Attached files
file | filename |
---|---|
EX-32 - EXHIBIT 32 - Summit Healthcare REIT, Inc | ex32.htm |
EX-31.2 - EXHIBIT 31.2 - Summit Healthcare REIT, Inc | ex31_2.htm |
EX-31.1 - EXHIBIT 31.1 - Summit Healthcare REIT, Inc | ex31_1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September 30, 2009
or
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission
File Number 000-52566
CORNERSTONE
CORE PROPERTIES REIT, INC.
(Exact
name of registrant as specified in its charter)
MARYLAND
|
73-1721791
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
1920
MAIN STREET, SUITE 400, IRVINE, CA
|
92614
|
(Address
of principal executive offices)
|
(Zip
Code)
|
949-852-1007
(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 issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the 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.
x Yes o 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 (Sec.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).
o Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
o Yes x No
As of
November 12, 2009, we had 22,902,680 shares issued and outstanding.
1
FORM
10-Q
Cornerstone
Core Properties REIT, Inc.
TABLE
OF CONTENTS
PART
I.
|
FINANCIAL
INFORMATION
|
|
Item
1.
|
Financial
Statements:
|
|
3
|
||
4
|
||
5
|
||
6
|
||
7
|
||
Item
2.
|
18
|
|
Item
3.
|
24
|
|
Item
4.
|
24
|
|
PART
II.
|
OTHER
INFORMATION
|
|
Item
1A.
|
25
|
|
Item
2.
|
25
|
|
Item
6.
|
27
|
|
28
|
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
|
|
September
30,
|
|
|
December
31,
|
|
||
|
|
2009
|
|
|
2008
|
|
||
ASSETS
|
|
|||||||
Cash
and cash equivalents
|
$
|
19,123,000
|
$
|
26,281,000
|
|
|||
Investments
in real estate:
|
|
|||||||
Land
|
39,138,000
|
39,138,000
|
|
|||||
Buildings
and improvements, net
|
90,205,000
|
92,327,000
|
|
|||||
Intangible
lease assets, net
|
930,000
|
1,490,000
|
|
|||||
|
130,273,000
|
132,955,000
|
|
|||||
Notes
receivable, net
|
2,500,000
|
3,875,000
|
|
|||||
Note
receivable from related party
|
14,000,000
|
—
|
|
|||||
Deferred
costs and deposits
|
37,000
|
351,000
|
|
|||||
Deferred
financing costs, net
|
172,000
|
211,000
|
|
|||||
Tenant
and other receivables, net
|
724,000
|
802,000
|
|
|||||
Other
assets, net
|
323,000
|
629,000
|
|
|||||
Total
assets
|
$
|
167,152,000
|
$
|
165,104,000
|
|
|||
|
|
|||||||
LIABILITIES
AND EQUITY
|
|
|||||||
Liabilities:
|
|
|||||||
Notes
payable
|
$
|
45,491,000
|
$
|
45,626,000
|
|
|||
Accounts
payable and accrued liabilities
|
1,539,000
|
683,000
|
|
|||||
Payable
to related parties
|
9,000
|
122,000
|
|
|||||
Prepaid
rent, security deposits and deferred revenue
|
834,000
|
969,000
|
|
|||||
Intangible
lease liability, net
|
245,000
|
393,000
|
|
|||||
Distributions
payable
|
896,000
|
827,000
|
|
|||||
Total
liabilities
|
49,014,000
|
48,620,000
|
|
|||||
|
|
|||||||
Commitments
and contingencies (Note 13)
|
|
|||||||
|
|
|||||||
Equity:
|
|
|||||||
Stockholders’
Equity:
|
|
|||||||
Preferred
stock, $0.001 par value; 10,000,000 shares authorized; no shares were
issued or outstanding at September 30, 2009 and December 31,
2008
|
—
|
—
|
|
|||||
Common
stock, $0.001 par value; 290,000,000 shares
authorized; 22,763,057 and 20,570,120 shares issued
and outstanding at September 30, 2009 and December 31, 2008,
respectively
|
24,000
|
21,000
|
|
|||||
Additional
paid-in capital
|
128,767,000
|
121,768,000
|
|
|||||
Accumulated
deficit
|
(10,790,000
|
)
|
(5,456,000
|
)
|
||||
Total
stockholders’ equity
|
118,001,000
|
116,333,000
|
|
|||||
Noncontrolling
interest
|
137,000
|
151,000
|
|
|||||
Total
equity
|
118,138,000
|
116,484,000
|
|
|||||
|
||||||||
Total
liabilities and equity
|
$
|
167,152,000
|
$
|
165,104,000
|
|
The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
||||||||||
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
||||
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Rental
revenues
|
|
$
|
1,880,000
|
|
|
$
|
2,321,000
|
|
|
$
|
6,011,000
|
|
|
$
|
6,687,000
|
|
Tenant
reimbursements and other income
|
|
|
468,000
|
|
|
|
570,000
|
|
|
|
1,507,000
|
|
|
|
1,675,000
|
|
Interest
income from notes receivable
|
|
|
309,000
|
|
|
|
61,000
|
|
|
|
988,000
|
|
|
|
86,000
|
|
|
|
2,657,000
|
|
|
|
2,952,000
|
|
|
|
8,506,000
|
|
|
|
8,448,000
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
operating and maintenance
|
|
|
999,000
|
|
|
|
751,000
|
|
|
|
2,700,000
|
|
|
|
2,202,000
|
|
General
and administrative
|
|
|
364,000
|
|
|
|
402,000
|
|
|
|
1,173,000
|
|
|
|
1,331,000
|
|
Asset
management fees
|
|
|
381,000
|
|
|
|
342,000
|
|
|
|
1,138,000
|
|
|
|
984,000
|
|
Real
estate acquisition costs
|
|
|
28,000
|
|
|
|
—
|
|
|
|
360,000
|
|
|
|
—
|
|
Depreciation
and amortization
|
|
|
989,000
|
|
|
|
948,000
|
|
|
|
2,786,000
|
|
|
|
2,620,000
|
|
Impairment
of notes receivable
|
4,626,000
|
|
—
|
4,626,000
|
—
|
|||||||||||
|
|
7,387,000
|
|
|
|
2,443,000
|
|
|
|
12,783,000
|
|
|
|
7,137,000
|
|
|
Operating
(loss) income
|
|
|
(4,730,000
|
)
|
|
|
509,000
|
|
|
|
(4,277,000)
|
|
|
|
1,311,000
|
|
Interest
income
|
|
|
3,000
|
|
|
|
105,000
|
|
|
|
7,000
|
|
|
|
221,000
|
|
Interest
expense
|
|
|
(341,000
|
)
|
|
|
(680,000
|
)
|
|
|
(1,069,000
|
)
|
|
|
(2,496,000
|
)
|
Net
loss
|
|
|
(5,068,000
|
)
|
|
|
(66,000
|
)
|
|
|
(5,339,000
|
)
|
|
|
(964,000
|
)
|
Less:
Net (loss) income attributable to the noncontrolling
interest
|
|
|
(5,000
|
)
|
|
|
—
|
|
|
(5,000
|
)
|
|
|
4,000
|
||
Net
loss attributable to common stockholders
|
|
$
|
(5,063,000
|
)
|
|
$
|
(66,000
|
)
|
|
$
|
(5,334,000
|
)
|
|
$
|
(968,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share attributable to common
stockholders
|
|
$
|
(0.22
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares
|
|
|
22,584,321
|
|
|
17,677,146
|
|
|
|
21,583,192
|
|
|
|
13,270,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
declared per common share
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY
For
the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
Number
of
Shares
|
Common
Stock
Par
Value
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Total
Stockholders’ Equity
|
Noncontrolling
Interest
|
Total
Equity
|
|
|||||||||||||||||||
Balance
- December 31, 2008
|
|
|
20,570,120
|
|
|
$
|
21,000
|
|
|
$
|
121,768,000
|
|
|
$
|
(5,456,000
|
)
|
|
$
|
116,333,000
|
|
|
$
|
151,000
|
|
|
$
|
116,484,000
|
|
Issuance
of common stock
|
|
|
2,755,353
|
|
|
|
3,000
|
|
|
|
21,802,000
|
|
|
|
—
|
|
|
|
21,805,000
|
|
|
|
—
|
|
|
|
21,805,000
|
|
Redeemed
shares
|
|
|
(562,416
|
)
|
|
|
—
|
|
|
|
(4,293,000
|
)
|
|
|
—
|
|
|
|
(4,293,000
|
)
|
|
|
—
|
|
|
|
(4,293,000
|
)
|
Offering
costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,643,000
|
)
|
|
|
—
|
|
|
|
(2,643,000
|
)
|
|
|
—
|
|
|
|
(2,643,000
|
)
|
Dividends
declared
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,867,000
|
)
|
|
|
—
|
|
|
|
(7,867,000
|
)
|
|
|
(9,000
|
)
|
|
|
(7,876,000
|
)
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,334,000
|
)
|
|
|
(5,334,000
|
)
|
|
|
(5,000
|
)
|
|
|
(5,339,000
|
)
|
Balance
– September 30, 2009
|
|
|
22,763,057
|
|
|
$
|
24,000
|
|
|
$
|
128,767,000
|
|
|
$
|
(10,790,000
|
)
|
|
$
|
118,001,000
|
|
|
$
|
137,000
|
|
|
$
|
118,138,000
|
|
|
Common
Stock
|
|
|
|
||||||||||||||||||||||||
|
Number
of
Shares
|
Common
Stock
Par
Value
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
|
Total
Stockholders’ Equity
|
Noncontrolling
Interest
|
Total
Equity
|
|||||||||||||||||||||
Balance
- December 31, 2007
|
9,908,551 | $ | 10,000 | $ | 64,239,000 | $ | (4,001,000 | ) | $ | 60,248,000 | $ | 309,000 | $ | 60,557,000 | ||||||||||||||
Issuance
of common stock
|
7,816,096 | 8,000 | 62,379,000 | — | 62,387,000 | — | 62,387,000 | |||||||||||||||||||||
Redeemed
shares
|
(159,292 | ) | — | (1,182,000 | ) | — | (1,182,000 | ) | — | (1,182,000 | ) | |||||||||||||||||
Offering
costs
|
— | — | (6,601,000 | ) | — | (6,601,000 | ) | — | (6,601,000 | ) | ||||||||||||||||||
Noncontrolling
interest buyout
|
1,595,141 | 1,000 | (1,000 | ) | — | — | (145,000 | ) | (145,000 | ) | ||||||||||||||||||
Dividends
declared
|
— | — | (4,870,000 | ) | — | (4,870,000 | ) | (14,000 | ) | (4,884,000 | ) | |||||||||||||||||
Net
(loss)/income
|
— | — | — | (968,000 | ) | (968,000 | ) | 4,000 | (964,000 | ) | ||||||||||||||||||
Balance
– September 30, 2008
|
19,160,496 | $ | 19,000 | $ | 113,964,000 | $ | (4,969,000 | ) | $ | 109,014,000 | $ | 154,000 | $ | 109,168,000 |
The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
Months Ended September 30,
|
|
|||||
|
|
2009
|
|
|
2008
|
|
||
Cash
flows from operating activities
|
|
|
|
|
|
|
||
Net
loss
|
|
$
|
(5,339,000)
|
$
|
(964,000
|
)
|
||
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|||||
Amortization
of deferred financing costs
|
|
|
182,000
|
371,000
|
|
|||
Depreciation
and amortization
|
|
|
2,786,000
|
2,620,000
|
|
|||
Straight-line
rents and amortization of acquired above (below) market leases,
net
|
|
|
(29,000
|
)
|
(293,000
|
)
|
||
Provision
for bad debt
|
|
|
423,000
|
171,000
|
|
|||
Impairment
of note receivable
|
4,626,000
|
—
|
||||||
Change
in operating assets and liabilities:
|
|
|
|
|||||
Tenant
and other receivables
|
|
|
(292,000)
|
(37,000
|
)
|
|||
Prepaid
and other assets
|
|
|
177,000
|
210,000
|
|
|||
Payable
and accrued liabilities
|
|
|
645,000
|
332,000
|
|
|||
Payable
to related parties
|
|
|
(95,000
|
)
|
(26,000
|
)
|
||
Prepaid
rent, security deposit and deferred revenues
|
|
|
(135,000
|
)
|
—
|
|
||
Net
cash provided by operating activities
|
|
|
2,949,000
|
2,384,000
|
|
|||
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Real
estate additions and acquisitions
|
|
|
(136,000
|
)
|
(8,087,000
|
)
|
||
Escrow
refund
|
|
|
—
|
150,000
|
|
|||
Notes
receivable
|
|
|
(17,038,000
|
)
|
(2,875,000
|
)
|
||
Net
cash used in investing activities
|
|
|
(17,174,000
|
)
|
|
|
(10,812,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
17,277,000
|
59,638,000
|
|
|||
Redeemed
shares
|
|
|
(4,293,000
|
)
|
(1,182,000
|
)
|
||
Repayment
of notes payable
|
|
|
(135,000
|
)
|
(27,404,000
|
)
|
||
Offering
costs
|
|
|
(2,358,000
|
)
|
(7,294,000
|
)
|
||
Noncontrolling
interest
|
|
|
—
|
(145,000
|
)
|
|||
Distributions
paid to stockholders
|
|
|
(3,271,000
|
)
|
(1,787,000
|
)
|
||
Distributions
paid to noncontrolling interest
|
|
|
(9,000
|
)
|
(12,000
|
)
|
||
Deferred
financing costs
|
|
|
(144,000
|
)
|
(242,000
|
)
|
||
Net
cash provided by financing activities
|
|
|
7,067,000
|
|
|
|
21,572,000
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(7,158,000
|
)
|
|
|
13,144,000
|
|
Cash
and cash equivalents - beginning of period
|
|
|
26,281,000
|
|
|
|
6,648,000
|
|
Cash
and cash equivalents - end of period
|
|
$
|
19,123,000
|
|
|
$
|
19,792,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
921,000
|
|
|
$
|
2,419,000
|
|
Supplemental
disclosure of non-cash financing and investing activities:
|
|
|
|
|
|
|
||
Distribution
declared not paid
|
|
$
|
896,000
|
|
|
$
|
743,000
|
|
Receivable
from transfer agent
|
$
|
—
|
$
|
45,000
|
||||
Distribution
reinvested
|
|
$
|
4,528,000
|
|
|
$
|
2,704,000
|
|
Payable
to related party
|
|
$
|
17,000
|
|
|
$
|
126,000
|
|
Security
deposits and other liabilities assumed upon acquisition of real
estate
|
|
$
|
—
|
|
|
$
|
127,000
|
|
Assumption
of loan in connection with property acquisition
|
|
$
|
—
|
|
|
$
|
7,375,000
|
|
Accrued
acquisition fees not paid
|
|
$
|
1,000
|
|
|
$
|
6,000
|
|
The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
CORNERSTONE CORE PROPERTIES REIT, INC. AND
SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
UNAUDITED
1.
|
Organization
|
Cornerstone
Core Properties REIT, Inc., a Maryland Corporation, was formed on October 22,
2004 under the General Corporation Law of Maryland for the purpose of engaging
in the business of investing in and owning commercial real estate. As
used in this report, the “Company”, “we”, “us” and “our” refer to Cornerstone
Core Properties REIT, Inc. and its consolidated subsidiaries except where the
context otherwise requires. Subject to certain restrictions and limitations, our
business is managed pursuant to an advisory agreement by an affiliate,
Cornerstone Realty Advisors, LLC, a Delaware limited liability company that was
formed on November 30, 2004 (the “Advisor”).
Cornerstone
Operating Partnership, L.P., a Delaware limited partnership (the “Operating
Partnership”) was formed on November 30, 2004. At September 30, 2009,
we owned a 99.88% general partner interest in the Operating Partnership while
the Advisor owned a 0.12% limited partnership interest. We anticipate
that we will conduct all or a portion of our operations through the Operating
Partnership. Our financial statements and the financial statements of
the Operating Partnership are consolidated in the accompanying condensed
consolidated financial statements. All intercompany accounts and
transactions have been eliminated in consolidation.
2.
|
Public
Offerings
|
On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan. We stopped making offers under our initial public
offering on June 1, 2009 upon raising gross offering proceeds of approximately
$163.7 million from the sale of approximately 21.7 million shares, including
shares sold under the distribution reinvestment plan. On June 10,
2009, SEC declared our follow-on offering effective and we commenced a follow-on
offering of up to 77,350,000 shares of our common stock, consisting of
56,250,000 shares for sale pursuant to a primary offering and 21,100,000 shares
for sale pursuant to our dividend reinvestment plan.
We
retained Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the Advisor,
to serve as our dealer manager for our offerings. PCC is responsible
for marketing our shares being offered pursuant to the offerings. PCC has been
the subject of a non-public inquiry by FINRA focused on private placements
conducted by our dealer manager during the period from January 1, 2004 through
the present. We are not the issuer of any of the securities offered
in the private placements that are the subject of FINRA’s
investigation. Such issuers, however, are affiliates of our
Advisor. FINRA informed our dealer manager that it has concluded its
inquiry and has indicated its intention to allege that PCC violated NASD Rules
2210 (Communications with the Public), 3010 (Supervision) and 2110 (Standards of
Commercial Honor and Principles of Trade) (which is now FINRA Rule 2010) in
connection with certain private placements. FINRA has proposed
significant sanctions against PCC and Terry Roussel, who serves as PCC’s
president and chief compliance officer and as one of its two
directors. PCC has informed us that it believes that it has complied
with the requirements of the conduct rules at issue and intends to challenge
these findings before a FINRA hearing panel if PCC does not first reach a
satisfactory settlement with FINRA regarding the alleged
violations. If FINRA imposes sanctions against PCC, PCC’s business
could be materially adversely impacted, which could adversely affect PCC’s
ability to serve effectively as the dealer manager of the offering.
We used
the net proceeds from our initial public offering to invest primarily in
investment real estate including multi-tenant industrial real estate located in
major metropolitan markets in the United States. We intend to use the
net proceeds from our follow-on offering to pay down temporary acquisition
financing on our existing assets and to acquire additional real estate
investments. As of September 30, 2009, a total of 20.6 million shares
of our common stock had been sold in both offerings for aggregate gross proceeds
of approximately $164.6 million, excluding, approximately 1.4 million shares
that were reinvested pursuant to our distribution reinvestment plan and
approximately 1.6 million shares issued in connection with the special 10% stock
dividend related to our initial public offering, reduced by approximately 0.8
million shares pursuant to our stock repurchase program.
3.
|
Summary
of Significant Accounting Policies
|
The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We base these estimates on various assumptions that we believe to be
reasonable under the circumstances, and these estimates form the basis for our
judgments concerning the carrying values of assets and liabilities that are not
readily apparent from other sources. We periodically evaluate these estimates
and judgments based on available information and experience. Actual results
could differ from our estimates under different assumptions and conditions. If
actual results significantly differ from our estimates, our financial condition
and results of operations could be materially impacted. For more information
regarding our critical accounting policies and estimates please refer to
"Summary of Significant Accounting Policies” contained in our Annual Report on
Form 10-K for the year ended December 31, 2008. There have been no material
changes to the critical accounting policies previously disclosed in that report
except as discussed below.
Interim
Financial Information
The
accompanying interim condensed consolidated financial statements have been
prepared by our management in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and in conjunction with the
rules and regulations of the SEC. Certain information and footnote
disclosures required for annual financial statements have been condensed or
excluded pursuant to SEC rules and regulations. Accordingly, the
interim condensed consolidated financial statements do not include all of the
information and footnotes required by GAAP for complete financial
statements. The accompanying financial information reflects all
adjustments which are, in the opinion of our management, of a normal recurring
nature and necessary for a fair presentation of our financial position, results
of operations and cash flows for the interim periods. Interim results of
operations are not necessarily indicative of the results to be expected for the
full year. In preparing the accompanying interim financial
statements, the Company has evaluated the potential occurrence of subsequent
events through November 13, 2009, the date at which the financial statements
were issued. The accompanying condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
the notes thereto included in the 2008 Annual Report on Form 10-K as filed with
the SEC. Operating results for the nine months ended September 30,
2009 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2009.
Fair
Value of Financial Instruments
On
January 1, 2008, we adopted Financial Accounting Standard Board Accounting
Standard Codification (“FASB ASC”) 820-10, Fair Value Measurements and
Disclosures. FASB ASC 820-10 defines fair value, establishes a framework
for measuring fair value in GAAP and provides for expanded disclosure about fair
value measurements. FASB ASC 820-10 applies prospectively to all other
accounting pronouncements that require or permit fair value measurements. The
adoption of FASB ASC 820-10 did not have a material impact on our consolidated
financial statements since we do not record our financial assets and liabilities
in our consolidated financial statements at fair value.
We
adopted FASB ASC 820-10 to our non-financial assets and non-financial
liabilities on January 1, 2009. The adoption of FASB ASC 820-10 to our
non-financial assets and liabilities did not have a material impact on our
consolidated financial statements.
FASB ASC
825-10, Financial Instruments,
requires the disclosure of fair value information about financial
instruments whether or not recognized on the face of the balance sheet, for
which it is practical to estimate that value.
We
generally determine or calculate the fair value of financial instruments using
quoted market prices in active markets when such information is available or
using appropriate present value or other valuation techniques, such as
discounted cash flow analyses, incorporating available market discount rate
information for similar types of instruments and our estimates for
non-performance and liquidity risk. These techniques are significantly affected
by the assumptions used, including the discount rate, credit spreads, and
estimates of future cash flow.
Our
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, tenant and other receivables, payable to related parties,
prepaid rent, security deposits, and deferred revenue, accounts payable and
accrued liabilities, notes receivable, note receivable from related party, and
notes payable. We consider the carrying values of cash and cash equivalents,
tenant and other receivables, payable to related parties, prepaid rent, security
deposits, and deferred revenue, accounts payable and accrued liabilities to
approximate fair value for these financial instruments because of the short
period of time between origination of the instruments and their expected
payment.
The fair
values of notes payable are estimated using lending rates available to us for
financial instruments with similar terms and maturities and had been calculated
to approximate the carrying value. The fair value of notes receivable
is estimated using current rates at which management believes similar loans
would be made and had been calculated to approximate the carrying value. The
fair value of the note receivable from related party is not determinable due to
the related party nature of the note receivable.
Adoption
of Accounting Pronouncements
On
January 1, 2009, we adopted FASB ASC 805-10, Business Combinations, which
requires the acquirer of a business combination to measure at fair value the
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, with limited exceptions. In
addition, this standard requires acquisition costs to be expensed as incurred.
As a result of our adoption of this standard, approximately $0.4 million of real
estate acquisition costs are included within expenses in our condensed
consolidated statement of operations for the nine months ended September 30,
2009.
On
January 1, 2009, we adopted FASB ASC 810-10-65, Consolidation, which
clarifies a noncontrolling interest in a subsidiary is an ownership interest in
the consolidated entity that should be reported as equity in the consolidated
financial statements. FASB ASC 810-10-65 also requires consolidated net income
to be reported at amounts that include the amounts attributable to both the
parent and the noncontrolling interest and requires disclosure, on the face of
the consolidated statement of income, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest.
FASB ASC
810-10-65 was required to be applied prospectively after adoption, with the
exception of the presentation and disclosure requirements, which were applied
retrospectively for all periods presented. As a result of the adoption of FASB
ASC 810-10-65, we reclassified approximately $0.2 million and $0.3 million in
noncontrolling interest to permanent equity on the consolidated balance sheets
as of December 31, 2008 and 2007, respectively. The impact of such
adoption on net loss for the periods ended September 30, 2009 and 2008 was
approximately $5,000 and $0, respectively. In periods subsequent to the adoption
of FASB ASC 810-10-65, we will periodically evaluate individual noncontrolling
interests for the ability to continue to recognize the noncontrolling interest
as permanent equity in the consolidated balance sheets. Any noncontrolling
interest that fails to qualify as permanent equity will be reclassified as
temporary equity and adjusted to the greater of (a) the carrying amount, or (b)
its redemption value as of the end of the period in which the determination is
made.
FASB ASC
810-10-65 requires retrospective application of the presentation and disclosure
requirements for all periods presented or to be incorporated by reference in any
registration statements to be filed by the Company subsequent to the adoption of
FASB ASC 810-10-65. However, given that the amounts changed as a result of the
retrospective application of FASB ASC 810-10-65 are
insignificant, we will make such prior period adjustments in future
filings.
On April
9, 2009, the FASB issued three FASB Staff Positions (“FSP”) to provide
additional application guidance and enhance disclosures regarding fair value
measurements and impairments of securities.
FASB ASC
820-10-65-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly, provides additional guidance for estimating fair value in
accordance with FASB ASC 820-10 when the volume and level of activity for the
asset or liability have significantly decreased in relation to normal market
activity. This FSP states a reporting entity shall evaluate circumstances to
determine whether the transaction is orderly based on the weight of the
evidence. Additional disclosures required by this FSP include the inputs and
valuation techniques used to measure fair values and any changes in
such.
FASB ASC
825-10-65-1, Interim
Disclosures about Fair Value of Financial Instruments, requires
disclosures about fair value of financial instruments for interim reporting
periods as well as in annual financial statements.
FASB ASC
320-10-65-1, Recognition and
Presentation of Other-Than-Temporary Impairments, intends to bring
greater consistency to the timing of impairment recognition, and provide greater
clarity to investors about the credit and noncredit components of impaired debt
securities that are not expected to be sold. The FSP also requires
increased and timely disclosures regarding expected cash flows, credit losses,
and an aging of securities with unrealized losses.
The FSPs
are effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15,
2009. On April 1, 2009, we adopted the FSPs to enhance
disclosures regarding fair value measurements. The adoption of these
FSPs did not have a significant impact on our condensed consolidated financial
statements.
On April
13, 2009, SEC Office of the Chief Accountant and Division of Corporation Finance
issued SEC Staff Accounting Bulletin 111 ("SAB 111"). SAB 111 amends and
replaces FASB ASC 320-10-S99-1, Miscellaneous Accounting – Other
Than Temporary Impairment of Certain Investments in Equity Securities, to
reflect FASB ASC 320-10-65-1. This FSP provides guidance for assessing whether
an impairment of a debt security is other than temporary, as well as how such
impairments are presented and disclosed in the financial statements. The amended
FASB ASC 320-10-S99-1 maintains the prior staff views related to equity
securities but has been amended to exclude debt securities from its scope. SAB
111 is effective upon the adoption of FASB ASC 320-10-65-1. The adoption of SAB
111 on April 1, 2009 did not have a material effect on our condensed
consolidated financial statements.
In June
2009, the FASB issued FASB ASC 855-10, Subsequent Events, which
establishes general standards of accounting for and disclosures of events that
occur after the balance sheet date but before the financial statements are
issued or available to be issued. It is effective for interim and annual periods
ending after June 15, 2009. We have adopted this standard as of June 30,
2009. The adoption of this standard did not have a material effect on
our condensed consolidated financial statements.
In June
2009, the FASB issued FASB ASC 105-10, Generally Accepted Accounting
Principles, which will become the source of authoritative US GAAP
recognized by the FASB to be applied to nongovernmental entities. It is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. We have adopted this standard as of September 30,
2009. The adoption of this standard did not have a material effect on
our condensed consolidated financial statements.
Recently Issued Accounting
Pronouncements
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”), (SFAS 167 shall remain authoritative until
integrated in the ASC), which amends the consolidation guidance applicable to
variable interest entities. The amendments to the consolidation guidance affect
all entities currently within the scope of FIN 46(R), as well as qualifying
special-purpose entities that are currently excluded from the scope of FIN
46(R). SFAS 167 is effective as of the beginning of the first fiscal year that
begins after November 15, 2009. We will adopt this standard on
January 1, 2010. We are in the process of evaluating the impact of
this standard to our financial statements.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets” (“SFAS 166”), (SFAS 166 shall remain authoritative
until integrated in the ASC). SFAS 166 removes the concept of a qualifying
special-purpose entity from SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS
140”) and removes the exception from applying FIN 46R. This statement also
clarifies the requirements for isolation and limitations on portions of
financial assets that are eligible for sale accounting. This statement is
effective for fiscal years beginning after November 15, 2009. We will adopt this
standard on January 1, 2010. We do not believe that the
adoption of this standard will have a material effect on our condensed
consolidated financial statements.
4.
|
Investments
in Real Estate
|
As of
September 30, 2009, our portfolio consists of twelve properties which were
approximately 79.63% leased. The following table provides summary
information regarding our properties.
Property
|
Location
|
Date
Purchased
|
Square
Footage
|
|
|
Purchase
Price
|
|
|
Associated
Debt
|
|
|
September
30, 2009
%
Leased
|
|
||||||||||
2111
South Industrial Park
|
North
Tempe, AZ
|
June
1, 2006
|
|
26,800
|
|
|
$
|
1,975,000
|
|
|
$
|
—
|
|
|
|
85.07
|
%
|
||||||
Shoemaker
Industrial Buildings
|
Santa
Fe Springs, CA
|
June
30, 2006
|
|
18,921
|
|
|
|
2,400,000
|
|
|
|
—
|
|
|
|
75.69
|
%
|
||||||
15172
Goldenwest Circle
|
Westminster,
CA
|
December
1, 2006
|
|
102,200
|
|
|
|
11,200,000
|
|
|
|
2,824,000
|
|
|
|
100.00
|
%
|
||||||
20100
Western Avenue
|
Torrance,
CA
|
December
1, 2006
|
|
116,433
|
|
|
|
19,650,000
|
|
|
|
4,702,000
|
|
|
|
51.46
|
%
|
||||||
Mack
Deer Valley
|
Phoenix,
AZ
|
January
21, 2007
|
|
180,985
|
|
|
|
23,150,000
|
|
|
|
3,868,000
|
|
|
|
80.23
|
%
|
||||||
Marathon
Center
|
Tampa
Bay, FL
|
April
2, 2007
|
|
52,020
|
|
|
|
4,450,000
|
|
|
|
—
|
|
|
|
76.18
|
%
|
||||||
Pinnacle
Park Business Center
|
Phoenix,
AZ
|
October
2, 2007
|
|
159,661
|
|
|
|
20,050,000
|
|
|
|
4,553,000
|
|
|
|
100.00
|
%
|
||||||
Orlando
Small Bay Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Carter
|
Winter
Garden, FL
|
November
15, 2007
|
|
49,125
|
|
|
|
4,624,000
|
|
|
|
|
|
|
|
92.37
|
%
|
||||||
Goldenrod
|
Orlando,
FL
|
November
15, 2007
|
|
78,646
|
|
|
|
7,402,000
|
|
|
|
|
|
|
|
80.65
|
%
|
||||||
Hanging
Moss
|
Orlando,
FL
|
November
15, 2007
|
|
94,200
|
|
|
|
8,866,000
|
|
|
|
|
|
|
|
82.59
|
%
|
||||||
Monroe
South
|
Sanford,
FL
|
November
15, 2007
|
|
172,500
|
|
|
|
16,236,000
|
|
|
|
|
|
|
|
63.24
|
%
|
||||||
|
|
|
|
394,471
|
|
|
|
37,128,000
|
|
|
|
22,420,000
|
|
|
|
79.83
|
%
|
||||||
Monroe
North CommerCenter
|
Sanford,
FL
|
April
17, 2008
|
|
181,348
|
|
|
|
14,275,000
|
|
|
|
7,124,000
|
|
|
|
78.49
|
%
|
||||||
|
|
|
|
1,232,839
|
|
|
$
|
134,278,000
|
|
|
$
|
45,491,000
|
|
|
|
79.63
|
%
|
As of
September 30, 2009, cost and accumulated depreciation and amortization related
to real estate assets and related lease intangibles were as
follows:
|
|
Buildings
and
Improvements
|
|
|
Site
Improvements
|
|
|
In-Place
Leases
|
|
|
Acquired
Above
Market
Leases
|
|
|
Acquired
Below
Market
Leases
|
|
|||||
Cost
|
|
$
|
86,207,000
|
|
|
$
|
10,360,000
|
|
|
$
|
2,009,000
|
|
|
$
|
1,692,000
|
|
|
$
|
(834,000
|
)
|
Accumulated
depreciation and amortization
|
|
|
(5,102,000
|
)
|
|
|
(1,260,000
|
)
|
|
|
(1,366,000
|
)
|
|
|
(1,405,000
|
)
|
|
|
589,000
|
|
Net
|
|
$
|
81,105,000
|
|
|
$
|
9,100,000
|
|
|
$
|
643,000
|
|
|
$
|
287,000
|
|
|
$
|
(245,000
|
)
|
As of
December 31, 2008, cost and accumulated depreciation and amortization related to
real estate assets and related lease intangibles were as follows:
|
|
Buildings
and
Improvements
|
|
|
Site
Improvements
|
|
|
In-Place
Leases
|
|
|
Acquired
Above
Market
Leases
|
|
|
Acquired
Below
Market
Leases
|
|
|||||
Cost
|
|
$
|
86,071,000
|
|
|
$
|
10,360,000
|
|
|
$
|
2,009,000
|
|
|
$
|
1,692,000
|
|
|
$
|
(834,000
|
)
|
Accumulated
depreciation and amortization
|
|
|
(3,361,000
|
)
|
|
|
(743,000
|
)
|
|
|
(979,000
|
)
|
|
|
(1,232,000
|
)
|
|
|
441,000
|
|
Net
|
|
$
|
82,710,000
|
|
|
$
|
9,617,000
|
|
|
$
|
1,030,000
|
|
|
$
|
460,000
|
|
|
$
|
(393,000
|
)
|
Depreciation
expense associated with buildings and improvements and site improvements for the
three months ended September 30, 2009 and 2008 was $781,000 and $759,000,
respectively. Depreciation expense associated with buildings and
improvements and site improvements for the nine months ended September 30, 2009
and 2008 was approximately $2.3 million and $2.1 million,
respectively.
Amortization
expense, net associated with the lease intangible assets and liabilities for the
three months ended September 30, 2009 and 2008 was $141,000 and $128,000,
respectively. Amortization expense, net associated with the lease
intangible assets and liabilities for the nine months ended September 30, 2009
and 2008 was $363,000 and $392,000, respectively. Estimated
amortization expense, net for October 1, 2009 through December 31, 2009 and each
of the four subsequent years is as follows:
|
|
Lease
Intangibles Amortization
|
|
|
October
1, 2009 to December 31, 2009
|
|
$
|
89,000
|
|
2010
|
|
$
|
302,000
|
|
2011
|
|
$
|
167,000
|
|
2012
|
|
$
|
65,000
|
|
2013
|
|
$
|
41,000
|
|
The
estimated useful lives for lease intangibles range from approximately one month
to nine years. As of September 30, 2009, the weighted-average
amortization period for in-place leases, acquired above market leases and
acquired below market leases were 4.1 years, 4.7 years and 3.5 years,
respectively.
5.
|
Allowance
for Doubtful Accounts
|
Our
allowance for doubtful accounts was $504,000 and $316,000 as of September 30,
2009 and December 31, 2008, respectively.
6.
|
Concentration
of Credit Risk
|
Financial
instruments that potentially subject us to a concentration of credit risk are
primarily cash investments. Cash is generally invested in government
backed securities and investment-grade short-term instruments and the amount of
credit exposure to any one commercial issuer is limited. Currently,
the Federal Deposit Insurance Corporation, or FDIC, generally insures amounts up
to $250,000 per depositor per insured bank, which is scheduled to be reduced to
$100,000 after December 31, 2009. As of September 30, 2009, we had
cash accounts in excess of FDIC insured limits.
As of
September 30, 2009, we owned three properties in the state of California, three
properties in the state of Arizona and six properties in the state of
Florida. Accordingly, there is a geographic concentration of risk
subject to fluctuations in each State’s economy.
7.
|
Notes
Receivable
|
In May
2008, we committed to fund up to $5.0 million to Servant Healthcare Investments
LLC and Servant Investments LLC (collectively “Servant”), two real estate
operating companies that are parties to an alliance agreement with the managing
member of the Advisor pursuant to which they are responsible for providing
certain acquisition and asset management services for programs sponsored by the
Advisor and its affiliates. Effective March 12, 2009, we increased the
commitment to Servant to a total of $10.0 million. The unsecured loans bear
interest at a rate of 10% per year and mature on May 19, 2013.
On a
quarterly basis, we evaluate the collectability of our notes
receivable. Our evaluation of collectability involves judgment,
estimates and a review of the Servant business models and their future
operations. During the quarter ended September 30, 2009, we concluded that the
collectability cannot be reasonably assured and therefore, in accordance with
FASB ASC 450-20, Contingencies
– Loss Contingencies, we recorded a note receivable reserve of
approximately $4.6 million against the balance of the Servant Investments LLC
note. The amount of this reserve has been included in our condensed consolidated
statements of operations under impairment of notes receivable.
For the
three months ended September 30, 2009 and 2008, interest income from the notes
receivable was $59,000 and $61,000, respectively. For the nine months ended
September 30, 2009 and 2008, interest income from the notes receivable was
$300,000 and $86,000, respectively.
8.
|
Note
Receivable from Related Party
|
On
January 22, 2009, we made a $14.0 million acquisition bridge loan to Caruth
Haven L.P, a Delaware limited partnership that is a wholly owned subsidiary of
Cornerstone Growth & Income REIT, Inc., a publicly offered, non-traded real
estate investment trust (“REIT”) sponsored by affiliates of our
sponsor. The loan is secured by a property and will mature on January
21, 2010, with no option to extend and bears interest at a variable rate of 300
basis points over the prime rate for the term of the loan. Caruth
Haven, L.P. may repay the loan, in whole or in part, on or before January 21,
2010 without incurring any prepayment penalty. Monthly installments
on the loan are interest-only and the entire principal amount is due on the
maturity date, assuming no prior principal prepayment. For the three months
ended September 30, 2009 and 2008, interest income for notes receivable from
related party was $224,000 and $0 respectively. For the nine months ended
September 30, 2009 and 2008, interest income for note receivable from related
party was $615,000 and $0, respectively.
9.
|
Payable
to Related Parties
|
Payable
to related parties at September 30, 2009 and December 31, 2008 consists of
offering costs, acquisition fees, and expense reimbursement payable and sales
commissions and dealer manager fees incurred to the Advisor and
PCC.
10.
|
Stockholders’
Equity
|
Common
Stock
Our
articles of incorporation authorize the issuance of 290,000,000 shares of common
stock with a par value of $0.001 and 10,000,000 shares of preferred stock with a
par value of $0.001. As of September 30, 2009, we had sold
approximately 20.6 million shares of common stock for total gross proceeds of
approximately $164.6 million. As of December 31, 2008, we had sold
approximately 18.4 million shares of common stock for a total of approximately
$147.3 million of gross proceeds.
Distributions
We have
adopted a distribution reinvestment plan that allows our stockholders to have
dividends and other distributions otherwise distributable to them invested in
additional shares of our common stock. We have registered 21,100,000
shares of our common stock for sale pursuant to the distribution reinvestment
plan in connection with our follow-on offering. The purchase price
per share is 95% of the price paid by the purchaser for our common stock, but
not less than $7.60 per share. As of September 30, 2009 and December
31, 2008, approximately 1.4 million and 0.8 million shares, respectively, had
been issued under the distribution reinvestment plan.
The
following are the distributions declared during the nine months ended
September 30, 2009 and 2008:
Distribution
Declared
|
|
|||||||||||||
Period
|
Cash
|
|
Reinvested
|
|
Total
|
|
||||||||
|
|
|
|
|
|
|||||||||
First
quarter 2008 (1)
|
|
$
|
485,000
|
|
|
$
|
719,000
|
|
|
$
|
1,204,000
|
|
||
Second
quarter 2008 (1)
|
|
$
|
611,000
|
|
|
$
|
926,000
|
|
|
$
|
1,537,000
|
|
||
Third
quarter 2008 (1)
|
$
|
832,000
|
$
|
1,297,000
|
$
|
2,129,000
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||
First
quarter 2009
|
|
$
|
1,020,000
|
|
|
$
|
1,464,000
|
|
|
$
|
2,484,000
|
|
||
Second
quarter 2009
|
|
$
|
1,125,000
|
|
|
$
|
1,523,000
|
|
|
$
|
2,648,000
|
|
||
Third
quarter 2009
|
$
|
1,181,000
|
$
|
1,554,000
|
$
|
2,735,000
|
(1)
|
Distributions
declared represented a return of capital for tax purposes. In order to
meet the requirements for being treated as a REIT under the Internal
Revenue Code, we must pay distributions to our shareholders each taxable
year equal to at least 90% of our net ordinary taxable
income. Some of our distributions have been paid from sources
other than operating cash flow, such as offering
proceeds. Until proceeds from our offering are fully invested
and generating operating cash flow sufficient to fully cover distributions
to stockholders, we intend to pay a portion of our distributions from the
proceeds of our offering or from borrowings in anticipation of future cash
flow.
|
The
declaration of distributions is at the discretion of our board of directors and
our board will determine the amount of distributions on a regular
basis. The amount of distributions will depend on our funds from
operations, financial condition, capital requirements, annual distribution
requirements under the REIT provisions of the Internal Revenue Code and other
factors our board of directors deems relevant. We may amend or
terminate the distribution reinvestment plan for any reason at any time upon 10
days prior written notice to participants.
Special
10% Stock Distribution
Our board
of directors authorized a special 10% stock distribution to be paid to the
stockholders of record on the date that we raised the first $125.0 million in
our initial public offering, which was achieved on July 23, 2008. All
stockholders of record on July 23, 2008 received one additional share of stock
for every 10 shares of stock they owned as of that date. For the
purpose of calculating the stock repurchase price for shares received as part of
the special 10% stock distribution declared in July 2008, the purchase price of
such shares will be deemed to be equal to the purchase price paid by the
stockholder for shares held by the stockholder immediately prior to the special
10% stock distribution.
Share
Repurchase Program
We have
adopted a share repurchase program for investors who have held their shares for
at least one year, unless the shares are being redeemed in connection with a
stockholder’s death. Under our current stock repurchase program, the
repurchase price will vary depending on the purchase price paid by the
stockholder and the number of years the shares are held. Our board of
directors may amend, suspend or terminate the program at any time on 30 days
prior notice to stockholders. We have no obligation to repurchase our
stockholders’ shares. Until September 21, 2012 our stock repurchase
program limits the number of shares of stock we can redeem (other than
redemptions due to death of a stockholder) to those that we can purchase with
net proceeds from the sale of stock under our distribution reinvestment plan in
the prior calendar year. Until September 21, 2012 we do not intend to redeem
more than the lesser of (i) the number of shares that could be redeemed using
the proceeds from our distribution reinvestment plan in the prior calendar year
or (ii) 5% of the number of shares outstanding at the end of the prior calendar
year.
During
the nine months ended September 30, 2009, we redeemed shares pursuant to our
stock repurchase program as follows:
Period
|
|
Total
Number of Shares Redeemed (1)
|
|
|
Average
Price Paid per Share
|
|
|||
|
|
|
|
|
|
|
|||
January
|
|
|
40,873
|
|
|
$
|
6.77
|
|
|
February
|
|
|
137,395
|
|
|
$
|
7.51
|
|
|
March
|
|
|
152,984
|
|
|
$
|
7.61
|
|
|
April
|
|
|
83,284
|
|
|
$
|
7.55
|
|
|
May
|
|
|
43,057
|
|
|
$
|
7.51
|
|
|
June
|
|
|
65,453
|
|
|
$
|
7.67
|
|
|
July
|
23,079
|
$
|
7.39
|
||||||
August
|
8,113
|
$
|
7.99
|
||||||
September
|
8,178
|
$
|
7.98
|
||||||
|
|
|
562,416
|
|
|
|
|
|
During
the nine months ended September 30, 2008, we redeemed shares pursuant to our
stock repurchase program as follows:
Period
|
|
Total
Number of Shares Redeemed (1)
|
|
|
Average
Price Paid per Share
|
|
|||
|
|
|
|
|
|
||||
January
|
|
|
12,500
|
|
|
$
|
7.20
|
|
|
February
|
|
|
12,484
|
|
|
$
|
7.36
|
|
|
March
|
|
|
2,016
|
|
|
$
|
7.15
|
|
|
April
|
|
|
396
|
|
|
$
|
7.09
|
|
|
May
|
|
|
14,616
|
|
|
$
|
7.61
|
|
|
June
|
|
|
31,607
|
|
|
$
|
7.51
|
|
|
July
|
56,504
|
$
|
7.59
|
||||||
August
|
22,569
|
$
|
7.15
|
||||||
September
|
6,600
|
$
|
6.76
|
||||||
|
|
159,292
|
|
|
|
|
|
_________________________
|
(1)
|
As
long as our common stock is not listed on a national securities exchange
or traded on an over -the-counter market, our stockholders who have held
their stock for at least one year may be able to have all or any portion
of their shares redeemed in accordance with the procedures outlined in the
prospectus relating to the shares they
purchased.
|
Our board
of directors may modify our stock repurchase program so that we can redeem stock
using the proceeds from the sale of our real estate investments or other
sources.
Employee
and Director Incentive Stock Plan
We have
adopted an Employee and Director Incentive Stock Plan (“the Plan”) which
provides for the grant of awards to our directors and full-time employees, as
well as other eligible participants that provide services to us. We
have no employees, and we do not intend to grant awards under the Plan to
persons who are not directors of ours. Awards granted under the Plan
may consist of nonqualified stock options, incentive stock options, restricted
stock, share appreciation rights, and distribution equivalent
rights. The term of the Plan is 10 years. The total number
of shares of common stock reserved for issuance under the Plan is equal to 10%
of our outstanding shares of stock at any time.
Effective
January 1, 2006, we adopted the provisions of, FASB ASC 718-10, Compensation – Stock
Compensation, which requires the measurement and recognition of
compensation expense for all share-based payment awards to employees and
directors based on estimated fair values. On August 6, 2008 and
August 8, 2007, we granted our non-employee directors nonqualified stock options
to purchase an aggregate of 20,000 and 20,000 shares of common stock,
respectively, at an exercise price of $8.00 per share. Of these
options, 15,000 lapsed on November 8, 2008 due to the resignation of one
director from the board of directors on August 6, 2008. Outstanding
stock options became immediately exercisable in full on the grant date, expire
in ten years after the grant date, and have no intrinsic value as of September
30, 2009. For the three and nine months ended September 30, 2009 and
2008, we did not incur any non-cash compensation expenses. No stock
options were exercised or canceled during the three and nine months ended
September 30, 2009. In connection with the registration of the shares in our
follow-on offering, we have suspended the issuance of options to our independent
directors under the Plan, and we do not expect to issue additional options to
our independent directors until we cease offering shares pursuant to our
offering.
11.
|
Related
Party Transactions
|
On
January 22, 2009, we made a $14.0 million acquisition bridge loan to Caruth
Haven L.P, a Delaware limited partnership that is a wholly owned subsidiary of
Cornerstone Growth & Income REIT, Inc., a publicly offered, non-traded REIT
sponsored by affiliates of our sponsor. See Note 8 for further
discussion.
Our
company has no employees. The Advisor is primarily responsible for managing our
business affairs and carrying out the directives of our board of
directors. We have an advisory agreement with the Advisor and a
dealer manager agreement with PCC which entitle the Advisor and PCC to specified
fees upon the provision of certain services with regard to our offerings and
investment of funds in real estate projects, among other services, as well as
reimbursement for organizational and offering costs incurred by the Advisor and
PCC on our behalf and reimbursement of certain costs and expenses incurred by
the Advisor in providing services to us.
Advisory
Agreement
Under the
terms of the advisory agreement, the Advisor will use commercially reasonable
efforts to present to us investment opportunities to provide a continuing and
suitable investment program consistent with the investment policies and
objectives adopted by our board of directors. The advisory agreement
calls for the Advisor to provide for our day-to-day management and to retain
property managers and leasing agents, subject to the authority of our board of
directors, and to perform other duties.
The fees
and expense reimbursements payable to the Advisor under the advisory agreement
are described below.
Organizational and Offering
Costs. Organizational and offering costs of our offerings are
being paid by the Advisor on our behalf and will be reimbursed to the Advisor
from the proceeds of our offerings. Organizational and
offering costs consist of all expenses (other than sales commissions and the
dealer manager fee) to be paid by us in connection with our offerings, including
our legal, accounting, printing, mailing and filing fees, charges of our escrow
holder and other accountable offering expenses, including, but not limited to,
(i) amounts to reimburse the Advisor for all marketing related costs and
expenses such as salaries and direct expenses of employees of the Advisor and
its affiliates in connection with registering and marketing our shares (ii)
technology costs associated with our offering of our shares; (iii) our costs of
conducting our training and education meetings; (iv) our costs of attending
retail seminars conducted by participating broker-dealers; and (v) payment or
reimbursement of bona fide due diligence expenses. In no event will
we have any obligation to reimburse the Advisor for organizational and offering
costs totaling in excess of 3.5% of the gross proceeds from our initial public
offering and follow-on offering.
As of
September 30, 2009, the Advisor and its affiliates had incurred on our behalf
organizational and offering costs for our initial public offering totaling
approximately $4.5 million, including approximately $0.1 million of
organizational costs that was expensed, approximately $4.4 million of offering
costs which reduce net proceeds of our initial public offering. As of
December 31, 2008, the Advisor and its affiliates had incurred on our behalf
organizational and offering costs totaling for our initial public offering
totaling approximately $4.2 million, including approximately $0.1 million of
organizational costs that have been expensed, approximately $4.1 million of
offering costs which reduced net proceeds of our initial public
offering.
The
Advisor and its affiliates had incurred organizational and offering costs on our
behalf for our follow-on offering in the amount of approximately $0.6 million
and $0.3 million as of September 30, 2009 and December 31, 2008.
Acquisition Fees and
Expenses. The advisory agreement requires us to pay the
Advisor acquisition fees in an amount equal to 2% of the gross proceeds of our
primary offering. We will pay the acquisition fees upon receipt of
the gross proceeds from our primary offering. However, if the
advisory agreement is terminated or not renewed, the advisor must return
acquisition fees not yet allocated to one of our investments. In
addition, we are required to reimburse the Advisor for direct costs the Advisor
incurs and amounts the Advisor pays to third parties in connection with the
selection and acquisition of a property, whether or not ultimately
acquired. For the three and nine months ended September 30, 2009, the
Advisor earned approximately $18,000 and $345,000 respectively of acquisition
fees, which had been expensed as incurred in accordance with our adoption of
FASB ASC 805-10 effective January 1, 2009. For the three and nine
months ended September 30, 2008, the Advisor earned approximately $469,000 and
$1.2 million, respectively of acquisitions fees which had been
capitalized.
Management
Fees. The advisory agreement requires us to pay the Advisor a
monthly asset management fee of one-twelfth of 1.0% of the sum of the aggregate
book basis carrying values of our assets invested, directly or indirectly, in
equity interests in and loans secured by real estate before reserves for
depreciation or bad debts or other similar non-cash reserves, calculated in
accordance with GAAP. In addition, we will reimburse the Advisor for
the direct costs and expenses incurred by the Advisor in providing asset
management services to us. These fees and expenses are in addition to
management fees that we pay to third party property managers. For the
three months ended September 30, 2009 and 2008 the Advisor earned $381,000 and
$342,000 respectively of asset management fees, which were expensed and included
in asset management fees in our condensed consolidated statement of
operations. For the nine months ended September 30, 2009 and 2008,
the Advisor earned approximately $1.1 million and $1.0 million respectively of
asset management fees, which were expensed and included in asset management fees
in our condensed consolidated statement of operations.
Operating Expenses.
The advisory agreement provides for reimbursement of the Advisor’s direct and
indirect costs of providing administrative and management services to
us. For the three months ended September 30, 2009 and 2008, $129,000
and $177,000 of such costs, respectively, were reimbursed and included in
general and administrative expenses in our condensed consolidated statement of
operations. For the nine months ended September 30, 2009 and
2008, $405,000 and $610,000 of such costs, respectively, were reimbursed and
included in general and administrative expenses in our condensed consolidated
statement of operations. The Advisor must pay or reimburse us the
amount by which our aggregate annual operating expenses exceed the greater of 2%
of our average invested assets or 25% of our net income unless a majority of our
independent directors determine that such excess expenses were justified based
on unusual and non-recurring factors.
Disposition
Fee. The advisory agreement provides that if the Advisor or
its affiliate provides a substantial amount of the services (as determined by a
majority of our directors, including a majority of our independent directors) in
connection with the sale of one or more properties, we will pay the Advisor or
such affiliate shall receive at closing a disposition fee up to 3% of the sales
price of such property or properties. This disposition fee may be
paid in addition to real estate commissions paid to non-affiliates, provided
that the total real estate commissions (including such disposition fee) paid to
all persons by us for each property shall not exceed an amount equal to the
lesser of (i) 6% of the aggregate contract sales price of each property or (ii)
the competitive real estate commission for each property. We will pay
the disposition fees for a property at the time the property is
sold.
Subordinated Participation
Provisions. The Advisor is entitled to receive a subordinated
participation upon the sale of our properties, listing of our common stock or
termination of the advisor, as follows:
|
·
|
After
stockholders have received cumulative distributions equal to $8.00 per
share (less any returns of capital) plus cumulative, non-compounded annual
returns on net invested capital, the Advisor will be paid a subordinated
participation in net sale proceeds ranging from a low of 5% of net sales
provided investors have earned annualized returns of 6% to a high of 15%
of net sales proceeds if investors have earned annualized returns of 10%
or more.
|
|
·
|
Upon
termination of the advisory agreement, the Advisor will receive the
subordinated performance fee due upon termination. This fee
ranges from a low of 5% of the amount by which the sum of the appraised
value of our assets minus our liabilities on the date the advisory
agreement is terminated plus total distributions (other than stock
distributions) paid prior to termination of the advisory agreement exceeds
the amount of invested capital plus annualized returns of 6%, to a high of
15% of the amount by which the sum of the appraised value of our assets
minus its liabilities plus all prior distributions (other than stock
distributions) exceeds the amount of invested capital plus annualized
returns of 10% or more.
|
|
·
|
In
the event we list our stock for trading, the Advisor will receive a
subordinated incentive listing fee instead of a subordinated participation
in net sales proceeds. This fee ranges from a low of 5% of the
amount by which the market value of our common stock plus all prior
distributions (other than stock distributions) exceeds the amount of
invested capital plus annualized returns of 6%, to a high of 15% of the
amount by which the sum of the market value of our stock plus all prior
distributions (other than stock distributions) exceeds the amount of
invested capital plus annualized returns of 10% or
more.
|
Dealer
Manager Agreement
PCC, as
dealer manager, is entitled to receive a sales commission of up to 7% of gross
proceeds from sales in our primary offerings. PCC, as dealer manager,
is also entitled to receive a dealer manager fee equal to up to 3% of gross
proceeds from sales in our primary offerings. The dealer manager is
also entitled to receive a reimbursement of bona fide due diligence expenses up
to 0.5% of the gross proceeds from sales in our primary
offerings. The advisory agreement requires the Advisor to reimburse
us to the extent that offering expenses including sales commissions, dealer
manager fees and organization and offering expenses (but excluding acquisition
fees and acquisition expenses discussed above) in excess of 13.5% of gross
proceeds from our primary offerings. For the three months ended
September 30, 2009 and 2008, our dealer manager earned sales commission and
dealer manager fees of $82,000 and approximately $2.3 million respectively. For
the nine months ended September 30, 2009 and 2008, our dealer manager earned
sales commission and dealer manager fees of approximately $1.7 million and $5.9
million, respectively. Dealer manager fees and sales commissions paid to PCC are
a cost of capital raised and, as such, are included as a reduction of additional
paid in capital in the accompanying condensed consolidated balance
sheets.
12.
|
Notes
Payable
|
On June
30, 2006, we entered into a credit agreement with HSH Nordbank AG, New York
Branch, for a temporary credit facility that we will use during our offering
period to facilitate our acquisitions of properties in anticipation of the
receipt of offering proceeds. As of September 30, 2009 and December
31, 2008, we had net borrowings of approximately $15.9 million, under the credit
agreement.
The
credit agreement permits us to borrow up to $50.0 million secured by real
property at a borrowing rate based on 30-day LIBOR plus a margin ranging from
115 to 135 basis points and requires payment of a usage premium of up to 15
basis points and an annual administrative fee. We may use the entire
credit facility to acquire real estate investments and we may use up to 10% of
the credit facility for working capital. We are entitled to prepay
the borrowings under the credit facility at any time without
penalty. On March 24, 2009, we notified the lender of our intent to
exercise the second of two one-year options to extend the loan maturity
date. On June 30, 2009, we satisfied conditions expressed by the
lender and extended our loan maturity date to June 30, 2010. The repayment of
obligations under the credit agreement may be accelerated in the event of a
default, as defined in the credit agreement. The facility contains
various covenants including financial covenants with respect to consolidated
interest and fixed charge coverage and secured debt to secured asset
value. As of September 30, 2009, we were in compliance with all these
financial covenants. During the three months ended September 30, 2009
and 2008, we incurred $58,000 and $260,000 of interest expense, respectively,
related to the credit agreement. During the nine months ended
September 30, 2009 and 2008, we incurred $186,000 and approximately $1.2 million
of interest expense, respectively, related to the credit agreement.
On
November 13, 2007, we entered into a loan agreement with Wachovia Bank, National
Association to facilitate the acquisition of properties during our offering
period. Pursuant to the terms of the loan agreement, we may borrow
$22.4 million at an interest rate of 140 basis points over 30-day LIBOR, secured
by specified real estate properties. The loan agreement has a
maturity date of November 13, 2009, and may be prepaid without
penalty. On August 17, 2009, we notified Wachovia Bank of our intent
to exercise the option to extend the loan for one year. The entire $22.4 million
available under the terms of the loan was used to finance an acquisition of
properties that closed on November 15, 2007. On November 10, 2009, we
received a letter from Wachovia Bank approving the loan extension pending an
approximately $6.6 million of principal reduction and satisfaction of certain
conditions expressed per the loan agreement. During the three months ended
September 30, 2009 and 2008, we incurred $96,000 and $228,000 of interest
expense, respectively, related to the loan agreement. During the nine
months ended September 30, 2009 and 2008, we incurred $300,000 and $719,000 of
interest expense, respectively, related to the loan agreement.
In
connection with our acquisition of Monroe North CommerCenter, on April 17, 2008,
we entered into an assumption and amendment of note, mortgage and other loan
documents (the “Loan Assumption Agreement”) with Transamerica Life Insurance
Company (“Transamerica”). Pursuant to the Loan Assumption Agreement,
we assumed the outstanding principal balance of approximately $7.4 million on
the Transamerica mortgage loan. The loan matures on November 1, 2014
and bears interest at a fixed rate of 5.89% per annum. During the
three months ended September 30, 2009 and 2008, we incurred $105,000 and
$108,000 of interest expense, respectively, related to the loan
agreement. During the nine months ended September 30, 2009 and 2008,
we incurred $317,000 and $197,000 of interest expense, respectively, related to
the loan agreement. As of September 30, 2009 and December 31, 2008,
we had net borrowings of approximately $7.1 million and $7.3 million,
respectively, under the Loan Assumption Agreement.
The
principal payments due on Monroe North CommerCenter mortgage loan for October 1,
2009 to December 31, 2009 and each of the subsequent years is as
follows:
Year
|
|
Principal
amount
|
|
|
October
1, 2009 to December 31, 2009
|
|
$
|
46,000
|
|
2010
|
|
$
|
193,000
|
|
2011
|
|
$
|
204,000
|
|
2012
|
|
$
|
217,000
|
|
2013
|
|
$
|
230,000
|
|
2014
and thereafter
|
|
$
|
6,234,000
|
|
In
connection with our notes payable, we had incurred financing costs totaling
approximately $1.5 million and approximately $1.4 million as of September 30,
2009 and December 31, 2008, respectively. These financing costs have
been capitalized and are being amortized over the life of the
agreements. For the three months ended September 30, 2009 and 2008,
$54,000 and $63,000, respectively, of deferred financing costs were amortized
and included in interest expense in the consolidated statements of
operations. For the nine months ended September 30, 2009 and 2008,
$182,000 and $371,000, respectively, of deferred financing costs were amortized
and included in interest expense in the consolidated statements of
operations. Consistent with our borrowing policies, during our
offering, we will borrow periodically to acquire properties and for working
capital. We will determine whether to use the proceeds of our
offerings to repay amounts borrowed under the credit agreement and loan
agreements depending on a number of factors, including the investments that are
available to us for purchase at the time and the cost of the credit
facility. Following the closing of our offerings, we will endeavor to
repay all amounts owing under the credit agreement and loan agreements or that
are secured by our properties and which have not previously been
paid. To the extent sufficient proceeds from our offerings are
unavailable to repay the indebtedness secured by properties within a reasonable
time following the closing of our offerings as determined by our board of
directors, we may sell properties or raise equity capital to repay the secured
debt, so that we will own our properties with no permanent acquisition
financing.
13.
|
Commitments
and Contingencies
|
We
committed to fund up to $10.0 million to Servant. As of September 30, 2009, we
have funded approximately $6.9 million of the commitment. See note 7 for further
detail.
We
monitor our properties for the presence of hazardous or toxic
substances. While there can be no assurance that a material
environmental liability does not exist, we are not currently aware of any
environmental liability with respect to the properties that would have a
material effect on our financial condition, results of operations and cash
flows. Further, we are not aware of any environmental liability or
any unasserted claim or assessment with respect to an environmental liability
that we believe would require additional disclosure or the recording of a loss
contingency.
Our
commitments and contingencies include the usual obligations of real estate
owners and operators in the normal course of business. In the opinion
of management, these matters are not expected to have a material impact on our
condensed consolidated financial position, cash flows and results of
operations. We are not presently subject to any material litigation
nor, to our knowledge, is any material litigation threatened against the Company
which if determined unfavorably to us would have a material adverse effect on
our cash flows, financial condition or results of operations.
14.
|
Subsequent
Event
|
Sale
of Shares of Common Stock
As of
November 13, 2009, we had raised approximately $165.0 million through the
issuance of approximately 20.7 million shares of our common stock under our
initial public offering and follow-on offering, excluding, approximately 1.5
million shares that were reinvested pursuant to our distribution reinvestment
plan and approximately 1.6 million shares issued in connection with the special
10% stock dividend related to our initial public offering, reduced by
approximately 0.8 million shares pursuant to our stock repurchase
program.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” should be read in conjunction with our financial
statements and notes thereto contained elsewhere in this report.
This
section contains forward-looking statements, including estimates, projections,
statements relating to our business plans, objectives and expected operating
results, and the assumptions upon which those statements are
based. These forward-looking statements generally are identified by
the words “believes,” “project,” “expects,” “anticipates,” “estimates,”
“intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will
continue,” “will likely result,” and similar
expressions. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking
statements. Forward-looking statements that were true at the time
made may ultimately prove to be incorrect or false. We undertake no
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise. All
forward-looking statements should be read in light of the risks identified in
Part II, Item 1A herein and Part I, Item 1A of our annual report on Form 10-K
for the year ended December 31, 2008 and Part II, Item 1A of our quarterly
reports on Form 10-Q for the quarters ended March 31, 2009 and June 30, 2009,
all filed with the Securities and Exchange Commission (the “SEC”).
Overview
Cornerstone
Core Properties REIT, Inc., a Maryland corporation, was formed on October 22,
2004 under the General Corporation Law of Maryland for the purpose of engaging
in the business of investing in and owning commercial real estate. As
used in this report, the “Company”, “we”, “us” and “our” refer to Cornerstone
Core Properties REIT, Inc. and its consolidated subsidiaries except where the
context otherwise requires. We have no paid employees and are externally managed
pursuant to an advisory agreement by an affiliate, Cornerstone Realty Advisors,
LLC, a Delaware limited liability company that was formed on November 30, 2004
(the “Advisor”).
Cornerstone
Operating Partnership, L.P., a Delaware limited partnership (the “Operating
Partnership”) was formed on November 30, 2004. At September 30, 2009,
we owned 99.88% general partner interest in the Operating Partnership while the
Advisor owned a 0.12 % limited partnership interest. We anticipate
that we will conduct all or a portion of our operations through the Operating
Partnership. Our financial statements and the financial statements of
the Operating Partnership are consolidated in the accompanying condensed
consolidated financial statements. All intercompany accounts and
transactions have been eliminated in consolidation.
On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan. We stopped making offers under our initial public
offering on June 1, 2009 upon raising gross offering proceeds of approximately
$163.7 million from the sale of approximately 21.7 million shares, including
shares sold under the distribution reinvestment plan. On June 10,
2009, we commenced a follow-on offering of up 77,350,000 shares of our common
stock, consisting of 56,250,000 shares for sale pursuant to a primary offering
and 21,100,000 shares for sale pursuant to our dividend reinvestment
plan. We retained Pacific Cornerstone Capital, Inc. (“PCC”), an
affiliate of the Advisor, to serve as the dealer manager for our
offerings. PCC is responsible for marketing our shares currently
being offered pursuant to the follow-on offering.
We used
the net proceeds from our initial public offering to invest primarily in
investment real estate including multi-tenant industrial real estate located in
major metropolitan markets in the United States. We intend to use the
net proceeds from our follow-on offering to pay down temporary acquisition
financing on our existing assets and to acquire additional real estate
investments.
As of
September 30, 2009, we had raised approximately $164.6 million of gross proceeds
from the sale of approximately 20.6 million shares of our common stock in our
initial public offering and follow-on offering and had acquired twelve
properties.
Our
revenues, which are comprised largely of rental income, include rents reported
on a straight-line basis over the initial term of the lease. Our growth depends,
in part, on our ability to increase rental income and other earned income from
leases by increasing rental rates and occupancy levels and control operating and
other expenses. Our operations are impacted by property specific, market
specific, general economic and other conditions.
Market
Outlook – Real Estate and Real Estate Finance Markets
During
2008 and 2009, significant and widespread concerns about credit risk and access
to capital have been present in the global capital markets. Both the national
and most global economies have experienced substantially increased unemployment
and a downturn in economic activity. In addition, recent failure or near failure
of several large financial institutions, together with government interventions
in the financial system, including interventions in bankruptcy proceedings and
restrictions on businesses, have led to increased market uncertainty and
volatility. Despite certain recent positive economic indicators and improved
stock market performance, the aforementioned conditions, combined with stagnant
business activity and low consumer spending, have resulted in an unprecedented
global recession and continue to contribute to a challenging macro-economic
environment that may interfere with the implementation of our business
strategies.
As a
result of the decline in general economic conditions, the U.S. commercial real
estate industry has also been experiencing deteriorating fundamentals across all
major property types and most geographic markets. Tenant defaults are on the
rise, while demand for commercial real estate space is contracting. It is
expected that this will create a highly competitive leasing environment that
should result in downward pressure on both occupancy and rental rates, resulting
in leasing incentives becoming more common. Mortgage delinquencies and defaults
have trended upward, with many industry analysts predicting significant credit
defaults, foreclosures and principal losses, in particular for subordinate
securitized debt instruments.
From a
financing perspective, the severe dislocations and liquidity disruptions in the
credit markets have impacted both the cost and availability of commercial real
estate debt. The commercial mortgage-backed securities market, formerly a
significant source of liquidity and debt capital, has become inactive and has
left a void in the market for long-term, affordable, fixed rate debt. This void
has been partially filled by portfolio lenders such as insurance companies, but
at very different terms than were available in the past five years. These
remaining lenders have generally increased credit spreads, lowered the amount of
available proceeds, required recourse security and credit enhancements, and
otherwise tightened underwriting standards considerably, while simultaneously
generally limiting lending to existing relationships with borrowers that invest
in high quality assets in top tier markets. In addition, lenders have limited
the amount of financing available to existing relationships in an effort to
manage and mitigate the risk of overconcentration in certain
borrowers.
Currently,
benchmark interest rates, such as LIBOR, are at historic lows, allowing some
borrowers with variable rate real estate loans to continue making debt service
payments even as the properties securing these loans experience decreased
occupancy and lower rental rates. These low rates have benefitted borrowers with
floating rate debt who have experienced lower revenues due to decreased
occupancy or lower rental rates. Low short-term rates have allowed them to meet
their debt obligations but the borrowers would not meet the current underwriting
requirements needed to refinance this debt today. As these loans near maturity,
borrowers will find it increasingly difficult to refinance these loans in the
current underwriting environment.
These
market conditions have and will likely continue to have a significant impact on
our real estate investments. In addition, these market conditions have impacted
our tenants’ businesses, which makes it more difficult for them to meet current
lease obligations and places pressure on them to negotiate favorable lease terms
upon renewal in order for their businesses to remain viable. Increases in rental
concessions given to retain tenants and maintain our occupancy level, which is
vital to the continued success of our portfolio, has resulted in lower current
cash flow. Projected future declines in rental rates, slower or potentially
negative net absorption of leased space and expectations of future rental
concessions, including free rent to retain tenants who are up for renewal or to
sign new tenants, are expected to result in additional decreases in cash flows.
Historically low interest rates have helped offset some of the impact of these
decreases in operating cash flow for properties financed with variable rate
mortgages; however, interest rates may not remain at these historically low
levels for the remaining life of many of our investments.
Critical Accounting
Policies
There
have been no material changes to our critical accounting policies as previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2008, as filed with the SEC, except as discussed under Note 3 of the
accompanying consolidated financial statements.
Results
of Operations
We owned
twelve properties during the full three month and periods ended September 30,
2009 and 2008. In January 2009, we made a $14.0 million mortgage loan
to an affiliate.
Three
months ended September 30, 2009 and 2008
Rental
revenues and tenant reimbursements in the quarter were approximately $2.3
million, a decrease of $0.6 million, from the comparable quarter of 2008. The
decrease is primarily due to lower occupancy rates, longer lease up periods for
vacant units, and tenant collectability issues resulting from the current
economic environment.
Interest
income from notes receivable was approximately $0.3 million in the 2009 quarter,
an increase of $0.2 million, from the comparable quarter of 2008. The increase
is due to higher notes receivable balances in 2009.
Property
operating and maintenance expense for the 2009 quarter was approximately $1.0
million, an increase of $0.2 million, from the comparable quarter of 2008. The
increase is primarily due to increases in property taxes and bad debt expense
and legal collection costs, resulting from current economic
conditions.
General
and administrative expense for 2009 quarter was approximately $0.4 million,
comparable to the same quarter of 2008.
Asset
management fees for the 2009 quarter were approximately $0.4 million, comparable
to the same quarter of 2008.
Real
estate acquisition costs for the 2009 quarter were $28,000, compared to $0 for
the 2008 quarter. The increase reflects the January 2009 adoption of
FASB ASC 805-10 which requires expensing certain costs that were previously
capitalized with the property.
Depreciation
and amortization for the 2009 quarter was approximately $0.9 million and was
comparable to the same quarter of 2008.
A note
receivable impairment reserve of approximately $4.6 million was recorded in the
2009 quarter. There was no impairment reserve in the comparable period of 2008.
The 2009 impairment was based on our evaluation of collectability that involves
judgment, estimates and a review of the Servant business models and their future
operations. While we remain confident of Servant Investment’s ability to
successfully execute its business plans, changes in the economic environment and
market conditions have delayed planned initiatives, and we concluded that the
collectability cannot be reasonably assured.
Interest
income for the 2009 quarter was $3,000, a decrease of $102,000, from the
comparable quarter of 2008. The decrease is primarily due to lower
investment rates on short term investments combined with a decline in the
average cash balance available for investment.
Interest
expense for the 2009 quarter was $0.3 million, a decrease of $0.4 million, from
the comparable quarter of 2008. The decrease is primarily due to lower interest
rates on our credit agreement with HSH Nordbank and Wachovia Bank and a lower
debt balance as a result of the $25.0 million principal pay down in the third
quarter of 2008.
Nine
months ended September 30, 2009 and 2008
Rental
revenues and tenant reimbursements for the nine months ended September 30, 2009
was approximately $7.5 million, a decrease of $0.9 million from the comparable
period in 2008. The decrease is primarily due to lower occupancy rates, longer
lease up periods for vacant units, and tenant collectability issues as a result
of the current economic environment.
Interest
revenue from notes receivable for the nine months ended September 30, 2009 was
approximately $1.0 million, an increase of approximately $0.9 million from the
comparable period of 2008. The increase is due to higher notes receivable
balances.
Property
operating and maintenance expense for the nine months ended September 30, 2009
was approximately $2.7 million, an increase of approximately $0.5 million from
the comparable period of 2008. The increase is primarily due to an increase in
property taxes and bad debt expense and legal collection costs as a result of
current economic conditions.
General
and administrative expense for the nine months ended September 30, 2009 was
approximately $1.2 million, a decrease of $0.1 million, from the comparable
period of 2008. The decrease is due to timing and incurrence of services
provided by the Advisor and lower legal and abandoned projects costs partially
offset by higher board of director and professional fees.
Asset
management fees for the nine months ended September 30, 2009 were approximately
$1.1 million, an increase of $0.1 million, from comparable period of 2008. The
increase is due to higher average assets under management in 2009.
Real
estate acquisition costs for the nine months ended September 30, 2009 were
approximately $0.4 million compared to $0 for the comparable period of 2008. The
increase reflects the January 2009 adoption of FASB ASC 805-10 which requires
expensing certain costs that were previously capitalized with the
property.
Depreciation
and amortization for the nine months ended September 30, 2009 was approximately
$2.8 million, an increase of $0.2 million from the comparable period of 2008.
The increase is due to the property acquired during second quarter of
2008.
A note
receivable impairment reserve of approximately $4.6 million was recorded in the
nine months ended September 30, 2009. No impairment was recorded in the
comparable period of 2008. The 2009 impairment was based on our evaluation of
collectability that involves judgment, estimates and a review of the Servant
business models and their future operations. While we remain confident of
Servant Investment’s ability to successfully execute its business plans, changes
in the economic environment and market conditions have delayed planned
initiatives, and we concluded that the collectability cannot be reasonably
assured.
Interest
income for the nine months ended September 30, 2009 was $7,000, a decrease of
approximately $0.2 million from the comparable period of 2008. The
decrease is primarily due to lower rates paid on short term investments combined
with a lower average cash balances available for investment.
Interest
expense for the nine months ended September 30, 2009 was approximately $1.1
million, a decrease of $1.4 million, from $2.5 million for the comparable period
of 2008. The decrease is primarily due to lower interest rates on our credit
agreement with HSH Nordbank and Wachovia Bank.
Liquidity
and Capital Resources
We expect
that primary sources of capital over the long term will include net proceeds
from the sale of our common stock and net cash flows from
operations. We expect that our primary uses of capital will be for
property acquisitions, for the payment of tenant improvements and leasing
commissions, operating expenses, interest expense on any outstanding
indebtedness, cash distributions, and for the repayment of notes payable. In
addition, we will continue to use temporary debt financing to facilitate our
acquisitions of properties in anticipation of receipt of offering
proceeds.
We have
adopted a stock repurchase program that enables our stockholders to sell their
stock to us in limited circumstances. Our stock repurchase program has
limitations and restrictions and may be cancelled. We intend to redeem shares
using proceeds from our distribution reinvestment plan but we may use other
available cash to repurchase the shares of a deceased shareholder. Our board of
directors may modify our stock repurchase program so that we can also redeem
stock using the proceeds from the sale of our properties or other
sources.
On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan. We stopped making offers under our initial public
offering on June 1, 2009. On June 10, 2009, we commenced a follow-on
offering of up to 77,350,000 shares of our common stock, consisting of
56,250,000 shares for sale pursuant to a primary offering and 21,100,000 shares
for sale pursuant to our dividend reinvestment plan. As of September 30, 2009, a
total of approximately 20.6 million shares of our common stock had been sold in
our combined offerings for aggregate gross proceeds of approximately $164.6
million.
As of
September 30, 2009, we had approximately $19.1 million in cash and cash
equivalents on hand and approximately $34.1 million available under our
acquisition credit facility with HSH Nordbank.
We may
use the available credit under our credit facility to acquire real estate
investments and we may use up to 10% of the credit facility for working
capital. We are entitled to prepay the borrowings under the credit
facility at any time without penalty. On March 24, 2009, we notified
HSH Nordbank of our intent to exercise the second of two one-year options to
extend the loan maturity date. On June 30, 2009, we satisfied
conditions expressed by the lender and extended our loan maturity date to June
30, 2010. The repayment of obligations under the credit agreement may be
accelerated in the event of a default, as defined in the credit
agreement. The facility contains various covenants including
financial covenants with respect to consolidated interest and fixed charge
coverage and secured debt to secured asset value. As of September 30,
2009, we were in compliance with all these financial covenants.
In
addition, on August 17, 2009, we notified Wachovia Bank of our intent to
exercise the option to extend our outstanding $22.4 million loan for one year to
November 13, 2010. On November 10, 2009, we received a letter from Wachovia Bank
approving the loan extension pending an approximately $6.6 million of principal
reduction and satisfaction of certain conditions expressed per the loan
agreement.
We
anticipate paying down the existing debt obligations with proceeds raised from
our offerings and proceeds to be received from a note receivable from a related
party when it matures in January 2010. Our liquidity will increase as
additional subscriptions are accepted and decrease as net offering proceeds are
expended in connection with the acquisition and operation of
properties.
There may
be a delay between the sale of our shares and the purchase of
properties. During this period, net offering proceeds will be
temporarily invested in short-term, liquid investments that could yield lower
returns than investments in real estate.
Until
proceeds from our offerings are invested and generating operating cash flow
sufficient to make distributions to stockholders, we intend to pay all or a
substantial portion of our distributions from the proceeds of our offering or
from borrowings in anticipation of future cash flow. For the nine
months ended September 30, 2009, cash distributions to stockholders were paid
from a combination of cash flow from operations and net proceeds raised from our
offerings.
Distributions
paid for the three months ended September 30, 2009 were approximately $2.7
million. Of this amount, approximately $1.6 million was reinvested through our
dividend reinvestment plan and approximately $1.1 million was paid in cash to
stockholders. 97.0% of the total cash distributions paid for the three months
ended September 30, 2009 was funded from cash flow from operations; the
shortfall of $36,000, or 3.0% of the total cash amount distributed, was funded
from proceeds from our offering.
As of
September 30, 2009, the Advisor and its affiliates had incurred on our behalf
organizational and offering costs for our initial public offering totaling
approximately $4.5 million, including approximately $0.1 million of
organizational costs that was expensed, approximately $4.4 million of offering
costs which reduce net proceeds of our initial public offering. As of
December 31, 2008, the Advisor and its affiliates had incurred on our behalf
organizational and offering costs totaling for our initial public offering
totaling approximately $4.2 million, including approximately $0.1 million of
organizational costs that have been expensed, approximately $4.1 million of
offering costs which reduced net proceeds of our initial public
offering.
The
Advisor and its affiliates had incurred organizational and offering costs on our
behalf for our follow-on offering in the amount of approximately $0.6 million
and $0.3 million as of September 30, 2009 and December 31, 2008.
In no
event will we have any obligation to reimburse the Advisor for these costs
totaling in excess of 3.5% of the gross proceeds from our initial public
offering and follow-on public offering. As of September 30, 2009, we
had reimbursed to the Advisor a total of $4.5 million for our initial public
offering and $0.6 million for our follow-on offering.
At times
during our offering stage, the amount of organization and offering expenses that
we incur, or that the Advisor and its affiliates incur on our behalf, may exceed
3.5% of the gross offering proceeds then raised, but our Advisor has agreed to
reimburse us to the extent that our organization and offering expenses exceed
this 3.5% limitation at the conclusion of our offerings. In addition, the
Advisor will pay all of our organization and offering expenses that, when
combined with the sales commissions and dealer manager fees that we incur exceed
13.5% of the gross proceeds from our public offerings.
We will
not rely on advances from the Advisor to acquire properties but the Advisor and
its affiliates may loan funds to special purposes entities that may acquire
properties on our behalf pending our raising sufficient proceeds from our public
offerings to purchase the properties from the special purpose
entity.
We will
endeavor to repay any temporary acquisition debt financing promptly upon receipt
of proceeds in our offerings. To the extent sufficient proceeds from
our offerings are unavailable to repay such debt financing within a reasonable
time as determined by our board of directors, we will endeavor to raise
additional equity or sell properties to repay such debt so that we will own our
properties with no permanent financing. We are not aware of any
material trends or uncertainties, favorable or unfavorable, other than national
economic conditions affecting real estate generally, which we anticipate may
have a material impact on either capital resources or the revenues or income to
be derived from the operation of real estate properties.
Financial
markets have recently experienced unusual volatility and uncertainty. Liquidity
has tightened in all financial markets, including the debt and equity
markets. Our ability to fund property acquisitions or development
projects, as well as our ability to repay or refinance debt maturities could be
adversely affected by an inability to secure financing at reasonable terms, if
at all. While we currently do not expect any difficulties, it is possible, in
these unusual and uncertain times, our revolving credit agreement with HSH
Nordbank could fail to fund a borrowing request. Such an event could adversely
affect our ability to access funds from the revolving credit facility when
needed.
Funds
from Operations
Funds
from operations (“FFO”) is a non-GAAP financial measure that is widely
recognized as a measure of REIT operating performance. We compute FFO
in accordance with the definition outlined by the National Association of Real
Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income
(loss), computed in accordance with GAAP, excluding extraordinary items, as
defined by GAAP, and gains (or losses) from sales of property, plus depreciation
and amortization on real estate assets, and after adjustments for unconsolidated
partnerships, joint ventures, noncontrolling interests and
subsidiaries. Our FFO may not be comparable to FFO reported by other
REITs that do not define the term in accordance with the current NAREIT
definition or that interpret the current NAREIT definition differently than we
do. We believe that FFO is helpful to investors and our management as
a measure of operating performance because it excludes depreciation and
amortization, gains and losses from property dispositions, and extraordinary
items, and as a result, when compared year to year, reflects the impact on
operations from trends in occupancy rates, rental rates, operating costs,
development activities, general and administrative expenses, and interest costs,
which is not immediately apparent from net income. Historical cost
accounting for real estate assets in accordance with GAAP implicitly assumes
that the value of real estate diminishes predictably over time. Since
real estate values have historically risen or fallen with market conditions,
many industry investors and analysts have considered the presentation of
operating results for real estate companies that use historical cost accounting
alone to be insufficient. As a result, our management believes that
the use of FFO, together with the required GAAP presentations, provide a more
complete understanding of our performance. Factors that impact FFO
include start-up costs, fixed costs, delay in buying assets, lower yields on
cash held in accounts pending investment, income from portfolio properties and
other portfolio assets, interest rates on acquisition financing and operating
expenses. FFO should not be considered as an alternative to net
income (loss), as an indication of our performance, nor is it indicative of
funds available to fund our cash needs, including our ability to make
distributions. Our calculations of FFO for the three and nine months
ended September 30, 2009 and 2008 are presented below:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
||||||||||
|
|
September
30,
|
|
|
September
30,
|
|
||||||||||
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net
loss attributable to common stockholders
|
|
$
|
(5,068,000
|
)
|
|
$
|
(66,000
|
)
|
|
$
|
(5,339,000
|
)
|
|
$
|
(964,000
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Net
(loss) income attributable to noncontrolling interest
|
|
|
(5,000
|
)
|
|
|
-
|
|
|
(5,000
|
)
|
|
4,000
|
|
||
Real
estate assets depreciation and amortization
|
|
|
989,000
|
|
|
|
948,000
|
|
|
2,786,000
|
|
|
2,620,000
|
|
||
Funds
from operations (FFO)
|
|
$
|
(4,074,000
|
)
|
|
$
|
882,000
|
|
|
$
|
(2,548,000
|
)
|
|
$
|
1,652,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Weighted
average shares outstanding
|
|
|
22,584,321
|
|
|
|
17,677,134
|
|
|
21,583,192
|
|
|
13,270,334
|
|
In
addition, FFO may be used to fund all or a portion of certain capitalizable
items that are excluded from FFO, such as capital expenditures and payments of
principal on debt, each of which may impact the amount of cash available for
distribution to our stockholders.
Some or
all of our distributions have been paid from sources other than operating cash
flow, such as offering proceeds, cash advanced to us or reimbursements of
expenses from the Advisor and proceeds from loans including those secured by our
assets. Given the uncertainty arising from numerous factors,
including both the raising and investing of capital in the current financing
environment, ultimate FFO performance cannot be predicted with
certainty. Currently, a portion of the cash distributions to our
stockholders are made from capital at an annualized rate of 6.0%, based on an
$8.00 per share purchase price. These distributions are being paid in
anticipation of future cash flow from our investments. Until proceeds from our
offering are invested and generating operating cash flow sufficient to make
distributions to stockholders, we intend to pay a portion of our distributions
from the proceeds of our offering or from borrowings in anticipation of future
cash flow, reducing the amount of funds that would otherwise be available for
investment.
Contractual
Obligations
The
following table reflects our contractual obligations as of September 30, 2009,
specifically our obligations under long-term debt agreements and notes
receivable:
|
|
Payment
due by period
|
|
|||||||||||||||||
Contractual
Obligations
|
|
Total
|
|
Less
than 1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
More
than 5 years
|
|
|||||||
Long-Term
Debt Obligations (1)
|
|
$
|
45,491,000
|
|
|
$
|
38,556,000
|
|
|
$
|
415,000
|
|
|
$
|
467,000
|
|
|
$
|
6,053,000
|
|
Interest
expense related to long term debt (2)
|
|
$
|
2,200,000
|
|
|
$
|
634,000
|
|
|
$
|
794,000
|
|
|
$
|
742,000
|
|
|
$
|
30,000
|
|
Note
receivable (3)
|
|
$
|
3,100,000
|
|
|
$
|
3,100,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
_________________________
(1) This
represents the sum of a credit agreement with HSH Nordbank, AG and loan
agreements with Wachovia Bank National Association and Transamerica Life
Insurance Company. On March 24, 2009, we notified HSH Nordbank, AG of
our intent to exercise the second of two one-year options to extend the loan
maturity date. On June 30, 2009, we satisfied conditions expressed by
the lender and extended our loan maturity date to June 30, 2010. The loan
agreement with Wachovia has a maturity date of November 13, 2009, and may be
prepaid without penalty. On August 17, 2009, we notified Wachovia
Bank of our intent to exercise the option to extend the loan for one year.
On November 10, 2009, we received a letter from Wachovia Bank approving the loan
extension pending an approximately $6.6 million of principal reduction and
satisfaction of certain conditions expressed per the loan
agreement.
(2)
Interest expense related to the credit agreement with HSH Nordbank, AG and loan
agreement with Wachovia Bank National Association are calculated based on the
loan balances outstanding at September 30, 2009, one month LIBOR at September
30, 2009 plus appropriate margin ranging from 1.15% and
1.40%. Interest expense related to loan agreement with Transamerica
Life Insurance Company is based on a fixed rate of 5.89% per annum.
(3) We
have committed to funding $10.0 million to entities that are parties to an
alliance with the managing member of the Advisor. As of September 30,
2009, we have funded approximately $6.9 million to Servant.
Item
3.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
We invest
our cash and cash equivalents in short-term, highly liquid investments including
government backed obligations, bank certificates of deposit and interest-bearing
accounts which, by their nature, are subject to interest rate
fluctuations. As of September 30, 2009, we had borrowed approximately
$15.9 million under our credit facility and loan agreements.
The
credit facility with HSH Nordbank and future borrowing on the credit facility is
subject to a variable rate through its maturity date. Under the terms
of the amended agreement, the principal balance will be due on September 30,
2010. The loan agreement with Wachovia Bank, National Association is
subject to a variable rate through its maturity date of November 13,
2009. The loan agreement with Transamerica Life Insurance Company is
based on a fixed rate of 5.89% per annum and therefore is not subject to any
interest rate fluctuations.
An
increase in the variable interest rate on the facilities constitutes a market
risk as a change in rates would increase or decrease interest incurred and
therefore cash flows available for distribution to
shareholders. Based on the debt outstanding as of September 30, 2009,
a 1% change in interest rates would result in a change in interest expense of
approximately $384,000 per year. During the period from January 1,
2009 through September 30, 2009, 30-day LIBOR has been flat. There can be no
assurance whether this rate will increase or decrease.
Item
4.
|
Controls
and Procedures
|
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our senior management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Our Chief Executive Officer and our Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures and have concluded that the disclosure controls and procedures were
effective as of the end of the period covered by this report.
In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
There
have been no changes in our internal control over financial reporting during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item
1A.
|
Risk
Factors
|
The
following risk supplements the risks disclosed in our annual report on Form 10-K
for the fiscal year ended December 31, 2008.
Our
limited operating history makes it difficult for you to evaluate
us. In addition, as a company in its early stages of operations we
have incurred losses in the past and may continue to incur losses.
We have a
limited operating history. As a consequence, our past performance and the past
performance of other real estate investment programs sponsored by affiliates of
our advisor may not be indicative of the performance we will achieve. We were
formed on October 22, 2004 in order to invest primarily in investment real
estate. We have acquired twelve properties as of the date of this report and
generated limited income, cash flow, funds from operations or funds from which
to make distributions to our shareholders. In addition, as a company
in its early stages of operations, we have incurred losses since our inception
and we may continue to incur losses.
We
have, and may in the future, pay distributions from sources other than cash
provided from operations.
Until
proceeds from our offering are invested and generating operating cash flow
sufficient to make distributions to stockholders, we intend to pay a substantial
portion of our distributions from the proceeds of our offerings or from
borrowings in anticipation of future cash flow. To the extent that we use
offering proceeds to fund distributions to stockholders, the amount of cash
available for investment in properties will be reduced. The distributions paid
for the four quarters ended September 30, 2009 were approximately $10.1
million. Of this amount approximately $5.9 million was reinvested
through our dividend reinvestment plan and approximately $4.2 million was paid
in cash to stockholders. For the four quarters ended September 30, 2009 cash
flow from operations and FFO were approximately $3.1 million and $(2.1) million,
respectively. Accordingly, for the four quarters ended September 30,
2009, total distributions exceeded cash flow from operations and FFO for the
same period. During the four quarters ended September 30, 2009, total
distribution paid in cash exceeded cash flow from operations and FFO for the
same period. We used offering proceeds to pay cash distributions in excess of
cash flow from operations during the fourth quarters ended September 30,
2009. Please see “Selected Information Regarding Our Operations –
Distributions” and “Market for and Distributions on our Common Stock –
Distribution History” in the prospectus for a more complete discussion regarding
our payment of distributions.
Item
2.
|
Unregistered Sales of
Equity Securities and Use of
Proceeds
|
We did
not sell any equity securities that were not registered under the Securities Act
of 1933 during the period covered by this Form 10-Q.
Initial
Public Offering
Our
registration statement (SEC File No. 333-121238) for our initial public offering
of up to 44,400,000 shares of our common stock at $8.00 per share and up to
11,000,000 additional shares at $7.60 per share pursuant to our distribution
reinvestment plan was declared effective on September 22, 2005. We
retained PCC to conduct our initial public offering on a best-efforts
basis. The aggregate offering amount of the shares registered for
sale in our initial public offering was $438,800,000. The offering
commenced on January 13, 2006 and terminated on June 1, 2009 prior to the sale
of all shares registered.
As of the
termination of the offering on June 1, 2009, excluding issuance of approximately
1.2 million shares under our distribution reinvestment plan, we had sold
approximately 20.5 million shares of common stock in our initial public
offering, raising gross offering proceeds of approximately $163.7
million. From this amount, we incurred approximately $16.2 million in
selling commissions and dealer manager fees payable to our dealer manager and
approximately $3.3 million in acquisition fees payable to the
Advisor. We have used approximately $93.0 million of the net offering
proceeds to acquire properties and reduce notes payable balance as of September
30, 2009. As of September 30, 2009, the Advisor and its affiliates
had incurred on our behalf organizational and offering costs totaling
approximately $4.5 million, including approximately $0.1 million of
organizational costs that have been expensed, approximately $4.4 million related
to offering costs which reduce net proceeds of our initial public
offering.
Follow-on
Public Offering
Our
registration statement (SEC File No. 333-155640) for our follow-on public
offering of up to 56,250,000 shares of our common stock at $8.00 per share and
up to 21,100,000 additional shares at $7.60 per share pursuant to our
distribution reinvestment plan was declared effective on June 10,
2009. We also retained PCC to conduct our follow-on public offering
on a best-efforts basis. The aggregate offering amount of the shares
registered for sale in our follow-on public offering is
$610,360,000. The offering commenced on June 10, 2009 and has not
terminated.
As of
September 30, 2009, excluding issuance of approximately 0.2 million shares under
our distribution reinvestment plan, we had sold approximately 0.1 million shares
of common stock in our follow-on offering, raising gross offering proceeds of
approximately $0.9 million. From this amount, we incurred
approximately $82,000 in selling commissions and dealer manager fees payable to
our dealer manager and approximately $18,000 in acquisition fees payable to the
Advisor. As of September 30, 2009, the Advisor and its affiliates had
incurred on our behalf organizational and offering costs totaling approximately
$0.6 million which reduce net proceeds of our follow-on public offering
provided, however that we will have no obligation to reimburse of Advisor for
organizational and offering costs totaling in excess of 3.5% of the gross
proceeds of our follow-on offering at the conclusion of the
offering.
During
the three months ended September 30, 2009, we redeemed shares pursuant to our
stock repurchase program as follows:
Period
|
|
Total
Number of Shares Redeemed (1)
|
|
|
Average
Price Paid per Share
|
|
|
Approximate
Dollar Value of Shares Available That May Yet Be Redeemed Under the
Program
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
July
2009
|
|
|
23,079
|
|
|
$
|
7.39
|
|
|
$
|
-
|
|
August
2009
|
|
|
8,113
|
|
|
$
|
7.99
|
|
|
$
|
-
|
|
September
2009
|
|
|
8,178
|
|
|
$
|
7.98
|
|
|
$
|
-
|
|
|
|
|
39,370
|
|
|
|
|
|
|
|
|
|
(1)
|
As
long as our common stock is not listed on a national securities exchange
or traded on an over –the-counter market, our stockholders who have held
their stock for at least one year may be able to have all or any portion
of their shares redeemed in accordance with the procedures outlined in the
prospectus relating to the shares they
purchased.
|
On March
23, 2009, our board of directors voted to clarify certain terms of the stock
redemption program purchase limitation. Until September 21, 2012 our
stock repurchase program limits the number of shares of stock we can redeem
(other than redemptions due to death of a stockholder) to those that we can
purchase with net proceeds from the sale of stock under our distribution
reinvestment plan in the prior calendar year. Until September 21, 2012 we do not
intend to redeem more than the lesser of (i) the number of shares that could be
redeemed using the proceeds from our distribution reinvestment plan in the prior
calendar year or (ii) 5% of the number of shares outstanding at the end of the
prior calendar year.
Item
6.
|
Exhibits
|
Ex.
|
Description
|
|
3.1
|
Articles
of Amendment and Restatement of Articles of Incorporation (incorporated by
reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2005)
|
|
3.2
|
Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.3 to
Post-Effective Amendment No. 1 to the Registration Statement on Form S-11
(No. 333-121238) filed on December 23, 2005)
|
|
4.1
|
Form
of Subscription Agreement (incorporated by reference to Appendix A to the
prospectus dated June 10, 2009)
|
|
4.2
|
Statement
regarding restrictions on transferability of shares of common stock (to
appear on stock certificate or to be sent upon request and without charge
to stockholders issued shares without certificates) (incorporated by
reference to Exhibit 4.2 to the Registration Statement on Form S-11 (No.
333-121238) filed on December 14, 2004)
|
|
4.3
|
Distribution
Reinvestment Plan (incorporated by reference to Appendix B to the
prospectus dated June 10, 2009)
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
||
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
||
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereunto duly authorized this 13th day of November,
2009.
CORNERSTONE
CORE PROPERTIES REIT, INC.
|
|||
|
|
||
By:
|
/s/
Terry G. Roussel
|
|
|
|
Terry
G. Roussel, Chief
Executive Officer
|
||
|
|
||
|
|
||
By:
|
/s/
Sharon C. Kaiser
|
|
|
|
Sharon
C. Kaiser, Chief
Financial Officer
|
||
|
(Principal
Financial Officer and
|
||
|
Principal
Accounting Officer)
|
28