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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

 

OR

 

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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

 

000-50256

HARTMAN COMMERCIAL PROPERTIES REIT
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of
incorporation or organization)		 76-0594970
(IRS Employer
Identification No.)

1450 W. Sam Houston Parkway N., Suite 100
Houston, Texas 77043
(Address of principal executive offices)

Registrant’s telephone number, including area code: (713) 467-2222

                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 S                                   No ¨

                Indicated by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨                                    No S

                The number of the registrant’s Common Shares of Beneficial Interest outstanding at November 15, 2004 was 7,010,146.
        Page 
 
PART I--FINANCIAL INFORMATION     
 

       Item 1.

        Financial Statements    2 
         Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003    2 
         Consolidated Statements of Income for the Three Months    
             and Nine Months Ended September 30, 2004 and 2003 (unaudited)    4 
         Consolidated Statements of Changes in Shareholders' Equity for the Nine Months     
             Ended September 30, 2004 (unaudited) and for the Year Ended December 31, 2003    5 
         Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and     
             2003 (unaudited)    6 
         Notes to Consolidated Financial Statements (unaudited)    7 
       Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations    19 
       Item 3.        Quantitative and Qualitative Disclosures about Market Risk    28 
       Item 4.        Controls and Procedures    28 
 
PART II--OTHER INFORMATION     
 
       Item 1.        Legal Proceedings    29 
       Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds   29 
       Item 3.        Defaults Upon Senior Securities    29 
       Item 4.        Submission of Matters to a Vote of Security Holders    29 
       Item 5.        Other Information    29 

       Item  6.

        Exhibits and Reports on Form 8-K    29 
       Signature Certifications   30 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

Hartman Commercial Properties REIT and Subsidiary
Consolidated Balance Sheets

   

September 30,
2004

        

December 31,
2003
   

(Unaudited)

    
Assets
         

Real estate

        

     Land

  

$

28,446,210 

  

$

26,664,999 

     Buildings and improvements

  

113,326,985 

  

105,055,635 
   

141,773,195 

  

131,720,634 

Less accumulated depreciation

  

(14,397,699)

  

(11,464,280)

                Real estate, net

  

127,375,496 

  

120,256,354 
         

Cash and cash equivalents

  

496,239

  

578,687 
         

Investment in real estate held for sale

  

12,221

  

-     
         

Escrows and acquisition deposits

  

3,054,290

  

3,188,649 
         

Note receivable

  

671,587 

  

687,003 
         

Receivables

        

Accounts receivable, net of allowance for doubtful

        

    accounts of $429,700 and $350,750 as of September 30, 2004

        

    and December 31, 2003, respectively

  

836,784 

  

526,855 

Accrued rent receivable

  

2,405,540 

  

1,963,214 

Due from affiliates

  

3,673,032 

  

3,679,602 
         

                Receivables, net

  

6,915,356 

  

6,169,671 
         

Deferred costs, net

  

2,827,442 

  

3,039,661 
         

Prepaid expenses and other assets

  

172,807 

  

146,366 
         

Total assets

  

$

141,525,438 

  

$

134,066,391 
         

 

 

 

 

See notes to consolidated financial statements.
 2

 

     
   

September 30,
2004

       

December 31,
2003
   

(Unaudited)

    
Liabilities and Shareholders’ Equity
         

Liabilities

        

    Notes payable

  

$

57,521,267 

  

$

47,343,182 

    Accounts payable and accrued expenses

  

2,665,952 

  

3,324,461 

    Due to affiliates

  

821,940 

  

757,451 

    Tenants’ security deposits

  

1,067,097 

  

1,061,209 

    Prepaid rent

  

378,246 

  

453,421 

    Dividends payable

  

1,226,776 

  

1,226,777 

    Other liabilities

  

1,016,459 

  

1,016,460 
         

                Total liabilities

  

64,697,737

  

55,182,961 
         

Minority interests of unit holders in Operating Partnership;

        

    5,808,337 units at September 30, 2004

        

    and December 31, 2003

  

36,695,826

  

37,567,446 
         

Minority interests in real estate held for sale

  

3,286

  

-     
         

Commitments and contingencies

  

-     

  

-     
         

Shareholders’ equity

        

    Preferred shares, $0.001 par value per share; 50,000,000

        

        shares authorized; none issued and outstanding

        

        at September 30, 2004 and December 31, 2003

  

-     

  

-     

    Common shares, $0.001 par value per share; 400,000,000

        

        shares authorized; 7,010,146 issued and outstanding at

        

        September 30, 2004 and December 31, 2003

  

7,010 

  

7,010 

    Additional paid-in capital

  

45,527,152 

  

45,527,152 

    Accumulated deficit

  

(5,405,573)

  

(4,218,178)
         

                Total shareholders’ equity

  

40,128,589 

  

41,315,984 
         

Total liabilities and shareholders’ equity

  

$ 

141,525,438 

  

$ 

134,066,391 

See notes to consolidated financial statements.
3

Hartman Commercial Properties REIT and Subsidiary
Consolidated Statements of Income
(Unaudited)

 

Three Months Ended September 30,

        

Nine Months Ended September 30,
 

2004

        

2003

  

2004

        

2003
               

Revenues

              

Rental income

$

4,674,623 

  

$

4,039,561 

  

$

13,671,538 

  

$

12,677,629 

Tenants’ reimbursements

1,166,462 

  

948,611 

  

3,448,438 

  

3,030,599 

Interest and other income

81,771 

  

45,911 

  

385,048 

  

348,611 
               

Total revenues

5,922,856 

 

5,034,083 

 

17,505,024 

 

16,056,839 
               

Expenses

              

Operation and maintenance

673,201 

  

649,621 

  

2,111,374 

  

1,954,001 

Interest expense

801,090 

  

308,501 

  

1,950,935 

  

977,324 

Real estate taxes

639,274 

  

623,086 

  

1,976,980 

  

1,463,318 

Insurance

111,994 

  

131,533 

  

350,813 

  

372,039 

Electricity, water and gas utilities

222,045 

  

225,176 

  

601,966 

  

615,979 

Management and partnership

              

    management fees to an affiliate

329,743 

  

281,208 

  

999,688 

  

939,336 

General and administrative

276,085 

  

190,727 

  

925,624 

  

810,538 

Depreciation

1,015,710 

  

926,681 

  

2,933,419 

  

2,785,557 

Amortization

305,879 

  

252,193 

  

904,581 

  

737,865 

Bad debt expense (recoveries)

54,075 

  

(2,000)

  

78,950 

  

282,000 
               

Total operating expenses

4,429,096 

 

3,586,726 

 

12,834,330 

 

10,937,957 
               

Income before minority interests

1,493,760 

  

1,447,357 

  

4,670,694 

  

5,118,882 
               

Minority interests in Operating
   Partnership

(696,464)

  

(676,661)

  

(2,177,759)

  

(2,388,479)
               

Net income

$

797,296 

  

$

770,696

  

$

2,492,935 

  

$

2,730,403 
               

Net income per common share

$

0.114 

  

$

0.110 

  

$

0.356 

  

$

0.389 
               

Weighted-average shares outstanding

7,010,146 

  

7,010,146 

  

7,010,146 

  

7,010,146 
               

 

 

See notes to consolidated financial statements.
4

Hartman Commercial Properties REIT and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)

   

Common Stock

  

Additional
Paid-in
Capital

  

Accumulated
Deficit

  



Total

Shares

        

Amount
                                       

Balance, December 31, 2002

  

7,010,146

  

$

7,010

  

$

45,527,152

  

$

(2,785,244)

  

$

42,748,918

     Net income for the year
          ended December 31,
          2003

  

-      

  

-     

  

-      

  

3,474,174 

  

3,474,174 

     Dividends

  

-      

  

-     

  

-      

  

  (4,907,108)

  

(4,907,108)

Balance, December 31, 2003

  

7,010,146

  

7,010

  

45,527,152

  

(4,218,178)

  

41,315,984 

     Net income for the nine
          months ended
          September 30, 2004

  

-      

  

-     

  

-      

  

2,492,935 

  

2,492,935 

     Dividends

  

-      

  

-     

  

-      

  

(3,680,330)

  

(3,680,330)

Balance, September 30, 2004

  

7,010,146

  

$

7,010

  

$

45,527,152

  

$

(5,405,573)

  

$

40,128,589 

 

 

 

 

 

See notes to consolidated financial statements.
5

Hartman Commercial Properties REIT and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)

   

Nine Months Ended September 30,
   

2004

          

2003

Cash flows from operating activities:

        

    Net income

  

$

2,492,935 

  

$

2,730,403 

    Adjustments to reconcile net income to

        

        net cash provided by (used in)

        

        operating activities:

        

            Depreciation

  

2,933,419 

  

2,785,557 

            Amortization

  

904,581 

  

737,865 

            Minority interests in Operating  Partnership

  

2,177,759 

  

2,388,479 
            Equity in income of real estate partnership  

(208,929)

  

 —     

            Bad debt expense

  

78,950 

  

282,000

            Changes in operating assets and liabilities:

        

                Escrows and acquisition deposits

  

134,359 

  

28,240 

                Receivables

  

(831,205)

  

(411,394)

                Due from affiliates

  

71,059 

  

(863,952)

                Deferred costs

  

(650,199)

  

(742,586)

                Prepaid expenses and other assets

  

273,337 

  

365,405

                Accounts payable and accrued expenses

  

(658,509)

  

(570,420)

                Tenants’ security deposits

  

5,888 

  

(40,863)

                Prepaid rent

  

  (75,175)

  

(1,179)
         

                    Net cash provided by

        

                        operating activities

  

6,648,270 

  

6,687,555
         

Cash flows used in investing activities:

        

    Additions to real estate

  

(10,052,561)

  

(1,345,067)

    Investment in real estate partnership

  

(9,033,561)

  

—     

    Distributions received from real estate partnership

  

9,233,555 

  

—     

    Issuance of note receivable

  

—     

  

(269,989)

    Repayment of note receivable

  

15,416 

  

—     

   

        

                    Net cash used in investing activities

  

(9,837,151)

  

(1,615,056)
         

Cash flows from financing activities:

        

    Dividends paid

  

(3,680,331)

  

(3,680,331)

    Distributions paid to OP unit holders

  

(3,049,380)

  

(3,049,380)

    Proceeds from notes payable

  

19,013,180 

  

—     

    Repayments of notes payable

  

(9,134,873)

  

(3,671,478)

    Payments of loan origination costs

  

 (42,163)

  

  —     
         

                    Net cash from (used in)

        

                        financing activities

  

3,106,433 

  

(10,401,189)
         

Net decrease in cash

        

    and cash equivalents

  

(82,448)

  

(5,328,690)
         

Cash and cash equivalents at beginning of period

  

578,687 

  

6,091,699 
         

Cash and cash equivalents at end of period

  

$

496,239