Partnership to pay liabilities.
We are a holding company. Our primary asset is our general partnership interest in our Operating Partnership. We have no independent means of generating revenues. To the extent we require funds to pay taxes or other liabilities incurred by us, to pay dividends or for any other purpose, we must rely on funds received from our Operating Partnership. If our Operating Partnership should become unable to distribute funds to us, we would be unable to continue operations after a short period. Most of the properties owned by our subsidiaries and joint ventures are encumbered by loans. These loans generally contain lockbox arrangements and reserve requirements that may affect the amount of cash available for distribution from the subsidiaries that own the properties to the Operating Partnership. Some of the loans include cash sweep and other restrictions and provisions that prior to an event of default may prevent the distribution of funds from the subsidiaries who own these properties to our Operating Partnership. In the event of a default under any of these loans, the defaulting subsidiary or joint venture would be prohibited from distributing cash to our Operating Partnership. As a result, our Operating Partnership may be unable to distribute funds to us and we may be unable to use funds from one property to support the operation of another property. As we acquire new properties and refinance our existing properties, we may finance these properties with new loans that contain similar provisions. Some of the loans to our subsidiaries and joint ventures may contain provisions that restrict us from loaning funds to our other subsidiaries or joint ventures. If we are permitted to loan funds to our subsidiaries or joint ventures, our loans generally will be subordinated to the existing debt on our properties.
Mr. Thomas has a significant vote in certain matters as a result of his control of 100% of our limited voting stock.
Each entity that received Operating Partnership units in our formation transactions received shares of our limited voting stock that are paired with units in our Operating Partnership on a one-for-one basis. All of these entities are directly or indirectly controlled by Mr. Thomas, and, as a result, Mr. Thomas controls 100% of our outstanding limited voting stock, or 34.0% of our outstanding voting stock (including outstanding shares of
21
common stock owned by Mr. Thomas and his affiliates) as of December 31, 2009. These limited voting shares are entitled to vote in the election of directors, for the approval of certain extraordinary transactions including any merger, sale or liquidation of the Company, amendments to our certificate of incorporation and any other matter required to be submitted to a separate class vote under Delaware law. Mr. Thomas may have interests that differ from that of our public stockholders, including by reason of his interests held in Operating Partnership units, and may accordingly vote as a stockholder in ways that may not be consistent with the interests of our public stockholders. This significant voting influence over certain matters may have the effect of delaying, preventing or deterring a change of control of our Company, or could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our Company.
Some provisions of our certificate of incorporation and bylaws may deter takeover attempts, which may limit the opportunity of our stockholders to sell their shares at a favorable price.
Some of the provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders by potentially providing them with the opportunity to sell their shares at a premium over the then market price. Our certificate of incorporation and bylaws contain provisions which may deter takeover attempts, including the following:
| | • | | vacancies on our board of directors may only be filled by the remaining directors; |
| | • | | only the board of directors can change the number of directors; |
| | • | | there is no provision for cumulative voting for directors; |
| | • | | directors may only be removed for cause; and |
| | • | | our stockholders are not permitted to act by written consent. |
In addition, our certificate of incorporation authorizes the board of directors to issue up to 25,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which will be determined at the time of issuance by our board of directors without further action by our stockholders. These terms may include voting rights, including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current stockholders’ control of our Company.
Finally, we are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder.
The provisions of our certificate of incorporation and bylaws, described above, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management, even if these events would be in the best interests of our stockholders.
We could authorize and issue stock without stockholder approval, which could cause our stock price to decline and which could dilute the holdings of our existing stockholders.
Our certificate of incorporation authorizes our board of directors to issue authorized but unissued shares of our common stock or preferred stock to classify or reclassify any unissued shares of our preferred stock and to
22
set the preferences, rights and other terms of the classified or unclassified shares. Our board of directors could establish a series of preferred stock that could, depending on the terms of the series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.
The payment of dividends on our common stock is at the discretion of our board of directors and subject to various restrictions and considerations and, consequently, may be changed or discontinued at any time.
Although we have historically paid quarterly dividends on our common stock until December 2009, the payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition, and any other factors deemed relevant by our board of directors. In February 2009, our board of directors reduced the quarterly dividend to $0.0125 per share, from $0.06 per share in 2008. In December 2009, our board of directors suspended the quarterly dividends to common stockholders. If, and when the dividend payments are reinstated, such quarterly dividend payments may be further reduced or stopped altogether in the future, in which case the only opportunity to achieve a positive return on an investment in our common stock would be if the market price of our common stock appreciates.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
Our Ownership Interest Properties
Our properties are located in the West Coast, Southwest, and Mid-Atlantic regions of the United States, consisting primarily of office space and also including mixed-use, multi-family and retail properties. The interests in One Commerce Square (June 1, 2004 through December 30, 2007), and Two Commerce Square (October 13, 2004 through August 5, 2008), not owned by us are reflected as noncontrolling interest. On August 6, 2008 and December 31, 2007, we exercised our option to purchase the remaining 11% interest in Two Commerce Square and One Commerce Square, respectively, for $2.0 million each, resulting in our 100% ownership of Two Commerce Square and One Commerce Square. We hold a 50% interest in 2121 Market Street; the other 50% interest is held by an entity owned by Philadelphia Management, an unaffiliated Philadelphia-based real estate developer. As of December 31, 2009, we provide asset and/or property management services for three properties on behalf of CalSTRS under a separate account relationship, and one property on behalf of the City of Sacramento. We have an ownership interest of 25% in TPG/CalSTRS, which holds a 100% ownership interest in twelve properties, and a 25% interest in ten properties in Austin, Texas. Our indirect interest in the ten properties in Austin is 6.25%.
An overview of these operating properties as of December 31, 2009 is presented below:
| | | | | | | | | | | | | | | | |
Consolidated properties: | | Location | | Percentage
Interest | | | Rentable
Square Feet (1) | | Percent
Leased (2) | | | Annualized
Net Rent (3) | | Annualized
Net Rent
Per
Leased
Square
Foot (4) |
One Commerce Square | | Philadelphia, PA | | 100.0 | % | | 942,866 | | 92.6 | % | | $ | 12,081,228 | | $ | 14.12 |
Two Commerce Square | | Philadelphia, PA | | 100.0 | | | 953,276 | | 86.8 | | | | 11,152,753 | | | 13.48 |
Four Points Centre (office buildings) (5) | | Austin, TX | | 100.0 | | | 192,062 | | 17.3 | | | | — | | | — |
| | | | | | | | | | | | | | | | |
Total/Weighted Average: | | | 2,088,204 | | 83.0 | % | | $ | 23,233,981 | | $ | 13.54 |
| | | | | | | | | | | | | | | | |
23
| | | | | | | | | | | | | | | | |
| | | | | | |
Unconsolidated properties: | | Location | | Percentage
Interest | | | Rentable
Square
Feet (1) | | Percent
Leased
(2) | | | Annualized
Net Rent (3) | | Annualized
Net Rent
Per Leased
Square
Foot (4) |
2121 Market Street (6) | | Philadelphia, PA | | 50.0 | % | | 22,136 | | 100.0 | % | | $ | 374,685 | | $ | 16.93 |
Reflections I | | Reston, VA | | 25.0 | | | 123,546 | | 100.0 | | | | 2,475,038 | | | 20.03 |
Reflections II | | Reston, VA | | 25.0 | | | 64,253 | | 100.0 | | | | 462,468 | | | 7.20 |
2500 City West | | Houston, TX | | 25.0 | | | 578,284 | | 91.6 | | | | 5,377,260 | | | 10.24 |
Fair Oaks Plaza | | Fairfax, VA | | 25.0 | | | 179,688 | | 84.3 | | | | 2,383,914 | | | 15.97 |
City National Plaza | | Los Angeles, CA | | 25.0 | | | 2,496,084 | | 83.2 | | | | 35,233,350 | | | 17.26 |
Four Falls Corporate Center | | Conshohocken, PA | | 25.0 | | | 253,985 | | 78.9 | | | | 3,228,377 | | | 16.30 |
Oak Hill Plaza | | King of Prussia, PA | | 25.0 | | | 164,360 | | 93.1 | | | | 2,267,173 | | | 14.78 |
Walnut Hill Plaza | | King of Prussia, PA | | 25.0 | | | 150,573 | | 55.3 | | | | 824,554 | | | 10.06 |
San Felipe Plaza | | Houston, TX | | 25.0 | | | 980,472 | | 87.7 | | | | 9,063,267 | | | 10.69 |
Brookhollow Central I, II and III | | Houston, TX | | 25.0 | | | 805,967 | | 68.2 | | | | 3,922,733 | | | 7.33 |
City West Place | | Houston, TX | | 25.0 | | | 1,473,020 | | 99.0 | | | | 17,683,847 | | | 12.15 |
Centerpointe I & II | | Fairfax, VA | | 25.0 | | | 421,651 | | 53.9 | | | | 4,024,724 | | | 18.31 |
San Jacinto Center | | Austin, TX | | 6.3 | | | 410,248 | | 75.6 | | | | 4,225,917 | | | 13.81 |
Frost Bank Tower | | Austin, TX | | 6.3 | | | 535,078 | | 87.5 | | | | 9,026,307 | | | 19.86 |
One Congress Plaza | | Austin, TX | | 6.3 | | | 518,385 | | 86.9 | | | | 6,940,691 | | | 15.54 |
One American Center | | Austin, TX | | 6.3 | | | 503,951 | | 78.0 | | | | 6,046,032 | | | 15.73 |
300 West 6th Street | | Austin, TX | | 6.3 | | | 454,225 | | 87.5 | | | | 8,341,851 | | | 21.48 |
Research Park Plaza I & II | | Austin, TX | | 6.3 | | | 271,882 | | 96.6 | | | | 4,584,599 | | | 17.41 |
Park 22 I-III | | Austin, TX | | 6.3 | | | 203,193 | | 82.5 | | | | 2,337,989 | | | 14.26 |
Great Hills Plaza | | Austin, TX | | 6.3 | | | 139,252 | | 64.5 | | | | 1,286,426 | | | 14.56 |
Stonebridge Plaza II | | Austin, TX | | 6.3 | | | 192,864 | | 96.0 | | | | 2,894,369 | | | 15.67 |
Westech 360 I-IV | | Austin, TX | | 6.3 | | | 175,529 | | 50.1 | | | | 1,144,828 | | | 13.51 |
| | | | | | | | | | | | | | | | |
Total/Weighted Average: | | | 11,118,626 | | 83.7 | % | | $ | 134,150,399 | | $ | 14.61 |
| | | | | | | | | | | | | | | | |
| (1) | For purposes of the tables above, both on-site and off-site parking is excluded. Total portfolio square footage includes office properties and mixed-use space (including retail), but excludes 168 apartment units at 2121 Market Street. All of the properties have been re-measured in accordance with Building Owners and Managers Association (BOMA) 1996 standards, and the rentable area for these properties reflects the BOMA 1996 measurement guidelines except for Research Park Plaza I & II, for which the rentable area is calculated consistent with leases in place on the property and local market conventions |
| (2) | Percent leased represents the sum of the square footage of the existing leases as a percentage of rentable area described in (1) above. |
| (3) | Annualized rent represents the annualized monthly contractual rent under existing leases as of December 31, 2009 (represents 100% of the existing leases even for properties for which our percentage interest is less than 100%). For leases with a remaining term of less than one year, annualized rent includes only the amounts through the expiration of the lease. For any tenant under a partial gross lease (which requires the tenant to reimburse the landlord for its pro-rata share of operating expenses in excess of a stated expense stop) or under a full gross lease (which does not require the tenant to reimburse the landlord for any operating expenses) the unreimbursed portion of current year operating expenses (which may be estimates as of such date) are subtracted from gross rent. |
| (4) | Annualized net rent per leased square foot represents annualized rent as computed above, divided by the total square footage under lease as of the same date. |
| (5) | During the third quarter of 2008, we completed the core and shell construction of a two-building Class A office campus totaling approximately 192,000 square feet at Four Points Centre in suburban Austin, Texas. As of December 31, 2009, 17.3% of this space was leased to one tenant and is currently within the rent abatement period. Once the rent abatement ceases in December 31, 2010, the annualized rent will be $601,584. |
| (6) | The square footage and occupancy information presented for 2121 Market Street represents the information for two retail/office tenants only, and excludes the 168 residential units comprising 132,823 square feet. |
24
Lease Expirations
The following table presents a summary of lease expirations for our consolidated properties (excluding our unconsolidated properties) for leases in place at December 31, 2009, plus available space, for each of the ten calendar years beginning January 1, 2010. This table assumes that none of our tenants exercise renewal options or early termination rights, if any, at or prior to their scheduled expirations.
| | | | | | | | | | | | | | | | | | | |
Years | | Total Number of
Tenants | | Total Area in
Square Feet
Covered by
Expiring Leases | | Percentage
of Aggregate
Square Feet | | | Annualized
Rent (1) | | Percentage
of Total
Annualized
Rent | | | Current Rent
per Square
foot (2) | | Rent per Square
Foot at
Expiration (3) |
Available | | — | | 375,109 | | 18.1 | % | | $ | — | | 0.0 | % | | $ | — | | $ | — |
2010 | | 13 | | 103,532 | | 5.0 | | | | 1,227,000 | | 5.1 | | | | 11.85 | | | 12.38 |
2011 | | 6 | | 60,971 | | 2.9 | | | | 947,000 | | 4.0 | | | | 15.53 | | | 16.14 |
2012 | | 10 | | 125,691 | | 6.1 | | | | 1,857,000 | | 7.8 | | | | 14.78 | | | 15.51 |
2013 | | 12 | | 320,931 | | 15.4 | | | | 5,911,000 | | 24.7 | | | | 18.42 | | | 20.19 |
2014 | | 6 | | 91,133 | | 4.4 | | | | 1,130,000 | | 4.7 | | | | 12.40 | | | 17.03 |
2015 | | 6 | | 399,999 | | 19.3 | | | | 6,186,000 | | 25.8 | | | | 15.46 | | | 18.03 |
2016 | | 4 | | 37,214 | | 1.8 | | | | 560,000 | | 2.3 | | | | 15.04 | | | 19.13 |
2017 | | 2 | | 133,016 | | 6.4 | | | | 2,119,000 | | 8.9 | | | | 15.93 | | | 19.15 |
2018 | | 3 | | 17,129 | | 0.8 | | | | 337,000 | | 1.4 | | | | 19.65 | | | 23.76 |
2019 | | 3 | | 32,842 | | 1.6 | | | | 473,000 | | 2.0 | | | | 14.39 | | | 19.04 |
Thereafter | | 7 | | 379,805 | | 18.2 | | | | 3,194,000 | | 13.3 | | | | 8.41 | | | 19.59 |
| | | | | | | | | | | | | | | | | | | |
Total | | 72 | | 2,077,372 | | 100.0 | % | | $ | 23,941,000 | | 100.0 | % | | | | | | |
| | | | | | | | | | | | | | | | | | | |
The following table presents a summary of lease expirations for our unconsolidated properties (excluding our consolidated properties) for leases in place at December 31, 2009, plus available space, for each of the ten calendar years beginning January 1, 20010. This table assumes that none of the tenants exercise renewal options or early termination rights, if any, at or prior to the scheduled expirations.
| | | | | | | | | | | | | | | | | | | |
Years | | Total Number of
Tenants | | Total Area in
Square Feet
Covered by
Expiring Leases | | Percentage
of Aggregate
Square Feet | | | Annualized
Rent (1) | | Percentage
of Total
Annualized
Rent | | | Current Rent
per Square
foot (2) | | Rent per Square
Foot at
Expiration (3) |
Available | | — | | 1,819,893 | | 16.4 | % | | $ | — | | 0.0 | % | | $ | — | | $ | — |
2010 | | 112 | | 743,041 | | 6.7 | | | | 12,027,000 | | 8.3 | | | | 16.19 | | | 16.26 |
2011 | | 80 | | 613,547 | | 5.5 | | | | 10,562,000 | | 7.3 | | | | 17.22 | | | 17.72 |
2012 | | 73 | | 947,360 | | 8.6 | | | | 17,766,000 | | 12.3 | | | | 18.75 | | | 19.91 |
2013 | | 75 | | 759,140 | | 6.9 | | | | 11,799,000 | | 8.2 | | | | 15.54 | | | 17.97 |
2014 | | 56 | | 1,393,733 | | 12.6 | | | | 22,162,000 | | 15.4 | | | | 15.90 | | | 18.74 |
2015 | | 38 | | 588,222 | | 5.3 | | | | 7,500,000 | | 5.2 | | | | 12.75 | | | 16.53 |
2016 | | 24 | | 655,064 | | 5.9 | | | | 9,655,000 | | 6.7 | | | | 14.74 | | | 18.43 |
2017 | | 12 | | 727,286 | | 6.6 | | | | 11,172,000 | | 7.8 | | | | 15.36 | | | 21.12 |
2018 | | 18 | | 639,248 | | 5.8 | | | | 10,698,000 | | 7.4 | | | | 16.73 | | | 23.55 |
2019 | | 9 | | 366,990 | | 3.3 | | | | 7,055,000 | | 4.9 | | | | 19.22 | | | 29.37 |
Thereafter | | 17 | | 1,809,937 | | 16.4 | | | | 23,673,000 | | 16.5 | | | | 13.08 | | | 21.86 |
| | | | | | | | | | | | | | | | | | | |
Total | | 514 | | 11,063,461 | | 100.0 | % | | $ | 144,069,000 | | 100.0 | % | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| (1) | Annualized rent is based on the current rent per leased square foot and excludes the effect of GAAP deferred rent adjustments, tenant reimbursements and parking and other revenues. |
| (2) | Current rent per leased square foot represents the current base rent as of December 31, 2009 excluding any future rent bumps, divided by total square footage under the lease as of the same date. |
| (3) | Rent per leased square foot at expiration represents the base rent including any future rent bumps, and thus represents the base rent that will be in place at lease expiration. |
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An overview of our development properties as of December 31, 2009 is presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | |
Pre-Development: | | Location | | TPGI
Percentage
Interest | | | Number
of Acres | | | Actual/Projected
Entitlements | | Units | | Status of
Entitlements | | TPGI Share |
| | | | | Potential
Property
Types | | Square
Feet | | | | Costs
Incurred
to Date | | Average
Cost
Per
Square
Foot | | Loan
Balance |
Campus El Segundo (1) | | El Segundo, CA | | 100.0 | % | | 26.1 | | | Office/ Retail/
R&D/ Hotel | | 1,800,000 | | | | Entitled | | $ | 60,160 | | $ | 33.42 | | $ | 17,000 |
MetroStudio@Lankershim (2) | | Los Angeles, CA | | NA | | | 14.4 | | | Office/
Production
Facility | | 1,500,000 | | | | Pending | | | 14,614 | | | 9.74 | | | — |
Four Points Centre | | Austin, TX | | 100.0 | | | 252.5 | | | Office/
Retail/ R&D/
Hotel | | 1,680,000 | | | | Entitled | | | 18,082 | | | 10.76 | | | — |
2100 JFK Boulevard | | Philadelphia, PA | | 100.0 | | | 0.7 | | | Office/
Retail/R&D/
Hotel | | 366,000 | | | | Entitled | | | 4,895 | | | 13.37 | | | |
2500 City West land | | Houston, TX | | 25.0 | | | 3.3 | (3) | | Office/ Retail/
Residential/
Hotel | | 500,000 | | | | Entitled | | | 900 | | | 7.20 | | | — |
CityWestPlace land | | Houston, TX | | 25.0 | | | 25.0 | | | Office/ Retail/
Residential | | 1,500,000 | | | | Entitled | | | 5,337 | | | 14.23 | | | — |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 7,346,000 | | | | | | $ | 103,988 | | $ | 16.70 | | $ | 17,000 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Fee Services: | | | | | | | | | | | | | | | | | | | | | | |
Universal Village (4) | | Los Angeles, CA | | NA | | | 124.0 | | | Residential/
Retail | | 180,000 | | 2,937 | | Pending | | | — | | | — | | | — |
Wilshire Grand (5) | | Los Angeles, CA | | NA | | | 2.7 | | | Office/ Retail/
Residential/
Hotel | | 2,500,000 | | 50 | | Pending | | | — | | | — | | | — |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 10,026,000 | | 2,987 | | | | $ | 103,988 | | $ | 16.70 | | $ | 17,000 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | As of December 31, 2009 |
Condominium
Units Held for
Sale: | | Location | | TPGI
Percentage
Interest | | | Description | | Number
of Units
Sold To
Date | | Total
Square
Feet
Sold
To
Date | | Average
Sales
Price
Per
Square
Foot
Sold To
Date | | Number of
Units
Remaining
To Be
Sold (7) | | Total
Square
Feet
Remaining
To Be
Sold | | Average
List
Price
Per
Square
Foot To
Be Sold | | Book
Carrying
Value | | Loan
Balance |
Murano | | Philadelphia, PA | | 73.0 | % (6) | | 43-story for-sale condominium project containing 302 units. Certificates of occupancy received for 100% of units. | | 194 | | 218,316 | | $521 | | 108 | | 133,524 | | $728 | | $ | 64,101 | | $ | 36,955 |
| (1) | We have completed infrastructure improvements to our Campus El Segundo development site, including installing underground utilities, rough grading, and streetscape improvements. The first phase of development is anticipated to include a 225,000 square foot, six-story Class A office building and parking structure to be constructed on 2.7 acres, which we are currently marketing to prospective tenants. |
| (2) | We are currently entitling this property, targeting approximately 1.5 million square feet. The first phase of this transit-oriented development is planned to become a television production facility and office space, in accordance with the space needs of NBC Universal. We expect to enter into a long-term ground lease with the Los Angeles Metropolitan Transportation Authority (which owns the land) upon completion of entitlements. |
26
| (3) | The number of acres excludes approximately 3.0 acres currently under contract for sale with a third party. This parcel is not encumbered by any debt and has a carrying value of approximately $3.9 million, of which TPGI’s share is approximately $1.0 million. |
| (4) | We have been engaged by NBC Universal to entitle and master plan their Universal Studios Hollywood backlot on which we have a right of first offer (ROFO) to develop approximately 124 acres for residential and related retail and community-serving uses. We are pursuing environmental clearance and governmental approvals for approximately 2,937 residential units and 180,000 square feet of retail and community-serving space. Upon successful completion of the entitlement process and our exercise of the ROFO, it is anticipated this project will be developed in phases over several years, subject to market conditions. |
| (5) | We have been engaged by Korean Air to entitle and master plan a 2.7 acre site in downtown Los Angeles for 2,500,000 square feet of development that consists of office, hotel, residential and retail uses. |
| (6) | We have a $26.1 million preferred equity interest in Murano. Excluding the preferred equity interest, we hold a 73% interest in the property. |
| (7) | Subsequent to December 31, 2009, we have entered into contracts to sell an additional ten units and expect to close the sale of two previously contracted units. The average sales price of these twelve units is $468 per square foot. Of the 108 units remaining to sell as of December 31, 2009, 89 units are above the 29th floor and have superior views. Also included in this unit count are units on premium and penthouse floors. |
Our portfolio in which we presently have an ownership interest includes approximately 21,550 vehicle spaces which are revenue generating within on-site and off-site parking facilities. The following table presents an overview of these garage properties as of December 31, 2009.
| | | | | | | | | |
On-Site/Off-Site Parking | | Square
Footage | | Vehicle
Capacity | | Vehicles
Under
Monthly
Contract (1) | | Percentage
of Vehicle
Capacity
Under
Monthly
Contract | |
On-Site Parking (2) | | 6,954,093 | | 19,065 | | 14,825 | | 77.8 | % |
Off-Site Parking (3) | | 1,056,000 | | 2,485 | | 2,477 | | 99.7 | % |
| | | | | | | | | |
Total | | 8,010,093 | | 21,550 | | 17,302 | | 80.3 | % |
| | | | | | | | | |
| (1) | Includes vehicle spaces provided to tenants under lease agreements. |
| (2) | Includes garage space at One Commerce Square and Two Commerce Square in which we have a 100% ownership interest, at City National Plaza, San Felipe Plaza, 2500 City West, Brookhollow Central I, II and III, 2101 CityWestPlace, and Fair Oaks Plaza, in which we have an indirect 25% ownership interest and at San Jacinto Center, Frost Bank Tower, One Congress Plaza, One American Center, and 300 West 6th Street, in which we have an indirect 6.25% ownership interest. |
| (3) | Includes off-site garage space for City National Plaza in which we have an indirect 25% ownership interest. |
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Our Managed Properties
In addition to our portfolio of operating and development properties in which we hold an ownership interest, we provide asset and/or property management services for four properties as a fee service for third parties. We asset and property manage three properties through our separate account relationship with CalSTRS. We developed and continue to property manage the CalEPA headquarters building. The table below presents an overview of those properties which we manage for third parties as of December 31, 2009. In addition, we provide asset and/or property management services for twelve properties held by TPG/CalSTRS and ten properties held by the Austin Portfolio Joint Venture as of December 31, 2009.
| | | | | | | |
Managed Properties | | Location | | Rentable
Square
Feet (1) | | Percent
Leased | |
800 South Hope Street | | Los Angeles, CA | | 242,176 | | 97.6 | % |
Pacific Financial Plaza | | Newport Beach, CA | | 279,474 | | 100.0 | |
1835 Market Street | | Philadelphia, PA | | 686,503 | | 88.5 | |
CalEPA Headquarters | | Sacramento, CA | | 950,939 | | 100.0 | |
| | | | | | | |
Total/Weighted Average | | 2,159,092 | | 96.1 | % |
| | | | | | | |
| (1) | For purposes of the table above, both on-site and off-site parking are excluded. Total portfolio square footage includes office properties and retail. The rentable area is calculated consistent with leases in place on the property and local market conventions. |
We have been named as a defendant in a number of lawsuits in the ordinary course of business. Management believes that the resolution of these suits will not have a materially adverse effect on our financial position and results of operations.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock trades on the Nasdaq Global Market under the symbol “TPGI”. As of March 18, 2010, there were ten stockholders of record. This figure does not reflect the beneficial ownership of shares held in the name of CEDE & Co. The following table sets forth, for the period indicated, the intra-day high and low per share sales prices in dollars on the Nasdaq Global Market for our common stock.
| | | | | | |
| | | High | | Low |
4th quarter 2009 | | $ | 3.74 | | $ | 2.06 |
3rd quarter 2009 | | | 2.98 | | | 1.18 |
2nd quarter 2009 | | | 2.50 | | | 1.15 |
1st quarter 2009 | | | 3.47 | | | 1.09 |
4th quarter 2008 | | | 10.34 | | | 1.64 |
3rd quarter 2008 | | | 11.74 | | | 7.40 |
2nd quarter 2008 | | | 11.04 | | | 7.92 |
1st quarter 2008 | | | 11.59 | | | 7.87 |
The closing price of our common stock as of March 18, 2010 was $3.13.
We paid quarterly dividends of $0.0125 per common share for the first three quarters in 2009 and $0.06 per common share quarterly for 2008. In December 2009, our board of directors suspended its quarterly dividends to common stockholders. The actual amount and timing of distributions is at the discretion of our board of directors and depends upon our financial condition, and no assurance can be given as to the amounts or timing of future distributions. Factors that could influence our ability to declare and pay dividends are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
There were no issuer purchases of equity securities during the year ended December 31, 2009.
Equity compensation plan information is discussed under the heading “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
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Performance Measurement Comparison
The following graph provides a comparison of cumulative total stockholder return for the period from December 31, 2004 through December 31, 2009, for the common stock of our company, Standard & Poor’s 500 Stock Index (S&P 500) and the Dow Jones Wilshire Real Estate Securities Index (DWRS). The stock performance graph assumes an investment of $100.00 in each of our common stock and the two indices, and the reinvestment of any dividends. The historical information reflected in the graph is not necessarily indicative of future performance. The data shown is based on the closing share prices or index values, as applicable, at the end of the last day of each month shown.
| | | | | | | | | | | | | | | | | | |
| | | 12/31/04 | | 12/31/05 | | 12/31/06 | | 12/31/07 | | 12/31/08 | | 12/31/09 |
Thomas Properties Group, Inc. | | $ | 100.00 | | $ | 100.00 | | $ | 130.39 | | $ | 89.40 | | $ | 22.39 | | $ | 26.18 |
S&P 500 | | $ | 100.00 | | $ | 103.00 | | $ | 117.03 | | $ | 121.16 | | $ | 74.53 | | $ | 92.01 |
DWRS | | $ | 100.00 | | $ | 108.63 | | $ | 141.54 | | $ | 111.76 | | $ | 63.57 | | $ | 77.28 |
| ITEM 6. | SELECTED FINANCIAL DATA |
The following table sets forth selected consolidated financial and operating data on a historical basis for our company.
The following data should be read in conjunction with our financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.
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Thomas Properties Group, Inc.
(dollars in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | |
| | | Thomas Properties Group, Inc. | |
| | | Year ended
December 31,
2009 | | | Year ended
December 31,
2008 | | | Year ended
December 31,
2007 | | | Year ended
December 31,
2006 | | | Year ended
December 31,
2005 | |
Revenues: | | | | | | | | | | | | | | | | | | | | |
Rental | | $ | 29,753 | | | $ | 30,523 | | | $ | 32,646 | | | $ | 33,076 | | | $ | 32,618 | |
Tenant reimbursements | | | 21,163 | | | | 25,874 | | | | 26,371 | | | | 25,197 | | | | 24,960 | |
Parking and other | | | 2,988 | | | | 3,869 | | | | 3,917 | | | | 3,837 | | | | 4,151 | |
Investment advisory, management, leasing, and development services | | | 9,345 | | | | 7,194 | | | | 12,750 | | | | 6,931 | | | | 3,630 | |
Investment advisory, management, leasing, and development services—unconsolidated real estate entities | | | 15,023 | | | | 18,263 | | | | 17,921 | | | | 12,603 | | | | 7,805 | |
Reimbursable property personnel costs | | | 5,584 | | | | 6,079 | | | | 3,877 | | | | 2,620 | | | | 2,074 | |
Condominium sales | | | 30,226 | | | | 79,758 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total revenues | | | 114,082 | | | | 171,560 | | | | 97,482 | | | | 84,264 | | | | 75,238 | |
| | | | | | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | | | | | |
Property operating and maintenance | | | 25,339 | | | | 25,608 | | | | 22,690 | | | | 20,805 | | | | 20,593 | |
Real estate taxes | | | 7,225 | | | | 6,482 | | | | 6,087 | | | | 5,904 | | | | 5,803 | |
Investment advisory, management, leasing, and development services | | | 11,910 | | | | 14,800 | | | | 13,093 | | | | 7,139 | | | | 4,144 | |
Reimbursable property personnel costs | | | 5,584 | | | | 6,079 | | | | 3,877 | | | | 2,620 | | | | 2,074 | |
Cost of condominium sales | | | 26,492 | | | | 62,436 | | | | — | | | | — | | | | — | |
Rent—unconsolidated real estate entities | | | 350 | | | | 284 | | | | 241 | | | | 227 | | | | 233 | |
Interest | | | 26,868 | | | | 22,763 | | | | 17,721 | | | | 20,570 | | | | 20,784 | |
Depreciation and amortization | | | 12,642 | | | | 11,766 | | | | 11,604 | | | | 12,661 | | | | 12,408 | |
General and administrative | | | 16,732 | | | | 16,411 | | | | 17,326 | | | | 17,202 | | | | 12,914 | |
Impairment loss | | | 13,000 | | | | 11,023 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total expenses | | | 146,142 | | | | 177,652 | | | | 92,639 | | | | 87,128 | | | | 78,953 | |
| | | | | | | | | | | | | | | | | | | | |
Gain on purchase of other secured loan | | | — | | | | — | | | | — | | | | — | | | | 25,776 | |
Gain on sale of real estate | | | 1,214 | | | | 3,618 | | | | 4,441 | | | | 10,640 | | | | — | |
Gain (loss) from early extinguishment of debt | | | 11,921 | | | | 255 | | | | — | | | | (360 | ) | | | (4,497 | ) |
Interest income | | | 338 | | | | 2,795 | | | | 6,014 | | | | 2,974 | | | | 1,268 | |
Equity in net loss of unconsolidated real estate entities | | | (16,236 | ) | | | (12,828 | ) | | | (14,853 | ) | | | (12,909 | ) | | | (16,259 | ) |
| | | | | | | | | | | | | | | | | | | | |
(Loss) income before (provision) benefit for income taxes and noncontrolling interests | | | (34,823 | ) | | | (12,252 | ) | | | 445 | | | | (2,519 | ) | | | 2,573 | |
(Provision) benefit for income taxes | | | (683 | ) | | | 1,885 | | | | (1,221 | ) | | | (635 | ) | | | (698 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | | (35,506 | ) | | | (10,367 | ) | | | (776 | ) | | | (3,154 | ) | | | 1,875 | |
| | | | | | | | | | | | | | | | | | | | |
Noncontrolling interests’ share of net loss (income): | | | | | | | | | | | | | | | | | | | | |
Unitholders in the Operating Partnership | | | 11,535 | | | | 4,683 | | | | (249 | ) | | | 1,577 | | | | (1,559 | ) |
Partners in the consolidated real estate entities | | | 2,408 | | | | 198 | | | | 122 | | | | (472 | ) | | | 328 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 13,943 | | | | 4,881 | | | | (127 | ) | | | 1,105 | | | | (1,231 | ) |
| | | | | | | | | | | | | | | | | | | | |
TPGI share of net (loss) income | | $ | (21,563 | ) | | $ | (5,486 | ) | | $ | (903 | ) | | $ | (2,049 | ) | | $ | 644 | |
| | | | | | | | | | | | | | | | | | | | |
(Loss) earnings per share-basic and diluted | | $ | (0.86 | ) | | $ | (0.24 | ) | | $ | (0.05 | ) | | $ | (0.15 | ) | | $ | 0.03 | |
Weighted average common shares outstanding—basic | | | 25,173,163 | | | | 23,693,577 | | | | 20,739,371 | | | | 14,339,032 | | | | 14,301,932 | |
Weighted average common shares outstanding—diluted | | | 25,173,163 | | | | 23,693,577 | | | | 20,739,371 | | | | 14,339,032 | | | | 14,306,607 | |
Cash flows from: | | | | | | | | | | | | | | | | | | | | |
Operating activities | | $ | (6,935 | ) | | $ | 2,216 | | | $ | 45,507 | | | $ | 20,628 | | | $ | 20,820 | |
Investing activities | | | 22,474 | | | | (35,543 | ) | | | (139,921 | ) | | | (19,084 | ) | | | (54,510 | ) |
Financing activities | | | (48,627 | ) | | | (24,282 | ) | | | 156,718 | | | | (1,116 | ) | | | 41,099 | |
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| | | | | | | | | | | | | | | |
| | | Thomas Properties Group, Inc. |
| | | December 31, |
| | | 2009 | | 2008 | | 2007 | | 2006 | | 2005 |
Balance Sheet Data (at year end): | | | | | | | | | | | | | | | |
Investments in real estate, net | | $ | 438,454 | | $ | 478,665 | | $ | 463,364 | | $ | 336,154 | | $ | 313,161 |
Total assets | | | 559,403 | | | 660,435 | | | 713,904 | | | 510,342 | | | 479,611 |
Mortgages, other secured, and unsecured loans | | | 318,236 | | | 387,945 | | | 396,007 | | | 331,828 | | | 325,179 |
Total liabilities | | | 357,058 | | | 439,708 | | | 478,496 | | | 375,152 | | | 344,690 |
Equity | | | 202,345 | | | 220,727 | | | 235,408 | | | 135,190 | | | 134,921 |
Total liabilities and equity | | | 559,403 | | | 660,435 | | | 713,904 | | | 510,342 | | | 479,611 |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-K entitled “Forward-Looking Statements.” Certain risk factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this report entitled “Risk Factors.”
When you read the financial statements and the information included in this report, you should be aware that our operations are significantly affected by both macro and micro economic forces. Our operations are directly affected by actual and perceived trends in various national and regional economic conditions that affect national and regional markets for commercial real estate services, including interest rates, the availability of credit to finance commercial real estate transactions, and the impact of tax laws affecting real estate. Periods of economic slowdown or recession, rising interest rates, tightening of the credit markets, declining demand for or increased supply of real estate, or the public perception that any of these events may occur can adversely affect our business. These conditions could result in a general decline in rents, which in turn would reduce revenue from property management fees and brokerage commissions derived from leases. In addition, these conditions could lead to a decline in property values as well as a decline in funds invested in commercial real estate and related assets, which in turn may reduce revenues from investment advisory, property management, leasing and development fees.
Overview and Background
We are a full-service real estate operating company that owns, acquires, develops and manages primarily office, as well as mixed-use and residential properties on a nationwide basis. We conduct our business through our Operating Partnership, of which we own 68.8% as of December 31, 2009 and have control over the major decisions of the Operating Partnership.
Critical Accounting Policies and Estimates
Accounting estimates. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the relevant reporting periods. Certain accounting policies are considered to be critical accounting estimates, as these policies require us to make assumptions about matters that are highly uncertain at the time the estimate is made and changes in the accounting estimate are reasonably likely to occur from period to period. We believe the following accounting policies reflect the more significant estimates used in the preparation of our financial statements. For a summary of significant accounting policies, see note 2 to our financial statements, included elsewhere in this report.
Investments in real estate. The price that we pay to acquire a property is impacted by many factors including the condition of the buildings and improvements, the occupancy of the building, the existence of above and below market tenant leases, the creditworthiness of the tenants, favorable or unfavorable financing, and numerous other factors. Accordingly, we are required to make subjective assessments to allocate the purchase price paid to acquire investments in real estate among the assets acquired and liabilities assumed based on our estimate of the fair values of such assets and liabilities. This includes determining the value of the buildings and improvements, land, any ground leases, tenant improvements, in-place tenant leases, tenant relationships, the value (or negative value) of above (or below) market leases and any debt assumed from the seller or loans made by the seller to us. Each of these estimates requires a great deal of judgment and some of the estimates involve complex calculations. Our calculation methodology is summarized in Note 2 to our consolidated financial statements. These allocation assessments have a direct impact on our results of operations because if we were to
33
allocate more value to land there would be no depreciation with respect to such amount or if we were to allocate more value to the buildings as opposed to allocating to the value of tenant leases, this amount would be recognized as an expense over a much longer period of time, since the amounts allocated to buildings are depreciated over the estimated lives of the buildings whereas amounts allocated to tenant leases are amortized over the terms of the leases. Additionally, the amortization of value (or negative value) assigned to non-market rate leases is recorded as an adjustment to rental revenue as compared to amortization of the value of in-place leases and tenant relationships, which is included in depreciation and amortization in our consolidated statements of operations.
We are required to make subjective assessments as to the useful lives of our 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 evaluate a property for potential impairment when events or changes in circumstances indicate that the current book value of the property may not be recoverable. Indicators of potential impairment include among other things: declining occupancy levels; declining rental rates; increasing number of tenants unable to pay their rent; deterioration in the local rental market; declining market values; our competitors’ beginning to experience financial difficulty or impair similar assets; and our inability or change of intent to hold the property.
In the event that these periodic assessments result in a determination that the carrying amount of a property exceeds the sum of the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual disposition of the property, we would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of the property. Estimates of expected future net cash flows are inherently uncertain and are based on assumptions dependent upon future and current market conditions and events that affect the ultimate value of the property. These estimates are highly subjective and require us to make assumptions relating to, among other things: future rental rates; tenant allowances; operating expenditures; property taxes; capital improvements; occupancy levels; the estimated proceeds generated from the future sale of the property or inability to sell the property; holding periods; market conditions; accessibility of capital and credit markets; recent sales activity of similar properties in the same market; our liquidity and ability and intent to hold the properties; development and construction costs; and discount rates. These estimates can change significantly between reporting periods. Due to the fact that estimates included in cash flow models are based on historical results and projected trends, unexpected changes in market conditions may lead to additional impairment charges in the future that cannot be anticipated.
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, “Investments—Equity Method and Joint Ventures”, we would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of our investment.
With respect to condominium units held for sale, we would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value less costs to sell the project. Estimates of fair value are often based on expected future net cash flows, which are inherently uncertain and are based on assumptions dependent upon future and current market conditions and events that affect the ultimate value of the project. These estimates require us to make assumptions relating to, among other things, sales absorption rates, selling prices and discount rates.
Refer to the impairment loss discussion in the section titled “Comparison of the year ended December 31, 2009 to the year ended December 31, 2008” found elsewhere herein for further information on the impairment losses recorded in the years ended December 31, 2009 and 2008.
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Revenue recognition. Leases with tenants are accounted for as operating leases. Rental income is recognized as earned based upon the contractual terms of the leases with tenants. Minimum annual rents are recognized on a straight-line basis over the lease term regardless of when the payments are made. The deferred rents asset on our balance sheets represents the aggregate excess rental revenue recognized on a straight-line basis over the cash received under the applicable lease provisions. Our leases generally contain provisions that require tenants to reimburse us for a portion of property operating expenses and real estate related taxes associated with the property. These reimbursements are recognized as revenues in the period the related expenses are incurred. Real estate commissions on leases we charge to third party owners of rental properties are generally recorded as income after we satisfy all obligations under the commission agreement. A typical commission agreement provides that we earn 50% of the lease commission upon the execution of the lease agreement by the tenant. The remaining 50% of the lease commission is earned at a later date, usually upon tenant occupancy. The existence of any significant future contingencies will delay recognition of commission revenue until those contingencies are satisfied. In addition, we eliminate lease commissions we charge on our ownership share of rental properties. Investment advisory, property management and development services fees are recognized when earned under the provisions of the related agreements.
We have one high-rise condominium project for which we used the percentage of completion accounting method to recognize costs and sales during the construction period, up through and including June 30, 2009. Commencing with the third quarter of 2009, we have applied 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.
Allowances for uncollectible current tenant receivables and unbilled deferred rents receivable. Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for estimated uncollectible tenant receivables and unbilled deferred rent. Our determination of the adequacy of these allowances requires significant judgments and estimates. Unbilled deferred rents receivable represents the amount that the cumulative straight-line rental revenue recorded to date exceeds cash rents billed to date under the lease agreements. Given the longer-term nature of these types of receivables, our determination of the adequacy of the allowance for unbilled deferred rents receivables is based primarily on historical loss experience. We evaluate the allowance for unbilled deferred rents receivable using a specific identification methodology for our company’s significant tenants, assessing a tenant’s financial condition and the tenant’s ability to meet its lease obligations. In addition, the allowance includes a reserve based upon our historical experience and current and anticipated future economic conditions that are not associated with any specific tenant.
Depreciable lives of leasing costs. We incur certain capital costs in connection with leasing our properties. These costs consist primarily of lease commissions and tenant improvements. Lease costs are amortized on the straight-line method over the shorter of the estimated useful life of the asset or the estimated remaining term of the lease, ranging from one to 15 years. We reevaluate the remaining useful life of these costs as the creditworthiness of our tenants changes. If we determine that the estimated remaining life of the respective lease has changed, we adjust the amortization period and, therefore, the amortization or depreciation expense recorded each period may fluctuate. If we experience increased levels of amortization or depreciation expense due to changes in the estimated useful lives of leasing costs, our results of operations may be adversely affected.
Income taxes. We are subject to federal income taxes in the United States, and also in states and local jurisdictions in which we operate. We account for income taxes according to FASB ASC 740, “Income Taxes”. FASB ASC 740 requires the recognition of deferred tax assets, net of applicable reserves, related to net operating
35
loss carryforwards and certain temporary differences. The standard requires recognition of a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied.
In accordance with the criteria of FASB ASC 450, “Contingencies”, we record tax contingencies when the exposure item becomes probable and reasonably estimable. We assess the tax uncertainties on a quarterly basis and maintain the required tax reserves until the underlying issue is resolved or upon the expiration of the statute of limitations. Our estimate of potential outcome of any uncertain tax issue is highly judgmental and we believe we have adequately provided for any reasonable and foreseeable outcomes related to uncertain tax matters.
In July 2006, the FASB issued FASB ASC 740, “Income Taxes”, which was effective for our company on January 1, 2007. FASB ASC 740-10-15 clarifies the accounting for uncertainty in tax positions and requires that we recognize the impact of a tax position in our financial statements if that position would more likely than not be sustained on audit, based on the technical merits of the position. We recorded the cumulative effect of this change in accounting principle as an adjustment to opening retained earnings at January 1, 2007.
Factors That May Influence Future Results of Operations
The following is a summary of the more significant factors we believe may affect our results of operations. For a more detailed discussion regarding the factors that you should consider before making a decision to acquire shares of our common stock, see the information under the caption “Risk Factors” elsewhere in this report.
Rental income. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space, to lease currently available space as well as space in newly developed or redeveloped properties and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in the submarkets where our properties are located.
Los Angeles, Philadelphia, Austin, and Houston—Submarket Information. A significant portion of our income is derived from properties located in Los Angeles, Philadelphia, Austin and Houston. The market conditions in these submarkets have a significant impact on our results of operations.
Information regarding significant tenants—Conrail. A significant amount of space at our Two Commerce Square property has historically been leased to CSX Corporation (“Conrail”). Approximately half or 375,000 square feet of this lease expired in June 2008 and the remaining half expired in June 2009. We have entered into agreements with replacement tenants at rental rates which are lower than the rates paid by Conrail. As a result, our aggregate revenues from this property are lower following the expiration of the Conrail lease. We have entered into direct leases for 624,000 square feet of the Conrail space. The lease terms range from 3 months to 139 months. Because of these direct leases, we no longer have any significant tenant concentration with Conrail.
Development and redevelopment activities. We believe that our development activities present growth opportunities for us over the next several years. We continually evaluate the size, timing and scope of our development and redevelopment initiatives and, as necessary, sales activity to reflect the economic conditions and the real estate fundamentals that exist in our submarkets. However, we may not be able to lease committed development or redevelopment properties at expected rental rates or within projected time frames or complete projects on schedule or within budgeted amounts. The occurrence of one or more of these events could adversely affect our financial condition, results of operations and cash flows. We currently own interests in four development projects, and TPG/CalSTRS owns four redevelopment properties and two development sites. As of December 31, 2009, we had incurred, on a consolidated basis, approximately $97.8 million of predevelopment and infrastructure costs that are reflected in Land improvements-development properties on our balance sheet. To the extent that we, or joint ventures we are a partner in, do not proceed with projects as planned, development and/or redevelopment costs would need to be evaluated for impairment.
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Results of Operations
The results of operations reflect the consolidation of the affiliates that own One Commerce Square, Two Commerce Square, Murano, 2100 JFK Boulevard, Four Points Centre, Campus El Segundo and our investment advisory, property management, leasing and real estate development operations. Included in our investment advisory, property management, leasing and development services operations are development fees we earn from unaffiliated third parties related to two separate entitlement projects—Universal Village and Wilshire Grand. The following properties are accounted for using the equity method of accounting:
2121 Market Street
City National Plaza (as of January 2003, the date of acquisition)
Reflections I (as of October 2004, the date of acquisition)
Reflections II (as of October 2004, the date of acquisition)
Four Falls Corporate Center (as of March 2005, the date of acquisition)
Oak Hill Plaza (as of March 2005, the date of acquisition)
Walnut Hill Plaza (as of March 2005, the date of acquisition)
San Felipe Plaza (as of August 2005, the date of acquisition)
2500 City West (as of August 2005, the date of acquisition)
Brookhollow Central I, II, and III (as of August 2005, the date of acquisition)
2500 City West land (as of December 2005, the date of acquisition)
CityWestPlace (as of June 2006, the date of acquisition)
CityWestPlace land (as of June 2006, the date of acquisition)
Centerpointe I & II (as of January 2007, the date of acquisition)
Fair Oaks Plaza (as of January 2007, the date of acquisition)
The following investment entity that holds a mortgage loan receivable related to Brookhollow Central is accounted for using the equity method of accounting:
BH Note B Lender, LLC (as of October 2008, the date of formation)
TPG/CalSTRS, LLC also owns a 25% interest in the Austin Portfolio Joint Venture which owns the following properties (“Austin Portfolio Joint Venture Properties”):
San Jacinto Center (as of June 2007, the date of acquisition)
Frost Bank Tower (as of June 2007, the date of acquisition)
One Congress Plaza (as of June 2007, the date of acquisition)
One American Center (as of June 2007, the date of acquisition)
300 West 6th Street (as of June 2007, the date of acquisition)
Research Park Plaza I & II (as of June 2007, the date of acquisition)
Park Centre (as of June 2007, the date of acquisition)
Great Hills Plaza (as of June 2007, the date of acquisition)
Stonebridge Plaza II (as of June 2007, the date of acquisition)
Westech 360 I-IV (as of June 2007, the date of acquisition)
Comparison of the year ended December 31, 2009 to the year ended December 31, 2008.
Total revenues. Total revenues decreased by $57.5 million, or 33.5%, to $114.1 million for the year ended December 31, 2009 compared to $171.6 million for the year ended December 31, 2008. The significant components of revenue are discussed below.
Rental revenues. Rental revenue decreased by $0.7 million, or 2.3% to $29.8 million for the year ended December 31, 2009 compared to $30.5 million for the year ended December 31, 2008. The decrease was primarily related to a scheduled expiration in June 2009 of a significant lease (Conrail) at Two Commerce Square representing approximately 378,000 rentable square feet. Approximately 91% of the space from the June 2009 Conrail lease expiration has been leased to former subtenants or new tenants at current market rates, which are lower than the expired lease rates.
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Tenant reimbursements.Tenant reimbursements decreased by $4.7 million or 18.1% to $21.2 million for the year ended December 31, 2009 compared to $25.9 million for the year ended December 31, 2008. The decrease was primarily related to the scheduled expiration in June 2008 of the Conrail lease at Two Commerce Square. Approximately half or 378,000 rentable square feet expired in June 2008 and the remaining half expired in June 2009. This decrease in reimbursement revenue was offset by revenues from former subtenants that are now direct tenants or new tenants.
Parking and other revenues. Parking and other revenues decreased by $0.9 million or 23.1% to $3.0 million for the year ended December 31, 2009 compared to $3.9 million for the year ended December 31, 2008. The decrease was primarily related to a decrease in transient and monthly parking at Commerce Square.
Investment advisory, management, leasing and development services revenues. This caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest. Revenues from these services increased by $2.1 million, or 29.2%, to $9.3 million for the year ended December 31, 2009 compared to $7.2 million for the year ended December 31, 2008. The increase was primarily due to a new development services contract signed with Korean Air and increased leasing activity at our managed properties.
Investment advisory, management, leasing and development services revenues—unconsolidated real estate entities.This caption represents revenues earned from services provided to entities in which we use the equity method to account for our ownership interest since we have significant influence, but not control over the entities. Revenues from these services from unconsolidated real estate entities decreased by $3.3 million, or 18.0%, to $15.0 million for the year ended December 31, 2009 compared to $18.3 million for the year ended December 31, 2008. This decrease was primarily a result of a decrease in leasing commission revenue of $2.0 million and a decrease in development and construction management fee revenue of $1.1 million across the portfolio.
Reimbursement of property personnel costs. This caption represents the reimbursement for property personnel salary, payroll taxes and benefits. The decrease of $0.5 million or 8.2% to $5.6 million for the year ended December 31, 2009 compared to $6.1 million for the year ended December 31, 2008 was primarily a result of paying the 2008 property level bonuses during 2008 which resulted in two years of bonus payments, both 2007 and 2008, being included in 2008 but only one year of expense being included in 2009.
Condominium sales. This caption represents the revenue recognized for Murano condominium units and parking spaces which closed as of December 31, 2009. The decrease of $49.6 million or 62.2% was primarily the result of a reduction in sales volume. For the twelve months ended December 31, 2009 we recognized revenue of $30.2 million, based on the sale of 75 units and 82 parking spaces. For the twelve months ended December 31, 2008 we recognized revenue of $79.8 million, based on the sale of 125 units and 119 parking spaces. Up to and including the quarter ended June 30, 2009, we accounted for units and parking spaces under contract of sale based on the percentage of completion method of accounting.
Total expenses. Total expenses decreased by $31.6 million, or 17.8%, to $146.1 million for the year ended December 31, 2009 compared to $177.7 million for the year ended December 31, 2008. The significant components of expense are discussed below.
Rental property operating and maintenance expense.Rental property operating and maintenance expense remained consistent for each of the twelve month periods ended December 31, 2009 and 2008.
Real estate taxes. Real estate taxes increased by $0.7 million or 10.8% to $7.2 million for the year ended December 31, 2009 compared to $6.5 million for the year ended December 31, 2008. The increase of $0.7 million was primarily the result of increased Philadelphia business taxes assessed on the sales proceeds of the Murano condominiums.
Investment advisory, management, leasing and development services expenses.These expenses decreased by $2.9 million, or 19.6%, to $11.9 million for the year ended December 31, 2009 as compared to $14.8 million for
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the year ended December 31, 2008, primarily due to a decrease in the use of consultants for system improvements and development services and a decrease in legal fees related to our formation of the Green Fund.
Reimbursable property personnel costs. This caption represents the reimbursement of property personnel salary, payroll taxes and benefits. The decrease of $0.5 million or 8.2% to $5.6 million for the year ended December 31, 2009 compared to $6.1 million for the year ended December 31, 2008 was primarily a result of paying the 2008 property level bonuses during 2008 which resulted in two years of bonus payments, both 2007 and 2008, being included in 2008 but only one year of expense being included in 2009.
Cost of condominium sales. The decrease of $35.9 million is due to reduced sales of units during 2009. For the twelve months ended December 31, 2009, we recognized costs of $26.5 million, based on sales of 75 units and 82 parking spaces compared with $62.4 million for the twelve months ended December 31, 2008, based on sales of 125 units and 119 parking spaces.
Interest expense. Interest expense increased by $4.1 million or 18.0% to $26.9 million for the year ended December 31, 2009 as compared to $22.8 million for the year ended December 31, 2008. The increase in interest expense is primarily attributable to $5.5 million in interest costs no longer being capitalized on Murano and our Four Points office buildings due to the completion of development on these projects during the year ended December 31, 2008 offset primarily due to a decrease in interest expense relating to the Murano of approximately $1.6 million resulting from payments on of the construction loan.
Depreciation and amortization expense.Depreciation and amortization expense increased by $0.8 million or 6.8% to $12.6 million for the year ended December 31, 2009 compared to $11.8 million for the year ended December 31, 2008. The increase is partially attributable to the purchase of 11% interests in One and Two Commerce Square during 2008. The increase is also attributable to the completion of construction and opening of the marketing center at Campus El Segundo during 2008.
General and administrative. General and administrative expenses increased by $0.3 million or 1.8% to $16.7 million for the year ended December 31, 2009 compared to $16.4 million for the year ended December 31, 2008. The increase is attributable to costs associated with the postponed equity offering during 2009.
Impairment Loss.We recognized an impairment charge related to our Murano condominium project whose units are complete and held for sale of $13.0 million for the year ended December 31, 2009 compared to an $11.0 million impairment charge for the year ended December 31, 2008. We are required to record Murano at its estimated fair value as it meets the held for sale criteria of FASB ASC 360, “Property, Plant and Equipment”. These non-cash impairment charges related to Murano are included in the “Impairment loss” line item in the consolidated statements of operations for the respective years. In addition, we recorded an impairment charge in accordance with the criteria of FASB ASC 323, “Investments—Equity Method and Joint Ventures” for our investment in the Austin Joint Venture, which is accounted for under the equity method, of $1.2 million for the year ended December 31, 2009 compared to a $1.2 million impairment charge for the year ended December 31, 2008. Additionally, we recorded impairment charges related to certain of our other properties accounted for using the equity method of accounting. Our 25 percent share of these impairment charges is as follows: Four Falls Corporate Center of $3.1 million; Walnut Hill Plaza of $1.4 million and Centerpointe I & II of $10.3 million. There were no impairment charges recorded for these properties for the year ended December 31, 2008. These non-cash impairment charges related to both our investment in the Austin Joint Venture and other properties accounted for using the equity method are included in the “Equity in net loss of unconsolidated real estate entities” line item in the consolidated statements of operations for the respective years.
As discussed in our critical accounting policies, the estimates of expected future net cash flows are inherently uncertain, and are based on assumptions dependent upon future and current market conditions and events that affect the ultimate value of the properties. These estimates can change significantly between reporting periods. Due to the fact that estimates included in cash flow models are based on historical results and projected trends, unexpected changes in market conditions may lead to additional impairment charges in the future that cannot be anticipated.
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One key assumption considered in our undiscounted cash flows test is the investment holding period. Certain of our properties (City National Plaza, 2500 City West, Brookhollow Central and CityWestPlace) have debt that matures in 2010. If we are unable to successfully refinance or extend all or a portion of this debt, the holding period used for the impairment testing would be subject to reconsideration, potentially resulting in undiscounted cash flows less than the book carrying values, which could potentially result in impairment if the estimated fair market value of these assets is less than their book carrying amount. With respect to City National Plaza, 2500 City West and CityWestPlace, the estimated fair value on a discounted cash flow basis for each asset exceeds the book carrying value, so no impairment would exist. With respect to Brookhollow Central, we believe it will be successfully refinanced as the estimated fair value is sufficiently greater than the debt balance. There could potentially be an impairment loss, though, if the holding period were revised as the estimated fair value for this asset is less than the book carrying amount.
Further, our Oak Hill Plaza property failed the undiscounted cash flows test at December 31, 2009 using a limited holding period in the test due to uncertainty regarding the maturing debt due in March 2010. The estimated fair market value for Oak Hill Plaza exceeds the book carrying value, though, so there is no impairment loss.
Additionally , the book carrying value of our Murano project, net of the impairment charges recorded as of December 31, 2009, is reflective of the Company’s estimation of future absorption rates and sales prices, which are supported by a third party appraisal. If the actual absorption and sales prices are materially less than the projection, we could potentially need to record additional impairment in future periods.
Gain on sale of real estate. Gain on sale of real estate decreased by $2.4 million, or 66.7%, to $1.2 million for the year ended December 31, 2009 compared to $3.6 million for the year ended December 31, 2008. For the twelve months ended December 31, 2009 we recognized a gain of $1.2 million related to the sale of a 1.9 acre land parcel adjacent to our Four Points development project. For the twelve months ended December 31, 2008 we recognized a previously deferred gain of $3.6 million related to the sale of a parcel of land at our Campus El Segundo development project. A 14.1 acre parcel at Campus El Segundo was sold in 2006 for $24.6 million resulting in a total gain of $18.4 million. We were obligated to fund certain infrastructure improvements of approximately $2.7 million with respect to the development of the sold parcel. The remaining deferred gain was recognized upon completion of the remaining infrastructure improvements during the year ended December 31, 2008.
Interest income. Interest income decreased by $2.5 million, or 89.3%, to $0.3 million for the year ended December 31, 2009 compared to $2.8 million for the year ended December 31, 2008, due to declining investment balances and lower interest rates.
Equity in net loss of unconsolidated real estate entities.Equity in net loss of unconsolidated real estate entities increased by $3.4 million, or 26.6%, to a net loss of $16.2 million for the year ended December 31, 2009 compared to a net loss of $12.8 million for the year ended December 31, 2008. Set forth below is a summary of the unconsolidated condensed financial information for the unconsolidated real estate entities and our share of net loss and equity in net loss for the years ended December 31, 2009 and 2008 (in thousands):
| | | | | | | | |
| | | 2009 | | | 2008 | |
Revenue | | $ | 324,694 | | | $ | 322,553 | |
Operating and other expenses | | | (166,575 | ) | | | (170,019 | ) |
Interest expense | | | (104,105 | ) | | | (126,386 | ) |
Depreciation and amortization | | | (120,129 | ) | | | (125,565 | ) |
Impairment loss | | | (64,044 | ) | | | (4,840 | ) |
Gain on early extinguishment of debt | | | 67,017 | | | | — | |
Loss from discontinued operations | | | (83 | ) | | | (104 | ) |
| | | | | | | | |
Net loss | | $ | (63,225 | ) | | $ | (104,361 | ) |
| | | | | | | | |
Thomas Properties’ share of net loss | | $ | (19,794 | ) | | $ | (16,168 | ) |
Intercompany eliminations | | | 3,558 | | | | 3,340 | |
| | | | | | | | |
Equity in net loss of unconsolidated real estate entities | | $ | (16,236 | ) | | $ | (12,828 | ) |
| | | | | | | | |
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Net loss from unconsolidated real estate entities for the year ended December 31, 2009 compared to the year ended December 31, 2008 decreased, primarily due to the gain from the extinguishment of debt in the Austin Portfolio Joint Venture and decreased interest expense resulting from lower interest rates on floating rate debt, offset by impairment charges recognized during 2009.
Our share of net loss from unconsolidated real estate entities for the year ended December 31, 2009 compared to the year ended December 31, 2008 increased primarily due to our relatively smaller interest in the Austin Portfolio Joint Venture’s gain on early extinguishment of debt.
(Provision) benefit for income taxes. Provision for income taxes decreased by $2.6 million, or 136.8%, to a provision of $0.7 million for the year ended December 31, 2009 compared to a benefit of $1.9 million for the year ended December 31, 2008. This change is attributable primarily to the Company recording a valuation allowance of $7.4 million in the current year.
Comparison of the year ended December 31, 2008 to the year ended December 31, 2007.
Total revenues. Total revenues increased by $74.1 million, or 76.0%, to $171.6 million for the year ended December 31, 2008 compared to $97.5 million for the year ended December 31, 2007. The significant components of revenue are discussed below.
Rental revenues. Rental revenue decreased by $2.1 million, or 6.4% to $30.5 million for the year ended December 31, 2008 compared to $32.6 million for the year ended December 31, 2007. The decrease was primarily related to a scheduled expiration in June 2008 of a significant lease at Two Commerce Square representing approximately 375,000 rentable square feet. Approximately 66% of the space from the June 2008 Conrail lease expiration has been leased to former subtenants or new tenants at current market rates, which are lower than the expired lease rates.
Tenant reimbursements.Tenant reimbursements decreased by $0.5 million or 1.9% to $25.9 million for the year ended December 31, 2008 compared to $26.4 million for the year ended December 31, 2007. The decrease was primarily related to a scheduled expiration in June 2008 of the Conrail lease at Two Commerce Square representing approximately 375,000 rentable square feet, offset by revenues from former subtenants that are now direct tenants or new tenants.
Parking and other revenues. Parking and other revenues remained consistent for each of the twelve month periods ended December 31, 2008 and 2007.
Investment advisory, management, leasing and development services revenues. This caption represents revenues earned from services provided to unaffiliated entities in which we have no ownership interest. Revenues from these services decreased by $5.6 million, or 43.8%, to $7.2 million for the year ended December 31, 2008 compared to $12.8 million for the year ended December 31, 2007. The decrease was primarily due to a disposition incentive fee of $5.6 million related to the sale of an unaffiliated fee-managed property in 2007.
Investment advisory, management, leasing and development services revenues—unconsolidated real estate entities.This caption represents revenues earned from services provided to entities in which we use the equity method to account for our ownership interest since we have significant influence, but not control over the entities. Revenues from these services from unconsolidated real estate entities increased by $0.4 million, or 2.2%, to $18.3 million for the year ended December 31, 2008 compared to $17.9 million for the year ended December 31, 2007. This increase was primarily a result of an increase in fee income of $1.5 million related to the Austin Portfolio Joint Venture properties acquired in June 2007 and an increase of $0.5 million in fee income related to the rest of the portfolio, which was offset by a decrease in acquisition fees of $1.7 million related to the property investments in Fairfax, Virginia acquired in January 2007, and Austin, Texas acquired in June 2007 as well as a decrease of $0.5 million in asset management fees primarily related to our Houston portfolio.
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Reimbursement of property personnel costs. This caption represents the reimbursement for property personnel salary, payroll taxes and benefits. The increase of $2.2 million or 56.4% to $6.1 million for the year ended December 31, 2008 compared to $3.9 million for the year ended December 31, 2007 was primarily a result of an increase in personnel as a result of the acquisition of the Austin Portfolio Joint Venture properties in June 2007 resulting in operations for a full twelve months in 2008 compared to seven months in 2007.
Condominium sales. This caption represents the revenue recognized on the percentage of completion method of accounting of the Murano condominium units and parking spaces which closed or were under a binding sales contract as of December 31, 2008. As of December 31, 2008, we had closed the sale of 111 units and 107 parking spaces and had an additional 14 units and 12 parking spaces under contract of sale, for which we recognized revenue of $79.8 million. Prior to the quarter ended June 30, 2008, we accounted for units and parking spaces under contract of sale based on the deposit method of accounting.
Total expenses. Total expenses increased by $85.1 million, or 91.9%, to $177.7 million for the year ended December 31, 2008 compared to $92.6 million for the year ended December 31, 2007. The significant components of expense are discussed below.
Rental property operating and maintenance expense.Rental property operating and maintenance expense increased by $2.9 million, or 12.8%, to $25.6 million for the year ended December 31, 2008 as compared to $22.7 million for the year ended December 31, 2007. The increase is primarily due to an increase in various operating expenses, such as professional services, engineering, utilities and business taxes as well as increased bad debt charges, and marketing and other expenses related to our completed development properties.
Real estate taxes. Real estate taxes remained consistent for each for the twelve month periods ended December 31, 2008 and 2007.
Investment advisory, management, leasing and development services expenses.These expenses increased by $1.7 million, or 13.0%, to $14.8 million for the year ended December 31, 2008 as compared to $13.1 million for the year ended December 31, 2007, primarily due to an increase in the use of consultants for accounting software improvements and development services and legal fees related to the formation of the Green Fund, offset by a decrease in leasing costs in Houston due to lower leasing volume in 2008 compared to 2007.
Reimbursable property personnel costs. This caption represents the reimbursement of property personnel salary, payroll taxes and benefits. The increase of $2.2 million or 56.4% to $6.1 million for the year ended December 31, 2008 compared to $3.9 million for the year ended December 31, 2007 was primarily a result of an increase in salaries and employment related costs related to the Austin Portfolio Joint Venture properties acquired in June 2007, resulting in operations for a full twelve months in 2008 compared to seven months in 2007.
Cost of condominium sales. This caption represents the cost recognized on the percentage of completion method of accounting for the Murano condominium units and parking spaces which closed or were under a binding sales contract as of December 31, 2008. As of December 31, 2008, we had closed the sale of 111 units and 107 parking spaces and had an additional 14 units and 12 parking spaces under contract of sale, for which we recognized cost of sales of $62.4 million. Prior to the quarter ended June 30, 2008, we accounted for units and parking spaces under contract of sale based on the deposit method of accounting.
Interest expense. Interest expense increased by $5.1 million or 28.8% to $22.8 million for the year ended December 31, 2008 as compared to $17.7 million for the year ended December 31, 2007. The increase in interest expense is primarily attributable to $5.1 million in interest costs no longer being capitalized on Murano and our Four Points office buildings due to the completion of development on these projects during the year ended December 31, 2008 and increased interest of $0.2 million related to the Campus El Segundo development being
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completed offset by a decrease in interest expense relating to Two Commerce Square of $0.7 million primarily due to the amortizing loan balances for the mortgage and mezzanine loans.
Depreciation and amortization expense.Depreciation and amortization expense remained consistent for each for the twelve month periods ended December 31, 2008 and 2007.
General and administrative. General and administrative expenses decreased by $0.9 million, or 5.2%, to $16.4 million for the year ended December 31, 2008 compared to $17.3 million for the year ended December 31, 2007. The decrease is due to a decrease in salaries and benefits related to a reduction in bonuses for the year ended December 31, 2008 as well as a $0.6 million decrease in business taxes due to a refund of Philadelphia business privilege tax and a decrease in certain Delaware corporate taxes.
Impairment Loss.We recognized a non-cash impairment charge of $11.0 million related to our Murano condominium project whose units are complete and held for sale. We are required to record Murano at its estimated fair value as it meets the held for sale criteria of FASB ASC 360, “Property, Plant and Equipment”. There was no corresponding impairment charge in 2007.
Gain on sale of real estate. Gain on sale of real estate decreased by $0.8 million, or 18.2%, to $3.6 million for the year ended December 31, 2008 compared to $4.4 million for the year ended December 31, 2007. A 14.1 acre parcel at Campus El Segundo was sold in 2006 for $24.6 million resulting in a total gain of $18.4 million. We were obligated to fund certain infrastructure improvements of approximately $2.7 million with respect to the development of the sold parcel. The remaining deferred gain was recognized upon completion of the remaining infrastructure improvements during the year ended December 31, 2008.
Interest income. Interest income decreased by $3.2 million, or 53.3%, to $2.8 million for the year ended December 31, 2008 compared to $6.0 million for the year ended December 31, 2007, due to declining investment balances and lower interest rates.
Equity in net loss of unconsolidated real estate entities.Equity in net loss of unconsolidated real estate entities improved by $2.1 million, or 14.1%, to a net loss of $12.8 million for the year ended December 31, 2008 compared to a net loss of $14.9 million for the year ended December 31, 2007. Set forth below is a summary of the unconsolidated condensed financial information for the unconsolidated real estate entities and our share of net loss and equity in net loss for the years ended December 31, 2008 and 2007 (in thousands):
| | | | | | | | |
| | | 2008 | | | 2007 | |
Revenue | | $ | 322,553 | | | $ | 258,512 | |
Operating and other expenses | | | (170,019 | ) | | | (138,942 | ) |
Interest expense | | | (126,386 | ) | | | (118,182 | ) |
Depreciation and amortization | | | (125,565 | ) | | | (107,633 | ) |
Impairment loss | | | (4,840 | ) | | | — | |
Noncontrolling interest | | | — | | | | (104 | ) |
(Loss) income from discontinued operations | | | (104 | ) | | | 7,662 | |
| | | | | | | | |
Net loss | | $ | (104,361 | ) | | $ | (98,687 | ) |
| | | | | | | | |
Thomas Properties’ share of net loss | | $ | (16,168 | ) | | $ | (17,465 | ) |
Intercompany eliminations | | | 3,340 | | | | 2,612 | |
| | | | | | | | |
Equity in net loss of unconsolidated real estate entities | | $ | (12,828 | ) | | $ | (14,853 | ) |
| | | | | | | | |
Net loss from unconsolidated real estate entities for the year ended December 31, 2008 compared to the year ended December 31, 2007 increased primarily due to the acquisition of our interest in the Austin Portfolio Joint Venture in June 2007 and an impairment loss recognized in 2008. In addition, income from discontinued
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operations for unconsolidated real estate entities decreased by $7.8 million for the year ended December 31, 2008 compared to the year ended December 31, 2007 due to the sale of Intercontinental Center in 2007.
Our share of net loss from unconsolidated real estate entities for the year ended December 31, 2008 compared to the year ended December 31, 2007 decreased primarily due to our relatively smaller interest in the Austin Portfolio Joint Venture.
(Provision) benefit for income taxes. Provision for income taxes decreased by $3.1 million, or 258.3%, to a benefit of $1.9 million for the year ended December 31, 2008 compared to a provision of $1.2 million for the year ended December 31, 2007. Of this decrease, an increase of approximately $0.4 million is attributable to the interest on unrecognized benefits, which is recorded as a component of income tax expense, and the remainder of $2.7 million is attributable to applying the statutory rate of 35% to the change in book income for the year ended December 31, 2007 of $0.3 million to a book loss for the year ended December 31, 2008 of $7.4 million. Refer to our tax rate reconciliation in our financial statement footnotes for a detailed reconciliation of our effective tax rate.
Liquidity and Capital Resources
Analysis of liquidity and capital resources
As of December 31, 2009, we have unrestricted cash and cash equivalents of $35.9 million. We believe that we will have sufficient capital to satisfy our liquidity needs over the next 12 months through working capital. We expect to meet our long-term liquidity requirements, including debt service, property and undeveloped land acquisitions and additional future development and redevelopment activity, through cash flow from operations, additional secured and unsecured long-term borrowings, dispositions of non-strategic assets, and the potential issuance of additional debt, or common or preferred equity securities, including convertible securities. Additionally, as noted elsewhere herein, on December 23, 2009, the Company completed the sale of 5.1 million shares through a registered direct offering of common stock at $2.55 per share. The net proceeds after deducting offering expenses were $13.1 million. We used the net proceeds to fund a portion of the discounted payoff of $25.2 million for $36.6 million in nonrecourse senior and junior mezzanine loans on Two Commerce Square which were scheduled to mature in January 2010. We do not have any present intent to reserve funds to retire existing debt upon maturity. We will instead seek to refinance this debt at maturity or retire the long-term debt through the issuance of securities, as market conditions permit. There can be no assurances that such debt refinancing will be available at the time of such maturities on acceptable terms, if at all, and our cost of capital could increase as a result of any such debt refinancing. If we are unable to obtain debt refinancing for properties in which we own an interest at maturity, we may lose some or all of our equity interests in such properties. Additionally, existing stockholders could experience substantial dilution in the event we are required to issue additional equity capital.
On March 6, 2010, an aggregate of $96.5 million in mortgage loans owed by subsidiaries of TPG/CalSTRS on unconsolidated properties at Four Falls Corporate Center and Oak Hill Plaza/Walnut Hill Plaza matured and became due in full. The borrowers under these loans have not, as of March 18, 2010, made payment on these loans and they are currently in default. These loans are non-recourse to the Company, and we do not anticipate making any payments or equity contributions to support the repayment or refinancing of these loans. The borrowers are currently in discussions with the lenders to restructure the debt or facilitate a sale or other liquidation of these properties. We do not believe that the loss of our equity interests in these properties will have a material effect on our business or results of operations.
As of December 31, 2009, we have unfunded capital commitments to (1) our joint venture with CalSTRS of $1.2 million; and (2) the Thomas High Performance Green Fund, an investment fund formed by us, CalSTRS and other institutional investors, of $50.0 million. With respect to our joint venture with CalSTRS, we are not obligated to fund our share of the capital commitment for the acquisition of any new project, but we are obligated to fund tenant improvements and other capital improvements for projects that were acquired prior to June 1,
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2007. We estimate we will fund all of the $1.2 million in 2010. Our requirement to fund all or a portion of our commitments to the Thomas High Performance Green Fund is subject to our identifying properties to acquire that are mutually acceptable to us, and our partners. Our cash requirements for the Green Fund could be reduced by contributions by us to the fund of assets in which we have an interest.
In December 2009, our board of directors suspended its quarterly dividends to common stockholders. The availability of funds to pay dividends is impacted by property-level restrictions on cash flows. With respect to our joint venture properties, we do not solely control decision making with respect to these properties, and may not be able to obtain monies from these properties even if funds are available for distribution to us. In addition, we may enter future financing arrangements that contain restrictions on our use of cash generated from our properties. The payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition, and any other factors deemed relevant by our board of directors.
Development and Redevelopment Projects
We own interests in four development projects, and our joint venture with CalSTRS owns four redevelopment properties and two development sites.
We anticipate seeking to mitigate our development risk on all of our development projects by obtaining significant pre-leasing and guaranteed maximum cost construction contracts. There can be no assurance we will be able to successfully implement these risk mitigation measures.
We substantially completed construction in 2008 of the Murano, a 302-unit high-rise residential condominium project in downtown Philadelphia. We entered into contracts for 125 units and 119 parking spaces, and recognized a gain on sale of approximately $17.3 million for the year ended December 31, 2008. Due to the deteriorating market conditions in the second half of 2008, we recorded an $11.0 million non-cash impairment charge during the three months ended December 31, 2008. During the year ended December 31, 2009, we entered into contracts for 82 units and 87 parking spaces, had twelve forfeitures and recognized a gain on sale of approximately $3.7 million. Of the twelve forfeitures, eleven related to prior year sales and one related to a 2009 sale, which was resold to a new buyer during 2009. Subsequent to December 31, 2009, we signed contracts for ten additional units. We recorded a $13.0 million non-cash impairment charge for the year ended December 31, 2009 on the Murano based on our estimation of future absorption and sales prices. Murano is classified as Condominium units held for sale on our balance sheets.
The amount and timing of costs associated with our development and redevelopment projects is inherently uncertain due to market and economic conditions. We presently intend to fund development and redevelopment expenditures primarily through construction or refurbishment financing.
| | • | | Construction of the Murano was financed in part with a construction loan up to $142.5 million. Repayment of this loan is being made with proceeds from the sales of condominium units. The loan has a balance of $37.0 million as of December 31, 2009. Subsequent to December 31, 2009, we closed on the sale of four units and we have eleven units under contract and expected to close, which will cumulatively reduce the principal balance by approximately $7.6 million. We are in discussions with the lender to extend the loan maturity to 2011, which based on the principal amortization feature of the loan, we believe is achievable. If we are unable to extend or refinance the loan, the lender could repossess the unsold units through foreclosure, which would result in an additional non-cash impairment charge. We have no guarantees on this debt other than the payment of interest through the maturity date. We do not earn any fee revenue from this project. |
| | • | | The completed core and shell construction of two office buildings at our development site at Four Points Centre was financed in part with a construction loan, which has an outstanding balance as of December 31, 2009 of $26.2 million with additional borrowing capacity of $10.4 million to fund tenant improvements and other project costs. On October 13, 2009, the Four Points Centre construction loan |
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| | was extended to July 31, 2012 with two one-year extension options subject to certain conditions. We have committed to pay down the principal amount of the loan in the total amount of $7.8 million of which we paid $3.9 million in October, 2009, $1.3 million in January, 2010 and we will pay the balance in two equal installments, in June and December, 2010. In addition, we paid $2.225 million in June 2009 which was held by the lender to fund any remaining project costs. As of December 31, 2009, these funds have been fully disbursed. The interest rate on the loan has been increased to LIBOR plus 3.50% per annum. We have guaranteed all of the required principal payments due in 2010 of $2.6 million (after the $1.3 million payment we made in January 2010) and 46.5% of the balance of the outstanding principal, interest and any other sum payable under this loan. After the remaining $2.6 million principal reductions we will make in 2010, the outstanding balance will be $22.3 million, which results in a maximum guarantee amount based on 46.5% of $10.4 million. We also provided additional collateral of approximately 62.4 acres of fully entitled unimproved land, which is immediately adjacent to our Four Points Centre office buildings. |
| | • | | Presently, we have not obtained construction financing for the development at Campus El Segundo. |
If we finance development projects through construction loans and are unable to obtain permanent financing on advantageous terms or at all, we would need to fund these obligations from cash flow from operations or seek alternative capital sources. If unsuccessful, this could adversely impact our financial condition and results of operations and impair our ability to satisfy our debt service obligations. If we are successful in obtaining construction or refurbishment financing and permanent financing, we anticipate that the corresponding interest costs would represent both a significant use of our cash flow and a material component of our results of operations.
We are also involved in managing the following three entitlement projects:
| | • | | We are presently entitling approximately 14.4 acres in Los Angeles, California, for office, production facility, residential and retail uses. The project, called Metro Studio@Lankershim, will include up to 1.5 million square feet. Upon completion of entitlements, we expect to enter into a long-term ground lease with the Los Angeles County Metropolitan Transportation Authority, which owns the land. |
| | • | | We have been engaged by NBC/Universal to entitle, master plan and develop (subject to our right of first offer) 124 acres located adjacent to Universal City in Los Angeles for the development of a residential and retail town center commonly referred to as Universal Village. We anticipate completing the development of these projects as market feasibility permits. |
| | • | | Korean Air, a subsidiary of Hanjin Group, has retained us as fee developer for the entitlement, design and redevelopment of the 2.7 acre Wilshire Grand property in downtown Los Angeles. The Wilshire Grand project envisions the development of two buildings, one approximately 65 stories and the other approximately 45 stories, to include approximately 1.5 million square feet of office, 560 hotel rooms, and 100 residential condominiums, with supporting retail and restaurant uses, for a total project size of up to approximately 2.5 million gross square feet. |
Leasing, Tenant Improvement and Capital Needs
In addition to our development and redevelopment projects, our One Commerce Square and Two Commerce Square properties require routine capital maintenance in the ordinary course of business. The properties also require that we incur expenditures for leasing commissions and tenant improvement costs. The level of these expenditures varies from year to year based on several factors, including lease expirations. We are contractually committed to incur expenditures of approximately $4.7 million in capital improvements, tenant improvements, and leasing commissions for the One Commerce Square and Two Commerce Square properties, collectively, during 2010 through 2013.
Annual capital expenditures may fluctuate in response to the nature, extent and timing of improvements required to maintain our properties. Tenant improvements and leasing costs may also fluctuate depending upon other factors, including the type of property involved, the existing tenant base, terms of leases, types of leases, the involvement of leasing agents and overall market conditions.
46
Contractual Obligations
A summary of our contractual obligations at December 31, 2009 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | Thereafter | | Total |
Regularly scheduled principal payments (2) | | $ | 4,400 | | $ | 1,971 | | $ | 2,161 | | $ | 1,946 | | $ | 1,884 | | $ | 1,996 | | $ | 14,358 |
Balloon payments due at maturity (1)(2) | | | 36,955 | | | 17,000 | | | 22,277 | | | 106,437 | | | — | | | 121,209 | | | 303,878 |
Interest payments—fixed rate debt (3) | | | 14,357 | | | 14,290 | | | 14,205 | | | 10,055 | | | 7,135 | | | 7,615 | | | 67,657 |
Interest payments—variable rate debt (3) | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Capital commitments (4) | | | 5,667 | | | 11 | | | — | | | 235 | | | — | | | — | | | 5,913 |
Operating lease (5) | | | 298 | | | 310 | | | 322 | | | 335 | | | 122 | | | — | | | 1,387 |
Obligations associated with uncertain tax positions (6) | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
| | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 61,677 | | $ | 33,582 | | $ | 38,965 | | $ | 119,008 | | $ | 9,141 | | $ | 130,820 | | $ | 393,193 |
| | | | | | | | | | | | | | | | | | | | | |
| (1) | The Murano construction loan has a balance of $37.0 million as of December 31, 2009 with a maturity date of July 31, 2010. There are no extension options remaining on this loan. This loan is nonrecourse to the Company, but the Company guarantees the payment of interest during the term of the loan. We amortize the principal balance of the Murano construction loan with approximately 93% of the sales proceeds as we close on the sale of condominium units. Subsequent to December 31, 2009, we closed on the sale of four units and we have eleven units under contract and expected to close, which will cumulatively reduce the principal balance by approximately $7.6 million. We are in discussions with the lender to extend the loan maturity to 2011, which based on the principal amortization feature of the loan, we believe is achievable. If we are unable to extend or refinance the loan, the lender could repossess the unsold units through foreclosure, which would result in an additional non-cash impairment charge. We have no guarantees on this debt other than the payment of interest through the maturity date. We do not earn any fee revenue from this project. |
| (2) | On October 13, 2009, the Four Points Centre construction loan in the amount of $26.2 million was extended to July 31, 2012 with two one-year extension options subject to certain conditions. We have provided a guarantee for a portion of principal and interest payable. We have also provided additional collateral of approximately 62.4 acres of fully entitled unimproved land, which is immediately adjacent to our Four Points Centre office buildings. We have committed to pay down the principal amount of the loan in the total amount of $7.8 million, of which we paid $3.9 million in October, 2009, $1.3 million in January, 2010 and we will pay the balance in two equal installments, in June and December, 2010. The loan has an unfunded balance of $10.4 million which is available to fund any remaining project costs. In addition, we paid $2.225 million in June 2009 which was held by the lender to fund any remaining project costs. As of December 31, 2009, these funds were fully disbursed. The interest rate on the loan has been increased to LIBOR plus 3.50% per annum. The balance of the loan as of December 31, 2009 was $26.2 million. |
| (3) | As of December 31, 2009, 75.0% of our debt was at contractually fixed rates. The information in the table above reflects our projected interest obligations for the fixed-rate payments based on the contractual interest rates and scheduled maturity dates. The remaining 25.0% of our debt bears interest at variable rates based on LIBOR plus a spread that ranges from 1.5% to 3.3%. The interest payments on the variable rate debt have not been reported in the table above because we cannot reasonably determine the future interest obligations on our variable rate debt as we cannot predict what LIBOR rates will be in the future. As of December 31, 2009, the one-month LIBOR was 0.23%. |
| (4) | Capital commitments of our company and consolidated subsidiaries include approximately $4.7 million of tenant improvements and leasing commissions for certain tenants in One Commerce Square and Two Commerce Square. We have an unfunded capital commitment of $1.2 million to our TPG/CalSTRS joint venture, which we estimate we will fund in 2010. We are not obligated to fund our share for the acquisition of any new project, but we are obligated to fund tenant improvements and other capital improvements for projects that were acquired prior to June 1, 2007. |
| (5) | Represents the future minimum lease payments on our operating lease for our corporate office at City National Plaza. The table does not reflect available extension options. |
| (6) | The obligations associated with uncertain tax provisions under FASB ASC 740 in the table above should represent amounts associated with uncertain tax positions related to temporary differences. However, reasonable estimates cannot be made about the amount and timing of payment, if any, for these obligations. As of December 31, 2009, $19.9 million of unrecognized tax benefits have been recorded as liabilities in accordance with FASB ASC 740, and we are uncertain as to if and when such amounts may be settled. Included within the unrecognized tax benefits is $2.1 million of accrued interest. We have not recorded any penalties with respect to unrecognized tax benefits. |
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Off-Balance Sheet Arrangements—Indebtedness of Unconsolidated Real Estate Entities
As of December 31, 2009, our company had investments in entities owning unconsolidated properties with stated ownership percentages ranging from 6.25% to 50.0%. We do not have sole control of these entities, and none of the entities are considered variable interest entities. Therefore, we account for them using the equity method of accounting. The table below summarizes the outstanding debt for the properties owned by our unconsolidated real estate entities as of December 31, 2009 (in thousands). For loans which had maturity dates extended subsequent to December 31, 2009, the new maturity date is reflected in the Maturity Date column. None of these loans are recourse to us other than as noted in footnote 9 below. Some of the loans listed in the table below subject TPG/CalSTRS to customary non-recourse carve out obligations.
| | | | | | | | | | | | | | |
| | | Interest Rate
at December 31,
2009 | | | Principal
Amount | | Maturity
Date | | Maturity
Date at end of
Extension Options |
City National Plaza (1)(2) | | | | | | | | | | | | | | |
Senior mortgage loan (3) | | LIBOR | | + | | 1.07 | % | | $ | 348,925 | | 7/9/2010 | | 7/9/2010 |
Senior mezzanine loan-Note A (3) | | LIBOR | | + | | 2.59 | % | | | 67,886 | | 7/9/2010 | | 7/9/2010 |
Senior mezzanine loan-Note B (3) | | LIBOR | | + | | 1.90 | % | | | 23,569 | | 7/9/2010 | | 7/9/2010 |
Senior mezzanine loan-Note C (3) | | LIBOR | | + | | 2.25 | % | | | 23,569 | | 7/9/2010 | | 7/9/2010 |
Senior mezzanine loan-Note D (3) | | LIBOR | | + | | 2.50 | % | | | 23,569 | | 7/9/2010 | | 7/9/2010 |
Senior mezzanine loan-Note E (3) | | LIBOR | | + | | 3.05 | % | | | 22,293 | | 7/9/2010 | | 7/9/2010 |
Junior mezzanine loan (3) | | LIBOR | | + | | 5.00 | % | | | 58,188 | | 7/9/2010 | | 7/9/2010 |
Note payable to former partner | | | | | | 5.75 | % | | | 19,758 | | 7/1/2012 | | 1/4/2016 |
CityWestPlace | | | | | | | | | | | | | | |
Fixed | | | | | | 6.16 | % | | | 121,000 | | 7/6/2016 | | 7/6/2016 |
Floating (3)(4) | | LIBOR | | + | | 1.25 | % | | | 92,400 | | 7/1/2010 | | 7/1/2011 |
San Felipe Plaza | | | | | | | | | | | | | | |
Mortgage loan-Note A (15) | | | | | | 5.28 | % | | | 101,500 | | 8/11/2010 | | 8/11/2010 |
Mortgage loan-Note B (15) | | LIBOR | | + | | 3.00 | % | | | 16,200 | | 8/11/2010 | | 8/11/2010 |
2500 City West | | | | | | | | | | | | | | |
Mortgage loan-Note A (15) | | | | | | 5.28 | % | | | 70,000 | | 8/11/2010 | | 8/11/2010 |
Mortgage loan-Note B (15) | | LIBOR | | + | | 3.00 | % | | | 14,132 | | 8/11/2010 | | 8/11/2010 |
Brookhollow Central I, II and III | | | | | | | | | | | | | | |
Mortgage loan-Note A (3) (15) | | LIBOR | | + | | 0.44 | % | | | 24,154 | | 8/9/2010 | | 8/9/2010 |
Mortgage loan-Note B (3) (15) | | LIBOR | | + | | 4.25 | % | | | 10,893 | | 8/9/2010 | | 8/9/2010 |
Mortgage loan-Note C (3) (15) | | LIBOR | | + | | 4.86 | % | | | 16,746 | | 8/9/2010 | | 8/9/2010 |
Four Falls Corporate Center | | | | | | | | | | | | | | |
Mortgage loan-Note A | | | | | | 5.31 | % | | | 42,200 | | 3/6/2010 | | 3/6/2010 |
Mortgage loan-Note B (3)(5)(6)(7) | | LIBOR | | + | | 3.25 | % | | | 9,867 | | 3/6/2010 | | 3/6/2010 |
Oak Hill Plaza/Walnut Hill Plaza | | | | | | | | | | | | | | |
Mortgage loan-Note A | | | | | | 5.31 | % | | | 35,300 | | 3/6/2010 | | 3/6/2010 |
Mortgage loan-Note B (3)(5)(7)(8) | | LIBOR | | + | | 3.25 | % | | | 9,152 | | 3/6/2010 | | 3/6/2010 |
2121 Market Street mortgage loan (9) | | | | | | 6.05 | % | | | 18,508 | | 8/1/2033 | | 8/1/2033 |
Reflections I mortgage loan | | | | | | 5.23 | % | | | 21,788 | | 4/1/2015 | | 4/1/2015 |
Reflections II mortgage loan | | | | | | 5.22 | % | | | 9,077 | | 4/1/2015 | | 4/1/2015 |
Centerpointe I & II (10) | | | | | | | | | | | | | | |
Senior mortgage loan (3) | | LIBOR | | + | | 0.60 | % | | | 55,000 | | 2/9/2011 | | 2/9/2012 |
Mezzanine loan-Note A (3) | | LIBOR | | + | | 1.51 | % | | | 25,000 | | 2/9/2011 | | 2/9/2012 |
Mezzanine loan-Note B (3) | | LIBOR | | + | | 2.49 | % | | | 21,618 | | 2/9/2011 | | 2/9/2012 |
Mezzanine loan-Note C (3) | | LIBOR | | + | | 3.26 | % | | | 22,162 | | 2/9/2011 | | 2/9/2012 |
Fair Oaks Plaza | | | | | | 5.52 | % | | | 44,300 | | 2/9/2017 | | 2/9/2017 |
Austin Portfolio Joint Venture Properties: | | | | | | | | | | | | | | |
San Jacinto Center | | | | | | | | | | | | | | |
Mortgage loan-Note A | | | | | | 6.05 | % | | | 43,000 | | 6/11/2017 | | 6/11/2017 |
Mortgage loan-Note B | | | | | | 6.05 | % | | | 58,000 | | 6/11/2017 | | 6/11/2017 |
Frost Bank Tower | | | | | | | | | | | | | | |
Mortgage loan-Note A | | | | | | 6.06 | % | | | 61,300 | | 6/11/2017 | | 6/11/2017 |
Mortgage loan-Note B | | | | | | 6.06 | % | | | 88,700 | | 6/11/2017 | | 6/11/2017 |
One Congress Plaza | | | | | | | | | | | | | | |
Mortgage loan-Note A | | | | | | 6.08 | % | | | 57,000 | | 6/11/2017 | | 6/11/2017 |
Mortgage loan-Note B | | | | | | 6.08 | % | | | 71,000 | | 6/11/2017 | | 6/11/2017 |
One American Center | | | | | | | | | | | | | | |
Mortgage loan-Note A | | | | | | 6.03 | % | | | 50,900 | | 6/11/2017 | | 6/11/2017 |
Mortgage loan-Note B | | | | | | 6.03 | % | | | 69,100 | | 6/11/2017 | | 6/11/2017 |
300 West 6th Street | | | | | | 6.01 | % | | | 127,000 | | 6/11/2017 | | 6/11/2017 |
Research Park Plaza I & II | | | | | | | | | | | | | | |
Senior mortgage loan (3)(11) | | LIBOR | | + | | 0.55 | % | | | 23,560 | | 6/9/2010 | | 6/9/2012 |
Mezzanine loan (3)(11) | | LIBOR | | + | | 2.01 | % | | | 27,940 | | 6/9/2010 | | 6/9/2012 |
Stonebridge Plaza II | | | | | | | | | | | | | | |
Senior mortgage loan (3)(11) | | LIBOR | | + | | 0.63 | % | | | 19,800 | | 6/9/2010 | | 6/9/2012 |
Mezzanine loan (3)(11) | | LIBOR | | + | | 1.76 | % | | | 17,700 | | 6/9/2010 | | 6/9/2012 |
Austin Portfolio Bank Term Loan (12)(13) | | LIBOR | | + | | 3.25 | % | | | 115,675 | | 6/1/2013 | | 6/1/2014 |
Austin Senior Secured Priority Facility (14) | | 10% | | - | | 20 | % | | | 21,617 | | 6/1/2012 | | 6/1/2012 |
| | | | | | | | | | | | | | |
Total outstanding debt of unconsolidated properties | | | $ | 2,221,046 | | | | |
| | | | | | | | | | | | | | |
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The 30 day LIBOR rate for the loans above was 0.23% at December 31, 2009, except for the Austin Bank Term Loan (see footnotes 13 and 14).
| (1) | The City National Plaza senior mortgage loan and Notes B, C, D and E under the senior mezzanine loans are subject to exit fees equal to 0.25% of the loan amounts. Note A under the senior mezzanine loan and the junior mezzanine loan are subject to an exit fee equal to 0.5% of the loan amount. Under certain circumstances all of the exit fees will be waived. |
| (2) | Subsequent to December 31, 2009, we negotiated on behalf of CalSTRS, our partner in City National Plaza, for CalSTRS to acquire all of the property’s mezzanine debt, which has a principal balance of approximately $219.1 million, and is scheduled to mature on July 9, 2010. CalSTRS acquired this debt and will contribute it to the partnership’s equity, reducing the leverage on the property from $568.0 million to $348.9 million, all of which is first mortgage debt. We are in discussions with CalSTRS to obtain an option to participate in the loan purchase, on or after the maturity of the mezzanine debt, based on our current pro rata share of 25% of the existing City National Plaza equity. We are in discussions with lenders to refinance the senior mortgage loan. We believe there is sufficient equity in this project to achieve a refinancing. If TPG/CalSTRS is unable to extend or refinance this loan, the lender could repossess the property through foreclosure, which would result in a non-cash impairment charge, potential loss of distributable cash flow and a loss of fee revenue for us. |
| (3) | The partnership that owns each property has purchased interest rate cap agreements for the funded portion of these loans. |
| (4) | This loan has a one-year extension option remaining at our election. |
| (5) | These loans are subject to exit fees equal to 1% of the loan amounts, however, under certain circumstances the exit fees will be waived. These loans bear interest at the greater of the one month LIBOR or 2.25% per annum, plus the applicable margin. As of December 31, 2009, one month LIBOR is below 2.25%, per annum. |
| (6) | This loan is secured by both a subordinate lien on the property and a payment guaranty issued by the special purpose entity which owns Oak Hill Plaza/Walnut Hill Plaza. |
| (7) | A subsidiary of TPG/CalSTRS (the “Borrower”) was unable to repay the loan by the maturity date of March 6, 2010 and therefore, the loan is in default. Pending a resolution of the loan default, either through a restructure of the debt, a sale or other transfer of the properties or the appointment of a receiver, we expect that we will continue to manage the properties pursuant to our management agreement with the Borrower. The management and leasing agreement expired on March 1, 2010, and is automatically renewed for successive periods of one year each, unless we elect not to renew the agreement. Due to the maturity date default, the lender has the authority to terminate us as the property manager. If the Borrower is unable to extend or refinance this loan, the lender could repossess the property through foreclosure, which would result in a loss of fee revenue for us. Refer to footnote 3 and footnote 4 in the TPG/CalSTRS financial statements for further details of the TPG/CalSTRS’ debt and related party arrangements. |
| (8) | This loan is secured by both a subordinate lien on the property and a payment guaranty issued by the special purpose entity which owns Four Falls Corporate Center. |
| (9) | The 2121 Market Street mortgage loan is prepayable without penalty after May 1, 2013, at which date the outstanding principal amount of this loan will be approximately $17.2 million. The interest rate will increase to the greater of 8.1% or the treasury rate plus 2.0% on August 1, 2013. Any amounts over the initial interest rate may be deferred to the extent excess cash is not available to make such payments. Provided there is no deferred interest, the loan balance will be fully amortized on August 1, 2033, the maturity date of the loan. The loan is guaranteed by our Operating Partnership and our co-general partner in the partnership that owns 2121 Market Street, up to a maximum amount of $3.3 million. |
| (10) | The Centerpointe I & II senior mortgage loan bears interest at a rate equal to one month LIBOR plus 0.60%. The mezzanine loans bear interest at a rate such that the weighted average of the rate on these loans and the |
49
| | rate on the senior mortgage loan secured by Centerpointe I & II equals LIBOR plus 1.59% per annum. The weighted average interest rate on the mezzanine loans as of December 31, 2009 was 2.6% per annum. The weighted average interest rate on all of the loans was 1.8% per annum. All of these loans have one one-year extension option remaining at our election subject to a debt service coverage ratio of 1:1. |
| (11) | These loans have two one-year extension options at our election. |
| (12) | During 2008, the Austin Portfolio Joint Venture entered into an interest rate collar agreement for $96.25 million, in which it bought a cap and sold a floor. On December 18, 2009, we entered into a settlement agreement with Lehman Brothers Holdings Inc. to terminate the interest rate collar agreement for TPG Austin Portfolio Holdings LLC. The Company settled this obligation with the Lehman affiliate on January 25, 2010. |
| (13) | The margin above LIBOR on the bank term loan is subject to adjustment under certain circumstances. The term loan is secured by mortgages on three of the Austin Portfolio Joint Venture properties and a pledge of equity interests in the remaining seven Austin Portfolio Joint Venture properties. These mortgage liens and equity pledges also secure the Austin senior secured priority facility, which has a priority right to repayment ahead of the Austin Portfolio Bank Term Loan. |
| (14) | During 2009, TPG-Austin Portfolio Holdings LP entered into agreements pursuant to which (i) an existing $100 million revolving loan was terminated, (ii) a senior secured priority facility of $60 million was established which a subsidiary of TPG/CalSTRS agreed to fund 25% on a pari passu basis with affiliates of Lehman Brothers and a sovereign wealth fund that are partners in the Austin Portfolio Joint Venture, and (iii) the venture purchased and retired $80 million of the Austin Portfolio bank term loan at a discount to face value, reducing that loan from $192.5 million to $112.5 million. The new $60 million Austin senior secured priority facility, which has a priority right to repayment ahead of the Austin Portfolio bank term loan, is senior in payment and right to the collateral to the bank term loan. The Austin senior secured priority facility bears interest at 10% per annum on the first $24 million, 15% per annum on the next $12 million and 20% per annum on the last $24 million. This restructure resolved the claims of the Austin Portfolio Joint Venture against Lehman arising from Lehman’s failure to fund the $100 million revolving loan. |
| (15) | We are in discussions with the lender to refinance this loan. We believe there is sufficient equity in this project to achieve a refinancing. If TPG/CalSTRS is unable to extend or refinance this loan, the lender could repossess the property through foreclosure, which would result in a non-cash impairment charge, potential loss of distributable cash flow and a loss of fee revenue for us. |
Cash Flows
Comparison of year ended December 31, 2009 to year ended December 31, 2008
Cash and cash equivalents were $35.9 million as of December 31, 2009 and $69.0 million as of December 31, 2008.
Operating Activities—Net cash used in operating activities was $6.9 million for the year ended December 31, 2009, which represented a decrease of $9.1 million from the net cash provided by operations of $2.2 million for the year ended December 31, 2008. The decrease was primarily the result of an increase in net loss of $25.1 million attributable to the Company.
Investing Activities—Net cash used in investing activities decreased by $58.0 million to $22.5 million provided by investing activities for the year ended December 31, 2009 compared to $35.5 million utilized in investing activities for the year ended December 31, 2008. The increase was primarily the result of a decrease in expenditures for real estate improvements of $86.2 million offset by lower proceeds from the sale of Murano condominiums of $30.8 million
Financing Activities—Net cash used in financing activities increased by $24.3 million to $48.6 million for the year ended December 31, 2009 compared to $24.3 million used in financing activities for the year ended December 31, 2008. The increase was primarily the result of a reduction of proceeds from mortgage and other secured loans of $67.0 million. The increase was offset by a decrease of $19.6 million related to principal payments of mortgage and other secured loans, $13.1 million in proceeds from a registered direct equity offering
50
during the year ended December 31, 2009 and a decrease of $5.6 million related to the payment of dividends to common stockholders and distributions to limited partners of the operating partnership.
Comparison of year ended December 31, 2008 to year ended December 31, 2007
Cash and cash equivalents were $69.0 million as of December 31, 2008 and $126.7 million as of December 31, 2007.
Operating Activities—Net cash provided by operating activities decreased by $43.3 million to $2.2 million for the year ended December 31, 2008 compared to $45.5 million for the year ended December 31, 2007. The decrease was primarily the result of an increase in net loss of $4.6 million attributable to the Company, gain on sale of Murano condominiums of $17.3 million, a decrease of $35.4 million in accounts payable and other liabilities and a decrease in deferred rents of $2.5 million primarily due to lease expirations for Conrail . The decreases were offset by the Murano impairment loss of $11.0 million and a decrease in receivables from unconsolidated subsidiaries resulting in payments of $4.5 million for lease commissions and other fees.
Investing Activities—Net cash used in investing activities decreased by $104.4 million to $35.5 million for the year ended December 31, 2008 compared to $139.9 million for the year ended December 31, 2007. The decrease was primarily the result of a decrease in expenditures for real estate improvements of $22.5 million, proceeds of $69.3 million received from the sale of Murano condominiums and a decrease of $18.8 million related to acquisitions of unconsolidated real estate entities. The increases were offset by $4.0 million used for the purchase of interests in One Commerce Square and Two Commerce Square and a decrease in the return of capital from unconsolidated real estate entities of $3.1 million.
Financing Activities—Net cash provided by financing activities decreased by $181.0 million to $24.3 million utilized for the year ended December 31, 2008 compared to $156.7 million provided by financing activities for the year ended December 31, 2007. The decrease was primarily the result of proceeds from our April 2007 public offering, net of offering costs, of $139.3 million and a decrease of $69.8 million related to principal payments of the Murano loans. The decreases were offset by $33.6 million related to payments for the redemption of operating units in 2007.
Inflation
Substantially all of our office leases provide for tenants to reimburse us for increases in real estate taxes and operating expenses related to the leased space at the applicable property. In addition, many of the leases provide for increases in fixed base rent. We believe that inflationary increases in real estate taxes and operating expenses may be partially offset by the contractual rent increases and expense reimbursements as described above. We have one multi-family residential rental property, which is located in the Philadelphia central business district and subject to short-term leases. Inflationary increases can often be offset by increased rental rates; however, a weak economic environment may restrict our ability to raise rental rates.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
A primary market risk faced by our company is interest rate risk. Our strategy is to match as closely as possible the expected holding periods and income streams of our assets with the terms of our debt. In general, we use floating rate debt on assets with higher growth prospects and less stability to their income streams. Correspondingly, with respect to stabilized assets with lower growth rates, we will generally use longer-term fixed-rate debt. As of December 31, 2009, our company had $80.1 million of outstanding consolidated floating rate debt, which is not subject to an interest rate cap.
The unconsolidated real estate entities have total debt of $2.2 billion, of which $1.1 billion bears interest at floating rates. As of December 31, 2009, interest rate caps have been purchased for $0.9 billion of the floating rate loans.
51
Our fixed and variable rate consolidated long-term debt at December 31, 2009 consisted of the following (in thousands):
| | | | | | | | | | | | |
Year of Maturity | | Fixed Rate | | | Variable
Rate | | | Total | |
2010 | | $ | 500 | | | $ | 40,855 | | | $ | 41,355 | |
2011 | | | 1,971 | | | | 17,000 | | | | 18,971 | |
2012 | | | 2,161 | | | | 22,277 | | | | 24,438 | |
2013 | | | 108,383 | | | | — | | | | 108,383 | |
2014 | | | 1,884 | | | | — | | | | 1,884 | |
Thereafter | | | 123,205 | | | | — | | | | 123,205 | |
| | | | | | | | | | | | |
Total | | $ | 238,104 | | | $ | 80,132 | | | $ | 318,236 | |
| | | | | | | | | | | | |
Weighted average interest rate | | | 5.95 | % | | | 4.90 | % | | | 5.69 | % |
We utilize sensitivity analyses to assess the potential effect on interest costs of our variable rate debt. At December 31, 2009, our variable rate long-term debt represents 25.2% of our total long-term debt. If interest rates were to increase by 75 basis points, or by approximately 15.3% of the weighted average variable rate at December 31, 2009, the net impact would be increased interest costs of $0.6 million per year.
Our estimates of the fair value of debt instruments at December 31, 2009 and 2008, respectively, were determined by performing discounted cash flow analyses using an appropriate market discount rate. Considerable judgment is necessary to interpret market data and develop the estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.
As of December 31, 2009 and 2008, the estimated fair value of our mortgage and other secured loans and unsecured loan aggregates $285.9 million and $364.1 million, respectively, compared to the aggregate carrying value of $318.2 million and $387.9 million, respectively.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements and supplementary data required by this Item 8 are filed with this report on Form 10-K commencing on page 59.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
52
As required by Rule 13a-15(b), promulgated by the SEC under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our management evaluated the effectiveness of our internal control over financial reporting based on the framework set forth inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009. Ernst & Young LLP, our independent registered public accounting firm, has audited our internal control over financial reporting as of December 31, 2009 and their attestation report is included in this Annual Report on Form 10-K.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting as defined in Rules 13a-15(f) or 15(d)-15(f) under the Exchange Act that occurred during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Thomas Properties Group, Inc.:
We have audited Thomas Properties Group, Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2009, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Annual Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity and noncontrolling interests and cash flows for each of the three years in the period ended December 31, 2009 of Thomas Properties Group, Inc. and Subsidiaries’ , and our report dated March 19, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
March 19, 2010
54
| ITEM 9B. | OTHER INFORMATION |
None.
55
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Executive officers are elected annually by the Board of Directors and serve at the discretion of the Board. The following table sets forth certain information regarding our directors and executive officers as of March 19, 2010. The information concerning Section 16(a) beneficial ownership reporting and corporate governance, including our nominating committee process, and audit committee members, will be included in the Proxy Statement to be filed relating to our 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
| | | | |
Name | | Age | | Position |
James A. Thomas | | 73 | | Chairman of the Board, President and Chief Executive Officer |
R. Bruce Andrews | | 69 | | Director |
Edward D. Fox | | 62 | | Director |
John Goolsby | | 68 | | Director |
Winston H. Hickox | | 67 | | Director |
Thomas S. Ricci | | 52 | | Executive Vice President |
Paul S. Rutter | | 56 | | Executive Vice President and General Counsel |
Randall L. Scott | | 54 | | Executive Vice President and Director |
John R. Sischo | | 53 | | Executive Vice President and Director |
Diana M. Laing | | 55 | | Chief Financial Officer and Secretary |
Robert D. Morgan | | 44 | | Senior Vice President, Accounting and Administration |
James A. Thomas serves as our Chairman of the Board, President and Chief Executive Officer. Mr. Thomas has served on our Board of Directors since the Company was organized in March 2004. Mr. Thomas founded our predecessor group of entities, and served as the Chairman of the Board and Chief Executive Officer of our predecessor group of entities from 1996 to the commencement of our operations in October 2004. Prior to founding our predecessor group of entities, Mr. Thomas served as a co-managing partner of Maguire Thomas Partners, a national full-service real estate operating company from 1983 to 1996. In 1996, Maguire Thomas Partners was divided into two companies with Mr. Thomas forming our predecessor group of entities with other key members of the former executive management at Maguire Thomas Partners. Mr. Thomas also served as Chief Executive Officer and principal owner of the Sacramento Kings NBA Basketball team and the ARCO Arena from 1992 until 1999. He is a member of the Real Estate Roundtable and the National Association of Real Estate Investment Trusts (NAREIT). Mr. Thomas is a current member and a former Chairman of the board of directors of Town Hall Los Angeles, and serves on the board of directors of the SOS Coral Trees, Los Angeles Chamber of Commerce, Center Theatre Group, and the National Advisory Council of the Cleveland Marshall School of Law. He serves on the board of trustees of the Ralph M. Parsons Foundation and I Have a Dream Foundation in Los Angeles, Baldwin Wallace College in Cleveland, and St. John’s Health Center Foundation in Santa Monica, California. Mr. Thomas also serves on the board of governors of the Music Center of Los Angeles County. He is a member of the Chairman Council of the Weingart Center Association, and the Colonial Williamsburg National Council. Additionally, Mr. Thomas is the Founder and Chairman of Fixing Angelenos Stuck in Traffic (F.A.S.T.). Mr. Thomas received his Bachelor of Arts degree in economics and political science with honors from Baldwin Wallace College in 1959. He graduatedmagna cum laude with a juris doctorate degree in 1963 from Cleveland Marshall Law School.
R. Bruce Andrews has been a member of our Board of Directors since October 2004. Until his retirement in April 2004, Mr. Andrews served as the President and Chief Executive Officer of Nationwide Health Properties, Inc., a real estate investment trust, which position he had held since September 1989. Mr. Andrews’ previous experience includes serving in various capacities including Chief Financial Officer, Chief Operating
56
Officer and Director of American Medical International. He began his career as an auditor with Arthur Andersen and Company. Mr. Andrews currently serves on the board of directors for Nationwide Health Properties, Inc. Mr. Andrews graduated from Arizona State University with a Bachelor of Science degree in accounting.
Edward D. Fox has been a member of our Board of Directors since October 2004. Since January 2003, Mr. Fox has served as Chairman and Chief Executive Officer of Vantage Property Investors, LLC, a private real estate investment and development company. Prior to 2003, Mr. Fox was Chairman and Chief Executive Officer of Center Trust, a real estate investment trust, from 1998 to January 2003 when Center Trust was acquired by Pan Pacific Retail Properties. Mr. Fox co-founded and served as the Chairman of CommonWealth Partners, a fully integrated real estate operating company, from 1995 through October 2003. Prior to forming CommonWealth Partners, Mr. Fox was a senior partner with Maguire Thomas Partners. A certified public accountant, Mr. Fox started his career in public accounting specializing in real estate transactions. Mr. Fox serves on the Dean’s advisory council for the USC School of Architecture and the board of directors of the Orthopaedic Hospital Foundation and the Los Angeles Boy Scouts. He is a member of the International Council of Shopping Centers, Urban Land Institute and the American Institute of Certified Public Accountants. He received a bachelor’s degree in accounting and a master’s degree in business, both with honors, from the University of Southern California.
John L. Goolsby has been a member of the Board of Directors since May 2006. He is a private investor and from 1988 until his retirement in 1998, he served as the President and Chief Executive Officer of The Howard Hughes Corporation, a real estate development company. He currently serves as a director of Tejon Ranch Company. Mr. Goolsby formerly served as a director of America West Airlines from 1994 until 2005 and Sierra Pacific Resources and its predecessor, Nevada Power Company, from 1989 until 2001. He served as a trustee of the Donald W. Reynolds Foundation from 1994 until 2005. Mr. Goolsby received a B.B.A. from the University of Texas at Arlington and is a certified public accountant in Texas.
Winston H. Hickox has been a member of our Board of Directors since October 2004. Since September 2006 he has been a partner in the government affairs consulting firm California Strategies, LLC. From June 2004 to July 2006, he was a Senior Portfolio Manager for the California Public Employees Retirement System, responsible for the design and implementation of environmental investment initiatives. From January 1999 to November 2003, Mr. Hickox served as Secretary of the California Environmental Protection Agency, and was responsible for a broad range of programs created to protect California’s human and environmental health. From December 1994 to May 1998, Mr. Hickox was a partner in LaSalle Advisors, Ltd. Prior to joining LaSalle Advisors, Ltd., Mr. Hickox was a Managing Director with Alex, Brown Kleinwort Benson Realty Advisors Corp. From April 1997 to January 1999, Mr. Hickox served as an alternate Commissioner on the California Coastal Commission. He was President of the California League of Conservation Voters from 1990 to 1994. He is currently a member of the board of Cadiz, Inc. and the Sacramento County Employees’ Retirement System. Mr. Hickox is a graduate of the California State University at Sacramento with a bachelor of science degree in business administration in 1965, and obtained a master of business administration degree in 1972 from Golden Gate University.
Thomas S. Ricci has served us as an Executive Vice President since April 2004. He served as Senior Vice President of our predecessor group of entities from May 1998 with oversight of business development and development services. From February 1992 through May 1998, Mr. Ricci was the vice president of planning and entitlements at Maguire Thomas Partners, Playa Capital Company division. As a senior executive at Maguire Thomas Partners, Mr. Ricci worked on several large mixed-use and commercial projects. Prior to joining Maguire Thomas Partners in 1987, Mr. Ricci was a Captain in the U.S. Air Force, where he was involved in planning, programming, design and construction of medical facilities at locations in the United States and abroad. Mr. Ricci is currently involved in various civic and professional organizations and serves as a member of the board of trustees of Marymount College in Rancho Palos Verdes, California. Mr. Ricci holds a bachelor of science degree and a bachelor of architecture degree with honors from the New York Institute of Technology.
Paul S. Rutter has served us as an Executive Vice President and General Counsel since September 2008. After practicing law with James A. Thomas from 1978 to 1983, Mr. Rutter cofounded Gilchrist & Rutter Professional Corporation, a real estate law firm in Los Angeles, in 1983 and served as Managing Shareholder of the firm until 2006. His law practice included negotiating, structuring and documenting transactions and joint
57
ventures involving commercial real estate development, financing, leasing, acquisitions and dispositions. In 2006, he became Executive Vice President, Major Transactions, at Maguire Properties, a NYSE listed Real Estate Investment Trust, where he was a member of the Executive Management Committee and oversaw the leasing, acquisition and financing transactions of that company. Mr. Rutter is active in several real estate organizations and has served on the boards of several charitable and non-profit organizations. Mr. Rutter currently is a member of the Board of Advisors of University of California, Los Angeles School of Law. Mr. Rutter earned his A.B. degree (magna cum laude) from the University of California, Los Angeles, where he received Dean’s List honors, and was Pi Gamma Mu and Phi Beta Kappa. Mr. Rutter received his Juris Doctor degree (Order of the Coif) from the University of California, Los Angeles School of Law, where he served as Topic and Comment Editor for the U.C.L.A. Law Review. He is admitted to the bars of the State of California, the U.S. Tax Court, the U.S. Court of Federal Appeals and the United States Supreme Court.
Randall L. Scott serves us as an Executive Vice President and Director. Mr. Scott has been a member of our Board of Directors since April 2004. Mr. Scott directed asset management operations nationally and East Coast development activity for our predecessor group of entities from its inception in 1996 until the commencement of our operations in October 2004. Prior to the formation of our predecessor group of entities, Mr. Scott was with Maguire Thomas Partners from 1986 to August 1996. As a senior executive at Maguire Thomas Partners, Mr. Scott worked on several large-scale development projects, including One Commerce Square in Philadelphia and The Gas Company Tower in Los Angeles. Mr. Scott was also on the pre-development team for the CalEPA project in Sacramento and served in a general business development capacity. Mr. Scott is currently involved in various civic and professional organizations and serves on the board of directors of the Center City District, a Philadelphia non-profit special services organization and the board of trustees of Magee Rehabilitation Hospital, a Philadelphia-based specialty hospital providing medical rehabilitation services to people with physical disabilities. Mr. Scott holds a bachelor’s degree in business administration from Butler University in Indianapolis.
John R. Sischo serves us as an Executive Vice President and Director. Mr. Sischo has been a member of our Board of Directors since April 2004. Mr. Sischo leads the company’s acquisition, investment and finance efforts in addition to managing investor relationships which include major pension funds and financial institutions. Mr. Sischo joined Thomas Properties Group in 1998 as Chief Financial Officer after leading Bankers Trust’s real estate practice for eight years in Los Angeles. He has executed over $10 billion in real estate transactions both public and private during his 24 year career and has developed investment vehicles for the firm which have resulted in approximately $1.0 billion of equity capital for these funds. He started his real estate banking career with Merrill Lynch Capital Markets and then moved to Security Pacific Corporation. Mr. Sischo received a bachelor’s degree in political science from the University of California at Los Angeles.
Diana M. Laing serves as our Chief Financial Officer and Secretary, which positions she has held since May 2004. She is responsible for financial reporting oversight, capital markets transactions and investor relations. Prior to becoming a member of our senior management team, Ms. Laing served as Chief Financial Officer of Triple Net Properties, LLC from January 2004 through April 2004. From December 2001 to December 2003, Ms. Laing served as Chief Financial Officer of New Pacific Realty Corporation, and held this position at Firstsource Corp. from July 2000 to May 2001. Previously, Ms. Laing was Executive Vice President and Chief Financial Officer of Arden Realty, Inc., a publicly-traded REIT, from August 1996 to July 2000. From 1982 to August 1996, she was Chief Financial Officer of Southwest Property Trust, Inc., a publicly-traded multi-family REIT. She is a member of the board of directors, chairman of the audit committee and a member of the compensation committee for The Macerich Company, a publicly-traded REIT. Ms. Laing holds a bachelor of science degree in accounting from Oklahoma State University.
Robert D. Morgan serves us as a Senior Vice President responsible for accounting and administration. He served us as a Vice President from April 2004 to December 2006 in the same capacity. Mr. Morgan joined our predecessor group of entities in March 2000 from Arthur Andersen LLP, where he spent 10 years in the real estate service group. At Arthur Andersen, Mr. Morgan was a Senior Manager specializing in providing audit and
58
transaction due diligence services to real estate developers, owners, lenders and operators. Mr. Morgan earned a bachelor of science degree in business administration with a concentration in accounting from California Polytechnic State University at San Luis Obispo. Mr. Morgan is a certified public accountant, licensed by the State of California.
The information concerning our audit committee financial expert required by Item 10 will be included in the Proxy Statement to be filed relating to our 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees. This code is publicly available on our web site at www.tpgre.com. Any substantive amendments to the code and any grant of waiver from a provision of the code requiring disclosure under applicable SEC or Nasdaq rules will be disclosed by us in a report on Form 8-K.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information concerning our executive compensation and director compensation required by Item 11 will be included in the Proxy Statement to be filed relating to our 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information concerning our security ownership of certain beneficial owners and management required by Item 12 will be included in the Proxy Statement to be filed relating to our 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Incentive Plans
Equity Compensation Plan Information
The following table sets forth information with respect to our 2004 Equity Incentive Plan (“Incentive Plan”) and our Non-employee Directors Restricted Stock Plan under which equity incentives of our company and our Operating Partnership are authorized for issuance. The Incentive Plan provides incentives to our employees and is intended to attract, reward and retain personnel. Our Incentive Plan permits the granting of awards in the form of options to purchase common stock, restricted shares of common stock and restricted incentive units in our Operating Partnership. Our Non-employee Directors Restricted Stock Plan provides for initial and annual grants to our non-employee directors.
Under the original Plan, we were allowed to issue up to 1,392,858 shares reserved under the Incentive Plan as either restricted stock awards or incentive unit awards and up to 619,048 shares upon the exercise of options granted pursuant to the Incentive Plan. At the Annual Meeting of shareholders in May 2007, the shareholders approved an increase in the number of shares of common stock reserved for issuance or transfer under the Plan from 2,011,906 shares to a total of 2,361,906. In addition, the restrictions on the aggregate number of shares that may be issued or transferred with respect to specified awards granted under the Plan were eliminated. At the Annual Meeting of Shareholders in June 2008, the shareholders approved an increase in the number of shares of the common stock reserved for issuance or transfer under the plan from 2,361,906 shares to a total of 3,361,906 shares. Under our Non-Employee Directors Restricted Stock Plan (“the Non-Employee Directors Plan”) a total of 60,000 shares are reserved for grant and as of December 31, 2009, 29,065 shares remain available for grant. Restricted shares granted under each of our plans entitle the holder to full voting rights and the holder will receive any dividends paid.
59
We have no equity compensation plans that were not approved by our security holders.
| | | | | | | | | |
Plan category | | Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights | | | Weighted-average
exercise price of
outstanding
options, warrants
and rights | | Number of securities
remaining available
for future issuance
under compensation
plans | |
Equity compensation plans approved by security holders at December 31, 2009 | | 667,694 | (1) | | $ | 12.75 | | 672,786 | (2) |
| (1) | In addition there were 206,110 vested incentive units outstanding and 259,444 unvested incentive units outstanding under our Incentive Plan at December 31, 2009. |
| (2) | Consists of 643,721 remaining available for grant under the Incentive Plan at December 31, 2009 and 29,065 remaining available for grant under the Non-employee director plan at December 31, 2009. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information concerning certain relationships and related transactions and director independence required by Item 13 will be included in the Proxy Statement to be filed relating to our 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information concerning our principal accounting fees and services required by Item 14 will be included in the Proxy Statement to be filed relating to our 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
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PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) Financial Statements and Financial Statement Schedules
The following consolidated financial information is included as a separate section of this report on Form 10-K:
INDEX TO FINANCIAL STATEMENTS
| | |
| | | Page |
Thomas Properties Group, Inc. and Subsidiaries: | | |
Report of Independent Registered Public Accounting Firm | | 64 |
Consolidated Balance Sheets as of December 31, 2009 and 2008 | | 65 |
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007 | | 66 |
Consolidated Statements of Equity and Noncontrolling Interests for the years ended December 31, 2009, 2008 and 2007 | | 67 |
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007 | | 68 |
Notes to Consolidated Financial Information | | 70 |
Schedule III: Investments in Real Estate | | 110 |
| |
TPG/CalSTRS, LLC: | | |
Report of Independent Registered Public Accounting Firm | | 111 |
Consolidated Balance Sheets as of December 31, 2009 and 2008 | | 112 |
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007 | | 113 |
Consolidated Statements of Members’ Equity and Comprehensive Loss for the years ended December 31, 2009, 2008 and 2007 | | 114 |
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007 | | 115 |
Notes to Consolidated Financial Information | | 116 |
(b) Exhibits
| | |
| 3.1 | | Second Amended and Restated Certificate of Incorporation of the Registrant. (1) |
| |
| 3.2 | | Amended and Restated Bylaws of the Registrant. (2) |
| |
| 10.1* | | Amended and Restated 2004 Equity Incentive Plan (3) |
| |
| 10.2 | | Operating Partnership Agreement. (4) |
| |
| 10.3 | | Master Contribution Agreement entered into by James A. Thomas and the other contributors party thereto. (4) |
| |
| 10.4 | | Non-employee Directors Restricted Stock Plan. (4) |
| |
| 10.5 | | Pairing Agreement between the Registrant and its Operating Partnership. (4) |
| |
| 10.6 | | Form of Indemnification Agreement entered into by the Registrant and each of its directors and executive officers. (5) |
| |
| 10.7* | | Amended and Restated Employment Agreement between the Registrant and Mr. James A Thomas. (15) |
| |
| 10.8* | | Amended and Restated Employment Agreement between the Registrant and Mr. Thomas S. Ricci. (15) |
| |
| 10.9* | | Amended and Restated Employment Agreement between the Registrant and Mr. Randall L. Scott. (15) |
| |
| 10.10* | | Amended and Restated Employment Agreement between the Registrant and Mr. John R. Sischo. (15) |
| |
| 10.11* | | Amended and Restated Employment Agreement between the Registrant and Ms. Diana M. Laing. (15) |
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| | |
| 10.12+ | | Second Amended and Restated Operating Agreement of TPG/CalSTRS, LLC. (5) |
| |
| 10.13 | | Registration Rights Agreement between the Registrant and the parties thereto. (4) |
| |
| 10.14 | | Loan Agreement dated as of July 31, 2003 between Philadelphia Plaza-Phase II, LP as Borrower and Morgan Stanley Mortgage Capital, Inc. as Lender. |
| |
| 10.15 | | [intentionally omitted] |
| |
| 10.16 | | [intentionally omitted] |
| |
| 10.17 | | [intentionally omitted] |
| |
| 10.18 | | Thomas Properties Group, Inc. Form of Restricted Shares Award Agreement. (6) |
| |
| 10.19 | | Thomas Properties Group, Inc., Form of Incentive Unit Award Agreement. (6) |
| |
| 10.20 | | Thomas Properties Group, Inc. Form of Non-Qualified Option Award Agreement. (6) |
| |
| 10.21 | | Thomas Properties Group, Inc. Form of Non-employee Directors’ Restricted Shares Award Agreement. (6) |
| |
| 10.22 | | Loan Agreement between TPG Oak Hill/Walnut Hill, LLC and Greenwich Capital Financial Products, Inc. (6) |
| |
| 10.23 | | Loan Agreement between TPG Four Falls, LLC and Greenwich Capital Financial Products, Inc. (6) |
| |
| 10.24 | | Loan Agreement between TPG—San Felipe Plaza, L.P. and Nomura Credit & Capital, Inc. (7) |
| |
| 10.25 | | Loan Agreement between TPG—2500 City West, L.P. and Nomura Credit & Capital, Inc. (7) |
| |
| 10.26 | | Loan Agreement between TPG—BH/ICC, L.P. and Nomura Credit & Capital, Inc. (7) |
| |
| 10.27 | | Loan Agreement between TPG—Commerce Square Partners—Philadelphia Plaza, L.P. as borrower and Greenwich Capital Financial Products, Inc. as lender. (8) |
| |
| 10.28 | | Loan Agreement between TPG-2101 CityWest 1&2, L.P. and Greenwich Capital Financial Products, Inc. (9) |
| |
| 10.29 | | Loan Agreement between TPG-2101 CityWest 3&4, L.P. and Greenwich Capital Financial Products, Inc. (9) |
| |
| 10.30 | | Loan Agreement between 515/555 Flower Associates, LLC and Citigroup Global Markets Realty Corp. |
| |
| 10.31 | | Loan Agreement between 515/555 Flower Mezzanine Associates, LLC and Citigroup Global Markets Realty Corp. |
| |
| 10.32 | | Loan Agreement between 515/555 Flower Junior Mezzanine Associates, LLC and Citigroup Global Markets Realty Corp. |
| |
| 10.33 | | First Amendment to Second Amended and Restated Operating Agreement of TPG/CalSTRS, LLC. (10) |
| |
| 10.34 | | Second Amendment to Second Amended and Restated Operating Agreement of TPG/CalSTRS, LLC. (11) |
| |
| 10.35 | | Third Amendment to Second Amended and Restated Operating Agreement of TPG/CalSTRS, LLC. (12) |
| |
| 10.36 | | Limited Partnership Agreement of Thomas High Performance Green Fund, L.P. |
| |
| 10.37+ | | Letter Agreement Relating to Thomas High Performance Green Fund, L.P. with California State Teachers’ Retirement System. (12) |
| |
| 10.38* | | Employment Agreement between the Registrant and Mr. Paul S. Rutter. (13) |
| |
| 10.39* | | Policy adopted by the Compensation Committee regarding equity grants to executive officers. (14) |
62
| | |
| 10.40 | | Fourth Amendment to Second Amended and Restated Operating Agreement of TPG/CalSTRS, LLC. (16) |
| |
| 10.41 | | Third Modification Agreement between TPG - El Segundo Partners, LLC and Wells Fargo Bank (17) |
| |
| 10.42 | | Amended and Restated Repayment Guaranty by Thomas Properties Group, Inc. and Thomas Properties Group L.P. for TPG-El Segundo Partners, LLC Loan Agreement (17) |
| |
| 10.43 | | Second Modification Agreement between New TPG - Four Points, L.P. and Wells Fargo Bank (17) |
| |
| 10.44 | | Discounted Payoff Agreement between Philadelphia Plaza - Phase II, LP and DB Realty Mezzanine Investment Fund II, L.L.C. and DB Realty Mezzanine Parallel Fund II, LLC (17) |
| |
| 10.45 | | Master Agreement for Debt and Equity Restructure of City National Plaza (18) |
| |
| 10.46 | | Fifth Amendment to Second Amended and Restated Operating Agreement of TPG/CalSTRS, LLC. |
| |
| 10.47 | | Sixth Amendment to Second Amended and Restated Operating Agreement of TPG/CalSTRS, LLC. |
| |
| 10.48 | | Thomas Master Investments, LLC Contribution Agreement, Maguire Thomas Partners-Commerce Square II, Ltd Contribution Agreement, Maguire/Thomas Partners-Philadelphia, Ltd. Contribution Agreement |
| |
| 21.1 | | Subsidiaries of the Registrant. |
| |
| 23.1 | | Consent of Ernst & Young, LLP. |
| |
| 31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
In accordance with SEC Release 33-8212, the following exhibits are being furnished, and are not being filed as part of this report or as a separate disclosure document, and are not being incorporated by reference into any registration statement filed under the Securities Act of 1933.
| | |
| |
| 32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| 32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (1) | Incorporated by reference from the Registrant’s Report on Form 8-K filed October 18, 2004. |
| (2) | Incorporated by reference from the Registrant’s Report on Form 8-K filed January 4, 2008. |
| (3) | Incorporated by reference from the Registrant’s Definitive Proxy Statement filed April 29, 2008. |
| (4) | Incorporated by reference from the Registrant’s Report on Form 10-Q filed November 22, 2004. |
| (5) | Incorporated by reference from Registration Statement file number 333-114527. |
| (6) | Incorporated by reference from the Registrant’s Report on Form 10-K filed March 30, 2005. |
| (7) | Incorporated by reference from the Registrant’s Report on Form 10-Q filed August 10, 2005. |
| (8) | Incorporated by reference from the Registrant’s Report on Form 8-K filed January 5, 2006. |
| (9) | Incorporated by reference from the Registrant’s Report on Form 10-Q filed August 9, 2006. |
| (10) | Incorporated by reference from the Registrant’s Report on Form 10-K filed April 2, 2007. |
| (11) | Incorporated by reference from the Registrant’s Report on Form 10-Q filed August 9, 2007. |
| (12) | Incorporated by reference from the Registrant’s Report on Form 10-K filed March 18, 2008. |
| (13) | Incorporated by reference from the Registrant’s Report on Form 8-K filed September 5, 2008. |
| (14) | Incorporated by reference from the Registrant’s Report on Form 8-K filed June 10, 2008. |
| (15) | Incorporated by reference from the Registrant’s Report on Form 8-K filed December 24, 2008. |
| (16) | Incorporated by reference from the Registrant’s Report on Form 10-K filed on March 23, 2009. |
| (17) | Incorporated by reference from the Registrant’s Report on Form 10-Q filed November 2, 2009. |
| (18) | Incorporated by reference from the Registrant’s Report on Form 8-K filed on March 5, 2010. |
| + | Confidential treatment requested. |
| * | Managerial compensatory plan or arrangement. |
63
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. (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations , equity and noncontrolling interest, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s 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. at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, 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, present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2009 the Company adopted FAS 160Noncontrolling Interest in Consolidated Financial Statements(codified in FASB ASC 810Consolidation), and FASB Staff Position No. EITF 03-06-1Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(codified in FASB ASC 260Earnings Per Share). All years and periods presented have been reclassified to conform to the adopted accounting standards.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Thomas Properties Group, Inc.’s internal control over financial reporting as of December 31, 2009, 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 19, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
March 19, 2010
64
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, 2009 and 2008
| | | | | | | | |
| | | 2009 | | | 2008 | |
| ASSETS | | | | | | | | |
Investments in real estate: | | | | | | | | |
Operating properties, net of accumulated depreciation of $95,561 and $101,191 as of December 31, 2009 and 2008, respectively | | $ | 276,603 | | | $ | 274,784 | |
Land improvements—development properties | | | 97,750 | | | | 101,495 | |
Construction in progress | | | — | | | | 1,274 | |
| | | | | | | | |
| | | 374,353 | | | | 377,553 | |
| | | | | | | | |
Condominium units held for sale | | | 64,101 | | | | 101,112 | |
Investments in unconsolidated real estate entities | | | 14,458 | | | | 29,098 | |
Cash and cash equivalents, unrestricted | | | 35,935 | | | | 69,023 | |
Restricted cash | | | 12,071 | | | | 16,665 | |
Rents and other receivables, net of allowance for doubtful accounts of $335 and $226 as of December 31, 2009 and 2008, respectively | | | 4,389 | | | | 4,452 | |
Receivables from condominium sales contracts, net | | | — | | | | 10,485 | |
Receivables from unconsolidated real estate entities | | | 2,010 | | | | 4,701 | |
Deferred rents | | | 12,954 | | | | 10,604 | |
Deferred leasing and loan costs, net of accumulated amortization of $8,342 and $9,826 as of December 31, 2009 and 2008, respectively | | | 15,375 | | | | 15,018 | |
Other assets, net | | | 23,757 | | | | 21,724 | |
| | | | | | | | |
Total assets | | $ | 559,403 | | | $ | 660,435 | |
| | | | | | | | |
| LIABILITIES AND EQUITY | | | | | | | | |
Liabilities: | | | | | | | | |
Mortgage loans | | $ | 255,104 | | | $ | 255,579 | |
Other secured loans | | | 63,132 | | | | 128,466 | |
Unsecured loan | | | — | | | | 3,900 | |
Accounts payable and other liabilities, net | | | 35,573 | | | | 45,748 | |
Dividends and distributions payable | | | — | | | | 2,377 | |
Prepaid rent and deferred revenue | | | 3,249 | | | | 3,638 | |
| | | | | | | | |
Total liabilities | | | 357,058 | | | | 439,708 | |
| | | | | | | | |
Commitments and Contingencies | | | | | | | | |
Equity: | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued or outstanding as of December 31, 2009 and 2008 | | | — | | | | — | |
Common stock, $.01 par value, 225,000,000 and 75,000,000 shares authorized, 30,878,621 and 23,853,904 shares issued and outstanding as of December 31, 2009 and December 31, 2008, respectively | | | 308 | | | | 238 | |
Limited voting stock, $.01 par value, 20,000,000 shares authorized, 13,813,331 and 14,496,666 shares issued and outstanding as of December 31, 2009 and December 31, 2008, respectively | | | 138 | | | | 145 | |
Additional paid-in capital | | | 185,344 | | | | 158,341 | |
Retained deficit and dividends, including $74 and $186 of other comprehensive loss as of December 31, 2009 and December 31, 2008, respectively | | | (49,394 | ) | | | (26,980 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 136,396 | | | | 131,744 | |
| | | | | | | | |
Noncontrolling interests: | | | | | | | | |
Unitholders in the Operating Partnership | | | 63,042 | | | | 85,210 | |
Partners in consolidated real estate entities | | | 2,907 | | | | 3,773 | |
| | | | | | | | |
Total noncontrolling interests | | | 65,949 | | | | 88,983 | |
| | | | | | | | |
Total equity | | | 202,345 | | | | 220,727 | |
| | | | | | | | |
Total liabilities and equity | | $ | 559,403 | | | $ | 660,435 | |
| | | | | | | | |
See accompanying notes to consolidated financial information.
65
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
| | | | | | | | | | | | |
| | | Year ended
December 31,
2009 | | | Year ended
December 31,
2008 | | | Year ended
December 31,
2007 | |
Revenues: | | | | | | | | | | | | |
Rental | | $ | 29,753 | | | $ | 30,523 | | | $ | 32,646 | |
Tenant reimbursements | | | 21,163 | | | | 25,874 | | | | 26,371 | |
Parking and other | | | 2,988 | | | | 3,869 | | | | 3,917 | |
Investment advisory, management, leasing, and development services | | | 9,345 | | | | 7,194 | | | | 12,750 | |
Investment advisory, management, leasing, and development services—unconsolidated real estate entities | | | 15,023 | | | | 18,263 | | | | 17,921 | |
Reimbursement of property personnel costs | | | 5,584 | | | | 6,079 | | | | 3,877 | |
Condominium sales | | | 30,226 | | | | 79,758 | | | | — | |
| | | | | | | | | | | | |
Total revenues | | | 114,082 | | | | 171,560 | | | | 97,482 | |
| | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | |
Property operating and maintenance | | | 25,339 | | | | 25,608 | | | | 22,690 | |
Real estate taxes | | | 7,225 | | | | 6,482 | | | | 6,087 | |
Investment advisory, management, leasing, and development services | | | 11,910 | | | | 14,800 | | | | 13,093 | |
Reimbursable property personnel costs | | | 5,584 | | | | 6,079 | | | | 3,877 | |
Cost of condominium sales | | | 26,492 | | | | 62,436 | | | | — | |
Rent—unconsolidated real estate entities | | | 350 | | | | 284 | | | | 241 | |
Interest | | | 26,868 | | | | 22,763 | | | | 17,721 | |
Depreciation and amortization | | | 12,642 | | | | 11,766 | | | | 11,604 | |
General and administrative | | | 16,732 | | | | 16,411 | | | | 17,326 | |
Impairment loss | | | 13,000 | | | | 11,023 | | | | — | |
| | | | | | | | | | | | |
Total expenses | | | 146,142 | | | | 177,652 | | | | 92,639 | |
| | | | | | | | | | | | |
Gain on sale of real estate | | | 1,214 | | | | 3,618 | | | | 4,441 | |
Gain from extinguishment of debt | | | 11,921 | | | | 255 | | | | — | |
Interest income | | | 338 | | | | 2,795 | | | | 6,014 | |
Equity in net loss of unconsolidated real estate entities | | | (16,236 | ) | | | (12,828 | ) | | | (14,853 | ) |
| | | | | | | | | | | | |
(Loss) income before (provision) benefit for income taxes and noncontrolling interests | | | (34,823 | ) | | | (12,252 | ) | | | 445 | |
Benefit (provision) for income taxes | | | (683 | ) | | | 1,885 | | | | (1,221 | ) |
| | | | | | | | | | | | |
Net loss | | | (35,506 | ) | | | (10,367 | ) | | | (776 | ) |
| | | | | | | | | | | | |
Noncontrolling interests’ share of net loss: | | | | | | | | | | | | |
Unitholders in the Operating Partnership | | | 11,535 | | | | 4,683 | | | | (249 | ) |
Partners in consolidated real estate entities | | | 2,408 | | | | 198 | | | | 122 | |
| | | | | | | | | | | | |
| | | 13,943 | | | | 4,881 | | | | (127 | ) |
| | | | | | | | | | | | |
TPGI share of net loss | | $ | (21,563 | ) | | $ | (5,486 | ) | | $ | (903 | ) |
| | | | | | | | | | | | |
Loss per share-basic and diluted | | $ | (0.86 | ) | | $ | (0.24 | ) | | $ | (0.05 | ) |
Weighted average common shares outstanding—basic and diluted | | | 25,173,163 | | | | 23,693,577 | | | | 20,739,371 | |
See accompanying notes to consolidated financial information.
66
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND NONCONTROLLING INTERESTS
(In thousands, except share data)
Years Ended December 31, 2009, 2008 and 2007
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Limited Voting Stock | | | Additional
Paid -In Capital | | | Deficit | | | Other
Comprehensive
Income (loss) | | | Noncontrolling
Interests | | | Total | |
| | | Shares | | Amount | | Shares | | | Amount | | | | | | |
Balance, December 31, 2006 | | 14,418,261 | | $ | 144 | | 16,666,666 | | | $ | 167 | | | $ | 67,601 | | | $ | (9,156 | ) | | $ | — | | | $ | 76,434 | | | $ | 135,190 | |
Adoption of FIN 48 | | — | | | — | | — | | | | — | | | | — | | | | (120 | ) | | | — | | | | — | | | | (120 | ) |
Issuance of unvested restricted stock | | 103,564 | | | 1 | | — | | | | — | | | | — | | | | — | | | | — | | | | (913 | ) | | | (912 | ) |
Vesting of restricted stock | | — | | | — | | — | | | | — | | | | 1,354 | | | | — | | | | — | | | | 176 | | | | 1,530 | |
Vesting of stock options | | — | | | — | | — | | | | — | | | | 465 | | | | — | | | | — | | | | 37 | | | | 502 | |
Vesting of incentive units | | — | | | — | | — | | | | — | | | | 1,481 | | | | — | | | | — | | | | 1,163 | | | | 2,644 | |
Change in noncontrolling interest (see Note 2) | | — | | | — | | — | | | | — | | | | (22,272 | ) | | | — | | | | — | | | | 22,272 | | | | — | |
Stock option exercise | | 26,111 | | | — | | — | | | | — | | | | 320 | | | | — | | | | — | | | | — | | | | 320 | |
Proceeds from sale of common stock, net of offering expenses | | 9,200,000 | | | 92 | | — | | | | — | | | | 139,316 | | | | — | | | | — | | | | — | | | | 139,408 | |
Syndication fee | | — | | | — | | — | | | | — | | | | (314 | ) | | | — | | | | — | | | | (246 | ) | | | (560 | ) |
Redemption of Operating Partnership units | | — | | | — | | (2,170,000 | ) | | | (22 | ) | | | (33,646 | ) | | | — | | | | — | | | | — | | | | (33,668 | ) |
Dividends | | — | | | — | | — | | | | — | | | | — | | | | (5,278 | ) | | | — | | | | (3,718 | ) | | | (8,996 | ) |
Tax benefit for uncertain tax provision | | — | | | — | | — | | | | — | | | | — | | | | 47 | | | | — | | | | — | | | | 47 | |
Other comprehensive loss recognized | | — | | | — | | — | | | | — | | | | — | | | | — | | | | (201 | ) | | | (129 | ) | | | (330 | ) |
Contributions | | — | | | — | | — | | | | — | | | | — | | | | — | | | | — | | | | 415 | | | | 415 | |
Distributions | | — | | | — | | — | | | | — | | | | — | | | | — | | | | — | | | | (36 | ) | | | (36 | ) |
Net loss | | — | | | — | | — | | | | — | | | | — | | | | (903 | ) | | | — | | | | 127 | | | | (776 | ) |
Fair market value change of redeemable noncontrolling interest in unconsolidated real estate entities | | — | | | — | | — | | | | — | | | | (736 | ) | | | — | | | | — | | | | 1,486 | | | | 750 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2007 | | 23,747,936 | | $ | 237 | | 14,496,666 | | | $ | 145 | | | $ | 153,569 | | | $ | (15,410 | ) | | $ | (201 | ) | | $ | 97,068 | | | $ | 235,408 | |
Issuance of unvested restricted stock | | 105,968 | | | 1 | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | |
Share registration expenses | | — | | | — | | — | | | | — | | | | (15 | ) | | | — | | | | — | | | | — | | | | (15 | ) |
Vesting of restricted stock | | — | | | — | | — | | | | — | | | | 1,063 | | | | — | | | | — | | | | — | | | | 1,063 | |
Vesting of stock options | | — | | | — | | — | | | | — | | | | 218 | | | | — | | | | — | | | | — | | | | 218 | |
Vesting of incentive units | | — | | | — | | — | | | | — | | | | 1,353 | | | | — | | | | — | | | | 861 | | | | 2,214 | |
Change in noncontrolling interest (see Note 2) | | — | | | — | | — | | | | — | | | | 787 | | | | — | | | | — | | | | (787 | ) | | | — | |
Dividends | | — | | | — | | — | | | | — | | | | — | | | | (5,898 | ) | | | — | | | | (3,589 | ) | | | (9,487 | ) |
Other comprehensive income recognized | | — | | | — | | — | | | | — | | | | — | | | | — | | | | 15 | | | | 8 | | | | 23 | |
Distributions | | — | | | — | | — | | | | — | | | | — | | | | — | | | | — | | | | (626 | ) | | | (626 | ) |
Net loss | | — | | | — | | — | | | | — | | | | — | | | | (5,486 | ) | | | — | | | | (4,881 | ) | | | (10,367 | ) |
Fair market value change of redeemable noncontrolling interest in unconsolidated real estate entities | | — | | | — | | — | | | | — | | | | 1,366 | | | | — | | | | — | | | | 929 | | | | 2,295 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2008 | | 23,853,904 | | $ | 238 | | 14,496,666 | | | $ | 145 | | | $ | 158,341 | | | $ | (26,794 | ) | | $ | (186 | ) | | $ | 88,983 | | | $ | 220,727 | |
Issuance of unvested restricted stock | | 410,000 | | | 4 | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4 | |
Redemption of operating partnership units | | 1,476,117 | | | 15 | | (683,335 | ) | | | (7 | ) | | | (11 | ) | | | — | | | | — | | | | — | | | | (3 | ) |
Proceeds from sale of common stock, net of offering expenses | | 5,138,600 | | | 51 | | — | | | | — | | | | 13,049 | | | | — | | | | — | | | | — | | | | 13,100 | |
Vesting of restricted stock | | — | | | — | | — | | | | — | | | | 1,310 | | | | — | | | | — | | | | — | | | | 1,310 | |
Vesting of stock options | | — | | | — | | — | | | | — | | | | 85 | | | | — | | | | — | | | | — | | | | 85 | |
Vesting of incentive units | | — | | | — | | — | | | | — | | | | 929 | | | | — | | | | — | | | | 516 | | | | 1,445 | |
Change in noncontrolling interest (see Note 2 and Note 7) | | — | | | — | | — | | | | — | | | | 11,330 | | | | — | | | | — | | | | (11,330 | ) | | | — | |
Dividends | | — | | | — | | — | | | | — | | | | — | | | | (963 | ) | | | — | | | | (538 | ) | | | (1,501 | ) |
Other comprehensive income recognized | | — | | | — | | — | | | | — | | | | — | | | | — | | | | 112 | | | | 62 | | | | 174 | |
Contributions | | — | | | — | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,542 | | | | 1,542 | |
Distributions | | — | | | — | | — | | | | — | | | | — | | | | — | | | | — | | | | (14 | ) | | | (14 | ) |
Net loss | | — | | | — | | — | | | | — | | | | — | | | | (21,563 | ) | | | — | | | | (13,943 | ) | | | (35,506 | ) |
Fair market value change of redeemable noncontrolling interest in unconsolidated real estate entity | | — | | | — | | — | | | | — | | | | 311 | | | | — | | | | — | | | | 671 | | | | 982 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2009 | | 30,878,621 | | $ | 308 | | 13,813,331 | | | $ | 138 | | | $ | 185,344 | | | $ | (49,320 | ) | | $ | (74 | ) | | $ | 65,949 | | | $ | 202,345 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial information.
67
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | |
| | | Year ended
December 31,
2009 | | | Year ended
December 31,
2008 | | | Year ended
December 31,
2007 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net loss | | $ | (35,506 | ) | | $ | (10,367 | ) | | $ | (776 | ) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | | | | | | | | |
Gain from extinguishment of debt | | | (11,921 | ) | | | — | | | | — | |
Gain on sale of real estate | | | (1,214 | ) | | | (3,618 | ) | | | (4,441 | ) |
Gain on sale of condominiums—closed units | | | (4,768 | ) | | | (15,001 | ) | | | — | |
Gain on sale of condominiums—units under contracts | | | — | | | | (2,321 | ) | | | — | |
Reversal of gain on sale of condominiums—cancellations | | | 1,034 | | | | — | | | | — | |
Equity in net loss of unconsolidated real estate entities | | | 16,236 | | | | 12,828 | | | | 14,853 | |
Deferred rents | | | (924 | ) | | | 3,433 | | | | 5,896 | |
Deferred taxes | | | (1,464 | ) | | | (2,179 | ) | | | (5,571 | ) |
Depreciation and amortization expense | | | 12,642 | | | | 11,766 | | | | 11,604 | |
Allowance for doubtful accounts | | | 315 | | | | 564 | | | | 143 | |
Amortization of loan costs | | | 691 | | | | 449 | | | | 327 | |
Amortization of above and below market leases, net | | | 23 | | | | (79 | ) | | | (16 | ) |
Non-cash amortization of share-based compensation | | | 2,840 | | | | 3,495 | | | | 3,764 | |
Distributions from operations of unconsolidated real estate entities | | | 724 | | | | 462 | | | | 1,113 | |
Impairment loss | | | 13,000 | | | | 11,023 | | | | — | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Rents and other receivables | | | (252 | ) | | | (2,664 | ) | | | (300 | ) |
Receivables from unconsolidated real estate entities | | | 2,691 | | | | 1,939 | | | | (2,566 | ) |
Deferred leasing and loan costs | | | (3,796 | ) | | | (3,864 | ) | | | (599 | ) |
Other assets | | | 785 | | | | (1,336 | ) | | | (9,044 | ) |
Deferred interest payable | | | 3,553 | | | | 4,587 | | | | 177 | |
Accounts payable and other liabilities | | | (1,235 | ) | | | (6,321 | ) | | | 29,099 | |
Due to affiliate | | | — | | | | — | | | | 2,000 | |
Prepaid rent and deferred revenue | | | (389 | ) | | | (580 | ) | | | (156 | ) |
| | | | | | | | | | | | |
Net cash (used in) provided by operating activities: | | | (6,935 | ) | | | 2,216 | | | | 45,507 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Expenditures for improvements to real estate | | | (16,784 | ) | | | (102,956 | ) | | | (125,481 | ) |
Proceeds from sale of condominiums | | | 38,432 | | | | 69,273 | | | | — | |
Purchases of interests in consolidated real estate entities | | | — | | | | (4,000 | ) | | | — | |
Purchases of interests in unconsolidated real estate entities | | | — | | | | — | | | | (18,797 | ) |
Proceeds from sale of real estate | | | 2,001 | | | | — | | | | — | |
Return of capital from unconsolidated real estate entities | | | 4,425 | | | | 4,105 | | | | 7,166 | |
Contributions to unconsolidated real estate entities | | | (5,600 | ) | | | (1,965 | ) | | | (2,059 | ) |
Payments for purchase of naming rights | | | — | | | | — | | | | (750 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | $ | 22,474 | | | $ | (35,543 | ) | | $ | (139,921 | ) |
| | | | | | | | | | | | |
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(In thousands)
| | | | | | | | | | | | |
| | | Year ended
December 31,
2009 | | | Year ended
December 31,
2008 | | | Year ended
December 31,
2007 | |
Cash flows from financing activities: | | | | | | | | | | | | |
Proceeds from equity offering, net | | | 13,100 | | | | (15 | ) | | | 139,386 | |
Payment for redemption of operating units | | | — | | | | — | | | | (33,646 | ) |
Noncontrolling interest contributions | | | 1,542 | | | | — | | | | — | |
Noncontrolling interest distributions | | | (14 | ) | | | (211 | ) | | | (36 | ) |
Payment of dividends to common stockholders and distributions to limited partners of the Operating Partnership | | | (3,878 | ) | | | (9,463 | ) | | | (8,557 | ) |
Principal payments of mortgage and other secured loans | | | (70,419 | ) | | | (89,998 | ) | | | (20,215 | ) |
Proceeds from mortgage and other secured loans | | | 8,054 | | | | 75,070 | | | | 84,217 | |
Proceeds from exercise of stock options | | | — | | | | — | | | | 320 | |
Change in restricted cash | | | 2,988 | | | | 320 | | | | (4,751 | ) |
| | | | | | | | | | | | |
Net cash (used in) provided by financing activities | | | (48,627 | ) | | | (24,297 | ) | | | 156,718 | |
| | | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (33,088 | ) | | | (57,624 | ) | | | 62,304 | |
Cash and cash equivalents at beginning of period | | | 69,023 | | | | 126,647 | | | | 64,343 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 35,935 | | | $ | 69,023 | | | $ | 126,647 | |
| | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
Cash paid for interest, net of capitalized interest of $110, $3,731 and $6,196, for the years ended December 31, 2009, 2008 and 2007 respectively | | $ | 24,156 | | | $ | 22,232 | | | $ | 22,730 | |
Other comprehensive income | | | (175 | ) | | | (22 | ) | | | 329 | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | | | | | |
Accrual for declaration of dividends to common shareholders and distributions to limited partners of the Operating Partnership | | $ | 2,377 | | | $ | 23 | | | $ | 438 | |
Investments in real estate included in accounts payable and other liabilities | | | (2,306 | ) | | | (9,584 | ) | | | 13,503 | |
Decrease in investments in real estate and accumulated depreciation for removal of fully amortized improvements | | | 15,498 | | | | 19,057 | | | | 4,540 | |
Reclassification of noncontrolling interest for limited partnership units in the Operating Partnership from additional paid in capital | | | 11,330 | | | | 787 | | | | 22,272 | |
Fair market value change of redeemable nonconrolling interest in unconsolidated real estate entity | | | (982 | ) | | | — | | | | — | |
Syndication fee related to investment in Austin Portfolio Joint Venture Properties | | | — | | | | — | | | | 560 | |
See accompanying notes to consolidated financial information.
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
December 31, 2009, 2008, and 2007
(Tabular amounts in thousands, except share and per share amounts)
1. Organization and Description of Business
The terms “Thomas Properties”, “us”, “we” and “our” 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 were formed to succeed to certain businesses of the Thomas Properties predecessor (Thomas Properties Group, Inc. Predecessor, or “TPGI Predecessor”), which was not a legal entity but rather a combination of real estate entities and operations. 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. The owners of TPGI Predecessor were Mr. James A. Thomas, our Chairman, Chief Executive Officer and President, and certain others who had minor ownership interests.
We were incorporated in the State of Delaware on March 9, 2004. On October 13, 2004, we completed our initial public offering (the “Offering”). Concurrent with the consummation of the Offering, Thomas Properties and the Operating Partnership, together with the partners and members of the affiliated partnerships and limited liability companies of TPGI Predecessor and other parties which held direct or indirect ownership interests in the properties engaged in certain formation transactions. The formation transactions were designed to (i) continue the operations of TPGI Predecessor, (ii) enable us to raise the necessary capital to acquire increased interests in certain of the properties and repay certain property level indebtedness, (iii) fund joint venture capital commitments, (iv) provide capital for future acquisitions, and (v) fund future development costs at our development properties.
On December 23, 2009, the Company completed the sale of 5.1 million shares through a registered direct offering of common stock at $2.55 per share. The net proceeds after deducting offering expenses were $13.1 million. We used the net proceeds to fund a portion of the discounted payoff of $25.2 million for $36.6 million in nonrecourse senior and junior mezzanine loans on Two Commerce Square which were scheduled to mature in January 2010.
Our operations are carried on through our Operating Partnership. We are the sole general partner in the Operating Partnership. Pursuant to contribution agreements among the owners of TPGI Predecessor and the Operating Partnership, the Operating Partnership received a contribution of interests in the real estate properties, as well as the investment advisory, property management, leasing and real estate development operations of TPGI Predecessor in exchange for limited partnership units (“Units”) in the Operating Partnership issued to the contributors and the assumption of debt and other specified liabilities. As of December 31, 2009, we held a 68.8% interest in the Operating Partnership which we consolidate, as we have control over the major decisions of the Operating Partnership.
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
As of December 31, 2009, 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 |
2100 JFK Boulevard | | Undeveloped land; Residential/Office/Retail | | PCBD |
Four Points Centre | | Suburban office; Undeveloped land; Office/Retail/Research and Development/Hotel | | Austin, Texas |
Campus El Segundo | | Developable land; Site infrastructure substantially complete; Office/Retail/ Research and Development/Hotel | | El Segundo, California |
Metro Studio@Lankershim | | Entitlements and pre-development in progress; Office/Studio/Production/Retail | | Los Angeles, California |
Unconsolidated properties: | | | | |
2121 Market Street | | Residential and retail | | PCBD |
TPG/CalSTRS, LLC (“TPG/CalSTRS”): | | | | |
City National Plaza | | High-rise office | | Los Angeles Central Business District, California |
Reflections I | | Suburban office—single tenancy | | Reston, Virginia |
Reflections II | | Suburban office—single tenancy | | Reston, Virginia |
Four Falls Corporate Center | | Suburban office | | Conshohocken, Pennsylvania |
Oak Hill Plaza | | Suburban office | | King of Prussia, Pennsylvania |
Walnut Hill Plaza | | Suburban office | | King of Prussia, Pennsylvania |
San Felipe Plaza | | High-rise office | | Houston, Texas |
2500 City West | | Suburban office | | Houston, Texas |
Brookhollow Central I-III | | Suburban office | | Houston, Texas |
CityWestPlace | | Suburban office and undeveloped land | | Houston, Texas |
Centerpointe I & II | | Suburban office | | Fairfax, Virginia |
Fair Oaks Plaza | | Suburban office | | Fairfax, Virginia |
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 |
Research Park Plaza I & II | | Suburban Office | | Austin, Texas |
Park Centre | | Suburban Office | | Austin, Texas |
Great Hills Plaza | | Suburban Office | | Austin, Texas |
Stonebridge Plaza II | | Suburban Office | | Austin, Texas |
Westech 360 I-IV | | Suburban Office | | Austin, Texas |
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
2100 JFK Boulevard includes a surface parking lot that services the retail tenant at 2121 Market Street. The City National Plaza property also 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.
From the late 1980s through 2000, TPGI Predecessor developed One Commerce Square, Two Commerce Square, 2121 Market Street and the California Environmental Protection Agency (“CalEPA”) headquarters building in Sacramento, California. We have the responsibility for the day-to-day operations of 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 three properties that are wholly owned by CalSTRS— 800 South Hope Street, 1835 Market Street and Pacific Financial Plaza—as well as the properties owned in a joint venture between CalSTRS and us (“TPG/CalSTRS”). In addition, we provide property management, leasing and development services to the properties discussed above, except we do not provide property management services for 2121 Market Street and Reflections I.
In 2001, TPGI Predecessor formed a joint venture with a third party, which entered into an agreement to purchase the land commonly referred to as Campus El Segundo. In October 2005, we purchased the entire interest of our unaffiliated noncontrolling partner in the joint venture and exercised the option to acquire the land.
Effective October 13, 2004, Mr. Thomas owned an 11% ownership interest in One Commerce Square and Two Commerce Square. On August 6, 2008 and December 31, 2007, we exercised our option to purchase the remaining 11% interest in Two Commerce Square and One Commerce Square, respectively, for $2.0 million each, resulting in our 100% ownership of Two Commerce Square and One Commerce Square.
As of December 31, 2009, we held a 73% interest in Murano, which was formed to hold a general partnership interest in the Murano development project. Commencing as of August 2, 2006, we consolidated this entity.
2. Summary of Significant Accounting Policies
In June 2009, the FASB issued FASB ASC 105, “Generally Accepted Accounting Principles.” This standard establishes the FASB Accounting Standards Codification (the “Codification”) as the sole source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). FASB ASC 105 is effective for interim and annual reporting periods ending after September 15, 2009. We have updated our references to accounting literature in these consolidated financial statements to those contained in the Codification. The adoption of FASB ASC 105 did not impact our financial position or results of operations.
Principles of Consolidation and Combination
The accompanying consolidated financial statements of our company include all the accounts of Thomas Properties Group, Inc., the Operating Partnership and the subsidiaries of the Operating Partnership. Property interests contributed to the Operating Partnership by Mr. Thomas and entities majority owned by him in exchange for Units have been accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests. Accordingly, the contributed assets and assumed liabilities were recorded at TPGI Predecessor’s historical cost basis, except for the noncontrolling owners’ share. The pooling-of-interests method of accounting also requires the reporting of results of operations, for the period in which the combination occurred as though the entities had been combined at either the beginning of the period or inception. Prior to the Offering, Thomas Properties Group, Inc. and the Operating Partnership had no operations. The combination did not require any material adjustments to conform the accounting policies of the separate entities. The remaining interests, which were acquired for cash and Units, have been accounted for as a purchase, and the excess of the purchase price over the related historical cost basis has been allocated to the assets acquired and liabilities assumed.
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
The real estate entities included in the consolidated financial statements have been consolidated only for the periods that such entities were under control by us or TPGI Predecessor, or were considered a variable interest entity. The equity method of accounting is utilized to account for investments in real estate entities over which we have significant influence, but not control over major decisions, including the decision to sell or refinance the properties owned by such entities. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
The interests in One Commerce Square (beginning June 1, 2004 through December 30, 2007), and Two Commerce Square (beginning October 13, 2004 through August 5, 2008), not owned by us are reflected as noncontrolling interest. On August 6, 2008 and December 31, 2007, we exercised our option to purchase the remaining 11% interest in Two Commerce Square and One Commerce Square, respectively, for $2.0 million each, resulting in our 100% ownership of Two Commerce Square and One Commerce Square.
We have a $26.1 million preferred equity interest in Murano. Excluding the preferred equity interest, a third party has a 27.0% ownership interest in Murano.
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 |
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 $19.6 million and $22.6 million as of December 31, 2009 and 2008, respectively. In December 2007, the FASB issued FASB ASC 805-10, “Business Combinations,” to create greater consistency in the accounting and financial reporting of business combinations. FASB ASC 805-10-05 requires a company to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity to be
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
measured at their fair values as of the acquisition date. FASB 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, FASB ASC 805-10 requires that acquisition-related costs and restructuring costs be recognized separately from the business combination and expensed as incurred. FASB ASC 805-10 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. The adoption of FASB ASC 805-10 did not have a material impact on our financial position or results of operations.
We consider assets to be held for sale pursuant to the provisions of FASB ASC 360, “Property, Plant and Equipment”. 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 none of the entities, other than Murano, effective August 1, 2006, are considered variable interest entities.
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, “Investments—Equity Method and Joint Ventures”, we would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of our investment.
Included in the consolidated net losses for the year ended December 31, 2009 and 2008, are pre-tax, non-cash impairment charges of $13.0 million and $11.0 million, respectively, related to our Murano condominium project whose units are complete and held for sale. We are required to record the condominium units at their estimated fair value beginning in 2008, as the condominium units met the held for sale criteria of FASB ASC 360, “Property, Plant, and Equipment.” The impairment charge is included in the “Impairment loss” line item in our consolidated statements of operations for the respective years. Also included in “Equity in net loss of unconsolidated real estate entities” in our consolidated statements of operations for the years ended December 31, 2009 and 2008, are pre-tax, non-cash impairment charges of $16.0 million and $1.2 million, respectively, related to our joint venture investments. We recorded our share of the impairment loss at the joint venture level as these investments met the other-than-temporary impairment criteria of FASB ASC 323, “Investments—Equity Method and Joint Ventures”.
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
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 $13,344,000 and $13,477,000 as of December 31, 2009 and 2008, respectively, and are included in deferred leasing and loan costs, net of accumulated amortization, in the accompanying consolidated balance sheets. For the years ended 2009 and 2008, amortization of leasing costs were $2,065,000 and $2,091,000, 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 $2,031,000 and $1,541,000 as of December 31, 2009 and 2008, 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.
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 or TPGI Predecessor acquired interests, based on the percentage interest acquired. For purchases of additional interests that were consummated subsequent to June 30, 2001, the effective date of FASB ASC 805, “Business Combinations”, the fair value of the real estate acquired is allocated to 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, based in each case on their fair values. Loan premiums, in the case of any above market rate loans, or loan discounts, in the case of below market loans, are recorded based on the fair value of any loans assumed in connection with acquiring the real estate.
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 allocated to land, building, tenant and site improvements based on management’s 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 allocating 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) management’s 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 amortized as an increase to rental income over the terms in the respective leases. As of December 31, 2009 and 2008, we had an asset related to above market leases of $838,000 and $1,070,000, respectively, net of accumulated amortization of $1,063,000 and $884,000, respectively, and a liability related to
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
below market leases of $674,000 and $920,000, respectively, net of accumulated accretion of $1,086,000 and $1,179,000, respectively. The weighted average amortization period for our above and below market leases was approximately 4.0 years and 3.8 years, respectively as of December 31, 2009 compared to 4.2 years for the above and below market leases as of December 31, 2008.
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 allocated between in-place lease values and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s 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 and TPGI Predecessor because such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated 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 related to the acquired in-place lease value and acquired above and below market leases at December 31, 2009:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Thereafter | | | Total | |
Amortization expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Acquired in-place lease value | | $ | 613,890 | | | $ | 498,049 | | | $ | 453,628 | | | $ | 367,574 | | | $ | 201,857 | | | $ | 797,333 | | | $ | 2,932,331 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustments to rental revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Above market leases | | $ | 221,106 | | | $ | 217,969 | | | $ | 207,029 | | | $ | 147,328 | | | $ | 25,544 | | | $ | 18,679 | | | $ | 837,655 | |
Below market leases | | | (219,416 | ) | | | (195,206 | ) | | | (135,066 | ) | | | (33,625 | ) | | | (26,221 | ) | | | (64,371 | ) | | | (673,905 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net adjustment to rental revenues | | $ | 1,690 | | | $ | 22,763 | | | $ | 71,963 | | | $ | 113,703 | | | $ | (677 | ) | | $ | (45,692 | ) | | $ | 163,750 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 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.
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
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 decreased revenue by $1,241,000, $3,044,000 and $5,678,000, for the years ended December 31, 2009, 2008 and 2007, respectively. Additionally, the net impact of the amortization of acquired above market leases and acquired below market leases increased revenue by $23,000, $80,000 and $16,000 for the years ended December 31, 2009, 2008 and 2007, 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 tenant’s 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.
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. With respect to a parcel we sold at Campus El Segundo in 2006, we deferred a portion of the gain as we were obligated to fund certain infrastructure improvements with respect to the sold parcel; therefore we recognized the deferred gain on the percentage of completion method. The improvements were completed in 2008 and the remaining deferred gain balance was recognized in 2008.
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 have 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
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
to keep the deposit. As of December 31, 2009, there were 18 forfeitures totaling $1,348,000, of which $774,000 was recognized in 2009, $528,000 was recognized in 2008, and $46,000 was recognized in 2007.
Investment advisory fees are based on a percentage of net operating income earned by a property under management 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 October 2004 initial public offering and our April 2007 public offering are reflected as a reduction to additional paid-in-capital. In addition, share registration expenses of $15,000 related to the redemption of incentive units 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. A valuation allowance is established for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
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 the deferred income tax charges become currently deductible for tax reporting purposes. For the year ended December 31, 2009, the Company has recorded a full valuation allowance of $7.4 million on a portion of their net deferred tax assets, the Company’s deferred tax assets in excess of their liability for unrecognized tax benefits discussed below, due to uncertainty of future realization.
In June 2006, the FASB issued FASB ASC 740-10-15, which clarifies the accounting for uncertainty in income taxes recognized in a company’s 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.
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,
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therefore, need to be included in the earnings allocation in computing basic earnings per share under the two-class method. The Company has adjusted its calculation of basic and diluted earnings per share to conform to the guidance provided in FASB ASC 260-10-45, which also required retrospective application for all periods presented. The two-class method is an earnings allocation method for calculating earnings per share when a company’s 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, “Compensation—Stock Compensation”. In accordance with FASB 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 company’s 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 use the Black-Scholes option pricing model to determine the fair value of our stock options grants.
Adoption of FASB Statement No. 160 and FSP EITF 03-6-1
In December 2007, FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 requires all entities to report noncontrolling interests in subsidiaries within equity in the consolidated financial statements, but separate from the parent shareholders’ equity. SFAS 160 also requires any acquisitions or dispositions of noncontrolling interests that do not result in a change of control to be accounted for as equity transactions. In addition, SFAS 160 requires that a parent company recognize a gain or loss in net income when a subsidiary is deconsolidated upon a change in control. SFAS 160 applies to fiscal years beginning after December 15, 2008 and is adopted prospectively. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The adoption of SFAS 160 resulted in a reclassification of minority interests to a separate component of total equity on the balance sheet and net income attributable to noncontrolling interests is shown as a reduction from net income in calculating net income available to common stockholders on the statement of operations. All previous references to “minority interests” in the consolidated financial statements have been revised to “noncontrolling interests.” In connection with the issuance of SFAS 160, certain revisions were also made to EITF Topic D-98 “Classification and Measurement of Redeemable Securities” (EITF D-98). See Note 6- Earnings (Loss) Per Share and Note 7- Equity for additional details.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 addresses whether instruments granted in share-based payment awards are participating securities prior to vesting, and therefore, need to be included in the earnings allocation when computing earnings per share under the two-class method as described
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in SFAS 128. In accordance with FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption on January 1, 2009, all prior-period earnings per share data presented was adjusted retrospectively with no material impact. See Note 6- Earnings (Loss) Per Share.
Management’s 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 management’s 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.
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 that includes projections of future revenues, expenses and capital improvement costs, similar to the income approach that is commonly utilized by appraisers.
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Recent Accounting Pronouncements
In February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events” (Topic 855): “Amendments to Certain Recognition and Disclosure Requirements”. ASU No. 2010-09 amends ASC 855 and requires public companies to evaluate subsequent events through the date that the financial statements are issued. This Update is effective immediately. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update 2010-01, which provided updated guidance for the purposes of applying Topics 505 and 260 (Equity and Earnings Per Share) on accounting for distributions to stockholders with components of stock and cash. The guidance clarifies that in calculating earnings per share, an entity should account for the stock portion of the distribution as a stock issuance and not as a stock dividend. The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of this accounting update did not have an impact on the Company’s consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. This ASU became effective for us on January 1, 2010. We do not currently anticipate that this ASU will have a material impact on our consolidated financial statements upon adoption.
In December 2009, the FASB issued ASU No. 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets.” ASU No. 2009-16 is a revision to ASC 860, “Transfers and Servicing,” and amends the guidance on accounting for transfers of financial assets, including securitization transactions, where entities have continued exposure to risks related to transferred financial assets. ASU No. 2009-16 also expands the disclosure requirements for such transactions. This ASU will become effective for us on January 1, 2010. We are currently evaluating the impact that this ASU will have on our financial statements.
In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This ASU amends the FASB Accounting Standards Codification for Statement 167. This Update is to defer the effective date of the amendments to the consolidation requirements made by FASB Statement 167 to a reporting entity’s interest in certain types of entities and clarify other aspects of the Statement 167 amendments. As a result of the deferral, a reporting entity will not be required to apply the Statement 167 amendments to the Subtopic 810-10 consolidation requirements to its interest in an entity that meets the criteria to qualify for the deferral. This Update also clarifies how a related party’s interests in an entity should be considered when evaluating the criteria for determining whether a decision maker or service provider fee represents a variable interest. In addition, the Update also clarifies that a quantitative calculation should not be the sole basis for evaluating whether a decision maker’s or service provider’s fee is a variable interest. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2009, which for us means January 1, 2010. We are currently evaluating the impact that this ASU will have on our financial statements.
In June 2009, the FASB issued FASB ASC 810-10-25, “Consolidation.” FASB ASC 810-10-25 revises the approach to determining the primary beneficiary of a Variable Interest Entity (“VIE”) to be more qualitative in nature and requires companies to more frequently reassess whether they must consolidate a VIE. FASB ASC 810-10-25 is effective for fiscal years beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. We are currently evaluating the potential impact of adopting FASB ASC 810-10-25 on our financial position and results of operations. The FASB subsequently amended certain aspects of this Topic with the issuance of ASU 2009-17.
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In April 2009, the FASB issued FASB ASC 820, “Fair Value Measurements and Disclosures.” FASB ASC 820-10-50 requires fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. FASB ASC 820-10-50 is effective for interim and annual periods ending after June 15, 2009. FASB ASC 820-10-50 concerns disclosure only and will not have an impact on our financial position or results of operations.
In April 2009, the FASB issued FASB ASC 820, “Fair Value Measurements and Disclosures.” FASB ASC 820-10-65-4 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10 when the volume and level of activity for the asset or liability have significantly decreased. FASB ASC 820-10-65-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. FASB ASC 820-10-65-4 is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FASB ASC 820-10-65-4 did not have a material impact on our financial position or results of operations.
In June 2008, the FASB issued FASB ASC 260-10-45, “Earnings Per Share.” FASB ASC 260-10-45 addresses whether instruments granted in share-based payment awards are participating securities prior to vesting, and therefore, need to be included in the earnings allocation when computing earnings per share under the two-class method as described in FASB ASC 260. In accordance with FASB ASC 260-10-45, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption on January 1, 2009, all prior-period earnings per share data presented was adjusted retrospectively with no material impact. See Note 6- Earnings (Loss) Per Share.
In February 2008, the FASB issued FASB ASC 820-10-15, “Fair Value Measurements and Disclosures.” FASB ASC 820-10-15 excludes FASB ASC 840-10, “Accounting for Leases”, and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FASB ASC 840-10. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB ASC 805-10, “Business Combinations”, regardless of whether those assets and liabilities are related to leases. The adoption of FASB ASC 820-10-15 did not have a material impact on our financial position or results of operations.
In December 2007, the FASB issued FASB ASC 805-10, “Business Combinations,” to create greater consistency in the accounting and financial reporting of business combinations. FASB ASC 805-10-05 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. FASB 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, FASB ASC 805-10 requires that acquisition-related costs and restructuring costs be recognized separately from the business combination and expensed as incurred. FASB ASC 805-10 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. The adoption of FASB ASC 805-10 did not have a material impact on our financial position or results of operations.
In February 2007, the FASB issued FASB ASC 825-10-05-5, “Financial Instruments.” This standard permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for the first fiscal year beginning after November 15, 2007. We did not elect the fair value measurement option for any financial assets or liabilities.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 810-10, “Noncontrolling Interests in Consolidated Financial Statements,” which requires
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all entities to report noncontrolling interests in subsidiaries within equity in the consolidated financial statements, but separate from the parent shareholders’ equity. FASB ASC 810-10 also requires any acquisitions or dispositions of noncontrolling interests that do not result in a change of control to be accounted for as equity transactions. In addition, FASB ASC 810-10 requires that a parent company recognize a gain or loss in net income when a subsidiary is deconsolidated upon a change in control. Effective January 1, 2009, we adopted the provisions of FASB ASC 810-10. The retrospective presentation and disclosure requirements outlined by FASB ASC 810-10 have been incorporated for all periods herein. The adoption of FASB ASC 810-10 resulted in a reclassification of minority interests to a separate component of total equity on the balance sheet and net income attributable to noncontrolling interests is shown as a reduction from net income in calculating net income available to common stockholders on the statement of operations. All previous references to “minority interests” in the consolidated financial statements have been revised to “noncontrolling interests.” In connection with the issuance of FASB ASC 810-10, certain revisions were also made to FASB ASC 480-10, “Classification and Measurement of Redeemable Securities”. See Note 6- Earnings (Loss) Per Share and Note 7- Equity for additional details.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
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.
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. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. There is a concentration of risk related to amounts that exceed the FDIC insurance coverage. We believe that the risk is not significant. Our cash equivalents are typically invested in AAA-rated short-term instruments, which provide daily liquidity. Additionally, approximately $5.2 million of our cash equivalents were invested in a program fully insured by the FDIC at December 31, 2009. This program provides enhanced capital protection.
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.
We generally require either a security deposit, letter of credit or a guarantee from our tenants. We 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.
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3. Unconsolidated Real Estate Entities
The unconsolidated real estate entities include our share of the entities that own 2121 Market Street, and the TPG/CalSTRS properties. TPG/CalSTRS owns the following properties:
City National Plaza (purchased January 2003)
Reflections I (purchased October 2004)
Reflections II (purchased October 2004)
Four Falls Corporate Center (purchased March 2005)
Oak Hill Plaza (purchased March 2005)
Walnut Hill Plaza (purchased March 2005)
San Felipe Plaza (purchased August 2005)
2500 City West (purchased August 2005)
Brookhollow Central I, II and III (purchased August 2005)
CityWestPlace land (purchased December 2005)
CityWestPlace (purchased June 2006)
Centerpointe I and II (purchased January 2007)
Fair Oaks Plaza (purchased January 2007)
The following investment entity that holds a mortgage loan receivable related to Brookhollow Central is accounted for using the equity method of accounting:
BH Note B Lender, LLC (formed in October 2008)
TPG/CalSTRS also owns a 25% interest in the TPG-Austin Portfolio Syndication Partners JV, LP (the “Austin Portfolio Joint Venture Properties”) which owns the following properties:
San Jacinto Center (purchased June 2007)
Frost Bank Tower (purchased June 2007)
One Congress Plaza (purchased June 2007)
One American Center (purchased June 2007)
300 West 6th Street (purchased June 2007)
Research Park Plaza I & II (purchased June 2007)
Park Centre (purchased June 2007)
Great Hills Plaza (purchased June 2007)
Stonebridge Plaza II (purchased June 2007)
Westech 360 I-IV (purchased June 2007)
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, 2009.
| | | |
2121 Market Street | | 50.0 | % |
TPG/CalSTRS: | | | |
All properties, excluding Austin Portfolio Joint Venture Properties | | 25.0 | % |
Austin Portfolio Joint Venture Properties | | 6.25 | % |
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Investments in unconsolidated real estate entities as of December 31, 2009 and 2008 are as follows:
| | | | | | | | |
| | | December 31, 2009 | | | December 31, 2008 | |
TPG/CalSTRS | | | | | | | | |
City National Plaza | | $ | (19,451 | ) | | $ | (18,486 | ) |
Reflections I | | | 1,602 | | | | 1,512 | |
Reflections II | | | 1,721 | | | | 1,666 | |
Four Falls Corporate Center | | | (3,292 | ) | | | 579 | |
Oak Hill Plaza/Walnut Hill Plaza | | | (1,622 | ) | | | 265 | |
San Felipe Plaza | | | 2,789 | | | | 3,367 | |
2500 City West | | | 784 | | | | 1,015 | |
Brookhollow Central I, II and III/ Intercontinental Center | | | 378 | | | | 816 | |
CityWestPlace | | | 21,422 | | | | 21,147 | |
Centerpointe I & II | | | (6,403 | ) | | | 4,960 | |
Fair Oaks Plaza | | | 2,106 | | | | 2,528 | |
Austin Portfolio Investor | | | (1,650 | ) | | | (3,358 | ) |
Frost Bank Tower | | | 2,351 | | | | 2,757 | |
300 West 6th Street | | | 1,892 | | | | 2,240 | |
San Jacinto Center | | | 1,574 | | | | 1,801 | |
One Congress Plaza | | | 1,922 | | | | 2,276 | |
One American Center | | | 1,662 | | | | 2,087 | |
Stonebridge Plaza II | | | 694 | | | | 694 | |
Park Centre | | | 666 | | | | 667 | |
Research Park Plaza I & II | | | 872 | | | | 840 | |
Westech 360 I-IV | | | 408 | | | | 477 | |
Great Hills Plaza | | | 330 | | | | 359 | |
TPG/CalSTRS | | | 3,442 | | | | 45 | |
BH Note B Lender | | | 802 | | | | 739 | |
Austin Portfolio Lender | | | 1,351 | | | | — | |
2121 Market Street and Harris Building Associates | | | (1,892 | ) | | | (1,895 | ) |
| | | | | | | | |
| | $ | 14,458 | | | $ | 29,098 | |
| | | | | | | | |
The following is a summary of the investments in unconsolidated real estate entities for the years ended December 31, 2009, 2008, and 2007:
| | | | |
Investment balance, December 31, 2006 | | $ | 44,626 | |
Contributions, including $18,797 for acquisition of new properties | | | 20,296 | |
Equity in net loss of unconsolidated real estate entities | | | (14,853 | ) |
Other comprehensive loss | | | (329 | ) |
Distributions | | | (8,279 | ) |
Fair market value change of redeemable noncontrolling interest | | | 750 | |
| | | | |
Investment balance, December 31, 2007 | | $ | 42,211 | |
Contributions, including $714 for acquisition of Brookhollow Note B loan | | | 1,965 | |
Equity in net loss of unconsolidated real estate entities | | | (12,828 | ) |
Other comprehensive income | | | 22 | |
Distributions | | | (4,567 | ) |
Fair market value change of redeemable noncontrolling interest | | | 2,295 | |
| | | | |
Investment balance, December 31, 2008 | | $ | 29,098 | |
Contributions | | | 5,600 | |
Other comprehensive income | | | 175 | |
Equity in net loss of unconsolidated real estate entities | | | (16,236 | ) |
Distributions | | | (5,161 | ) |
Redemption of redeemable noncontrolling interest | | | 982 | |
| | | | |
Investment balance, December 31, 2009 | | $ | 14,458 | |
| | | | |
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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. We are required to use diligent efforts to sell each joint venture property within five years of that property reaching stabilization, except for certain stabilized properties, as to which we are required to perform a hold/sell analysis at least annually and make a recommendation to the TPG/CalSTRS’ management committee regarding the appropriate holding period.
The total capital commitment to the joint venture was $378.3 million as of December 31, 2009, of which approximately $3.6 million and $1.2 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 the joint venture, and the other party has a specified time to elect to either buy the initiating party’s 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 the joint venture. The buyout price is based upon a 3% discount to the appraised fair market value. In addition, the noncontrolling owner of City National Plaza (“CNP”) had the option to require the joint venture to purchase its interest for an amount equal to what would be payable to it upon liquidation of the asset at fair market value. The estimated value of this put option is reflected as ‘redeemable noncontrolling interest’ in the 2008 balance sheet below. During the second quarter of 2009, TPG/CalSTRS redeemed the approximately 15% membership interest held by the noncontrolling owner in the CNP partnership. The redemption price of $19.8 million was based on a $725 million value for CNP and was financed with a promissory note due in 2012. Our share of the redemption price was $4.95 million. The redemption eliminated the former noncontrolling owner’s put option to TPG/CalSTRS and eliminated his right of approval of any sale or financing. Effective with this redemption, TPG/CalSTRS owns 100% of CNP and our interest in CNP increased to 25%.
Subsequent to December 31, 2009, we negotiated on behalf of CalSTRS, our partner in CNP for CalSTRS, to acquire all of the property’s mezzanine debt, which has a principal balance of approximately $219.1 million, and is scheduled to mature on July 9, 2010. CalSTRS will convert this debt to the partnership’s equity, reducing the leverage on the property from $568.0 million to $348.9 million, all of which is first mortgage debt. We are in discussions with CalSTRS to obtain an option to participate in the loan purchase, on or after the maturity of the mezzanine debt, based on our pro rata share of 25% of the existing CNP equity. Based on the existing agreement which we are currently in discussions with CalSTRS for potential revision, if we do not participate in the loan purchase, our share of the CNP equity will be reduced from 25% to approximately 8% when the mezzanine loans are converted into equity.
Lehman Brothers Holdings, Inc. filed for bankruptcy protection in September 2008. The Lehman affiliate that owns the equity interest in the Austin Portfolio Joint Venture is 100% indirectly owned by Lehman Brothers Holdings, Inc. In addition, two Lehman Brothers Holdings, Inc. affiliates consisting of Lehman Commercial Paper Inc. and Lehman Brothers Inc., are administrative agent and lead arranger, respectively, under the Austin Portfolio Joint Venture’s $292.5 million credit agreement, which included a $100 million revolving credit facility and a $192.5 million term loan. The $192.5 million term loan was fully funded by Lehman Commercial Paper Inc. and is secured by certain properties held in the joint venture and secondary liens on other joint venture properties.
On March 25, 2009, the Lehman Brothers Bankruptcy Court judge approved a plan to restructure the $292.5 million credit facility by replacing the unfunded $100 million commitment with $60 million of new senior
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secured priority financing contributed by the partners in proportion to their percentage interest in the partnership. Proceeds from this new financing were used to deleverage the portfolio by acquiring at a discount and immediately retiring third-party term loan debt with an $80 million face value for $14 million, thereby reducing that loan from $192.5 million to $112.5 million, and to provide an ongoing source of capital for leasing and capital improvements. To date, approximately $33.0 million of the senior secured facility has been advanced by the partners, of which the Company has advanced $2.1 million. After the restructuring, the partners’ ownership interests remained the same and the funds advanced under the senior secured facility are a first priority mortgage lien on three of the Austin buildings and a first priority right to payment on a pledge of the equity interests in the other seven Austin buildings owned by the Austin Partnership.
On December 18, 2009, we also entered into a settlement agreement with Lehman Brothers Holdings Inc. to terminate the interest rate collar agreement for TPG Austin Portfolio Holdings LLC resulting in settlement of this obligation with the Lehman affiliate on January 25, 2010.
Following is summarized financial information for the unconsolidated real estate entities as of December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007:
Summarized Balance Sheets
| | | | | | |
| | | 2009 | | 2008 |
| ASSETS | | | | | | |
Investments in real estate, net | | $ | 2,224,709 | | $ | 2,335,067 |
Land held for sale | | | 3,853 | | | 3,835 |
Receivables including deferred rents, net | | | 83,506 | | | 72,764 |
Deferred leasing and loan costs, net | | | 144,287 | | | 168,980 |
Other assets | | | 127,727 | | | 101,430 |
Assets associated with discontinued operations | | | — | | | 86 |
| | | | | | |
Total assets | | $ | 2,584,082 | | $ | 2,682,162 |
| | | | | | |
| LIABILITIES AND OWNERS’ EQUITY | | | | | | |
Mortgage and other secured loans | | $ | 2,217,118 | | $ | 2,237,717 |
Below market rents, net | | | 62,527 | | | 80,467 |
Other liabilities | | | 98,401 | | | 105,998 |
Liabilities associated with discontinued operations | | | — | | | 121 |
| | | | | | |
Total liabilities | | | 2,378,046 | | | 2,424,303 |
| | | | | | |
Redeemable noncontrolling interest | | | — | | | 18,771 |
Owners’ equity: | | | | | | |
Thomas Properties, including $133 and $308 of other comprehensive loss as of 2009 and 2008, respectively | | | 21,242 | | | 34,839 |
Other owners, including $1,171 and $4,211 of other comprehensive loss as of 2009 and 2008, respectively | | | 184,794 | | | 204,249 |
| | | | | | |
Total owners’ equity | | | 206,036 | | | 239,088 |
| | | | | | |
Total liabilities and owners’ equity | | $ | 2,584,082 | | $ | 2,682,162 |
| | | | | | |
87
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
Summarized Statements of Operations
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Revenues | | $ | 324,694 | | | $ | 322,553 | | | $ | 258,512 | |
Expenses: | | | | | | | | | | | | |
Operating and other expenses | | | 166,575 | | | | 170,019 | | | | 138,942 | |
Interest expense | | | 104,105 | | | | 126,386 | | | | 118,182 | |
Depreciation and amortization | | | 120,129 | | | | 125,565 | | | | 107,633 | |
Impairment loss | | | 59,133 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total expenses | | | 449,942 | | | | 421,970 | | | | 364,757 | |
| | | | | | | | | | | | |
Loss from continuing operations | | | (125,248 | ) | | | (99,417 | ) | | | (106,245 | ) |
Gain on extinguishment of debt | | | 67,017 | | | | — | | | | — | |
Redeemable noncontrolling interest | | | — | | | | — | | | | (104 | ) |
Impairment loss—unconsolidated real estate entities | | | (4,911 | ) | | | (4,840 | ) | | | — | |
Gain on sale of real estate | | | — | | | | — | | | | 7,932 | |
Loss from discontinued operations | | | (83 | ) | | | (104 | ) | | | (270 | ) |
| | | | | | | | | | | | |
Net loss | | $ | (63,225 | ) | | $ | (104,361 | ) | | $ | (98,687 | ) |
| | | | | | | | | | | | |
Thomas Properties’ share of net loss, prior to intercompany eliminations | | $ | (19,794 | ) | | $ | (16,168 | ) | | $ | (17,465 | ) |
Intercompany eliminations | | | 3,558 | | | | 3,340 | | | | 2,612 | |
| | | | | | | | | | | | |
Equity in net loss of unconsolidated real estate entities | | $ | (16,236 | ) | | $ | (12,828 | ) | | $ | (14,853 | ) |
| | | | | | | | | | | | |
Included in the preceding summarized balance sheets as of December 31, 2009 and 2008, are the following balance sheets of TPG/CalSTRS, LLC:
| | | | | | |
| | | 2009 | | 2008 |
| ASSETS | | | | | | |
Investments in real estate, net | | $ | 1,145,163 | | $ | 1,224,401 |
Land held for sale | | | 3,853 | | | 3,835 |
Receivables including deferred rents, net | | | 70,237 | | | 65,741 |
Investments in unconsolidated real estate entities | | | 50,844 | | | 45,347 |
Deferred leasing and loan costs, net | | | 79,640 | | | 90,954 |
Other assets | | | 98,293 | | | 69,506 |
Assets associated with discontinued operations | | | — | | | 86 |
| | | | | | |
Total assets | | $ | 1,448,030 | | $ | 1,499,870 |
| | | | | | |
| LIABILITIES AND MEMBERS’ EQUITY | | | | | | |
Mortgage and other secured loans | | $ | 1,346,319 | | $ | 1,311,391 |
Other liabilities | | | 59,843 | | | 73,354 |
Liabilities associated with discontinued operations | | | — | | | 121 |
| | | | | | |
Total liabilities | | | 1,406,162 | | | 1,384,866 |
Redeemable noncontrolling interest | | | — | | | 18,771 |
Members’ equity: | | | | | | |
Thomas Properties, including $133 and $308 of other comprehensive loss as of December 31, 2009 and December 31, 2008, respectively | | | 22,193 | | | 36,073 |
CalSTRS, including $397 and $938 of other comprehensive loss as of December 31, 2009 and December 31, 2008, respectively | | | 19,675 | | | 60,160 |
| | | | | | |
Total members’ equity | | | 41,868 | | | 96,233 |
| | | | | | |
Total liabilities and members’ equity | | $ | 1,448,030 | | $ | 1,499,870 |
| | | | | | |
88
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
Following is summarized financial information by real estate entity for the years ended December 31, 2009, 2008 and 2007:
| | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, 2009 | |
| | | 2121 Market
Street and Harris
Building
Associates | | TPG/
CalSTRS,
LLC | | | Austin
Portfolio
Properties | | | Eliminations | | | Total | |
Revenues* | | $ | 3,578 | | $ | 203,079 | | | $ | 118,037 | | | $ | — | | | $ | 324,694 | |
| | | | | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | | | | |
Operating and other expenses | | | 1,362 | | | 111,858 | | | | 53,355 | | | | — | | | | 166,575 | |
Interest expense | | | 1,154 | | | 49,541 | | | | 53,410 | | | | — | | | | 104,105 | |
Depreciation and amortization | | | 973 | | | 64,260 | | | | 54,896 | | | | — | | | | 120,129 | |
Impairment loss—property level | | | | | | 59,133 | | | | — | | | | — | | | | 59,133 | |
| | | | | | | | | | | | | | | | | | | |
Total expenses | | | 3,489 | | | 284,792 | | | | 161,661 | | | | — | | | | 449,942 | |
| | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | | 89 | | | (81,713 | ) | | | (43,624 | ) | | | — | | | | (125,248 | ) |
Gain on extinguishment of debt | | | — | | | — | | | | 67,017 | | | | — | | | | 67,017 | |
Equity in net loss of unconsolidated real estate entities** | | | — | | | 1,834 | | | | — | | | | (6,745 | ) | | | (4,911 | ) |
Loss from discontinued operations | | | — | | | (83 | ) | | | — | | | | — | | | | (83 | ) |
| | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 89 | | $ | (79,962 | ) | | $ | 23,393 | | | $ | (6,745 | ) | | $ | (63,225 | ) |
| | | | | | | | | | | | | | | | | | | |
Thomas Properties’ share of net income (loss) | | $ | 45 | | $ | (21,301 | ) | | $ | 1,462 | | | $ | — | | | $ | (19,794 | ) |
| | | | | | | | | | | | | | | | | | | |
Intercompany eliminations | | | | | | | | | | | | | | | | | | 3,558 | |
| | | | | | | | | | | | | | | | | | | |
Equity in net loss of unconsolidated real estate entities | | | | | | | | | | | | | | | | | $ | (16,236 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, 2008 | |
| | | 2121 Market
Street and Harris
Building
Associates | | | TPG/
CalSTRS,
LLC | | | Austin
Portfolio
Properties | | | Eliminations | | Total | |
Revenues* | | $ | 3,602 | | | $ | 201,316 | | | $ | 117,635 | | | $ | — | | $ | 322,553 | |
| | | | | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | | | | |
Operating and other expenses | | | 1,453 | | | | 114,579 | | | | 53,987 | | | | — | | | 170,019 | |
Interest expense | | | 1,203 | | | | 67,102 | | | | 58,081 | | | | — | | | 126,386 | |
Depreciation and amortization | | | 2,371 | | | | 63,690 | | | | 59,504 | | | | — | | | 125,565 | |
| | | | | | | | | | | | | | | | | | | |
Total expenses | | | 5,027 | | | | 245,371 | | | | 171,572 | | | | — | | | 421,970 | |
| | | | | | | | | | | | | | | | | | | |
Loss from continuing operations | | | (1,425 | ) | | | (44,055 | ) | | | (53,937 | ) | | | — | | | (99,417 | ) |
Equity in net loss of unconsolidated real estate entities** | | | — | | | | (18,123 | ) | | | — | | | | 13,283 | | | (4,840 | ) |
Loss from discontinued operations | | | — | | | | (104 | ) | | | — | | | | — | | | (104 | ) |
| | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (1,425 | ) | | $ | (62,282 | ) | | $ | (53,937 | ) | | $ | 13,283 | | $ | (104,361 | ) |
| | | | | | | | | | | | | | | | | | | |
Thomas Properties’ share of net loss | | $ | (707 | ) | | $ | (12,200 | ) | | $ | (3,261 | ) | | $ | — | | $ | (16,168 | ) |
| | | | | | | | | | | | | | | | | | | |
Intercompany eliminations | | | | | | | | | | | | | | | | | | 3,340 | |
| | | | | | | | | | | | | | | | | | | |
Equity in net loss of unconsolidated real estate entities | | | | | | | | | | | | | | | | | $ | (12,828 | ) |
| | | | | | | | | | | | | | | | | | | |
89
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
| | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, 2007 | |
| | | 2121 Market
Street and Harris
Building
Associates | | | TPG/
CalSTRS,
LLC | | | Austin
Portfolio
Properties | | | Eliminations | | Total | |
Revenues* | | $ | 5,712 | | | $ | 185,773 | | | $ | 67,027 | | | $ | — | | $ | 258,512 | |
| | | | | | | | | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | | | | | | | | |
Operating and other expenses | | | 3,515 | | | | 106,865 | | | | 28,562 | | | | — | | | 138,942 | |
Interest expense | | | 1,182 | | | | 81,247 | | | | 35,753 | | | | — | | | 118,182 | |
Depreciation and amortization | | | 962 | | | | 67,955 | | | | 38,716 | | | | — | | | 107,633 | |
| | | | | | | | | | | | | | | | | | | |
Total expenses | | | 5,659 | | | | 256,067 | | | | 103,031 | | | | — | | | 364,757 | |
| | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | | 53 | | | | (70,294 | ) | | | (36,004 | ) | | | — | | | (106,245 | ) |
Gain on sale of real estate | | | — | | | | 7,932 | | | | — | | | | — | | | 7,932 | |
Equity in net loss of unconsolidated real estate entities | | | — | | | | (9,001 | ) | | | — | | | | 9,001 | | | — | |
Redeemable noncontrolling interest | | | (104 | ) | | | — | | | | — | | | | — | | | (104 | ) |
Loss from discontinued operations | | | — | | | | (270 | ) | | | — | | | | — | | | (270 | ) |
| | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (51 | ) | | $ | (71,633 | ) | | $ | (36,004 | ) | | $ | 9,001 | | $ | (98,687 | ) |
| | | | | | | | | | | | | | | | | | | |
Thomas Properties’ share of net loss | | $ | (25 | ) | | $ | (15,190 | ) | | $ | (2,250 | ) | | $ | — | | $ | (17,465 | ) |
| | | | | | | | | | | | | | | | | | | |
Intercompany eliminations | | | | | | | | | | | | | | | | | | 2,612 | |
| | | | | | | | | | | | | | | | | | | |
Equity in net loss of unconsolidated real estate entities | | | | | | | | | | | | | | | | | $ | (14,853 | ) |
| | | | | | | | | | | | | | | | | | | |
| * | Includes interest income. |
| ** | The total amounts of $(4,911) and $(4,840) for the years ended December 31, 2009 and 2008, respectively, represent impairment of TPG/CalSTRS’ investment in the Austin Portfolio Joint Venture. |
For the years ended December 31, 2009, 2008 and 2007, one tenant accounted for approximately 9.0%, 9.6% and 10.2%, respectively, of rent and tenant reimbursements (excluding tenant reimbursements for over-standard usage of certain operating expenses) of TPG/CalSTRS.
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, 2009 and 2008:
| | | | | | | | |
| | | 2009 | | | 2008 | |
Our share of owners’ equity recorded by unconsolidated real estate entities | | $ | 21,242 | | | $ | 34,839 | |
Intercompany eliminations and other adjustments | | | (6,784 | ) | | | (5,741 | ) |
| | | | | | | | |
Investments in unconsolidated real estate entities | | $ | 14,458 | | | $ | 29,098 | |
| | | | | | | | |
90
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
4. Mortgage and Other Secured Loans
A summary of the outstanding mortgage and other secured loans as of December 31, 2009 and 2008 is as follows. None of these loans is recourse to us, except that we have guaranteed the Campus El Segundo mortgage loan and partially guaranteed the Four Points Centre construction loan, under which our liability is currently limited to a maximum of $11.6 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.
| | | | | | | | | | | | |
| | | | | Outstanding Debt | | Maturity Date | | Maturity Date
at End of
Extension
Options |
Secured debt | | Interest Rate at
December 31, 2009 | | As of
December 31,
2009 | | As of
December 31,
2008 | | |
One Commerce Square mortgage loan (1) | | 5.67% | | $ | 130,000 | | $ | 130,000 | | 1/6/2016 | | 1/6/2016 |
Two Commerce Square: | | | | | | | | | | | | |
Mortgage loan (2) | | 6.30% | | | 108,104 | | | 108,579 | | 5/9/2013 | | 5/9/2013 |
Senior mezzanine loan (3) | | — | | | — | | | 31,573 | | — | | — |
Junior mezzanine loan (3) | | — | | | — | | | 4,462 | | — | | — |
Campus El Segundo mortgage loan (4) | | Libor + 3.75% | | | 17,000 | | | 17,000 | | 7/31/2011 | | 7/31/2014 |
Four Points Centre construction loan (5) | | Libor + 3.50% | | | 26,177 | | | 28,527 | | 7/31/2012 | | 7/31/2014 |
Murano construction loan (6) | | 7% or 3 month Libor + 3.25% | | | 36,955 | | | 63,904 | | 7/31/2010 | | 7/31/2010 |
| | | | | | | | | | | | |
Total secured debt | | | | $ | 318,236 | | $ | 384,045 | | | | |
| | | | | | | | | | | | |
| (1) | The mortgage loan is subject to interest only payments through January 2011, 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 prior to October 2015. |
| (2) | The mortgage loan may be defeased, and beginning February 2012, may be prepaid. |
| (3) | We paid off two mezzanine loans on Two Commerce Square which were scheduled to mature in January 2010. The loans, which had a combined total principal and accrued interest amount of $36.6 million, were paid off for a discounted amount of $25.2 million, resulting in gain from extinguishment of debt of $11.4 million. |
| (4) | The interest rate as of December 31, 2009 was 4.1% per annum. On October 10, 2009, the loan agreement was modified and the loan maturity was extended to July 31, 2011 with three one-year extension options, at our election, subject to us complying with certain covenants, with a final maturity date of July 31, 2014 if all extension options are exercised. The lender has the option to require payment of $2.5 million at the time of each extension. The interest rate on the loan has been increased to LIBOR plus 3.75% per annum. We have guaranteed 100% of the principal, interest and any other sum payable under 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, 2009. |
| (5) | The weighted average interest rate as of December 31, 2009 was 2.5% per annum. On October 13, 2009, we entered into an agreement with the lender to modify and extend this loan to July 31, 2012 with two one-year extension options at our election subject to certain conditions. We have provided a repayment and completion guaranty. We have also agreed to provide additional collateral of approximately 62.4 acres of fully entitled unimproved land, which is immediately adjacent to our Four Points Centre office buildings located in Austin, Texas. We have also committed to pay down the principal amount of the loan in the total amount of $7.8 million of which we paid $3.9 million in October, 2009, $1.3 million in January, 2010 and |
91
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
| | the balance will be paid in two equal installments, in June and December, 2010. The loan has an unfunded balance of the commitment of $10.4 million which is available to fund any remaining project costs. In addition, we paid $2.225 million in June 2009 which was held by the lender to fund any remaining project costs. As of December 31, 2009, these funds have been fully disbursed. The interest rate on the loan has been increased to LIBOR plus 3.50% per annum. We have agreed to certain financial covenants on this loan as the guarantor, which we were in compliance with as of December 31, 2009. |
| (6) | In January 2010, we exercised the final six-month extension option, which extended the maturity date to July 31, 2010. The interest rate for this loan as of December 31, 2009 was 7%. Subsequent to December 31, 2009, we closed on the sale of four units and we have eleven units under contract and expected to close, which will cumulatively reduce the principal balance by approximately $7.6 million. We are in discussions with the lender to extend the loan maturity to 2011, which based on the principal amortization feature of the loan, we believe is achievable. If we are unable to extend or refinance the loan, the lender could repossess the unsold units through foreclosure, which would result in an additional non-cash impairment charge. This loan is nonrecourse to the Company, but the Company guarantees the payment of interest on the loan during the term of the loan. We do not earn any fee revenue from this project. |
The loan agreement for Two Commerce Square requires that all receipts collected from this property be deposited in lockbox accounts under the control of the lenders to fund reserves, debt service and operating expenditures. Included in restricted cash at December 31, 2009 and 2008 is $1,749,000 and $2,218,000, respectively, which has been deposited in the lockbox account.
Certain mortgage and other secured loans were repaid or defeased, which resulted in repayment and defeasance costs. Such costs, along with the write-off of unamortized loan costs, net of loan premiums recorded, are presented as loss from early extinguishment of debt in the accompanying consolidated statements of operations.
Certain of our loan agreements require us to maintain monies in reserve accounts to fund various expenditures such as capital improvements, taxes, insurance, leasing commissions and debt service. Included in restricted cash on our consolidated balance sheet at December 31, 2009, are reserve funds totaling $5.3 million for One Commerce Square, $5.2 million for Two Commerce Square and $1.6 million for Murano.
As of December 31, 2009, subject to certain extension options exercisable by the Company, principal payments due for the secured and unsecured outstanding debt are as follows (in thousands):
| | | | | | |
| | | Amount Due at
Original Maturity
Date | | Amount Due at
Maturity Date
After Exercise of
Extension Options |
2010 | | $ | 41,355 | | $ | 41,355 |
2011 | | | 18,971 | | | 1,971 |
2012 | | | 24,438 | | | 2,161 |
2013 | | | 108,383 | | | 108,383 |
2014 | | | 1,884 | | | 41,161 |
Thereafter | | | 123,205 | | | 123,205 |
| | | | | | |
| | $ | 318,236 | | $ | 318,236 |
| | | | | | |
92
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
5. Unsecured Loan
In October 2005, we purchased the entire interest of our unaffiliated partner in TPG-El Segundo Partners, LLC, of which $3.9 million was financed with an unsecured loan from the former noncontrolling partner. Principal and accrued interest on this loan had a scheduled maturity of October 12, 2009. The final installment of principal and interest was paid on April 3, 2009. We recognized $0.5 million gain on early extinguishment of debt related to this loan.
6. Earnings (Loss) 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 Company has granted restricted stock and incentive partnership units to employees in connection with stock based compensation. The restricted stock and incentive partnership units are considered to be participating securities because they have non forfeitable rights to dividends. The Company has adjusted its calculation of basic and diluted earnings per share to conform to the guidance provided in FASB ASC 260-10-45, which also required retrospective application for all periods presented. The change in calculating basic and diluted earnings per share pursuant to the adoption of FASB ASC 260-10-45 changed the amounts previously reported for both basic and diluted earnings per share for the years ended December 31, 2008 and 2007 by $(0.01) per share.
The two-class method is an earnings allocation method for calculating earnings per share when a company’s 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 common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends accruing during the respective 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 securities. Basic earnings per common share and participating security 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 years. We only present the earnings per share attributable to the common shareholders.
For the years ended December 31, 2009, 2008 and 2007, the Company incurred losses and paid dividends. The 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, 2009, 2008 and 2007, all potentially dilutive instruments are anti-dilutive and have been excluded from our computation of weighted average dilutive shares outstanding.
We declared dividends per share of $0.04, $0.24 and $0.24 for the years ended December 31, 2009, 2008 and 2007, respectively. In December 2009, our board of directors suspended its quarterly dividends to common stockholders.
93
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
The following is a summary of the elements used in calculating basic and diluted loss per share for the years ended December 31, 2009, 2008 and 2007 (in thousands except share and per share amounts):
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Net loss attributable to common shares | | $ | (21,563 | ) | | $ | (5,486 | ) | | $ | (903 | ) |
Dividends to participating securities | | | (33 | ) | | | (174 | ) | | | (173 | ) |
| | | | | | | | | | | | |
Net loss attributable to common shares, net of dividends to participating securities | | $ | (21,596 | ) | | $ | (5,660 | ) | | $ | (1,076 | ) |
| | | | | | | | | | | | |
Weighted average common shares outstanding—basic and diluted | | | 25,173,163 | | | | 23,693,577 | | | | 20,739,371 | |
| | | | | | | | | | | | |
Loss per share—basic and diluted | | $ | (0.86 | ) | | $ | (0.24 | ) | | $ | (0.05 | ) |
| | | | | | | | | | | | |
Dividends declared per share | | $ | (0.04 | ) | | $ | (0.24 | ) | | $ | (0.24 | ) |
| | | | | | | | | | | | |
7. 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. A 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. A 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, 2009 and December 31, 2008, we held a 68.8% and 61.0% interest in the Operating Partnership, respectively.
Issuances of Common Stock and Change in Limited Voting Stock
On April 25, 2007, we sold 9.2 million shares of common stock (including the shares issued upon exercise of the underwriters’ over-allotment option), pursuant to an effective registration statement previously filed with the Securities and Exchange Commission, at $16.00 per share. We received net proceeds, after deducting underwriting discounts and commissions and offering expenses, of $139.4 million from this offering of which $33.7 million was used to redeem 2,170,000 units in our Operating Partnership held by our CEO, and 45,000 units held by another senior executive. The redemption in Operating Partnership units, which are paired with limited voting stock on a one-for-one basis, resulted in a decrease in the total limited voting stock from 16,666,666 shares at December 31, 2006 to 14,496,666 shares at December 31, 2007. Following the closing of the offering, we held a 60.5% interest in our Operating Partnership at April 25, 2007.
On December 23, 2009, the Company completed the sale of 5.1 million shares through a registered direct offering of common stock at $2.55 per share. The net proceeds after deducting offering expenses were $13.1 million. We used the net proceeds to fund a portion of the discounted payoff of $25.2 million for $36.6 million in nonrecourse
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NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
senior and junior mezzanine loans on Two Commerce Square which were scheduled to mature in January 2010. Following the closing of the offering, we held a 68.8% interest in our Operating Partnership at December 23, 2009.
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 cancelled and not subject to reissuance.
Incentive Partnership Units
We have issued a total of 1,303,336 incentive units as of December 31, 2009 to certain employees. Incentive units represent a profits interest in the Operating Partnership and generally will be treated as regular Units in the Operating Partnership and rank pari passu with the 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 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 Units to the extent of the incentive units’ economic capital account balance. We had 30,878,621 shares of common stock, of which 1,476,117 shares were unregistered, and 14,019,441 Units outstanding as of December 31, 2009, and 465,554 incentive units outstanding which were issued under our Incentive Plan, defined below. The 1,476,117 unregistered shares were issued in connection with the redemption of 1,476,117 Operating Partnership Units by executives. The share of the Company owned by the Operating Partnership unit holders is reflected as a separate component called noncontrolling interests in the equity section of our consolidated balance sheets.
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. Our Incentive Plan permits the granting of awards in the form of options to purchase common stock, restricted shares of common stock and restricted incentive units in our Operating Partnership. We may issue up to 3,361,906 shares as either stock option awards, restricted stock awards or incentive unit awards. 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.
Shares of newly issued common stock will be issued upon exercise of stock options.
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NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
Restricted Stock
Under the 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 | | See below |
March 2008 | | 100,000 | | | 855 | | See below |
January 2009 | | 410,000 | | | 1,019 | | See below |
| | | | | | | |
Issued from Inception to December 31, 2009 | | 716,667 | | $ | 4,754 | | |
| | | | | | | |
Vesting for the 100,000 and 100,000 shares commenced as of March 7, 2007 and March 19, 2008, respectively. These restricted shares will vest in full on the third anniversary of the vesting commencement date, provided that vesting could occur on the second anniversary of the vesting commencement date if certain performance goals are met. In January 2009, we issued an additional 410,000 restricted shares to executives which vest over a period of five years. Fifty percent of the restricted shares granted to executives vest based on stock performance, and fifty percent are discretionary vesting shares based on individual and company goals. The fair value of the restricted stock grants is determined based on the Company’s common stock price at the date of grant. The fair value of restricted stock grants with market conditions (e.g. stock based performance grants) is adjusted accordingly for the effect on fair value of those market conditions.
Holders of restricted stock have full voting rights and receive any dividends paid.
Under the Non-Employee Directors Plan, we have issued the following outstanding restricted shares to our non-employee directors:
| | | | | | | |
| | | Shares | | Aggregate
Value
(in thousands) | | Vesting Status |
Issued in October 2004 | | 10,000 | | $ | 120 | | Fully vested |
Issued in 2005 | | 4,984 | | | 60 | | Fully vested |
Issued in 2006 | | 6,419 | | | 82 | | Fully vested |
Issued in 2007 | | 3,564 | | | 60 | | Fully vested |
Issued in 2008 | | 5,968 | | | 60 | | Fully vested |
| | | | | | | |
Issued from Inception to December 31, 2008 | | 30,935 | | $ | 382 | | |
| | | | | | | |
We recorded compensation expense totaling $1,309,600, $1,063,000 and $896,000 for the vesting of the restricted stock grants for the years ended December 31, 2009, 2008 and 2007, respectively. The total income tax benefit recognized in the statement of operations related to this compensation expense was $558,000, $451,000 and $385,000 for the years ended December 31, 2009, 2008 and 2007, respectively. The weighted-average grant date fair value of restricted stock granted to executives during the year ended December 31, 2009 was $2.49 per share. No grants of restricted stock were made to non-employee directors during the year ended December 31, 2009. As of December 31, 2009, there was $1,023,000 of total unrecognized compensation cost related to the unvested restricted stock under the Incentive Plan. The unrecognized compensation expense is expected to be recognized over a weighted average period of 1.9 years.
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
Incentive Units
Under our Incentive Plan, we issued to certain executives 730,003 incentive units upon consummation of our initial public offering in October 2004, which fully vested on October 13, 2007. In February 2006, we issued 120,000 incentive units to certain executives, which units vested on the third anniversary of the grant date. In March 2007, we issued an additional 183,333 incentive units to certain executives, which units vest over a three year period, with one third vesting each on the first, second, and third anniversary dates of the grant. In March 2008, we issued an additional 160,000 incentive units to certain executives, which units vest over a three year period, with one third vesting each on the first, second, and third anniversary dates of the grant. In September 2008, we issued an additional 110,000 incentive units to a new executive, which vest over a three to five year period and are subject to market based performance measures as well as individual and company goals. No incentive units were issued for the year ended December 31, 2009. The fair value of the incentive unit grants is determined based on the Company’s common stock price at the date of grant.
We have issued the following incentive units to our executives:
| | | | | | | |
| | | 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 | | Partially vested |
Issued in 2008 | | 270,000 | | | 2,312 | | Partially vested |
| | | | | | | |
Issued from Inception to December 31, 2008 | | 1,303,336 | | $ | 14,946 | | |
| | | | | | | |
For the years ended December 31, 2009, 2008 and 2007, we recorded compensation expense for the vesting of the incentive unit grants totaling $1,444,000, $2,214,000 and $2,645,000, respectively. There were no incentive units granted during the year ended December 31, 2009. As of December 31, 2009, there was $585,000 of unrecognized compensation expense related to incentive units. The unrecognized compensation expense is expected to be recognized over a weighted average period of 1.1 years.
Stock options
Under our Incentive Plan, we have 667,694 stock options outstanding as of December 31, 2009. There were no stock option grants for the year ended December 31, 2009. 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 Term—The expected term of the Company’s stock-based awards represents the period that the Company’s stock-based awards are expected to be outstanding.
Expected Stock Price Volatility—The 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 Yield—The dividend yield is based on the Company’s expected future dividend payments.
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
Risk-Free Interest Rate—The 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 Forfeitures—When 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 Statement of Operations for the years ended December 31, 2008 and 2007 is based on awards ultimately expected to vest, it should be reduced for estimated forfeitures. FASB ASC 718 “Compensation—Stock 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.
The following are the weighted-average assumptions used in the Black-Scholes option pricing model for stock option grants made by the Company in 2008 and 2007:
| | | | | | |
| | | 2008 | | | 2007 | |
Expected dividend yield | | 2.90 | % | | 1.55 | % |
Expected term | | 5 to 8 years | | | 2 to 4 years | |
Risk-free interest rate | | 3.20 | % | | 4.62 | % |
Expected stock price volatility | | 11 | % | | 13 | % |
The following is a summary of stock option activity under our Incentive Plan as of and for the year ended December 31, 2009:
| | | | | | | | | | |
| | | Shares | | | Weighted
Average
Exercise
Price | | Weighted Average
Remaining
Contractual Term
(in years) | | Aggregate
Intrinsic
Value
(in thousands) |
Outstanding at January 1, 2009 | | 670,609 | | | $ | 12.74 | | | | |
Granted | | — | | | | — | | | | |
Forfeitures | | (2,915 | ) | | | 10.45 | | | | |
Exercised | | — | | | | — | | | | |
| | | | | | | | | | |
Outstanding at December 31, 2009 | | 667,694 | | | $ | 12.75 | | 6.3 | | — |
| | | | | | | | | | |
Options exercisable at December 31, 2009 | | 600,469 | | | $ | 12.96 | | 6.2 | | — |
| | | | | | | | | | |
The following is a summary of stock option activity under our Incentive Plan as of and for the year ended December 31, 2008:
| | | | | | | | | |
| | | Shares | | Weighted
Average
Exercise
Price | | Weighted Average
Remaining
Contractual Term
(in years) | | Aggregate
Intrinsic
Value |
Outstanding at January 1, 2008 | | 501,197 | | $ | 13.52 | | | | |
Granted | | 169,412 | | | 10.45 | | | | |
Forfeitures | | — | | | — | | | | |
Exercised | | — | | | — | | | | |
| | | | | | | | | |
Outstanding at December 31, 2008 | | 670,609 | | | 12.74 | | 7.4 | | — |
| | | | | | | | | |
Options exercisable at December 31, 2008 | | 409,102 | | | 13.22 | | 6.5 | | — |
| | | | | | | | | |
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
The following is a summary of stock option activity under our Incentive Plan as of and for the year ended December 31, 2007:
| | | | | | | | | | |
| | | Shares | | | Weighted
Average
Exercise
Price | | Weighted Average
Remaining
Contractual Term
(in years) | | Aggregate
Intrinsic
Value |
Outstanding at January 1, 2007 | | 389,166 | | | $ | 12.41 | | | | |
Granted-March | | 101,475 | | | | 15.45 | | | | |
Granted-June | | 50,000 | | | | 17.19 | | | | |
Forfeitures | | (13,333 | ) | | | 12.26 | | | | |
Exercised | | (26,111 | ) | | | 12.26 | | | | |
| | | | | | | | | | |
Outstanding at December 31, 2007 | | 501,197 | | | | 13.52 | | 6.9 | | — |
| | | | | | | | | | |
Options exercisable at December 31, 2007 | | 300,833 | | | | 12.33 | | 7.0 | | — |
| | | | | | | | | | |
As of December 31, 2009, there was $28,000 of total unrecognized compensation expense related to the unvested stock options. The total unrecognized compensation expense is expected to be recognized over a weighted average period of 0.9 years. There were no stock options granted or exercised during year ended December 31, 2009.
We recorded compensation expense totaling $85,000, $218,000 and $223,000 related to the stock options for the years ended December 31, 2009, 2008 and 2007. The total income tax benefit recognized in the statement of operations related to this compensation expense was $36,000, $93,000 and $96,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
Noncontrolling Interests
On January 1, 2009, the Company adopted FASB ASC 810-10“Consolidation”, which clarifies 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 parent’s 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 interests on our consolidated balance sheets relate primarily to the partnership and incentive units in the Operating Partnership (collectively, the “Units”) 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 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 Units, if applicable. The Company may elect to acquire those incentive units in exchange for shares of the Company’s common stock on a one-for-one basis,
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NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
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 Company’s common stock at the time of redemption.
FASB ASC 810-10 was required to be applied prospectively after adoption, with the exception of the presentation and disclosure requirements, which were applied retrospectively for all periods presented. The Company evaluated the terms of the Units and, as a result of the adoption of FASB ASC 810-10, the Company reclassified noncontrolling interests to permanent equity in the accompanying consolidated balance sheets and recorded a decrease to the carrying value of noncontrolling interests of approximately $7.8 million (a corresponding increase was recorded to additional paid-in capital) to reflect the noncontrolling interests’ proportionate share of equity at December 31, 2009. In periods subsequent to the adoption of FASB ASC 810-10, the Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity in the consolidated balance sheets. 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 465,554 outstanding incentive units not owned by the Company at December 31, 2009 was approximately $1,378,000 based on the closing price of the Company’s common stock of $2.96 per share as of December 31, 2009.
A charge is recorded each period to the consolidated statements of income (loss) for the noncontrolling interests’ proportionate share of the Company’s net income (loss). An additional adjustment is made each period such that the carrying value of the noncontrolling interests equals the greater of (a) the noncontrolling interests’ proportionate share of equity as of the period end, or (b) the redemption value of the noncontrolling interests as of the period end, if classified as temporary equity.
Equity is allocated between controlling and noncontrolling interests as follows(in thousands) :
| | | | | | | | | | | | |
| | | Stockholders’
Equity | | | Noncontrolling
Interests | | | Total
Equity | |
Balance at December 31, 2008 | | $ | 131,744 | | | $ | 88,983 | | | $ | 220,727 | |
Net loss | | | (21,563 | ) | | | (13,943 | ) | | | (35,506 | ) |
Vesting of stock compensation | | | 2,324 | | | | 516 | | | | 2,840 | |
Reclassification adjustment | | | 11,330 | | | | (11,330 | ) | | | — | |
Other comprehensive income | | | 113 | | | | 62 | | | | 175 | |
Fair market value change of noncontrolling interest in unconsolidated real estate entity | | | 311 | | | | 671 | | | | 982 | |
Dividends | | | (963 | ) | | | (538 | ) | | | (1,501 | ) |
Distributions | | | — | | | | (14 | ) | | | (14 | ) |
Contributions | | | — | | | | 1,542 | | | | 1,542 | |
Stock offering, net of expenses | | | 13,100 | | | | — | | | | 13,100 | |
| | | | | | | | | | | | |
Balance at December 31, 2009 | | $ | 136,396 | | | $ | 65,949 | | | $ | 202,345 | |
| | | | | | | | | | | | |
8. Related Party Transactions
An affiliate of Mr. Thomas leased retail space for a restaurant located at One Commerce Square and Two Commerce Square through June 30, 2008. The lessee entity had an operating agreement with an unaffiliated third party to manage the restaurant. The Operating Partnership wrote off approximately $659,000 in outstanding accounts receivables related to this lease, of which $538,000 had been fully reserved in prior years and $121,000 was expensed to bad debt expense during the year ended December 31, 2008. The Operating Partnership also
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
expensed $22,000 of unamortized tenant improvements and $5,000 of unamortized lease costs related to this terminated lease during the year ended December 31, 2008. The Operating Partnership incurred $212,000 related to the closure of the restaurant and currently holds a liquor license with an estimated value of $65,000. There were no corresponding charges for the year ended December 31, 2009.
We provide certain property management, leasing and development and investment advisory services in connection with service agreements with certain of our consolidated subsidiaries and equity accounted unconsolidated entities. The following is a summary of those services for the years ended December 31, 2009, 2008 and 2007(in thousands):
| | | | | | | | | | | | |
| | | Twelve months ended December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
Property management, leasing and development services fees | | | 24,172 | | | | 29,297 | | | | 24,934 | |
Investment advisory fees | | | 6,928 | | | | 7,102 | | | | 15,369 | |
| | | | | | | | | | | | |
Total fees | | | 31,100 | | | | 36,399 | | | | 40,303 | |
Investment advisory, management, leasing and development services expenses | | | (11,910 | ) | | | (14,800 | ) | | | (13,093 | ) |
| | | | | | | | | | | | |
Net investment advisory, management, leasing and development services income | | $ | 19,190 | | | $ | 21,599 | | | $ | 27,210 | |
| | | | | | | | | | | | |
Total fees attributable to third parties and related parties: | | | | | | | | | | | | |
Total fees attributable to third parties | | $ | 9,345 | | | $ | 7,194 | | | $ | 12,750 | |
Total fees attributable to related parties (unconsolidated entities and subsidiaries) | | | 21,755 | | | | 29,205 | | | | 27,553 | |
| | | | | | | | | | | | |
Total fees before intercompany transaction eliminations | | $ | 31,100 | | | $ | 36,399 | | | $ | 40,303 | |
| | | | | | | | | | | | |
Reconciliation of total fees to consolidated statement of operations:
| | | | | | | | | | | | |
Total fees before intercompany transaction eliminations | | $ | 31,100 | | | $ | 36,399 | | | $ | 40,303 | |
Elimination of intercompany fee revenues (subsidiaries and our share of unconsolidated entities) | | | (6,732 | ) | | | (10,942 | ) | | | (9,632 | ) |
| | | | | | | | | | | | |
Total fees net of eliminations | | $ | 24,368 | | | $ | 25,457 | | | $ | 30,671 | |
| | | | | | | | | | | | |
Total fees as presented in the consolidated statement of operations:
| | | | | | | | | |
Investment advisory, management, leasing, and development services—third parties | | $ | 9,345 | | $ | 7,194 | | $ | 12,750 |
Investment advisory, management, leasing, and development services—unconsolidated real estate entities (related parties) | | | 15,023 | | | 18,263 | | | 17,921 |
| | | | | | | | | |
Total fees | | $ | 24,368 | | $ | 25,457 | | $ | 30,671 |
| | | | | | | | | |
9. 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
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THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
loss of the Operating Partnership allocated to us in accordance with the Operating Partnership’s Agreement of Limited Partnership. As of December 31, 2009 and 2008, we held a 68.8% and 61.0%, respectively, capital interest in the Operating Partnership. For the years ended December 31, 2009, 2008 and 2007, we were allocated 65.8%, 61.0% and 55.5%, respectively, of the income and losses from the Operating Partnership.
Our effective tax rate is (2)%, 15% and 274%, respectively, for the years ended December 31, 2009, 2008 and 2007. The resulting tax rate is primarily due to the noncontrolling interests’ attributable income as a result of our adoption of FASB ASC 810, and the valuation allowance recorded during the year related to the Company’s net deferred tax asset.
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, 2009, 2008 and 2007:
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Current income taxes: | | | | | | | | | | | | |
Federal | | $ | (1,601 | ) | | $ | (123 | ) | | $ | (5,616 | ) |
State | | | (546 | ) | | | (171 | ) | | | (1,177 | ) |
| | | | | | | | | | | | |
Total current income taxes | | $ | (2,147 | ) | | $ | (294 | ) | | $ | (6,793 | ) |
| | | | | | | | | | | | |
Deferred income tax benefit (provision): | | | | | | | | | | | | |
Federal | | | 7,892 | | | | 2,092 | | | | 4,728 | |
State | | | 1,607 | | | | 502 | | | | 1,179 | |
| | | | | | | | | | | | |
Total deferred income tax benefit (provision) | | $ | 9,499 | | | $ | 2,594 | | | $ | 5,907 | |
| | | | | | | | | | | | |
Interest expense, gross of related tax effects | | | (646 | ) | | | (415 | ) | | | (335 | ) |
Change in valuation allowance | | | (7,389 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
(Provision) benefit for income taxes | | $ | (683 | ) | | $ | 1,885 | | | $ | (1,221 | ) |
| | | | | | | | | | | | |
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, 2009, 2008 and 2007 are as follows:
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Tax benefit (provision) at statutory rate of 35% | | $ | 12,188 | | | $ | 4,288 | | | $ | (155 | ) |
Noncontrolling interests | | | (4,880 | ) | | | (1,708 | ) | | | 44 | |
State income taxes, net of federal tax benefit & reduction in state valuation allowance | | | 868 | | | | 160 | | | | 15 | |
Restricted incentive unit compensation | | | (331 | ) | | | (473 | ) | | | (521 | ) |
Interest expense, gross of related tax effects | | | (646 | ) | | | (415 | ) | | | (335 | ) |
Valuation allowance | | | (7,389 | ) | | | — | | | | — | |
Other | | | (493 | ) | | | 33 | | | | (269 | ) |
| | | | | | | | | | | | |
(Provision) benefit for income taxes | | $ | (683 | ) | | $ | 1,885 | | | $ | (1,221 | ) |
| | | | | | | | | | | | |
Effective income tax rate | | | (2 | )% | | | 15 | % | | | 274 | % |
| | | | | | | | | | | | |
102
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
The significant components of the net deferred tax (asset) as of December 31, 2009 and 2008 are as follows:
| | | | | | | | |
| | | 2009 | | | 2008 | |
Deferred tax (asset): | | | | | | | | |
Net operating loss carry forward | | $ | (14,710 | ) | | $ | (6,787 | ) |
State taxes | | | (546 | ) | | | (596 | ) |
Stock compensation | | | (1,732 | ) | | | (1,170 | ) |
Income from Operating Partnership | | | 3,991 | | | | 172 | |
Impairment loss | | | (11,006 | ) | | | (2,854 | ) |
Cancellation of debt deferral | | | 4,441 | | | | — | |
Interest income from loan receivable | | | (4,641 | ) | | | (3,649 | ) |
Valuation allowance | | | 7,389 | | | | — | |
Other, net | | | (830 | ) | | | (650 | ) |
| | | | | | | | |
Deferred tax (asset), net | | $ | (17,644 | ) | | $ | (15,534 | ) |
| | | | | | | | |
The net deferred tax asset is included with other assets on the Company’s balance sheet. As of the year ended December 31, 2009, the Company anticipates having net operating loss carryforwards of $37.2 million for federal purposes and $34.7 million for state purposes that are subject to the gross annual limitation under Internal Revenue Code Section 382 (“Section 382”). The Company’s gross annual limitation under Section 382 is $9.9 million per year. The Company’s net operating loss carryforwards are subject to varying expirations from 2015 through 2029.
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 the deferred income tax charges become currently deductible for tax reporting purposes. For the year ended December 31, 2009, the Company has recorded a full valuation allowance of $7.4 million on a portion of their net deferred tax assets, the Company’s deferred tax assets in excess of their liability for unrecognized tax benefits discussed below, due to uncertainty of future realization.
In June 2006, the FASB issued FASB ASC 740-10-15, which clarifies the accounting for uncertainty in income taxes recognized in a company’s 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.
The Company files U.S. federal income tax returns and returns in various states jurisdictions. The Company’s 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, 2009, 2008, and 2007 we recorded $646,000, $415,000, and $335,000, respectively, of interest related to unrecognized tax benefits as a component of income tax expense.
The Company adopted the provisions of FASB ASC 740-10-15 on January 1, 2007, which resulted in unrecognized tax benefits of approximately $9 million and accrued interest of $200,000 of which $120,000 was recorded as a reduction to the opening balance of retained earnings, and if recognized, would affect our effective tax rate.
103
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
As of December 31, 2009, 2008, and 2007, the Company has recorded unrecognized tax benefits of approximately $17.8 million, $15.7 million, and $15.6 million, respectively, and if recognized, would not affect our effective tax rate.
The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2009, 2008, and 2007, the Company has recorded $2.1 million, $1.5 million, and $0.7 million respectively, of accrued interest with respect to unrecognized tax benefits. We have not recorded any penalties with respect to unrecognized tax benefits.
We do not anticipate any significant increases or decreases to the amounts of unrecognized tax benefits within the next twelve months.
We conduct business in California, Pennsylvania, Texas and Virginia. For federal and state purposes, the years ended December 31, 2004, through 2009 remain subject to examination by the respective tax jurisdictions.
A reconciliation of the Company’s unrecognized tax benefits as of December 31, 2009, 2008, and 2007 are as follows:
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Unrecognized Tax Benefits—Opening Balance | | $ | 15,660 | | | $ | 15,577 | | | $ | 9,022 | |
Gross increases—tax positions in prior period | | | 84 | | | | 80 | | | | 437 | |
Gross decreases—tax positions in prior period | | | (9 | ) | | | (134 | ) | | | (62 | ) |
Gross increases—current period tax positions | | | 2,394 | | | | 520 | | | | 6,676 | |
Gross decreases—current period tax positions | | | (347 | ) | | | (383 | ) | | | (496 | ) |
| | | | | | | | | | | | |
| | $ | 17,782 | | | $ | 15,660 | | | $ | 15,577 | |
| | | | | | | | | | | | |
10. Fair Value of Financial Instruments
FASB ASC 825-10-50-8, “Financial Instruments,” requires us to disclose fair value information about all financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate fair value.
Our estimates of the fair value of financial instruments as of December 31, 2009 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.
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.
As of December 31, 2009 and 2008, the estimated fair value of our mortgage and other secured loans and unsecured loan aggregates $285.9 million and $364.1 million, respectively, compared to the aggregate carrying value of $318.2 million and $387.9 million, respectively.
104
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
11. Minimum Future Lease Rentals
We have entered into various lease agreements with tenants as of December 31, 2009. 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, | | | |
2010 | | $ | 27,848 |
2011 | | | 29,166 |
2012 | | | 28,157 |
2013 | | | 26,311 |
2014 | | | 22,058 |
Thereafter | | | 57,870 |
| | | |
| | $ | 191,410 |
| | | |
The leases generally also require reimbursement of the tenant’s proportional share of common area, real estate taxes and other operating expenses, which are not included in the amounts above.
12. Revenue Concentrations
(a) Rental revenue concentrations:
A significant portion of our rental revenues and tenant reimbursements were generated from one tenant, Conrail. The revenue recognized related to this tenant for the years ended December 31, 2009, 2008, and 2007 was $6,352,000, $19,206,000 and $25,320,000, respectively.
In March 1990, Two Commerce Square entered into a long-term lease agreement with Conrail to occupy approximately 753,000 square feet of office space in Two Commerce Square, a portion of which expired in 2008 and the remainder expired in 2009. As an inducement to enter into the lease, Two Commerce Square agreed to pay Conrail $34,000,000 no later than the fifth anniversary of the commencement of the lease, as defined, plus accrued interest at 8% per annum, compounded annually, under certain circumstances.
In accordance with the agreement, $34,000,000 was paid to Conrail in 1997. This lease concession has been reflected in the accompanying financial statements as a deferred rent receivable, and was recognized ratably over Conrail’s lease period as a reduction in rental revenue. Interest is payable only in the event of sufficient cash flow from Two Commerce Square, as defined. We have not paid any interest through December 31, 2009 and believe that an accrual for interest expense at December 31, 2009 is not required and interest will not be payable as a result of the expiration of the Conrail lease in June 2009.
As of December 31, 2009 and 2008, $0, and $1,377,000, respectively, of the deferred rents relates to Conrail. As of December 31, 2009 and 2008, we had received prepaid rents of $0 and $1,329,000, respectively, from Conrail.
(b) 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 December 31, 2009 and 2008, there were three office properties, respectively,
105
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
subject to the separate account relationship. At December 31, 2009 and 2008, there were twenty-two 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 three properties under the separate account relationship are no longer eligible for acquisition fees. Under the joint venture relationship, we are paid acquisition fees at the time a property is acquired, as a percent of the total acquisition price. For the year ended December 31, 2007, we earned acquisition fees of $7,265,000 including $1,703,000 from TPG/CalSTRS. We did not earn any acquisition fees during the years ended December 31, 2009 and 2008.
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 property’s 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. For the years ended December 31, 2009, 2008 and 2007, we earned asset management fees under these agreements of $5,014,000, $5,348,000 and $5,937,000, respectively, including $4,507,000, $4,757,000 and $5,211,000, respectively, from TPG/CalSTRS.
We perform property management and leasing services for fourteen of the fifteen properties subject to the asset management agreements with CalSTRS. We are entitled to property management fees calculated based on 2% or 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 property’s acquisition. The agreements are automatically renewed for successive periods of one year each, unless we elect not to renew the agreements. For the years ended December 31, 2009, 2008 and 2007, we earned property management fees under these agreements of $8,269,000, $8,251,000 and $6,455,000, respectively, including $7,643,000, $7,593,000 and $5,586,000, respectively, from TPG/CalSTRS. In addition, for the years ended December 31, 2009, 2008 and 2007, we were reimbursed $5,019,000, $5,631,000 and $3,524,000, respectively, including $4,475,000, $4,975,000 and $2,928,000, respectively, from TPG/CalSTRS. The reimbursements represent primarily the cost of on-site property management personnel incurred on behalf of the managed properties.
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, 2009, 2008 and 2007, we earned leasing commissions under the agreements of $3,869,000, $4,652,000 and $4,289,000, respectively, including $2,127,000, $4,104,000 and $4,126,000, respectively, from TPG/CalSTRS. For the years ended December 31, 2009, 2008 and 2007, we earned development fees under these agreements of $884,000, $1,909,000 and $1,387,000, respectively, including $745,000, $1,810,000 and $1,297,000, respectively, from our joint venture with CalSTRS.
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. For the year ended December 31, 2007, we earned incentive compensation of $5,563,000 related to the sale of Valencia Town Center. None was earned during the years ended December 31, 2009 or 2008. 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 earned an incentive compensation fee of $571,000 related to the sale of our joint venture property, Intercontinental Center,
106
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
during the year ended December 31, 2007. Of these amounts, 25% was eliminated in consolidation and the remaining 75% was recorded as deferred revenue due to the clawback provision. We did not earn any incentive fees from CalSTRS during the years ended December 31, 2009 and 2008.
At December 31, 2009 and 2008, we had accounts receivable, including amounts generated under the above agreements, of $2,560,000 and $5,306,000, respectively, including $1,785,000 and $4,371,000, respectively, due from TPG/CalSTRS.
We also provide property management and leasing services for the CalEPA building for the City of Sacramento. The property management agreement expires on June 30, 2016, is extendable through June 30, 2020 and is subject to early termination on June 30, 2011 based on the terms in the agreement. Property management fees are fixed and subject to an annual increase. For the years ended December 31, 2009, 2008 and 2007, we earned property management fees from the City of Sacramento of $922,000, $922,000 and $894,000, respectively, and were reimbursed $534,000, $448,000 and $353,000, respectively. The reimbursements represent the cost of on-site property management personnel incurred on behalf of the managed property. At December 31, 2009 and 2008, we had accounts receivable from the CalEPA building of $66,000 and $45,000, respectively.
13. Commitments and Contingencies
We have been named as a defendant in a number of lawsuits in the ordinary course of business. We believe that the ultimate settlement of these suits 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 $65,000, $61,000 and $688,000 for the years ended December 31, 2009, 2008 and 2007, respectively. Our contributions decreased by 91.1% in 2008 compared to 2007 primarily due to company wide cost reduction measures.
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, 2009, 2008, and 2007 we incurred rent expense of $350,000, $284,000 and $241,000, respectively, to City National Plaza. These expense amounts are included in rent—unconsolidated real estate entities. The rent expense related to One Commerce Square is eliminated in consolidation.
The minimum future rents payable as of December 31, 2009 is $1.4 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, with an outstanding balance of $18,508,000 and $18,826,000 as of December 31, 2009 and 2008, respectively, secured by a first trust deed on 2121 Market Street is guaranteed by our Operating Partnership and our co-general partner in the partnership that owns 2121 Market Street, up to a maximum amount of $3.3 million.
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.
107
THOMAS PROPERTIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
In connection with our Murano construction loan (see Note 4), we and two unaffiliated individuals who are partners in the Murano development project, collectively agreed to guarantee the completion of the required work, as defined in the applicable agreement, in favor of the construction loan lender, which has been completed, and agreed to guarantee payment of interest during the extension term of the loan.
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. After the remaining $2.6 million principal reduction payments we will make in 2010, the outstanding balance will be $22.3 million, which results in a maximum guarantee amount based on 46.5% of $10.4 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.
14. Subsequent Events
Subsequent to December 31, 2009, we negotiated on behalf of CalSTRS, our partner in City National Plaza, for CalSTRS to acquire all of the property’s mezzanine debt, which has a principal balance of approximately $219.1 million, and is scheduled to mature on July 9, 2010. CalSTRS acquired this debt and will contribute it to the partnership’s equity, reducing the leverage on the property from $568.0 million to $348.9 million, all of which is first mortgage debt. We are in discussions with CalSTRS to obtain an option to participate in the loan purchase, on or after the maturity of the mezzanine debt, based on our pro rata share of 25% of the existing City National Plaza equity.
108
15. Quarterly Financial Information—Unaudited
The tables below reflect the selected quarterly information for us for the years ended December 31, 2009 and 2008. 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,
2009 | | | September 30,
2009 | | | June 30,
2009 | | | March 31,
2009 | |
Total revenue | | $ | 27,749 | | | $ | 42,884 | | | $ | 22,204 | | | $ | 21,271 | |
Loss before gain on sale of real estate, gain (loss) on early extinguishment of debt, interest income, equity in net loss of unconsolidated real estate entities, noncontrolling interests and provision for income tax | | | (10,116 | ) | | | (12,413 | ) | | | (3,918 | ) | | | (5,613 | ) |
Loss before noncontrolling interests and provision/benefit for income taxes | | | (13,080 | ) | | | (15,482 | ) | | | (4,385 | ) | | | (1,876 | ) |
Net loss | | | (7,730 | ) | | | (10,912 | ) | | | (2,746 | ) | | | (174 | ) |
Net loss per share-basic and diluted | | $ | (0.30 | ) | | $ | (0.43 | ) | | $ | (0.11 | ) | | $ | (0.01 | ) |
Weighted-average shares outstanding-basic and diluted | | | 25,753,994 | | | | 25,212,319 | | | | 24,889,637 | | | | 24,542,990 | |
| | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | December 31,
2008 | | | September 30,
2008 | | | June 30,
2008 | | March 31,
2008 | |
Total revenue | | $ | 21,307 | | | $ | 25,720 | | | $ | 100,902 | | $ | 23,631 | |
(Loss) income before gain on sale of real estate, interest income, equity in net loss of unconsolidated real estate entities, noncontrolling interests and provision for income tax | | | (16,898 | ) | | | (3,785 | ) | | | 14,762 | | | (170 | ) |
(Loss) income before noncontrolling interests and provision/benefit for income taxes | | | (20,164 | ) | | | (7,166 | ) | | | 14,232 | | | 847 | |
Net income (loss) | | | (7,710 | ) | | | (2,941 | ) | | | 4,948 | | | 219 | |
Net income (loss) per share-basic | | $ | (0.33 | ) | | $ | (0.13 | ) | | $ | 0.20 | | $ | 0.01 | |
Net income (loss) per share-diluted | | $ | (0.33 | ) | | $ | (0.13 | ) | | $ | 0.20 | | $ | 0.01 | |
Weighted-average shares outstanding-basic | | | 23,724,453 | | | | 23,701,294 | | | | 23,678,260 | | | 23,658,963 | |
Weighted-average shares outstanding-diluted | | | 23,724,453 | | | | 23,701,294 | | | | 23,678,260 | | | 23,658,963 | |
| (1) | Certain unrecorded expenses, primarily interest, related to the first, second and third quarters were recorded in the fourth quarter. We believe the amounts were not material. |
109
SCHEDULE III—INVESTMENTS IN REAL ESTATE
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | One
Commerce
Square | | | Two
Commerce
Square | | | Murano | | | 2100 JFK
Boulevard | | | Four Points
Centre | | | Campus El
Segundo | | | Metro Studio
@
Lankershim |
Property Type | |
| High-rise
office |
| |
| High-rise
office |
| |
| Condominium
Units Held for
Sale |
| | | Parking lot | | |
| Office/
Retail/Hotel/
Development |
| |
| Office/
Retail/Hotel/
Development |
| |
| Office/Prod.
Facility/
Residential/
Retail
Development |
Location | |
| Philadelphia,
PA |
| |
| Philadelphia,
PA |
| |
| Philadelphia,
PA |
| |
| Philadelphia,
PA |
| |
| Austin,
TX |
| |
| El Segundo,
CA |
| |
| Los Angeles,
CA |
Encumbrances, net | | $ | 130,000 | | | $ | 108,104 | | | $ | 36,955 | | | $ | — | | | $ | 26,177 | | | $ | 17,000 | | | $ | — |
Initial cost to the real estate entity that acquired the property: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Land and improvements | | | 14,259 | | | | 15,758 | | | | 6,213 | | | | 4,872 | | | | 10,523 | | | | 39,937 | | | | — |
Buildings and improvements | | | 87,653 | | | | 147,951 | | | | — | | | | — | | | | — | | | | — | | | | — |
Cost capitalized subsequent to acquisition: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Land and improvements | | | 528 | | | | 706 | | | | 1,835 | | | | 53 | | | | 9,081 | | | | 20,223 | | | | 14,614 |
Buildings and improvements | | | 34,353 | (1) | | | 27,541 | (1) | | | 56,054 | | | | — | | | | 38,597 | | | | 3,264 | | | | — |
Gross amount at which carried at close of period: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Land and improvements | | | 14,787 | | | | 16,464 | | | | 8,048 | | | | 4,925 | | | | 19,604 | | | | 60,160 | | | | 14,614 |
Buildings and improvements | | | 122,006 | | | | 175,492 | | | | 56,054 | | | | — | | | | 38,597 | | | | 3,264 | | | | — |
Accumulated depreciation and amortization (2) | | | (30,597 | ) | | | (64,513 | ) | | | — | | | | (33 | ) | | | (98 | ) | | | (320 | ) | | | — |
Date construction completed | | | 1987 | | | | 1992 | | | | 2008 | | | | N/A | | | | N/A | | | | N/A | | | | N/A |
| | | | | | | |
Investments in real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | | | | | | | | | | | | |
Balance, beginning of the year | | $ | 579,856 | | | $ | 574,983 | | | $ | 442,798 | | | | | | | | | | | | | | | | |
Additions during the year: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Improvements | | | 6,871 | | | | 100,841 | | | | 136,725 | | | | | | | | | | | | | | | | |
Deductions during the year: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of real estate sold | | | (24,214 | ) | | | (62,436 | ) | | | — | | | | | | | | | | | | | | | | |
Asset impairment | | | (13,000 | ) | | | (11,023 | ) | | | — | | | | | | | | | | | | | | | | |
Retirements | | | (15,498 | ) | | | (22,509 | ) | | | (4,540 | ) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, end of the year | | $ | 534,015 | | | $ | 579,856 | | | $ | 574,983 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated depreciation related to investments in real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | | | | | | | | | | | | |
Balance, beginning of the year | | $ | (101,191 | ) | | $ | (111,619 | ) | | $ | (106,644 | ) | | | | | | | | | | | | | | | |
Additions during the year | | | (9,868 | ) | | | (8,729 | ) | | | (9,515 | ) | | | | | | | | | | | | | | | |
Retirements during the year | | | 15,498 | | | | 19,157 | | | | 4,540 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, end of the year | | $ | (95,561 | ) | | $ | (101,191 | ) | | $ | (111,619 | ) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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. |
The aggregate gross cost of our investments in real estate for federal income tax purposes approximated $399.8 million as of December 31, 2009 (unaudited).
110
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Members
TPG/CalSTRS, LLC:
We have audited the accompanying consolidated balance sheets of TPG/CalSTRS, LLC (a Delaware limited liability company) (“TPG/CalSTRS”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, members’ equity and comprehensive loss, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of TPG/CalSTRS’ management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit 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. We were not engaged to perform an audit of TPG/CalSTRS’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of TPG/CalSTRS’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2009 the Company adopted FAS 160Noncontrolling Interest in Consolidated Financial Statements(codified in FASB ASC 810Consolidation). All years and periods presented have been reclassified to conform to the adopted accounting standards.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TPG/CalSTRS at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Los Angeles, California
March 19, 2010
111
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
(In thousands)
| | | | | | | | |
| | | 2009 | | | 2008 | |
| ASSETS | | | | | | | | |
Investments in real estate: | | | | | | | | |
Operating properties | | $ | 1,039,627 | | | $ | 1,024,503 | |
Land and improvements | | | 120,188 | | | | 120,016 | |
Land improvements—development properties | | | 24,982 | | | | 24,999 | |
Tenant improvements | | | 207,888 | | | | 197,923 | |
| | | | | | | | |
| | | 1,392,685 | | | | 1,367,441 | |
Less accumulated depreciation and impairment losses | | | (247,522 | ) | | | (143,040 | ) |
| | | | | | | | |
| | | 1,145,163 | | | | 1,224,401 | |
Investments in real estate—land held for sale | | | 3,853 | | | | 3,835 | |
| | | | | | | | |
| | | 1,149,016 | | | | 1,228,236 | |
Investments in unconsolidated real estate entities | | | 50,844 | | | | 45,347 | |
Cash and cash equivalents, unrestricted | | | 3,911 | | | | 10,668 | |
Restricted cash | | | 87,441 | | | | 51,583 | |
Accounts receivable, net of allowance for doubtful accounts of $429 and $121 as of 2009 and 2008, respectively | | | 1,669 | | | | 3,681 | |
Receivables from unconsolidated real estate entities | | | 295 | | | | — | |
Deferred leasing costs and value of in-place leases, net of accumulated amortization of $59,151 and $57,312 as of 2009 and 2008, respectively | | | 77,938 | | | | 88,587 | |
Deferred loan costs, net of accumulated amortization of $5,000 and $5,339 as of 2009 and 2008, respectively | | | 1,702 | | | | 2,367 | |
Deferred rents | | | 68,273 | | | | 62,060 | |
Acquired above market leases, net of accumulated amortization of $5,519 and $5,835 as of 2009 and 2008, respectively | | | 1,810 | | | | 2,435 | |
Prepaid expenses and other assets | | | 5,131 | | | | 4,820 | |
Assets associated with discontinued operations | | | — | | | | 86 | |
| | | | | | | | |
Total assets | | $ | 1,448,030 | | | $ | 1,499,870 | |
| | | | | | | | |
| LIABILITIES AND EQUITY | | | | | | | | |
Commitments and contingencies Liabilities: | | | | | | | | |
Mortgage loans | | $ | 1,042,635 | | | $ | 989,305 | |
Other secured loans | | | 287,859 | | | | 322,086 | |
Unsecured loans, net of unamortized discount of $3,933 | | | 15,825 | | | | — | |
Accounts payable and other liabilities | | | 41,302 | | | | 49,569 | |
Due to affiliate | | | 1,676 | | | | 4,967 | |
Acquired below market leases, net of accumulated amortization of $11,790 and $9,931 as of 2009 and 2008, respectively | | | 10,173 | | | | 12,548 | |
Prepaid rent and deferred revenue | | | 6,692 | | | | 6,270 | |
Liabilities associated with discontinued operations | | | — | | | | 121 | |
| | | | | | | | |
Total liabilities | | | 1,406,162 | | | | 1,384,866 | |
| | | | | | | | |
Redeemable noncontrolling interest | | | — | | | | 18,771 | |
Members’ equity, including $530 and $1,246 accumulated other comprehensive loss as of 2009 and 2008, respectively | | | 41,868 | | | | 96,233 | |
| | | | | | | | |
Total liabilities and members’ equity | | $ | 1,448,030 | | | $ | 1,499,870 | |
| | | | | | | | |
See accompanying notes to consolidated financial information.
112
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2009, 2008 and 2007
(In thousands)
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Revenues: | | | | | | | | | | | | |
Rental | | $ | 134,627 | | | $ | 131,617 | | | $ | 127,570 | |
Tenant reimbursements | | | 49,593 | | | | 49,375 | | | | 36,143 | |
Parking | | | 15,073 | | | | 15,455 | | | | 13,934 | |
Other | | | 3,531 | | | | 3,704 | | | | 5,365 | |
| | | | | | | | | | | | |
Total revenues | | | 202,824 | | | | 200,151 | | | | 183,012 | |
| | | | | | | | | | | | |
Expenses: | | | | | | | | | | | | |
Operating | | | 75,976 | | | | 77,585 | | | | 73,153 | |
Real estate and other taxes | | | 22,633 | | | | 24,624 | | | | 20,683 | |
General and administrative | | | 9,820 | | | | 9,212 | | | | 10,412 | |
Parking | | | 3,429 | | | | 3,158 | | | | 2,606 | |
Depreciation | | | 49,401 | | | | 46,440 | | | | 43,483 | |
Amortization | | | 14,859 | | | | 17,250 | | | | 24,483 | |
Interest | | | 49,541 | | | | 67,102 | | | | 81,247 | |
Impairment loss | | | 59,133 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total expenses | | | 284,792 | | | | 245,371 | | | | 256,067 | |
| | | | | | | | | | | | |
Loss from continuing operations before interest income and equity in net income (loss) of unconsolidated real estate entities | | | (81,968 | ) | | | (45,220 | ) | | | (73,055 | ) |
Interest income | | | 255 | | | | 1,165 | | | | 2,761 | |
Equity in net income (loss) of unconsolidated real estate entities | | | 1,834 | | | | (18,123 | ) | | | (9,001 | ) |
| | | | | | | | | | | | |
Loss from continuing operations | | | (79,879 | ) | | | (62,178 | ) | | | (79,295 | ) |
(Loss) income from discontinued operations | | | (83 | ) | | | (104 | ) | | | 7,662 | |
| | | | | | | | | | | | |
Net loss | | $ | (79,962 | ) | | $ | (62,282 | ) | | $ | (71,633 | ) |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial information.
113
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY AND COMPREHENSIVE LOSS
Years Ended December 31, 2009, 2008 and 2007
(In thousands)
| | | | | | | | | | | | |
| | | CalSTRS | | | TPG | | | Total | |
Balance-December 31, 2006 | | $ | 67,458 | | | $ | 48,060 | | | $ | 115,518 | |
Contributions | | | 90,904 | | | | 20,566 | | | | 111,470 | |
Distributions | | | (10,692 | ) | | | (4,161 | ) | | | (14,853 | ) |
Fair market value change of redeemable noncontrolling interest | | | 2,251 | | | | 750 | | | | 3,001 | |
Syndication fee | | | (1,678 | ) | | | (559 | ) | | | (2,237 | ) |
Net loss | | | (54,193 | ) | | | (17,440 | ) | | | (71,633 | ) |
Other comprehensive loss | | | (31 | ) | | | 46 | | | | 15 | |
| | | | | | | | | | | | |
Comprehensive loss | | | (54,224 | ) | | | (17,394 | ) | | | (71,618 | ) |
| | | | | | | | | | | | |
Balance-December 31, 2007 | | | 94,019 | | | | 47,262 | | | | 141,281 | |
Contributions | | | 5,892 | | | | 1,965 | | | | 7,857 | |
Fair market value change of redeemable noncontrolling interest | | | 6,885 | | | | 2,295 | | | | 9,180 | |
Net loss | | | (46,711 | ) | | | (15,571 | ) | | | (62,282 | ) |
Other comprehensive income | | | 75 | | | | 122 | | | | 197 | |
| | | | | | | | | | | | |
Comprehensive loss | | | (46,636 | ) | | | (15,449 | ) | | | (62,085 | ) |
| | | | | | | | | | | | |
Balance-December 31, 2008 | | | 60,160 | | | | 36,073 | | | | 96,233 | |
Contributions | | | 16,800 | | | | 5,600 | | | | 22,400 | |
Distributions | | | (724 | ) | | | (724 | ) | | | (1,448 | ) |
Fair market value change of redeemable noncontrolling interest | | | 2,946 | | | | 984 | | | | 3,930 | |
Net loss | | | (60,043 | ) | | | (19,919 | ) | | | (79,962 | ) |
Other comprehensive income | | | 536 | | | | 179 | | | | 715 | |
| | | | | | | | | | | | |
Comprehensive loss | | | (59,507 | ) | | | (19,740 | ) | | | (79,247 | ) |
| | | | | | | | | | | | |
Balance-December 31, 2009 | | $ | 19,675 | | | $ | 22,193 | | | $ | 41,868 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial information.
114
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009, 2008 and 2007
(In thousands)
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net loss | | $ | (79,962 | ) | | $ | (62,282 | ) | | $ | (71,633 | ) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | | | | | | | | |
Gain on sale of real estate | | | — | | | | — | | | | (7,932 | ) |
Depreciation and amortization expense | | | 64,260 | | | | 63,622 | | | | 67,955 | |
Amortization of above and below market leases, net | | | (1,750 | ) | | | (1,566 | ) | | | (4,422 | ) |
Amortization of loan costs | | | 2,765 | | | | 3,701 | | | | 4,681 | |
Expense of previously capitalized assets | | | 375 | | | | — | | | | — | |
Allowance for doubtful accounts | | | 351 | | | | 113 | | | | 283 | |
Equity in net (loss) income in unconsolidated real estate entities | | | (1,834 | ) | | | 18,123 | | | | 9,001 | |
Deferred rents, net | | | (5,190 | ) | | | (8,782 | ) | | | (12,281 | ) |
Impairment loss | | | 59,133 | | | | — | | | | — | |
Distributions received from unconsolidated real estate entities | | | 1,809 | | | | — | | | | — | |
Purchase of interest rate caps | | | (379 | ) | | | — | | | | — | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | 2,095 | | | | 1,153 | | | | 2,960 | |
Due from affiliates | | | (288 | ) | | | — | | | | — | |
Prepaid expenses and other assets | | | (1,078 | ) | | | (856 | ) | | | 14,922 | |
Deferred rents and deferred lease costs | | | (5,493 | ) | | | (10,664 | ) | | | (16,825 | ) |
Accounts payable and other liabilities | | | (915 | ) | | | 1,514 | | | | (260 | ) |
Due to affiliates | | | (3,291 | ) | | | (2,375 | ) | | | 1,835 | |
Prepaid rent and deferred revenue | | | 16 | | | | 753 | | | | 1,393 | |
Deferred interest payable | | | 4 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net cash (used in) provided by operating activities | | | 30,628 | | | | 2,454 | | | | (10,323 | ) |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Expenditures for real estate | | | (36,047 | ) | | | (85,182 | ) | | | (246,543 | ) |
Proceeds from sale of real estate | | | — | | | | — | | | | 23,594 | |
Distributions received from unconsolidated real estate entities | | | 362 | | | | 570 | | | | 369 | |
Investments in unconsolidated real estate entities | | | (5,000 | ) | | | (2,988 | ) | | | (73,750 | ) |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (40,685 | ) | | | (87,600 | ) | | | (296,330 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Proceeds from mortgage and other secured loans | | | 36,616 | | | | 80,072 | | | | 219,886 | |
Repayment of mortgage loan | | | (18,410 | ) | | | (4,613 | ) | | | (14,570 | ) |
Members’ contributions | | | 22,400 | | | | 7,857 | | | | 111,472 | |
Members’ distributions | | | (1,448 | ) | | | — | | | | (14,853 | ) |
Change in restricted cash | | | (35,858 | ) | | | 5,685 | | | | 3,202 | |
Payment of loan costs | | | — | | | | — | | | | (1,591 | ) |
| | | | | | | | | | | | |
Net cash provided by financing activities | | | 3,300 | | | | 89,001 | | | | 303,546 | |
| | | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (6,757 | ) | | | 3,855 | | | | (3,107 | ) |
Cash and cash equivalents, at beginning of period | | | 10,668 | | | | 6,813 | | | | 9,920 | |
| | | | | | | | | | | | |
Cash and cash equivalents, at end of period | | $ | 3,911 | | | $ | 10,668 | | | $ | 6,813 | |
| | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
Cash paid during the period for interest, including capitalized interest of $228, $2,020 and $3,075 for the years ended December 31, 2009, 2008 and 2007, respectively | | $ | 48,101 | | | $ | 67,015 | | | $ | 78,546 | |
Other comprehensive income | | | 468 | | | | 197 | | | | 15 | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | | | | | | | |
Investments in real estate included in accounts payable and other liabilities | | | 3,187 | | | | 7,377 | | | | 3,855 | |
Decrease in investments in real estate and accumulated depreciation for removal of fully amortized improvements | | | 1,480 | | | | 3,944 | | | | 4,887 | |
Issuance of note payable for buyout of noncontrolling interest | | | 19,758 | | | | — | | | | — | |
Syndication fee related to the investment in Austin Portfolio Joint Venture | | | — | | | | — | | | | 2,237 | |
Increase in lease inducements included in deferred rent | | | 511 | | | | 1,001 | | | | 6,668 | |
See accompanying notes to consolidated financial information.
115
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION
Years Ended December 31, 2009, 2008 and 2007
(Tabular amounts in thousands, except share and per share amounts)
1. Organization
TPG/CalSTRS, LLC (“TPG/CalSTRS” or “the Company”) was formed on December 23, 2002 as a Delaware limited liability company for the purpose of acquiring 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 can be positively impacted by introduction of new capital and/or management.
The original members of TPG/CalSTRS were Thomas Properties Group, LLC, a Delaware limited liability company, with a 5% ownership interest and California State Teachers’ Retirement System (“CalSTRS”), with a 95% ownership interest.
TPG/CalSTRS is the sole member of TPGA, LLC, a Delaware limited liability company, which is the managing member of TPG Plaza Investments, LLC (“TPG Plaza”), a Delaware limited liability company. Prior to the second quarter of 2009, TPGA, LLC had an 85.4% ownership interest in TPG Plaza. TPG/CalSTRS’ financial statements are consolidated with the accounts of TPGA, LLC and TPG Plaza. The ownership interest of the other member of TPG Plaza is reflected in the accompanying balance sheets as redeemable noncontrolling interest. During the second quarter of 2009, TPG/CalSTRS redeemed the approximately 15% noncontrolling interest held by the other member. Effective with this redemption, which is discussed further in note 9, TPG/CalSTRS owns 100% of TPG Plaza.
On January 28, 2003, TPG Plaza purchased an office building complex located in Los Angeles, California, commonly known as City National Plaza. On October 13, 2004, Thomas Properties Group, LLC contributed its interest in TPG/CalSTRS to Thomas Properties Group, L.P. (“TPG”), a Maryland limited partnership, in connection with the initial public offering of TPG’s sole general partner, Thomas Properties Group, Inc. CalSTRS contributed to TPG/CalSTRS its interest in office buildings located in Reston, Virginia, commonly known as Reflections I and Reflections II. In addition, TPG increased its ownership interest in TPG/CalSTRS from 5% to 25%. TPG acts as the managing member of TPG/CalSTRS. During 2005, TPG/CalSTRS acquired four properties in suburban Philadelphia, Pennsylvania, and four properties in Houston, Texas, including a 6.3 acre (unaudited) development site in Houston, Texas. During 2006, TPG/CalSTRS sold a suburban office property in suburban Philadelphia, Pennsylvania, and acquired a four-building campus and 24.0 acre (unaudited) development site in Houston, Texas. During 2007, TPG/CalSTRS acquired two suburban office properties in Fairfax, Virginia and sold one office property in Houston Texas. In addition, TPG/CalSTRS acquired a 25% interest in the Austin Portfolio Joint Venture which owns a portfolio of ten office properties in Austin, Texas.
116
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
As of December 31, 2009, TPG/CalSTRS owned a 100% interest in the following twelve properties:
| | | | |
Property | | Type | | Location |
| | |
City National Plaza | | High-rise office | | Los Angeles Central Business District, California |
Reflections I | | Suburban office—single tenancy | | Reston, Virginia |
Reflections II | | Suburban office—single tenancy | | Reston, Virginia |
Four Falls Corporate Center | | Suburban office | | Conshohocken, Pennsylvania |
Oak Hill Plaza | | Suburban office | | King of Prussia, Pennsylvania |
Walnut Hill Plaza | | Suburban office | | King of Prussia, Pennsylvania |
San Felipe Plaza | | High-rise office | �� | Houston, Texas |
2500 City West | | Suburban office | | Houston, Texas |
Brookhollow Central I, II and III | | Suburban office | | Houston, Texas |
CityWestPlace | | Suburban office and undeveloped land | | Houston, Texas |
Centerpointe I & II | | Suburban office | | Fairfax, Virginia |
Fair Oaks Plaza | | Suburban office | | Fairfax, Virginia |
TPG/CalSTRS, LLC also owns a 25% interest in a joint venture which owns the following ten properties (“Austin Portfolio Joint Venture Properties”):
| | | | |
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 |
Research Park Plaza I & II | | Suburban office | | Austin, Texas |
Park Centre | | Suburban office | | Austin, Texas |
Great Hills Plaza | | Suburban office | | Austin, Texas |
Stonebridge Plaza II | | Suburban office | | Austin, Texas |
Westech 360 I—IV | | Suburban office | | Austin, Texas |
Either member of TPG/CalSTRS may trigger a 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 either elect to buy the initiating party’s interest, or sell its own interest to the initiating party. Under certain events, CalSTRS has a buy-out option to purchase TPG’s interest in TPG/CalSTRS. The buy-out price is generally based on a 3% discount to appraised fair market value.
TPG is required to use diligent efforts to sell each joint venture property within five years of that property reaching stabilization, except that for stabilized properties, TPG is required to perform a hold/sell analysis at least annually, and make a recommendation to the management committee regarding the appropriate holding period for these properties.
Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable limited liability company agreements. Such allocations may differ
117
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
from the stated ownership percentage interests in such entities as a result of preferred returns and allocation formulas as described in the limited liability company agreements. Following are the stated ownership percentages, prior to any preferred or special allocations, as of December 31, 2009:
| | | |
All properties, excluding Austin Portfolio Joint Venture Properties: | | | |
CalSTRS | | 75.0 | % |
TPG | | 25.0 | % |
Austin Portfolio Joint Venture Properties: | | | |
CalSTRS | | 18.7 | % |
TPG | | 6.3 | % |
Other members | | 75.0 | % |
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
In June 2009, the FASB issued FASB ASC 105, “Generally Accepted Accounting Principles.” This standard establishes the FASB Accounting Standards Codification (the “Codification”) as the sole source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). FASB ASC 105 is effective for interim and annual reporting periods ending after September 15, 2009. We have updated our references to accounting literature in these consolidated financial statements to those contained in the Codification. The adoption of FASB ASC 105 did not impact our financial position or results of operations.
Principles of Consolidation
The accompanying consolidated financial statements include all the accounts of TPG/CalSTRS and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
We hold interests, together with certain third parties, in a limited liability company which we consolidate in our financial statements. Such interests are subject to the provisions of FASB ASC 810, “Consolidation” and AICPA Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures”. Based on the provisions set forth in these rules, we consolidate the limited liability company because it is considered a variable interest entity and we are the primary beneficiary.
Cash Equivalents
TPG/CalSTRS considers all highly liquid financial instruments purchased with an original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash consists of property lockbox deposits under the control of lenders to fund reserves, debt service and operating expenditures. See Note 3 for additional information on restrictions under the terms of certain secured notes payable.
118
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
Investments in Real Estate
Investments in real estate are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:
| | |
Buildings | | 40 years |
Building improvements | | 5 to 40 years |
Tenant improvements | | Shorter of the useful lives or the terms of the
related leases. |
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 $11,563,000 and $11,336,000 as of December 31, 2009 and 2008, respectively. In December 2007, the FASB issued FASB ASC 805-10, “Business Combinations,” to create greater consistency in the accounting and financial reporting of business combinations. FASB ASC 805-10-05 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. FASB 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, FASB ASC 805-10 requires that acquisition-related costs and restructuring costs be recognized separately from the business combination and expensed as incurred. FASB ASC 805-10 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. The adoption of FASB ASC 805-10 did not have a material impact on our financial position or results of operations.
Investments in Real Estate- Land held for sale
TPG/CalSTRS considers assets to be held for sale pursuant to the provisions of FASB ASC 360, “Property, Plant and Equipment.” The held for sale classification for real estate owned is evaluated quarterly.
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, “Investments—Equity Method and Joint Ventures”, we would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of our investment.
119
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
We recorded an impairment charge of our investment in the Austin Portfolio Joint Venture, which is accounted for under the equity method, for the years ended December 31, 2009 and 2008 of $4.9 million and $4.8 million, respectively. These non-cash impairment charges related to our investment in the Austin Portfolio Joint Venture are included in the “Equity in net loss of unconsolidated real estate entities” line item in the consolidated statements of operations for the respective years. In addition, we recorded impairment charges related to certain of our wholly-owned properties in accordance with the provisions of FASB ASC 360, “Property, Plant and Equipment.” as follows: Four Falls Corporate Center of $12.3 million; Walnut Hill Plaza of $5.4 million and Centerpointe I & II of $41.3 million. There were no impairment charges recorded for our wholly-owned properties for the year ended December 31, 2008. These non-cash impairment charges related to our properties are included in the “Impairment loss” line item in the consolidated statements of operations.
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. 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.
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 TPG/CalSTRS acquired interests, based on the percentage interest acquired. For purchases of additional interests that were consummated subsequent to June 30, 2001, the effective date of FASB ASC 805, “Business Combinations”, the fair value of the real estate acquired is allocated to 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, 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 allocated to land, building, tenant and site improvements based on management’s 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 allocating 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) management’s 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 are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the terms in the respective leases. As of December 31, 2009 and 2008, we had an asset related to above market leases of $1,810,000 and $2,435,000, respectively, net of accumulated amortization
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(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
of $5,519,000 and $5,835,000, respectively, and a liability related to below market leases of $10,173,000 and $12,548,000, respectively, net of accumulated accretion of $11,790,000 and $9,931,000, respectively. The weighted average amortization period for the above and below market leases was approximately 3.4 years and 4.6 years, respectively, as of December 31, 2009 and 4.5 years as of December 31, 2008.
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 allocated between in-place lease values and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s 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 TPG/CalSTRS because such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated 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 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 related to the acquired in-place lease value and acquired above and below market leases at December 31, 2009:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Thereafter | | | Total | |
Amortization expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Acquired in-place lease value | | $ | 6,363,551 | | | $ | 5,329,924 | | | $ | 4,687,985 | | | $ | 4,275,264 | | | $ | 3,955,566 | | | $ | 9,095,722 | | | $ | 33,708,012 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustments to rental revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Above market leases | | $ | 446,642 | | | $ | 402,592 | | | $ | 293,920 | | | | 195,679 | | | $ | 182,526 | | | $ | 288,669 | | | $ | 1,810,028 | |
Below market leases | | $ | (2,095,613 | ) | | $ | (1,906,498 | ) | | $ | (1,722,629 | ) | | $ | (1,614,224 | ) | | $ | (1,356,181 | ) | | $ | (1,478,227 | ) | | $ | (10,173,372 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net adjustment to rental revenues | | $ | (1,648,971 | ) | | $ | (1,503,906 | ) | | $ | (1,428,709 | ) | | $ | (1,418,545 | ) | | $ | (1,173,655 | ) | | $ | (1,189,558 | ) | | $ | (8,363,344 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 $6,542,000, $9,849,000 and $13,156,000 for the years ended December 31, 2009, 2008, and 2007, respectively. Additionally, the net impact of the amortization of acquired above market leases and acquired below market leases increased revenue by $1,750,000, $1,566,000 and $4,420,000 for the years ended December 31, 2009, 2008 and 2007, 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 accounts receivable. TPG/CalSTRS also maintains 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 reviews of prospective tenant’s risk profiles prior to lease execution and continual monitoring of our tenant portfolio to identify potential problem tenants.
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(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
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 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 statement of operations, are recognized when the related leases are canceled and TPG/CalSTRS has no continuing obligation to provide services to such former tenants.
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.
Derivative Instruments and Hedging Activities
FASB ASC 815, “Derivatives and Hedging”, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by FASB ASC 815, TPG/CalSTRS records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income, outside of earnings, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. TPG/CalSTRS assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings. We use a variety of methods and assumptions based on market conditions and risks existing at each balance sheet date to determine the approximate fair values of our cash flow hedges.
The objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, TPG/CalSTRS primarily uses interest rate caps as part of its cash flow hedging strategy. Under FASB ASC 815, our interest rate caps qualify as cash flow hedges. No derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, TPG/CalSTRS does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.
At December 31, 2009 and 2008, interest rate caps with a fair value of $3,000 and $(11,000), respectively, were included in deferred loan costs. The change in net unrealized gain (loss) of $716,000, $197,000 and $15,000 in 2009, 2008 and 2007, respectively, for these derivatives designated as cash flow hedges is separately disclosed in the statements of members’ equity and comprehensive loss. On December 18, 2009, we entered into a settlement agreement with Lehman Brothers Holdings Inc. for $5.0 million to terminate the interest rate collar agreement for TPG Austin Portfolio Holdings LLC, which we paid on January 25, 2010.
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(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
On January 1, 2008 we adopted FASB ASC 820-10, “Fair Value Measurement.” FASB ASC 820-10 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. FASB ASC 820-10 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. FASB ASC 820-10-35 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, FASB ASC 820-10-35 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs utilize quoted prices (unadjusted) for identical assets or liabilities in active markets that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
To comply with the provisions of FASB ASC 820-10-35, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. We have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We do not have any fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2009.
Asset Retirement Obligation
We account for asset retirement obligations in accordance with FASB ASC 410, “Asset Retirement and Environmental Obligations”, which provides clarification with respect to the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing and/or method of settlement of the obligation is conditional on a future event. FASB ASC 410-20-25 requires that the fair value of a liability for a conditional asset retirement obligation be recognized in the period in which it was incurred if a reasonable estimate of fair value can be made. TPG/CalSTRS has determined that conditional legal obligations exist for City National Plaza related primarily to asbestos-containing materials. As of December 31, 2009 and 2008, the liability for conditional asset retirement obligations for City National Plaza was $0.8 million and $1.0 million, respectively.
Income Taxes
TPG/CalSTRS and its subsidiaries, which are pass-through entities, 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 Company is subject to income taxes in Texas and records its share of Texas income taxes from the Austin Portfolio Joint Venture Properties. For the year ended December 31, 2009, the Company recorded Texas income tax expense of $621,000 as a component of real estate and other taxes. The Company’s share of Texas income taxes from the Austin Portfolio Joint Venture Properties of $168,000 is recorded as a component of equity in net income/loss of unconsolidated real estate entities.
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(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
Effective December 31, 2009, TPG/CalSTRS adopted pronouncement ASU 2009-06 with respect to how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. The pronouncement requires the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are “more likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes federal and certain states. Open tax years are those that are open for examinations by taxing authorities.
TPG/CalSTRS has had no examinations in progress and none are expected at this time. As of December 31, 2009, management has reviewed all open tax years and major jurisdictions and concluded the adoption of the new accounting guidance resulted in no impact to the Company’s financial position or results of operations. There is no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken in future tax returns.
Fair Value of Financial Instruments
FASB ASC 825-10-50-8, “Financial Instruments,” requires us to disclose fair value information about all financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate fair value.
Our estimates of the fair value of financial instruments as of December 31, 2009 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.
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.
As of December 31, 2009 and 2008, the estimated fair value of our mortgage and other secured loans and unsecured loan aggregates $1.3 billion and $1.2 billion, respectively, compared to the aggregate carrying value of $1.4 billion and $1.3 billion, respectively.
Adoption of FASB Statement No. 160
In December 2007, FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 requires all entities to report noncontrolling interests in subsidiaries within equity in the consolidated financial statements, but separate from the parent shareholders’ equity. SFAS 160 also requires any acquisitions or dispositions of noncontrolling interests that do not result in a change of control to be accounted for as equity transactions. In addition, SFAS 160 requires that a parent company recognize a gain or loss in net income when a subsidiary is deconsolidated upon a change in control. SFAS 160 applies to fiscal years beginning after December 15, 2008 and is adopted prospectively. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The adoption of SFAS 160 resulted in a reclassification of minority interests to a separate component of total equity on the balance sheet and net income attributable to noncontrolling interests is shown as a reduction from net income in calculating net income available to common stockholders on the statement of operations. All previous references to “minority interests” in the consolidated financial statements have been revised to “noncontrolling interests.” See Note 9—Equity for additional details.
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(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
Management’s 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.
TPG/CalSTRS has identified certain critical accounting policies that affect management’s more significant judgments and estimates used in the preparation of the consolidated financial statements. On an ongoing basis, TPG/CalSTRS will 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 and on various other assumptions that TPG/CalSTRS believes is reasonable under the circumstances.
TPG/CalSTRS must make estimates related to the collectability of accounts receivable related to minimum rent, deferred rent, expense reimbursements, lease termination fees and other income. TPG/CalSTRS 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.
TPG/CalSTRS is 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 its investments in real estate. These assessments have a direct impact on net income because if TPG/CalSTRS were to shorten the expected useful lives of its investments in real estate, TPG/CalSTRS would depreciate such investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
TPG/CalSTRS is required to make subjective assessments as to whether there are impairments in the values of its investments in real estate. These assessments have a direct impact on net income because recording an impairment loss results in a negative adjustment to net income.
TPG/CalSTRS is 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. These assessments have a direct impact on 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. TPG/CalSTRS estimates the fair value of rental properties utilizing a discounted cash flow analysis that includes projections of future revenues, expenses and capital improvement costs, similar to the income approach that is commonly utilized by appraisers.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Concentration of Risk
Financial instruments that subject TPG/CalSTRS to credit risk consist primarily of cash and accounts receivable. Unrestricted cash and restricted cash is maintained on deposit with high quality financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. There is a concentration of risk related to amounts that exceed the FDIC insurance coverage.
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(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
For the years ended December 31, 2009, 2008 and 2007, one tenant accounted for approximately 9.0%, 9.6% and 10.2%, respectively, of rent and tenant reimbursements (excluding tenant reimbursements for over-standard usage of certain operating expenses) of TPG/CalSTRS.
TPG/CalSTRS generally requires either a security deposit, letter of credit or a guarantee from its tenants.
Expenses
Expenses include all costs incurred by TPG/CalSTRS in connection with the management, operation, maintenance and repair of the properties and are expensed as incurred.
Recent Accounting Pronouncements
In February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events” (Topic 855):” Amendments to Certain Recognition and Disclosure Requirements”. ASU No. 2010-09 amends ASC 855 and requires public companies to evaluate subsequent events through the date that the financial statements are issued. This update is effective immediately. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. This ASU became effective for us on January 1, 2010. We do not currently anticipate that this ASU will have a material impact on our consolidated financial statements upon adoption.
In December 2009, the FASB issued ASU No. 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets.” ASU No. 2009-16 is a revision to ASC 860, “Transfers and Servicing,” and amends the guidance on accounting for transfers of financial assets, including securitization transactions, where entities have continued exposure to risks related to transferred financial assets. ASU No. 2009-16 also expands the disclosure requirements for such transactions. This ASU will become effective for us on January 1, 2010. We are currently evaluating the impact that this ASU will have on our financial statements.
In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This ASU amends the FASB Accounting Standards Codification for Statement 167. This Update is to defer the effective date of the amendments to the consolidation requirements made by FASB Statement 167 to a reporting entity’s interest in certain types of entities and clarify other aspects of the Statement 167 amendments. As a result of the deferral, a reporting entity will not be required to apply the Statement 167 amendments to the Subtopic 810-10 consolidation requirements to its interest in an entity that meets the criteria to qualify for the deferral. This Update also clarifies how a related party’s interests in an entity should be considered when evaluating the criteria for determining whether a decision maker or service provider fee represents a variable interest. In addition, the Update also clarifies that a quantitative calculation should not be the sole basis for evaluating whether a decision maker’s or service provider’s fee is a variable interest. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2009, which for us means January 1, 2010. We are currently evaluating the impact that this ASU will have on our financial statements.
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(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
In June 2009, the FASB issued FASB ASC 810-10-25, “Consolidation.” FASB ASC 810-10-25 revises the approach to determining the primary beneficiary of a Variable Interest Entity (“VIE”) to be more qualitative in nature and requires companies to more frequently reassess whether they must consolidate a VIE. FASB ASC 810-10-25 is effective for fiscal years beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. We are currently evaluating the potential impact of adopting FASB ASC 810-10-25 on our financial position and results of operations. The FASB subsequently amended certain aspects of this Topic with the issuance of ASU 2009-17.
In April 2009, the FASB issued FASB ASC 820, “Fair Value Measurements and Disclosures.” FASB ASC 820-10-50 requires fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. FASB ASC 820-10-50 is effective for interim and annual periods ending after June 15, 2009. FASB ASC 820-10-50 concerns disclosure only and will not have an impact on our financial position or results of operations.
In April 2009, the FASB issued FASB ASC 820, “Fair Value Measurements and Disclosures.” FASB ASC 820-10-65-4 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10 when the volume and level of activity for the asset or liability have significantly decreased. FASB ASC 820-10-65-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. FASB ASC 820-10-65-4 is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FASB ASC 820-10-65-4 did not have a material impact on our financial position or results of operations.
In February 2008, the FASB issued FASB ASC 820-10-15, “Fair Value Measurements and Disclosures.” FASB ASC 820-10-15 excludes FASB ASC 840-10, “Accounting for Leases”, and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FASB ASC 840-10. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB ASC 805-10, “Business Combinations”, regardless of whether those assets and liabilities are related to leases. The adoption of FASB ASC 820-10-15 did not have a material impact on our financial position or results of operations.
In December 2007, the FASB issued FASB ASC 805-10, “Business Combinations,” to create greater consistency in the accounting and financial reporting of business combinations. FASB ASC 805-10-05 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. FASB 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, FASB ASC 805-10 requires that acquisition-related costs and restructuring costs be recognized separately from the business combination and expensed as incurred. FASB ASC 805-10 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. The adoption of FASB ASC 805-10 did not have a material impact on our financial position or results of operations.
In February 2007, the FASB issued FASB ASC 825-10-05-5, “Financial Instruments.” This standard permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for the first fiscal year beginning after November 15, 2007. We did not elect the fair value measurement option for any financial assets or liabilities.
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NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 810-10, “Noncontrolling Interests in Consolidated Financial Statements,” which requires all entities to report noncontrolling interests in subsidiaries within equity in the consolidated financial statements, but separate from the parent shareholders’ equity. FASB ASC 810-10 also requires any acquisitions or dispositions of noncontrolling interests that do not result in a change of control to be accounted for as equity transactions. In addition, FASB ASC 810-10 requires that a parent company recognize a gain or loss in net income when a subsidiary is deconsolidated upon a change in control. Effective January 1, 2009, we adopted the provisions of FASB ASC 810-10. The retrospective presentation and disclosure requirements outlined by FASB ASC 810-10 have been incorporated for all periods herein. The adoption of FASB ASC 810-10 resulted in a reclassification of minority interests to a separate component of total equity on the balance sheet and net income attributable to noncontrolling interests is shown as a reduction from net income in calculating net income available to common stockholders on the statement of operations. All previous references to “minority interests” in the consolidated financial statements have been revised to “noncontrolling interests.” In connection with the issuance of FASB ASC 810-10, certain revisions were also made to FASB ASC 480-10, “Classification and Measurement of Redeemable Securities”. See Note 6- Earnings (Loss) Per Share and Note 7- Equity for additional details.
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(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
3. Mortgage and Other Secured Loans
A summary of the outstanding mortgage and other secured loans (in thousands) as of December 31, 2009 and 2008 is as follows. None of these loans are recourse to TPG/CalSTRS. In connection with some of the loans listed in the table below, TPG/CalSTRS is subject to customary non-recourse carve out obligations.
| | | | | | | | | | | | | |
| | | Interest Rate
at December 31, 2009 | | | Outstanding Debt | | Maturity
Date | | Maturity
Date at
End of
Extension
Options |
| | | 2009 | | 2008 | | |
City National Plaza (1)(2) | | | | | | | | | | | | | |
Senior mortgage loan (3) | | LIBOR + 1.07 | % | | $ | 348,925 | | $ | 355,300 | | 7/9/2010 | | 7/9/2010 |
Senior mezzanine loan-Note A (3) | | LIBOR + 2.59 | % | | | 67,886 | | | 66,446 | | 7/9/2010 | | 7/9/2010 |
Senior mezzanine loan-Note B (3) | | LIBOR + 1.90 | % | | | 23,569 | | | 24,000 | | 7/9/2010 | | 7/9/2010 |
Senior mezzanine loan-Note C (3) | | LIBOR + 2.25 | % | | | 23,569 | | | 24,000 | | 7/9/2010 | | 7/9/2010 |
Senior mezzanine loan-Note D (3) | | LIBOR + 2.50 | % | | | 23,569 | | | 24,000 | | 7/9/2010 | | 7/9/2010 |
Senior mezzanine loan-Note E (3) | | LIBOR + 3.05 | % | | | 22,293 | | | 22,700 | | 7/9/2010 | | 7/9/2010 |
Junior mezzanine loan (3) | | LIBOR + 5.00 | % | | | 58,188 | | | 56,954 | | 7/9/2010 | | 7/9/2010 |
Note payable to former partner | | 5.75 | % | | | 19,758 | | | — | | 7/1/2012 | | 1/4/2016 |
CityWestPlace | | | | | | | | | | | | | |
Fixed | | 6.16 | % | | | 121,000 | | | 121,000 | | 7/6/2016 | | 7/6/2016 |
Floating (3) (4) | | LIBOR + 1.25 | % | | | 92,400 | | | 92,400 | | 7/1/2010 | | 7/1/2011 |
San Felipe Plaza | | | | | | | | | | | | | |
Mortgage loan-Note A (10) | | 5.28 | % | | | 101,500 | | | 101,500 | | 8/11/2010 | | 8/11/2010 |
Mortgage loan-Note B (10) | | LIBOR + 3.00 | % | | | 16,200 | | | 16,200 | | 8/11/2010 | | 8/11/2010 |
2500 City West | | | | | | | | | | | | | |
Mortgage loan-Note A (10) | | 5.28 | % | | | 70,000 | | | 70,000 | | 8/11/2010 | | 8/11/2010 |
Mortgage loan-Note B (10) | | LIBOR + 3.00 | % | | | 14,132 | | | 11,378 | | 8/11/2010 | | 8/11/2010 |
| | | | | | | | | | | | | |
Brookhollow Central I, II and III | | | | | | | | | | | | | |
Mortgage loan-Note A (3) (10) | | LIBOR + 0.44 | % | | | 24,154 | | | 24,154 | | 8/9/2010 | | 8/9/2010 |
Mortgage loan-Note B (3) (10) | | LIBOR + 4.25 | % | | | 10,893 | | | 17,494 | | 8/9/2010 | | 8/9/2010 |
Mortgage loan-Note C (3) (10) | | LIBOR + 4.86 | % | | | 16,746 | | | 16,746 | | 8/9/2010 | | 8/9/2010 |
Four Falls Corporate Center | | | | | | | | | | | | | |
Mortgage loan-Note A | | 5.31 | % | | | 42,200 | | | 42,200 | | 3/6/2010 | | 3/6/2010 |
Mortgage loan-Note B (3)(5)(6)(7) | | LIBOR + 3.25 | % | | | 9,867 | | | 9,867 | | 3/6/2010 | | 3/6/2010 |
Oak Hill Plaza/Walnut Hill Plaza | | | | | | | | | | | | | |
Mortgage loan-Note A | | 5.31 | % | | | 35,300 | | | 35,300 | | 3/6/2010 | | 3/6/2010 |
Mortgage loan-Note B (3)(5)(7)(8) | | LIBOR + 3.25 | % | | | 9,152 | | | 9,152 | | 3/6/2010 | | 3/6/2010 |
Reflections I mortgage loan | | 5.23 | % | | | 21,788 | | | 22,169 | | 4/1/2015 | | 4/1/2015 |
Reflections II mortgage loan | | 5.22 | % | | | 9,077 | | | 9,236 | | 4/1/2015 | | 4/1/2015 |
Centerpointe I & II (9) | | | | | | | | | | | | | |
Senior mortgage loan (3) | | LIBOR + 0.60 | % (3) | | | 55,000 | | | 55,000 | | 2/9/2011 | | 2/9/2012 |
Mezzanine loan-Note A (3) | | LIBOR + 1.51 | % (3) | | | 25,000 | | | 14,501 | | 2/9/2011 | | 2/9/2012 |
Mezzanine loan-Note B (3) | | LIBOR + 2.49 | % (3) | | | 21,618 | | | 12,539 | | 2/9/2011 | | 2/9/2012 |
Mezzanine loan-Note C (3) | | LIBOR + 3.26 | % (3) | | | 22,162 | | | 12,855 | | 2/9/2011 | | 2/9/2012 |
Fair Oaks Plaza | | 5.52 | % | | | 44,300 | | | 44,300 | | 2/9/2017 | | 2/9/2017 |
| | | | | | | | | | | | | |
| | | | | $ | 1,350,246 | | $ | 1,311,391 | | | | |
| | | | | | | | | | | | | |
129
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
The LIBOR rate for the loans above was 0.23% at December 31, 2009.
| (1) | The City National Plaza senior mortgage loan and Notes B, C, D and E under the senior mezzanine loans are subject to exit fees equal to 0.25% of the loan amounts. Note A under the senior mezzanine loan and the junior mezzanine loan are subject to an exit fee equal to 0.5% of the loan amount. Under certain circumstances all of the exit fees will be waived. |
| (2) | Subsequent to December 31, 2009, we negotiated on behalf of CalSTRS, our partner in City National Plaza, for CalSTRS to acquire all of the property’s mezzanine debt, which has a principal balance of approximately $219.1 million, and is scheduled to mature on July 9, 2010. CalSTRS acquired this debt and will contribute it to the partnership’s equity, reducing the leverage on the property from $568.0 million to $348.9 million, all of which is first mortgage debt. We are in discussions with CalSTRS to obtain an option to participate in the loan purchase, on or after the maturity of the mezzanine debt, based on our current pro rata share of 25% of the existing City National Plaza equity. We are in discussions with lenders to refinance the senior mortgage loan. We believe there is sufficient equity in this project to achieve a refinancing. If TPG/CalSTRS is unable to extend or refinance this loan, the lender could repossess the property through foreclosure, which would result in a non-cash impairment charge and a potential loss of distributable cash flow. |
| (3) | The partnership that owns each property has purchased interest rate cap agreements for the funded portion of these loans. |
| (4) | This loan has a one-year extension option remaining at our election. |
| (5) | These loans are subject to exit fees equal to 1% of the loan amounts, however, under certain circumstances the exit fees will be waived. These loans bear interest at the greater of the one month LIBOR or 2.25% per annum, plus the applicable margin. As of December 31, 2009, one month LIBOR is below 2.25%, per annum. |
| (6) | This loan is secured by both a subordinate lien on the property and a payment guaranty issued by the special purpose entity which owns Oak Hill Plaza/Walnut Hill Plaza. |
| (7) | A subsidiary of TPG/CalSTRS was unable to repay the loan by the maturity date of March 6, 2010 and therefore, the loan is in default. Pending a resolution of the loan default, either through a restructure of the debt, a sale or other transfer of the properties or the appointment of a receiver, TPG/CalSTRS expects that TPG will continue to manage the properties pursuant to its management agreement with TPG/CalSTRS. The management and leasing agreement expired on March 1, 2010, and is automatically renewed for successive periods of one year each, unless TPG elects not to renew the agreement. Due to the maturity date default, the lender has the authority to terminate TPG as the property manager. If the Borrower is unable to extend or refinance this loan, the lender could repossess the property through foreclosure, which could result in additional impairment loss. |
| (8) | This loan is secured by both a subordinate lien on the property and a payment guaranty issued by the special purpose entity which owns Four Falls Corporate Center. |
| (9) | The Centerpointe I & II senior mortgage loan bears interest at a rate equal to one month LIBOR plus 0.60%. The mezzanine loans bear interest at a rate such that the weighted average of the rate on these loans and the rate on the senior mortgage loan secured by Centerpointe I & II equals LIBOR plus 1.59% per annum. The weighted average interest rate on the mezzanine loans as of December 31, 2009 was 2.6% per annum. The weighted average interest rate on all of the loans was 1.8% per annum. All of these loans have one one-year extension option remaining at our election subject to a debt service coverage ratio of 1:1. |
| (10) | We are in discussions with the lender to refinance this loan. We believe there is sufficient equity in this project to achieve a refinancing. If TPG/CalSTRS is unable to extend or refinance this loan, the lender could repossess the property through foreclosure, which would result in a non-cash impairment charge and a potential loss of distributable cash flow. |
130
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
The loan agreements generally require that all receipts collected from the properties be deposited in a lockbox account under the control of the lender to fund reserves, debt service and operating expenditures. These amounts are reflected as restricted cash in the accompanying balance sheets.
As of December 31, 2009, scheduled principal payments 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 |
2010 | | $ | 1,134,323 | (1) | | | 918,143 |
2011 | | | — | | | | 92,400 |
2012 | | | 19,758 | | | | 123,780 |
2013 | | | — | | | | — |
2014 | | | — | | | | — |
Thereafter | | | 196,165 | | | | 215,923 |
| | | | | | | |
| | $ | 1,350,246 | | | $ | 1,350,246 |
| | | | | | | |
| (1) | TPG/CalSTRS has extension options for $92.4 million and it plans to exercise these options. |
4. Related Party Transactions
TPG/CalSTRS incurred acquisition fees to an affiliate of TPG of $833,000 and $1,475,000 for the years ended December 31, 2007 and 2006, respectively, which have been capitalized to real estate. Such fees were paid upon acquisition of two properties in 2007 and one property in 2006. During the year ended December 31, 2007, an acquisition fee of $1,438,000 was incurred upon the acquisition of a 25% equity investment in the Austin Portfolio Joint Venture, which owns a portfolio of 10 properties. In 2008 and 2009 TPG/CalSTRS did not incur any acquisition fees.
TPG provides asset management services to TPG/CalSTRS. For the years ended December 31, 2009, 2008 and 2007, TPG/CalSTRS incurred asset management fees of $5,615,000, $5,841,000 and $6,256,000, respectively, to TPG, which are included in general and administrative expenses and loss from discontinued operations. An additional $354,000 and $353,000 were incurred for asset management fees for the Austin Portfolio Joint Venture Properties for the year ended December 31, 2009 and 2008, respectively.
Pursuant to a management and leasing agreement, TPG performs property management and leasing services for TPG/CalSTRS. TPG is entitled to property management fees calculated based on 3% of gross property revenues, paid on a monthly basis. In addition, TPG is reimbursed for compensation paid to certain of its employees and direct out-of-pocket expenses. For the years ended December 31, 2009, 2008 and 2007, TPG charged TPG/CalSTRS $5,905,000, $5,730,000 and $5,030,000, respectively, for property management fees and $2,626,000, $2,943,000 and $2,140,000, respectively, representing the cost of on-site property management personnel incurred on behalf of TPG/CalSTRS, which are included in operating expenses and loss from operations. An additional $3,406,000 and $3,435,000 were incurred for property management fees and $1,849,000 and $2,032,000 for costs of on-site property management personnel for the Austin Portfolio Joint Venture Properties for the year ended December 31, 2009 and 2008, respectively.
For new leases entered into by TPG/CalSTRS, TPG is entitled to leasing commissions, calculated at 4% of base rent during years 1 through 10 of a lease and 3% of base rent thereafter, where TPG acts as the procuring
131
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
broker, and 2% of lease rent during years 1 through 10 of a lease and 1.5% of base rent thereafter, where TPG acts as the co-operating broker. For lease renewals, where TPG is the procuring broker and there is no co-operating broker, TPG is entitled to leasing commissions, calculated at 4% of base rent. For lease renewals, where there is both a procuring and co-operating broker, if TPG is the procuring broker, it is entitled to receive 3% of base rents and if it’s the co-operating broker, it is entitled to receive 1.5% of base rents. Commissions are paid 50% at signing and 50% upon occupancy. The leasing commissions will be split on the customary basis between TPG and tenant representative when applicable. For the years ended December 31, 2009, 2008 and 2007, TPG/CalSTRS incurred leasing commissions to TPG of $1,049,000, $1,575,000 and $3,821,000, respectively, which are included in deferred leasing costs. An additional $1,077,000 and $2,529,000 were earned by TPG for leasing commissions for the Austin Portfolio Joint Venture Properties for the year ended December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, $680,000 and $4,963,000, respectively, are payable to TPG pursuant to the management and leasing agreements discussed above.
The management and leasing agreement expires on January 27, 2010, and is automatically renewed for successive periods of one year each, unless TPG elects not to renew the agreement.
TPG receives incentive compensation based on a minimum return on investment to CalSTRS, following which TPG would participate in cash flow above the stated return, subject to a clawback provision in the joint venture agreement if returns for a property fall below the stated return. For the year ended December 31, 2006, TPG earned incentive compensation of $521,000 related to the sale of Valley Square. TPG earned incentive compensation of $571,000 related to the sale of Intercontinental Center during the year ended December 31, 2007. None was earned for the years ended December 31, 2008 and December 31, 2009.
TPG acts as the development manager for the properties. TPG/CalSTRS pays TPG a fee based upon a market rate percentage of the total direct and indirect costs of the property, including the cost of all tenant improvements therein. For the years ended December 31, 2009, 2008 and 2007, TPG/CalSTRS incurred development management fees of $742,000, $2,040,000 and $1,600,000, respectively, to TPG, which have been capitalized to real estate. An additional $197,000 and $259,000 were incurred for the Austin Portfolio Joint Venture Properties for the years ended December 31, 2009 and 2008, respectively.
In connection with a retail restaurant tenant at City National Plaza, affiliates of TPG have acquired membership interests in the limited liability company comprising the tenant. In order to help balance the construction budget for the restaurant improvements and to allow for payment of outstanding construction obligations, TPG agreed to waive $150,000 of construction management fees it earned through December 15, 2008, and it also agreed to defer receipt of the remaining balance of fees owed of approximately $170,000 until such time as sufficient proceeds exist from the sale of additional membership units.
TPG/CalSTRS obtains insurance as part of a master insurance policy that includes all the properties in which TPG and affiliated entities have an investment and for which they perform investment advisory or property management services. Property insurance premiums are allocated to TPG/CalSTRS based on estimated insurable values. Liability insurance premiums are allocated to TPG/CalSTRS based on relative square footage. The allocated premiums for the years ended December 31, 2009, 2008 and 2007 are $5,825,000, $5,307,000 and $7,131,000, respectively, and are included in operating expenses and loss from discontinued operations.
TPG is a tenant in City National Plaza through May 2014. For the years ended December 31, 2009, 2008, and 2007, rental revenues from TPG were $378,000, $409,000, and $378,000, respectively.
At December 31, 2009, we had accounts receivable for advisor fee revenue of $394,000 due from the Austin Portfolio Joint Venture Properties.
132
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
5. Discontinued Operations
In January 2007, TPG/CalSTRS classified Intercontinental Center as held for sale, upon the decision to market the property for sale. In accordance with FASB ASC 360, “Property, Plant and Equipment”, the results of operations for Intercontinental Center are reflected in the consolidated statements of operations as discontinued operations since acquisition of the property in August 2005. The property was sold in April 2007. The residual amounts for the sale of Valley Square Office Park in 2006 are also reflected in discontinued operations for 2007. The results of operations for Valley Square Office Park are reflected in the consolidated statements of operations as discontinued operations from acquisition of the property in March 2005 through the date of sale in April 2006.
The following table summarizes the income and expense components that comprise income (loss) from discontinued operations before noncontrolling interests for the year ended December 31, 2009, 2008 and 2007 (in thousands):
| | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 |
Revenues: | | | | | | | | | | | |
Rental | | $ | — | | | $ | — | | | $ | 1,002 |
Tenant reimbursements | | | — | | | | — | | | | 146 |
Other | | | — | | | | 1 | | | | 29 |
| | | | | | | | | | | |
Total revenues | | | — | | | | 1 | | | | 1,177 |
| | | | | | | | | | | |
Expenses: | | | | | | | | | | | |
Operating and other expenses | | | 83 | | | | 105 | | | | 1,022 |
Interest expense | | | — | | | | — | | | | 425 |
Depreciation and amortization | | | — | | | | — | | | | — |
| | | | | | | | | | | |
Total expenses | | | 83 | | | | 105 | | | | 1,447 |
| | | | | | | | | | | |
Gain on sale of property | | | — | | | | — | | | | 7,932 |
| | | | | | | | | | | |
Income (loss) from discontinued operations | | $ | (83 | ) | | $ | (104 | ) | | $ | 7,662 |
| | | | | | | | | | | |
The following table summarizes the components that comprise the assets and liabilities associated with discontinued operations as of December 31, 2009 and 2008 (in thousands):
| | | | | | | | |
| | | 2009 | | | 2008 | |
| ASSETS | | | | | | | | |
Receivables including deferred rents | | $ | — | | | $ | 86 | |
| | | | | | | | |
Total assets associated with discontinued operations | | $ | — | | | $ | 86 | |
| | | | | | | | |
| LIABILITIES AND EQUITY | | | | | | | | |
Liabilities: | | | | | | | | |
Other liabilities | | $ | — | | | $ | 121 | |
| | | | | | | | |
Total liabilities associated with discontinued operations | | | — | | | | 121 | |
| | | | | | | | |
Members’ equity | | | (182 | ) | | | (35 | ) |
| | | | | | | | |
Total liabilities and members’ equity associated with discontinued operations | | $ | (182 | ) | | $ | 86 | |
| | | | | | | | |
133
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
6. Minimum Future Lease Rentals
TPG/CalSTRS has entered into various lease agreements with tenants as of December 31, 2009. The minimum future cash rents receivable on non-cancelable leases, including leases relating to the property held for sale, in each of the next five years and thereafter are as follows (in thousands):
| | | |
Year ending December 31, | | | |
2010 | | $ | 127,295 |
2011 | | | 123,872 |
2012 | | | 118,101 |
2013 | | | 108,777 |
2014 | | | 98,716 |
Thereafter | | | 327,521 |
| | | |
| | $ | 904,282 |
| | | |
The leases generally also require reimbursement of the tenant’s proportionate share of common area, real estate taxes and other operating expenses, which are not included in the amounts above.
7. Commitments and Contingencies
TPG/CalSTRS has been named as a defendant in a number of lawsuits in the ordinary course of business. TPG/CalSTRS believes that the ultimate settlement of these suits will not have a material adverse effect on its financial position and results of operations.
In connection with the ownership, operation and management of the real estate properties, TPG/CalSTRS may be potentially liable for costs and damages related to environmental matters. TPG/CalSTRS has not been notified by any governmental authority of any noncompliance, liability or other claim in connection with any of the properties, and TPG/CalSTRS is not aware of any other environmental condition with respect to any of the properties that management believes will have a material adverse effect on TPG/CalSTRS’ assets or results of operations.
8. Unconsolidated Real Estate Entities
As of the formation date in October 2008, TGP/CalSTRS indirectly owns a 25% interest in Square Mile Brookhollow LLC, an entity which purchased a mortgage loan (commonly referred to as Note B) which is secured by Brookhollow Central I, II and III. Our investment balances as of December 31, 2009 and 2008 were $0.8 million and $2.5 million, respectively.
TPG/CalSTRS also owns a 25% interest in the Austin Portfolio Joint Venture which owns the following ten properties all of which were purchased on June 1, 2007:
San Jacinto Center
Frost Bank Tower
One Congress Plaza
One American Center
300 West 6th Street
Research Park Plaza I & II
Park 22 I-III
Great Hills Plaza
Stonebridge Plaza II
Westech 360 I-IV
134
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
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.
The following is a summary of the investments in the Austin Portfolio Joint Venture for the period from June 1, 2007 (date of acquisition) to December 31, 2009:
| | | | |
Investment balance, June 1, 2007 (date of acquisition) | | $ | 71,512 | |
Contributions | | | — | |
Equity in net loss of unconsolidated real estate entities | | | (9,001 | ) |
Other comprehensive loss | | | (481 | ) |
Distributions | | | (368 | ) |
| | | | |
Investment balance, December 31, 2007 | | $ | 61,662 | |
Equity in net loss of unconsolidated real estate entities | | | (18,193 | ) |
Other comprehensive loss | | | (610 | ) |
| | | | |
Investment balance, December 31, 2008 | | $ | 42,859 | |
Contributions | | | 5,000 | |
Equity in net income of unconsolidated real estate entities | | | 1,303 | |
Other comprehensive income | | | 834 | |
| | | | |
Investment balance, December 31, 2009 | | $ | 49,996 | |
| | | | |
Following is summarized financial information for the Austin Portfolio Joint Venture as of December 31, 2009 and 2008 and for the years ended December 31, 2009 and 2008 and the period from inception (June 1, 2007) through December 31, 2007:
Summarized Balance Sheets
| | | | | | |
| | | 2009 | | 2008 |
ASSETS | | | | | | |
Investments in real estate, net | | $ | 1,064,304 | | $ | 1,094,556 |
Receivables including deferred rents | | | 12,786 | | | 6,560 |
Deferred leasing and loan costs, net | | | 64,483 | | | 77,803 |
Other assets | | | 27,555 | | | 30,436 |
| | | | | | |
Total assets | | $ | 1,169,128 | | $ | 1,209,355 |
| | | | | | |
| | |
LIABILITIES AND OWNERS’ EQUITY | | | | | | |
Mortgage and other secured loans | | $ | 852,291 | | $ | 907,500 |
Below market rents, net | | | 52,354 | | | 67,919 |
Other liabilities | | | 47,508 | | | 43,683 |
| | | | | | |
Total liabilities | | | 952,153 | | | 1,019,102 |
| | | | | | |
Owners’ equity: | | | | | | |
TPG/CalSTRS, including $258 and $1,091 of other comprehensive loss as of 2009 and 2008, respectively | | | 54,244 | | | 47,563 |
Other owners, including $774 and $3,271 of other comprehensive loss as of 2009 and 2008, respectively | | | 162,731 | | | 142,690 |
| | | | | | |
Total owners’ equity | | | 216,975 | | | 190,253 |
| | | | | | |
Total liabilities and owners’ equity | | $ | 1,169,128 | | $ | 1,209,355 |
| | | | | | |
135
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
Summarized Statement of Operations
| | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | Period from
Inception (June 1,
2007) Through
December 31,
2007 | |
Revenues | | $ | 118,037 | | | $ | 117,635 | | | $ | 67,027 | |
Expenses: | | | | | | | | | | | | |
Operating and other expenses | | | 53,355 | | | | 53,987 | | | | 28,562 | |
Interest expense | | | 53,410 | | | | 58,081 | | | | 35,753 | |
Depreciation and amortization | | | 54,896 | | | | 59,504 | | | | 38,716 | |
| | | | | | | | | | | | |
Total expenses | | | 161,661 | | | | 171,572 | | | | 103,031 | |
| | | | | | | | | | | | |
Loss from continuing operations | | | (43,624 | ) | | | (53,937 | ) | | | (36,004 | ) |
Gain on extinguishment of debt | | | 67,017 | | | | — | | | | — | |
| | | | | | | | | | | | |
Net loss | | $ | 23,393 | | | $ | (53,937 | ) | | $ | (36,004 | ) |
| | | | | | | | | | | | |
TPG/CalSTRS’ share of net loss | | $ | 5,849 | | | $ | (13,484 | ) | | $ | (9,001 | ) |
Intercompany eliminations | | | 365 | | | | 131 | | | | — | |
Impairment loss | | | (4,911 | ) | | | (4,840 | ) | | | — | |
| | | | | | | | | | | | |
Equity in net loss of Austin Portfolio Joint Ventures | | $ | 1,303 | | | $ | (18,193 | ) | | $ | (9,001 | ) |
| | | | | | | | | | | | |
Lehman Brothers Holdings, Inc. filed for bankruptcy protection in September 2008. The Lehman affiliate that owns the equity interest in the Austin Portfolio Joint Venture is 100% indirectly owned by Lehman Brothers Holdings, Inc. In addition, two Lehman Brothers Holdings, Inc. affiliates consisting of Lehman Commercial Paper Inc. and Lehman Brothers Inc., are administrative agent and lead arranger, respectively, under the Austin Portfolio Joint Venture’s $292.5 million credit agreement, which included a $100 million revolving credit facility and a $192.5 million term loan. The $192.5 million term loan was fully funded by Lehman Commercial Paper Inc. and is secured by certain properties held in the joint venture and secondary liens on other joint venture properties.
On March 25, 2009, the Lehman Brothers Bankruptcy Court judge approved a plan to restructure the $292.5 million credit facility by replacing the unfunded $100 million commitment with $60 million of new senior secured priority financing contributed by the partners in proportion to their percentage interest in the partnership. Proceeds from this new financing were used to deleverage the portfolio by acquiring at a discount and immediately retiring third-party term loan debt with an $80 million face value for $14 million, thereby reducing that loan from $192.5 million to $112.5 million, and to provide an ongoing source of capital for leasing and capital improvements. To date, approximately $33.0 million of the senior secured facility has been advanced by the partners, of which TPG/CalSTRS has advanced $8.25 million. After the restructuring, the partners’ ownership interests remained the same and the funds advanced under the senior secured facility are a first priority mortgage lien on three of the Austin buildings and a first priority right to payment on a pledge of the equity interests in the other seven Austin buildings owned by the Austin Partnership.
On December 18, 2009, we also entered into a settlement agreement with Lehman Brothers Holdings Inc. to terminate the interest rate collar agreement for TPG Austin Portfolio Holdings LLC. The Company settled this obligation with the Lehman affiliate on January 25, 2010.
136
TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
9. Equity
Noncontrolling Interests
On January 1, 2009, the Company adopted FASB ASC 810-10“Consolidation”, which clarifies 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 parent’s 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.
FASB ASC 810-10 was required to be applied prospectively after adoption, with the exception of the presentation and disclosure requirements, which were applied retrospectively for all periods presented. In periods subsequent to the adoption of FASB ASC 810-10, the Company will periodically evaluate individual noncontrolling interests for the ability to continue to recognize the noncontrolling interest as permanent equity in the consolidated balance sheets. 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. A charge is recorded each period to the consolidated statements of income (loss) for the noncontrolling interests’ proportionate share of the Company’s net income (loss). An additional adjustment is made each period such that the carrying value of the noncontrolling interests equals the greater of (a) the noncontrolling interests’ proportionate share of equity as of the period end, or (b) the redemption value of the noncontrolling interests as of the period end, if classified as temporary equity.
During the second quarter of 2009, TPG/CalSTRS redeemed the approximately 15% noncontrolling membership interest held by an unaffiliated partner in the City National Plaza (CNP) partnership. The redemption price of $19.8 million was based on a $725 million value for CNP and was financed with a promissory note due in 2012. The redemption eliminated the former partner’s right to “put” his interest to TPG/CalSTRS at fair market value and eliminated his right of approval of any sale or financing. Effective with this redemption, TPG/CalSTRS owns 100% of CNP.
Equity is allocated between controlling and noncontrolling interests as follows (in thousands):
| | | | | | | | | | | | |
| | | Members’
Equity | | | Noncontrolling
Interests | | | Total
Equity | |
Balance at December 31, 2008 | | $ | 96,233 | | | $ | 18,771 | | | $ | 115,004 | |
Net loss | | | (79,962 | ) | | | — | | | | (79,962 | ) |
Other comprehensive income | | | 715 | | | | — | | | | 715 | |
Fair market value change of redeemable noncontrolling interest | | | 3,930 | | | | (3,930 | ) | | | — | |
Redemption of redeemable noncontrolling interest | | | | | | | (14,841 | ) | | | (14,841 | ) |
Distributions | | | (1,448 | ) | | | — | | | | (1,448 | ) |
Contributions | | | 22,400 | | | | — | | | | 22,400 | |
| | | | | | | | | | | | |
Balance at December 31, 2009 | | $ | 41,868 | | | $ | — | | | $ | 41,868 | |
| | | | | | | | | | | | |
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TPG/CalSTRS, LLC
(A Delaware Limited Liability Company)
NOTES TO CONSOLIDATED FINANCIAL INFORMATION—(Continued)
10. Subsequent Events
Subsequent to December 31, 2009, we negotiated on behalf of CalSTRS, our partner in CNP, for CalSTRS to acquire all of the property’s mezzanine debt, which has a principal balance of approximately $219.1 million, and is scheduled to mature on July 9, 2010. CalSTRS acquired this debt and will contribute it to the partnership’s equity, reducing the leverage on the property from $568.0 million to $348.9 million, all of which is first mortgage debt. We are in discussions with CalSTRS to obtain an option to participate in the loan purchase, on or after the maturity of the mezzanine debt, based on our current pro rata share of 25% of the existing CNP equity.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: March 19, 2010
| | |
| THOMAS PROPERTIES GROUP, INC. |
| |
By: | | /s/ James A. Thomas |
| | James A. Thomas Chief Executive Officer |
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints James A. Thomas and Diana M. Laing, his or her true and lawful attorneys-in-fact each acting alone, with full power of substitution and re-substitution, for him or her and in his or her name, place and stead in any and all capacities to sign any or all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitutes, each acting alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated below.
| | | | |
Signature | | Title | | Date |
| | |
/s/ JAMES A. THOMAS James A. Thomas | | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | | March 19, 2010 |
| | |
/s/ R. BRUCE ANDREWS R. Bruce Andrews | | Director | | March 19, 2010 |
| | |
/s/ EDWARD D. FOX Edward D. Fox | | Director | | March 19, 2010 |
| | |
/s/ WINSTON H. HICKOX Winston H. Hickox | | Director | | March 19, 2010 |
| | |
/s/ JOHN GOOLSBY John Goolsby | | Director | | March 19, 2010 |
| | |
/s/ RANDALL L. SCOTT Randall L. Scott | | Executive Vice President and Director | | March 19, 2010 |
| | |
/s/ JOHN R. SISCHO John R. Sischo | | Executive Vice President and Director | | March 19, 2010 |
| | |
/s/ DIANA M. LAING Diana M. Laing | | Chief Financial Officer (Principal Financial Officer) | | March 19, 2010 |
| | |
/s/ ROBERT D. MORGAN Robert D. Morgan | | Senior Vice President (Principal Accounting Officer) | | March 19, 2010 |
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