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, 2012
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 No. 000-53200
Chambers Street Properties
(Exact name of registrant as specified in its charter)
| | |
| Maryland | | 56-2466617 |
(State or other jurisdiction incorporation or organization) | | (I.R.S. Employer Identification No.) |
47 Hulfish Street, Suite 210, Princeton, New Jersey 08542
(Address of principal executive offices—zip code)
(609) 683-4900
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| | |
Title of Each Class | | Name of Each Exchange on Which Registered |
| None | | Not Applicable |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Shares of Beneficial Interest, Par Value $0.01 Per Share
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 Website, 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 x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405) is not contained herein, and will not be contained, to the best of the 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 | | Smaller reporting company ¨ |
| | (do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Since there was no established market for the voting and non-voting common shares as of June 30, 2012, there was no market value for the common shares held by non-affiliates of the registrant as of such date.
The number of shares outstanding of the registrant’s common shares, $0.01 par value, was 248,593,441 as of March 22, 2013.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 2013 Annual Shareholders’ Meeting expected to be filed on or prior to April 30, 2013 are incorporated by reference into Part III of this Annual Report on Form 10-K.
CHAMBERS STREET PROPERTIES
FORM 10-K
TABLE OF CONTENTS
PART I
Overview
Chambers Street Properties is a self-managed Maryland real estate investment trust (a “REIT”) that acquires, owns and operates primarily office and industrial properties (primarily warehouse/distribution/logistics). Our management team manages our day-to-day operations and oversees and supervises our employees and outside service providers. Prior to July 1, 2012, we were known as CB Richard Ellis Realty Trust and all of our business activities were managed by CBRE Advisors LLC, the former investment advisor, pursuant to an advisory agreement which terminated according to its terms on June 30, 2012. On July 1, 2012, we hired 14 employees of an affiliate of the former investment advisor based in Princeton, New Jersey and we have since hired an additional 9 employees, primarily to serve our accounting function in our Los Angeles, California office. Acquisitions and asset management services are performed principally by us, with certain services provided by third parties.
As of December 31, 2012, we owned, on a consolidated basis, 82 office, industrial (primarily warehouse/distribution/logistics) and retail properties located in 18 states (Arizona, California, Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, Maryland, Massachusetts, Minnesota, New Jersey, North Carolina, Pennsylvania, South Carolina, Texas, Utah and Virginia) and in the United Kingdom encompassing approximately 18,995,000 rentable square feet in the aggregate. In addition, we had ownership interests in five unconsolidated entities that, as of December 31, 2012, owned interests in 54 properties. Excluding those properties owned through our investment in CBRE Strategic Partners Asia, we owned, on an unconsolidated basis, 47 office, industrial (primarily warehouse/distribution/logistics) and retail properties located in ten states (Arizona, Florida, Illinois, Indiana, Minnesota, Missouri, North Carolina, Ohio, Tennessee and Texas) and in the United Kingdom and Europe encompassing approximately 15,067,000 rentable square feet in the aggregate. As of December 31, 2012, our portfolio was 97.80% leased. As of December 31, 2012, 90 of our consolidated and unconsolidated properties were triple net leased to single tenants, which represented approximately 82% of our total portfolio’s square footage.
We were formed on March 30, 2004 and commenced operations in July 2004, following an initial private placement of our common shares of beneficial interest. Since that time, we have raised equity capital to finance our real estate investment activities through two public offerings of our common shares of beneficial interest. Our public offerings raised an aggregate of $2,388,227,000 in gross offering proceeds, excluding proceeds associated with common shares issued under our amended and restated dividend reinvestment plan. Our common shares of beneficial interest are not currently listed on a national securities exchange. We were initially formed as CB Richard Ellis Realty Trust and on July 1, 2012, we changed our name to Chambers Street Properties. All of our real estate investments are held directly by, or indirectly through wholly owned subsidiaries of CSP Operating Partnership, LP (“CSP OP”) which we are the sole general partner. We have elected to be taxed as a REIT for U.S. federal income tax purposes. As a REIT, we generally will not be subject to U.S. federal income tax on that portion of our income that is distributed to our shareholders if at least 90% of our net taxable income is distributed to our shareholders.
Unless the context otherwise requires or indicates, references to, “we,” “our” and “us” refer to the activities of and the assets and liabilities of the business and operations of Chambers Street Properties and its subsidiaries.
Investment Objectives and Acquisition Policies
We invest in real estate properties, focusing primarily on office and industrial (primarily warehouse/distribution/logistics) properties with triple net lease tenants, as well as other real estate-related assets. We may also utilize our expertise and resources to capitalize on unique opportunities that may exist elsewhere in the marketplace. We intend to invest primarily in properties located in geographically-diverse metropolitan areas in the United States. We have invested in properties outside of the United States and may make additional such investments should suitable opportunities arise. We expect that any additional international investments we make will focus on properties typically located in significant business districts and suburban markets, and may be made directly by us or in partnership with third parties.
Our current investment objectives are:
| | ¡ | | to maximize cash dividends paid to our shareholders; |
| | ¡ | | to preserve and protect our shareholders’ capital contributions; |
| | ¡ | | to realize growth in the value of our assets upon our ultimate sale of such assets; and |
1
| | ¡ | | to provide our shareholders with the potential for future liquidity by (i) listing our shares on a national securities exchange, the NASDAQ Global Select Market or the NASDAQ Global Market or (ii) if a listing has not occurred on or before December 31, 2011 our Board of Trustees must consider (but is not required to commence) an orderly liquidation of our assets. See “—Transition to Self-Management” |
We may not change our investment objectives, except upon approval of shareholders holding a majority of our outstanding shares; however, our Board of Trustees may change any of our investment policies without prior notice to, or a vote of our shareholders.
We employ an enhanced income investment strategy designed to maximize risk-adjusted returns. To do so, we purchase, actively and passively manage and sell properties located in the business districts and suburban markets of major metropolitan areas. Our primary focus is on office and industrial (primarily warehouse/distribution/logistics) properties. When making investment decisions we consider relevant risks and financial factors, including market conditions, the creditworthiness of major tenants, the expected levels of rental and occupancy rates, current and projected cash flow of the property, the location, condition and use of the property, suitability for any development contemplated or in progress, income-producing capacity, the prospects for long-range appreciation, liquidity and income tax considerations.
Although our primary focus is on single-tenant, net lease properties, our office portfolio may include properties such as multi-tenant and sale leasebacks, office parks and portfolios, newly constructed, corporate/user activity, medical office, technology/telecommunication, redevelopments and stabilized operations. Our industrial portfolio consists primarily of single-tenant warehouse/distribution/logistics properties with triple net leases, but may also include office/showroom, research and development facilities, manufacturing, sale leasebacks and corporate/user activity properties.
Although we are not limited as to the form our investments may take, our investments in real estate generally take the form of holding fee title or a long-term leasehold estate in the properties we acquire. We acquire such interests either directly in CSP OP or indirectly by acquiring membership interests in, or acquisitions of property through, limited liability companies or through investments in joint ventures, partnerships, co-tenancies or other co-ownership arrangements with developers of properties, or other persons. We may purchase properties and lease them back to the sellers of such properties. We may also enter into arrangements with the seller or developer of a property whereby the seller or developer agrees that if during a stated period the property does not generate a specified cash flow, the seller or developer will pay in cash to us a sum necessary to reach the specified cash flow level, subject in some cases to negotiated dollar limitations. We may, from time to time, invest in or make mortgage or other real estate-related loans, which may include first or second mortgages, mezzanine loans or other real estate-related investments that do not conflict with the maintenance of our REIT qualification. Although we do not have a formal policy, our criteria for investing in mortgage loans will be substantially the same as those involved in our investment in properties and will be subject to the investment limitations contained in our declaration of trust.
In determining whether to purchase a particular property, we may, in accordance with customary practices, obtain an option on such property. The amount paid for an option, if any, is normally surrendered if the property is not purchased and is normally credited against the purchase price if the property is purchased.
Our obligation to close the purchase of any property is generally conditioned upon the delivery and verification of certain documents from the seller or developer, including, where appropriate:
| | ¡ | | plans and specifications; |
| | ¡ | | evidence of marketable title subject to such liens and encumbrances; |
| | ¡ | | title and liability insurance policies; and |
| | ¡ | | audited financial statements covering recent operations of properties having operating histories, unless such statements would not be required to be filed with the Securities and Exchange Commission, or the SEC, so long as we are a public company. |
We will not close the purchase of any property unless and until we obtain an environmental assessment for each property purchased and are generally satisfied with the environmental status of the property. A Phase I environmental site assessment basically consists of a visual survey of the building and the property in an attempt to identify areas of potential environmental concern, visually observing
2
neighboring properties to assess surface conditions or activities that may have an adverse environmental impact on the property, and contacting local governmental agency personnel and performing a regulatory agency file search in an attempt to determine any known environmental concerns in the immediate vicinity of the property. A Phase I environmental site assessment does not generally include any sampling or testing of soil, groundwater or building materials from the property. We may pursue additional assessments or reviews if the Phase I site assessment indicates that further environmental investigation is warranted.
In connection with our assessment and selection of investment partners, property managers, development managers and other service providers, we will consider their experience and reputation in the areas of environmental sustainability, including experience in the development and operation of buildings certified under the LEED (Leadership in Energy and Environmental Design) Green Building Rating System promulgated by the US Green Building Counsel. We will evaluate the sustainability of a prospective investment property by assessing its Energy Star score, its preliminary LEED score, and sustainability measures that have been or can be implemented, such as recycling, water conservation and green cleaning methods. We will consider operational, maintenance and capital improvement practices for existing properties designed to increase energy efficiency, reduce waste and otherwise lessen environmental impacts while remaining conscious of economic performance.
Development and Construction of Properties
We have directly, or in partnership with third-parties, invested in, and may in the future invest in properties that are to be, wholly or partially, constructed or completed. We are not restricted in our ability to invest in such properties. To help ensure performance by the builders of properties that are under construction, completion of properties under construction may be guaranteed at the price contracted either by an adequate completion bond, performance bond or other appropriate instruments. We may rely, however, upon the substantial net worth of the contractor or developer or a personal guarantee accompanied by financial statements showing a substantial net worth provided by an affiliate of the person entering into the construction or development contract as an alternative to a completion bond or performance bond. Development of real estate properties is subject to risks relating to a builder’s ability to control construction costs or to build in conformity with plans, specifications and timetables.
We may make periodic progress payments or other cash advances to developers and builders of our properties prior to completion of construction only upon receipt of an architect’s certification as to the percentage of the project then-completed and as to the dollar amount of the construction then-completed. We intend to use such additional controls on disbursements to builders and developers as we deem necessary or prudent.
We may directly employ one or more project managers to plan, supervise and implement the development of any unimproved properties that we may acquire. In such event, such persons would be compensated directly by us.
Joint Venture Investments
We have entered into, and may in the future enter into, joint ventures, partnerships, co-tenancies and other co-ownership arrangements or participations with real estate developers, owners and other third-parties for the purpose of developing, owning and operating real properties. In determining whether to invest in a particular joint venture, we will evaluate the real property or development opportunity that such joint venture being formed to own or develop under the same criteria employed for the selection of our real estate property investments.
In the event that the co-venturer were to elect to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer’s interest in the property held by the joint venture. In the event that any joint venture with an affiliated entity holds interests in more than one property, the interest in each such property may be specially allocated based upon the respective proportion of funds invested by each co-venturer in each such property.
Borrowing Policies
We operate on a leveraged basis, which provides us with more funds available for investment in assets and achieving other strategic objectives. This will allow us to make more investments than would otherwise be possible, resulting in a larger and more diversified portfolio. Although our liability for the repayment of certain of our indebtedness is expected to be limited to the value of the asset securing the liability, we also borrow on an unsecured basis, and our liability for repayment of our unsecured indebtedness is not limited by any of our assets.
We have adopted a policy to limit our aggregate borrowing to no more than 65% of the cost of our assets before non-cash reserves and depreciation, subject to the 300% of net assets borrowing restriction described below. This policy may, however, be altered at any
3
time or suspended by our Board of Trustees if necessary to pursue attractive investment opportunities. Our declaration of trust currently contains a limitation on the amount of indebtedness that we may incur, so that until our shares are listed on a national securities exchange, our aggregate borrowing may not exceed 300% of our net assets unless any excess borrowing is approved by a majority of our independent trustees and is disclosed to shareholders in our next quarterly report. Our Board of Trustees must review our aggregate borrowing from time to time, but at least quarterly.
We may refinance properties during the term of a loan only in limited circumstances, such as when a decline in interest rates makes it beneficial to prepay an existing mortgage, in anticipation of an existing mortgage maturity or if an attractive investment becomes available and the proceeds from the refinancing can be used to purchase such investment. The benefits of the refinancing may include an increased cash flow resulting from reduced debt service requirements, an increase in dividend distributions from proceeds of the refinancing, if any, and/or an increase in property ownership if some refinancing proceeds are reinvested in real estate.
Disposition Policies
We generally intend to hold each asset we acquire for an extended period. However, circumstances might arise which could result in the early sale of some assets. We may sell a property before the end of the expected holding period if, among other reasons:
| | ¡ | | in our judgment, the sale of the asset is in the best interests of our shareholders; |
| | ¡ | | we can reinvest the proceeds in a higher-yielding investment; |
| | ¡ | | we can increase cash flow through the disposition of the asset; or |
| | ¡ | | in our judgment, the value of an asset might decline substantially. |
The determination of whether a particular asset should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing economic conditions, with a view to achieving maximum long-term capital appreciation. We cannot assure you that this objective will be realized. See “—Investments Objectives and Acquisition Policies.”
Investment Limitations
Our declaration of trust currently places numerous limitations on us with respect to the manner in which we may invest our funds, most of which are required by various provisions of the North American Securities Administrators Association Guidelines, or NASAA Guidelines. Our declaration of trust provides that until our shares are listed on a national securities exchange or included on the NASDAQ Global Select Market or the NASDAQ Global Market, we may not:
| | ¡ | | invest in equity securities unless a majority of our trustees, including a majority of any independent trustees not otherwise interested in the transaction, approve such investment as being fair, competitive and commercially reasonable; |
| | ¡ | | make investments in unimproved property or indebtedness secured by a deed of trust or mortgage loans on unimproved property in excess of 10% of our total assets; |
| | ¡ | | invest in commodities or commodity futures contracts, except for futures contracts when used solely for the purpose of hedging in connection with our ordinary business of investing in real estate assets and mortgages; |
| | ¡ | | make or invest in mortgage loans unless an appraisal is obtained concerning the underlying property, except for those mortgage loans insured or guaranteed by a government or government agency. In cases where a majority of our independent trustees determine, and in all cases in which the transaction is with any of our trustees or the former investment advisor or its affiliates, such appraisal shall be obtained from an independent appraiser. We will maintain such appraisal in our records for at least five years and it will be available for your inspection and duplication. We will also obtain a mortgagee’s or owner’s title insurance policy as to the priority of the mortgage; |
| | ¡ | | invest in real estate contracts of sale, otherwise known as land sale contracts, unless the contract is in recordable form and is appropriately recorded in the chain of title; |
| | ¡ | | make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans on such property would exceed an amount equal to 85% of the appraised value of such property as determined by appraisal unless substantial justification exists for exceeding such limit because of the presence of other underwriting criteria; |
| | ¡ | | make or invest in mortgage loans that are subordinate to any mortgage or equity interest of any of our trustees, the former investment advisor or its affiliates; |
4
| | ¡ | | issue “redeemable securities,” as defined in Section 2(a)(32) of the Investment Company Act of 1940, as amended, or the Investment Company Act; |
| | ¡ | | issue debt securities unless the historical debt service coverage (in the most recently completed fiscal year) as adjusted for known changes is sufficient to properly service that higher level of debt; |
| | ¡ | | grant warrants or options to purchase shares to the former investment advisor or its affiliates or to officers or trustees affiliated with the former investment advisor except on the same terms as such warrants or options are sold to the general public and in an amount not to exceed 10% of the outstanding shares on the date of grant of the warrants and options; |
| | ¡ | | issue equity securities on a deferred payment basis or other similar arrangement; or |
| | ¡ | | lend money to our trustees or to the former investment advisor or its affiliates. |
Change in Investment Objectives and Limitations
Until our shares are listed on a national securities exchange, our declaration of trust currently requires that the independent trustees review our investment policies at least annually to determine that the policies we are following are in the best interests of our shareholders. Each determination and the basis therefore, are required to be set forth in our minutes. The methods of implementing our investment policies also may vary as new investment techniques are developed. The methods of implementing our investment objectives and policies, except as otherwise provided in the organizational documents, may be altered by a majority of our trustees, including a majority of the independent trustees, without the approval of the shareholders. Our investment objectives themselves, however, may only be amended by a vote of the shareholders holding a majority of our outstanding shares.
Restrictions on Roll-up Transactions
Until our shares are listed on a national securities exchange, our declaration of trust currently requires that we follow the policy set forth below with respect to any “Roll-up Transaction.” In connection with any proposed transaction considered a “Roll-up Transaction” involving us and the issuance of securities of an entity, or a Roll-up Entity, that would be created or would survive after the successful completion of the Roll-up Transaction, an appraisal of all properties must be obtained from a competent independent appraiser. The properties must be appraised on a consistent basis, and the appraisal shall be based on the evaluation of all relevant information and shall indicate the value of the properties as of the date immediately prior to the announcement of the proposed Roll-up Transaction. The appraisal shall assume an orderly liquidation of properties over a 12-month period. The terms of the engagement of the independent appraiser must clearly state that the engagement is for our benefit and our shareholders’ benefit. A summary of the appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to our shareholders in connection with any proposed Roll-up Transaction. If the appraisal will be included in a document used to offer the securities of a Roll-up Entity, the appraisal shall be filed with the SEC and the states as an exhibit to the registration statement for the offering.
A “Roll-up Transaction” is a transaction involving the acquisition, merger, conversion or consolidation, directly or indirectly, of us and the issuance of securities of a Roll-up Entity. This term does not include:
| | ¡ | | a transaction involving our securities that have been listed on a national securities exchange for at least 12 months; or |
| | ¡ | | a transaction involving our conversion into corporate or association form if, as a consequence of the transaction, there will be no significant adverse change in any of the following: our shareholder voting rights; the term of our existence; compensation to the former investment advisor or its affiliates; or our investment objectives. |
In connection with a proposed Roll-up Transaction, the person sponsoring the Roll-up Transaction must offer to our shareholders who vote “no” on the proposal a choice of:
| | ¡ | | accepting the securities of the Roll-up Entity offered in the proposed Roll-up Transaction; or |
| | ¡ | | remaining as shareholders and preserving their interests on the same terms and conditions as existed previously; or |
| | ¡ | | receiving cash in an amount equal to the shareholders’ pro rata share of the appraised value of our net assets. |
We are prohibited from participating in any proposed Roll-up Transaction:
| | ¡ | | that would result in our shareholders having voting rights in a Roll-up Entity that are less than those provided in our bylaws and described elsewhere in this document including rights with respect to the election and removal of trustees, annual reports, annual and special meetings, amendment of our declaration of trust and our dissolution; |
5
| | ¡ | | that includes provisions that would operate to materially impede or frustrate the accumulation of shares by any purchaser of the securities of the Roll-up Entity, except to the minimum extent necessary to preserve the tax status of the Roll-up Entity, or which would limit the ability of an investor to exercise voting rights of its securities of the Roll-up Entity on the basis of the number of shares held by that investor; |
| | ¡ | | in which shareholders’ right to access of records of the Roll-up Entity will be less than those provided in our declaration of trust and bylaws; or |
| | ¡ | | in which any of the costs of the Roll-up Transaction would be borne by us if the Roll-up Transaction is not approved by our shareholders. |
Policies With Respect to Certain Other Activities
If our Board of Trustees determines that additional funding is required, we may raise such funds through equity offerings or the retention of cash flow (subject to the REIT provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) concerning distribution requirements and taxability of undistributed net taxable income) or a combination of these methods.
In the event that our Board of Trustees determines to raise additional equity capital, it has the authority, without shareholder approval, to issue additional common or preferred shares in any manner and on such terms and for such consideration it deems appropriate, at any time.
We have authority to repurchase or otherwise reacquire our shares and may engage in such activities in the future. We may invest in the securities of other issuers for the purpose of exercising control. We currently have no intention to underwrite securities of other issuers.
Our Board of Trustees may change any of these policies without prior notice to or a vote of our shareholders.
Transition to Self-Management
In 2010, our Board of Trustees established a Special Committee of the Board (the “Special Committee”) consisting of the Board’s independent trustees to explore and review our strategic alternatives and liquidity events in accordance with our investment objectives. The Special Committee engaged Robert A. Stanger & Co., Inc. as its financial advisor, to assist with its exploration and review of our strategic alternatives and liquidity events in accordance with our investment objectives (as discussed above). During 2011, with the assistance of its financial advisor and in consultation with the former investment advisor and our Board of Trustees, the Special Committee discussed and considered various strategic alternatives, including potentially continuing as a going concern under our current business plan, a potential liquidation of our assets either through a sale or merger of our company (including through either a bulk sale of our portfolio or through a sale of our individual properties) as well as a potential listing of our shares on a national securities exchange. In December 2011, after consideration of the recent general economic and capital market conditions, market conditions for listed REITs, credit market conditions, our operational performance, the status of our portfolio, our then current offering and our current and anticipated deployment of available capital to investments, the Special Committee and our Board of Trustees determined that, at that time, it was in the best interests of our shareholders for our shares to remain unlisted and to continue operations rather than commencing a liquidation of our assets. The Special Committee and our Board of Trustees believed that remaining unlisted and continuing our operations would provide us with the ability to purchase additional properties in order to continue to expand and diversify our portfolio and thus potentially better position us for a liquidity event. Our Board of Trustees, in consultation with our financial advisors, continues to monitor market conditions and explore strategic alternatives and liquidity options (which may include a listing of our common shares on a national securities exchange).
In March 2012, the Special Committee determined that our company and its shareholders would benefit from an internal management structure in that such a structure could provide cost savings, improved distribution coverage, flexibility to pursue a variety of strategic initiatives, the ability to take advantage of opportunities created by changing market conditions and an opportunity to enhance the trading values of our common shares to the extent that we pursue and complete a listing of our common shares on a national securities exchange, the NASDAQ Global Select Market or the NASDAQ Global Market. Our Board of Trustees, based on the recommendation of the Special Committee, authorized the Special Committee to commence a process to achieve internal management.
On April 27, 2012, we entered into a transition to self-management agreement (the “Transition to Self-Management Agreement”) with CSP OP, CBRE Global Investors, and the former investment advisor, which sets forth certain tasks to be performed by each of the parties to the agreement in order to facilitate our self-management, including but not limited to our hiring of the 19 identified employees of the former investment advisor and/or its affiliates who were dedicated to our operations.
6
Additionally, on June 29, 2012, effective June 30, 2012, we undertook several management and board changes as follows: (i) appointed Louis P. Salvatore to serve as an independent trustee, the Chairman of the Audit Committee of the Board of Trustees and as a member of each of the Compensation and Nominating and Corporate Governance Committees of the Board of Trustees, to fill the vacancy left by Peter E. DiCorpo, who stepped down as a trustee in connection with the termination of the advisory agreement, (ii) appointed Jack A. Cuneo to serve as our President and Chief Executive Officer, (iii) appointed Philip L. Kianka to serve as our Executive Vice President and Chief Operating Officer and (iv) appointed Martin A. Reid to serve as our Executive Vice President and Chief Financial Officer. In connection with Mr. Reid’s appointment as Chief Financial Officer, Laurie E. Romanak stepped down as our Chief Financial Officer and Mr. Reid stepped down as the Chairman and as a member of the Audit Committee of the Board of Trustees and as a member of each of the Compensation Committee and the Conflicts Committee of the Board of Trustees. In addition, on June 19, 2012, our Board of Trustees appointed Charles E. Black to serve as the Chairman of the Board of Trustees in accordance with a provision in our bylaws that requires the chairman be an independent member.
On June 30, 2012, the advisory agreement with the former investment advisor terminated according to its terms and, effective July 1, 2012, we entered into a transitional services agreement (the “Transitional Services Agreement”) with CSP OP and the former investment advisor pursuant to which the former investment advisor will provide certain operational and consulting related services to us at the direction of our officers and other personnel for a term ending April 30, 2013.
For consulting services provided to us in connection with the investment management of our assets, the former investment advisor shall be paid an investment management consulting fee payable in cash consisting of (i) a monthly fee equal to one-twelfth of 0.5% of the aggregate cost (before non-cash reserves and depreciation) of all real estate investments within our portfolio and (ii) a monthly fee equal to 5.0% of the aggregate monthly net operating income derived from all real estate investments within our portfolio, subject to certain adjustments. For consulting services provided to us in connection with the acquisition of assets, the former investment advisor or its affiliates shall be paid acquisition fees up to 1.5% of (i) the contract purchase price of real estate investments acquired by us, or (ii) when we make an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity. The total of all acquisition consulting fees payable with respect to real estate investments shall not exceed an amount equal to 6% of the contract purchase price (or 6% of funds advanced with respect to mortgages) provided, however, that a majority of the uninterested members of the Board of Trustees may approve amounts in excess of this limit.
Upon the termination date of the Transitional Services Agreement, we and the former investment advisor shall agree on a list of unacquired real estate investments for which the former investment advisor has performed certain acquisition related consulting services (a “Qualifying Property”). If any Qualifying Property is acquired by us within the nine months following the termination of the Transitional Services Agreement then we shall pay an acquisition consulting fee equal to 0.75% of (i) the contract purchase price of the real estate investments (including debt), or (ii) when we make an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity to the former investment advisor. Real estate investments for which there is a dispute as to whether it is a Qualifying Property that are acquired within the nine months following the termination of the Transitional Services Agreement will be submitted to arbitration.
For consulting services provided to us in connection with property management, leasing or construction services, the former investment advisor shall be paid based upon the customary property management, leasing and construction supervision fees applicable to the geographic location and type of property. Such fees for each service provided are expected to range from 2.0% to 5.0% of gross revenues received from a property that we own. We shall pay the former investment advisor a real estate commission fee upon the sale of properties in an amount equal to the lesser of (i) one-half of the competitive real estate commission or (ii) 3% of the sales price of each property sold. The total brokerage commission paid may not exceed the lesser of the competitive real estate commission or an amount equal to 6% of the sales price of the property.
To the extent that the Company assumes or incurs prior to the termination of the Transition Services Agreement a cost that was previously borne by the former investment advisor during the term of the Transition Services Agreement or its predecessor agreement, then amounts otherwise owed under the Transition Services Agreement shall be correspondingly reduced on a monthly basis; provided that (i) any Assumed Costs resulting from hiring of any targeted personnel shall reduce the amounts payable by the Company under this agreement for such month only to the extent of their base salary and benefits (as in effect immediately prior to their hiring by the Company) and any related other direct employer costs (but excluding any bonus amounts) earned or incurred during the month.
We will reimburse the former investment advisor for certain expenses paid or incurred in connection with services provided under the Transitional Services Agreement. In addition, the former investment advisor will only be entitled to reimbursement for third party expenses incurred in connection with services provided pursuant to the Transitional Services Agreement that we have approved in writing. Our sole obligation to reimburse the former investment advisor for expenses incurred related to personnel costs was to make an aggregate payment equal to $2,500,000 on the effective date of the agreement.
7
Industry Segments
We view our operations as having three consolidated property reportable segments, two Domestic segments, consisting of Domestic Office Properties and Domestic Industrial Properties and an International Office/Retail Properties segment, which participate in the acquisition, development, ownership and operation of high quality real estate assets in their respective regions. Information regarding our reportable segments can be reviewed under Note 10, “Segment Disclosure,” in the accompanying consolidated financial statements.
Geographic Areas of Properties
We currently operate in two consolidated property geographic areas, the United States and the United Kingdom. Information regarding the geographic diversification of our consolidated properties as of December 31, 2012 can be reviewed under Note 9, “Concentrations—Geographic Concentrations,” in the accompanying consolidated financial statements. As of December 31, 2012, we also have ownership interests in (i) CBRE Strategic Partners Asia II, L.P. (“CBRE Strategic Partners Asia”), which owned interests in properties in China and Japan, (ii) the Goodman Princeton Holdings (Jersey) Limited joint venture (the “UK JV”), which owned interests in properties in the United Kingdom and (iii) the Goodman Princeton Holdings (LUX) SARL joint venture (the “European JV”), which owned interests in properties in Germany. Information relative to CBRE Strategic Partners Asia, the UK JV and the European JV can be reviewed under Note 5, “Investments in Unconsolidated Entities” in the accompanying consolidated financial statements.
Competition
We compete for real property investments with other REITs and institutional investors such as pension funds, private real estate investment funds, insurance company investment accounts, private investment companies, individuals and other entities engaged in real estate activities, some of which have greater financial resources than we do. Such competition may result in an increase in the amount we must pay to acquire a property or may require us to locate another property that meets our investment criteria. Leasing of real estate is also highly competitive in the current market, and we will experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide rent concessions, incur charges for tenant improvements or offer other inducements to enable us to timely lease vacant space, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers.
Employees
As of December 31, 2012, we had 23 full-time employees.
Facilities
Our principal offices are located at 47 Hulfish Street, Suite 210, Princeton, New Jersey 08542. We also have offices located at 515 South Flower Street, Suite 1020, Los Angeles, California 90071. Our telephone number is (609) 683-4900. We believe our current facilities are adequate for our present and future operations.
Available Information
Our website ishttp://www.chambersstreetproperties.com. The information found on, or otherwise accessible through, our website is not incorporated information and does not form a part of this Annual Report on Form 10-K or any other report or document we file with or furnish to the SEC. We make available, free of charge, on or through the “SEC Filings” section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We have also posted on our website the Amended and Restated Audit Committee Charter, Amended and Restated Compensation Committee Charter, Nominating and Corporate Governance Committee Charter and Amended and Restated Code of Business Conduct and Ethics, which govern our trustees, officers and employees. Within the time period required by the SEC, we will post on our website any amendment to our Amended and Restated Code of Business Conduct and Ethics and any waiver applicable to our senior financial officers, and our executive officers or trustees. The information contained on our website is not incorporated into this Annual Report on Form 10-K. You can also read and copy any materials we file with the SEC at its Public Reference Room at 100 F Street, NE, Washington, DC 20549 (1-800-SEC-0330). The SEC maintains an Internet site(http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
8
Risks Related To Our Business and Our Properties
Real estate investments are long-term illiquid investments and may be difficult to sell in response to changing economic conditions.
Real estate investments are subject to certain inherent risks. Real estate investments are generally long-term investments that cannot be quickly converted to cash. Real estate investments are also subject to adverse changes in general economic conditions or local conditions that may reduce the demand for office, industrial, retail and multi-family residential or other types of properties. Other factors can also affect real estate values, including:
| | ¡ | | possible international and U.S. federal, state or local regulations and controls affecting rents, prices of goods, fuel and energy consumption and prices, water and environmental restrictions; |
| | ¡ | | increasing labor and material costs; |
| | ¡ | | the perceptions of tenants and prospective tenants of the convenience, attractiveness and safety of our properties; |
| | ¡ | | competition from comparable properties; |
| | ¡ | | the occupancy rate of our properties; |
| | ¡ | | the ability to collect on a timely basis all rents from tenants; |
| | ¡ | | the effects of any bankruptcies or insolvencies of major tenants; |
| | ¡ | | acts of nature, including earthquakes, hurricanes and other natural disasters (which may result in uninsured losses); |
| | ¡ | | acts of terrorism or war; |
| | ¡ | | rises in operating costs, taxes and insurance costs; |
| | ¡ | | changes in interest rates and in the availability, cost and terms of mortgage funding; and |
| | ¡ | | other factors which are beyond our control. |
Adverse economic conditions in the geographic regions in which we purchase properties may adversely affect our income and our ability to pay distributions to our shareholders.
Our business may be affected by potential adverse market and economic conditions experienced by the economy or real estate industry as a whole or by local economic conditions in the markets in which our properties are located, including potential dislocations in the credit markets and an elevated rate of unemployment. Adverse economic conditions in the geographic regions in which we buy our properties could affect real estate values in these regions and, to the extent that any of our tenants in these regions rely upon the local economy for their revenues, our tenants’ businesses could also be affected by such conditions. Such economic weakness may reduce demand for space and remove support for rents and property values.
A commercial property’s income and value may be adversely affected by national and regional economic conditions, local real estate conditions such as an oversupply of properties or a reduction in demand for properties, availability of “for sale” properties, competition from other similar properties, our ability to provide adequate maintenance, insurance and management services, increased operating costs (including real estate taxes), the attractiveness and location of the property and changes in market rental rates. Changes or fluctuations in energy costs could result in higher operating costs, which may affect our results from operations. Our income will be adversely affected if a significant number of tenants are unable to pay rent or if our properties cannot be rented on favorable terms. Additionally, if tenants of properties that we lease on a triple-net basis fail to pay required tax, utility and other impositions, we could be required to pay those costs, which would adversely affect funds available for future acquisitions or cash available for distributions. Our performance is linked to economic conditions in the regions where our properties are located and in the market for office and industrial (primarily warehouse/distribution/logistics) properties generally. Therefore, to the extent that there are adverse economic conditions in those regions, and in these markets generally, that impact the applicable market rents, such conditions could result in a reduction of our income and cash available for distributions and thus affect the amount of distributions we can make to investors as well as the amounts we could otherwise receive upon a sale of a property in a negatively affected region.
9
Adverse economic conditions affecting the particular industries of our tenants may adversely affect our income and our ability to pay distributions to our shareholders.
We are subject to certain industry concentrations with respect to our properties, including the following, which, as of December 31, 2012, accounted for the percentage of our share of annualized base rent as indicated: Financial Services (13.6%); Pharmaceutical & Health Care Related (11.1%); Consumer Products (10.9%); Internet Retail (7.2%); and Defense and Aerospace (6.0%). Adverse economic conditions affecting a particular industry of one or more of our tenants could affect the financial ability of one or more of our tenants to make payments under their leases, which could cause delays in our receipt of rental revenues or a vacancy in one or more of our properties for a period of time. Therefore, changes in economic conditions of the particular industry of one or more of our tenants could reduce our ability to pay dividends and the value of one or more of our properties at the time of sale of such properties.
A concentration of our investments in a limited number of property classes may leave our profitability vulnerable to a downturn in such sectors.
At any one time, a significant portion of our property investments may be in a limited number of property classes. As of December 31, 2012, a majority of our investments were in two property classes, office (57%) and industrial (primarily warehouse/distribution/logistics) (39%) (based on approximate total acquisition costs, with our unconsolidated properties included our pro rata share of effective ownership, however, excluding our investments in CBRE Strategic Partners Asia). As a result, we are subject to risks inherent in investments in these classes. The potential effects on our revenues, and as a result on cash available for distribution to our shareholders, resulting from a downturn in the business conducted on those properties could be more pronounced than if we had a more diversified portfolio.
Geographic concentration of our portfolio may make us particularly susceptible to adverse economic developments in those geographic areas.
A concentration of our properties in a particular geographic area may impact our operating results and abilities to make distributions if that area is impacted by negative economic developments. Your investment will be subject to greater risk to the extent that we lack a geographically diversified portfolio. As of December 31, 2012, approximately 43% of our portfolio (based on approximate total acquisition costs, with our unconsolidated properties included at our pro rata share of effective ownership, however, excluding our investments in CBRE Strategic Partners Asia) consisted of properties located in New Jersey (16.1%); Florida (8.5%); Texas (6.9%); Washington, D.C. (5.9%); and Ohio (5.8%).
We are particularly susceptible to adverse economic or other conditions in these markets (such as periods of economic slowdown or recession, business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes and the cost of complying with governmental regulations or increased regulation), as well as to natural disasters that occur in these markets. Our financial condition and our ability to make distributions to our shareholders would be adversely affected by any significant adverse developments in those markets. We cannot assure you that these markets will grow or that underlying real estate fundamentals will be favorable to owners and operators of properties similar to ours. Our operations may also be affected if competing properties are built in either of these markets. Moreover, submarkets within any of our core markets may be dependent upon a limited number of industries.
Our results of operations rely on major tenants and insolvency, bankruptcy or receivership of these or other tenants could adversely affect our results of operations.
Giving effect to leases in effect as of December 31, 2012 for consolidated properties and unconsolidated joint venture properties, as of that date, our five largest tenants, Amazon.com, Inc., Barclays Capital Inc., the U.S. Government, Raytheon Company and JP Morgan Chase together represented approximately 21.5% of our share of annualized base rent. Our rental revenue depends on entering into leases with and collecting rents from tenants. General and regional economic conditions may adversely affect our major tenants and potential tenants in our markets. Our major tenants may experience a material business downturn, weakening their financial condition and potentially resulting in their failure to make timely rental payments and/or a default under their leases. In many cases, we have made substantial up front investments in the applicable leases, through tenant improvement allowances and other concessions, as well as typical transaction costs (including professional fees and commissions) that we may not be able to recover. In the event of any tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment.
The bankruptcy or insolvency of a major tenant also may adversely affect the income produced by our properties. If any tenant becomes a debtor in a case under the United States Bankruptcy Code, we cannot evict the tenant solely because of the bankruptcy. In
10
addition, the bankruptcy court might authorize the tenant to reject and terminate their lease with us. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. 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 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, and there are restrictions under bankruptcy laws that limit the amount of the claim we can make if a lease is rejected.
Our revenue and cash flow could be materially adversely affected if any of our significant tenants were to become bankrupt or insolvent, or suffer a downturn in their business, default under their leases or fail to renew their leases at all or renew on terms less favorable to us than their current terms.
Because we are dependent on our tenants for substantially all of our revenue, our success is materially dependent on the financial stability of our tenants.
Lease payment defaults by tenants could cause us to reduce the amount of distributions to shareholders. A default of a tenant on its lease payments would cause us to lose the revenue from the property. In the event of such a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and leasing our property. If a lease is terminated, we cannot assure you that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. Further, we may be required to make rent or other concessions to tenants, accommodate requests for renovations, build-to-suit remodeling and other improvements or provide additional services to our tenants. As a result, we may have to make significant capital or other expenditures in order to retain tenants whose leases expire and to attract new tenants in sufficient numbers. A default by a tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease, or a tenant’s election not to extend a lease upon its expiration, could have an adverse effect on our financial condition and our ability to pay distributions. Certain of our properties are occupied by only a single tenant and, therefore, the success of those properties will be materially dependent on the financial stability of such tenants. Current weak economic conditions and the remnants of the credit crisis may put financial pressure on and increase the likelihood of the financial failure of, or other default in payment by, one or more of the tenants to whom we have exposure.
We are subject to risks involved in single tenant leases, and the default by one or more tenants could materially and adversely affect us.
As of December 31, 2012, approximately 72% (based on approximate total acquisition cost, with our unconsolidated properties included at our pro rata share of effective ownership, however, excluding our investments in CBRE Strategic Partners Asia) of our portfolio consists of single tenant triple net properties. Any of our tenants may experience a downturn in its business at any time that may significantly weaken its financial condition or cause its failure. As a result, such tenant may decline to extend or renew its lease upon expiration, fail to make rental payments when due or declare bankruptcy. The default, financial distress or bankruptcy of a single tenant could cause interruptions in the receipt of rental revenue and/or result in a vacancy, which is likely to result in the complete reduction in the operating cash flows generated by the property leased to that tenant and may decrease the value of that property. In addition, a majority of our leases generally require the tenant to pay all or substantially all of the operating expenses normally associated with the ownership of the property, such as utilities, real estate taxes, insurance and routine maintenance. Following a vacancy at a single-tenant property, we will be responsible for all of the operating costs at such property until it can be re-let, if at all.
A property that incurs a significant vacancy could be difficult to sell or lease.
A property may incur a vacancy either by the continued default of a tenant under its lease or the expiration of one of our leases. Some of our properties may be specifically suited to the particular needs of the tenant based on the type of business the tenant operates. As of December 31, 2012, leases representing 6.61% of our annualized base rent were scheduled to expire during 2013. We cannot assure you that leases will be renewed or that our properties will be re-let at rental rates equal to or above our current average rental rates or that substantial rent abatements, tenant improvements, early termination rights or below-market renewal options will not be offered to attract new tenants or retain existing tenants. We may have difficulty obtaining a new tenant for any vacant space in our properties, particularly if the space limits the types of businesses that can use the space without major renovation. If a vacancy on any of our properties continues for a long period of time, we may suffer reduced revenues resulting in less cash to be distributed to shareholders. In addition, the resale value of the property could be diminished because the market value of a particular property may depend principally upon the value of the leases of such property.
11
If one or more of our tenants file for bankruptcy protection, we may be precluded from collecting all sums due.
If one or more of our tenants, or the guarantor of a tenant’s lease, commences, or has commenced against it, any proceeding under any provision of the U.S. federal bankruptcy code, as amended, or any other legal or equitable proceeding under any bankruptcy, insolvency, rehabilitation, receivership or debtor’s relief statute or law (bankruptcy proceeding), we may be unable to collect sums due under relevant leases. Any or all of the tenants, or a guarantor of a tenant’s lease obligations, could be subject to a bankruptcy proceeding.
Such a bankruptcy proceeding may bar our efforts to collect pre-bankruptcy debts from these entities or their properties, unless we are able to obtain an enabling order from the bankruptcy court. If a lease is rejected by a tenant in bankruptcy, we would only have a general unsecured claim against the tenant, and may not be entitled to any further payments under the lease. A tenant’s or lease guarantor’s bankruptcy proceeding could hinder or delay efforts to collect past due balances under relevant leases, and could ultimately preclude collection of these sums. Such an event could cause a decrease or cessation of rental payments which would mean a reduction in our cash flow and the amount available for distribution to our shareholders. In the event of a bankruptcy proceeding, we cannot assure you that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distribution to our shareholders may be adversely affected.
If our tenants are unable to secure financing necessary to continue to operate their businesses and pay us rent, we could be materially and adversely affected.
Many of our tenants rely on external sources of financing to operate their businesses. If our tenants are unable to secure financing necessary to continue to operate their businesses, they may be unable to meet their rent obligations or be forced to declare bankruptcy and reject their leases, which could materially and adversely affect us.
Our net leases may require us to pay property related expenses that are not the obligations of our tenants.
Under the terms of all of our net leases, in addition to satisfying their rent obligations, our tenants are responsible for the payment of real estate taxes, insurance and ordinary maintenance and repairs. However, under the provisions of future leases with our tenants, we may be required to pay some expenses, such as the costs of environmental liabilities, roof and structural repairs, insurance, certain non-structural repairs and maintenance. If our properties incur significant expenses that must be paid by us under the terms of our leases, our business, financial condition and results of operations will be adversely affected and the amount of cash available to meet expenses and to make distributions to holders of our common shares may be reduced.
We may not have funding for future tenant improvements, which may reduce your returns and make it difficult to attract one or more new tenants.
When a tenant at one of our properties does not renew its lease or otherwise vacates its space in one of our buildings, it is likely that, in order to attract one or more new tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space and other lease-up costs. Substantially all of our net offering proceeds available for investment has been used for investment in real estate properties. We may maintain working capital reserves but cannot guarantee they will be adequate. We also have no identified funding source to provide funds that may be required in the future for tenant improvements, tenant refurbishments and other lease-up costs in order to attract new tenants. We cannot assure you that any such source of funding will be available to us for such purposes in the future and, to the extent we are required to use net cash from operations to fund such tenant improvements, tenant refurbishments and other lease-up costs, cash distributions to our shareholders will be reduced.
The actual rents we receive for the properties in our portfolio may be less than our asking rents, and we may experience lease roll down from time to time, which could negatively impact our ability to generate cash flow growth.
As a result of various factors, including potential competitive pricing pressure specific to certain submarkets, general economic weakness and the desirability of our properties compared to other properties in our submarkets, we may be unable to realize the asking rents across the properties in our portfolio. In addition, the degree of discrepancy between our asking rents and the actual rents we are able to obtain may vary both from property to property and among different leased spaces within a single property. If we are unable to obtain rental rates that are on average comparable to our asking rents across our portfolio, then our ability to generate cash flow growth will be negatively impacted. In addition, depending on asking rental rates at any given time as compared to expiring leases in our portfolio, from time to time rental rates for expiring leases may be higher than starting rental rates for new leases.
12
We will be subject to additional risks as a result of any joint ventures.
We have entered, and may in the future enter, into joint ventures for the acquisition, development or improvement of properties. We have purchased and developed, and may in the future purchase and develop, properties in joint ventures or in partnerships, co-tenancies or other co-ownership arrangements with sellers of properties, affiliates of sellers, developers or other persons. Such investments may involve risks not otherwise present with an investment in real estate, including, for example:
| | ¡ | | the possibility that our co-venturer, co-tenant or partner in an investment might become bankrupt; |
| | ¡ | | that maturities of debt encumbering our jointly owned investments may not be able to be refinanced at all or on terms that are as favorable as the current terms; |
| | ¡ | | that such co-venturer, co-tenant or partner may at any time have economic or business interests or goals which are or become inconsistent with our business interests or goals, including inconsistent goals relating to the sale of properties owned by such co-venturer, co-tenant or partner or the timing of the termination and liquidation of such party; |
| | ¡ | | the possibility that we may incur impairments and liabilities as the result of actions taken by the controlling party; |
| | ¡ | | that such co-venturer, co-tenant or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; or |
| | ¡ | | that we will not manage the properties, or be able to select the management for the property, that a joint venture owns. |
Actions by such a co-venturer, co-tenant or partner might have the result of subjecting the property to liabilities in excess of those contemplated and may have the effect of reducing your returns. We have ownership interests in five unconsolidated entities that, as of December 31, 2012, owned interests in 54 properties (which such amount does not reflect the 17 Duke joint venture properties that CSP OP acquired 100% of the interests in during March 2013).
It may be difficult for us to exit a joint venture after an impasse.
In our joint ventures, there will be a potential risk of impasse in some business decisions because our approval and the approval of each co-venturer may be required for some significant operating decisions. In any joint venture, we may have the right to buy all or a portion of the other co-venturer’s interest or to sell all or a portion of our own interest on specified terms and conditions in the event of an impasse. In the event of an impasse, it is possible that neither party will have the funds necessary to complete a buy-out. In addition, we may experience difficulty in locating a third-party purchaser for our joint venture interest and in obtaining a favorable sale price for the interest or, in certain cases, may require the prior written consent of the general partner or managing member of the venture. As a result, it is possible that we may not be able to exit the relationship if an impasse develops.
If third party managers providing property management services for certain of our properties or their personnel are negligent in their performance of, or default on, their management obligations, our tenants may not renew their leases or we may become subject to unforeseen liabilities. If this occurs, our financial condition and operating results, as well as our ability to pay dividends to shareholders at historical levels or at all, could be substantially harmed.
We have entered into agreements with third party management companies to provide property management services for certain of our properties, and we expect to enter into similar agreements with respect to properties we acquire in the future. We cannot supervise these third party managers and their personnel on a day-to-day basis and we cannot assure you that they will manage our properties in a manner that is consistent with their obligations under our agreements, that they will not be negligent in their performance or engage in other criminal or fraudulent activity, or that these managers will not otherwise default on their management obligations to us. If any of the foregoing occurs, our relationships with our tenants could be damaged, which may prevent the tenants from renewing their leases, and we could incur liabilities resulting from loss or injury to our properties or to persons at our properties. If we are unable to lease our properties or we become subject to significant liabilities as a result of third party management performance issues, our operating results and financial condition, as well as our ability to pay distributions to our shareholders, could be adversely affected.
Development and construction of our properties may result in delays and increased costs and risks.
We have invested, and may in the future invest, some or all of the net proceeds available for investment in the acquisition and development of properties upon which we (or a joint venture partner) will develop and construct improvements. We will be subject to the following risks associated with such development and redevelopment activities:
| | ¡ | | unsuccessful development or redevelopment opportunities could result in direct expenses to us; |
13
| | ¡ | | construction or redevelopment costs of a project may exceed original estimates, possibly making the project less profitable than originally estimated, or unprofitable; |
| | ¡ | | time required to complete the construction or redevelopment of a project or to lease up the completed project may be greater than originally anticipated, thereby adversely affecting our cash flow and liquidity; |
| | ¡ | | contractor and subcontractor disputes, strikes, labor disputes or supply disruptions; |
| | ¡ | | the builder’s failure to perform may necessitate legal action by us to rescind the purchase or the construction contract or to compel performance; |
| | ¡ | | we may incur additional risks when we make periodic progress payments or other advances to such builders prior to completion of construction; |
| | ¡ | | failure to achieve expected occupancy and/or rent levels within the projected time frame, if at all (delays in completion of construction could also give tenants the right to terminate pre-construction leases for space at a newly developed project); |
| | ¡ | | delays with respect to obtaining or the inability to obtain necessary zoning, occupancy, land use and other governmental permits, and changes in zoning and land use laws; |
| | ¡ | | occupancy rates and rents of a completed project may not be sufficient to make the project profitable; |
| | ¡ | | if our projections of rental income and expenses and estimates of the fair market value of a property upon completion of construction are inaccurate, we may pay too much for a property; |
| | ¡ | | our ability to dispose of properties developed or redeveloped with the intent to sell could be impacted by the ability of prospective buyers to obtain financing given the current state of the credit markets; and |
| | ¡ | | the availability and pricing of financing to fund our development activities on favorable terms or at all. |
Factors such as those discussed above can result in increased costs of a project or loss of our investment, which could adversely impact our ability to make distributions to our shareholders. In addition, we may not be able to find suitable tenants to lease our newly constructed projects. Furthermore, we must rely upon projections of rental income and expenses and estimates of the fair market value of a property upon completion of construction when agreeing upon a price to be paid for the property at the time of acquisition of the property. If our projections are inaccurate, we may pay too much for a property.
Retail properties depend on anchor tenants to attract shoppers and could be adversely affected by the loss of a key anchor tenant.
We have acquired, and may in the future acquire, properties with retail components. As with all rental properties, we are subject to the risk that tenants may be unable to make their lease payments or may decline to extend a lease upon its expiration. A lease termination by a tenant that occupies a large area of a retail center (commonly referred to as an anchor tenant) could impact leases of other tenants. Other tenants may be entitled to modify the terms of their existing leases in the event of a lease termination by an anchor tenant, or the closure of the business of an anchor tenant that leaves its space vacant even if the anchor tenant continues to pay rent. Any such modifications or conditions could be unfavorable to us as the property owner and could decrease rents, expense recoveries or the market value of the property. Additionally, major tenant closures may result in decreased customer traffic, which could lead to decreased sales at other stores. In the event of a default by a tenant or anchor store, we may experience delays and costs in enforcing our rights as landlord to recover amounts due to us under the terms of our agreements with those parties.
We are subject to risks that affect the general retail environment, such as weakness in the economy, the level of consumer spending, the adverse financial condition of large retailing companies and competition from discount and internet retailers, any of which could adversely affect market rents for retail space and the willingness or ability of retailers to lease space in our properties.
Certain of our properties are in the retail real estate market. This means that we are subject to factors that affect the retail sector generally, as well as the market for retail space. The retail environment and the market for retail space have been, and could continue to be, adversely affected by weakness in the national, regional and local economies, the level of consumer spending and consumer confidence, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, the excess amount of retail space in a number of markets and increasing competition from discount retailers, outlet malls, internet retailers and other online businesses. Increases in consumer spending via the internet may significantly affect our retail tenants’ ability to generate sales in their stores. New and enhanced technologies, including new digital technologies and new web services technologies, may increase competition for certain of our retail tenants.
14
Any of the foregoing factors could adversely affect the financial condition of our retail tenants and the willingness of retailers to lease space. In turn, these conditions could negatively affect market rents for retail space and could materially and adversely affect our distributions to our shareholders.
Competition for investments may reduce the number of acquisition opportunities available to us and increase costs of those acquisitions, which may impede our growth.
The current market for acquisitions that meet our investment criteria is extremely competitive. We experience competition for such real property investments from corporations, other real estate investment trusts, pension plans and other entities engaged in real estate investment activities. This competition may increase the demand for the types of properties in which we typically invest and, therefore, reduce the number of suitable acquisition opportunities available to us and increase the prices paid for such acquisition properties. In addition, the number of entities and the amount of funds competing for suitable investments may increase. This competition will increase if investments in real estate become more attractive relative to other forms of investment. Any such increase would result in increased demand for these assets and therefore increased prices paid for them. The significant competition for acquisitions may impede our growth.
Uncertain market conditions could adversely affect the return on your investment.
We intend to hold the various real properties in which we invest until such time as we, subject to the approval of our Board of Trustees, determine that the sale or other disposition thereof appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met. We cannot predict with any certainty the various market conditions affecting real estate investments that will exist at any particular time in the future. Due to the uncertainty of market conditions that may affect the future disposition of our properties, we cannot assure you that we will be able to sell our properties at a profit in the future. Accordingly, the extent to which you will receive cash distributions and realize potential appreciation on our real estate investments will be dependent upon fluctuating market conditions.
General economic conditions may affect the timing of the sale of our properties and the purchase price we receive.
We may be unable to sell a property if or when we decide to do so. The real estate market is affected by many factors, such as general economic conditions, the availability of financing, interest rates and other factors, including supply and demand for real estate investments, all of which are beyond our control. We cannot predict whether we will be able to sell any property for the price or on terms that are acceptable to us. Further, we cannot predict the length of time that will be needed to find a willing purchaser and to close the sale of a property.
We may acquire properties or portfolios of properties through tax deferred contribution transactions, which could result in shareholder dilution and limit our ability to sell such assets.
In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in our operating partnership, which may result in shareholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
Lock-out provisions, which preclude pre-payments of a loan, could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distributions to investors. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our shareholders and, therefore, may have an adverse impact on the value of the shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our shareholders. Further, if we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows and negatively impact our ability to pay cash distributions to our shareholders.
15
We may obtain only limited warranties when we purchase a property and would have only limited recourse in the event our due diligence did not identify any issues that lower the value of our property.
The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property as well as the loss of rental income from that property.
We may experience a decline in the fair value of our assets, which may have a material impact on our financial condition, liquidity and results of operations.
A decline in the fair market value of our assets may require us to recognize a permanent impairment against such assets under GAAP if we were to determine that, we do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the amortized cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale.
We may become subject to litigation, which could have a material and adverse effect on our financial condition, results of operations and cash flow.
We may become subject to litigation, including claims relating to our operations, offerings, and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We generally intend to defend ourselves vigorously; however, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby having an adverse effect on our financial condition, results of operations and cash flow. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and trustees.
Real estate related taxes may increase and if these increases are not passed on to tenants, our income will be reduced.
Some local real property tax assessors may seek to reassess some of our properties as a result of our acquisition of the property. Generally, from time to time our property taxes increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. In some areas where we have properties, declines in other tax revenues for the states are resulting in the states considering increases to future property and other business related tax rates. Although some tenant leases may permit us to pass through such tax increases to the tenants for payment, there is no assurance that renewal leases or future leases will be negotiated on the same basis. Increases not passed through to tenants will adversely affect our income, cash available for distributions, and the amount of distributions to investors.
If we purchase environmentally hazardous property, our operating results could be adversely affected.
Under various U.S. federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. In connection with the acquisition and ownership of our properties, we may be potentially liable for such costs. The cost of defending against claims of liability, complying with environmental regulatory requirements or remediating any contaminated property could have a material adverse effect on our business, assets or results of operations and, consequently, amounts available for distribution to you. Any costs or expenses relating to environmental matters may not be covered by insurance.
16
Uninsured losses relating to real property may adversely affect your returns.
In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by any such uninsured loss. In addition, we may have limited funding to repair or reconstruct the damaged property, and we cannot assure you that any such source of funding will be available to us for such purposes in the future. Furthermore, insurance may be unavailable or uneconomical. In particular, insurance coverage relating to flood or earthquake damage or terrorist acts may not be available or affordable.
We may incur significant costs complying with various federal, state and local laws, regulations and covenants that are applicable to our properties and, in particular costs associated with complying with regulations such as the Americans with Disabilities Act of 1990 may result in unanticipated expenses.
The properties in our portfolio are subject to various covenants and U.S. federal, state and local laws and regulatory requirements, including permitting and licensing requirements. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or restrict our use of our properties and may require us to obtain approval from local officials of community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. Among other things, these restrictions may relate to fire and safety, seismic or hazardous material abatement requirements. There can be no assurance that existing laws and regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional regulations will not be adopted that increase such delays or result in additional costs. Our growth strategy may be affected by our ability to obtain permits, licenses and zoning relief. Our failure to obtain such permits, licenses and zoning relief or to comply with applicable laws could have an adverse effect on our financial condition, results of operations and cash flow.
In addition, under the Americans with Disabilities Act of 1990, or ADA, all places of public accommodation are required to meet certain U.S. federal requirements related to access and use by disabled persons. These requirements became effective in 1992. A number of additional U.S. federal, state and local laws may also require modifications to our properties, or restrict further renovations of the properties, with respect to access thereto by disabled persons. For example, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1991 to be accessible to the handicapped. On March 15, 2011, final regulations implementing a substantial number of changes to the Accessibility Guidelines under the ADA became effective. These new guidelines could cause some of our properties to incur costly measures to become fully compliant. Noncompliance with the ADA or the FHAA could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. We do not conduct audits or investigations of all of these properties to determine their compliance and we cannot predict the ultimate cost of compliance with the ADA, the FHAA or other legislation. If one or more of our properties in which we invest is not in compliance with the ADA, the FHAA or other legislation, then we would be required to incur additional costs to bring the property into compliance. If we incur substantial costs to comply with the ADA and the FHAA or other legislation, our financial condition, results of operations, cash flow, price per share of our common shares and our ability to satisfy debt service obligations and to pay distributions could be adversely affected.
If we make or invest in mortgage loans, our mortgage loans may be impacted by unfavorable real estate market conditions, which could decrease the value of our mortgage investments.
If we make or invest in mortgage loans, we will be at risk of defaults by the borrowers on those mortgage loans. These defaults may be caused by many conditions beyond our control, including interest rate levels and local and other economic conditions affecting real estate values. We will not know whether the values of the properties securing the mortgage loans will remain at the levels existing on the dates of origination of the mortgage loans. If the values of the underlying properties drop, our risk will increase because of the lower value of the security associated with such loans.
If we invest in mortgage loans, our mortgage loans will be subject to interest rate fluctuations which could reduce our returns as compared to market interest rates as well as the value of the mortgage loans in the event we sell the mortgage loans.
If we invest in fixed-rate, long-term mortgage loans and interest rates rise, the mortgage loans could yield a return that is lower than then-current market rates. If interest rates decrease, we will be adversely affected to the extent that mortgage loans are prepaid, because we may not be able to make new loans at the previously higher interest rate. If we invest in variable interest rate loans, if interest rates decrease, our revenues will likewise decrease. Finally, if interest rates increase, the value of loans we own at such time would decrease which would lower the proceeds we would receive in the event we sell such loans.
17
Your investment may be subject to additional risks when we make international investments.
We purchase properties located outside the United States. These investments may be affected by factors peculiar to the laws and business practices of the jurisdictions in which the properties are located. These laws may expose us to risks that are different from and in addition to those commonly found in the United States. Foreign investments could be subject to the following risks:
| | ¡ | | changing governmental rules and policies, including changes in land use and zoning laws; |
| | ¡ | | enactment of laws relating to the foreign ownership of real property and laws restricting the ability of foreign persons or companies to remove profits earned from activities within the country to the person’s or company’s country of origin; |
| | ¡ | | fluctuations in foreign currency exchange rates, which may adversely impact the fair values and earnings streams of our international holdings and, therefore, the returns on our non-dollar denominated investments. Although we may hedge our foreign currency risk subject to the REIT income qualification tests, it is possible that we may not be able to do so successfully and may incur losses on these investments as a result of exchange rate fluctuations; |
| | ¡ | | adverse market conditions caused by terrorism, civil unrest, natural disasters and changes in national or local governmental or economic conditions; |
| | ¡ | | the willingness of domestic or foreign lenders to make mortgage loans in certain countries and changes in the availability, cost and terms of mortgage funds resulting from varying national economic policies; |
| | ¡ | | the imposition of unique tax structures and changes in real estate and other tax rates and other operating expenses in particular countries; |
| | ¡ | | our ability to qualify as a REIT may be affected; and |
| | ¡ | | general political and economic instability. |
Although our international activities currently are a relatively small portion of our business (international properties represented approximately 12% of the net rentable square feet of all of our properties at December 31, 2012), to the extent that we expand our international activities, these risks could increase in significance which in turn could adversely affect our results of operations and financial condition.
Delays in liquidating defaulted mortgage loans could reduce our investment returns.
If there are defaults under mortgage loans that we may make or invest in, we may not be able to repossess and sell the underlying properties quickly. The resulting time delay could reduce the value of our investment in the defaulted mortgage loans. An action to foreclose on a property securing a mortgage loan is regulated by state statutes and rules and is subject to many of the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the mortgage loan.
Terrorist attacks and other acts of violence or war may affect the market for our common shares, the industry in which we conduct our operations and our profitability.
Terrorist attacks may harm our results of operations and your investment. We cannot assure you that there will not be terrorist attacks in the localities in which we conduct business. These attacks or armed conflicts may directly impact the property underlying our asset-based securities or the securities markets in general. Losses resulting from these types of events are uninsurable.
More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the worldwide financial markets and economy. Adverse economic conditions could harm the value of the property underlying our asset-backed securities or the securities markets in general which could harm our operating results and revenues.
Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act of 1940, as amended.
We do not intend to invest in marketable securities, and we do not intend to register as an investment company under the Investment Company Act of 1940, as amended, (the “Investment Company Act”). If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things:
| | ¡ | | limitations on capital structure; |
| | ¡ | | restrictions on specified investments; |
18
| | ¡ | | prohibitions on transactions with affiliates; and |
| | ¡ | | compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses. |
In general, we expect to be able to rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Company Act. In order to qualify for this exemption, at least 55% of our portfolio must be comprised of real property and mortgages and other liens on an interest in real estate (collectively, “qualifying assets”) and at least 80% of our portfolio must be comprised of real estate-related assets. Qualifying assets include mortgage loans, mortgage-backed securities that represent the entire ownership in a pool of mortgage loans and other interests in real estate. In order to maintain our exemption from registering as an investment company under the Investment Company Act, we must continue to engage primarily in the business of purchasing or otherwise acquiring real estate.
To maintain compliance with the exemption from registration provided by section 3(c)(5)(C) of the Investment Company Act, we may be unable to sell assets we would otherwise want to sell, and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forego opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. If we were required to register as an investment company, our business would be adversely affected and we would be prohibited from engaging in our business as currently contemplated because the Investment Company Act imposes significant limitations on leverage. Criminal and civil actions could also be brought against us if we failed to comply with the Investment Company Act. In addition, our contracts could be unenforceable (unless a court in equity were to require enforcement), and a court could appoint a receiver to take control of us and liquidate our business. Although we intend to monitor our portfolio, there can be no assurance that we will be able to maintain our exemption from registration as an investment company under the Investment Company Act. Further, in August of 2011, the SEC solicited public comment on a wide range of issues relating to Section 3(c)(5)(C) of the Investment Company Act, including the nature of the assets that qualify for purposes of the exemption and leverage used by mortgage related vehicles. There can be no assurance that the laws and regulations governing the Investment Company Act status of companies primarily owning real estate related assets, including the SEC or its staff providing more specific or different guidance regarding this exemption, will not change in a manner that adversely affects our operations. To the extent that the SEC or its staff provides more specific or different guidance, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.
Risks Related to Our Organization and Structure
We have limited experience operating as a self-managed company, which makes our future performance difficult to predict. As a result of our transition to self-management, we may be exposed to risks which we have not historically encountered.
We have a limited operating history as a self-managed company. Historically, all of our business activities were managed by our former investment advisor pursuant to the fourth amended and restated advisory agreement, which terminated according to its terms on June 30, 2012. As a result, our future performance as a self-managed company is more difficult to predict. In addition, as of December 31, 2012, we had 23 full-time employees. As their employer, we will be subject to those potential liabilities that are commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes, and other employee-related liabilities and grievances, and we will bear the costs of the establishment and maintenance of such plans.
Our success depends to a significant degree upon the continued contributions of certain key personnel, each of whom would be difficult to replace. If we were to lose the benefit of the experience, efforts and abilities of one or more of these individuals, our operating results could suffer.
We rely on a small number of persons who comprise our existing key management team to implement our business and investment strategies. Our ability to achieve our investment objectives and to make distributions to our shareholders is dependent upon the continued performance of our Board of Trustees and our key management personnel. While we entered into employment agreements with certain of our key management personnel, they may nevertheless cease to provide services to us at any time. In addition, if any member of our Board of Trustees were to resign, we would lose the benefit of such trustee’s governance and experience. The loss of services of any of our key management personnel, or our inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results.
Our common shares are not currently listed on an exchange and cannot be readily sold.
There is currently no public trading market for our shares and, therefore, it will be difficult for you to sell your shares promptly. We cannot assure you that any trading market will develop or, if developed, that any such market will be sustained. We do not expect a
19
public market for our common shares to develop prior to any listing of our shares on a national securities exchange, which may not occur in the near future or at all. Additionally, our declaration of trust contains restrictions on the ownership and transfer of our shares, and these restrictions may inhibit your ability to sell your shares. We currently have a share redemption program, however, it is limited in terms of the amount of shares which may be repurchased quarterly and annually and may be limited, suspended, terminated or amended at any time by our Board of Trustees. We are conducting an ongoing review of potential alternatives for our share redemption program, which may include the suspension or termination of the plan. The absence of an active public market for our shares could impair a shareholder’s ability to sell our shares or obtain an active trading market valuation of the value of their interest in us. If our existing shareholders are able to sell their shares, they may only be able to sell them at a substantial discount from the price they paid.
We sold our common shares in a fixed price offering, and are currently selling shares pursuant to our second amended and restated dividend reinvestment plan in a fixed price offering. The fixed offering price may not accurately represent the current value of our assets at any particular time; therefore, the purchase price paid for our common shares may be higher than the value of our assets per common share at the time of purchase.
Our public offerings were fixed price offerings, which means that the offering price for our common shares was fixed and did not vary based on the underlying value of our assets at any time. Our Board of Trustees arbitrarily determined the offering price in its sole discretion. Shares in our public offerings were sold at a price per share of $10.00 and shares were sold pursuant to our dividend reinvestment plan at a price of $9.50 per share. In the dividend reinvestment plan offering, shares are currently sold at a price of $9.50 per share. In the event that our Board of Trustees determines that the fair market value of our common shares has changed, common shares will thereafter be sold pursuant to the dividend reinvestment plan at a price determined by our Board of Trustees, which price shall not be less than 95% of the fair market value of a common share on the reinvestment date (including any administrative costs paid by us on participants’ behalf) as so determined. Additionally, our Board of Trustees may amend or terminate our dividend reinvestment plan for any reason and at any time upon ten days prior written notice to participants. On or before July 30, 2013, we will be required to estimate the value of our common shares per share to assist broker-dealers in connection with their obligations under applicable Financial Industry Regulatory Authority (“FINRA”) rules with respect to customer account statements and to assist fiduciaries of retirement plans subject to annual reporting requirements of the employee retirement income security act (“ERISA”) in preparation of their reports.
The fixed offering price for our common shares does not reflect and continues not to reflect, and is not derived from, the fair market value of our properties and other assets nor does it represent the amount of net proceeds that would result from an immediate liquidation of those assets, because the amount of proceeds available for investment from our public offerings was net of selling commissions, dealer manager fees, other organization and offering costs and acquisition fees and expenses. Further, the fixed price of our common shares at any time does not take into account how market fluctuations affect the value of our investments, including how the current disruptions in the financial and real estate markets may affect the values of our investments and how developments related to individual assets may have increased or decreased the value of our portfolio. Therefore, the fixed offering price established for our common shares may not accurately represent the current or future value of the assets per share of our common shares at any particular time, and if valuation were to occur, the value per share may be less than the price for which such shares were sold.
Restrictions on ownership of a controlling percentage of our shares may limit your opportunity to receive a premium on your shares.
To assist us in complying with the share ownership requirements necessary for us to qualify as a REIT, our declaration of trust currently prohibits, with certain exceptions, direct or constructive ownership by any person of more than 3.0% by number or value, whichever is more restrictive, of our outstanding common shares or more than 3.0% by number or value, whichever is more restrictive, of our outstanding shares. Our Board of Trustees, in its sole discretion, may exempt a person from the share ownership limit. Additionally, our declaration of trust prohibits direct or constructive ownership of our shares that would otherwise result in our failure to qualify as a REIT. The constructive ownership rules in our declaration of trust are complex and may cause the outstanding shares owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than any ownership limit by an individual or entity could cause that individual or entity to own constructively in excess of any ownership limit of our outstanding shares. Any attempt to own or transfer our shares in excess of the ownership limit without the consent of our Board of Trustees shall be void, and will result in the shares being transferred to a charitable trust. These provisions may inhibit market activity and the resulting opportunity for our shareholders to receive a premium for their shares that might otherwise exist if any person were to attempt to assemble a block of our shares in excess of the number of shares permitted under our declaration of trust and which may be in the best interests of our shareholders.
20
Maryland takeover statutes could restrict a change of control, which could have the affect of inhibiting a change in control even if a change in control were in our shareholders’ interests.
Under Maryland law, certain “business combinations” between a Maryland REIT and an interested shareholder or an affiliate of an interested shareholder are prohibited for five years after the most recent date on which the interested shareholder becomes an interested shareholder. These business combinations include a merger, consolidation, share exchange, or asset transfers or issuance or reclassification of equity securities. An interested shareholder is defined as:
| | ¡ | | any person who beneficially owns 10% or more of the voting power of our company’s shares; or |
| | ¡ | | an affiliate or associate of our company who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting shares of our company. |
A person is not an interested shareholder under the statute if our Board of Trustees approves in advance the transaction by which he otherwise would have become an interested shareholder. After the five-year prohibition, any business combination between the Maryland REIT and an interested shareholder generally must be recommended by our Board of Trustees and approved by the affirmative vote of at least:
| | ¡ | | 80% of the votes entitled to be cast by holders of outstanding shares of voting shares of our company; and |
| | ¡ | | 66% of the votes entitled to be cast by holders of voting shares of our company other than shares held by the interested shareholder with whom or with whose affiliate the business combination is to be effected or by the interested shareholder’s affiliates or associates, voting together as a single group. |
The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for our common shares or otherwise be in the best interests of our shareholders.
Our Board of Trustees has adopted a resolution exempting our company from the provisions of the Maryland General Corporate Law (the “MGCL”) relating to business combinations with interested shareholders or affiliates of interested shareholders. However, such resolution can be altered or repealed, in whole or in part, at any time by our Board of Trustees. If such resolution is repealed, the business combination statute could have the effect of discouraging offers to acquire us and of increasing the difficulty of consummating these offers, even if our acquisition would be in our shareholders’ best interests.
Maryland law also limits the ability of a third-party to buy a large stake in us and exercise voting power in electing trustees.
The MGCL, as applicable to REITs, provides that “control shares” of a Maryland real estate investment trust acquired in a “control share acquisition” have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquire, by officers or by directors who are employees of the corporation. “Control shares” are voting shares that would entitle the acquirer to exercise voting power in electing trustees within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained shareholder approval. A “control share acquisition” means the acquisition of control shares. The control share acquisition statute does not apply (i) to shares acquired in a merger, consolidation or share exchange if we are a party to the transaction, or (ii) to acquisitions approved or exempted by our declaration of trust or bylaws. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of our shares. We cannot assure you that such provision will not be amended or eliminated at any time in the future. If such provision is eliminated, the control share acquisition statute could have the effect of discouraging offers to acquire us and increasing the difficulty of consummating any such offers, even if our acquisition would be in our shareholders’ best interests.
Our existing shareholders are limited in their ability to sell their shares pursuant to our share redemption program.
Our share redemption program currently provides our existing shareholders with the opportunity, on a quarterly basis, to request that we redeem all or a portion of their shares after they have held them for one year, subject to certain restrictions and limitations. In the event that an existing shareholder presents fewer than all of his or her shares to us for redemption, such shareholder must present at least 25% of his or her shares to us for redemption and must retain at least $5,000 of common shares if any shares are held after such redemption. Shares are redeemed only to the extent of cash available after the payment of dividends necessary to maintain our qualification as a REIT and to avoid the payment of any U.S. federal income tax or excise tax on our net taxable income or from, at the sole discretion of our Board of Trustees, other sources. This will significantly limit our ability to redeem a shareholder’s shares. To the
21
extent our available cash flow is insufficient to fund all redemption requests, each shareholder’s request will be reduced on a pro rata basis, unless he or she withdraws a request for redemption or ask that we carry over the request to the next quarterly period, if any, when sufficient funds become available. Our Board of Trustees reserves the right to suspend, amend or terminate the share redemption program at any time. We are conducting an ongoing review of potential alternatives for our share redemption program, which may include the suspension or termination of the plan. Our Board of Trustees has delegated to our officers the right to waive the one-year holding period and pro rata redemption requirements in the event of the death, disability (as such term is defined in the Internal Revenue Code) or bankruptcy of a shareholder. A shareholder has no right to request redemption of his or her shares should our shares become listed on a national securities exchange, the NASDAQ Global Select Market or the NASDAQ Global Market. Therefore, a shareholder should not assume that he or she will be able to sell any of his or her shares back to us pursuant to our share redemption program.
We pay (or may pay) fees and expenses to our former investment advisor and its affiliates under agreements, which payments reduce the amount of cash available for investment in properties or distribution to shareholders.
Our former investment advisor and its affiliates continue to perform certain consulting, support and transitional services for us in accordance with the terms of the transitional services agreement as requested by us from time to time, which expires on April 30, 2013. To the extent that these services are performed by our former investment advisor or one of its affiliates, we may pay an investment management consulting fee, an acquisition consulting fee, property management, leasing and construction fees and a real estate commission fee upon the sale of a property, all subject to adjustment in certain instances, as applicable to our former investment advisor or its affiliates. We also reimburse our former investment advisor for certain expenses incurred or paid in connection with the services it provides to us under the transitional services agreement. Further, until June 30, 2017, if we attempt to effect certain types of transactions, including, but not limited to, a merger, consolidation or the sale of 10% of more of our business, assets or voting securities, we have agreed under our transition to self-management agreement to engage CBRE Global Investors, LLC, our former sponsor, or an affiliate of our former sponsor to provide financial advice and assistance in connection therewith provided that such entity continues to have the sufficient expertise and resources to provide such financial advice or assistance. Additionally, we also have issued to an affiliate of our former investment advisor one class B limited partnership interest (representing 100% of the class B interest outstanding) in CSP OP, which certain of our executive officers own an aggregate 15% distribution interest. For a description of the class B limited partnership interest, See Note 11 to the Consolidated Financial Statements “Investment Management and Other Fees to Related Parties.” These fees and partnership interest distributions reduce the amount of cash available for investment in properties or distribution to shareholders.
We may be unable to pay or maintain cash distributions or increase distributions over time.
There are many factors that can affect the availability and timing of cash distributions to shareholders. Cash distributions will be based principally on cash available from our operations. The amount of the distributions we make to our shareholders is determined by our Board of Trustees, at its sole discretion, and is dependent on a number of factors, including cash available for payment of distributions, our financial condition, and capital expenditure requirements and annual distribution requirements needed to maintain our qualification as a REIT, as well as any liquidity event options we may pursue. The amount of cash available for distributions is affected by many factors, such as our ability to buy properties as proceeds become available, rental income from such properties, our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. Our Board of Trustees may reduce the amount of distributions paid at any time, and we cannot assure you that we will be able to pay or maintain the level of distributions we have historically paid or that distributions will increase over time. We cannot give any assurance that rents from the properties will increase, or that future acquisitions of real properties or other real estate assets will increase our cash available for distributions to shareholders. Our actual results may differ significantly from the assumptions used by our Board of Trustees in establishing the distribution rate to shareholders. We may not have sufficient legally available cash from operations to make a distribution required to qualify for or maintain our REIT status. We may increase borrowings or use proceeds from our public offerings to make distributions, each of which could be deemed to be a return of investors’ capital. We may make distributions from the proceeds of our public offerings or from borrowings in anticipation of future cash flow. Any such distributions will constitute a return of capital and may reduce the amount of capital we ultimately invest in properties and negatively impact the value of investors’ investment.
The amount and timing of cash dividends is uncertain.
In the past we have made quarterly distributions to our shareholders. Subject to certain limitations, we bear all expenses incurred in our operations, which reduces cash generated by operations and amounts available for distribution to our shareholders. In addition, our Board of Trustees, in its discretion, may retain any portion of such funds for working capital, subject to the REIT distribution requirements. We have not set any future dividend payment amount and cannot guarantee the amount and timing of distributions paid in the future, if any.
22
We are uncertain of our sources for funding of future capital needs.
In the event that we develop a need for additional capital in the future for the improvement of our assets or for any other reason, we will need to identify sources for such funding, other than reserves we may establish, and we cannot assure you that such sources of funding will be available to us for capital needs in the future.
We are authorized to issue preferred shares. The issuance of preferred shares could adversely affect the holders of our common shares issued pursuant to our public offerings.
Our declaration of trust authorizes us to issue 1,000,000,000 shares, of which 10,000,000 shares are designated as preferred shares. Subject to approval by our Board of Trustees, we may issue preferred shares with rights, preferences, and privileges that are more beneficial than the rights, preferences, and privileges of our common shares. Holders of our common shares do not have preemptive rights to acquire any shares issued by us in the future. If we ever create and issue preferred shares with a distribution preference over common shares, payment of any distribution preferences on outstanding preferred shares would reduce the amount of funds available for the payment of distributions on our common shares. In addition, holders of preferred shares are normally entitled to receive a preference payment in the event we liquidate, dissolve or wind up before any payment is made to our common shareholders, thereby reducing the amount a common shareholder might otherwise receive upon such an occurrence. Also, under certain circumstances, the issuance of preferred shares may have the effect of delaying or preventing a change in control of our company.
Our Board of Trustees may change our investment policies without shareholder approval, which could alter the nature of investors’ investments.
Our declaration of trust requires that our independent trustees review our investment policies at least annually to determine that the policies we are following are in the best interest of the shareholders. These policies may change over time. The methods of implementing our investment policies may also vary, as new real estate development trends emerge and new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our Board of Trustees without the approval of our shareholders. As a result, the nature of investors’ investments could change without investors’ consent.
If we fail to maintain an effective system of integrated internal controls, we may not be able to report our financial results accurately, which could have a material adverse effect on us.
We are required to report our operations on a consolidated basis under GAAP and, in some cases, on a property-by-property basis. If we fail to maintain proper overall business controls, our results of operations could be harmed or we could fail to meet our reporting obligations. In addition, the existence of a material weakness or significant deficiency could result in errors in our financial statements that could require a restatement, cause us to fail to meet our reporting obligations and cause shareholders to lose confidence in our reported financial information, which could have a material adverse effect on us. In the case of joint ventures, we may also be subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputation damage relating to, overall business controls, that are not under our control which could have a material adverse effect of us.
Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.
Accounting rules for certain aspects of our and our joint ventures operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in the preparation of our or our joint ventures financial statements and the delivery of this information to our shareholders. Furthermore, changes in accounting rules or in our accounting assumptions and/or judgments, such as asset impairments, could materially impact our financial statements. Under any of these circumstances, we could be materially and adversely affected.
Risks Related to Our Debt Financing
Dislocations or volatility in the capital and credit markets could adversely affect us.
Dislocations or volatility in the financial markets have the potential to affect, particularly in the near term, the value of our properties and our investments in unconsolidated joint ventures, the availability or the terms of financing that we and our unconsolidated joint ventures have or may anticipate utilizing, the ability of us and our unconsolidated joint ventures to make principal and interest payments on or refinance any outstanding debt when due. It may also impact the ability of our tenants and potential tenants to enter into new leases or satisfy rental payments under existing leases. Capital market dislocations or volatility may potentially cause certain financial institutions to fail or to seek federal assistance. In the event of a failure of a lender or counterparty to a financial contract,
23
obligations under the financial contract might not be honored and many forms of assets may be at risk and may not be fully returned to us. Should a financial institution fail to fund its committed amounts when contractually obligated to do so, our ability to meet our obligations could be materially and adversely impacted.
We could become more highly leveraged and an increase in debt service could adversely affect our cash flow and ability to make distributions.
We had approximately $761,875,000 of consolidated outstanding indebtedness, excluding discount and fair value adjustment, representing approximately 46% of our net assets (or approximately 37% of the approximate total acquisition cost of our consolidated properties, including intangibles) as of December 31, 2012. Although we have adopted a policy to limit our aggregate borrowing to no more than 65% of the cost of our assets before non-cash reserves and depreciation, subject to the 300% of net assets borrowing restriction described below, this policy may be altered at any time or suspended by our Board of Trustees if necessary to pursue attractive investment opportunities. Our declaration of trust currently contains a limitation on the amount of indebtedness that we may incur, so that until our shares are listed on a national securities exchange, our aggregate borrowing may not exceed 300% of our net assets unless any excess borrowing is approved by a majority of our independent trustees and is disclosed to shareholders in our next quarterly report.
Our 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; |
| | ¡ | | we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to meet operational needs; |
| | ¡ | | 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; |
| | ¡ | | we may be forced to dispose of one or more of our properties, possibly on unfavorable terms or in violation of certain covenants to which we may be subject; |
| | ¡ | | we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations; and |
| | ¡ | | our default under any loan with cross default provisions could result in a default on other indebtedness. |
If we become more highly leveraged, then the resulting increase in debt service could adversely affect our ability to make payments on outstanding indebtedness and to pay our anticipated distributions and/or the distributions required to qualify as a REIT, and could harm our financial condition.
Our growth depends on external sources of capital that are outside of our control, which may affect our ability to seize strategic opportunities, satisfy debt obligations and make distributions to our shareholders.
In order to qualify as a REIT, we must distribute to our shareholders, on an annual basis, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. In addition, we will be subject to U.S. federal income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income (including net capital gains) and will be subject to a 4% nondeductible excise tax on the amount by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we may need to rely on third-party sources to fund our capital needs. We may not be able to obtain financing on favorable terms, in the time period we desire, or at all. Any additional debt we incur will increase our leverage. Our access to third-party sources of capital depends, in part, on:
| | ¡ | | general market conditions; |
| | ¡ | | the market’s perception of our growth potential; |
| | ¡ | | our current debt levels; |
| | ¡ | | our current and expected future earnings; and |
| | ¡ | | our cash flow and cash distributions. |
24
If we cannot obtain capital from third-party sources, we may not be able to acquire or redevelop properties when strategic opportunities exist, satisfy our principal and interest obligations or make the cash distributions to our shareholders necessary to maintain our qualification as a REIT.
Our unsecured credit facility will restrict our ability to engage in some business activities, including our ability to incur additional indebtedness in excess of agreed amounts and make certain investments, which could adversely affect our financial condition, results of operations and cash flow.
Our unsecured credit facility contains customary negative covenants and other financial and operating covenants that, among other things:
| | ¡ | | restrict our ability to incur additional indebtedness in excess of agreed amounts; |
| | ¡ | | restrict our ability to incur certain types of liens; |
| | ¡ | | restrict our ability to make certain investments; |
| | ¡ | | restrict our ability to merge with another company; |
| | ¡ | | restrict our ability to sell or dispose of assets; |
| | ¡ | | restrict our ability to make distributions to shareholders; and |
| | ¡ | | require us to satisfy minimum financial coverage ratios, minimum tangible net worth requirements and maximum leverage ratios. |
These limitations will restrict our ability to engage in some business activities, which could adversely affect our financial condition, results of operations and cash flow. In addition, our unsecured credit facility contains specific cross-default provisions with respect to specified other indebtedness, giving the lenders the right to declare a default if we are in default under other loans in some circumstances.
If we fail to make our debt payments, we could lose our investment in a property.
We intend to secure the loans we obtain to fund future property acquisitions with mortgages on some of our properties. If we are unable to make our debt payments as required, a lender could foreclose on the property or properties securing its debt. This could cause us to lose part or all of our investment which in turn could cause a reduction in the value of the shares and the dividends payable to our shareholders.
High mortgage rates and/or unavailability of mortgage debt may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our net income and the amount of cash distributions we can make.
If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place mortgage debt on properties, we may be unable to refinance the properties when the loans become due, or to refinance on favorable terms. If interest rates are higher when we refinance our properties, our income could be reduced. If any of these events occur, our cash flow could be reduced. This, in turn, could reduce cash available for distribution to our shareholders and may hinder our ability to raise more capital by issuing more shares or by borrowing more money.
Increases in interest rates could increase the amount of our debt payments, adversely affect our ability to pay dividends to our shareholders and could also adversely affect the values of the properties we own.
We expect that we will incur additional indebtedness in the future. Interest we pay could reduce cash available for distributions. Additionally, if we incur variable rate debt, increases in interest rates would increase our interest costs, which would reduce our cash flows and our ability to service indebtedness and, therefore, our ability to pay dividends to you. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.
If we enter into financing arrangements involving balloon payment obligations, it may adversely affect our ability to pay dividends.
Our financing arrangements may require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At
25
the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment. A refinancing or sale under these circumstances could affect the rate of return to shareholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to qualify as a REIT. In such case, we may be forced to borrow funds to make the distributions required to qualify as a REIT.
Failure to hedge effectively against interest rate changes may adversely affect our results of operations.
Subject to maintaining our qualification as a REIT, we may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as interest cap agreements and interest rate swap agreements. These agreements may fail to protect or could adversely affect us because, among other things:
| | ¡ | | interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; |
| | ¡ | | available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought; |
| | ¡ | | the duration of the hedge may not match the duration of the related liability; |
| | ¡ | | the amount of income that a REIT may earn from hedging transactions (other than through taxable REIT subsidiaries) is limited by U.S. federal tax provisions governing REITs; |
| | ¡ | | the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; |
| | ¡ | | the party owing money in the hedging transaction may default on its obligation to pay; |
| | ¡ | | we could incur significant costs associated with the settlement of the agreements; |
| | ¡ | | the underlying transactions could fail to qualify as highly-effective cash flow hedges under FASB ASC “Derivative and Hedging”; and |
| | ¡ | | a court could rule that such an agreement is not legally enforceable. |
We have adopted a policy relating to the use of derivative financial instruments to hedge interest rate risks related to our borrowings. This policy governs our use of derivative financial instruments to manage the interest rates on our variable rate borrowings. Our policy states that we will not use derivatives for speculative or trading purposes and intend only to enter into contracts with major financial institutions based on their credit rating and other factors, but our Board of Trustees may choose to change these policies in the future. Hedging may reduce the overall returns on our investments, which could reduce our cash available for distribution to our shareholders. Failure to hedge effectively against interest rate changes may materially adversely affect our financial condition, results of operations and cash flow.
Risks Related to Our Taxation as a REIT
If we fail to qualify as a REIT in any taxable year, our operations and ability to make distributions will be adversely affected because we will be subject to U.S. federal income tax on our taxable income at regular corporate rates with no deductions for distributions made to shareholders.
We believe that we are organized and operate in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and that our method of operation enables us to continue to meet the requirements for qualification and taxation as a REIT under the Internal Revenue Code. So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income we distribute currently to our shareholders. In order for us to qualify as a REIT, we must satisfy certain requirements established under highly technical and complex provisions of the Internal Revenue Code and Treasury Regulations for which there are only limited judicial or administrative interpretations, and which involve the determination of various factual matters and circumstances not entirely within our control.
In order for distributions to be deductible for U.S. federal income tax purposes and count towards our distribution requirement, they must not be “preferential dividends.” A distribution will not be treated as preferential if it is pro rata among all outstanding shares within a particular class. IRS guidance, however, allows a REIT to offer shareholders participating in its dividend reinvestment program (“DRIP”) up to a 5% discount on shares purchased through the DRIP without treating such reinvested dividends as preferential. Our DRIP offers a 5% discount. In 2007, 2008 and the first two quarters of 2009, common shares issued pursuant to our DRIP were treated as issued as of the first day following the close of the quarter for which the distributions were declared, and not on the date that the cash distributions were paid to shareholders not participating in our DRIP. Because we declare dividends on a daily basis, including
26
with respect to common shares issued pursuant to our DRIP, the IRS could have taken the position that distributions paid by us during these periods were preferential on the grounds that the discount provided to DRIP participants effectively exceeded the authorized 5% discount or, alternatively, that the overall distributions were not pro rata among all shareholders. In addition, in the years 2007 through 2009 we paid certain individual retirement account (“IRA”) custodial fees in respect of IRA accounts that invested in our common shares, which could have been treated as dividend distributions to the IRAs, and therefore as preferential dividends as such amounts were not paid in respect of our other outstanding common shares. Although we believe that the effect of the operation of our DRIP and the payment of such fees was immaterial, the REIT rules do not provide an exception for deminimis preferential dividends.
On July 8, 2011, we and the former investment advisor entered into a closing agreement with the IRS (the “Closing Agreement”) pursuant to which (i) the Internal Revenue Service (“IRS”) agreed not to challenge our dividends as preferential for its taxable years 2007, 2008 and 2009 as a result of the matters described above, and (ii) the former investment advisor paid a compliance fee of approximately $135,000 to the IRS. In accordance with the terms of the Closing Agreement, none of us, our Operating Partnership or any subsidiary thereof have directly or indirectly reimbursed or will directly or indirectly reimburse the former investment advisor for its payment of this compliance fee and none of the former investment advisor or its direct or indirect owners has deducted or will deduct the compliance fee from their taxable income. We and the former investment advisor expect to remain in compliance with the terms of the Closing Agreement, but any inadvertent non-compliance with such terms could result in adverse consequences for us. As a result of the Closing Agreement, we have met our distribution requirement for its taxable years ended December 31, 2007, 2008 and 2009.
If we were to fail to qualify as a REIT for any taxable year, or if we failed to meet our distribution requirements we would be subject to U.S. federal income tax on our taxable income at regular corporate rates with no deductions for distributions made to shareholders. Further, in such event, we would generally be disqualified from treatment as a REIT for the four taxable years following the year in which we lose our REIT qualification. Accordingly, the loss of our REIT qualification would reduce our net earnings available for investment or distribution to shareholders because of the substantial tax liabilities that would be imposed on us. We might also be required to borrow funds or sell investments to pay the applicable tax.
We may be subject to tax on our undistributed net taxable income or be forced to borrow funds to make distributions required to qualify as a REIT.
As a REIT, we generally must distribute at least 90% of our annual net taxable income (excluding net capital gain) to our shareholders and we are subject to regular corporate income tax to the extent that we distribute less than 100% of our annual net taxable income. In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. In order to make distributions necessary to qualify as a REIT and avoid the payment of income and excise taxes, we may need to borrow funds on a short-term, or possibly long-term, basis, use proceeds from our public offerings or future public offerings, or sell properties, even if the then prevailing market conditions are not favorable for borrowings or sales. Our need for cash to make distributions could result from, among other things, a difference in timing between the actual receipt of cash and inclusion of income for U.S. federal income tax purposes, the effect of non-deductible capital expenditures, the creation of reserves and the repayment of indebtedness.
Dividends payable by REITs generally do not qualify for reduced U.S. federal income tax rates.
The maximum U.S. federal income tax rate for dividends payable by domestic corporations to individual U.S. shareholders is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore maybe subject to a 39.6% maximum U.S. federal income tax on ordinary income. The more favorable rates applicable to regular corporate dividends could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our shares.
We will pay some taxes.
Even if we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay some U.S. federal, state, local and foreign taxes on our income and property, including a 100% penalty tax on any gain recognized on property held primarily for sale to customers in the ordinary course of a trade or business. To the extent that we are required to pay U.S. federal, state, local or foreign taxes, we will have less cash available for distribution to our shareholders.
27
The ability of our Board of Trustees to revoke our REIT election without shareholder approval may cause adverse consequences to our shareholders.
Our charter provides that our Board of Trustees may revoke or otherwise terminate our REIT election, without the approval of our shareholders, if it determines that it is no longer in our best interests to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our taxable income and we would no longer be required to distribute most of our taxable income to our shareholders, which may have adverse consequences on the total return to our shareholders and the value of our shares.
Legislative or regulatory action could adversely affect investors.
In recent years, numerous legislative, judicial and administrative changes have been made to the U.S. federal income tax laws applicable to investments similar to an investment in our shares. Additional changes to tax laws are likely to continue to occur in the future, and we cannot assure you that any such changes will not adversely affect the taxation of us or our shareholders. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our properties.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
We did not have any unresolved comments with the staff of the SEC as of the date of this Annual Report on Form 10-K.
28
Properties
As of December 31, 2012, we owned, on a consolidated basis, 82 office, industrial (primarily warehouse/distribution/logistics) and retail properties located in 18 states (Arizona, California, Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, Maryland, Massachusetts, Minnesota, New Jersey, North Carolina, Pennsylvania, South Carolina, Texas, Utah and Virginia) and in the United Kingdom, encompassing approximately 18,995,000 rentable square feet. Our consolidated properties were approximately 97.00% leased (based upon square feet) as of December 31, 2012. As of December 31, 2012, 62 of our consolidated properties were triple net leased to single tenants, which represented approximately 15,509,000 rentable square feet. As of December 31, 2012, certain of our consolidated properties were subject to mortgage debt, a description of which is set forth in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources—Financing.”
In addition, we had ownership interests in five unconsolidated entities that, as of December 31, 2012, owned interests in 54 properties. Excluding those properties owned through our investment in CBRE Strategic Partners Asia, we owned, on an unconsolidated basis, 47 office, industrial (primarily warehouse/distribution/logistics) and retail properties located in ten states (Arizona, Florida, Illinois, Indiana, Minnesota, Missouri, North Carolina, Ohio, Tennessee and Texas) and in the United Kingdom and Europe encompassing approximately 15,067,000 rentable square feet. Our unconsolidated properties were approximately 98.80% leased (based upon square feet) as of December 31, 2012. As of December 31, 2012, 28 of our unconsolidated properties were triple net leased to single tenants, which represented approximately 12,265,000 rentable square feet. As of December 31, 2012, certain of our unconsolidated properties were subject to mortgage debt, a description of which is set forth in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources—Financing.”
As of December 31, 2012, our portfolio was 97.80% leased (based upon square feet). The total effective annual rents for our office properties, industrial properties and retail properties were approximately $158,710,000, $86,645,000 and $8,608,000 as of December 31, 2012, respectively (net of any rent concessions). The average effective annual rent per square foot for our office properties, industrial (primarily warehouse/distribution/logistics) properties and retail properties was approximately $19.39, $3.87 and $18.09 as of December 31, 2012, respectively (net of any rent concessions). The average effective annual rent per square foot for our triple net lease office and industrial properties was approximately $18.17 and $3.98 as of December 31, 2012, respectively (net of any rent concessions). As of December 31, 2011, our portfolio was 97.90% leased (based upon square feet). The total effective annual rents for our office properties, industrial properties and retail properties were approximately $161,086,000, $76,084,000 and $8,691,000 as of December 31, 2011, respectively (net of any rent concessions). The average effective annual rent per square foot for our office properties, industrial (primarily warehouse/distribution/logistics) properties and retail properties was approximately $19.00, $3.94 and $17.49 as of December 31, 2011, respectively (net of any rent concessions). The average effective annual rent per square foot for our triple net lease office and industrial properties was approximately $17.29 and $4.05 as of December 31, 2011, respectively (net of any rent concessions).
The following table provides information relating to our properties, excluding those owned through our investment in CBRE Strategic Partners Asia, as of December 31, 2012. These properties consisted of 69 industrial properties, encompassing 24,673,000 rentable square feet, 57 office properties, encompassing 8,893,000 rentable square feet and three retail properties, encompassing 496,000 rentable square feet.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Property and Market | | Date
Acquired | | | Year
Built | | | Property Type | | Our
Effective
Ownership | | | Net Rentable
Square Feet
(in thousands) | | | Percentage
Leased | | | Approximate
Total
Acquisition Cost(1)
(in thousands) | |
Domestic Consolidated Properties: | | | | | | | | | | | | | | | | | | | | | | | | | | |
REMEC Corporate Campus 1(2)
San Diego, CA | | | 9/15/2004 | | | | 1983 | | | Office | | | 100.00 | % | | | 34 | | | | 100.00 | % | | | $ 6,833 | |
REMEC Corporate Campus 2(2)
San Diego, CA | | | 9/15/2004 | | | | 1983 | | | Office | | | 100.00 | % | | | 30 | | | | 100.00 | % | | | 6,125 | |
REMEC Corporate Campus 3(2)
San Diego, CA | | | 9/15/2004 | | | | 1983 | | | Office | | | 100.00 | % | | | 37 | | | | 100.00 | % | | | 7,523 | |
REMEC Corporate Campus 4(2)
San Diego, CA | | | 9/15/2004 | | | | 1983 | | | Office | | | 100.00 | % | | | 31 | | | | 100.00 | % | | | 6,186 | |
300 Constitution Drive(2)
Boston, MA | | | 11/3/2004 | | | | 1998 | | | Warehouse/Distribution | | | 100.00 | % | | | 330 | | | | 100.00 | % | | | 19,805 | |
Deerfield Commons(3)
Atlanta, GA | | | 6/21/2005 | | | | 2000 | | | Office | | | 100.00 | % | | | 122 | | | | 100.00 | % | | | 21,834 | |
505 Century(2)
Dallas, TX | | | 1/9/2006 | | | | 1997 | | | Warehouse/Distribution | | | 100.00 | % | | | 100 | | | | 100.00 | % | | | 6,095 | |
29
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Property and Market | | Date
Acquired | | | Year
Built | | | Property Type | | Our
Effective
Ownership | | | Net Rentable
Square Feet
(in thousands) | | | Percentage
Leased | | | Approximate
Total
Acquisition Cost(1)
(in thousands) | |
631 International(2)
Dallas, TX | | | 1/9/2006 | | | | 1998 | | | Warehouse/Distribution | | | 100.00 | % | | | 73 | | | | 100.00 | % | | | 5,407 | |
660 North Dorothy(2)
Dallas, TX | | | 1/9/2006 | | | | 1997 | | | Warehouse/Distribution | | | 100.00 | % | | | 120 | | | | 79.17 | % | | | 6,836 | |
Bolingbrook Point III
Chicago, IL | | | 8/29/2007 | | | | 2006 | | | Warehouse/Distribution | | | 100.00 | % | | | 185 | | | | 100.00 | % | | | 18,170 | |
Community Cash Complex 1(2)
Spartanburg, SC | | | 8/30/2007 | | | | 1960 | | | Warehouse/Distribution | | | 100.00 | % | | | 206 | | | | 3.50 | % | | | 2,690 | |
Community Cash Complex 2(2)
Spartanburg, SC | | | 8/30/2007 | | | | 1978 | | | Warehouse/Distribution | | | 100.00 | % | | | 144 | | | | 100.00 | % | | | 2,225 | |
Community Cash Complex 3(2)
Spartanburg, SC | | | 8/30/2007 | | | | 1981 | | | Warehouse/Distribution | | | 100.00 | % | | | 116 | | | | 100.00 | % | | | 1,701 | |
Community Cash Complex 4(2)
Spartanburg, SC | | | 8/30/2007 | | | | 1984 | | | Warehouse/Distribution | | | 100.00 | % | | | 33 | | | | 100.00 | % | | | 547 | |
Community Cash Complex 5(2)
Spartanburg, SC | | | 8/30/2007 | | | | 1984 | | | Warehouse/Distribution | | | 100.00 | % | | | 53 | | | | 100.00 | % | | | 824 | |
Fairforest Building 1(2)
Spartanburg, SC | | | 8/30/2007 | | | | 2000 | | | Warehouse/Distribution | | | 100.00 | % | | | 51 | | | | 100.00 | % | | | 2,974 | |
Fairforest Building 2(2)
Spartanburg, SC | | | 8/30/2007 | | | | 1999 | | | Warehouse/Distribution | | | 100.00 | % | | | 104 | | | | 100.00 | % | | | 5,379 | |
Fairforest Building 3(2)
Spartanburg, SC | | | 8/30/2007 | | | | 2000 | | | Warehouse/Distribution | | | 100.00 | % | | | 100 | | | | 100.00 | % | | | 5,760 | |
Fairforest Building 4(2)
Spartanburg, SC | | | 8/30/2007 | | | | 2001 | | | Warehouse/Distribution | | | 100.00 | % | | | 101 | | | | 100.00 | % | | | 5,640 | |
Fairforest Building 5
Spartanburg, SC | | | 8/30/2007 | | | | 2006 | | | Warehouse/Distribution | | | 100.00 | % | | | 316 | | | | 100.00 | % | | | 16,968 | |
Fairforest Building 6
Spartanburg, SC | | | 8/30/2007 | | | | 2005 | | | Warehouse/Distribution | | | 100.00 | % | | | 101 | | | | 100.00 | % | | | 7,469 | |
Fairforest Building 7(2)
Spartanburg, SC | | | 8/30/2007 | | | | 2006 | | | Warehouse/Distribution | | | 100.00 | % | | | 101 | | | | 83.78 | % | | | 5,626 | |
Greenville/Spartanburg Industrial Park(2)
Spartanburg, SC | | | 8/30/2007 | | | | 1990 | | | Warehouse/Distribution | | | 100.00 | % | | | 67 | | | | 100.00 | % | | | 3,388 | |
Highway 290 Commerce Park Building 1(2)
Spartanburg, SC | | | 8/30/2007 | | | | 1995 | | | Warehouse/Distribution | | | 100.00 | % | | | 150 | | | | 100.00 | % | | | 5,388 | |
Highway 290 Commerce Park Building 5(2)
Spartanburg, SC | | | 8/30/2007 | | | | 1993 | | | Warehouse/Distribution | | | 100.00 | % | | | 30 | | | | 100.00 | % | | | 1,420 | |
Highway 290 Commerce Park Building 7(2)
Spartanburg, SC | | | 8/30/2007 | | | | 1994 | | | Warehouse/Distribution | | | 100.00 | % | | | 94 | | | | 100.00 | % | | | 4,889 | |
HJ Park Building 1(2)
Spartanburg, SC | | | 8/30/2007 | | | | 2003 | | | Warehouse/Distribution | | | 100.00 | % | | | 70 | | | | 100.00 | % | | | 4,216 | |
Jedburg Commerce Park(2)
Charleston, SC | | | 8/30/2007 | | | | 2007 | | | Warehouse/Distribution | | | 100.00 | % | | | 513 | | | | 100.00 | % | | | 41,991 | |
Kings Mountain I
Charlotte, NC | | | 8/30/2007 | | | | 1998 | | | Warehouse/Distribution | | | 100.00 | % | | | 100 | | | | 100.00 | % | | | 5,497 | |
Kings Mountain II
Charlotte, NC | | | 8/30/2007 | | | | 2002 | | | Warehouse/Distribution | | | 100.00 | % | | | 301 | | | | 100.00 | % | | | 11,311 | |
Mount Holly Building
Charleston, SC | | | 8/30/2007 | | | | 2003 | | | Warehouse/Distribution | | | 100.00 | % | | | 101 | | | | 100.00 | % | | | 6,208 | |
North Rhett I
Charleston, SC | | | 8/30/2007 | | | | 1973 | | | Warehouse/Distribution | | | 100.00 | % | | | 285 | | | | 21.07 | % | | | 10,302 | |
North Rhett II
Charleston, SC | | | 8/30/2007 | | | | 2001 | | | Warehouse/Distribution | | | 100.00 | % | | | 102 | | | | 100.00 | % | | | 7,073 | |
North Rhett III(2)
Charleston, SC | | | 8/30/2007 | | | | 2002 | | | Warehouse/Distribution | | | 100.00 | % | | | 80 | | | | 100.00 | % | | | 4,812 | |
North Rhett IV
Charleston, SC | | | 8/30/2007 | | | | 2005 | | | Warehouse/Distribution | | | 100.00 | % | | | 316 | | | | 100.00 | % | | | 17,060 | |
Orangeburg Park Building
Charleston, SC | | | 8/30/2007 | | | | 2003 | | | Warehouse/Distribution | | | 100.00 | % | | | 101 | | | | 0 | % | | | 5,474 | |
Orchard Business Park 2(2)
Spartanburg, SC | | | 8/30/2007 | | | | 1993 | | | Warehouse/Distribution | | | 100.00 | % | | | 18 | | | | 100.00 | % | | | 761 | |
Union Cross Building I
Winston-Salem, NC | | | 8/30/2007 | | | | 2005 | | | Warehouse/Distribution | | | 100.00 | % | | | 101 | | | | 100.00 | % | | | 6,585 | |
Union Cross Building II
Winston-Salem, NC | | | 8/30/2007 | | | | 2005 | | | Warehouse/Distribution | | | 100.00 | % | | | 316 | | | | 100.00 | % | | | 17,216 | |
Highway 290 Commerce Park Building 2(2)
Spartanburg, SC | | | 9/24/2007 | | | | 1995 | | | Warehouse/Distribution | | | 100.00 | % | | | 100 | | | | 100.00 | % | | | 4,626 | |
30
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Property and Market | | Date
Acquired | | | Year
Built | | | Property Type | | Our
Effective
Ownership | | | Net Rentable
Square Feet
(in thousands) | | | Percentage
Leased | | | Approximate
Total
Acquisition Cost(1)
(in thousands) | |
Highway 290 Commerce Park Building 6(2)
Spartanburg, SC | | | 11/1/2007 | | | | 1996 | | | Warehouse/Distribution | | | 100.00 | % | | | 105 | | | | 100.00 | % | | | 3,760 | |
Lakeside Office Center
Dallas, TX | | | 3/5/2008 | | | | 2006 | | | Office | | | 100.00 | % | | | 99 | | | | 95.65 | % | | | 17,994 | |
Kings Mountain III(2)
Charlotte, NC | | | 3/14/2008 | | | | 2007 | | | Warehouse/Distribution | | | 100.00 | % | | | 542 | | | | 100.00 | % | | | 25,728 | |
Enclave on the Lake(2)
Houston, TX | | | 7/1/2008 | | | | 1999 | | | Office | | | 100.00 | % | | | 171 | | | | 100.00 | % | | | 37,827 | |
Avion Midrise III
Washington, DC | | | 11/18/2008 | | | | 2002 | | | Office | | | 100.00 | % | | | 72 | | | | 100.00 | % | | | 21,111 | |
Avion Midrise IV
Washington, DC | | | 11/18/2008 | | | | 2002 | | | Office | | | 100.00 | % | | | 72 | | | | 100.00 | % | | | 21,112 | |
13201 Wilfred(2)
Minneapolis, MN | | | 6/29/2009 | | | | 1999 | | | Warehouse/Distribution | | | 100.00 | % | | | 335 | | | | 100.00 | % | | | 15,340 | |
3011, 3055 & 3077 Comcast Place(2)
East Bay, CA | | | 7/1/2009 | | | | 1988 | | | Office | | | 100.00 | % | | | 220 | | | | 100.00 | % | | | 49,000 | |
140 Depot Street(2)
Boston, MA | | | 7/31/2009 | | | | 2009 | | | Warehouse/Distribution | | | 100.00 | % | | | 238 | | | | 100.00 | % | | | 18,950 | |
12650 Ingenuity Drive
Orlando, FL | | | 8/5/2009 | | | | 1999 | | | Office | | | 100.00 | % | | | 125 | | | | 100.00 | % | | | 25,350 | |
Crest Ridge Corporate Center 1(2)
Minneapolis, MN | | | 8/17/2009 | | | | 2009 | | | Office | | | 100.00 | % | | | 116 | | | | 100.00 | % | | | 28,419 | |
West Point Trade Center(2)
Jacksonville, FL | | | 12/30/2009 | | | | 2009 | | | Warehouse/Distribution | | | 100.00 | % | | | 602 | | | | 100.00 | % | | | 29,000 | |
5160 Hacienda Drive(2)
East Bay, CA | | | 4/8/2010 | | | | 1988 | | | Office | | | 100.00 | % | | | 202 | | | | 100.00 | % | | | 38,500 | |
10450 Pacific Center Court(2)
San Diego, CA | | | 5/7/2010 | | | | 1985 | | | Office | | | 100.00 | % | | | 134 | | | | 100.00 | % | | | 32,750 | |
225 Summit Ave(2)
Northern NJ | | | 6/21/2010 | | | | 1966 | | | Office | | | 100.00 | % | | | 143 | | | | 100.00 | % | | | 40,600 | |
One Wayside Road
Boston, MA | | | 6/24/2010 | | | | 1998 | | | Office | | | 100.00 | % | | | 201 | | | | 100.00 | % | | | 55,525 | |
100 Tice Blvd.
Northern NJ | | | 9/28/2010 | | | | 2007 | | | Office | | | 100.00 | % | | | 209 | | | | 100.00 | % | | | 67,600 | |
Ten Parkway North
Chicago, IL | | | 10/12/2010 | | | | 1999 | | | Office | | | 100.00 | % | | | 100 | | | | 100.00 | % | | | 25,000 | |
4701 Gold Spike Drive
Dallas, TX | | | 10/27/2010 | | | | 2002 | | | Warehouse/Distribution | | | 100.00 | % | | | 420 | | | | 100.00 | % | | | 20,300 | |
1985 International Way
Cincinnati, OH | | | 10/27/2010 | | | | 1998 | | | Warehouse/Distribution | | | 100.00 | % | | | 189 | | | | 100.00 | % | | | 14,800 | |
Summit Distribution Center
Salt Lake City, UT | | | 10/27/2010 | | | | 2001 | | | Warehouse/Distribution | | | 100.00 | % | | | 275 | | | | 100.00 | % | | | 13,400 | |
3660 Deerpark Boulevard
Jacksonville, FL | | | 10/27/2010 | | | | 2002 | | | Warehouse/Distribution | | | 100.00 | % | | | 322 | | | | 100.00 | % | | | 15,300 | |
Tolleson Commerce Park II
Phoenix, AZ | | | 10/27/2010 | | | | 1999 | | | Warehouse/Distribution | | | 100.00 | % | | | 217 | | | | 100.00 | % | | | 9,200 | |
Pacific Corporate Park(2)(3)
Washington, DC | | | 11/15/2010 | | | | 2002 | | | Office | | | 100.00 | % | | | 696 | | | | 100.00 | % | | | 144,500 | |
100 Kimball Drive(2)
Northern NJ | | | 12/10/2010 | | | | 2006 | | | Office | | | 100.00 | % | | | 175 | | | | 100.00 | % | | | 60,250 | |
70 Hudson Street
New York City Metro, NJ | | | 4/11/2011 | | | | 2000 | | | Office | | | 100.00 | % | | | 409 | | | | 100.00 | % | | | 155,000 | |
90 Hudson Street(4)
New York City Metro, NJ | | | 4/11/2011 | | | | 1999 | | | Office | | | 100.00 | % | | | 418 | | | | 100.00 | % | | | 155,000 | |
Millers Ferry Road(2)
Dallas, TX | | | 6/2/2011 | | | | 2011 | | | Warehouse/Distribution | | | 100.00 | % | | | 1,020 | | | | 100.00 | % | | | 40,366 | |
Sky Harbor Operations Center(2)
Phoenix, AZ | | | 9/30/2011 | | | | 2003 | | | Office | | | 100.00 | % | | | 396 | | | | 100.00 | % | | | 53,500 | |
1400 Atwater Drive(2)(5)
Philadelphia, PA | | | 10/27/2011 | | | | 2012 | | | Office | | | 100.00 | % | | | 300 | | | | 100.00 | % | | | 72,742 | |
Aurora Commerce Center Bldg. C(2)
Denver, CO | | | 11/30/2011 | | | | 2007 | | | Warehouse/Distribution | | | 100.00 | % | | | 407 | | | | 100.00 | % | | | 24,500 | |
Sabal Pavilion
Tampa, FL | | | 12/30/2011 | | | | 1998 | | | Office | | | 100.00 | % | | | 121 | | | | 100.00 | % | | | 21,368 | |
2400 Dralle Road(2)(3)
Chicago, IL | | | 3/20/2012 | | | | 2011 | | | Warehouse/Distribution | | | 100.00 | % | | | 1,350 | | | | 100.00 | % | | | 64,250 | |
Midwest Commerce Center I(2)
Kansas City, KS | | | 8/16/2012 | | | | 2009 | | | Warehouse/Distribution | | | 100.00 | % | | | 1,107 | | | | 100.00 | % | | | 62,950 | |
20000 S Diamond Lake Rd(2)
Minneapolis, MN | | | 11/7/2012 | | | | 2004 | | | Warehouse/Distribution | | | 100.00 | % | | | 280 | | | | 100.00 | % | | | 18,500 | |
31
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Property and Market | | Date
Acquired | | | Year
Built | | | Property Type | | Our
Effective
Ownership | | | Net Rentable
Square Feet
(in thousands) | | | Percentage
Leased | | | Approximate
Total
Acquisition Cost(1)
(in thousands) | |
Gateway at Riverside(2)
Baltimore, MD | | | 11/30/2012 | | | | 1991 | | | Warehouse/Distribution | | | 100.00 | % | | | 801 | | | | 100.00 | % | | | 49,229 | |
701 & 801 Charles Ewing Blvd.(2)
Central NJ | | | 12/28/2012 | | | | 2009 | | | Office | | | 100.00 | % | | | 111 | | | | 100.00 | % | | | 28,310 | |
Mid-Atlantic Distribution Center-Bldg. A(2)
Baltimore, MD | | | 12/28/2012 | | | | 2008 | | | Warehouse/Distribution | | | 100.00 | % | | | 672 | | | | 100.00 | % | | | 43,150 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Domestic Consolidated Properties(6) | | | | | | | 2001 | | | | | | | | | | 18,705 | | | | 96.95 | % | | | 1,941,015 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
International Consolidated Properties: | | | | | | | | | | | | | | | | | | | | | | | | | | |
602 Central Blvd.(2)
Coventry, UK | | | 4/27/2007 | | | | 2001 | | | Office | | | 100.00 | % | | | 50 | | | | 100.00 | % | | | 23,847 | |
Thames Valley Five
Reading, UK | | | 3/20/2008 | | | | 1998 | | | Office | | | 100.00 | % | | | 40 | | | | 100.00 | % | | | 29,572 | |
Albion Mills Retail Park
Wakefield, UK | | | 7/11/2008 | | | | 2000 | | | Retail | | | 100.00 | % | | | 55 | | | | 100.00 | % | | | 22,098 | |
Maskew Retail Park
Peterborough, UK | | | 10/23/2008 | | | | 2007 | | | Retail | | | 100.00 | % | | | 145 | | | | 100.00 | % | | | 53,740 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
International Consolidated Properties(6) | | | | | | | 2003 | | | | | | | | | | 290 | | | | 100.00 | % | | | 129,257 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Properties(6) | | | | | | | 2001 | | | | | | | | | | 18,995 | | | | 97.00 | % | | | 2,070,272 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Domestic Unconsolidated Properties(6)(7): | | | | | | | | | | | | | | | | | | | | | | | |
Buckeye Logistics Center(8)
Phoenix, AZ | | | 6/12/2008 | | | | 2008 | | | Warehouse/Distribution | | | 80.00 | % | | | 1,009 | | | | 100.00 | % | | | 52,797 | |
Afton Ridge Shopping Center(9)
Charlotte, NC | | | 9/18/2008 | | | | 2007 | | | Retail | | | 90.00 | % | | | 296 | | | | 97.92 | % | | | 44,530 | |
AllPoints at Anson Bldg. 1(8)
Indianapolis, IN | | | 9/30/2008 | | | | 2008 | | | Warehouse/Distribution | | | 80.00 | % | | | 1,037 | | | | 100.00 | % | | | 42,684 | |
12200 President’s Court(8)
Jacksonville, FL | | | 9/30/2008 | | | | 2008 | | | Warehouse/Distribution | | | 80.00 | % | | | 772 | | | | 100.00 | % | | | 29,995 | |
201 Sunridge Blvd.(8)
Dallas, TX | | | 9/30/2008 | | | | 2008 | | | Warehouse/Distribution | | | 80.00 | % | | | 823 | | | | 100.00 | % | | | 25,690 | |
Aspen Corporate Center 500(8)
Nashville, TN | | | 9/30/2008 | | | | 2008 | | | Office | | | 80.00 | % | | | 180 | | | | 100.00 | % | | | 29,936 | |
125 Enterprise Parkway(8)
Columbus, OH | | | 12/10/2008 | | | | 2008 | | | Warehouse/Distribution | | | 80.00 | % | | | 1,142 | | | | 100.00 | % | | | 38,088 | |
AllPoints Midwest Bldg. I(8)
Indianapolis, IN | | | 12/10/2008 | | | | 2008 | | | Warehouse/Distribution | | | 80.00 | % | | | 1,200 | | | | 100.00 | % | | | 41,428 | |
Celebration Office Center(8)
Orlando, FL | | | 5/13/2009 | | | | 2009 | | | Office | | | 80.00 | % | | | 101 | | | | 100.00 | % | | | 13,640 | |
22535 Colonial Pkwy(8)
Houston, TX | | | 5/13/2009 | | | | 2009 | | | Office | | | 80.00 | % | | | 90 | | | | 100.00 | % | | | 11,596 | |
Fairfield Distribution Ctr. IX(8)
Tampa, FL | | | 5/13/2009 | | | | 2008 | | | Warehouse/Distribution | | | 80.00 | % | | | 136 | | | | 100.00 | % | | | 7,151 | |
Northpoint III(8)
Orlando, FL | | | 10/15/2009 | | | | 2001 | | | Office | | | 80.00 | % | | | 108 | | | | 100.00 | % | | | 14,592 | |
Goodyear Crossing Ind. Park II(8)
Phoenix, AZ | | | 12/7/2009 | | | | 2009 | | | Warehouse/Distribution | | | 80.00 | % | | | 820 | | | | 100.00 | % | | | 36,516 | |
3900 North Paramount Parkway(8)
Raleigh, NC | | | 3/31/2010 | | | | 1999 | | | Office | | | 80.00 | % | | | 101 | | | | 100.00 | % | | | 11,176 | |
3900 South Paramount Parkway(8)
Raleigh, NC | | | 3/31/2010 | | | | 1999 | | | Office | | | 80.00 | % | | | 119 | | | | 100.00 | % | | | 13,055 | |
1400 Perimeter Park Drive(8)
Raleigh, NC | | | 3/31/2010 | | | | 1991 | | | Office | | | 80.00 | % | | | 45 | | | | 100.00 | % | | | 3,970 | |
Miramar I(8)(10)
Ft. Lauderdale, FL | | | 3/31/2010 | | | | 2001 | | | Office | | | 80.00 | % | | | 94 | | | | 100.00 | % | | | 13,645 | |
Miramar II(8)(10)
Ft. Lauderdale, FL | | | 3/31/2010 | | | | 2001 | | | Office | | | 80.00 | % | | | 129 | | | | 100.00 | % | | | 20,899 | |
McAuley Place(8)
Cincinnati, OH | | | 12/21/2010 | | | | 2001 | | | Office | | | 80.00 | % | | | 191 | | | | 100.00 | % | | | 28,000 | |
Point West I(8)
Dallas, TX | | | 12/21/2010 | | | | 2008 | | | Office | | | 80.00 | % | | | 183 | | | | 100.00 | % | | | 23,600 | |
Sam Houston Crossing I(8)
Houston, TX | | | 12/21/2010 | | | | 2007 | | | Office | | | 80.00 | % | | | 160 | | | | 100.00 | % | | | 20,400 | |
Regency Creek(8)
Raleigh, NC | | | 12/21/2010 | | | | 2008 | | | Office | | | 80.00 | % | | | 122 | | | | 100.00 | % | | | 18,000 | |
32
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Property and Market | | Date
Acquired | | | Year
Built | | | Property Type | | Our
Effective
Ownership | | | Net Rentable
Square Feet
(in thousands) | | | Percentage
Leased | | | Approximate
Total
Acquisition Cost(1)
(in thousands) | |
Easton III(8)
Columbus, OH | | | 12/21/2010 | | | | 1999 | | | Office | | | 80.00 | % | | | 136 | | | | 100.00 | % | | | 14,400 | |
533 Maryville Centre(8)
St. Louis, MO | | | 12/21/2010 | | | | 2000 | | | Office | | | 80.00 | % | | | 125 | | | | 100.00 | % | | | 19,102 | |
555 Maryville Centre(8)
St. Louis, MO | | | 12/21/2010 | | | | 2000 | | | Office | | | 80.00 | % | | | 127 | | | | 90.49 | % | | | 15,578 | |
Norman Pointe I(8)
Minneapolis, MN | | | 3/24/2011 | | | | 2000 | | | Office | | | 80.00 | % | | | 213 | | | | 97.49 | % | | | 34,080 | |
Norman Pointe II(8)
Minneapolis, MN | | | 3/24/2011 | | | | 2007 | | | Office | | | 80.00 | % | | | 324 | | | | 100.00 | % | | | 37,520 | |
One Conway Park(2)(8)
Chicago, IL | | | 3/24/2011 | | | | 1989 | | | Office | | | 80.00 | % | | | 105 | | | | 72.20 | % | | | 12,320 | |
West Lake at Conway(8)
Chicago, IL | | | 3/24/2011 | | | | 2008 | | | Office | | | 80.00 | % | | | 98 | | | | 100.00 | % | | | 14,060 | |
The Landings I(8)
Cincinnati, OH | | | 3/24/2011 | | | | 2006 | | | Office | | | 80.00 | % | | | 176 | | | | 100.00 | % | | | 23,728 | |
The Landings II(8)
Cincinnati, OH | | | 3/24/2011 | | | | 2007 | | | Office | | | 80.00 | % | | | 175 | | | | 96.06 | % | | | 20,928 | |
One Easton Oval(2)(8)
Columbus, OH | | | 3/24/2011 | | | | 1997 | | | Office | | | 80.00 | % | | | 125 | | | | 67.43 | % | | | 9,529 | |
Two Easton Oval(2)(8)
Columbus, OH | | | 3/24/2011 | | | | 1995 | | | Office | | | 80.00 | % | | | 129 | | | | 81.92 | % | | | 10,195 | |
Atrium I(8)
Columbus, OH | | | 3/24/2011 | | | | 1996 | | | Office | | | 80.00 | % | | | 315 | | | | 100.00 | % | | | 36,200 | |
Weston Pointe I(8)
Ft. Lauderdale, FL | | | 3/24/2011 | | | | 1999 | | | Office | | | 80.00 | % | | | 98 | | | | 95.21 | % | | | 15,507 | |
Weston Pointe II(8)
Ft. Lauderdale, FL | | | 3/24/2011 | | | | 2000 | | | Office | | | 80.00 | % | | | 97 | | | | 100.00 | % | | | 18,701 | |
Weston Pointe III(8)
Ft. Lauderdale, FL | | | 3/24/2011 | | | | 2003 | | | Office | | | 80.00 | % | | | 97 | | | | 100.00 | % | | | 18,867 | |
Weston Pointe IV(8)
Ft. Lauderdale, FL | | | 3/24/2011 | | | | 2006 | | | Office | | | 80.00 | % | | | 96 | | | | 100.00 | % | | | 22,605 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Domestic Unconsolidated Properties(6)(7) | | | | | | | 2005 | | | | | | | | | | 11,294 | | | | 98.40 | % | | | 864,708 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
International Unconsolidated Properties(7): | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amber Park(2)(11)
South Normanton, UK | | | 6/10/2010 | | | | 1997 | | | Warehouse/Distribution | | | 80.00 | % | | | 208 | | | | 100.00 | % | | | 12,514 | |
Brackmills(2)(11)
Northampton, UK | | | 6/10/2010 | | | | 1984 | | | Warehouse/Distribution | | | 80.00 | % | | | 187 | | | | 100.00 | % | | | 13,407 | |
Düren(2)(12)
Rhine-Ruhr, Germany | | | 6/10/2010 | | | | 2008 | | | Warehouse/Distribution | | | 80.00 | % | | | 392 | | | | 100.00 | % | | | 13,148 | |
Schönberg(2)(12)
Hamburg, Germany | | | 6/10/2010 | | | | 2009 | | | Warehouse/Distribution | | | 80.00 | % | | | 454 | | | | 100.00 | % | | | 13,819 | |
Langenbach(2)(12)
Munich, Germany | | | 10/28/2010 | | | | 2010 | | | Warehouse/Distribution | | | 80.00 | % | | | 225 | | | | 100.00 | % | | | 18,573 | |
Graben Distribution Center I(12)
Munich, Germany | | | 12/20/2011 | | | | 2011 | | | Warehouse/Distribution | | | 80.00 | % | | | 1,018 | | | | 100.00 | % | | | 54,962 | |
Graben Distribution Center II(12)
Munich, Germany | | | 12/20/2011 | | | | 2011 | | | Warehouse/Distribution | | | 80.00 | % | | | 73 | | | | 100.00 | % | | | 6,868 | |
Valley Park, Unit D(2)(11)
Rugby, UK | | | 3/19/2012 | | | | 2011 | | | Warehouse/Distribution | | | 80.00 | % | | | 146 | | | | 100.00 | % | | | 10,247 | |
Koblenz Distribution Center(12)
Frankfurt, Germany | | | 12/12/2012 | | | | 2012 | | | Warehouse/Distribution | | | 80.00 | % | | | 1,070 | | | | 100.00 | % | | | 63,021 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
International Unconsolidated Properties(6)(7) | | | | | | | 2008 | | | | | | | | | | 3,773 | | | | 100.00 | % | | | 206,559 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Unconsolidated Properties(6)(7) | | | | | | | 2005 | | | | | | | | | | 15,067 | | | | 98.80 | % | | | 1,071,267 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
All Properties(6)(7) | | | | | | | 2002 | | | | | | | | | | 34,062 | | | | 97.80 | % | | $ | 3,141,539 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Approximate total acquisition cost represents the purchase price inclusive of customary costs and acquisition fees for properties acquired prior to January 1, 2009 and exclusive of customary costs and acquisition fees for properties acquired on dates subsequent to January 1, 2009. |
| (2) | This property is unencumbered. |
| (3) | Includes undeveloped land zoned for future office and warehouse/distribution/logistics use. |
| (4) | The National Union Fire Insurance Company’s lease expired on December 31, 2012, and it vacated the property. The 90 Hudson Street property is currently 65% leased. |
33
| (5) | This property is a consolidated joint venture office development property under construction as of December 31, 2012. This property’s Approximate Total Acquisition Cost reflects the costs incurred as of December 31, 2012. See “—Recent Developments,” for an update of this investment. |
| (6) | Total or weighted average. Weighted average Year Built is weighted based upon Approximate Total Acquisition Costs. Weighted average Percentage Leased is weighted based upon Net Rental Square Feet. |
| (7) | Does not include CBRE Strategic Partners Asia properties. |
| (8) | This property is held through the Duke joint venture. See “—Recent Developments,” for an update of this investment. |
| (9) | This property is held through the Afton Ridge joint venture. |
| (10) | Consolidated properties acquired on December 31, 2009 and contributed to the Duke joint venture. |
| (11) | This property is held through the UK JV. |
| (12) | This property is held through the European JV. |
Joint Venture with Duke Realty
On May 5, 2008, we entered into a contribution agreement with Duke Realty Limited Partnership (“Duke”), a subsidiary of Duke Realty Corporation (NYSE: DRE), to form the Duke joint venture to initially acquire $248,900,500 in industrial real property assets (the “Industrial Portfolio”). The Industrial Portfolio consisted of six bulk industrial built-to-suit, fully leased properties. On September 12, 2008, we entered into a first amendment to the contribution agreement to acquire a fully leased office building for $37,111,000 and to increase and revise the total purchase commitment to $282,400,000. We own an 80% interest and Duke owns a 20% interest in the Duke joint venture.
As of December 31, 2012, the Duke joint venture held interests in 37 properties, 10 located in Florida, eight located in Ohio, four each located in North Carolina and Texas, two each located in Arizona, Illinois, Indiana, Minnesota and Missouri and one in Tennessee. The 37 properties total 10,998,000 rentable square feet and are currently 98% leased. As of December 31, 2012, the Duke joint venture included 23 triple net single-tenant and other single-tenant properties representing approximately 81% of Duke joint venture portfolio square footage.
We entered into an operating agreement for the Duke joint venture with Duke on June 12, 2008. Duke acts as the managing member of the Duke joint venture and is entitled to receive fees in connection with the services it provides to the Duke joint venture, including asset management, construction, development, leasing and property management services. Duke is also entitled to a promoted interest in the Duke joint venture. We have joint approval rights over all major policy decisions.
On December 17, 2010, in connection with the entry into the Purchase Agreement for the Office Portfolio, as defined below, we entered into an amended and restated operating agreement for the Duke joint venture. The amended and restated operating agreement generally contains the same terms and conditions as the operating agreement dated June 12, 2008 described above, except for the following material changes: (i) Duke has granted us a call option to acquire Duke’s entire interest in the Duke joint venture which such interest shall be valued based on the opinions of qualified appraisers and which we can elect to exercise any time after June 30, 2012 upon the occurrence and adoption by resolution of certain triggering events and (ii) the Duke joint venture has certain rights to participate in the development of certain adjacent and nearby parcels of land currently owned by Duke. See “—Subsequent Events.”
We carry our investment in the Duke joint venture on the equity method of accounting because it is an entity under shared control with Duke. Those investments where we have the ability to exercise significant influence (but not control) over operating and financial policies of such entities are accounted for using the equity method. We eliminate transactions with such equity method subsidiaries to the extent of our ownership in such entities.
Afton Ridge Joint Venture
On September 18, 2008, we acquired a 90% ownership interest in Afton Ridge Joint Venture, LLC, or Afton Ridge, the owner of Afton Ridge Shopping Center, from unrelated third parties. CK Afton Ridge Shopping Center, LLC, a subsidiary of Childress Klein Properties, Inc., or CK Afton Ridge, retained a 10% ownership interest in Afton Ridge and continues to manage Afton Ridge Shopping Center. In connection with the services it provides, CK Afton Ridge is entitled to receive fees, including management, construction management and property management fees. Afton Ridge Shopping Center is located at the intersection of I-85 and Kannapolis Parkway, in Kannapolis, NC.
Afton Ridge Shopping Center is a 470,288 square foot regional shopping center, completed in 2007, in which we own 296,388 rentable square feet that is currently 99% leased. One of the shopping center’s anchors, a 173,900 square foot SuperTarget, is not owned by us. Additional anchor tenants in Afton Ridge Shopping Center are Best Buy, Marshalls, PetSmart, Dick’s Sporting Goods, Stein Mart and Ashley Furniture. Afton Ridge Shopping Center is the retail component of a 260 acre master planned mixed-use development.
CBRE Strategic Partners Asia
We have agreed to a capital commitment of up to $20,000,000 in CB Richard Ellis Group Strategic Partners Asia II-A, L.P., or CBRE Strategic Partners Asia. As of December 31, 2012, we had funded $17,526,000 of our capital commitment and owned an ownership interest of approximately 5.07% in CBRE Strategic Partners Asia. CBRE Strategic Partners Asia was formed to purchase, reposition,
34
develop, hold for investment and sell institutional quality real estate and related assets in targeted markets in Asia, including China, Japan, India, South Korea, Hong Kong, Singapore and other Asia Pacific markets. As of December 31, 2012, CBRE Strategic Partners Asia, (which closed on January 31, 2008) with its parallel fund CB Richard Ellis Strategic Partners Asia II, L.P., had aggregate investor commitments of approximately $394,203,000 and had acquired ownership interests in 10 properties, five in China and five in Japan. Two of the five original ownership interests located in China were sold in 2010 and one ownership interest in China was sold in 2012. CBRE Strategic Partners Asia has an eight-year term, which may be extended for up to two one-year periods with the approval of two-thirds of the limited partners.
CBRE Strategic Partners Asia is managed by CBRE Investors SP Asia II, LLC, or the Investment Manager, an affiliate of CBRE Global Investors. The Investment Manager is entitled to an annual management fee and acquisition fees. Our share of investment management fees paid to the Investment Manager was approximately $144,000, $204,000 and $282,000, for the years ended December 31, 2012, 2011 and 2010, respectively. No acquisition fees were paid to the investment manager in 2012, 2011 and 2010.
CBRE Strategic Partners Asia is not obligated to redeem the interests of any of its investors, including us, prior to 2017. Except in certain limited circumstances such as transfers to affiliates or successor trustees or state agencies, we will not be permitted to sell our interest in CBRE Strategic Partners Asia without the prior written consent of the general partner, which the general partner may withhold in its sole discretion.
UK JV and European JV
On June 10, 2010, we entered into two joint ventures with subsidiaries of the Goodman Group (ASX: GMG), (“Goodman”), one of which will seek to invest in logistics focused warehouse/distribution/logistics properties in the United Kingdom, (the “UK JV”), and the other which will seek to invest in logistics focused warehouse/distribution/logistics properties in France, Belgium, the Netherlands, Luxembourg and Germany, (the “European JV”). We own an 80% interest in each joint venture and Goodman owns a 20% interest in each joint venture.
UK JV
The shareholders’ agreement pertaining to the UK JV is by and among RT Princeton UK Holdings, LLC (our wholly-owned subsidiary), Goodman Jersey Holding Trust and Goodman Princeton Holdings (Jersey) Limited, the UK JV, for the purpose of acquiring and holding, either directly or indirectly, up to £400,000,000 in logistics focused warehouse/distribution/logistics properties. On June 10, 2010, we initially funded the UK JV with capital contributions of $26,180,000. The UK JV acquired an initial portfolio of two properties, which were previously owned by a subsidiary of Goodman and which were purchased by the UK JV simultaneously with the closing of the UK JV.
As of December 31, 2012, the UK JV held interests in three properties. The three triple net single-tenant properties total 541,000 rentable square feet and are currently 100% leased.
The initial investment term of the UK JV is three years. A board of directors, comprised of members representing us and Goodman, in each case with an equal number of votes, has the responsibility for the supervision, management and major operating decisions of the UK JV and its business, except with respect to certain reserved matters which will require the unanimous approval of us and Goodman.
During the investment period, the UK JV has a right of first offer, with respect to certain logistics development or logistics investment assets considered for investment in the UK by Goodman or us. If a deadlock has arisen pertaining to a major decision regarding a specific property, either shareholder may exercise a buy-sell option in relation to the relevant property. After the initial investment period, either shareholder wishing to exit the UK JV may exercise a buy-sell option with respect to their entire interest in the UK JV.
The UK JV will pay certain fees to certain Goodman subsidiaries in connection with the services they provide to the UK JV, including but not limited to investment advisory, development management and property management services. Goodman may also be entitled to a promoted interest in the UK JV.
European JV
The shareholders’ agreement pertaining to the European JV is by and among RT Princeton CE Holdings, LLC (our wholly-owned subsidiary), Goodman Europe Development Trust acting by its trustee Goodman Europe Development Pty Ltd. and Goodman Princeton Holdings (LUX) S.À.R.L., the European JV, for the purpose of acquiring and holding, either directly or indirectly, up to€400,000,000 in logistics focused warehouse/ distribution/logistics properties. On June 10, 2010, we initially funded the European JV with capital contributions of $26,802,000. The European JV acquired an initial portfolio of two properties, Duren and Schönberg, which were previously owned by a subsidiary of Goodman and which were purchased by the European JV simultaneously with the closing of the European JV.
As of December 31, 2012, the European JV held interests in six properties. The six triple net single-tenant properties total 3,232,000 rentable square feet and are currently 100% leased.
35
The initial investment term of the European JV is three years. A board of directors, comprised of members representing us and Goodman, in each case with an equal number of votes, has the responsibility for the supervision, management and major operating decisions of the European JV and its business, except with respect to certain reserved matters which will require the unanimous approval of us and Goodman.
During the investment period, the European JV has a right of second offer (after another investment vehicle managed by Goodman) with respect to certain logistics development or logistics investment assets considered for investment by Goodman, and has a right of first offer with respect to certain logistics development or logistics investment assets considered for investment by us. If a deadlock has arisen pertaining to a major decision regarding a specific property, either shareholder may exercise a buy-sell option in relation to the relevant property. After the initial investment period, either shareholder wishing to exit the European JV may exercise a buy-sell option with respect to their entire interest in the European JV. The European JV will pay certain fees to certain Goodman subsidiaries in connection with the services they provide to the European JV, including but not limited to investment advisory, development management and property management services. Certain Goodman subsidiaries may also be entitled to a promoted interest in the European JV.
Single- and Multi-Tenant Property Distribution
Our single- and multi-tenant property distribution of December 31, 2012 was as follows (Net Rentable Square Feet and Approximate Total Acquisition Cost in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated
Properties | | | Unconsolidated
Properties(1) | | | Consolidated & Unconsolidated
Properties(1) | |
Property Type | | Properties | | | Net Rentable
Square Feet | | | Approximate
Total
Acquisition
Cost | | | Properties | | | Net Rentable
Square Feet | | | Approximate
Total
Acquisition
Cost | | | Properties | | | Net Rentable
Square Feet | | | Approximate
Total
Acquisition
Cost | |
Triple Net Single-Tenant Properties(2) | | | 62 | | | | 15,509 | | | $ | 1,553,818 | | | | 28 | | | | 12,265 | | | $ | 692,341 | | | | 90 | | | | 27,774 | | | $ | 2,246,159 | |
Multi-Tenant Properties | | | 14 | | | | 2,566 | | | | 359,189 | | | | 15 | | | | 2,379 | | | | 312,403 | | | | 29 | | | | 4,945 | | | | 671,592 | |
Other Single-Tenant Properties | | | 6 | | | | 920 | | | | 157,265 | | | | 4 | | | | 423 | | | | 66,523 | | | | 10 | | | | 1,343 | | | | 223,788 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 82 | | | | 18,995 | | | $ | 2,070,272 | | | | 47 | | | | 15,067 | | | $ | 1,071,267 | | | | 129 | | | | 34,062 | | | $ | 3,141,539 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Number of Properties and Net Rentable Square Feet for Unconsolidated Properties are at 100%. Approximate Total Acquisition Cost for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia. |
| (2) | Triple Net Single-Tenant Properties include certain properties that have di minimis secondary tenant(s). |
Property Type Distribution
Our property type distribution as of December 31, 2012 was as follows (Net Rentable Square Feet and Approximate Total Acquisition Cost in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated
Properties | | | Unconsolidated
Properties(1) | | | Consolidated & Unconsolidated
Properties(1) | |
| | | Properties | | | Net Rentable
Square Feet | | | Approximate
Total
Acquisition
Cost | | | Properties | | | Net Rentable
Square Feet | | | Approximate
Total
Acquisition
Cost | | | Properties | | | Net Rentable
Square Feet | | | Approximate
Total
Acquisition
Cost | |
Office | | | 28 | | | | 4,834 | | | $ | 1,253,378 | | | | 29 | | | | 4,059 | | | $ | 545,829 | | | | 57 | | | | 8,893 | | | $ | 1,799,207 | |
Warehouse/ Distribution | | | 52 | | | | 13,961 | | | | 741,056 | | | | 17 | | | | 10,712 | | | | 480,908 | | | | 69 | | | | 24,673 | | | | 1,221,964 | |
Retail | | | 2 | | | | 200 | | | | 75,838 | | | | 1 | | | | 296 | | | | 44,530 | | | | 3 | | | | 496 | | | | 120,368 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 82 | | | | 18,995 | | | $ | 2,070,272 | | | | 47 | | | | 15,067 | | | $ | 1,071,267 | | | | 129 | | | | 34,062 | | | $ | 3,141,539 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Number of Properties and Net Rentable Square Feet for Unconsolidated Properties are at 100%. Approximate Total Acquisition Cost for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia. |
36
Geographic Distribution
Our geographic distribution as of December 31, 2012 was as follows (Net Rentable Square Feet and Approximate Total Acquisition Cost in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated
Properties | | | Unconsolidated
Properties(1) | | | Consolidated & Unconsolidated
Properties(1) | |
Domestic | | Properties | | | Net Rentable
Square Feet | | | Approximate
Total
Acquisition
Cost | | | Properties | | | Net Rentable
Square Feet | | | Approximate
Total
Acquisition
Cost | | | Properties | | | Net Rentable
Square Feet | | | Approximate
Total
Acquisition
Cost | |
New Jersey | | | 6 | | | | 1,465 | | | $ | 506,760 | | | | — | | | | — | | | $ | — | | | | 6 | | | | 1,465 | | | $ | 506,760 | |
Florida | | | 4 | | | | 1,170 | | | | 91,018 | | | | 10 | | | | 1,728 | | | | 175,602 | | | | 14 | | | | 2,898 | | | | 266,620 | |
Texas | | | 7 | | | | 2,003 | | | | 134,825 | | | | 4 | | | | 1,256 | | | | 81,286 | | | | 11 | | | | 3,259 | | | | 216,111 | |
Virginia | | | 3 | | | | 840 | | | | 186,723 | | | | — | | | | — | | | | — | | | | 3 | | | | 840 | | | | 186,723 | |
Ohio | | | — | | | | — | | | | — | | | | 8 | | | | 2,389 | | | | 181,068 | | | | 8 | | | | 2,389 | | | | 181,068 | |
South Carolina | | | 27 | | | | 3,558 | | | | 179,171 | | | | — | | | | — | | | | — | | | | 27 | | | | 3,558 | | | | 179,171 | |
North Carolina | | | 5 | | | | 1,360 | | | | 66,337 | | | | 5 | | | | 683 | | | | 90,731 | | | | 10 | | | | 2,043 | | | | 157,068 | |
Arizona | | | 2 | | | | 613 | | | | 62,700 | | | | 2 | | | | 1,829 | | | | 89,313 | | | | 4 | | | | 2,442 | | | | 152,013 | |
California | | | 7 | | | | 688 | | | | 146,917 | | | | — | | | | — | | | | — | | | | 7 | | | | 688 | | | | 146,917 | |
Minnesota | | | 3 | | | | 731 | | | | 62,259 | | | | 2 | | | | 537 | | | | 71,600 | | | | 5 | | | | 1,268 | | | | 133,859 | |
Illinois | | | 3 | | | | 1,635 | | | | 107,420 | | | | 2 | | | | 203 | | | | 26,380 | | | | 5 | | | | 1,838 | | | | 133,800 | |
Massachusetts | | | 3 | | | | 769 | | | | 94,280 | | | | — | | | | — | | | | — | | | | 3 | | | | 769 | | | | 94,280 | |
Maryland | | | 2 | | | | 1,473 | | | | 92,379 | | | | — | | | | — | | | | — | | | | 2 | | | | 1,473 | | | | 92,379 | |
Indiana | | | — | | | | — | | | | — | | | | 2 | | | | 2,237 | | | | 84,112 | | | | 2 | | | | 2,237 | | | | 84,112 | |
Pennsylvania | | | 1 | | | | 300 | | | | 72,742 | | | | — | | | | — | | | | — | | | | 1 | | | | 300 | | | | 72,742 | |
Kansas | | | 1 | | | | 1,107 | | | | 62,950 | | | | — | | | | — | | | | — | | | | 1 | | | | 1,107 | | | | 62,950 | |
Missouri | | | — | | | | — | | | | — | | | | 2 | | | | 252 | | | | 34,680 | | | | 2 | | | | 252 | | | | 34,680 | |
Tennessee | | | — | | | | — | | | | — | | | | 1 | | | | 180 | | | | 29,936 | | | | 1 | | | | 180 | | | | 29,936 | |
Colorado | | | 1 | | | | 407 | | | | 24,500 | | | | — | | | | — | | | | — | | | | 1 | | | | 407 | | | | 24,500 | |
Georgia | | | 1 | | | | 122 | | | | 21,834 | | | | — | | | | — | | | | — | | | | 1 | | | | 122 | | | | 21,834 | |
Kentucky | | | 1 | | | | 189 | | | | 14,800 | | | | — | | | | — | | | | — | | | | 1 | | | | 189 | | | | 14,800 | |
Utah | | | 1 | | | | 275 | | | | 13,400 | | | | — | | | | — | | | | — | | | | 1 | | | | 275 | | | | 13,400 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Domestic | | | 78 | | | | 18,705 | | | | 1,941,015 | | | | 38 | | | | 11,294 | | | | 864,708 | | | | 116 | | | | 29,999 | | | | 2,805,723 | |
| | | | | | | | | |
International | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Germany | | | — | | | | — | | | | — | | | | 6 | | | | 3,232 | | | | 170,391 | | | | 6 | | | | 3,232 | | | | 170,391 | |
United Kingdom | | | 4 | | | | 290 | | | | 129,257 | | | | 3 | | | | 541 | | | | 36,168 | | | | 7 | | | | 831 | | | | 165,425 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total International | | | 4 | | | | 290 | | | | 129,257 | | | | 9 | | | | 3,773 | | | | 206,559 | | | | 13 | | | | 4,063 | | | | 335,816 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 82 | | | | 18,995 | | | $ | 2,070,272 | | | | 47 | | | | 15,067 | | | $ | 1,071,267 | | | | 129 | | | | 34,062 | | | $ | 3,141,539 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Number of Properties and Net Rentable Square Feet for Unconsolidated Properties are at 100%. Approximate Total Acquisition Cost for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia. |
37
Significant Tenants
The following table details our largest tenants as of December 31, 2012 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Consolidated Properties | | | Unconsolidated
Properties(1) | | | Consolidated &
Unconsolidated
Properties(1) | |
| | | Tenant | | Primary Industry | | Net Rentable
Square Feet | | | Annualized
Base Rent | | | Net Rentable
Square Feet | | | Annualized
Base Rent | | | Net Rentable
Square Feet | | | Annualized
Base Rent | |
| 1. | | Amazon.com, Inc(2) | | Internet Retail | | | — | | | $ | — | | | | 4,954 | | | $ | 16,831 | | | | 4,954 | | | $ | 16,831 | |
| 2. | | Barclay’s Capital | | Financial Services | | | 409 | | | | 12,278 | | | | — | | | | — | | | | 409 | | | | 12,278 | |
| 3. | | Raytheon Company | | Defense and Aerospace | | | 666 | | | | 10,023 | | | | — | | | | — | | | | 666 | | | | 10,023 | |
| 4. | | General Services Admin | | Government | | | 71 | | | | 2,158 | | | | 378 | | | | 7,358 | | | | 449 | | | | 9,516 | |
| 5. | | National Union Fire(3) Insurance Co | | Insurance | | | 172 | | | | 6,011 | | | | — | | | | — | | | | 172 | | | | 6,011 | |
| 6. | | JP Morgan Chase | | Financial Services | | | 396 | | | | 5,973 | | | | — | | | | — | | | | 396 | | | | 5,973 | |
| 7. | | Nuance Communications | | Software | | | 201 | | | | 5,665 | | | | — | | | | — | | | | 201 | | | | 5,665 | |
| 8. | | Endo Health Solutions Inc. | | Pharmaceutical and Health Care Related | | | 300 | | | | 5,591 | | | | | | | | | | | | 300 | | | | 5,591 | |
| 9. | | Lord Abbett & Co | | Financial Services | | | 149 | | | | 5,211 | | | | — | | | | — | | | | 149 | | | | 5,211 | |
| 10. | | Eisai | | Pharmaceutical and Health Care Related | | | 209 | | | | 5,189 | | | | — | | | | — | | | | 209 | | | | 5,189 | |
| 11. | | Comcast | | Telecommunications | | | 220 | | | | 4,819 | | | | — | | | | — | | | | 220 | | | | 4,819 | |
| 12. | | The Coleman Company | | Consumer Product | | | 1,107 | | | | 4,528 | | | | — | | | | — | | | | 1,107 | | | | 4,528 | |
| 13. | | Deloitte | | Professional Services | | | 175 | | | | 4,390 | | | | — | | | | — | | | | 175 | | | | 4,390 | |
| 14. | | Clorox International Co. | | Consumer Products | | | 1,350 | | | | 4,310 | | | | — | | | | — | | | | 1,350 | | | | 4,310 | |
| 15. | | Barr Laboratories | | Pharmaceutical and Health Care Related | | | 142 | | | | 4,061 | | | | — | | | | — | | | | 142 | | | | 4,061 | |
| 16. | | Unilever(4) | | Consumer Products | | | — | | | | — | | | | 1,595 | | | | 3,864 | | | | 1,595 | | | | 3,864 | |
| 17. | | PPD Development | | Pharmaceutical and Health Care Related | | | — | | | | — | | | | 252 | | | | 3,762 | | | | 252 | | | | 3,762 | |
| 18. | | Eveready Battery Company | | Consumer Products | | | — | | | | — | | | | 168 | | | | 3,568 | | | | 168 | | | | 3,568 | |
| 19. | | ConAgra Foods | | Food Service and Retail | | | 742 | | | | 3,422 | | | | — | | | | — | | | | 742 | | | | 3,422 | |
| 20. | | NDB Capital Markets | | Financial Services | | | 97 | | | | 3,400 | | | | — | | | | — | | | | 97 | | | | 3,400 | |
| 21. | | Carl Zeiss | | Pharmaceutical and Health Care Related | | | 202 | | | | 3,337 | | | | — | | | | — | | | | 202 | | | | 3,337 | |
| 22. | | Whirlpool Corp | | Consumer Product | | | 1,020 | | | | 3,264 | | | | — | | | | — | | | | 1,020 | | | | 3,264 | |
| 23. | | American LaFrance | | Vehicle Related Manufacturing | | | 513 | | | | 3,163 | | | | — | | | | — | | | | 513 | | | | 3,163 | |
| 24. | | Bob’s Discount Furniture | | Home Furnishings/Home Improvement | | | 672 | | | | 2,977 | | | | | | | | | | | | 672 | | | | 2,977 | |
| 25. | | Prime Distribution Services | | Logistics and Distribution | | | — | | | | — | | | | 1,200 | | | | 2,958 | | | | 1,200 | | | | 2,958 | |
| 26. | | Nationwide Mutual Ins | | Insurance | | | — | | | | — | | | | 315 | | | | 2,928 | | | | 315 | | | | 2,928 | |
| 27. | | Kellogg’s | | Consumer Products | | | — | | | | — | | | | 1,142 | | | | 2,817 | | | | 1,142 | | | | 2,817 | |
| 28. | | Time Warner | | Telecommunications | | | 134 | | | | 2,814 | | | | — | | | | — | | | | 134 | | | | 2,814 | |
| 29. | | B&Q | | Home Furnishings/Home Improvement | | | 104 | | | | 2,713 | | | | — | | | | — | | | | 104 | | | | 2,713 | |
38
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Consolidated Properties | | | Unconsolidated
Properties(1) | | | Consolidated &
Unconsolidated
Properties(1) | |
| | | Tenant | | Primary Industry | | Net Rentable
Square Feet | | | Annualized
Base Rent | | | Net Rentable
Square Feet | | | Annualized
Base Rent | | | Net Rentable
Square Feet | | | Annualized
Base Rent | |
| 30. | | REMEC | | Defense and Aerospace | | | 133 | | | | 2,579 | | | | — | | | | — | | | | 133 | | | | 2,579 | |
| 31. | | Dr. Pepper | | Food Service and Retail | | | 601 | | | | 2,532 | | | | — | | | | — | | | | 601 | | | | 2,532 | |
| 32. | | Syngenta Seeds | | Agriculture | | | 116 | | | | 2,473 | | | | — | | | | — | | | | 116 | | | | 2,473 | |
| 33. | | NCS Pearson, Inc | | Education | | | — | | | | — | | | | 153 | | | | 2,424 | | | | 153 | | | | 2,424 | |
| 34. | | Verizon Wireless(5) | | Telecommunications | | | — | | | | — | | | | 180 | | | | 2,375 | | | | 180 | | | | 2,375 | |
| 35. | | Iowa College Acquisition Corp.(6) | | Education | | | 125 | | | | 2,303 | | | | — | | | | — | | | | 125 | | | | 2,303 | |
| 36. | | Citicorp North America | | Financial Services | | | — | | | | — | | | | 194 | | | | 2,284 | | | | 194 | | | | 2,284 | |
| 37. | | Royal Caribbean Cruises | | Travel/Leisure | | | — | | | | — | | | | 129 | | | | 2,225 | | | | 129 | | | | 2,225 | |
| 38. | | SBM Atlantia, Inc. | | Petroleum and Mining | | | 171 | | | | 2,217 | | | | — | | | | — | | | | 171 | | | | 2,217 | |
| 39. | | FMC Corporation | | Petroleum and Mining | | | 111 | | | | 2,116 | | | | — | | | | — | | | | 111 | | | | 2,116 | |
| 40. | | American Home Mortgage | | Financial Services | | | — | | | | — | | | | 183 | | | | 2,024 | | | | 183 | | | | 2,024 | |
| | Other (232 tenants) | | | 8,117 | | | | 41,051 | | | | 4,043 | | | | 37,976 | | | | 12,160 | | | | 79,027 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 18,425 | | | $ | 160,568 | | | | 14,886 | | | $ | 93,394 | | | | 33,311 | | | $ | 253,962 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Net Rentable Square Feet for Unconsolidated Properties is at 100%. Annualized Base Rent for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia. |
| (2) | Our tenants are Amazon.com.azdc, Inc., in the Buckeye Logistics Center and Goodyear Crossing Park II properties, Amazon.com.indc, LLC, in the AllPoints at Anson Bldg. 1 property, and Amazon Fulfillment GmbH, in the Graben Distribution Center I property, which are all wholly-owned subsidiaries of Amazon.com. |
| (3) | The National Union Fire Insurance Company’s lease expired on December 31, 2012, and it vacated the property. The 90 Hudson Street property is currently 65% leased. |
| (4) | Our tenant is CONOPCO, Inc., a wholly-owned subsidiary of Unilever. |
| (5) | Verizon Wireless is the d/b/a for Cellco Partnership. |
| (6) | Our tenant is Iowa College Acquisitions Corp., an operating subsidiary of Kaplan, Inc. The lease is guaranteed by Kaplan Inc. |
39
Tenant Industries
Our tenants operate across a wide range of industries. The following table details our tenant-industry concentrations as of December 31, 2012 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated Properties | | | Unconsolidated
Properties(1) | | | Consolidated &
Unconsolidated
Properties(1) | |
Primary Tenant Industry Category | | Net Rentable
Square Feet | | | Annualized
Base Rent | | | Net Rentable
Square Feet | | | Annualized
Base Rent | | | Net Rentable
Square Feet | | | Annualized
Base Rent | |
Financial Services | | | 1,233 | | | $ | 28,586 | | | | 532 | | | $ | 5,938 | | | | 1,765 | | | $ | 34,524 | |
Pharmaceutical and Health Care Related | | | 1,188 | | | | 19,613 | | | | 717 | | | | 8,523 | | | | 1,905 | | | | 28,136 | |
Consumer Products | | | 4,528 | | | | 14,382 | | | | 3,510 | | | | 13,331 | | | | 8,038 | | | | 27,713 | |
Internet Retail | | | 330 | | | | 1,426 | | | | 4,954 | | | | 16,831 | | | | 5,284 | | | | 18,257 | |
Defense and Aerospace | | | 901 | | | | 15,296 | | | | — | | | | — | | | | 901 | | | | 15,296 | |
Logistics and Distribution | | | 1,081 | | | | 4,602 | | | | 2,243 | | | | 8,089 | | | | 3,324 | | | | 12,691 | |
Insurance(2) | | | 271 | | | | 7,992 | | | | 438 | | | | 4,639 | | | | 709 | | | | 12,631 | |
Telecommunications | | | 737 | | | | 9,678 | | | | 194 | | | | 2,537 | | | | 931 | | | | 12,215 | |
Government | | | 72 | | | | 2,158 | | | | 378 | | | | 7,358 | | | | 450 | | | | 9,516 | |
Food Service and Retail | | | 2,032 | | | | 8,392 | | | | 38 | | | | 460 | | | | 2,070 | | | | 8,852 | |
Home Furnishings/Home Improvement | | | 1,226 | | | | 7,739 | | | | 70 | | | | 1,070 | | | | 1,296 | | | | 8,809 | |
Vehicle Related Manufacturing | | | 1,542 | | | | 8,571 | | | | — | | | | — | | | | 1,542 | | | | 8,571 | |
Business Services | | | 1,016 | | | | 4,323 | | | | 310 | | | | 3,813 | | | | 1,326 | | | | 8,136 | |
Education | | | 124 | | | | 2,303 | | | | 362 | | | | 5,702 | | | | 486 | | | | 8,005 | |
Professional Services | | | 258 | | | | 5,216 | | | | 144 | | | | 1,945 | | | | 402 | | | | 7,161 | |
Software | | | 201 | | | | 5,665 | | | | 15 | | | | 214 | | | | 216 | | | | 5,879 | |
Other Manufacturing | | | 785 | | | | 2,701 | | | | 154 | | | | 2,552 | | | | 939 | | | | 5,253 | |
Petroleum and Mining | | | 285 | | | | 4,388 | | | | 55 | | | | 646 | | | | 340 | | | | 5,034 | |
Specialty Retail | | | 391 | | | | 3,203 | | | | 111 | | | | 1,193 | | | | 502 | | | | 4,396 | |
Travel and Leisure | | | — | | | | — | | | | 240 | | | | 4,327 | | | | 240 | | | | 4,227 | |
Agriculture | | | 116 | | | | 2,472 | | | | 9 | | | | 99 | | | | 125 | | | | 2,571 | |
Apparel Retail | | | — | | | | — | | | | 225 | | | | 1,897 | | | | 225 | | | | 1,897 | |
Executive Office Suites | | | 86 | | | | 1,735 | | | | 12 | | | | — | | | | 98 | | | | 1,735 | |
Utilities | | | — | | | | — | | | | 127 | | | | 1,538 | | | | 127 | | | | 1,538 | |
Other Retail | | | 22 | | | | 127 | | | | 48 | | | | 692 | | | | 70 | | | | 819 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 18,425 | | | $ | 160,568 | | | | 14,886 | | | $ | 93,394 | | | | 33,311 | | | $ | 253,962 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Net Rentable Square Feet for Unconsolidated Properties is at 100%. Annualized Base Rent for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia. |
| (2) | Includes National Union Fire Insurance Company—see “—Significant Tenants.” |
40
Tenant Lease Expirations
The following table sets forth a schedule of expiring leases for our consolidated and unconsolidated properties as of December 31, 2012 (Expiring Net Rentable Square Feet and Expiring Base Rent in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated Properties | | | Unconsolidated
Properties(1) | | | Consolidated &
Unconsolidated
Properties(1) | |
| | | Expiring
Net Rentable
Square Feet | | | Expiring
Base Rent | | | Expiring
Net Rentable
Square Feet | | | Expiring
Base Rent | | | Number
Of
Expiring
Leases | | | Expiring
Net Rentable
Square Feet | | | Expiring
Base Rent | | | Percentage
of Expiring
Base Rent | |
2013 | | | 1,775 | | | $ | 13,615 | | | | 662 | | | $ | 5,029 | | | | 51 | | | | 2,437 | | | $ | 18,644 | | | | 6.61 | % |
2014 | | | 1,266 | | | | 7,648 | | | | 406 | | | | 6,209 | | | | 37 | | | | 1,672 | | | | 13,857 | | | | 4.91 | % |
2015 | | | 741 | | | | 6,339 | | | | 410 | | | | 4,273 | | | | 33 | | | | 1,151 | | | | 10,612 | | | | 3.76 | % |
2016 | | | 1,152 | | | | 17,420 | | | | 685 | | | | 9,045 | | | | 33 | | | | 1,837 | | | | 26,465 | | | | 9.39 | % |
2017 | | | 425 | | | | 6,569 | | | | 1,317 | | | | 10,876 | | | | 35 | | | | 1,742 | | | | 17,445 | | | | 6.19 | % |
2018 | | | 813 | | | | 8,859 | | | | 2,219 | | | | 12,844 | | | | 27 | | | | 3,032 | | | | 21,703 | | | | 7.70 | % |
2019 | | | 2,472 | | | | 16,971 | | | | 3,736 | | | | 18,426 | | | | 24 | | | | 6,208 | | | | 35,397 | | | | 12.55 | % |
2020 | | | 1,875 | | | | 18,623 | | | | 30 | | | | 457 | | | | 12 | | | | 1,905 | | | | 19,080 | | | | 6.77 | % |
2021 | | | 4,126 | | | | 33,703 | | | | 2,538 | | | | 16,452 | | | | 17 | | | | 6,664 | | | | 50,155 | | | | 17.79 | % |
2022 | | | 517 | | | | 5,883 | | | | 1,234 | | | | 7,293 | | | | 6 | | | | 1,751 | | | | 13,176 | | | | 4.67 | % |
Thereafter | | | 3,263 | | | | 41,750 | | | | 1,649 | | | | 13,687 | | | | 20 | | | | 4,912 | | | | 55,437 | | | | 19.65 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | 18,425 | | | $ | 177,380 | | | | 14,886 | | | $ | 104,591 | | | | 295 | | | | 33,311 | | | $ | 281,971 | | | | 100.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Weighted Average Remaining Term (years)(2) | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
Triple Net Single-Tenant Properties(3) | | | | | | | 8.11 | | | | | | | | 7.27 | | | | | | | | | | | | 7.85 | | | | | |
Multi-Tenant Properties | | | | | | | 6.54 | | | | | | | | 5.44 | | | | | | | | | | | | 5.96 | | | | | |
Other Single-Tenant Properties | | | | | | | 5.58 | | | | | | | | 7.84 | | | | | | | | | | | | 6.56 | | | | | |
Total | | | | | | | 7.67 | | | | | | | | 6.73 | | | | | | | | | | | | 7.32 | | | | | |
| (1) | Expiring Net Rentable Square Feet for Unconsolidated Properties is at 100%. Expiring Base Rent for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia. |
| (2) | Weighted Average Remaining Term is the average remaining term weighted by Expiring Base Rent. |
| (3) | Triple Net Single-Tenant Properties include certain properties that have di minimis secondary tenant(s). |
41
Property Portfolio Size
Our portfolio size at the end of each quarter since commencement of our initial public offering (October 24, 2006) through December 31, 2012 is as follows (Net Rentable Square Feet and Approximate Total Acquisition Cost in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated Properties | | | Unconsolidated Properties(1) | | | Consolidated &
Unconsolidated
Properties(1) | |
Cumulative Property Portfolio as of: | | Properties | | | Net Rentable
Square Feet | | | Approximate
Total
Acquisition
Cost | | | Properties | | | Net Rentable
Square Feet | | | Approximate
Total
Acquisition
Cost | | | Properties | | | Net Rentable
Square Feet | | | Approximate
Total
Acquisition
Cost | |
12/31/2006 | | | 9 | | | | 878 | | | | 86,644 | | | | — | | | | — | | | | — | | | | 9 | | | | 878 | | | | 86,644 | |
3/31/2007 | | | 9 | | | | 878 | | | | 86,644 | | | | — | | | | — | | | | — | | | | 9 | | | | 878 | | | | 86,644 | |
6/30/2007 | | | 10 | | | | 928 | | | | 110,491 | | | | — | | | | — | | | | — | | | | 10 | | | | 928 | | | | 110,491 | |
9/30/2007 | | | 42 | | | | 5,439 | | | | 348,456 | | | | — | | | | — | | | | — | | | | 42 | | | | 5,439 | | | | 348,456 | |
12/31/2007 | | | 44 | | | | 5,576 | | | | 353,594 | | | | — | | | | — | | | | — | | | | 44 | | | | 5,576 | | | | 353,594 | |
3/31/2008 | | | 47 | | | | 6,257 | | | | 426,856 | | | | — | | | | — | | | | — | | | | 47 | | | | 6,257 | | | | 426,856 | |
6/30/2008 | | | 47 | | | | 6,257 | | | | 426,856 | | | | 1 | | | | 605 | | | | 35,636 | | | | 48 | | | | 6,862 | | | | 462,492 | |
9/30/2008 | | | 49 | | | | 6,483 | | | | 486,777 | | | | 6 | | | | 3,307 | | | | 193,773 | | | | 55 | | | | 9,790 | | | | 680,550 | |
12/31/2008 | | | 52 | | | | 6,771 | | | | 582,682 | | | | 8 | | | | 5,649 | | | | 273,205 | | | | 60 | | | | 12,420 | | | | 855,887 | |
3/31/2009 | | | 52 | | | | 6,771 | | | | 582,717 | | | | 8 | | | | 5,649 | | | | 273,130 | | | | 60 | | | | 12,420 | | | | 855,847 | |
6/30/2009 | | | 53 | | | | 7,106 | | | | 598,103 | | | | 11 | | | | 5,976 | | | | 305,308 | | | | 64 | | | | 13,082 | | | | 903,411 | |
9/30/2009 | | | 57 | | | | 7,805 | | | | 719,822 | | | | 11 | | | | 5,976 | | | | 305,202 | | | | 68 | | | | 13,781 | | | | 1,025,024 | |
12/31/2009 | | | 60 | | | | 8,630 | | | | 791,314 | | | | 13 | | | | 6,904 | | | | 356,158 | | | | 73 | | | | 15,534 | | | | 1,147,472 | |
3/31/2010 | | | 58 | | | | 8,407 | | | | 748,835 | | | | 18 | | | | 7,392 | | | | 418,818 | | | | 76 | | | | 15,799 | | | | 1,167,653 | |
6/30/2010 | | | 62 | | | | 9,086 | | | | 916,210 | | | | 22 | | | | 8,633 | | | | 471,615 | | | | 84 | | | | 17,719 | | | | 1,387,825 | |
9/30/2010 | | | 63 | | | | 9,295 | | | | 983,810 | | | | 22 | | | | 8,633 | | | | 471,615 | | | | 85 | | | | 17,928 | | | | 1,455,425 | |
12/31/2010 | | | 73 | | | | 12,800 | | | | 1,308,560 | | | | 30 | | | | 9,901 | | | | 629,268 | | | | 103 | | | | 22,701 | | | | 1,937,828 | |
3/31/2011 | | | 73 | | | | 12,800 | | | | 1,308,560 | | | | 43 | | | | 11,950 | | | | 903,508 | | | | 116 | | | | 24,750 | | | | 2,212,068 | |
6/30/2011 | | | 75 | | | | 14,614 | | | | 1,657,966 | | | | 43 | | | | 12,356 | | | | 917,566 | | | | 118 | | | | 26,970 | | | | 2,575,532 | |
9/30/2011 | | | 74 | | | | 13,906 | | | | 1,689,048 | | | | 43 | | | | 12,355 | | | | 918,771 | | | | 117 | | | | 26,261 | | | | 2,607,819 | |
12/31/2011 | | | 77 | | | | 14,434 | | | | 1,747,299 | | | | 45 | | | | 13,851 | | | | 997,506 | | | | 122 | | | | 28,285 | | | | 2,744,805 | |
3/31/2012 | | | 78 | | | | 15,784 | | | | 1,824,403 | | | | 46 | | | | 13,997 | | | | 1,007,753 | | | | 124 | | | | 29,781 | | | | 2,832,156 | |
6/30/2012 | | | 78 | | | | 15,784 | | | | 1,842,359 | | | | 46 | | | | 13,997 | | | | 1,007,753 | | | | 124 | | | | 29,781 | | | | 2,850,112 | |
9/30/2012 | | | 78 | | | | 16,831 | | | | 1,920,218 | | | | 46 | | | | 13,997 | | | | 1,008,246 | | | | 124 | | | | 30,828 | | | | 2,928,464 | |
12/31/2012 | | | 82 | | | | 18,995 | | | | 2,070,272 | | | | 47 | | | | 15,067 | | | | 1,071,267 | | | | 129 | | | | 34,062 | | | | 3,141,539 | |
| (1) | Net Rentable Square Feet for unconsolidated properties is at 100%. Approximate Total Acquisition Cost is at our pro rata share of effective ownership and does not include our investment in CBRE Strategic Partners Asia. |
Insurance Coverage on Properties
We carry comprehensive general liability coverage and umbrella liability coverage on all of our properties with limits of liability which we deem adequate. Similarly, we are insured against the risk of direct physical damage in amounts we believe to be adequate to reimburse us on a replacement basis for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. The cost of such insurance is passed through to tenants whenever possible.
Property Tax Basis and Real Estate Tax
The following table provides information regarding our property tax basis and real estate taxes at each of our consolidated properties as of December 31, 2012:
| | | | | | | | | | |
Location | | Property | | Original Property
Tax Basis | | | 2012 Annualized Real
Estate Taxes | |
San Diego, CA | | REMEC Corporate Campus | | $ | 26,667,000 | | | $ | 324,000 | |
Boston, MA | | 300 Constitution Drive | | | 19,805,000 | | | | 306,000 | |
Atlanta, GA | | Deerfield Commons I | | | 19,572,000 | | | | 232,000 | |
Atlanta, GA | | Deerfield Commons II | | | 2,262,000 | | | | 52,000 | |
42
| | | | | | | | | | |
Location | | Property | | Original Property
Tax Basis | | | 2012 Annualized Real
Estate Taxes | |
Dallas, TX | | 505 Century | | | 6,095,000 | | | | 112,000 | |
Dallas, TX | | 631 International | | | 5,407,000 | | | | 86,000 | |
Dallas, TX | | 660 North Dorothy | | | 6,836,000 | | | | 107,000 | |
Chicago IL | | Bolingbrook Point III | | | 18,170,000 | | | | 224,000 | |
Spartanburg, SC | | Community Cash Complex 1-5 | | | 7,987,000 | | | | 147,000 | |
Spartanburg, SC | | Fairforest Bldgs. 1-4 | | | 19,753,000 | | | | 356,000 | |
Spartanburg, SC | | Fairforest Bldg. 5 | | | 16,968,000 | | | | 277,000 | |
Spartanburg, SC | | Fairforest Bldg. 6 | | | 7,469,000 | | | | 159,000 | |
Spartanburg, SC | | Fairforest Bldg. 7 | | | 5,626,000 | | | | 116,000 | |
Spartanburg, SC | | Greenville/Spartanburg Ind. Pk. | | | 3,388,000 | | | | 77,000 | |
Spartanburg, SC | | Highway 290 Commerce Pk. Bldgs. | | | 20,083,000 | | | | 370,000 | |
Spartanburg, SC | | HJ Park Bldg. 1 | | | 4,216,000 | | | | 110,000 | |
Charleston, SC | | Jedburg Commerce Park | | | 41,991,000 | | | | 355,000 | |
Charlotte, NC | | Kings Mountain I | | | 5,497,000 | | | | 35,000 | |
Charlotte, NC | | Kings Mountain II | | | 11,311,000 | | | | 55,000 | |
Charleston, SC | | Mount Holly Building | | | 6,208,000 | | | | 53,000 | |
Charleston, SC | | North Rhett I | | | 10,302,000 | | | | 138,000 | |
Charleston, SC | | North Rhett II | | | 7,073,000 | | | | 69,000 | |
Charleston, SC | | North Rhett III | | | 4,812,000 | | | | 55,000 | |
Charleston, SC | | North Rhett IV | | | 17,060,000 | | | | 226,000 | |
Charleston, SC | | Orangeburg Park Bldg. | | | 5,474,000 | | | | 130,000 | |
Spartanburg, SC | | Orchard Business Park 2 | | | 761,000 | | | | 11,000 | |
Winston-Salem, NC | | Union Cross Bldg. I | | | 6,585,000 | | | | 122,000 | |
Winston-Salem, NC | | Union Cross Bldg. II | | | 17,216,000 | | | | 176,000 | |
Dallas, TX | | Lakeside Office Center | | | 17,994,000 | | | | 241,000 | |
Charlotte, NC | | Kings Mountain III | | | 25,728,000 | | | | 85,000 | |
Houston, TX | | Enclave on the Lake | | | 37,827,000 | | | | 716,000 | |
Washington, DC | | Avion Midrise III | | | 21,111,000 | | | | 241,000 | |
Washington, DC | | Avion Midrise IV | | | 21,112,000 | | | | 241,000 | |
Minneapolis, MN | | 13201 Wilfred | | | 15,340,000 | | | | 529,000 | |
Oakland, CA | | 3011, 3055 & 3077 Comcast Place | | | 49,000,000 | | | | 802,000 | |
Boston, MA | | 140 Depot Street | | | 18,950,000 | | | | 239,000 | |
Orlando, FL | | 12650 Ingenuity Drive | | | 25,350,000 | | | | 274,000 | |
Minneapolis, MN | | Crest Ridge Corporate Center I | | | 28,419,000 | | | | 871,000 | |
Jacksonville, FL | | West Point Trade Center | | | 29,000,000 | | | | 483,000 | |
Oakland, CA | | 5160 Hacienda Dr. | | | 38,500,000 | | | | 464,000 | |
San Diego, CA | | 10450 Pacific Center Ct. | | | 32,750,000 | | | | 371,000 | |
Northern NJ | | 225 Summit Avenue | | | 40,600,000 | | | | 484,000 | |
Boston, MA | | One Wayside Road | | | 55,525,000 | | | | 583,000 | |
Northern NJ | | 100 Tice Blvd. | | | 67,600,000 | | | | 860,000 | |
Chicago, IL | | Ten Parkway North | | | 25,000,000 | | | | 438,000 | |
Washington, DC | | Pacific Corporate Park | | | 144,500,000 | | | | 2,045,000 | |
Northern NJ | | 100 Kimball Drive | | | 60,250,000 | | | | 814,000 | |
Dallas, TX | | 4701 Gold Spike Drive | | | 20,300,000 | | | | 344,000 | |
Cincinnati, OH | | 1985 International Way | | | 14,800,000 | | | | 110,000 | |
Salt Lake City, UT | | Summit Distribution Center | | | 13,400,000 | | | | 133,000 | |
Jacksonville, FL | | 3660 Deerpark Boulevard | | | 15,300,000 | | | | 184,000 | |
Phoenix, AZ | | Tolleson Commerce Park II | | | 9,200,000 | | | | 169,000 | |
New York City Metro, NJ | | 70 Hudson Street | | | 155,000,000 | | | | 2,343,000 | |
New York City Metro, NJ | | 90 Hudson Street | | | 155,000,000 | | | | 2,310,000 | |
Dallas, TX | | Millers Ferry Road | | | 40,366,000 | | | | 1,070,000 | |
Phoenix, AZ | | Sky Harbor Operations Center | | | 53,500,000 | | | | N/A | |
Denver, CO | | Aurora Commerce Center Bldg. C | | | 24,500,000 | | | | 503,000 | |
Tampa FL | | Sabal Pavilion | | | 21,368,000 | | | | 296,000 | |
Chicago, IL | | 2400 Dralle Road | | | 64,250,000 | | | | 252,000 | |
43
| | | | | | | | | | |
Location | | Property | | Original Property
Tax Basis | | | 2012 Annualized Real
Estate Taxes | |
Kansas City, KS | | Midwest Commerce Center I | | | 62,950,000 | | | | 622,000 | |
Minneapolis, MN | | 20000 S. Diamond Lake Road | | | 18,500,000 | | | | 464,000 | |
Baltimore, MD | | Gateway I and Gateway II at Riverside | | | 49,229,000 | | | | 315,000 | |
Central, NJ | | 701 & 801 Charles Ewing Blvd. | | | 28,310,000 | | | | 1,062,000 | |
Baltimore, MD | | Mid-Atlantic Distribution Center—Bldg. A | | | 43,150,000 | | | | 135,000 | |
Philadelphia, PA(1) | | 1400 Atwater Drive | | | 72,742,000 | | | | N/A | |
Coventry, UK | | 602 Central Blvd. | | | 23,847,000 | | | | N/A | |
Reading, UK | | Thames Valley Five | | | 29,572,000 | | | | N/A | |
Wakefield, UK | | Albion Mills Retail Park | | | 22,098,000 | | | | N/A | |
Peterborough, UK | | Maskew Retail Park | | | 53,740,000 | | | | N/A | |
| | | | | | | | | | |
Total | | | | $ | 2,070,272,000 | | | $ | 25,573,000 | |
| | | | | | | | | | |
| (1) | This amount is based on the pre-construction completion assessed value of this property and the post-construction completion date assessment is likely to increase our future annualized real-estate taxes on this property. |
Regulations
Our properties, as well as any other properties that we may acquire in the future, are subject to various international, U.S. federal, state and local laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. Our properties are subject to regulation under federal laws, such as the ADA, under which all public accommodations must meet federal requirements related to access and use by disabled persons, and state and local laws addressing earthquake, fire and life safety requirements. Although we believe that our properties substantially comply with present requirements under applicable governmental regulations, none of our properties have been audited or investigated for compliance by any regulatory agency. If we were not in compliance with material provisions of the ADA or other regulations affecting our properties, we might be required to take remedial action, which could include making modifications or renovations to properties. Federal, state or local governments may also enact future laws and regulations that could require us to make significant modifications or renovations to our properties. If we were to incur substantial costs to comply with the ADA or any other regulations, our financial condition, results of operations, cash flow, the quoted trading prices of our securities and ability to satisfy our debt service obligations and to pay distributions to shareholders could be adversely affected. We believe that we have all permits and approvals necessary under current law to operate our properties.
Recent Developments
On January 30, 2013, we acquired 100% of Trammel Crow Company’s (“TCC”) interest in our joint venture with TCC which owned and developed our 1400 Atwater Drive property, a 300,000 square foot office development in Malvern, Pennsylvania, a suburb of Philadelphia. 1400 Atwater Drive is 100% leased to Endo Pharmaceuticals, Inc. for use as their corporate headquarters through November 2024 and the lease is guaranteed by Endo Health Solutions Inc. (NASDAQ: ENDP), Endo Pharmaceuticals’ parent company, a specialty pharmaceutical and healthcare solutions company. The cost of the acquisition was approximately $3,431,000. We funded this acquisition using cash reserves and borrowings under our Unsecured Credit Facility.
On February 19, 2013, we entered into an agreement with TCC that will obligate us to form a joint venture with TCC upon the expiration of certain contingencies. We would own a 95% interest and TCC would own a 5% interest in the joint venture. The joint venture will develop a four building, 454,801 square foot build-to-suit office complex in Malvern, Pennsylvania, a suburb of Philadelphia, for Shire US, Inc., which will serve as their US corporate headquarters under a fifteen year lease. Shire US, Inc. is the US based subsidiary of Irish pharmaceutical company Shire Plc (LSE: SHP, NASDAQ: SHPG), a major international pharmaceutical company. The total project cost is anticipated to be approximately $122,288,000 and upon completion of construction and satisfaction of closing obligations, we will acquire 100% of TCC’s interest in the joint venture. There can be no assurance that the joint venture will be formed or that the project will be completed.
On March 1, 2013, we acquired 100% of Duke Realty Limited Partnership’s (“Duke Realty”) interests in 17 properties that were held in our joint venture with Duke Realty (“Duke JV”). The properties are located in major submarkets of Phoenix, Raleigh/Durham, Houston,
44
Columbus, Cincinnati, Orlando, Ft. Lauderdale, Minneapolis and Dallas and consisted of 16 office buildings and one warehouse/distribution/logistics building totaling 3,318,402 square feet. The acquisition was structured such that membership interests in each of the subsidiaries that hold the properties were distributed to Duke Realty and CSP OP on a pro rata basis in accordance with their percentage ownership interests in the Duke JV (80% to CSP OP and 20% Duke Realty) and CSP OP then purchased Duke Realty’s 20% membership interests in those subsidiaries, resulting in CSP OP owning a 100% interest in each of the property-owning subsidiaries. The aggregate purchase price that CSP OP paid to Duke Realty in connection with the acquisition was approximately $98,140,000, which is 20% of approximately $490,700,000 exclusive of fees and customary closing costs, but inclusive of approximately $216,010,000 of existing mortgage financing. We funded this acquisition using cash reserves and borrowings under our Unsecured Credit Facility.
On March 5, 2013, we entered into an unsecured term loan in the amount of $50,000,000 with TD Bank, N.A (the “TD Term Loan”). Upon closing the TD Term Loan, we simultaneously entered into an interest rate swap agreement with TD Bank to effectively fix the interest rate on the TD Term Loan at 3.425% per annum for its seven-year term, based upon the TD Term Loan’s current stated applicable margin, which may vary during its term based upon the then-current leverage ratio or our then-current credit rating. The TD Term Loan contains customary representations and warrants and covenants. We used the proceeds of the TD Term Loan to repay a portion of our borrowings under our Unsecured Credit Facility.
On March 7, 2013, we entered into an unsecured term loan (the “Wells Fargo Term Loan”) in the amount of $200,000,000 with Wells Fargo Bank, National Association (“Wells Fargo”) and certain other lenders defined in the Wells Fargo Term Loan. Upon closing the Wells Fargo Term Loan, we simultaneously entered into an interest rate swap agreement with Wells Fargo to effectively fix the interest rate on the Wells Fargo Term Loan at 2.4885% per annum for its five-year term, based upon the Wells Fargo Term Loan’s current stated applicable margin, which may vary based upon the then-current leverage ratio or our then-current credit rating. The Wells Fargo Term Loan contains customary representations and warrants and covenants. We used the proceeds of the Wells Fargo Term Loan to repay a portion of our borrowings under our Unsecured Credit Facility.
On March 7, 2013, we entered into a First Amendment (the “First Amendment”) to the credit agreement entered into on September 13, 2012 with a group of lenders, which provided us with an unsecured, revolving credit facility in the initial amount of $700,000,000 (the “Unsecured Credit Facility”). The First Amendment modified the Unsecured Credit Facility to among other things: (i) amend certain definitions, (ii) amend certain requirements of the guarantor, (iii) amend the requirements relating to quarterly financial statements, annual statements, compliance certificates and certain other SEC filings, (iv) amend the requirements relating to electronic delivery of information, (v) provide the Company with an option to restate the tangible net worth covenant in the event of a redemption event, (vi) remove the restriction on negative pledges, (vii) amend the restrictions on intercompany transfers and (viii) amend certain disclosure and confidentiality provisions.
We were not party to any material legal proceedings at December 31, 2012.
| ITEM 4. | MINE SAFETY DISCLOSURE |
None.
45
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDERS MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
As of March 22, 2013, we had approximately 248,593,441 common shares outstanding, held by a total of 62,421 shareholders. The number of shareholders is based on the records of DST Systems, Inc., which serves as our registrar and transfer agent. There is currently no active public trading market for our common shares and a trading market may never develop or, if developed, such market may not be sustained. As a result, you may find it difficult to find a buyer for your shares. In addition, our declaration of trust currently prohibits the ownership of more than 3.0% by number or value, whichever is more restrictive, of our outstanding common shares or more than 3.0% by number or value, whichever is more restrictive, of our outstanding shares, unless exempted by our board of trustees. Consequently, there is the risk that our shareholders may not be able to sell their shares at a time or price acceptable to them. Pursuant to our follow-on public offering, which closed on January 30, 2012, we sold our common shares to the public at a price of $10.00 per share and at a price of $9.50 per share pursuant to our dividend reinvestment plan. We are currently issuing common shares to shareholders at a price of $9.50 per share pursuant to our amended and restated dividend reinvestment plan.
To assist fiduciaries of retirement plans subject to the annual reporting requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”), we intend to provide reports of the per share estimate value of common shares to those fiduciaries who request such requests. In addition, in order for Financial Industry Regulatory Authority (“FINRA”) members and their associated persons to have participated in the sale of common shares pursuant to our public offerings, we are required pursuant to FINRA Rule 2310 to disclose in each annual report distributed to shareholders a per share estimated value of the shares, the method by which it was developed and the date of the data used to develop the estimated value. For these purposes, the estimated value of the shares was deemed to be $10.00 per share as of December 31, 2012. The basis for this estimated value is the fact that the public offering price for our common shares in our completed follow-on public offering was $10.00 per share (not taking into account purchase price discounts for certain categories of purchasers). However, there is currently no active public trading market for the common shares at this time, and there can be no assurance that shareholders could receive $10.00 per share if such a market did exist and they sold their common shares or that they will be able to receive such amount for their common shares in the future. Moreover, we have not performed an appraisal of our properties; as such, this estimated value is not necessarily based upon the appraised value of our properties, nor does it necessarily represent the amount shareholders would receive if our properties were sold and the proceeds distributed to our shareholders in a liquidation, which amount may be less than $10.00 per share. Until July 30, 2013 (18 months after the termination of our follow-on public offering), we intend to use the offering price of our common shares in our follow-on public offering as the per share estimated value. Thereafter, the value of the properties and other assets will be based on valuations of either our properties or us as a whole, whichever valuation method our Board of Trustees determines to be appropriate, which may include independent valuations of our properties or of our company as a whole.
Dividend Reinvestment Plan
On July 29, 2012, our Board of Trustees adopted and approved, effective July 1, 2012, a second amendment and restatement of our dividend reinvestment plan. The following is a summary of our second amended and restated dividend reinvestment plan (the “divided reinvestment plan”) that allows you to have dividends and other distributions otherwise distributable to you invested in additional common shares. As of December 31, 2012, we had issued 17,993,725 common shares pursuant to our dividend reinvestment plan.
Administrator
DST systems, Inc. serves as the plan administrator. The plan administrator administers the plan, keeps records and provides each participant with purchase confirmations.
Eligibility
Our existing shareholders, and persons who receive our shares upon conversion of OP units of CSP OP are eligible to participate in our dividend reinvestment plan, provided such persons meet the investor suitability and minimum purchase requirements of their states of residence. We may elect to deny your participation in the dividend reinvestment plan if you reside in a jurisdiction or foreign country where, in our judgment, the burden or expense of compliance with applicable securities laws makes your participation impracticable or inadvisable.
46
Election to Participate
Assuming you are eligible, you may elect to participate in the dividend reinvestment plan by completing the enrollment form available from the plan administrator. Your participation in the dividend reinvestment plan will begin with the next dividend made after receipt of your enrollment form provided such notice is received more than 30 days prior to the last day of the fiscal quarter. Once enrolled, you may continue to purchase shares under our dividend reinvestment plan until we have sold all of the shares registered in the dividend reinvestment plan offering, have terminated the dividend reinvestment plan offering or have terminated the dividend reinvestment plan. If you participate in the dividend reinvestment plan, all of your dividends will be reinvested through the plan.
Share Purchases
Our Board of Trustees determined that the offering price for shares under the dividend reinvestment plan will initially be $9.50 per share. In our recent public offerings of common shares, the price per common share was $10.00. In the event that our Board of Trustees determines that the fair market value of our common shares has changed, common shares will thereafter be sold pursuant to the dividend reinvestment plan at a price determined by our Board of Trustees, which price shall not be less than 95% of the fair market value of a common share on the reinvestment date (including any administrative costs paid by us on participants’ behalf) as so determined. There is currently no active public trading market for our common shares. The initial offering price per share may not reflect the value of the underlying assets. The selling price also may not be indicative of the price at which the shares may trade if they were listed on an exchange or of the proceeds that a shareholder may receive if we liquidated or dissolved. The purchase of fractional shares is a permissible, and likely, result of the reinvestment of distributions under the dividend reinvestment plan. Shares may be issued under the dividend reinvestment plan until all shares registered as part of the dividend reinvestment plan offering have been sold.
Investment of Distribution
Our plan administrator uses the aggregate amount of distributions to all participants for each fiscal quarter to purchase shares (including fractional shares) for the participants. If the aggregate amount of distributions to participants exceeds the amount necessary to purchase all shares then available for purchase, the plan administrator will purchase all available shares and will return all remaining distributions to the participants within 30 days after the date such distributions are made. Any distributions not so invested will be returned to participants.
At this time, participants do not have the option to make voluntary contributions to the dividend reinvestment plan to purchase shares in excess of the amount of shares that can be purchased with their distributions. Our Board of Trustees reserves the right, however, to amend the dividend reinvestment plan in the future to permit voluntary contributions to the dividend reinvestment plan by participants, to the extent consistent with our objective of qualifying as a REIT.
Purchase Confirmations
The plan administrator provides a confirmation of your quarterly purchases under the dividend reinvestment plan. The plan administrator is to provide the confirmation to you or your designee within 30 days after the end of each quarter, which confirmation is to disclose the following information:
| | ¡ | | each dividend reinvested for your account during the quarter; |
| | ¡ | | the date of the reinvestment; |
| | ¡ | | the number and price of the shares purchased by you; |
| | ¡ | | the total number of shares in your account; and |
| | ¡ | | all material information regarding the dividend reinvestment plan and the effect of reinvesting dividends. |
Fees and Commissions
We do not pay selling commissions or other fees on shares sold under our dividend reinvestment plan. We do not receive a fee for selling shares under the dividend reinvestment plan. We are responsible for all administrative charges and expenses charged by the plan administrator. Any interest earned on such distributions will be paid to us to defray certain costs relating to the dividend reinvestment plan.
Voting
You may vote all whole shares acquired through the dividend reinvestment plan.
47
Tax Consequences of Participation
The reinvestment of dividends does not relieve you of any taxes which may be payable on such dividends. When your dividends are reinvested to acquire shares (including any fractional share), you will be treated as having received a distribution in the amount of the fair market value of our common shares on the dividend payment date, multiplied by the number of shares (including any fractional share) purchased plus any brokerage fees, commissions or administrative costs paid by us on your behalf in connection with the reinvestment. You should be aware that, because shares purchased with reinvested dividends may be purchased at up to a 5% discount, the taxable income received by you as a participant in our dividend reinvestment plan may be greater than the taxable income that would have resulted from the receipt of the dividend in cash. We will withhold 28% of the amount of dividends or distributions paid if you fail to furnish a valid taxpayer identification number, fail to properly report interest or dividends or fail to certify that you are not subject to withholding.
Termination of Participation
You may terminate your participation (in whole and not in part) in the dividend reinvestment plan at any time, without penalty, by providing written notice to us at least ten business days prior to the last day of the fiscal period to which the distribution relates. If you terminate your participation in the dividend reinvestment plan, the plan administrator will send you a check in payment for the amount of any distributions that have not been reinvested in shares, and our record books will be revised to reflect the ownership records of your whole and fractional shares. Any transfer of your shares will effect a termination of the participation of those shares in the dividend reinvestment plan. You must promptly notify us should you no longer meet the suitability standards described under the “Suitability Standards” section of the prospectus relating to our dividend reinvestment plan offering or cannot make the other representations or warranties set forth in the enrollment form at any time prior to the listing of our shares on the New York Stock Exchange or another national securities exchange. We will terminate your participation to the extent that a reinvestment of your dividends in our shares would cause you to exceed the ownership limitation contained in our declaration of trust. In the event you terminate your participation in the dividend reinvestment plan, you may subsequently re-enroll in the plan upon receipt of the then current version of the prospectus relating to our dividend reinvestment plan offering by notifying the plan agent and completing any required documents.
Amendment or Termination of Plan
We may amend or terminate the dividend reinvestment plan for any reason at any time upon ten days prior written notice to participants.
Share Redemption Program
On February 3, 2012, our Board of Trustees adopted and approved an amendment and restatement of our share redemption program (the “share redemption program”). Our share redemption program is designed to provide existing eligible shareholders with limited, interim liquidity by enabling them to sell shares back to us prior to a liquidity event. Shareholders who have held their shares for at least one year and who purchased those shares from us or received the shares from us through a non-cash transaction, not in the secondary market, may, on a quarterly basis, present to us for redemption all or any portion of their shares. However, in the event that an eligible shareholder presents fewer than all of his or her shares to us for redemption, such shareholder must present at least 25% of his or her shares to us for redemption and must retain at least $5,000 of common shares if any shares are held after such redemption. At that time, we may, subject to the conditions and limitations described below, redeem such shares for cash to the extent that we have sufficient funds available from the proceeds received through our dividend reinvestment plan and, at the sole discretion of our Board of Trustees, other sources, to fund such redemption after the payment of dividends necessary to maintain our qualification as a REIT and to avoid payment of any U.S. federal income tax or excise tax on our net taxable income and other funding needs as determined by our Board of Trustees.
Subject to certain restrictions discussed herein, we may redeem shares, from time to time, at the following prices:
| | |
Share Purchase Anniversary | | Redemption Price as a
Percentage of
Purchase Price |
Less than 1 year | | No Redemption Allowed |
1 year | | 92.0% |
2 years | | 93.5% |
3 years | | 95.0% |
4 and longer | | 100.0% |
48
At any time that we are engaged in an offering of our common shares, the per share redemption price will not exceed the applicable per share offering price. Thereafter, the per share redemption price will be the applicable per share offering price paid until we conduct an annual valuation of our shares. After an annual valuation, the per share redemption price will be based on the then-current net asset value of our common shares as determined by our Board of Trustees (as adjusted for any share dividends, combinations, splits, recapitalizations and the like with respect to our common shares). Shares issued pursuant to our dividend reinvestment plan will be redeemed according to the above schedule at a price based upon the indicated percentage of the purchase price paid for such shares acquired through the dividend reinvestment plan. Our Board of Trustees will announce any purchase price adjustment and the time period of its effectiveness as a part of its regular communications with our shareholders.
Our Board of Trustees has delegated to our officers the right to waive the one-year holding period and pro rata redemption requirements described below in the event of the death, disability (as such term is defined in the Internal Revenue Code) or bankruptcy of a shareholder. Shares that are redeemed in connection with the death, disability or bankruptcy of a shareholder will be redeemed at the time of showing death, disability or bankruptcy and at 100% of the price at which the investor purchased such shares while the share redemption program is in effect and sufficient funds are available from the proceeds received through our dividend reinvestment plan or, at the sole discretion of our Board of Trustees, other sources. However, in the event that an eligible shareholder presents fewer than all of his or her shares to us for redemption, such shareholder must present at least 25% of his or her shares to us for redemption and must retain at least $5,000 of common shares if any shares are held after such redemption.
Redemption of shares, when requested, will be made quarterly and, in the event our available cash from the proceeds received through our dividend reinvestment plan or, at the sole discretion of our Board of Trustees, other sources, is insufficient to fund all redemption requests, each shareholder’s request will be reduced on a pro rata basis. Alternatively, if we do not have such funds available, at the time when redemption is requested, a shareholder can (i) withdraw his or her request for redemption, or (ii) ask that we carry over his or her request to the next quarterly period, if any, when sufficient funds become available. If a shareholder does not make a subsequent request, we will treat the initial redemption request as cancelled.
We are not obligated to redeem common shares under our share redemption program. During any calendar year, we will not redeem more than 5% of the weighted average number of shares outstanding during the prior calendar year. The aggregate amount of redemptions under our share redemption program is not expected to exceed the aggregate proceeds received during any calendar year from the sale of shares pursuant to our dividend reinvestment plan. However, to the extent that the aggregate proceeds received from the sale of shares pursuant to our dividend reinvestment plan are not sufficient to fund redemption requests pursuant to the 5% limitation outlined above, the Board of Trustees may, in its sole discretion, choose to use other sources of funds to redeem common shares. Such sources of funds could include cash on hand and cash available from borrowings. We cannot guarantee that any funds set aside for our share redemption program will be sufficient to accommodate any or all requests made in any year.
Our Board of Trustees, in its sole discretion, may choose to terminate or otherwise amend the terms of the share redemption program or to reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund our share redemption program are needed for other purposes or it is in the best interests of our shareholders to increase our cash reserves. If we terminate, amend or suspend the share redemption program or reduce the number of shares to be redeemed under the share redemption program, we will provide 30 days’ advance notice to shareholders, and we will disclose the change in quarterly and annual reports filed with the SEC on Form 10-Q and Form 10-K.
A shareholder who wishes to have his or her shares redeemed must mail or deliver a written request on a form we provide, executed by the shareholder, its trustee or authorized agent, to the redemption agent, which is currently DST Systems, Inc. Within 30 days following the redemption agent’s receipt of the shareholder’s request, the redemption agent will forward to such shareholder the documents necessary to affect the redemption, including any signature guarantee we or the redemption agent may require. The redemption agent will affect such redemption for the calendar quarter provided that it receives the properly completed redemption documents relating to the shares to be redeemed from the shareholder at least one calendar month prior to the last day of the current calendar quarter and has sufficient funds available to redeem such shares. The effective date of any redemption will be the last date during a quarter during which the redemption agent receives the properly completed redemption documents. As a result, we anticipate that, assuming sufficient funds are available for redemption and we have not reached our 5% limitation, the redemptions will be paid no later than 30 days after the quarterly determination of the availability of funds for redemption.
You will have no right to request redemption of your shares should our shares become listed on a national securities exchange, the NASDAQ Global Select Market or the NASDAQ Global Market. Our share redemption program is only intended to provide interim liquidity for our existing shareholders until a secondary market develops for the shares, at which time the program would terminate. No such market presently exists, and we cannot assure you that any market for your shares will ever develop. We are conducting an ongoing review of potential alternatives for our share redemption program, which may include the suspension or termination of the plan.
49
For the years ended December 31, 2012 and 2011, we received requests to redeem 7,460,762 common shares and 4,698,734, common shares, respectively, pursuant to our share redemption program. We redeemed 100% of the redemption requests for each of the years ended December 31, 2012 and 2011 at an average price per share of $9.43 and $9.21, respectively. We funded share redemptions for the periods noted above from the proceeds of the sale of our common shares pursuant to our dividend reinvestment plan.
Shares
The number of our common shares issued and outstanding as of March 22, 2013 was 248,593,441
Distribution Policy
We intend to distribute all or substantially all of our net taxable income (which does not ordinarily equate to net income as calculated in accordance with GAAP) to our shareholders in each year. We currently intend to declare dividends on a daily basis, but aggregate and pay dividends on a quarterly basis. Our distribution policy is subject to revision at the discretion of our Board of Trustees without notice to you or shareholder approval. All distributions will be made by us at the discretion of our Board of Trustees and will be based upon our Board of Trustee’s evaluation of our assets, operating results, historical and projected cash flows (and sources thereof), historical and projected equity offering proceeds from our offerings, historical and projected debt incurred, projected investments and capital requirements, the anticipated timing between receipt of our equity offering proceeds and investment of those proceeds, maintenance of REIT qualification, applicable provisions of Maryland law, general economic, market and industry conditions, any liquidity event options we may pursue, and such other factors as our Board of Trustees deems relevant. We cannot assure you that we will be able to pay or maintain the levels of distributions we have historically paid or that distributions will increase over time.
In order to qualify as a REIT under the Internal Revenue Code, we generally must make distributions to our shareholders each year in an amount at least equal to (i) 90% of our net taxable income, excluding net capital gains, plus (ii) 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Internal Revenue Code, minus (iii) any excess non-cash income. In general, our dividends will be applied toward these requirements only if paid in the taxable year to which they relate, or in the following taxable year if the dividends are declared before we timely file our tax return for that year, the dividends are paid on or before the first regular dividend payment following the declaration and we elect on our tax return to have a specified dollar amount of such distributions treated as if paid in the prior year. In addition, dividends declared by us in October, November or December of one taxable year and payable to a shareholder of record on a specific date in such a month are treated as both paid by us and received by the shareholder during such taxable year, provided that the dividend is actually paid by us by January 31 of the following taxable year.
It is anticipated that distributions generally will be taxable as ordinary income to our shareholders, although a portion of such distributions may be designated by us as a return of capital or as capital gain. We will furnish annually to each of our shareholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital or capital gains.
The following table sets forth the distributions per common share declared by our Board of Trustees and dates of such distributions:
| | | | | | |
Quarter | | Declared | | | Date of Distribution |
First Quarter, 2010 | | $ | 0.15 | | | April 16, 2010 |
Second Quarter, 2010 | | $ | 0.15 | | | July 16, 2010 |
Third Quarter, 2010 | | $ | 0.15 | | | October 15, 2010 |
Fourth Quarter, 2010 | | $ | 0.15 | | | January 14, 2011 |
First Quarter, 2011 | | $ | 0.15 | | | April 15, 2011 |
Second Quarter, 2011 | | $ | 0.15 | | | July 15, 2011 |
Third Quarter, 2011 | | $ | 0.15 | | | October 14, 2011 |
Fourth Quarter, 2011 | | $ | 0.15 | | | January 13, 2012 |
First Quarter, 2012 | | $ | 0.15 | | | April 13, 2012 |
Second Quarter, 2012 | | $ | 0.15 | | | July 13, 2012 |
Third Quarter, 2012 | | $ | 0.15 | | | October 12, 2012 |
Fourth Quarter, 2012 | | $ | 0.15 | | | January 11, 2013 |
First Quarter, 2013 | | $ | 0.15 | | | April 12, 2013* |
| * | Anticipated payment date |
50
The following table presents total distributions declared and paid and distributions per share as well as the source of payment of such distributions, for each of the last four quarters in the years ended December 31, 2012, 2011 and 2010:
| | | | | | | | | | | | | | | | |
2012 Quarters | | First | | | Second | | | Third | | | Fourth | |
Total distributions declared and paid | | $ | 36,726,000 | | | $ | 37,366,000 | | | $ | 37,374,000 | | | $ | 37,418,000 | |
Distributions per share | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | |
Amount of distributions per share funded by cash flows provided by operating entities | | | 0.1282 | | | | 0.1005 | | | | 0.1186 | | | | 0.0261 | |
Amount of distributions per share funded by uninvested proceeds from financings of our properties | | | 0.0218 | | | | 0.0495 | | | | 0.0314 | | | | 0.1239 | |
| | | | |
2011 Quarters | | First | | | Second | | | Third | | | Fourth | |
Total distributions declared and paid | | $ | 25,306,000 | | | $ | 27,125,000 | | | $ | 29,911,000 | | | $ | 32,785,000 | |
Distributions per share | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | |
Amount of distributions per share funded by cash flows provided by operating entities | | $ | 0.0758 | | | $ | 0.0707 | | | $ | 0.0888 | | | $ | 0.0716 | |
Amount of distributions per share funded by uninvested proceeds from financings of our properties | | $ | 0.0742 | | | $ | 0.0793 | | | $ | 0.0612 | | | $ | 0.0784 | |
| | | | |
2010 Quarters | | First | | | Second | | | Third | | | Fourth | |
Total distributions declared and paid | | $ | 16,841,000 | | | $ | 19,266,000 | | | $ | 21,623,000 | | | $ | 24,053,000 | |
Distributions per share | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | |
Amount of distributions per share funded by cash flows provided by operating entities | | $ | 0.1212 | | | $ | 0.0540 | | | $ | 0.0826 | | | $ | 0.0444 | |
Amount of distributions per share funded by uninvested proceeds from financing of our properties | | $ | 0.0288 | | | $ | 0.0960 | | | | 0.0674 | | | $ | 0.1056 | |
On December 11, 2012, our Board of Trustees approved a quarterly distribution to shareholders of $0.15 per common share for the first quarter of 2013. The distribution will be calculated on a daily basis and paid on April 12, 2013 to shareholders of record during the period January 1, 2013 through and including March 31, 2013.
Our first quarter 2012 distributions, paid on April 13, 2012, were funded 85.46% by cash flows provided by operating activities and 14.54% from uninvested proceeds from financings of our properties. In addition, distributions totaling $16,777,000 were reinvested in our common shares pursuant to our dividend reinvestment plan. Our second quarter 2012 distributions, paid on July 13, 2012, were funded 67.02% by cash flows provided by operating activities and 32.98% from uninvested proceeds from financings of our properties. In addition, distributions totaling $16,991,000 were reinvested in our common shares pursuant to our dividend reinvestment plan. Our third quarter 2012 distributions, paid on October 12, 2012, were funded 79.04% by cash flows provided by operating activities and 20.96% from uninvested proceeds from financings of our properties. In addition, distributions totaling $16,917,000 were reinvested in our common shares pursuant to our dividend reinvestment plan. Our fourth quarter 2012 distributions, paid on January 11, 2013, were funded 17.43% by cash flows provided by operating activities and 82.57% from uninvested proceeds from financings of our properties. In addition, distributions totaling $16,799,000 were reinvested in our common shares pursuant to our dividend reinvestment plan.
Our 2012 distributions were funded 62.12% by cash flows provided by operating activities and 37.88% from uninvested proceeds from financings of our properties. In addition, 2012 distributions totaling $67,484,000 were reinvested in our common shares pursuant to our dividend reinvestment plan during 2012.
Our first quarter 2011 distributions, paid on April 15, 2011, were funded 50.51% by cash flows provided by operating activities and 49.49% from uninvested proceeds from financings of our properties. In addition, distributions totaling $10,861,000 were reinvested in our common shares pursuant to our dividend reinvestment plan. Our second quarter 2011 distributions, paid on July 15, 2011, were funded 47.10% by cash flows provided by operating activities and 52.90% from uninvested proceeds from financings of our properties. In addition, distributions totaling $11,806,000 were reinvested in our common shares pursuant to our dividend reinvestment plan. Our third quarter 2011 distributions, paid on October 14, 2011, were funded 59.22% by cash flows provided by operating activities and 40.78% from uninvested proceeds from financings of our properties. In addition, distributions totaling $13,269,000 were reinvested in our common shares pursuant to our dividend reinvestment plan. Our fourth quarter 2011 distributions, paid on January 14, 2012, were funded 47.74% by cash flows provided by operating activities and 52.26% from uninvested proceeds from financings of our properties. In addition, distributions totaling $14,737,000 were reinvested in our common shares pursuant to our dividend reinvestment plan.
51
Our 2011 distributions were funded 51.17% by cash flows provided by operating activities and 48.83% from uninvested proceeds from financings of our properties. In addition, 2011 distributions totaling $50,674,000 were reinvested in our common shares pursuant to our dividend reinvestment plan during 2011.
Our first quarter 2010 distributions, paid on April 16, 2010, were funded 80.79% by cash flows provided by operating activities and 19.21% from uninvested proceeds from financings of our properties. In addition, distributions totaling $7,318,000 were reinvested in our common shares pursuant to our dividend reinvestment plan. Our second quarter 2010 distributions, paid on July 16, 2010, were funded 35.98% by cash flows provided by operating activities and 64.02% from uninvested proceeds from financings of our properties. In addition, distributions totaling $8,390,000 were reinvested in our common shares pursuant to our dividend reinvestment plan. Our third quarter 2010 distributions, paid on October 15, 2010, were funded 55.08% by cash flows provided by operating activities and 44.92% from uninvested proceeds from financings of our properties. In addition, distributions totaling $9,349,000 were reinvested in our common shares pursuant to our dividend reinvestment plan. Our fourth quarter 2010 distributions, paid on January 14, 2011, were funded 29.60% by cash flows provided by operating activities and 71.40% from uninvested proceeds from financings of our properties. In addition, distributions totaling $10,260,000 were reinvested in our common shares pursuant to our dividend reinvestment plan.
Our 2010 distributions were funded 48.38% by cash flows provided by operating activities and 51.62% from uninvested proceeds from financings of our properties. In addition, 2010 distributions totaling $35,317,000 were reinvested in our common shares pursuant to our dividend reinvestment plan during 2010.
Total distributions declared and paid for the period from inception (July 1, 2004 through December 31, 2012 were $439,055,000 and total Funds from Operations for the period from inception (July 1, 2004) through December 31, 2012 were $275,103,000. For a discussion of our supplemental financial measures, see “-Non-GAAP Supplemental Financial Measure: Funds from Operations.
To the extent that our cash available for distribution is less than the amount we are required to distribute to qualify as a REIT, we may consider various funding sources to cover any shortfall, including borrowing funds on a short-term, or possibly long-term, basis, using offering proceeds or selling properties. In addition, we may utilize these funding sources to make distributions using offering proceeds that exceed the amount we are required to distribute to qualify as a REIT.
Unregistered Sales and Repurchases of Securities
During the years ending December 31, 2012, 2011 and 2010, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended. See “Share Redemption Program” for a discussion of our share redemption program, including shares that we have redeemed thereunder.
The following table provides information with respect to our share redemption program for the three months ended December 31, 2012:
| | | | | | | | | | | | |
Period | | Total Number of
Shares Purchased | | | Average Price
Paid Per
Share | | | Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs | | Maximum Number (or
approximate dollar value) of
Shares that May Yet Be Purchased
Under the Plans or Programs |
October | | | 1,806,891 | | | $ | 9.42 | | | N/A | | N/A |
November | | | — | | | | — | | | N/A | | N/A |
December | | | — | | | | — | | | N/A | | N/A |
Total | | | 1,806,891 | | | $ | 9.42 | | | N/A | | N/A |
Use of Proceeds from Sale of Registered Securities
The registration statement relating to our initial public offering (No. 333-127405) was declared effective on October 24, 2006. CNL Securities Corp. was the dealer manager of our initial public offering. The registration statement covered up to $2,000,000,000 in common shares of beneficial interest, 90% of which were offered at a price of $10.00 per share, and 10% of which were offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the former investment advisor or another firm we choose for that purpose. Our initial public offering was terminated effective as of the close of business on January 29, 2009. As of the close of business on January 29, 2009, we had sold a total of 60,808,967 common shares in the initial public offering, including 1,487,943 common shares which were issued pursuant to our dividend reinvestment plan. We withdrew from registration a total of 140,243,665 common shares that were registered but not sold in connection with the initial public offering. From October 24, 2006 (effective date) through January 29, 2009 (termination date), we had accepted subscriptions from 13,270 investors, issued 60,808,967 common shares and
52
received $607,345,702 in gross offering proceeds pursuant to our initial public offering. After payment of approximately $8,290,000 in acquisition fees and related expenses, payment of approximately $26,335,000 in selling commission, $8,898,000 in dealer manager fees, $4,008,000 in marketing support fees and payment of approximately $12,147,000 in organization and offering expenses, as of January 29, 2009, we had raised aggregate net offering proceeds of approximately $548,000,000.
The registration statement relating to our follow-on public offering (No. 333-152653) was declared effective on January 30, 2009. CNL Securities Corp. was the dealer manager of our follow-on offering. The registration statement covered up to $3,000,000,000 in common shares of beneficial interest, 90% of which were offered at a price of $10.00 per share, and 10% of which were offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the former investment advisor or another firm we choose for that purpose. Our follow-on offering was closed on January 30, 2012. From January 29, 2009 (effective date) to January 30, 2012 (close), we had accepted subscriptions from 49,377 investors, issued 190,672,251 common shares and received $1,901,137,211 in gross offering proceeds pursuant to our follow-on public offering. After payment of approximately $46,057,000 in acquisition fees and related expenses, payment of approximately $108,365,000 in selling commissions, $35,900,000 in dealer manager fees, $17,833,000 in marketing support fees and payment of approximately $24,189,000 in organization and offering expenses, as of January 30, 2012, we had raised aggregate net offering proceeds of approximately $1,669,000,000.
Equity Incentive Plan
We have adopted an amended and restated 2004 equity incentive plan. The purpose of the amended and restated 2004 equity incentive plan is to provide us with the flexibility to use share options and other awards to provide a means of performance-based compensation. Key employees, directors, trustees, officers, advisors, consultants or other personnel of ours and our subsidiaries or other persons expected to provide significant services to us or our subsidiaries, including employees of the former investment advisor, would be eligible to be granted share options, restricted shares, phantom shares, dividend equivalent rights and other share-based awards under the amended and restated 2004 equity incentive plan.
On April 20, 2010, our Board’s independent trustees, Messrs. Black, Reid and Orphanides, were awarded equity grants under the amended and restated 2004 equity incentive plan on the following terms: (i) each award was for $80,000 in restricted common shares of the Trust (or 8,000 shares at $10.00 per share) for a total of $240,000; (ii) each award vested in its entirety, upon issuance; and (iii) the independent trustee would not be able to redeem any of the restricted common shares prior to the third anniversary of date of issuance, but retains the rights to dividends declared and paid during such restriction period. We recognized a stock based compensation expense of $240,000 during the year ended December 31, 2010 as a result of granting these awards to our independent trustees.
On June 17, 2011, our Board’s independent trustees, Messrs. Black, Reid and Orphanides, were awarded equity grants under our 2004 equity incentive plan on the following terms: (i) each award was for $9,200 in restricted common shares of the Trust (or 1,000 shares at $9.20 per share) for a total of $27,600; (ii) each award vested in its entirety, upon issuance; and (iii) the independent trustee would not be able to redeem any of the restricted common shares prior to the third anniversary of date of issuance, but retains the rights to dividends declared and paid during such restriction period. We recognized a stock based compensation expense of $27,600 during the year ended December 31, 2011 as a result of granting these awards to our independent trustees.
On September 25, 2012, Mr. Cuneo, our president and chief executive officer, entered into an employment agreement with us, pursuant to which, on September 28, 2012, Mr. Cuneo was awarded an equity grant under our amended and restated 2004 equity incentive plan on the following terms: an award of 150,000 restricted common shares, one-third of which will vest on each of the first, second and third anniversaries of the date of the grant, provided that Mr. Cuneo is still employed by us on the applicable date of vesting subject to the terms of the amended and restated 2004 equity incentive plan and the restricted award agreement pursuant to which it was granted.
Also on September 25, 2012, Mr. Kianka, our executive vice president and chief operating officer, entered into an employment agreement with us, pursuant to which Mr. Kianka was awarded an equity grant under our amended and restated 2004 equity incentive plan on the following terms: an award of 75,000 restricted common shares, one-third of which will vest on each of the first, second and third anniversaries of the date of the grant, provided that Mr. Kianka is still employed by us on the applicable date of vesting, subject to the terms of the amended and restated 2004 equity incentive plan and the restricted award agreement pursuant to which it was granted. Also on September 25, 2012, a total of 75,000 restricted common shares with time-based vesting were granted to members of senior management of the Company.
On February 7, 2013, our Board’s independent trustees, Messrs. Black, Orphanides and Salvatore, were awarded equity grants under the amended and restated 2004 equity incentive plan on the following terms: (i)(x) Mr. Black’s award was for $100,000 in common shares (or 10,000 shares at $10.00 per share) and (y) Messrs. Orphanides and Salvatore each were awarded $25,000 in common shares (or 2,500 shares at $10.00 per share) for a total of $150,000; and (ii) each award vested in its entirety, upon issuance.
53
On March 15, 2013, a total of 281,625 restricted common shares were granted to our named executive officers (Messrs. Cuneo, Kianka and Reid) based on the executive’s achievement of performance objectives during 2012, as determined in the discretion of our Compensation Committee. Additionally, 21 of our employees were granted 117,300 restricted shares, in the aggregate, on March 15, 2013. One-third of the restricted shares granted to our named executive officers and employees will vest in each of the first three anniversaries of grant if the grantee is employed by the company on such anniversary.
In the event a listing of our common shares on a national securities exchange, or certain mergers, sales or other related transactions involving the Company, or certain sales of assets occurs on or prior to July 1, 2014, the Company will grant awards to members of senior management of the Company in the aggregate of 375,000 common shares. These shares will be fully vested when and if granted.
Administration
The Compensation Committee, appointed by our Board of Trustees, has the full authority to administer and interpret the 2004 equity incentive plan, to authorize the granting of awards, to determine the eligibility of an employee, trustee or consultant to receive an award, to determine the number of common shares to be covered by each award, to determine the terms, provisions and conditions of each award, to prescribe the form of instruments evidencing awards and to take any other actions and make all other determinations that it deems necessary or appropriate. Our Compensation Committee may, among other things, establish performance goals that must be met in order for awards to be granted or to vest, or for the restrictions on any such awards to lapse. From and after the closing of our initial public offering, the amended and restated 2004 equity incentive plan will be administered by a Compensation Committee consisting of two or more non-employee trustees, each of whom is intended to be, to the extent required by Rule 16b-3 under the Securities Exchange Act of 1934, as amended, a nonemployee trustee and will, at such times as we are subject to Section 162(m) of the Internal Revenue Code, qualify as an “outside director” for purposes of Section 162(m) of the Internal Revenue Code, or, if no committee exists, the Board of Trustees. References below to our Compensation Committee include a reference to the board for those periods in which the board is acting.
Available shares
Subject to adjustment upon certain corporate transactions or events, a maximum of 20,000,000 common shares (but not more than 10% of the common shares outstanding at the time of grant) may be subject to share options, shares of restricted shares, phantom shares and dividend equivalent rights under the amended and restated 2004 equity incentive plan. Any common shares withheld or surrendered by plan participants in connection with the payment of an option exercise price or in connection with tax withholding will not count towards the share limitation and will be available for issuance under the amended and restated 2004 equity incentive plan. If an option or other award granted under the amended and restated 2004 equity incentive plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards. Unless previously terminated by our Board of Trustees, no new award may be granted under the amended and restated 2004 equity incentive plan after the tenth anniversary of the date that such plan was initially approved by our Board of Trustees. No award may be granted under our amended and restated 2004 equity incentive plan to any person who, assuming exercise of all options and payment of all awards held by such person would own or be deemed to own more than 3.0% of our outstanding common shares. As of December 31, 2012, the number of common shares remaining or available for future issuance under the amended and restated 2004 equity incentive plan was 19,673,000.
Awards Under the Amended and Restated 2004 Equity Incentive Plan
Options
The terms of specific options, including whether options shall constitute “incentive stock options” for purposes of Section 422(b) of the Internal Revenue Code, shall be determined by our Compensation Committee. The exercise price of an option shall be determined by our Compensation Committee and reflected in the applicable award agreement. The exercise price with respect to incentive share options may not be lower than 100%, or 110% in the case of an incentive share option granted to a 10% shareholder, if permitted under the plan, of the fair market value of one of our common shares on the date of grant. Each option will be exercisable after the period or periods specified in the award agreement, which will generally not exceed ten years from the date of grant (or five years in the case of an incentive share option granted to a 10% shareholder, if permitted under the plan). Options will be exercisable at such times and subject to such terms as determined by our Compensation Committee.
Restricted Shares
A restricted share award is an award of common shares that is subject to restrictions on transferability and such other restrictions, if any, as our Board of Trustees or Compensation Committee may impose at the date of grant. Grants of restricted shares will be subject
54
to vesting schedules as determined by our Compensation Committee. The restrictions may lapse separately or in combination at such times, under such circumstances, including, without limitation, a specified period of employment or the satisfaction of pre-established criteria, in such installments or otherwise, as our Compensation Committee may determine. Except to the extent restricted under the award agreement relating to the restricted shares, a participant granted restricted shares has all of the rights of a shareholder, including, without limitation, the right to vote and the right to receive dividends on the restricted shares. Although dividends are paid on all restricted shares, whether or not vested, at the same rate and on the same date as our common shares, holders of restricted shares are prohibited from selling such shares until they vest.
Phantom Shares
Phantom shares will vest as provided in the applicable award agreement. A phantom share represents a right to receive the fair market value of a share of our common shares, or, if provided by our Compensation Committee, the right to receive the fair market value of a share of our common shares in excess of a base value established by our Compensation Committee at the time of grant. Phantom shares may generally be settled in cash or by transfer of common shares (as may be elected by the participant or our Compensation Committee, as may be provided by our Compensation Committee at grant). Our Compensation Committee may, in its discretion and under certain circumstances, permit a participant to receive as settlement of the phantom shares installments over a period not to exceed ten years. In addition, our Compensation Committee may establish a program under which distributions with respect to phantom shares may be deferred for additional periods as set forth in the preceding sentence.
Dividend Equivalents
A dividend equivalent is a right to receive (or have credited) the equivalent value of dividends declared on common shares otherwise subject to an award. Our Compensation Committee may provide that amounts payable with respect to dividend equivalents shall be converted into cash or additional common shares. Our Compensation Committee will establish all other limitations and conditions of awards of dividend equivalents as it deems appropriate.
Other Share-Based Awards
Our amended and restated 2004 equity incentive plan authorizes the granting of other awards based upon the common shares (including the grant of securities convertible into common shares and shares appreciation rights), and subject to terms and conditions established at the time of grant.
Adjustments in General; Certain Change in Control Provisions
In the event of certain corporate reorganizations or other events, our Compensation Committee generally may make certain adjustments in its discretion to the manner in which the amended and restated 2004 equity incentive plan operates (including, for example, to the number of shares available under the plan), and may otherwise take actions which, in its judgment, are necessary to preserve the rights of plan participants. Upon a change in control (as defined in the plan), our Compensation Committee generally may make such adjustments as it, in its discretion, determines are necessary or appropriate in light of the change in control, if our Compensation Committee determines that the adjustments do not have an adverse economic impact on the participants, and certain other special provisions may apply.
Amendment and Termination
Our Board of Trustees may generally amend the amended and restated 2004 equity incentive plan as it deems advisable, except in certain respects regarding outstanding awards. In addition, the amended and restated 2004 equity incentive plan may not be amended without shareholder approval if the absence of such approval would cause the amended and restated 2004 equity incentive plan to fail to comply with any applicable legal requirement or applicable exchange or similar rule.
Performance Bonus Plan
We have adopted an amended and restated 2004 performance bonus plan. Annual bonuses under our amended and restated 2004 performance bonus plan may be awarded by our Compensation Committee to selected officers or other employees of ours, or key employees, based on corporate factors or individual factors (or a combination of both). Subject to the provisions of the amended and restated 2004 performance bonus plan, the Compensation Committee (i) determines and designate those key employees to whom bonuses are to be granted; (ii) determines, consistently with the amended and restated 2004 performance bonus plan, the amount of the bonus to be granted to any key employee for any performance period; and (iii) determines, consistently with the amended and
55
restated 2004 performance bonus plan, the terms and conditions of each bonus. Bonuses may be so awarded by our Compensation Committee prior to the commencement of any performance period, during or after any performance period. No bonus shall exceed 200% of the key employee’s aggregate salary for the year. The Compensation Committee may provide for partial bonus payments at target and other levels. Corporate performance hurdles for bonuses may be adjusted by our Compensation Committee in its discretion to reflect (i) dilution from corporate acquisitions and share offerings and (ii) changes in applicable accounting rules and standards. Our Compensation Committee may determine that bonuses shall be paid in cash or shares or other equity-based grants, or a combination thereof. Our Compensation Committee may also provide that any such share grants be made under our amended and restated 2004 equity incentive plan or any other equity-based plan or program we may establish. Our Compensation Committee may provide for programs under which the payment of bonuses may be deferred at the election of the employee. To the extent that compensation under our amended and restated 2004 performance bonus plan is intended to qualify for certain transitional rules applicable for purposes of 162(m) of the Internal Revenue Code, it is possible that additional requirements will apply with respect to the establishment (including as to timing) of the performance goals.
As of December 31, 2012, no awards have been granted under our 2004 performance bonus plan.
On March 19, 2013, our Board of Trustees terminated our amended and restated 2004 performance bonus plan.
56
| ITEM | 6. SELECTED FINANCIAL DATA |
The following table sets forth our consolidated financial data on a historical basis for the periods ended December 31, 2012, 2011, 2010, 2009, and 2008.
Chambers Street Properties
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | | | | | |
Rental | | $ | 147,662 | | | $ | 121,459 | | | $ | 69,373 | | | $ | 47,023 | | | $ | 33,396 | |
Tenant Reimbursements | | | 33,864 | | | | 27,097 | | | | 14,166 | | | | 9,301 | | | | 6,753 | |
| | | | | | | | | | | | | | | | | | | | |
Total Revenue | | | 181,526 | | | | 148,556 | | | | 83,539 | | | | 56,324 | | | | 40,149 | |
| | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Operating and Maintenance | | | 19,079 | | | | 16,883 | | | | 8,618 | | | | 4,974 | | | | 3,248 | |
Property Taxes | | | 22,768 | | | | 17,840 | | | | 10,965 | | | | 7,624 | | | | 5,479 | |
Interest | | | 34,351 | | | | 33,735 | | | | 14,881 | | | | 11,378 | | | | 10,323 | |
General and Administrative Expense | | | 15,826 | | | | 6,171 | | | | 5,526 | | | | 4,246 | | | | 3,320 | |
Property Management Fee to Related Party | | | 1,557 | | | | 1,470 | | | | 948 | | | | 656 | | | | 491 | |
Investment Management Fee to Related Party | | | 29,695 | | | | 20,908 | | | | 11,595 | | | | 7,803 | | | | 3,964 | |
Acquisition Expenses | | | 7,752 | | | | 14,464 | | | | 17,531 | | | | 5,832 | | | | — | |
Depreciation and Amortization | | | 73,653 | | | | 61,415 | | | | 32,125 | | | | 25,093 | | | | 17,171 | |
Loss on Impairment | | | — | | | | — | | | | — | | | | 9,160 | | | | — | |
Transition Costs | | | 8,249 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Expenses | | | 212,930 | | | | 172,886 | | | | 102,189 | | | | 76,766 | | | | 43,996 | |
| | | | | | | | | | | | | | | | | | | | |
Other Income and Expenses | | | | | | | | | | | | | | | | | | | | |
Interest and Other Income | | | 2,629 | | | | 1,619 | | | | 1,260 | | | | 344 | | | | 2,039 | |
Net Settlement (Payments) Receipts on Interest Rate Swaps | | | (682 | ) | | | (700 | ) | | | (1,096 | ) | | | (660 | ) | | | 65 | |
Gain (Loss) on Interest Rate Swaps and Cap | | | 564 | | | | 397 | | | | 23 | | | | 89 | | | | (1,496 | ) |
(Loss) Gain on Note Payable at Fair Value | | | (111 | ) | | | (25 | ) | | | (118 | ) | | | (807 | ) | | | 1,168 | |
Loss on Early Extinguishment of Debt | | | (2,961 | ) | | | (108 | ) | | | (72 | ) | | | — | | | | — | |
Loss on Transfer of Real Estate Held for Sale to Continuing Operations | | | — | | | | — | | | | — | | | | — | | | | (3,451 | ) |
Loss on Swap Termination | | | (14,323 | ) | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Other Income and (Expenses) | | | (14,884 | ) | | | 1,183 | | | | (3 | ) | | | (1,034 | ) | | | (1,675 | ) |
| | | | | | | | | | | | | | | | | | | | |
Loss Before (Provision) Benefit for Income Taxes and Equity in Income (Loss) of Unconsolidated Entities | | | (46,288 | ) | | | (23,147 | ) | | | (18,653 | ) | | | (21,476 | ) | | | (5,522 | ) |
(Provision) Benefit for Income Taxes | | | (266 | ) | | | (456 | ) | | | (296 | ) | | | (169 | ) | | | 82 | |
Equity in Income (Loss) of Unconsolidated Entities | | | 3,959 | | | | 3,590 | | | | 8,838 | | | | 2,743 | | | | (1,242 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net Loss From Continuing Operations | | | (42,595 | ) | | | (20,013 | ) | | | (10,111 | ) | | | (18,902 | ) | | | (6,682 | ) |
Income (Loss) From Discontinued Operations | | | (413 | ) | | | 728 | | | | (507 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net Loss | | | (43,008 | ) | | | (19,285 | ) | | | (10,618 | ) | | | (18,902 | ) | | | (6,682 | ) |
Net Loss Attributable to Non-Controlling Operating Partnership Units | | | 32 | | | | 26 | | | | 18 | | | | 54 | | | | 26 | |
| | | | | | | | | | | | | | | | | | | | |
Net Loss Attributable to Chambers Street Properties | | $ | (42,976 | ) | | $ | (19,259 | ) | | $ | (10,600 | ) | | $ | (18,848 | ) | | $ | (6,656 | ) |
| | | | | | | | | | | | | | | | | | | | |
Per Share Data: | | | | | | | | | | | | | | | | | | | | |
Basic and Diluted Net Loss Per Share from Continuing Operations | | $ | (0.17 | ) | | $ | (0.10 | ) | | $ | (0.08 | ) | | $ | (0.23 | ) | | $ | (0.14 | ) |
Basic and Diluted Net Income (Loss) Per Share from Discontinued Operations | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Basic and Diluted Net Loss Per Share | | $ | (0.17 | ) | | $ | (0.10 | ) | | $ | (0.08 | ) | | $ | (0.23 | ) | | $ | (0.14 | ) |
| | | | | | | | | | | | | | | | | | | | |
Weighted Average Common Shares Outstanding—Basic and Diluted | | | 248,154,277 | | | | 192,042,918 | | | | 136,456,565 | | | | 81,367,593 | | | | 46,089,680 | |
Dividends Declared Per Share | | $ | 0.60 | | | $ | 0.60 | | | $ | 0.60 | | | $ | 0.60 | | | $ | 0.59 | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Investments in Real Estate, After Accumulated Depreciation and Amortization | | $ | 1,600,811 | | | $ | 1,414,726 | | | $ | 1,055,975 | | | $ | 639,573 | | | $ | 484,827 | |
Investments in Unconsolidated Entities | | | 515,829 | | | | 537,631 | | | | 410,062 | | | | 214,097 | | | | 131,703 | |
Real Estate and Other Assets Held for Sale | | | — | | | | — | | | | 22,056 | | | | — | | | | — | |
Total Assets | | | 2,554,862 | | | | 2,440,700 | | | | 1,716,720 | | | | 1,059,019 | | | | 709,920 | |
Notes Payable | | | 502,232 | | | | 638,921 | | | | 365,592 | | | | 212,425 | | | | 177,161 | |
Loan Payable | | | 265,000 | | | | 25,000 | | | | 60,000 | | | | — | | | | — | |
Liabilities Related to Real Estate and Other Assets Held for Sale | | | — | | | | — | | | | 441 | | | | — | | | | — | |
Total Liabilities | | | 894,039 | | | | 768,941 | | | | 491,954 | | | | 256,556 | | | | 220,249 | |
Non-Controlling Interest—Variable Interest Entity | | | 826 | | | | 686 | | | | — | | | | — | | | | — | |
Class B Interest | | | 200 | | | | — | | | | — | | | | — | | | | — | |
Non-Controlling Interest—Operating Partnership Units | | | 2,464 | | | | 2,464 | | | | 2,464 | | | | 2,464 | | | | 2,464 | |
Shareholders’ Equity | | | 1,657,333 | | | | 1,668,609 | | | | 1,222,302 | | | | 799,999 | | | | 487,207 | |
Total Liabilities and Equity | | | 2,554,862 | | | | 2,440,700 | | | | 1,716,720 | | | | 1,059,019 | | | | 709,920 | |
57
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Explanatory Note
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements, the notes thereto, and the other financial data included elsewhere in this Form 10-K.
Cautionary Note Regarding Forward-Looking Statements
This document contains various “forward-looking statements.” You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “would,” “could,” “should,” “seeks,” “approximately,” “intends,” “plans,” “projects,” “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. Statements regarding the following subjects may be impacted by a number of risks and uncertainties:
| | ¡ | | our ability to obtain future financing arrangements; |
| | ¡ | | estimates relating to our future distributions; |
| | ¡ | | our understanding of our competition; |
| | ¡ | | projected capital expenditures; |
| | ¡ | | the impact of technology on our products, operations and business; and |
| | ¡ | | the use of the proceeds of our dividend reinvestment plan offering and subsequent offerings. |
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common shares, along with the following factors that could cause actual results to vary from our forward-looking statements:
| | ¡ | | national, regional and local economic climates; |
| | ¡ | | changes in supply and demand for office and industrial properties; |
| | ¡ | | adverse changes in the real estate markets, including increasing vacancy, decreasing rental revenue and increasing insurance costs; |
| | ¡ | | availability and credit worthiness of prospective tenants; |
| | ¡ | | our ability to maintain rental rates and maximize occupancy; |
| | ¡ | | our ability to identify and secure acquisitions; |
| | ¡ | | our failure to successfully manage growth or operate acquired properties; |
| | ¡ | | our pace of acquisitions and/or dispositions of properties; |
| | ¡ | | risks related to development projects (including construction delay, cost overruns or our inability to obtain necessary permits); |
| | ¡ | | payment of distributions from sources other than cash flows and operating activities; |
| | ¡ | | receiving corporate debt ratings and changes in the general interest rate environment; |
| | ¡ | | availability of capital (debt and equity); |
| | ¡ | | our ability to refinance existing indebtedness or incur additional indebtedness; |
| | ¡ | | failure to comply with our debt covenants; |
| | ¡ | | unanticipated increases in financing and other costs, including a rise in interest rates; |
| | ¡ | | the actual outcome of the resolution of any conflict; |
58
| | ¡ | | material adverse actions or omissions by any of our joint venture partners; |
| | ¡ | | our ability to operate as a self-managed company; |
| | ¡ | | availability of and ability to retain our executive officers and other qualified personnel; |
| | ¡ | | future terrorist attacks in the United States or abroad; |
| | ¡ | | the ability of CSP OP to qualify as a partnership for U.S. federal income tax purposes; |
| | ¡ | | foreign currency fluctuations; |
| | ¡ | | changes to accounting principles and policies and guidelines applicable to REITs; |
| | ¡ | | legislative or regulatory changes adversely affecting REITs and the real estate business; |
| | ¡ | | environmental, regulatory and/or safety requirements; and |
| | ¡ | | other factors discussed under Item 1A Risk Factors of this Annual Report on Form 10-K for the year ended December 31, 2012 and those factors that may be contained in any filing we make with the SEC, including Part II, Item 1A of Form 10-Qs. |
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise. For a further discussion of these and other factors that could impact our future results, performance or transactions, see Item 1A. “Risk Factors.”
Overview
Chambers Street Properties is a self-managed Maryland REIT that was formed on March 30, 2004. Our management team manages our day-to-day operations and oversees and supervises our employees and outside service providers. Acquisitions and asset management services are performed principally by us, with certain services provided by third parties. Prior to July 1, 2012, all of the business activities of the Company were managed by CBRE Advisors LLC (the “former investment advisor”) pursuant to the fourth amended and restated advisory agreement (the “Fourth Amended Advisory Agreement”), which terminated according to its terms on June 30, 2012. In addition, effective July 1, 2012, the Company entered into a transitional services agreement with CSP OP and the former investment advisor pursuant to which the former investment advisor would provide certain operational and consulting services to the Company at the direction of our officers and other personnel for a term ending not later than April 30, 2013 which is described further below.
We invest in real estate properties, focusing primarily on office and industrial (primarily warehouse/distribution/logistics) properties, as well as other real estate-related assets. We primarily target single-tenant office and industrial assets, in well-located and growing markets that are critical to the tenant’s business. A majority of these properties are subject to triple net or similar leases, where the tenant bears all or substantially all of the costs, including cost increases, for real estate taxes, utilities, insurance and ordinary repairs. We may also utilize our expertise and resources to capitalize on unique opportunities that may exist elsewhere in the marketplace. We intend to invest primarily in properties located in geographically-diverse metropolitan areas in the United States. In addition, we currently seek to invest up to 30% of our total assets in properties outside of the United States. We expect that our international investments will focus on properties typically located in significant business districts and suburban markets. Some of our domestic and international investments may be in partnership with other entities that have significant local-market expertise.
As of December 31, 2012, we owned, on a consolidated basis, 82 office, industrial (primarily warehouse/distribution/logistics) and retail properties located in 18 states (Arizona, California, Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, Maryland, Massachusetts, Minnesota, New Jersey, North Carolina, Pennsylvania, South Carolina, Texas, Utah and Virginia) and in the United Kingdom, encompassing approximately 18,995,000 rentable square feet. Our consolidated properties were approximately 97.00% leased (based upon square feet) as of December 31, 2012. As of December 31, 2012, 62 of our consolidated properties were triple net leased to single tenants, which represented approximately 15,509,000 rentable square feet. As of December 31, 2012, certain of our consolidated properties were subject to mortgage debt, a description of which is set forth in “Financial Condition, Liquidity and Capital Resources—Financing.”
In addition, we had ownership interests in five unconsolidated entities that, as of December 31, 2012, owned interests in 54 properties. Excluding those properties owned through our investment in CBRE Strategic Partners Asia, we owned, on an unconsolidated basis, 47 office, industrial (primarily warehouse/distribution/logistics) and retail properties located in ten states (Arizona, Florida, Illinois, Indiana, Minnesota, Missouri, North Carolina, Ohio, Tennessee and Texas) and in the United Kingdom and Europe encompassing approximately 15,067,000 rentable square feet. Our unconsolidated properties were approximately 98.80% leased (based upon square feet) as of December 31, 2012. As of December 31, 2012, 28 of our unconsolidated properties were triple net leased to single
59
tenants, which represented approximately 12,265,000 rentable square feet. As of December 31, 2012, certain of our unconsolidated properties were subject to mortgage debt, a description of which is set forth in “-Financial Condition, Liquidity and Capital Resources—Financing.” For a discussion of and detailed disclosure regarding our portfolio, see “Item 2. Properties.”
As of December 31, 2012, our portfolio was 97.80% leased, and the total effective annual rents for our office properties, industrial properties and retail properties were approximately $158,710,000, $86,645,000 and $8,608,000, respectively (net of any rent concessions). The average effective annual rent per square foot for our office properties, industrial (primarily warehouse/distribution/logistics) properties and retail properties was approximately $19.39, $3.87 and $18.09, respectively (net of any rent concessions). The average effective annual rent per square foot for our triple net lease office and industrial properties was approximately $18.17 and $3.98 as of December 31, 2012, respectively (net of any rent concessions). As of December 31, 2011, our portfolio was 97.90% leased, and the total effective annual rents for our office properties, industrial properties and retail properties were approximately $161,086,000, $76,084,000 and $8,691,000 as of December 31, 2011, respectively (net of any rent concessions). The average effective annual rent per square foot for our office properties, industrial properties and retail properties was approximately $19.00, $3.94 and $17.49 as of December 31, 2011, respectively (net of any rent concessions). The average effective annual rent per square foot for our triple net lease office and industrial properties was approximately $17.29 and $4.05 as of December 31, 2011, respectively (net of any rent concessions).
Our business objective is to maximize shareholder value through: (1) maintaining an experienced management team of investment professionals; (2) investing in properties in certain markets where property fundamentals will support stable income returns and where capital appreciation is expected to be above average; (3) acquiring properties at a discount to replacement cost and where there is expected positive rent growth; and (4) repositioning our properties where the potential exists to increase their value in the market place. Operating results at our individual properties are impacted by the supply and demand for office, industrial, and retail space, trends of national and regional economies, the financial health of current and prospective tenants and their customers, capital and credit market trends, construction costs, and interest rate movements. Individual operating property performance is monitored and calculated using certain non-GAAP financial measures such as an analysis of net operating income. An analysis of net operating income as compared to local regional and national statistics may provide insight into short or longer term trends exclusive of capital markets or capital structuring issues. Interest rates are a critical factor in our results of operations. Our properties may be financed with significant amounts of debt, so changes in interest rates may affect both net income and the health of capital markets. For investments outside of the United States, in addition to monitoring local property market fundamentals and capital and credit market trends, we evaluate currency hedging strategies, taxes, the stability of the local government and economy and the experience of our management team in the region.
We were formed on March 30, 2004 and commenced operations in July 2004, following an initial private placement of our common shares of beneficial interest. Since that time, we have raised equity capital to finance our real estate investment activities through two public offerings of our common shares of beneficial interest. Our public offerings raised an aggregate of $2,388,227,000 in gross offering proceeds, excluding proceeds associated with common shares issued under our amended and restated dividend reinvestment plan. Our common shares of beneficial interest are not currently listed on a national securities exchange. We were initially formed as CB Richard Ellis Realty Trust and on July 1, 2012, we changed our name to Chambers Street Properties. All of our real estate investments are held directly by, or indirectly through wholly owned subsidiaries of CSP Operating Partnership, LP (“CSP OP”) which we are the sole general partner. We have elected to be taxed as a REIT for U.S. federal income tax purposes. As a REIT, we generally will not be subject to U.S. federal income tax on that portion of our income that is distributed to our shareholders if at least 90% of our net taxable income is distributed to our shareholders.
In 2010, our Board of Trustees established a Special Committee of the Board (the “Special Committee”) consisting of the Board’s independent trustees to explore and review our strategic alternatives and liquidity events in accordance with our investment objectives. The Special Committee engaged Robert A. Stanger & Co., Inc. as its financial advisor, to assist with its exploration and review of our strategic alternatives and liquidity events in accordance with our investment objectives (as discussed above). During 2011, with the assistance of its financial advisor and in consultation with the former investment advisor and our Board of Trustees, the Special Committee discussed and considered various strategic alternatives, including potentially continuing as a going concern under our current business plan, a potential liquidation of our assets either through a sale or merger of our company (including through either a bulk sale of our portfolio or through a sale of our individual properties) as well as a potential listing of our shares on a national securities exchange. In December 2011, after consideration of the recent general economic and capital market conditions, market conditions for listed REITs, credit market conditions, our operational performance, the status of our portfolio, our then current offering and our current and anticipated deployment of available capital to investments, the Special Committee and our Board of Trustees determined it was in the best interests of our shareholders for our shares to remain unlisted and to continue operations rather than commencing a liquidation of our assets. The Special Committee and our Board of Trustees believed that remaining unlisted and
60
continuing our operations would provide us with the ability to purchase additional properties in order to continue to expand and diversify our portfolio and thus potentially better position us for a liquidity event. Our Board of Trustees, in consultation with our financial advisors, continues to monitor market conditions and explore strategic alternatives and liquidity options which may include the listing of our shares on a national securities exchange.
Transition to Self-Management
In March 2012, the Special Committee determined that our company and its shareholders would benefit from an internal management structure in that such a structure could provide cost savings, improved distribution coverage, flexibility to pursue a variety of strategic initiatives, the ability to take advantage of opportunities created by changing market conditions and an opportunity to enhance the trading values of our common shares to the extent that we pursue and complete a listing of our common shares on a national securities exchange, the NASDAQ Global Select Market or the NASDAQ Global Market. Our Board of Trustees, based on the recommendation of the Special Committee, authorized the Special Committee to commence a process to achieve internal management.
On April 27, 2012, we entered into a transition to self-management agreement (the “Transition to Self-Management Agreement”) with CSP OP, CBRE Global Investors, and the former investment advisor, which sets forth certain tasks to be performed by each of the parties to the agreement in order to facilitate our self-management, including but not limited to our hiring of the 19 identified employees of the former investment advisor and/or its affiliates who were dedicated to our operations. The tasks set forth in the Transition to Self-Management Agreement have been fulfilled.
Additionally, on June 29, 2012, effective June 30, 2012, we undertook several management and board changes as follows: (i) appointed Louis P. Salvatore to serve as an independent trustee, the Chairman of the Audit Committee of the Board of Trustees and as a member of each of the Compensation and Nominating and Corporate Governance Committees of the Board of Trustees, to fill the vacancy left by Peter E. DiCorpo, who stepped down as a trustee in connection with the termination of the Fourth Amended Advisory Agreement, (ii) appointed Jack A. Cuneo to serve as our President and Chief Executive Officer, (iii) appointed Philip L. Kianka to serve as our Executive Vice President and Chief Operating Officer and (iv) appointed Martin A. Reid to serve as our Executive Vice President and Chief Financial Officer. In connection with Mr. Reid’s appointment as Chief Financial Officer, Laurie E. Romanak stepped down as our Chief Financial Officer and Mr. Reid stepped down as the Chairman and as a member of the Audit Committee of the Board of Trustees and as a member of each of the Compensation Committee and the Conflicts Committee of the Board of Trustees. In addition, on June 19, 2012, our Board of Trustees appointed Charles E. Black to serve as the Chairman of the Board of Trustees in accordance with a provision in our bylaws that requires the chairman be an independent member.
On June 30, 2012, the Fourth Amended Advisory Agreement terminated according to its terms and, effective July 1, 2012, we entered into a transitional services agreement (the “Transitional Services Agreement”) with CSP OP and the former investment advisor pursuant to which the former investment advisor will provide certain operational and consulting related services to us at the direction of our officers and other personnel for a term ending April 30, 2013.
For consulting services provided to us in connection with the investment management of our assets, the former investment advisor shall be paid an investment management consulting fee payable in cash consisting of (i) a monthly fee equal to one-twelfth of 0.5% of the aggregate cost (before non-cash reserves and depreciation) of all real estate investments within our portfolio and (ii) a monthly fee equal to 5.0% of the aggregate monthly net operating income derived from all real estate investments within our portfolio, subject to certain adjustments. For consulting services provided to us in connection with the acquisition of assets, the former investment advisor or its affiliates shall be paid acquisition fees up to 1.5% of (i) the contract purchase price of real estate investments acquired by us, or (ii) when we make an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity. The total of all acquisition consulting fees payable with respect to real estate investments shall not exceed an amount equal to 6% of the contract purchase price (or 6% of funds advanced with respect to mortgages) provided, however, that a majority of the uninterested members of the Board of Trustees may approve amounts in excess of this limit.
Upon the termination date of the Transitional Services Agreement, we and the former investment advisor shall agree on a list of unacquired real estate investments for which the former investment advisor has performed certain acquisition related consulting services (a “Qualifying Property”). If any Qualifying Property is acquired by us within the nine months following the termination of the Transitional Services Agreement then we shall pay an acquisition consulting fee equal to 0.75% of (i) the contract purchase price of the real estate investments (including debt), or (ii) when we make an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity to the former investment advisor. Real estate investments for which there is a dispute as to whether it is a Qualifying Property that are acquired within the nine months following the termination of the Transitional Services Agreement will be submitted to arbitration.
61
For consulting services provided to us in connection with property management, leasing or construction services, to the extent such services are used, the former investment advisor shall be paid based upon the customary property management, leasing and construction supervision fees applicable to the geographic location and type of property. Such fees for each service provided are expected to range from 2.0% to 5.0% of gross revenues received from a property that we own. We shall pay the former investment advisor a real estate commission fee upon the sale of properties in an amount equal to the lesser of (i) one-half of the competitive real estate commission or (ii) 3% of the sales price of each property sold. The total brokerage commission paid may not exceed the lesser of the competitive real estate commission or an amount equal to 6% of the sales price of the property.
To the extent that the Company assumes or incurs prior to the termination of the Transition Services Agreement a cost that was previously borne by the former investment advisor during the term of the Transition Services Agreement or its predecessor agreement, then amounts otherwise owed under the Transition Services Agreement shall be correspondingly reduced on a monthly basis; provided that (i) any Assumed Costs resulting from hiring of any targeted personnel shall reduce the amounts payable by the Company under this agreement for such month only to the extent of their base salary and benefits (as in effect immediately prior to their hiring by the Company) and any related other direct employer costs (but excluding any bonus amounts) earned or incurred during the month.
We will reimburse the former investment advisor for certain expenses paid or incurred in connection with services provided under the Transitional Services Agreement. In addition, the former investment advisor will only be entitled to reimbursement for third party expenses incurred in connection with services provided pursuant to the Transitional Services Agreement that we have approved in writing. Our sole obligation to reimburse the former investment advisor for expenses incurred related to personnel costs was to make an aggregate payment equal to $2,500,000 on the effective date of the agreement.
Market Trends
In early 2010, the commercial real estate market experienced gradual indications of market stabilization and improved access to debt financing on attractive terms began to reappear. During 2010 and into 2011, we also noted the initial signs of added competition for commercial real estate investments, particularly for high-quality stabilized properties leased to credit worthy tenants on a long-term basis, and we additionally experienced a willingness of our tenants to commit to extended lease maturities, and in some instances expand existing facilities.
As economic activity progressed in 2011 and during 2012, a slower pace of recovery in the general economy continued with a gradual improvement in certain key metrics such as exports and corporate profits. In the current environment, capital availability continues to remain concentrated on the highest quality, well-leased and strategically positioned properties that provide lower risk and stable investment return potential, and for well sponsored real estate investment programs with experienced management teams.
Construction and development of new properties has shown signs of improvement, primarily with regard to new, single-tenant, built-to-suit opportunities leased on a long-term basis. As a well-capitalized core investor with modest levels of leverage, we expect to continue to have access to attractive investment opportunities in the U.S. markets. We also anticipate there will be enhanced opportunities to acquire high-quality properties in strong European markets. Moreover, we were able to execute on our investment objectives during 2011 and 2012 in the same disciplined and selective manner we have employed since our inception.
We believe we are well positioned with a relative advantage due to our modest leverage, modest near-term capital needs and strong liquidity position. All of our management decisions are done with the same goals in mind; growing our portfolio for steady income, sustaining our tenant relationships and enhancing the value of our portfolio.
Critical Accounting Policies
Management believes our most critical accounting policies are accounting for lease revenues (including straight-line rent), regular evaluation of whether the value of a real estate asset has been impaired, real estate purchase price allocations and accounting for our derivatives and hedging activities and fair value of financial instruments and investment, if any. Each of these items involves estimates that require management to make judgments that are subjective in nature. Management relies on its experience, collects historical data and current market data, and analyzes these assumptions in order to arrive at what it believes to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the accounting policies described below. In addition, application of these accounting policies involves the exercise of judgments on the use of assumptions as to future uncertainties and, as a result, actual results could materially differ from these estimates.
62
Revenue Recognition and Valuation of Receivables
All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is recorded as deferred rent. In connection with various leases, we have received irrevocable stand-by letters of credit totaling $17,760,000 and $16,714,000 as security for such leases at December 31, 2012 and 2011.
Reimbursements from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes, insurance and other recoverable costs, are recognized as revenue in the period the expenses are incurred. Tenant reimbursements are recognized and presented on a gross basis, when we are the primary obligor with respect to incurring expenses and with respect to having the credit risk.
Tenant receivables and deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and deferred rent. Management’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, individual receivables, current economic conditions, and other relevant factors. The allowances are increased or decreased through the provision for bad debts. The allowance for uncollectible rent receivable was $11,000 and $821,000 as of December 31, 2012 and December 31, 2011, respectively. During the year ended December 31, 2012, we wrote off $378,000 of uncollectable receivables for the tenants Robert Spooner Gallerie at 505 Century, 2 AM Group, Inc., at Highway 290 Commerce Park Building 1 and East Coast Absorbants at Orchard Business Park 2. We did not write off any uncollectible rent receivables in 2011. During the year ended December 31, 2010, we wrote off $310,000 of the uncollectible rent receivables for the tenants Randal C. Espey at the Deerfield Commons I property, Cell Arch Technologies, Inc. and Keogh Consulting, Inc. at the Lakeside Office Center, Romeo Rim, Inc. at the Cherokee Corporate Park, and Amax Engineering Corporation at the 660 North Dorothy.
Investments in Real Estate and Related Long-Lived Assets (Impairment Evaluation)
We record investments in real estate at cost (including third-party acquisition expenses) and we capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of repairs and maintenance as incurred. We compute depreciation using the straight-line method over the estimated useful lives of our real estate assets, which we expect to be approximately 39 years for buildings and improvements, three to five years for equipment and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
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 these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis throughout the expected useful lives of the related assets.
We have adopted,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“FASB ASC 360-10”), which establishes a single accounting model for the impairment or disposal of long-lived assets including discontinued operations. This accounting provision requires that the operations related to properties that have been sold or that we intend to sell be presented as discontinued operations in the statement of operations for all periods presented, and properties we intend to sell be designated as “held for sale” on our balance sheet.
When circumstances such as adverse market conditions indicate a possible impairment of the value of a property, we review the recoverability of the property’s carrying value. The review of recoverability is based on our estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. Our forecast of these cash flows considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. These factors contain subjectivity and thus are not able to be precisely estimated. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate.
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 estimated fair value of the assets. The estimated fair value of the asset group identified for step two
63
testing is based on either the income approach with market discount rate, terminal capitalization rate and rental rate assumptions being most critical, or on the sales comparison approach to similar properties. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
Purchase Accounting for Acquisition of Investments in Real Estate
We apply the acquisition method to all acquired real estate investments. The purchase consideration of the real estate is allocated to the acquired tangible assets, consisting primarily of land, site improvements, building and tenant improvements and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases, value of tenant relationships and acquired ground leases, based in each case on their fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market loans, will be 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 is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land (or acquired ground lease if the land is subject to a ground lease), site improvements, building and tenant 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 similar 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 similar leases including leasing commissions, legal and other related costs.
In allocating the purchase consideration 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 and, for below-market leases, over a period equal to the initial term plus any below-market fixed rate renewal periods. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental income over the initial terms of the respective leases and any below-market fixed rate renewal periods. The capitalized above-market lease values are amortized as a decrease to rental income over the initial terms of the prospective leases.
The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the estimated cost of operations during a theoretical lease-up period to replace in-place leases, including lost revenues and any unreimbursed operating expenses, plus an estimate of deferred leasing commissions for in-place leases. This aggregate value is allocated between in-place lease value 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 real estate acquired as 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 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.
Accounting for Derivative Financial Investments and Hedging Activities
All of our derivative instruments are carried at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Calculation of a fair value of derivative instruments also requires management to use estimates. Amounts will be reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings.
Derivative instruments designated in a hedge relationship to mitigate 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. The changes in fair value hedges are accounted for by recording the fair value of the derivative instruments on the balance sheet as either assets or liabilities,
64
with the corresponding amount recorded in current period earnings. We have certain interest rate swap derivatives that are designated as qualifying cash flow hedges and follow the accounting treatment discussed above. We also have certain interest rate swap derivatives that do not qualify for hedge accounting, and accordingly, changes in fair values are recognized in current earnings.
We disclose the fair values of derivative instruments and their gains and losses in a tabular format. We also provide more information about our liquidity by disclosing derivative features that are credit risk-related. Finally, we cross-reference within footnotes to enable financial statement users to locate important information about derivative instruments; see Note 15 “Derivative Instruments” and Note 17 “Fair Value of Financial Instruments and Investments” for a further discussion of our derivative financial instruments.
Fair Value of Financial Instruments and Investments
We elected to apply the fair value option for one of our eligible mortgage notes payable that was newly issued debt during the year ended December 31, 2008. The measurement of the elected mortgage note payable at its fair value and its impact on the statement of operations is described in Note 16 to the consolidated financial statements “Fair Value Option—Note Payable” and Note 17 to the consolidated financial statements “Fair Value of Financial Instruments and Investments.”
We generally determine or calculate the fair value of financial instruments using the appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow. The Investment Manager of CBRE Strategic Partners Asia applies valuation techniques for our investment carried at fair value based upon the application of the income approach, the direct market comparison approach, the replacement cost approach or third party appraisals to the underlying assets held in the unconsolidated entity in determining the net asset value attributable to our ownership interest therein. The financial assets and liabilities recorded at fair value in our consolidated financial statements are the seven interest rate swaps, our investment in CBRE Strategic Partners Asia (a real estate entity which qualifies as an investment company under the Investment Company Act with respect to its accounting treatment) and one mortgage note payable that is economically hedged by one of the interest rate swaps.
The remaining financial assets and liabilities which are only disclosed at fair value are comprised of all other notes payable, the unsecured line of credit and other debt instruments. We determined the fair value of our secured notes payable and other debt instruments by performing discounted cash flow analyses using an appropriate market discount rate. We calculate the market discount rate by obtaining period-end treasury rates for fixed-rate debt, or London Inter-Bank Offering Rate (“LIBOR”) rates for variable-rate debt, for maturities that correspond to the maturities of our debt and then adding an appropriate credit spread derived from information obtained from third-party financial institutions. These credit spreads take into account factors such as our credit standing, the maturity of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.
The carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term maturities.
We adopted the fair value measurement criteria described herein for our non-financial assets and non-financial liabilities on January 1, 2009. The adoption of the fair value measurement criteria to our non-financial assets and liabilities did not have a material impact on our consolidated financial statements. Assets and liabilities typically recorded at fair value on a non-recurring basis include:
| | ¡ | | Non-financial assets and liabilities initially measured at fair value in an acquisition or business combination; |
| | ¡ | | Long-lived assets measured at fair value due to an impairment assessment and |
| | ¡ | | Asset retirement obligations initially measured under the Codification Topic“Asset Retirement and Environmental Obligations” (“FASB ASC 410”). |
65
Rental Operations
Our reportable segments consist of three types of commercial real estate properties for which our management internally evaluates operating performance and financial results: the Domestic Industrial Properties, Domestic Office Properties and International Office/Retail Properties. We evaluate the performance of our segments based on net operating income, defined as: rental income and tenant reimbursements less property and related expenses (operating and maintenance, management fees and real estate taxes) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and our company-level general and administrative expenses. The following tables compare the net operating income for the years ended December 31, 2012, 2011 and 2010 (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Domestic Industrial Properties | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | |
Rental | | $ | 43,296 | | | $ | 31,102 | | | $ | 23,903 | |
Tenant Reimbursements | | | 9,239 | | | | 6,760 | | | | 5,481 | |
| | | | | | | | | | | | |
Total Revenues | | | 52,535 | | | | 37,862 | | | | 29,384 | |
| | | | | | | | | | | | |
Property and Related Expenses: | | | | | | | | | | | | |
Operating and Maintenance | | | 2,456 | | | | 1,934 | | | | 1,546 | |
General and Administrative | | | 583 | | | | 604 | | | | 257 | |
Property Management Fee to Related Party | | | 316 | | | | 268 | | | | 289 | |
Property Taxes | | | 7,753 | | | | 6,292 | | | | 5,735 | |
| | | | | | | | | | | | |
Total Expenses | | | 11,108 | | | | 9,098 | | | | 7,827 | |
| | | | | | | | | | | | |
Net Operating Income | | | 41,427 | | | | 28,764 | | | | 21,557 | |
| | | | | | | | | | | | |
Domestic Office Properties | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | |
Rental | | | 97,164 | | | | 83,897 | | | | 38,792 | |
Tenant Reimbursements | | | 24,314 | | | | 20,058 | | | | 8,294 | |
| | | | | | | | | | | | |
Total Revenues | | | 121,478 | | | | 103,955 | | | | 47,086 | |
| | | | | | | | | | | | |
Property and Related Expenses: | | | | | | | | | | | | |
Operating and Maintenance | | | 16,272 | | | | 14,301 | | | | 6,142 | |
General and Administrative | | | 324 | | | | 201 | | | | 433 | |
Property Management Fee to Related Party | | | 932 | | | | 746 | | | | 370 | |
Property Taxes | | | 15,015 | | | | 11,548 | | | | 5,230 | |
| | | | | | | | | | | | |
Total Expenses | | | 32,543 | | | | 26,796 | | | | 12,175 | |
| | | | | | | | | | | | |
Net Operating Income | | | 88,935 | | | | 77,159 | | | | 34,911 | |
| | | | | | | | | | | | |
International Office/Retail Properties | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | |
Rental | | | 7,202 | | | | 6,460 | | | | 6,678 | |
Tenant Reimbursements | | | 311 | | | | 279 | | | | 391 | |
| | | | | | | | | | | | |
Total Revenues | | | 7,513 | | | | 6,739 | | | | 7,069 | |
| | | | | | | | | | | | |
Property and Related Expenses: | | | | | | | | | | | | |
Operating and Maintenance | | | 351 | | | | 648 | | | | 930 | |
General and Administrative | | | 259 | | | | 234 | | | | 213 | |
Property Management Fee to Related Party | | | 309 | | | | 456 | | | | 289 | |
| | | | | | | | | | | | |
Total Expenses | | | 919 | | | | 1,338 | | | | 1,432 | |
| | | | | | | | | | | | |
Net Operating Income | | | 6,594 | | | | 5,401 | | | | 5,637 | |
| | | | | | | | | | | | |
Reconciliation to Consolidated Net Loss | | | | | | | | |
Total Segment Net Operating Income | | | 136,956 | | | | 111,324 | | | | 62,105 | |
Interest Expense | | | 34,351 | | | | 33,735 | | | | 14,881 | |
General and Administrative | | | 14,660 | | | | 5,132 | | | | 4,623 | |
Investment Management Fee to Related Party | | | 29,695 | | | | 20,908 | | | | 11,595 | |
Acquisition Expenses | | | 7,752 | | | | 14,464 | | | | 17,531 | |
Depreciation and Amortization | | | 73,653 | | | | 61,415 | | | | 32,125 | |
Transition Costs | | | 8,249 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | |
| | | (31,404 | ) | | | (24,330 | ) | | | (18,650 | ) |
| | | | | | | | | | | | |
66
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Other Income and Expenses | | | | | | | | | | | | |
Interest and Other Income | | | 2,629 | | | | 1,619 | | | | 1,260 | |
Net Settlement Payments on Interest Rate Swaps | | | (682 | ) | | | (700 | ) | | | (1,096 | ) |
Gain on Interest Rate Swaps and Cap | | | 564 | | | | 397 | | | | 23 | |
Loss on Note Payable at Fair Value | | | (111 | ) | | | (25 | ) | | | (118 | ) |
Loss on Early Extinguishment of Debt | | | (2,961 | ) | | | (108 | ) | | | (72 | ) |
Loss on Swap Termination | | | (14,323 | ) | | | 0 | | | | 0 | |
| | | | | | | | | | | | |
Loss Before Provision for Income Taxes and Equity in Income of Unconsolidated Entities | | | (46,288 | ) | | | (23,147 | ) | | | (18,653 | ) |
Provision for Income Taxes | | | (266 | ) | | | (456 | ) | | | (296 | ) |
Equity in Income of Unconsolidated Entities | | | 3,959 | | | | 3,590 | | | | 8,838 | |
| | | | | | | | | | | | |
Net Loss From Continuing Operations | | | (42,595 | ) | | | (20,013 | ) | | | (10,111 | ) |
Income (Loss) from Discontinued Operations | | | 0 | | | | 427 | | | | (507 | ) |
Realized (Loss) Gain from Sale | | | (413 | ) | | | 301 | | | | 0 | |
| | | | | | | | | | | | |
Income (Loss) from Discontinued Operations | | | (413 | ) | | | 728 | | | | (507 | ) |
| | | | | | | | | | | | |
Net Loss | | | (43,008 | ) | | | (19,285 | ) | | | (10,618 | ) |
| | | | | | | | | | | | |
Net Loss Attributable to Non-Controlling Operating Partnership Units | | | 32 | | | | 26 | | | | 18 | |
| | | | | | | | | | | | |
Net Loss Attributable to Chambers Street Properties Shareholders | | $ | (42,976 | ) | | $ | (19,259 | ) | | $ | (10,600 | ) |
| | | | | | | | | | | | |
| (1) | Total Segment Net Operating Income is a Non-GAAP financial measure which may be useful as a supplemental measure for evaluating the relationship of each reporting segment to the combined total. This measure should not be viewed as an alternative measure of operating performance to our U.S. GAAP presentations provided. Segment “Net Operating Income” is defined as operating revenues (rental income, tenant reimbursements and other property income) less property and related expenses (property expenses, including real estate taxes) before depreciation and amortization expense. The Net Operating Income segment information presented consists of the same Net Operating Income segment information disclosed in Note 10 to our consolidated financial statements in this Annual Report on Form 10-K. |
67
Consolidated Results of Operations
Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011
Revenues
Rental
Rental revenue increased $26,203,000, or 22%, to $147,662,000 during the year ended December 31, 2012 compared to $121,459,000 for the year ended December 31, 2011. The increase was primarily due to the acquisitions of 70 Hudson Street, 90 Hudson Street, Millers Ferry Road, Sky Harbor Operations Center, Aurora Commerce Center, and Sabal Pavilion (the “2011 Acquisitions”) during the year ended December 31, 2011 and the acquisitions of 2400 Dralle Road, Midwest Commerce Center I, 20000 S Diamond Lake Rd., Gateway at Riverside, 701 & 801 Charles Ewing Blvd. and Mid-Atlantic Distribution Center—Bldg. A (the “2012 Acquisitions”, together with the “2011 Acquisitions”, the “2011 and 2012 Acquisitions”) during the year ended December 31, 2012.
Tenant Reimbursements
Tenant reimbursements increased $6,767,000, or 25%, to $33,864,000 for the year ended December 31, 2012 compared to $27,097,000 for the year ended December 31, 2011, primarily due to tenant reimbursement revenue from the 2011 and 2012 Acquisitions.
Expenses
Operating and Maintenance
Property operating and maintenance expenses increased $2,196,000, or 13%, to $19,079,000 for the year ended December 31, 2012 compared to $16,883,000 for the year ended December 31, 2011. The increase was primarily due to operating and maintenance expenses attributable to the 2011 and 2012 Acquisitions.
Property Taxes
Property tax expense increased $4,928,000, or 28%, to $22,768,000 for the year ended December 31, 2012 compared to $17,840,000 for the year ended December 31, 2011. The increase in property taxes was primarily due to the 2011 and 2012 Acquisitions.
Interest
Interest expense increased $616,000, or 2%, to $34,351,000 for the year ended December 31, 2012 compared to $33,735,000 for the year ended December 31, 2011 primarily as a result of assumption of debt related to the 2011 acquisitions of 70 Hudson Street, 90 Hudson Street and Sabal Pavilion, the placement of debt on Kings Mountain III and unsecured credit facility interest.
General and Administrative
General and administrative expense increased $9,655,000, or 156%, to $15,826,000 for the year ended December 31, 2012 compared to $6,171,000 for the year ended December 31, 2011. Of the total increase, $5,885,000 was due to salary and other expenses incurred as a result of internalization of management on July 1, 2012; $1,882,000 was due to the increase in professional fees; $952,000 was due to the increase in shareholders servicing fees and report production costs; $528,000 was due to the increase in legal expenses; $262,000 was due to the increase in directors’ and officers’ insurance and expenses; $115,000 was due to the increase in general audit fees and Sarbanes-Oxley assistance; $264,000 was due to an increase in share based compensation to certain senior members of management in 2012 offset by a reduction in organizational costs of $233,000.
Property Management Fee and Investment Management Fee to Related Party
Property management fee and investment management fee to related party increased $8,874,000, or 40%, to $31,252,000 for the year ended December 31, 2012 compared to $22,378,000 for the year ended December 31, 2011. The increase resulted from the year to year growth in assets under management and amounts due under the Transitional Services Agreement.
68
Acquisition Expenses
Acquisition expenses decreased $6,712,000, or 46%, to $7,752,000 for the year ended December 31, 2012 compared to $14,464,000 for the year ended December 31, 2011. The decrease was due to a reduction of the value of properties acquired during the year ended December 31, 2012 as compared to those acquired during the same period in 2011.
Depreciation and Amortization
Depreciation and amortization expense increased $12,238,000, or 20%, to $73,653,000 for the year ended December 31, 2012 as compared to $61,415,000 for the year ended December 31, 2011. The net increase was related to 2011 and 2012 Acquisitions.
Transition Costs
During 2012, we incurred $8,249,000 of transition costs in connection with our transition to self-management. There was no transition costs incurred for the year ended December 31, 2011.
Interest and Other Income
Interest and other income increased $1,010,000, or 62%, to $2,629,000 for the year ended December 31, 2012 compared to $1,619,000 for the year ended December 31, 2011. The increase was primarily due to the recognition of revenue for the lease terminations at Fairforest Bldg. 3 and Summit Distribution Center in 2012.
Net Settlement Payments on Interest Rate Swaps
During the year ended December 31, 2012, we made net payments on interest rate swaps of $682,000 compared to $700,000 during the year ended December 31, 2011. The decrease is a result of lower variable interest rates for the year ended December 31, 2012 as compared to the year ended December 31, 2011.
Gain on Interest Rate Swaps
During the year ended December 31, 2012, our derivative instruments generated income of $564,000 compared to $397,000 for the year ended December 31, 2011 or a year to year increase of $167,000. The year to year change is attributable to the upcoming 2013 debt maturity.
Loss on Note Payable at Fair Value
Loss on the Albion Mills Retail Park notes payables is $111,000 for the year ended December 31, 2012 compared to $25,000 for the year ended December 31, 2011. The year to year valuation change is attributable to the upcoming debt maturity in October 2013.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt increased $2,853,000, or 2,642%, to $2,961,000 for the year ended December 31, 2012 compared to $108,000 for the year ended December 31, 2011. The increase in loss is due to payoff of a $25,000,000 loan payable and payoff of notes payable that were secured by Pacific Corporate Park, 100 Kimball Drive, Kings Mountain III, and HJ Park—Bldg. 1 properties during the year ended December 31, 2012.
Loss on Swap Termination
We incurred $14,323,000 of loss on swap termination during the year ended December 31, 2012 in connection with the termination of interest rate swaps on Pacific Corporate Park, 100 Kimball Drive and Kings Mountain III loans and the $25,000,000 loan payable. There was no loss on swap termination during the year ended December 31, 2011.
Provision for Income Taxes
Provision for income taxes decreased $190,000, or 42%, to $266,000 for the year ended December 31, 2012 compared to $456,000 for the year ended December 31, 2011 resulting primarily from decreased state liabilities and a refund of prior year taxes paid from North Carolina.
69
Equity in Income of Unconsolidated Entities
Equity in income of unconsolidated entities increased $369,000, or 10%, to $3,959,000 for the year ended December 31, 2012 compared $3,590,000 for the year ended December 31, 2011. The increase was primarily due to improved operating performance and gain on sale related to CBRE Strategic Partners Asia joint venture and increase in income from European JV resulting from the acquisition of Graben Distribution Center I and II, offset by the increase in interest expense related to the 2011 placement of debt on 18 Duke joint venture properties.
Net Loss Discontinued Operations
Loss from discontinued operations for the year ended December 31, 2012 was $413,000. The loss was attributable to a realized loss from sale of Cherokee Corporate Park in July 2012. Income from discontinued operations for the year ended December 31, 2011 was $728,000. Revenues and expenses from discontinued operations represent the activities of the held for sale portfolio of light industrial and warehouse/distribution/logistics buildings acquired during the year ended December 31, 2010 and sold during the year ended December 31, 2011.
Net Loss Attributable to Non-Controlling Operating Partnership Units
During the year ended December 31, 2012, net loss attributable to non-controlling interest was $32,000 compared to $26,000 for the year ended December 31, 2011, or a year to year increase of $6,000.
Consolidated Results of Operations
Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010
Revenues
Rental
Rental revenue increased $52,086,000, or 75%, to $121,459,000 during the year ended December 31, 2011 compared to $69,373,000 for the year ended December 31, 2010. The increase was primarily due to the acquisitions of 5160 Hacienda Drive, 10450 Pacific Center Court, 225 Summit Avenue, One Wayside Road, 100 Tice Blvd., Ten Parkway North, Pacific Corporate Park, 100 Kimball Drive, 4701 Gold Spike Drive, 1985 International Way, Summit Distribution Center, 3660 Deerpark Boulevard, and Tolleson Commerce Park II (the “2010 Acquisitions”) during the year ended December 31, 2010 and the acquisitions of 70 Hudson Street, 90 Hudson Street, Millers Ferry Road, Sky Harbor Operations Center, Aurora Commerce Center Bldg. C, and Sabal Pavilion (the “2011 Acquisitions”, together with the “2010 Acquisitions”, the “2010 and 2011 Acquisitions”) during the year ended December 31, 2011.
Tenant Reimbursements
Tenant reimbursements increased $12,931,000, or 91%, to $27,097,000 for the year ended December 31, 2011 compared to $14,166,000 for the year ended December 31, 2010, primarily due to tenant reimbursement revenue from the 2010 and 2011 Acquisitions.
Expenses
Operating and Maintenance
Property operating and maintenance expenses increased $8,265,000, or 96%, to $16,883,000 for the year ended December 31, 2011 compared to $8,618,000 for the year ended December 31, 2010. The increase was primarily due to the 2010 and 2011 Acquisitions and increased operating and maintenance expenses associated with property vacancies.
Property Taxes
Property tax expense increased $6,875,000, or 63%, to $17,840,000 for the year ended December 31, 2011 compared to $10,965,000 for the year ended December 31, 2010. The increase in property taxes was primarily due to the 2010 and 2011 Acquisitions.
70
Interest
Interest expense increased $18,854,000, or 127%, to $33,735,000 for the year ended December 31, 2011 compared to $14,881,000 for the year ended December 31, 2010 primarily as a result of the assumption of debt related to the 2010 acquisition of One Wayside Road and 100 Tice Blvd. and the 2011 acquisitions of 70 Hudson Street, 90 Hudson Street and Sabal Pavilion, placing debt on Pacific Corporate Park, Ten Parkway North, 100 Kimball Drive and Kings Mountain III and interest related to the revolving credit facility with Wells Fargo Bank, N.A., (the “Amended Wells Fargo Credit Facility”).
General and Administrative
General and administrative expense increased $645,000, or 12%, to $6,171,000 for the year ended December 31, 2011 compared to $5,526,000 for the year ended December 31, 2010. Of the total increase, $704,000 was due to the increase in professional and other fees; $285,000 was due to the increase in general audit fees and Sarbanes-Oxley assistance; $261,000 was due to the increase in legal expenses; $117,000 was due to the increase in trustees and officers’ insurance and expenses; $30,000 was due to the increase in shareholder servicing fees and report production costs offset by the reduction of $540,000 in organizational costs and $212,000 due to restricted common shares granted to our independent trustees in 2010.
Property Management Fee and Investment Management Fee to Related Party
Property management fee and investment management fee to related party increased $9,835,000, or 78%, to $22,378,000 for the year ended December 31, 2011 compared to $12,543,000 for the year ended December 31, 2010. The increase was primarily due to an increase in assets under management.
Acquisition Expenses
Acquisition expenses decreased $3,067,000, or 18%, to $14,464,000 for the year ended December 31, 2011 compared to $17,531,000 for the year ended December 31, 2010. The decrease was primarily due to a reduction of the value of consolidated properties acquired in 2011 compared to those acquired in 2010.
Depreciation and Amortization
Depreciation and amortization expense increased $29,290,000, or 91%, to $61,415,000 for the year ended December 31, 2011 as compared to $32,125,000 for the year ended December 31, 2010. The increase was primarily due to the 2010 and 2011 Acquisitions.
Interest and Other Income
Interest and other income increased $359,000, or 29%, to $1,619,000 for the year ended December 31, 2011 compared to $1,260,000 for the year ended December 31, 2010. The increase was primarily due to the recognition of additional miscellaneous revenue resulting from the Cherokee Park settlement agreement, sub-lease payments at 225 Summit Avenue and Tolleson Commerce Park mineral rights income.
Net Settlement Payments on Interest Rate Swaps
During the year ended December 31, 2011, we made net payments on interest rate swaps of $700,000 compared to $1,096,000 during the year ended December 31, 2010. The decrease was primarily a result of higher variable interest rates for the year ended December 31, 2011 as compared to the year ended December 31, 2010.
Gain on Interest Rate Swaps and Cap
During the year ended December 31, 2011, our derivative instruments generated income of $397,000 as compared to $23,000 for the year ended December 31, 2010 or a year to year increase of $374,000.
Loss on Note Payable at Fair Value
Loss on note payable decreased by $93,000, or 79%, to $25,000 for the year ended December 31, 2011 compared to $118,000 for the year ended December 31, 2010. The year to year change is attributable to a stabilization of UK interest rate spreads and base rates used to value the loan.
71
Loss on Early Extinguishment of Debt
During the year ended December 31, 2011, we repaid in full the existing loans at North Rhett III and 300 Constitution Drive and incurred expenses of $103,000 and $5,000, respectively. During the year ended December 31, 2010, we repaid in full the existing loan at 602 Central Blvd. and incurred expense of $72,000.
Provision for Income Taxes
Provision for income taxes increased $160,000, or 54%, to $456,000 for the year ended December 31, 2011 compared to $296,000 for the year ended December 31, 2010 resulting primarily from increased tax liabilities in a number of states in which we hold properties.
Equity in Income of Unconsolidated Entities
Equity in income of unconsolidated entities decreased $5,248,000, or 59%, to $3,590,000 for the year ended December 31, 2011 compared to $8,838,000 for the year ended December 31, 2010. The decrease was primarily due to additional interest expense and deferred financing cost amortization for the Duke joint venture secured and unsecured term loans for the year ended December 31, 2011. The Duke joint venture increased its debt by $239,075,000 of which our share was $191,260,000 from December 31, 2010 to 2011. Investments in properties by the Duke joint venture also increased by $342,800,000 of which our share was $274,240,000 as proceeds from the loans were used to acquire more assets.
Discontinued Operations
Income (loss) from discontinued operations was $728,000 and $(507,000) for the years ended December 31, 2011 and 2010, respectively. Revenues and expenses from discontinued operations represent the activities of the held for sale portfolio of two industrial warehouse distribution buildings acquired during the year ended December 31, 2010. The properties were sold during the year ended December 31, 2011.
Net Loss Attributable to Non-Controlling Operating Partnership Units
During the year ended December 31, 2011, net loss attributable to non-controlling interest was $26,000 compared to $18,000 for the year ended December 31, 2010, or a year to year increase of $8,000.
Financial Condition, Liquidity and Capital Resources
Overview
Liquidity is a measurement of the ability to meet cash requirements, including funding investments and ongoing commitments, to repay borrowings, to make distributions to our shareholders to redeem shares in accordance with our share redemption program and other general business needs. Our sources of funds will primarily be our current dividend reinvestment plan offering (though we may terminate the plan at any time), property operating cash flows and borrowings, including under our unsecured credit facility. Additionally, we expect other financing opportunities could provide additional sources of funds (including a possible listing and future offerings of our common shares). Our ability to raise funds is dependent on general economic conditions, general market conditions for REITs, and our operating performance. We believe that these cash resources will be sufficient to satisfy our cash requirements and we do not anticipate a need to raise funds from other than these sources within the next twelve months. While we may be able to anticipate and plan for certain liquidity needs, there may be unexpected increases in uses of cash that are beyond our control and which would affect our financial condition and results of operations. For example, we may be required to comply with new laws or regulations that cause us to incur unanticipated capital expenditures for our properties, thereby increasing our liquidity needs. Even if there are no material changes to our anticipated liquidity requirements, our sources of liquidity may be fewer than, and the funds available from such sources may be less than, anticipated or needed. Cash flow from operations is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates achieved on our leases, the collectability of rent and operating escalations and recoveries from our tenants and the level of operating and other costs. The properties in our portfolio are located in markets throughout the United States. Positive or negative changes in economic or other conditions, adverse weather conditions and natural disasters in these markets may affect our overall performance. No single tenant accounted for more than 7% of our annualized base rent for the year ended December 31, 2012.
Depending on market conditions, our debt financing may be as much as approximately 65% of the value of the cost of our assets before non-cash reserves and depreciation. The amount of debt we place on an individual property, or the amount of debt incurred by an individual entity in which we invest, may be more or less than 65% of the value of such property or the value of the assets owned by such entity, depending on market conditions and other factors.
72
In fact, depending on market conditions and other factors, we may choose not to place debt on our portfolio or our assets and may choose not to borrow to finance our operations or to acquire properties. Our declaration of trust currently limits our borrowing to 300% of our net assets unless any excess borrowing is approved by a majority of our independent trustees and is disclosed to our shareholders in our next quarterly report. Our declaration of trust currently defines “net assets” as our total assets (other than intangibles) at cost, before deducting depreciation, reserves for bad debts or other non-cash reserves, less total liabilities, calculated at least quarterly by us on a basis consistently applied; provided, however, that during such periods in which we are obtaining regular independent valuations of the current value of its net assets for purposes of enabling fiduciaries of employee benefit plan shareholders to comply with applicable Department of Labor reporting requirements, “net assets” means the greater of (i) the amount determined pursuant to the foregoing and (ii) the assets’ aggregate valuation established by the most recent such valuation report without reduction for depreciation, bad debts or other non-cash reserves. Any indebtedness we do incur will likely be subject to continuing covenants, and we will likely be required to make continuing representations and warranties in connection with such debt. Moreover, some or all of our debt may be secured by some or all of our assets. If we default in the payment of interest or principal on any such debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, our lender may accelerate the maturity of such debt requiring us to immediately repay all outstanding principal. If we are unable to make such payment, our lender could foreclose on our assets that are pledged as collateral to such lender. The lender could also sue us or force us into bankruptcy. Any such event would have a material adverse effect on the value of our common shares. We believe that, even without any proceeds raised from our public offering, we have sufficient cash flow from operations to continue as a going concern for the next twelve months and into the foreseeable future.
In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to the former investment advisor. During the acquisition and operational stages, certain services related to the acquisition and management of our investments and our operations were provided to us by the former investment advisor pursuant to an advisory agreement entered into in July 2004 which was amended and restated in October 2006, in December 2010 and again in April 2012. The advisory agreement terminated according to its terms on June 30, 2012. Pursuant to the advisory agreement, we made various payments to the former investment advisor, including acquisition fees, investment management fees and payments for reimbursements of certain costs incurred by the former investment advisor in providing related services to us. See Note 11 to the Consolidated Financial Statements “Investment Management and Other Fees to Related Parties,” for a discussion of fees and expenses paid to the former investment advisor for the years ended December 31, 2012, 2011 and 2010, respectively, and for a discussion of our transition to self-management. Additionally, we also have issued to an affiliate of our former investment advisor one class B limited partnership interest (representing 100% of the class B interest outstanding) in CSP OP, which certain of our executive officers own an aggregate 15% distribution interest. For a description of the class B limited partnership interest, See Note 11 to the Consolidated Financial Statements “Investment Management and Other Fees to Related Parties.” Lastly, during the year ended December 31, 2012, we began the process of transitioning from being an externally managed company to a self-managed company and we believe the costs incurred to accomplish this transition involve many non-recurring costs which are being excluded to arrive at FFO, as adjusted.
In order to avoid corporate-level tax on our net taxable income, we are required to pay distributions to our shareholders equal to our net taxable income. In addition, to qualify as a REIT, we generally are required to pay annual distributions to our shareholders equal to at least 90% of our net ordinary taxable income. We anticipate borrowing funds to obtain additional capital to grow our business and acquire additional real estate investments, but there can be no assurance that we will be able to do so on terms acceptable to us, if at all.
As of December 31, 2012, we had $107,355,000 cash and cash equivalents available as well as $435,000,000 available under the Unsecured Credit Facility.
Historical Cash Flows
Our net cash provided by operating activities increased by $33,581,000 to $92,494,000 for the year ended December 31, 2012, compared to 58,913,000 for the year ended December 31, 2011. The increase was due to the positive operating results from 2012 acquisitions for both consolidated properties and the Duke joint venture.
Net cash used in investing activities increased by $6,546,000 to $339,712,000 for the year ended December 31, 2012, compared to $333,166,000 for the year ended December 31, 2011. The increase was mainly due to acquisition of real estate properties and investments in unconsolidated entities during the year ended December 31, 2012 compared to the year ended December 31, 2011.
Net cash provided by financing activities decreased by $347,914,000 to $116,442,000 for the year ended December 31, 2012, compared to $464,356,000 for the year ended December 31, 2011. The decrease was due to reduced proceeds from the public offering of $486,618,000 resulting from the closing of the follow-on offering on January 30, 2012, an increase in deferred financing costs of $3,919,000, a decrease from non-controlling interest-variable interest entity of $546,000, an increase in principal payments on notes payable of $69,542,000, an increase in shareholder redemptions of $13,672,000, an increase in distributions to shareholders of
73
$18,627,000 and a decrease in proceeds from notes payable of $81,700,000 offset by a decrease in payment on loan payable of $60,000,000, a decrease in payment of offering costs of $50,482,000, an increase in borrowing on loan payable of $215,000,000 and an increase in security deposit of $1,228,000.
Non-GAAP Supplemental Financial Measure: Funds from Operations
Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry analysts and investors consider presentations of operating results for REITs that use historical cost accounting to be insufficient by themselves. Consequently, the National Association of Real Estate Investment Trusts, or NAREIT, created Funds from Operations, or FFO, as a supplemental measure of REIT operating performance.
FFO is a non-GAAP measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net income. FFO, as we define it, is presented as a supplemental financial measure. Management believes that FFO is a useful supplemental measure of REIT performance. FFO does not present, nor do we intend for it to present, a complete picture of our financial condition and/or operating performance. We believe that net income, as computed under GAAP, appropriately remains the primary measure of our performance and that FFO, when considered in conjunction with net income, improves the investing public’s understanding of the operating results of REITs and makes comparisons of REIT operating results more meaningful.
We compute FFO in accordance with standards established by NAREIT. Modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business and provide greater transparency to the investing public as to how our management team considers our results of operations. As a result, our FFO may not be comparable to FFO as reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do. The revised NAREIT White Paper on FFO defines FFO as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, impairment charges and gains and losses from sales of depreciable operating property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures.
Management believes that NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time, and that depreciation charges required by GAAP do not always reflect the underlying economic realities. Likewise, the exclusion from NAREIT’s definition of FFO of impairment charges and gains and losses from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods. Thus, FFO provides a performance measure that, when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates and operating costs. Management also believes that FFO provides useful information to the investment community about our financial performance when compared to other REITs, since FFO is generally recognized as the industry standard for reporting the operations of REITs.
However, changes in the accounting and reporting rules under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that have been put into effect since the establishment of NAREIT’s definition of FFO have prompted an increase in the non-cash and non-operating items included in FFO. Furthermore, publicly registered, non-traded REITs typically have a significant amount of acquisition activity during their initial years of investment and operation and therefore we believe require additional adjustments to FFO in evaluating performance. As a result, in addition to presenting FFO in accordance with the NAREIT definition, we also disclose FFO, as adjusted, which excludes the effects of acquisition costs and unrealized gain/loss in investments in unconsolidated entities. FFO, as adjusted, is a useful measure to management’s decision-making process. As discussed below, period to period fluctuations in the excluded items can be driven by short-term factors that are not particularly relevant to our long-term investment decisions, long-term capital structures or long-term tax planning and tax structuring decisions.
We believe that adjusting FFO to exclude these acquisition costs and unrealized gains/losses more appropriately presents our results of operations on a comparative basis. The items that we exclude from net income are subject to significant fluctuations from period to period that cause both positive and negative effects on our results of operations, often in inconsistent and unpredictable directions. For example, our acquisition costs are primarily the result of the volume of our acquisitions completed during each period, and therefore we believe such acquisition costs are not reflective of our operating results during each period. Similarly, unrealized gains or non-cash impairment charges that we have recognized during a given period are based primarily upon changes in the estimated fair market value of certain of our investments due to deterioration in market conditions and do not necessarily reflect the operating performance of these properties during the corresponding period. Lastly, during the three month period ended June 30, 2012, the Company began the process of transitioning from being an externally managed company to a self-managed company and we believe the costs incurred to accomplish this transition involve many non-recurring costs which are being excluded to arrive at FFO, as adjusted.
74
We believe that FFO, as adjusted, is useful to investors as a supplemental measure of operating performance. We believe that adjusting FFO to exclude acquisition costs provides investors a view of the performance of our portfolio over time, including after we cease to acquire properties on a frequent and regular basis and allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions. In addition, as many other non-traded REITs adjust FFO to exclude acquisition costs and impairment charges, we believe that our calculation and reporting of FFO, as adjusted, will assist investors and analysts in comparing our performance with that of other non-traded REITs. We also believe that FFO, as adjusted, may provide investors with a useful indication of our future performance, particularly after our acquisition stage, and of the sustainability of our current distribution policy. However, because FFO, as adjusted, excludes acquisition costs, which are an important component in an analysis of our historical performance, such supplemental measure should not be construed as a historical performance measure and may not be as useful a measure for estimating the value of our common shares. In addition, the impairment charges that we exclude from FFO, as adjusted, may be realized as a loss in the future upon the ultimate disposition of the related properties or other assets through the form of lower cash proceeds. FFO and FFO as adjusted measure cash generated from operating activities not in accordance with GAAP and should not be considered as alternatives to (i) net income (determined in accordance with GAAP), as indications of our financial performance, or (ii) to cash flow from operating activities (determined in accordance with GAAP) as measures of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make cash distributions. We believe that to further understand our performance, each of FFO and FFO, as adjusted, should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our Consolidated Financial Statements.
Not all REITs calculate FFO and FFO, as adjusted (or an equivalent measure), in the same manner and therefore comparisons with other REITs may not be meaningful.
The following table presents our FFO and FFO, as adjusted for the years ended December 31, 2012, 2011 and 2010 (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Reconciliation of net loss to funds from operations | | | | | | | | | | | | |
Net Loss Attributable to Chambers Street Properties Shareholders | | $ | (42,976 | ) | | $ | (19,259 | ) | | $ | (10,600 | ) |
Adjustments: | | | | | | | | | | | | |
Non-controlling operating partnership units | | | (32 | ) | | | (26 | ) | | | (18 | ) |
Real estate depreciation and amortization | | | 73,653 | | | | 61,415 | | | | 32,125 | |
Realized gain from transfer of real estate to unconsolidated entity | | | — | | | | — | | | | (154 | ) |
Realized loss (gain) from sales of discontinued operations | | | 413 | | | | (301 | ) | | | — | |
Net effect of FFO adjustment from unconsolidated entities(1) | | | 54,837 | | | | 47,671 | | | | 17,209 | |
| | | | | | | | | | | | |
FFO(2) | | $ | 85,895 | | | $ | 89,500 | | | $ | 38,562 | |
Other Adjustments: | | | | | | | | | | | | |
Acquisition and related expenses | | | 8,301 | | | | 14,699 | | | | 18,806 | |
Loss on Early Extinguishment of Debt | | | 2,961 | | | | — | | | | — | |
Loss on Swap Termination | | | 14,323 | | | | — | | | | — | |
Transition Costs | | | 8,249 | | | | — | | | | — | |
Unrealized gain/ loss in unconsolidated entity | | | 70 | | | | 1,617 | | | | 1,043 | |
| | | | | | | | | | | | |
FFO, as adjusted | | $ | 119,799 | | | $ | 105,816 | | | $ | 58,411 | |
| (1) | Represents our share of the FFO adjustments allowable under the NAREIT definition (primarily depreciation) for each of our unconsolidated entities multiplied by the percentage of income or loss recognized by us for each of these unconsolidated entities during each year. |
| (2) | All periods have been revised to reflect the impairment charges as adjustments to FFO consistent with the revised NAREIT definition issued during 2011. |
Financing
Notes Payable
In connection with our acquisition of the Carolina Portfolio on August 30, 2007, we assumed 13 loans with principal balances totaling $66,110,000 ($62,944,000 at estimated fair value including the discount of $3,166,000) from various lenders that are secured by first deeds of trust on the properties and the assignment of related rents and leases. The loans bear interest at rates ranging from 4.98% to 6.33% per annum and were scheduled to mature between March 1, 2013 and February 1, 2025. The loans require monthly payments of interest and principal, fully amortized over the lives of the loans. Two of the 13 loans, North Rhett III and HJ Park—Bldg. 1, were
75
paid off in full on November 22, 2011 and December 3, 2012, respectively. Principal payments totaling $4,487,000 were made during the year ended December 31, 2012. We indemnify the lenders against environmental costs and expenses and guarantee the loans under certain conditions.
On December 27, 2007, we entered into a $9,000,000 financing agreement secured by the Bolingbrook Point III property with the Northwestern Mutual Life Insurance Company. The loan is for a term of seven years and bears a fixed interest rate of 5.26% per annum with principal due at maturity. On January 14, 2011, we paid down $1,100,000 of principal in connection with the lease termination settlement with one of the tenants.
On May 30, 2008, we entered into a £7,500,000 financing arrangement with the Royal Bank of Scotland plc secured by the Thames Valley Five property. On July 27, 2010 we paid down the loan by £1,860,000 leaving a loan balance of £5,640,000 ($9,160,000 at December 31, 2012). The loan is for a term of five years (with a two-year extension option) and bears interest at a variable rate adjusted quarterly, (based on nine month GBP-based LIBOR plus 1.01%). On August 14, 2008, we entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 5.41% plus 1.01% or 6.42% per annum as of December 31, 2012, and expires on May 30, 2013. In conjunction with the loan paydown, we incurred a cost of £227,000 ($361,000 at August 3, 2010) to reduce the notional amount of the interest rate swap from £7,500,000 to £5,640,000. Interest only payments are due quarterly for the term of the loan with principal due at maturity.
On October 10, 2008, we entered into a £5,771,000 ($9,373,000 at December 31, 2012) financing agreement with the Royal Bank of Scotland plc secured by Albion Mills Retail Park property. The loan is for a term of five years and bears interest at a variable rate adjusted quarterly, based on three month GBP-based LIBOR plus 1.31%. On November 25, 2008, we entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.94% plus 1.31% or 5.25% per annum as of December 31, 2012 and expires on October 10, 2013. Interest only payments are due quarterly for the term of the loan with principal due at maturity.
On November 18, 2008, in connection with the acquisition of Avion Midrise III & IV, we assumed $20,851,000 ($22,186,000 face value less discount of $1,335,000) fixed rate mortgage loan from Capmark Finance, Inc. that bears interest at a rate of 5.52% per annum and matures on April 1, 2014. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $456,000 were made during the year ended December 31, 2012.
On August 5, 2009, in connection with the acquisition of 12650 Ingenuity Drive, we assumed a $12,572,000 ($13,539,000 face value less a discount of $967,000) fixed rate mortgage loan from PNC Bank, National Association that bears interest at a rate of 5.62% and matures on October 1, 2014. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $404,000 were made during the year ended December 31, 2012.
On August 10, 2009, we entered into a £13,975,000 ($22,698,000 at December 31, 2012) financing agreement with the Abbey National Treasury Services plc secured by the Maskew Retail Park property. On September 24, 2009, we drew the full amount of the loan and concurrently entered into an interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.42% plus 2.26% or 5.68% per annum for the five-year term of the loan. Interest only payments are due quarterly for the term of the loan with principal due at maturity.
On June 24, 2010, we assumed two loans in connection with the acquisition of One Wayside Road: (i) a $14,888,000 ($14,633,000 at face value plus a premium of $255,000) fixed rate mortgage loan from State Farm Life Insurance Company that bears interest at a rate of 5.66% and matures on August 1, 2015; and (ii) a $12,479,000 ($12,132,000 at face value plus a premium of $347,000) fixed rate mortgage loan from State Farm Life Insurance Company that bears interest at a rate of 5.92% and matures on August 1, 2015. Principal and interest payments are due monthly for the remaining loan terms and principal payments totaling $650,000 were made during the year ended December 31, 2012 on the two loans.
On September 28, 2010, we assumed two loans in connection with the acquisition of 100 Tice Blvd.: (i) a $23,136,000 ($21,218,000 at face value plus a premium of $1,918,000) fixed rate loan from Principal Life Insurance Company that bears interest at a rate of 5.97%, matures on September 15, 2022 and the lender has the right to call the loan due and payable on September 15, 2017; (ii) a $23,136,000 ($21,217,000 at a face value plus a premium of $1,919,000) fixed rate mortgage from Hartford Life and Accidental Insurance Company that bears interest at a rate of 5.97%, matures on September 15, 2022 and the lender has the right to call the loan due and payable on September 15, 2017. Principal and interest payments are due monthly for the remaining loan terms and principal payments totaling $1,036,000 were made during the year ended December 31, 2012 on the two loans.
On December 7, 2010, we entered into a $85,000,000 secured term loan through a subsidiary with Wells Fargo Bank, National Association, or the Pacific Corporate Park Loan. The Pacific Corporate Park Loan had a seven-year term, monthly amortization of $250,000 and was secured by Pacific Corporate Park. Upon closing of the Pacific Corporate Park Loan on December 7, 2010, we
76
entered into an interest rate swap agreement with Wells Fargo Bank, National Association to effectively fix the interest rate on the entire outstanding Pacific Corporate Park Loan amount at 4.89% for its seven-year term. Principal and interest payments are due monthly. The loan was paid in full on November 27, 2012 and the unamortized deferred financing costs associated with obtaining the loan totaling $1,101,000 were expensed.
On December 29, 2010, we entered into a $12,600,000 secured term loan through Woodmen of The World Life Insurance Society secured by the Ten Parkway North property. The Ten Parkway North loan bears interest at a fixed rate of 4.75% per annum and matures on January 1, 2021. Principal and interest payments are due monthly and principal payments totaling $281,000 were made during the year ended December 31, 2012.
Beginning January 2011, principal and interest payments are due monthly on the $9,725,000 term loan secured by the Deerfield Commons I that was originally entered into on November 29, 2005. The loan bears interest at a fixed rate of 5.23% per annum and interest only payments were due monthly for the first 60 months. Principal payments totaling $145,000 were made during the year ended December 31, 2012.
On February 8, 2011, we entered into five cross-collateralized secured term loans totaling $37,000,000 with ING USA Annuity and Life Insurance Company secured by the following properties: 4701 Gold Spike Road, $10,650,000, Summit Distribution Center, $6,700,000, Tolleson Commerce Park II, $4,600,000, 3660 Deerpark Blvd., $7,650,000 and 1985 International Way, $7,400,000. The loans bear interest at a fixed rate of 4.45% and mature on March 1, 2018. Principal and interest payments are due monthly and principal payments totaling $623,000 were made during the year ended December 31, 2012.
On February 28, 2011, we entered into a $33,000,000 secured term loan with TD Bank secured by the 100 Kimball Drive property. Upon closing the 100 Kimball Drive loan, we simultaneously entered into an interest rate swap agreement with TD Bank to effectively fix the interest rate on the entire outstanding loan amount to 5.25% for its 10-year term. Principal and interest payments are due monthly. The loan was paid in full on November 27, 2012 and the unamortized deferred financing costs associated with obtaining the loan totaling $430,000 were expensed.
On April 11, 2011, in connection with the acquisition of 70 Hudson Street, we assumed a $124,113,000 ($120,857,000 face value plus a premium of $3,256,000) fixed rate mortgage loan from Lehman Brothers Bank, FSB that bears interest at a rate of 5.65% and matures on April 11, 2016. Principal and interest payments are due monthly and principal payments totaling $1,758,000 were made during the year ended December 31, 2012.
On April 11, 2011, in connection with the acquisition of 90 Hudson Street, we assumed a $120,247,000 ($117,562,000 face value plus a premium of $2,685,000) fixed rate mortgage loan from Teachers Insurance and Annuity Association of America that bears interest at a rate of 5.66% and matures on May 1, 2016. On July 14, 2011, we and Teachers Insurance and Annuity Association of America, or the Lender, agreed to modify the $117,562,000 existing mortgage loan assumed by us. The loan was modified to extend its maturity by three years, from May 1, 2016 to May 1, 2019. The 5.66% annual interest rate was unchanged but is subject to a new 30-year amortization schedule. We pre-paid approximately $8,600,000 of loan’s balance (with no pre-payment penalty) in connection with the modification. Principal and interest payments are due monthly and principal payments totaling $1,453,000 were made during the year ended December 31, 2012.
On June 24, 2011, we entered into a $11,700,000 secured term loan with TD Bank secured by the Kings Mountain III property. Effective July 1, 2011, we entered into an interest rate swap agreement with TD Bank to effectively fix the interest rate on the entire outstanding loan amount to 4.47% for its 7-year term maturing on July 1, 2018. Principal and interest payments are due monthly. The loan was paid in full on November 27, 2012 and the unamortized deferred financing costs associated with obtaining the loan totaling $238,000 were expensed.
On December 30, 2011, in connection with the acquisition of Sabal Pavilion, we assumed a $15,428,000 ($14,700,000 face value plus a premium of $728,000) fixed rate mortgage loan from U.S. Bank National Association that bears interest at a rate of 6.38% and matures on August 1, 2013. Interest payments are due monthly with principal due at maturity.
Loan Payable
On May 26, 2010, we entered into a $70,000,000 revolving credit facility with Wells Fargo Bank, N.A., or the Wells Fargo Credit Facility. The initial maturity date of the Wells Fargo Credit Facility was May 26, 2014, however we could extend the maturity date to May 26, 2015, subject to certain conditions. $15,000,000 of the Wells Fargo Credit Facility was initially drawn upon closing on May 26, 2010, with $55,000,000 initially remaining available for disbursement during the term of the facility. We had the right to prepay any
77
outstanding amount of the Wells Fargo Credit Facility, in whole or in part, without premium or penalty at any time during the term of this Wells Fargo Credit Facility, however, we initially could not reduce the outstanding principal balance below a minimum outstanding amount of $15,000,000, without reducing the total $70,000,000 Wells Fargo Credit Facility capacity. Initially, the Wells Fargo Credit Facility had a floating interest rate of 300 basis points over LIBOR, however this interest rate would be at least 4.00% for any of the outstanding balance that was not subject to an interest rate swap with an initial term of at least two years.
Upon closing on May 26, 2010, we entered into an interest rate swap agreement with Wells Fargo Bank, N.A. to effectively fix the interest rate on the initial $15,000,000 outstanding loan amount at 5.10% for the four-year term of the facility. The interest rate swap was designated as a qualifying cash flow hedge at the start date of the hedge relationship as described in Note 15 “Derivative Instruments.” The Wells Fargo Credit Facility was initially secured by our 13201 Wilfred, 3011, 3055 & 3077 Comcast Place, 140 Depot Street, Crest Ridge Corporate Center I and West Point Trade Center properties. In addition, CSP OP provided a limited guarantee for the Wells Fargo Credit Facility.
On August 31, 2010, we entered into an amended and restated credit agreement with Wells Fargo Bank, N.A. to expand the Wells Fargo Credit Facility from its initial capacity of $70,000,000 to an amended capacity of $125,000,000 (the “Amended Wells Fargo Credit Facility”). In connection with the Amended Wells Fargo Credit Facility, the minimum outstanding amount was increased to $25,000,000 and as such an additional $10,000,000 was drawn (in addition to the $15,000,000 initially drawn on May 26, 2010) with the remaining $100,000,000 available for disbursement during the term of the facility. The Amended Wells Fargo Credit Facility was secured by an additional three of our properties, for a total of eight properties in all: 13201 Wilfred Lane, 3011, 3055 & 3077 Comcast Place, 140 Depot Street, Crest Ridge Corporate Center, West Point Trade Center, 5160 Hacienda Drive, 10450 Pacific Center Court and 225 Summit Avenue. The interest rate was reduced by 25 basis points to 275 basis points over LIBOR (which rate would apply to all withdrawals from the Amended Wells Fargo Credit Facility other than the initial $15,000,000 that was drawn on May 26, 2010) and the initial interest rate floor of 4.00% was eliminated. The initial maturity date remained May 26, 2014, however we could extend the maturity date to May 26, 2015, subject to certain conditions. The Amended Wells Fargo Credit Facility was replaced with the Unsecured Credit Facility as set forth below.
On September 13, 2012, we entered into a credit agreement (the “Credit Agreement”) with a group of lenders to provide CSP OP with an unsecured, revolving credit facility (the “Unsecured Credit Facility”) with an initial capacity of $700,000,000. The Unsecured Credit Facility replaced the Amended Wells Fargo Credit Facility, which was terminated concurrently with the closing of the Unsecured Credit Facility. The Company paid the $25,000,000 outstanding balance of the Amended Wells Fargo Credit Facility with cash on hand and expensed the unamortized deferred financing costs associated with obtaining the loan totaling $1,191,000. As of December 31, 2012, $265,000,000 was drawn under the Unsecured Credit Facility with the remaining $435,000,000 available for disbursement during the term of the facility. The $265,000,000 is included in Loan Payable on our consolidated balance sheets. As of December 31, 2012 the Unsecured Credit Facility has a term of four years, which term may be extended for one year at the option of CSP OP provided that CSP OP is not then in default and upon payment of customary extension fees. The Unsecured Credit Facility has no minimum outstanding balance requirements. Under certain circumstances, CSP OP may request an increase in the capacity of the Unsecured Credit Facility by up to an additional $700,000,000, to an aggregate size of $1,400,000,000, although none of the lenders has any obligation to participate in such increase. The Unsecured Credit Facility includes a $25,000,000 swingline sub-facility and a $25,000,000 letter of credit sub-facility. CSP OP paid customary arrangement and commitment fees to the lenders in connection with the Unsecured Credit Facility. The Company and certain of its subsidiaries have provided a guaranty in connection with the Unsecured Credit Facility.
The loans under the Unsecured Credit Facility will bear interest, at CSP OP’s election, based on (i) LIBOR, for interest periods of one, three or six months, plus the applicable margin, or (ii) the LIBOR Market Index Rate plus the applicable margin (if the LIBOR Market Index Rate is unavailable, the per annum rate of interest would be the Federal Funds Rate plus 1.5%, plus the applicable margin). The LIBOR Market Index Rate is LIBOR in respect of loans of one-month interest periods, determined on a daily basis, plus the applicable margin. The applicable margin is (i) for periods prior to the Company or CSP OP having a credit rating, based on the Company’s then current leverage ratio, and (ii) during such periods when the Company or CSP OP has a credit rating, based on its then current credit rating. The applicable margin can vary from (i) 1.60% to 2.35% based upon the then current leverage ratio, or (ii) 1.00% to 1.80% based upon a then current credit rating of the Company or CSP OP. As of the closing of the Unsecured Credit Facility, the current stated applicable margin was 1.60%. CSP OP will pay customary fees in connection with borrowings under the Unsecured Credit Facility. Further, CSP OP may prepay any revolving or swingline loan, in whole or in part, at any time without premium or penalty. As of December 31, 2012, outstanding borrowings of $265,000,000 bear interest at a rate of 1.82% based on 1.60% over the three month LIBOR.
Under the Unsecured Credit Facility, the Company will be subject to certain financial covenants that require, among other things: the maintenance of (i) a leverage ratio of not more than 0.60; (ii) a fixed charge coverage ratio of at least 1.50; (iii) a secured leverage ratio of not more than (a) 0.45 prior to the Unsecured Credit Facility’s second anniversary, or (b) 0.40 thereafter; (iv) an unencumbered
78
leverage ratio of not more than 0.60; (v) a ratio of unencumbered net operating income to unsecured interest expense of at least 1.75 (unless the Company or CSP OP obtains an investment grade credit rating, in which case this requirement is eliminated); (vi) minimum tangible net worth of $1,653,403,000 plus 85% of the net proceeds of certain future equity issuances; and (vii) unencumbered asset value of at least $400,000,000. In addition, the Unsecured Credit Facility contains a number of customary non-financial covenants including those restricting liens, mergers, sales of assets, certain investments in unimproved land and mortgage receivables, intercompany transfers, transactions with affiliates and distributions.
See “—Subsequent Events,” for an update of Loan Payable.
Distribution Policy
Our distribution policy is subject to revision at the discretion of our Board of Trustees without notice to you or shareholder approval. All distributions will be made by us at the discretion of our Board of Trustees and will be based upon our Board of Trustee’s evaluation of our assets, operating results, historical and projected cash flows (and sources thereof), historical and projected equity offering proceeds from our offerings, historical and projected debt incurred, projected investments and capital requirements, the anticipated timing between receipt of our equity offering proceeds and investment of those proceeds, maintenance of REIT qualification, applicable provisions of Maryland law, general economic, market and industry conditions, any liquidity event options we may pursue, and such other factors as our Board of Trustees deems relevant. We cannot assure you that we will be able to pay or maintain the levels of distributions we have historically paid or that distributions will increase over time.
In order to qualify as a REIT under the Internal Revenue Code we generally must make distributions to our shareholders each year in an amount at least equal to 90% of our REIT taxable income (as determined without regard to the dividends paid deduction and excluding net capital gain).
It is anticipated that distributions generally will be taxable as ordinary income to our shareholders, although a portion of such distributions may be designated by us as a return of capital or as capital gain. We will furnish annually to each of our shareholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital or capital gains.
| | | | | | | | | | | | | | | | |
2012 Quarters | | First | | | Second | | | Third | | | Fourth | |
Total distributions declared and paid | | $ | 36,726,000 | | | $ | 37,366,000 | | | $ | 37,374,000 | | | $ | 37,418,000 | |
Distributions per share | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | |
| | | | | | | | | | | | | | | | |
2011 Quarters | | First | | | Second | | | Third | | | Fourth | |
Total distributions declared and paid | | $ | 25,306,000 | | | $ | 27,125,000 | | | $ | 29,911,000 | | | $ | 32,785,000 | |
Distributions per share | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | |
| | | | | | | | | | | | | | | | |
2010 Quarters | | First | | | Second | | | Third | | | Fourth | |
Total distributions declared and paid | | $ | 16,841,000 | | | $ | 19,266,000 | | | $ | 21,623,000 | | | $ | 24,053,000 | |
Distributions per share | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | | | $ | 0.15 | |
To the extent that our cash available for distribution is less than the amount we are required to distribute to qualify as a REIT, we may consider various funding sources to cover any shortfall, including borrowing funds on a short-term, or possibly long-term, basis, using offering proceeds or selling properties. In addition, we may utilize these funding sources to make distributions that exceed the amount we are required to distribute to qualify as a REIT.
Off-Balance Sheet Arrangements
As of December 31, 2012, we had five Investments in Unconsolidated Entities: (i) a 5.07% ownership interest in CBRE Strategic Partners Asia; (ii) an 80% ownership interest in the Duke joint venture; (iii) a 90% ownership interest in Afton Ridge; (iv) a 80% ownership interest in the UK JV; and (v) an 80% ownership interest in the European JV. Our investments are discussed in Item 2, “Properties,” and Note 5, “Investments in Unconsolidated Entities” in the accompanying consolidated financial statements.
79
Contractual Obligations and Commitments
The following table provides information with respect to our consolidated property contractual obligations at December 31, 2012 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Contractual Obligations | | Total | | | Less than
One
Year | | | One to
Three Years | | | Three to
Five Years | | | More than
Five Years | |
Note Payable (and interest payments) Collateralized by Deerfield Commons I | | $ | (10,888 | ) | | $ | (643 | ) | | $ | (10,245 | ) | | $ | — | | | $ | — | |
Note Payable (and interest payments) Collateralized by Bolingbrook Point III | | | (8,766 | ) | | | (416 | ) | | | (8,350 | ) | | | — | | | | — | |
Notes Payable (and interest payments) Collateralized by the Carolina Portfolio | | | (57,105 | ) | | | (6,426 | ) | | | (12,852 | ) | | | (12,852 | ) | | | (24,975 | ) |
Note Payable (and interest payments) Collateralized by Lakeside Office Center | | | (10,305 | ) | | | (650 | ) | | | (9,655 | ) | | | — | | | | — | |
Note Payable (and interest payments) Collateralized by Thames Valley Five(1) | | | (9,553 | ) | | | (9,553 | ) | | | — | | | | — | | | | — | |
Note Payable (and interest payments) Collateralized by Albion Mills Retail Park(1) | | | (9,754 | ) | | | (9,754 | ) | | | — | | | | — | | | | — | |
Note Payable (and interest payments) Collateralized by Avion Midrise III & IV | | | (21,966 | ) | | | (1,618 | ) | | | (20,348 | ) | | | — | | | | — | |
Note Payable (and interest payments) Collateralized by 12650 Ingenuity Drive | | | (13,514 | ) | | | (1,118 | ) | | | (12,396 | ) | | | — | | | | — | |
Note Payable (and interest payments) Collateralized by Maskew Retail Park(1) | | | (25,113 | ) | | | (1,288 | ) | | | (23,825 | ) | | | — | | | | — | |
Note Payable (and interest payments) Collateralized by One Wayside Road | | | (28,953 | ) | | | (2,127 | ) | | | (26,826 | ) | | | — | | | | — | |
Note Payable (and interest payments) Collateralized by 100 Tice Blvd | | | (50,806 | ) | | | (3,469 | ) | | | (6,939 | ) | | | (40,398 | ) | | | — | |
Note Payable (and interest payments) Collateralized by Ten Parkway | | | (16,203 | ) | | | (862 | ) | | | (1,724 | ) | | | (1,724 | ) | | | (11,893 | ) |
Note Payable (and interest payments) Collateralized by 4701 Gold Spike Drive | | | (12,639 | ) | | | (644 | ) | | | (1,288 | ) | | | (1,288 | ) | | | (9,419 | ) |
Note Payable (and interest payments) Collateralized by 1985 International Way | | | (8,782 | ) | | | (447 | ) | | | (895 | ) | | | (895 | ) | | | (6,545 | ) |
Note Payable (and interest payments) Collateralized by Summit Distribution Center | | | (7,951 | ) | | | (405 | ) | | | (810 | ) | | | (810 | ) | | | (5,926 | ) |
Note Payable (and interest payments) Collateralized by 3660 Deerpark Boulevard | | | (9,078 | ) | | | (462 | ) | | | (925 | ) | | | (925 | ) | | | (6,766 | ) |
Note Payable (and interest payments) Collateralized by Tolleson Commerce Park II | | | (5,458 | ) | | | (278 | ) | | | (556 | ) | | | (556 | ) | | | (4,068 | ) |
Note Payable (and interest payments) Collateralized by 70 Hudson Street | | | (139,891 | ) | | | (8,585 | ) | | | (17,169 | ) | | | (114,137 | ) | | | — | |
Note Payable (and interest payments) Collateralized by 90 Hudson Street | | | (142,739 | ) | | | (6,897 | ) | | | (15,048 | ) | | | (15,048 | ) | | | (105,746 | ) |
Note Payable (and interest payments) Collateralized by Sabal Pavilion | | | (15,247 | ) | | | (15,247 | ) | | | — | | | | — | | | | — | |
Unsecured Credit Facility (and interest payments) | | | (282,885 | ) | | | (4,823 | ) | | | (9,646 | ) | | | (268,416 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | (887,596 | ) | | $ | (75,712 | ) | | $ | (179,497 | ) | | $ | (457,049 | ) | | $ | (175,338 | ) |
| | | | | | | | | | | | | | | | | | | | |
| (1) | These contractual obligations include the expected net payments due under interest rate swap agreements where in each case we have swapped our variable interest rate payments due under the debt agreements for fixed rates of interest payments. |
80
The following table provides information with respect to our unconsolidated property contractual obligations at December 31, 2012 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Contractual Obligations | | Total | | | Less than
One
Year | | | One to
Three Years | | | Three to
Five Years | | | More than
Five Years | |
Note Payable (and interest payments) Collateralized by Duke Joint Venture | | $ | (453,051 | ) | | $ | (103,102 | ) | | $ | (141,439 | ) | | $ | (32,629 | ) | | $ | (175,881 | ) |
Note Payable (and interest payments) Collateralized by Afton Ridge Joint Venture | | | (24,040 | ) | | | (24,040 | ) | | | — | | | | — | | | | — | |
Notes Payable (and interest payments) Collateralized by European JV | | | (73,610 | ) | | | (1,543 | ) | | | (3,087 | ) | | | (68,980 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total(1) | | $ | (550,701 | ) | | $ | (128,685 | ) | | $ | (144,526 | ) | | $ | (101,609 | ) | | $ | (175,881 | ) |
| | | | | | | | | | | | | | | | | | | | |
| (1) | Unconsolidated payment amounts are at our pro rata share of effective ownership and exclude our investment in CBRE Strategic Partners Asia. |
As of December 31, 2012, we had an unfunded investment commitment in CBRE Strategic Partners Asia totaling $2,474,000. The timing of future payments is uncertain.
Income Taxes
We elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 2004. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we generally distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gain). It is our current intention to adhere to these requirements and maintain our REIT qualification. As a REIT, we generally will not be subject to corporate level U.S. federal income tax on net income we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year, then we will be subject to U.S. federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed taxable income, if any.
Included as a component of our tax provision, we have incurred income and other taxes (franchise, local and state government and international) related to our continuing operations in the amount of $266,000, $456,000 and $296,000 for California, Georgia, Massachusetts, Minnesota, New Jersey, Pennsylvania, Texas, North Carolina, and United Kingdom impacting our operations during the years ended December 31, 2012, 2011 and 2010, respectively.
Inflation
The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. We expect to include provisions in the majority of our tenant leases designed to protect us from the impact of inflation. These provisions will include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases, annual reimbursement of operating expenses above a certain allowance. Due to the generally long-term nature of these leases, annual rent increases may not be sufficient to cover inflation and rent may be below market.
Quantitative and Qualitative Disclosures About Market Risk
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.
We may be exposed to the effects of interest rate changes primarily as a result of long-term debt used to maintain liquidity and fund expansion of our real estate investment portfolio and operations. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we will borrow primarily at fixed rates or variable rates and, in some cases, with the ability to convert variable rates to fixed rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes.
81
Consolidated Notes Payable secured by real property are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | Interest Rate as of
December 31, | | | | | Notes Payable as of
December 31, | |
Property | | 2012 | | | 2011 | | | Maturity Date | | 2012 | | | 2011 | |
Deerfield Commons I | | | 5.23 | % | | | 5.23 | % | | December 1, 2015 | | $ | 9,442 | | | $ | 9,587 | |
Bolingbrook Point III | | | 5.26 | | | | 5.26 | | | January 1, 2015 | | | 7,900 | | | | 7,900 | |
Fairforest Bldg. 5(1) | | | 6.33 | | | | 6.33 | | | February 1, 2024 | | | 8,840 | | | | 9,368 | |
Fairforest Bldg. 6(1) | | | 5.42 | | | | 5.42 | | | June 1, 2019 | | | 2,402 | | | | 2,703 | |
HJ Park—Bldg. 1(1) | | | — | | | | 4.98 | | | March 1, 2013 | | | 0 | | | | 369 | |
North Rhett I(1) | | | 5.65 | | | | 5.65 | | | August 1, 2019 | | | 2,827 | | | | 3,547 | |
North Rhett II(1) | | | 5.20 | | | | 5.20 | | | October 1, 2020 | | | 1,822 | | | | 2,005 | |
North Rhett IV(1) | | | 5.80 | | | | 5.80 | | | February 1, 2025 | | | 8,935 | | | | 9,427 | |
Mt Holly Bldg.(1) | | | 5.20 | | | | 5.20 | | | October 1, 2020 | | | 1,822 | | | | 2,006 | |
Orangeburg Park Bldg.(1) | | | 5.20 | | | | 5.20 | | | October 1, 2020 | | | 1,853 | | | | 2,040 | |
Kings Mountain I(1) | | | 5.27 | | | | 5.27 | | | October 1, 2020 | | | 1,578 | | | | 1,737 | |
Kings Mountain II(1) | | | 5.47 | | | | 5.47 | | | January 1, 2020 | | | 4,589 | | | | 5,105 | |
Union Cross Bldg. I(1) | | | 5.50 | | | | 5.50 | | | July 1, 2021 | | | 2,344 | | | | 2,552 | |
Union Cross Bldg. II(1) | | | 5.53 | | | | 5.53 | | | June 1, 2021 | | | 7,149 | | | | 7,791 | |
Thames Valley Five(2)(3) | | | 6.42 | | | | 6.42 | | | May 30, 2013 | | | 9,160 | | | | 8,762 | |
Lakeside Office Center | | | 6.03 | | | | 6.03 | | | September 1, 2015 | | | 8,862 | | | | 8,973 | |
Avion Midrise III & IV(4) | | | 5.52 | | | | 5.52 | | | April 1, 2014 | | | 20,464 | | | | 20,920 | |
12650 Ingenuity Drive(5) | | | 5.62 | | | | 5.62 | | | October 1, 2014 | | | 12,272 | | | | 12,677 | |
Maskew Retail Park(2)(6) | | | 5.68 | | | | 5.68 | | | August 10, 2014 | | | 22,698 | | | | 21,710 | |
One Wayside Road(7) | | | 5.66 | | | | 5.66 | | | August 1, 2015 | | | 13,745 | | | | 14,115 | |
One Wayside Road(7) | | | 5.92 | | | | 5.92 | | | August 1, 2015 | | | 11,464 | | | | 11,743 | |
100 Tice Blvd(8) | | | 5.97 | | | | 5.97 | | | September 15, 2017 | | | 20,094 | | | | 20,612 | |
100 Tice Blvd(8) | | | 5.97 | | | | 5.97 | | | September 15, 2017 | | | 20,093 | | | | 20,611 | |
Ten Parkway North | | | 4.75 | | | | 4.75 | | | January 1, 2021 | | | 12,072 | | | | 12,354 | |
Pacific Corporate Park(9) | | | — | | | | 4.89 | | | December 7, 2017 | | | 0 | | | | 81,750 | |
4701 Gold Spike Drive(10) | | | 4.45 | | | | 4.45 | | | March 1, 2018 | | | 10,342 | | | | 10,521 | |
1985 International Way(10) | | | 4.45 | | | | 4.45 | | | March 1, 2018 | | | 7,186 | | | | 7,310 | |
Summit Distribution Center(10) | | | 4.45 | | | | 4.45 | | | March 1, 2018 | | | 6,506 | | | | 6,619 | |
3770 Deerpark Boulevard(10) | | | 4.45 | | | | 4.45 | | | March 1, 2018 | | | 7,428 | | | | 7,557 | |
Tolleson Commerce Park II(10) | | | 4.45 | | | | 4.45 | | | March 1, 2018 | | | 4,467 | | | | 4,544 | |
100 Kimball Drive(11) | | | — | | | | 5.25 | | | March 1, 2021 | | | 0 | | | | 32,521 | |
70 Hudson Street(12) | | | 5.65 | | | | 5.65 | | | April 11, 2016 | | | 117,981 | | | | 119,740 | |
90 Hudson Street(12) | | | 5.66 | | | | 5.66 | | | May 1, 2019 | | | 106,465 | | | | 107,918 | |
Kings Mountain III(13) | | | — | | | | 4.47 | | | July 1, 2018 | | | 0 | | | | 11,595 | |
Sabal Pavilion(14) | | | 6.38 | | | | 6.38 | | | August 1, 2013 | | | 14,700 | | | | 14,700 | |
| | | | | | | | | | | | | | | | | | |
Consolidated Notes Payable | | | 487,502 | | | | 623,389 | |
Plus Premium | | | 7,555 | | | | 9,595 | |
Less Discount | | | (2,113 | ) | | | (2,838 | ) |
| | | | | | | | | | | | | | | | | | |
Consolidated Notes Payable Net of Premium / Discount | | $ | 492,944 | | | $ | 630,146 | |
| | | | | | | | | | | | | | | | | | |
| (1) | These notes payable were assumed from the seller of these properties on August 30, 2007 as part of the property acquisitions and were recorded at estimated fair value which includes the discount. The North Rhett III loan was paid off in full on November 22, 2011. HJ Park—Bldg. 1 loan was paid in full on December 3, 2012. |
| (2) | These loans are subject to certain financial covenants (interest coverage and loan to value). |
| (3) | We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 5.41% through its expiration on May 30, 2013, and therefore including the mortgage note’s spread of 1.01% over GBP-based LIBOR, effectively fixed the mortgage note’s all-in interest rate at 6.42% per annum for its remaining term. The stated rates, not including the interest rate swap, on the mortgage note payable were 1.54% and 1.98% at December 31, 2012 and 2011, respectively, and were based on GBP LIBOR plus a spread of 1.01%. |
| (4) | The loan was assumed from the seller of Avion Midrise III & IV on November 18, 2008 and was recorded at estimated fair value which includes the discount. |
82
| (5) | The loan was assumed from the seller of 12650 Ingenuity Drive on August 5, 2009 and was recorded at estimated fair value which includes the discount. |
| (6) | We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.42% through its expiration on August 10, 2014, and therefore, including the mortgage note’s spread of 2.26% over GBP-based LIBOR, effectively fixed the mortgage note’s all-in interest rate at 5.68% per annum for its remaining term. The stated rates, not including the interest rate swap, on the mortgage note payable were 2.78% and 3.23% at December 31, 2012 and 2011, respectively, and were based on GBP LIBOR plus a spread of 2.26%. |
| (7) | The two loans were assumed from the seller of One Wayside Road on June 24, 2010 and were recorded at estimated fair value which includes the premiums. |
| (8) | The two loans were assumed from the seller of 100 Tice Blvd. on September 28, 2010 and were recorded at estimated fair value which includes the premiums. |
| (9) | We entered into an interest rate swap agreement that fixes LIBOR at 2.69% plus 2.20%, or 4.89% per annum as of December 31, 2012, and expires on December 7, 2017. The loan was paid in full on November 27, 2012 |
| (10) | We entered into five loans totaling $37,000,000 on February 8, 2011 that are cross-collateralized by these properties. |
| (11) | We entered into an interest rate swap agreement that fixes LIBOR at 3.50% plus 1.75% per annum as of December 31, 2012 and expires on March 1, 2021. The loan was paid in full on November 27, 2012. |
| (12) | The two loans were assumed from the seller of 70 Hudson Street and 90 Hudson Street, respectively, on April 11, 2011 and were recorded at estimated fair value which includes the premiums. |
| (13) | We entered into an interest rate swap agreement that fixes LIBOR at 2.47% plus 2.00%, or 4.47% per annum as of December 31, 2012 and expires on July 1, 2018. The loan was paid in full on November 27, 2012. |
| (14) | The loan was assumed from the seller of Sabal Pavilion on December 30, 2011 and was recorded at estimated fair value which includes the premium. The anticipated maturity date as presented represents the early prepayment option date prior to the automatic debt extension that would include an increase in the interest rate to 11.38% and extend until the loan is paid in full. |
Consolidated Note Payable at Fair Value secured by real property are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Interest Rate as of
December 31, | | | | | | Notes Payable as of
December 31, | |
Property | | 2012 | | | 2011 | | | Maturity Date | | | 2012 | | | 2011 | |
Albion Mills Retail Park(1)(2)(3) | | | 5.25 | % | | | 5.25 | % | | | October 10, 2013 | | | $ | 9,373 | | | $ | 8,965 | |
Less Fair Value Adjustment | | | | | | | | | | | | | | | (85 | ) | | | (190 | ) |
| | | | | | | | | | | | | | | | | | | | |
Consolidated Note Payable at Fair Value | | | | | | | | | | | | | | $ | 9,288 | | | $ | 8,775 | |
| | | | | | | | | | | | | | | | | | | | |
| (1) | The loan is subject to certain financial covenants (interest coverage and loan to value). |
| (2) | The Albion Mills Retail Park notes payable balance is presented at cost basis. This loan is carried on our balance sheet at fair value (see Note 17). |
| (3) | We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.94% through its expiration on October 10, 2013, and therefore, including the mortgage note’s spread of 1.31% over GBP-based LIBOR, effectively fixed the mortgage note’s all-in interest rate at 5.25% per annum for its remaining term. The stated rates, not including the interest rate swap, on the mortgage note payable were 1.84% and 2.28% at December 31, 2012 and 2011, respectively and were based on GBP LIBOR plus a spread of 1.31%. |
83
Unconsolidated Notes Payable secured by real property are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | Interest Rate as of December 31, | | | Maturity Date | | Notes Payable as of December 31,(1) | |
Property | | 2012 | | | 2011 | | | | 2012 | | | 2011 | |
Buckeye Logistics Center(2) | | | 5.58 | % | | | 5.58 | % | | October 1, 2013 | | $ | 16,000 | | | $ | 16,000 | |
Afton Ridge Shopping Center | | | 5.70 | | | | 5.70 | | | October 1, 2013 | | | 22,950 | | | | 22,950 | |
Aspen Corporate Center 500(2) | | | 5.58 | | | | 5.58 | | | October 1, 2013 | | | 16,960 | | | | 16,960 | |
AllPoints at Anson Bldg. 1(2) | | | 5.58 | | | | 5.58 | | | October 1, 2013 | | | 13,600 | | | | 13,600 | |
12200 President’s Court(2) | | | 5.58 | | | | 5.58 | | | October 1, 2013 | | | 17,280 | | | | 17,280 | |
201 Sunridge Blvd.(2). | | | 5.58 | | | | 5.58 | | | October 1, 2013 | | | 15,520 | | | | 15,520 | |
AllPoints Midwest Bldg. 1(2) | | | 5.58 | | | | 5.58 | | | January 1, 2014 | | | 19,200 | | | | 19,200 | |
125 Enterprise Parkway(2) | | | 5.58 | | | | 5.58 | | | January 1, 2014 | | | 21,440 | | | | 21,440 | |
Celebration Office Center III(3) | | | 4.25 | | | | 4.25 | | | December 1, 2015 | | | 7,338 | | | | 7,472 | |
22535 Colonial Pkwy(3) | | | 4.25 | | | | 4.25 | | | December 1, 2015 | | | 6,566 | | | | 6,685 | |
Fairfield Distribution Ctr. IX | | | 5.00 | | | | 5.00 | | | September 1, 2021 | | | 3,643 | | | | 3,721 | |
Northpoint III(3) | | | 4.25 | | | | 4.25 | | | December 1, 2015 | | | 8,497 | | | | 8,652 | |
Goodyear Crossing II(3) | | | 4.25 | | | | 4.25 | | | December 1, 2015 | | | 16,221 | | | | 16,517 | |
1400 Perimeter Park Drive(3) | | | 4.25 | | | | 4.25 | | | December 1, 2015 | | | 1,931 | | | | 1,966 | |
3900 North Paramount Parkway(3) | | | 4.25 | | | | 4.25 | | | December 1, 2015 | | | 6,373 | | | | 6,489 | |
3900 South Paramount Parkway(3) | | | 4.25 | | | | 4.25 | | | December 1, 2015 | | | 6,373 | | | | 6,489 | |
Miramar I(3) | | | 4.25 | | | | 4.25 | | | December 1, 2015 | | | 7,570 | | | | 7,708 | |
Miramar II(3) | | | 4.25 | | | | 4.25 | | | December 1, 2015 | | | 10,196 | | | | 10,382 | |
Point West I | | | 3.41 | | | | 3.41 | | | December 6, 2016 | | | 9,093 | | | | 9,353 | |
McAuley Place | | | 3.98 | | | | 3.98 | | | September 1, 2018 | | | 10,864 | | | | 11,134 | |
Sam Houston Crossing I | | | 4.42 | | | | 4.42 | | | September 1, 2021 | | | 8,619 | | | | 8,765 | |
533 & 555 Maryville Centre | | | 5.24 | | | | 5.24 | | | October 1, 2021 | | | 19,275 | | | | 19,555 | |
Regency Creek I | | | 5.24 | | | | 5.24 | | | October 1, 2021 | | | 8,851 | | | | 8,979 | |
Atrium I | | | 3.78 | | | | 3.78 | | | May 31, 2018 | | | 18,762 | | | | 19,510 | |
Two Easton Oval | | | 3.95 | | | | 3.95 | | | January 31, 2019 | | | 5,322 | | | | 5,470 | |
West Lake at Conway | | | 5.00 | | | | 5.00 | | | September 1, 2021 | | | 7,598 | | | | 7,761 | |
The Landings I & II | | | 5.24 | | | | 5.24 | | | October 1, 2021 | | | 23,603 | | | | 23,945 | |
Norman Pointe I & II | | | 5.24 | | | | 5.24 | | | October 1, 2021 | | | 35,011 | | | | 35,518 | |
Weston Pointe I – IV | | | 5.24 | | | | 5.24 | | | October 1, 2021 | | | 36,191 | | | | 36,715 | |
Graben Distribution Center I & II | | | 2.39 | | | | — | | | July 27, 2017 | | | 32,814 | | | | — | |
Koblenz Distribution Center | | | 2.27 | | | | — | | | November 11, 2017 | | | 33,500 | | | | — | |
| | | | | | | | | | | | | | | | | | |
Unconsolidated Notes Payable | | $ | 467,161 | | | $ | 405,736 | |
| | | | | | | | | | | | | | | | | | |
| (1) | Unconsolidated notes payable amounts are at our pro rata share of effective ownership, which is 80% for all except for the Afton Ridge Shopping Center which is 90%. |
| (2) | These seven loans are cross-collateralized. |
| (3) | These nine loans are cross-collateralized. |
Upon the maturity of our debt, there is a market risk as to the prevailing rates at the time of refinancing. Changes in market rates on our fixed-rate debt affect the fair market value of our debt but it has no impact on interest expense or cash flow. A 100 basis point increase or decrease in interest rates on our fixed rate debt would not increase or decrease our annual interest expense on our fixed rate debt.
84
The fair value of long-term debt was estimated based on current interest rates available to us for debt instruments with similar terms. The following tables summarize our financial instruments and their calculated fair value at December 31, 2012 and 2011 (in thousands):
| | | | | | | | |
| | | As of December 31, 2012 | |
| | | Carrying
Value | | | Total Fair
Value | |
Financial Assets (Liabilities): | | | | | | | | |
Interest Rate Swaps—Non Qualifying | | $ | (423 | ) | | $ | (423 | ) |
Interest Rate Swaps—Qualifying | | | (1,015 | ) | | | (1,015 | ) |
Notes Payable | | | (502,232 | ) | | | (523,739 | ) |
Loan Payable | | | (265,000 | ) | | | (265,000 | ) |
A 100 basis point increase or decrease in interest rates would increase or decrease the fair market value of our notes payable by $17,763,000 at December 31, 2012. In addition, a 100 basis point increase or decrease in interest rates would either increase or decrease annual variable interest expense as follows; approximately $92,000 on the Thames Valley Five property, approximately $94,000 on the Albion Mills Retail Park property and approximately $227,000 on the Maskew Retail Park property.
| | | | | | | | |
| | | As of December 31, 2011 | |
| | | Carrying
Value | | | Carrying
Value | |
Financial Assets (Liabilities): | | | | | | | | |
Interest Rate Swaps—Non Qualifying | | $ | (958 | ) | | $ | (958 | ) |
Interest Rate Swaps—Qualifying | | | (12,340 | ) | | | (12,340 | ) |
Notes Payable | | | (638,921 | ) | | | (664,910 | ) |
Loan Payable | | | (25,000 | ) | | | (25,000 | ) |
In addition to changes in interest rates, the value of our real estate is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees, which may affect our ability to refinance our debt if necessary.
Debt Maturities
The following table details our consolidated and unconsolidated debt maturities as of December 31, 2012 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated Debt | | | Unconsolidated Debt(1) | | | Consolidated &
Unconsolidated Debt(1) | |
| | | Scheduled
Amortization | | | Term
Maturities | | | Total | | | Scheduled
Amortization | | | Term
Maturities | | | Total | | | Scheduled
Amortization | | | Term
Maturities | | | Total | |
2013(2) | | $ | 11,224 | | | | 33,233 | | | $ | 44,457 | | | $ | 5,071 | | | $ | 102,310 | | | $ | 107,381 | | | $ | 16,295 | | | $ | 135,543 | | | $ | 151,838 | |
2014 | | | 11,540 | | | | 54,010 | | | | 65,550 | | | | 5,262 | | | | 40,640 | | | | 45,902 | | | | 16,802 | | | | 94,650 | | | | 111,452 | |
2015 | | | 11,277 | | | | 48,749 | | | | 60,026 | | | | 5,337 | | | | 66,959 | | | | 72,296 | | | | 16,614 | | | | 115,708 | | | | 132,322 | |
2016(3) | | | 9,687 | | | | 376,276 | | | | 385,963 | | | | 4,137 | | | | 8,052 | | | | 12,189 | | | | 13,824 | | | | 384,328 | | | | 398,152 | |
2017 | | | 9,116 | | | | 34,327 | | | | 43,443 | | | | 4,031 | | | | 66,315 | | | | 70,346 | | | | 13,147 | | | | 100,642 | | | | 113,789 | |
2018 | | | 7,815 | | | | 32,165 | | | | 39,980 | | | | 3,640 | | | | 23,822 | | | | 27,462 | | | | 11,455 | | | | 55,987 | | | | 67,442 | |
2019 | | | 5,901 | | | | 95,265 | | | | 101,166 | | | | 3,121 | | | | 4,416 | | | | 7,537 | | | | 9,022 | | | | 99,681 | | | | 108,703 | |
2020 | | | 4,349 | | | | — | | | | 4,349 | | | | 3,273 | | | | — | | | | 3,273 | | | | 7,622 | | | | — | | | | 7,622 | |
2021 | | | 2,476 | | | | 9,271 | | | | 11,747 | | | | 2,518 | | | | 118,257 | | | | 120,775 | | | | 4,994 | | | | 127,528 | | | | 132,522 | |
2022 | | | 1,870 | | | | — | | | | 1,870 | | | | — | | | | — | | | | — | | | | 1,180 | | | | — | | | | 1,180 | |
Thereafter | | | 3,324 | | | | — | | | | 3,324 | | | | — | | | | — | | | | — | | | | 3,324 | | | | — | | | | 3,324 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 78,579 | | | $ | 683,296 | | | $ | 761,875 | | | $ | 36,390 | | | $ | 430,771 | | | $ | 467,161 | | | $ | 114,969 | | | $ | 1,114,067 | | | $ | 1,229,036 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
85
Fixed and Floating Interest Rate Debt as of December 31, 2012 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated Debt | | | Unconsolidated Debt(1) | | | Consolidated &
Unconsolidated Debt(1) | |
| | | Scheduled
Amorti
zation | | | Term
Maturities | | | Total | | | Scheduled
Amorti
zation | | | Term
Maturities | | | Total | | | Scheduled
Amorti
zation | | | Term
Maturities | | | Total | |
Amount | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed Interest Rate Debt | | $ | 78,579 | | | $ | 418,296 | | | $ | 496,875 | | | $ | 36,390 | | | $ | 430,771 | | | $ | 467,161 | | | $ | 114,969 | | | $ | 849,067 | | | $ | 964,036 | |
Floating Interest Rate Debt | | | — | | | | 265,000 | | | | 265,000 | | | | — | | | | — | | | | — | | | | — | | | | 265,000 | | | | 265,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 78,579 | | | $ | 683,296 | | | $ | 761,875 | | | $ | 36,390 | | | $ | 430,771 | | | $ | 467,161 | | | $ | 114,969 | | | $ | 1,114,067 | | | $ | 1,229,036 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted Average Remaining Term (years) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed Interest Rate Debt | | | | | | | | | | | 4.43 | | | | | | | | | | | | 4.60 | | | | | | | | | | | | 4.51 | |
Floating Interest Rate Debt | | | | | | | | | | | 3.71 | | | | | | | | | | | | N/A | | | | | | | | | | | | 3.71 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | 4.28 | | | | | | | | | | | | 4.60 | | | | | | | | | | | | 4.40 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted Average Interest Rate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed Interest Rate Debt | | | | | | | | | | | 5.60 | % | | | | | | | | | | | 4.63 | % | | | | | | | | | | | 5.13 | % |
Floating Interest Rate Debt | | | | | | | | | | | 1.82 | % | | | | | | | | | | | N/A | | | | | | | | | | | | 1.82 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | 4.28 | % | | | | | | | | | | | 4.63 | % | | | | | | | | | | | 4.41 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Unconsolidated debt amounts are at our pro rata share of effective ownership. |
| (2) | The Thames Valley Five consolidated debt ($9,160,000 at December 31, 2012) maturity date may be extended for an additional two years from May, 2013 to May, 2015. In addition, Afton Ridge has the option to extend the maturity date of the unconsolidated debt ($22,950,000 at December 31, 2012—our share) for one additional year from October, 2013 to October, 2014. |
| (3) | Consolidated debt amount includes a $265,000,000 outstanding balance on the Unsecured Credit Facility as of December 31, 2012. The Unsecured Credit Facility may be extended for an additional year from September 2016 to September 2017. |
Encumbered and Unencumbered Properties
The following table details our Encumbered and Unencumbered properties as of December 31, 2012 (Approximate Acquisition Cost and Debt Balance in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Consolidated Properties | | | Unconsolidated properties(1) | | | Consolidated &
Unconsolidated Properties(1) | |
| | | Properties | | | Approximate
Acquisition
Cost | | | Debt
Balance | | | Properties | | | Approximate
Acquisition Cost | | | Debt
Balance | | | Properties | | | Approximate
Acquisition
Cost | | | Debt
Balance | |
Encumbered Properties | | | 31 | | | $ | 932,464 | | | $ | 496,875 | | | | 38 | | | $ | 957,515 | | | $ | 467,161 | | | | 69 | | | $ | 1,889,979 | | | $ | 964,036 | |
Unencumbered Properties | | | 51 | | | | 1,137,808 | | | | — | | | | 9 | | | | 113,752 | | | | — | | | | 60 | | | | 1,251,560 | | | | — | |
Unsecured Debt | | | — | | | | — | | | | 265,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 265,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Properties | | | 82 | | | $ | 2,070,272 | | | $ | 761,875 | | | | 47 | | | $ | 1,071,267 | | | $ | 467,161 | | | | 129 | | | $ | 3,141,539 | | | $ | 1,229,036 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Number of Properties at 100%. Approximate Acquisition Cost and Debt Balance for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia. |
86
Subsequent Events
On January 30, 2013, we acquired 100% of Trammel Crow Company’s (“TCC”) interest in our joint venture with TCC which owned and developed our 1400 Atwater Drive property, a 300,000 square foot office development in Malvern, Pennsylvania, a suburb of Philadelphia. 1400 Atwater Drive is 100% leased to Endo Pharmaceuticals, Inc. for use as their corporate headquarters through November 2024 and the lease is guaranteed by Endo Health Solutions Inc. (NASDAQ: ENDP), Endo Pharmaceuticals’ parent company, a specialty pharmaceutical and healthcare solutions company. The cost of the acquisition was approximately $3,431,000. We funded this acquisition using cash reserves and borrowings under our Unsecured Credit Facility.
On February 7, 2013, we filed a registration statement on Form S-8 to register 500,000 common shares of beneficial ownership pursuant to our amended and restated 2004 equity incentive plan.
On February 7, 2013, our Board’s independent trustees, Messrs. Black, Orphanides and Salvatore, were awarded equity grants under the amended and restated 2004 equity incentive plan on the following terms: (i)(x) Mr. Black’s award was for $100,000 in common shares (or 10,000 shares at $10.00 per share) and (y) Messrs. Orphanides and Salvatore each were awarded $25,000 in common shares (or 2,500 shares at $10.00 per share) for a total of $150,000; and (ii) each award vested in its entirety, upon issuance.
On February 19, 2013, we entered into an agreement with TCC that will obligate us to form a joint venture with TCC upon the expiration of certain contingencies. We would own a 95% interest and TCC would own a 5% interest in the joint venture. The joint venture will develop a four building, 454,801 square foot build-to-suit office complex in Malvern, Pennsylvania, a suburb of Philadelphia, for Shire US, Inc., which will serve as their US corporate headquarters under a fifteen year lease. Shire US, Inc. is the US based subsidiary of Irish pharmaceutical company Shire Plc (LSE: SHP, NASDAQ: SHPG), a major international pharmaceutical company. The total project cost is anticipated to be approximately $122,288,000 and upon completion of construction and satisfaction of closing obligations, we will acquire 100% of TCC’s interest in the joint venture. There can be no assurance that the joint venture will be formed or that the project will be completed.
On March 1, 2013, we acquired 100% of Duke Realty Limited Partnership’s (“Duke Realty”) interests in 17 properties that were held in our joint venture with Duke Realty (“Duke JV”). The properties are located in major submarkets of Phoenix, Raleigh/Durham, Houston, Columbus, Cincinnati, Orlando, Ft. Lauderdale, Minneapolis and Dallas and consisted of 16 office buildings and one warehouse/distribution/logistics building totaling 3,318,402 square feet. The acquisition was structured such that membership interests in each of the subsidiaries that hold the properties were distributed to Duke Realty and CSP OP on a pro rata basis in accordance with their percentage ownership interests in the Duke JV (80% to CSP OP and 20% Duke Realty) and CSP OP then purchased Duke Realty’s 20% membership interests in those subsidiaries, resulting in CSP OP owning a 100% interest in each of the property-owning subsidiaries. The aggregate purchase price that CSP OP paid to Duke Realty in connection with the acquisition was approximately $98,140,000, which is 20% of approximately $490,700,000 exclusive of fees and customary closing costs, but inclusive of approximately $216,010,000 of existing mortgage financing. We funded this acquisition using cash reserves and borrowings under our Unsecured Credit Facility.
On March 5, 2013, we entered into an unsecured term loan in the amount of $50,000,000 with TD Bank, N.A (the “TD Term Loan”). Upon closing the TD Term Loan, we simultaneously entered into an interest rate swap agreement with TD Bank to effectively fix the interest rate on the TD Term Loan at 3.425% per annum for its seven-year term, based upon the TD Term Loan’s current stated applicable margin, which may vary during its term based upon the then-current leverage ratio or our then-current credit rating. The TD Term Loan contains customary representations and warrants and covenants. We used the proceeds of the TD Term Loan to repay a portion of our borrowings under our Unsecured Credit Facility.
On March 7, 2013, we entered into an unsecured term loan (the “Wells Fargo Term Loan”) in the amount of $200,000,000 with Wells Fargo Bank, National Association (“Wells Fargo”) and certain other lenders defined in the Wells Fargo Term Loan. Upon closing the Wells Fargo Term Loan, we simultaneously entered into an interest rate swap agreement with Wells Fargo to effectively fix the interest rate on the Wells Fargo Term Loan at 2.4885% per annum for its five-year term, based upon the Wells Fargo Term Loan’s current stated applicable margin, which may vary based upon the then-current leverage ratio or our then-current credit rating. The Wells Fargo Term Loan contains customary representations and warrants and covenants. We used the proceeds of the Wells Fargo Term Loan to repay a portion of our borrowings under our Unsecured Credit Facility.
On March 7, 2013, we entered into a First Amendment (the “First Amendment”) to the credit agreement entered into on September 13, 2012 with a group of lenders, which provided us with an unsecured, revolving credit facility in the initial amount of $700,000,000 (the “Unsecured Credit Facility”). The First Amendment modified the Unsecured Credit Facility to among other things: (i) amend certain definitions, (ii) amend certain requirements of the guarantor, (iii) amend the requirements relating to quarterly financial statements, annual statements, compliance certificates and certain other SEC filings, (iv) amend the requirements relating to electronic delivery of information, (v) provide the Company with an option to restate the tangible net worth covenant in the event of a redemption event, (vi) remove the restriction on negative pledges, (vii) amend the restrictions on intercompany transfers and (viii) amend certain disclosure and confidentiality provisions.
87
On March 15, 2013, a total of 281,625 restricted common shares were granted to our named executive officers (Messrs. Cuneo, Kianka and Reid) based on the executive’s achievement of performance objectives during 2012, as determined in the discretion of our Compensation Committee. Additionally, 21 of our employees were granted 117,300 restricted shares, in the aggregate, on March 15, 2013. One-third of the restricted shares granted to our named executive officers and employees will vest in each of the first three anniversaries of grant if the grantee is employed by the company on such anniversary.
On March 19, 2013, our Board of Trustees terminated our amended and restated 2004 performance bonus plan.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
For a discussion of quantitative and qualitative disclosures about market risk, see the “Quantitative and Qualitative Disclosures About Market Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations above.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See Part IV Item 15 beginning on page F-1 of this Annual Report on Form 10-K incorporated herein by reference.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
88
| ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We have formally adopted a policy for disclosure controls and procedures that provides guidance on the evaluation of disclosure controls and procedures and is designed to ensure that all corporate disclosure is complete and accurate in all material respects and that all information required to be disclosed in the periodic reports submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods and in the manner specified in the Securities and Exchange Commission’s rules and forms and that disclosure controls and procedures were effective to ensure that the information required to be disclosed by us is accumulated and communicated to our management, including our chief executive officer and chief financial offer, as appropriate to allow timely decisions regarding required disclosure. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports. Also, we have an investment in five unconsolidated entities. As we do not control these entities, our disclosure controls and procedures with respect to these entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, as required by the Securities Exchange Act Rule 13(a)-15(e), our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Securities Exchange Act Rules 13a-15(f), including maintenance of (i) records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, and (ii) policies and procedures that provide reasonable assurance that (a) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, (b) our receipts and expenditures are being made only in accordance with authorizations of management and our Board of Trustees and (c) we will prevent or timely detect unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of the inherent limitations of any system of internal control. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses of judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper overriding of controls. As a result of such limitations, there is risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on our evaluation under the COSO framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2012. The effectiveness of internal control over financial reporting as of December 31, 2012 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Controls Over Financial Reporting
No changes in internal control over financial reporting occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
89
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of
Chambers Street Properties
Princeton, New Jersey
We have audited the internal control over financial reporting of Chamber Street Properties and subsidiaries (the “Company”) as of December 31, 2012, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 the accompanying Management’s Report on Internal Control 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 by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting 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, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2012 of the Company and our report dated March 22, 2013 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 22, 2013
| ITEM 9B. | OTHER INFORMATION |
None.
90
PART III
| ITEM 10. | TRUSTEES, EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE |
The information required by Item 10 will be set forth in our Definitive Proxy Statement for our 2013 Annual Meeting of Shareholders, expected to be filed pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended, on or prior to April 30, 2013 (the “2013 Proxy Statement”), and is incorporated herein by reference in accordance with General Instruction G.(3) to Form 10-K.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by Item 11 will be set forth in the 2013 Proxy Statement and is incorporated herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MATTERS |
The information required by Item 12 will be set forth in the 2013 Proxy Statement and is incorporated herein by reference.
| ITEM 13. | CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND TRUSTEE INDEPENDENCE |
The information required by Item 13 will be set forth in the 2013 Proxy Statement and is incorporated herein by reference.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by Item 14 will be set forth in the 2013 Proxy Statement and is incorporated herein by reference.
91
PART IV
| ITEM | 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| a) | Financial Statements and Schedules |
Reference is made to the “Index to Consolidated Financial Statements” on page F-1 of this report and the Consolidated Financial Statements included herein, beginning on page F-2.
In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about us or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
| | ¡ | | should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; |
| | ¡ | | have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; |
| | ¡ | | may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and |
| | ¡ | | were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about us may be found elsewhere in this Annual Report on Form 10-K and our other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
92
The following exhibits are filed as part of this Annual Report on Form 10-K.
EXHIBIT INDEX
| | |
Exhibit No. | | |
| |
| 3.1 | | Second Amended and Restated Declaration of Trust of CB Richard Ellis Realty Trust (Previously filed as Exhibit 3.1 to Pre-Effective Amendment No. 5 to the Registration Statement on Form S-11 (File No. 333-127405) filed September 13, 2006 and incorporated herein by reference). |
| |
| 3.2 | | Articles of Amendment of Declaration of Trust of CB Richard Ellis Realty Trust (Previously filed as exhibit 3.1 to the current report on Form 8-K (File No. 000-53200) filed June 22, 2009 and incorporated herein by reference). |
| |
| 3.3 | | Second Articles of Amendment to the Second Amended and Restated Declaration of Trust of CB Richard Ellis Realty Trust (Previously filed as Exhibit 3.1 to the Current Report on Form 8-K (File 000-53200) filed June 22, 2012 and incorporated herein by reference). |
| |
| 3.4 | | Third Amended and Restated Bylaws of Chambers Street Properties (Previously filed as Exhibit 3.2 to the Current Report on Form 8-K (File 000-53200) filed June 22, 2012 and incorporated herein by reference). |
| |
| 4.1 | | Second Amended and Restated Dividend Reinvestment Plan (Previously filed as Exhibit 10.6 to the Current Report on Form 8-K (File 000-53200) filed July 5, 2012 and incorporated herein by reference). |
| |
| 4.2 | | Amended and Restated Share Redemption Program (Previously filed as Exhibit 4.2 to Current Report on Form 8-K (File No. 000-53200) filed on February 3, 2012 and incorporated herein by reference). |
| |
| 10.1 | | Amended and Restated 2004 Equity Incentive Plan (Previously filed as Exhibit 10.3 to the Current Report on Form 8-K (File 000-53200) filed July 5, 2012 and incorporated herein by reference). |
| |
| 10.2 | | Amended and Restated 2004 Performance Bonus Plan (Previously filed as Exhibit 10.4 to the Current Report on Form 8-K (File 000-53200) filed July 5, 2012 and incorporated herein by reference). |
| |
| 10.3 | | Third Amended and Restated Agreement of Limited Partnership, by and among CB Richard Ellis Realty Trust and the limited partners named therein, dated April 27, 2012 (Previously filed as Exhibit 10.3 to the Current Report on Form 8-K (File 000-53200) filed April 30, 2012 and incorporated herein by reference). |
| |
| 10.4 | | Amendment No. 1 to Third Amended and Restated Agreement of Limited Partnership, by and among Chambers Street Properties and the limited partners named therein, entered into as of July 1, 2012 (Previously filed as Exhibit 10.7 to the Quarterly Report on Form 10-Q (File 000-53200) filed August 14, 2012 and incorporated herein by reference). |
| |
| 10.5 | | Form of Amended and Restated Indemnification Agreement (Previously filed as Exhibit 10.18 to Pre-Effective Amendment No. 5 to the Registration Statement on Form S-11 (File No. 333-127405) filed September 13, 2006 and incorporated herein by reference). |
| |
| 10.6 | | Credit Agreement, dated August 30, 2007, by and among CBRE Operating Partnership, L.P. and CBRERT Carolina TRS, Inc., as borrowers, CB Richard Ellis Realty Trust, Bank of America, N.A. as Administrative Agent, and the other lenders thereto (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File No. 333-127405) filed September 5, 2007 and incorporated herein by reference). |
| |
| 10.7 | | Contribution Agreement, dated May 5, 2008, by and among Duke Realty Limited Partnership, Duke/Hulfish, LLC and CBRE Operating Partnership, L.P. (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-53200) filed May 6, 2008 and incorporated herein by reference). |
| |
| 10.8 | | Duke/Hulfish, LLC Limited Liability Company Agreement, by and among CBRE Operating Partnership, L.P. and Duke Realty Limited Partnership, dated June 12, 2008 (Previously filed as Exhibit 10.3 to Form 10-Q (File No. 000-53200) filed November 14, 2008 and incorporated herein by reference). |
| |
| 10.9 | | First Amendment to the Contribution Agreement, by and between Duke Realty Limited Partnership, Duke/Hulfish LLC and CBRE Operating Partnership, L.P. dated September 12, 2008 (Previously filed as Exhibit 10.7 to the Quarterly Report on Form 10-Q (File No. 000-53200) filed November 14, 2008 and incorporated herein by reference). |
| |
| 10.10 | | Side Letter, between CB Richard Ellis Realty Trust, CB Richard Ellis Investors and CBRE Advisors LLC dated February 12, 2009 (Previously filed as Exhibit 1.2 to the Current Report on Form 8-K (File No. 000-53200) filed February 18, 2009 and incorporated herein by reference). |
93
| | |
Exhibit No. | | |
| |
| 10.11 | | Side Letter between CB Richard Ellis Realty Trust and CNL Securities Corp. dated February 12, 2009 (Previously filed as Exhibit 1.3 to the Current Report on Form 8-K (File No. 000-53200) filed February 18, 2009 and incorporated herein by reference). |
| |
| 10.12 | | Shareholders’ Agreement by and among Goodman Europe Development Trust, RT Princeton CE Holdings, LLC and Goodman Princeton Holdings (LUX) S.À R.L., dated June 10, 2010 (Previously filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 000-53200) filed August 13, 2010 and incorporated herein by reference). |
| |
| 10.13 | | Shareholders’ Agreement by and among Goodman Jersey Holdings Trust, RT Princeton UK Holdings, LLC and Goodman Princeton Holdings (Jersey) Limited, dated June 10, 2010 (Previously filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 000-53200) filed August 13, 2010 and incorporated herein by reference). |
| |
| 10.14 | | Agreement of Sale, by and among 70 Hudson Street, L.L.C., 70 Hudson Street Urban Renewal Associates, L.L.C. and RT 70 Hudson, LLC dated October 15, 2010 (Previously filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q (File 000-53200) filed November 12, 2010 and incorporated herein by reference). |
| |
| 10.15 | | Agreement of Sale, by and among 90 Hudson Street, L.L.C., 90 Hudson Street Urban Renewal Associates, L.L.C. and RT 90 Hudson, LLC dated October 15, 2010 (Previously filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q (File 000-53200) filed November 12, 2010 and incorporated herein by reference). |
| |
| 10.16 | | Agreement for Purchase and Sale of Real Property, by and between AOL Inc. and RT Pacific Blvd, LLC, dated October 29, 2010 (Previously filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q (File 000-53200) filed November 12, 2010 and incorporated herein by reference). |
| |
| 10.17 | | Purchase and Sale Agreement, by and among Duke Realty Limited Partnership, Duke Secured Financing 2009-1PAC, LLC, Duke Realty Ohio and Duke/Princeton, LLC, dated December 17, 2010 (Previously filed as Exhibit 10.2 to the Current Report on Form 8-K (File 000-53200) filed December 23, 2010 and incorporated herein by reference). |
| |
| 10.18 | | Duke/Hulfish, LLC Amended and Restated Limited Liability Company Agreement, by and among CBRE Operating Partnership, L.P. and Duke Realty Limited Partnership, dated December 17, 2010 (Previously filed as Exhibit 10.3 to the Current Report on Form 8-K (File 000-53200) filed December 23, 2010 and incorporated herein by reference). |
| |
| 10.19 | | Loan Agreement dated March 24, 2011, between Duke/Hulfish, LLC and Wells Fargo Bank, National Association (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K/A (File No. 000-53200) filed March 29, 2011 and incorporated herein by reference). |
| |
| 10.20 | | Assumption of Mortgage and Security Agreement by and among U.S. Bank National Association, as trustee, as successor-in-interest to Bank of America, National Association, as successor by merger to LaSalle Bank National Association, as trustee for the registered holders of LB-UBS Commercial Mortgage Trust 2006-C4, Commercial Mortgage Pass-through Certificates, Series 2006-C4, 70 Hudson Street L.L.C., 70 Hudson Street Urban Renewal Associates, L.L.C., Hartz Financial Corp., RT 70 Hudson Street LLC, RT 70 Hudson Street Urban Renewal, LLC, CBRE Operating Partnership, L.P., and CB Richard Ellis Realty Trust dated April 11, 2011 (Previously filed as Exhibit 10.36 to Post-Effective Amendment No. 9 to the Registration Statement on Form S-11 (File No. 333-152653) filed on April 21, 2011 and incorporated herein by reference). |
| |
| 10.21 | | Loan Agreement, by and between 70 Hudson Street L.L.C., 70 Hudson Street Urban Renewal Associates, L.L.C. and Lehman Brothers Bank, FSB dated April 11, 2006 (Previously filed as Exhibit 10.37 to Post-Effective Amendment No. 9 to the Registration Statement on Form S-11 (File No. 333-152653) filed on April 21, 2011 and incorporated herein by reference). |
| |
| 10.22 | | Loan Assumption and Modification Agreement, by and among RT 90 Hudson, LLC and 90 Hudson Street L.L.C. and Teachers Insurance and Annuity Association of America dated April 11, 2011 (Previously filed as Exhibit 10.38 to Post-Effective Amendment No. 9 to the Registration Statement on Form S-11 (File No. 333-152653) filed on April 21, 2011 and incorporated herein by reference). |
| |
| 10.23 | | Promissory Note, by and between Teachers Insurance and Annuity Association of America and 90 Hudson Street L.L.C. dated April 11, 2006 (Previously filed as Exhibit 10.39 to Post-Effective Amendment No. 9 to the Registration Statement on Form S-11 (File No. 333-152653) filed on April 21, 2011 and incorporated herein by reference). |
| |
| 10.24 | | Omnibus Amendment to Loan Documents, by and between RT 90 Hudson, LLC and Teachers Insurance and Annuity Association of America dated July 14, 2011 (Previously filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q (File 000-53200) filed August 15, 2011 and incorporated herein by reference). |
94
| | |
Exhibit No. | | |
| |
| 10.25 | | Amended and Restated Promissory Note, by and between RT 90 Hudson, LLC and Teachers Insurance and Annuity Association of America dated July 14, 2011 (Previously filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q (File 000-53200) filed August 15, 2011 and incorporated herein by reference). |
| |
| 10.26 | | Transition to Self-Management Agreement, by and among CB Richard Ellis Realty Trust, CBRE Operating Partnership, L.P., CBRE Global Investors, LLC and CBRE Advisors LLC, dated April 27, 2012 (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed April 30, 2012 and incorporated herein by reference). |
| |
| 10.27 | | Transitional Services Agreement, by and among Chambers Street Properties, CSP Operating Partnership, LP and CBRE Advisors LLC, dated July 1, 2012 (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed July 5, 2012 and incorporated herein by reference). |
| |
| 10.28 | | Indemnification Agreement with Louis P. Salvatore (Previously filed as Exhibit 10.2 to the Current Report on Form 8-K (File 000-53200) filed July 5, 2012 and incorporated herein by reference). |
| |
| 10.29 | | Amended and Restated Form of Share Award Agreement (Previously filed as Exhibit 10.5 to the Current Report on Form 8-K (File 000-53200) filed July 5, 2012 and incorporated herein by reference). |
| |
| 10.30 | | Credit Agreement, dated September 13, 2012, by and among CSP Operating Partnership, LP as Borrower, Chambers Street Properties, as Parent, Wells Fargo Bank, National Association as Administrative Agent, the financial institutions party thereto as Lenders, Wells Fargo Securities, LLC, RBC Capital Markets, as Joint Lead Arrangers and Joint Bookrunners, Royal Bank of Canada, as Syndication Agent and each of Bank of Montreal, Barclays Bank PLC, JPMorgan Chase Bank, N.A., Regions Bank and TD Bank, N.A. as a Documentation Agent (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed September 19, 2012 and incorporated herein by reference). |
| |
| 10.31 | | Employment Agreement by and among Chambers Street Properties, CSP Operating Partnership, LP and Jack A. Cuneo (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed October 1, 2012 and incorporated herein by reference). |
| |
| 10.32 | | Employment Agreement by and among Chambers Street Properties, CSP Operating Partnership, LP and Philip L. Kianka (Previously filed as Exhibit 10.2 to the Current Report on Form 8-K (File 000-53200) filed October 1, 2012 and incorporated herein by reference). |
| |
| 10.33 | | Employment Agreement by and among Chambers Street Properties, CSP Operating Partnership, LP and Martin A. Reid (Previously filed as Exhibit 10.3 to the Current Report on Form 8-K (File 000-53200) filed October 1, 2012 and incorporated herein by reference). |
| |
| 10.34 | | Form of Restricted Share Award Agreement (Previously filed as Exhibit 10.4 to the Current Report on Form 8-K (File 000-53200) filed October 1, 2012 and incorporated herein by reference). |
| |
| 10.35 | | Omnibus Agreement, by and between Duke Realty Limited Partnership and CSP Operating Partnership, LP dated January 29, 2013 (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed January 31, 2013 and incorporated herein by reference). |
| |
| 10.36 | | First Amendment to the Amended and Restated Limited Liability Company Agreement of Duke/Hulfish, LLC (previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed March 7, 2013 and incorporated herein by reference). |
| |
| 10.37 | | First Amendment to Credit Agreement, dated March 7, 2013, by and among CSP Operating Partnership, LP as Borrower, Chambers Street Properties, as Parent, Wells Fargo Bank, National Association, as Administrative Agent, the financial institutions party thereto as Lenders, Wells Fargo Bank, National Association, Bank of Montreal, Barclays Bank PLC, JPMorgan Chase Bank, N.A., Regions Bank, TD Bank, Citibank, N.A., Union Bank, N.A., PNC Bank, National Association, RBS Citizens, N.A. U.S. Bank National Association, and Goldman Sachs Bank USA (previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed on March 13, 2013 and incorporated herein by reference). |
| |
| 10.38 | | Term Loan Agreement, dated March 7, 2013, by and among CSP Operating Partnership, LP as Borrower, Chambers Street Properties, as Parent, Wells Fargo Bank, National Association, as Administrative Agent, the financial institutions party thereto as Lenders, Wells Fargo Bank, National Association, Bank of Montreal, JPMorgan Chase Bank, N.A. Regions Bank, Union Bank, N.A., PNC Bank, National Association, RBS Citizens, N.A. and U.S. Bank National Association (previously filed as Exhibit 10.2 to the Current Report on Form 8-K (File 000-53200) filed on March 13, 2013 and incorporated herein by reference). |
| |
| 21.1 | | List of Subsidiaries of Chambers Street Properties, filed herewith. |
95
| | |
Exhibit No. | | |
| |
| 23.1 | | Consent of Deloitte & Touche LLP, filed herewith. |
| |
| 23.2 | | Consent of KPMG LLP, filed herewith. |
| |
| 24.1 | | Power of Attorney (included on the signature page to this Annual Report on Form 10-K). |
| |
| 31.1 | | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| |
| 31.2 | | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| |
| 32.1 | | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| |
| 32.2 | | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| |
| 101* | | The following materials from Chambers Street Properties’ Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Shareholders’ Equity and Non-Controlling Interest and (v) the Notes to the Condensed Consolidated Financial Statements, furnished herewith. |
| * | Users of this data are advised that pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
96
CHAMBERS STREET PROPERTIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | | Page | |
Report of Independent Registered Public Accounting Firm | | | F-2 | |
Consolidated Balance Sheets as of December 31, 2012 and 2011 | | | F-3 | |
Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010 | | | F-4 | |
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2012, 2011 and 2010 | | | F-5 | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010 | | | F-6 | |
Consolidated Statements of Equity for the Years Ended December 31, 2012, 2011 and 2010 | | | F-7 | |
Notes to the Consolidated Financial Statements for the Years Ended December 31, 2012, 2011 and 2010 | | | F-8 | |
Schedule III—Properties and Accumulated Depreciation Through December 31, 2012 | | | F-57 | |
| |
Duke/Hulfish, LLC and Subsidiaries | | | | |
Report of Independent Registered Public Accounting Firm | | | F-61 | |
Consolidated Balance Sheets as of December 31, 2012 and 2011 | | | F-62 | |
Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010 | | | F-63 | |
Consolidated Statements of Members’ Equity for the Years Ended December 31, 2012, 2011 and 2010 | | | F-64 | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010 | | | F-65 | |
Notes to the Consolidated Financial Statements—December 31, 2012, 2011 and 2010 | | | F-66 | |
Schedule III—Properties and Accumulated Depreciation through December 31, 2012 | | | F-76 | |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of
Chambers Street Properties
Princeton, New Jersey
We have audited the accompanying consolidated balance sheets of Chambers Street Properties and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive loss, equity, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We did not audit the financial statements of Duke/Hulfish, LLC (a joint venture), which statements reflect total assets constituting 13% and 15% of consolidated total assets as of December 31, 2012 and 2011, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Duke/Hulfish, LLC, is based solely on the report of the other auditors.
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 and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Chambers Street Properties and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, based on our audits and (as to the amounts included for Duke/Hulfish, LLC) the report of the other auditors, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 22, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 22, 2013
F-2
CHAMBERS STREET PROPERTIES
Consolidated Balance Sheets
as of December 31, 2012 and 2011
(In Thousands, Except Share Data)
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
ASSETS | | | | | | | | |
Investments in Real Estate: | | | | | | | | |
Land | | $ | 378,806 | | | $ | 338,401 | |
Site Improvements | | | 181,816 | | | | 150,936 | |
Buildings and Improvements | | | 1,091,639 | | | | 938,640 | |
Tenant Improvements | | | 80,679 | | | | 74,896 | |
| | | | | | | | |
| | | 1,732,940 | | | | 1,502,873 | |
Less: Accumulated Depreciation and Amortization | | | (132,129 | ) | | | (88,147 | ) |
| | | | | | | | |
Net Investments in Real Estate | | | 1,600,811 | | | | 1,414,726 | |
Investments in Unconsolidated Entities | | | 515,829 | | | | 537,631 | |
Construction In Progress and Other Assets—Variable Interest Entity | | | 76,826 | | | | 17,233 | |
Cash and Cash Equivalents | | | 107,355 | | | | 238,277 | |
Restricted Cash | | | 10,998 | | | | 7,216 | |
Accounts and Other Receivables, Net of Allowance of $11 and $821, respectively | | | 6,675 | | | | 5,036 | |
Deferred Rent | | | 25,210 | | | | 17,719 | |
Acquired Above-Market Leases, Net of Accumulated Amortization of $23,364 and $15,729, respectively | | | 31,855 | | | | 31,415 | |
Acquired In-Place Lease Value, Net of Accumulated Amortization of $89,943 and $60,861, respectively | | | 162,558 | | | | 158,655 | |
Deferred Financing Costs, Net of Accumulated Amortization of $9,502 and $4,189, respectively | | | 8,322 | | | | 7,294 | |
Lease Commissions, Net of Accumulated Amortization of $1,705 and $990, respectively | | | 4,645 | | | | 3,522 | |
Other Assets | | | 3,778 | | | | 1,976 | |
| | | | | | | | |
Total Assets | | $ | 2,554,862 | | | $ | 2,440,700 | |
| | | | | | | | |
LIABILITIES, NON-CONTROLLING INTERESTS AND SHAREHOLDERS’ EQUITY | | | | | | | | |
LIABILITIES | | | | | | | | |
Notes Payable, Less Discount of $2,113 and $2,838, plus premium of $7,555 and $9,595, respectively | | $ | 492,944 | | | $ | 630,146 | |
Note Payable at Fair Value | | | 9,288 | | | | 8,775 | |
Loan Payable | | | 265,000 | | | | 25,000 | |
Security Deposits | | | 1,811 | | | | 741 | |
Accounts Payable and Accrued Expenses | | | 24,531 | | | | 20,128 | |
Accounts Payable and Accrued Expenses and Prepaid Rent—Variable Interest Entity | | | 24,531 | | | | 3,305 | |
Accrued Offering Costs Payable to Related Parties | | | — | | | | 1,974 | |
Acquired Below-Market Leases, Net of Accumulated Amortization of $19,077 and $13,876, respectively | | | 24,582 | | | | 29,148 | |
Above-Market Ground Leases, Obligation, Net of Accumulated Amortization of $89 and $17, respectively | | | 1,412 | | | | 1,483 | |
Property Management Fee Payable to Related Party | | | 384 | | | | 190 | |
Investment Management Fee Payable to Related Party | | | 10,700 | | | | 1,968 | |
Distributions Payable | | | 37,418 | | | | 32,785 | |
Interest Rate Swaps at Fair Value—Non-Qualifying Hedge | | | 423 | | | | 958 | |
Interest Rate Swap at Fair Value—Qualifying Hedges | | | 1,015 | | | | 12,340 | |
| | | | | | | | |
Total Liabilities | | | 894,039 | | | | 768,941 | |
COMMITMENTS AND CONTINGENCIES (NOTE 18) | | | | | | | | |
NON-CONTROLLING INTERESTS | | | | | | | | |
Operating Partnership Units | | | 2,464 | | | | 2,464 | |
Class B Interest | | | 200 | | | | 0 | |
Non-Controlling Interest—Variable Interest Entity | | | 826 | | | | 686 | |
SHAREHOLDERS’ EQUITY | | | | | | | | |
Common Shares of Beneficial Interest, $0.01 par value, 990,000,000 shares authorized; 249,664,156 and 230,955,633 issued and outstanding as of December 31, 2012 and 2011, respectively | | | 2,494 | | | | 2,309 | |
Additional Paid-in-Capital | | | 2,203,888 | | | | 2,038,566 | |
Accumulated Deficit | | | (540,462 | ) | | | (348,602 | ) |
Accumulated Other Comprehensive Loss | | | (8,587 | ) | | | (23,664 | ) |
| | | | | | | | |
Total Shareholders’ Equity | | | 1,657,333 | | | | 1,668,609 | |
| | | | | | | | |
Total Liabilities, Non–Controlling Interests and Shareholders’ Equity | | $ | 2,554,862 | | | $ | 2,440,700 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements.
F-3
CHAMBERS STREET PROPERTIES
Consolidated Statements of Operations
For the Years Ended December 31, 2012, 2011 and 2010
(In Thousands, Except Share Data)
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
REVENUES | | | | | | | | | | | | |
Rental | | $ | 147,662 | | | $ | 121,459 | | | $ | 69,373 | |
Tenant Reimbursements | | | 33,864 | | | | 27,097 | | | | 14,166 | |
| | | | | | | | | | | | |
Total Revenues | | | 181,526 | | | | 148,556 | | | | 83,539 | |
| | | | | | | | | | | | |
EXPENSES | | | | | | | | | | | | |
Operating and Maintenance | | | 19,079 | | | | 16,883 | | | | 8,618 | |
Property Taxes | | | 22,768 | | | | 17,840 | | | | 10,965 | |
Interest | | | 34,351 | | | | 33,735 | | | | 14,881 | |
General and Administrative | | | 15,826 | | | | 6,171 | | | | 5,526 | |
Property Management Fee to Related Party | | | 1,557 | | | | 1,470 | | | | 948 | |
Investment Management Fee to Related Party | | | 29,695 | | | | 20,908 | | | | 11,595 | |
Acquisition Expenses | | | 7,752 | | | | 14,464 | | | | 17,531 | |
Depreciation and Amortization | | | 73,653 | | | | 61,415 | | | | 32,125 | |
Transition Costs | | | 8,249 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | |
Total Expenses | | | 212,930 | | | | 172,886 | | | | 102,189 | |
| | | | | | | | | | | | |
OTHER INCOME AND EXPENSES | | | | | | | | | | | | |
Interest and Other Income | | | 2,629 | | | | 1,619 | | | | 1,260 | |
Net Settlement Payments on Interest Rate Swaps | | | (682 | ) | | | (700 | ) | | | (1,096 | ) |
Gain on Interest Rate Swaps | | | 564 | | | | 397 | | | | 23 | |
Loss on Note Payable at Fair Value | | | (111 | ) | | | (25 | ) | | | (118 | ) |
Loss on Early Extinguishment of Debt | | | (2,961 | ) | | | (108 | ) | | | (72 | ) |
Loss on Swap Termination | | | (14,323 | ) | | | 0 | | | | 0 | |
| | | | | | | | | | | | |
Total Other Income and (Expenses) | | | (14,884 | ) | | | 1,183 | | | | (3 | ) |
| | | | | | | | | | | | |
LOSS FROM CONTINUING OPERATIONS BEFORE (PROVISION) BENEFIT FOR INCOME TAXES AND EQUITY IN INCOME (LOSS) OF UNCONSOLIDATED ENTITIES | | | (46,288 | ) | | | (23,147 | ) | | | (18,653 | ) |
PROVISION FOR INCOME TAXES | | | (266 | ) | | | (456 | ) | | | (296 | ) |
EQUITY IN INCOME OF UNCONSOLIDATED ENTITIES | | | 3,959 | | | | 3,590 | | | | 8,838 | |
| | | | | | | | | | | | |
NET LOSS FROM CONTINUING OPERATIONS | | | (42,595 | ) | | | (20,013 | ) | | | (10,111 | ) |
| | | | | | | | | | | | |
DISCONTINUED OPERATIONS | | | | | | | | | | | | |
Income (Loss) from Discontinued Operations | | | 0 | | | | 427 | | | | (507 | ) |
Realized (Loss) Gain from Sale | | | (413 | ) | | | 301 | | | | 0 | |
| | | | | | | | | | | | |
(LOSS) INCOME FROM DISCONTINUED OPERATIONS | | | (413 | ) | | | 728 | | | | (507 | ) |
| | | | | | | | | | | | |
NET LOSS | | | (43,008 | ) | | | (19,285 | ) | | | (10,618 | ) |
| | | | | | | | | | | | |
Net Loss Attributable to Non-Controlling Operating Partnership Units | | | 32 | | | | 26 | | | | 18 | |
| | | | | | | | | | | | |
NET LOSS ATTRIBUTABLE TO CHAMBERS STREET PROPERTIES SHAREHOLDERS | | $ | (42,976 | ) | | $ | (19,259 | ) | | $ | (10,600 | ) |
| | | | | | | | | | | | |
Basic and Diluted Net Loss Per Share from Continuing Operations Attributable to Chambers Street Properties Shareholders | | $ | (0.17 | ) | | $ | (0.10 | ) | | $ | (0.08 | ) |
| | | | | | | | | | | | |
Basic and Diluted Net (Loss) Income Per Share from Discontinued Operations Attributable to Chambers Street Properties Shareholders | | $ | (0.00 | ) | | $ | (0.00 | ) | | $ | (0.00 | ) |
| | | | | | | | | | | | |
Basic and Diluted Net Loss Per Share Attributable to Chambers Street Properties | | $ | (0.17 | ) | | $ | (0.10 | ) | | $ | (0.08 | ) |
| | | | | | | | | | | | |
Weighted Average Common Shares Outstanding—Basic and Diluted | | | 248,154,277 | | | | 192,042,918 | | | | 136,456,565 | |
Dividends Declared Per Share | | $ | 0.60 | | | $ | 0.60 | | | $ | 0.60 | |
See accompanying notes to consolidated financial statements.
F-4
CHAMBERS STREET PROPERTIES
Consolidated Statements of Comprehensive Loss
For the Years Ended December 31, 2012, 2011 and 2010
(In Thousands, Except Share Data)
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
NET LOSS | | $ | (43,008 | ) | | $ | (19,285 | ) | | $ | (10,618 | ) |
Foreign Currency Translation Gain (Loss) | | | 4,415 | | | | (820 | ) | | | 2,275 | |
Swap Fair Value Adjustments | | | 10,662 | | | | (11,169 | ) | | | (1,639 | ) |
| | | | | | | | | | | | |
COMPREHENSIVE LOSS | | | (27,931 | ) | | | (31,274 | ) | | | (9,982 | ) |
Comprehensive Loss Attributable to Non-Controlling Operating Partnership Units | | | 17 | | | | 37 | | | | 18 | |
| | | | | | | | | | | | |
COMPREHENSIVE LOSS ATTRIBUTABLE TO CHAMBERS STREET PROPERTIES SHAREHOLDERS | | $ | (27,914 | ) | | $ | (31,237 | ) | | $ | (9,964 | ) |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-5
CHAMBERS STREET PROPERTIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2012, 2011 and 2010
(In Thousands)
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | |
Net Loss | | $ | (43,008 | ) | | $ | (19,285 | ) | | $ | (10,618 | ) |
Adjustments to Reconcile Net Loss to Net Cash Flows Provided by Operating Activities: | | | | | | | | | | | | |
Equity in Income of Unconsolidated Entities | | | (3,959 | ) | | | (3,590 | ) | | | (8,838 | ) |
Distributions from Unconsolidated Entities | | | 40,005 | | | | 23,666 | | | | 26,262 | |
Gain on Interest Rate Swaps | | | (564 | ) | | | (397 | ) | | | (23 | ) |
Loss on Note Payable at Fair Value | | | 111 | | | | 25 | | | | 118 | |
Loss on Early Extinguishment of Debt | | | 2,961 | | | | 79 | | | | 53 | |
Net Realized Loss (Gain) on Sale of Discontinued Operations | | | 413 | | | | (301 | ) | | | 0 | |
Gain on Transfer of Real Estate | | | 0 | | | | 0 | | | | (154 | ) |
Depreciation and Amortization of Building and Improvements | | | 44,113 | | | | 36,962 | | | | 20,082 | |
Amortization of Deferred Financing Costs | | | 2,067 | | | | 1,572 | | | | 1,081 | |
Amortization of Acquired In-Place Lease Value | | | 28,826 | | | | 23,986 | | | | 11,778 | |
Amortization of Above and Below Market Leases | | | 2,485 | | | | 2,131 | | | | 604 | |
Amortization of Lease Commissions | | | 714 | | | | 467 | | | | 265 | |
Amortization of Discount (Premium) on Notes Payable | | | (1,316 | ) | | | (367 | ) | | | 732 | |
Deferred Income Taxes | | | 0 | | | | 0 | | | | 61 | |
Share Based Compensation | | | 445 | | | | 28 | | | | 240 | |
Changes in Assets and Liabilities: | | | | | | | | | | | | |
Accounts and Other Receivables | | | (1,639 | ) | | | 641 | | | | (1,431 | ) |
Deferred Rent | | | (7,491 | ) | | | (9,114 | ) | | | (5,035 | ) |
Other Assets | | | (3,080 | ) | | | (1,969 | ) | | | (1,543 | ) |
Accounts Payable and Accrued Expenses | | | 22,486 | | | | 3,735 | | | | 5,282 | |
Investment and Property Management Fees Payable to Related Party | | | 8,925 | | | | 644 | | | | 651 | |
| | | | | | | | | | | | |
Net Cash Flows Provided By Operating Activities | | | 92,494 | | | | 58,913 | | | | 39,567 | |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | |
Acquisitions of Real Estate Property | | | (266,491 | ) | | | (192,899 | ) | | | (468,765 | ) |
Acquisitions of Real Estate Held for Sale | | | 0 | | | | 0 | | | | (22,000 | ) |
Proceeds from Sales of Discontinued Operations | | | 2,885 | | | | 23,596 | | | | 0 | |
Investments in Unconsolidated Entities | | | (45,568 | ) | | | (141,632 | ) | | | (235,701 | ) |
Distributions from Unconsolidated Entities | | | 32,468 | | | | 0 | | | | 68,343 | |
Purchase Deposit | | | 0 | | | | 0 | | | | (20,005 | ) |
Restricted Cash | | | (2,431 | ) | | | (7,854 | ) | | | (135 | ) |
Lease Commissions | | | (1,834 | ) | | | (2,347 | ) | | | (1,019 | ) |
Improvements—Variable Interest Entity | | | (55,998 | ) | | | (2,230 | ) | | | 0 | |
Improvements to Investments in Real Estate | | | (2,743 | ) | | | (9,800 | ) | | | (1,838 | ) |
| | | | | | | | | | | | |
Net Cash Flows Used in Investing Activities | | | (339,712 | ) | | | (333,166 | ) | | | (681,120 | ) |
| | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | |
Proceeds from Common Shares—Public Offering | | | 172 | | | | 658 | | | | 565 | |
Proceeds from Additional Paid-in-Capital—Public Offering | | | 171,086 | | | | 657,218 | | | | 553,402 | |
Redemption of Common Shares | | | (52,912 | ) | | | (39,240 | ) | | | (16,407 | ) |
Payment of Offering Costs | | | (20,444 | ) | | | (70,926 | ) | | | (55,000 | ) |
Payment of Distributions | | | (78,830 | ) | | | (60,203 | ) | | | (41,227 | ) |
Distribution to Non-Controlling Interest-Operating Partnership Units | | | (148 | ) | | | (148 | ) | | | (148 | ) |
Contribution from Non-Controlling Interest—Variable Interest Entity | | | 140 | | | | 686 | | | | 0 | |
Borrowing on Loan Payable | | | 265,000 | | | | 50,000 | | | | 60,000 | |
Principal Payments on Loan Payable | | | (25,000 | ) | | | (85,000 | ) | | | 0 | |
Proceeds from Notes Payable | | | 0 | | | | 81,700 | | | | 97,600 | |
Principal Payments on Notes Payable | | | (137,272 | ) | | | (67,730 | ) | | | (16,645 | ) |
Deferred Financing Costs | | | (6,420 | ) | | | (2,501 | ) | | | (5,229 | ) |
Security Deposits | | | 1,070 | | | | (158 | ) | | | 305 | |
| | | | | | | | | | | | |
Net Cash Flows Provided by Financing Activities | | | 116,442 | | | | 464,356 | | | | 577,216 | |
| | | | | | | | | | | | |
EFFECT OF FOREIGN CURRENCY TRANSLATION | | | (146 | ) | | | (44 | ) | | | (76 | ) |
| | | | | | | | | | | | |
Net (Decrease) Increase in Cash and Cash Equivalents | | | (130,922 | ) | | | 190,059 | | | | (64,413 | ) |
Cash and Cash Equivalents, Beginning of Year | | | 238,277 | | | | 48,218 | | | | 112,631 | |
| | | | | | | | | | | | |
Cash and Cash Equivalents, End of Year | | $ | 107,355 | | | $ | 238,277 | | | $ | 48,218 | |
| | | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | | | | | | | | | | | | |
Cash Paid During the Year for Interest | | $ | 33,056 | | | $ | 31,911 | | | $ | 12,793 | |
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | | | | | |
Distributions Declared and Payable | | $ | 37,418 | | | $ | 32,785 | | | $ | 24,053 | |
Proceeds from Dividend Reinvestment | | $ | 65,421 | | | $ | 46,193 | | | $ | 31,254 | |
Application of Deposit to Investment in Unconsolidated Entity | | $ | 0 | | | $ | 7,500 | | | $ | 0 | |
Application of Deposit to Purchase Price of Real Estate | | $ | 0 | | | $ | 12,505 | | | $ | 0 | |
Accrued Acquisition Costs Related to Real Property | | $ | 0 | | | $ | 383 | | | $ | 0 | |
Duke joint venture Contribution/Distribution—Amazon Expansion | | $ | 697 | | | $ | 25,364 | | | $ | 10,640 | |
Deconsolidation of Real Estate Transferred to Duke joint venture | | $ | 0 | | | $ | 0 | | | $ | (41,888 | ) |
Notes Payable Assumed on Acquisition of Real Estate | | $ | 0 | | | $ | 253,119 | | | $ | 73,540 | |
Increase in Investment in Duke joint venture from Transfer of Real Estate | | $ | 0 | | | $ | 0 | | | $ | 42,042 | |
Share Awards Increase in APIC | | $ | 445 | | | $ | 28 | | | $ | 240 | |
Accrued Offering Costs | | $ | 0 | | | $ | 2,107 | | | $ | 1,032 | |
Accounts Payable and Accrued Expenses—Construction in Progress | | $ | 3,264 | | | $ | 3,305 | | | $ | 0 | |
See accompanying notes to consolidated financial statements.
F-6
CHAMBERS STREET PROPERTIES
Consolidated Statements of Shareholders’ Equity
For the Years Ended December 31, 2012, 2011 and 2010
(In Thousands, Except Share Data)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Shares | | | Additional
Paid-in-
Capital | | | Accumulated
Deficit | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Total
Shareholders’
Equity | |
| | | Shares | | | Amount | | | | | |
Balance at January 1, 2010 | | | 106,465,683 | | | $ | 1,065 | | | $ | 933,088 | | | $ | (121,832 | ) | | $ | (12,322 | ) | | $ | 799,999 | |
Net Loss | | | 0 | | | | 0 | | | | 0 | | | | (10,600 | ) | | | — | | | | (10,600 | ) |
Other Comprehensive Income | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 636 | | | | 636 | |
Net Contributions From Public Offering of Common Shares, $0.01 Par Value | | | 59,817,671 | | | | 598 | | | | 584,623 | | | | 0 | | | | 0 | | | | 585,221 | |
Share Based Compensation | | | 24,000 | | | | 0 | | | | 240 | | | | 0 | | | | 0 | | | | 240 | |
Costs Associated with Public Offering | | | 0 | | | | 0 | | | | (54,837 | ) | | | 0 | | | | 0 | | | | (54,837 | ) |
Redemption of Common Shares | | | (1,796,101 | ) | | | (18 | ) | | | (16,389 | ) | | | 0 | | | | 0 | | | | (16,407 | ) |
Adjustment to Record Non-Controlling Interest at Redemption Value | | | 0 | | | | 0 | | | | (166 | ) | | | 0 | | | | 0 | | | | 166 | |
Distributions | | | 0 | | | | 0 | | | | 0 | | | | (81,784 | ) | | | 0 | | | | (81,784 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2010 | | | 164,511,253 | | | | 1,645 | | | | 1,446,559 | | | | (214,216 | ) | | | (11,686 | ) | | | 1,222,302 | |
Net Loss | | | 0 | | | | 0 | | | | 0 | | | | (19,259 | ) | | | 0 | | | | (19,259 | ) |
Other Comprehensive Loss | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (11,978 | ) | | | (11,978 | ) |
Net Contributions From Public Offering of Common Shares, $0.01 Par Value | | | 70,704,939 | | | | 707 | | | | 703,362 | | | | 0 | | | | 0 | | | | 704,069 | |
Share Based Compensation | | | 3,000 | | | | 0 | | | | 28 | | | | 0 | | | | 0 | | | | 28 | |
Costs Associated with Public Offering | | | 0 | | | | 0 | | | | (72,001 | ) | | | 0 | | | | 0 | | | | (72,001 | ) |
Redemption of Common Shares | | | (4,263,559 | ) | | | (43 | ) | | | (39,197 | ) | | | 0 | | | | 0 | | | | (39,240 | ) |
Adjustment to Record Non-Controlling Interest at Redemption Value | | | 0 | | | | 0 | | | | (185 | ) | | | 0 | | | | 0 | | | | (185 | ) |
Distributions | | | 0 | | | | 0 | | | | 0 | | | | (115,127 | ) | | | 0 | | | | (115,127 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2011 | | | 230,955,633 | | | | 2,309 | | | | 2,038,566 | | | | (348,602 | ) | | | (23,664 | ) | | | 1,668,609 | |
Net Loss | | | 0 | | | | 0 | | | | 0 | | | | (42,976 | ) | | | 0 | | | | (42,976 | ) |
Other Comprehensive Income | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 15,077 | | | | 15,077 | |
Net Contributions From Public Offering of Common Shares, $0.01 Par Value | | | 24,057,013 | | | | 241 | | | | 236,438 | | | | 0 | | | | 0 | | | | 236,679 | |
Share Based Compensation | | | 300,000 | | | | 0 | | | | 245 | | | | 0 | | | | 0 | | | | 245 | |
Costs Associated with Public Offering | | | 0 | | | | 0 | | | | (18,337 | ) | | | 0 | | | | 0 | | | | (18,337 | ) |
Redemption of Common Shares | | | (5,648,490 | ) | | | (56 | ) | | | (52,856 | ) | | | 0 | | | | 0 | | | | (52,912 | ) |
Adjustment to Record Non-Controlling Interest at Redemption Value | | | 0 | | | | 0 | | | | (168 | ) | | | 0 | | | | 0 | | | | (168 | ) |
Distributions | | | 0 | | | | 0 | | | | 0 | | | | (148,884 | ) | | | 0 | | | | (148,884 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2012 | | | 249,664,156 | | | $ | 2,494 | | | $ | 2,203,888 | | | $ | (540,462 | ) | | $ | (8,587 | ) | | $ | 1,657,333 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-7
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2012, 2011 and 2010
Unless the context otherwise requires or indicates, references to “we,” “the Company” “our,” and “us” refer to the activities of and the assets and liabilities of the business and operations of Chambers Street Properties and its subsidiaries.
1. Organization and Nature of Business
Chambers Street Properties, formerly known as CB Richard Ellis Realty Trust, was formed on March 30, 2004 under the laws of the state of Maryland. Our operating partnership, CSP Operating Partnership, LP (“CSP OP”), formerly known as CBRE Operating Partnership, L.P., was formed in Delaware on March 30, 2004. We are CSP OP’s majority owner and sole general partner. We elected to be taxed as a real estate investment trust (“REIT”) under sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with the taxable period ended December 31, 2004. We invest in real estate properties, focusing primarily on office and industrial (primarily warehouse/distribution/logistics) properties, as well as other real estate-related assets.
We operate in an umbrella partnership REIT structure in which CSP OP owns, directly or indirectly, substantially all of the properties acquired on our behalf. For each interest in our common shares that we issue, an equal interest in the limited partnership units of CSP OP is issued to us in exchange for the cash proceeds from the issuance of the interest in our common shares. We currently own approximately 99.90% of the common partnership units of CSP OP. CBRE REIT Holdings, LLC (“REIT Holdings”), an affiliate of our former investment advisor (as defined below), holds the remaining interest in CSP OP through 246,361 limited partnership units representing approximately a 0.10% ownership of the total limited partnership units. In exchange for services provided to us relating to our formation and subsequent operations, REIT Holdings also owns a Class B limited partnership interest (“Class B interest”).
On July 1, 2004, we commenced operations and issued 6,844,313 common shares of beneficial interest in connection with our initial capitalization. In addition, REIT Holdings purchased 29,937 limited partnership units in CSP OP as a limited partner. During October 2004, we issued an additional 123,449 common shares of beneficial interest to an unrelated third-party investor. On October 24, 2006, we commenced an initial public offering of up to $2,000,000,000 of our common shares, and from October 24, 2006 (effective date) through January 29, 2009 (close) we accepted subscriptions from 13,270 investors, issued 60,808,967 common shares including 1,487,943 common shares issued pursuant to our dividend reinvestment plan, and received $607,345,702 in gross proceeds. On January 30, 2009, we commenced a follow-on public offering of up to $3,000,000,000 of our common shares, and from January 30, 2009 (effective date) through January 30, 2012 (close) we accepted subscriptions from 49,990 investors, issued 190,672,251 common shares including 11,170,603 common shares issued pursuant to our dividend reinvestment plan, and received $1,901,137,211 in gross proceeds. On February 3, 2012, we filed a registration statement on Form S-3 to register 25,000,000 of our common shares for up to $237,500,000 pursuant to the amended and restated dividend reinvestment plan which we subsequently amended to reflect our name change from CB Richard Ellis Realty Trust to Chambers Street Properties.
Prior to July 1, 2012, all of our business activities were managed by CBRE Advisors LLC (the “former investment advisor”) pursuant to advisory agreements. The fourth amended and restated advisory agreement (the “Fourth Amended Advisory Agreement”) terminated according to its terms on June 30, 2012, and we transitioned to a self-managed company, in accordance with a plan determined by our Board of Trustees. Our executive officers are responsible for the management of our day-to-day operations, including the supervision of our employees and third-party service providers. Acquisitions and asset management activities are now performed by our employees, with certain services provided by third parties at market rates. In addition, effective July 1, 2012, we entered into a transitional services agreement (“Transitional Services Agreement”) with CSP OP and the former investment advisor pursuant to which the former investment advisor will, at our direction, provide certain operational and consulting services to us for a term ending on April 30, 2013.
See Note 11—“Investment Management and Other Fees to Related Parties” for a discussion of the Transitional Services Agreement.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with the rules applicable to Form 10-K and include all information and footnotes required for financial statement presentation, including disclosures required under Generally Accepted Accounting Principles (“U.S. GAAP”) for complete financial statements.
F-8
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Principles of Consolidation
Because we are the sole general partner and majority owner of CSP OP and have majority control over their management and major operating decisions, the accounts of CSP OP are consolidated in our financial statements. The interests of REIT Holdings are reflected in non-controlling interest in the accompanying consolidated financial statements. All inter-company accounts and transactions are eliminated in consolidation. CBRE Global Investors, L.L.C. (“CBRE Global Investors”), an affiliate of the former investment advisor, also owns an interest in us through its ownership of 243,229 common shares of beneficial interest at December 31, 2012 and 2011.
Investment in Unconsolidated Entities
We determine if an entity is a VIE based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. We make judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, then a quantitative analysis, if necessary. In a quantitative analysis, we incorporate various estimates, including estimated future cash flows, asset holding periods and discount rates, as well as estimates of the probabilities of the occurrence of various scenarios occurring. If the entity is a VIE, we then determine whether to consolidate the entity as the primary beneficiary. We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. If we made different judgments or utilized different estimates in these evaluations, it could result in differing conclusions as to whether or not an entity is a VIE and whether or not we consolidate such entity.
With respect to our majority limited membership interests in the Duke/Hulfish, LLC joint venture (the “Duke joint venture”), the Afton Ridge Joint Venture, LLC (“Afton Ridge”), the Goodman Princeton Holdings (Jersey) Limited joint venture (the “UK JV”) and the Goodman Princeton Holdings (LUX) SARL joint venture (the “European JV”), we considered the Accounting Standards Codification (“ASC”) Topic “Consolidation” (“FASB ASC 810”) in determining that we did not have control over the financial and operating decisions of such entities due to the existence of substantive participating rights held by the minority limited members who are also the managing members of the Duke joint venture and Afton Ridge, and the investment advisors/managers of the UK JV and the European JV, respectively. Additionally, we concluded that each of these entities was under the shared control of its’ limited members. The accounting policies applied by each of these entities are consistent with those applied by us.
We carry our investments in CBRE Strategic Partners Asia, the Duke joint venture, Afton Ridge, the UK JV and the European JV using the equity method of accounting because we have the ability to exercise significant influence (but not control) over operating and financial policies of each such entity. We eliminate transactions with such equity method entities to the extent of our ownership in each such entity. Accordingly, our share of net income (loss) of these equity method entities is included in consolidated net income (loss).
Our determination of the appropriate accounting method with respect to our investment in CB Richard Ellis Strategic Partners Asia II-A, L.P. (“CBRE Strategic Partners Asia”), which is not considered a Variable Interest Entity (“VIE”), is partially based on CBRE Strategic Partners Asia’s sufficiency of equity investment at risk which was triggered by a substantial paydown during 2009 of its subscription line of credit, which is backed by investor capital commitments to fund its operations. We account for this investment under the equity method of accounting.
CBRE Strategic Partners Asia is a limited partnership that qualifies for specialized industry accounting for investment companies. Specialized industry accounting allows investment companies to carry their investments at fair value, with changes in the fair value of the investments recorded in the statement of operations. On the basis of the guidance in ASC 970-323, the Company accounts for its investment in CBRE Strategic Partners Asia under the equity method. As a result, and in accordance with ASC 810-10-25-15 the specialized accounting treatment, principally the fair value basis applied by CBRE Strategic Partners Asia under the investment company guide, is retained in the recognition of equity method earnings in the statement of operations of the Company. See Note 17 “Fair Value of Financial Instruments and Investments” for further discussion of the application of the fair value accounting to our investment in CBRE Strategic Partners Asia.
We evaluate our investments in unconsolidated entities for indicators of impairment during each reporting period. A series of operating losses of an investee or other factors may indicate that a decrease in value of the Company’s investment in the unconsolidated entity has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value. If a property level impairment is recorded by an unconsolidated entity related to its assets, the Company’s proportionate share is reflected in the equity in loss from unconsolidated entities with a corresponding decrease to its investment in unconsolidated entities.
F-9
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Additionally, the Company considers various qualitative factors to determine if a decrease in the value of the investment is other-than-temporary. These factors include age of the venture, intent and ability for the Company to recover its investment in the entity, financial condition and long-term prospects of the entity and its underlying real estate assets, short-term liquidity needs of the unconsolidated entity, trends in the economic environments or leasing markets where its real estate assets are located, overall projected returns on investment, and any defaults under contracts with third parties (including bank debt). If the Company believes that the decline in the fair value of the investment is temporary, then no impairment is recorded.
Consolidated Variable Interest Entities
In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-17, “Consolidations” (“Topic 810”): “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” This ASU incorporates the Statement of Financial Accounting Standards (SFAS) No. 167, “Amendments to FASB Interpretation No. 46(R),” issued by the FASB in June 2009. The amendments in this ASU replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact such entity’s economic performance and (i) the obligation to absorb losses of such entity or (ii) the right to receive benefits from such entity. ASU 2009-17 also requires additional disclosures about a reporting entity’s involvement in variable interest entities, which enhances the information provided to users of financial statements.
In October 2011, one of our consolidated subsidiaries, RT Atwater Holding, LLC, entered into a real estate development venture with a subsidiary of the Trammel Crow Company (“TCC”), a wholly-owned subsidiary of CBRE Group, Inc., a former related party of ours, whereby we own 95% of the newly formed entity and TCC owns the remaining 5% of the entity. The new entity, RT/TC Atwater, LP (“Atwater”), was formed for the purpose of developing and then operating a build-to-suit suburban office and research facility for a single tenant that has agreed to a minimum lease term of 12 years starting from the completion of construction of the facility. Through the provisions of the Atwater, LP agreement, we and TCC collectively have the power to direct the activities that most significantly impact the economic performance of Atwater. Atwater was deemed a variable interest entity and we were the entity within the related party group determined to be most closely associated with Atwater. We began to consolidate the entity at its inception in October 2011.
On February 16, 2012, we entered into a construction loan agreement with Atwater, a consolidated joint venture, to provide it with up to $49,575,000 of financing which will be available for disbursements to fund construction expenditures at 1400 Atwater Drive. We received a $250,000 financing fee from the joint venture for providing this construction loan. The construction loan will bear interest at 5.00% of amounts outstanding and is scheduled to mature on or before April 30, 2013, unless otherwise extended. This construction loan has been eliminated in the consolidation of Atwater for reporting purposes.
Atwater’s construction in progress and other assets, including the initial land acquired by Atwater in October 2011, was $76,826,000 and $17,233,000 at December 31, 2012 and 2011. The assets of the entity are the sole collateral for the other liabilities of the entity. For the year ended December 31, 2012 and 2011, there were no revenues and operating expenses relating to the operating activities of the entity. The capital account of TCC is included in non-controlling interest—variable interest entity on the accompanying consolidated balance sheets at December 31, 2012 and 2011, respectively.
The construction of the Atwater property was substantially complete and ready for its intended use in January 2013. In addition, we exercised our right to acquire TCC’s 5% interest in the entity upon the completion of construction of the property. (see Subsequent Event Note 21).
Use of Estimates
The preparation of financial statements, in conformity with U.S. GAAP, requires us to make 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.
F-10
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Segment Information
We currently operate our consolidated properties in two geographic areas, the United States and the United Kingdom. We view our consolidated property operations as three reportable segments, a Domestic Industrial segment, a Domestic Office segment and an International Office/Retail segment, which participate in the acquisition, development, ownership, and operation of high quality real estate in their respective segments.
Cash Equivalents
We consider short-term investments with maturities of three months or less when purchased to be cash equivalents. As of December 31, 2012 and 2011, cash equivalents consisted primarily of investments in money market funds.
Restricted Cash
Restricted cash represents those cash accounts for which the use of funds is restricted by loan covenants. As of December 31, 2012 and 2011 our restricted cash balance was $10,998,000 and $7,216,000, respectively, which represented amounts set aside as impounds for future property tax payments, property insurance payments and tenant improvement payments as required by our agreements with our lenders.
Discontinued Operations and Real Estate Held for Sale
In a period in which a property has been disposed of or is classified as held for sale, the statements of operations for current and prior periods report the results of operations of the property as discontinued operations.
At such time as a property is deemed held for sale, such property is carried at the lower of: (1) its carrying amount or (2) fair value less costs to sell. In addition, a property being held for sale ceases to be depreciated. We classify operating properties as property held for sale in the period in which all of the following criteria are met:
| | ¡ | | management, having the authority to approve the action, commits to a plan to sell the asset; |
| | ¡ | | the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; |
| | ¡ | | an active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated; |
| | ¡ | | the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year; |
| | ¡ | | the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and |
| | ¡ | | given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn. |
Accounting for Derivative Financial Instruments and Hedging Activities
All of our derivative instruments are carried at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Calculation of the fair value of derivative instruments also requires management to use estimates. Amounts will be reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings
Derivative instruments designated in a hedge relationship to mitigate 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. The changes in fair value
F-11
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
hedges are accounted for by recording the fair value of the derivative instruments on the balance sheet as either assets or liabilities, with the corresponding amount recorded in current period earnings. We have certain interest rate swap derivatives that are designated as qualifying cash flow hedges and follow the accounting treatment discussed above. We also have certain interest rate swap derivatives that do not qualify for hedge accounting, and accordingly, changes in fair values are recognized in current earnings.
We disclose the fair values of derivative instruments and their gains and losses in a tabular format. We also provide more information about our liquidity by disclosing derivative features that are credit risk-related. Finally, we cross-reference within these footnotes to enable financial statement users to locate important information about derivative instruments. See Note 15 “Derivative Instruments” and Note 17 “Fair Value of Financial Instruments and Investments” for a further discussion of our derivative financial instruments.
Investments in Real Estate and Related Long Lived Assets (Impairment Evaluation)
Our investments in real estate is stated at depreciated cost. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:
| | |
Buildings and Improvements | | 39 years |
Site Improvements | | 15 and 25 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. As of December 31, 2012, we owned on a consolidated basis, 82 real estate investments. As of December 31, 2011, we owned, on a consolidated basis, 77, real estate investments.
On April 5, 2011, we sold Orchard Business Park I, a vacant warehouse/distribution/logistics building, located in Spartanburg, SC. The sales price was $1,275,000.
On April 11, 2011, we acquired two office buildings, 70 Hudson Street and 90 Hudson Street located in Jersey City, NJ. The purchase price was $310,000,000.
On June 2, 2011, we acquired Millers Ferry Road, a single tenant warehouse/distribution/logistics building located in Wilmer, TX, a suburb of Dallas. The purchase price was approximately $40,366,000.
On August 12, 2011, we sold Rickenbacker II and Rickenbacker III, two warehouse/distribution/logistics buildings located in Groveport, OH, a suburb of Columbus, OH. The sales price was approximately $22,639,000.
On September 30, 2011, we acquired Sky Harbor Operations Center, a single tenant office building located in Phoenix, AZ. The purchase price was $53,500,000.
On November 30, 2011, we acquired Aurora Commerce Center Bldg. C, a multitenant warehouse/distribution/logistics building located in Aurora CO, a suburb of Denver. The purchase price was $24,500,000.
On December 30, 2011, we acquired Sabal Pavilion, a single tenant office building located in Tampa, FL. The purchase price was $21,368,000.
On March 20, 2012, we acquired 2400 Dralle Road, a single tenant warehouse/distribution/logistics building located in University Park, Illinois, a suburb of Chicago. The purchase price was $64,250,000.
On July 9, 2012, we sold Cherokee Corporate Park, a warehouse/distribution/logistics building located in Spartanburg, SC. The sales price was $3,125,000.
On August 16, 2012, we acquired Midwest Commerce Center I, a single tenant warehouse/distribution/logistics building located in Gardner, Kansas, a suburb of Kansas City. The purchase price was $62,950,000.
F-12
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
On November 7, 2012, we acquired 20000 S. Diamond Lake Road, a single tenant warehouse/distribution/logistics building located in Rogers, Minnesota, a suburb of Minneapolis. The purchase price was $18,500,000.
On November 30, 2012, we acquired Gateway at Riverside, a single tenant warehouse’/distribution/logistics building located in Belcamp, Maryland, a suburb of Baltimore. The purchase price was $46,304,000. We also acquired adjacent land, Gateway II at Riverside, for a purchase price of $2,925,000.
On December 28, 2012, we acquired 701 & 801 Charles Ewing Blvd., a single tenant office/R&D building located in Ewing, NJ. The purchase price was $28,310,000.
On December 28, 2012, we acquired Mid-Atlantic Distribution Center Bldg. A, a single tenant warehouse/distribution/logistics building located in Perryman, Maryland, a suburb of Baltimore. The purchase price was $43,150,000.
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 estimated fair value of the assets. The estimated fair value of the asset group identified for step two testing is based on either the income approach with market discount rate, terminal capitalization rate and rental rate assumptions being most critical, or on the sales comparison approach to similar properties. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
No impairments of long-lived assets were recognized during the years ended December 31, 2012, 2011 or 2010.
Other Assets
Other assets include the following as of December 31, 2012 and 2011 (in thousands):
| | | | | | | | |
| | | December 31,
2012 | | | December 31,
2011 | |
Prepaid insurance | | $ | 1,790 | | | $ | 401 | |
Prepaid real estate taxes | | | 224 | | | | 184 | |
Other | | | 1,764 | | | | 1,391 | |
| | | | | | | | |
Total | | $ | 3,778 | | | $ | 1,976 | |
| | | | | | | | |
Concentration of Credit Risk
Our properties are located throughout the United States and in the United Kingdom. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory, and social factors affecting the communities in which the tenants operate. Our credit risk relates primarily to cash, restricted cash, and interest rate swap and cap agreements. Cash accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000.
We have not experienced any losses to date on our invested cash and restricted cash. The interest rate cap and swap agreements create credit risk. Credit risk arises from the potential failure of counterparties to perform in accordance with the terms of their contracts. Our risk management policies define parameters of acceptable market risk and limit exposure to credit risk. Credit exposure resulting from derivative financial instruments is represented by their fair value amounts, increased by an estimate of potential adverse position exposure arising from changes over time in interest rates, maturities, and other relevant factors. We do not anticipate nonperformance by any of our counterparties.
Non-Controlling Interest—Operating Partnership Units
We owned a 99.90% and 99.89% partnership interest in CSP OP as of December 31, 2012 and 2011, respectively. The remaining 0.10% and 0.11% partnership interest as of December 31, 2012 and 2011, respectively, was owned by REIT Holdings in the form of 246,361 non-controlling operating partnership units which are exchangeable for cash or, at the Company’s discretion, on a one for one basis for common shares of the Company, with an estimated aggregate redemption value of $2,464,000.
F-13
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
With respect to the operating partnership units, FASB ASC 480-10Distinguishing Liabilities from Equity requires non-controlling interests with redemption provisions that permit the issuer to settle in either cash or common shares at the option of the issuer to be further evaluated under the Codification Sub-Topic “Derivatives and Hedging—Conditions Necessary for Equity Classification” (“FASB ASC 815-40-25-10”) to determine whether permanent equity or temporary equity classification on the balance sheet is appropriate. Since the operating partnership units contain such a provision, the Company evaluated this guidance and determined that the operating partnership units do not meet the requirements to qualify for equity presentation. As a result, upon the adoption of FASB ASC 810Consolidation and the related revisions to FASB ASC 480-10 the operating partnership units are presented in the temporary equity section of the consolidated balance sheets and reported at the higher of their proportionate share of the net assets of CSP OP or fair value, with period to period changes in value reported as an adjustment to shareholder’s equity. Under the terms of the Second Amended Partnership Agreement, the fair value of the operating partnership units is determined as an amount equal to the redemption value as defined therein.
Purchase Accounting for Acquisition of Investments in Real Estate
We apply the acquisition method to all acquired real estate investments. The purchase consideration of the real estate is allocated to the acquired tangible assets, consisting primarily of land, site improvements, building and tenant improvements and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases, value of tenant relationships and acquired ground leases, based in each case on their fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market loans, will be 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 is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land (or acquired ground lease if the land is subject to a ground lease), site improvements, building and tenant 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 similar 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 similar leases including leasing commissions, legal and other related costs.
In allocating the purchase consideration 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 and, for below-market leases, over a period equal to the initial term plus any below-market fixed rate renewal periods. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental income over the initial terms of the respective leases and any below-market fixed rate renewal periods. The capitalized above-market lease values are amortized as a decrease to rental income over the initial terms of the prospective leases.
The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the estimated cost of operations during a theoretical lease-up period to replace in-place leases, including lost revenues and any unreimbursed operating expenses, plus an estimate of deferred leasing commissions for in-place leases. This aggregate value is allocated between in-place lease value 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 real estate acquired as 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 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.
F-14
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). In the accompanying consolidated balance sheets, accumulated other comprehensive income (loss) consists of foreign currency translation adjustments and swap fair value adjustments for qualifying hedges.
Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, beginning with our taxable year ended December 31, 2004. To qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) as defined in the Internal Revenue Code, to our shareholders and satisfy certain other organizational and operating requirements. We generally will not be subject to U.S. federal income taxes if we distribute 100% of our net taxable income each year to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income taxes (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and may not be able to qualify as a REIT for the four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and to U.S. federal income taxes and excise taxes on our undistributed taxable income. Except as discussed below, we believe that we have met all of the REIT distribution and technical requirements for the years ended December 31, 2012 and 2011. We intend to continue to adhere to these requirements and maintain our REIT qualification.
In order for distributions to be deductible for U.S. federal income tax purposes and count towards our distribution requirement, they must not be “preferential dividends.” A distribution will not be treated as preferential if it is pro rata among all outstanding shares of stock within a particular class. IRS guidance, however, allows a REIT to offer shareholders participating in its dividend reinvestment program (“DRIP”) up to a 5% discount on shares purchased through the DRIP without treating such reinvested dividends as preferential. Our DRIP offers a 5% discount. In 2007, 2008 and the first two quarters of 2009, common shares issued pursuant to our DRIP were treated as issued as of the first day following the close of the quarter for which the distributions were declared, and not on the date that the cash distributions were paid to shareholders not participating in our DRIP. Because we declare dividends on a daily basis, including with respect to common shares issued pursuant to our DRIP, the IRS could take the position that distributions paid by us during these periods were preferential on the grounds that the discount provided to DRIP participants effectively exceeded the authorized 5% discount or, alternatively, that the overall distributions were not pro rata among all shareholders. In addition, in the years 2007 through 2009 we paid certain individual retirement account (“IRA”) custodial fees in respect of IRA accounts that invested in our common shares. The payment of certain of such amounts could have been treated as dividend distributions to the IRAs, and therefore as preferential dividends as such amounts were not paid in respect of our other outstanding common shares. Although we believe that the effect of the operation of our DRIP and the payment of such fees was immaterial, the REIT rules do not provide an exception forde minimis preferential dividends.
We submitted a request to the IRS for a closing agreement under which the IRS would grant us relief with respect to payments we made to shareholders under our DRIP and in respect of certain custodial fees we paid on behalf of some of our IRA shareholders, in each case, which payments could be treated as preferential dividends under the rules applicable to REITs. On July 8, 2011, the Company and the former investment advisor entered into the Closing Agreement with the IRS pursuant to which (i) the IRS agreed not to challenge the Company’s dividends as preferential for its taxable years 2007, 2008 and 2009 as a result of the matters described above, and (ii) the former investment advisor paid a compliance fee of approximately $135,000 to the IRS. In accordance with the terms of the Closing Agreement, none of the Company, CSP OP or any subsidiary thereof have directly or indirectly reimbursed or will directly or indirectly reimburse the former investment advisor for its payment of this compliance fee and none of the former investment advisor or its direct or indirect owners has deducted or will deduct the compliance fee from their taxable income. The Company and the former investment advisor expect to remain in compliance with the terms of the Closing Agreement, but any inadvertent non-compliance with such terms could result in adverse consequences for us. As a result of the Closing Agreement, the Company has met its distribution requirement for its taxable years ended December 31, 2007, 2008 and 2009.
Revenue Recognition and Valuation of Receivables
All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is recorded as deferred rent. In connection with various leases, we have received irrevocable stand-by letters of credit totaling $17,760,000 and $16,714,000 as security for such leases at December 31, 2012 and 2011.
F-15
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Reimbursements from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes, insurance and other recoverable costs, are recognized as revenue in the period the expenses are incurred. Tenant reimbursements are recognized and presented on a gross basis, when we are the primary obligor with respect to incurring expenses and with respect to having the credit risk.
Tenant receivables and deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and deferred rent. Management’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, individual receivables, current economic conditions, and other relevant factors. The allowances are increased or decreased through the provision for bad debts. The allowance for uncollectible rent receivable was $11,000 and $821,000 as of December 31, 2012 and, 2011, respectively. During the year ended December 31, 2012, we wrote off $378,000 of uncollectable receivables for the tenants Robert Spooner Gallerie at 505 Century, 2 AM Group, Inc., at Highway 290 Commerce Park Building 1 and East Coast Absorbants at Orchard Business Park 2. There were no write offs recorded in 2011. During the year ended December 31, 2010, we wrote off $310,000 of the uncollectible rent receivables for the tenants Randal C. Espey at the Deerfield Commons I property, Cell Arch Technologies, Inc. and Keogh Consulting, Inc. at the Lakeside Office Center, Romeo Rim, Inc. at the Cherokee Corporate Park, and Amax Engineering Corporation at the 660 North Dorothy.
Offering Costs
Offering costs totaling $18,337,000 and $72,001,000 were incurred during the years ended December 31, 2012 and 2011, respectively, and are recorded as a reduction of additional paid-in-capital in the consolidated statement of shareholders’ equity. Offering costs incurred through December 31, 2012 totaled $237,676,000. Of the total amount, $217,959,000 was incurred to CNL Securities Corp., as the former dealer manager of our public offerings (the “former dealer manager”); $3,969,000 was incurred to CBRE Group, Inc., an affiliate of the former investment advisor; $912,000 was incurred to the former investment advisor for reimbursable marketing costs and $14,836,000 was incurred to other service providers. Each party was paid the amount incurred from proceeds of our public offering. As of December 31, 2012 and 2011, the accrued offering costs payable to related parties included in our consolidated balance sheets were $0 and $1,974,000, respectively. Offering costs payable to unrelated parties of $0 and $133,000 at December 31, 2012 and 2011, respectively, were included in accounts payable and accrued expenses. All offering costs have been paid as of December 31, 2012.
Deferred Financing Costs and Discounts on Notes Payable
Direct costs incurred in connection with obtaining financing are amortized over the respective term of the loan on a straight-line basis, which approximates the effective interest method.
Discounts on notes payable are amortized to interest expense based on the effective interest method.
Translation of Non-U.S. Currency Amounts
The financial statements and transactions of our United Kingdom real estate operation are recorded in its functional currency, namely the Great Britain Pound (“GBP”) and are then translated into U.S. dollars (“USD”).
Assets and liabilities of this operation are denominated in the functional currency and are then translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average exchange rate for the reporting period. Translation adjustments are reported in “Accumulated Other Comprehensive Loss,” a component of Shareholders’ Equity.
The carrying value of our United Kingdom assets and liabilities fluctuate due to changes in the exchange rate between the USD and the GBP. The exchange rate of the USD to the GBP was $1.6242 and $1.5535 at December 31, 2012 and 2011, respectively. The profit and loss weighted average exchange rate of the USD to the GBP was approximately $1.5865, $1.6089 and $1.5461 for the years ended December 31, 2012, 2011 and 2010, respectively.
The carrying value of our European assets and liabilities fluctuate due to changes in the exchange rate between the USD and the EUR. The exchange rate of the USD to the EUR was $1.3189 and $1.2945 at December 31, 2012 and 2011, respectively. The profit and loss weighted average exchange rate of the USD to the EUR was approximately $1.2877, $1.4000 and $1.3256 for the years ended December 31, 2012, 2011 and 2010 respectively.
F-16
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Class B Interest—Related Party
Effective July 1, 2004, REIT Holdings, an affiliate of the former investment advisor, was granted a Class B interest in CSP OP. The Class B interest is an equity instrument that was issued in exchange for services provided to us relating to our formation and subsequent operations. The holder is entitled to receive distributions made by CSP OP in an amount equal to 15% of all net sales proceeds on dispositions of properties or other assets (including by liquidation, merger or otherwise) after the other partners, including us, have received in the aggregate, cumulative distributions from property income, sales proceeds or other services equal to (i) the total capital contributions made to CSP OP and (ii) a 7% annual, uncompounded return on such capital contributions.
Effective May 1, 2012, we entered into the Third Amended Partnership Agreement which revised the redemption rights of the Class B interest. Accordingly, the Class B interest may be redeemed upon the earliest to occur of (i) the exercise by the holder of the Class B interest of its right to require CSP OP to redeem its interest, which right continues for five years from the date of the agreement, (ii) the fifth anniversary of the date of the agreement, (iii) certain other liquidity events, (iv) a merger or sale transaction (a “Merger or Sale”), or (v) our common shares becoming listed or admitted to trading on a national securities exchange or designated for quotation on the NASDAQ Global Select Market or the NASDAQ Global Market (a “Listing”). CSP OP may reject a redemption and institute a blackout period with respect to redemptions upon the determination by our Board of Trustees that an appraisal process would not be in the best interest of CSP OP at the time of the proposed redemption. A blackout period may only be imposed as the result of a potential Merger or Sale or potential Listing. The consideration received for the redemption of the Class B interest will depend upon the event triggering the redemption. In the event of a redemption in connection with (a) a Listing, the consideration will be determined based on the market value of our shares for a 30 day period beginning 150 days after the Listing, or (b) a Merger or Sale, the consideration will be determined based on our aggregate share value in the transaction. In the event of a redemption as a result of (a) the exercise by the holder of the Class B interest of its redemption right, (b) the fifth anniversary of the date of the agreement or (c) certain other liquidity events, the consideration will be determined based on an appraisal process. As a result, future changes in the fair value of the Class B interest will be deferred from recognition in the financial statements until a Listing or Merger or Sale transaction takes place.
As a result of the modification of the terms of the Class B interest pursuant to the Third Amended Partnership Agreement, it was no longer required that the Class B interest be redeemed or forfeited upon a termination of the former investment advisor as investment advisor to the Company. Consequently, we recognized an expense of $200,000 during the year ended December 31, 2012 for the current economic fair value resulting from the modification of the terms of the Class B interest.
With respect to the Class B interest in CSP OP, FASB ASC 480-10 “Distinguishing Liabilities from Equity” requires non-controlling interests with redemption provisions that permit the issuer to settle in either cash or common shares at the option of the issuer to be further evaluated under the Codification Sub-Topic “Derivatives and Hedging—Conditions Necessary for Equity Classification” (“FASB ASC 815-40-25-10”) to determine whether permanent equity or temporary equity classification on the balance sheet is appropriate. Since the Class B interest contains such a provision, we evaluated this guidance and determined that the Class B interest does not meet the requirements to qualify for equity presentation. As a result, the Class B interest in CSP OP is presented in the temporary equity section of the consolidated balance sheets and reported at fair value, with period to period changes in value reported as an adjustment to shareholder’s equity. Under the terms of the Third Amended Partnership Agreement, the fair value of the Class B Interest is determined as an amount equal to the redemption value as defined therein.
Transition Costs
We incurred certain costs in connection with our transition from being an externally managed company to a self-managed company (“Transition Costs”). These Transition Costs consist of legal, consulting and other third-party service provider costs incurred by us in order to execute on our Board of Trustees’ decision to become a self-managed company. The Transition Costs include legal and consulting costs resulting from the amendment of our management structure and various corporate relationships, including with respect to our relations with the former investment advisor, as well as exploring and implementing strategic alternatives for information technology, office space and personnel needs, among other expenses. Transition costs totaling $8,249,000 were incurred during year ended December 31, 2012.
Earnings Per Share Attributable to Chambers Street Properties Shareholders
Basic net income (loss) per share is computed by dividing income (loss) by the weighted average number of common shares outstanding during each period. The computation of diluted net income (loss) further assumes the dilutive effect of stock options, stock
F-17
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
warrants and contingently issuable shares, if any. We have recorded a net loss for the years ended December 31, 2012, 2011 and 2010 the effect of stock options, restricted stock grants, stock warrants and contingently issuable shares, are anti–dilutive, and accordingly, the $713,000 in restricted stock awards have been excluded from the earnings per share computation. In addition, no stock options, stock warrants or contingently issuable shares have ever been issued. As a result, there is no difference in basic and diluted shares.
Fair Value of Financial Instruments and Investments
We elected to apply the fair value option for one of our eligible mortgage notes payable that was newly issued debt during the year ended December 31, 2008. The measurement of the elected mortgage note payable at its fair value and its impact on the statement of operations is described in Note 16 “Fair Value Option-Note Payable” and Note 17 “Fair Value of Financial Instruments and Investments.” At December 31, 2012, the fair value of the mortgage note payable was determined using a market interest rate of 3.015%.
We generally determine or calculate the fair value of financial instruments using appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow. The Investment Manager of CBRE Strategic Partners Asia applies valuation techniques for our investment carried at fair value based upon the application of the income approach, the direct market comparison approach, the replacement cost approach or third party appraisals to the underlying assets held in the unconsolidated entity in determining the net asset value attributable to our ownership interest therein. The financial assets and liabilities recorded at fair value in our consolidated financial statements are the two interest rate swaps, one interest rate cap, our investment in CBRE Strategic Partners Asia (a real estate entity which qualifies as an investment company under the Investment Company Act), and one mortgage note payable that is economically hedged by one of the interest rate swaps.
The remaining financial assets and liabilities which are only disclosed at fair value are comprised of all other notes payable, the unsecured line of credit and other debt instruments. We determined the fair value of our secured notes payable and other debt instruments by performing discounted cash flow analyses using an appropriate market discount rate. We calculate the market discount rate by obtaining period-end treasury rates for fixed-rate debt, or London Inter-Bank Offering Rate (“LIBOR”) rates for variable-rate debt, for maturities that correspond to the maturities of our debt and then adding an appropriate credit spread derived from information obtained from third-party financial institutions. These credit spreads take into account factors such as our credit standing, the maturity of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.
The carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term maturities.
We adopted the fair value measurement criteria described herein for our non-financial assets and non-financial liabilities on January 1, 2009. The adoption of the fair value measurement criteria to our non-financial assets and liabilities did not have a material impact to our consolidated financial statements. Assets and liabilities typically recorded at fair value on a non-recurring basis include:
| | ¡ | | Non-financial assets and liabilities initially measured at fair value in an acquisition or business combination; |
| | ¡ | | Long-lived assets measured at fair value due to an impairment assessment; and |
| | ¡ | | Asset retirement obligations initially measured under the ASC Topic “Asset Retirement and Environmental Obligations” (“FASB ASC 410”). |
Share-based Compensation
For share-based awards for which there is no pre-established performance period, we recognize compensation costs over the service vesting period, which represents the requisite service period, on a straight-line basis.
For share-based awards in which the performance period precedes the grant date, we recognize compensation costs over the requisite service period, which includes both the performance and service vesting periods, using the accelerated attribution expense method. The requisite service period begins on the date the Compensation Committee of the Board of Trustees authorizes the award and adopts any relevant performance measures.
F-18
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
During the performance period for a share-based award program, we estimate the total compensation cost of the potential future awards. We then record compensation costs equal to the portion of the requisite service period that has elapsed through the end of the reporting period.
For share based awards granted by the Company, CSP OP issues a number of common units equal to the number of common shares ultimately granted by us in respect of such awards.
Subsequent Events
In preparing our accompanying financial statements, management has evaluated subsequent events through the financial statement issuance date. We believe that the disclosures contained herein are adequate to prevent the information presented from being misleading.
Adoption of Accounting Standards
New Accounting Standards
In May 2011, the FASB issued, ASU 2011-04 to theFair Value Measurement topic of the Accounting Standards Codification (“ASC”). The ASU eliminates unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards, expands the disclosure requirements of the Fair Value Measurements topic of the ASC for fair value measurements and makes other amendments, including:
| | ¡ | | limiting the highest-and-best-use and valuation-premise concepts only to measuring the fair value of nonfinancial assets; |
| | ¡ | | permitting an exception to fair value measurement principles for financial assets and financial liabilities (and derivatives) with offsetting positions in market risk or counterparty credit risk when several criteria are met. When the criteria are met, an entity can measure the fair value of the net risk position; |
| | ¡ | | clarifying that premiums or discounts that reflect size as a characteristic of the reporting entity’s holding rather than as a characteristic of the asset or liability (for example, a control premium when measuring the fair value of a controlling interest) are not permitted in a fair value measurement; and |
| | ¡ | | prescribing a model for measuring the fair value of an instrument classified in shareholders’ equity; this model is consistent with the guidance on measuring the fair value of liabilities. |
ASU 2011-04 expands theFair Value Measurements topic’s disclosure requirements, particularly for fair value measurements categorized in Level 3 of the fair value hierarchy: (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (2) a description of the valuation processes in place (e.g., how the entity decides its valuation policies and procedures, as well as changes in its analyses of fair value measurements, from period to period), (3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs, (4) discussion of the use of a nonfinancial asset that differs from the asset’s highest and best use, and (5) the level of the fair value hierarchy of financial instruments for items that are not measured at fair value but for which disclosure of fair value is required.
ASU 2011-04 is applicable to our company for interim and annual periods beginning after December 15, 2011. The adoption of this ASU had a material effect on the disclosures in our consolidated financial statements in Notes 15 “Derivative Instruments” and Note 17 “Fair Value of Financial Instruments and Investments.”
In June 2011, the FASB issued ASU 2011-05,Presentation of Comprehensive Income (included in ASC 220, Comprehensive Income), or ASU 2011-05, which amends existing guidance to allow only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous statement of comprehensive income, or (2) in two separate but consecutive financial statements consisting of an income statement followed by a statement of other comprehensive income. ASU 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We early adopted ASU 2011-05 during the year ended December 31, 2011 and included the statements of comprehensive income or loss in the consolidated financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2011.
F-19
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
In December 2011, the FASB issued an Accounting Standards Update, (“ASU”), ASU 2011-11 to the Balance Sheet topic of the Codification. The amendments in this ASU affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with the Offsetting Presentation section of the Balance Sheet topic or the Presentation section of the Derivatives and Hedging topic of the Codification or (2) subject an enforceable master netting arrangement or similar agreement. The amendments in this ASU require the Company to disclose information about offsetting and related arrangement to enable users of financial statements to understand the effect of netting to an entity’s financial position.
In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. The ASU clarifies that the scope applied to derivatives accounted for in accordance with the Derivatives and Hedging topic of the Codification, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with the Offsetting Presentation section of the Balance Sheet topic or the Presentation section of the Derivatives and Hedging topic or subject to an enforceable master netting arrangement or similar agreement.
The ASU amendment and the subsequent clarification of the amendment are effective for periods beginning on or after January 1, 2013, and must be shown for all periods shown on the balance sheet. The adoption of these ASU amendments is not expected to have a material effect on our financial condition or results of operations.
Other Accounting Standards Updates not effective until after December 2012 are not expected to have a significant effect on our consolidated financial position or results of operations.
3. Acquisition of Real Estate
The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, site improvements, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above and below-market leases and the value of in-place leases and tenant relationships, if any, based in each case on their respective fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market loans, will be recorded based on the fair value of any loans assumed in connection with acquiring the real estate. Above-market ground leases will be recorded based on the respective fair value of the ground leases. Effective January 1, 2009, we began expensing deal costs related to our consolidated acquisitions.
70 Hudson Street and 90 Hudson Street were acquired on April 11, 2011 for $155,000,000 each, Millers Ferry Road was acquired on June 2, 2011, for $40,366,000, Sky Harbor Operations Center was acquired on September 30, 2011 for $53,500,000, Aurora Commerce Center Bldg. C was acquired on November 30, 2011 for $24,500,000 and Sabal Pavilion was acquired on December 30, 2011 for $21,368,000.
2400 Dralle Road was acquired on March 20, 2012 for $64,250,000, Midwest Commerce Center I was acquired on August 16, 2012 for $62,950,000, 20000 S. Diamond Lake Road was acquired on November 7, 2012 for $18,500,000, Gateway at Riverside and Gateway II at Riverside were acquired on November 30, 2012 for $49,229,000. 701 and 801 Charles Ewing Blvd. was acquired on December 28, 2012 for $28,310,000 and Mid Atlantic Distribution Center Bldg. A was acquired on December 28, 2012 for $43,150,000.
The segment of income from continuing operations generated since the respected dates of acquisition for each property are as follows: $3,474,000 2400 Dralle Road, $1,759,000 Midwest Commerce Center I, $214,000 S. Diamond Lake Road, $311,000 Gateway I & II at Riverside, $29,000 701 & 801 Charles Ewing Blvd, and $38,000 Mid Atlantic Distribution Center Bldg. A. A total of $5,796,000 and $29,000 were included in Domestic Industrial and the Domestic Office segment net operating income for the year ended December 31, 2012 for 2012 acquisitions.
F-20
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
The following table summarizes the final fair values of the assets acquired and liabilities assumed for the above noted acquisitions during the years ended December 31, 2012 and 2011 and designated as real estate held for investment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property | | Land | | | Site
Improve-
ments | | | Building
Improve-
ments | | | Tenant
Improve-
ments | | | Acquired In-
Place Lease
Value | | | Above
Market
Lease
Value | | | Below
Market
Lease
Value | | | Ground
Lease | | | (Premium)
Discount
on Notes | | | Purchase
Price | | | Notes
Payable
Assumed | | | Net
Assets
Acquired | |
70 Hudson Street | | $ | 55,300 | | | $ | 8,885 | | | $ | 56,195 | | | $ | 3,470 | | | $ | 19,903 | | | $ | 14,503 | | | $ | 0 | | | $ | 0 | | | $ | (3,256 | ) | | $ | 155,000 | | | $ | (120,857 | ) | | $ | 34,143 | |
90 Hudson Street | | | 56,400 | | | | 9,969 | | | | 76,909 | | | | 3,198 | | | | 18,293 | | | | 28 | | | | (7,112 | ) | | | 0 | | | | (2,685 | ) | | | 155,000 | | | | (117,562 | ) | | | 37,438 | |
Millers Ferry Road | | | 5,835 | | | | 8,755 | | | | 18,411 | | | | 688 | | | | 7,149 | | | | 0 | | | | (472 | ) | | | 0 | | | | 0 | | | | 40,366 | | | | 0 | | | | 40,366 | |
Sky Harbor Operations Center | | | 0 | | | | 20,848 | | | | 19,677 | | | | 4,565 | | | | 16,535 | | | | 0 | | | | (6,625 | ) | | | (1,500 | ) | | | 0 | | | | 53,500 | | | | 0 | | | | 53,500 | |
Aurora Commerce Center Bldg. C | | | 2,600 | | | | 1,126 | | | | 17,466 | | | | 254 | | | | 2,643 | | | | 411 | | | | 0 | | | | 0 | | | | 0 | | | | 24,500 | | | | 0 | | | | 24,500 | |
Sabal Pavilion | | | 3,900 | | | | 1,394 | | | | 10,734 | | | | 1,656 | | | | 4,505 | | | | 0 | | | | (93 | ) | | | 0 | | | | (728 | ) | | | 21,368 | | | | (14,700 | ) | | | 6,668 | |
2400 Dralle Road | | | 11,706 | | | | 4,732 | | | | 38,175 | | | | 912 | | | | 6,645 | | | | 2,080 | | | | 0 | | | | 0 | | | | 0 | | | | 64,250 | | | | 0 | | | | 64,250 | |
Midwest Commerce Center I | | | 6,665 | | | | 10,517 | | | | 36,170 | | | | 597 | | | | 7,172 | | | | 1,829 | | | | 0 | | | | 0 | | | | 0 | | | | 62,950 | | | | 0 | | | | 62,950 | |
20000 S. Diamond Lake Rd | | | 1,976 | | | | 884 | | | | 12,041 | | | | 55 | | | | 2,622 | | | | 922 | | | | 0 | | | | 0 | | | | 0 | | | | 18,500 | | | | 0 | | | | 18,500 | |
Gateway at Riverside | | | 9,258 | | | | 6,850 | | | | 26,918 | | | | 475 | | | | 6,001 | | | | 293 | | | | (566 | ) | | | 0 | | | | 0 | | | | 49,229 | | | | 0 | | | | 49,229 | |
701 & 702 Charles Ewing Bldg | | | 2,376 | | | | 3,832 | | | | 14,306 | | | | 2,268 | | | | 5,117 | | | | 411 | | | | 0 | | | | 0 | | | | 0 | | | | 28,310 | | | | 0 | | | | 28,310 | |
Mid-Atlantic Distribution Center-Bldg. A | | | 7,033 | | | | 3,578 | | | | 24,780 | | | | 385 | | | | 4,811 | | | | 2,563 | | | | 0 | | | | 0 | | | | 0 | | | | 43,150 | | | | 0 | | | | 43,150 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 163,049 | | | $ | 81,370 | | | $ | 351,782 | | | $ | 18,523 | | | $ | 101,396 | | | $ | 23,040 | | | $ | (14,868 | ) | | $ | (1,500 | ) | | $ | (6,669 | ) | | $ | 716,123 | | | $ | (253,119 | ) | | $ | 463,004 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Building Improvements are depreciated over 39 years; Site Improvements are depreciated over 15 and 25 years; Tenant Improvements, Acquired In-Place Lease Value, Above Market Lease Value and Below Market Lease Value are amortized over the remaining lease terms at the time of acquisition.
Acquisition related expenses of $7,752,000 and $14,464,000 and $17,531,000 associated with the acquisitions of real estate were expensed as incurred during the years ended December 31, 2012, 2011 and 2010, respectively.
Unaudited pro forma results, assuming the above noted acquisitions had occurred as of January 1, 2011 for purposes of the 2012 acquisitions and assuming the above noted 2011 acquisitions had occurred as of January 1, 2010 for purposes of presenting the 2012 and 2011 proforma disclosures, respectively, are presented below. Non-recurring 2012 acquisition costs totaling $7,752,000 were excluded from the 2012 pro forma and included in the year ended December 31, 2011 as an operating expense. Nonrecurring 2011 acquisition costs totaling $14,464,000 are excluded from this presentation.
These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as increased depreciation and amortization expenses as a result of tangible and intangible assets acquired in the acquisitions. These unaudited pro forma results do not purport to be indicative of what operating results would have been had the acquisitions actually occurred on January 1, 2011 or 2010 and may not be indicative of future operating results.
F-21
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Pro forma operations for the years ended December 31, 2012 and 2011 (in thousands, except share data):
| | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | |
Revenue | | $ | 194,843 | | | $ | 183,056 | |
Operating Loss | | | (18,944 | ) | | | (12,652 | ) |
Net Loss | | | (30,378 | ) | | | (6,946 | ) |
Basic and Diluted Loss Per Share | | $ | (0.12 | ) | | $ | (0.04 | ) |
Weighted Average Shares Outstanding for Basic and Diluted Loss | | | 248,154,277 | | | | 192,042,918 | |
4. Real Estate and Other Assets Held for Sale and Related Liabilities
Real estate and other assets held for sale include real estate for sale in their present condition that have met all of the “held for sale” criteria of ASC 360 “Accounting for the Impairment or Disposal of Long-Lived Assets,” and other assets directly related to such projects. Liabilities related to real estate and other assets held for sale have been included as a single line item in the accompanying consolidated balance sheets.
There were no real estate and other assets held for sale and related liabilities as of December 31, 2012 and 2011.
In accordance with ASC 205-20 Presentation of Financial Statement-Discontinued Operation, the income and the net gain on dispositions of operating properties are reflected in the consolidated statements of operations as discontinued operations for all periods presented.
For the year ended December 31, 2012, the Company recognized a loss from discontinued operations of $413,000 associated with the disposition of the Cherokee Corporate Park property on July 9, 2012.
Revenues and expenses from discontinued operations for the year ended December 31, 2011 and 2010, respectively, represent the activities of the held for sale portfolio of warehouse distribution buildings acquired during the year ended December 31, 2010 for $22,000,000. On August 12, 2011, we sold the Rickenbacker II and Rickenbacker III properties located in Groveport, OH, for approximately $22,639,000. The aggregate sales proceeds after customary closing costs were approximately $22,433,000 resulting in a gain on sale of $426,000. We also sold Orchard Park III for $1,275,000 and recognized a loss of ($125,000) during 2011.
In accordance withASC 205-20 Presentation of Financial Statement-Discontinued Operation, the income and the net gain on dispositions of operating properties are reflected in the consolidated statements of operations as discontinued operations for all periods presented.
F-22
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Discontinued operations for the years ended December 31, 2012, 2011 and 2010 (in thousands):
| | | | | | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Revenues: | | | | | | | | | | | | |
Rental | | $ | 0 | | | $ | 878 | | | $ | 138 | |
Tenant Reimbursement | | | 0 | | | | 207 | | | | 26 | |
| | | | | | | | | | | | |
Total Revenues. | | | 0 | | | | 1,085 | | | | 164 | |
| | | |
Expenses: | | | | | | | | | | | | |
Operating and Maintenance | | | 0 | | | | 310 | | | | 71 | |
Property Taxes | | | 0 | | | | 89 | | | | 14 | |
General and Administrative | | | 0 | | | | 41 | | | | 2 | |
Investment Management Fee to Related Party | | | 0 | | | | 96 | | | | 16 | |
Property management Fee to Related Party | | | 0 | | | | 0 | | | | 7 | |
Acquisition Expenses | | | 0 | | | | 0 | | | | 500 | |
| | | | | | | | | | | | |
Total Expenses | | | 0 | | | | 536 | | | | 610 | |
| | | | | | | | | | | | |
Provision for Income Taxes in Discontinued Operations | | | 0 | | | | 122 | | | | 61 | |
| | | | | | | | | | | | |
Income (Loss) from Discontinued Operations | | | 0 | | | | 427 | | | | (507 | ) |
Net Realized (Loss) Gain from Sale | | | (413 | ) | | | 301 | | | | 0 | |
| | | | | | | | | | | | |
Total (Loss) Income from Discontinued Operations | | $ | (413 | ) | | $ | 728 | | | $ | (507 | ) |
| | | | | | | | | | | | |
5. Investments in Unconsolidated Entities
Investments in unconsolidated entities at December 31, 2012 and 2011 consist of the following (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
CBRE Strategic Partners Asia | | $ | 8,098 | | | $ | 8,381 | |
Duke Joint Venture | | | 344,511 | | | | 377,145 | |
Afton Ridge Joint Venture | | | 17,008 | | | | 18,274 | |
UK JV | | | 37,487 | | | | 26,590 | |
European JV | | | 108,725 | | | | 107,241 | |
| | | | | | | | |
| | $ | 515,829 | | | $ | 537,631 | |
| | | | | | | | |
The following is a summary of the investments in unconsolidated entities for the years ended December 31, 2012 and 2011 (in thousands):
| | | | | | | | |
| | | 2012 | | | 2011 | |
Investment Balance, January 1, | | $ | 537,631 | | | $ | 410,062 | |
Contributions | | | 45,568 | | | | 149,132 | |
Company’s Equity in Net Income (including adjustments for basis differences) | | | 3,959 | | | | 3,590 | |
Other Comprehensive Income of Unconsolidated Entities | | | 1,144 | | | | (1,487 | ) |
Distributions | | | (72,473 | ) | | | (23,666 | ) |
| | | | | | | | |
Investment Balance, December 31, | | $ | 515,829 | | | $ | 537,631 | |
| | | | | | | | |
CBRE Strategic Partners Asia
We have agreed to a capital commitment of $20,000,000 in CBRE Strategic Partners Asia, which extended for 57 months (to October 31, 2012) after the close of the final capital commitment. As of December 31, 2012, we have contributed $17,526,000 of
F-23
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
our capital commitment. CBRE Global Investors formed CBRE Strategic Partners Asia to purchase, reposition, develop, hold for investment and sell institutional quality real estate and related assets in targeted markets in Asia, including China, Japan, India, South Korea, Hong Kong, Singapore and other Asia Pacific markets. The initial closing date of CBRE Strategic Partners Asia was in July 2007, with additional commitments being accepted through January 2008. CBRE Strategic Partners Asia closed on January 31, 2008, with aggregate capital commitments of $394,203,000. CBRE Strategic Partners Asia has an eight-year term, which may be extended for up to two one-year periods with the approval of two-thirds of the limited partners.
As of December 31, 2012, CBRE Strategic Partners Asia, with its parallel fund, CB Richard Ellis Strategic Asia II, L.P., had aggregate investor commitments of $394,203,000 from institutional investors including CBRE Global Investors, an affiliate of the former investment advisor. We own an ownership interest of approximately 5.07% in CBRE Strategic Partners Asia. As of December 31, 2012, CBRE Strategic Partners Asia had acquired ownership interests in ten properties, five in China and five in Japan. Two of the five ownership interests in China were sold in 2010 and one was sold in 2012.
We carry our investment in CBRE Strategic Partners Asia using the equity method of accounting. Those investments where we have the ability to exercise significant influence (but not control) over operating and financial policies of such entities (including certain entities where we have less than 20% ownership) are accounted for using the equity method. Accordingly, our share of the earnings or losses of these equity method entities is included in consolidated net loss.
CBRE Strategic Partners Asia is a limited partnership that qualifies for specialized industry accounting for investment companies. Specialized industry accounting allows investment companies to carry their investments at fair value, with changes in the fair value of the investments recorded in the statement of operations. On the basis of the guidance in ASC 970-323, the Company accounts for its investment in CBRE Strategic Partners Asia under the equity method. As a result, and in accordance with ASC 810-10-25-15 the specialized accounting treatment, principally the fair value basis, applied by CBRE Strategic Partners Asia under the investment company guide is retained in the recognition of equity method earnings in the statement of operations of the Company. See Note 17 “Fair Value of Financial Instruments and Investments” for further discussion of the application of the fair value accounting to our investment in CBRE Strategic Partners Asia.
Consolidated Balance Sheets of CBRE Strategic Partners Asia as of December 31, 2012 and 2011 (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
Assets | | | | | | | | |
Real Estate | | $ | 161,351 | | | $ | 215,948 | |
Other Assets | | | 56,054 | | | | 11,545 | |
| | | | | | | | |
Total Assets | | $ | 217,405 | | | $ | 227,493 | |
| | | | | | | | |
Liabilities and Equity | | | | | | | | |
Notes Payable | | $ | 39,693 | | | $ | 45,466 | |
Other Liabilities | | | 14,864 | | | | 13,948 | |
| | | | | | | | |
Total Liabilities | | | 54,557 | | | | 59,414 | |
| | | | | | | | |
Company’s Equity | | | 8,098 | | | | 8,383 | |
Other Investors’ Equity | | | 154,750 | | | | 159,696 | |
| | | | | | | | |
Total Liabilities and Equity | | $ | 217,405 | | | $ | 227,493 | |
| | | | | | | | |
Consolidated Statements of Operations of CBRE Strategic Partners Asia for the years ended December 31, 2012, 2011, and 2010 (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Total Revenues and Appreciation (Depreciation) | | $ | 6,382 | | | $ | 2,639 | | | $ | 29,329 | |
Total Expenses | | | 4,313 | | | | 32,603 | | | | 9,924 | |
| | | | | | | | | | | | |
Net (Loss) Income | | | 2,069 | | | | (29,964 | ) | | | 19,405 | |
| | | | | | | | | | | | |
Company’s Equity in Net (Loss) Income | | $ | 85 | | | $ | (1,547 | ) | | $ | 949 | |
| | | | | | | | | | | | |
F-24
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Duke Joint Venture
On May 5, 2008, we entered into a contribution agreement with Duke Realty Limited Partnership (“Duke”), a subsidiary of Duke Realty Corporation (NYSE: DRE), to form the Duke joint venture to acquire $248,900,500 in industrial real property assets (the “Industrial Portfolio”). The Industrial Portfolio consisted of six bulk industrial built-to-suit, fully leased properties. On September 12, 2008, we entered into a first amendment to the contribution agreement to acquire a fully leased office building for $37,111,000 and to increase and revise the total purchase commitment to $282,400,000. We own an 80% interest and Duke owns a 20% interest in the Duke joint venture.
We entered into an operating agreement for the Duke joint venture with Duke on June 12, 2008. Duke acts as the managing member of the Duke joint venture and is entitled to receive fees in connection with the services it provides to the Duke joint venture, including asset management, construction, development, leasing and property management services. Duke is also entitled to a promoted interest in the Duke joint venture. We have joint approval rights over all major policy decisions.
On December 17, 2010, we entered into an amended and restated operating agreement for the Duke joint venture. The amended and restated operating agreement generally contains the same terms and conditions as the operating agreement dated June 12, 2008 described above, except for the following material changes: (i) Duke has granted us a call option to acquire Duke’s entire interest in the Duke joint venture which such interest shall be valued based on the opinions of qualified appraisers and which we can elect to exercise any time after June 30, 2012 upon the occurrence and adoption by resolution of certain triggering events and (ii) the Duke joint venture has certain rights to participate in the development of certain adjacent and nearby parcels of land currently owned by Duke.
We carry our investment in the Duke joint venture using the equity method of accounting because it is an entity under shared control with Duke. Those investments where we have the ability to exercise significant influence (but not control) over operating and financial policies of such entities are accounted for using the equity method. We eliminate transactions with such equity method subsidiaries to the extent of our ownership in such entities.
On March 24, 2011, in connection with the acquisition of 13 properties for $342,800,000 of which our share was $274,240,000 exclusive of closing costs and acquisition fees which were both expensed as incurred, the Duke joint venture entered into a $275,000,000 unsecured term loan (the “Term Loan”) with Wells Fargo Bank, N.A. While the Term Loan was non-recourse to us, the pro rata share of the Term Loan obligation attributable to us was initially $220,000,000 in accordance with our ownership interest in the Duke joint venture. The Term Loan had a six-month term and two six-month extension options. The Term Loan had an interest rate of LIBOR plus 2.50% and was fully pre-payable at any time, subject to any customary costs. An origination fee of $1,650,000 was paid to Wells Fargo Bank, N.A. at the closing of the term loan. The Term Loan Agreement contained customary representations and warranties and covenants. During the term of the loan, the Duke joint venture agreed to comply with certain financial covenants related to its leverage ratio, net asset value, unencumbered leverage ratio and the inability to enter into certain types of investments.
On April 28, 2011, the Duke joint venture entered into lease amendments to expand the Buckeye Logistics Center property, a warehouse/distribution/logistics center located in Phoenix, AZ. On May 2, 2011, the Duke joint venture closed on the acquisition of additional land and entered into a construction agreement (along with the lease amendments collectively, the “Buckeye Expansion Agreements”). The existing property was 100% leased to a subsidiary of Amazon.com through September 2018. Pursuant to the Buckeye Expansion Agreements, Buckeye Logistics Center (i) was expanded from the current 604,678 square feet to approximately 1,009,351 square feet and (ii) remained 100% leased to a subsidiary of Amazon.com, which lease was extended through September 2021. The total cost of the expansion was approximately $21,518,000 to the Duke joint venture.
On August 4, 2011, we contributed $31,200,000, our 80% share of $39,000,000, to the Duke joint venture. The contribution was used towards a pay down of the Term Loan on August 8, 2011. On August 8, 2011, the Duke joint venture closed on two loans with Woodman of the World Life Insurance Society totaling $14,425,000. The loans are secured by the Fairfield Distribution Center IX, $4,675,000, and West Lake at Conway, $9,750,000, properties. Net proceeds from the financing totaling approximately $13,818,000 were used to pay down the Term Loan. Approximately $52,818,000 of the $275,000,000 Term Loan was paid down on August 8, 2011 reducing the outstanding balance as of that date to approximately $222,182,000.
On August 16, 2011, the Duke joint venture closed on three loans with Wells Fargo Bank, N.A., totaling $43,400,000. The three loans are individually secured by the Easton III, Point West I and Atrium I properties. Upon closing the $6,900,000 loan secured by the Easton III property, the Duke joint venture entered into an interest rate swap agreement with Wells Fargo to effectively fix the annual interest rate on this loan at 3.95% for its entire term until this loan’s scheduled maturity on January 31, 2019. Upon closing the $11,800,000 loan secured by the Point West I property, the Duke joint venture entered into an interest rate swap agreement with Wells Fargo Bank,
F-25
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
N.A. to effectively fix the annual interest rate on this loan to 3.41% for its entire term until this loan’s scheduled maturity on December 6, 2016. Upon closing the $24,700,000 loan secured by the Atrium I property, the Duke joint venture entered into an interest rate swap agreement with Wells
Fargo Bank, N.A., to effectively fix the annual interest rate on this loan to 3.775% for its entire term until this loan’s scheduled maturity on May 31, 2018. Principal and interest payments are due monthly on the three loans. Upon closing, the Duke joint venture paid down approximately $42,700,000 of the $222,182,000 remaining balance of the Term Loan reducing the outstanding balance as of August 16, 2011 to approximately $179,482,000.
On August 25, 2011, the Duke joint venture closed on two loans with Principal Life Insurance Company totaling approximately $25,000,000 ($20,000,000 at our 80% pro rata share of the Duke joint venture). The loans are secured by the Sam Houston Crossing I and McAuley Place properties. The loans represent a 41.3% loan-to-cost on the $60,500,000 total allocated acquisition costs of the properties. The loan secured by the Sam Houston Crossing I property has an interest rate of 4.42%, a ten-year term and a 30-year amortization schedule. The loan secured by the McAuley Place property has an interest rate of 3.98%, a seven-year term and a 25-year amortization schedule. Principal and interest payments are due monthly on the loans. Upon closing, the Duke joint venture paid down approximately $25,000,000 of the $179,482,000 remaining balance of the Term Loan reducing its outstanding balance as of August 25, 2011 to approximately $154,482,000.
On September 12, 2011, the Duke joint venture closed on five loans with John Hancock Life Insurance Company (U.S.A.) totaling approximately $156,250,000 ($125,000,000 at our 80% pro rata share of the Duke joint venture). The loans are secured by the 533 Maryville Centre, 555 Maryville Centre, The Landings I, The Landings II, Norman Pointe I, Norman Pointe II, Weston Pointe I, Weston Pointe II, Weston Pointe III, Weston Pointe IV and Regency Creek properties. The loans have a fixed interest rate of 5.24%, a ten-year term and a 30-year amortization schedule. The loans may not be prepaid during the first two years of their terms, but thereafter may be fully prepaid subject to yield maintenance. Principal and interest payments are due monthly on the loans. Upon closing, the Duke joint venture paid down the remaining approximately $154,482,000 balance of the Term Loan.
As of December 31, 2012, the Duke joint venture had purchased approximately $1,023,000,000 of assets, exclusive of acquisition fees and closing costs, and held interests in 37 properties, 10 located in Florida, eight located in Ohio, four each located in North Carolina and Texas, two each located in Arizona, Illinois, Indiana, Minnesota and Missouri and one located in Tennessee. As of December 31, 2012, the Duke joint venture owned 23 triple net single-tenant and other single-tenant properties representing approximately 81% of Duke joint venture portfolio square footage.
See Note 21 “Subsequent Events,” for an update of this investment.
Consolidated Balance Sheet of the Duke joint venture as of December 31, 2012 (in thousands):
| | | | | | | | | | | | |
| | | December 31,
2012 | | | REIT Basis
Adjustments(1) | | | Total | |
Assets | | | | | | | | | | | | |
Real Estate Net | | $ | 778,188 | | | $ | 1,942 | | | $ | 780,130 | |
Other Assets | | | 146,572 | | | | 0 | | | | 146,572 | |
| | | | | | | | | | | | |
Total Assets | | $ | 924,760 | | | $ | 1,942 | | | $ | 926,702 | |
| | | | | | | | | | | | |
Liabilities and Equity | | | | | | | | | | | | |
Notes Payable | | $ | 472,370 | | | $ | 0 | | | $ | 472,370 | |
Other Liabilities | | | 24,179 | | | | 0 | | | | 24,179 | |
| | | | | | | | | | | | |
Total Liabilities | | | 496,549 | | | | 0 | | | | 496,549 | |
| | | | | | | | | | | | |
Company’s Equity | | | 342,569 | | | | 1,942 | | | | 344,511 | |
Other Investor’s Equity | | | 85,642 | | | | 0 | | | | 85,642 | |
| | | | | | | | | | | | |
Total Liabilities and Equity | | $ | 924,760 | | | $ | 1,942 | | | $ | 926,702 | |
| | | | | | | | | | | | |
| (1) | REIT Basis Adjustments include those costs incurred by the Company outside of the Duke joint venture that are directly capitalizable to its investment in real estate assets acquired within the Duke joint venture including acquisition costs paid to our former investment advisor prior to January 1, 2009. Thereafter such acquisition fees were expensed as incurred. |
F-26
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Consolidated Balance Sheet of the Duke joint venture as of December 31, 2011 (in thousands):
| | | | | | | | | | | | |
| | | December 31,
2011 | | | REIT Basis
Adjustments(1) | | | Total | |
Assets | | | | | | | | | | | | |
Real Estate Net | | $ | 807,959 | | | $ | 2,052 | | | $ | 810,011 | |
Other Assets | | | 163,709 | | | | 0 | | | | 163,709 | |
| | | | | | | | | | | | |
Total Assets | | $ | 971,668 | | | $ | 2,052 | | | $ | 973,720 | |
| | | | | | | | | | | | |
Liabilities and Equity | | | | | | | | | | | | |
Notes Payable | | $ | 478,482 | | | $ | 0 | | | $ | 478,482 | |
Other Liabilities | | | 24,320 | | | | 0 | | | | 24,320 | |
| | | | | | | | | | | | |
Total Liabilities | | | 502,802 | | | | 0 | | | | 502,802 | |
| | | | | | | | | | | | |
Company’s Equity | | | 375,093 | | | | 2,052 | | | | 377,145 | |
Other Investor’s Equity | | | 93,773 | | | | 0 | | | | 93,773 | |
| | | | | | | | | | | | |
Total Liabilities and Equity | | $ | 971,668 | | | $ | 2,052 | | | $ | 973,720 | |
| | | | | | | | | | | | |
| (1) | REIT Basis Adjustments include those costs incurred by the Company outside of the Duke joint venture that are directly capitalizable to its investment in real estate assets acquired within the Duke joint venture including acquisition costs paid to our former investment advisor prior to January 1, 2009. Thereafter such acquisition fees were expensed as incurred. |
Consolidated Statement of Operations of the Duke joint venture for the year ended December 31, 2012, 2011 and 2010 (in thousands);
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Total Revenues | | $ | 125,333 | | | $ | 111,283 | | | $ | 47,595 | |
Operating Expenses | | | 42,102 | | | | 35,666 | | | | 10,684 | |
Interest | | | 24,551 | | | | 21,424 | | | | 8,893 | |
Depreciation and Amortization | | | 59,663 | | | | 50,935 | | | | 18,893 | |
| | | | | | | | | | | | |
Net Income | | $ | (983 | ) | | $ | 3,258 | | | $ | 9,125 | |
| | | | | | | | | | | | |
Company’s Share in Net Income | | $ | (786 | ) | | $ | 2,606 | | | $ | 7,063 | |
Adjustments for Company Basis | | | (110 | ) | | | (119 | ) | | | (118 | ) |
| | | | | | | | | | | | |
Company’s Equity in Net Income | | $ | (896 | ) | | $ | 2,487 | | | $ | 6,945 | |
| | | | | | | | | | | | |
Afton Ridge Joint Venture
On September 18, 2008, we acquired a 90% ownership interest in Afton Ridge, the owner of Afton Ridge Shopping Center, from unrelated third parties. CK Afton Ridge Shopping Center, LLC, a subsidiary of Childress Klein Properties, Inc. (“CK Afton Ridge”), retained a 10% ownership interest in Afton Ridge and continues to manage Afton Ridge Shopping Center. CK Afton Ridge acts as the managing member of Afton Ridge and is entitled to receive fees, including management, construction management and property management fees. We have joint approval rights over all major operating and policy decisions.
Afton Ridge Shopping Center is located at the intersection of I-85 and Kannapolis Parkway, in Kannapolis, North Carolina. We acquired our ownership interest in Afton Ridge for approximately $45,000,000, exclusive of customary closing costs, which was funded using net proceeds from our initial public offering. Upon closing, we paid our former investment advisor an acquisition fee of approximately $450,000. This acquisition fee is not included in the $45,000,000 total acquisition cost of Afton Ridge, but is included as additional cost basis at our wholly-owned investment subsidiary.
Afton Ridge Shopping Center is a 470,288 square foot regional shopping center, completed in 2006, in which Afton Ridge owns 296,388 rentable square feet that is currently 99% leased. One of the shopping center’s anchors, a 173,900 square foot SuperTarget, is
F-27
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
not owned by us. Additional anchor tenants in Afton Ridge Shopping Center are Best Buy, Marshalls, PetSmart, Dick’s Sporting Goods, Stein Mart and Ashley Furniture. Afton Ridge Shopping Center is the retail component of a 260 acre master planned mixed-use development.
On October 15, 2008, Afton Ridge obtained a $25,500,000 loan from the Metropolitan Life Insurance Company, secured by the Afton Ridge Shopping Center which was originally acquired on September 18, 2008. The loan is for a term of five years, plus a 12-month extension option, and bears interest at a fixed rate of 5.70%. Interest payments only are due monthly for the term of the loan with principal due at maturity.
We carry our investment in Afton Ridge using the equity method of accounting because it is an entity under shared control with CK Afton Ridge. Those investments where we have the ability to exercise significant influence (but not control) over operating and financial policies of such entities are accounted for using the equity method. We eliminate transactions with such equity investees to the extent of our ownership in such entities.
Consolidated Balance Sheet of Afton Ridge as of December 31, 2012 (in thousands):
| | | | | | | | | | | | |
| | | December 31,
2012 | | | REIT Basis
Adjustments(1) | | | Total | |
Assets | | | | | | | | | | | | |
Real Estate Net | | $ | 43,492 | | | $ | 566 | | | $ | 44,058 | |
Other Assets | | | 2,704 | | | | 0 | | | | 2,704 | |
| | | | | | | | | | | | |
Total Assets | | $ | 46,196 | | | $ | 566 | | | $ | 46,762 | |
| | | | | | | | | | | | |
Liabilities and Equity | | | | | | | | | | | | |
Note Payable | | $ | 25,500 | | | $ | 0 | | | $ | 25,500 | |
Other Liabilities | | | 2,428 | | | | 0 | | | | 2,428 | |
| | | | | | | | | | | | |
Total Liabilities | | | 27,928 | | | | 0 | | | | 27,928 | |
| | | | | | | | | | | | |
Company’s Equity | | | 16,442 | | | | 566 | | | | 17,008 | |
Other Investor’s Equity | | | 1,826 | | | | 0 | | | | 1,826 | |
| | | | | | | | | | | | |
Total Liabilities and Equity | | $ | 46,196 | | | $ | 566 | | | $ | 46,762 | |
| | | | | | | | | | | | |
| (1) | REIT Basis Adjustments include those costs incurred outside of Afton Ridge that are directly capitalizable to its investment in real estate assets acquired within Afton Ridge including acquisition costs paid to our former investment advisor prior to January 1, 2009. Thereafter such acquisitions fees were expensed as incurred. |
Consolidated Balance Sheet of Afton Ridge as of December 31, 2011 (in thousands):
| | | | | | | | | | | | |
| | | December 31,
2011 | | | REIT Basis
Adjustments(1) | | | Total | |
Assets | | | | | | | | | | | | |
Real Estate Net | | $ | 44,839 | | | $ | 585 | | | $ | 45,424 | |
Other Assets | | | 3,064 | | | | 0 | | | | 3,064 | |
| | | | | | | | | | | | |
Total Assets | | $ | 47,903 | | | $ | 585 | | | $ | 48,488 | |
| | | | | | | | | | | | |
Liabilities and Equity | | | | | | | | | | | | |
Note Payable | | $ | 25,500 | | | $ | 0 | | | $ | 25,500 | |
Other Liabilities | | | 2,749 | | | | 0 | | | | 2,749 | |
| | | | | | | | | | | | |
Total Liabilities | | | 28,249 | | | | 0 | | | | 28,249 | |
| | | | | | | | | | | | |
Company’s Equity | | | 17,689 | | | | 585 | | | | 18,274 | |
Other Investor’s Equity | | | 1,965 | | | | 0 | | | | 1,965 | |
| | | | | | | | | | | | |
Total Liabilities and Equity | | $ | 47,903 | | | $ | 585 | | | $ | 48,488 | |
| | | | | | | | | | | | |
F-28
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Consolidated Statements of Operations of Afton Ridge for the year end December 31, 2012, 2011 and, 2010 (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Total Revenues | | $ | 5,120 | | | $ | 5,191 | | | $ | 5,043 | |
Operating Expenses | | | 1,316 | | | | 1,356 | | | | 1,265 | |
Interest | | | 1,503 | | | | 1,503 | | | | 1,503 | |
Depreciation and Amortization | | | 1,813 | | | | 1,842 | | | | 1,815 | |
| | | | | | | | | | | | |
Net Income | | $ | 488 | | | $ | 490 | | | $ | 460 | |
| | | | | | | | | | | | |
Company’s Share in Net Income | | $ | 439 | | | $ | 441 | | | $ | 414 | |
Adjustments for REIT Basis | | | (18 | ) | | | (17 | ) | | | (20 | ) |
| | | | | | | | | | | | |
Company’s Equity in Net Income | | $ | 421 | | | $ | 424 | | | $ | 394 | |
| | | | | | | | | | | | |
UK JV and European JV
On June 10, 2010, we entered into two joint ventures with subsidiaries of the Goodman Group (ASX: GMG), or Goodman, one of which will seek to invest in logistics focused warehouse/distribution/logistics properties in the United Kingdom, or the UK JV, and the other which will seek to invest in logistics focused warehouse/distribution/logistics properties in France, Belgium, the Netherlands, Luxembourg and Germany, or the European JV. We own an 80% interest in each joint venture and Goodman owns a 20% interest in each joint venture. The terms of each joint venture are described in more detail below.
We carry our investments in the UK JV and European JV using the equity method of accounting because the UK JV and European JV are entities under shared control with Goodman. Those investments where we have the ability to exercise significant influence (but not control) over operating and financial policies of such entities are accounted for using the equity method. We eliminated transactions with such equity method subsidiaries to the extent of our ownership in such entities.
UK JV
The shareholders’ agreement pertaining to the UK JV is by and among RT Princeton UK Holdings, LLC (our wholly-owned subsidiary), Goodman Jersey Holding Trust and Goodman Princeton Holdings (Jersey) Limited, the UK JV, for the purpose of acquiring and holding, either directly or indirectly, up to £400,000,000 in logistics focused warehouse/distribution/logistics properties. On June 10, 2010, we initially funded the UK JV with capital contributions of $26,180,000. The UK JV has acquired an initial portfolio of two properties, as described further in the table below, which were previously owned by a subsidiary of Goodman and which were purchased by the UK JV simultaneously with the closing of the UK JV.
On March 19, 2012, we contributed an additional capital contribution of $10,764,000 to acquire Valley Park, Unit D from an unaffiliated third party.
A board of directors, comprised of members representing us and Goodman, in each case with an equal number of votes, has the responsibility for the supervision, management and major operating decisions of the UK JV and its business, except with respect to certain reserved matters which will require the unanimous approval of us and Goodman.
During the investment period, the UK JV has a right of first offer, with respect to certain logistics development or logistics investment assets considered for investment in the UK by Goodman or us. If a deadlock has arisen pertaining to a major decision regarding a specific property, either shareholder may exercise a buy-sell option in relation to the relevant property. After the initial investment period, either shareholder wishing to exit the UK JV may exercise a buy-sell option with respect to their entire interest in the UK JV.
The UK JV will pay certain fees to certain Goodman subsidiaries in connection with the services they provide to the UK JV, including but not limited to investment advisory, development management and property management services. Goodman may also be entitled to a promoted interest in the UK JV.
F-29
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Consolidated Balance Sheet of UK JV as of December 31, 2012 and 2011 (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
Assets | | | | | | | | |
Real Estate Net | | $ | 45,871 | | | $ | 32,545 | |
Other Assets | | | 2,807 | | | | 1,788 | |
| | | | | | | | |
Total Assets | | $ | 48,678 | | | $ | 34,333 | |
| | | | | | | | |
Liabilities and Equity | | | | | | | | |
| | $ | 1,819 | | | $ | 1,095 | |
| | | | | | | | |
Total Liabilities | | | 1,819 | | | | 1,095 | |
| | | | | | | | |
Company’s Equity | | | 37,487 | | | | 26,590 | |
Other Investor’s Equity | | | 9,372 | | | | 6,648 | |
| | | | | | | | |
Total Liabilities and Equity | | $ | 48,678 | | | $ | 34,333 | |
| | | | | | | | |
Consolidated Statements of Operations of UK JV for the year ended December 31, 2012 and 2011 for the period June 10, 2010 through December 31, 2010 (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | | | For the Period June 10,
2010 through
December 31, 2010 | |
| | | 2012 | | | 2011 | | |
Total Revenues | | $ | 4,349 | | | $ | 3,365 | | | $ | 1,832 | |
Operating Expenses | | | 1,295 | | | | 445 | | | | 601 | |
Depreciation and Amortization | | | 1,850 | | | | 4,423 | | | | 810 | |
| | | | | | | | | | | | |
Net Income | | $ | 1,204 | | | $ | 1,497 | | | $ | 421 | |
| | | | | | | | | | | | |
Company’s Equity in Net Income | | $ | 963 | | | $ | 1,197 | | | $ | 337 | |
| | | | | | | | | | | | |
European JV
The shareholders’ agreement pertaining to the European JV is by and among RT Princeton CE Holdings, LLC (our wholly-owned subsidiary), Goodman Europe Development Trust acting by its trustee Goodman Europe Development Pty Ltd. and Goodman Princeton Holdings (LUX) S.À.R.L., the European JV, for the purpose of acquiring and holding, either directly or indirectly, up to€400,000,000 in logistics focused warehouse/distribution/logistics properties. On June 10, 2010, we initially funded the European JV with capital contributions of $26,802,000. The European JV acquired an initial portfolio of two properties, Düren and Schönberg, which were previously owned by a subsidiary of Goodman and which were purchased by the European JV simultaneously with the closing of the European JV.
On October 28, 2010, we contributed an additional capital contribution of $18,672,000 to the European JV to acquire Langenbach which was also previously owned by a subsidiary of Goodman.
On December 20, 2011, we made an additional capital contribution of $62,559,000 to the European JV to acquire Graben Distribution Center I and II which were previously owned by a subsidiary of Goodman.
On July 27, 2012, the European JV closed on a loan with Dekabank Deutsche Gironzentrale (“Dekabank”) for approximately€31,100,000 (approximately $38,390,000 assuming an exchange rate of€1.00: $1.2344 at closing, or $30,712,000 at our 80% pro rata share), exclusive of customary fees and expenses. The loan is secured by the European Joint Venture’s Graben Distribution Center I and Graben Distribution Center II properties. The loan is interest only, with a fixed interest rate of 2.39% per annum, and has a five-year term. The loan may be prepaid subject to customary prepayment fees and restrictions. Interest payments are due quarterly on the loan.
On December 12, 2012 we made an additional net capital contribution of $31,781,000 to the European JV to acquire the Koblenz Distribution Center, which was previously owned by a subsidiary of Goodman. The acquisition was partially funded by a loan from Dekabank in the amount of€31,750,000.
F-30
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
A board of directors, comprised of members representing us and Goodman, in each case with an equal number of votes, has the responsibility for the supervision, management and major operating decisions of the European JV and its business, except with respect to certain reserved matters which will require the unanimous approval of us and Goodman.
During the investment period, the European JV has a right of second offer (after another investment vehicle managed by Goodman) with respect to certain logistics development or logistics investment assets considered for investment by Goodman, and has a right of first offer with respect to certain logistics development or logistics investment assets considered for investment by us. If a deadlock has arisen pertaining to a major decision regarding a specific property, either shareholder may exercise a buy-sell option in relation to the relevant property. After the initial investment period, either shareholder wishing to exit the European JV may exercise a buy-sell option with respect to their entire interest in the European JV.
The European JV will pay certain fees to certain Goodman subsidiaries in connection with the services they provide to the European JV, including but not limited to investment advisory, development management and property management services. Certain Goodman subsidiaries may also be entitled to a promoted interest in the European JV.
Consolidated Balance Sheet of European JV as of December 31, 2012 and 2011 (in thousands):
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
Assets | | | | | | | | |
Real Estate Net | | $ | 208,786 | | | $ | 131,783 | |
Other Assets | | | 23,036 | | | | 11,552 | |
| | | | | | | | |
Total Assets | | $ | 231,822 | | | $ | 143,335 | |
| | | | | | | | |
Liabilities and Equity | | | | | | | | |
Notes Payable | | $ | 82,894 | | | $ | 0 | |
Other Liabilities | | | 13,022 | | | | 9,284 | |
| | | | | | | | |
Total Liabilities | | | 95,916 | | | | 9,284 | |
| | | | | | | | |
Company’s Equity | | | 108,725 | | | | 107,241 | |
Other Investor’s Equity | | | 27,181 | | | | 26,810 | |
| | | | | | | | |
Total Liabilities and Equity | | $ | 231,822 | | | $ | 143,335 | |
| | | | | | | | |
Consolidated Statements of Operations of European JV for the year ended December 31, 2012 and 2011 for the period June 10, 2010 through December 31, 2010 (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | | | For the Period
June 10, 2010 through
December 31, 2010 | |
| | | 2012 | | | 2011 | | |
Total Revenues | | $ | 11,947 | | | $ | 6,430 | | | $ | 2,461 | |
Operating Expenses | | | 1,863 | | | | 2,042 | | | | 819 | |
Interest Expenses | | | 462 | | | | 0 | | | | 0 | |
Depreciation and Amortization | | | 5,388 | | | | 3,103 | | | | 1,376 | |
| | | | | | | | | | | | |
Net Income | | $ | 4,234 | | | $ | 1,285 | | | $ | 266 | |
| | | | | | | | | | | | |
Company’s Equity in Net Income | | $ | 3,387 | | | $ | 1,029 | | | $ | 213 | |
| | | | | | | | | | | | |
6. Acquisition Related Intangible Assets and Liabilities
Our acquisition related intangible assets and liabilities are included in the consolidated balance sheets as acquired in-place lease value, acquired above market lease value and acquired below market lease value.
F-31
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
The following is a schedule of future amortization of acquisition related intangible assets as of December 31, 2012 (in thousands):
| | | | | | | | | | | | | | | | |
| | | Assets | | | Liabilities | |
| | | Above-Market
Lease Value | | | Acquired
In-Place Lease Value | | | Below-Market
Lease Value | | | Above Market
Ground Lease
Obligations | |
2013 | | $ | 7,522 | | | $ | 25,911 | | | $ | 2,842 | | | $ | 71 | |
2014 | | | 6,035 | | | | 23,601 | | | | 2,743 | | | | 71 | |
2015 | | | 5,732 | | | | 21,817 | | | | 2,582 | | | | 71 | |
2016 | | | 2,754 | | | | 17,604 | | | | 2,561 | | | | 71 | |
2017 | | | 2,192 | | | | 16,262 | | | | 2,501 | | | | 71 | |
Thereafter | | | 7,620 | | | | 57,363 | | | | 11,353 | | | | 1,057 | |
| | | | | | | | | | | | | | | | |
| | $ | 31,855 | | | $ | 162,558 | | | $ | 24,582 | | | $ | 1,412 | |
| | | | | | | | | | | | | | | | |
The amortization of the above- and below-market lease values included in rental revenue were ($7,658,000) and $5,173,000, respectively, for the year ended December 31, 2012, ($6,385,000) and $4,254,000, respectively, for the year ended December 31, 2011 and ($3,460,000) and $2,939,000, respectively, for the year ended December 31, 2010. The amortization of in-place lease value included in amortization expense was $28,826,000, $23,987,000 and $11,778,000, for the years ended December 31, 2012, 2011 and 2010, respectively. The amortization of the above market ground lease obligation was $71,000 and $18,000 for the years ended December 31, 2012 and 2011, respectively. There was no amortization of the above market ground lease obligation for the year ended December 31, 2010.
F-32
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
7. Debt
Notes Payable secured by real property are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | Interest Rate as of
December 31, | | | Maturity Date | | Notes Payable as of
December 31, | |
Property | | 2012 | | | 2011 | | | | 2012 | | | 2011 | |
Deerfield Commons I. | | | 5.23 | % | | | 5.23 | % | | December 1, 2015 | | $ | 9,442 | | | $ | 9,587 | |
Bolingbrook Point III | | | 5.26 | | | | 5.26 | | | January 1, 2015 | | | 7,900 | | | | 7,900 | |
Fairforest Bldg. 5(1) | | | 6.33 | | | | 6.33 | | | February 1, 2024 | | | 8,840 | | | | 9,368 | |
Fairforest Bldg. 6(1) | | | 5.42 | | | | 5.42 | | | June 1, 2019 | | | 2,402 | | | | 2,703 | |
HJ Park—Bldg. 1(1) | | | — | | | | 4.98 | | | March 1, 2013 | | | 0 | | | | 369 | |
North Rhett I(1) | | | 5.65 | | | | 5.65 | | | August 1, 2019 | | | 2,827 | | | | 3,547 | |
North Rhett II(1) | | | 5.20 | | | | 5.20 | | | October 1, 2020 | | | 1,822 | | | | 2,005 | |
North Rhett IV(1) | | | 5.80 | | | | 5.80 | | | February 1, 2025 | | | 8,935 | | | | 9,427 | |
Mt Holly Bldg.(1) | | | 5.20 | | | | 5.20 | | | October 1, 2020 | | | 1,822 | | | | 2,006 | |
Orangeburg Park Bldg.(1) | | | 5.20 | | | | 5.20 | | | October 1, 2020 | | | 1,853 | | | | 2,040 | |
Kings Mountain I(1) | | | 5.27 | | | | 5.27 | | | October 1, 2020 | | | 1,578 | | | | 1,737 | |
Kings Mountain II(1) | | | 5.47 | | | | 5.47 | | | January 1, 2020 | | | 4,589 | | | | 5,105 | |
Union Cross Bldg. I(1) | | | 5.50 | | | | 5.50 | | | July 1, 2021 | | | 2,344 | | | | 2,552 | |
Union Cross Bldg. II(1) | | | 5.53 | | | | 5.53 | | | June 1, 2021 | | | 7,149 | | | | 7,791 | |
Thames Valley Five(2)(3) | | | 6.42 | | | | 6.42 | | | May 30, 2013 | | | 9,160 | | | | 8,762 | |
Lakeside Office Center | | | 6.03 | | | | 6.03 | | | September 1, 2015 | | | 8,862 | | | | 8,973 | |
Avion Midrise III & IV(4) | | | 5.52 | | | | 5.52 | | | April 1, 2014 | | | 20,464 | | | | 20,920 | |
12650 Ingenuity Drive(5) | | | 5.62 | | | | 5.62 | | | October 1, 2014 | | | 12,272 | | | | 12,677 | |
Maskew Retail Park(2)(6) | | | 5.68 | | | | 5.68 | | | August 10, 2014 | | | 22,698 | | | | 21,710 | |
One Wayside Road(7) | | | 5.66 | | | | 5.66 | | | August 1, 2015 | | | 13,745 | | | | 14,115 | |
One Wayside Road(7) | | | 5.92 | | | | 5.92 | | | August 1, 2015 | | | 11,464 | | | | 11,743 | |
100 Tice Blvd(8) | | | 5.97 | | | | 5.97 | | | September 15, 2017 | | | 20,094 | | | | 20,612 | |
100 Tice Blvd(8) | | | 5.97 | | | | 5.97 | | | September 15, 2017 | | | 20,093 | | | | 20,611 | |
Ten Parkway North | | | 4.75 | | | | 4.75 | | | January 1, 2021 | | | 12,072 | | | | 12,354 | |
Pacific Corporate Park(9) | | | — | | | | 4.89 | | | December 7, 2017 | | | 0 | | | | 81,750 | |
4701 Gold Spike Drive(10) | | | 4.45 | | | | 4.45 | | | March 1, 2018 | | | 10,342 | | | | 10,521 | |
1985 International Way(10) | | | 4.45 | | | | 4.45 | | | March 1, 2018 | | | 7,186 | | | | 7,310 | |
Summit Distribution Center(10) | | | 4.45 | | | | 4.45 | | | March 1, 2018 | | | 6,506 | | | | 6,619 | |
3770 Deerpark Boulevard(10) | | | 4.45 | | | | 4.45 | | | March 1, 2018 | | | 7,428 | | | | 7,557 | |
Tolleson Commerce Park II(10) | | | 4.45 | | | | 4.45 | | | March 1, 2018 | | | 4,467 | | | | 4,544 | |
100 Kimball Drive(11) | | | — | | | | 5.25 | | | March 1, 2021 | | | 0 | | | | 32,521 | |
70 Hudson Street(12) | | | 5.65 | | | | 5.65 | | | April 11, 2016 | | | 117,981 | | | | 119,740 | |
90 Hudson Street(12) | | | 5.66 | | | | 5.66 | | | May 1, 2019 | | | 106,465 | | | | 107,918 | |
Kings Mountain III(13) | | | — | | | | 4.47 | | | July 1, 2018 | | | 0 | | | | 11,595 | |
Sabal Pavilion(14) | | | 6.38 | | | | 6.38 | | | August 1, 2013 | | | 14,700 | | | | 14,700 | |
| | | | | | | | | | | | | | | | | | |
Notes Payable | | | 487,502 | | | | 623,389 | |
Plus Premium | | | 7,555 | | | | 9,595 | |
Less Discount | | | (2,113 | ) | | | (2,838 | ) |
| | | | | | | | | | | | | | | | | | |
Notes Payable Net of Premium / Discount | | $ | 492,944 | | | $ | 630,146 | |
| | | | | | | | | | | | | | | | | | |
| (1) | These notes payable were assumed from the seller of these properties on August 30, 2007 as part of the property acquisitions and were recorded at estimated fair value which includes the discount. The North Rhett III loan was paid off in full on November 22, 2011. The HJ Park—Bldg. 1 loan was paid in full on December 3, 2012. |
| (2) | These loans are subject to certain financial covenants (interest coverage and loan to value). |
F-33
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
| (3) | We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 5.41% through its expiration on May 30, 2013, and therefore including the mortgage note’s spread of 1.01% over GBP-based LIBOR, effectively fixed the mortgage note’s all-in interest rate at 6.42% per annum for its remaining term. The stated rates, not including the interest rate swap, on the mortgage note payable were 1.54% and 1.98% at December 31, 2012 and 2011, respectively, and were based on GBP LIBOR plus a spread of 1.01%. |
| (4) | The loan was assumed from the seller of Avion Midrise III & IV on November 18, 2008 and was recorded at estimated fair value which includes the discount. |
| (5) | The loan was assumed from the seller of 12650 Ingenuity Drive on August 5, 2009 and was recorded at estimated fair value which includes the discount. |
| (6) | We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.42% through its expiration on August 10, 2014, and therefore, including the mortgage note’s spread of 2.26% over GBP-based LIBOR, effectively fixed the mortgage note’s all-in interest rate at 5.68% per annum for its remaining term. The stated rates, not including the interest rate swap, on the mortgage note payable were 2.78% and 3.23% at December 31, 2012 and 2011, respectively, and were based on GBP LIBOR plus a spread of 2.26%. |
| (7) | The two loans were assumed from the seller of One Wayside Road on June 24, 2010 and were recorded at estimated fair value which includes the premiums. |
| (8) | The two loans were assumed from the seller of 100 Tice Blvd. on September 28, 2010 and were recorded at estimated fair value which includes the premiums. |
| (9) | We entered into an interest rate swap agreement that fixes LIBOR at 2.69% plus 2.20%, or 4.89% per annum as of December 31, 2012, and expires on December 7, 2017. The loan was paid in full on November 27, 2012 |
| (10) | We entered into five loans totaling $37,000,000 on February 8, 2011 that are cross-collateralized by these properties. |
| (11) | We entered into an interest rate swap agreement that fixes LIBOR at 3.50% plus 1.75% per annum as of December 31, 2012 and expires on March 1, 2021. The loan was paid in full on November 27, 2012. |
| (12) | The two loans were assumed from the seller of 70 Hudson Street and 90 Hudson Street, respectively, on April 11, 2011 and were recorded at estimated fair value which includes the premiums. |
| (13) | We entered into an interest rate swap agreement that fixes LIBOR at 2.47% plus 2.00%, or 4.47% per annum as of December 31, 2012 and expires on July 1, 2018. The loan was paid in full on November 27, 2012. |
| (14) | The loan was assumed from the seller of Sabal Pavilion on December 30, 2011 and was recorded at estimated fair value which includes the premium. The anticipated maturity date as presented represents the early prepayment option date prior to the automatic debt extension that would include an increase in the interest rate to 11.38% and extend until the loan is paid in full. |
Note Payable at Fair Value secured by real property is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | Interest Rate as of
December 31, | | | Maturity Date | | | Notes Payable as of
December 31, | |
Property | | 2012 | | | 2011 | | | | 2012 | | | 2011 | |
Albion Mills Retail Park(1)(2)(3) . | | | 5.25 | % | | | 5.25 | % | | | October 10, 2013 | | | $ | 9,373 | | | $ | 8,965 | |
Less Fair Value Adjustment | | | | (85 | ) | | | (190 | ) |
| | | | | | | | | | | | | | | | | | | | |
Note Payable at Fair Value | | | $ | 9,288 | | | $ | 8,775 | |
| | | | | | | | | | | | | | | | | | | | |
| (1) | The loan is subject to certain financial covenants (interest coverage and loan to value). |
| (2) | The Albion Mills Retail Park notes payable balance is presented at cost basis. This loan is carried on our balance sheet at fair value (see Note 17). |
| (3) | We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.94% through its expiration on October 10, 2013, and therefore, including the mortgage note’s spread of 1.31% over GBP-based LIBOR, effectively fixed the mortgage note’s all-in interest rate at 5.25% per annum for its remaining term. The stated rates, not including the interest rate swap, on the mortgage note payable were 1.84% and 2.28% at December 31, 2012 and 2011, respectively and were based on GBP LIBOR plus a spread of 1.31%. |
F-34
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Notes Payable
In connection with our acquisition of the Carolina Portfolio on August 30, 2007, we assumed 13 loans with principal balances totaling $66,110,000 ($62,944,000 at estimated fair value including the discount of $3,166,000) from various lenders that are secured by first deeds of trust on the properties and the assignment of related rents and leases. The loans bear interest at rates ranging from 4.98% to 6.33% per annum and mature between March 1, 2013 and February 1, 2025. The loans require monthly payments of interest and principal, fully amortized over the lives of the loans. Two of the 13 loans, North Rhett III and HJ Park – Bldg. 1, were paid off in full on November 22, 2011 and December 3, 2012, respectively. Principal payments totaling $4,487,000 were made during the year ended December 31, 2012. We indemnify the lenders against environmental costs and expenses and guarantee the loans under certain conditions.
On December 27, 2007, we entered into a $9,000,000 financing agreement secured by the Bolingbrook Point III property with the Northwestern Mutual Life Insurance Company. The loan is for a term of seven years and bears a fixed interest rate of 5.26% per annum with principal due at maturity. On January 14, 2011, we paid down $1,100,000 of principal in connection with the lease termination settlement with one of the tenants.
On May 30, 2008, we entered into a £7,500,000 financing arrangement with the Royal Bank of Scotland plc. secured by the Thames Valley Five property. On July 27, 2010 we paid down the loan by £1,860,000 leaving a loan balance of £5,640,000 ($9,160,000 at December 31, 2012). The loan is for a term of five years (with a two-year extension option) and bears interest at a variable rate adjusted quarterly, (based on nine month GBP-based LIBOR plus 1.01%. On August 14, 2008, we entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 5.41% plus 1.01% or 6.42% per annum as of December 31, 2012, and expires on May 30, 2013. In conjunction with the loan paydown, we incurred a cost of £227,000 ($361,000 at August 3, 2010) to reduce the notional amount of the interest rate swap from £7,500,000 to £5,640,000. Interest only payments are due quarterly for the term of the loan with principal due at maturity.
On October 10, 2008, we entered into a £5,771,000 ($9,373,000 at December 31, 2012) financing agreement with the Royal Bank of Scotland plc. secured by Albion Mills Retail Park property. The loan is for a term of five years and bears interest at a variable rate adjusted quarterly, based on three month GBP-based LIBOR plus 1.31%. On November 25, 2008, we entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.94% plus 1.31% or 5.25% per annum as of December 31, 2012 and expires on October 10, 2013. Interest only payments are due quarterly for the term of the loan with principal due at maturity.
On November 18, 2008, in connection with the acquisition of Avion Midrise III & IV, we assumed $20,851,000 ($22,186,000 face value less discount of $1,335,000) fixed rate mortgage loan from Capmark Finance, Inc. that bears interest at a rate of 5.52% per annum and matures on April 1, 2014. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $456,000 were made during the year ended December 31, 2012.
On August 5, 2009, in connection with the acquisition of 12650 Ingenuity Drive, we assumed a $12,572,000 ($13,539,000 face value less a discount of $967,000) fixed rate mortgage loan from PNC Bank, National Association that bears interest at a rate of 5.62% and matures on October 1, 2014. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $404,000 were made during the year ended December 31, 2012.
On August 10, 2009, we entered into a £13,975,000 ($22,698,000 at December 31, 2012) financing agreement with the Abbey National Treasury Services plc. secured by the Maskew Retail Park property. On September 24, 2009, we drew the full amount of the loan and concurrently entered into an interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.42% plus 2.26% or 5.68% per annum for the five-year term of the loan. Interest only payments are due quarterly for the term of the loan with principal due at maturity.
On June 24, 2010, we assumed two loans in connection with the acquisition of One Wayside Road: (i) a $14,888,000 ($14,633,000 at face value plus a premium of $255,000) fixed rate mortgage loan from State Farm Life Insurance Company that bears interest at a rate of 5.66% and matures on August 1, 2015; and (ii) a $12,479,000 ($12,132,000 at face value plus a premium of $347,000) fixed rate mortgage loan from State Farm Life Insurance Company that bears interest at a rate of 5.92% and matures on August 1, 2015. Principal and interest payments are due monthly for the remaining loan terms and principal payments totaling $650,000 were made during the year ended December 31, 2012 on the two loans.
F-35
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
On September 28, 2010, we assumed two loans in connection with the acquisition of 100 Tice Blvd.: (i) a $23,136,000 ($21,218,000 at face value plus a premium of $1,918,000) fixed rate loan from Principal Life Insurance Company that bears interest at a rate of 5.97%, matures on September 15, 2022 and the lender has the right to call the loan due and payable on September 15, 2017; (ii) a $23,136,000 ($21,217,000 at a face value plus a premium of $1,919,000) fixed rate mortgage from Hartford Life and Accidental Insurance Company that bears interest at a rate of 5.97%, matures on September 15, 2022 and the lender has the right to call the loan due and payable on September 15, 2017. Principal and interest payments are due monthly for the remaining loan terms and principal payments totaling $1,036,000 were made during the year ended December 31, 2012 on the two loans.
On December 7, 2010, we entered into a $85,000,000 secured term loan through a subsidiary with Wells Fargo Bank, National Association (“Wells Fargo Bank, N.A.”), or the Pacific Corporate Park loan. The Pacific Corporate Park loan had a seven-year term, monthly amortization of $250,000 and was secured by Pacific Corporate Park. Upon closing of the Pacific Corporate Park Loan on December 7, 2010, we entered into an interest rate swap agreement with Wells Fargo Bank, N.A. to effectively fix the interest rate on the entire outstanding Pacific Corporate Park loan amount at 4.89% for its seven-year term. Principal and interest payments were due monthly. The loan was paid in full on November 27, 2012 and the unamortized deferred financing costs associated with obtaining the loan totaling $1,101,000 were expensed.
On December 29, 2010, we entered into a $12,600,000 secured term loan through Woodmen of The World Life Insurance Society secured by the Ten Parkway North property. The Ten Parkway North loan bears interest at a fixed rate of 4.75% per annum and matures on January 1, 2021. Principal and interest payments are due monthly and principal payments totaling $281,000 were made during the year ended December 31, 2012.
Beginning January 2011, principal and interest payments are due monthly on the $9,725,000 term loan secured by the Deerfield Commons I that was originally entered into on November 29, 2005. The loan bears interest at a fixed rate of 5.23% per annum and interest only payments were due monthly for the first 60 months. Principal payments totaling $145,000 were made during the year ended December 31, 2012.
On February 8, 2011, we entered into five cross-collateralized secured term loans totaling $37,000,000 with ING USA Annuity and Life Insurance Company secured by the following properties: 4701 Gold Spike Road, $10,650,000, Summit Distribution Center, $6,700,000, Tolleson Commerce Park II, $4,600,000, 3660 Deerpark Blvd., $7,650,000 and 1985 International Way, $7,400,000. The loans bear interest at a fixed rate of 4.45% and mature on March 1, 2018. Principal and interest payments were due monthly and principal payments totaling $623,000 were made during the year ended December 31, 2012.
On February 28, 2011, we entered into a $33,000,000 secured term loan with TD Bank secured by the 100 Kimball Drive property. Upon closing the 100 Kimball Drive loan, we simultaneously entered into an interest rate swap agreement with TD Bank to effectively fix the interest rate on the entire outstanding loan amount to 5.25% for its 10 year term. Principal and interest payments were due monthly. The loan was paid in full on November 27, 2012 and the unamortized deferred financing costs associated with obtaining the loan totaling $430,000 were expensed.
On April 11, 2011, in connection with the acquisition of 70 Hudson Street, we assumed a $124,113,000 ($120,857,000 face value plus a premium of $3,256,000) fixed rate mortgage loan from Lehman Brothers Bank, FSB that bears interest at a rate of 5.65% and matures on April 11, 2016. Principal and interest payments are due monthly and principal payments totaling $1,758,000 were made during the year ended December 31, 2012.
On April 11, 2011, in connection with the acquisition of 90 Hudson Street, we assumed a $120,247,000 ($117,562,000 face value plus a premium of $2,685,000) fixed rate mortgage loan from Teachers Insurance and Annuity Association of America that bears interest at a rate of 5.66% and matures on May 1, 2016. On July 14, 2011, we and Teachers Insurance and Annuity Association of America, or the Lender, agreed to modify the $117,562,000 existing mortgage loan assumed by us. The loan was modified to extend its maturity by three years, from May 1, 2016 to May 1, 2019. The 5.66% annual interest rate was unchanged but is subject to a new 30-year amortization schedule. We pre-paid approximately $8,600,000 of loan’s balance (with no pre-payment penalty) in connection with the modification. Principal and interest payments are due monthly and principal payments totaling $1,453,000 were made during the year ended December 31, 2012.
F-36
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
On June 24, 2011, we entered into a $11,700,000 secured term loan with TD Bank secured by the Kings Mountain III property. Effective July 1, 2011, we entered into an interest rate swap agreement with TD Bank to effectively fix the interest rate on the entire outstanding loan amount to 4.47% for its 7 year term maturing on July 1, 2018. Principal and interest payments were due monthly. The loan was paid in full on November 27, 2012 and the unamortized deferred financing costs associated with obtaining the loan totaling $238,000 were expensed.
On December 30, 2011, in connection with the acquisition of Sabal Pavilion, we assumed a $15,428,000 ($14,700,000 face value plus a premium of $728,000) fixed rate mortgage loan from U.S. Bank National Association that bears interest at a rate of 6.38% and matures on August 1, 2013. Interest payments are due monthly with principal due at maturity.
Loan Payable
On May 26, 2010, we entered into a $70,000,000 revolving credit facility with Wells Fargo Bank, N.A., or the Wells Fargo Credit Facility. The initial maturity date of the Wells Fargo Credit Facility was May 26, 2014, however we could extend the maturity date to May 26, 2015, subject to certain conditions. $15,000,000 of the Wells Fargo Credit Facility was initially drawn upon closing on May 26, 2010, with $55,000,000 initially remaining available for disbursement during the term of the facility. We had the right to prepay any outstanding amount of the Wells Fargo Credit Facility, in whole or in part, without premium or penalty at any time during the term of this Wells Fargo Credit Facility, however, we initially could not reduce the outstanding principal balance below a minimum outstanding amount of $15,000,000, without reducing the total $70,000,000 Wells Fargo Credit Facility capacity. Initially, the Wells Fargo Credit Facility had a floating interest rate of 300 basis points over LIBOR, however this interest rate would be at least 4.00% for any of the outstanding balance that was not subject to an interest rate swap with an initial term of at least two years.
Upon closing on May 26, 2010, we entered into an interest rate swap agreement with Wells Fargo Bank, N.A. to effectively fix the interest rate on the initial $15,000,000 outstanding loan amount at 5.10% for the four-year term of the facility. The interest rate swap was designated as a qualifying cash flow hedge at the start date of the hedge relationship as described in Note 15 “Derivative Instruments.” The Wells Fargo Credit Facility was initially secured by our 13201 Wilfred, 3011, 3055 & 3077 Comcast Place, 140 Depot Street, Crest Ridge Corporate Center I and West Point Trade Center properties. In addition, CSP OP provided a limited guarantee for the Wells Fargo Credit Facility.
On August 31, 2010, we entered into an amended and restated credit agreement with Wells Fargo Bank, N.A. to expand the Wells Fargo Credit Facility from its initial capacity of $70,000,000 to an amended capacity of $125,000,000 (the “Amended Wells Fargo Credit Facility”). In connection with the Amended Wells Fargo Credit Facility, the minimum outstanding amount was increased to $25,000,000 and as such an additional $10,000,000 was drawn (in addition to the $15,000,000 initially drawn on May 26, 2010) with the remaining $100,000,000 available for disbursement during the term of the facility. The Amended Wells Fargo Credit Facility was secured by an additional three of our properties, for a total of eight properties in all: 13201 Wilfred Lane, 3011, 3055 & 3077 Comcast Place, 140 Depot Street, Crest Ridge Corporate Center, West Point Trade Center, 5160 Hacienda Drive, 10450 Pacific Center Court and 225 Summit Avenue. The interest rate was reduced by 25 basis points to 275 basis points over LIBOR (which rate would apply to all withdrawals from the Amended Wells Fargo Credit Facility other than the initial $15,000,000 that was drawn on May 26, 2010) and the initial interest rate floor of 4.00% was eliminated. The initial maturity date remained May 26, 2014, however we could extend the maturity date to May 26, 2015, subject to certain conditions. The Amended Wells Fargo Credit Facility was replaced with the Unsecured Credit Facility as set forth below.
On September 13, 2012, we entered into a credit agreement (the “Credit Agreement”) with a group of lenders to provide CSP OP with an unsecured, revolving credit facility (the “Unsecured Credit Facility”) with an initial capacity of $700,000,000. The Unsecured Credit Facility replaced the Amended Wells Fargo Credit Facility, which was terminated concurrently with the closing of the Unsecured Credit Facility. The Company paid the $25,000,000 outstanding balance of the Amended Wells Fargo Credit Facility with cash on hand and expensed the unamortized deferred financing costs associated with obtaining the loan totaling $1,191,000. During the year ended December 31, 2012, $265,000,000 was drawn under the Unsecured Credit Facility with the remaining $435,000,000 available for disbursement during the term of the facility. The $265,000,000 is included in Loan Payable on our consolidated balance sheets as of December 31, 2012. The Unsecured Credit Facility has a term of four years, which term may be extended for one year at the option of CSP OP provided that CSP OP is not then in default and upon payment of customary extension fees. The Unsecured Credit Facility has no minimum outstanding balance requirements. Under certain circumstances, CSP OP may request an increase in the capacity of the Unsecured Credit Facility by up to an additional $700,000,000, to an aggregate size of $1,400,000,000, although none of the lenders
F-37
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
has any obligation to participate in such increase. The Unsecured Credit Facility includes a $25,000,000 swingline sub-facility and a $25,000,000 letter of credit sub-facility. CSP OP paid customary arrangement and commitment fees to the lenders in connection with the Unsecured Credit Facility. The Company and certain of its subsidiaries have provided a guaranty in connection with the Unsecured Credit Facility.
The loans under the Unsecured Credit Facility will bear interest, at CSP OP’s election, based on (i) LIBOR, for interest periods of one, three or six months, plus the applicable margin, or (ii) the LIBOR Market Index Rate plus the applicable margin (if the LIBOR Market Index Rate is unavailable, the per annum rate of interest would be the Federal Funds Rate plus 1.5%, plus the applicable margin). The LIBOR Market Index Rate is LIBOR in respect of loans of one-month interest periods, determined on a daily basis, plus the applicable margin. The applicable margin is (i) for periods prior to the Company or CSP OP having a credit rating, based on the Company’s then current leverage ratio, and (ii) during such periods when the Company or CSP OP has a credit rating, based on its then current credit rating. The applicable margin can vary from (i) 1.60% to 2.35% based upon the then current leverage ratio, or (ii) 1.00% to 1.80% based upon a then current credit rating of the Company or CSP OP. As of the closing of the Unsecured Credit Facility, the current stated applicable margin was 1.60%. CSP OP will pay customary fees in connection with borrowings under the Unsecured Credit Facility. Further, CSP OP may prepay any revolving or swingline loan, in whole or in part, at any time without premium or penalty. As of December 31, 2012, outstanding borrowings of $265,000,000 bear interest at a rate of 1.82% based on 1.60% over the three month LIBOR.
Under the Unsecured Credit Facility, the Company will be subject to certain financial covenants that require, among other things: the maintenance of (i) a leverage ratio of not more than 0.60; (ii) a fixed charge coverage ratio of at least 1.50; (iii) a secured leverage ratio of not more than (a) 0.45 prior to the Unsecured Credit Facility’s second anniversary, or (b) 0.40 thereafter; (iv) an unencumbered leverage ratio of not more than 0.60; (v) a ratio of unencumbered net operating income to unsecured interest expense of at least 1.75 (unless the Company or CSP OP obtains an investment grade credit rating, in which case this requirement is eliminated); (vi) minimum tangible net worth of $1,653,403,000 plus 85% of the net proceeds of certain future equity issuances; and (vii) unencumbered asset value of at least $400,000,000. In addition, the Unsecured Credit Facility contains a number of customary non-financial covenants including those restricting liens, mergers, sales of assets, certain investments in unimproved land and mortgage receivables, intercompany transfers, transactions with affiliates and distributions.
See Note 21 “Subsequent Events,” for an update of Loan Payable.
The minimum principal payments due for the notes payable and loan payable are as follows as of December 31, 2012 (in thousands):
| | | | |
2013 | | $ | 44,457 | |
2014 | | | 65,550 | |
2015 | | | 60,026 | |
2016 | | | 385,963 | |
2017 | | | 43,443 | |
Thereafter | | | 162,436 | |
| | | | |
| | $ | 761,875 | |
| | | | |
Our organizational documents contain a limitation on the amount of indebtedness that we may incur, so that unless our shares are listed on a national securities exchange, our aggregate borrowing may not exceed 300% of our net assets unless any excess borrowing is approved by a majority of our independent trustees and is disclosed to shareholders in our next quarterly report.
F-38
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
8. Minimum Future Rents Receivable
The following is a schedule of minimum future rentals to be received on non-cancelable operating leases from consolidated properties as of December 31, 2012 (in thousands):
| | | | |
2013 | | $ | 152,479 | |
2014 | | | 149,721 | |
2015 | | | 142,105 | |
2016 | | | 128,681 | |
2017 | | | 121,044 | |
Thereafter | | | 517,176 | |
| | | | |
| | $ | 1,211,206 | |
| | | | |
9. Concentrations
Tenant Revenue Concentrations
For the years ended December 31, 2012, 2011, and 2010 there were no significant revenue concentrations.
Geographic Concentrations
As of December 31, 2012, we owned 82 consolidated properties located in 18 states (Arizona, California, Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, Maryland, Massachusetts, Minnesota, New Jersey, North Carolina, Pennsylvania, South Carolina, Texas, Utah and Virginia) and in the United Kingdom. As of December 31, 2011, we owned 77 consolidated properties, located 16 states (Arizona, California, Colorado, Florida, Georgia, Illinois, Kentucky, Massachusetts, Minnesota, New Jersey, North Carolina, Pennsylvania, South Carolina, Texas, Utah, and Virginia) and in the United Kingdom.
Our geographic revenue concentrations from consolidated properties for the years ended December 31, 2012, 2011 and 2010 are as follows:
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Domestic | | | | | | | | | | | | |
New Jersey | | | 28.39 | % | | | 27.84 | % | | | 5.66 | % |
Virginia | | | 10.80 | | | | 12.96 | | | | 7.88 | |
California | | | 8.88 | | | | 10.80 | | | | 16.54 | |
Texas | | | 8.18 | | | | 8.80 | | | | 11.12 | |
South Carolina | | | 8.16 | | | | 8.54 | | | | 15.76 | |
Massachusetts | | | 5.75 | | | | 6.68 | | | | 9.32 | |
Florida | | | 5.24 | | | | 4.98 | | | | 9.12 | |
Illinois | | | 4.55 | | | | 2.73 | | | | 2.78 | |
Arizona | | | 4.15 | | | | 1.78 | | | | 0.25 | |
Minnesota | | | 3.68 | | | | 4.41 | | | | 6.88 | |
North Carolina | | | 2.63 | | | | 2.40 | | | | 2.76 | |
Colorado | | | 1.43 | | | | 0.14 | | | | 0 | |
Georgia | | | 1.18 | | | | 1.47 | | | | 2.87 | |
Kansas | | | 1.12 | | | | 0 | | | | 0 | |
Kentucky | | | 0.79 | | | | 1.00 | | | | 0.32 | |
Utah | | | 0.72 | | | | 0.92 | | | | 0.28 | |
Maryland | | | 0.21 | | | | 0 | | | | 0 | |
Pennsylvania | | | 0.01 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | |
Total Domestic | | | 95.87 | | | | 95.46 | | | | 91.54 | |
International | | | | | | | | | | | | |
United Kingdom | | | 4.13 | | | | 4.54 | | | | 8.46 | |
| | | | | | | | | | | | |
Total | | | 100.00 | % | | | 100.00 | % | | | 100.00 | % |
| | | | | | | | | | | | |
F-39
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Our geographic long-lived asset concentrations from consolidated properties as of December 31, 2012 and 2011 are as follows: (based on real estate related assets)
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
Domestic | | | | | | | | |
New Jersey | | | 25.68 | % | | | 29.44 | % |
Virginia | | | 8.94 | | | | 10.90 | |
South Carolina | | | 7.78 | | | | 9.66 | |
California | | | 6.78 | | | | 8.18 | |
Texas | | | 6.28 | | | | 7.58 | |
Illinois | | | 5.35 | | | | 2.42 | |
Maryland | | | 4.95 | | | | 0 | |
Massachusetts | | | 4.51 | | | | 5.44 | |
Florida | | | 4.42 | | | | 5.34 | |
Pennsylvania | | | 3.89 | | | | 0.76 | |
Arizona | | | 3.51 | | | | 4.26 | |
Kansas | | | 3.31 | | | | 0 | |
Minnesota | | | 3.05 | | | | 2.50 | |
North Carolina | | | 2.84 | | | | 3.40 | |
Colorado | | | 1.25 | | | | 1.51 | |
Kentucky | | | 0.70 | | | | 0.86 | |
Georgia | | | 0.68 | | | | 0.81 | |
Utah | | | 0.62 | | | | 0.78 | |
| | | | | | | | |
Total Domestic | | | 94.54 | | | | 93.84 | |
International | | | | | | | | |
United Kingdom | | | 5.46 | | | | 6.16 | |
| | | | | | | | |
Total | | | 100.00 | % | | | 100.00 | % |
| | | | | | | | |
10. Segment Disclosure
Our reportable segments consist of three types of commercial real estate properties, namely, Domestic Industrial Properties, Domestic Office Properties and International Office/Retail Properties. Management internally evaluates the operating performance and financial results of our segments based on net operating income. We also have certain general and administrative level activities including legal, accounting, tax preparation and shareholder servicing costs that are not considered separate operating segments. Our reportable segments are on the same basis of accounting as described in Note 2-“Basis of Presentation and Summary of Significant Accounting Policies”.
F-40
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
We evaluate the performance of our segments based on net operating income, defined as: rental income and tenant reimbursements less property and related expenses (operating and maintenance, property management fees, property level general and administrative expenses and real estate taxes) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and our general and administrative expenses. The following table compares the net operating income for the years ended December 31, 2012, 2011 and 2010 (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Domestic Industrial Properties | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | |
Rental | | $ | 43,296 | | | $ | 31,102 | | | $ | 23,903 | |
Tenant Reimbursements | | | 9,239 | | | | 6,760 | | | | 5,481 | |
| | | | | | | | | | | | |
Total Revenues | | | 52,535 | | | | 37,862 | | | | 29,384 | |
| | | | | | | | | | | | |
Property and Related Expenses: | | | | | | | | | | | | |
Operating and Maintenance | | | 2,456 | | | | 1,934 | | | | 1,546 | |
General and Administrative | | | 583 | | | | 604 | | | | 257 | |
Property Management Fee to Related Party | | | 316 | | | | 268 | | | | 289 | |
Property Taxes | | | 7,753 | | | | 6,292 | | | | 5,735 | |
| | | | | | | | | | | | |
Total Expenses | | | 11,108 | | | | 9,098 | | | | 7,827 | |
| | | | | | | | | | | | |
Net Operating Income | | | 41,427 | | | | 28,764 | | | | 21,557 | |
| | | | | | | | | | | | |
Domestic Office Properties | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | |
Rental | | | 97,164 | | | | 83,897 | | | | 38,792 | |
Tenant Reimbursements | | | 24,314 | | | | 20,058 | | | | 8,294 | |
| | | | | | | | | | | | |
Total Revenues | | | 121,478 | | | | 103,955 | | | | 47,086 | |
| | | | | | | | | | | | |
Property and Related Expenses: | | | | | | | | | | | | |
Operating and Maintenance | | | 16,272 | | | | 14,301 | | | | 6,142 | |
General and Administrative | | | 324 | | | | 201 | | | | 433 | |
Property Management Fee to Related Party | | | 932 | | | | 746 | | | | 370 | |
Property Taxes | | | 15,015 | | | | 11,548 | | | | 5,230 | |
| | | | | | | | | | | | |
Total Expenses | | | 32,543 | | | | 26,796 | | | | 12,175 | |
| | | | | | | | | | | | |
Net Operating Income | | | 88,935 | | | | 77,159 | | | | 34,911 | |
| | | | | | | | | | | | |
International Office/Retail Properties | | | | | | | | | | | | |
Revenues: | | | | | | | | | | | | |
Rental | | | 7,202 | | | | 6,460 | | | | 6,678 | |
Tenant Reimbursements | | | 311 | | | | 279 | | | | 391 | |
| | | | | | | | | | | | |
Total Revenues | | | 7,513 | | | | 6,739 | | | | 7,069 | |
| | | | | | | | | | | | |
Property and Related Expenses: | | | | | | | | | | | | |
Operating and Maintenance | | | 351 | | | | 648 | | | | 930 | |
General and Administrative | | | 259 | | | | 234 | | | | 213 | |
Property Management Fee to Related Party | | | 309 | | | | 456 | | | | 289 | |
| | | | | | | | | | | | |
Total Expenses | | | 919 | | | | 1,338 | | | | 1,432 | |
| | | | | | | | | | | | |
Net Operating Income | | | 6,594 | | | | 5,401 | | | | 5,637 | |
| | | | | | | | | | | | |
F-41
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Reconciliation to Consolidated Net Loss | | | | | | | | | | | | |
Total Segment Net Operating Income | | | 136,956 | | | | 111,324 | | | | 62,105 | |
Interest Expense | | | 34,351 | | | | 33,735 | | | | 14,881 | |
General and Administrative | | | 14,660 | | | | 5,132 | | | | 4,623 | |
Investment Management Fee to Related Party | | | 29,695 | | | | 20,908 | | | | 11,595 | |
Acquisition Expenses | | | 7,752 | | | | 14,464 | | | | 17,531 | |
Depreciation and Amortization | | | 73,653 | | | | 61,415 | | | | 32,125 | |
Transition Costs | | | 8,249 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | |
| | | (31,404 | ) | | | (24,330 | ) | | | (18,650 | ) |
| | | | | | | | | | | | |
Other Income and Expenses | | | | | | | | | | | | |
Interest and Other Income | | | 2,629 | | | | 1,619 | | | | 1,260 | |
Net Settlement Payments on Interest Rate Swaps | | | (682 | ) | | | (700 | ) | | | (1,096 | ) |
Gain on Interest Rate Swaps and Cap | | | 564 | | | | 397 | | | | 23 | |
Loss on Note Payable at Fair Value | | | (111 | ) | | | (25 | ) | | | (118 | ) |
Loss on Early Extinguishment of Debt | | | (2,961 | ) | | | (108 | ) | | | (72 | ) |
Loss on Swap Termination | | | (14,323 | ) | | | 0 | | | | 0 | |
| | | | | | | | | | | | |
Loss Before Provision for Income Taxes and Equity in Income of Unconsolidated Entities | | | (46,288 | ) | | | (23,147 | ) | | | (18,653 | ) |
| | | | | | | | | | | | |
Provision for Income Taxes | | | (266 | ) | | | (456 | ) | | | (296 | ) |
Equity in Income of Unconsolidated Entities | | | 3,959 | | | | 3,590 | | | | 8,838 | |
| | | | | | | | | | | | |
Net Loss From Continuing Operations | | | (42,595 | ) | | | (20,013 | ) | | | (10,111 | ) |
| | | | | | | | | | | | |
Income (Loss) from Discontinued Operations | | | 0 | | | | 427 | | | | (507 | ) |
Realized (Loss) Gain from Sale | | | (413 | ) | | | 301 | | | | 0 | |
| | | | | | | | | | | | |
(Loss) Income from Discontinued Operations | | | (413 | ) | | | 728 | | | | (507 | ) |
| | | | | | | | | | | | |
Net Loss | | | (43,008 | ) | | | (19,285 | ) | | | (10,618 | ) |
Net Loss Attributable to Non-Controlling Operating Partnership Units | | | 32 | | | | 26 | | | | 18 | |
| | | | | | | | | | | | |
Net Loss Attributable to Chambers Street Properties Shareholders | | $ | (42,976 | ) | | $ | (19,259 | ) | | $ | (10,600 | ) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | December 31, | |
Condensed Assets | | 2012 | | | 2011 | | | 2010 | |
Domestic Industrial Properties—Continuing Operations | | $ | 678,930 | | | $ | 463,869 | | | $ | 412,093 | |
Domestic Office Properties—Continuing Operations | | | 1,077,328 | | | | 1,091,120 | | | | 711,084 | |
Domestic Industrial Properties—Discontinued Operations | | | 0 | | | | 0 | | | | 22,056 | |
International Office/Retail Properties | | | 105,502 | | | | 102,992 | | | | 104,076 | |
Non-Segment Assets | | | 616,276 | | | | 765,486 | | | | 467,411 | |
Non-Segment Construction in Progress and Other Assets—Variable Interest Entity | | | 76,826 | | | | 17,233 | | | | 0 | |
| | | | | | | | | | | | |
Total Assets | | $ | 2,554,862 | | | $ | 2,440,700 | | | $ | 1,716,720 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | December 31, | |
Capital Expenditures(1) | | 2012 | | | 2011 | | | 2010 | |
Domestic Industrial Properties—Continuing Operations | | $ | 239,470 | | | $ | 70,382 | | | $ | 74,643 | |
Domestic Office Properties—Continuing Operations | | | 28,914 | | | | 376,028 | | | | 465,050 | |
Domestic Industrial Properties—Discontinued Operations | | | 0 | | | | 0 | | | | 22,000 | |
International Office/Retail Properties | | | 668 | | | | 2,048 | | | | 0 | |
Non-Segment Assets | | | 0 | | | | 512 | | | | 110 | |
Non-Segment Construction in Progress—Variable Interest Entity | | | 56,180 | | | | 9,078 | | | | 0 | |
| | | | | | | | | | | | |
Total Capital Expenditures | | $ | 325,232 | | | $ | 458,048 | | | $ | 561,803 | |
| | | | | | | | | | | | |
| (1) | This table presents acquisitions and improvements on real estate investment. |
F-42
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
11. Investment Management and Other Fees to Related Parties
Prior to July 1, 2012, all of our business activities were managed by the former investment advisor pursuant to the Fourth Amended Advisory Agreement, which terminated according to its terms on June 30, 2012. Effective July 1, 2012, we entered into the Transitional Services Agreement with CSP OP and the former investment advisor pursuant to which the former investment advisor will provide certain consulting related services to us at the direction of our officers and other personnel for a term ending on April 30, 2013. For consulting services provided to us in connection with the investment management of our assets, the former investment advisor shall be paid an investment management consulting fee payable in cash consisting of (i) a monthly fee equal to one-twelfth of 0.5% of the aggregate cost (before non-cash reserves and depreciation) of all real estate investments within our portfolio and (ii) a monthly fee equal to 5.0% of the aggregate monthly net operating income derived from all real estate investments within our portfolio, subject to certain adjustments. For consulting services provided to us in connection with the acquisition of assets, the former investment advisor or its affiliates shall be paid acquisition fees up to 1.5% of (i) the contract purchase price of real estate investments acquired by us, or (ii) when we make an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity. The total of all acquisition consulting fees payable with respect to real estate investments shall not exceed an amount equal to 6% of the contract purchase price (or 6% of funds advanced with respect to mortgages) provided, however, that a majority of the uninterested members of the Board of Trustees may approve amounts in excess of this limit.
Upon the termination date of the Transitional Services Agreement, we and the former investment advisor shall agree on a list of unacquired real estate investments for which the former investment advisor has performed certain acquisition related consulting services (a “Qualifying Property”). If any Qualifying Property is acquired by us within the nine months following the termination of the Transitional Services Agreement then we shall pay an acquisition consulting fee equal to 0.75% of (i) the contract purchase price of the real estate investments (including debt), or (ii) when we make an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity to the former investment advisor. Real estate investments for which there is a dispute as to whether it is a Qualifying Property that are acquired within the nine months following the termination of the Transitional Services Agreement will be submitted to arbitration.
For consulting services provided to us in connection with property management, leasing or construction services, the former investment advisor shall be paid based upon the customary property management, leasing and construction supervision fees applicable to the geographic location and type of property. Such fees for each service provided are expected to range from 2.0% to 5.0% of gross revenues received from a property that we own. We shall pay the former investment advisor a real estate commission fee upon the sale of properties in an amount equal to the lesser of (i) one-half of the competitive real estate commission or (ii) 3% of the sales price of each property sold. The total brokerage commission paid may not exceed the lesser of the competitive real estate commission or an amount equal to 6% of the sales price of the property.
To the extent that the we assume or incur prior to the termination of the Transition Services Agreement a cost that was previously borne by the former investment advisor during the term of the Transition Services Agreement or its predecessor agreement, then amounts otherwise owed under the Transition Services Agreement shall be correspondingly reduced on a monthly basis; provided that (i) any Assumed Costs resulting from hiring of any targeted personnel shall reduce the amounts payable by us under this agreement for such month only to the extent of their base salary and benefits (as in effect immediately prior to their hiring by us) and any related other direct employer costs (but excluding any bonus amounts) earned or incurred during the month.
We will reimburse the former investment advisor for certain expenses paid or incurred in connection with services provided under the Transitional Services Agreement. In addition, the former investment advisor will only be entitled to reimbursement for third party expenses incurred in connection with services provided pursuant to the Transitional Services Agreement that we have approved in writing. Our sole obligation to reimburse the former investment advisor for expenses incurred related to personnel costs was to make an aggregate payment equal to $2,500,000 on the effective date of the agreement.
Previously, pursuant to the Fourth Amended Advisory Agreement, the former investment advisor and its affiliates performed services relating to the management of our assets. We also have paid fees to the former dealer manager for services it performed with respect to our prior public offerings. Items of compensation and equity participation are as follows:
Offering Costs Relating to Public Offerings
Offering costs totaling $17,530,000, $67,609,000 and $51,724,000, were incurred to related parties during the years ended December 31, 2012, 2011 and 2010, respectively, and are recorded as a reduction of additional paid-in-capital in the consolidated
F-43
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
statement of shareholders’ equity. Of the total amounts, $17,504,000, $67,282,000 and $51,503,000 was incurred to CNL Securities Corp., as the former dealer manager of our follow-on public offering, and $26,000, $327,000 and $221,000, was incurred to the former investment advisor for reimbursable marketing for the years ended December 31, 2012, 2011 and 2010, respectively. Each party will be paid the amount incurred from proceeds of our follow-on public offering. As of December 31, 2012 and 2011, the accrued offering costs payable to related parties included in our consolidated balance sheets were $0 and $1,974,000. We believe that all offering costs have been paid as of December 31, 2012.
Investment Management Fee to Related Party
Prior to October 24, 2006, the former investment advisor received an annual fee equal to 0.75% of the book value of the total assets, as defined in the advisory agreement, based on the assets of CSP OP. The investment management fee was calculated monthly based on the average of total assets, as defined, during such period. On October 24, 2006, we entered into that certain amended and restated agreement of limited partnership of CSP OP (the “Amended Partnership Agreement”) and that certain amended and restated advisory agreement (the “Amended Advisory Agreement”). The Amended Advisory Agreement provided an investment management fee of (i) a monthly fee equal to one twelfth of 0.6% of the aggregate cost (before non-cash reserves and depreciation) of all real estate investments within our portfolio and (ii) a monthly fee equal to 7.0% of the aggregate monthly net operating income derived from all real estate investments within our portfolio. On January 30, 2009, we entered into that certain second amended and restated advisory agreement (the “Second Amended Advisory Agreement”) and that certain second amended agreement of limited partnership of CSP Operating Partnership, L.P. (the “Second Amended Partnership Agreement”). The Second Amended Advisory Agreement modified, among other things, the investment management fee to consist of (a) a monthly fee equal to one twelfth of 0.5% of the aggregate costs (before non-cash reserves and depreciation) of all real estate investment in our portfolio and (b) a monthly fee equal to 5.0% of the aggregate monthly net operating income derived from all real estate investments in our portfolio The Second Amended Partnership Agreement generally contained the same terms and conditions as the Amended Partnership Agreement, except for clarification regarding the timing of potential distributions that the holder of the Class B interest would have been entitled to.
On December 21, 2010, we entered into that certain third amended and restated advisory agreement (the “Third Amended Advisory Agreement”). The Third Amended Advisory Agreement contained the same terms and conditions as the Second Amended Advisory Agreement, except that the term of the agreement was extended to April 30, 2011, subject to an unlimited number of successive one-year renewals upon the mutual consent of the parties. The former investment advisor did not waive any investment management fees during the years ended December 31, 2012 and 2011, respectively.
On April 27, 2012, we entered into the Fourth Amended Advisory Agreement with CSP OP and the former investment advisor, effective May 1, 2012. The Fourth Amended Advisory Agreement generally contained the same terms and conditions as the Third Amended and Restated Advisory Agreement dated December 21, 2010, except for the following material changes: (i) the term of the agreement was modified to expire on the earlier of (a) June 30, 2012 or (b) such date that we became self-managed through the hiring of a majority of 14 identified current employees of the former investment advisor and/or its affiliates, subject to up to four successive two-month renewals; provided, however, that no renewal shall have been permitted if we became self-managed; (ii) to the extent we assume costs prior to the termination of the Fourth Amended Advisory Agreement in connection with our transition to self-management of the type which were previously borne by the former investment advisor pursuant to the Third Amended Advisory Agreement, then the fees paid to the former investment advisor would be correspondingly reduced on a monthly basis, subject to certain adjustments; and (iii) the indemnification provisions were modified to specify that we would indemnify the former investment advisor and its affiliates under any predecessor advisory agreement, future services agreement or arising from the performance of duties as an officer or trustee of the Company or another entity for which they served at our request. The Fourth Amendment and Restated Advisory Agreement terminated according to its terms on June 30, 2012.
On April 27, 2012, we entered into the Third Amended Partnership Agreement with each of the limited partners of the CSP OP, effective May 1, 2012. The Third Amended Partnership Agreement generally contains the same terms and conditions as the Second Amended Partnership Agreement, except with respect to the redemption of the Class B interest. Under the Third Amended Partnership Agreement, the Class B interest may be redeemed upon the earliest to occur of (i) the exercise by the holder of the Class B interest of its right to require CSP OP to redeem its interest, which such right continues for five years from the date of the agreement, (ii) the fifth anniversary of the date of the agreement, (iii) certain other liquidity events, (iv) a merger or sale transaction (a “Merger or Sale”), or (v) our common shares becoming listed or admitted to trading on a national securities exchange or designated for quotation on the NASDAQ Global Select Market or the NASDAQ Global Market (a “Listing”). CSP OP may reject a redemption and institute a blackout
F-44
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
period with respect to redemptions upon the determination by our Board of Trustees that an appraisal process would not be in the best interest of CSP OP at the time of the proposed redemption. A blackout period may only be imposed as the result of a potential Merger or Sale or potential Listing. The consideration received for the redemption of the Class B interest will depend upon the event triggering the redemption. In the event of a redemption in connection with (a) a Listing, the consideration will be determined based on the market value of our shares for a 30 day period beginning 150 days after the Listing, or (b) a Merger or Sale, the consideration will be determined based on our aggregate share value in the transaction. In the event of a redemption as a result of (a) the exercise by the holder of the Class B interest of its redemption right, (b) the fifth anniversary of the date of the agreement or (c) certain other liquidity events, the consideration will be determined based on an appraisal process.
We recognized $200,000 in expense associated with the Class B interest during the year ended December 31, 2012. The former investment advisor earned investment management fees of $29,695,000, $21,004,000 and $11,611,000 the years ended December 31, 2012, 2011 and 2010, respectively. The fee earned during the six months ended December 31, 2012 is based on the Transitional Services Agreement which allows for certain adjustments. Adjustments totaling $3,969,000, were recorded as a reduction of the Investment Management Fee during the year ended December 31 2012. As of December 31, 2012 and 2011, the investment management fees payable to a related party in our consolidated balance sheets were $10,700,000 and $1,968,000, respectively. In connection with services provided to the former investment advisor, CFG VIII, Inc., the former sub-advisor and affiliate of the former dealer manager pursuant to a sub-advisory agreement dated August 21, 2006 (which such agreement terminated by its terms on June 30, 2012 in connection with the termination of the Fourth Amended Advisory Agreement), was paid by the former investment advisor $1,672,000, $2,900,000 and $1,604,000 for the years ended December 31, 2012, 2011 and 2010, respectively.
Acquisition Fee and Expenses to Related Party
The Transitional Services Agreement (and the advisory agreement prior to its termination) permits the former investment advisor to earn an acquisition fee of up to 1.5% of (i) the purchase price of real estate investments acquired by us, including any debt attributable to such investments, or (ii) when we make an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity. The former investment advisor earned acquisition fees of $5,095,000, $11,873,000 and $11,852,000 for the years ended December 31, 2012, 2011 and 2010, respectively. In connection with services provided to the former investment advisor, the former sub advisor, pursuant to a sub advisory agreement, was paid by the former investment advisor acquisition fees of $209,000, $2,220,000 and $2,216,000 for the years ended December 31, 2012, 2011 and 2010, respectively. The former investment advisor earned $64,000, $730,000 and $1,204,000 in acquisition related expenses during the years ended December 31, 2012, 2011 and 2010, respectively. Prior to the adoption of “Business Combinations” on January 1, 2009, these acquisition fees and expenses were capitalized to investments in real estate and related intangibles.
Management Services to Related Party
Pursuant to the Transitional Services Agreement (and the advisory agreement prior to its termination) affiliates of the former investment advisor may also provide leasing, brokerage, property management, construction management or mortgage banking services for us. CBRE Group, Inc., an affiliate of the former investment advisor, received property management fees of approximately $1,557,000, $1,470,000 and $954,000 for the years ended December 31, 2012, 2011 and 2010, respectively. As of December 31, 2012 and 2011, the property management fees payable to related party included in our consolidated balance sheets were $384,000 and $190,000, respectively. Brokerage fees of $388,000, $111,000 and $0 were paid to affiliates of the former investment advisor for the years ended December 31, 2012, 2011 and 2010, respectively. Mortgage banking fees of $0, $2,113,000 and $1,217,000 were paid to CBRE Capital Markets, as affiliate of the former investment advisor, for years ended December 31, 2012, 2011 and 2010, respectively.
Affiliates of the former investment advisor received leasing fees of $876,000, $1,952,000 and $895,000 for the years ended December 31, 2012, 2011 and 2010, respectively An affiliate of the former investment advisor received construction management fees of $1,049,000, $154,000 and $20,700 for the years ended December 31, 2012, 2011 and 2010, respectively.
12. Equity Incentive Plan and Performance Bonus Plan
Equity Incentive Plan
We have adopted a 2004 equity incentive plan which was amended and restated in July 2012 to reflect our name change. The purpose of the amended and reinstated 2004 equity incentive plan is to provide us with the flexibility to use share options and other awards to
F-45
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
provide a means of performance-based compensation. Our key employees, directors, trustees, officers, advisors, consultants or other personnel and our subsidiaries or other persons expected to provide significant services or our subsidiaries would be eligible to be granted share options, restricted shares, phantom shares, distribution equivalent rights and other share-based awards under the amended and reinstated 2004 equity incentive plan.
On April 20, 2010, our Board’s independent trustees, Messrs. Black, Reid and Orphanides, were awarded equity grants under the amended and restated 2004 equity incentive plan on the following terms: (i) each award was for $80,000 in restricted common shares of the Company (or 8,000 shares at $10.00 per share) for a total of $240,000; (ii) each award vested in its entirety, upon issuance; and (iii) the independent trustee would not be able to redeem any of the restricted common shares prior to the third anniversary of date of issuance, but retains the rights to dividends declared and paid during such restriction period. We recognized a stock based compensation expense of $240,000 during the year ended December 31, 2010 as a result of granting these awards to our independent trustees.
On June 17, 2011, our Board’s independent trustees, Messrs. Black, Reid and Orphanides, were awarded equity grants under the amended and restated 2004 equity incentive plan on the following terms: (i) each award was for $9,200 in restricted common shares of the Company (or 1,000 shares at $9.20 per share) for a total of $27,600; (ii) each award vested in its entirety, upon issuance; and (iii) the independent trustee would not be able to redeem any of the restricted common shares prior to the third anniversary of date of issuance, but retains the rights to dividends declared and paid during such restriction period. We recognized a stock based compensation expense of $27,600 during the year ended December 31, 2011 as a result of granting these awards to our independent trustees.
A total of 300,000 restricted common shares with time-based vesting were granted to Mr. Cuneo, Mr. Kianka and other members of senior management of the Company on September 25, 2012 and the grant date fair value of the awards was $3,000,000. Compensation expense will be recognized on a straight-line basis over the service vesting period of three years and will take into consideration an estimated forfeiture rate of 5%. We recognized stock based compensation expense of $245,000 during the year ended December 31, 2012 as a result of granting the awards to Mr. Cuneo, Mr. Kianka and other members of senior management.
In the event a listing of our common shares on a national securities exchange, or certain mergers, sales or other related transactions involving the Company, or certain sales of assets occurs on or prior to July 1, 2014, the Company will grant awards to members of senior management of the Company in the aggregate of 375,000 common shares. These shares will be fully vested when and if granted. The grant date fair value of the awards was $3,750,000. Compensation expense has been deferred until the contingency is resolved.
See “—Subsequent Events.”
Summary of Time-Based Restricted Common Shares
A summary of our time-based Restricted Common Shares from January 1, 2012 through December 31, 2012 is presented below:
| | | | | | | | | | | | | | | | |
| | | Nonvested | | | | |
| | | Shares | | | Weighted-Average
Grant Date Fair
Value Per Share | | | Vested | | | Total | |
Outstanding at January 1, 2012 | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | |
Granted | | | 300,000 | | | | 10.00 | | | | 0 | | | | 3,000,000 | |
Vested | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
Canceled | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | | | | | |
Outstanding as of December 31, 2012 | | | 300,000 | | | $ | 10.00 | | | | 0 | | | $ | 3,000,000 | |
| | | | | | | | | | | | | | | | |
F-46
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Summary of Performance Based Restricted Common Shares
A summary of Performance- Based Restricted Common Shares from January 1, 2012 through December 31, 2012 is presented below:
| | | | | | | | | | | | | | | | |
| | | Nonvested | | | | |
| | | Shares | | | Weighted-Average
Grant Date Fair
Value Per Share | | | Vested | | | Total | |
Outstanding at January 1, 2012 | | | 0 | | | $ | 0 | | | | 0 | | | $ | 0 | |
Granted | | | 375,000 | | | | 10.00 | | | | 0 | | | | 3,750,000 | |
Vested | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
Canceled | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | | | | | |
Outstanding as of December 31, 2012 | | | 375,000 | | | $ | 10.00 | | | | 0 | | | $ | 3,750,000 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
Compensation expense recorded during the period | | $ | 445,000 | | | $ | 28,000 | | | $ | 240,000 | |
Unamortized compensation costs | | $ | 6,167,000 | | | $ | 0 | | | $ | 0 | |
Units available for the future awards | | | 19,298,000 | | | | 19,973,000 | | | | 19,976,000 | |
Performance Bonus Plan
We have adopted a 2004 performance bonus plan which was amended and restated in July 2012 to reflect our name change. Annual bonuses under our 2004 performance bonus plan are awarded by our Compensation Committee to selected key employees, including employees of the former investment advisor, based on corporate factors or individual factors (or a combination of both). Subject to the provisions of the amended and restated 2004 performance bonus plan, the Compensation Committee will (i) determine and designate those key employees to whom bonuses are to be granted; (ii) determine, consistently with the amended and restated 2004 performance bonus plan, the amount of the bonus to be granted to any key employee for any performance period; and (iii) determine, consistently with the amended and restated 2004 performance bonus plan, the terms and conditions of each bonus. Bonuses may be so awarded by the Compensation Committee prior to the commencement of any performance period, during or after any performance period. No bonus shall exceed 200% of the key employee’s aggregate salary for the year. The Compensation Committee may provide for partial bonus payments at target and other levels. Corporate performance hurdles for bonuses may be adjusted by the Compensation Committee in its discretion to reflect (i) dilution from corporate acquisitions and share offerings, and (ii) changes in applicable accounting rules and standards. The Compensation Committee may determine that bonuses shall be paid in cash or shares or other equity-based grants, or a combination thereof. The Compensation Committee may also provide that any such share grants be made under our amended and restated 2004 equity incentive plan or any other equity-based plan or program we may establish. The Compensation Committee may provide for programs under which the payment of bonuses may be deferred at the election of the employee. No bonuses were awarded and no bonus related expenses were incurred by us during the periods ended December 31, 2012, 2011 and 2010, respectively. See “—Subsequent Events.”
13. Shareholders’ Equity
Under our declaration of trust, we currently have the authority to issue a total of 1,000,000,000 shares of beneficial interest. Of the total shares authorized, 990,000,000 shares are designated as common shares with a par value of $0.01 per share and 10,000,000 shares are designated as preferred shares.
The registration statement relating to our initial public offering was declared effective by the SEC on October 24, 2006. CNL Securities Corp. acted as the dealer manager of this offering. The registration statement covered up to $2,000,000,000 in common shares of beneficial interest, 90% of which were offered at a price of $10.00 per share, and 10% of which were offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the former investment advisor, or another firm we choose for that purpose. As of January 29, 2009, we had issued 60,808,967 common shares in our initial public offering. We terminated the initial public offering effective as of the close of business on January 29, 2009. The registration statement relating to our follow-on public offering was declared effective by the SEC on January 30, 2009. CNL Securities Corp. acted as the dealer manager of this offering. The registration statement covered up
F-47
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
to $3,000,000,000 in common shares of beneficial interest, 90% of which will be offered at a price of $10.00 per share, and 10% of which will be offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the former investment advisor, or another firm we choose for that purpose. We reserve the right to reallocate the shares between the primary offering and our dividend reinvestment plan. From January 30, 2009 (effective date) through January 30, 2012, we received gross offering proceeds of approximately $1,901,137,211 from the sale of 190,672,251 shares. We terminated the follow-on public offering effective as of the close of business on January 30, 2012.
During the years ended December 31, 2012, 2011 and 2010, we repurchased 5,648,490 common shares, 4,263,559 common shares and 1,796,101 common shares, respectively, under our share redemption programs.
Accumulated Other Comprehensive Income (Loss)
The following presents the changes in the balances of each component of accumulated other comprehensive income (loss) for the three years ended December 31, 2012:
| | | | | | | | | | | | |
| | | Foreign Currency
Translation Gain (Loss) | | | Swap Fair Value
Adjustment | | | Accumulated Other
Comprehensive Income
(Loss) | |
January 1, 2010 | | $ | (12,030 | ) | | $ | (292 | ) | | $ | (12,322 | ) |
Other Comprehensive Income (Loss) | | | 2,272 | | | | (1,636 | ) | | | 636 | |
| | | | | | | | | | | | |
December 31, 2010 | | | (9,758 | ) | | | (1,928 | ) | | | (11,686 | ) |
Other Comprehensive Loss | | | (821 | ) | | | (11,157 | ) | | | (11,978 | ) |
| | | | | | | | | | | | |
December 31, 2011 | | | (10,579 | ) | | | (13,085 | ) | | | (23,664 | ) |
Other Comprehensive Income | | | 4,415 | | | | 10,662 | | | | 15,077 | |
| | | | | | | | | | | | |
December 31, 2012 | | $ | (6,164 | ) | | $ | (2,423 | ) | | $ | (8,587 | ) |
| | | | | | | | | | | | |
14. Distributions
Earnings and profits, which determine the taxability of distributions to shareholders, will differ from income reported for financial reporting purposes due to the differences for federal income tax purposes including the treatment of loss on extinguishment of debt, revenue recognition, compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation.
The following table reconciles the distributions declared per common share to the distributions paid per common share during the years ended December 31, 2012, 2011 and 2010:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
Distributions declared per common share | | $ | 0.600 | | | $ | 0.600 | | | $ | 0.600 | |
Less: Distributions declared in the current period, and paid in the subsequent period | | | (0.150 | ) | | | (0.150 | ) | | | (0.150 | ) |
Add: Distributions declared in the prior year, and paid in the current year | | | 0.150 | | | | 0.150 | | | | 0.150 | |
| | | | | | | | | | | | |
Distributions paid per common share | | $ | 0.600 | | | $ | 0.600 | | | $ | 0.600 | |
| | | | | | | | | | | | |
Distributions to shareholders during the years ended December 31, 2012, 2011, and 2010, totaled $144,251,000, $106,396,000 and $72,481,000, respectively.
We issued 6,886,421 common shares, 4,862,381 common shares and 3,289,918 common shares pursuant to our dividend reinvestment plan for the years ended December 31, 2012, 2011 and 2010, respectively.
F-48
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
The income tax treatment for distributions declared for the years ended December 31, 2012, 2011 and 2010 as identified above, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
Ordinary Income | | $ | 0.087 | | | | 14.5 | % | | $ | 0.239 | | | | 39.9 | % | | $ | 0.202 | | | | 33.7 | % |
Return of Capital | | | 0.513 | | | | 85.5 | | | | 0.361 | | | | 60.1 | (1) | | | 0.398 | | | | 66.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 0.600 | | | | 100.0 | % | | $ | 0.600 | | | | 100.0 | % | | $ | 0.600 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | This percentage is comprised of return of capital at 59.6% and qualified dividend income at 0.5%. |
15. Derivative Instruments
The following table sets forth the terms of our interest rate swap derivative instruments at December 31, 2012 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | |
Type of Instrument | | Notional Amount | | | Fair Value | | | Pay Fixed Rate | | | Receive Variable
Rate | | | Maturity Date | |
Non-qualifying Interest Rate Swap on Thames Valley debt(1) | | $ | 9,160 | | | | (182 | ) | | | 5.41 | % | | | 0.52 | % | | | May 30, 2013 | |
Non-qualifying Interest Rate Swap on Albion Mills debt(1) | | $ | 9,280 | | | | (241 | ) | | | 3.94 | % | | | 0.54 | % | | | October 10, 2013 | |
Qualifying Interest Rate Swap on Maskew debt(1) | | $ | 22,698 | | | | (1,015 | ) | | | 3.42 | % | | | 0.53 | % | | | August 10, 2014 | |
| (1) | Based on three month GBP-based LIBOR BBA Index with variable rate reset dates every 90 days during the term of the swaps. |
The following table sets forth the terms of our interest rate swap derivative instruments at December 31, 2011 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | |
Type of Instrument | | Notional Amount | | | Fair Value | | | Pay Fixed Rate | | | Receive Variable
Rate | | | Maturity Date | |
Non-qualifying Interest Rate Swap on Thames Valley debt(1) | | $ | 8,762 | | | | (520 | ) | | | 5.41 | % | | | 1.04 | % | | | May 30, 2013 | |
Non-qualifying Interest Rate Swap on Albion Mills debt(1) | | $ | 8,877 | | | | (438 | ) | | | 3.94 | % | | | 0.96 | % | | | October 10, 2013 | |
Qualifying Interest Rate Swap on Maskew debt(1) | | $ | 21,710 | | | | (1,250 | ) | | | 3.42 | % | | | 0.97 | % | | | August 10, 2014 | |
Qualifying Interest Rate Swap on Wells Fargo Credit Facility loan | | $ | 15,000 | | | | (540 | ) | | | 2.10 | % | | | 0.27 | % | | | May 26, 2014 | |
Qualifying Interest Rate Swap on Pacific Corporate Park debt | | $ | 82,000 | | | | (5,721 | ) | | | 2.69 | % | | | 0.32 | % | | | December 7, 2017 | |
Qualifying Interest Rate Swap on 100 Kimball debt | | $ | 32,521 | | | | (4,120 | ) | | | 3.50 | % | | | 0.27 | % | | | March 1, 2021 | |
Qualifying Interest Rate Swap on Kings Mountain III debt | | $ | 11,595 | | | | (709 | ) | | | 2.47 | % | | | 0.27 | % | | | July 1, 2018 | |
| (1) | Based on three month GBP-based LIBOR BBA Index with variable rate reset dates every 90 days during the term of the swaps. |
We marked our two non-qualifying economic hedge interest rate swap instruments to their estimated liability fair value of $423,000 and $958,000 on the consolidated balance sheet at December 31, 2012 and 2011 included in Liabilities as Interest Rate Swaps at Fair Value. We recognized a gain on interest rate swaps of $564,000, $397,000 and $23,000 for the years ended December 31, 2012, 2011 and 2010 respectively, included in Gain on Interest Rate Swaps on the Consolidated Statements of Operations.
Our $22,698,000 notional amount interest rate swap has been designated as a qualifying cash flow hedge of the LIBOR base payments due under our Maskew Retail Park variable rate note payable from its inception on September 24, 2009. The estimated fair value of the interest rate swap liability value of $1,015,000 and $1,250,000 as of December 31, 2012 and 2011, respectively, has resulted in a swap fair value adjustment being recorded to other comprehensive gain (loss) totaling $235,000, ($161,000) and ($797,000) for the years ended December 31, 2012, 2011 and 2010, respectively.
F-49
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Our $15,000,000 notional amount interest rate swap was terminated under our Amended Wells Fargo Credit Facility variable rate loan payable on September 13, 2012. We incurred a $495,000 cost in relation to the termination of this swap arrangement.
Our $79,750,000 notional amount interest rate swap was terminated under our Pacific Corporate Park variable rate loan payable on November 27, 2012. We incurred a $7,517,000 cost in relation to the termination of this swap arrangement.
Our $32,023,000 notional amount interest rate swap was terminated under our 100 Kimball variable rate loan payable on November 27, 2012. We incurred a $5,294,000 cost in relation to the termination of this swap arrangement.
Our $11,401,000 notional amount interest rate swap was terminated under our Kings Mountain III variable rate loan payable on November 27, 2012. We incurred a $1,017,000 cost in relation to the termination of this swap arrangement.
Swap termination costs of $14,323,000 are recorded in loss on swap termination on the consolidated statement of operations.
There was no measured ineffectiveness for any of ours qualifying hedges during the years ended December 31, 2012, 2011 and 2010.
16. Fair Value Option—Note Payable
During the fourth quarter of 2008 we elected to apply the fair value option on a note payable which bears interest at a variable rate and is currently subject to an economic hedge by an interest rate swap with similar terms and the same notional amount. We have elected to apply the fair value option on the Albion Mills Retail Park variable rate note payable to match the fair value treatment of interest rate swap derivative on the same note payable thereby achieving a reduction in the artificial volatility in net income or loss that occurs when related financial assets and liabilities are measured and reported on a different basis in the consolidated financial statements.
We applied the fair value option for the Albion Mills Retail Park note payable at each reporting period. Included in Loss on Notes Payable at Fair Value in the Statements of Operations were $111,000, $25,000 and $118,000 for the years ended December 31, 2012, 2011 and 2010, respectively. In addition, there was ($402,000) and $19,000 translation (loss) gain recorded to Other Comprehensive Loss at December 31, 2012 and 2011, respectively.
17. Fair Value of Financial Instruments and Investments
We apply the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical financial instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We have classified the Albion Mills Retail Park notes payable as Level 3 as of December 31, 2012 and 2011 due to the lack of current market activity and our reliance on unobservable inputs to estimate the fair value of the mortgage note payable.
As of December 31, 2012 and 2011, we held certain items that are required to be measured at fair value on a recurring basis. These included cash equivalents, interest rate swap derivative contracts and our equity method investment in CBRE Strategic Partners Asia. Cash equivalents consist of short-term, highly liquid, income-producing investments, all of which have maturities of 90 days or less, including money market funds and U.S. Government obligations. Derivative instruments are related to our economic hedging activities with respect to interest rates.
The fair values of the interest rate swap derivative agreements are estimated with the assistance of a third party valuation specialist, as reviewed by management, using the market standard methodology of discounting the future expected cash payments and receipts on the pay and receive legs of the interest rate swap agreements that swap the estimated variable-rate mortgage note payment stream for a fixed-rate receive payment stream over the period of the loan. The variable interest rates used in the calculation of projected receipts on the interest rate swap agreements are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance
F-50
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
risk and the respective counterparty’s nonperformance risk in the fair value measurements (where appropriate). Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of December 31, 2012 and 2011, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We have consistently applied these valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivative contracts we hold.
The Class B Interest is based on Level 3 valuation inputs for valuing subordinated equity instruments at the CSP OP level.
Our investment in CBRE Strategic Partners Asia is based on the Level 3 valuation inputs applied by the Investment Manager of this investment company utilizing the following approaches for valuing the underlying real estate related investments within the investment company:
| | ¡ | | The income approach is generally based on a discounted cash flow analysis. Such an analysis for a real property includes projecting net cash flows from the property from a buyer’s perspective and computing the present value of the cash flows using a market discount rate. The cash flows include a projection of the net sales proceeds at the end of our estimate of a market participant holding period, computed using market reversionary capitalization rates and projected cash flows from the property for the year following the holding period. |
| | ¡ | | The direct market comparison approach to property valuation is primarily based on the principle of substitution, which holds that the value of a property tends to be set by the price that would be paid to acquire a substitute property of similar utility and desirability within a reasonable amount of time. Transactions of similar properties are analyzed and compared to the subject property. Factors affecting value include differences in the location, size, quality of construction and other physical features, property rights appraised, timing of sale, and economic and market conditions. |
| | ¡ | | The replacement cost approach to property valuation is a theoretical breakdown of the property into land and building components. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. While the replacement cost of the improvements can be determined by adding the labor, material, and other costs, land values must be derived from an analysis of comparable data. The cost approach is considered reliable when used on newer structures, but the method tends to become less reliable for older properties. |
| | ¡ | | For investments owned more than one year, except for investments under construction or incurring significant renovation, it is CBRE Strategic Partners Asia’s policy to obtain a third-party appraisal. For investments in real estate under construction or incurring significant renovation, the valuation analysis is prepared by the investment manager. |
The level 3 investments of the Company are limited to the note payable at fair value, the Class B Interest and the investment in CBRE Strategic Partners Asia each of which has its estimated fair value reviewed and approved by designate members of management of the company.
The following items are measured at fair value on a recurring basis at December 31, 2012 and 2011 (in thousands):
| | | | | | | | | | | | | | | | |
| | | As of December 31, 2012 | |
| | | | | | Fair Value Measurements Using: | |
| | | Total
Fair Value | | | Quoted
Markets
Prices
(Level 1) | | | Significant
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | |
Financial Assets (Liabilities) | | | | | | | | | | | | | | | | |
Cash and Cash Equivalents | | $ | 6,495 | | | $ | 6,495 | | | $ | 0 | | | $ | 0 | |
Interest Rate Swaps at Fair Value—Non Qualifying Hedges | | $ | (423 | ) | | $ | 0 | | | $ | (423 | ) | | $ | 0 | |
Interest Rate Swaps at Fair Value—Qualifying Hedges | | $ | (1,015 | ) | | $ | 0 | | | $ | (1,015 | ) | | $ | 0 | |
Investment in CBRE Strategic Partners Asia | | $ | 8,098 | | | $ | 0 | | | $ | 0 | | | $ | 8,098 | |
Note Payable at Fair Value | | $ | (9,288 | ) | | $ | 0 | | | $ | 0 | | | $ | (9,288 | ) |
Class B Interest | | $ | (200 | ) | | $ | 0 | | | $ | 0 | | | $ | (200 | ) |
F-51
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
| | | | | | | | | | | | | | | | |
| | | As of December 31, 2011 | |
| | | | | | Fair Value Measurements Using: | |
| | | Total
Fair Value | | | Quoted
Markets
Prices
(Level 1) | | | Significant
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | |
Financial Assets (Liabilities) | | | | | | | | | | | | | | | | |
Cash and Cash Equivalents | | $ | 184,160 | | | $ | 184,160 | | | $ | 0 | | | $ | 0 | |
Interest Rate Swaps at Fair Value—Non Qualifying Hedges | | $ | (958 | ) | | $ | 0 | | | $ | (958 | ) | | $ | 0 | |
Interest Rate Swaps at Fair Value—Qualifying Hedges | | $ | (12,340 | ) | | $ | 0 | | | $ | (12,340 | ) | | $ | 0 | |
Investment in CBRE Strategic Partners Asia | | $ | 8,381 | | | $ | 0 | | | $ | 0 | | | $ | 8,381 | |
Note Payable at Fair Value | | $ | (8,775 | ) | | $ | 0 | | | $ | 0 | | | $ | (8,775 | ) |
The following table presents our activity for the variable rate note payable and our investment in CBRE Strategic Partners Asia measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2012 and 2011 (in thousands):
| | | | | | | | |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | Investment in
CBRE Strategic
Partners Asia | | | Note Payable | |
Balance at January 1, 2012 | | $ | 8,381 | | | $ | (8,775 | ) |
Contributions | | | 2,030 | | | | 0 | |
Distributions | | | (2,400 | ) | | | 0 | |
Total Gain (Loss) on Fair Value Adjustment | | | 87 | | | | (111 | ) |
Translation Adjustment in Other Comprehensive Income | | | 0 | | | | (402 | ) |
| | | | | | | | |
Balance at December 31, 2012 | | $ | 8,098 | | | $ | (9,288 | ) |
| | | | | | | | |
The Amount of Total Income (Loss) for the Period Included in Loss on Note Payable at Fair Value and Equity in Income of Unconsolidated Entities Relating to Note Payable and Investment in Unconsolidated Entities Held at December 31, 2012 | | $ | 87 | | | $ | (111 | ) |
| | | | | | | | |
| | | | | | | | |
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | | Investment in
CBRE Strategic
Partners Asia | | | Note Payable | |
Balance at January 1, 2011 | | $ | 9,471 | | | $ | (8,769 | ) |
Contributions | | | 457 | | | | 0 | |
Distributions | | | 0 | | | | 0 | |
Total Gain (Loss) on Fair Value Adjustment | | | (1,547 | ) | | | (25 | ) |
Translation Adjustment | | | 0 | | | | 19 | |
| | | | | | | | |
Balance at December 31, 2011 | | $ | 8,381 | | | $ | (8,775 | ) |
| | | | | | | | |
The Amount of Total Gain (Loss) for the Period Included in Equity in Income of Unconsolidated Entities and the Decrease in Unrealized Gain Relating to Note Payable Held at December 31, 2011 | | $ | (1,547 | ) | | $ | (25 | ) |
| | | | | | | | |
Gains and losses (realized and unrealized) included in earnings related to the interest rate swaps, as well as for the elected fair value note payable for the years ended December 31, 2012 and 2011, respectively, are reported as components of “Other Income and Expense” on the consolidated statements of operations.
We use derivative instruments to mitigate the effects of interest rate fluctuations on specific forecasted transactions as well as recognized financial obligations or assets. We do not use derivative instruments for speculative or trading purposes.
The primary risks associated with derivative instruments are market and credit risk. Market risk is defined as the potential for loss in value of a derivative instrument due to adverse changes in market prices (interest rates). Utilizing derivative instruments allows us to effectively manage the risk of fluctuations in interest rates related to the potential effects these changes could have on future earnings and forecasted cash flows.
F-52
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Credit risk is the risk that one of the parties to a derivative contract fails to perform or meet their financial obligation. We do not obtain collateral associated with our derivative instruments, but monitor the credit standing of our counterparties on a regular basis. Should a counterparty fail to perform, we would incur a financial loss to the extent that the associated derivative contract was in an asset position. At December 31, 2012, we do not anticipate non-performance by the counterparties to our outstanding derivative contracts.
At December 31, 2012, we expect that the hedged forecasted transactions, for each of the outstanding qualifying cash flow hedging relationships, remain probable of occurring and that no gains or losses recorded to accumulated other comprehensive loss are expected to be reclassified to earnings.
To illustrate the effect of movements in the interest rate markets, we performed a market sensitivity analysis on our outstanding hedging instruments. We applied various basis point spreads to the underlying interest rate curves of the derivative portfolio in order to determine the instruments’ change in fair value. The following table summarizes the results of the analysis performed at December 31, 2012 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
Type of Instrument | | Notional Amount | | | Maturity Date | | | Effects of Change in Interest Rates | |
| | | | -100 Basis
Points | | | -50 Basis
Points | | | +50 Basis
Points | | | +100 Basis
Points | |
Non-qualifying Interest Rate Swap on Thames Valley Retail Park debt(1) | | $ | 9,160 | | | | May 30, 2013 | | | $ | (12 | ) | | $ | (12 | ) | | $ | 12 | | | $ | 23 | |
Non-qualifying Interest Rate Swap on Albion Mills debt(1) | | $ | 9,280 | | | | October 10, 2013 | | | | (37 | ) | | | (35 | ) | | | 35 | | | | 69 | |
Qualifying Interest Rate Swap on Maskew Retail Park debt(1) | | $ | 22,698 | | | | August 10, 2014 | | | | (200 | ) | | | (177 | ) | | | 175 | | | | 348 | |
| (1) | Based on three month GBP-based LIBOR BBA Index with variable rate reset dates every 90 days during the term of the swaps. |
The estimated fair value of our investment in CBRE Strategic Partners Asia is most sensitive to changes in capitalization rates for commercial properties in large urban areas in China and Japan, and among other factors, is also sensitive to currency exchange rate fluctuations and changes in the interest rates of China, Japan and the U.S., respectively. Decreases in capitalization rates and increases in interest rates generally increase the value of our investments. Changes in currency exchanges rates where the U.S. Dollar increases in value against the Chinese Yuan and Japanese Yen generally decrease the value of our investments. The estimated fair value of the Albion Mills variable-rate loan is not sensitive to changes in index interest rates, but remains somewhat sensitive to changes in credit spreads available to us. If credit spreads increase, the fair value of this note payable balance decreases.
Disclosure of Fair Value of Financial Instruments
For disclosure purposes only, the following table summarizes our notes payable and loan payable and their estimated fair values at December 31, 2012 and 2011 (in thousands):
| | | | | | | | | | | | | | | | |
| | | Book Value | | | Fair Value | |
Financial Instrument | | 2012 | | | 2011 | | | 2012 | | | 2011 | |
Notes Payable | | $ | 492,944 | | | $ | 630,146 | | | $ | 514,451 | | | $ | 656,135 | |
Note Payable at Fair Value | | | 9,288 | | | | 8,775 | | | | 9,288 | | | | 8,775 | |
| | | | | | | | | | | | | | | | |
Total Notes Payable | | $ | 502,232 | | | $ | 638,921 | | | $ | 523,739 | | | $ | 664,910 | |
| | | | | | | | | | | | | | | | |
Loan Payable | | $ | 265,000 | | | $ | 25,000 | | | $ | 265,000 | | | $ | 25,000 | |
| | | | | | | | | | | | | | | | |
| (1) | Level 3: For purposes of this fair value disclosure, we based our fair value estimate for notes payable on our internal valuation that includes a representative sample of our lenders’ market interest rate quotes as of December 31, 2012 and 2011 for debt with similar risk characteristics and maturities. We based the Note Payable carried at fair value on a third party appraiser’s valuation, which used similar techniques as our internal valuation model as of December 31, 2012 and 2011. |
These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We have classified
F-53
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
the notes payable as Level 3 as of December 31, 2012 and 2011 due to the lack of current market activity and our reliance on unobservable inputs to estimate the fair value of the mortgage note payable. The estimated fair values of our Notes Payable are sensitive to interest rate changes in the market as well as changes in our own estimated credit spreads. (See Note 2 for further discussion of inputs used for estimating fair value of our Notes Payable.)
18. Commitments and Contingencies
We have agreed to a capital commitment of up to $20,000,000 in CBRE Strategic Partners Asia. As of December 31, 2012, we funded $17,526,000 of our capital commitment. CBRE Global Investors, an affiliate of the former investment advisor, formed CBRE Strategic Partners Asia to purchase, reposition, develop, hold for investment and sell institutional quality real estate and related assets in targeted markets in China, Japan, India, South Korea, Hong Kong, Singapore and other Asia Pacific markets. If we and all other currently committed capital investors had funded our entire commitments in CBRE Strategic Partners Asia as of December 31, 2012, we would have owned an ownership interest of approximately 5.07% in CBRE Strategic Partners Asia. A majority of our trustees (including a majority of our independent trustees) not otherwise interested in this transaction approved the transaction as being fair, competitive and commercially reasonable. CBRE Strategic Partners Asia is managed by CB Richard Ellis Investors SP Asia II, LLC or the Fund Manager, a subsidiary of CBRE Global Investors, an affiliate of the former investment advisor.
Litigation—From time to time, we and our properties may be subject to legal proceedings, which arise in the ordinary course of our business. Currently, neither our company nor any of our properties are subject to, or threatened with, any legal proceedings for which the outcome is reasonably likely to have a material effect on our results of operations, or financial condition, or cash flows.
Environmental Matters—We are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.
19. Quarterly Financial Information (unaudited)
Summarized quarterly financial data for the years ended December 31, 2012, 2011 and 2010 was as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | |
| | | 2012 Quarter Ended | |
| | | March 31 | | | June 30 | | | September 30 | | | December 31 | |
Revenues from Operations | | $ | 43,399 | | | $ | 44,886 | | | $ | 47,147 | | | $ | 46,094 | |
Net Loss | | | (2,154 | ) | | | (1,899 | ) | | | (12,384 | ) | | | (26,571 | ) |
Net Loss Attributable to Chambers Street Properties Shareholders | | | (2,152 | ) | | | (1,899 | ) | | | (12,379 | ) | | | (26,546 | ) |
Net Loss per common share-basic and diluted | | | (0.01 | ) | | | (0.01 | ) | | | (0.05 | ) | | | (0.10 | ) |
| |
| | | 2011 Quarter Ended | |
| | | March 31 | | | June 30 | | | September 30 | | | December 31 | |
Revenues from Operations | | $ | 30,270 | | | $ | 37,037 | | | $ | 39,789 | | | $ | 41,460 | |
Net Loss | | | (2,613 | ) | | | (9,376 | ) | | | (2,446 | ) | | | (4,850 | ) |
Net Loss Attributable to Chambers Street Properties Shareholders | | | (2,609 | ) | | | (9,363 | ) | | | (2,442 | ) | | | (4,845 | ) |
Net Loss per common share-basic and diluted | | | (0.02 | ) | | | (0.05 | ) | | | (0.01 | ) | | | (0.02 | ) |
| |
| | | 2010 Quarter Ended | |
| | | March 31 | | | June 30 | | | September 30 | | | December 31 | |
Revenues from Operations | | $ | 17,920 | | | $ | 17,451 | | | $ | 20,104 | | | $ | 28,064 | |
Net Income (Loss) | | | 146 | | | | (4,229 | ) | | | (1,208 | ) | | | (5,327 | ) |
Net Income (Loss) Attributable to Chambers Street Properties Shareholders | | | 145 | | | | (4,221 | ) | | | (1,206 | ) | | | (5,318 | ) |
Net Income (Loss) per common share-basic and diluted | | | 0.00 | | | | (0.03 | ) | | | (0.01 | ) | | | (0.03 | ) |
20. Income Taxes
We elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 2004. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we generally
F-54
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gain). It is our current intention to adhere to these requirements and maintain our REIT qualification. As a REIT, we generally will not be subject to corporate level U.S. federal income tax on net income we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year, then we will be subject to U.S. federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed taxable income, if any.
During 2010, we made taxable REIT subsidiary (“TRS”) elections for two held for sale property subsidiaries. The elections, effective for the tax year beginning January 1, 2010 and future years, were made pursuant to section 856(i) of the Internal Revenue Code. Our TRS’s are subject to corporate level income taxes which are recorded in our consolidated financial statements.
In the third quarter of 2011 both properties were sold and the TRS’s were subsequently liquidated.
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Net Income (Loss) from Operations | | $ | 0 | | | $ | 427 | | | $ | (446 | ) |
Net Income from Property Sale | | | 0 | | | | 425 | | | | 0 | |
| | | | | | | | | | | | |
Total Net Income (Loss) Available to Common Shareholders | | | 0 | | | | 852 | | | | (446 | ) |
Add: Tax Expense | | | 0 | | | | 122 | | | | 0 | |
Less: Tax Adjustment for Gain on Sale | | | 0 | | | | (128 | ) | | | 0 | |
Less: Straight-line Rent | | | 0 | | | | (3 | ) | | | 0 | |
Less: Tax Depreciation and Amortization | | | 0 | | | | (332 | ) | | | (33 | ) |
(Less) Add: Receipts of Prepaid Rent | | | 0 | | | | (166 | ) | | | 166 | |
Add: Capitalized Acquisition Expense for Tax | | | 0 | | | | 0 | | | | 501 | |
| | | | | | | | | | | | |
Taxable Income for TRS | | $ | 0 | | | $ | 345 | | | $ | 188 | |
| | | | | | | | | | | | |
The following table summarizes the provision for income taxes of the TRS for the years ended December 31, 2012, 2011 and 2010 (in thousands):
| | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Current | | $ | 0 | | | $ | 122 | | | $ | 61 | |
Deferred | | | 0 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | |
Total Provision for Income Taxes | | $ | 0 | | | $ | 122 | | | $ | 61 | |
| | | | | | | | | | | | |
ASC 740 requires that entities taxed as corporations recognize tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Since the Company has liquidated its TRS and believes it has satisfied all requisite REIT compliance tests, no amount of deferred tax asset or liability has been recorded as of December 31, 2012, other than as mentioned below regarding United Kingdom tax liabilities.
Included as a component of our tax provision, we have incurred income and other taxes (franchise, local and state government and international) related to our continuing operations in the amounts of $266,000, $456,000 and $296,000 in California, Georgia, Massachusetts, Minnesota, New Jersey, Pennsylvania, Texas, North Carolina, and the United Kingdom impacting our operations during the years ended December 31, 2012, 2011 and 2010, respectively. The United Kingdom taxes real property operating results at a statutory rate of 20%. The United Kingdom taxable loss for the years ended December 31, 2012 and 2011 resulted in a deferred tax asset of approximately $624,000 and $1,311,000 as a result of net operating loss carryforwards for both years. We have provided for a full valuation allowance of ($624,000) and ($1,311,000) as of December 31, 2012 and 2011 on deferred tax assets because there is no history of earnings and profits in the United Kingdom are not expected to be sufficient to absorb the net operating losses in the near term.
F-55
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
21. Subsequent Events
On January 30, 2013, we acquired 100% of Trammel Crow Company’s (“TCC”) interest in our joint venture with TCC which owned and developed our 1400 Atwater Drive property, a 300,000 square foot office development in Malvern, Pennsylvania, a suburb of Philadelphia. 1400 Atwater Drive is 100% leased to Endo Pharmaceuticals, Inc. for use as their corporate headquarters through November 2024 and the lease is guaranteed by Endo Health Solutions Inc. (NASDAQ: ENDP), Endo Pharmaceuticals’ parent company, a specialty pharmaceutical and healthcare solutions company. The cost of the acquisition was approximately $3,431,000. We funded this acquisition using cash reserves and borrowings under our Unsecured Credit Facility.
On February 7, 2013, we filed a registration statement on Form S-8 to register 500,000 common shares of beneficial ownership pursuant to our amended and restated 2004 equity incentive plan.
On February 7, 2013, our Board’s independent trustees, Messrs. Black, Orphanides and Salvatore, were awarded equity grants under the amended and restated 2004 equity incentive plan on the following terms: (i)(x) Mr. Black’s award was for $100,000 in common shares (or 10,000 shares at $10.00 per share) and (y) Messrs. Orphanides and Salvatore each were awarded $25,000 in common shares (or 2,500 shares at $10.00 per share) for a total of $150,000; and (ii) each award vested in its entirety, upon issuance.
On February 19, 2013, we entered into an agreement with TCC that will obligate us to form a joint venture with TCC upon the expiration of certain contingencies. We would own a 95% interest and TCC would own a 5% interest in the joint venture. The joint venture will develop a four building, 454,801 square foot build-to-suit office complex in Malvern, Pennsylvania, a suburb of Philadelphia, for Shire US, Inc., which will serve as their US corporate headquarters under a fifteen year lease. Shire US, Inc. is the US based subsidiary of Irish pharmaceutical company Shire Plc (LSE: SHP, NASDAQ: SHPG), a major instructional pharmaceutical company. The total project cost is anticipated to be approximately $122,288,000 and upon completion of construction and satisfaction of closing obligations, we will acquire 100% of TCC’s interest in the joint venture. There can be no assurance that the joint venture will be formed or that the project will be completed.
On March 1, 2013, we acquired 100% of Duke Realty Limited Partnership’s (“Duke Realty”) interests in 17 properties that were held in our joint venture with Duke Realty (“Duke JV”). The properties are located in major submarkets of Phoenix, Raleigh/Durham, Houston, Columbus, Cincinnati, Orlando, Ft. Lauderdale, Minneapolis and Dallas and consisted of 16 office buildings and one warehouse/distribution/logistics building totaling 3,318,402 square feet. The acquisition was structured such that membership interests in each of the subsidiaries that hold the properties were distributed to Duke Realty and CSP OP on a pro rata basis in accordance with their percentage ownership interests in the Duke JV (80% to CSP OP and 20% Duke Realty) and CSP OP then purchased Duke Realty’s 20% membership interests in those subsidiaries, resulting in CSP OP owning a 100% interest in each of the property-owning subsidiaries. The aggregate purchase price that CSP OP paid to Duke Realty in connection with the acquisition was approximately $98,140,000, which is 20% of approximately $490,700,000 exclusive of fees and customary closing costs, but inclusive of approximately $216,010,000 of existing mortgage financing. We funded this acquisition using cash reserves and borrowings under our Unsecured Credit Facility.
On March 5, 2013, we entered into an unsecured term loan in the amount of $50,000,000 with TD Bank, N.A (the “TD Term Loan”). Upon closing the TD Term Loan, we simultaneously entered into an interest rate swap agreement with TD Bank to effectively fix the interest rate on the TD Term Loan at 3.425% per annum for its seven-year term, based upon the TD Term Loan’s current stated applicable margin, which may vary during its term based upon the then-current leverage ratio or our then-current credit rating. The TD Term Loan contains customary representations and warrants and covenants. We used the proceeds of the TD Term Loan to repay a portion of our borrowings under our Unsecured Credit Facility.
On March 7, 2013, we entered into an unsecured term loan (the “Wells Fargo Term Loan”) in the amount of $200,000,000 with Wells Fargo Bank, National Association (“Wells Fargo”) and certain other lenders defined in the Wells Fargo Term Loan. Upon closing the Wells Fargo Term Loan, we simultaneously entered into an interest rate swap agreement with Wells Fargo to effectively fix the interest rate on the Wells Fargo Term Loan at 2.4885% per annum for its five-year term, based upon the Wells Fargo Term Loan’s current stated applicable margin, which may vary based upon the then-current leverage ratio or our then-current credit rating. The Wells Fargo Term Loan contains customary representations and warrants and covenants. We used the proceeds of the Wells Fargo Term Loan to repay a portion of our borrowings under our Unsecured Credit Facility.
F-56
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
On March 7, 2013, we entered into a First Amendment (the “First Amendment”) to the credit agreement entered into on September 13, 2012 with a group of lenders, which provided us with an unsecured, revolving credit facility in the initial amount of $700,000,000 (“Unsecured Credit Facility”). The First Amendment modified the Unsecured Credit Facility to among other things: (i) amend certain definitions, (ii) amend certain requirements of the guarantor, (iii) amend the requirements relating to quarterly financial statements, annual statements, compliance certificates and certain other SEC filings, (iv) amend the requirements relating to electronic delivery of information, (v) provide the Company with an option to restate the tangible net worth covenant in the event of a redemption event, (vi) remove the restriction on negative pledges, (vii) amend the restrictions on intercompany transfers and (viii) amend certain disclosure and confidentiality provisions.
On March 15, 2013, a total of 281,625 restricted common shares were granted to our named executive officers (Messrs. Cuneo, Kianka and Reid) based on the executive’s achievement of performance objectives during 2012, as determined in the discretion of our Compensation Committee. Additionally, 21 of our employees were granted 117,300 restricted shares, in the aggregate, on March 15, 2013. One-third of the restricted shares granted to our named executive officers and employees will vest in each of the first three anniversaries of grant if the grantee is employed by the company on such anniversary.
On March 19, 2013, our Board of Trustees terminated our amended and restated 2004 performance bonus plan.
F-57
Schedule III—Properties and Accumulated Depreciation Through December 31, 2012 (in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Acquisition Costs | | | Improvements
Subsequent
to Purchase
Date | | | Total
Cost | | | Accumulated
Depreciation
and Amortization | | | Net
Investments
in Real
Estate | |
Property | | Encumbrances
Net | | | Land | | | Site
Improve-
ments | | | Building
and
Improve-
ments | | | Tenant
Improve-
ments | | | Total | | | | | |
REMEC Corporate Campus | | $ | 0 | | | $ | 11,862 | | | $ | 0 | | | $ | 8,933 | | | $ | 3,217 | | | $ | 24,012 | | | $ | 95 | | | $ | 24,107 | | | $ | (4,056 | ) | | $ | 20,051 | |
300 Constitution | | | 0 | | | | 5,591 | | | | 0 | | | | 13,826 | | | | 733 | | | | 20,150 | | | | 0 | | | | 20,150 | | | | (3,607 | ) | | | 16,543 | |
Deerfield Commons I | | | 9,443 | | | | 2,054 | | | | 935 | | | | 7,760 | | | | 1,363 | | | | 12,112 | | | | 1,789 | | | | 13, 019 | | | | (4,219 | ) | | | 9,682 | |
Deerfield Commons II | | | 0 | | | | 2,262 | | | | 0 | | | | 0 | | | | 0 | | | | 2,262 | | | | 0 | | | | 2,262 | | | | 0 | | | | 2,262 | |
660 North Dorothy | | | 0 | | | | 1,576 | | | | 417 | | | | 3,401 | | | | 199 | | | | 5,593 | | | | 304 | | | | 5,897 | | | | (1,119 | ) | | | 4,778 | |
505 Century | | | 0 | | | | 950 | | | | 304 | | | | 3,684 | | | | 119 | | | | 5,057 | | | | 407 | | | | 5,464 | | | | (1,153 | ) | | | 4,311 | |
631 International | | | 0 | | | | 923 | | | | 238 | | | | 2,912 | | | | 285 | | | | 4,358 | | | | 101 | | | | 4,459 | | | | (905 | ) | | | 3,554 | |
602 Central Blvd. | | | 0 | | | | 4,991 | | | | 262 | | | | 14,554 | | | | 0 | | | | 19,807 | | | | 700 | | | | 20,507 | | | | (2,238 | ) | | | 18,269 | |
Bolingbrook Point III | | | 7,900 | | | | 2,423 | | | | 522 | | | | 13,434 | | | | 164 | | | | 16,543 | | | | 7 | | | | 16,550 | | | | (2,154 | ) | | | 14,396 | |
Fairforest Bldg. 5 | | | 8,766 | | | | 1,788 | | | | 2,462 | | | | 12,017 | | | | 100 | | | | 16,367 | | | | 0 | | | | 16,367 | | | | (2,618 | ) | | | 13,749 | |
Fairforest Bldg. 6 | | | 2,324 | | | | 1,181 | | | | 506 | | | | 3,754 | | | | 459 | | | | 5,900 | | | | 0 | | | | 5,900 | | | | (999 | ) | | | 4,901 | |
Fairforest Bldg. 7 | | | 0 | | | | 660 | | | | 463 | | | | 4,503 | | | | 0 | | | | 5,626 | | | | 595 | | | | 6,221 | | | | (1,048 | ) | | | 5,173 | |
HJ Park Bldg. 1 | | | 0 | | | | 575 | | | | 468 | | | | 2,472 | | | | 12 | | | | 3,527 | | | | 7 | | | | 3,534 | | | | (516 | ) | | | 3,108 | |
North Rhett I | | | 2,744 | | | | 1,290 | | | | 366 | | | | 9,627 | | | | 428 | | | | 11,711 | | | | 0 | | | | 11,711 | | | | (1,875 | ) | | | 9,836 | |
North Rhett II | | | 1,737 | | | | 539 | | | | 144 | | | | 5,670 | | | | 26 | | | | 6,379 | | | | 603 | | | | 6,982 | | | | (1,099 | ) | | | 5,883 | |
North Rhett III | | | 0 | | | | 631 | | | | 209 | | | | 3,366 | | | | 18 | | | | 4,224 | | | | 0 | | | | 4,224 | | | | (548 | ) | | | 3,676 | |
North Rhett IV | | | 8,607 | | | | 2,433 | | | | 1,716 | | | | 12,445 | | | | 91 | | | | 16,685 | | | | 0 | | | | 16,685 | | | | (2,346 | ) | | | 14,339 | |
Jedburg Commerce Park | | | 0 | | | | 4,029 | | | | 3,026 | | | | 20,381 | | | | 149 | | | | 27,585 | | | | 0 | | | | 27,585 | | | | (3,995 | ) | | | 23,590 | |
Mount Holly Bldg. | | | 1,737 | | | | 1,012 | | | | 1,050 | | | | 3,699 | | | | 18 | | | | 5,779 | | | | 55 | | | | 5,834 | | | | (916 | ) | | | 4,918 | |
Orangeburg Park Bldg. | | | 1,767 | | | | 544 | | | | 641 | | | | 3,636 | | | | 93 | | | | 4,914 | | | | 0 | | | | 4,914 | | | | (818 | ) | | | 4,098 | |
Kings Mt. I | | | 1,509 | | | | 508 | | | | 362 | | | | 3,097 | | | | 166 | | | | 4,133 | | | | 40 | | | | 4,173 | | | | (736 | ) | | | 3,347 | |
Kings Mt. II | | | 4,435 | | | | 773 | | | | 1,351 | | | | 10,199 | | | | 958 | | | | 13,281 | | | | 0 | | | | 13,281 | | | | (2,289 | ) | | | 10,992 | |
Kings Mt. III | | | 0 | | | | 1,183 | | | | 1,647 | | | | 13,738 | | | | 0 | | | | 16,568 | | | | 4,831 | | | | 21,399 | | | | (2,888 | ) | | | 18,511 | |
Union Cross Bldg. I | | | 2,253 | | | | 852 | | | | 759 | | | | 3,905 | | | | 27 | | | | 5,543 | | | | 0 | | | | 5,543 | | | | (815 | ) | | | 4,728 | |
Union Cross Bldg. II | | | 6,883 | | | | 1,658 | | | | 1,576 | | | | 12,271 | | | | 65 | | | | 15,570 | | | | 0 | | | | 15,570 | | | | (2,304 | ) | | | 13,266 | |
Lakeside Office Center | | | 8,862 | | | | 4,328 | | | | 817 | | | | 10,497 | | | | 1,139 | | | | 16,781 | | | | 359 | | | | 17,140 | | | | (2,353 | ) | | | 14,787 | |
Thames Valley Five | | | 9,160 | | | | 6,538 | | | | 959 | | | | 12,932 | | | | 78 | | | | 20,507 | | | | 7 | | | | 20,514 | | | | (1,945 | ) | | | 18,589 | |
Enclave on the Lake | | | 0 | | | | 4,056 | | | | 10,230 | | | | 20,823 | | | | 1,197 | | | | 36,306 | | | | 1,286 | | | | 37,592 | | | | (5,691 | ) | | | 31,901 | |
Albion Mills Retail Park | | | 9,286 | | | | 7,591 | | | | 179 | | | | 7,452 | | | | 0 | | | | 15,222 | | | | 0 | | | | 15,222 | | | | (897 | ) | | | 14,325 | |
Fairforest Bldg. 1 | | | 0 | | | | 334 | | | | 107 | | | | 2,509 | | | | 5 | | | | 2,955 | | | | 0 | | | | 2,955 | | | | (309 | ) | | | 2,646 | |
Fairforest Bldg. 2 | | | 0 | | | | 396 | | | | 122 | | | | 4,654 | | | | 2 | | | | 5,174 | | | | 200 | | | | 5,374 | | | | (613 | ) | | | 4,761 | |
Fairforest Bldg. 3 | | | 0 | | | | 608 | | | | 231 | | | | 4,695 | | | | 14 | | | | 5,548 | | | | 0 | | | | 5,548 | | | | (591 | ) | | | 4,957 | |
Fairforest Bldg. 4 | | | 0 | | | | 661 | | | | 331 | | | | 4,566 | | | | 10 | | | | 5,568 | | | | 88 | | | | 5,656 | | | | (601 | ) | | | 5,055 | |
Highway 290 Commerce Pk. Bldg. 1 | | | 0 | | | | 704 | | | | 219 | | | | 4,347 | | | | 8 | | | | 5,278 | | | | 0 | | | | 5,278 | | | | (544 | ) | | | 4,734 | |
Highway 290 Commerce Pk. Bldg. 2 | | | 0 | | | | 1,131 | | | | 363 | | | | 3,008 | | | | 24 | | | | 4,526 | | | | 0 | | | | 4,526 | | | | (444 | ) | | | 4,082 | |
Highway 290 Commerce Pk. Bldg. 5 | | | 0 | | | | 421 | | | | 162 | | | | 800 | | | | 4 | | | | 1,387 | | | | 103 | | | | 1,490 | | | | (141 | ) | | | 1,349 | |
F-58
Schedule III—Properties and Accumulated Depreciation Through December 31, 2012 (in Thousands)—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Acquisition Costs | | | Improvements
Subsequent
to Purchase
Date | | | Total
Cost | | | Accumulated
Depreciation
and Amortization | | | Net
Investments
in Real
Estate | |
Property | | Encumbrances
Net | | | Land | | | Site
Improve-
ments | | | Building
and
Improve-
ments | | | Tenant
Improve-
ments | | | Total | | | | | |
Highway 290 Commerce Pk. Bldg. 6 | | | 0 | | | | 572 | | | | 176 | | | | 3,012 | | | | 0 | | | | 3,760 | | | | 554 | | | | 4,314 | | | | (395 | ) | | | 3,919 | |
Highway 290 Commerce Pk. Bldg. 7 | | | 0 | | | | 1,233 | | | | 510 | | | | 2,949 | | | | 1 | | | | 4,693 | | | | 361 | | | | 5,054 | | | | (500 | ) | | | 4,554 | |
Orchard Business Park 2 | | | 0 | | | | 173 | | | | 62 | | | | 526 | | | | 0 | | | | 761 | | | | 35 | | | | 796 | | | | (106 | ) | | | 690 | |
Greenville/Spartanburg Ind. Pk. | | | 0 | | | | 460 | | | | 200 | | | | 2,584 | | | | 2 | | | | 3,246 | | | | 240 | | | | 3,486 | | | | (396 | ) | | | 3,090 | |
Community Cash Complex 1 | | | 0 | | | | 867 | | | | 175 | | | | 1,622 | | | | 0 | | | | 2,664 | | | | 411 | | | | 3,075 | | | | (615 | ) | | | 2,460 | |
Community Cash Complex 2 | | | 0 | | | | 887 | | | | 136 | | | | 1,169 | | | | 3 | | | | 2,195 | | | | 0 | | | | 2,195 | | | | 0 | | | | 2,195 | |
Community Cash Complex 3 | | | 0 | | | | 205 | | | | 16 | | | | 1,190 | | | | 22 | | | | 1,433 | | | | 22 | | | | 1,455 | | | | (17 8 | ) | | | 1,277 | |
Community Cash Complex 4 | | | 0 | | | | 132 | | | | 15 | | | | 399 | | | | 0 | | | | 546 | | | | 0 | | | | 546 | | | | 0 | | | | 546 | |
Community Cash Complex 5 | | | 0 | | | | 138 | | | | 15 | | | | 671 | | | | 0 | | | | 824 | | | | 0 | | | | 824 | | | | 0 | | | | 824 | |
Avion Midrise III & IV | | | 20,103 | | | | 6,810 | | | | 1,179 | | | | 30,004 | | | | 1,105 | | | | 39,098 | | | | 201 | | | | 39,299 | | | | (4,585 | ) | | | 34,714 | |
Maskew Retail Park | | | 22,698 | | | | 17,260 | | | | 1,112 | | | | 27,925 | | | | 0 | | | | 46,297 | | | | 87 | | | | 46,384 | | | | (3,302 | ) | | | 43,082 | |
13201 Wilfred Lane | | | 0 | | | | 2,274 | | | | 412 | | | | 11,049 | | | | 129 | | | | 13,864 | | | | 0 | | | | 13,864 | | | | (1,138 | ) | | | 12,726 | |
3011, 3055 & 3077 Comcast Place | | | 0 | | | | 7,013 | | | | 998 | | | | 21,858 | | | | 7,739 | | | | 37,608 | | | | 0 | | | | 37,608 | | | | (4,009 | ) | | | 33,599 | |
140 Depot Street | | | 0 | | | | 3,560 | | | | 1,172 | | | | 11,898 | | | | 158 | | | | 16,788 | | | | 0 | | | | 16,788 | | | | (1,363 | ) | | | 15,425 | |
12650 Ingenuity Drive | | | 11,918 | | | | 3,520 | | | | 397 | | | | 13,330 | | | | 1,517 | | | | 18,764 | | | | 152 | | | | 18,764 | | | | (1,677 | ) | | | 17,239 | |
Crest Ridge Corporate Center I | | | 0 | | | | 4,624 | | | | 335 | | | | 16,024 | | | | 3,174 | | | | 24,157 | | | | 28 | | | | 24,157 | | | | (2,503 | ) | | | 21,682 | |
West Point Trade Center | | | 0 | | | | 5,843 | | | | 2,925 | | | | 16,067 | | | | 368 | | | | 25,203 | | | | 1,284 | | | | 26,487 | | | | (2,028 | ) | | | 24,459 | |
5160 Hacienda Drive | | | 0 | | | | 8,100 | | | | 740 | | | | 20,776 | | | | 1,693 | | | | 31,309 | | | | 0 | | | | 31,309 | | | | (1,977 | ) | | | 29,332 | |
10450 Pacific Center Court | | | 0 | | | | 5,000 | | | | 724 | | | | 20,410 | | | | 1,061 | | | | 27,195 | | | | 0 | | | | 27,195 | | | | (1,832 | ) | | | 25,363 | |
225 Summit Avenue | | | 0 | | | | 7,100 | | | | 978 | | | | 25,460 | | | | 2,240 | | | | 35,778 | | | | 0 | | | | 35,778 | | | | (2,333 | ) | | | 33,445 | |
One Wayside Road | | | 25,528 | | | | 7,500 | | | | 517 | | | | 37,870 | | | | 2,442 | | | | 48,329 | | | | 62 | | | | 48,391 | | | | (3,293 | ) | | | 45,098 | |
100 Tice Blvd. | | | 42,751 | | | | 7,300 | | | | 1,048 | | | | 47,114 | | | | 2,231 | | | | 57,693 | | | | 0 | | | | 57,693 | | | | (3,333 | ) | | | 54,360 | |
Ten Parkway North | | | 12,072 | | | | 3,500 | | | | 276 | | | | 15,764 | | | | 1,368 | | | | 20,908 | | | | 12 | | | | 20,920 | | | | (1,193 | ) | | | 19,727 | |
Pacific Corporate Park | | | 0 | | | | 21,128 | | | | 47,023 | | | | 46,992 | | | | 14,810 | | | | 129,953 | | | | 0 | | | | 129,953 | | | | (12,498 | ) | | | 117,455 | |
4701 Gold Spike Drive | | | 10,342 | | | | 3,500 | | | | 384 | | | | 14,057 | | | | 95 | | | | 18,036 | | | | 0 | | | | 18,036 | | | | (882 | ) | | | 17,154 | |
1985 International Way | | | 7,186 | | | | 2,200 | | | | 395 | | | | 10,544 | | | | 33 | | | | 13,172 | | | | 0 | | | | 13,172 | | | | (666 | ) | | | 12,506 | |
Summit Distribution Center | | | 6,506 | | | | 2,300 | | | | 548 | | | | 9,122 | | | | 67 | | | | 12,037 | | | | 36 | | | | 12,073 | | | | (645 | ) | | | 11,428 | |
3660 Deerpark Boulevard | | | 7,428 | | | | 2,400 | | | | 438 | | | | 10,036 | | | | 67 | | | | 12,941 | | | | 0 | | | | 12,941 | | | | (660 | ) | | | 12,281 | |
Tolleson Commerce Park II | | | 4,467 | | | | 2,200 | | | | 567 | | | | 4,753 | | | | 62 | | | | 7,582 | | | | 166 | | | | 7,748 | | | | (428 | ) | | | 7,320 | |
100 Kimball Drive | | | 0 | | | | 8,800 | | | | 1,270 | | | | 39,400 | | | | 2,946 | | | | 52,416 | | | | 0 | | | | 52,416 | | | | (2,804 | ) | | | 49,612 | |
70 Hudson Street | | | 120,184 | | | | 55,300 | | | | 8,885 | | | | 56,195 | | | | 3,470 | | | | 123,850 | | | | 0 | | | | 123,850 | | | | (4,606 | ) | | | 119,244 | |
90 Hudson Street | | | 108,665 | | | | 56,400 | | | | 9,968 | | | | 76,909 | | | | 3,198 | | | | 146,475 | | | | 0 | | | | 146,475 | | | | (5,460 | ) | | | 141,015 | |
Millers Ferry Road | | | 0 | | | | 5,835 | | | | 8,755 | | | | 18,412 | | | | 688 | | | | 33,690 | | | | 0 | | | | 33,690 | | | | (1,694 | ) | | | 31,996 | |
Sky Harbor Operations Center | | | 0 | | | | 0 | | | | 20,848 | | | | 19,677 | | | | 4,565 | | | | 45,090 | | | | 0 | | | | 45,090 | | | | (2,753 | ) | | | 42,337 | |
Aurora Commerce Center Bldg. C | | | 0 | | | | 2,600 | | | | 1,125 | | | | 17,467 | | | | 254 | | | | 21,446 | | | | 0 | | | | 21,446 | | | | (607 | ) | | | 20,839 | |
Sabal Pavilion | | | 14,970 | | | | 3,900 | | | | 1,393 | | | | 10,735 | | | | 1,657 | | | | 17,685 | | | | 0 | | | | 17,685 | | | | (547 | ) | | | 17,138 | |
F-59
Schedule III—Properties and Accumulated Depreciation Through December 31, 2012 (in Thousands)—(Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Acquisition Costs | | | Improvements
Subsequent
to Purchase
Date | | | Total Cost | | | Accumulated
Depreciation
and Amortization | | | Net
Investments
in Real
Estate | |
Property | | Encumbrances
Net | | | Land | | | Site
Improve-
ments | | | Building
and
Improve-
ments | | | Tenant
Improve-
ments | | | Total | | | | | |
1400 Atwater Drive | | | 0 | | | | 6,847 | | | | 0 | | | | 0 | | | | 0 | | | | 6,847 | | | | 65,895 | | | | 72,742 | | | | 0 | | | | 72,742 | |
2400 Dralle Road | | | 0 | | | | 11,706 | | | | 4,732 | | | | 38,175 | | | | 912 | | | | 55,525 | | | | 0 | | | | 55,525 | | | | (1,042 | ) | | | 54,483 | |
Midwest Commerce Center I | | | 0 | | | | 6,665 | | | | 10,517 | | | | 36,170 | | | | 597 | | | | 53,949 | | | | 0 | | | | 53,949 | | | | (561 | ) | | | 53,388 | |
20000 S Diamond Lake Road | | | 0 | | | | 1,976 | | | | 884 | | | | 12,041 | | | | 55 | | | | 14,956 | | | | 0 | | | | 14,956 | | | | (32 | ) | | | 14,924 | |
Gateway at Riverside | | | 0 | | | | 6,940 | | | | 6,597 | | | | 26,919 | | | | 476 | | | | 40,932 | | | | 0 | | | | 40,932 | | | | (97 | ) | | | 40,835 | |
Gateway II at Riverside | | | 0 | | | | 2,318 | | | | 253 | | | | 0 | | | | 0 | | | | 2,571 | | | | 0 | | | | 2,571 | | | | (1 | ) | | | 2,570 | |
701 & 801 Charles Ewing Blvd | | | 0 | | | | 2,376 | | | | 3,832 | | | | 14,306 | | | | 2,268 | | | | 22,782 | | | | 0 | | | | 22,782 | | | | 0 | | | | 20,460 | |
Mid-Atlantic Distribution Center – Bldg. A | | | 0 | | | | 7,033 | | | | 3,578 | | | | 24,780 | | | | 385 | | | | 35,776 | | | | 0 | | | | 35,776 | | | | 0 | | | | 35,776 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 502,231 | | | $ | 385,551 | | | $ | 179,254 | | | $ | 1,085,928 | | | $ | 73,029 | | | $ | 1,723,762 | | | $ | 81,123 | | | $ | 1,804,885 | | | $ | (132,129 | ) | | $ | 1,672,756 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-60
CHAMBERS STREET PROPERTIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Years Ended December 31, 2012, 2011 and 2010
Investments in real estate (in thousands):
| | | | | | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Balance, beginning of the year | | $ | 1,514,633 | | | $ | 1,107,185 | | | $ | 671,131 | |
Acquisitions | | | 230,919 | | | | 387,159 | | | | 466,554 | |
Disposition | | | (3,715 | ) | | | (1,375 | ) | | | 0 | |
Improvements | | | 2,688 | | | | 9,282 | | | | 1,726 | |
Improvements—Variable Interest Entity(1) | | | 60,360 | | | | 12,382 | | | | 0 | |
Transfers to joint ventures | | | 0 | | | | 0 | | | | (32,226 | ) |
| | | | | | | | | | | | |
Balance, end of the year(1) | | $ | 1,804,885 | | | $ | 1,514,633 | | | $ | 1,107,185 | |
| | | | | | | | | | | | |
| (1) | Includes $71,945,000 of costs associated with the development of Atwater presented on our consolidated Balance Sheet as Construction in Progress and Other Assets—Variable Interest Entity. |
Accumulated depreciation related to investments in real estate (in thousands):
| | | | | | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
Balance, beginning of year | | $ | (88,084 | ) | | $ | (51,292 | ) | | $ | (31,558 | ) |
Additions | | | (44,045 | ) | | | (36,792 | ) | | | (19,958 | ) |
Transfers to joint ventures | | | 0 | | | | 0 | | | | 224 | |
| | | | | | | | | | | | |
Balance, end of the year | | $ | (132,129 | ) | | $ | (88,084 | ) | | $ | (51,292 | ) |
| | | | | | | | | | | | |
The aggregate gross cost of our investments in real estate for U.S. Federal income tax purposes approximated $2,006,395,000, $1,735,379,000, and $1,271,465,000 as of December 31, 2012, 2011 and 2010, respectively.
F-61
Independent Auditors’ Report
The Members
Duke/Hulfish, LLC:
We have audited the accompanying consolidated financial statements of Duke/Hulfish, LLC and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income, members’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and the related notes to the consolidated financial statements. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedule III.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and 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 consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Duke/Hulfish, LLC and its subsidiaries as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the each of the years in the three-year period ended December 31, 2012 in accordance with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule III, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Indianapolis, Indiana
March 1, 2013
F-62
DUKE/HULFISH, LLC AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2012 and 2011
| | | | | | | | |
| | | 2012 | | | 2011 | |
Assets | | | | | | | | |
Land and land improvements | | $ | 153,208,129 | | | $ | 153,163,882 | |
Buildings | | | 607,797,689 | | | | 606,078,293 | |
Tenant improvements | | | 107,614,087 | | | | 105,284,950 | |
Construction in progress | | | 314,717 | | | | 80,368 | |
| | | | | | | | |
| | | 868,934,622 | | | | 864,607,493 | |
Accumulated depreciation | | | (90,746,593 | ) | | | (56,648,116 | ) |
| | | | | | | | |
Net investment property | | | 778,188,029 | | | | 807,959,377 | |
Cash and cash equivalents | | | 10,086,442 | | | | 7,052,382 | |
Accounts receivable, net of allowance for doubtful accounts of $50,415 and $0, respectively | | | 4,413,581 | | | | 3,637,425 | |
Accrued straight line rent | | | 14,447,319 | | | | 10,089,322 | |
Deferred financing fees, net of accumulated amortization of $2,007,612 and $1,125,722, respectively | | | 3,743,326 | | | | 4,619,181 | |
Intangible lease assets and deferred leasing costs, net of accumulated amortization of $57,666,583 and $30,515,451, respectively | | | 111,109,204 | | | | 136,581,193 | |
Prepaid insurance and other assets | | | 2,772,186 | | | | 1,728,867 | |
| | | | | | | | |
| | $ | 924,760,087 | | | $ | 971,667,747 | |
| | | | | | | | |
Liabilities and Members’ Equity | | | | | | | | |
Mortgage notes payable | | $ | 472,370,094 | | | $ | 478,482,275 | |
Accounts payable and accrued expenses | | | 2,946,535 | | | | 3,518,379 | |
Accrued real estate taxes | | | 12,231,568 | | | | 10,750,548 | |
Accrued interest | | | 1,954,350 | | | | 1,990,573 | |
Construction payables | | | — | | | | 299,611 | |
Prepaid rent and security deposits | | | 4,083,565 | | | | 5,150,594 | |
Other liabilities | | | 2,962,609 | | | | 2,609,467 | |
| | | | | | | | |
Total liabilities | | | 496,548,721 | | | | 502,801,447 | |
Members’ equity | | | 428,211,366 | | | | 468,866,300 | |
| | | | | | | | |
| | $ | 924,760,087 | | | $ | 971,667,747 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements.
F-63
DUKE/HULFISH, LLC AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
Years ended December 31, 2012, 2011, and 2010
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
Revenues: | | | | | | | | | | | | |
Contractual rental income | | $ | 120,936,869 | | | $ | 107,342,521 | | | $ | 45,028,210 | |
Straight-line rental income | | | 4,396,322 | | | | 3,908,194 | | | | 2,565,586 | |
| | | | | | | | | | | | |
| | | 125,333,191 | | | | 111,250,715 | | | | 47,593,796 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Rental expenses | | | 19,610,677 | | | | 16,353,233 | | | | 3,743,153 | |
Property management fees | | | 3,382,268 | | | | 2,960,742 | | | | 1,020,105 | |
Real estate taxes | | | 17,296,904 | | | | 13,791,235 | | | | 5,142,214 | |
Depreciation and amortization | | | 59,662,540 | | | | 50,935,468 | | | | 18,892,655 | |
| | | | | | | | | | | | |
| | | 99,952,389 | | | | 84,040,678 | | | | 28,798,127 | |
| | | | | | | | | | | | |
Income from rental operations | | | 25,380,802 | | | | 27,210,037 | | | | 18,795,669 | |
General and administrative expenses | | | 1,829,959 | | | | 2,559,835 | | | | 778,291 | |
| | | | | | | | | | | | |
Operating income | | | 23,550,843 | | | | 24,650,202 | | | | 18,017,378 | |
Other income (expenses): | | | | | | | | | | | | |
Interest expense | | | (24,551,469 | ) | | | (21,424,026 | ) | | | (8,893,400 | ) |
Interest and other income | | | 17,930 | | | | 31,900 | | | | 1,693 | |
| | | | | | | | | | | | |
Net (loss) income | | | (982,696 | ) | | | 3,258,076 | | | | 9,125,671 | |
Comprehensive (loss) income: | | | | | | | | | | | | |
Derivative instrument activity | | | (814,838 | ) | | | (952,817 | ) | | | — | |
| | | | | | | | | | | | |
Comprehensive (loss) income | | $ | (1,797,534 | ) | | $ | 2,305,259 | | | $ | 9,125,671 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-64
DUKE/HULFISH, LLC AND SUBSIDIARIES
Consolidated Statements of Members’ Equity
Years ended December 31, 2012, 2011, and 2010
| | | | | | | | | | | | |
| | | CSP Operating
Partnership, LP | | | Duke Realty
Limited
Partnership | | | Total | |
Members’ equity—December 31, 2009 | | $ | 182,181,657 | | | $ | 45,248,296 | | | $ | 227,429,953 | |
Capital contributions | | | 219,572,078 | | | | 52,774,140 | | | | 272,346,218 | |
Capital distributions | | | (104,723,849 | ) | | | (24,062,083 | ) | | | (128,785,932 | ) |
Net income | | | 7,062,843 | | | | 2,062,828 | | | | 9,125,671 | |
| | | | | | | | | | | | |
Members’ equity—December 31, 2010 | | | 304,092,729 | | | | 76,023,181 | | | | 380,115,910 | |
Capital contributions | | | 111,480,201 | | | | 27,870,050 | | | | 139,350,251 | |
Capital distributions | | | (42,324,096 | ) | | | (10,581,024 | ) | | | (52,905,120 | ) |
Net income | | | 2,606,461 | | | | 651,615 | | | | 3,258,076 | |
Other comprehensive loss | | | (762,254 | ) | | | (190,563 | ) | | | (952,817 | ) |
| | | | | | | | | | | | |
Members’ equity—December 31, 2011 | | | 375,093,041 | | | | 93,773,259 | | | | 468,866,300 | |
Capital contributions | | | 1,691,094 | | | | 422,773 | | | | 2,113,867 | |
Capital distributions | | | (32,777,014 | ) | | | (8,194,253 | ) | | | (40,971,267 | ) |
Net loss | | | (786,157 | ) | | | (196,539 | ) | | | (982,696 | ) |
Other comprehensive loss | | | (651,870 | ) | | | (162,968 | ) | | | (814,838 | ) |
| | | | | | | | | | | | |
Members’ equity—December 31, 2012 | | $ | 342,569,094 | | | $ | 85,642,272 | | | $ | 428,211,366 | |
| | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-65
DUKE/HULFISH, LLC AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2012, 2011, and 2010
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net (loss) income | | $ | (982,696 | ) | | $ | 3,258,076 | | | $ | 9,125,671 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 61,481,758 | | | | 52,679,662 | | | | 19,175,380 | |
Amortization of deferred financing fees | | | 881,890 | | | | 2,494,664 | | | | 232,581 | |
Straight-line rent adjustment | | | (4,405,592 | ) | | | (3,908,194 | ) | | | (2,565,586 | ) |
Accounts receivable, net | | | (815,750 | ) | | | (795,667 | ) | | | (1,256,869 | ) |
Prepaid insurance and other assets | | | (1,043,319 | ) | | | (1,098,555 | ) | | | (178,485 | ) |
Accounts payable, accrued expenses, and other liabilities | | | (1,006,226 | ) | | | 3,827,825 | | | | 907,759 | |
Accrued real estate taxes | | | 1,382,497 | | | | 1,009,562 | | | | 400,058 | |
Accrued interest | | | (36,223 | ) | | | 967,240 | | | | 325,833 | |
Prepaid rent and security deposits | | | (1,067,029 | ) | | | 2,708,184 | | | | 705,543 | |
| | | | | | | | | | | | |
Net cash provided by operating activities | | | 54,389,310 | | | | 61,142,797 | | | | 26,871,885 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Acquisition of real estate assets | | | — | | | | (341,297,178 | ) | | | (208,056,574 | ) |
Development of real estate assets, net of amounts accrued as of year-end | | | (871,267 | ) | | | (27,968,510 | ) | | | (11,595,022 | ) |
Recurring building improvements | | | (464,899 | ) | | | (829,338 | ) | | | (29,587 | ) |
Recurring leasing and tenant improvement costs | | | (5,043,468 | ) | | | (4,960,786 | ) | | | (759,949 | ) |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (6,379,634 | ) | | | (375,055,812 | ) | | | (220,441,132 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Loan acquisition costs | | | (6,035 | ) | | | (5,003,078 | ) | | | (1,515,333 | ) |
Proceeds from mortgage borrowings | | | — | | | | 239,075,000 | | | | 92,000,000 | |
Proceeds from unsecured debt borrowings | | | — | | | | 275,000,000 | | | | — | |
Repayment of unsecured debt borrowings | | | — | | | | (275,000,000 | ) | | | — | |
Repayment of mortgage borrowings | | | (6,112,181 | ) | | | (2,592,725 | ) | | | — | |
Contributions from members | | | 1,242,600 | | | | 107,766,769 | | | | 216,668,620 | |
Distributions to members | | | (40,100,000 | ) | | | (21,200,000 | ) | | | (115,485,932 | ) |
| | | | | | | | | | | | |
Net cash (used in) provided by financing activities | | | (44,975,616 | ) | | | 318,045,966 | | | | 191,667,355 | |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 3,034,060 | | | | 4,132,951 | | | | (1,901,892 | ) |
Cash and cash equivalents at beginning of year | | | 7,052,382 | | | | 2,919,431 | | | | 4,821,323 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 10,086,442 | | | $ | 7,052,382 | | | $ | 2,919,431 | |
| | | | | | | | | | | | |
Supplemental cash flow disclosure: | | | | | | | | | | | | |
Cash paid for interest | | $ | 23,637,169 | | | $ | 18,357,521 | | | $ | 8,444,986 | |
Supplemental disclosure of noncash activities: | | | | | | | | | | | | |
Contribution of properties by CBRE Operating | | | | | | | | | | | | |
Partnership, L.P. and related net working capital | | $ | — | | | $ | — | | | $ | 42,377,598 | |
Contribution of properties by Duke Realty Limited | | | | | | | | | | | | |
Partnership and related net working capital | | | — | | | $ | (121,638 | ) | | | — | |
Declared distribution/contribution—Anson and Buckeye Expansions | | $ | 871,267 | | | $ | 31,705,120 | | | $ | 13,300,000 | |
Write-off of fully amortized deferred financing fees | | $ | — | | | $ | 1,849,894 | | | $ | — | |
See accompanying notes to consolidated financial statements.
F-66
DUKE/HULFISH, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
(1) The Company
Duke/Hulfish, LLC (Company) was formed on April 29, 2008 (inception) by Duke Realty Limited Partnership (DRLP) and CBRE Operating Partnership, L.P. (collectively, the Members), to own and manage commercial real estate properties. Effective July 1, 2012 CBRE Operating Partnership, L.P. changed its name to CSP Operating Partnership, LP (CSP) which had no impact on the operating agreement. DRLP’s and CSP’s percentage membership interests in the Company are 20% and 80%, respectively. The term of the Company extends through December 31, 2033 unless the Company is dissolved earlier pursuant to other conditions as defined in the Company’s operating agreement (the Agreement).
On March 31, 2010, the Company acquired three real estate properties from DRLP with a combined agreed value of $35,150,615 including prorations and CSP contributed two real estate properties with a combined agreed value of $42,377,598 including prorations. Cash contributions of $28,125,452 and $15,506,883 were made by CSP and DRLP, respectively, to the Company. A cash distribution of $8,475,518 was made to CSP in order for CSP to maintain an 80% interest in the Company.
On August 24, 2010, the Company acquired 16.2 acres from a joint venture that DRLP had a 50% ownership interest in for an agreed value of $1,458,648 in order to expand a single tenant industrial building located in Indianapolis. The acquisition price is included in the building basis in the accompanying consolidated 2010 balance sheet.
On December 17, 2010, a wholly owned subsidiary of the Company, Duke Princeton, LLC, was formed to acquire directly or indirectly certain office properties. Upon formation, Duke Princeton, LLC entered into a purchase and sale agreement with DRLP and an affiliate of DRLP to acquire certain office properties. The first tranche (Tranche 1) closed on December 21, 2010 and included seven office buildings located in the Midwest, South, and Southeast with a combined gross agreed value of $173,850,000.
The Tranche I properties, consisted of five real estate properties acquired from DRLP with a combined agreed value of $119,981,127 including prorations. Cash contributions of $96,065,493 and $24,016,373 were made by CSP and DRLP, respectively, to the Company. In addition, as part of Tranche I, the Company acquired two real estate properties from an affiliate of DRLP with a combined agreed value of $52,924,832 including prorations. Cash contributions of $42,363,535 and $10,590,884 were made by CSP and DRLP, respectively, to the Company.
The second tranche and third tranche (Tranche 2 and Tranche 3) included thirteen office buildings located in the Midwest and the Southeast and closed on March 24, 2011 for a combined gross agreed value of $342,800,000. As part of Tranche 2 and Tranche 3, the Company acquired eight real estate properties from DRLP with a combined agreed value of $214,838,408 including prorations. Additionally, as part of Tranche 2 and Tranche 3, the Company acquired five real estate properties from an affiliate of DRLP, with a combined agreed value of $126,458,770 including prorations. These acquisitions were funded by unsecured credit facility net borrowings of $273,310,328 (note 5) and cash contributions of $54,389,480 and $13,597,370 made by CSP and DRLP, respectively, to the Company.
On May 2, 2011, the Company acquired 17.56 acres from DRLP with an agreed value of $4,326,743 in order to expand a single tenant industrial building located in Phoenix. The acquisition price is included in the land and land improvements in the accompanying consolidated 2011 balance sheet.
On September 16, 2011, the Company acquired 3.82 acres from a joint venture that DRLP had a 50% ownership interest in for an agreed value of $439,300 in order to expand a parking lot at a single tenant industrial building located in Indianapolis. The acquisition price is included in land and land improvements in the accompanying consolidated 2011 balance sheet.
As of December 31, 2012, the Company’s portfolio consisted of eight single tenant industrial buildings, 15 single tenant office buildings, and 14 multi tenant office buildings located in the Midwest, South, Southeast, and Southwest comprising approximately 11 million square feet. The portfolio is 98.08% leased as of December 31, 2012.
F-67
DUKE/HULFISH, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
December 31, 2012 and 2011
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, DH Franklin, LLC, DH Anson, LLC, DH Jacksonville, LLC, DH Plainfield, LLC, DH Wilmer, LLC, DH Buckeye, LLC, DH West Jefferson, LLC, DH Katy, LLC, DH Orlando, LLC, DH Tampa LLC, DH Northpoint III, LLC, DH Goodyear, LLC, DH Research Triangle, LLC and Duke Princeton, LLC.
All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
(b) Real Estate Investments
Rental real property, including land, land improvements, buildings and building improvements, and tenant improvements, is included in investment property and are generally stated at cost. Buildings and land improvements are depreciated on the straight line method over their estimated life not to exceed 40 and 15 years, respectively, and tenant improvement costs are depreciated on the straight line method over the shorter of the useful life of the improvement or the term of the related lease.
Cost Capitalization: Direct and certain indirect costs clearly associated with and incremental to the development, construction, leasing, or expansion of real estate investments are capitalized as a cost of the property.
The Company capitalizes interest and direct and indirect project costs associated with the initial construction of a property up to the time the property is substantially complete and ready for its intended use. The Company believes the completion of the building shell is the proper basis for determining substantial completion. The interest rate used to capitalize interest is based upon the Company’s average borrowing rate on existing debt.
The Company capitalizes direct and indirect costs, including interest costs, on vacant space during extended lease up periods after construction of the building shell has been completed if costs are being incurred to ready the vacant space for its intended use. Once necessary work has been completed on a vacant space, project costs are no longer capitalized. The Company ceases capitalization of all project costs on extended lease up periods after the shorter of a one year period after the completion of the building shell or when the property attains 90% occupancy. In addition, all leasing commissions paid to third parties for new leases or lease renewals are capitalized and amortized over the life of the related lease.
Impairment of Real Estate: Real estate investments are individually evaluated for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If such an evaluation is considered necessary, the Company compares the carrying amount of that real estate investment with the expected undiscounted cash flows that are directly associated with, and that are expected to arise as a direct result of, the use and eventual disposition of that real estate investment. The Company’s estimate of the expected future cash flows used in testing for impairment is based on, among other things, estimates regarding future market conditions, rental rates, occupancy levels, costs of tenant improvements, leasing commissions and other tenant concessions, assumptions regarding the residual value of the real estate investments at the end of the anticipated holding period, and the length of the anticipated holding period and is, therefore, subjective by nature. These assumptions could differ materially from actual results. If the Company’s strategy changes or if market conditions otherwise dictate a reduction in the holding period and an earlier sale date, an impairment loss could be recognized and such loss could be material. To the extent the carrying amount of a real estate investment exceeds the associated estimate of undiscounted cash flows, an impairment loss is recorded to reduce the carrying value of the asset to its fair value. No impairments were recorded in any of the periods presented.
The determination of the fair value of real estate investments is also highly subjective, especially in markets where there is a lack of recent comparable transactions. The Company primarily utilizes the income approach to estimate the fair value, when necessary, of the income producing properties. The Company utilizes marketplace participant assumptions to estimate the fair value of an income producing property to the extent an impairment charge is required to be measured. The estimation of future cash flows, as well as the selection of the discount rate and exit capitalization rate used in applying the income approach is also highly subjective.
Acquisition of Real Estate Property and Related Assets: Acquisition costs amounted to $0, $935,575, and $136,527 for the years ended December 31, 2012, 2011, and 2010, respectively, are expensed as incurred and included in rental expenses in the accompanying consolidated statements of operations.
F-68
DUKE/HULFISH, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
December 31, 2012 and 2011
The Company allocates the purchase price of acquired properties to net tangible and identified intangible assets based on their respective fair values, using all pertinent information available at the date of acquisition. The allocation to tangible assets (buildings, tenant improvements, and land) is based upon management’s determination of the value of the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon internally determined assumptions that the Company believes are consistent with current market conditions for similar properties. The most important assumptions in determining the allocation of the purchase price to tangible assets are the exit capitalization rate, discount rate, estimated market rents, and hypothetical expected lease-up periods. The purchase price of real estate assets is also allocated to intangible assets consisting of the above or below market component of in-place leases and the value of in-place leases.
The value allocable to the above or below market component of an acquired in place lease is determined based upon the present value (using a discount rate that reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be received pursuant to the lease over its remaining term and (ii) management’s estimate of the amounts that would be received using fair market rates over the remaining term of the lease. The amounts allocated to above market leases and below market leases are included in intangible lease assets and other liabilities, respectively, in the consolidated balance sheet and are amortized to rental income over the remaining terms of the respective leases.
Factors considered in determining the value allocable to in-place leases include estimates, during hypothetical expected lease-up periods of space that is actually leased at the time of acquisition, of lost rent at market rates, fixed operating costs that will be recovered from tenants, and theoretical leasing commissions required to execute similar leases. These intangible assets are included in intangible lease assets in the consolidated balance sheet and are amortized to depreciation and amortization over the remaining term of the existing lease.
(c) Cash Equivalents
Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents.
(d) Valuation of Receivables
The Company reserves the entire receivable balance, including straight line rent, of any tenant with an amount outstanding over 90 days. Additional reserves are recorded as necessary for more current amounts, where collectibility is deemed doubtful. Straight line rent receivables for any tenant with long term risk, regardless of the status of rent receivables, are reviewed and reserved as necessary.
(e) Deferred Costs
Costs incurred in connection with obtaining financing are amortized to interest expense, over the term of the related loan. All direct and indirect costs, including estimated internal costs, associated with the leasing of real estate investments owned by the Company are capitalized and amortized over the term of the related lease. The Company includes lease incentive costs, which are payments made on behalf of a tenant to sign a lease, in intangible lease assets and amortizes them on a straight line basis over the respective lease terms as a reduction of rental income. The Company includes as lease incentives amounts funded to construct tenant improvements owned by the tenant. Unamortized costs are charged to expense upon the early termination of the lease.
(f) Interest Rate Swap Agreement
Derivative financial instruments contain an element of risk such that counterparties may be unable to meet the terms of such agreements. The Company minimizes its risk exposure by limiting the counterparties to commercial and investment banks, which meet established credit and capital guidelines.
The Company entered into three interest rate swap agreements (the Swaps) to mitigate risk occurring from potential changes in interest rates relating to three mortgage notes originated in 2011 (note 5). The objective for holding such a derivative is to decrease the Company’s exposure to cash flow volatility, while maintaining liquidity and flexibility.
The Swaps became effective as of August 16, 2011 (the Effective Date) and expire on December 6, 2016, May 31, 2018 and January 31, 2019, respectively. The Swaps provide interest rate protection against the increase of one month LIBOR above 2.00% starting on the Effective Date. The three Swaps provide for notional amounts of balances of $11,366,000, $23,452,000, and $6,652,000 and effectively fixed the variable rate mortgage notes (note 5) to provide for a fixed interest rate of 3.41%, 3.78%, and 3.95%, respectively, starting on the Effective Date.
F-69
DUKE/HULFISH, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
December 31, 2012 and 2011
As of December 31, 2012 and 2011, the fair value of the Swaps was a liability of $1,767,655 and $952,817, respectively, and is included in other liabilities in the accompanying consolidated balance sheets. As of December 31, 2012 and 2011, the Company’s Swaps qualified for hedge accounting under FASB ASC 815, Derivatives and Hedging. Accordingly, for the years ended December 31, 2012 and 2011, the change in the fair value of the Swaps of $814,838 and $952,817, respectively, was recorded as a component of other comprehensive income. The effectiveness of the Swaps is evaluated throughout their life using the hypothetical derivative method, under which the change in the Swaps’ fair value are compared to the change in the fair value of a hypothetical swap. The ineffective portion of the hedge was insignificant for each period impacted; however, if it was significant, the ineffectiveness would be recorded in interest expense in the accompanying consolidated statements of operations.
The Company has valued derivative financial instruments using Level 2 inputs (see (i) below). Gains or losses resulting from changes in the value of derivatives are based on the intended use of the derivative and the resulting designation.
(g) Revenues
The timing of revenue recognition under an operating lease is determined based upon ownership of the tenant improvements. If the Company is the owner of the tenant improvements, revenue recognition commences after the improvements are completed and the tenant takes possession or control of the space. In contrast, if the Company determines that the tenant allowances they are funding are lease incentives, then the Company commences revenue recognition when possession or control of the space is turned over to the tenant. Rental income from leases with scheduled rental increases during their terms is recognized on a straight line basis. The Company includes reimbursements of specified operating expenses in rental income.
The Company records lease termination fees when a tenant has executed a definitive termination agreement with the Company and the payment of the termination fee is not subject to any material conditions that must be met or waived before the fee is due to the Company. The Company recognized $36,553, $1,164,464, and $0 in termination fees during 2012, 2011, and 2010, respectively, which are included in contractual rental income in the accompanying consolidated statements of operations.
(h) Income Taxes
The Company is subject to state and local income taxation in Texas, Tennessee, and certain Ohio municipalities. The net deferred tax asset or liability related to temporary differences impacting the Company’s expected state and local income taxation is not material. For the years ended December 31, 2012, 2011, and 2010, the Company recorded current state and local income tax expenses of approximately $247,000, $207,000, and $101,000, respectively, in the accompanying consolidated statements of operations.
Except with respect to the state and local taxation in Texas, Tennessee, and Ohio municipalities, for federal and state income tax purposes, the Company is treated as a partnership and the allocated share of income or loss for the year is included in the income tax returns of the members accordingly, no other accounting for income taxes is required in the accompanying consolidated financial statements.
The Company accounts for uncertain tax positions in accordance with FASB ASC 740 10, Income Taxes, which prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FASB ASC 740 10 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting for interim periods, and disclosures for uncertain tax positions. The tax years from 2009 through 2012 remain open to examination by the taxing jurisdictions to which the Company is subject. As of December 31, 2012 and 2011, the Company recorded a liability for unrecognized tax benefits, a portion of which represents penalties and interest, of $79,000 and $0, respectively,
(i) Fair Value Measurements
Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
| | ¡ | | Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities to which the Company has access. |
F-70
DUKE/HULFISH, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
December 31, 2012 and 2011
| | ¡ | | 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 and yield curves that are observable at commonly quoted intervals. |
| | ¡ | | Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. |
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The fair value approximates the carrying value for all financial instruments except for indebtedness (note 5).
(j) Use of Estimates
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and the 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.
(k) Recent Accounting Pronouncements
In January 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). The amendments in this update require an entity to provide information about the amounts reclassified from accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the income statement or in the notes, significant amounts reclassified from accumulated other comprehensive income by the net income line item. We do not expect the adoption of ASU 2013-02 on January 1, 2013 to have an impact on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We have elected the single continuous statement approach, and the required financial statements are presented herein.
(3) Property Contributions and Acquisitions
During 2011, the Company acquired eight real estate properties from DRLP and five real estate properties from an affiliate of DRLP. The acquisitions were financed through cash contributions and unsecured credit facility borrowings. During 2010, CSP contributed two real estate properties to the Company. During 2010, the Company acquired eight real estate properties from DRLP. During 2010, the Company acquired two real estate properties from an affiliate of DRLP. The 2010 contributions and acquisitions were financed through cash contributions. The assets contributed and acquired were recorded at their agreed-upon value at the date of contribution or acquisition, as summarized below:
| | | | | | | | |
| | | 2011 | | | 2010 | |
Land and land improvements | | $ | 42,177,037 | | | | 32,611,510 | |
Buildings | | | 206,551,732 | | | | 140,826,903 | |
Tenant improvements | | | 24,907,271 | | | | 23,772,873 | |
Intangible lease assets | | | 74,532,904 | | | | 55,401,043 | |
| | | | | | | | |
Total assets acquired | | | 348,168,944 | | | | 252,612,329 | |
Intangible lease liabilities | | | (149,399 | ) | | | (198,494 | ) |
Net working capital assumed | | | (6,722,367 | ) | | | (1,979,663 | ) |
| | | | | | | | |
Purchase price, net of assumed working capital | | $ | 341,297,178 | | | | 250,434,172 | |
| | | | | | | | |
F-71
DUKE/HULFISH, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
December 31, 2012 and 2011
The allocation to tangible assets (buildings, tenant improvements, and land and land improvements) is based upon management’s determination of the value of the property as if it were vacant using discounted cash flow models similar to those used by independent appraisers. Factors considered by management include an estimate of carrying costs during the expected lease up periods considering current market conditions, and costs to execute similar leases. The Company’s valuation estimates primarily relied upon Level 3 inputs, as previously defined.
The total amount of intangible assets is allocated to in place lease values based upon management’s assessment of their respective values. The Company’s valuation estimates primarily relied upon Level 3 inputs, as previously defined. In place lease intangible assets are amortized over the remaining life of the related leases, which is approximately five years. Amortization expense for in place lease intangible assets was $24,924,650, $21,115,031 and $4,307,186 for the years ended December 31, 2012, 2011 and 2010, respectively. Estimated amortization expense for the next five years and thereafter is as follows:
| | | | |
Year: | | | | |
2013 | | $ | 24,552,247 | |
2014 | | | 19,622,144 | |
2015 | | | 17,113,605 | |
2016 | | | 12,535,093 | |
2017 | | | 9,094,667 | |
Thereafter | | | 13,774,006 | |
| | | | |
| | $ | 96,691,762 | |
| | | | |
The value allocable to the above or below market component of an acquired in place lease is determined based upon the present value (using an interest rate that reflects the risks associated with the lease) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term and (ii) management’s estimate of the amounts that would be paid using current fair market rates over the remaining term of the lease. The Company’s valuation estimates primarily relied upon Level 3 inputs, as previously defined. Above and below market lease intangibles are amortized over the remaining life of the related leases, which is approximately six years. Net amortization expense of $1,798,959, $1,734,256, and $282,725 is included as a reduction to rental income in the accompanying 2012, 2011, and 2010 consolidated statements of operations, respectively. Estimated net amortization expense for the next five years and thereafter is as follows:
| | | | |
Year: | | | | |
2013 | | $ | 1,441,673 | |
2014 | | | 1,258,721 | |
2015 | | | 1,239,448 | |
2016 | | | 1,148,190 | |
2017 | | | 812,698 | |
Thereafter | | | 2,652,660 | |
| | | | |
| | $ | 8,553,390 | |
| | | | |
The results of operations for the acquired properties have been included in operating income in the accompanying consolidated statements of operations since the date of contribution or acquisition.
Fair Value Measurements
The fair value estimates used in allocating the aggregate purchase price of each acquisition and contribution among the individual components of real estate assets and liabilities were determined primarily through calculating the “as if vacant” value of each building, using the income approach, and relied significantly upon internally determined assumptions. The Company determined these estimates to have been primarily based upon Level 3 inputs, which are unobservable inputs based on the Company’s assumptions. The most significant assumptions utilized in these estimates, for 2011 acquisitions, are summarized as follows:
| | | | |
Discount rate | | | 9.70% –10.20 | % |
Capitalization rate | | | 6.85% –10.80 | % |
Lease-up period | | | 18 months | |
Net rental rate per square foot | | $ | 10.25 – 34.50 | |
F-72
DUKE/HULFISH, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
December 31, 2012 and 2011
(4) Related Party Transactions
The following summarizes the significant arrangements with entities affiliated with DRLP that provide services to the Company:
| | ¡ | | Management and accounting services are provided for a fee equal to the greater of (1) 2% of the base rent under each lease or (2) the amount of property management fees recoverable from a tenant as additional rent under its lease, as defined. Other professional services are provided for a fee at established hourly rates. These fees amounted to $3,568,760, $3,139,169, and $1,020,105 for the years ended December 31, 2012, 2011, and 2010, respectively, and are included in property management fees and general and administrative expenses in the accompanying consolidated statements of operations. |
| | ¡ | | Maintenance services are provided for a fee based on established hourly rates, which amounted to $2,025,740, $1,556,224, and $252,923 for the years ended December 31, 2012, 2011, and 2010, respectively, and are included in rental expenses in the accompanying consolidated statements of operations. |
| | ¡ | | Administration is provided for a fee equal to 15 basis points (0.15%) per annum of the stated value of the properties owned by the Company or its subsidiaries. These fees amounted to $1,540,769, $1,373,170, and $681,603 for the years ended December 31, 2012, 2011, and 2010, respectively, and are included in general and administrative expenses in the accompanying consolidated statements of operations. |
| | ¡ | | Pursuant to the management agreement, DRLP obtains insurance from an affiliate on behalf of the Company. Amounts incurred for insurance premiums were $2,198,653, $2,014,078, and $858,759 for the years ended December 31, 2012, 2011, and 2010, respectively, and are included in rental expenses in the accompanying consolidated statements of operations. |
| | ¡ | | Leasing costs are provided for a fee by an affiliate of DRLP based on the gross lease value of new leases. These fees amounted to $694,310, $1,187,561, and $297,591 for the years ended December 31, 2012, 2011, and 2010, respectively and are capitalized into deferred leasing costs in the accompanying consolidated balance sheets. |
| | ¡ | | Construction management services for tenant improvement costs and expansion projects are provided for a fee of 10% of hard costs, which amounted to $630,110, $1,538,224, and $1,048,442 in 2012, 2011, and 2010, respectively, and are capitalized into net investment property in the accompanying consolidated balance sheets. |
| | ¡ | | Development services are provided for a fee of 4% of defined project costs, which amounted to $0, $624,619, and $461,314 in 2012, 2011, and 2010, respectively, and are capitalized into net investment property in the accompanying consolidated balance sheets. |
| | ¡ | | A payable of $675,507 and $266,433 for operating expenses and administration fees due to DRLP or its affiliates is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets as of December 31, 2012 and 2011, respectively. |
(5) Indebtedness
In 2008, the Company entered into seven mortgage notes with 40/86 Mortgage Capital, Inc. (40/86) totaling $150,000,000, which are secured by seven properties contributed in 2008. These mortgage notes bear interest at a fixed rate of 5.58% per annum and provide for monthly interest only payments through October 1, 2013 ($99,200,000) and January 1, 2014, ($50,800,000) at which time all remaining unpaid interest and principal are due.
On November 24, 2010, the Company entered into eight mortgage notes with MetLife totaling $92,000,000. These mortgage notes bear interest at a fixed rate of 4.25% per annum and provide for monthly interest and principal payments based on a 30 year amortization period through December 1, 2015, at which time all remaining unpaid interest and principal are due. These mortgage notes are secured by nine properties acquired or contributed during 2009 and 2010.
On March 24, 2011, the Company entered into a six month unsecured credit facility (The Facility) with Wells Fargo for $275,000,000. The Facility required interest only payments of LIBOR plus 2.5%. On March 24, 2011, the Company borrowed $275,000,000 to fund the acquisition of the Tranche 2 and Tranche 3 properties discussed in note 1. The Facility was paid off in connection with the mortgage note borrowings discussed below, as well as cash contributions from CSP and DRLP of $31,200,000 and $7,800,000, respectively.
F-73
DUKE/HULFISH, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
December 31, 2012 and 2011
On August 8, 2011, the Company entered into two mortgage notes with Woodman of the World Life Insurance Society totaling $14,425,000. These mortgage notes bear interest at a fixed rate of 5% per annum and provide for monthly interest and principal payments based on a 25 year amortization period through September 1, 2021, at which time all remaining unpaid interest and principal are due. These notes are secured by one property that was contributed in 2008 and one property that was acquired during 2011.
On August 16, 2011, the Company entered into a loan agreement for three notes with Wells Fargo Bank National Association (Wells Fargo) totaling $43,400,000. One mortgage note totals $24,700,000 and bears interest at LIBOR plus 2% per annum, which was effectively fixed at 3.78% through an interest rate swap agreement (note 2), and provides for monthly interest and principal payments based on a 20 year amortization period through May 31, 2018, at which time all remaining unpaid interest and principal are due. This mortgage note was secured by one property acquired during 2011. A second mortgage note totals $11,800,000 and bears interest at LIBOR plus 2% per annum, which was effectively fixed at 3.41% through an interest rate swap agreement (note 2), and provides for monthly interest and principal payments based on a 25 year amortization period through December 6, 2016, at which time all remaining unpaid interest and principal are due. This mortgage note was secured by one property acquired during 2010. A third mortgage note totals $6,900,000 and bears interest at LIBOR plus 2% per annum, which was effectively fixed at 3.95% through an interest rate swap agreement (note 2), and provides for monthly interest and principal payments based on a 25 year amortization period through January 31, 2019, at which time all remaining unpaid interest and principal are due. This mortgage note was secured by one property acquired during 2010.
On August 25, 2011, the Company entered into two mortgage notes with Principal Life Insurance Company totaling $25,000,000. One mortgage note totals $11,000,000 and bears interest at a fixed rate of 4.42% per annum and provides for monthly interest and principal payments based on a 30 year amortization period through September 1, 2021, at which time all remaining unpaid interest and principal are due. A second mortgage note totals $14,000,000 and bears interest at a fixed rate of 3.98% per annum and provides for monthly interest and principal payments based on a 25 year amortization period through September 1, 2018, at which time all remaining unpaid interest and principal are due. These notes are secured by two properties acquired during 2010.
On September 12, 2011, the Company entered into five mortgage notes with John Hancock Life Insurance Company totaling $156,250,000. These mortgage notes bear interest at a fixed rate of 5.24% per annum and provide for monthly interest and principal payments based on a 30 year amortization period through October 1, 2021, at which time all remaining unpaid interest and principal are due. These mortgage notes are secured by eleven properties acquired during 2011 and 2010.
Each member has confirmed to the Company that it will provide its respective pro-rata share of financial support necessary to satisfy the Company’s debt service requirements as they come due until at least January 1, 2014. The Company is in compliance with the terms of all of the mortgage notes at December 31, 2012 and 2011.
At December 31, 2012, the future minimum principal payments of mortgage notes payable are as follows:
| | | | |
Year: | | | | |
2013 | | $ | 105,539,104 | |
2014 | | | 57,377,194 | |
2015 | | | 90,370,088 | |
2016 | | | 15,237,225 | |
2017 | | | 5,038,362 | |
Thereafter | | | 198,808,121 | |
| | | | |
| | $ | 472,370,094 | |
| | | | |
Interest capitalized amounted to $0, $438,167, and $110,000 in 2012, 2011, and 2010, respectively.
The Company has estimated the fair value of the mortgage notes to be approximately $498,100,000 and $501,400,000 at December 31, 2012 and 2011, respectively. The estimated fair value has been determined by the Company using available market information and a discounted cash flow methodology using interest rates that range from 3.2% to 3.5% at December 31, 2012 and 3.1% to 4.0% at December 31, 2011. Considerable judgment is required in interpreting market data to develop the estimates of fair
F-74
DUKE/HULFISH, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
December 31, 2012 and 2011
value. The current market rate the Company utilized was internally estimated; therefore, the Company concluded its determination of the fair value of its fixed rate secured debt was primarily based upon Level 3 inputs (as described in note 2) for the year ended December 31, 2012 and 2011. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the liability. The use of different assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.
The following table summarizes the book value and changes in the fair value of the Company’s mortgage notes for the year ended December 31, 2012:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Book value at
December 31,
2011 | | | Book value at
December 31,
2012 | | | Fair value at
December 31,
2011 | | | Issuances | | | Payoffs | | | Adjustments
to fair value | | | Fair value at
December 31,
2012 | |
Mortgage notes | | $ | 478,482,275 | | | | 472,370,094 | | | | 501,400,000 | | | | — | | | | (6,112,181 | ) | | | 2,812,181 | | | | 498,100,000 | |
(6) Leasing Activity
The Company leases its operating properties to tenants under agreements that are classified as operating leases. At December 31, 2012, future minimum receipts from tenants on leases for each of the next five years and thereafter are as follows:
| | | | |
Year: | | | | |
2013 | | $ | 93,180,648 | |
2014 | | | 93,789,553 | |
2015 | | | 93,024,606 | |
2016 | | | 84,240,940 | |
2017 | | | 75,412,173 | |
Thereafter | | | 186,103,296 | |
| | | | |
| | $ | 625,751,216 | |
| | | | |
In addition to minimum rents, certain leases require reimbursements of specified operating expenses, which amounted to $28,955,803, $23,773,780, and $7,534,312 for the years ended December 31, 2012, 2011 and 2010, respectively, and are included in contractual rental income in the accompanying consolidated statements of operations.
One tenant occupies 26% of the Company’s 11 million total square feet in three buildings. This tenant accounts for approximately 18% of future minimum receipts.
(7) Members’ Equity
Operating and Financing Distributions
The Company pays operating distributions to its members in accordance with the provisions of the Agreement dated May 5, 2008 and amended and restated December 17, 2010. The Agreement provides the Members a first tier return equal to 6.25% per annum of the Members’ Unrecovered Capital, as defined, which shall be paid quarterly to the extent cash is available. CSP has priority over DRLP for payment of first tier returns. To the extent any first tier return is not paid, it shall accumulate and compound with interest on the unpaid amount at the first tier rate.
If the first tier return is paid, then available cash shall be paid pro rata to the Members until the Members have received a return of their Unrecovered Capital. Once the Members have received the return of their Unrecovered Capital, then the balance is distributed to the Members in accordance with their membership interests (80% to CSP and 20% to DRLP).
The primary distinction between the Members is the distribution priority and voting rights. CSP has priority on distributions and has greater voting rights than DRLP. However, all Major Decisions, as defined in the Agreement, require unanimous consent of all members of the Company’s executive committee, which includes representation by the Members.
In addition, the Agreement provides for distributions of Net Capital Transaction Proceeds, as defined. Net Capital Transaction Proceeds are distributed first to members who have made priority loans. Proceeds would then be allocated to the Members in proportion to their Unrecovered Capital balances, which is 80% and 20% to CSP and DRLP, respectively. Excess proceeds would then be allocated to CSP until those distributions equal CSP’s cumulative First Tier Return (6.25%) from the inception of the Company to the date of such distribution; then to DRLP until the distributions equal DRLP’s cumulative First Tier Return (6.25%) from the inception of the Company to the date of such distribution; then to the Members in accordance with their percentage membership interests until the cumulative distributions received by CSP equal an amount needed to attain a 10% internal rate of return for CSP. The balance would then be allocated 25% to DRLP and 75% to CSP.
F-75
DUKE/HULFISH, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
December 31, 2012 and 2011
In connection with the November 2010 financing discussed in note 5, proceeds from debt financing of $72,888,331 and $18,222,083 were distributed to CBOP and DRLP, respectively, during 2010 and are reflected as a reduction of CBOP’s and DRLP’s equity at December 31, 2010.
Operating proceeds of $12,720,000 and $3,180,000 were distributed to CBOP and DRLP, respectively, for the year ended December 31, 2010. In addition, operating distributions of $10,640,000 and $2,660,000 to CBOP and DRLP, respectively, were declared in 2010 and recontributed to the Company in order to fund development costs. The Company is treating these non-cash amounts as distributions and contributions in the accompanying consolidated 2010 Statement of Members’ Equity.
During 2011, CSP and DRLP made contributions of $31,200,000 and $7,800,000, respectively, in order to cover the shortfall between the payoff of The Facility and the 2011 mortgage note borrowings (note 5). These contributions are reflected as an increase to CSP’s and DRLP’s equity at December 31, 2011.
Operating proceeds of $16,960,000 and $4,240,000 were distributed to CSP and DRLP, respectively, for the year ended December 31, 2011. In addition, operating distributions of $25,364,095 and $6,341,025 to CSP and DRLP, respectively, were declared in 2011 and recontributed to the Company in order to fund development costs. The Company is treating these non-cash amounts as capital distributions and capital contributions in the accompanying consolidated 2011 Statement of Members’ Equity.
During 2012, CSP and DRLP made capital contributions of $994,080 and $248,520, respectively, to fund capital reserve requirements for the Wells Fargo notes. Also, operating proceeds of $32,080,000 and $8,020,000 were distributed to CSP and DRLP, respectively, for the year ended December 31, 2012. In addition, operating distributions of $697,014 and $174,253 to CSP and DRLP, respectively, were declared in 2012 and recontributed to the Company in order to fund development costs. The Company is treating these non cash amounts as capital distributions and capital contributions in the accompanying consolidated 2012 Statement of Members’ Equity.
As of December 31, 2012, 2011, and 2010, there were no unpaid and accumulated first tier returns due to CSP or DRLP.
Liquidation Distributions and Allocation of Net Income
Net income is allocated to the partners based on how proceeds would be allocated in connection with a hypothetical liquidation of the Company at book value. Proceeds would first be allocated to the Members in proportion to their Unrecovered Capital balances, which is 80% and 20% to CSP and DRLP, respectively. Excess proceeds would then be allocated to CSP until those distributions equal CSP’s cumulative First Tier Return (6.25%) from the inception of the Company to the date of such distribution; then to DRLP until the distributions equal DRLP’s cumulative First Tier Return (6.25%) from the inception of the Company to the date of such distribution; then to the Members in accordance with their percentage membership interests until the cumulative distributions received by CSP equal an amount needed to attain a 10% internal rate of return for CSP. The balance would then be allocated 25% to DRLP and 75% to CSP.
In connection with the amended and restated Agreement, the Agreement provides for a call option that upon the occurrence of a Trigger Event, as defined, CSP may elect to acquire DRLP’s interest in the Company. The call price would be based on the average of each of the Members’ qualified appraiser’s written appraisals for the fair market value of the real estate properties if the appraisals are within 10% of the lower fair market value. If the appraisals are not within 10% of the lower fair market value, then a third appraisal is performed and the call price is calculated in accordance with the provisions of the Agreement.
(8) Subsequent Event
On March 1, 2013, the Company’s ownership interest in certain special purpose entities holding 16 office buildings and one industrial building, totaling 3.3 million square feet and valued at approximately $493,000,000, was distributed to the members in accordance with their membership interests.
The Company has evaluated subsequent events through March 1, 2013, and did not identify any additional items requiring disclosure.
F-76
DUKE/HULFISH, LLC AND SUBSIDIARIES
Properties and Accumulated Depreciation
December 31, 2012
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Initial cost to the joint venture | |
Property | | Year
acquired | | | Encumbrances,
net | | | Land | | | Site
improvements | | | Building and
improvements | | | Tenant
improvements | | | Total Acq. | | | Improvements
subsequent to
purchase date | | | December 31,
2012 total cost | | | Accumulated
depreciation
and amortization | |
Buckeye Logistics Center | | | 2008 | | | | 20,000 | | | $ | 3,850 | | | | 3,575 | | | | 25,108 | | | | 6,651 | | | | 39,184 | | | | 20,431 | | | | 59,615 | | | | (7,889 | ) |
Aspen Corporate Center 500 | | | 2008 | | | | 21,200 | | | | 2,889 | | | | 2,876 | | | | 21,223 | | | | 7,089 | | | | 34,077 | | | | (121 | ) | | | 33,956 | | | | (6,053 | ) |
All Points at Anson Bldg. 1 | | | 2008 | | | | 17,000 | | | | 1,381 | | | | 4,228 | | | | 20,029 | | | | 5,618 | | | | 31,256 | | | | 18,425 | | | | 49,681 | | | | (6,886 | ) |
201 Sunridge Blvd. | | | 2008 | | | | 19,400 | | | | 5,310 | | | | 2,304 | | | | 21,136 | | | | 934 | | | | 29,684 | | | | (10 | ) | | | 29,674 | | | | (3,298 | ) |
12200 President’s Court | | | 2008 | | | | 21,600 | | | | 6,064 | | | | 5,985 | | | | 21,836 | | | | 776 | | | | 34,661 | | | | — | | | | 34,661 | | | | (4,348 | ) |
All Points Midwest Bldg. 1 | | | 2008 | | | | 24,000 | | | | 3,370 | | | | 6,720 | | | | 33,769 | | | | 3,889 | | | | 47,748 | | | | — | | | | 47,748 | | | | (6,748 | ) |
125 Enterprise Parkway | | | 2008 | | | | 26,800 | | | | 1,915 | | | | 2,053 | | | | 36,909 | | | | 3,008 | | | | 43,885 | | | | — | | | | 43,885 | | | | (5,475 | ) |
Fairfield Distribution Ctr. IX | | | 2009 | | | | 4,554 | | | | 443 | | | | 1,438 | | | | 4,414 | | | | 875 | | | | 7,170 | | | | — | | | | 7,170 | | | | (946 | ) |
Celebration Office Center III | | | 2009 | | | | 9,173 | | | | 1,470 | | | | 1,659 | | | | 9,138 | | | | 3,028 | | | | 15,295 | | | | — | | | | 15,295 | | | | (2,816 | ) |
1400 Ravello Drive | | | 2009 | | | | 8,207 | | | | 1,645 | | | | 404 | | | | 7,540 | | | | 3,182 | | | | 12,771 | | | | 13 | | | | 12,784 | | | | (1,917 | ) |
Northpoint III | | | 2009 | | | | 10,621 | | | | 809 | | | | 1,213 | | | | 11,147 | | | | 3,255 | | | | 16,424 | | | | — | | | | 16,424 | | | | (2,018 | ) |
Goodyear Crossing Ind. Park II | | | 2009 | | | | 20,277 | | | | 2,940 | | | | 3,920 | | | | 24,223 | | | | 8,977 | | | | 40,060 | | | | — | | | | 40,060 | | | | (5,414 | ) |
1400 Perimeter Park Drive | | | 2010 | | | | 2,414 | | | | 346 | | | | 320 | | | | 2,892 | | | | 865 | | | | 4,423 | | | | 88 | | | | 4,511 | | | | (444 | ) |
3900 N. Paramount Parkway | | | 2010 | | | | 7,966 | | | | 612 | | | | 564 | | | | 8,532 | | | | 2,403 | | | | 12,111 | | | | 29 | | | | 12,140 | | | | (1,181 | ) |
3900 S. Paramount Parkway | | | 2010 | | | | 7,966 | | | | 612 | | | | 564 | | | | 9,790 | | | | 2,836 | | | | 13,802 | | | | — | | | | 13,802 | | | | (1,335 | ) |
RT Miramar I (Devry) | | | 2010 | | | | 9,462 | | | | 3,350 | | | | 1,155 | | | | 7,375 | | | | 716 | | | | 12,596 | | | | 942 | | | | 13,538 | | | | (1,083 | ) |
RT Miramar II-Royal Caribbean | | | 2010 | | | | 12,745 | | | | 4,500 | | | | 1,255 | | | | 14,079 | | | | 836 | | | | 20,670 | | | | 507 | | | | 21,177 | | | | (1,719 | ) |
McAuley Place | | | 2010 | | | | 13,581 | | | | 1,420 | | | | 951 | | | | 21,897 | | | | 850 | | | | 25,118 | | | | 560 | | | | 25,679 | | | | (1,470 | ) |
Easton III | | | 2010 | | | | 6,652 | | | | 2,002 | | | | 651 | | | | 10,246 | | | | 2,147 | | | | 15,046 | | | | 25 | | | | 15,071 | | | | (1,144 | ) |
533 Maryville Centre | | | 2010 | | | | 13,271 | | | | 1,768 | | | | 305 | | | | 16,609 | | | | 48 | | | | 18,730 | | | | (48 | ) | | | 18,682 | | | | (875 | ) |
555 Maryville Centre | | | 2010 | | | | 10,823 | | | | 1,765 | | | | 429 | | | | 13,371 | | | | 152 | | | | 15,717 | | | | 202 | | | | 15,919 | | | | (742 | ) |
Point West I | | | 2010 | | | | 11,366 | | | | 949 | | | | 2,313 | | | | 13,247 | | | | 6,479 | | | | 22,988 | | | | — | | | | 22,988 | | | | (3,130 | ) |
Regency Creek I | | | 2010 | | | | 11,064 | | | | 1,542 | | | | 1,619 | | | | 12,677 | | | | 2,251 | | | | 18,089 | | | | — | | | | 18,089 | | | | (1,501 | ) |
Sam Houston Crossing One | | | 2010 | | | | 10,774 | | | | 1,855 | | | | 1,766 | | | | 10,107 | | | | 4,189 | | | | 17,917 | | | | 5 | | | | 17,922 | | | | (2,070 | ) |
One Easton Oval | | | 2011 | | | | — | | | | 1,538 | | | | 231 | | | | 9,154 | | | | 44 | | | | 10,967 | | | | 1,455 | | | | 12,421 | | | | (550 | ) |
Two Easton Oval | | | 2011 | | | | — | | | | 1,532 | | | | 230 | | | | 8,490 | | | | 222 | | | | 10,474 | | | | 592 | | | | 11,066 | | | | (582 | ) |
Norman Pointe I | | | 2011 | | | | 20,830 | | | | 4,000 | | | | 1,015 | | | | 28,283 | | | | 1,343 | | | | 34,641 | | | | 100 | | | | 34,741 | | | | (1,852 | ) |
Norman Pointe II | | | 2011 | | | | 22,933 | | | | 3,460 | | | | 1,884 | | | | 23,478 | | | | 7,916 | | | | 36,738 | | | | 74 | | | | 36,812 | | | | (5,976 | ) |
Weston Pointe I | | | 2011 | | | | 9,270 | | | | 2,750 | | | | 578 | | | | 11,393 | | | | 508 | | | | 15,229 | | | | 296 | | | | 15,525 | | | | (893 | ) |
Weston Pointe II | | | 2011 | | | | 11,179 | | | | 2,328 | | | | 489 | | | | 13,935 | | | | 973 | | | | 17,725 | | | | 332 | | | | 18,057 | | | | (1,043 | ) |
Weston Pointe III | | | 2011 | | | | 11,278 | | | | 2,328 | | | | 489 | | | | 15,493 | | | | 358 | | | | 18,668 | | | | 276 | | | | 18,944 | | | | (892 | ) |
Weston Pointe IV | | | 2011 | | | | 13,512 | | | | 2,296 | | | | 689 | | | | 15,266 | | | | 3,008 | | | | 21,259 | | | | 49 | | | | 21,307 | | | | (1,402 | ) |
One Conway Park | | | 2011 | | | | — | | | | 2,243 | | | | 188 | | | | 10,306 | | | | 464 | | | | 13,201 | | | | 683 | | | | 13,884 | | | | (807 | ) |
West Lake at Conway | | | 2011 | | | | 9,497 | | | | 2,253 | | | | 1,261 | | | | 8,387 | | | | 1,757 | | | | 13,658 | | | | 721 | | | | 14,379 | | | | (1,309 | ) |
Landings Building I | | | 2011 | | | | 15,676 | | | | 1,500 | | | | 1,365 | | | | 16,126 | | | | 5,696 | | | | 24,687 | | | | 49 | | | | 24,736 | | | | (1,789 | ) |
Landings Building II | | | 2011 | | | | 13,827 | | | | 1,500 | | | | 1,913 | | | | 15,441 | | | | 2,618 | | | | 21,472 | | | | 80 | | | | 21,552 | | | | (1,706 | ) |
Atrium I | | | 2011 | | | | 23,452 | | | | 3,580 | | | | 537 | | | | 30,800 | | | | — | | | | 34,917 | | | | 121 | | | | 35,038 | | | | (1,445 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 472,370 | | | $ | 84,115 | | | | 59,136 | | | | 583,846 | | | | 95,961 | | | | 823,058 | | | | 45,877 | | | | 868,935 | | | | (90,747 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
F-77
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.
| | | | | | |
| | | | CHAMBERS STREET PROPERTIES |
| | | |
| Date: March 22, 2013 | | | | By: | | /S/ MARTIN A. REID |
| | | | Name: | | Martin A. Reid |
| | | | Title: | | Chief Financial Officer |
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and trustees of Chambers Street Properties hereby severally constitute Jack A. Cuneo and Martin A. Reid, and each of them singly, our true and lawful attorneys and with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Annual Report on Form 10-K filed herewith and any and all amendments to said Annual Report on Form 10-K, and generally to do all such things in our names and in our capacities as officers and trustees to enable Chambers Street Properties to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Annual Report on Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| | | | |
Signature | | Title | | Date |
| | |
/S/ JACK A. CUNEO Jack A. Cuneo | | President, Chief Executive Officer and Trustee, (Principal Executive Officer) | | March 22, 2013 |
| | |
/S/ CHARLES E. BLACK Charles E. Black | | Chairman of the Board and Trustee | | March 22, 2013 |
| | |
/S/ LOUIS P. SALVATORE Louis P. Salvatore | | Trustee | | March 22, 2013 |
| | |
/S/ JAMES M. ORPHANIDES James M. Orphanides | | Trustee | | March 22, 2013 |
| | |
/S/ MARTIN A. REID Martin A. Reid | | Executive Vice President, Chief Financial Officer, Secretary and Trustee (Principal Financial and Accounting Officer) | | March 22, 2013 |
EXHIBIT INDEX
| | |
Exhibit No. | | |
| |
| 3.1 | | Second Amended and Restated Declaration of Trust of CB Richard Ellis Realty Trust (Previously filed as Exhibit 3.1 to Pre-Effective Amendment No. 5 to the Registration Statement on Form S-11 (File No. 333-127405) filed September 13, 2006 and incorporated herein by reference). |
| |
| 3.2 | | Articles of Amendment of Declaration of Trust of CB Richard Ellis Realty Trust (Previously filed as exhibit 3.1 to the current report on Form 8-K (File No. 000-53200) filed June 22, 2009 and incorporated herein by reference). |
| |
| 3.3 | | Second Articles of Amendment to the Second Amended and Restated Declaration of Trust of CB Richard Ellis Realty Trust (Previously filed as Exhibit 3.1 to the Current Report on Form 8-K (File 000-53200) filed June 22, 2012 and incorporated herein by reference). |
| |
| 3.4 | | Third Amended and Restated Bylaws of Chambers Street Properties (Previously filed as Exhibit 3.2 to the Current Report on Form 8-K (File 000-53200) filed June 22, 2012 and incorporated herein by reference). |
| |
| 4.1 | | Second Amended and Restated Dividend Reinvestment Plan (Previously filed as Exhibit 10.6 to the Current Report on Form 8-K (File 000-53200) filed July 5, 2012 and incorporated herein by reference). |
| |
| 4.2 | | Amended and Restated Share Redemption Program (Previously filed as Exhibit 4.2 to Current Report on Form 8-K (File No. 000-53200) filed on February 3, 2012 and incorporated herein by reference). |
| |
| 10.1 | | Amended and Restated 2004 Equity Incentive Plan (Previously filed as Exhibit 10.3 to the Current Report on Form 8-K (File 000-53200) filed July 5, 2012 and incorporated herein by reference). |
| |
| 10.2 | | Amended and Restated 2004 Performance Bonus Plan (Previously filed as Exhibit 10.4 to the Current Report on Form 8-K (File 000-53200) filed July 5, 2012 and incorporated herein by reference). |
| |
| 10.3 | | Third Amended and Restated Agreement of Limited Partnership, by and among CB Richard Ellis Realty Trust and the limited partners named therein, dated April 27, 2012 (Previously filed as Exhibit 10.3 to the Current Report on Form 8-K (File 000-53200) filed April 30, 2012 and incorporated herein by reference). |
| |
| 10.4 | | Amendment No. 1 to Third Amended and Restated Agreement of Limited Partnership, by and among Chambers Street Properties and the limited partners named therein, entered into as of July 1, 2012 (Previously filed as Exhibit 10.7 to the Quarterly Report on Form 10-Q (File 000-53200) filed August 14, 2012 and incorporated herein by reference). |
| |
| 10.5 | | Form of Amended and Restated Indemnification Agreement (Previously filed as Exhibit 10.18 to Pre-Effective Amendment No. 5 to the Registration Statement on Form S-11 (File No. 333-127405) filed September 13, 2006 and incorporated herein by reference). |
| |
| 10.6 | | Credit Agreement, dated August 30, 2007, by and among CBRE Operating Partnership, L.P. and CBRERT Carolina TRS, Inc., as borrowers, CB Richard Ellis Realty Trust, Bank of America, N.A. as Administrative Agent, and the other lenders thereto (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File No. 333-127405) filed September 5, 2007 and incorporated herein by reference). |
| |
| 10.7 | | Contribution Agreement, dated May 5, 2008, by and among Duke Realty Limited Partnership, Duke/Hulfish, LLC and CBRE Operating Partnership, L.P. (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-53200) filed May 6, 2008 and incorporated herein by reference). |
| |
| 10.8 | | Duke/Hulfish, LLC Limited Liability Company Agreement, by and among CBRE Operating Partnership, L.P. and Duke Realty Limited Partnership, dated June 12, 2008 (Previously filed as Exhibit 10.3 to Form 10-Q (File No. 000-53200) filed November 14, 2008 and incorporated herein by reference). |
| |
| 10.9 | | First Amendment to the Contribution Agreement, by and between Duke Realty Limited Partnership, Duke/Hulfish LLC and CBRE Operating Partnership, L.P. dated September 12, 2008 (Previously filed as Exhibit 10.7 to the Quarterly Report on Form 10-Q (File No. 000-53200) filed November 14, 2008 and incorporated herein by reference). |
| |
| 10.10 | | Side Letter, between CB Richard Ellis Realty Trust, CB Richard Ellis Investors and CBRE Advisors LLC dated February 12, 2009 (Previously filed as Exhibit 1.2 to the Current Report on Form 8-K (File No. 000-53200) filed February 18, 2009 and incorporated herein by reference). |
| |
| 10.11 | | Side Letter between CB Richard Ellis Realty Trust and CNL Securities Corp. dated February 12, 2009 (Previously filed as Exhibit 1.3 to the Current Report on Form 8-K (File No. 000-53200) filed February 18, 2009 and incorporated herein by reference). |
| | |
Exhibit No. | | |
| |
| 10.12 | | Shareholders’ Agreement by and among Goodman Europe Development Trust, RT Princeton CE Holdings, LLC and Goodman Princeton Holdings (LUX) S.À R.L., dated June 10, 2010 (Previously filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 000-53200) filed August 13, 2010 and incorporated herein by reference). |
| |
| 10.13 | | Shareholders’ Agreement by and among Goodman Jersey Holdings Trust, RT Princeton UK Holdings, LLC and Goodman Princeton Holdings (Jersey) Limited, dated June 10, 2010 (Previously filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 000-53200) filed August 13, 2010 and incorporated herein by reference). |
| |
| 10.14 | | Agreement of Sale, by and among 70 Hudson Street, L.L.C., 70 Hudson Street Urban Renewal Associates, L.L.C. and RT 70 Hudson, LLC dated October 15, 2010 (Previously filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q (File 000-53200) filed November 12, 2010 and incorporated herein by reference). |
| |
| 10.15 | | Agreement of Sale, by and among 90 Hudson Street, L.L.C., 90 Hudson Street Urban Renewal Associates, L.L.C. and RT 90 Hudson, LLC dated October 15, 2010 (Previously filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q (File 000-53200) filed November 12, 2010 and incorporated herein by reference). |
| |
| 10.16 | | Agreement for Purchase and Sale of Real Property, by and between AOL Inc. and RT Pacific Blvd, LLC, dated October 29, 2010 (Previously filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q (File 000-53200) filed November 12, 2010 and incorporated herein by reference). |
| |
| 10.17 | | Purchase and Sale Agreement, by and among Duke Realty Limited Partnership, Duke Secured Financing 2009-1PAC, LLC, Duke Realty Ohio and Duke/Princeton, LLC, dated December 17, 2010 (Previously filed as Exhibit 10.2 to the Current Report on Form 8-K (File 000-53200) filed December 23, 2010 and incorporated herein by reference). |
| |
| 10.18 | | Duke/Hulfish, LLC Amended and Restated Limited Liability Company Agreement, by and among CBRE Operating Partnership, L.P. and Duke Realty Limited Partnership, dated December 17, 2010 (Previously filed as Exhibit 10.3 to the Current Report on Form 8-K (File 000-53200) filed December 23, 2010 and incorporated herein by reference). |
| |
| 10.19 | | Loan Agreement dated March 24, 2011, between Duke/Hulfish, LLC and Wells Fargo Bank, National Association (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K/A (File No. 000-53200) filed March 29, 2011 and incorporated herein by reference). |
| |
| 10.20 | | Assumption of Mortgage and Security Agreement by and among U.S. Bank National Association, as trustee, as successor-in-interest to Bank of America, National Association, as successor by merger to LaSalle Bank National Association, as trustee for the registered holders of LB-UBS Commercial Mortgage Trust 2006-C4, Commercial Mortgage Pass-through Certificates, Series 2006-C4, 70 Hudson Street L.L.C., 70 Hudson Street Urban Renewal Associates, L.L.C., Hartz Financial Corp., RT 70 Hudson Street LLC, RT 70 Hudson Street Urban Renewal, LLC, CBRE Operating Partnership, L.P., and CB Richard Ellis Realty Trust dated April 11, 2011 (Previously filed as Exhibit 10.36 to Post-Effective Amendment No. 9 to the Registration Statement on Form S-11 (File No. 333-152653) filed on April 21, 2011 and incorporated herein by reference). |
| |
| 10.21 | | Loan Agreement, by and between 70 Hudson Street L.L.C., 70 Hudson Street Urban Renewal Associates, L.L.C. and Lehman Brothers Bank, FSB dated April 11, 2006 (Previously filed as Exhibit 10.37 to Post-Effective Amendment No. 9 to the Registration Statement on Form S-11 (File No. 333-152653) filed on April 21, 2011 and incorporated herein by reference). |
| |
| 10.22 | | Loan Assumption and Modification Agreement, by and among RT 90 Hudson, LLC and 90 Hudson Street L.L.C. and Teachers Insurance and Annuity Association of America dated April 11, 2011 (Previously filed as Exhibit 10.38 to Post-Effective Amendment No. 9 to the Registration Statement on Form S-11 (File No. 333-152653) filed on April 21, 2011 and incorporated herein by reference). |
| |
| 10.23 | | Promissory Note, by and between Teachers Insurance and Annuity Association of America and 90 Hudson Street L.L.C. dated April 11, 2006 (Previously filed as Exhibit 10.39 to Post-Effective Amendment No. 9 to the Registration Statement on Form S-11 (File No. 333-152653) filed on April 21, 2011 and incorporated herein by reference). |
| |
| 10.24 | | Omnibus Amendment to Loan Documents, by and between RT 90 Hudson, LLC and Teachers Insurance and Annuity Association of America dated July 14, 2011 (Previously filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q (File 000-53200) filed August 15, 2011 and incorporated herein by reference). |
| |
| 10.25 | | Amended and Restated Promissory Note, by and between RT 90 Hudson, LLC and Teachers Insurance and Annuity Association of America dated July 14, 2011 (Previously filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q (File 000-53200) filed August 15, 2011 and incorporated herein by reference). |
| | |
Exhibit No. | | |
| |
| 10.26 | | Transition to Self-Management Agreement, by and among CB Richard Ellis Realty Trust, CBRE Operating Partnership, L.P., CBRE Global Investors, LLC and CBRE Advisors LLC, dated April 27, 2012 (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed April 30, 2012 and incorporated herein by reference). |
| |
| 10.27 | | Transitional Services Agreement, by and among Chambers Street Properties, CSP Operating Partnership, LP and CBRE Advisors LLC, dated July 1, 2012 (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed July 5, 2012 and incorporated herein by reference). |
| |
| 10.28 | | Indemnification Agreement with Louis P. Salvatore (Previously filed as Exhibit 10.2 to the Current Report on Form 8-K (File 000-53200) filed July 5, 2012 and incorporated herein by reference). |
| |
| 10.29 | | Amended and Restated Form of Share Award Agreement (Previously filed as Exhibit 10.5 to the Current Report on Form 8-K (File 000-53200) filed July 5, 2012 and incorporated herein by reference). |
| |
| 10.30 | | Credit Agreement, dated September 13, 2012, by and among CSP Operating Partnership, LP as Borrower, Chambers Street Properties, as Parent, Wells Fargo Bank, National Association as Administrative Agent, the financial institutions party thereto as Lenders, Wells Fargo Securities, LLC, RBC Capital Markets, as Joint Lead Arrangers and Joint Bookrunners, Royal Bank of Canada, as Syndication Agent and each of Bank of Montreal, Barclays Bank PLC, JPMorgan Chase Bank, N.A., Regions Bank and TD Bank, N.A. as a Documentation Agent (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed September 19, 2012 and incorporated herein by reference). |
| |
| 10.31 | | Employment Agreement by and among Chambers Street Properties, CSP Operating Partnership, LP and Jack A. Cuneo (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed October 1, 2012 and incorporated herein by reference). |
| |
| 10.32 | | Employment Agreement by and among Chambers Street Properties, CSP Operating Partnership, LP and Philip L. Kianka (Previously filed as Exhibit 10.2 to the Current Report on Form 8-K (File 000-53200) filed October 1, 2012 and incorporated herein by reference). |
| |
| 10.33 | | Employment Agreement by and among Chambers Street Properties, CSP Operating Partnership, LP and Martin A. Reid (Previously filed as Exhibit 10.3 to the Current Report on Form 8-K (File 000-53200) filed October 1, 2012 and incorporated herein by reference). |
| |
| 10.34 | | Form of Restricted Share Award Agreement (Previously filed as Exhibit 10.4 to the Current Report on Form 8-K (File 000-53200) filed October 1, 2012 and incorporated herein by reference). |
| |
| 10.35 | | Omnibus Agreement, by and between Duke Realty Limited Partnership and CSP Operating Partnership, LP dated January 29, 2013 (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed January 31, 2013 and incorporated herein by reference). |
| |
| 10.36 | | First Amendment to the Amended and Restated Limited Liability Company Agreement of Duke/Hulfish, LLC (previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed March 7, 2013 and incorporated herein by reference). |
| |
| 10.37 | | First Amendment to Credit Agreement, dated March 7, 2013, by and among CSP Operating Partnership, LP as Borrower, Chambers Street Properties, as Parent, Wells Fargo Bank, National Association, as Administrative Agent, the financial institutions party thereto as Lenders, Wells Fargo Bank, National Association, Bank of Montreal, Barclays Bank PLC, JPMorgan Chase Bank, N.A., Regions Bank, TD Bank, Citibank, N.A., Union Bank, N.A., PNC Bank, National Association, RBS Citizens, N.A. U.S. Bank National Association, and Goldman Sachs Bank USA (previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File 000-53200) filed on March 13, 2013 and incorporated herein by reference). |
| |
| 10.38 | | Term Loan Agreement, dated March 7, 2013, by and among CSP Operating Partnership, LP as Borrower, Chambers Street Properties, as Parent, Wells Fargo Bank, National Association, as Administrative Agent, the financial institutions party thereto as Lenders, Wells Fargo Bank, National Association, Bank of Montreal, JPMorgan Chase Bank, N.A. Regions Bank, Union Bank, N.A., PNC Bank, National Association, RBS Citizens, N.A. and U.S. Bank National Association (previously filed as Exhibit 10.2 to the Current Report on Form 8-K (File 000-53200) filed on March 13, 2013 and incorporated herein by reference). |
| |
| 21.1 | | List of Subsidiaries of Chambers Street Properties, filed herewith. |
| |
| 23.1 | | Consent of Deloitte & Touche LLP, filed herewith. |
| |
| 23.2 | | Consent of KPMG LLP, filed herewith. |
| | |
Exhibit No. | | |
| |
| 24.1 | | Power of Attorney (included on the signature page to this Annual Report on Form 10-K). |
| |
| 31.1 | | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| |
| 31.2 | | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| |
| 32.1 | | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| |
| 32.2 | | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
| |
| 101* | | The following materials from Chambers Street Properties’ Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Shareholders’ Equity and Non-Controlling Interest and (v) the Notes to the Condensed Consolidated Financial Statements, furnished herewith. |
| * | Users of this data are advised that pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
