UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
Form 10-Q
_____________________________________________
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 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 number 000-53960
_____________________________________________
COLE CREDIT PROPERTY TRUST III, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________
Maryland | 26-1846406 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
2325 East Camelback Road, Suite 1100 Phoenix, Arizona, 85016 | (602) 778-8700 | |
(Address of principal executive offices; zip code) | (Registrant’s telephone number, including area code) |
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | x (Do not check if smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 9, 2012, there were 478.0 million shares of common stock, par value $0.01, of Cole Credit Property Trust III, Inc. outstanding.
COLE CREDIT PROPERTY TRUST III, INC.
INDEX
Item 1. Financial Statements | |
2
PART I
FINANCIAL INFORMATION
The accompanying condensed consolidated unaudited interim financial statements for the three and nine months ended September 30, 2012 have been prepared by Cole Credit Property Trust III, Inc. (the “Company,” “we,” “us” or “our”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The financial statements herein should also be read in conjunction with the notes to the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results expected for the full year. The information furnished in our accompanying condensed consolidated unaudited balance sheets and condensed consolidated unaudited statements of operations, comprehensive income, stockholders’ equity, and cash flows reflects all adjustments that are, in our opinion, necessary for a fair presentation of the aforementioned financial statements. Such adjustments are of a normal recurring nature.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We caution readers not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report on Form 10-Q. We make no representation or warranty (expressed or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q. Additionally, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. The forward-looking statements should be read in light of the risk factors identified in the Item 1A “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
3
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, 2012 | December 31, 2011 | ||||||
ASSETS | |||||||
Investment in real estate assets: | |||||||
Land | $ | 1,443,915 | $ | 1,129,584 | |||
Buildings and improvements, less accumulated depreciation of $163,053 and $89,608, respectively | 3,917,804 | 3,050,385 | |||||
Acquired intangible lease assets, less accumulated amortization of $105,346 and $58,884, respectively | 803,809 | 657,262 | |||||
Total investment in real estate assets, net | 6,165,528 | 4,837,231 | |||||
Investment in notes receivable, net | 90,332 | 64,683 | |||||
Investment in marketable securities | 68,457 | 41,750 | |||||
Investment in marketable securities pledged as collateral | 274,139 | 72,379 | |||||
Total investment in real estate assets, marketable securities and notes receivable, net | 6,598,456 | 5,016,043 | |||||
Real estate assets held for sale | 306,697 | 311,351 | |||||
Cash and cash equivalents | 83,797 | 216,353 | |||||
Restricted cash | 16,846 | 17,540 | |||||
Investment in unconsolidated joint ventures | 84,531 | 21,543 | |||||
Rents and tenant receivables, less allowance for doubtful accounts of $329 and $202, respectively | 76,922 | 52,045 | |||||
Property escrow deposits, prepaid expenses and other assets | 20,480 | 11,584 | |||||
Deferred financing costs, less accumulated amortization of $20,868 and $11,305, respectively | 54,977 | 51,109 | |||||
Total assets | $ | 7,242,706 | $ | 5,697,568 | |||
LIABILITIES AND EQUITY | |||||||
Notes payable and other borrowings | $ | 3,153,632 | $ | 2,373,984 | |||
Accounts payable and accrued expenses | 47,019 | 33,815 | |||||
Escrowed investor proceeds | — | 1,930 | |||||
Due to affiliates | 3,780 | 4,847 | |||||
Acquired below market lease intangibles, less accumulated amortization of $14,766 and $8,581, respectively | 109,608 | 92,034 | |||||
Distributions payable | 25,418 | 20,858 | |||||
Derivative liabilities, deferred rent and other liabilities | 55,057 | 48,420 | |||||
Liabilities related to real estate assets held for sale | 3,200 | 3,316 | |||||
Total liabilities | 3,397,714 | 2,579,204 | |||||
Commitments and contingencies | |||||||
Redeemable common stock | 212,947 | 134,101 | |||||
EQUITY: | |||||||
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding | — | — | |||||
Common stock, $0.01 par value; 990,000,000 shares authorized, 477,190,838 and 385,236,590 shares issued and outstanding, respectively | 4,772 | 3,852 | |||||
Capital in excess of par value | 4,068,045 | 3,322,924 | |||||
Accumulated distributions in excess of earnings | (464,270 | ) | (319,031 | ) | |||
Accumulated other comprehensive income (loss) | 19,714 | (24,757 | ) | ||||
Total stockholders’ equity | 3,628,261 | 2,982,988 | |||||
Noncontrolling interests | 3,784 | 1,275 | |||||
Total equity | 3,632,045 | 2,984,263 | |||||
Total liabilities and equity | $ | 7,242,706 | $ | 5,697,568 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
4
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Revenues: | |||||||||||||||
Rental and other property income | $ | 126,588 | $ | 82,003 | $ | 348,425 | $ | 208,823 | |||||||
Tenant reimbursement income | 11,483 | 6,321 | 31,753 | 14,564 | |||||||||||
Interest income on notes receivable | 1,769 | 1,384 | 4,617 | 4,088 | |||||||||||
Interest income on marketable securities | 6,478 | 13 | 13,871 | 13 | |||||||||||
Total revenue | 146,318 | 89,721 | 398,666 | 227,488 | |||||||||||
Expenses: | |||||||||||||||
General and administrative expenses | 5,790 | 3,116 | 14,479 | 7,188 | |||||||||||
Property operating expenses | 13,439 | 6,840 | 35,286 | 16,142 | |||||||||||
Property and asset management expenses | 12,199 | 7,424 | 33,869 | 19,200 | |||||||||||
Acquisition related expenses | 11,104 | 24,480 | 43,923 | 47,201 | |||||||||||
Depreciation | 27,800 | 17,368 | 75,579 | 42,905 | |||||||||||
Amortization | 14,566 | 9,240 | 40,349 | 22,927 | |||||||||||
Total operating expenses | 84,898 | 68,468 | 243,485 | 155,563 | |||||||||||
Operating income | 61,420 | 21,253 | 155,181 | 71,925 | |||||||||||
Other income (expense): | |||||||||||||||
Equity in income of unconsolidated joint ventures | 445 | 354 | 1,331 | 1,131 | |||||||||||
Other income | 38 | 74 | 4,031 | 296 | |||||||||||
Interest expense | (44,803 | ) | (22,711 | ) | (102,929 | ) | (53,971 | ) | |||||||
Total other expense | (44,320 | ) | (22,283 | ) | (97,567 | ) | (52,544 | ) | |||||||
Income (loss) from continuing operations | 17,100 | (1,030 | ) | 57,614 | 19,381 | ||||||||||
Discontinued operations | |||||||||||||||
Operating income | 1,470 | 2,312 | 5,215 | 6,940 | |||||||||||
Gain on sale of real estate assets | — | — | 14,781 | — | |||||||||||
Income from discontinued operations | 1,470 | 2,312 | 19,996 | 6,940 | |||||||||||
Net income | 18,570 | 1,282 | 77,610 | 26,321 | |||||||||||
Net income (loss) allocated to noncontrolling interests | 3 | 11 | (117 | ) | 310 | ||||||||||
Net income attributable to the Company | $ | 18,567 | $ | 1,271 | $ | 77,727 | $ | 26,011 | |||||||
Weighted average number of common shares outstanding: | |||||||||||||||
Basic and diluted | 476,353,149 | 320,524,336 | 457,996,321 | 291,885,880 | |||||||||||
Income (loss) from continuing operations per common share: | |||||||||||||||
Basic and diluted | $ | 0.04 | $ | (0.00 | ) | $ | 0.13 | $ | 0.07 | ||||||
Income from discontinued operations per common share: | |||||||||||||||
Basic and diluted | $ | 0.00 | $ | 0.01 | $ | 0.04 | $ | 0.02 | |||||||
Net income attributable to the Company per common share: | |||||||||||||||
Basic and diluted | $ | 0.04 | $ | 0.00 | $ | 0.17 | $ | 0.09 | |||||||
Distributions declared per common share | $ | 0.16 | $ | 0.16 | $ | 0.49 | $ | 0.49 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
5
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Net income | $ | 18,570 | $ | 1,282 | $ | 77,610 | $ | 26,321 | |||||||
Other comprehensive income (loss): | |||||||||||||||
Unrealized gain (loss) on marketable securities | 44,349 | (1,082 | ) | 43,038 | (1,082 | ) | |||||||||
Unrealized loss on interest rate swaps | (2,153 | ) | (13,478 | ) | (7,830 | ) | (19,385 | ) | |||||||
Reclassification of previous unrealized loss on interest rate swaps into net income | 9,263 | — | 9,263 | — | |||||||||||
Total other comprehensive income (loss) | 51,459 | (14,560 | ) | 44,471 | (20,467 | ) | |||||||||
Total comprehensive income (loss) | 70,029 | (13,278 | ) | 122,081 | 5,854 | ||||||||||
Total comprehensive income (loss) attributable to noncontrolling interest | 3 | 11 | (117 | ) | 310 | ||||||||||
Total comprehensive income (loss) attributable to the Company | $ | 70,026 | $ | (13,289 | ) | $ | 122,198 | $ | 5,544 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
Capital in | Accumulated | Accumulated | ||||||||||||||||||||||||||||
Common Stock | Excess | Distributions | Other | Total | Non- | |||||||||||||||||||||||||
Number of | Par | of Par | in Excess of | Comprehensive | Stockholders’ | controlling | Total | |||||||||||||||||||||||
Shares | Value | Value | Earnings | (Loss) Income | Equity | Interests | Equity | |||||||||||||||||||||||
Balance, January 1, 2012 | 385,236,590 | $ | 3,852 | $ | 3,322,924 | $ | (319,031 | ) | $ | (24,757 | ) | $ | 2,982,988 | $ | 1,275 | $ | 2,984,263 | |||||||||||||
Issuance of common stock | 96,667,486 | 967 | 956,882 | — | — | 957,849 | — | 957,849 | ||||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | 2,938 | 2,938 | ||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (312 | ) | (312 | ) | ||||||||||||||||||||
Distributions to investors | — | — | — | (222,966 | ) | — | (222,966 | ) | — | (222,966 | ) | |||||||||||||||||||
Commissions on stock sales and related dealer manager fees | — | — | (72,926 | ) | — | — | (72,926 | ) | — | (72,926 | ) | |||||||||||||||||||
Other offering costs | — | — | (13,188 | ) | — | — | (13,188 | ) | — | (13,188 | ) | |||||||||||||||||||
Redemptions of common stock | (4,713,238 | ) | (47 | ) | (46,071 | ) | — | — | (46,118 | ) | — | (46,118 | ) | |||||||||||||||||
Changes in redeemable common stock | — | — | (78,846 | ) | — | — | (78,846 | ) | — | (78,846 | ) | |||||||||||||||||||
Purchase of investment from noncontrolling interest | — | — | (730 | ) | — | — | (730 | ) | — | (730 | ) | |||||||||||||||||||
Comprehensive income (loss) | — | — | — | 77,727 | 44,471 | 122,198 | (117 | ) | 122,081 | |||||||||||||||||||||
Balance, September 30, 2012 | 477,190,838 | $ | 4,772 | $ | 4,068,045 | $ | (464,270 | ) | $ | 19,714 | $ | 3,628,261 | $ | 3,784 | $ | 3,632,045 |
Capital in | Accumulated | Accumulated | ||||||||||||||||||||||||||||
Common Stock | Excess | Distributions | Other | Total | Non- | |||||||||||||||||||||||||
Number of | Par | of Par | in Excess of | Comprehensive | Stockholders’ | controlling | Total | |||||||||||||||||||||||
Shares | Value | Value | Earnings | Loss | Equity | Interests | Equity | |||||||||||||||||||||||
Balance, January 1, 2011 | 248,070,364 | $ | 2,481 | $ | 2,164,528 | $ | (163,040 | ) | $ | (7,188 | ) | $ | 1,996,781 | $ | 371 | $ | 1,997,152 | |||||||||||||
Issuance of common stock | 94,108,456 | 940 | 934,823 | — | — | 935,763 | — | 935,763 | ||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (34 | ) | (34 | ) | ||||||||||||||||||||
Distributions to investors | — | — | — | (141,992 | ) | — | (141,992 | ) | — | (141,992 | ) | |||||||||||||||||||
Commissions on stock sales and related dealer manager fees | — | — | (76,137 | ) | — | — | (76,137 | ) | — | (76,137 | ) | |||||||||||||||||||
Other offering costs | — | — | (12,879 | ) | — | — | (12,879 | ) | — | (12,879 | ) | |||||||||||||||||||
Redemptions of common stock | (3,293,997 | ) | (33 | ) | (31,855 | ) | — | — | (31,888 | ) | — | (31,888 | ) | |||||||||||||||||
Changes in redeemable common stock | — | — | (46,450 | ) | — | — | (46,450 | ) | — | (46,450 | ) | |||||||||||||||||||
Purchase of investment from noncontrolling interest | — | — | (707 | ) | — | — | (707 | ) | — | (707 | ) | |||||||||||||||||||
Comprehensive income (loss) | — | — | — | 26,011 | (20,467 | ) | 5,544 | 310 | 5,854 | |||||||||||||||||||||
Balance, September 30, 2011 | 338,884,823 | $ | 3,388 | $ | 2,931,323 | $ | (279,021 | ) | $ | (27,655 | ) | $ | 2,628,035 | $ | 647 | $ | 2,628,682 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
7
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 77,610 | $ | 26,321 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation | 80,828 | 48,755 | |||||
Amortization of intangible lease assets and below market lease intangibles, net | 43,499 | 25,411 | |||||
Amortization of deferred financing costs | 10,451 | 5,516 | |||||
Amortization of fair value adjustments of mortgage notes payable assumed | 93 | 64 | |||||
Accretion on marketable securities, net | (2,002 | ) | (3 | ) | |||
Accretion on notes receivable, net | (797 | ) | (760 | ) | |||
Bad debt expense | 251 | 147 | |||||
Equity in income of unconsolidated joint ventures | (1,331 | ) | (1,131 | ) | |||
Return on investment from unconsolidated joint ventures | 1,331 | 1,131 | |||||
Gain on sale and condemnation of real estate assets | (15,445 | ) | — | ||||
Loss on interest rate swap | 9,263 | — | |||||
Changes in assets and liabilities: | |||||||
Rents and tenant receivables | (27,147 | ) | (25,211 | ) | |||
Prepaid expenses and other assets | (6,131 | ) | (1,994 | ) | |||
Accounts payable and accrued expenses | 9,807 | 10,817 | |||||
Deferred rent and other liabilities | (1,709 | ) | 5,537 | ||||
Due to affiliates | 5 | 2,509 | |||||
Net cash provided by operating activities | 178,576 | 97,109 | |||||
Cash flows from investing activities: | |||||||
Investment in real estate assets, marketable securities and notes receivable | (1,658,106 | ) | (1,813,152 | ) | |||
Investment in and advances to unconsolidated joint ventures | (85,363 | ) | (7,725 | ) | |||
Return of investment and repayment of advance from unconsolidated joint ventures | 22,375 | 611 | |||||
Principal repayments from notes receivable | 648 | 75 | |||||
Proceeds from sale and condemnation of real estate assets | 69,222 | — | |||||
Payment of property escrow deposits | (33,532 | ) | (37,375 | ) | |||
Refund of property escrow deposits | 30,571 | 37,144 | |||||
Change in restricted cash | 694 | (4,097 | ) | ||||
Net cash used in investing activities | (1,653,491 | ) | (1,824,519 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from issuance of common stock | 832,885 | 857,425 | |||||
Offering costs on issuance of common stock | (87,195 | ) | (88,371 | ) | |||
Redemptions of common stock | (46,118 | ) | (31,888 | ) | |||
Distributions to investors | (93,442 | ) | (60,350 | ) | |||
Proceeds from notes payable and other borrowings | 1,482,508 | 1,158,188 | |||||
Repayment of notes payable and other borrowings | (726,953 | ) | (75,804 | ) | |||
Payment of loan deposits | (5,198 | ) | (5,238 | ) | |||
Refund of loan deposits | 5,403 | 4,936 | |||||
Payment on earnout liabilities | (5,952 | ) | — | ||||
Change in escrowed investor proceeds liability | (1,930 | ) | 1,100 | ||||
Deferred financing costs paid | (14,275 | ) | (25,376 | ) | |||
Contributions from noncontrolling interests | 2,938 | — | |||||
Distributions to noncontrolling interests | (312 | ) | (34 | ) | |||
Net cash provided by financing activities | 1,342,359 | 1,734,588 | |||||
Net (decrease) increase in cash and cash equivalents | (132,556 | ) | 7,178 | ||||
Cash and cash equivalents, beginning of period | 216,353 | 109,942 | |||||
Cash and cash equivalents, end of period | $ | 83,797 | $ | 117,120 |
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
8
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
September 30, 2012
NOTE 1 — ORGANIZATION AND BUSINESS
Cole Credit Property Trust III, Inc. (the “Company”) is a Maryland corporation that was formed on January 22, 2008, which has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes. Substantially all of the Company’s business is conducted through Cole REIT III Operating Partnership, LP (“CCPT III OP”), a Delaware limited partnership. The Company is the sole general partner of, and owns a 99.99% partnership interest in, CCPT III OP. Cole REIT Advisors III, LLC (“CR III Advisors”), the advisor to the Company, is the sole limited partner and owner of an insignificant noncontrolling partnership interest of less than 0.01% of CCPT III OP.
As of September 30, 2012, the Company owned 968 properties, comprising 41.4 million rentable square feet of single and multi-tenant retail and commercial space located in 47 states, which include properties owned through consolidated joint venture arrangements. As of September 30, 2012, the rentable space at these properties was 99% leased. As of September 30, 2012, the Company also owned 31 commercial mortgage backed securities (“CMBS”) and three notes receivable. In addition, through unconsolidated joint venture arrangements, as of September 30, 2012, the Company had interests in 11 properties comprising 2.0 million gross rentable square feet of commercial space.
The Company ceased offering shares of common stock in its initial primary offering (the “Initial Offering”) on October 1, 2010. At the completion of the Initial Offering, a total of approximately 217.5 million shares of common stock had been issued, including approximately 211.6 million shares issued in the primary offering and approximately 5.9 million shares issued pursuant to a distribution reinvestment plan (the “DRIP”). The remaining 32.5 million unsold shares in the Initial Offering were deregistered.
On September 22, 2010, the registration statement for a follow-on offering of 275.0 million shares of the Company’s common stock (the “Follow-on Offering”) was declared effective by the SEC. The Company commenced sales of the common stock pursuant to the Follow-on Offering after the termination of the Initial Offering on October 1, 2010. Of the 275.0 million shares registered pursuant to the Follow-on Offering, the Company offered up to 250.0 million shares in its primary offering at a price of $10.00 per share and up to 25.0 million shares pursuant to the DRIP at a price of $9.50 per share. The Company ceased issuing shares in the Follow-on Offering on April 27, 2012. At the completion of the Follow-on Offering, a total of approximately 262.2 million shares of common stock had been issued, including approximately 242.9 million shares issued in the primary offering and approximately 19.3 million shares issued pursuant to the DRIP. The remaining 12.8 million unsold shares in the Follow-on Offering were deregistered.
In addition, the Company registered 75.0 million shares of common stock under the DRIP pursuant to a registration statement filed on Form S-3 (the “DRIP Offering” and collectively with the Initial Offering and Follow-on Offering, the “Offerings”), which was filed with the SEC on March 14, 2012 and automatically became effective with the SEC upon filing. The Company will continue to issue shares of common stock under the DRIP Offering.
As of September 30, 2012, the Company had issued approximately 487.4 million shares of its common stock in the Offerings, including approximately 7.8 million shares issued in the DRIP Offering. The Company had aggregate gross proceeds from the Offerings of $4.8 billion (including shares sold pursuant to the Company’s DRIP) as of September 30, 2012, before share redemptions of $99.9 million and offering costs, selling commissions and dealer management fees of $463.2 million.
The Company’s common stock is not currently listed on a national securities exchange. The Company may seek to list its common stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its common stock until its shares are listed on a national securities exchange. In the event it does not obtain listing prior to October 1, 2020, its charter requires that it either: (1) seek stockholder approval of an extension or elimination of this listing deadline; or (2) seek stockholder approval to adopt a plan of liquidation.
9
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The condensed consolidated unaudited financial statements of the Company have been prepared in accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the statements for the interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair presentation of the results for such periods. Results for these interim periods are not necessarily indicative of full year results. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2011, and related notes thereto set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
The condensed consolidated unaudited financial statements include the accounts of the Company, its wholly-owned subsidiaries and consolidated joint venture arrangements in which the Company has controlling financial interests. The portions of the consolidated joint venture arrangements not owned by the Company were presented as noncontrolling interests as of and during the period consolidated. All intercompany balances and transactions have been eliminated in consolidation. Certain prior year balances have been reclassified in the condensed consolidated unaudited balance sheets and statements of operations to conform with the current year presentation of real estate assets held for sale and discontinued operations.
The Company evaluates its relationships and investments to determine if it has variable interests. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. If the Company determines that it has a variable interest in an entity, it evaluates whether such interest is in a variable interest entity (“VIE”). A VIE is broadly defined as an entity where either (1) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company consolidates any VIEs when it is determined to be the primary beneficiary of the VIE’s operations.
A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance, its form of ownership interest, its representation on the entity’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and to replace the manager of and/or liquidate the entity.
The Company continually evaluates the need to consolidate joint ventures based on standards set forth in GAAP. In determining whether the Company has a controlling interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, power to make decisions and contractual and substantive participating rights of the partners/members as well as whether the entity is a VIE for which the Company is the primary beneficiary. As of September 30, 2012, the Company consolidated the accounts of three joint ventures (the “Consolidated Joint Ventures”), which held assets with an aggregate book value of $58.5 million.
In addition, the Company evaluates its investments in marketable securities to determine if they qualify as VIEs. As of September 30, 2012, the Company determined that investments in marketable securities are VIEs, of which the Company is not the primary beneficiary because it does not have the ability to direct the activities of the VIEs that most significantly impact each entity’s economic performance. The Company’s maximum exposure to loss from these investments does not exceed their aggregate amortized cost basis of $298.2 million.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management 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.
10
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
Investment in and Valuation of Real Estate and Related Assets
Real estate and related assets are stated at cost, less accumulated depreciation and amortization. Amounts capitalized to real estate and related assets consist of the cost of acquisition, excluding acquisition related expenses, construction and any tenant improvements, major improvements and betterments that extend the useful life of the real estate and related assets and leasing costs. All repairs and maintenance are expensed as incurred.
The Company is required to make subjective assessments as to the useful lives of its depreciable assets. The Company considers the period of future benefit of each respective asset to determine the appropriate useful life of the assets. Real estate and related assets, other than land, are depreciated or amortized on a straight-line basis. The estimated useful lives of the Company’s real estate and related assets by class are generally as follows:
Building and capital improvements | 40 years |
Tenant improvements | Lesser of useful life or lease term |
Intangible lease assets | Lease term |
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate and related assets may not be recoverable. Impairment indicators that the Company considers include, but are not limited to, bankruptcy or other credit concerns of a property’s major tenant, such as a history of late payments, rental concessions and other factors, a significant decrease in a property’s revenues due to lease terminations, vacancies, co-tenancy clauses, reduced lease rates or other circumstances. When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying amount of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying amount, the Company will adjust the real estate and related assets to their respective fair values and recognize an impairment loss. Generally, fair value is determined using a discounted cash flow analysis and recent comparable sales transactions. No impairment indicators were identified and no impairment losses were recorded during the nine months ended September 30, 2012 or 2011.
When developing estimates of expected future cash flows, the Company makes certain assumptions regarding future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, terminal capitalization and discount rates, the expected number of months it takes to re-lease the property, required tenant improvements and the number of years the property will be held for investment. The use of alternative assumptions in estimating expected future cash flows could result in a different determination of the property’s expected future cash flows and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the fair value of the real estate and related assets.
When a real estate asset is identified by the Company as held for sale, the Company ceases depreciation and amortization of the assets related to the property and estimates the fair value, net of selling costs. If, in management’s opinion, the fair value, net of selling costs, of the asset is less than the carrying amount of the asset, an adjustment to the carrying amount would be recorded to reflect the estimated fair value of the property, net of selling costs.
Allocation of Purchase Price of Real Estate and Related Assets
Upon the acquisition of real properties, the Company allocates the purchase price to acquired tangible assets, consisting of land, buildings and improvements, and identified intangible assets and liabilities, consisting of the value of above market and below market leases and the value of in-place leases, based in each case on their respective fair values. Acquisition related expenses are expensed as incurred. The Company utilizes independent appraisals to assist in the determination of the fair values of the tangible assets of an acquired property (which includes land and building). The Company obtains an independent appraisal for each real property acquisition. The information in the appraisal, along with any additional information available to the Company’s management, is used in estimating the amount of the purchase price that is allocated to land. Other information in the appraisal, such as building value and market rents, may be used by the Company’s management in estimating the allocation of purchase price to the building and to intangible lease assets and liabilities. The appraisal firm has no involvement in management’s allocation decisions other than providing this market information.
11
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
The fair values of above market and below market lease values are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) an estimate of fair market lease rates for the corresponding in-place leases, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease including any bargain renewal periods, with respect to a below market lease. The above market and below market lease values are capitalized as intangible lease assets or liabilities, respectively. Above market lease values are amortized as a reduction to rental income over the remaining terms of the respective leases. Below market leases are amortized as an increase to rental income over the remaining terms of the respective leases, including any bargain renewal periods. In considering whether or not the Company expects a tenant to execute a bargain renewal option, the Company evaluates economic factors and certain qualitative factors at the time of acquisition, such as the financial strength of the tenant, remaining lease term, the tenant mix of the leased property, the Company’s relationship with the tenant and the availability of competing tenant space. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above market or below market lease values relating to that lease would be recorded as an adjustment to rental income.
The fair values of in-place leases include estimates of direct costs associated with obtaining a new tenant and opportunity costs associated with lost rental and other property income which are avoided by acquiring a property with an in-place lease. Direct costs associated with obtaining a new tenant include commissions and other direct costs and are estimated in part by utilizing information obtained from independent appraisals and management’s consideration of current market costs to execute a similar lease. The intangible values of opportunity costs, which are calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease, are capitalized as intangible lease assets and are amortized to expense over the remaining term of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.
The Company estimates the fair value of assumed mortgage notes payable based upon indications of current market pricing for similar types of debt financing with similar maturities. Assumed mortgage notes payable are initially recorded at their estimated fair value as of the assumption date, and the difference between such estimated fair value and the mortgage note’s outstanding principal balance is amortized to interest expense over the term of the respective mortgage note payable.
The determination of the fair values of the real estate and related assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, capitalization and discount rates, interest rates and other variables. The use of alternative estimates may result in a different allocation of the Company’s purchase price, which could impact the Company’s results of operations.
Discontinued Operations
Upon the disposal of a real estate asset or the determination of a real estate asset as being held for sale, the Company determines if the asset disposed of is considered a component of the Company. A component is comprised of operations and cash flows that can clearly be distinguished, operationally and for financial reporting purposes, from the rest of the Company. If the asset is considered a component of the Company, the results of operations and gains or losses on the sale of the component are required to be presented in discontinued operations if both of the following criteria are met: (1) the operations and cash flows of the asset have been (or will be) eliminated from the ongoing operations of the Company as a result of the disposal transaction and (2) the Company will not have any significant continuing involvement in the operations of the asset after the disposal transaction. Also, the prior period results of operations for the asset are reclassified and presented in discontinued operations in the prior consolidated statements of operations.
Sale of Real Estate Assets
Gains on the sale of real estate assets are generally recognized by the full accrual method when the following criteria are met: (1) the gain is determinable, that is, the collectability of the sales price is reasonably assured or the amount that will not be collectible can be estimated, and (2) the earnings process is virtually complete, that is, the Company is not obligated to perform significant activities after the sale to earn the gain.
12
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
Investment in Marketable Securities
Investments in marketable securities consist of investments in CMBS, including those pledged as collateral. The Company classifies its investments as available-for-sale as the Company intends to hold its investments until maturity, however the Company may sell them prior to their maturity. These investments are carried at estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss). The Company uses estimated non-binding quoted market prices from the trading desks of financial institutions that are dealers in such securities, where available, for similar CMBS tranches that actively participate in the CMBS market and industry benchmarks, such as Trepp’s CMBS Analytics, where applicable. Market conditions, such as interest rates, liquidity, trading activity and credit spreads may cause significant variability to the received quotes. If the Company is unable to obtain quotes or if the Company believes the quotes received are inaccurate, the Company would estimate fair value using internal models that primarily consider the Trepp’s CMBS Analytics, expected cash flows, known and expected defaults and rating agency reports. Changes in market conditions could result in a significant increase or decrease in the recorded amount of the securities. Significant judgment is involved in valuations and different judgments and assumptions used in management’s valuation could result in alternative valuations. If there are significant disruptions to the financial markets, the Company’s estimates of fair value may have significant volatility. Upon the sale of a security, the realized net gain or loss is computed on a specific identification basis.
The Company monitors its available-for-sale securities for impairments. A loss is recognized when the Company determines that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary. The Company considers many factors in determining whether the impairment of a security is deemed to be other-than-temporary, including, but not limited to, the length of time the security has had a decline in estimated fair value below its amortized cost, the amount of the unrealized loss, the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, external credit ratings and recent changes in such ratings. The analysis of determining whether the impairment of a security is deemed to be other-than-temporary requires significant judgments and assumptions. The use of alternative judgments and assumptions could result in a different conclusion.
Accretion of discounts on the CMBS is recognized based on the effective yield method and is recorded in the accompanying condensed consolidated unaudited statements of operations in interest income on marketable securities. The effective yield on these CMBS is based on the projected cash flows from each security, which are estimated based on the Company’s observation of current information and events and include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses. The Company reviews and, if appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such securities. Actual maturities of the securities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, and prepayments of principal. Therefore actual maturities of the securities may be shorter than stated contractual maturities.
Investment in Unconsolidated Joint Ventures
Investment in unconsolidated joint ventures as of September 30, 2012 consists of the Company’s interest in six joint ventures that own 11 properties (the “Unconsolidated Joint Ventures”). The Company accounts for the Unconsolidated Joint Ventures using the equity method of accounting as the Company has the ability to exercise significant influence, but not control, over operating and financial policies of these investments. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the joint venture’s earnings and distributions. The Company is required to determine whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of its investment in the joint venture. If an event or change in circumstance has occurred, the Company is required to evaluate the joint venture for potential impairment and determine if the carrying amount of its investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in a joint venture for potential impairment requires the Company’s management to exercise significant judgment and to make certain assumptions. The use of different judgments and assumptions could result in different conclusions. No impairment indicators were identified and no impairment losses were recorded related to the Unconsolidated Joint Ventures for the nine months ended September 30, 2012 or 2011.
13
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
Concentration of Credit Risk
As of September 30, 2012, the Company had cash on deposit, including restricted cash, in 12 financial institutions, eight of which had deposits in excess of federally insured levels, totaling $25.1 million; however, the Company has not experienced any losses in such accounts. The Company limits significant cash investments to accounts held by financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk on its cash deposits.
No single tenant accounted for greater than 10% of the Company’s 2012 gross annualized rental revenues. Tenants in the restaurant industry comprised 10% of the Company’s 2012 gross annualized rental revenues. Additionally, the Company has certain geographic concentrations in its property holdings. In particular, as of September 30, 2012, 180 of the Company’s properties were located in Texas accounting for 16% of its 2012 gross annualized rental revenues.
Repurchase Agreements
In certain circumstances the Company may obtain financing through a repurchase agreement. The Company evaluates the initial transfer of a financial instrument and the related repurchase agreement for sale accounting treatment. In instances where the Company maintains effective control over the transferred securities, the Company accounts for the transaction as a secured borrowing, and accordingly, both the securities and related repurchase agreement payable are recorded separately in the consolidated balance sheets. In instances where the Company does not maintain effective control over the transferred securities, the Company accounts for the transaction as a sale of securities for proceeds consisting of cash and a forward purchase contract.
New Accounting Pronouncements
In June 2011, the U.S. Financial Accounting Standards Board issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income, which requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The Company elected to present two separate but consecutive statements herein.
NOTE 3 — FAIR VALUE MEASUREMENTS
GAAP defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. GAAP emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e. interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 – Unobservable inputs, which are only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.
The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:
14
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
Cash and cash equivalents and restricted cash – The Company considers the carrying values of these financial assets to approximate fair value because of the short period of time between their origination and their expected realization.
Notes receivable – The fair value is estimated by discounting the expected cash flows on the notes at rates at which management believes similar loans would be made as of September 30, 2012 and December 31, 2011. The estimated fair value of these notes was $96.5 million and $69.0 million as of September 30, 2012 and December 31, 2011, respectively, as compared to the carrying value of $90.3 million and $64.7 million as of September 30, 2012 and December 31, 2011, respectively. The fair value of the Company’s notes receivable is estimated using Level 2 inputs.
Notes payable and other borrowings – The fair value is estimated by discounting the expected cash flows based on estimated borrowing rates available to the Company as of September 30, 2012 and December 31, 2011. The estimated fair value of the notes payable and other borrowings was $3.3 billion and $2.4 billion as of September 30, 2012 and December 31, 2011, respectively, as compared to the carrying value of $3.2 billion and $2.4 billion as of September 30, 2012 and December 31, 2011, respectively. The fair value of the Company’s notes payable and other borrowings is estimated using Level 2 inputs.
Marketable securities – The Company’s marketable securities are carried at fair value and are valued using Level 3 inputs. The Company used estimated non-binding quoted market prices from the trading desks of financial institutions that are dealers in such securities for similar CMBS tranches that actively participate in the CMBS market and industry benchmarks, such as Trepp’s CMBS Analytics. As of September 30, 2012 and December 31, 2011, no marketable securities were valued using internal models.
Derivative Instruments – The Company’s derivative instruments represent interest rate swaps. All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair value of these instruments is determined using interest rate market pricing models. The Company includes the impact of credit valuation adjustments on derivative instruments measured at fair value.
Earnout Agreements – The Company has acquired certain properties subject to earnout provisions obligating the Company to pay additional consideration to the seller contingent on the future leasing and occupancy of vacant space at each property. Earnout payments are based on a predetermined formula and have set time periods regarding the obligation to make the payment as set forth in the respective purchase and sale agreement. If, at the end of the respective time period, certain space has not been leased and occupied, the Company will have no further obligation under the applicable earnout provision. The earnouts are carried at fair value and are valued using Level 3 inputs, including estimated timing and probability of leasing the vacant space, as there is no public market for this item and thus Level 1 and Level 2 inputs are unavailable for an item of this nature. Any changes to the estimated fair value are reflected in the statements of operations. The estimated fair value of these agreements totaled $6.3 million and $5.5 million as of September 30, 2012 and December 31, 2011, respectively, and is included in the accompanying condensed consolidated unaudited balance sheets in other liabilities. During the nine months ended September 30, 2012, the Company recorded additional earnout liabilities with an aggregate estimated fair value of $6.5 million at purchase. In addition, during the nine months ended September 30, 2012, the Company increased the fair value of the outstanding earnout agreements by $288,000, which is recorded in the accompanying condensed consolidated unaudited statements of operations in acquisition related expenses. During the nine months ended September 30, 2012, the obligations under certain earnout provisions were satisfied and the Company paid $6.0 million to the seller.
Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for, on disposition of the financial assets and liabilities. As of September 30, 2012, there have been no transfers of financial assets or liabilities between levels.
In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011 (in thousands):
15
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
Balance as of September 30, 2012 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets: | |||||||||||||||
Marketable securities | $ | 342,596 | $ | — | $ | — | $ | 342,596 | |||||||
Liabilities: | |||||||||||||||
Interest rate swaps | $ | (33,922 | ) | $ | — | $ | (33,922 | ) | $ | — | |||||
Earnout agreements | (6,349 | ) | — | — | (6,349 | ) | |||||||||
Total liabilities | $ | (40,271 | ) | $ | — | $ | (33,922 | ) | $ | (6,349 | ) | ||||
Balance as of December 31, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets: | |||||||||||||||
Marketable securities | $ | 114,129 | $ | — | $ | — | $ | 114,129 | |||||||
Liabilities: | |||||||||||||||
Interest rate swaps | $ | (26,092 | ) | $ | — | $ | (26,092 | ) | $ | — | |||||
Earnout agreements | (5,519 | ) | — | — | (5,519 | ) | |||||||||
Total liabilities | $ | (31,611 | ) | $ | — | $ | (26,092 | ) | $ | (5,519 | ) |
The following table shows a reconciliation of the change in fair value of marketable securities for the three and nine months ended September 30, 2012 and 2011 (in thousands):
Three Months Ended | Nine Months Ended | ||||||
September 30, 2012 | September 30, 2012 | ||||||
Balance at beginning of period | $ | 274,761 | $ | 114,129 | |||
Total gains | |||||||
Unrealized gain included in other comprehensive income, net | 44,349 | 43,038 | |||||
Purchases, issuances, settlements, sales and accretion | |||||||
Purchases | 22,362 | 183,427 | |||||
Issuances | — | — | |||||
Settlements | — | — | |||||
Accretion included in earnings, net | 1,124 | 2,002 | |||||
Balance at end of period | $ | 342,596 | $ | 342,596 |
Three Months Ended | Nine Months Ended | ||||||
September 30, 2011 | September 30, 2011 | ||||||
Balance at beginning of period | $ | — | $ | — | |||
Total gains | |||||||
Unrealized loss included in other comprehensive income, net | (1,082 | ) | (1,082 | ) | |||
Purchases, issuances, settlements, sales and accretion | |||||||
Purchases | 25,585 | 25,585 | |||||
Issuances | — | — | |||||
Settlements | — | — | |||||
Accretion included in earnings, net | 3 | 3 | |||||
Balance at end of period | $ | 24,506 | $ | 24,506 |
16
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
NOTE 4 — REAL ESTATE ACQUISITIONS
2012 Property Acquisitions
During the nine months ended September 30, 2012, the Company acquired interests in 287 commercial properties for an aggregate purchase price of $1.5 billion (the “2012 Acquisitions”). The Company purchased the 2012 Acquisitions with net proceeds from the Follow-on Offering and the DRIP Offering and through the issuance or assumption of mortgage notes. The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocation (in thousands):
September 30, 2012 | |||
Land | $ | 328,363 | |
Building and improvements | 950,557 | ||
Acquired in-place leases | 173,737 | ||
Acquired above-market leases | 28,174 | ||
Acquired below-market leases | (27,744 | ) | |
Total purchase price | $ | 1,453,087 |
The Company recorded revenue for the three and nine months ended September 30, 2012 of $26.8 million and $46.7 million, respectively, and a net loss for the three and nine months ended September 30, 2012 of $1.2 million and $20.7 million, respectively, related to the 2012 Acquisitions.
The following information summarizes selected financial information of the Company, as if all of the 2012 Acquisitions were completed on January 1, 2011 for each period presented below. The table below presents the Company’s estimated revenue and net income, on a pro forma basis, for the three and nine months ended September 30, 2012 and 2011, respectively (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Pro forma basis (unaudited): | |||||||||||||||
Revenue | $ | 157,462 | $ | 128,863 | $ | 465,594 | $ | 343,060 | |||||||
Net income | $ | 32,175 | $ | 12,603 | $ | 142,990 | $ | 25,651 |
The unaudited pro forma information for the three and nine months ended September 30, 2012 was adjusted to exclude $9.9 million and $37.4 million, respectively, of acquisition costs recorded during the current period related to the 2012 Acquisitions. These costs were recognized in the unaudited pro forma information for the nine months ended September 30, 2011. The unaudited pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2011, nor does it purport to represent the results of future operations.
2012 Investments in Development Projects
During the nine months ended September 30, 2012, the Company acquired a completed development project for an aggregate purchase price of $7.7 million through the repayment of a construction loan facility and the purchase of the joint venture partner’s noncontrolling interest. The Company also completed the construction of a single tenant office building. Total costs for the construction of the building were $12.2 million. The development of these projects was initiated in 2011, and therefore, these properties are not included in the 2012 Acquisitions.
17
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
2012 Investments in Unconsolidated Joint Ventures
During the nine months ended September 30, 2012, the Company acquired a $36.1 million interest in an unconsolidated joint venture arrangement. In addition, the Company acquired a $27.7 million financial interest in one of the Consolidated Joint Ventures, whose only assets are interests in three of the Unconsolidated Joint Ventures.
In connection with the acquired interests in the unconsolidated joint venture arrangements discussed above, one of the Unconsolidated Joint Ventures borrowed $17.6 million (the “Advance Note”) from one of the Consolidated Joint Ventures and fully repaid the Advance Note during the nine months ended September 30, 2012. The Advance Note had a variable interest rate equal to the one-month LIBOR plus 225 basis points. During the nine months ended September 30, 2012, the Company recorded $107,000 of interest income on the Advance Note. No financing coordination fees were incurred in connection with the Advance Note.
2011 Property Acquisitions
During the nine months ended September 30, 2011, the Company acquired interests in 184 commercial properties, including a property held in one of the Consolidated Joint Ventures, for an aggregate purchase price of $1.8 billion (the “2011 Acquisitions”). The Company purchased the 2011 Acquisitions with net proceeds from the Offerings and through the issuance or assumption of mortgage notes. The Company allocated the purchase price of the 2011 Acquisitions to the fair value of the assets acquired and liabilities assumed. The following table summarizes the purchase price allocation (in thousands):
September 30, 2011 | ||||
Land | $ | 365,923 | ||
Building and improvements | 1,215,330 | |||
Acquired in-place leases | 191,521 | |||
Acquired above-market leases | 49,776 | |||
Acquired below-market leases | (28,421 | ) | ||
Fair value adjustment of assumed notes payable | 438 | |||
Total purchase price | $ | 1,794,567 |
The Company recorded revenue for the three and nine months ended September 30, 2011 of $27.4 million and $41.5 million, respectively, and a net loss for the three and nine months ended September 30, 2011 of $11.0 million and $24.7 million, respectively, related to the 2011 Acquisitions.
2011 Investments in Development Projects
During the nine months ended September 30, 2011, the Company acquired a completed development project for an aggregate purchase price of $5.9 million through the repayment of a construction loan facility and the purchase of the joint venture partner’s noncontrolling interest. The development of this project was initiated in 2010, and therefore, this property purchase is not included in the 2011 Acquisitions.
The Company also acquired a controlling financial interest in one of the Consolidated Joint Ventures, which purchased a land parcel for $1.0 million, for development of a single tenant commercial store, during the nine months ended September 30, 2011. As discussed above, the Company acquired the completed property during the nine months ended September 30, 2012.
2011 Investments in Unconsolidated Joint Ventures
During the nine months ended September 30, 2011, the Company acquired an interest in an unconsolidated joint venture arrangement for $7.7 million.
18
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
NOTE 5 — INVESTMENT IN NOTES RECEIVABLE
During the nine months ended September 30, 2012, the Company acquired a $25.0 million junior mezzanine loan (the “Mezzanine Loan”), secured by equity interests in a joint venture which owns 15 shopping centers. The Mezzanine Loan has an interest rate of LIBOR plus 9.0% with a LIBOR floor of 0.50% and matures in July 2015 with two one-year extension options. As of September 30, 2012, investment in notes receivable included $25.5 million related to the Mezzanine Loan balance, which consisted of the outstanding face amount of the loan of $25.0 million, $500,000 of acquisition costs and net accumulated amortization of acquisition costs of $22,000. The acquisition costs are amortized over the term of the loan using the effective interest rate method. Interest only payments are due each month. There were no amounts past due as of September 30, 2012.
In addition, as of September 30, 2012, the Company owned two mortgage notes receivable, each of which is secured by an office building (collectively the “Mortgage Notes”). As of September 30, 2012 and December 31, 2011, investment in notes receivable included $64.9 million and $64.7 million, respectively, related to the Mortgage Notes. As of September 30, 2012, the Mortgage Notes balance consisted of the outstanding face amount of the notes of $73.1 million, a $12.0 million discount, $1.3 million of acquisition costs and net accumulated accretion of discounts and amortization of acquisition costs of $2.5 million. As of December 31, 2011, the Mortgage Notes balance consisted of the outstanding face amount of the notes of $73.7 million, a $12.0 million discount, $1.3 million of acquisition costs and net accumulated accretion of discounts and amortization of acquisition costs of $1.7 million. The discount is accreted and acquisition costs are amortized over the terms of each respective Mortgage Note using the effective interest rate method. The Mortgage Notes have a fixed interest rate of 5.93% per annum and mature on October 1, 2018. Interest and principal payments are due each month until October 1, 2018. There were no amounts past due as of September 30, 2012.
The Company evaluates the collectability of both interest and principal on each note receivable to determine whether it is collectible, primarily through the evaluation of credit quality indicators, such as underlying collateral and payment history. No impairment losses were recorded related to notes receivable for the nine months ended September 30, 2012 or 2011. In addition, no allowances for uncollectability were recorded related to notes receivable as of September 30, 2012 or December 31, 2011.
NOTE 6 — INVESTMENT IN MARKETABLE SECURITIES
As of September 30, 2012, the Company owned 31 CMBS, with an estimated aggregate fair value of $342.6 million. As of December 31, 2011, the Company owned 11 CMBS, with an estimated aggregate fair value of $114.1 million. As of September 30, 2012, certain of these securities were pledged as collateral under repurchase agreements (the “Repurchase Agreements”), as discussed in Note 9 to these condensed consolidated unaudited financial statements. The following table provides the activity for the CMBS during the nine months ended September 30, 2012 (in thousands):
Amortized Cost Basis | Unrealized Gain | Fair Value | |||||||||
Marketable securities as of December 31, 2011 | $ | 112,794 | $ | 1,335 | $ | 114,129 | |||||
Face value of marketable securities acquired | 269,570 | — | 269,570 | ||||||||
Discounts on purchase of marketable securities, net of acquisition costs | (86,143 | ) | — | (86,143 | ) | ||||||
Net accretion on marketable securities | 2,002 | — | 2,002 | ||||||||
Increase in fair value of marketable securities | — | 43,038 | 43,038 | ||||||||
Marketable securities as of September 30, 2012 | $ | 298,223 | $ | 44,373 | $ | 342,596 |
19
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
The following table shows the fair value and gross unrealized gains and losses of the Company’s CMBS as of September 30, 2012 (in thousands) and the length of time the CMBS has been in the unrealized gain or continuous loss position:
Less than 12 months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
Description of Securities | Fair Value | Unrealized Gains | Unrealized (Losses) | Fair Value | Unrealized Gains | Unrealized (Losses) | Fair Value | Unrealized Gains | Unrealized (Losses) | ||||||||||||||||||||||||||
CMBS | $ | 310,273 | $ | 40,470 | $ | (2,349 | ) | $ | 32,323 | $ | 6,252 | $ | — | $ | 342,596 | $ | 46,722 | $ | (2,349 | ) |
As of September 30, 2012, the unrealized losses were deemed to be a temporary impairment based upon the following: (1) the Company having no intent to sell these securities, (2) it is more likely than not that the Company will not be required to sell the securities before recovery and (3) the Company’s expectation to recover the entire amortized cost basis of these securities. The Company determined that the unrealized losses of $2.3 million resulted from volatility in interest rates and credit spreads and other qualitative factors relating to macro-credit conditions in the mortgage market. Additionally, as of September 30, 2012, the Company had determined that the subordinate CMBS tranches below the Company’s CMBS investment adequately protected the Company’s ability to recover its investment and that the Company’s estimates of anticipated future cash flows from the CMBS investment had not been adversely impacted by any deterioration in the creditworthiness of the specific CMBS issuers.
The scheduled maturity of the Company’s CMBS as of September 30, 2012 is as follows (in thousands):
Available-for-sale | |||||||
Amortized Cost | Estimated Fair Value | ||||||
Due within one year | $ | — | $ | — | |||
Due after one year through five years | — | — | |||||
Due after five years through ten years | 287,387 | 332,795 | |||||
Due after ten years | 10,836 | 9,801 | |||||
$ | 298,223 | $ | 342,596 |
Actual maturities of marketable securities can differ from contractual maturities because borrowers may have the right to prepay their respective loan balances at any time. In addition, factors such as prepayments and interest rates may affect the yields on the marketable securities.
NOTE 7 — DISCONTINUED OPERATIONS
On March 9, 2012, the Company sold 12 properties for a gross sales price of $69.4 million (the “Drugstore Properties”). The transaction resulted in net cash proceeds of $68.4 million to the Company and a gain of $14.8 million. In connection with this sale, $216,000 of straight-line rent receivables were written off as a reduction to the gain. The Company has no continuing involvement with the Drugstore Properties. As of the sale date, March 9, 2012, the major class of assets of the Drugstore Properties was net total investment in real estate assets of $53.7 million. There were no significant liabilities associated with the Drugstore Properties.
As of September 30, 2012, the Company classified two properties as held for sale (the “Held for Sale Properties”). The major classes of assets of the Held for Sale Properties were net total investment in real estate assets of $295.9 million and straight-line rent receivables of $10.8 million. There were $3.2 million of liabilities associated with the Held for Sale Properties.
The results of operations for the Drugstore Properties and the Held for Sale Properties (collectively, the “Discontinued Operations Properties”) have been presented as discontinued operations on the Company’s condensed consolidated unaudited statements of operations for all periods presented. The Discontinued Operations Properties’ revenues for the three and nine months ended September 30, 2012 were $6.7 million and $21.3 million, respectively. The Discontinued Operations Properties’ revenues for the three and nine months ended September 30, 2011 were $7.9 million and $23.3 million, respectively.
20
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
NOTE 8 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Company uses certain types of derivative instruments for the purpose of managing or hedging its interest rate risks. The following table summarizes the notional amount and fair value of the Company’s executed swap agreements designated as hedging instruments (in thousands):
Aggregate Outstanding | Fair Value of Liabilities | ||||||||||||||||||
Balance Sheet Location | Notional Amount | Interest Rates (1) | Effective Dates | Maturity Dates | September 30, 2012 | December 31, 2011 | |||||||||||||
Interest Rate Swaps | Derivative liabilities, deferred rent and other liabilities | $ | 835,350 | 3.15% to 6.83% | 12/18/2009 to 7/5/2012 | 6/27/2014 to 4/1/2021 | $ | (33,922 | ) | $ | (26,092 | ) |
_______________
(1) | The interest rates consist of the underlying index swapped to a fixed rate and the applicable interest rate spread. |
Additional disclosures related to the fair value of the Company’s derivative instruments are included in Note 3 to these condensed consolidated unaudited financial statements. The notional amount under the agreements is an indication of the extent of the Company’s involvement in each instrument, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company designated the interest rate swaps as cash flow hedges, to hedge the variability of the anticipated cash flows on its variable rate notes payable. The change in fair value of the effective portion of the derivative instruments that are designated as hedges is recorded in other comprehensive income or loss. The ineffective portion of the change in fair value of the derivative instruments is recorded in interest expense.
The following table summarizes the unrealized gains and losses on the Company’s derivative instruments and hedging activities for the three and nine months ended September 30, 2012 and 2011 (in thousands):
Amount of Loss Recognized in Other Comprehensive Income | Amount of Loss Reclassified from Accumulated Other Comprehensive Income to Interest Expense (1) | ||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||
Interest Rate Swaps | $ | (2,153 | ) | $ | (13,478 | ) | $ | (7,830 | ) | $ | (19,385 | ) | $ | 9,263 | $ | — | $ | 9,263 | $ | — |
_______________
(1) | As of September 30, 2012, an interest rate swap was designated as ineffective and the unrealized loss was reclassified from accumulated other comprehensive income into interest expense as it related to one of the Held for Sale Properties and the Company intended to terminate the swap when the property is sold. |
The Company has agreements with each of its derivative counterparties that contain a provision whereby if the Company defaults on certain of its unsecured indebtedness, then the Company could also be declared in default on its derivative obligations resulting in an acceleration of payment. In addition, the Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with credit-worthy counterparties. The Company records credit risk valuation adjustments on its interest rate swaps based on the respective credit quality of the Company and the counterparty. As of both September 30, 2012 and 2011, there were no termination events or events of default related to the interest rate swaps.
21
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
NOTE 9 — NOTES PAYABLE AND OTHER BORROWINGS
As of September 30, 2012, the Company and the Consolidated Joint Ventures had $3.2 billion of debt outstanding, with a weighted average years to maturity of 5.1 years and weighted average interest rate of 4.34%. The following table summarizes the debt activity during the nine months ended and as of September 30, 2012 (in thousands):
During the Nine Months Ended September 30, 2012 | |||||||||||||||||||
Balance as of December 31, 2011 | Debt Issuance and Assumptions | Repayments | Other (1) | Balance as of September 30, 2012 | |||||||||||||||
Fixed rate debt | $ | 1,560,068 | $ | 566,416 | $ | (20,730 | ) | $ | 79,093 | $ | 2,184,847 | ||||||||
Variable rate debt | 132,143 | 557 | — | (79,000 | ) | 53,700 | |||||||||||||
Construction facilities | 4,614 | 15,542 | (5,223 | ) | — | 14,933 | |||||||||||||
Credit facility | 647,750 | 850,000 | (701,000 | ) | — | 796,750 | |||||||||||||
Repurchase agreements | 29,409 | 73,993 | — | — | 103,402 | ||||||||||||||
Total(2) | $ | 2,373,984 | $ | 1,506,508 | $ | (726,953 | ) | $ | 93 | $ | 3,153,632 |
(1) | Represents fair value adjustment of assumed mortgage notes payable, net of amortization, of $93,000. In addition, $79.0 million of variable rate debt outstanding as of December 31, 2011 was effectively fixed through the use of an interest rate swap with an effective date of June 29, 2012. |
(2) | The table above does not include loan amounts associated with certain unconsolidated joint venture arrangements of $170.9 million, of which $10.2 million is recourse to CCPT III OP. These loans mature on various dates ranging from November 2015 to July 2021. |
As of September 30, 2012, the fixed rate debt includes $556.6 million of variable rate debt subject to interest rate swap agreements which had the effect of fixing the variable interest rates per annum through the maturity date of the loan. In addition, the fixed rate debt includes mortgage notes assumed with an aggregate face amount of $40.7 million and an aggregate fair value of $39.4 million at the date of assumption. The fixed rate debt has interest rates ranging from 3.52% to 6.83% per annum. The variable rate debt has variable interest rates ranging from LIBOR plus 225 basis points to 275 basis points per annum. In addition, the construction facilities have interest rates ranging from LIBOR plus 235 basis points to 250 basis points per annum, with certain debt containing LIBOR floors. The debt outstanding matures on various dates from January 2013 through October 2022. The aggregate balance of gross real estate and related assets, net of gross intangible lease liabilities, securing the fixed and variable rate debt outstanding was $4.3 billion as of September 30, 2012. Each of the mortgage notes payable is secured by the respective properties on which the debt was placed.
As of September 30, 2012, the Company had $60.0 million available for borrowing under a senior unsecured credit facility (the “Credit Facility”) based on the underlying collateral pool of $1.5 billion. The Credit Facility provides borrowings up to $857.5 million, which includes a $278.75 million term loan (the “Term Loan”) and up to $578.75 million in revolving loans (the “Revolving Loans”). The Credit Facility may be increased to a maximum of $950.0 million. Depending upon the type of loan specified and overall leverage ratio, the Revolving Loans bear interest at either LIBOR plus an interest rate spread ranging from 2.25% to 3.00% or a base rate plus an interest rate spread ranging from 1.25% to 2.00%. The base rate is greater of (1) LIBOR plus 1.00%, (2) Bank of America N.A.’s Prime Rate or (3) the Federal Funds Rate plus 0.50%. During the year ended December 31, 2011, the Company executed two swap agreements associated with the Term Loan, which had the effect of fixing the variable interest rates per annum through the maturity date of the respective loan at 3.45% and 3.15%, respectively. The Revolving Loans and Term Loan had a combined weighted average interest rate of 2.99% as of September 30, 2012.
The Repurchase Agreements have interest rates ranging from 1.63% to 2.16% and mature on various dates from October 2012 through January 2013. Upon maturity, the Company may elect to renew the Repurchase Agreements for a period of 90 days until the CMBS mature. The CMBS have a weighted average remaining term of 9.6 years. Under the Repurchase Agreements, the lender retains the right to mark the underlying collateral to fair value. A reduction in the value of the pledged assets would require the Company to provide additional collateral to fund margin calls. As of September 30, 2012, the securities held as collateral had a fair value of $274.1 million and an amortized cost of $236.2 million. There was no cash collateral held by the counterparty as of September 30, 2012. The Repurchase Agreements are being accounted for as secured borrowings because the Company maintains effective control of the financed assets. The Repurchase Agreements are non-recourse to the Company and CCPT III OP.
22
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
The Credit Facility and certain notes payable contain customary affirmative, negative and financial covenants, representations, warranties and borrowing conditions. These agreements also include usual and customary events of default and remedies for facilities of this nature. Based on the Company’s analysis and review of its results of operations and financial condition, the Company believes it was in compliance with the covenants of the Credit Facility and such notes payable as of September 30, 2012.
NOTE 10 — SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the nine months ended September 30, 2012 and 2011 are as follows (in thousands):
Nine Months Ended September 30, | |||||||
2012 | 2011 | ||||||
Supplemental Disclosures of Non-Cash Investing and Financing Activities: | |||||||
Distributions declared and unpaid | $ | 25,418 | $ | 17,752 | |||
Fair value of mortgage notes assumed in real estate acquisitions at date of assumption | $ | 24,000 | $ | 4,862 | |||
Common stock issued through distribution reinvestment plan | $ | 124,964 | $ | 78,338 | |||
Net unrealized gain (loss) on interest rate swaps | $ | 1,433 | $ | (19,385 | ) | ||
Unrealized gain (loss) on marketable securities | $ | 43,038 | $ | (1,082 | ) | ||
Earnout liabilities recorded upon property acquisitions | $ | 6,494 | $ | 5,519 | |||
Accrued other offering costs | $ | — | $ | 827 | |||
Accrued deferred financing costs | $ | 44 | $ | — | |||
Accrued construction and capital expenditures | $ | 3,353 | $ | 34 | |||
Supplemental Cash Flow Disclosures: | |||||||
Interest paid, net of capitalized interest of $237 and $42, respectively | $ | 85,437 | 51,274 |
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. The Company is not aware of any pending legal proceedings of which the outcome is reasonably possible to have a material effect on its results of operations, financial condition or liquidity.
Purchase Commitments
As of September 30, 2012, the Company had entered into agreements with unaffiliated third-party sellers to purchase a 100% interest in five retail properties, subject to meeting certain criteria, for an aggregate purchase price of $259.8 million, exclusive of closing costs. As of September 30, 2012, the Company had $7.7 million of property escrow deposits held by escrow agents in connection with these future property acquisitions, all of which will be forfeited if the transactions are not completed under certain circumstances. These deposits are included in the accompanying September 30, 2012 condensed consolidated unaudited balance sheet in property escrow deposits, prepaid expenses and other assets. As of November 9, 2012, none of these escrow deposits had been forfeited.
In addition, during the nine months ended September 30, 2012, a purchase agreement was terminated and the seller paid the Company a breakage fee and reimbursed the Company for certain underwriting expenses paid. The Company recorded these proceeds, net of underwriting expenses and advisor reimbursements, of $2.7 million as other income. The Company reimbursed CR III Advisors and its affiliates for $256,000 of costs related to this transaction.
As of September 30, 2012, the Company owned one land parcel, upon which an office building is being developed. Based on budgeted construction costs, the cost to complete the facility is estimated to be $45.8 million. The construction is being funded by a construction loan facility totaling $33.8 million. As of September 30, 2012, $7.9 million was outstanding under the construction facility. Additionally, the Company had properties subject to earnout provisions obligating it to pay additional consideration to the seller contingent on the future leasing and occupancy of vacant space at the properties, as discussed in Note 3 to these condensed consolidated unaudited financial statements.
23
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
Environmental Matters
In connection with the ownership and operation of real estate, the Company potentially may be liable for costs and damages related to environmental matters. The Company owns certain properties that are subject to environmental remediation. In each case, the seller of the property, the tenant of the property and/or another third party has been identified as the responsible party for environmental remediation costs related to the respective property. Additionally, in connection with the purchase of certain of the properties, the respective sellers and/or tenants have indemnified the Company against future remediation costs. In addition, the Company carries environmental liability insurance on its properties that provides limited coverage for remediation liability and pollution liability for third-party bodily injury and property damage claims. Accordingly, the Company does not believe that it is reasonably possible that the environmental matters identified at such properties will have a material effect on its results of operations, financial condition or liquidity, nor is it aware of any environmental matters at other properties which it believes are reasonably possible to have a material effect on its results of operations, financial condition or liquidity.
NOTE 12 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
The Company has incurred commissions, fees and expenses payable to CR III Advisors or its affiliates in connection with the Offerings, and has incurred and will continue to incur commissions, fees and expenses in connection with the acquisition, management and sale of the assets of the Company.
Offerings
In connection with the Initial Offering and Follow-on Offering, Cole Capital Corporation (“Cole Capital”), the Company’s dealer manager, which is affiliated with our advisor, received a selling commission of up to 7.0% of gross offering proceeds, before reallowance of commissions earned by participating broker-dealers. Cole Capital reallowed 100% of selling commissions earned to participating broker-dealers. In addition, Cole Capital received 2.0% of gross offering proceeds, before reallowance to participating broker-dealers, as a dealer manager fee in connection with the Initial Offering and Follow-on Offering. Cole Capital, in its sole discretion, reallowed a portion of its dealer manager fee to such participating broker-dealers as a marketing and due diligence expense reimbursement, based on factors such as the volume of shares sold by such participating broker-dealers and the amount of marketing support provided by such participating broker-dealers. No selling commissions or dealer manager fees were paid to Cole Capital or any other broker-dealers with respect to shares sold under the Company’s DRIP.
All other organization and offering expenses associated with the sale of the Company’s common stock (excluding selling commissions and the dealer manager fee) were paid by CR III Advisors or its affiliates and were reimbursed by the Company up to 1.5% of aggregate gross offering proceeds. A portion of the other organization and offering expenses may be underwriting compensation.
The Company recorded commissions, fees and expense reimbursements as shown in the table below for services provided by CR III Advisors and its affiliates related to the services described above during the periods indicated (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Offering: | |||||||||||||||
Selling commissions | $ | — | $ | 21,292 | $ | 56,264 | $ | 58,999 | |||||||
Selling commissions reallowed by Cole Capital | $ | — | $ | 21,292 | $ | 56,264 | $ | 58,999 | |||||||
Dealer manager fee | $ | — | $ | 6,191 | $ | 16,662 | $ | 17,138 | |||||||
Dealer manager fee reallowed by Cole Capital | $ | — | $ | 3,227 | $ | 8,446 | $ | 8,822 | |||||||
Other organization and offering expenses | $ | — | $ | 4,651 | $ | 13,188 | $ | 12,879 |
Acquisitions and Operations
CR III Advisors or its affiliates also receive acquisition and advisory fees of up to 2.0% of the contract purchase price of each asset for the acquisition, development or construction of properties and will be reimbursed for acquisition expenses incurred in the process of acquiring properties, so long as the total acquisition fees and expenses relating to the transaction does not exceed 6.0% of the contract purchase price.
24
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
The Company paid, and expects to continue to pay, CR III Advisors a monthly asset management fee of 0.0417%, which is one-twelfth of 0.5%, of the Company’s average invested assets for that month (the “Asset Management Fee”). The Company will reimburse costs and expenses incurred by CR III Advisors in providing asset management services.
The Company paid, and expects to continue to pay, Cole Realty Advisors, Inc. (“Cole Realty Advisors”), its property manager, which is affiliated with our advisor, fees for the management and leasing of the Company’s properties. Property management fees are up to 2.0% of gross revenue for single-tenant properties and 4.0% of gross revenue for multi-tenant properties and leasing commissions will be at prevailing market rates; provided however, that the aggregate of all property management and leasing fees paid to affiliates of our advisor plus all payments to third parties will not exceed the amount that other nonaffiliated management and leasing companies generally charge for similar services in the same geographic location. Cole Realty Advisors may subcontract its duties for a fee that may be less than the fee provided for in the property management agreement. The Company reimburses Cole Realty Advisors’ costs of managing and leasing the properties.
The Company reimburses CR III Advisors for all expenses it paid or incurred in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse CR III Advisors for any amount by which its operating expenses (including the Asset Management Fee) at the end of the four preceding fiscal quarters exceeds the greater of (1) 2% of average invested assets, or (2) 25% of net income other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of assets for that period, unless the Company’s independent directors find that a higher level of expense is justified for that year based on unusual and non-recurring factors. The Company will not reimburse CR III Advisors for personnel costs in connection with services for which CR III Advisors receives acquisition fees and real estate commissions.
If CR III Advisors, or its affiliates, provides substantial services, as determined by the independent directors, in connection with the origination or refinancing of any debt financing obtained by the Company that is used to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay CR III Advisors or its affiliates a financing coordination fee equal to 1% of the amount available and/or outstanding under such financing; provided however, that CR III Advisors or its affiliates shall not be entitled to a financing coordination fee in connection with the refinancing of any loan secured by any particular property that was previously subject to a refinancing in which CR III Advisors or its affiliates received such a fee. Financing coordination fees payable from loan proceeds from permanent financing will be paid to CR III Advisors or its affiliates as the Company acquires and/or assumes such permanent financing. With respect to any revolving line of credit, no financing coordination fees will be paid on loan proceeds from any line of credit unless all net offering proceeds received as of the date proceeds from the line of credit are drawn for the purpose of acquiring assets have been invested. In addition, with respect to any revolving line of credit, CR III Advisors or its affiliates will receive financing coordination fees only in connection with amounts being drawn for the first time and not upon any re-drawing of amounts that had been repaid by the Company.
The Company recorded fees and expense reimbursements as shown in the table below for services provided by CR III Advisors and its affiliates related to the services described above during the periods indicated (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Acquisitions and Operations: | |||||||||||||||
Acquisition fees and expenses | $ | 9,019 | $ | 19,617 | $ | 39,115 | $ | 37,764 | |||||||
Asset management fees and expenses | $ | 8,531 | $ | 5,379 | $ | 23,566 | $ | 13,936 | |||||||
Property management and leasing fees and expenses | $ | 3,594 | $ | 2,419 | $ | 10,675 | $ | 6,493 | |||||||
Operating expenses | $ | 406 | $ | 553 | $ | 2,290 | $ | 1,663 | |||||||
Financing coordination fees | $ | 1,344 | $ | 5,115 | $ | 7,153 | $ | 11,472 |
25
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
Liquidation/Listing
If CR III Advisors or its affiliates provides a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of one or more properties, the Company will pay CR III Advisors or its affiliates up to one-half of the brokerage commission paid, but in no event to exceed an amount equal to 3% of the sales price of each property sold. In no event will the combined real estate commission paid to CR III Advisors, its affiliates and unaffiliated third parties exceed 6% of the contract sales price. In addition, after investors have received a return of their net capital contributions and an 8% cumulative, non-compounded annual return, then CR III Advisors is entitled to receive 15% of the remaining net sale proceeds.
Upon listing of the Company’s common stock on a national securities exchange, a fee equal to 15% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing, exceeds the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate an 8% cumulative, non-compounded annual return to investors will be paid to CR III Advisors (the “Subordinated Incentive Listing Fee”).
Upon termination of the advisory agreement with CR III Advisors, other than termination by the Company because of a material breach of the advisory agreement by CR III Advisors, a performance fee of 15% of the amount, if any, by which the appraised asset value at the time of such termination plus total distributions paid to stockholders through the termination date exceeds the aggregate capital contribution contributed by investors less distributions from sale proceeds plus payment to investors of an 8% annual, cumulative, non-compounded return on capital. No subordinated performance fee will be paid to the extent that the Company has already paid or become obligated to pay CR III Advisors a subordinated participation in net sale proceeds or the Subordinated Incentive Listing Fee.
During the nine months ended September 30, 2012 and 2011, no commissions or fees were incurred for services provided by CR III Advisors and its affiliates related to the services described above.
Due to Affiliates
As of September 30, 2012, $3.8 million had been incurred primarily for operating and acquisition expenses, by CR III Advisors and its affiliates, but had not yet been reimbursed by the Company and were included in due to affiliates on the condensed consolidated unaudited balance sheets. As of December 31, 2011, $4.8 million had been incurred primarily for other organization and offering, operating and acquisition expenses, by CR III Advisors and its affiliates, but had not yet been reimbursed by the Company and were included in due to affiliates on the condensed consolidated unaudited balance sheets.
NOTE 13 — ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged or will engage CR III Advisors and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company’s common stock available for issuance, as well as other administrative responsibilities for the Company including accounting services and investor relations. As a result of these relationships, the Company is dependent upon CR III Advisors and its affiliates. In the event that these companies are unable to provide the Company with these services, the Company would be required to find alternative providers of these services.
NOTE 14 — SUBSEQUENT EVENTS
Issuance of Shares of Common Stock in the DRIP Offering
The Company continues to issue shares of common stock under the DRIP Offering. As of November 9, 2012, the Company had issued, approximately 10.9 million shares pursuant to the DRIP Offering, resulting in gross proceeds to the Company of $103.5 million.
Redemption of Shares of Common Stock
Subsequent to September 30, 2012, the Company redeemed approximately 2.3 million shares for $22.5 million at an average price per share of $9.84.
26
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
September 30, 2012
Investment in Real Estate and Related Assets
Subsequent to September 30, 2012, the Company acquired a 100% interest in one commercial real estate property for an aggregate purchase price of $1.4 million. The Company also acquired an interest in a joint venture arrangement for $37.1 million. The acquisitions were funded with net proceeds of the Follow-on Offering and the DRIP Offering. The Company has not completed its initial purchase price allocations with respect to these properties and therefore cannot provide similar disclosures to those included in Note 4 to these condensed consolidated unaudited financial statements for these properties. In addition, the Company purchased four CMBS with an aggregate face value of $50.4 million for an aggregate price of $21.3 million.
Sale of Real Estate and Related Assets
Subsequent to September 30, 2012, the Company sold the Held for Sale Properties discussed in Note 5 to these condensed consolidated unaudited financial statements with an aggregate net book value of $303.5 million, for an aggregate sales price of $386.7 million, exclusive of closing costs. In addition, the Company sold five CMBS with an aggregate amortized cost basis of $15.6 million for aggregate proceeds of $19.9 million.
Notes Payable and Other Borrowings
Subsequent to September 30, 2012, the Company entered into loan agreements totaling $192.5 million secured by commercial properties with an aggregate purchase price of $306.2 million. In connection with one of the Held for Sale Properties, the Company prepaid a mortgage note of $156.0 million and terminated the related swap agreement. As of November 9, 2012, the Company had $25.0 million outstanding under the construction facilities and $697.8 million outstanding under the Credit Facility.
Held for Sale Properties
Subsequent to September 30, 2012, seven properties with an aggregate net book value of $71.8 million met the held for sale criteria. A loan of $24.3 million will be assumed in connection with the sale of one of the properties. The Company anticipates the sales to close prior to December 31, 2012 for an aggregate sales price greater than the properties' aggregate net book value.
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Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated unaudited financial statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011. The terms “we,” “us,” “our” and the “Company” refer to Cole Credit Property Trust III, Inc. and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our condensed consolidated unaudited financial statements and the notes thereto.
Forward-Looking Statements
Except for historical information, this section contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including discussion and analysis of our financial condition and our subsidiaries, our anticipated capital expenditures, amounts of anticipated cash distributions to our stockholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on their knowledge and understanding of our business and industry. Words such as “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” or comparable words, variations and similar expressions are intended to identify forward-looking statements. All statements not based on historical fact are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or implied in the forward-looking statements. A full discussion of our risk factors may be found under Part I Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Investors are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this Quarterly Report on Form 10-Q include, among others, changes in general economic conditions, changes in real estate conditions, construction costs that may exceed estimates, construction delays, increases in interest rates, lease-up risks, rent relief, inability to obtain new tenants upon the expiration or termination of existing leases, inability to obtain financing or refinance existing debt and the potential need to fund tenant improvements or other capital expenditures out of operating cash flows. The forward-looking statements should be read in light of the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2011.
Management’s discussion and analysis of financial condition and results of operations are based upon our condensed consolidated unaudited financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Overview
We were formed on January 22, 2008 to acquire and operate a diverse portfolio of core commercial real estate investments primarily consisting of necessity retail properties located throughout the United States, including U.S. protectorates. We commenced our principal operations on January 6, 2009. Prior to such date, we were considered a development stage company. We acquired our first real estate property on January 6, 2009. We have no paid employees and are externally advised and managed by our advisor. We elected to be taxed, and currently qualify, as a REIT for federal income tax purposes.
We completed our Follow-on Offering on April 27, 2012 and will continue to issue shares of common stock under the DRIP Offering. We expect that we will continue to acquire properties throughout 2012 utilizing the proceeds from the Follow-on Offering and DRIP Offering, proceeds from financings on owned properties and future property acquisitions and proceeds from the potential strategic sale of properties and other investments. We expect that property acquisitions in 2013 and future periods, if any, will be funded by proceeds from the strategic sale of properties and other investments, financing of the acquired properties, proceeds from our DRIP Offering and cashflows from operations. We expect property acquisitions in future periods to be less than acquisitions in 2012.
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Our operating results and cash flows are primarily influenced by rental income from our commercial properties, interest expense on our property acquisition indebtedness and acquisition and operating expenses. Rental and other property income accounted for 87% and 91% of total revenue during the three months ended September 30, 2012 and 2011, respectively, and 87% and 92% of total revenue during the nine months ended September 30, 2012 and 2011, respectively. As 99% of our rentable square feet was under lease as of September 30, 2012, with a weighted average remaining lease term of 12.8 years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors. Our advisor regularly monitors the creditworthiness of our tenants by reviewing the tenant’s financial results, credit rating agency reports (if any) on the tenant or guarantor, the operating history of the property with such tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment, and other information for changes and possible trends. If our advisor identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant’s financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property, or identifying a possible replacement tenant should the current tenant fail to perform on the lease. As of September 30, 2012, the debt leverage ratio of our consolidated real estate assets, which is the ratio of debt to total gross real estate and related assets net of gross intangible lease liabilities, was 44%. As we acquire additional commercial real estate, we will be subject to changes in real estate prices and changes in interest rates on any new indebtedness used to acquire the properties. We may manage our risk of changes in real estate prices on future property acquisitions by entering into purchase agreements and loan commitments simultaneously, or through loan assumption, so that our operating yield is determinable at the time we enter into a purchase agreement, by contracting with developers for future delivery of properties, or by entering into sale-leaseback transactions. We manage our interest rate risk by monitoring the interest rate environment in connection with future property acquisitions or upcoming debt maturities to determine the appropriate financing or refinancing terms, which may include fixed rate loans, variable rate loans or interest rate hedges. If we are unable to acquire suitable properties or obtain suitable financing terms for future acquisitions or refinancing, our results of operations may be adversely affected.
Recent Market Conditions
Beginning in late 2007, domestic and international financial markets experienced significant disruptions that were brought about in large part by challenges in the world-wide banking system. These disruptions severely impacted the availability of credit and contributed to rising costs associated with obtaining credit. Since 2010, the volume of mortgage lending for commercial real estate has been increasing and lending terms have improved and they continue to improve; however, such lending activity continues to be significantly less than previous levels. Although lending market conditions have improved, certain factors continue to negatively affect the lending environment, including the sovereign credit issues of certain countries in the European Union. We have experienced, and may continue to experience, more stringent lending criteria, which may affect our ability to finance certain property acquisitions or refinance our debt at maturity. Additionally, for properties for which we are able to obtain financing, the interest rates and other terms on such loans may be unacceptable. We have managed, and expect to continue to manage, the current mortgage lending environment by considering alternative lending sources, including the securitization of debt, utilizing fixed rate loans, borrowing on our existing Credit Facility, short-term variable rate loans, assuming existing mortgage loans in connection with property acquisitions, or entering into interest rate lock or swap agreements, or any combination of the foregoing.
The economic downturn led to high unemployment rates and a decline in consumer spending. These economic trends have adversely impacted the retail and real estate markets by causing higher tenant vacancies, declining rental rates and declining property values. In 2011 and through September 30, 2012, the economy improved and continues to show signs of recovery. Additionally, the real estate markets have experienced an improvement in property values, occupancy and rental rates; however, in many markets property values, occupancy and rental rates continue to be below those previously experienced before the economic downturn. As of September 30, 2012, 99% of our rentable square feet was under lease. However, if the recent improvements in economic conditions do not continue, we may experience significant vacancies or be required to reduce rental rates on occupied space. If we do experience significant vacancies, our advisor will actively seek to lease our vacant space; however, such space may be leased at lower rental rates and for shorter lease terms than previously experienced. In addition, as many retailers and other tenants have been delaying or eliminating their store expansion plans, the amount of time required to re-lease a property may increase as a result.
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Results of Operations
Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate investments. The following table shows the property statistics of our real estate assets, including the Consolidated Joint Ventures, as of September 30, 2012 and 2011:
September 30, | |||||
2012 | 2011 | ||||
Number of commercial properties (1) | 968 | 634 | |||
Approximate rentable square feet (2) | 41.4 million | 30.0 million | |||
Percentage of rentable square feet leased | 99 | % | 99 | % |
(1) | Excludes properties owned through the Unconsolidated Joint Ventures. |
(2) | Including square feet of the buildings on land that are subject to ground leases. |
The following table summarizes our real estate investment activity, including the Consolidated Joint Ventures, during the three and nine months ended September 30, 2012 and 2011:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
Commercial properties acquired (1) | 42 | 92 | 287 | 184 | |||||||||||
Approximate purchase price of acquired properties | $ | 371.0 million | $ | 967.7 million | $ | 1.5 billion | $ | 1.8 billion | |||||||
Approximate rentable square feet (2) | 1.5 million | 6.3 million | 9.2 million | 12.2 million |
(1) | Excludes properties owned through the Unconsolidated Joint Ventures. |
(2) | Including square feet of the buildings on land that are subject to ground leases. |
As shown in the tables above, we and our Consolidated Joint Ventures owned 968 commercial properties as of September 30, 2012, compared to 634 commercial properties as of September 30, 2011. Accordingly, our results of operations for the three and nine months ended September 30, 2012, as compared to the three and nine months ended September 30, 2011, reflect significant increases in most categories.
Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011
Revenue. Revenue increased $56.6 million, or 63%, to $146.3 million for the three months ended September 30, 2012, compared to $89.7 million for the three months ended September 30, 2011. Our revenue consisted primarily of rental and other property income from net leased commercial properties, which accounted for 87% and 91% of total revenues during the three months ended September 30, 2012 and 2011, respectively.
Rental and other property income increased $44.6 million, or 54%, to $126.6 million for the three months ended September 30, 2012, compared to $82.0 million for the three months ended September 30, 2011. The increase was primarily due to the acquisition of 334 rental income-producing properties subsequent to September 30, 2011. We also pay certain operating expenses subject to reimbursement by our tenants, which resulted in $11.5 million of tenant reimbursement income during the three months ended September 30, 2012, compared to $6.3 million during the three months ended September 30, 2011.
Interest income on notes receivable increased $385,000, or 28%, to $1.8 million for the three months ended September 30, 2012, compared to $1.4 million for the three months ended September 30, 2011. The increase was due to the interest income earned on the Mezzanine Loan acquired during the three months ended September 30, 2012, as discussed in Note 5 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q.
In addition, we recorded interest income on marketable securities of $6.5 million for the three months ended September 30, 2012, compared to $13,000 for the three months ended September 30, 2011. The increase is due to the acquisition of 30 CMBS subsequent to September 30, 2011.
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General and Administrative Expenses. General and administrative expenses increased $2.7 million, or 87%, to $5.8 million for the three months ended September 30, 2012, compared to $3.1 million for the three months ended September 30, 2011. The increase was primarily due to an increase in legal and professional fees for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The primary general and administrative expense items are legal, professional and accounting fees, escrow and trustee fees and operating expense reimbursements to our advisor.
Property Operating Expenses. Property operating expenses increased $6.6 million, or 97%, to $13.4 million for the three months ended September 30, 2012, compared to $6.8 million for the three months ended September 30, 2011. The increase was primarily due to increased property taxes, repairs and maintenance and insurance expenses relating to the acquisition of 334 rental income-producing properties subsequent to September 30, 2011. In addition, the increase was due to the ownership of more properties during the three months ended September 30, 2012 than in the three months ended September 30, 2011, for which we initially pay certain operating expenses and are reimbursed by the tenant in accordance with the respective lease agreements. The primary property operating expense items are property taxes, repairs and maintenance and property related insurance.
Property and Asset Management Expenses. Pursuant to the advisory agreement with our advisor, we are required to pay to our advisor a monthly asset management fee equal to one-twelfth of 0.50% of the average invested assets. Additionally, we may be required to reimburse expenses incurred by our advisor in providing asset management services, subject to limitations as set forth in the advisory agreement. Pursuant to the property management agreement with our affiliated property manager, we are required to pay to our property manager a property management fee in an amount up to 2% of gross revenues from each of our single tenant properties and up to 4% of gross revenues from each of our multi-tenant properties. We may also be required to reimburse our property manager expenses it incurred relating to managing or leasing the properties, subject to limitations as set forth in the advisory agreement.
Property and asset management expenses increased $4.8 million, or 65%, to $12.2 million for the three months ended September 30, 2012, compared to $7.4 million for the three months ended September 30, 2011. Property management fees increased $1.4 million, or 70%, to $3.4 million for the three months ended September 30, 2012 from $2.0 million for the three months ended September 30, 2011. The increase in property management fees was primarily due to an increase in cash receipts related to an increase in rental and other property income for the three months ended September 30, 2012, from the 334 properties acquired subsequent to September 30, 2011.
Asset management fees increased $3.2 million, or 65%, to $8.1 million for the three months ended September 30, 2012, from $4.9 million for the three months ended September 30, 2011. The increase in asset management fees was primarily due to an increase in the average invested assets to $6.7 billion for the three months ended September 30, 2012, from $4.4 billion for the three months ended September 30, 2011.
In addition, during the three months ended September 30, 2012, we recorded $708,000 related to reimbursement of expenses incurred by our advisor in performing property and asset management services, compared to $518,000 for the three months ended September 30, 2011. The increase was primarily due to expenses incurred by our advisor related to management of 334 additional rental income-producing properties acquired subsequent to September 30, 2011.
Acquisition Related Expenses. Acquisition related expenses decreased $13.4 million, or 55%, to $11.1 million for the three months ended September 30, 2012, compared to $24.5 million for the three months ended September 30, 2011. The decrease is due to acquisition related expenses incurred in connection with the purchase of 42 commercial properties, for an aggregate purchase price of $371.0 million, during the three months ended September 30, 2012, compared to 92 commercial properties, for an aggregate purchase price of $967.7 million, during the three months ended September 30, 2011. Pursuant to the advisory agreement with our advisor, we pay an acquisition fee to our advisor of 2% of the contract purchase price of each property or asset acquired. We also reimburse our advisor for acquisition expenses incurred in the process of acquiring property or in the origination or acquisition of a loan other than for personnel costs for which our advisor receives acquisition fees.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $15.8 million, or 59%, to $42.4 million for the three months ended September 30, 2012, compared to $26.6 million for the three months ended September 30, 2011. The increase was primarily due to an increase in the average invested assets to $6.7 billion for the three months ended September 30, 2012, from $4.4 billion for the three months ended September 30, 2011.
Equity in Income of Unconsolidated Joint Ventures. Equity in income of Unconsolidated Joint Ventures increased $91,000, or 26%, to $445,000 for the three months ended September 30, 2012, compared to $354,000 for the three months ended September 30, 2011. The increase is primarily due to the acquisition of four of the Unconsolidated Joint Ventures subsequent to September 30, 2011.
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Other Income. Other income, which includes interest income, decreased $36,000, or 49%, to $38,000 during the three months ended September 30, 2012, compared to $74,000 during the three months ended September 30, 2011. The decrease was primarily due to lower average uninvested cash of $174.5 million during the three months ended September 30, 2012, as compared to $217.0 million during the three months ended September 30, 2011, as a result of acquiring 334 rental income-producing properties subsequent to September 30, 2011.
Interest Expense. Interest expense increased $22.1 million, or 97%, to $44.8 million for the three months ended September 30, 2012, compared to $22.7 million during the three months ended September 30, 2011. The increase was due to an increase in the average aggregate amount of notes payable and other borrowings outstanding to $3.0 billion during the three months ended September 30, 2012, from $1.9 billion for the three months ended September 30, 2011. In addition, the increase was due to a $9.3 million loss reclassified from accumulated other comprehensive income into interest expense on an ineffective interest rate swap as it related to one of the Held for Sale Properties during the three months ended September 30, 2012. See Note 5 to our condensed consolidated unaudited financial statements in this Quarterly Report on 10-Q for further information.
Income from Discontinued Operations. Income from discontinued operations was $1.5 million for the three months ended September 30, 2012, compared to $2.3 million for the three months ended September 30, 2011. The decrease was due to the sale of the Drugstore Properties on March 9, 2012, as these properties are not included in the results of operations for the three months ended September 30, 2012.
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011
Revenue. Revenue increased $171.2 million, or 75%, to $398.7 million for the nine months ended September 30, 2012, compared to $227.5 million for the nine months ended September 30, 2011. Our revenue consisted primarily of rental and other property income from net leased commercial properties, which accounted for 87% and 92% of total revenues during the nine months ended September 30, 2012 and September 30, 2011, respectively.
Rental and other property income increased $139.6 million, or 67%, to $348.4 million for the nine months ended September 30, 2012, compared to $208.8 million for the nine months ended September 30, 2011. The increase was primarily due to the acquisition of 334 rental income-producing properties subsequent to September 30, 2011. We also pay certain operating expenses subject to reimbursement by our tenants, which resulted in $31.8 million of tenant reimbursement income during the nine months ended September 30, 2012, compared to $14.6 million during the nine months ended September 30, 2011.
Interest income on notes receivable increased $529,000, or 13%, to $4.6 million for the nine months ended September 30, 2012, compared to $4.1 million for the nine months ended September 30, 2011. The increase was primarily due to the interest income earned on the Mezzanine Loan acquired during the nine months ended September 30, 2012, as discussed in Note 5 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q, combined with interest earned on the Advance Note during the nine months ended September 30, 2012, as discussed in Note 4 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q.
In addition, we recorded interest income on marketable securities of $13.9 million for the nine months ended September 30, 2012 compared to $13,000 for the nine months ended September 30, 2011. The increase is due to the acquisition of 30 CMBS subsequent to September 30, 2011.
General and Administrative Expenses. General and administrative expenses increased $7.3 million, or 101%, to $14.5 million for the nine months ended September 30, 2012, compared to $7.2 million for the nine months ended September 30, 2011. The increase was primarily due to an increase in legal and professional fees for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011, combined with increased trustee fees and operating expense reimbursements as a result of an increase in the number of stockholders of record and the acquisition of 334 rental income-producing properties subsequent to September 30, 2011. The primary general and administrative expense items are legal, professional and accounting fees, escrow and trustee fees, operating expense reimbursements to our advisor and state franchise and income taxes.
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Property Operating Expenses. Property operating expenses increased $19.2 million or 119%, to $35.3 million for the nine months ended September 30, 2012, compared to $16.1 million for the nine months ended September 30, 2011. The increase was primarily due to increased property taxes, repairs and maintenance and insurance expenses relating to the acquisition of 334 rental income-producing properties subsequent to September 30, 2011. In addition, the increase was due to the ownership of more properties during the nine months ended September 30, 2012 than in the nine months ended September 30, 2011, for which we initially pay certain operating expenses and are reimbursed by the tenant in accordance with the respective lease agreements. The primary property operating expense items are property taxes, repairs and maintenance and property related insurance.
Property and Asset Management Expenses. Pursuant to the advisory agreement with our advisor, we are required to pay to our advisor a monthly asset management fee equal to one-twelfth of 0.50% of the average invested assets. Additionally, we may be required to reimburse expenses incurred by our advisor in providing asset management services, subject to limitations as set forth in the advisory agreement. Pursuant to the property management agreement with our affiliated property manager, we are required to pay to our property manager a property management fee in an amount up to 2% of gross revenues from each of our single tenant properties and up to 4% of gross revenues from each of our multi-tenant properties. We may also be required to reimburse our property manager expenses it incurred relating to managing or leasing the properties, subject to limitations as set forth in the advisory agreement.
Property and asset management expenses increased $14.7 million, or 77%, to $33.9 million for the nine months ended September 30, 2012, compared to $19.2 million for the nine months ended September 30, 2011. Property management fees increased $4.0 million, or 77%, to $9.2 million for the nine months ended September 30, 2012 from $5.2 million for the nine months ended September 30, 2011. The increase in property management fees was primarily due to an increase in cash receipts related to an increase in rental and other property income for the nine months ended September 30, 2012, from the 334 properties acquired subsequent to September 30, 2011.
Asset management fees increased $9.8 million, or 79%, to $22.2 million for the nine months ended September 30, 2012, from $12.4 million for the nine months ended September 30, 2011. The increase in asset management fees was primarily due to an increase in the average invested assets to $6.0 billion for the nine months ended September 30, 2012, from $4.0 billion for the nine months ended September 30, 2011.
In addition, during the nine months ended September 30, 2012, we recorded $2.4 million related to reimbursement of expenses incurred by our advisor in performing property and asset management services, compared to $1.6 million for the nine months ended September 30, 2011. The increase was primarily due to expenses incurred by our advisor related to management of 334 additional rental income-producing properties acquired subsequent to September 30, 2011.
Acquisition Related Expenses. Acquisition related expenses decreased $3.3 million, or 7%, to $43.9 million for the nine months ended September 30, 2012, compared to $47.2 million for the nine months ended September 30, 2011. The decrease is due to acquisition related expenses incurred in connection with the purchase of 287 commercial properties, for an aggregate purchase price of $1.5 billion, during the nine months ended September 30, 2012, compared to 184 commercial properties, for an aggregate purchase price of $1.8 billion, during the nine months ended September 30, 2011. Pursuant to the advisory agreement with our advisor, we pay an acquisition fee to our advisor of 2% of the contract purchase price of each property or asset acquired. We also reimburse our advisor for acquisition expenses incurred in the process of acquiring property or in the origination or acquisition of a loan, other than for personnel costs for which our advisor receives acquisition fees.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $50.1 million, or 76%, to $115.9 million for the nine months ended September 30, 2012, compared to $65.8 million for the nine months ended September 30, 2011. The increase was primarily due to an increase in the average invested assets to $6.0 billion for the nine months ended September 30, 2012, from $4.0 billion for the nine months ended September 30, 2011.
Equity in Income of Unconsolidated Joint Ventures. Equity in income of Unconsolidated Joint Ventures increased $200,000, or 18%, to $1.3 million for the nine months ended September 30, 2012, compared to $1.1 million for the nine months ended September 30, 2011. The increase is primarily due to the acquisition of four of the Unconsolidated Joint Ventures during the nine months ended September 30, 2012.
Other Income. Other income during the nine months ended September 30, 2012 primarily consisted of non-recurring net proceeds of $2.7 million received as a result of a seller terminating a purchase agreement, as discussed in Note 11 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q. In addition, we received net proceeds of $664,000 as a result of the sale and condemnation of two land parcels during the nine months ended September 30, 2012. Other income also includes interest income on uninvested cash.
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Interest Expense. Interest expense increased $48.9 million, or 91%, to $102.9 million for the nine months ended September 30, 2012, compared to $54.0 million during the nine months ended September 30, 2011. The increase was primarily due to an increase in the average aggregate amount of notes payable and other borrowings outstanding to $2.8 billion during the nine months ended September 30, 2012, from $1.6 billion for the nine months ended September 30, 2011. In addition, the increase was due to a $9.3 million loss reclassified from accumulated other comprehensive income into interest expense on an ineffective interest rate swap as it related to one of the Held for Sale Properties during the nine months ended September 30, 2012. See Note 5 to our condensed consolidated unaudited financial statements in this Quarterly Report on 10-Q for further information.
Income from Discontinued Operations. Income from discontinued operations was $5.2 million for the nine months ended September 30, 2012, compared to $6.9 million for the nine months ended September 30, 2011. The decrease was primarily due to the sale of the Drugstore Properties on March 9, 2012, as compared to a full nine months of operations for these properties during the nine months ended September 30, 2011.
Gain on sale of real estate assets. During the nine months ended September 30, 2012, we recorded a gain on the sale of the Drugstore Properties of $14.8 million. No similar transactions occurred during the nine months ended September 30, 2011.
Funds From Operations and Modified Funds From Operations
Funds From Operations (“FFO”) is a non-GAAP financial performance measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and widely recognized by investors and analysts as one measure of operating performance of a real estate company. The FFO calculation excludes items such as real estate depreciation and amortization, gains and losses on the sale of depreciable real estate and impairments of depreciable real estate. Depreciation and amortization as applied in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, it is management’s view, and we believe the view of many industry investors and analysts, that the presentation of operating results for real estate companies by using the historical cost accounting method alone is insufficient. In addition, FFO excludes gains and losses from the sale of depreciable real estate and impairment charges on depreciable real estate, which we believe provides management and investors with a helpful additional measure of the performance of our real estate portfolio, as it allows for comparisons, year to year, that reflect the impact on operations from trends in items such as occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs. We compute FFO in accordance with NAREIT’s definition.
In addition to FFO, we use Modified Funds From Operations (“MFFO”) as a non-GAAP supplemental financial performance measure to evaluate the operating performance of our real estate portfolio. MFFO, as defined by our company, excludes from FFO acquisition related costs, which are required to be expensed in accordance with GAAP. In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments’ revenues and expenses. Management believes that excluding acquisition costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management, and provides investors a view of the performance of our portfolio over time, including after the Company ceases to acquire properties on a frequent and regular basis. MFFO also allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of our performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.
For all of these reasons, we believe FFO and MFFO, in addition to net income and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of our real estate portfolio over time. However, not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. FFO and MFFO should not be considered as alternatives to net income or to cash flows from operating activities, and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs.
MFFO 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 MFFO excludes acquisition expenses, which are an important component in an analysis of the historical performance of a property, MFFO should not be construed as a historic performance measure. Neither the SEC, NAREIT, nor any other regulatory body has evaluated the acceptability of the exclusions contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP financial performance measure.
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Our calculation of FFO and MFFO, and reconciliation to net income, which is the most directly comparable GAAP financial measure, is presented in the table below for the three and nine months ended September 30, 2012 and 2011 (in thousands). FFO and MFFO are influenced by the timing of acquisitions and the operating performance of our real estate investments.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||||
NET INCOME ATTRIBUTABLE TO THE COMPANY | $ | 18,567 | $ | 1,271 | $ | 77,727 | $ | 26,011 | |||||||
Depreciation of real estate assets | 27,800 | 17,368 | 75,579 | 42,905 | |||||||||||
Amortization of lease related costs | 14,566 | 9,240 | 40,349 | 22,927 | |||||||||||
Depreciation and amortization of real estate assets from discontinued operations | 2,014 | 2,341 | 6,149 | 7,019 | |||||||||||
Depreciation and amortization of real estate assets in unconsolidated joint ventures | 1,549 | 395 | 3,153 | 1,224 | |||||||||||
Gain on sale and condemnation of real estate assets | — | — | (15,445 | ) | — | ||||||||||
Funds from operations (FFO) | 64,496 | 30,615 | 187,512 | 100,086 | |||||||||||
Acquisition related expenses | 11,104 | 24,480 | 43,923 | 47,201 | |||||||||||
Modified funds from operations (MFFO) | $ | 75,600 | $ | 55,095 | $ | 231,435 | $ | 147,287 |
Set forth below is additional information that may be helpful in assessing our operating results:
• | In order to recognize revenues on a straight-line basis over the terms of the respective leases, we recognized additional revenue by straight-lining rental revenue of $8.9 million and $24.2 million during the three and nine months ended September 30, 2012, respectively, and $6.8 million and $17.8 million during the three and nine months ended and September 30, 2011, respectively. In addition, related to the Unconsolidated Joint Ventures, straight-line revenue of $130,000 and $208,000 for the three and nine months ended September 30, 2012, respectively, and $53,000 and $65,000 for the three and nine months ended and September 30, 2011, respectively is included in equity in income of unconsolidated joint ventures on the condensed consolidated unaudited statements of operations. |
• | Amortization of deferred financing costs and amortization of fair value adjustments of mortgage notes assumed totaled $3.9 million and $10.5 million during the three and nine months ended September 30, 2012, respectively, and $2.5 million and $5.6 million during the three and nine months ended and September 30, 2011, respectively. In addition, related to the Unconsolidated Joint Ventures, amortization of deferred financing costs of $74,000 and $131,000 for the three and nine months ended September 30, 2012, respectively, and $13,000 and $40,000 for the three and nine months ended September 30, 2011, respectively, is included in equity in income of unconsolidated joint ventures on the condensed consolidated unaudited statements of operations. |
• | During the nine months ended September 30, 2012, a purchase agreement was terminated and the seller paid us a breakage fee and reimbursed us for certain underwriting expenses paid. We recorded these proceeds, net of underwriting expenses and advisor reimbursements, of $2.7 million as other income. |
• | During the nine months ended September 30, 2012, a $9.3 million loss was reclassified from accumulated other comprehensive income into interest expense on an ineffective interest rate swap as it related to one of the Held for Sale Properties. |
Distributions
Our board of directors authorized a daily distribution, based on 366 days in the calendar year, of $0.001776144 per share (which equates to 6.50% on an annualized basis calculated at the current rate, assuming a $10.00 per share purchase price) for stockholders of record as of the close of business on each day of the period, commencing on January 1, 2012 and ending on December 31, 2012.
During the nine months ended September 30, 2012 and 2011, we paid distributions of $218.4 million and $138.7 million, respectively, including $125.0 million and $78.3 million, respectively, through the issuance of shares pursuant to our DRIP. Our 2012 distributions were funded by net cash provided by operating activities of $178.6 million, or 82%, distributions received in excess of income from the Unconsolidated Joint Ventures of $4.7 million, or 2%, and proceeds from the issuance of common stock of $35.1 million, or 16%. Our 2011 distributions were funded by net cash provided by operating activities of $97.1 million, or 70%, return of capital from the Unconsolidated Joint Ventures of $611,000, or 1%, and proceeds from the issuance
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of common stock of $41.0 million, or 29%. Net cash provided by operating activities for the nine months ended September 30, 2012 and 2011, reflects a reduction for real estate acquisition related costs incurred and expensed of $43.9 million and $47.2 million, respectively, in accordance with GAAP. We treat our real estate acquisition expenses as funded by proceeds from the offering of our shares, including proceeds from the DRIP Offering. Therefore, for consistency, proceeds from the issuance of common stock for the nine months ended September 30, 2012 and 2011 have been reported as a source of distributions to the extent that acquisition expenses have reduced net cash flows from operating activities.
Share Redemptions
Our share redemption program provides that we will not redeem in excess of 5% of the weighted average number of shares outstanding during the trailing twelve months prior to the end of the fiscal quarter for which the redemptions are being paid (the “Trailing Twelve-month Cap”); provided, however, that while shares subject to a redemption requested upon the death of a stockholder will be included in calculating the maximum number of shares that may be redeemed, such shares will not be subject to the Trailing Twelve-month Cap. In addition, all redemptions, including those upon death or qualifying disability, are limited to those that can be funded with cumulative net proceeds from the sale of shares through our DRIP. The redemption price per share (other than shares pursuant to our DRIP) will depend on the price paid for the shares (until such time as our board of directors has determined a reasonable estimate of the value of our shares) and the length of time the stockholder has held such shares. The redemption price for shares purchased pursuant to our DRIP will be the amount paid for such shares or, after our board of directors has determined a reasonable estimate of the value of our shares, the most recent estimated value of each share. During the nine months ended September 30, 2012 we received valid redemption requests relating to approximately 4.7 million shares, which we redeemed in full for $46.1 million (an average of $9.78 per share). A valid redemption request is one that complies with the applicable requirements and guidelines of our current share redemption program. We have funded and intend to continue funding share redemptions with proceeds of our DRIP Offering. Subsequent to September 30, 2012, we redeemed approximately 2.3 million shares for a total of $22.5 million, or an average price per share of $9.84.
In addition to the caps discussed above, the redemptions are limited quarterly to 1.25% of the weighted average number of shares outstanding during the trailing twelve-month period ending on the last day of the fiscal quarter. In addition, the funding for redemptions each quarter generally will be limited to the net proceeds we receive from the sale of shares in the respective quarter under our DRIP. The share redemption program further provides that while shares subject to redemption requested upon the death of a stockholder will be included in calculating the maximum number of shares that may be redeemed, such shares will not be subject to the quarterly percentage caps. Our management may waive these quarterly caps in its sole discretion, subject to the Trailing Twelve-month Cap.
Liquidity and Capital Resources
General
As of September 30, 2012, we had cash and cash equivalents of $83.8 million and available borrowings of $60.0 million under our Credit Facility. Additionally, as of September 30, 2012, we had unencumbered properties with a gross book value of $2.4 billion, including $1.5 billion of assets that are part of the Credit Facility’s unencumbered borrowing base (the “Borrowing Base Assets”), which may be used as collateral to secure additional financing in future periods or as additional collateral to facilitate the refinancing of current mortgage debt as it becomes due, subject to certain covenants and leverage and borrowing base restrictions related to our Credit Facility; however, the use of any Borrowing Base Assets as collateral would reduce the available borrowings under our Credit Facility.
Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for operating expenses, distributions and redemptions to stockholders and interest and principal on current and any future debt financings. We expect to meet our short-term liquidity requirements through cash flows provided by operations and proceeds from the DRIP Offering. Operating cash flows are expected to increase as additional properties are added to our portfolio. As of September 30, 2012, we and one of the Consolidated Joint Ventures had a total of $43.6 million of fixed rate debt and construction facilities maturing within the next 12 months. In addition, we have repurchase agreements of $103.4 million maturing within the next 12 months that we may elect to renew for periods of 90 days until the respective CMBS mature. The CMBS have a weighted average remaining term of 9.6 years. If we are unable to extend, finance, or refinance the amounts maturing, we expect to pay down any remaining amounts through a combination of the use of available cash, cash provided by property operations, available borrowings on our Credit Facility, borrowings on our unencumbered properties and/or proceeds from our DRIP Offering. We believe that the resources stated above will be sufficient to satisfy our operating requirements for the foreseeable future, and we do not anticipate a need to raise funds from sources other than those described above within the next 12 months.
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Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the acquisition of real estate and real estate-related investments and the payment of acquisition related expenses, operating expenses, distributions and redemptions to stockholders and interest and principal on any future debt financings. Generally, we expect to meet cash needs for items other than acquisitions and acquisition related expenses and debt maturities from our cash flow from operations, and we expect to meet cash needs for acquisitions and debt maturities from the net proceeds from the DRIP Offering and from secured or unsecured borrowings on our current unencumbered properties and future properties, refinancing of current debt, borrowings on our Credit Facility and the strategic sale of properties.
We expect that substantially all cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid; however, we may use other sources to fund distributions as necessary, including the proceeds from the DRIP Offering, borrowing on the Credit Facility and/or future borrowings on our unencumbered assets. During the nine months ended September 30, 2012, we funded distributions to our stockholders with cash flows from operations, distributions received in excess of income from the Unconsolidated Joint Ventures and proceeds from the issuance of common stock as discussed above in the section captioned “Distributions.” The Credit Facility and certain notes payable contain customary affirmative, negative and financial covenants, including requirements for minimum net worth, debt service coverage ratios, and leverage ratios. These covenants may limit our ability to incur additional debt and make borrowings on the Credit Facility.
As of September 30, 2012, we had issued approximately 487.4 million shares of our common stock in the Offerings resulting in gross proceeds of $4.8 billion. As of September 30, 2012, we had redeemed a total of approximately 10.3 million shares of common stock for a cost of $99.9 million, at an average price per share of $9.73.
As of September 30, 2012, we and the Consolidated Joint Ventures had $3.2 billion of debt outstanding. See Note 9 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for certain terms of the debt outstanding. Additionally, the ratio of debt to gross real estate and related assets net of gross intangible lease liabilities, as of September 30, 2012, was 44% and the weighted average years to maturity was 5.1 years.
Our contractual obligations as of September 30, 2012, were as follows (in thousands):
Payments due by period (1) (2) (3) | |||||||||||||||||||
Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years (9) | |||||||||||||||
Principal payments - fixed rate debt(4) | $ | 2,185,817 | $ | 36,548 | $ | 360,408 | $ | 273,668 | $ | 1,515,193 | |||||||||
Interest payments - fixed rate debt | 727,193 | 108,593 | 212,011 | 168,992 | 237,597 | ||||||||||||||
Principal payments - variable rate debt | 53,700 | — | 41,950 | 11,750 | — | ||||||||||||||
Interest payments - variable rate debt(5) | 3,612 | 1,445 | 1,990 | 177 | — | ||||||||||||||
Principal payments - construction facilities(6) | 14,933 | 7,020 | 7,913 | — | — | ||||||||||||||
Interest payments - construction facilities | 427 | 384 | 43 | — | — | ||||||||||||||
Principal payments - credit facility | 796,750 | — | 796,750 | — | — | ||||||||||||||
Interest payments - credit facility(7) | 42,578 | 24,292 | 18,286 | — | — | ||||||||||||||
Principal payments - repurchase agreements(8) | 103,402 | 103,402 | — | — | — | ||||||||||||||
Interest payments - repurchase agreements | 276 | 276 | — | — | — | ||||||||||||||
Total | $ | 3,928,688 | $ | 281,960 | $ | 1,439,351 | $ | 454,587 | $ | 1,752,790 |
(1) | The table above does not include amounts due to our advisor or its affiliates pursuant to our advisory agreement because such amounts are not fixed and determinable. |
(2) | As of September 30, 2012, we had $556.6 million of variable rate debt fixed through the use of interest rate swaps. We used the rates fixed under our swap agreements to calculate the debt payment obligations in future periods. |
(3) | The table above does not include loan amounts associated with certain unconsolidated joint venture arrangements of $170.9 million, of which $10.2 million is recourse to CCPT III OP. These loans mature on various dates ranging from November 2015 to July 2021. |
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(4) | Principal payment amounts reflect actual payments based on the face amount of notes payable secured by our wholly-owned properties and our Consolidated Joint Ventures. As of September 30, 2012, the fair value adjustment, net of amortization, of mortgage notes assumed was $970,000. |
(5) | Rates ranging from 2.46% to 2.96% were used to calculate the variable debt payment obligations in future periods. These were the rates effective as of September 30, 2012. |
(6) | The construction facilities have an aggregate commitment, if fully funded, of $47.8 million related to our development project. |
(7) | Payment obligations for the Term Loan outstanding under the Credit Facility are based on the respective interest rates of 3.45% and 3.15%, which are the rates fixed under the respective executed swap agreements that had the effect of fixing the variable interest rates per annum through the maturity date of June 2014. |
(8) | We may elect to renew the terms under the Repurchase Agreements for periods of 90 days until the respective CMBS, which are held as collateral, mature. |
(9) | Assumes we accept the interest rates that one lender may reset on September 1, 2013 and February 1, 2015, respectively, related to mortgage notes payable of $30.0 million and $32.0 million, respectively. |
Our charter prohibits us from incurring debt that would cause our borrowings to exceed the greater of 75% of our gross assets, valued at the greater of the aggregate cost (before depreciation and other non-cash reserves) or fair value of all assets owned by us, unless approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report.
As of September 30, 2012, we had entered into agreements with unaffiliated third-party sellers to purchase a 100% interest in five retail properties, subject to meeting certain criteria, for an aggregate purchase price of $259.8 million, exclusive of closing costs. As of September 30, 2012 we had $7.7 million of property escrow deposits held by escrow agents in connection with these future property acquisitions, all of which will be forfeited if the transactions are not completed under certain circumstances. As of November 9, 2012, none of these escrow deposits had been forfeited.
We also own properties subject to earnout provisions obligating us to pay additional consideration to the seller contingent on the future leasing and occupancy of vacant space at the properties. Assuming all the conditions are satisfied, we estimate that we would be obligated to pay $6.3 million in accordance with the purchase agreements.
As of September 30, 2012, the Company also owned a land parcel, upon which an office building is being developed. Based on budgeted construction costs, the cost to complete the facility is estimated to be $45.8 million in aggregate. The construction will be funded by a construction loan facility totaling $33.8 million. As of September 30, 2012, $7.9 million was outstanding under the construction facility.
Cash Flow Analysis
Operating Activities. During the nine months ended September 30, 2012, net cash provided by operating activities increased $81.5 million, or 84%, to $178.6 million, compared to $97.1 million for the nine months ended September 30, 2011. The change was primarily due to increases in net income of $51.3 million and depreciation and amortization expenses totaling $55.1 million, partially offset by the gain on sale and condemnation of real estate assets of $15.4 million and a change in deferred rent and other liabilities of $7.2 million for the nine months ended September 30, 2012. See “Results of Operations” for a more complete discussion of the factors impacting our operating performance.
Investing Activities. Net cash used in investing activities decreased $171.0 million, or 9%, to $1.7 billion for the nine months ended September 30, 2012 compared to $1.8 billion for the nine months ended September 30, 2011. The decrease is primarily due to the acquisition of 287 commercial properties for an aggregate purchase price of $1.5 billion during the nine months ended September 30, 2012, compared to 184 commercial properties for an aggregate purchase price of $1.8 billion for the nine months ended September 30, 2011, combined with cash proceeds from the sale and condemnation of real estate assets of $69.2 million for the nine months ended September 30, 2012. The decrease was partially offset by an increase in cash used for the investment in and advances to unconsolidated joint ventures of $77.6 million for the nine months ended September 30, 2012.
Financing Activities. Net cash provided by financing activities decreased $392.2 million, or 23%, to $1.3 billion for the nine months ended September 30, 2012, compared to $1.7 billion for the nine months ended September 30, 2011. The decrease was primarily due to an increase in the repayment of notes payable and other borrowings of $651.1 million, which was partially offset by an increase in the proceeds from notes payable and other borrowings of $324.3 million for the nine months ended September 30, 2012.
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Election as a REIT
We are taxed as a REIT under the Internal Revenue Code of 1986, as amended. To maintain our qualification as a REIT, we must continue to meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains).
If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying condensed consolidated unaudited financial statements. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying condensed consolidated unaudited financial statements.
Critical Accounting Policies and Estimates
Our accounting policies have been established to conform to GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We consider our critical accounting policies to be the following:
• | Investment in and Valuation of Real Estate and Related Assets; |
• | Allocation of Purchase Price of Real Estate and Related Assets; |
• | Discontinued Operations; |
• | Sale of Real Estate Assets; |
• | Revenue Recognition; |
• | Investment in Unconsolidated Joint Ventures; |
• | Investment in Notes Receivable; |
• | Investment in Marketable Securities; |
• | Income Taxes; and |
• | Derivative Instruments and Hedging Activities. |
A complete description of such policies and our considerations is contained in our Annual Report on Form 10-K for the year ended December 31, 2011. Discontinued Operations and Sale of Real Estate Assets were not considered critical accounting policies for the year ended December 31, 2011 because such transactions had not occurred at the time. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2011, and related notes thereto.
Discontinued Operations
Upon the disposal of a real estate asset or the determination of a real estate asset as being held for sale, the Company determines if the asset disposed of is considered a component of the Company. A component is comprised of operations and cash flows that can clearly be distinguished, operationally and for financial reporting purposes, from the rest of the Company. If the asset is considered a component of the Company, the results of operations and gains or losses on the sale of the component are required to be presented in discontinued operations if both of the following criteria are met: (1) the operations and cash
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flows of the asset have been (or will be) eliminated from the ongoing operations of the Company as a result of the disposal transaction and (2) the Company will not have any significant continuing involvement in the operations of the asset after the disposal transaction. Also, the prior period results of operations for the asset are reclassified and presented in discontinued operations in the prior consolidated statements of operations.
Sale of Real Estate Assets
Gains on the sale of real estate assets are generally recognized by the full accrual method when the following criteria are met: (1) the gain is determinable, that is, the collectability of the sales price is reasonably assured or the amount that will not be collectible can be estimated, and (2) the earnings process is virtually complete, that is, the Company is not obligated to perform significant activities after the sale to earn the gain.
Commitments and Contingencies
We may be subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 11 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for further explanations.
Related-Party Transactions and Agreements
We have entered into agreements with CR III Advisors and its affiliates, whereby we have paid and may continue to pay certain fees to, or reimburse certain expenses of, CR III Advisors or its affiliates such as acquisition and advisory fees and expenses, financing coordination fees, organization and offering costs, sales commissions, dealer manager fees, asset and property management fees and expenses, leasing fees and reimbursement of certain operating costs. See Note 12 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for a further explanation of the various related-party transactions, agreements and fees.
Subsequent Events
Certain events occurred subsequent to September 30, 2012 through the filing date of this Quarterly Report on Form 10-Q. Refer to Note 14 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for further explanation. Such events are:
• | Issuance of shares of common stock in the DRIP Offering; |
• | Redemption of shares of common stock; |
• | Investment in real estate and related assets; |
• | Sale of real estate and related assets; |
• | Notes payable and other borrowings; and |
• | Held for sale properties. |
New Accounting Pronouncements
Refer to Note 2 to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for further explanation. There have been no accounting pronouncements issued, but not yet applied by us, that will significantly impact our financial statements.
Off Balance Sheet Arrangements
As of September 30, 2012 and December 31, 2011, we had no material off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As of September 30, 2012, we and two of the Consolidated Joint Ventures had $690.0 million of variable rate debt, including the Revolving Loans and the repurchase agreements, and therefore we are exposed to interest rate changes in LIBOR. As of September 30, 2012, a change of 50 basis points in interest rates would result in a change in interest expense of $3.5 million per annum, assuming all of our derivatives remain effective hedges. In the future we may obtain additional variable rate debt financing to fund certain property acquisitions, and may be further exposed to interest rate changes. Our objectives in managing interest rate risks will be to limit the impact of interest rate changes on operations and cash flows, and to lower overall borrowing costs. To achieve these objectives, we will borrow primarily at interest rates with the lowest margins available and, in some cases, with the ability to convert variable interest rates to fixed rates. We have entered, and expect to continue to enter, into derivative financial instruments, such as interest rate swaps, in order to mitigate our interest rate risk on a given variable rate financial instrument. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. We may also enter into rate lock arrangements to lock interest rates on future borrowings. We may be exposed to credit and market risks including, but not limited to, the failure of any counterparty to perform under the terms of the derivative contract or the adverse effect on the value of the financial instrument resulting from a change in interest rates.
As of September 30, 2012, we had 52 interest rate swap agreements outstanding, which mature on various dates from June 2014 through April 2021, with an aggregate notional amount under the swap agreements of $835.4 million and an aggregate net fair value of $(33.9) million. The fair value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads. As of September 30, 2012, an increase of 50 basis points in interest rates would result in a decrease to the fair value of the derivative liability of $10.6 million.
We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of September 30, 2012, were effective to ensure that information required to be disclosed by us in this Quarterly Report on Form 10-Q is recorded, processed, summarized and reported within the time periods specified by the rules and forms promulgated under the Exchange Act, and is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
No change occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) in connection with the foregoing evaluations that occurred during the three months ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. | Legal Proceedings |
In the ordinary course of business we may become subject to litigation or claims. We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or to which our properties are the subject.
Item 1A. | Risk Factors |
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2011.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
As of September 30, 2012, we had issued approximately 487.4 million shares in the Offerings for gross proceeds of $4.8 billion, out of which we paid $401.1 million in selling commissions and dealer manager fees and $62.1 million in organization and offering costs to our advisor or its affiliates. With the net offering proceeds, we and the Consolidated Joint Ventures acquired $6.6 billion in real estate and related assets and interests in the Unconsolidated Joint Ventures of $84.5 million and paid costs of $184.4 million in acquisition related expenses. As of November 9, 2012, we have sold approximately 490.5 million shares in the Offerings for gross offering proceeds of $4.9 billion.
Our board of directors has adopted a share redemption program that enables our stockholders who hold their shares for more than one year to sell their shares to us in limited circumstances. The redemption price per share (other than shares pursuant to our DRIP) will depend on the price paid for the shares (until such time as our board of directors has determined a reasonable estimate of the value of our shares) and the length of time the stockholder has held such shares. The redemption price for shares purchased pursuant to our DRIP will be the amount paid for such shares or, after our board of directors has determined a reasonable estimate of the value of our shares, the most recent estimated value of each share. Our board of directors reserves the right in its sole discretion at any time, and from time to time, to waive the one-year holding period in the event of death, bankruptcy or other exigent circumstances or terminate, suspend or amend the share redemption program. Under the terms of the share redemption program, share redemptions are subject to the Trailing Twelve-month Cap; provided, however shares subject to redemption requests upon death of a stockholder will not be subject to the Trailing Twelve-month Cap. In addition, all redemptions, including those upon death or qualifying disability, are limited to those that can be funded with the cumulative net proceeds from our DRIP. In addition to these caps, the redemptions are limited quarterly to 1.25% of the weighted average number of shares outstanding during the trailing twelve-month period. In addition, the funding for redemptions each quarter generally will be limited to the net proceeds we receive from the sale of shares in the respective quarter under the DRIP. The share redemption program further provides that while shares subject to a redemption requested upon the death of a stockholder will be included in calculating the maximum number of shares that may be redeemed, such shares will not be subject to the quarterly caps. Our management may waive these quarterly caps in its sole discretion, subject to the Trailing Twelve-month Cap.
The provisions of the share redemption program in no way limit our ability to repurchase shares from stockholders by any other legally available means for any reason that our board of directors, in its discretion, deems to be in our best interest. During the three months ended September 30, 2012, we redeemed shares, including those due to death, as follows:
Total Number of Shares Redeemed | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||
July 2012 | 2,500 | $ | 10.00 | 2,500 | (1 | ) | ||||||
August 2012 | 2,234,085 | $ | 9.83 | 2,234,085 | (1 | ) | ||||||
September 2012 | — | $ | — | — | (1 | ) | ||||||
Total | 2,236,585 | 2,236,585 | (1 | ) |
(1) | A description of the maximum number of shares that may be purchased under our redemption program is included in the narrative preceding this table. |
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Item 3. | Defaults Upon Senior Securities |
No events occurred during the three months ended September 30, 2012 that would require a response to this item.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
No events occurred during the three months ended September 30, 2012 that would require a response to this item.
Item 6. | Exhibits |
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements 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.
Cole Credit Property Trust III, Inc. (Registrant) | |||
By: | /s/ Simon J. Misselbrook | ||
Name: | Simon J. Misselbrook | ||
Title: | Senior Vice President of Accounting (Principal Accounting Officer) |
Date: November 9, 2012
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EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. | Description | |
3.1 | Third Articles of Amendment and Restatement of Cole Credit Property Trust III, Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s pre-effective amendment to Form S-11 (File No. 333-149290), filed on September 29, 2008). | |
3.2 | Amended and Restated Bylaws of Cole Credit Property Trust III, Inc. (Incorporated by reference to Exhibit 3.2 to the Company’s pre-effective amendment to Form S-11 (File No. 333-149290), filed on May 7, 2008). | |
3.3 | Articles of Amendment (Incorporated by reference to the Company’s Current Report on Form 8-K (File No. 333-149290) filed on April 9, 2010). | |
3.4 | Second Articles of Amendment of Cole Credit Property Trust III, Inc. (Incorporated by reference to Exhibit 3.4 to the Company’s post-effective amendment to Form S-11 (File No. 333-164884), filed on July 22, 2011). | |
31.1* | Certification of the Principal Executive Officer of the Company pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of the Principal Financial Officer of the Company pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1** | Certification of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS*** | XBRL Instance Document. | |
101.SCH*** | XBRL Taxonomy Extension Schema Document. | |
101.CAL*** | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF*** | XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB*** | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE*** | XBRL Taxonomy Extension Presentation Linkbase Document. |
________________
* | Filed herewith. |
** | In accordance with Item 601(b) (32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
*** | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
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