Attached files
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2009
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the transition period
from to
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Commission
file number: 1-9900
PACIFIC
OFFICE PROPERTIES TRUST, INC.
(Exact
name of registrant as specified in its charter)
Maryland
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86-0602478
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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233
Wilshire Boulevard, Suite 310
Santa
Monica, CA 90401
(Address
of principal executive offices) (Zip Code)
(Registrant’s
telephone number, including area code): (310) 395-2083
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of exchange on which
registered
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Common
Stock, par value $0.0001 per share
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NYSE
Amex
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Securities
registered pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15 (d) of the Exchange
Act. Yes o No þ
Indicate
by check mark whether the registrant (1) has filed all reports required by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such
files) . Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer o Smaller
reporting company þ
(Do not check if a smaller
reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
The
aggregate market value of Common Stock held by non-affiliates of the registrant
computed by reference to the closing price of the registrant’s Common Stock on
the NYSE Amex Stock Exchange (formerly the American Stock Exchange) on
June 30, 2009 was $7,555,785.
As of
March 22, 2010, there were 3,850,420 shares of Common Stock, par value $0.0001
per share, and 100 shares of Class B Common Stock, par value $0.0001 per share,
issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrant’s
definitive proxy statement to be issued in conjunction with the registrant’s annual meeting
of stockholders to be held in 2010 are incorporated by reference in
Part III of this Annual Report on Form 10-K. The proxy statement
will be filed by the registrant with the Securities and
Exchange Commission not later than 120 days after the end of the registrant’s
fiscal year ended December 31, 2009.
PACIFIC
OFFICE PROPERTIES TRUST, INC.
TABLE
OF CONTENTS
FORM 10-K
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Page
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Explanatory
Note
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ii
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PART I
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Item
1.
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Business
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1 | |||
Item
1A.
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Risk
Factors
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4 | |||
Item
1B.
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Unresolved
Staff
Comments
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20 | |||
Item
2.
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Properties
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20 | |||
Item
3.
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Legal
Proceedings
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32 | |||
Item
4.
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(Removed
and
Reserved)
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32 | |||
PART II
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Item
5.
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Market
For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases
of
Equity
Securities
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33 | |||
Item
6.
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Selected
Financial
Data
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34 | |||
Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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34 | |||
Item
7A.
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Quantitative
and Qualitative Disclosures about Market
Risk
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48 | |||
Item
8.
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Financial
Statements and Supplementary
Data
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48 | |||
Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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48 | |||
Item
9A(T).
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Controls
and
Procedures
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49 | |||
Item
9B.
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Other
Information
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49 | |||
PART III
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Item
10.
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Directors,
Executive Officers and Corporate
Governance
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50 | |||
Item
11.
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Executive
Compensation
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50 | |||
Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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50 | |||
Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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50 | |||
Item
14.
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Principal
Accountant Fees and
Services
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50 | |||
PART IV
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Item
15.
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Exhibits
and Financial Statement
Schedules
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51 | |||
Signatures
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55 |
i
PACIFIC
OFFICE PROPERTIES TRUST, INC.
FORM 10-K
Explanatory
Note
On
March 19, 2008 (the “Effective Date”), Arizona Land Income Corporation, an
Arizona corporation (“AZL”), and POP Venture, LLC, a Delaware limited liability
company (“Venture”), consummated the transactions (the “Transactions”)
contemplated by a Master Formation and Contribution Agreement, dated as of
October 3, 2006, as amended (the “Master Agreement”). As part of the
Transactions, AZL merged with and into its wholly-owned subsidiary, Pacific
Office Properties Trust, Inc., a Maryland corporation (the “Company”), with the
Company being the surviving corporation. Substantially all of the assets and
certain liabilities of AZL and substantially all of the commercial real estate
assets and related liabilities of Venture were contributed to a newly formed
Delaware limited partnership, Pacific Office Properties, L.P. (the “Operating
Partnership” or “UPREIT”), in which the Company became the sole general partner
and Venture became a limited partner. The commercial real estate assets of
Venture contributed to the UPREIT consisted of eight office properties and a
7.5% joint venture interest in one office property, comprising approximately
2.4 million square feet of rentable area in the Honolulu, San Diego
and Phoenix metropolitan areas (the “Contributed Properties”).
Waterfront
Partners OP, LLC (“Waterfront”), which had the largest interest in Venture, was
designated as the acquiring entity in the business combination for financial
accounting purposes. Accordingly, historical financial information for
Waterfront has also been presented in this Annual Report on Form 10-K for the
period from January 1, 2008 through the Effective Date. Additional explanatory
notations are contained in this Annual Report on Form 10-K to distinguish the
historical financial information of Waterfront from that of the
Company.
Unless
the context otherwise requires, the terms “us”, “we”, “our”, “Company” and
“registrant” as used in this Annual Report on Form 10-K refer to Pacific
Office Properties Trust, Inc. and its subsidiaries (including the Operating
Partnership) subsequent to the Transactions consummated on March 19,
2008.
ii
PART I
ITEM 1. -
BUSINESS
Pacific
Office Properties Trust, Inc. is a Maryland corporation which has elected to be
treated as a real estate investment trust (a “REIT”) under the Internal Revenue
Code of 1986 (the “Code”). We are primarily focused on acquiring, owning and
operating office properties in selected submarkets of long term growth markets
in Honolulu and the western United States, including southern California and the
greater Phoenix metropolitan area. For a detailed discussion of our geographic
segments, see Note 15 to the combined consolidated financial statements
included in this Annual Report on Form 10-K.
Through
our Operating Partnership, we own whole interests in eight fee simple and
leasehold office properties (comprising 11 office buildings) and we own
interests in seven joint ventures (including managing ownership interests in six
of those seven) holding 16 office properties (comprising 34 office
buildings). Our property portfolio, or “Property Portfolio”, is approximately
4.7 million rentable square feet. The portion of our Property Portfolio
that is effectively owned by us (representing leasable square feet of our wholly
owned properties and our respective ownership interests in our unconsolidated
joint venture properties), which we refer to as our “Effective Portfolio”,
comprised approximately 2.5 million leasable square feet as of
December 31, 2009. Our unconsolidated joint ventures are
accounted for under the equity method of accounting.
We are
externally advised by Pacific Office Management, Inc., a Delaware corporation
(the “Advisor”), an entity owned and controlled by Jay H. Shidler, our Chairman
of the Board, and certain related parties of The Shidler Group, which is a
business name utilized by a number of affiliates controlled by Jay H. Shidler,
pursuant to an Amended and Restated Advisory Agreement dated as of March 3,
2009, entered into by us, the Operating Partnership and the Advisor (as amended,
the “Advisory Agreement”). The Advisor is responsible for the
day-to-day operation and management of the Company.
We
operate in a manner that permits us to satisfy the requirements for taxation as
a REIT under the Code. As a REIT, we generally are not subject to federal income
tax on our taxable income that is distributed to our stockholders and are
required to distribute to our stockholders at least 90% of our annual REIT
taxable income (excluding net capital gains).
Our
corporate headquarters office and that of our Advisor are located at
233 Wilshire Blvd., Suite 310, Santa Monica, California 90401, and our
telephone number is (310) 395-2083.
Business Objectives and
Growth Strategies
Our
primary business objectives are to achieve sustainable long-term growth in funds
from operations (“FFO”) per share and dividends per share and to maximize
long-term stockholder value. We intend to achieve these objectives primarily
through external growth and through internal growth as we improve the operations
of our properties. Our external growth will be focused upon the acquisition and
operation of “value-added” office properties located in the western United
States.
Key
elements of our business objectives and growth strategies include:
External
Growth
Our
external growth strategy is based on the following:
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•
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Opportunistic
Acquisition and Repositioning. We intend to selectively
acquire existing office properties at significant discounts to replacement
cost, that are under-managed or under-leased, and which are best
positioned to benefit from improving office market
fundamentals;
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1
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•
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Co-investment
Strategy. We believe
that the acquisition of commercial properties in partnership with
institutional co-investors provides us the opportunity to earn greater
returns on invested equity through incentive participations and management
fees; and
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•
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Recycling
of Capital. We intend
to seek opportunities to sell stabilized properties and reinvest proceeds
into new “value-added” office acquisition
opportunities.
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Internal
Growth
The
majority of our existing properties are located in what we believe are some of
the healthiest office markets in the United States, including southern
California and Honolulu. These markets are characterized by office employment
growth, low office vacancy and low office construction starts. Over the long
term, we expect to utilize our in-depth local market knowledge and managerial
expertise to execute on our leasing and management initiatives as
follows:
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Tenant
Retention and Lease-up. We expect to realize increased
rental income by focusing on our strategic leasing initiatives, including
focusing on near-term expiring leases and aggressively marketing available
space to prospective tenants;
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Contractual
Rent Increases. We expect to realize increased rental
income through scheduled increases of rental rates included in the
majority of our lease agreements with
tenants; and
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Operational
Leverage. We seek increased operating efficiencies
through greater economies of scale as a result of future property
acquisitions in our existing markets, and through the reduction of
operating expenses on an incremental
basis.
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Our
Structure
As part
of the formation transactions, POP Venture, LLC, a Delaware limited liability
company, which we refer to as Venture, contributed to our Operating Partnership
ownership interests in eight wholly-owned properties and one property in which
it held a 7.5% managing ownership interest. We refer to these properties as the
Contributed Properties. In exchange for its contribution to the
Operating Partnership of the Contributed Properties, Venture received 13,576,165
common units in our Operating Partnership, referred to as Common Units, together
with 4,545,300 Class A convertible preferred units in our Operating Partnership,
referred to as Preferred Units, and $16,695,000 in promissory
notes.
The
Common Units held by Venture are redeemable by Venture on a one-for-one basis
for shares of our common stock listed on the NYSE Amex, referred to as our
Listed Common Stock, or a new class of common units without redemption rights,
as elected by a majority of our independent directors. Each Preferred Unit is
initially convertible into 7.1717 Common Units, but such conversion may not
occur before the date we consummate an underwritten public offering (of at least
$75 million) of our Listed Common Stock. Upon conversion of the Preferred Units
to Common Units, such Common Units will be redeemable by Venture on a
one-for-one basis for shares of our Listed Common Stock or a new class of common
units without redemption rights, as elected by a majority of our independent
directors, but no earlier than one year after the date of their conversion from
Preferred Units to Common Units.
2
As part
of our formation transactions, we issued to our Advisor one share of
proportionate voting preferred stock, which we refer to as the Proportionate
Voting Preferred Stock. The Proportionate Voting Preferred Stock has no dividend
rights and minimal rights to distributions in the event of liquidation, but it
entitles our Advisor to vote on all matters for which the holders of Listed
Common Stock are entitled to vote. Our Advisor has agreed to cast its
Proportionate Voting Preferred Stock votes on any matter in direct proportion to
votes that are cast by limited partners of our Operating Partnership holding the
Common Units and Preferred Units issued in the formation transactions. The
number of votes that our Advisor is entitled to cast equals the total number of
shares of Listed Common Stock issuable upon redemption for shares of the Common
Units and Preferred Units (representing 46,173,693 common share
equivalents) issued in connection with the formation transactions,
notwithstanding any restrictions on redemption of the Operating Partnership
units. This number will decrease to the extent that these Operating Partnership
units are redeemed in the future. The number will not increase in the event of
subsequent unit issuances by our Operating Partnership. As of December 31,
2009, that share of Proportionate Voting Preferred Stock represented
approximately 92.3% of our voting power.
In
connection with these transactions, Venture also granted us options to acquire
managing ownership interests in five joint ventures holding 14 additional office
properties. We exercised those options in multiple transactions. The acquisition
price for one of the joint ventures was funded by issuing a total of 723,102
Common Units. These Common Units are redeemable by the holders on a
one-for-one basis for shares of our Listed Common Stock or cash, as elected by a
majority of our independent directors.
On
January 12, 2010, we commenced a registered continuous public offering of up to
40,000,000 shares of our Senior Common Stock, which ranks senior to our Listed
Common Stock and Class B Common Stock with respect to dividends and distribution
of amounts upon liquidation. The Senior Common Stock has a $10.00 per
share (plus accrued and unpaid dividends) liquidation preference. Subject
to the preferential rights of any future series of preferred shares, holders of
Senior Common Stock will be entitled to receive, when and as declared by our
Board of Directors, cumulative cash dividends in an amount per share equal to a
minimum of $0.725 per share per annum, payable monthly. Should the
dividend payable on our Listed Common Stock exceed its current rate of $0.20 per
share per annum, the Senior Common Stock dividend would increase by 25% of the
amount by which the Listed Common Stock dividend exceeds $0.20 per share per
annum. Holders of Senior Common Stock have the right to vote on all
matters presented to stockholders as a single class with holders of the Listed
Common Stock, the Class B Common Stock and the Proportionate Voting Preferred
Stock. Each share of Senior Common Stock is entitled to one vote on
each matter to be voted upon by our stockholders. Shares of Senior
Common Stock may be exchanged, at the option of the holder, for shares of Listed
Common Stock after the fifth anniversary of the issuance of such shares of
Senior Common Stock.
Regulation
Our
properties are subject to various covenants, laws, ordinances and regulations,
including for example regulations relating to common areas, fire and safety
requirements, various environmental laws, and the Americans with Disabilities
Act of 1990 (ADA). Various environmental laws impose liability for release,
disposal or exposure to various hazardous materials, including for example
asbestos-containing materials, a substance known to be present in a number of
our buildings. Such laws could impose liability on us even if we neither knew
about nor were responsible for the contamination. Under the ADA, we must meet
federal requirements related to access and use by disabled persons to the extent
that our properties are “public accommodations”. The costs of our on-going
efforts to comply with these laws are substantial. Moreover, as we have not
conducted a comprehensive audit or investigation of all of our properties to
determine our compliance with applicable laws, we may be liable for
investigation and remediation costs, penalties, and/or damages, which could be
substantial and could adversely affect our ability to sell or rent our property
or to borrow using such property as collateral.
Competitive
Factors
We
compete with a number of developers, owners and operators of office and
commercial real estate, many of which own properties similar to ours in the same
markets in which our properties are located. If our competitors offer space at
rental rates below current market rates, or below the rental rates we currently
charge our tenants, we may lose potential tenants and we may be pressured to
reduce our rental rates below those we currently charge or to offer more
substantial rent abatements, tenant improvements, early termination rights or
below-market renewal options in order to retain tenants when our tenants’ leases
expire. In that case, our financial condition, results of operations, cash flow,
per share trading price of our Listed Common Stock and ability to satisfy our
debt service obligations and to pay dividends to you may be adversely
affected.
3
Employment
We do not
have any employees. We are externally advised by our Advisor, an entity owned
and controlled by Mr. Shidler and by its directors and officers, certain of
whom are also our executive officers and who own substantial beneficial
interests in our Company. In accordance with our Advisory Agreement, our Advisor
manages, operates and administers our day-to-day operations, business and
affairs. Our Advisor employs approximately 70 executives and staff members.
This same management team has overseen the acquisition, leasing and operations
of many of our existing assets since their original acquisition by entities
affiliated with The Shidler Group, and prior to our formation
transactions.
Available
Information
Our
corporate headquarters office and that of our Advisor are located at
233 Wilshire Boulevard, Suite 310, Santa Monica, CA 90401. Our website
is located at http://www.pacificofficeproperties.com.
We make available free of charge, on or through our website, our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and any amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission (“SEC”). You can also read and copy any
materials we file with the SEC at its Public Reference Room at
100 F Street, NE, Washington, DC 20549 (1-800-SEC-0330), on official
business days during the hours of 10:00 am to 3:00 pm. The SEC
maintains an Internet site (http://www.sec.gov)
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
ITEM 1A. -
RISK
FACTORS
The
following section sets forth material factors that may adversely affect our
business and operations. This is not an exhaustive list, and additional
factors could adversely affect our business and financial
performance. Moreover, we operate in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and
it is not possible for us to predict all such risk factors, nor can we assess
the impact of all such risk factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. This
discussion of risk factors includes many forward-looking
statements. For cautions about relying on forward-looking statements,
please refer to the section entitled “Note Regarding Forward Looking Statements”
in Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations. “
Risks Related To Our
Business And Properties
We
need to raise additional capital, which may not be available to us and may limit
our growth and profitability.
Our business is capital intensive and our ability to maintain our operations and
acquire additional properties depends on our cash flow from operations and our
ability to raise additional capital on acceptable terms. We have not achieved
positive cash flow since our formation transactions were consummated in March
2008. We expect that our funds from operations will be insufficient to fund
expected capital expenditures and future acquisition costs. Accordingly, we
expect that we will need to raise additional capital, either from debt or
equity, or the sale of existing properties to meet these needs. We cannot be
certain that we will be able to raise additional capital on acceptable terms or
at all. If we are unable to raise needed capital, our ability to operate our
properties may suffer and our ability to grow the Company will be
impaired.
The current
volatility in the credit markets could limit demand for our office properties and
affect the overall availability and cost of credit.
The
current volatility in the credit markets could limit demand for our office
properties and affect the overall availability and cost of credit. At this time,
there can be no assurance that the actions taken by the U.S. government,
Federal Reserve or other government and regulatory bodies for the reported
purpose of stabilizing the economy or financial markets will achieve their
intended effect. The impact of the current credit environment on our ability to
obtain financing in the future and the costs and terms of the same is unclear.
No assurances can be given that the effects of the current crisis will not have
a material adverse effect on our business, financial condition, results of
operations or trading price of our Listed Common Stock.
4
In
addition, given these current conditions, the Company’s business and results of
operations could be adversely affected as follows:
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Our
tenants may experience deterioration in their sales or other revenue, or
experience a constraint on the availability of credit necessary to fund
operations, which in turn may adversely impact those tenants’ ability to
pay contractual base rents and tenant recoveries. Some tenants may
terminate their occupancy due to an inability to operate profitably for an
extended period of time, impacting our ability to maintain occupancy
levels.
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•
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Constraints
on the availability of credit to tenants, necessary to purchase and
install improvements, fixtures and equipment and to fund start-up business
expenses, could impact our ability to procure new tenants for spaces
currently vacant in existing operating properties or properties under
development.
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•
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The
prolonged economic slowdown has resulted in, and may continue to result
in, decreased demand for office space, forcing us, in some cases, to offer
rent concessions, fund greater tenant improvement allowances and provide
other concessions or additional services to attract
tenants.
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•
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Our
co-investment partners could experience difficulty obtaining financing in
the future for the same reasons discussed above. Their inability to obtain
financing on acceptable terms, or at all, could negatively impact our
ability to acquire additional
properties.
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•
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Further
deterioration in the real estate market after we acquire properties may
result in a decline in the market value of our properties or cause us to
experience other losses related to our assets, which may adversely affect
our results of operations, the availability and cost of credit and our
ability to make distributions to our
stockholders.
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We have a substantial amount of
indebtedness outstanding on a consolidated basis, which may affect
our ability to pay dividends, may expose us to interest rate fluctuation risk
and may expose us to the risk of default under our debt
obligations.
As of
December 31, 2009, our total consolidated indebtedness was approximately
$427.5 million. Our joint venture properties are also leveraged and we may incur
significant additional debt for various purposes, including the funding of
future acquisitions of property.
We have
$66.4 million in aggregate principal indebtedness maturing in 2010. We
have initiated discussions with the servicers for each of these
non-recourse loans regarding an agreement to extend the maturity date of
the loans and to make certain other modifications to the terms of the
loans. If we are unable to extend the maturity date of any of the loans,
we may attempt to refinance the indebtedness or utilize a combination of cash on
hand, available borrowings under our credit facility and any available proceeds
from our continuous offering of Senior Common Stock to repay the loan. If
we are unable to repay any loan at maturity, we may not be able to retain our
equity in the properties in question.
Payments
of principal and interest on borrowings may leave our property-owning entities
with insufficient cash resources to operate our properties and/or pay
distributions to us so that we can make distributions to stockholders currently
contemplated or necessary to maintain our REIT qualification. Our substantial
outstanding indebtedness, and the limitations imposed on us by our debt
agreements, could have significant other adverse consequences, including the
following:
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•
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our
cash flow may be insufficient to meet our required principal and interest
payments;
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•
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we
may be unable to borrow additional funds as needed or on favorable terms,
which could adversely affect our liquidity for acquisitions or
operations;
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5
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we
may be unable to refinance our indebtedness at maturity or the refinancing
terms may be less favorable than the terms of our original
indebtedness;
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we
may be forced to dispose of one or more of our properties, possibly on
disadvantageous terms;
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•
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we
will be exposed to interest and future interest rate volatility with
respect to indebtedness that is variable
rate; and
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•
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any
property-owning entity may default on its obligations and the lenders or
mortgagees may foreclose on our properties and execute on any collateral
that secures their loans.
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If any
one of these events were to occur, our financial condition, results of
operations, cash flow, per share trading price of our Listed Common Stock and
our ability to satisfy our debt service obligations and to pay dividends to you
could be adversely affected. In addition, any foreclosure on our properties
could create taxable income without accompanying cash proceeds, which could
adversely affect our ability to meet the REIT distribution requirements imposed
by the Code.
Our organizational
documents have no limitation on the amount of indebtedness that we may incur. As
a result, we may become more highly leveraged in the future, which could
adversely affect our financial condition.
Our
organizational documents contain no limitations regarding the maximum level of
indebtedness that we may incur. Accordingly, we could, without stockholder
approval, become more highly leveraged, which could result in an increase in our
debt service, could materially adversely affect our cash flow and our ability to
make distributions to our stockholders and/or the distributions required to
maintain our REIT qualification, and could harm our financial condition. Higher
leverage will also increase the risk of default on our obligations.
All of our
properties are located in southern California, Phoenix and Honolulu. We
are
dependent on the southern California, Phoenix and Honolulu office markets
and economies, and
are therefore susceptible to risks of events in those markets that could adversely
affect our business, such as adverse market conditions, changes in local laws or
regulations, and natural disasters.
Because
all of our properties are concentrated in southern California, Phoenix and
Honolulu, we are exposed to greater economic risks than if we owned a more
geographically dispersed portfolio. We are susceptible to adverse developments
in the southern California, Phoenix and Honolulu economic and regulatory
environments (such as business layoffs or downsizing, industry slowdowns,
relocations of businesses, increases in real estate and other taxes, costs of
complying with governmental regulations or increased regulation and other
factors) as well as natural disasters that occur in these areas (such as
earthquakes, floods and other events). In addition, the State of California is
also regarded as more litigious and more highly regulated and taxed than many
states, which may reduce demand for office space in California. Any adverse
developments in the economy or real estate markets in southern California,
Phoenix or Honolulu, or any decrease in demand for office space resulting from
the southern California, Phoenix or Honolulu regulatory or business
environments, could adversely impact our financial condition, results of
operations and cash flow, the per share trading price of our Listed Common Stock
and our ability to satisfy our debt service obligations and to pay dividends to
you.
We are prohibited
from disposing of or refinancing the Contributed Properties under certain
circumstances until March 2018.
A sale of
any of the Contributed Properties that would not provide continued tax deferral
to POP Venture, LLC, which we refer to as Venture, is prohibited under the
Master Agreement and the contribution agreements for such properties for ten
years after the closing of the transactions related to such properties. These
restrictions on the sale of such properties may prevent us from selling the
properties or may adversely impact the terms available to us upon a disposition.
In addition, we have agreed that, during such ten-year period, we will not
prepay or defease any mortgage indebtedness of such properties, other than in
connection with a concurrent refinancing with non-recourse mortgage debt of an
equal or greater amount and subject to certain other restrictions. These
restrictions limit our ability to refinance indebtedness on those properties and
to manage our debt structure. As a result, we may be unable to access certain
capital resources that would otherwise be available to us. Furthermore, if any
such sale or defeasance is foreseeable, we are required to notify Venture and to
cooperate with it in considering strategies to defer or mitigate the recognition
of gain under the Code. These contractual obligations may limit our future
operating flexibility and compel us to take actions or enter into transactions
that we otherwise would not undertake. If we fail to comply with any of these
requirements, we will be liable for a make-whole cash payment to Venture, the
cost of which could be material and could adversely affect our
liquidity.
6
The
illiquidity of real estate investments could significantly impede our ability to
respond to adverse changes in the performance of our properties and harm our
financial condition.
Real
estate investments, especially office properties like the properties we
currently own and intend to acquire, are relatively illiquid and may become even
more illiquid during periods of economic downturn. In particular, these risks
could arise from weakness in or even the lack of an established market for a
property, changes in the financial condition or prospects of prospective
purchasers, changes in national or international economic conditions and changes
in laws, regulations or fiscal policies of jurisdictions in which the property
is located. As a result, we may not be able to sell a property or properties
quickly or on favorable terms and realize our investment objectives, or
otherwise promptly modify our portfolio, in response to changing economic,
financial and investment conditions when it otherwise may be prudent to do so.
This inability to respond quickly to changes in the performance of our
properties and sell an unprofitable property could adversely affect our cash
flows and results of operations, thereby limiting our ability to make
distributions to our stockholders. Our financial condition could also be
adversely affected if we were, for example, unable to sell one or more of our
properties in order to meet our debt obligations upon maturity.
The Code
imposes restrictions on a REIT’s ability to dispose of properties that are not
applicable to other types of real estate companies. In particular, the tax laws
applicable to REITs require that we hold our properties for investment, rather
than primarily for sale in the ordinary course of business, which may cause us
to forego or defer sales of properties that otherwise would be in our best
interest. Therefore, we may not be able to vary our portfolio in response to
economic or other conditions promptly or on favorable terms, which may adversely
affect our cash flows, financial condition, results of operations, and our
ability to pay distributions on, and the market price of, our Listed Common
Stock.
In
addition, our ability to dispose of some of our properties could be constrained
by their tax attributes. Properties which we own for a significant period of
time or which we acquire through tax deferred contribution transactions in
exchange for units in our Operating Partnership may have low tax bases. If we
dispose of these properties outright in taxable transactions, we may need to
distribute a significant amount of the taxable gain to our stockholders under
the requirements of the Code for REITs or pay federal income tax at regular
corporate rates on the amount of any gain, which in turn would impact our cash
flow and increase our leverage. To dispose of low basis or tax-protected
properties efficiently, we may from time to time use like-kind exchanges, which
qualify for non-recognition of taxable gain, but can be difficult to consummate
and result in the property for which the disposed assets are exchanged
inheriting their low tax bases and other tax attributes (including tax
protection covenants).
Our operating
performance is subject to risks associated with the real estate industry.
Real
estate investments are subject to various risks and fluctuations and cycles in
value and demand, many of which are beyond our control. Certain events may
decrease cash available for dividends, as well as the value of our properties.
These events include, but are not limited to:
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adverse
changes in economic and demographic
conditions;
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vacancies
or our inability to rent space on favorable
terms;
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adverse
changes in financial conditions of buyers, sellers and tenants of
properties;
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inability
to collect rent from tenants;
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competition
from other real estate investors with significant capital, including other
real estate operating companies, publicly-traded REITs and institutional
investment funds;
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reductions
in the level of demand for office space and changes in the relative
popularity of properties;
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increases
in the supply of office space;
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fluctuations
in interest rates, which could adversely affect our ability, or the
ability of buyers and tenants of properties, to obtain financing on
favorable terms or at all;
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increases
in expenses, including insurance costs, labor costs, energy prices, real
estate assessments and other taxes and costs of compliance with laws,
regulations and governmental policies, and our inability to pass on some
or all of these increases to our
tenants; and
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changes
in, and changes in enforcement of, laws, regulations and governmental
policies, including, without limitation, health, safety, environmental,
zoning and tax laws, governmental fiscal policies and the Americans with
Disabilities Act of 1990, which we call
the ADA.
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In
addition, periods of economic slowdown or recession, rising interest rates or
declining demand for real estate, or the public perception that any of these
events may occur, could result in a general decline in rents or an increased
incidence of defaults under existing leases without a corresponding decrease in
expenses. Costs associated with real estate investments, such as real estate
taxes, insurance, loan payments and maintenance, generally will not be reduced
even if the vacancy rate at a property increases or rental rates decrease. If we
cannot operate our properties so as to meet our financial expectations, our
financial condition, results of operations, cash flow, per share trading price
of our Listed Common Stock and ability to satisfy our debt service obligations
and to pay dividends to you could be adversely affected. There can be no
assurance that we can achieve our economic objectives.
We
may not be able to control our operating costs or our expenses may remain
constant or increase, even if our revenues do not increase, causing our results
of operations to be adversely affected.
Factors
that may adversely affect our ability to control operating costs include the
need to pay for insurance and other operating costs, including real estate
taxes, which could increase over time, the need periodically to repair, renovate
and re-lease space, the cost of compliance with governmental regulation,
including zoning and tax laws, the potential for liability under applicable
laws, interest rate levels and the availability of financing. If our operating
costs increase as a result of any of the foregoing factors, our results of
operations may be adversely affected.
The
expense of owning and operating a property is not necessarily reduced when
circumstances such as market factors and competition cause a reduction in income
from the property. As a result, if revenues decline, we may not be able to
reduce our expenses accordingly. If a property is mortgaged and we are unable to
meet the mortgage payments, the lender could foreclose on the mortgage and take
possession of the property, resulting in a further reduction in net
income.
We are subject to risks
and liabilities unique to joint venture relationships.
We own
properties through “joint venture” investments in which we co-invest with
another investor. Our business plan contemplates further acquisitions of office
properties through joint ventures and sales to institutions of partial ownership
of properties that we wholly own. Joint venture investments involve certain
risks, including:
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co-investment
partners may control or share certain approval rights over major
decisions;
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co-investment
partners may fail to fund their share of any required capital
commitments;
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co-investment
partners might have economic or other business interests or goals that are
inconsistent with our business interests or goals that would affect our
ability to operate the property;
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co-investment
partners may have the power to act contrary to our instructions and
policies, including our current policy with respect to maintaining our
REIT qualification;
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joint
venture agreements often restrict the transfer of a member’s or
co-investment partner’s interest or “buy-sell” or may otherwise restrict
our ability to sell the interest when we desire or on advantageous
terms;
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disputes
between us and our co-investment partners may result in litigation or
arbitration that would increase our expenses and divert attention from
other elements of our business and result in subjecting the properties
owned by the applicable joint venture to additional risk;
and
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we
may in certain circumstances be liable for the actions of our
co-investment partners.
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The
occurrence of one or more of the events described above could adversely affect
our financial condition, results of operations, cash flow and our ability to pay
dividends.
Adverse market and economic
conditions could cause us to recognize impairment charges.
We
regularly review our real estate assets for impairment indicators, such as a
decline in a property’s occupancy rate. If we determine that indicators of
impairment are present, we review the properties affected by these indicators to
determine whether an impairment charge is required. We use considerable judgment
in making determinations about impairments, from analyzing whether there are
indicators of impairment to the assumptions used in calculating the fair value
of the investment. Accordingly, our subjective estimates and evaluations may not
be accurate, and such estimates and evaluations are subject to change or
revision.
Ongoing
adverse market and economic conditions and market volatility will likely
continue to make it difficult to value the real estate assets owned by us as
well as the value of our interests in unconsolidated joint ventures. There may
be significant uncertainty in the valuation, or in the stability of the cash
flows, discount rates and other factors related to such assets due to the
adverse market and economic conditions that could result in a substantial
decrease in their value. We may be required to recognize additional asset and
goodwill impairment charges in the future, which could materially and adversely
affect our business, financial condition and results of operations.
If we are deemed
an “investment company” under the Investment Company Act of 1940, it
could have
a material adverse effect on our business.
We do not
expect to operate as an “investment company” under the Investment Company Act.
However, the analysis relating to whether a company qualifies as an investment
company can involve technical and complex rules and regulations. If we own
assets that qualify as “investment securities” as such term is defined under
this Act and the value of such assets exceeds 40% of the value of our total
assets, we could be deemed to be an investment company and be required to
register under the Act. Registered investment companies are subject to a variety
of substantial requirements that could significantly impact our operations. The
costs and expenses we would incur to register and operate as an investment
company, as well as the limitations placed on our operations, could have a
material adverse impact on our operations and your investment return. In order
to operate in a manner to avoid being required to register as an investment
company we may be unable to sell assets we would otherwise want to sell or we
may need to sell assets we would otherwise wish to retain. In addition, we may
also have to forgo opportunities to acquire interests in companies or entities
that we would otherwise want to acquire.
Our success
depends on the ability of our Advisor to operate properties, and our
Advisor’s
failure to operate our properties in a sufficient manner could have a
material
adverse effect on the value of our real estate investments and results of
operations.
We
presently have no employees. Our officers are employees of our Advisor. We
depend on the ability of our Advisor to operate our properties and manage our
other investments in a manner sufficient to maintain or increase revenues and to
generate sufficient revenues in excess of our operating and other expenses. Our
Advisor is not required to dedicate any particular number of employees or
employee hours to our business in order to fulfill its obligations under the
Advisory Agreement. We are subject to the risk that our Advisor will terminate
the Advisory Agreement and that no suitable replacement will be found to manage
us. We believe that our success depends to a significant extent upon the
experience of our Advisor’s executive officers, whose continued service is not
guaranteed. If our Advisor terminates the Advisory Agreement, we may not be able
to execute our business plan and may suffer losses, which could have a material
adverse effect on our ability to make distributions to our stockholders. The
failure of our Advisor to operate our properties and manage our other
investments will adversely affect the underlying value of our real estate
investments, the results of our operations and our ability to make distributions
to our stockholders and to pay amounts due on our indebtedness.
9
We depend on the
experience and expertise of our and our Advisor’s senior management team, and the
loss of the services of our key personnel could have a material adverse
effect on
our business strategy, financial condition and results of
operations.
We are
dependent on the efforts, diligence, skill, network of business contacts and
close supervision of all aspects of our business by our Advisor. Our continued
success will depend on the continued service of our and our Advisor’s senior
management team. The loss of their services could harm our business strategy,
financial condition and results of operations, which would adversely affect the
value of our Listed Common Stock.
Our Advisor’s
corporate management fee is payable regardless of our performance, which may reduce
its incentive to devote time and resources to our portfolio.
Our
Advisor is entitled to receive a corporate management fee of $1.5 million
per year, less direct expenses incurred by us, as defined, up to a maximum
reduction of $750,000, regardless of the performance of our portfolio. Our
Advisor’s entitlement to substantial non-performance based compensation might
reduce its incentive to devote its time and effort to seeking profitable
opportunities for our portfolio. This in turn could hurt our ability to make
distributions to our stockholders.
The actual rents
we receive for the properties in our portfolio may be less than our asking rents, and
we may experience lease roll down from time to time.
We may be
unable to realize our asking rents across the properties in our portfolio
because of:
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competitive
pricing pressure in our submarkets;
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adverse
conditions in the southern California, Phoenix or Honolulu real estate
markets;
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general
economic downturn; and
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the
desirability of our properties compared to other properties in our
submarkets.
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In
addition, the degree of discrepancy between our asking rents and the actual
rents we are able to obtain may vary both from property to property and among
different leased spaces within a single property. If we are unable to achieve
our asking rents across our portfolio, then our ability to generate cash flow
growth will be negatively impacted. In addition, depending on asking rental
rates at any given time as compared to expiring leases in our portfolio, from
time to time rental rates for expiring leases may be higher than starting rental
rates for new leases.
We
may be unable to renew leases or lease vacant space.
As of
December 31, 2009, leases representing approximately 12.5% of the
4,682,698 rentable square feet of our total portfolio were scheduled to
expire in 2010, and an additional 14.8% of the square footage of our total
portfolio was available for lease. These leases may not be renewed, or may be
re-leased at rental rates equal to or below existing rental rates. Substantial
rent abatements, tenant improvements, early termination rights or below-market
renewal options may be offered to attract new tenants or retain existing
tenants. Accordingly, portions of our properties may remain vacant for extended
periods of time. In addition, some existing leases currently provide tenants
with options to renew the terms of their leases at rates that are less than the
current market rate or to terminate their leases prior to the expiration date
thereof. If we are unable to obtain rental rates that are on average comparable
to our asking rents across our portfolio, then our ability to generate cash flow
growth will be negatively impacted.
10
We
may be required to make significant capital expenditures to improve our
properties in order to retain and attract tenants, causing a decline in
operating revenues and reducing cash available for debt service and
distributions to stockholders.
To the
extent adverse economic conditions continue in the real estate market and demand
for office space remains low, we expect that, upon expiration of leases at our
properties, we will be required to make rent or other concessions to tenants,
accommodate requests for renovations, build-to-suit remodeling and other
improvements or provide additional services to our tenants. As a result, we may
have to make significant capital or other expenditures in order to retain
tenants whose leases expire and to attract new tenants in sufficient numbers.
Additionally, we may need to raise capital to make such expenditures. If we are
unable to do so or capital is otherwise unavailable, we may be unable to make
the required expenditures. This could result in non-renewals by tenants upon
expiration of their leases, which would result in declines in revenues from
operations and reduce cash available for debt service and distributions to
stockholders.
We
may face potential adverse effects from bankruptcies or insolvencies of our
tenants, which could decrease our cash flow and revenues.
The
bankruptcy or insolvency of one or more of our tenants may adversely affect the
income produced by our properties. Our tenants could file for bankruptcy
protection or become insolvent in the future. In the event a tenant that is in
default under its lease files for bankruptcy protection, we may experience
delays in recapturing the leased premises and incur substantial costs in
enforcing our rights. Once a tenant files for bankruptcy, we are prohibited from
evicting the tenant or obtaining damages without bankruptcy court approval. A
bankruptcy court, however, could authorize a tenant to reject and terminate its
lease with us. In such case, our claim against the bankrupt tenant for unpaid
and future rent would be subject to a statutory cap that might be substantially
less than the remaining rent actually owed under the lease. Under any
circumstances, it is unlikely that a bankrupt tenant will pay, in full, amounts
owed to us under a lease. Any such shortfalls could adversely affect our cash
flow and results of operations.
Potential
losses may not be covered by insurance.
Our
business operations in southern California, Phoenix and Honolulu are susceptible
to, and could be significantly affected by, adverse weather conditions and
natural disasters such as earthquakes, tsunamis, hurricanes, volcanoes, wind,
floods, landslides, drought and fires. These adverse weather conditions and
natural disasters could cause significant damage to the properties in our
portfolio, the risk of which is enhanced by the concentration of our properties’
locations. Our insurance may not be adequate to cover business interruption or
losses resulting from adverse weather or natural disasters. In addition, our
insurance policies include customary deductibles and limitations on recovery. As
a result, we may be required to incur significant costs in the event of adverse
weather conditions and natural disasters. We may discontinue earthquake or any
other insurance coverage on some or all of our properties in the future if the
cost of premiums for any of these policies in our judgment exceeds the value of
the coverage discounted for the risk of loss.
Furthermore,
we do not carry insurance for certain losses, including, but not limited to,
losses caused by war or by certain environmental conditions, such as mold or
asbestos. In addition, our title insurance policies may not insure for the
current aggregate market value of our portfolio, and we do not intend to
increase our title insurance coverage as the market value of our portfolio
increases. As a result, we may not have sufficient coverage against all losses
that we may experience, including from adverse title claims. If we experience a
loss that is uninsured or that exceeds policy limits, we could incur significant
costs and lose the capital invested in the damaged properties as well as the
anticipated future cash flows from those properties.
In
addition, our properties may not be able to be rebuilt to their existing height
or size at their existing location under current land-use laws and policies. In
the event that we experience a substantial or comprehensive loss of one of our
properties, we may not be able to rebuild such property to its existing
specifications and otherwise may have to upgrade such property to meet current
code requirements.
We
face possible risks associated with climate change.
We cannot
predict with certainty whether global warming or cooling is occurring and, if
so, at what rate. However, the physical effects of climate change could have a
material adverse effect on our properties, operations and business. All of our
properties are concentrated in southern California, Phoenix and Honolulu. To the
extent climate change causes changes in weather patterns, our markets could
experience increases in storm intensity and rising sea-levels. Over time, these
conditions could result in declining demand for office space in our buildings or
the inability of us to operate the buildings at all. Climate change may also
have indirect effects on our business by increasing the cost of (or making
unavailable) property insurance on terms we find acceptable and increasing the
cost of energy at our properties. Moreover, compliance with new laws or
regulations related to climate change, including compliance with “green”
building codes, may require us to make improvements to our existing properties
or increase taxes and fees assessed on us or our properties. There can be no
assurance that climate change will not have a material adverse effect on our
properties, operations or business.
11
Terrorism and
other factors affecting demand for our properties could harm our operating
results.
The
strength and profitability of our business depends on demand for and the value
of our properties. Future terrorist attacks in the United States, such as the
attacks that occurred in New York and Washington, D.C. on
September 11, 2001, and other acts of terrorism or war may have a negative
impact on our operations. Such terrorist attacks could have an adverse impact on
our business even if they are not directed at our properties. In addition, the
terrorist attacks of September 11, 2001 have substantially affected the
availability and price of insurance coverage for certain types of damages or
occurrences, and our insurance policies for terrorism include large deductibles
and co-payments. Although we maintain terrorism insurance coverage on our
portfolio, the lack of sufficient insurance for these types of acts could expose
us to significant losses and could have a negative impact on our
operations.
We face intense
competition, which may decrease, or prevent increases of, the occupancy and
rental rates of our properties.
We
compete with a number of developers, owners and operators of office real estate,
many of which own properties similar to ours in the same markets in which our
properties are located. If our competitors offer space at rental rates below
current market rates, or below the rental rates we currently charge our tenants,
we may lose existing or potential tenants and we may be pressured to reduce our
rental rates below those we currently charge or to offer more substantial rent
abatements, tenant improvements, early termination rights or below-market
renewal options in order to retain tenants when our tenants’ leases expire. In
that case, our financial condition, results of operations, cash flow, per share
trading price of our Listed Common Stock and ability to satisfy our debt service
obligations and to pay dividends to you may be adversely affected.
Because we own
real property, we will be subject to extensive environmental regulation which
creates uncertainty regarding future environmental expenditures and liabilities.
Environmental
laws regulate, and impose liability for, releases of hazardous or toxic
substances into the environment. Under some of these laws, an owner or operator
of real estate may be liable for costs related to soil or groundwater
contamination on or migrating to or from its property. In addition, persons who
arrange for the disposal or treatment of hazardous or toxic substances may be
liable for the costs of cleaning up contamination at the disposal
site.
These
laws often impose liability regardless of whether the person knew of, or was
responsible for, the presence of the hazardous or toxic substances that caused
the contamination. Contamination resulting from any of these substances or the
failure to properly remediate them, may adversely affect our ability to sell or
rent our property or to borrow using the property as collateral. In addition,
persons exposed to hazardous or toxic substances may sue for personal injury
damages. For example, some laws impose liability for release of or exposure to
asbestos-containing materials, a substance known to be present in a number of
our buildings. In other cases, some of our properties may have been impacted by
contamination from past operations or from off-site sources. As a result, we may
be potentially liable for investigation and cleanup costs, penalties and damages
under environmental laws.
Although
most of our properties have been subjected to preliminary environmental
assessments, known as Phase I assessments, by independent environmental
consultants that identify certain liabilities, Phase I assessments are limited
in scope, and may not include or identify all potential environmental
liabilities or risks associated with the property. Unless required by applicable
law, we may decide not to further investigate, remedy or ameliorate the
liabilities disclosed in the Phase I assessments. Further, these or other
environmental studies may not identify all potential environmental liabilities
or accurately assess whether we will incur material environmental liabilities in
the future. If we do incur material environmental liabilities in the future, we
may face significant remediation costs, and we may find it difficult to sell any
affected properties.
12
Compliance with
the Americans with Disabilities Act and fire, safety and other regulations may
require us to make unanticipated expenditures that could significantly
reduce the cash available for distribution to our
stockholders.
Under the
ADA, all public accommodations must meet federal requirements related to access
and use by disabled persons. Although we believe that our properties
substantially comply with present requirements of the ADA, we have not conducted
an audit or investigation of all of our properties to determine our compliance.
If one or more of our properties or future properties is not in compliance with
the ADA, then we would be required to incur additional costs to bring the
property into compliance. Additional federal, state and local laws also may
require modifications to our properties, or restrict our ability to renovate our
properties. We cannot predict the ultimate amount of the cost of compliance with
the ADA or other legislation.
In
addition, our properties are subject to various federal, state and local
regulatory requirements, such as state and local fire and life safety
requirements. If we were to fail to comply with these various requirements, we
might incur governmental fines or private damage awards. If we incur substantial
costs to comply with the ADA or any other regulatory requirements, our financial
condition, results of operations, cash flow, market price of our Listed Common
Stock and our ability to satisfy our debt service obligations and to pay
distributions to our stockholders could be adversely affected. Local
regulations, including municipal or local ordinances, zoning restrictions and
restrictive covenants imposed by community developers may restrict our use of
our properties and may require us to obtain approval from local officials or
community standards organizations at any time with respect to our properties,
including prior to acquiring a property or when undertaking renovations of any
of our existing properties.
We may be unable
to complete acquisitions that would grow our business and, even if consummated, we
may fail to successfully integrate and operate acquired
properties.
We plan
to acquire additional properties as opportunities arise. Our ability to acquire
properties on favorable terms and successfully integrate and operate them is
subject to the following significant risks:
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we
may be unable to acquire desired properties because of competition from
other real estate investors with better access to less expensive capital,
including other real estate operating companies, publicly-traded REITs and
investment funds;
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we
may acquire properties that are not accretive to our results upon
acquisition, and we may not successfully manage and lease those properties
to meet our expectations;
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competition
from other potential acquirers may significantly increase purchase
prices;
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we
may be unable to generate sufficient cash from operations or obtain the
necessary debt or equity financing to consummate an acquisition on
favorable terms or at all;
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we
may need to spend more than anticipated amounts to make necessary
improvements or renovations to acquired
properties;
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we
may spend significant time and money on potential acquisitions that we do
not consummate;
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we
may be unable to quickly and efficiently integrate new acquisitions into
our existing operations;
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we
may suffer higher than expected vacancy rates and/or lower than expected
rental rates; and
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we
may acquire properties without any recourse, or with only limited
recourse, for liabilities against the former owners of the
properties.
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If we
cannot complete property acquisitions on favorable terms, or operate acquired
properties to meet our goals or expectations, our financial condition, results
of operations, cash flow, per share trading price of our Listed Common Stock and
ability to satisfy our debt service obligations and to pay dividends to you
could be adversely affected.
13
We may be unable
to successfully expand our operations into new markets in the western United
States.
Each of
the risks applicable to our ability to acquire and successfully integrate and
operate properties in the markets in which our properties are located are also
applicable to our ability to acquire and successfully integrate and operate
properties in new markets. In addition to these risks, we may not possess the
same level of familiarity with the dynamics and market conditions of certain new
markets that we may enter, which could adversely affect our ability to expand
into those markets. We may be unable to build a significant market share or
achieve a desired return on our investments in new markets. If we are
unsuccessful in expanding into new markets, it could adversely affect our
financial condition, results of operations, cash flow, per share trading price
of our Listed Common Stock and ability to satisfy our debt service obligations
and to pay dividends to you.
If
we default on the ground leases to which two of our properties are subject, our
business could be adversely affected.
Our
interests in two of our properties are ground leasehold interests. If we default
under the terms of these leases, we may be liable for damages and could lose our
leasehold interest in the property. If any of these events were to occur, our
business and results of operations would be adversely affected.
Our property
taxes could increase due to property tax rate changes or reassessment,
which would
impact our cash flows.
We will
be required to pay some state and local taxes on our properties. The real
property taxes on our properties may increase as property tax rates change or as
our properties are assessed or reassessed by taxing authorities. Therefore, the
amount of property taxes we pay in the future may increase substantially and we
may be unable to fully recover these increased costs from our tenants. If the
property taxes we pay increase and we are unable to fully recover these
increased costs from our tenants, our cash flow would be impacted, and our
ability to pay expected dividends to our stockholders could be adversely
affected.
We
may become subject to litigation, which could have a material adverse effect on
our financial condition.
In the
future, we may become subject to litigation, including claims relating to our
operations, offerings and otherwise in the ordinary course of business. Some of
these claims may result in significant defense costs and potentially significant
judgments against us, some of which are not, or cannot be, insured against. We
generally intend to vigorously defend ourselves; however, we cannot be certain
of the ultimate outcomes of any claims that may arise in the future. Resolution
of these types of matters against us may result in our having to pay significant
fines, judgments or settlements, which, if uninsured, or if the fines, judgments
and settlements exceed insured levels, could adversely impact our earnings and
cash flows, thereby impacting our ability to service debt and make distributions
to our stockholders. Certain litigation or the resolution of certain litigation
may affect the availability or cost of some of our insurance coverage, which
could adversely impact our results of operations and cash flows, expose us to
increased risks that would be uninsured, and/or adversely impact our ability to
attract officers and directors.
Risks Related to Conflicts
of Interest and Certain Relationships
There may be
various conflicts of interest resulting from the relationships among us,
our
management, our Advisor, our dealer manager and other
parties.
There may
be conflicts of interest among us, our management, our Advisor and our
affiliated dealer manager of our continuous offering of Senior Common Stock.
These potential conflicts of interest include the following:
|
•
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Certain
of our officers are also officers, directors and stockholders of our
Advisor and may, therefore, benefit from the compensation arrangements
relating to our Advisor under the Advisory Agreement, which were not the
result of arm’s-length
negotiations.
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14
|
•
|
Certain
of our directors and officers may engage in the management of other
business entities and properties in other business entities, which may
result in a potential conflict with respect to the allocation of time of
such key personnel.
|
|
•
|
The
dealer manager of our continuous offering of Senior Common Stock is owned
in part and controlled by Mr. Shidler and therefore is affiliated with us.
As a result, the fees paid to the dealer manager for the services provided
to us in connection with that offering were determined without the benefit
of arm’s-length negotiations of the type normally conducted between
unrelated parties and may be in excess of amounts that we would otherwise
pay to third parties for such
services.
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•
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In
the event that the sale by us of any of the Contributed Properties would
be beneficial to us but would negatively impact the tax treatment of
Venture, it is possible that any of our directors or officers with a
financial interest in Venture may experience a conflict of
interest.
|
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•
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In
the registration rights agreement we entered into with Venture, we
retained certain rights to defer registration in circumstances where such
registration would be detrimental to us. It is possible that any of our
directors or officers having a financial interest in Venture or its
affiliates may experience a conflict of interest in circumstances where a
registration would be advantageous to such persons, but detrimental
to us.
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•
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Certain
entities affiliated with us hold promissory notes payable by our Operating
Partnership. Those entities have rights under the promissory notes, and
their exercise of these rights and pursuit of remedies may be affected by
their relationship with each other.
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•
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In
connection with our formation transactions, certain Contributed Properties
were encumbered by debt or, in the case of one Contributed Property, which
we refer to as “Clifford Center,” obligations under the ground lease.
These encumbrances are secured, in part, by certain guaranty and indemnity
obligations of Mr. Shidler and James C. Reynolds and entities wholly-owned
or controlled by them, or the Indemnitees. Our Operating Partnership
entered into certain indemnity agreements with the Indemnitees on
March 19, 2008, referred to as the Indemnity Agreements, in order to
indemnify the Indemnitees under these guaranties and indemnities. Our
Operating Partnership’s specific indemnity obligations in each Indemnity
Agreement are basically to defend, indemnify and hold harmless the
Indemnitee from and against any and all demands, claims, causes of action,
judgments, losses, costs, damages and expenses, including attorneys’ fees
and costs of litigation arising from or relating to any or all of the
guaranty or indemnity obligations of the Indemnitee following
formation.
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•
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An
entity controlled by Mr. Shidler has pledged a certificate of deposit in
the amount of $15 million as security for our Operating Partnership’s
credit agreement with First Hawaiian Bank, for which the Operating
Partnership has agreed to pay certain fees and provide certain
indemnification rights.
|
These
conflicts may result in terms that are more favorable to our management, our
Advisor and/or our other affiliates than would have been obtained on an
arm’s-length basis, and may operate to the detriment of our
stockholders.
We
are controlled by Jay H. Shidler.
Jay H.
Shidler is the Chairman of our board of directors, controls Venture and is a
stockholder and a director of our Advisor. As part of our formation
transactions, we issued to our Advisor one share of Proportionate Voting
Preferred Stock, which is entitled to cast a number of votes equal to the total
number of shares of Listed Common Stock issuable upon redemption for shares of
the Common Units and Preferred Units that we issued in connection with the
formation transactions. Our Advisor has agreed to cast its Proportionate Voting
Preferred Stock votes on any matter in direct proportion to votes that are cast
by limited partners of our Operating Partnership holding the Common Units and
Preferred Units issued in the formation transactions. Venture holds those Common
Units and Preferred Units and is controlled by Mr. Shidler. As of December
31, 2009, the one share of Proportionate Voting Preferred Stock represented
approximately 92% of our voting power. In addition, under the Advisory
Agreement, our Advisor effectively controls our operations and management and
that of our Operating Partnership. Therefore, because of his position with us,
Venture and our Advisor, and the additional shares of our Listed Common Stock
that he holds, Mr. Shidler has the ability to effectively vote
approximately 94% of our currently outstanding voting securities and has
significant influence over our policies and strategy and the operations and
control of our business and the business of our Operating Partnership. The
interests of Mr. Shidler in these matters may conflict with the interests
of our other stockholders. As a result, Mr. Shidler could cause us or our
Operating Partnership to take actions that our other stockholders do not
support.
15
Jay H. Shidler
may compete with us and, therefore, may have conflicts of interest with
us.
We have
entered into a Noncompetition Agreement with Jay H. Shidler, who is the Chairman
of our board of directors. The Noncompetition Agreement with Mr. Shidler
prohibits, without our prior written consent, Mr. Shidler from investing in
certain office properties in any county in which we own an office property or in
our targeted geographic operating region. However, this covenant not to compete
does not restrict:
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•
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business
conducted on our behalf;
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•
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investments
in which Mr. Shidler obtained an interest prior to our formation
transactions;
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•
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investments
in areas in which we do not own office property at the time of such
investment;
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•
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activities
of First Industrial Realty Trust, Inc., Corporate Office Properties Trust
and their respective affiliates;
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•
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investment
opportunities considered and rejected by
us; and
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•
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investments
in any entity as long as Mr. Shidler does not own more than 4.9% of
the entity and is not actively engaged in the management of such
entity.
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It is
therefore possible, despite the limitations imposed by his Noncompetition
Agreement that a property in which Mr. Shidler or an affiliate of
Mr. Shidler has an interest may compete with us in the future if we were to
invest in a property similar in type and in close proximity to that
property.
Risks Related to our Capital
Stock, our Corporate Structure and our Status as a REIT
Unless
our Listed Common Stock meets all applicable listing standards, it could be
suspended or delisted from the NYSE Amex, which may decrease the liquidity of
our Listed Common Stock, make capital raising efforts more difficult and harm
our financial condition and business.
Our
Listed Common Stock is listed and traded on the NYSE Amex under the symbol
“PCE.” If we were to fail to meet any of the continued listing
standards of the NYSE Amex, our Listed Common Stock could be suspended or
delisted from the exchange. The NYSE Amex will consider the
suspension or removal of a listed security when, in the opinion of the NYSE
Amex:
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•
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the
financial condition and/or operating results of the issuer appear to be
unsatisfactory,
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•
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it
appears that the extent of public distribution or the aggregate market
value of the security has become so reduced as to make further dealings on
the NYSE Amex inadvisable,
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•
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the
issuer has sold or otherwise disposed of its principal operating assets or
has ceased to be an operating
company,
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•
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the
issuer has failed to comply with its listing agreements with the NYSE
Amex, or
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•
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any
other event occurs or any condition exists which makes further dealings on
the NYSE Amex unwarranted.
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16
As of
December 31, 2009, our stockholders’ equity, which on a GAAP basis does not
include the value of non-controlling interests (namely, the Common Units and
Preferred Units of our Operating Partnership), was below the exchange’s minimum
threshold for that specific metric under the NYSE Amex’s continued listing
standards. While our total equity, which includes the value of
non-controlling interests, substantially exceeds the minimum threshold for
stockholders’ equity, we have not determined the exchange’s view of these
circumstances. Because we are not currently in technical compliance
with the exchange’s minimum threshold for stockholders’ equity, there can be no
assurance that the NYSE Amex will not consider initiating suspension or
delisting procedures. In the event that we were to receive a formal
deficiency notice, we would be required to issue a press release and to file the
appropriate report with the SEC. We would then expect to have an opportunity to
regain compliance within a specified period of time or to provide the exchange
with a plan to regain compliance with the appropriate listing standard or, if
the exchange were to fail to accept such a plan, appeal any decision by the
exchange to delist our Listed Common Stock. There can be no assurance that the
exchange would accept such a plan, that such a plan would be successful, or that
any appeals by us to the exchange would be successful. Any suspension
or delisting could adversely affect the market price and the liquidity of our
Listed Common Stock and negatively impact our financial condition and
business.
The partnership
units of our Operating Partnership, future offerings of debt, securities and
preferred stock may dilute the holdings of our existing stockholders.
We may
attempt to increase our capital resources by making additional offerings of debt
or equity securities, including commercial paper, medium term notes, senior or
subordinated notes and classes of preferred stock, convertible preferred units
or common stock. Upon liquidation, holders of our debt securities, holders of
our Senior Common Stock or any preferred stock we may issue and lenders with
respect to other borrowings would receive a distribution of our available assets
prior to the holders of our Listed Common Stock. Future equity offerings and the
issuance of Listed Common Stock in exchange for partnership units of our
Operating Partnership may dilute the holdings of our existing stockholders. If
we decide to issue preferred stock in addition to our Proportionate Voting
Preferred Stock already issued, it could have a preference on liquidation
distributions or a preference on dividend payments that could limit our ability
to make a dividend distribution to our existing stockholders.
If
we fail to remain qualified as a REIT in any taxable year, our operations and
ability to make distributions will be adversely affected because we will be
subject to U.S. federal income tax on our taxable income at regular corporate
rates with no deduction for distributions made to stockholders.
We
believe that we are organized and operate in conformity with the requirements
for qualification and taxation as a REIT under the Code, and that our method of
operation enables us to continue to meet the requirements for qualification and
taxation as a REIT under the Code. However, qualification as a REIT
requires us to satisfy highly technical and complex Code provisions for which
only limited judicial and administrative authorities exist, and which are
subject to change, potentially with retroactive effect. Even a technical or
inadvertent mistake could jeopardize our REIT status. Our continued
qualification as a REIT will depend on our satisfaction of certain asset,
income, organizational, distribution, stockholder ownership and other
requirements on a continuing basis. In particular, our ability to qualify as a
REIT depends on the relative values of our common stock and our other classes of
equity, which are susceptible to fluctuations, and on the actions of third
parties in which we may own an interest but over which we have no control or
limited influence.
If we
were to fail to qualify as a REIT in any tax year, then:
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•
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we
would not be required to make distributions to our
stockholders;
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•
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we
would not be allowed to deduct distributions to our stockholders in
computing our taxable income;
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•
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we
would be subject to federal income tax, including any applicable
alternative minimum tax, at regular corporate rates;
and
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•
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any
resulting tax liability could be substantial and could require us to
borrow money or sell assets to pay such liability, and would reduce the
amount of cash available for distribution to stockholders. Unless we were
entitled to relief under applicable statutory provisions, we would be
disqualified from treatment as a REIT for the subsequent four taxable
years following the year during which we lost our qualification, and thus,
our cash available for distribution to stockholders would be reduced for
each of the years during which we did not qualify as a
REIT.
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17
In
connection with our formation transactions, we received a representation from
our predecessor, AZL, that it qualified as a REIT under the provisions of the
Code. However, during 2009 we became aware that AZL historically invested excess
cash from time to time in money market funds that, in turn, were invested
exclusively or primarily in short-term federal government
securities. Additionally, during 2009 we became aware that AZL made
two investments in local government obligations. Our predecessor,
AZL, with no objection from outside advisors, treated these investments as
qualifying assets for purposes of the 75% gross asset test. However,
if these investments were not qualifying assets for purposes of the 75% gross
asset test, then AZL may not have satisfied the REIT gross asset tests for
certain quarters, in part, because they may have exceeded 5% of the gross value
of AZL’s assets. If these investments resulted in AZL’s noncompliance
with the REIT gross asset tests, however, we and our predecessor, AZL, would
retain qualification as a REIT pursuant to certain mitigation provisions of the
Code, which provide that so long as any noncompliance was due to reasonable
cause and not due to willful neglect, and certain other requirements are met,
qualification as a REIT may be retained but a penalty tax would be
owed. Any potential noncompliance with the gross asset tests would be
due to reasonable cause and not due to willful neglect so long as ordinary
business care and prudence were exercised in attempting to satisfy such
tests. Based on our review of the circumstances surrounding the
investments, we believe that any noncompliance was due to reasonable cause and
not due to willful neglect. Additionally, we believe that we have
complied with the other requirements of the mitigation provisions of the Code
with respect to such potential noncompliance with the gross asset tests (and
have paid the appropriate penalty tax), and, therefore, our qualification, and
that of our predecessor, AZL, as a REIT should not be affected. The
Internal Revenue Service is not bound by our determination, however, and no
assurance can be provided that the Internal Revenue Service will not assert that
AZL failed to comply with the REIT gross asset tests as a result of the money
market fund investments and the local government securities investments and that
such failures were not due to reasonable cause. If the Internal
Revenue Service were to successfully challenge this position, then it could
determine that we and AZL failed to qualify as a REIT in one or more of our
taxable years.
Even if we remain
qualified as a REIT, we may face other tax liabilities that reduce our cash
flow.
Even if
we remain qualified for taxation as a REIT, we may be subject to certain
federal, state and local taxes on our income and assets, including taxes on any
undistributed income. Any of these taxes would decrease the amount of cash
available for distribution to our stockholders. In addition, in order to meet
the REIT qualification requirements, or to avert the imposition of a 100% tax
that applies to certain gains derived by a REIT from dealer property or
inventory, we may in the future hold some of our assets through taxable
subsidiary corporations, which (unlike REITs) are taxed on their taxable income,
whether or not distributed.
Dividends
payable by REITs do not qualify for the reduced tax rates available for some
dividends.
The
maximum tax rate applicable to income from “qualified dividends” payable to U.S.
stockholders that are individuals, trusts and estates has been reduced by
legislation to 15% (through 2010). Dividends payable by REITs, however,
generally are not eligible for the reduced tax rates. Although this legislation
does not adversely affect the taxation of REITs or dividends payable by REITs,
the more favorable rates applicable to regular corporate qualified dividends
could cause investors who are individuals, trusts and estates to perceive
investments in REITs to be relatively less attractive than investments in the
stocks of non-REIT corporations that pay dividends, which could adversely affect
the market price of the stock of REITs, including our Listed Common
Stock.
Complying with
REIT requirements may force us to borrow to make distributions to stockholders.
As a
REIT, we must generally distribute at least 90% of our annual REIT taxable
income, subject to certain adjustments, to our stockholders. If we satisfy the
REIT distribution requirement but distribute less than 100% of our taxable
income, we will be subject to federal corporate income tax on our undistributed
taxable income. In addition, we will be subject to a 4% nondeductible excise tax
if the actual amount that we pay to our stockholders in a calendar year is less
than a minimum amount specified under federal tax laws.
18
From time
to time, we may generate taxable income greater than our cash flow available for
distribution to stockholders (for example, due to substantial non-deductible
cash outlays, such as capital expenditures or principal payments on debt). If we
do not have other funds available in these situations, we could be required to
borrow funds, sell investments at disadvantageous prices or find alternative
sources of funds to make distributions sufficient to enable us to pay out enough
of our taxable income to satisfy the REIT distribution requirement and to avoid
income and excise taxes in a particular year. These alternatives could increase
our operating costs or diminish our levels of growth.
We may be subject
to adverse legislative or regulatory tax changes that could reduce the market price
of our common stock.
At any
time, the federal income tax laws governing REITs, or the administrative
interpretations of those laws, may be amended. Any of those new laws or
interpretations may take effect retroactively and could adversely affect us or
you as a stockholder. REIT dividends, with only very limited exceptions, do not
qualify for preferential tax rates, which might cause shares of common stock in
non-REIT corporations to be a more attractive investment to individual investors
than shares in REITs and could have an adverse effect on the value of our common
stock.
REIT restrictions
on ownership of our capital stock may delay or prevent our acquisition by a
third party, even if an acquisition is in the best interests of our stockholders.
In order
for us to qualify as a REIT, not more than 50% of the value of our capital stock
may be owned, directly or indirectly, by five or fewer individuals during the
last half of any taxable year.
Our
charter provides that, subject to certain exceptions, no person, including
entities, may own, or be deemed to own by virtue of the attribution provisions
of the Code, more than 4.9% in economic value of the aggregate of the
outstanding shares of capital stock, or more than 4.9% in economic value or
number of shares, whichever is more restrictive, of our outstanding shares of
common stock. While these restrictions may prevent any five individuals from
owning more than 50% of the shares, they could also discourage a change in
control of our company. These restrictions may also deter tender offers that may
be attractive to stockholders or limit the opportunity for stockholders to
receive a premium for their shares if an investor seeks to acquire a block of
shares of our capital stock.
Provisions in our
charter, bylaws and Maryland law may delay or prevent our acquisition by a
third party, even if such acquisition were in the best interests of our
stockholders.
Certain
provisions of Maryland law and our charter and bylaws could have the effect of
discouraging, delaying or preventing transactions that involve an actual or
threatened change in control of us, and may have the effect of entrenching our
management and members of our board of directors, regardless of their
performance. These provisions cover, among other topics, the
following:
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removal
of directors;
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limitation
on stockholder-requested special
meetings;
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advance
notice provisions for stockholder nominations and
proposals;
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exclusive
power of our board to amend our
bylaws;
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issuance
of preferred stock;
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duties
of directors with respect to unsolicited takeovers;
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restrictions
on transfer and ownership of shares of our
stock;
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•
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restrictions
of the Maryland Business Combination Act; and
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power
of our board to subject us to statutory provisions related to unsolicited
takeovers without a stockholder
vote.
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19
Our board
of directors may classify or reclassify any unissued common stock or preferred
stock and establish the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption of any such stock. Thus, our board of
directors could authorize the issuance of preferred stock with priority as to
distributions and amounts payable upon liquidation over the rights of our
existing stockholders. Such preferred stock could also have the effect of
delaying, deferring or preventing a change in control of us, including an
extraordinary transaction (such as a merger, tender offer or sale of all or
substantially all of our assets) that might provide a premium price to our
existing stockholders. Our board of directors may also, without
stockholder approval, amend our charter to increase or decrease the aggregate
number of shares of our stock or the number of shares of stock of any class or
series that we have authority to issue.
Complying with
REIT requirements may cause us to forego otherwise attractive opportunities.
To
qualify as a REIT for federal income tax purposes, we must continually satisfy
tests concerning, among other things, the sources of our income, the nature and
diversification of our assets, the amounts that we distribute to our
stockholders and the ownership of our stock. We may be required to make
distributions to stockholders at disadvantageous times or when we do not have
funds readily available for distribution. Thus, compliance with the REIT
requirements may hinder our ability to operate solely on the basis of maximizing
profits.
Complying with
REIT requirements may force us to liquidate otherwise attractive investments.
To
qualify as a REIT we must ensure that at the end of each calendar quarter at
least 75% of the value of our assets consists of cash, cash items, U.S.
government securities and qualified REIT real estate assets. The remainder of
our investment in securities generally cannot comprise more than 10% of the
outstanding voting power, or more than 10% of the total value of the outstanding
securities, of any one issuer. In addition, in general, no more than 5% of the
value of our assets (other than assets which qualify for purposes of the 75%
asset test) may consist of the securities of any one issuer, and no more than
25% of the value of our total assets may be represented by securities of one or
more taxable REIT subsidiaries. If we fail to comply with these requirements at
the end of any calendar quarter, we generally must correct such failure within
30 days after the end of the calendar quarter to avoid losing our REIT status
and suffering adverse tax consequences. As a result, we may be required to
liquidate otherwise attractive investments.
Liquidation of
collateral may jeopardize our REIT status.
To
continue to qualify as a REIT, we must comply with requirements regarding our
assets and our sources of income. If we are compelled to liquidate investments
to satisfy our obligations to our lenders, we may be unable to comply with these
requirements, ultimately jeopardizing our status as a REIT.
Complying
with REIT requirements may limit our ability to hedge effectively.
The REIT
provisions of the Code may limit our ability to hedge our operations. Under
current law, any income that we generate from derivatives or other transactions
intended to hedge our interest rate risks, or any income from foreign currency
or other hedges, will generally be treated as nonqualifying income for purposes
of the REIT 75% and 95% gross income tests unless specified requirements are
met. As a result of these rules, we may have to limit our use of hedging
techniques that might otherwise be advantageous, which could result in greater
risks associated with interest rate or other changes than we would otherwise
incur.
ITEM 1B. -
UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM 2. -
PROPERTIES
Our
property portfolio is comprised of quality office buildings located in selected
submarkets of long-term growth of Honolulu and the western United States,
including southern California and the greater Phoenix metropolitan area. Each
property is owned either through entities wholly-owned by us or through joint
ventures. We hold managing ownership interests in six of our seven
joint ventures.
20
As of
December 31, 2009, our Property Portfolio consisted of 24 institutional quality
office properties, including co-owned properties, comprising 4.7 million
rentable square feet in 45 separate buildings. Each of our properties is
suitable and adequate for its intended use. Currently, approximately half of our
Property Portfolio, on a rentable area basis, is owned in partnership with
institutional investors. The following tables contain descriptive information
about all of our properties as of December 31, 2009.
PROPERTY
|
NO.
OF
BUILDINGS
|
YEAR
BUILT/
RENOVATED
|
RENTABLE
SQ.
FT.
|
PERCENTAGE
OWNERSHIP
|
ANNUALIZED
RENT(1)(2)
|
|||||||||||||||
Consolidated
Properties
|
||||||||||||||||||||
Waterfront
Plaza
|
||||||||||||||||||||
500
Ala Moana Blvd.
|
1 | 1988/2006 | 534,475 | 100.0 | % | $ | 17,092,221 | |||||||||||||
Honolulu,
HI 96813
|
||||||||||||||||||||
Davies
Pacific Center
|
||||||||||||||||||||
841
Bishop Street
|
1 | 1972/2006 | 353,224 | 100.0 | % | 10,648,452 | ||||||||||||||
Honolulu,
HI 96813
|
||||||||||||||||||||
Pan
Am Building
|
||||||||||||||||||||
1600
Kapiolani Blvd.
|
1 | 1969/2005 | 209,889 | 100.0 | % | 7,542,984 | ||||||||||||||
Honolulu,
HI 96814
|
||||||||||||||||||||
First
Insurance Center
|
||||||||||||||||||||
1100
Ward Avenue
|
1 | 1960 | 202,992 | 100.0 | % | 6,959,220 | ||||||||||||||
Honolulu,
HI 96814
|
||||||||||||||||||||
PBN
Building
|
||||||||||||||||||||
1833
Kalakaua Avenue
|
1 | 1964/2006 | 90,559 | 100.0 | % | 2,121,576 | ||||||||||||||
Honolulu,
HI 96815
|
||||||||||||||||||||
Clifford
Center
|
||||||||||||||||||||
810
Richards Street
|
1 | 1964/2005 | 72,415 | 100.0 | % | 1,679,772 | ||||||||||||||
Honolulu,
HI 96813
|
||||||||||||||||||||
Sorrento
Technology Center
|
||||||||||||||||||||
10140
Barnes Canyon Rd.
|
2 | 1985 | 63,363 | 100.0 | % | 1,550,568 | ||||||||||||||
10180
Barnes Canyon Rd.
|
||||||||||||||||||||
San
Diego, CA 92121
|
||||||||||||||||||||
City
Square
|
||||||||||||||||||||
3800
N. Central Ave.
|
3 | 1961/1988 | 738,422 | 100.0 | % | 10,954,716 | ||||||||||||||
3838
N. Central Ave.
|
1971/1994 | |||||||||||||||||||
4000
N. Central Ave.
|
1965/2000 | |||||||||||||||||||
Phoenix,
AZ 85012
|
||||||||||||||||||||
Total
Consolidated Properties
|
11 | 2,265,339 | $ | 58,549,509 |
21
PROPERTY
|
NO.
OF
BUILDINGS
|
YEAR
BUILT/
RENOVATED
|
RENTABLE
SQ.
FT.
|
PERCENTAGE
OWNERSHIP
|
ANNUALIZED
RENT(1)(2)
|
|||||||||||||||
Joint
Venture Properties
|
||||||||||||||||||||
Torrey
Hills Corp. Center
|
||||||||||||||||||||
11250
El Camino Real
|
1 | 1998 | 24,066 | 32.2 | % | $ | 893,796 | |||||||||||||
San
Diego, CA 92130
|
||||||||||||||||||||
Palomar
Heights Plaza
|
||||||||||||||||||||
5860
Owens Avenue
|
3 | 2001 | 45,538 | 32.2 | % | 740,436 | ||||||||||||||
5868
Owens Avenue
|
||||||||||||||||||||
5876
Owens Avenue
|
||||||||||||||||||||
Carlsbad,
CA 92008
|
||||||||||||||||||||
Palomar
Heights Corp. Center
|
||||||||||||||||||||
5857
Owens Avenue
|
1 | 1999 | 64,812 | 32.2 | % | 1,617,564 | ||||||||||||||
Carlsbad,
CA 92008
|
||||||||||||||||||||
Scripps
Ranch Bus. Park
|
||||||||||||||||||||
9775
Business Park Ave.
|
2 | 1984/2006 | 47,248 | 32.2 | % | 545,988 | ||||||||||||||
10021
Willow Creek Rd.
|
||||||||||||||||||||
San
Diego, CA 92131
|
||||||||||||||||||||
Via
Frontera Bus. Park
|
||||||||||||||||||||
10965
Via Frontera Dr.
|
2 | 1979/1996 | 78,819 | 10.0 | % | 1,472,388 | ||||||||||||||
10993
Via Frontera Dr.
|
||||||||||||||||||||
San
Diego, CA 92127
|
||||||||||||||||||||
Poway
Flex
|
||||||||||||||||||||
13550
Stowe Drive
|
1 | 1991 | 112,000 | 10.0 | % | 1,048,320 | ||||||||||||||
Poway,
CA 92064
|
||||||||||||||||||||
Carlsbad
Corp. Center.
|
||||||||||||||||||||
1950
Camino Vida Roble
|
1 | 1996 | 121,528 | 10.0 | % | 1,836,816 | ||||||||||||||
Carlsbad,
CA 92008
|
||||||||||||||||||||
Savi
Tech Center
|
||||||||||||||||||||
22705
Savi Ranch Pkwy.
|
4 | 1989 | 372,327 | 10.0 | % | 6,953,748 | ||||||||||||||
22715
Savi Ranch Pkwy.
|
||||||||||||||||||||
22725
Savi Ranch Pkwy.
|
||||||||||||||||||||
22745
Savi Ranch Pkwy.
|
||||||||||||||||||||
Yorba
Linda, CA 92887
|
||||||||||||||||||||
Yorba
Linda Bus. Park
|
||||||||||||||||||||
22833
La Palma Ave.
|
5 | 1988 | 166,042 | 10.0 | % | 1,817,652 | ||||||||||||||
22343
La Palma Ave.
|
||||||||||||||||||||
22345
La Palma Ave.
|
||||||||||||||||||||
22347
La Palma Ave.
|
||||||||||||||||||||
22349
La Palma Ave.
|
||||||||||||||||||||
Yorba
Linda, CA 92887
|
||||||||||||||||||||
South
Coast Exec. Center
|
||||||||||||||||||||
1503
South Coast Dr.
|
1 | 1980/1997 | 61,025 | 10.0 | % | 807,036 | ||||||||||||||
Costa
Mesa, CA 92626
|
||||||||||||||||||||
Gateway
Corp. Center
|
||||||||||||||||||||
1370
Valley Vista Dr.
|
1 | 1987 | 85,216 | 10.0 | % | 2,009,940 | ||||||||||||||
Diamond
Bar, CA 91765
|
22
PROPERTY
|
NO.
OF
BUILDINGS
|
YEAR
BUILT/
RENOVATED
|
RENTABLE
SQ.
FT.
|
PERCENTAGE
OWNERSHIP
|
ANNUALIZED
RENT(1)(2)
|
|||||||||||||||
Black
Canyon Corp. Ctr.
|
||||||||||||||||||||
16404
N. Black Canyon Hwy.
|
1 | 1980/2006 | 218,694 | 17.5 | % | 2,524,680 | ||||||||||||||
Phoenix,
AZ 85053
|
||||||||||||||||||||
Bank
of Hawaii Waikiki Center
|
||||||||||||||||||||
2155
Kalakaua Avenue
|
1 | 1980/1989 | 152,288 | 17.5 | % | 6,809,940 | ||||||||||||||
Honolulu,
HI 96815
|
||||||||||||||||||||
Seville
Plaza
|
||||||||||||||||||||
5469
Kearny Villa Rd.
|
3 | 1976/2002 | 138,576 | 7.5 | % | 2,819,796 | ||||||||||||||
5471
Kearny Villa Rd.
|
||||||||||||||||||||
5473
Kearny Villa Rd.
|
||||||||||||||||||||
San
Diego, CA 92123
|
||||||||||||||||||||
U.S.
Bank Center
|
||||||||||||||||||||
101
North First Ave.
|
2 | 1976/2000-05 | 372,676 | 7.5 | % | 6,610,941 | ||||||||||||||
21
West Van Buren St.
|
1954 | |||||||||||||||||||
Phoenix,
AZ 85003
|
||||||||||||||||||||
Seaview
Corporate Center
|
5 | 1983-2001/ | 356,504 | 5.0 | % | 10,015,356 | ||||||||||||||
10180
Telesis Court
|
2005 | |||||||||||||||||||
10190
Telesis Court
|
||||||||||||||||||||
10182
Telesis Court
|
||||||||||||||||||||
10188
Telesis Court
|
||||||||||||||||||||
San
Diego, CA 92121
|
||||||||||||||||||||
Total
Joint Venture Properties
|
34 | 2,417,359 | $ | 48,524,397 | ||||||||||||||||
Total
Property Portfolio (3)
|
45 | 4,682,698 | $ | 107,073,906 | ||||||||||||||||
Total
Effective Portfolio (4)
|
2,544,562 | $ | 64,207,364 |
(1)
|
Represents
annualized monthly contractual rent under existing leases as of December
31, 2009. This amount reflects total rent before abatements and includes
expense reimbursements, some of which are estimated. Total abatements
committed to as of December 31, 2009 for the twelve months ended December
31, 2010 were approximately $0.213 million for our consolidated
properties and $0.068 million for our unconsolidated joint venture
properties. Annualized rent for the unconsolidated joint
venture properties are reported with respect to each property in its
entirety, rather than the portion of the property represented by our
ownership interest.
|
Existing
net rents are converted to gross rents by adding estimated annualized
operating expense reimbursements to base
rents.
|
(3)
|
Rentable
square feet and annualized rent for the Total Property Portfolio are
reported as the sum of the amounts reported for each property in its
entirety, rather than the portion of the property represented by our
ownership interest.
|
(4)
|
Rentable
square feet and annualized rent for the Total Effective Portfolio are
reported with respect to the portion of our properties represented by our
ownership interest.
|
23
Occupancy
Rates and Annualized Rents
The
following table sets forth the occupancy rate and average annualized rent per
square foot for each of our properties at December 31st of
each of the past five years commencing with the year of the property’s
acquisition by either the Company or affiliates of The Shidler
Group.
Consolidated
Properties
|
OCCUPANCY RATES(1)
|
ANNUALIZED RENT PER LEASED SF(2)
(3)
|
||||||||||||||||||||||||||||||||||||||
Property
|
2005
|
2006
|
2007
|
2008
|
2009
|
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||||||||||||||||
Waterfront
Plaza
|
85 | % | 94 | % | 91 | % | 86 | % | 94 | % | $ | 29.52 | $ | 29.41 | $ | 31.37 | $ | 33.95 | $ | 37.12 | ||||||||||||||||||||
Davies
Pacific Center
|
89 | % | 90 | % | 85 | % | 87 | % | 86 | % | 27.25 | 30.10 | 31.54 | 35.93 | 35.12 | |||||||||||||||||||||||||
Pan
Am Building
|
93 | % | 93 | % | 98 | % | 97 | % | 93 | % | 28.77 | 31.60 | 31.73 | 38.83 | 38.57 | |||||||||||||||||||||||||
First
Insurance Center
|
97 | % | 97 | % | 97 | % | 97 | % | 99 | % | 24.54 | 30.59 | 33.07 | 35.82 | 34.61 | |||||||||||||||||||||||||
PBN
Building
|
81 | % | 75 | % | 72 | % | 73 | % | 73 | % | 24.66 | 27.92 | 29.06 | 31.36 | 32.33 | |||||||||||||||||||||||||
Clifford
Center
|
69 | % | 79 | % | 79 | % | 81 | % | 83 | % | 20.46 | 24.36 | 27.18 | 29.39 | 31.95 | |||||||||||||||||||||||||
Sorrento
Tech. Center
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 24.90 | 21.41 | 22.14 | 23.70 | 24.47 | |||||||||||||||||||||||||
City
Square
|
63 | % | 73 | % | 77 | % | 77 | % | 72 | % | 17.11 | 18.39 | 18.29 | 20.35 | 20.64 | |||||||||||||||||||||||||
Total/Weighted
Average
|
80 | % | 86 | % | 86 | % | 85 | % | 85 | % | $ | 24.71 | $ | 26.33 | $ | 27.27 | $ | 30.39 | $ | 31.26 |
Joint
Venture Properties
OCCUPANCY
RATES(1)
|
ANNUALIZED
RENT PER LEASED SF(2)(3)
|
|||||||||||||||||||||||||||||||||||||||
PROPERTY
|
2005
|
2006
|
2007
|
2008
|
2009
|
2005
|
2006
|
2007
|
2008
|
2009
|
||||||||||||||||||||||||||||||
Torrey
Hills Corp. Center
|
– | – | – | 100 | % | 89 | % | $ | – | $ | – | $ | – | $ | 40.00 | $ | 41.81 | |||||||||||||||||||||||
Palomar
Heights Plaza
|
– | – | – | 88 | % | 70 | % | – | – | – | 25.08 | 23.07 | ||||||||||||||||||||||||||||
Palomar
Heights Corp. Center
|
– | – | – | 90 | % | 87 | % | – | – | – | 27.67 | 28.85 | ||||||||||||||||||||||||||||
Scripps
Ranch Business Park
|
– | – | – | 85 | % | 44 | % | – | – | – | 18.89 | 26.20 | ||||||||||||||||||||||||||||
Via
Frontera Bus. Park
|
– | 70 | % | 93 | % | 93 | % | 100 | % | – | 17.21 | 16.47 | 19.39 | 18.68 | ||||||||||||||||||||||||||
Poway
Flex
|
– | 100 | % | 100 | % | 100 | % | 100 | % | – | 8.40 | 9.49 | 9.00 | 9.36 | ||||||||||||||||||||||||||
Carlsbad
Corp. Center
|
– | 44 | % | 44 | % | 67 | % | 95 | % | – | 15.15 | 15.42 | 16.47 | 17.60 | ||||||||||||||||||||||||||
Savi
Tech Center
|
– | 97 | % | 97 | % | 97 | % | 97 | % | – | 16.87 | 18.39 | 18.80 | 19.26 | ||||||||||||||||||||||||||
Yorba
Linda Bus. Park
|
– | 94 | % | 95 | % | 87 | % | 94 | % | – | 9.99 | 10.79 | 11.65 | 11.66 | ||||||||||||||||||||||||||
South
Coast Exec. Center
|
– | 100 | % | 80 | % | 60 | % | 51 | % | – | 24.34 | 24.10 | 25.43 | 25.82 | ||||||||||||||||||||||||||
Gateway
Corp. Center
|
– | 84 | % | 94 | % | 94 | % | 91 | % | – | 24.62 | 25.90 | 27.45 | 26.65 | ||||||||||||||||||||||||||
Black
Canyon Corp. Center
|
– | – | 65 | % | 65 | % | 65 | % | – | – | 15.60 | 16.43 | 17.85 | |||||||||||||||||||||||||||
Bank
of Hawaii Waikiki Center
|
– | – | 88 | % | 87 | % | 86 | % | – | – | 38.90 | 54.05 | 52.25 | |||||||||||||||||||||||||||
Seville
Plaza
|
94 | % | 90 | % | 92 | % | 77 | % | 75 | % | 21.54 | 24.93 | 26.94 | 26.84 | 27.04 | |||||||||||||||||||||||||
U.S.
Bank Center
|
– | 77 | % | 79 | % | 80 | % | 80 | % | – | 18.64 | 20.53 | 22.37 | 22.26 | ||||||||||||||||||||||||||
Seaview
Corporate Center
|
– | – | – | – | 92 | % | – | – | – | – | 31.05 | |||||||||||||||||||||||||||||
Total/Weighted
Average
|
94 | % | 85 | % | 84 | % | 84 | % | 85 | % | $ | 21.54 | $ | 17.21 | $ | 19.95 | $ | 22.39 | $ | 23.73 | ||||||||||||||||||||
Portfolio
Totals
|
81 | % | 85 | % | 85 | % | 85 | % | 85 | % | $ | 24.50 | $ | 22.70 | $ | 23.98 | $ | 26.60 | $ | 27.33 |
(3) Annualized
rent for existing net rents are converted to gross rent by adding estimated
expense reimbursements to base rents.
24
Tenant
Diversification
The
following tables provide information on the largest tenants, by annualized
rental revenue, in our properties as a portfolio as of December 31, 2009. No
single tenant accounts for 10% or more of our total consolidated
revenues.
Consolidated
Properties
Tenant
|
Lease
Expiration
|
Market
Rentable
Square
Feet
|
Annualized
Rental
Revenue(1)
|
%
of Total
Annualized
Rent
|
Property
|
Industry
|
||||||||||
First
Insurance Company of Hawaii Ltd.
|
02/28/18
|
109,755 | $ | 3,976,236 | 6.79 | % |
First
Insurance Ctr.
|
Insurance
|
||||||||
Hawaii
InsuranceConsultants, Ltd.
|
12/31/12
|
79,159 | 3,230,859 | 5.52 | % |
Waterfront
Plaza
|
Insurance
|
|||||||||
AZ
Dept. of Economic Security.
|
12/31/12
|
104,059 | 1,974,852 | 3.37 | % |
City
Square
|
Government
|
|||||||||
Straub
Clinic & Hospital
|
01/31/13
|
55,986 | 1,727,376 | 2.95 | % |
First
Insurance Ctr.
|
Healthcare
|
|||||||||
AT&T
Corp.
|
06/30/10
|
26,160 | 1,097,040 | 1.87 | % |
Waterfront
Plaza
|
Communications
|
|||||||||
Mc
Corriston, Miho, Miller, Mukai, LLP
|
12/31/11
|
35,828 | 1,025,508 | 1.75 | % |
Waterfront
Plaza
|
Legal
Services
|
|||||||||
Oahu
Publications, Inc.
|
01/31/13
|
25,691 | 1,006,716 | 1.72 | % |
Waterfront
Plaza
|
Journalism
|
|||||||||
Fujitsu
Transaction Solutions, Inc.
|
12/31/10
|
37,886 | 912,024 | 1.56 | % |
Sorrento
Technology Ctr.
|
Technology
|
|||||||||
Royal
State Financial Corp.
|
10/31/11
|
22,119 | 855,096 | 1.46 | % |
Pan
Am Building
|
Insurance
|
|||||||||
AZ
DES-Social Security
|
05/31/14
|
39,524 | 820,908 | 1.41 | % |
City
Square
|
Government
|
|||||||||
Total
Annualized Rental Revenue for Top Ten Tenants
|
$ | 16,626,615 | 28.40 | % | ||||||||||||
Total
Annualized Rental Revenue
|
$ | 58,549,509 | ||||||||||||||
25
Tenant
Diversification
Joint
Venture Properties
Tenant
|
Lease
Expiration
|
Market
Rentable
Square
Feet
|
Ownership
Interest %
|
Annualized
Rental
Revenue (1)
|
%
of Total
Annualized
Rent
|
Property
|
Industry
|
||||||||||||||
CareFusion
Corp.
|
02/28/15
|
130,000 | 10.00 | % | $ | 2,679,216 | 5.52 | % |
Savi
Tech Center
|
Health
Care
|
|||||||||||
Nobel
Biocare USA, Inc.
|
10/31/17
|
122,361 | 10.00 | % | 2,402,436 | 4.95 | % |
Savi
Tech Center
|
Health
Care
|
||||||||||||
The
Active Network, Inc.
|
10/31/11
|
61,587 | 5.00 | % | 2,080,308 | 4.29 | % |
Seaview
Corp
Center
|
Technology
|
||||||||||||
Pfizer,
Inc.
|
07/31/13
|
61,211 | 5.00 | % | 1,987.440 | 4.10 | % |
Seaview
Corp Center
|
Health
Care
|
||||||||||||
Bank
of Hawaii
|
01/31/38
|
6,971 | 17.50 | % | 1,947,132 | 4.01 | % |
Bank
of Hawaii Waikiki Center
|
Financial
Services
|
||||||||||||
Adobe
Systems, Inc.
|
01/31/13
|
61,211 | 5.00 | % | 1,870,236 | 3.85 | % |
Seaview
Corp
Center
|
Technology
|
||||||||||||
High-Tech
Institute, Inc.
|
04/04/18
|
92,974 | 17.50 | % | 1,583,832 | 3.27 | % |
Black
Canyon Corporate Center
|
Education
|
||||||||||||
JTB
Hawaii, Inc.
|
12/31/12
|
35,623 | 17.50 | % | 1,261,056 | 2.60 | % |
Bank
of Hawaii
Waikiki
Center
|
Tourism
|
||||||||||||
Valley
Metro Rail, Inc.
|
06/30/16
|
57,007 | 7.50 | % | 1,256,496 | 2.59 | % |
U.S.
Bank Center
|
Transportation
|
||||||||||||
Jacobs
Engineering Group, Inc...
|
10/30/11
|
53,717 | 7.50 | % | 1,219,524 | 2.51 | % |
U.S.
Bank Center
|
Engineering
|
||||||||||||
Total
Annualized Rental Revenue for Top Ten Tenants
|
$ | 18,287,676 | 37.69 | % | |||||||||||||||||
Total
Annualized Rental Revenue
|
$ | 48,524,397 |
(1)
Annualized Rental Revenue represents monthly base rental revenue and tenant
reimbursements as of December 31, 2009, on an annualized
basis.
The
following table contains information about tenants who occupy more than 10% of
any of our properties as of December 31, 2009. No tenant occupies more than 10%
of the aggregate rentable area of our consolidated portfolio. No tenant occupies
more than 10% of the aggregate rentable area of our Property
Portfolio:
PROPERTY/TENANT
|
INDUSTRY/
PRINCIPAL
BUSINESS
|
LEASE
EXPIRATION (1)
|
RENEWAL
OPTION
|
TOTAL
LEASED
SQ.
FT.
|
%
OF
RENTABLE
SQ.
FT.
|
ANNUALIZED
RENT (2)
|
%
OF
ANNUALIZED
RENT
|
|||||||
Waterfront
Plaza
|
||||||||||||||
Hawaii
Insurance Consultants
|
Insurance
|
12/31/12
|
Yes(3)
|
79,159
|
14.8%
|
$ 3,230,859
|
18.9%
|
|||||||
Pan
Am Building
|
||||||||||||||
Royal
State Financial Corp.
|
Insurance
|
10/31/11
|
Yes(4)
|
22,119
|
10.5%
|
855,096
|
11.3%
|
|||||||
First
Insurance Center
|
||||||||||||||
Straub
Clinic & Hospital
|
Healthcare
|
01/31/13
|
Yes(5)
|
55,986
|
27.6%
|
1,727,376
|
24.8%
|
|||||||
First
Insurance Co. of Hawaii
|
Insurance
|
02/28/18
|
Yes(6)
|
109,755
|
54.1%
|
3,976,236
|
57.1%
|
|||||||
Pacific
Business News Bldg.
|
||||||||||||||
Business
Journal Publications
|
Media
& Pub.
|
MTM
|
Yes(7)
|
9,632
|
10.6%
|
267,684
|
12.5%
|
|||||||
Clifford
Center
|
||||||||||||||
Hawaii
Dept. of Human Services
|
Government
|
MTM
|
Yes(8)
|
12,911
|
17.8%
|
311,412
|
18.5%
|
|||||||
Clifford
Projects
|
Arch.
Svcs.
|
02/29/16
|
Yes(9)
|
11,444
|
15.8%
|
393,840
|
23.4%
|
|||||||
City
Square
|
||||||||||||||
AZ
Dept. of Econ. Security
|
Government
|
12/31/12
|
Yes(10)
|
104,059
|
14.1%
|
1,974,852
|
18.0%
|
26
PROPERTY/TENANT
|
INDUSTRY/
PRINCIPAL
BUSINESS
|
LEASE
EXPIRATION (1)
|
RENEWAL
OPTION
|
TOTAL
LEASED
SQ.
FT.
|
%
OF
RENTABLE
SQ.
FT.
|
ANNUALIZED
RENT (2)
|
%
OF
ANNUALIZED
RENT
|
Sorrento
Technology Center
|
||||||||||||||
Info.
Systems Laboratories
|
Technology
|
11/30/11
|
Yes(11)
|
25,477
|
40.2%
|
$ 638,544
|
41.2%
|
|||||||
Fujitsu
|
Technology
|
12/31/10
|
Yes(12)
|
37,886
|
59.8%
|
912,024
|
58.8%
|
|||||||
Bank
of Hawaii Waikiki Center
|
||||||||||||||
ResortQuest
Hawaii
|
Hospitality
|
10/31/19
|
Yes(13)
|
24,854
|
16.3%
|
617,568
|
9.1%
|
|||||||
JTB
Hawaii
|
Hospitality
|
12/31/12
|
Yes(14)
|
35,623
|
23.4%
|
1,261,056
|
18.5%
|
|||||||
Planet
Hollywood (Honolulu)
|
Retail
|
12/31/13
|
Yes(15)
|
17,795
|
11.7%
|
747,540
|
11.0%
|
|||||||
U.S.
Bank Center
|
||||||||||||||
Valley
Metro Rail
|
Trans.
|
06/30/16
|
Yes(16)
|
57,007
|
15.3%
|
1,256,496
|
19.0%
|
|||||||
Jacobs
Engineering Group
|
Engineering
|
10/31/11
|
Yes(17)
|
53,717
|
14.4%
|
1,219,524
|
18.4%
|
|||||||
Black
Canyon Corporate Center
|
||||||||||||||
Paychex
North America
|
Bus.
Svcs.
|
06/30/12
|
Yes(18)
|
48,427
|
22.1%
|
940,848
|
37.3%
|
|||||||
High
Tech Institute
|
Technology
|
04/04/18
|
Yes(19)
|
92,974
|
42.5%
|
1,583,832
|
62.7%
|
|||||||
Poway
Flex
|
||||||||||||||
General
Atomics Aero. Systems
|
Technology
|
05/31/15
|
Yes(20)
|
112,000
|
100.0%
|
1,048,320
|
100.0%
|
|||||||
Gateway
Corporate Center
|
||||||||||||||
Kleinfelder,
Inc.
|
Bus.
Svcs.
|
07/31/11
|
Yes(21)
|
11,171
|
13.1%
|
307,092
|
15.3%
|
|||||||
University
of Phoenix
|
Education
|
09/30/14
|
No
|
30,627
|
35.9%
|
767,676
|
38.2%
|
|||||||
Carlsbad
Corporate Center
|
||||||||||||||
San
Diego Golf Academy
|
Education
|
01/31/15
|
Yes(22)
|
20,254
|
16.7%
|
332,976
|
18.1%
|
|||||||
Jitterbug
|
Technology
|
05/31/14
|
Yes(23)
|
23,358
|
19.2%
|
476,508
|
25.9%
|
|||||||
Linear,
LLC
|
Technology
|
09/30/13
|
Yes(24)
|
53,022
|
43.6%
|
874,716
|
47.6%
|
|||||||
Yorba
Linda Business Park
|
||||||||||||||
AJ
Oster West
|
Mfcturing.
|
03/31/14
|
Yes(25)
|
50,282
|
30.3%
|
409,632
|
22.5%
|
|||||||
Savi
Tech Center
|
||||||||||||||
First
American RE Facilities
|
Services
|
10/31/12
|
Yes(26)
|
47,198
|
12.7%
|
906,204
|
13.0%
|
|||||||
Ashley
Furniture Homestore
|
Retail
|
09/30/16
|
Yes(27)
|
61,541
|
16.5%
|
965,892
|
13.9%
|
|||||||
Nobel
Biocare USA
|
Health
Care
|
10/31/17
|
No
|
122,361
|
32.9%
|
2,402,436
|
34.5%
|
|||||||
CareFusion
Corp.
|
Health
Care
|
02/28/15
|
Yes(28)
|
130,000
|
34.9%
|
2,679,216
|
38.5%
|
|||||||
Seaview
Corporate Center
|
||||||||||||||
The
Active Network
|
Technology
|
10/31/11
|
Yes(29)
|
61,587
|
17.3%
|
2,080,308
|
20.8%
|
|||||||
Adobe
Systems
|
Technology
|
01/31/13
|
Yes(30)
|
61,211
|
17.2%
|
1,870,236
|
18.7%
|
|||||||
Pfizer
|
Health
Care
|
07/31/13
|
No
|
61,211
|
17.2%
|
1,987,440
|
19.8%
|
|||||||
CA,
Inc.
|
Technology
|
08/31/13
|
Yes(31)
|
38,302
|
10.7%
|
1,069,008
|
10.7%
|
|||||||
Via
Frontera Business Park
|
||||||||||||||
BAE
Systems
|
Technology
|
12/31/09
|
No
|
21,795
|
27.7%
|
466,692
|
31.7%
|
|||||||
Xpress
Data
|
Technology
|
05/31/10
|
No
|
15,120
|
19.2%
|
249,048
|
16.9%
|
|||||||
Quick
Pak
|
Technology
|
12/31/13
|
Yes(32)
|
15,540
|
19.7%
|
270,204
|
18.4%
|
|||||||
Compendia
|
Services
|
08/31/12
|
No
|
18,300
|
23.2%
|
307,440
|
20.9%
|
|||||||
Panasonic
|
Technology
|
11/30/10
|
No
|
8,064
|
10.2%
|
179,004
|
12.2%
|
|||||||
Torrey
Hills Corporate Center
|
||||||||||||||
Pacific
Hospitality Group
|
Hospitality
|
01/31/10
|
No
|
3,928
|
16.3%
|
135,276
|
15.1%
|
|||||||
Foley
& Lardner
|
Legal
Svcs.
|
11/30/10
|
Yes(33)
|
17,449
|
72.5%
|
758,520
|
84.9%
|
27
PROPERTY/TENANT
|
INDUSTRY/
PRINCIPAL
BUSINESS
|
LEASE
EXPIRATION (1)
|
RENEWAL
OPTION
|
TOTAL
LEASED
SQ.
FT.
|
%
OF
RENTABLE
SQ.
FT.
|
ANNUALIZED
RENT (2)
|
%
OF
ANNUALIZED
RENT
|
Palomar
Heights Plaza
|
||||||||||||||
LMR
Solutions
|
Technology
|
11/30/12
|
No
|
8,758
|
19.2%
|
$
94,764
|
12.8%
|
|||||||
Palomar
Heights Corp. Center
|
||||||||||||||
Wells
Fargo Bank
|
Fncl.
Svcs.
|
06/30/12
|
Yes(34)
|
7,583
|
11.7%
|
233,112
|
14.4%
|
|||||||
Yahoo!
|
Technology
|
04/30/10
|
Yes(35)
|
17,824
|
27.5%
|
481,248
|
29.8%
|
|||||||
Entriq
|
Technology
|
10/31/13
|
Yes(36)
|
22,247
|
34.3%
|
633,288
|
39.2%
|
|||||||
Scripps
Ranch Business Park
|
||||||||||||||
Jones
& Stokes Associates
|
Consulting
|
03/31/15
|
Yes(37)
|
15,356
|
32.5%
|
$ 427,536
|
78.3%
|
____________
(1)
|
Expiration
dates assume no exercise of renewal, extension or termination
options.
|
(2)
|
Represents
annualized monthly gross rent at December 31,
2009.
|
(3)
|
Hawaii
Insurance Consultants has an option to extend its term for two 5-year
periods, with base rent set at an agreed upon negotiated base rental rate
of 95% of the fair market rental rate at the time of the
extension.
|
(4)
|
Royal
State Financial Corp. has an option to extend its term for two 5-year
periods at fair market rent.
|
(5)
|
Straub
Clinic & Hospital has an option to extend its term for a one 5-year
period, with base rent set at an agreed upon negotiated base rental rate
not to exceed 90% of the fair market rental rate at the time of the
extension.
|
(6)
|
First
Insurance Company of Hawaii has an option to extend its term for three
10-year periods, with base rent set at an agreed upon negotiated base
rental rate of 95% of the fair market rental rate at the time of the
extension.
|
(7)
|
Business
Journal Publications has an option to extend its term for 5 years at 95%
of the fair market rent at the time of
extension.
|
(8)
|
State
of Hawaii, Dept. of Human Services has an option to extend its term for 4
years and 11 months at fair market
rent.
|
(9)
|
Clifford
Projects has an option to extend its term for 5 years at fair market
rent.
|
(10)
|
The
Arizona Dept. of Economic Security has an option to extend its term for 5
years at fair market rent.
|
(11)
|
Information
Systems Laboratories has an option to extend its term for 5 years at the
higher of fair market rent or a 3.5% increase above the tenant’s rent at
expiration.
|
(12)
|
Fujitsu
has an option to extend its term for 5 years at fair market
rent.
|
(13)
|
ResortQuest
Hawaii has an option to extend its term for one 5-year period at 90% of
fair market rent.
|
(14)
|
JTB
Hawaii has an option to extend its term for one 5-year period at fair
market rent.
|
(15)
|
Planet
Hollywood has an option to extend its term for one 5-year period at fair
market rent.
|
(16)
|
Valley
Metro Rail has an option to extend its term for two 5-year periods at 95%
of fair market rent.
|
(17)
|
Jacobs
Engineering Group has an option to extend its term for 5 years at 95% of
fair market rent.
|
(18)
|
Paychex
has an option to extend its term for three 3-year periods at fair market
rent.
|
(19)
|
High
Tech Institute has an option to extend its term for two 5-year periods at
fair market rent.
|
(20)
|
General
Atomics has an option to extend its term for three 5-year
periods. Base rent for the first period is set at 4% annual
increases, while base rent for the second and third period are set at fair
market rent.
|
(21)
|
Kleinfelder
has option to extend its term for one 5-year period, with base rent set at
the higher of fair market rent or the monthly rental rate during the month
immediately preceding the lease expiration
date.
|
(22)
|
San
Diego Golf Academy has an option to extend its term for one 5-year period
at fair market rent.
|
(23)
|
Jitterbug
has an option to extend its term for one 5-year period at fair market
rent.
|
(24)
|
Linear
LLC has an option to extend its term for two 5-year periods at 95% of the
fair market rent at the time of
extension.
|
(25)
|
AJ
Oster West has an option to extend its term for one 3-year period at fair
market rent.
|
(26)
|
First
American Real Estate Facilities has an option to extend its term for one
5-year period at fair market rent.
|
(27)
|
Ashley
Furniture has an option to extend its term for two 5-year periods, with
base rent set at an increase of 12% at the time of
extension.
|
(28)
|
CareFusion
Corp. has an option to extend its term for one 5-year period at fair
market rent.
|
(29)
|
The
Active Network has an option to extend its term for one 5-year period at
fair market rent.
|
(30)
|
Adobe
Systems has an option to extend its term for one 5-year period at fair
market rent.
|
(31)
|
CA,
Inc. has an option to extend its term for one 5-year period at 95% of the
fair market rent at the time of
extension.
|
(32)
|
Quick
Pak has an option to extend its term for one 5-year period at fair market
rent.
|
(33)
|
Foley
& Lardner, LLP has an option to extend its term for one 3-year period
at fair market rent.
|
(34)
|
Wells
Fargo has an option to extend its term for two 5-year periods at fair
market rent.
|
(35)
|
Yahoo!
has an option to extend its term for one 2-year period at fair market
rent.
|
(36)
|
Entriq
has an option to extend its term for one 3-year period at fair market
rent.
|
(37)
|
Jones
& Stokes Associates has an option to extend its term for one 5-year
period at fair market rent.
|
28
Lease Distribution by Square Footage
The
following tables summarize the lease distributions by square footage for all our
properties as of December 31, 2009.
Consolidated
Properties
Square Feet Under Lease
|
Number
of Leases
|
Leases
as a
% of Total
|
Market Rentable
Square Feet
|
Square
Feet
as a %
of Total
|
Annualized
Rent (1)(2)
|
Annualized
Rent
as a % of Total
|
||||||||||||||||||||
2,500
or less
|
555 | 76.66 | % | 344,136 | 15.19 | % | $ | 11,443,086 | 19.54 | % | ||||||||||||||||
2,501 — 10,000 | 115 | 15.88 | % | 542,183 | 23.93 | % | 16,790,388 | 28.68 | % | |||||||||||||||||
10,001 — 20,000 | 31 | 4.28 | % | 429,428 | 18.96 | % | 13,600,020 | 23.23 | % | |||||||||||||||||
20,001 — 40,000 | 9 | 1.24 | % | 267,916 | 11.83 | % | 7,566,360 | 12.92 | % | |||||||||||||||||
40,001 — 100,000 | 1 | 0.14 | % | 76,828 | 3.39 | % | 3,230,859 | 5.52 | % | |||||||||||||||||
Greater
than 100,000
|
2 | 0.28 | % | 212,227 | 9.37 | % | 5,918,796 | 10.11 | % | |||||||||||||||||
Subtotal
|
713 | 98.48 | % | 1,872,718 | 82.67 | % | $ | 58,549,509 | 100.00 | % | ||||||||||||||||
Available
|
— | — | 340,658 | 15.04 | % | — | — | |||||||||||||||||||
Signed
Leases Not Commenced
|
11 | 1.52 | % | 51,963 | 2.29 | % | — | — | ||||||||||||||||||
Total/Weighted
Average
|
724 | 100.0 | % | 2,265,339 | 100.0 | % | $ | 58,549,509 | 100.00 | % |
(1)
Represents annualized monthly rent under commenced leases as of
December 31, 2009. This amount reflects total cash rent before abatements.
Total abatements for the twelve months ending December 31, 2010 were
$0.213 million.
Joint
Venture Properties
Square Feet Under Lease
|
Number
of Leases
|
Leases
as a
% of Total
|
Market
Rentable
Square
Feet
|
Square
Feet
as a %
of Total
|
Annualized
Rent(1)(2)
|
Annualized
Rent
as a
% of Total
|
Effective Annualized
Rent(1)
(2)
|
Effective
Annualized
Rent
as a
% of Total
|
||||||||||||||||||||||||||
2,500
or less
|
190 | 58.82 | % | 154,294 | 6.38 | % | $ | 3,832,929 | 7.90 | % | $ | 480,366 | 8.49 | % | ||||||||||||||||||||
2,501 — 10,000 | 86 | 26.63 | % | 398,578 | 16.49 | % | 12,106,092 | 24.95 | % | 1,626,289 | 28.74 | % | ||||||||||||||||||||||
10,001 — 20,000 | 18 | 5.57 | % | 246,558 | 10.20 | % | 6,498,036 | 13.39 | % | 882,551 | 15.60 | % | ||||||||||||||||||||||
20,001 — 40,000 | 11 | 3.41 | % | 309,024 | 12.78 | % | 7,357,464 | 15.16 | % | 969,237 | 17.13 | % | ||||||||||||||||||||||
40,001 — 100,000 | 13 | 4.02 | % | 694,346 | 28.72 | % | 15,002,340 | 30.92 | % | 1,326,659 | 23.45 | % | ||||||||||||||||||||||
Greater
than 100,000
|
2 | 0.62 | % | 242,000 | 10.02 | % | 3,727,536 | 7.68 | % | 372,753 | 6.59 | % | ||||||||||||||||||||||
Subtotal
|
320 | 99.07 | % | 2,044,800 | 84.59 | % | $ | 48,524,397 | 100.0 | % | $ | 5,657,855 | 100.00 | % | ||||||||||||||||||||
Available
|
— | - | 353,158 | 14.61 | % | — | — | — | — | |||||||||||||||||||||||||
Signed
Leases Not Commenced
|
3 | 0.93 | % | 19,401 | 0.80 | % | — | — | — | — | ||||||||||||||||||||||||
Total/Weighted
Average
|
323 | 100.00 | % | 2,417,359 | 100.00 | % | $ | 48,524,397 | 100.00 | % | $ | 5,657,855 | 100.00 | % |
29
Lease
Expirations
The
following tables summarize the lease expirations for leases in place as of
December 31, 2009 for all of our properties. The information set forth in
the table assumes that tenants exercise no renewal options or early termination
rights.
Consolidated
Properties
Year of Lease Expiration
|
Number
of
Leases
|
Market
Rentable
Square
Feet
|
Square
Feet
as a %
of Total
|
Annualized
Rent(1)
|
Annualized
Rent
as
a % of Total
|
Annualized
Rent
Per Leased
Square
Foot(2)
|
Annualized
Rent
at Expiration
|
Annualized
Rent
Per
Square Foot
at Expiration(3)
|
||||||||||||||||||||||||
2010
|
185 | 331,929 | 14.65 | % | $ | 11,116,097 | 18.99 | % | $ | 33.49 | $ | 11,187,348 | $ | 33.70 | ||||||||||||||||||
2011
|
158 | 336,115 | 14.84 | % | 10,333,896 | 17.65 | % | 30.75 | 10,648,584 | 31.68 | ||||||||||||||||||||||
2012
|
137 | 408,023 | 18.01 | % | 12,582,903 | 21.49 | % | 30.84 | 13,112,907 | 32.14 | ||||||||||||||||||||||
2013
|
89 | 274,135 | 12.10 | % | 8,215,129 | 14.03 | % | 29.97 | 8,758,326 | 31.95 | ||||||||||||||||||||||
2014
|
58 | 170,222 | 7.51 | % | 5,131,380 | 8.76 | % | 30.15 | 5,419,356 | 31.84 | ||||||||||||||||||||||
2015
|
25 | 111,263 | 4.91 | % | 2,667,612 | 4.56 | % | 23.98 | 2,927,844 | 26.31 | ||||||||||||||||||||||
2016
|
17 | 52,717 | 2.33 | % | 1,844,364 | 3.15 | % | 34.99 | 2,087,736 | 39.60 | ||||||||||||||||||||||
2017
|
5 | 20,733 | 0.92 | % | 670,896 | 1.15 | % | 32.36 | 849,840 | 40.99 | ||||||||||||||||||||||
2018
|
17 | 125,992 | 5.56 | % | 4,573,248 | 7.81 | % | 36.30 | 5,380,728 | 42.71 | ||||||||||||||||||||||
2019
|
6 | 10,517 | 0.46 | % | 365,076 | 0.62 | % | 34.71 | 434,832 | 41.35 | ||||||||||||||||||||||
Thereafter
|
16 | 31,072 | 1.38 | % | 1,048,908 | 1.79 | % | 33.76 | 1,181,508 | 38.02 | ||||||||||||||||||||||
Available
for Lease
|
340,658 | 15.04 | % | |||||||||||||||||||||||||||||
Signed
Leases Not Commenced
|
11 | 51,963 | 2.29 | % | — | — | — | — | — | |||||||||||||||||||||||
Total/Weighted
Average
|
724 | 2,265,339 | 100.00 | % | $ | 58,549,509 | 100.00 | % | $ | 31.26 | $ | 61,989,009 | $ | 33.10 |
30
Lease
Expirations
Joint
Venture Properties
Year
of Lease Expiration
|
No.
of Leases
Expiring
|
Market
Rentable
Square Feet
|
Expiring
Square
Feet
as
a % of
Total
|
Annualized
Rent(1)
|
Annualized
Rent
as a % of Total
|
Annualized
Rent Per
Leased Square
Foot(2)
|
Annualized
Rent
at Expiration
|
Annualized
Rent
Per Square Foot
at
Expiration (3)
|
Effective
Annualized
Rent
|
Effective
Annualized
Rent
at Expiration
|
||||||||||||||||||||||||||||||
2010
|
102 | 253,530 | 10.49 | % | $ | 6,300,192 | 12.98 | % | $ | 24.85 | $ | 6,349,212 | $ | 25.04 | $ | 1,072,374 | $ | 1,084,074 | ||||||||||||||||||||||
2011
|
65 | 251,153 | 10.39 | % | 7,177,680 | 14.79 | % | 28.58 | 7,511,412 | 29.91 | 560,166 | 583,023 | ||||||||||||||||||||||||||||
2012
|
40 | 248,874 | 10.30 | % | 5,849,964 | 12.06 | % | 23.51 | 6,578,628 | 26.43 | 778,190 | 906,026 | ||||||||||||||||||||||||||||
2013
|
43 | 363,494 | 15.04 | % | 10,089,864 | 20.79 | % | 27.76 | 10,999,812 | 30.26 | 968,400 | 1,053,228 | ||||||||||||||||||||||||||||
2014
|
28 | 187,054 | 7.73 | % | 3,692,829 | 7.61 | % | 19.74 | 4,117,152 | 22.01 | 343,325 | 383,093 | ||||||||||||||||||||||||||||
2015
|
12 | 328,246 | 13.58 | % | 5,464,296 | 11.26 | % | 16.65 | 6,432,672 | 19.60 | 616,795 | 718,583 | ||||||||||||||||||||||||||||
2016
|
13 | 148,851 | 6.16 | % | 3,002,256 | 6.19 | % | 20.17 | 3,426,948 | 23.02 | 300,509 | 341,507 | ||||||||||||||||||||||||||||
2017
|
3 | 129,558 | 5.36 | % | 2,577,468 | 5.31 | % | 19.89 | 3,055,200 | 23.58 | 253,371 | 300,288 | ||||||||||||||||||||||||||||
2018
|
3 | 92,974 | 3.85 | % | 1,583,832 | 3.26 | % | 17.04 | 1,971,144 | 21.20 | 277,171 | 344,950 | ||||||||||||||||||||||||||||
2019
|
4 | 24,854 | 1.02 | % | 617,568 | 1.28 | % | 24.85 | 680,232 | 27.37 | 108,075 | 119,041 | ||||||||||||||||||||||||||||
Thereafter
|
7 | 16,212 | 0.67 | % | 2,168,448 | 4.47 | % | 133.76 | 3,606,480 | 222.46 | 379,479 | 631,134 | ||||||||||||||||||||||||||||
Available
For Lease
|
— | 353,158 | 14.61 | % | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Signed
Leases Not Commenced
|
3 | 19,401 | 0.80 | % | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Total/Wtd.
Avg.
|
323 | 2,417,359 | 100.00 | % | $ | 48,524,397 | 100.00 | % | $ | 23.73 | $ | 54,728,892 | $ | 26.76 | $ | 5,657,855 | $ | 6,464,947 |
(1)
Annualized Rent represents gross rental revenue which consists of monthly
aggregate base rental revenue and tenant reimbursements per property as of
December 31, 2009, on an annualized basis.
(2)
Represents annualized rent divided by leased square feet.
(3)
Represents annualized rent at expiration divided by leased square
feet.
Ground
Leased Properties
We have
ground lease agreements for both Clifford Center and Waterfront
Plaza. The Clifford Center property ground lease expires May 31,
2035. The annual rental obligation is a combination of a base rent amount plus
3% of base rental income from tenants. On June 1, 2016 and 2026, the annual
rental obligation will reset to an amount equal to 6% of the fair market value
of the land. However, the ground rent cannot be less than the rent for the prior
period.
The
Waterfront Plaza ground lease expires December 31, 2060. The annual rental
obligation has fixed increases at five year intervals until it resets on
January 1, 2036, 2041, 2046, 2051, and 2056 to an amount equal to 8.0% of
the fair market value of the land. However, the ground lease rent cannot be less
than the rent for the prior period.
See Note
11 of our combined consolidated financial statements included in this Annual
Report on Form 10-K for additional information regarding our ground leased
properties.
Indebtedness
We
maintain material borrowings related to our properties. For detailed information
on our borrowings as of December 31, 2009, please refer to the Indebtedness
section in Item 7 of this Annual Report on Form 10-K.
31
Market
Information
Market
and industry data and other statistical information used throughout this section
are based on independent industry publications, including CB Richard Ellis as it
relates to our Honolulu office market and Grubb & Ellis as it relates
to all our other office markets. Some data is also based on our good faith
estimates, which are derived from our review of management’s knowledge of the
industry and independent sources. Although we are not aware of any misstatements
regarding the industry data that we present in this report, our estimates
involve risks and uncertainties and are subject to change based on various
factors, including those discussed under “Risk Factors” and “Note Regarding
Forward-Looking Statements.”
Honolulu
Office Market
We have
seven properties that represent approximately 1,490,200 effective rentable
square feet (or 58.6% of our Effective Portfolio) located in the Honolulu office
submarkets of Honolulu Downtown (Central Business District), Waikiki and
Kapiolani at December 31, 2009. These office submarkets, based on a combined
weighted average, experienced net negative absorption of approximately 9,300
square feet during the fourth quarter of 2009. Based on a combined weighted
average, the total percent occupied within these submarkets increased from 86.6%
occupied as of September 30, 2009 to 87.0% occupied as of December 31, 2009.
During the fourth quarter of 2009, average asking rents decreased from $35.34
per annualized square foot as of September 30, 2009 to $35.10 per annualized
square foot as of December 31, 2009.
Phoenix
Office Market
We have
three properties that represent approximately 804,600 effective rentable square
feet (or 31.6% of our Effective Portfolio) located in the Phoenix office
submarkets of Phoenix Downtown North, Downtown South and Deer Valley at December
31, 2009. These office submarkets, based upon a combined weighted average,
experienced net positive absorption of approximately 17,000 square feet during
the fourth quarter of 2009. Based on a combined weighted average, the total
percent occupied within these submarkets remained flat at 80.3% occupied as of
September 30, 2009 and December 31, 2009. During the fourth quarter of 2009,
average asking rents decreased from $24.87 per annualized square foot as of
September 30, 2009 to $24.69 per square foot annually as of December 31,
2009.
San
Diego Office Market
We have
ten properties that represent approximately 181,200 effective rentable square
feet (or 7.1% of our Effective Portfolio) located in the San Diego office
submarkets of San Diego North County and Central County at December 31, 2009.
These office submarkets, based upon a combined weighted average, experienced net
positive absorption of approximately 451,000 square feet during the fourth
quarter of 2009. Based on a combined weighted average, the total percent
occupied within these submarkets increased from 83.0% occupied as of September
30, 2009 to 84.1% occupied as of December 31, 2009. During the fourth quarter of
2009, average asking rents decreased from $27.43 per annualized square foot as
of September 30, 2009 to $26.95 per annualized square foot as of December 31,
2009.
ITEM 3.
- LEGAL PROCEEDINGS
We are
not currently a party, as plaintiff or defendant, to any legal proceedings
which, individually or in the aggregate, are expected by us to have a material
effect on our business, financial condition or results of operation if
determined adversely to it.
ITEM 4. -
(REMOVED AND RESERVED)
32
PART II
ITEM 5. - MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Our
Listed Common Stock is traded on the NYSE Amex under the symbol
“PCE.” The following table sets forth the high and low closing sales
prices for our Listed Common Stock as reported by the NYSE Amex and the
dividends declared for each of the periods indicated.
|
High
|
Low
|
Dividends
|
|||||||||
2009
|
||||||||||||
Fourth
Quarter
|
$ | 4.34 | $ | 3.03 | $ | 0.05 | ||||||
Third
Quarter
|
$ | 4.38 | $ | 3.50 | $ | 0.05 | ||||||
Second
Quarter
|
$ | 5.00 | $ | 3.65 | $ | 0.05 | ||||||
First
Quarter
|
$ | 5.50 | $ | 4.30 | $ | 0.05 | ||||||
2008
|
||||||||||||
Fourth
Quarter
|
$ | 6.65 | $ | 2.52 | $ | 0.05 | ||||||
Third
Quarter
|
$ | 7.32 | $ | 6.10 | $ | 0.05 | ||||||
Second
Quarter
|
$ | 7.30 | $ | 5.92 | $ | 0.00 | ||||||
First
Quarter (beginning March 20, 2008)
|
$ | 7.75 | $ | 4.65 | $ | 0.00 |
As of
March 18, 2010, our Listed Common Stock was held by 53 stockholders of
record. Because many of the shares of our Listed Common Stock are
held by brokers and other institutions on behalf of stockholders, we were unable
to estimate the total number of beneficial owners represented by these
stockholders of record.
There
currently is no established public trading market for our Senior Common Stock,
and we do not expect to have our shares of Senior Common Stock listed on any
securities exchange or quoted on an automated quotation system in the near
future. As of March 18, 2010, no shares of Senior Common Stock were
outstanding.
Dividends
Our
Listed Common Stock ranks junior to our Senior Common Stock with respect to
dividends and distribution of amounts upon liquidation. Holders of
our Senior Common Stock are entitled to receive, when and as authorized by our
board of directors and declared by us, cumulative cash dividends in an amount
per share equal to a minimum of $0.725 per share per annum, payable
monthly. Holders of our Senior Common Stock are entitled to
cumulative dividends before any dividends may be declared or set aside on our
Listed Common Stock. In addition, if the dividend payable on our
Listed Common Stock exceeds $0.20 per share per annum, the Senior Common Stock
dividend will increase by 25% of the amount by which the Listed Common Stock
dividend exceeds $0.20 per share per annum. As of March 18,
2010, we have not
yet declared or paid any dividends on the Senior Common Stock.
Subject
to the preferential rights of our Senior Common Stock and any series of our
preferred shares (of which there currently are none issued that have a dividend
preference), holders of Listed Common Stock will be entitled to receive
dividends when and as authorized by our board of directors and declared by us,
out of funds legally available for the payment of dividends. We
cannot assure you that our historical dividends and distributions will be made
or sustained or that our board of directors will not change our dividend policy
in the future. Any dividends or other distributions we pay in the future will
depend upon our legal and contractual restrictions, including the provisions of
the Senior Common Stock, as well as actual results of operations, economic
conditions, debt service requirements and other factors. Our actual
results of operations will be affected by a number of factors, including the
revenue we receive from our properties, our operating expenses, interest
expense, the ability of our tenants to meet their obligations and unanticipated
expenditures. For more information regarding risk factors that could materially
adversely affect our actual results of operations, see Item 1A – “Risk Factors”
in this Annual Report on Form 10-K.
33
Dividends
on our common stock in excess of our current and accumulated earnings and
profits will not be taxable to a taxable U.S. stockholder under current federal
income tax law to the extent those distributions do not exceed the stockholder’s
adjusted tax basis in his or her common stock, but rather will reduce the
adjusted basis of the common stock. In that case, the gain (or loss) recognized
on the sale of that common stock or upon our liquidation will be increased (or
decreased) accordingly. To the extent those distributions exceed a taxable U.S.
stockholder’s adjusted tax basis in his or her common stock, they generally will
be treated as a capital gain realized from the disposition of those shares. The
percentage of our stockholder distributions that exceeds our current and
accumulated earnings and profits may vary substantially from year to
year.
Federal
income tax law requires that a REIT distribute at least 90% of its annual REIT
taxable income excluding net capital gains, and that it pay tax at regular
corporate rates to the extent that it annually distributes less than 100% of its
REIT taxable income including capital gains. We anticipate that our estimated
cash available for distribution will exceed the annual distribution requirements
applicable to REITs. However, under some circumstances, we may be required to
pay distributions in excess of cash available for distribution in order to meet
these distribution requirements and we may need to borrow funds to make some
distributions.
ITEM 6. - SELECTED
FINANCIAL DATA
Not
applicable.
ITEM 7. - MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The
following discussion should be read in conjunction with the other sections of
this Annual Report on Form 10-K, including the consolidated financial
statements and the related notes thereto that appear in Item 8 of this
Annual Report on Form 10-K. As noted in the Explanatory Note to this Annual
Report on Form 10-K, the Company’s financial information and results of
operations were significantly affected by the consummation of the Transactions
on March 19, 2008. It was determined for purposes of the Transactions that the
commercial real estate assets contributed by Venture were not under common
control. Waterfront, which had the largest interest in Venture, was designated
as the acquiring entity in the business combination for financial accounting
purposes. Accordingly, historical financial information for Waterfront has also
been presented in this Annual Report on Form 10-K for the period from
January 1, 2008 through March 19, 2008. Additional explanatory notations are
contained in this Annual Report on Form 10-K to distinguish the historical
information of Waterfront from that of the Company. Historical results set forth
in the consolidated financial statements included in Item 8 and this
Section should not be taken as indicative of our future operations.
Note
Regarding Forward-Looking Statements
Our
disclosure and analysis in this Annual Report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), which include information relating to future
events, future financial performance, strategies, expectations, risks and
uncertainties. From time to time, we also provide forward-looking statements in
other materials we release to the public as well as oral forward-looking
statements. These forward-looking statements include, without limitation,
statements regarding: projections, predictions, expectations, estimates or
forecasts as to our business, financial and operational results and future
economic performance; statements regarding strategic transactions such as
mergers or acquisitions or a possible dissolution of the Company; and statements
of management’s goals and objectives and other similar expressions. Such
statements give our current expectations or forecasts of future events; they do
not relate strictly to historical or current facts. Words such as “believe”,
“may”, “will”, “should”, “could”, “would”, “predict”, “potential”, “continue”,
“plan”, “anticipate”, “estimate”, “expect”, “intend”, “objective”, “seek”,
“strive” and similar expressions, as well as statements in future tense,
identify forward-looking statements.
Certain
matters discussed in this Annual Report on Form 10-K are forward-looking
statements. The risks and uncertainties inherent in such statements may cause
actual future events or results to differ materially and adversely from those
described in the forward-looking statements.
34
We cannot
guarantee that any forward-looking statement will be realized. Achievement of
future results is subject to risks, uncertainties and potentially inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could differ
materially from past results and those anticipated, estimated or projected.
These factors include the risks and uncertainties described in “Risk Factors” in
Item 1A of this Annual Report on Form 10-K. You should bear this in mind as you
consider forward-looking statements.
We
undertake no obligation to publicly update forward-looking statements, whether
as a result of new information, future events or otherwise. You are advised,
however, to consult any further disclosures we make on related subjects in our
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the
SEC.
Overview
We are a
Maryland corporation and have elected to be treated as a REIT under the Code.
Our Listed Common Stock is currently listed and publicly traded on the NYSE Amex
under the symbol “PCE”. We are primarily focused on acquiring, owning and
operating office properties in selected submarkets of long term growth markets
in Honolulu and the western United States, including southern California and the
greater Phoenix metropolitan area. For a detailed discussion of our geographic
segments, see Note 15 to the combined consolidated financial statements
included in this Annual Report on Form 10-K.
Through
our Operating Partnership, we own whole interests in eight fee simple and
leasehold office properties (comprising 11 office buildings) and interests
in seven joint ventures (including managing ownership interests in six of those
seven) holding 16 office properties (comprising 34 office buildings).
Our Property Portfolio is approximately 4.7 million rentable square feet.
The portion of our Property Portfolio that is effectively owned by us
(representing leasable square feet of our wholly owned properties and our
respective ownership interests in our unconsolidated joint venture properties),
which we refer to as our “Effective Portfolio”, comprised approximately
2.5 million leasable square feet as of December 31,
2009. Our unconsolidated joint ventures are accounted for under the
equity method of accounting. Additional information about our
Property Portfolio can be found in Item 2 of this Annual Report on Form
10-K.
We are
externally advised by Pacific Office Management, Inc., referred to as our
Advisor, an entity owned and controlled by Jay H. Shidler, our Chairman of the
Board, and certain related parties of The Shidler Group, which is a business
name utilized by a number of affiliates controlled by Jay H. Shidler, pursuant
to the Advisory Agreement. The Advisor is responsible for the
day-to-day operation and management of the Company.
We
operate in a manner that permits us to satisfy the requirements for taxation as
a REIT under the Code. As a REIT, we generally are not subject to federal income
tax on our taxable income that is distributed to our stockholders and are
required to distribute to our stockholders at least 90% of our annual REIT
taxable income (excluding net capital gains).
We
maintain a website at www.pacificofficeproperties.com.
Information on this website shall not constitute part of this Annual Report on
Form 10-K. Copies of our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and amendments to such reports are available
without charge on our website. In addition, our Corporate Governance Guidelines,
Code of Business Conduct and Ethics, Audit Committee Charter, Compensation
Committee Charter, Nominating and Corporate Governance Committee Charter, along
with supplemental financial and operating information prepared by us, are all
available without charge on our website or upon request to us. We also post or
otherwise make available on our website from time to time other information that
may be of interest to our investors.
35
Critical
Accounting Policies
This
discussion and analysis of the historical financial condition and results of
operations is based upon the accompanying consolidated financial statements
which have been prepared in accordance with GAAP. The preparation of these
financial statements in conformity with GAAP requires management to make
estimates and assumptions in certain circumstances that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses in the reporting period. Actual
amounts may differ from these estimates and assumptions. Summarized below are
those accounting policies that require material subjective or complex judgments
and that have the most significant impact on financial conditions and results of
operations. These estimates have been evaluated on an ongoing basis, based upon
information currently available and on various assumptions that management
believes are reasonable as of the date hereof. In addition, other companies in
similar businesses may use different estimation policies and methodologies,
which may impact the comparability of the results of operations and financial
conditions to those of other companies.
Investment in
Real Estate. For financial accounting purposes, Waterfront was designated
as the acquiring entity in the business combination pursuant to the Transactions
and its assets and liabilities have been recorded at their historical cost
basis. In that regard, substantially all of the commercial real estate assets
and related liabilities of Venture and substantially all of the assets and
certain liabilities of AZL were deemed to be acquired by Waterfront. The
commercial real estate assets of Venture that were deemed to be acquired by
Waterfront consisted of the Contributed Properties. Further, the assets of AZL
deemed to be acquired by Waterfront primarily consisted of cash and cash
equivalents, investments in marketable securities, other assets and related
liabilities. Immediately prior to the Effective Date, Mr. Shidler owned a 56.25%
controlling interest in Waterfront but did not own a controlling interest in the
other Contributed Properties. However, Mr. Shidler did have a controlling
interest in Venture whereby he had the power to direct the transfer of the
Contributed Properties to the Operating Partnership. Accordingly, Mr. Shidler’s
transfer of his ownership interests in the remaining Contributed Properties to
Waterfront, the accounting acquirer he controls, was deemed to be a transfer
under common control. As such, Mr. Shidler’s ownership interests in the
Contributed Properties are recorded at historical cost. Ownership interests in
the Contributed Properties not owned by Mr. Shidler were recorded at the
estimated fair value of the acquired assets and assumed liabilities on the
Effective Date.
The price
of the common stock of AZL was determined to be $5.10 per share at the Effective
Date. The fair value of a Preferred Unit at the Effective Date was estimated to
be $37.31 after taking into account the AZL common stock price of $5.10 and
various other factors that determine the value of a convertible
security.
Acquisitions
of properties and other business combinations are accounted for using the
purchase method and, accordingly, the results of operations of acquired
properties are included in our result of operations from the respective dates of
acquisition. Estimates of future cash flows and other valuation techniques are
used to allocate the purchase price of acquired property between land, buildings
and improvements, equipment and identifiable intangible assets and liabilities
such as amounts related to in-place market leases, acquired below and above
market leases and tenant relationships. Our allocations are typically
based on the relative fair value of the assets acquired and initial valuations
are subject to change until such information is finalized no later than 12
months from the acquisition date. Each of these estimates requires a great deal
of judgment, and some of the estimates involve complex calculations. These
allocation assessments have a direct impact on our results of operations because
if we were to allocate more value to land there would be no depreciation with
respect to such amount. If we were to allocate more value to the buildings as
opposed to tenant leases, this amount would be recognized as an expense over a
much longer period of time, since the amounts allocated to buildings are
depreciated over the estimated lives of the buildings whereas amounts allocated
to tenant leases are amortized over the remaining terms of the
leases.
Land,
buildings and improvements, and furniture, fixtures and equipment are recorded
at cost. Depreciation and amortization are computed using the straight-line
method for financial reporting purposes. Buildings and improvements are
depreciated over their estimated useful lives which range from 18 to 42 years.
Tenant improvement costs recorded as capital assets are depreciated over the
shorter of (i) the tenant’s remaining lease term or (ii) the life of the
improvement. Furniture, fixtures and equipment are depreciated over three to
seven years. Properties that are acquired that are subject to ground leases are
depreciated over the remaining life of the related leases as of the date of
assumption of the lease.
36
Impairment of
Long-Lived Assets. We assess the potential for impairment of our
long-lived assets, including real estate properties, whenever events occur or a
change in circumstances indicate that the recorded value might not be fully
recoverable. We determine whether impairment in value has occurred by comparing
the estimated future undiscounted cash flows expected from the use and eventual
disposition of the asset to its carrying value. If the undiscounted cash flows
do not exceed the carrying value, the real estate carrying value is reduced to
fair value and impairment loss is recognized. We did not recognize an impairment
loss on our long-lived assets during the years ended December 31, 2009 and
2008.
Impairment of
Investments in Unconsolidated Joint Ventures. Our investment
in unconsolidated joint ventures is subject to a periodic impairment review and
is considered to be impaired when a decline in fair value is judged to be
other-than-temporary. An investment in an unconsolidated joint venture that we
identify as having an indicator of impairment is subject to further analysis to
determine if the investment is other than temporarily impaired, in which case we
write down the investment to its estimated fair value. We did not recognize an
impairment loss on our investment in unconsolidated joint ventures during the
years ended December 31, 2009 and 2008.
Goodwill.
We record the excess cost of an acquired entity over the net of the
amounts assigned to assets acquired (including identified intangible assets) and
liabilities assumed as goodwill. Goodwill is not amortized but is tested for
impairment at a level of reporting referred to as a “reporting unit” on an
annual basis, during the fourth quarter of each calendar year, or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. The assessment of impairment involves a two-step process whereby an
initial assessment for potential impairment is performed, followed by a
measurement of the amount of impairment, if any. Impairment testing is performed
using the fair value approach, which requires the use of estimates and judgment,
at the reporting unit level. A reporting unit is the operating segment, or a
business that is one level below the operating segment if discrete financial
information is prepared and regularly reviewed by management at that level. The
determination of a reporting unit’s fair value is based on management’s best
estimate, which generally considers the market-based earning multiples of the
unit’s peer companies or expected future cash flows. If the carrying value of a
reporting unit exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment loss, if
any. An impairment is recognized as a charge against income equal to
the excess of the carrying value of goodwill over its implied value on the date
of the impairment. The factors that may cause an impairment in goodwill
include, but may not be limited to, a sustained decline in our stock
price, the occurrence, or sustained existence, of adverse economic
conditions or decreased cash flow from our properties. The impairment
analysis performed as of December 31, 2009 resulted in no
impairment.
Revenue
Recognition. The following
four criteria must be met before we recognize revenue and gain:
|
•
|
persuasive
evidence of an arrangement exists;
|
|
•
|
the
delivery has occurred or services
rendered;
|
|
•
|
the
fee is fixed and determinable; and
|
|
•
|
collectability
is reasonably assured.
|
All
leases are classified as operating leases. For all lease terms exceeding one
year, rental income is recognized on a straight-line basis over the terms of the
leases. Deferred rent receivables represent rental revenue recognized on a
straight-line basis in excess of billed rents. Reimbursements from tenants for
real estate taxes and other recoverable operating expenses are recognized as
revenues in the period the applicable costs are incurred.
Rental
revenue from parking operations and rental revenue from month-to-month leases or
leases with no scheduled rent increases or other adjustments is recognized on a
monthly basis when earned.
Lease
termination fees, which are included in rental revenue in the accompanying
consolidated statements of operations, are recognized when the related leases
are canceled and where no corresponding continuing obligation to provide
services to such former tenants exists. We recorded $0.02 million and
$0.02 million of lease termination revenue for years ended
December 31, 2009 and 2008, respectively.
Other
revenue and non-operating income on the accompanying combined consolidated
statements of operations generally include income incidental to operations and
are recognized when earned.
37
Monitoring of
Rents and Other Receivables. An allowance is
maintained for estimated losses that may result from the inability of tenants to
make required payments. If a tenant fails to make contractual payments beyond
any allowance, we may recognize bad debt expense in future periods equal to the
amount of unpaid rent and deferred rent. We generally do not require collateral
or other security from our tenants, other than security deposits or letters of
credit. If estimates of collectability differ from the cash received, the timing
and amount of reported revenue could be impacted. We had an allowance for
doubtful accounts of $1.1 million and $0.8 million as of December 31,
2009 and 2008, respectively.
As of
December 31, 2009, we had a total of approximately $0.5 million of lease
security available on existing letters of credit, as well as $2.7 million of
lease security available in security deposits. As of
December 31, 2008, we had a total of approximately $0.9 million of
lease security available on existing letters of credit, as well as
$2.6 million of lease security available in security deposits.
Investments in
Joint Ventures. We have
determined that one of our joint ventures is a variable interest entity. We are
not deemed to be the primary beneficiary of that variable interest entity. Our
investments in joint ventures that are not variable interest entities are
accounted for under the equity method of accounting because we exercise
significant influence over, but do not control, our joint ventures. Our joint
venture partners have substantive participating rights, including approval of
and participation in setting operating budgets. Accordingly, we have determined
that the equity method of accounting is appropriate for our investments in joint
ventures.
On
April 1, 2008, we and our joint venture partner in Seville Plaza entered
into an Amended Operating Agreement. Based on this amendment, which served to
modify and provide substantive participating rights to the non-managing member,
we have accounted for our 7.5% investment in Seville Plaza under the equity
method of accounting. Prior to the date of such amendment, we had consolidated
our 7.5% investment in Seville Plaza.
Income
Taxes. We have elected
to be taxed as a REIT under the Code. To qualify as a REIT, we must meet a
number of organizational and operational requirements, including a requirement
that we currently distribute at least 90% of our REIT taxable income to our
stockholders. Also, at least 95% of gross income in any year must be derived
from qualifying sources. We intend to adhere to these requirements and maintain
our REIT status. As a REIT, we generally will not be subject to corporate level
federal income tax on taxable income that we distribute currently to our
stockholders. However, we may be subject to certain state and local taxes on our
income and property, and to federal income and excise taxes on our undistributed
taxable income, if any. Based on our estimates, we do not believe that we have
generated taxable income during the period from March 20, 2008 to December 31,
2008 or for the twelve months ended December 31, 2009. Accordingly, no provision
for income taxes has been recognized by the Company.
Pursuant
to the Code, we may elect to treat certain of our newly created corporate
subsidiaries as taxable REIT subsidiaries (“TRS”). In general, a TRS may perform
non-customary services for our tenants, hold assets that we cannot hold directly
and generally engage in any real estate or non-real estate related business. A
TRS is subject to corporate federal income tax. As of
December 31, 2009, none of our subsidiaries were considered
a TRS.
Results
of Operations
The
following discussion regarding our results of operations was significantly
affected by the Transactions; the properties acquired on the Effective Date were
in our portfolio for 287 days in 2008 compared to 365 days in 2009. Our
discussion below addresses the historical information for the year ended
December 31, 2009 for the Company, and the historical information for the period
from January 1, 2008 to March 19, 2008 for Waterfront, plus the period from
March 20, 2008 to December 31, 2008 for the Company, on a combined basis (the
“Combined Entity”).
38
Overview
As of
December 31, 2009, the Property Portfolio and Effective Portfolio were 85.2% and
84.7% leased, respectively, to a total of 1,047 tenants. Approximately 12.5% of
our Property Portfolio leased square footage expires during 2010 and another
12.5% of our Property Portfolio leased square footage expires during 2011. We
receive income primarily from rental revenue (including tenant reimbursements)
from our office properties, and to a lesser extent, from our parking revenues.
Our office properties are typically leased to tenants with good credit for terms
ranging from 2 to 20 years.
As of
December 31, 2009, our consolidated Honolulu portfolio was 90.9% leased, with
approximately 133,100 square feet available. Our Honolulu portfolio attributable
to our unconsolidated joint ventures was 85.6% leased, with approximately 21,900
square feet available. Our effective Honolulu portfolio was 90.4% leased, with
approximately 155,000 square feet available.
As of
December 31, 2009, our consolidated Phoenix portfolio was 71.9% leased, with
approximately 207,600 square feet available. Our Phoenix portfolio attributable
to our unconsolidated joint ventures was 74.1% leased, with approximately
153,000 square feet available. Our effective Phoenix portfolio was 71.8% leased,
with approximately 360,500 square feet available.
As of
December 31, 2009, our consolidated San Diego portfolio, which consists of our
Sorrento Technology Center property, was 100% leased. Our San Diego portfolio
attributable to our unconsolidated joint ventures was 88.0% leased, with
approximately 119,100 square feet available. Our effective San Diego portfolio
was 88.4% leased, with approximately 119,100 square feet available.
Comparison
of the Property Portfolio for the year ended December 31, 2009 to the year ended
December 31, 2008
2009
|
2008
(1)
|
$
Change
|
%
Change
|
|||||||||||||
Revenue:
|
||||||||||||||||
Rental
|
$ | 42,462 | $ | 37,447 | $ | 5,015 | 13.4 | % | ||||||||
Tenant
reimbursements
|
21,662 | 19,375 | 2,287 | 11.8 | % | |||||||||||
Parking
|
8,150 | 6,890 | 1,260 | 18.3 | % | |||||||||||
Other
|
365 | 394 | (29 | ) | (7.4 | %) | ||||||||||
Total
revenue
|
72,639 | 64,106 | 8,533 | 13.3 | % | |||||||||||
Expenses:
|
||||||||||||||||
Rental
property operating
|
39,480 | 37,714 | 1,766 | 4.7 | % | |||||||||||
General
and administrative
|
2,649 | 18,577 | (15,928 | ) | (85.7 | %) | ||||||||||
Depreciation
and amortization
|
27,240 | 22,295 | 4,945 | 22.2 | % | |||||||||||
Interest
|
27,051 | 22,932 | 4,119 | 18.0 | % | |||||||||||
Loss
from extinguishment of debt
|
171 | - | 171 | 100.0 | % | |||||||||||
Other
|
- | 143 | (143 | ) | (100.0 | %) | ||||||||||
Total
expenses
|
96,591 | 101,661 | (5,070 | ) | (5.0 | %) | ||||||||||
Loss
before equity in net earnings of unconsolidated
|
||||||||||||||||
joint
ventures and non-operating income
|
(23,952 | ) | (37,555 | ) | 13,603 | 36.2 | % | |||||||||
Equity
in net earnings of unconsolidated
|
||||||||||||||||
joint
ventures
|
313 | 93 | 220 | 236.6 | % | |||||||||||
Non-operating
income
|
434 | 85 | 349 | 410.6 | % | |||||||||||
Net
loss
|
$ | (23,205 | ) | $ | (37,377 | ) | $ | 14,172 | 37.9 | % | ||||||
(1)
|
Amounts reflected in 2008
represent the sum of the results of the Company for the period from March
20, 2008 to December 31, 2008 and the results of Waterfront for the period
from January 1, 2008 to March 19,
2008.
|
39
Revenues
Rental Revenue. Rental
revenue increased by $5.0 million, or 13.4%, for the year ended December 31,
2009 compared to the year ended December 31, 2008. An increase of $6.0 million
was primarily attributable to the number of days the properties acquired at the
Effective Date were in our portfolio during 2009 compared to
2008. The increase is partially offset by a $1.0 million decrease due
to decreased average occupancy, rental rates and below market rent amortization
at our City Square and Davies Pacific Center properties.
Tenant Reimbursements. Tenant
reimbursements increased by $2.3 million, or 11.8%, for the year ended December
31, 2009 compared to the year ended December 31, 2008. An increase of $3.5
million was primarily attributable to the number of days the properties acquired
at the Effective Date were in our portfolio during 2009 compared to
2008. This increase is partially offset by a decrease in electricity
costs (and corresponding decrease in tenant reimbursements) in Hawaii in
2009.
Parking Revenue. Parking
revenue increased by $1.3 million, or 18.3%, for the year ended December 31,
2009 compared to the year ended December 31, 2008. The increase was primarily
attributable to the number of days the properties acquired at the Effective Date
were in our portfolio during 2009 compared to 2008.
Expenses
Rental Property Operating Expenses.
Rental property operating expenses increased by $1.8 million, or 4.7%,
for the year ended December 31, 2009 compared to the year ended December 31,
2008. An increase of $3.2 million was primarily attributable to the number of
days the properties acquired at the Effective Date were in our portfolio during
2009 compared to 2008. This increase was partially offset by a
reduction in our bad debt reserves of $0.5 million and a $1.7 million decrease
in electricity costs in Hawaii due to lower oil prices in 2009.
General and Administrative.
General and administrative expense decreased by $15.9 million, or 85.7%, for the
year ended December 31, 2009 compared to the year ended December 31, 2008. The
decrease is primarily due to a $16.2 million share-based compensation charge
resulting from the Transactions during the year ended December 31,
2008. The decrease is also due to the non-recurrence of certain
expenses of $0.4 million related to the Transactions and a $0.1 million decrease
in professional fees relating to Sarbanes-Oxley compliance. These
decreases are partially offset by additional financial audit fees of $0.3
million and increased fees paid to the Advisor and our board of directors ($0.3
million increase due to the number of days the properties acquired at the
Effective Date were in our portfolio during 2009 compared to 2008).
Depreciation and Amortization
Expense. Depreciation and amortization expense increased by $4.9 million,
or 22.2%, for the year ended December 31, 2009 compared to the year ended
December 31, 2008. The increase was primarily attributable to the number of days
the properties acquired at the Effective Date were in our portfolio during 2009
compared to 2008.
Interest Expense. Interest
expense increased by $4.1 million, or 18.0%, for the year ended December 31,
2009 compared to the year ended December 31, 2008. An increase of $3.4 million
was primarily attributable to the number of days the properties acquired at the
Effective Date were in our portfolio during the 2009 compared to 2008. An
additional increase of $0.7 million was due to interest incurred on the
unsecured promissory notes that were in place for a longer period in 2009
partially offset by a decrease in the interest rate on our variable interest
rate debt.
Loss from extinguishment of debt.
We recognized a $0.2 million loss from extinguishment of debt during the
year ended December 31, 2009 due to the write-off of unamortized loan costs
related to the termination of our former credit facility with KeyBank in
September 2009. We did not recognize any comparable losses in the
prior year.
Equity
in net earnings of unconsolidated joint ventures
Equity
in net earnings of unconsolidated joint ventures increased by $0.2 million, or
236.6%, for the year ended December 31, 2009 compared to the year ended December
31, 2008. The increase was primarily attributable to the addition of the SoCal
II joint venture in August 2008.
40
Non-operating
income
Non-operating
income increased by $0.3 million, or 410.6%, for the year ended December 31,
2009 compared to the year ended December 31, 2008. The increase was primarily
attributable to a write-off of tax penalties accrued in relation to AZL’s
potential noncompliance with the REIT asset tests. We paid penalties
and fees of $0.07 million instead of the fully accrued amount of $0.5
million.
Liquidity
and Capital Resources
Cash
Balances, Available Borrowings and Capital Resources
As of
December 31, 2009, we had $3.2 million in cash and cash equivalents as compared
to $4.5 million as of December 31, 2008. In addition, we had restricted cash
balances of $6.5 million as of December 31, 2009 as compared to $7.3 million as
of December 31, 2008. Restricted cash primarily consists of interest-bearing
cash deposits required by certain of our mortgage loans to fund anticipated
expenditures for real estate taxes, insurance, debt service and leasing costs.
In addition, as of December 31, 2009, we have approximately $6.1 million
available under our credit facility for borrowings.
We have
$66.4 million in aggregate principal indebtedness maturing in
2010. We have initiated discussions with the servicers for each of
these non-recourse loans regarding an agreement to extend the maturity date of
the loans and to make certain other modifications to the terms of the
loans. If we are unable to extend the maturity date of any of the
loans, we may attempt to refinance the indebtedness or utilize a combination of
cash on hand, available borrowings under our credit facility and any available
proceeds from our continuous offering of Senior Common Stock to repay the
loan. If we are unable to repay any loan at maturity, we may not be
able to retain our equity in the properties in question.
We expect
to meet our long-term liquidity and capital requirements such as scheduled
principal maturities, property acquisitions costs, if any, and other
non-recurring capital expenditures through net cash provided by operations,
existing cash on hand, refinancing of existing indebtedness, any available
proceeds from our continuous offering of Senior Common Stock and through other
available investment and financing activities, including the assumption of
mortgage indebtedness upon acquisition or the procurement of new acquisition
mortgage indebtedness. We may plan for our future financing
activities to include selling a portion of the equity in the properties in which
we currently hold whole interests.
We expect
that we will fund only 10% to 20% of the required equity for new office
properties acquired in the future. The balance of the equity investment is
expected to be funded, on a transaction-by-transaction basis, by one or more
co-investors. We have pre-existing relationships with a number of potential
co-investors that we believe will provide ample opportunities to fund
anticipated acquisitions. Our business strategy provides us with the opportunity
to earn greater returns on invested equity through incentive participation and
management fees.
As of
December 31, 2009, our total consolidated debt was approximately $427.5 million
with a weighted average interest rate of 5.79% and a weighted average remaining
term of 5.4 years.
Cash
Flows
Net cash
provided by operating activities for the Company for the year ended December 31,
2009 was $5.9 million compared to $2.2 million for the Combined Entity for the
year ended December 31, 2008. The increase of $3.7 million for the Company
compared to the Combined Entity was primarily attributable to improved vendor
payment management in addition to incremental cash flow due to the number of
days the properties acquired at the Effective Date were in our portfolio during
2009 compared to 2008, 365 days in 2009 compared to 287 days in
2008.
Net cash
used in investing activities for the Company for the year ended December 31,
2009 was $5.5 million compared to $8.9 million for the Combined Entity for the
year ended December 31, 2008. During 2009, our restricted cash
decreased by $0.8 million due to a return of escrow deposits and property tax
payments made from our reserve accounts and we paid $1.4 million to acquire an
interest in an unconsolidated joint venture. In addition, we
decreased our capital expenditures related to real estate by $2.6 million
compared to the same period in the prior year and we received $1.4 million in
additional capital distributions from our investments in unconsolidated joint
ventures and a catch up in distributions from another joint venture that we did
not elect to receive in the prior year. In addition, we received $6.5 million
from Contributed Properties upon the Effective Date. This was offset by our
payment of $4.1 million of acquisition costs related to the Transactions during
the year ended December 31, 2008, which did not recur during the year ended
December 31, 2009.
41
Net cash
used in financing activities was $1.6 million for the year ended December 31,
2009 compared to $8.5 million in net cash provided by financing activities for
the Combined Entity for the year ended December 31, 2008. Our cash
used during the 2009 period was primarily attributable to $5.8 million in
distributions paid to non-controlling interests and stockholders, which we
expect to continue paying, offset by $5.9 million in net draws from our
revolving line of credit. In addition we paid $1.8 million in offering
costs attributable to our Senior Common Stock. During 2008, we received $6.4
million from the issuance of equity securities, as a result of the Transactions.
In addition, in 2008, the Combined Entity also received $2.7 million in net
equity contributions from the previous partners. We do not, however,
expect to continue to receive equity contributions in a manner similar to that
received during the 2008 period based on our capital structure after the
Transactions.
Indebtedness
Mortgage
and Other Loans
The
following table sets forth information relating to the material borrowings with
respect to our properties and other material indebtedness as of December 31,
2009. Unless otherwise indicated in the footnotes to the table, each
loan requires monthly payments of interest only and a balloon payment at
maturity, and all numbers, other than percentages, are reported in
thousands:
PROPERTY
|
AMOUNT
|
INTEREST
RATE
|
MATURITY
DATE
|
BALANCE
DUE AT MATURITY DATE
|
PREPAYMENT/ DEFEASANCE
|
||||||||||||
Clifford
Center (1)
|
$ | 3,501 | 6.00 | % |
8/15/2011
|
$ | 3,032 | (2) | |||||||||
Davies
Pacific Center
|
95,000 | 5.86 | % |
11/11/2016
|
95,000 | (3) | |||||||||||
First
Insurance Center
|
38,000 | 5.74 | % |
1/1/2016
|
38,000 | (4) | |||||||||||
First
Insurance Center
|
14,000 | 5.40 | % |
1/6/2016
|
14,000 | (5) | |||||||||||
Pacific
Business News Building
(6)
|
11,653 | 6.98 | % |
4/6/2010
|
11,613 | (7) | |||||||||||
Pan
Am Building
|
60,000 | 6.17 | % |
8/11/2016
|
60,000 | (8) | |||||||||||
Waterfront
Plaza
|
100,000 | 6.37 | % |
9/11/2016
|
100,000 | (9) | |||||||||||
Waterfront
Plaza
|
11,000 | 6.37 | % |
9/11/2016
|
11,000 | (10) | |||||||||||
City
Square
|
27,500 | 5.58 | % |
9/1/2010
|
27,500 | (11) | |||||||||||
City
Square (12)
|
27,017 |
LIBOR
+ 2.35
|
% |
9/1/2010
|
27,017 | (13) | |||||||||||
Sorrento
Technology Center (14)
|
11,800 | 5.75 | % (15) |
1/11/2016
(15)
|
10,825 | (16) | |||||||||||
Subtotal
|
$ | 399,471 |
|
||||||||||||||
Revolving
line of credit (17)
|
8,947 | 1.85 | % |
9/2/2011
|
$ | 8,947 | |||||||||||
Outstanding
principal balance
|
$ | 408,418 | |||||||||||||||
Less:
Unamortized discount, net
|
(1,979 | ) | |||||||||||||||
Net
|
$ | 406,439 | |||||||||||||||
42
(1)
Requires monthly principal and interest payments of $39.8. The initial
maturity date is August 15, 2011. We have the option to extend
the maturity date to August, 15, 2014 for a nominal
fee.
|
(2)
|
Loan
is prepayable, subject to prepayment premium equal to greater of 2% of
amount prepaid or yield
maintenance.
|
(3)
|
Loan
is prepayable, after second anniversary of its securitization, subject to
prepayment premium equal to greater of (a) 1% of amount prepaid or (b)
yield maintenance. No premium due after August 11,
2016.
|
(4)
|
Loan
is prepayable subject to a prepayment premium in an amount equal to the
greater of 3% of outstanding principal amount or yield
maintenance. No premium due after October 1,
2015. Loan may also be defeased two years after the “start-up
date,” if securitized.
|
(5)
|
Loan
is not prepayable until October 6, 2015; however, loan may be defeased two
years after the “start-up date,” if securitized. No premium is
due upon prepayment.
|
(6)
|
Requires
monthly principal and interest payments of
$81.
|
(7)
|
Loan
is prepayable; no premium is due upon prepayment. Loan may be
defeased two years after the “start-up date,” if
securitized. We have initiated discussions with the servicer
for this loan regarding an agreement to extend the maturity date of the
loan and to make certain other modifications to the terms of the
loan.
|
(8)
|
Loan
may be prepaid following second anniversary of its securitization subject
to a prepayment premium equal to greater of 1% of principal balance of
loan or yield maintenance. No premium is due after May 11,
2016.
|
(9)
|
Loan
may be prepaid subject to payment of a yield maintenance-based prepayment
premium; no premium is due after June 11, 2016. Loan may also
be defeased after the date that is two years from the “start-up date” of
the loan, if securitized.
|
(10)
|
Loan
may be prepaid subject to payment of a yield maintenance-based prepayment
premium; no premium is due after June 11,
2016.
|
(11)
|
Loan
may not be prepaid until June 1, 2010. Loan may be defeased at
any time. We are currently in discussions with the servicer for
this loan regarding an agreement to
extend the maturity date of the loan and to make certain other
modifications to the terms of the
loan.
|
(12)
|
The
Company has an interest rate cap on this loan for the notional amount of
$28.5 million, which effectively limits the LIBOR rate on this loan to
7.45%. The interest rate cap expires on September 1, 2010,
commensurate with the maturity date of this note payable. We
are currently in discussions with the servicer for this loan
regarding an
agreement to extend the maturity date of the loan and to make certain
other modifications to the terms of the
loan.
|
(13)
|
Loan
may be prepaid subject to payment of a fee in amount of
$142.
|
(14) From
and after January 11, 2010, requires monthly principal and interest payments in
the amount of $69.
(15)
|
Although
the maturity date is January 11, 2036, January 11, 2016 is the anticipated
repayment date because the interest rate adjusts as of January 11, 2016 to
greater of 7.75% or treasury rate plus 70 basis points, plus
2.0%.
|
(16)
|
No
prepayment is permitted prior to October 11, 2016. Loan may be
defeased after the second anniversary of the “start-up date” of the loan,
if securitized.
|
(17)
|
The
revolving line of credit matures on September 2, 2011. See
“Revolving Line of Credit” below.
|
Our
variable rate debt, as reflected in the above schedule and in Note 9 to our
combined consolidated financial statements included in this Annual Report on
Form 10-K, bears interest at a rate based on 30-day LIBOR, which was 0.23% as of
December 31, 2009, plus a spread. Our variable rate debt at December 31, 2009
has an initial term that matures in September 2010. As noted above,
we are currently in discussions with the servicer for this debt regarding an agreement to extend
the maturity date of the loan and to make certain other modifications to the
terms of the loan.
The debt
secured by our properties is owed at the property level rather than by the
Company or the Operating Partnership. This debt is non-recourse to the Operating
Partnership except for customary recourse carve-outs for borrower misconduct and
environmental liabilities and one fully recourse mortgage loan for the
Contributed Property known as Clifford Center. The recourse liability
for borrower misconduct and environmental liabilities was guaranteed by Mr.
Shidler and James C. Reynolds, a director and stockholder of our Advisor, and
entities wholly-owned or controlled by them, and the Operating Partnership has
indemnified them to the extent of their guaranty liability. This debt
strategy isolates mortgage liabilities in separate, stand-alone entities,
allowing us to have only our property-specific equity investment at
risk.
As of
December 31, 2009, our ratio of total consolidated debt to total consolidated
market capitalization was approximately 68.4%. Our total consolidated market
capitalization of $625.0 million includes our total consolidated debt of $427.5
million and the market value of our common stock and common stock equivalents
outstanding of $197.4 million (based on the closing price of our Listed Common
Stock of $3.89 per share on the NYSE Amex on December 31, 2009).
At
December 31, 2009, the Operating Partnership was subject to a $0.5 million
recourse commitment that it provided on behalf of POP San Diego I joint venture
in connection with certain of that joint venture’s mortgage loans. The
contractual provisions of these mortgage loans provide for the full release of
this recourse commitment upon the satisfaction of certain conditions within our
control. We believe that the subject conditions will be satisfied by management
prior to, or during, the second quarter ending June 30, 2010, and will
therefore result in the immediate and full release of the Operating Partnership
from this recourse commitment. As such, we have not recorded this as
a liability because the probability for recourse is remote.
43
Revolving
Line of Credit
On
September 2, 2009, we entered into a Credit Agreement (the “FHB Credit
Facility”) with First Hawaiian Bank (the “Lender”). The FHB Credit
Facility initially provided us with a revolving line of credit in the principal
sum of $10 million. On December 31, 2009, we amended the FHB Credit
Facility to increase the maximum principal amount available for borrowing under
the revolving line of credit to $15 million. Amounts borrowed under
the FHB Credit Facility will bear interest at a fluctuating annual rate equal to
the effective rate of interest paid by the Lender on time certificates of
deposit, plus 1.00%. We are permitted to use the proceeds of the line
of credit for working capital and general corporate purposes, consistent with
our real estate operations and for such other purposes as the Lender may
approve. As of December 31, 2009, we had outstanding borrowings of
$8.9 million under the FHB Credit Facility.
The FHB
Credit Facility matures on September 2, 2011. As security for the FHB
Credit Facility, as amended, Shidler Equities, L.P., a Hawaii limited
partnership controlled by Mr. Shidler (“Shidler LP”), has pledged to FHB a
certificate of deposit in the principal amount of $15 million. As a
condition to this pledge, the Operating Partnership and Shidler LP entered into
an indemnification agreement pursuant to which the Operating Partnership agreed
to indemnify Shidler LP from any losses, damages, costs and expenses incurred by
Shidler LP in connection with the pledge. In addition, to the extent
that all or any portion of the certificate of deposit is withdrawn by FHB and
applied to the payment of principal, interest and/or charges under the FHB
Credit Facility, the Operating Partnership agreed to pay to Shidler LP interest
on the withdrawn amount at a rate of 7.00% per annum from the date of the
withdrawal until the date of repayment in full by the Operating Partnership to
Shidler LP. Pursuant to this indemnification agreement, as amended,
the Operating Partnership also agreed to pay to Shidler LP an annual fee of
2.00% of the entire $15 million principal amount of the certificate of
deposit.
The FHB
Credit Facility contains various customary covenants, including covenants
relating to disclosure of financial and other information to the Lender,
maintenance and performance of our material contracts, our maintenance of
adequate insurance, payment of the Lender’s fees and expenses, and other
customary terms and conditions.
Subordinated
Promissory Notes
At
December 31, 2009 and 2008, we had promissory notes payable by the Operating
Partnership to certain of our affiliates in the aggregate principal amount of
$21.1 million and $23.8 million, respectively, which were originally issued upon
the exercise of the option granted by Venture in connection with our formation
transactions. The promissory notes accrue interest at a rate of 7% per annum,
with interest payable quarterly, subject to the Operating Partnership’s right to
defer the payment of interest for any or all periods up until the date of
maturity. The promissory notes mature on various dates commencing on March 19,
2013 through August 31, 2013, but the Operating Partnership may elect to extend
maturity of any note for one additional year. Maturity accelerates upon the
occurrence of (a) an underwritten public offering of at least $75 million of our
common stock, (b) the sale of substantially all the assets of the Company or (c)
the merger of the Company with another entity. The promissory notes are
unsecured obligations of the Operating Partnership.
On
September 23, 2009, the Operating Partnership entered into an exchange agreement
with certain of our affiliates, referred to as the
Transferors. Pursuant to the terms of the exchange agreement, on
September 25, 2009, certain unsecured subordinated promissory notes, in the
aggregate outstanding amount (including principal and accrued interest) of
approximately $3.0 million, issued by the Operating Partnership to the
Transferors were exchanged for 789,095 shares of our Listed Common
Stock. The price per share of Listed Common Stock issued pursuant to
the exchange agreement was $3.82, which represented the volume-weighted average
closing market price per share of Listed Common Stock on the NYSE Amex for the
thirty trading days preceding the date of the exchange agreement.
For the
period from March 20, 2008 through December 31, 2009, interest payments on the
unsecured notes payable to related parties have been deferred with the exception
of $0.3 million which was related to the notes exchanged pursuant to the
exchange agreement. At December 31, 2009 and December 31, 2008, $2.6
million and $1.2 million, respectively, of accrued interest attributable to
unsecured notes payable to related parties is included in accounts payable and
other liabilities in the accompanying consolidated balance sheets.
44
Distributions
We have
made an election to be taxed as a REIT under Sections 856 through 860 of the
Code, and related regulations and intend to continue to operate so as to remain
qualified as a REIT for federal income tax purposes. We generally will not be
subject to federal income tax on income that we distribute to our stockholders
and UPREIT unit holders, provided that we distribute 100% of our REIT taxable
income and meet certain other requirements for qualifying as a REIT. If we fail
to qualify as a REIT in any taxable year, we will be subject to federal income
tax on our taxable income at regular corporate rates and will not be permitted
to qualify for treatment as a REIT for federal income tax purposes for four
years following the year during which qualification is lost. Such an event could
materially affect our income and our ability to pay dividends. We believe we
have been organized as, and our past and present operations qualify the Company
as, a REIT.
In
connection with our formation transactions, we received a representation from
our predecessor, AZL, that it qualified as a REIT under the provisions of the
Code. However, during 2009 we became aware that AZL historically invested excess
cash from time to time in money market funds that, in turn, were invested
exclusively or primarily in short-term federal government
securities. Additionally, during 2009 we became aware that AZL made
two investments in local government obligations. Our predecessor,
AZL, with no objection from outside advisors, treated these investments as
qualifying assets for purposes of the 75% gross asset test. However,
if these investments were not qualifying assets for purposes of the 75% gross
asset test, then AZL may not have satisfied the REIT gross asset tests for
certain quarters, in part, because they may have exceeded 5% of the gross value
of AZL’s assets. If these investments resulted in AZL’s noncompliance
with the REIT gross asset tests, however, we and our predecessor, AZL, would
retain qualification as a REIT pursuant to certain mitigation provisions of the
Code, which provide that so long as any noncompliance was due to reasonable
cause and not due to willful neglect, and certain other requirements are met,
qualification as a REIT may be retained but a penalty tax would be
owed. Any potential noncompliance with the gross asset tests would be
due to reasonable cause and not due to willful neglect so long as ordinary
business care and prudence were exercised in attempting to satisfy such
tests. Based on our review of the circumstances surrounding the
investments, we believe that any noncompliance was due to reasonable cause and
not due to willful neglect. Additionally, we believe that we have
complied with the other requirements of the mitigation provisions of the Code
with respect to such potential noncompliance with the gross asset tests (and
have paid the appropriate penalty tax), and, therefore, our qualification, and
that of our predecessor, AZL, as a REIT should not be affected. The
Internal Revenue Service is not bound by our determination, however, and no
assurance can be provided that the Internal Revenue Service will not assert that
AZL failed to comply with the REIT gross asset tests as a result of the money
market fund investments and the local government securities investments and that
such failures were not due to reasonable cause. If the Internal
Revenue Service were to successfully challenge this position, then it could
determine that we and AZL failed to qualify as a REIT in one or more of our
taxable years.
One of
our primary objectives, consistent with our policy of retaining sufficient cash
for reserves and working capital purposes and maintaining our status as a REIT,
is to distribute a substantial portion of our funds available from operations to
our common stockholders and UPREIT unit holders in the form of dividends or
distributions on a quarterly basis. Dividends and distributions by the Company
are contingent upon the Company’s receipt of distributions on the Common Units
from the Operating Partnership. The Operating Partnership is prohibited from
making distributions on the Common Units unless all accumulated distributions on
the Preferred Units have been paid, except to pay certain operating expenses of
the Company and for the purposes of maintaining our qualification as a REIT. As
of December 31, 2009, we considered market factors and our performance in
addition to REIT requirements in determining distribution levels.
During
fiscal year 2008, we declared cash dividends of $0.05 per share for each of the
third and fourth quarters of 2008, which were paid on October 15, 2008 and
January 15, 2009 to our common stockholders of record as of September 30, 2008
and December 31, 2008, respectively. Commensurate with our
declaration of these dividends, we declared cash distributions in the amount of
$0.05 per Common Unit and 2% cumulative unpaid and current distributions per
Preferred Unit, which were paid on October 15, 2008 and January 15, 2009 to
holders of record as of September 30, 2008 and December 31, 2008,
respectively.
During
fiscal year 2009, we declared quarterly cash dividends of $0.05 per share, which
were paid on April 15, July 15, October 15, 2009 and January 15, 2010 to
our common stockholders of record as of March 31, June 30, September 30,
2009 and December 31, 2009, respectively. Commensurate with our declaration of
these quarterly cash dividends, we also declared quarterly cash distributions of
$0.05 per Common Unit and $0.125 per Preferred Unit, which were paid on April
15, July 15, October 15, 2009 and January 15, 2010 to holders of record as
of March 31, June 30, September 30, 2009 and December 31, 2009,
respectively.
45
Amounts
accumulated for distribution to stockholders and UPREIT unit holders are
invested primarily in interest-bearing accounts which are consistent with our
intention to maintain our qualification as a REIT. At December 31, 2009,
the cumulative unpaid distributions attributable to Preferred Units were
$0.57 million, which were paid on January 15, 2010.
Related
Party Transactions
We are
externally advised by the Advisor, an entity owned and controlled by Mr. Shidler
and by its directors and officers, certain of whom are also our executive
officers and who own substantial beneficial interests in our Company. For a more
detailed discussion of our Advisor and other related party transactions, see
Note 13 to our combined consolidated financial statements included in this
Annual Report on Form 10-K.
Recent
Accounting Pronouncements
Pronouncements
Affecting Fair Value Measurement
In
September 2006, the FASB issued guidance for using fair value to measure assets
and liabilities. We adopted this guidance for the valuation of financial assets
and liabilities in 2008 and the valuation of non-financial assets and
liabilities as of January 1, 2009. Our adoption of this guidance did
not have a material impact on our consolidated results of operations, financial
position or cash flow, as our derivative value is not significant.
In April
2009, the FASB issued guidance requiring disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. Our adoption of this guidance on
April 1, 2009 resulted in additional disclosures but did not have a material
impact on our consolidated financial position, results of operations or cash
flows.
Pronouncements
Affecting Future Property Acquisitions
In
December 2007, the FASB issued guidance broadening the fair value measurement
and recognition of assets acquired, liabilities assumed and interests
transferred as a result of business combinations. Under this pronouncement,
acquisition-related costs must be expensed rather than capitalized as part of
the basis of the acquired business. Companies are also required to enhance
disclosure to improve the ability of financial statement users to evaluate the
nature and financial effects of business combinations. We adopted the guidance
on January 1, 2009 and believe that such adoption could materially impact our
future consolidated financial results to the extent that we acquire significant
amounts of real estate or real estate related businesses, as related acquisition
costs will be expensed as incurred compared to the current practice of
capitalizing such costs and amortizing them over the estimated useful life of
the assets or real estate related businesses acquired.
In April
2009, the FASB issued guidance to address application issues raised by
preparers, auditors, and members of the legal profession on initial recognition
and measurement, subsequent measurement and accounting, and disclosure of assets
and liabilities arising from contingencies in a business
combination. Assets and liabilities arising from contingencies are
recognized at fair value on the acquisition date. We adopted this
guidance on July 1, 2009 and will apply it prospectively to business
combinations completed on or after that date. The impact of the
adoption will depend on the nature of acquisitions completed after July 1,
2009.
Pronouncements
Pertaining to our Investment in Unconsolidated Joint Ventures
In
November 2008, the FASB provided guidance for the accounting of contingent
consideration, recognition of other-than-temporary impairment (OTTI) of an
equity method investee, and change in level of ownership or degree of influence.
The accounting of contingent consideration might result in the recording of a
liability with an increase to the corresponding investment balance. The investor
must recognize its share of the investee’s impairment charges. A gain or loss to
the investor resulting from a change in level of ownership or influence must be
recognized in earnings of the investor. We adopted the guidance on January 1,
2009 and it did not have an impact on our consolidated financial position,
results of operations or cash flows. In the event that we acquire a controlling
interest in our existing investments in unconsolidated joint ventures, we
believe that the adoption of this guidance could materially impact our future
consolidated financial results.
46
In
June 2009, the FASB issued guidance which requires us to
perform an on-going reassessment of whether our enterprise is the primary
beneficiary of a variable interest entity. This analysis identifies the
primary beneficiary of a variable interest entity as the enterprise that has
both of the following characteristics: (i) the power to direct the activities of
a variable interest entity that most significantly impact the entity’s economic
performance, and (ii) the obligation to absorb losses of the entity that could
potentially be significant to the variable interest entity or the right to
receive benefits from the entity that could potentially be significant to the
variable interest entity. This guidance is effective for us beginning
January 1, 2010 and the adoption of this standard on our consolidated financial
statements will not have an impact on our consolidated financial position,
results of operations or cash flows.
Pronouncements
Pertaining to the Non-controlling Interests in our Operating
Partnership
In
December 2007, the FASB issued guidance which requires a non-controlling
interest in a subsidiary to be reported as equity and the amount of consolidated
net income specifically attributable to the non-controlling interest to be
identified in the combined consolidated financial statements. We must also be
consistent in the manner of reporting changes in the parent’s ownership interest
and the guidance requires fair value measurement of any non-controlling equity
investment retained in a deconsolidation. We adopted the guidance on January 1,
2009.
Concurrently
with the adoption of the guidance regarding non-controlling interests, we also
adopted guidance which required us to present the limited partnership common and
preferred interests in the UPREIT in the mezzanine section of our consolidated
balance sheets because the decision to redeem for cash or Company shares is not
solely within the control of the Company. Because some of the Company’s
directors also own limited partnership common and preferred interests indirectly
through Venture combined with the existence of the Proportionate Voting
Preferred Stock we have determined that there are hypothetical situations where
the holders of our partnership units could control the method of redemption
(cash or Company shares) and therefore these partnership units required
mezzanine presentation in our consolidated balance sheet at December 31, 2008
before the modification of the redemption features. In addition, we were
required to measure our outstanding Common Units at redemption value because the
units are considered redeemable for shares or cash outside the control of the
Company after March 19, 2010. Our Preferred Units did not require
redemption value measurement because these units were not considered redeemable
until no earlier than the later of (i) March 19, 2010, and (ii) the date we
consummate an underwritten public offering (of at least $75 million) of our
common stock. In the capital market environment at the time,
management did not consider the completion of the public stock offering probable
at the time. Furthermore, in the event that we acquire a controlling
interest in our existing investments in unconsolidated joint ventures, we
believe that the adoption of this guidance could materially impact our future
consolidated financial results, as our existing investments would be adjusted to
fair value at the date of acquisition of the controlling
interest. See Note 12 to our combined consolidated financial
statements included in this Annual Report on Form 10-K for additional
information regarding non-controlling interests.
Pronouncement
Affecting Treatment of Nonvested Share-Based Payments in Net Loss Available to
Common Stockholders per Share
In June
2008, the FASB issued guidance that requires that share-based payment awards
that are not fully vested and contain non-forfeitable rights to receive
dividends or dividend equivalents declared on our common stock be treated as
participating securities in the computation of EPS pursuant to the two-class
method. Dividend equivalents corresponding to the cash dividends
declared on our common stock are forfeitable for unvested restricted stock
unit awards granted to our board of directors, as described in Note 14,
“Share-Based Payments”. We applied this guidance retrospectively to
all periods presented for fiscal years beginning after December 15, 2008, which
for us means January 1, 2009. The adoption of this guidance did not have an
impact on our consolidated financial position, results of operations and cash
flows.
47
Pronouncements
Resulting in Modified Disclosures in the Financial Statements
In May
2009, the FASB established general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued. We adopted this guidance during the quarter ended June
30, 2009 and it resulted in additional disclosure but did not have a material
impact on our financial statements. In February 2010, the guidance
was amended, eliminating the requirement to disclose the date through which
subsequent events were evaluated.
In June
2009, the FASB Accounting Standards Codification was established as the source
of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with GAAP. The guidance does not change GAAP but changed
how we reference GAAP in our consolidated financial statements beginning with
the Form 10-Q for the period ended September 30, 2009.
ITEM 7A. - QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM 8. - FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Our
combined consolidated financial statements and supplementary data are included
as a separate section of this Annual Report on Form 10-K commencing on page
F-1 and are incorporated herein by reference.
ITEM 9. - CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE
None.
48
ITEM 9A(T). - CONTROLS
AND PROCEDURES
Evaluation
of disclosure controls and procedures –
As
required by Rule 13a-15(b) of the Exchange Act, in connection with the
filing of this Annual Report on Form 10-K, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15 (e) and 15d-15(e) of the Exchange Act) as of the end
of the period covered by this Annual Report on Form 10-K. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of
December 31, 2009, the end of the period covered by this
report.
Management’s
Report on Internal Control Over Financial Reporting –
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act). Our management assessed the effectiveness of
our internal control over financial reporting as of December 31, 2009. In
making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Controls - Integrated
Framework. Our management has concluded that, as of December 31,
2009, our internal control over financial reporting was effective based on these
criteria.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
Changes
in Internal Control Over Financial Reporting –
There
have been no changes that occurred during the fourth quarter of the fiscal year
covered by this report in our internal control over financial reporting
identified in connection with the evaluation referenced above that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. - OTHER
INFORMATION
None.
49
PART III
ITEM 10. - DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information
required by Item 10 is incorporated by reference to our definitive proxy
statement for our annual stockholders’ meeting presently scheduled to be held in
May 2010.
ITEM 11. - EXECUTIVE
COMPENSATION
Information
required by Item 11 is incorporated by reference to our definitive proxy
statement for our annual stockholders’ meeting presently scheduled to be held in
May 2010.
ITEM
12. - SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND
MANAGEMENT AND
RELATED
STOCKHOLDER MATTERS
Information
required by Item 12 is incorporated by reference to our definitive proxy
statement for our annual stockholders’ meeting presently scheduled to be held in
May 2010.
ITEM 13. - CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information
required by Item 13 is incorporated by reference to our definitive proxy
statement for our annual stockholders’ meeting presently scheduled to be held in
May 2010.
ITEM 14. - PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Information
required by Item 14 is incorporated by reference to our definitive proxy
statement for our annual stockholders’ meeting presently scheduled to be held in
May 2010.
50
PART IV
ITEM 15. - EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
(a)
|
(1)
and (2) Financial Statements and
Financial Statement Schedule
|
Index to Financial
Statements
|
|
Page No.
|
|||||
• |
Report
of Independent Registered Public Accounting Firm Ernst & Young
LLP.
|
F-1 | |||||
• |
Report
of Independent Registered Public Accounting Firm PricewaterhouseCoopers
LLP.
|
F-2 | |||||
• |
Consolidated
Balance Sheets of the Company as of December 31, 2009 and December
31, 2008
|
F-3 | |||||
• |
Combined
Consolidated Statements of Operations, of the Company for the years ended
December 31, 2009 and December 31, 2008
|
F-4 | |||||
• |
Consolidated
Statements of Equity (Cumulative Deficit) of the Company for the year
ended December 31, 2009 and the period from March 20, 2008 through
December 31, 2008, and for Waterfront, for the period from
January 1, 2008 through March 19, 2008
|
F-5 | |||||
• |
Combined
Consolidated Statements of Cash Flows, of the Company for the years ended
December 31, 2009 and December 31, 2008
|
F-6 | |||||
• |
Notes
to Combined Consolidated Financial Statements
|
F-7 | |||||
• |
Schedule
III – Real Estate and Accumulated Depreciation as of December 31,
2009
|
F-39 | |||||
All
other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the combined
consolidated financial statements or notes thereto.
|
51
(3) List
of Exhibits.
Exhibit No.
|
Description
|
3.1
|
Articles
of Amendment and Restatement of the Company (previously filed as Exhibit
3.1 to the Company’s Quarterly Report on Form 10-Q filed November 23, 2009
(File No. 001-09900) and incorporated herein by
reference).
|
3.2
|
Articles
Supplementary of the Company dated November 20, 2009 (previously filed as
Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed November
23, 2009 (File No. 001-09900) and incorporated herein by
reference).
|
3.3
|
Articles
of Amendment of the Company dated November 20, 2009 (previously filed as
Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q filed November
23, 2009 (File No. 001-09900) and incorporated herein by
reference).
|
3.4
|
Articles
of Amendment of the Company dated January 5, 2010 (previously filed as
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed January 5,
2010 (File No. 001-09900) and incorporated herein by
reference).
|
3.5
|
Articles
Supplementary of Board of Directors Reclassifying and Designating a series
of common stock as Senior Common Stock, dated March 4, 2010 (previously
filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed
March 9, 2010 (File No. 001-09900) and incorporated herein by
reference).
|
3.6
|
Amended
and Restated Bylaws (previously filed as Exhibit 3.2 to the Company’s
Current Report on Form 8-K filed March 25, 2008 (File No. 001-09900) and
incorporated herein by reference).
|
10.1
|
Advisory
and Servicing Agreement between ALI Advisor, Inc. and the Company dated
June 13, 1988 (previously filed as Exhibit 10.1 to the Company’s
Annual Report on Form 10-KSB filed March 31, 2005 (File No.
001-09900) and incorporated herein by reference).
|
10.2
|
Indemnification
Agreement dated May 12, 1992 between the Company and Robert Blackwell
(previously filed as Exhibit 10.2 to the Company’s Annual Report on
Form 10-KSB filed March 31, 2005 (File No. 001-09900) and
incorporated herein by reference).
|
10.3
|
Indemnification
Agreement dated October 1, 1991 between the Company and Burton
Freireich (previously filed as Exhibit 10.3 to the Company’s Annual
Report on Form 10-KSB filed March 31, 2005 (File No. 001-09900)
and incorporated herein by reference).
|
10.4
|
Master
Formation and Contribution Agreement dated October 3, 2006 between
the registrant and POP Venture, LLC (previously filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed on October 3,
2006 (File No. 001-09900) and incorporated herein by
reference).
|
10.5
|
Amendment
and Exhibit Acknowledgement to Master Formation and Contribution
Agreement, dated November 2, 2006, between the Company and POP
Venture, LLC (previously filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on November 6, 2006 (File No.
001-09900) and incorporated herein by reference).
|
10.6
|
Second
Amendment to Master Formation and Contribution Agreement, dated
December 7, 2006, between the Company and POP Venture, LLC
(previously filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on December 11, 2006 (File No. 001-09900) and
incorporated herein by reference).
|
10.7
|
Third
Amendment to Master Formation and Contribution Agreement, dated
December 7, 2006, between the Company and POP Venture, LLC
(previously filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on March 29, 2007 (File No. 001-09900) and
incorporated herein by reference).
|
10.8
|
Fourth
Amendment to Master Formation and Contribution Agreement, dated
November 9, 2007, between the Company and POP Venture, LLC
(previously filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on November 13, 2007 (File No. 001-09900) and
incorporated herein by reference).
|
10.9
|
Master
Amendment to Contribution Agreements, dated November 9, 2007, between
the Company and POP Venture, LLC (previously filed as Exhibit 10.2 to
the Company’s Current Report on Form 8-K filed on November 13,
2007 (File No. 001-09900) and incorporated herein by
reference).
|
52
Exhibit No.
|
Description
|
10.10
|
Form
of Contribution Agreement, dated November 2, 2006, between the
Company and POP Venture, LLC (previously filed as Exhibit 2.1 to the
Company’s Current Report on Form 8-K filed on November 6, 2006
(File No. 001-09900) and incorporated herein by
reference).
|
10.11
|
Noncompetition
Agreement, dated as of March 19, 2008, between Pacific Office
Properties, L.P. and Jay H. Shidler (previously filed as Exhibit 10.4 to
the Company’s Current Report on Form 8-K filed March 25, 2008 (File No.
001-09900) and incorporated herein by reference).
|
10.12
|
Form
of Indemnity Agreement, dated as of March 19, 2008 (previously filed
as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed March
25, 2008 (File No. 001-09900) and incorporated herein by
reference).
|
10.13
|
Purchase
and Contribution Agreement and Joint Escrow Instructions dated as of
February 27, 2008 between Buie Carlsbad LLC and Shidler West
Investment Partners, LP (previously filed as Exhibit 10.5 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2008 (File No. 001-09900) and incorporated herein by
reference).
|
10.14
|
Membership
Interest Purchase Agreement dated as of April 30, 2008 by and among
the Pacific Office Properties, L.P., and STIRR Black Canyon, LLC, and
POP/BC Mezzanine, L.L.C. (previously filed as Exhibit 10.6 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2008 (File No. 001-09900) and incorporated herein by
reference).
|
10.15
|
Membership
Interest Purchase Agreement dated as of May 23, 2008 by and among the
Pacific Office Properties, L.P., STIRR USB Towers, LLC and POP/USB
Partners, LLC (previously filed as Exhibit 10.7 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (File
No. 001-09900) and incorporated herein by reference).
|
10.16
|
Membership
Interest Purchase Agreement dated as of May 23, 2008 by and among the
Pacific Office Properties, L.P., STIRR 2155 Kalakaua, LLC and 2155
Mezzanine, LLC (previously filed as Exhibit 10.8 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (File
No. 001-09900) and incorporated herein by reference).
|
10.17
|
Form
of Promissory Note (previously filed as Exhibit 10.11 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended June 30,
2008 (File No. 001-09900) and incorporated herein by
reference).
|
10.18
|
Membership
Interest Purchase Agreement dated as of August 14, 2008, by and
between STIRR SoCal Portfolio II, LLC and Pacific Office Properties, L.P.
(previously filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed August 20, 2008 (File No. 001-09900) and
incorporated herein by reference).
|
10.19
|
Credit
Agreement dated as of August 25, 2008, by and among Pacific Office
Properties, L.P., Keybank National Association, and Keybank Capital
Markets (previously filed as Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed August 29, 2008 (File
No. 001-09900) and incorporated herein by
reference).
|
10.20
|
Amended
and Restated Advisory Agreement dated as of March 3, 2009, by and
among the Company, Pacific Office Properties, L.P., and Pacific Office
Management, Inc. (previously filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed March 9, 2009 (File
No. 001-09900) and incorporated herein by
reference).
|
10.21
|
First
Amendment to Amended and Restated Advisory Agreement dated as of September
25, 2009, by and among the Company, Pacific Office Properties, L.P., and
Pacific Office Management, Inc. (previously filed as Exhibit 10.3 to
the Company’s Current Report on Form 8-K filed September 28, 2009 (File
No. 001-09900) and incorporated herein by reference).
|
10.22
|
Pacific
Office Properties Trust, Inc. 2008 Directors’ Stock Plan (previously filed
as Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A
filed April 1, 2009 (File No. 001-09900) and incorporated herein by
reference).
|
10.23
|
Form
of Restricted Stock Unit Award Agreement under the Company’s 2008
Directors’ Stock Plan (previously filed as Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2009 (File No. 001-09900) and incorporated herein by
reference).
|
10.24
|
Exchange
Agreement, dated as of September 23, 2009, by and among Pacific Office
Properties, L.P., Shidler Equities, L.P., Reynolds Partners, L.P., MJR
Equities, LLC, JRI Equities, LLC and Lawrence J. Taff (previously filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
September 28, 2009 (File No. 001-09900) and incorporated herein by
reference).
|
10.25
|
Credit
Agreement dated as of September 2, 2009 between Pacific Office Properties,
L.P. and First Hawaiian Bank (previously filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed September 4, 2009 (File
No. 001-09900) and incorporated herein by
reference).
|
53
Exhibit No.
|
Description
|
10.26
|
Promissory
Note dated September 2, 2009 issued by Pacific Office Properties, L.P. to
First Hawaiian Bank (previously filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed September 4, 2009 (File
No. 001-09900) and incorporated herein by
reference).
|
10.27
|
Indemnification
Agreement dated as of September 2, 2009 between Pacific Office Properties,
L.P. and Shidler Equities L.P. (previously filed as Exhibit 10.3 to
the Company’s Current Report on Form 8-K filed September 4, 2009
(File No. 001-09900) and incorporated herein by
reference).
|
10.28
|
Amendment
to Loan Documents, dated as of December 31, 2009, among First Hawaiian
Bank, Pacific Office Properties, L.P. and Shidler Equities L.P.
(previously filed as Exhibit 10.2 to the Company’s Current Report on Form
8-K filed January 5, 2010 (File No. 001-09900) and incorporated herein by
reference).
|
10.29
|
Amendment
to Indemnification Agreement, dated as of December 31, 2009, between
Pacific Office Properties, L.P. and Shidler Equities L.P. (previously
filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed
January 5, 2010 (File No. 001-09900) and incorporated herein by
reference).
|
10.30
|
Second
Amended and Restated Agreement of Limited Partnership of Pacific Office
Properties, L.P. dated as of December 30, 2009 (previously filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 5,
2010 (File No. 001-09900) and incorporated herein by
reference).
|
10.31
|
Dealer
Manager Agreement, dated as of January 12, 2010, between the Company and
Priority Capital Investments, LLC (previously filed as Exhibit 1.1 to
Amendment No. 2 to the Company’s Registration Statement on Form S-11 (File
No. 333-157128) on January 6, 2010 and incorporated herein by
reference).
|
21.1
|
Subsidiaries
of Pacific Office Properties Trust, Inc. (Filed
herewith)
|
23.1
|
Consent
of Ernst & Young LLP. (Filed herewith.)
|
23.2
|
Consent
of PricewaterhouseCoopers LLP. (Filed
herewith.)
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed herewith.)
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed herewith.)
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
|
54
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PACIFIC
OFFICE PROPERTIES TRUST, INC.
|
||
Date:
March 22, 2010
|
By:
|
/s/ Jay H.
Shidler
Jay
H. Shidler
Chairman
of the Board and Chief Executive
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated.
Name
|
Title
|
Date
|
/s/ Jay H. Shidler
|
Chairman
of the Board and Chief Executive Officer
|
March
22, 2010
|
Jay
H. Shidler
|
(Principal
Executive Officer)
|
|
/s/ Lawrence J. Taff
|
Chief
Financial Officer
|
March
22, 2010
|
Lawrence
J. Taff
|
(Principal
Financial and Accounting Officer)
|
|
/s/ Michael W. Brennan
|
Director
|
March
22, 2010
|
Michael
W. Brennan
|
||
/s/ Robert L. Denton
|
Director
|
March
22, 2010
|
Robert
L. Denton
|
||
/s/ Clay W. Hamlin
|
Director
|
March
22, 2010
|
Clay
W. Hamlin
|
||
/s/ Paul M. Higbee
|
Director
|
March
22, 2010
|
Paul
M. Higbee
|
||
/s/ Thomas R. Hislop
|
Director
|
March
22, 2010
|
Thomas
R. Hislop
|
55
Report
of Independent Auditors
To the
Board of Directors and Stockholders of
Pacific
Office Properties Trust, Inc.:
We have
audited the accompanying consolidated balance sheet, of Pacific Office
Properties Trust, Inc., (the Company) as of December 31, 2009, and the related
combined consolidated statements of operations, equity, and cash flows for the
year ended December 31, 2009. These financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audit. The consolidated financial statements of the Company for the
year ended December 31, 2008, were audited by other auditors whose reports dated
March 27, 2009, and were restated on November 23, 2009, both of which expressed
an unqualified opinion on those statements.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Pacific Office
Properties Trust, Inc. at December 31, 2009, and the combined consolidated
results of its operations and its cash flows for the year ended December 31,
2009, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young
LLP
Los
Angeles, California
F-1
Report of Independent
Registered Public Accounting Firm
To the
Board of Directors and Stockholders of
Pacific
Office Properties Trust, Inc.:
In our
opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders’ equity (members’
deficit), and of cash flows present fairly, in all material respects, the
financial position of Pacific Office Properties Trust, Inc. (the “Company”) at
December 31, 2008 and the results of their operations and their cash flows
for the period from March 20, 2008 to December 31, 2008 in conformity
with accounting principles generally accepted in the United States of America.
Also in our opinion, the accompanying consolidated statements of operations, of
stockholders’ equity (members’ deficit) and of cash flows present fairly, in all
material respect the results of operations and cash flows of Waterfront Partners
OP, LLC (“Waterfront”) for the period from January 1, 2008 through
March 19, 2008 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company’s and Waterfront’s management. Our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
LLP
Los
Angeles, California
March 27,
2009 except for the effects of the retrospective adoption of ASC 810
"Consolidation" and ASC 480-10-S99 "Distinguishing Liabilities from Equity," as
to which the date is November 23, 2009
F-2
Pacific
Office Properties Trust, Inc.
Consolidated
Balance Sheets
(in
thousands, except share data)
December
31, 2009
|
December
31, 2008
|
|||||||
ASSETS
|
||||||||
Investments
in real estate, net
|
$ | 382,950 | $ | 392,657 | ||||
Cash
and cash equivalents
|
3,195 | 4,463 | ||||||
Restricted
cash
|
6,507 | 7,267 | ||||||
Rents
and other receivables, net
|
6,471 | 6,342 | ||||||
Intangible
assets, net
|
33,228 | 41,379 | ||||||
Other
assets, net
|
5,055 | 4,680 | ||||||
Goodwill
|
62,019 | 61,519 | ||||||
Investment
in unconsolidated joint ventures
|
10,911 | 11,590 | ||||||
Total
assets
|
$ | 510,336 | $ | 529,897 | ||||
LIABILITIES
AND EQUITY
|
||||||||
Mortgage
and other loans, net
|
$ | 406,439 | $ | 400,108 | ||||
Unsecured
notes payable to related parties
|
21,104 | 23,776 | ||||||
Accounts
payable and other liabilities
|
22,000 | 17,088 | ||||||
Acquired
below market leases, net
|
9,512 | 11,817 | ||||||
Total
liabilities
|
459,055 | 452,789 | ||||||
Commitments
and contingencies
|
||||||||
Non-controlling
interests
|
- | 133,250 | ||||||
Equity:
|
||||||||
Preferred
stock, $0.0001 par value, 100,000,000 shares authorized, one share of
Proportionate
|
||||||||
Voting
Preferred Stock issued and outstanding at December 31, 2009 and December
31, 2008
|
- | - | ||||||
Common
Stock, $0.0001 par value, 239,999,900 shares authorized, 3,850,420 shares
issued and outstanding at
|
- | - | ||||||
December
31, 2009; 200,000,000 shares authorized, 3,031,025 shares issued and
outstanding at December 31, 2008
|
185 | 185 | ||||||
Class
B Common Stock, $0.0001 par value, 100 shares authorized, issued and
outstanding at December 31, 2009;
|
- | - | ||||||
200,000
shares authorized, 100 shares issued and outstanding at December 31,
2008
|
- | - | ||||||
Additional
paid-in capital
|
- | - | ||||||
Cumulative
deficit
|
(132,511 | ) | (56,327 | ) | ||||
Total
stockholders' equity
|
(132,326 | ) | (56,142 | ) | ||||
Non-controlling
interests
|
183,607 | - | ||||||
Total
equity
|
51,281 | (56,142 | ) | |||||
Total
liabilities and equity
|
$ | 510,336 | $ | 529,897 | ||||
See
accompanying notes to combined consolidated financial statements.
F-3
Pacific
Office Properties Trust, Inc.
Combined
Consolidated Statements of Operations
(in
thousands, except share and per share data)
For
the year ended December 31,
|
||||||||
2009
|
2008
(1)
|
|||||||
Revenue:
|
||||||||
Rental
|
$ | 42,462 | $ | 37,447 | ||||
Tenant
reimbursements
|
21,662 | 19,375 | ||||||
Parking
|
8,150 | 6,890 | ||||||
Other
|
365 | 394 | ||||||
Total
revenue
|
72,639 | 64,106 | ||||||
Expenses:
|
||||||||
Rental
property operating
|
39,480 | 37,714 | ||||||
General
and administrative
|
2,649 | 18,577 | ||||||
Depreciation
and amortization
|
27,240 | 22,295 | ||||||
Interest
|
27,051 | 22,932 | ||||||
Loss
on extinguishment of debt
|
171 | - | ||||||
Other
|
- | 143 | ||||||
Total
expenses
|
96,591 | 101,661 | ||||||
Loss
before equity in net earnings of unconsolidated
|
||||||||
joint
ventures and non-operating income
|
(23,952 | ) | (37,555 | ) | ||||
Equity
in net earnings of unconsolidated joint ventures
|
313 | 93 | ||||||
Non-operating
income
|
434 | 85 | ||||||
Net
loss
|
(23,205 | ) | (37,377 | ) | ||||
Fair
value adjustment of Preferred Units (Note 12)
|
(58,645 | ) | - | |||||
Net
loss attributable to non-controlling interests
|
66,237 | 29,557 | ||||||
Net
loss attributable to common stockholders
|
$ | (15,613 | ) | $ | (7,820 | ) | ||
Net
loss per common share - basic and diluted
|
$ | (4.79 | ) | (2) | ||||
Weighted
average number of common shares
|
||||||||
outstanding
- basic and diluted
|
3,259,013 | (2) | ||||||
|
(1)
|
Amounts
reflected in 2008 represent the sum of the amounts included herein as the
consolidated results of operations of Waterfront and the Company (the
“Combined Entity”) for the period from January 1, 2008 through December
31, 2008.
|
(2)
|
Refer
to Note 12 for our Earnings per Share calculation for the Combined
Entity.
|
See
accompanying notes to combined consolidated financial statements.
F-4
Pacific
Office Properties Trust, Inc.
Consolidated
Statements of Equity (Cumulative Deficit)
|
Pacific
Office Properties Trust, Inc.
|
Waterfront
|
||||||||||
|
For
the Period from
|
For
the Period from
|
||||||||||
|
March 20,
2008
|
January 1,
2008
|
||||||||||
|
Year
Ended
|
through
|
through
|
|||||||||
|
December 31,
2009
|
December 31,
2008
|
March
19, 2008
|
|||||||||
(In
thousands, except share and unit data)
|
||||||||||||
Common
Units:
|
||||||||||||
Balance
at beginning of period
|
14,299,267 | 3,494,624 | ||||||||||
Issuance
of Common Units
|
- | - | ||||||||||
Balance at end of
period:
|
14,299,267 | 3,494,624 | ||||||||||
Preferred
Units:
|
||||||||||||
Balance
at beginning of period
|
4,545,300 | - | ||||||||||
Issuance
of Preferred Units
|
- | - | ||||||||||
Balance at end of
period:
|
4,545,300 | - | ||||||||||
Shares
of Common Stock:
|
||||||||||||
Balance
at beginning of period
|
3,031,125 | 1,851,125 | - | |||||||||
Issuance
of common stock
|
819,395 | 1,180,000 | - | |||||||||
Balance at end of
period:
|
3,850,520 | 3,031,125 | - | |||||||||
Common
Stock:
|
||||||||||||
Balance
at beginning of period
|
$ | 185 | $ | - | $ | - | ||||||
AZL
stock converted to PCE stock
|
- | 185 | - | |||||||||
Issuance
of common stock
|
- | - | - | |||||||||
Balance at end of
period:
|
$ | 185 | $ | 185 | $ | - | ||||||
Additional
Paid-in Capital:
|
||||||||||||
Balance
at beginning of period
|
$ | - | $ | - | $ | - | ||||||
AZL
stock converted to PCE stock
|
- | 9,255 | - | |||||||||
Basis
adjustment
|
309 | - | - | |||||||||
Fair
value measurement of Common Units
|
(3,514 | ) | (15,698 | ) | - | |||||||
Issuance
of common stock
|
3,014 | 6,350 | - | |||||||||
Stock
compensation
|
191 | 93 | - | |||||||||
Balance at end of
period:
|
$ | - | $ | - | $ | - | ||||||
Cumulative
Deficit:
|
||||||||||||
Balance
at beginning of period
|
$ | (56,327 | ) | $ | (37,738 | ) | $ | (36,767 | ) | |||
Reclassify
Waterfront deficit to non-controlling interests
|
- | 37,738 | - | |||||||||
Net
loss
|
(15,613 | ) | (6,741 | ) | (971 | ) | ||||||
Fair
value measurement of Common Units
|
(59,880 | ) | (49,283 | ) | - | |||||||
Distributions
|
(691 | ) | (303 | ) | - | |||||||
Balance at end of
period:
|
$ | (132,511 | ) | $ | (56,327 | ) | $ | (37,738 | ) | |||
Total Stockholders'
Equity (Cumulative Deficit):
|
||||||||||||
Balance
at beginning of period
|
$ | (56,142 | ) | $ | (37,738 | ) | $ | (36,767 | ) | |||
Reclassify
Waterfront deficit to non-controlling interests
|
- | 37,738 | - | |||||||||
AZL
stock converted to PCE stock
|
- | 9,440 | - | |||||||||
Basis
adjustment
|
309 | - | - | |||||||||
Net
loss
|
(15,613 | ) | (6,741 | ) | (971 | ) | ||||||
Issuance
of common stock
|
3,014 | 6,350 | - | |||||||||
Distributions
|
(691 | ) | (303 | ) | - | |||||||
Fair
value measurement of Common Units
|
(63,394 | ) | (64,981 | ) | - | |||||||
Stock
compensation
|
191 | 93 | - | |||||||||
Balance at end of
period:
|
$ | (132,326 | ) | $ | (56,142 | ) | $ | (37,738 | ) | |||
Non-Controlling
Interests:
|
||||||||||||
Balance
at beginning of period
|
$ | - | $ | - | $ | - | ||||||
Reclassification
from Temporary Equity to Permanent Equity
|
133,250 | - | - | |||||||||
Net
loss
|
(66,237 | ) | - | - | ||||||||
Basis
adjustment
|
(309 | ) | - | - | ||||||||
Fair
value measurement of Common Units
|
63,394 | - | - | |||||||||
Fair
value measurement of Preferred Units
|
58,645 | - | - | |||||||||
Distributions
|
(5,136 | ) | - | - | ||||||||
Balance at end of
period:
|
$ | 183,607 | $ | - | $ | - | ||||||
Total
Equity:
|
$ | 51,281 | $ | (56,142 | ) | $ | (37,738 | ) | ||||
See accompanying notes to
combined consolidated financial statements.
F-5
Pacific
Office Properties Trust, Inc.
Combined
Consolidated Statements of Cash Flows
(in
thousands)
For
the year ended December 31, 2009
|
For
the year ended December 31, 2008 (1)
|
|||||||
Operating
activities
|
||||||||
Net
loss
|
$ | (23,205 | ) | $ | (37,377 | ) | ||
Adjustments
to reconcile net loss to net cash
|
||||||||
provided
by (used in) operating activities:
|
||||||||
Depreciation
and amortization
|
27,240 | 22,295 | ||||||
Interest
amortization
|
1,392 | 985 | ||||||
Share
based compensation charge attributable to the Transaction
|
- | 16,194 | ||||||
Write-off
of tax penalty accrual
|
(423 | ) | - | |||||
Other
share based compensation
|
191 | 93 | ||||||
Loss
from extinguishment of debt
|
171 | - | ||||||
Below
market lease amortization, net
|
(2,305 | ) | (2,439 | ) | ||||
Equity in net earnings of unconsolidated joint ventures
|
(313 | ) | (92 | ) | ||||
Net operating distributions received from unconsolidated
|
||||||||
joint
ventures
|
238 | 178 | ||||||
Bad
debt expense
|
712 | 937 | ||||||
Other
|
- | 368 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Rents
and other receivables
|
(841 | ) | (1,941 | ) | ||||
Other
assets
|
479 | 1,021 | ||||||
Accounts
payable and other liabilities
|
2,523 | 1,932 | ||||||
Net
cash provided by operating activities
|
5,859 | 2,154 | ||||||
Investing
activities
|
||||||||
Acquisition
and improvement of real estate
|
(5,982 | ) | (8,541 | ) | ||||
Investment
in unconsolidated joint venture
|
(1,468 | ) | - | |||||
Capital
distributions from equity investees
|
2,221 | 866 | ||||||
Payment
of leasing commissions
|
(1,011 | ) | (789 | ) | ||||
Cash
held by properties upon Effective Date
|
- | 6,470 | ||||||
Deferred
acquisition costs and other
|
- | (4,059 | ) | |||||
Decrease
(increase) in restricted cash
|
760 | (2,797 | ) | |||||
Net
cash used in investing activities
|
(5,480 | ) | (8,850 | ) | ||||
Financing
activities
|
||||||||
Proceeds
from issuance of equity securities
|
- | 6,350 | ||||||
Repayment
of mortgage notes payable
|
(404 | ) | (252 | ) | ||||
Proceeds
from mortgage notes payable
|
405 | - | ||||||
Repayments
of revolving credit facility
|
(3,000 | ) | (10,000 | ) | ||||
Borrowings
from revolving credit facility
|
8,947 | 13,000 | ||||||
Deferred
financing costs
|
(151 | ) | (1,339 | ) | ||||
Offering
costs
|
(1,842 | ) | - | |||||
Security
deposits
|
224 | 116 | ||||||
Dividends
|
(693 | ) | (152 | ) | ||||
Distributions
to non-controlling interests
|
(5,133 | ) | (1,925 | ) | ||||
Equity
contributions
|
- | 4,167 | ||||||
Equity
distributions
|
- | (1,425 | ) | |||||
Net
cash (used in) provided by financing activities
|
(1,647 | ) | 8,540 | |||||
(Decrease)
increase in cash and cash equivalents
|
(1,268 | ) | 1,844 | |||||
Balance
at beginning of period
|
4,463 | 2,619 | ||||||
Balance
at end of period
|
$ | 3,195 | $ | 4,463 | ||||
Supplemental
cash flow information
|
||||||||
Interest
paid
|
$ | 23,640 | $ | 22,804 | ||||
Supplemental
Disclosure of Non-Cash Investing and Financing Activities
|
||||||||
Exchange
of unsecured notes payable to related parties
|
$ | 3,014 | $ | - | ||||
for
common units
|
||||||||
Assets,
net, acquired on the Effective Date
|
$ | - | $ | 386,132 | ||||
Liabilities,
net, assumed on the Effective Date
|
$ | - | $ | 305,047 | ||||
Issuance
of unsecured notes payable to related parties to acquire managing
interests in joint ventures
|
$ | - | $ | 7,285 | ||||
Issuance
of common units to acquire managing joint venture
interests
|
$ | - | $ | 4,824 | ||||
Accrued
capital expenditures
|
$ | 794 | $ | 857 | ||||
(1)
|
Amounts
reflected in 2008 represent the sum of the amounts included herein as the
consolidated cash flows of the Combined Entity for the period
from January 1, 2008 through December 31,
2008.
|
See accompanying notes to combined
consolidated financial statements.
F-6
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
1. Organization
and Ownership
Pacific Office
Properties
The terms
“Pacific Office Properties,” “us,” “we,” and “our” as used in this Annual Report
on Form 10-K refer to Pacific Office Properties Trust, Inc. (the “Company”)
and its subsidiaries and joint ventures. Through our controlling interest in
Pacific Office Properties, L.P. (the “UPREIT” or the “Operating Partnership”),
of which we are the sole general partner, and the subsidiaries of the Operating
Partnership, we own and operate office properties in selected submarkets of long
term growth markets in Honolulu and the western United States, including
southern California and the greater Phoenix metropolitan area. We operate as a
real estate investment trust (“REIT”) for federal income tax purposes. We are
externally advised by Pacific Office Management, Inc., a Delaware corporation
(the “Advisor”), an entity owned and controlled by Jay H. Shidler, our Chairman
of the Board, and certain related parties of The Shidler Group, which is a
business name utilized by a number of affiliates controlled by Jay H. Shidler.
The Advisor is responsible for our day-to-day operation and
management.
Through
our Operating Partnership, as of December 31, 2009, we owned whole
interests in eight fee simple and leasehold office properties and we owned
ownership interests in seven joint ventures (including management ownership
interests in six of those seven) holding 16 office properties, comprising
approximately 4.7 million square feet of leasable area in Honolulu,
southern California and the greater Phoenix metropolitan areas (the “Property
Portfolio”). As of December 31, 2009, the portion of our Property
Portfolio, which was effectively owned by us (representing the leasable square
feet of our wholly-owned properties and our respective ownership interests in
our unconsolidated joint venture properties) (the “Effective Portfolio”),
comprised approximately 2.5 million leasable square feet. Our property
statistics as of December 31, 2009, were as follows:
Number of
|
Property
Portfolio
|
Effective
Portfolio
|
||||||||||||||
|
Properties
|
Buildings
|
Square Feet
|
Square Feet
|
||||||||||||
Wholly-owned
properties
|
8 | 11 | 2,265,339 | 2,265,339 | ||||||||||||
Unconsolidated
joint ventures properties
|
16 | 34 | 2,417,359 | 279,223 | ||||||||||||
Total
|
24 | 45 | 4,682,698 | 2,544,562 |
References
to square footage, acreage, occupancy or number of buildings made within the
notes to the combined consolidated financial statements are
unaudited.
Transactions
On March
19, 2008 (the “Effective Date”), Arizona Land Income Corporation, an Arizona
corporation (“AZL”), and POP Venture, LLC, a Delaware limited liability company
(“Venture”), consummated the transactions (the “Transactions”) contemplated by a
Master Formation and Contribution Agreement, dated as of October 3, 2006, as
amended (the “Master Agreement”). As part of the Transactions, AZL merged with
and into the Company, its wholly owned subsidiary, with the Company being the
surviving corporation. Substantially all of the assets and liabilities of AZL
and substantially all of the commercial real estate assets and liabilities of
Venture, which included eight office properties and a 7.5% joint venture
interest in one office property (the “Contributed Properties”), were contributed
to a newly formed Delaware limited partnership, the Operating Partnership, in
which the Company became the sole general partner and Venture became a limited
partner with corresponding 18.2% and 81.8% common ownership interests,
respectively.
For
financial accounting purposes, Waterfront Partners OP, LLC (“Waterfront”), which
had the largest interest in Venture, was designated as the acquiring entity in
the business combination. Accordingly, historical financial information for
Waterfront has also been presented in this Annual Report on Form 10-K
through the Effective Date. Additional
explanatory notations are contained in this Annual Report on Form 10-K to
distinguish the historical financial information of Waterfront from that of the
Company.
F-7
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
The
agreed upon gross asset value of the Contributed Properties, including related
intangible assets, was $563.0 million. The aggregate net asset value of the
Contributed Properties, including related intangible assets, was $151.5 million
on the Effective Date. In exchange for its contribution to the Operating
Partnership, Venture received 13,576,165 common limited partner unit interests
(“Common Units”) and 4,545,300 convertible preferred limited partner unit
interests (“Preferred Units”) in the Operating Partnership. The assets of AZL
contributed into the Operating Partnership primarily consisted of cash and cash
equivalents, investments in marketable securities, other assets and related
liabilities having an aggregate net asset value of approximately $3.03 million
on the Effective Date.
The
Common Units received by Venture represented 28.99% of the total estimated fair
value of the Common and Preferred Units issued in the Transactions and were
valued using an estimated fair value per share of $2.79 per share. The Preferred
Units represented 71.01% of the total estimated fair value of the units issued
in the Transactions. The contractual terms and provisions of the Preferred Units
included a beneficial conversion feature because it provided the holders with a
security whose market price was in excess of the carrying value of the
corresponding Common Units at the date of their issuance, March 19, 2008. See
Note 12 for a detailed discussion of our equity securities.
As part
of the Transactions, we issued to the Advisor one share of Proportionate Voting
Preferred Stock (the “Proportionate Voting Preferred Stock”), which entitles the
Advisor to vote on any matters presented to our stockholders, and which
represents that number of votes equal to the total number of shares of common
stock issuable upon redemption of the Common Units and Preferred Units that were
issued in connection with the Transactions. As of December 31, 2009, that share
of Proportionate Voting Preferred Stock represented approximately 92.3% of our
voting power. This number will decrease to the extent that these Operating
Partnership units are redeemed for shares of common stock in the future, but
will not increase in the event of future unit issuances by the Operating
Partnership. Venture, as the holder of these Operating Partnership units, has a
contractual right to require the Advisor to vote the Proportionate Voting
Preferred Stock as directed by Venture.
As of
December 31, 2009, Venture owned 46,173,693 shares of our common stock assuming
that all Operating Partnership units were fully redeemed for shares on such
date, notwithstanding the prohibition on redemption for at least two years after
the Transactions in the case of the Common Units, and for at least three years,
in the case of the Preferred Units and the change of the redemption features
that occurred on December 30, 2009 (see Note 12 for additional detail). Assuming
the immediate redemption of all the Operating Partnership units held by Venture,
Venture and its related parties control approximately 93.8% and 95.9% of the
total economic interest and voting power, respectively, in the
Company.
As part
of the Transactions, we issued promissory notes payable by the Operating
Partnership to certain members of Venture in the aggregate principal amount of
$16.7 million in consideration for such members’ contribution of certain
properties. The promissory notes accrue interest at a rate of 7% per annum, with
interest payable quarterly, subject to the Operating Partnership’s right to
defer the interest payments for any or all periods up until the date of
maturity. The promissory notes mature on various dates commencing March 19, 2013
through August 31, 2013, but the Operating Partnership may elect to extend
maturity for one additional year. Maturity accelerates upon the occurrence of a)
a qualified public offering, as defined under the Master Agreement; b) the sale
of substantially all the assets of the Company; or c) the merger of the Company
with another entity. The promissory notes are unsecured obligations of the
Operating Partnership.
As part
of the Transactions, we issued one million shares of our common stock to related
party designees of Venture for $5.00 per share in cash and 180,000 shares of our
common stock to an unrelated third party designee of Venture for $7.50 per share
in cash. We contributed the proceeds received from these common stock issuances,
along with substantially all of our assets and liabilities, to the Operating
Partnership on the Effective Date.
Since the
Effective Date substantially all of our operations have been carried out through
the Operating Partnership and its subsidiaries.
F-8
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
In
accordance with the partnership agreement of the Operating Partnership (the
“Partnership Agreement”), we allocate all distributions and profits and losses
in proportion to the percentage ownership interests of the respective partners.
As the sole general partner of the Operating Partnership, we are required to
take such reasonable efforts, as determined by us in our sole discretion, to
cause the Operating Partnership to make sufficient distributions to avoid any
federal income or excise tax at the company level and to maintain our status as
a REIT for federal income tax purposes.
Advisor
We are
externally advised by the Advisor, an entity owned and controlled by our
founder, The Shidler Group. The Advisor manages, operates and administers the
Company’s day-to-day operations, business and affairs pursuant to an Amended and
Restated Advisory Agreement dated as of March 3, 2009 (as amended, the “Advisory
Agreement”). See Note 13 for a detailed discussion of the Advisor’s role and the
Advisory Agreement.
|
2. Summary
of Significant Accounting Policies
|
Basis
of Presentation
The
accompanying combined consolidated financial statements and related disclosures
included herein have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).
As
further described in Note 1, Waterfront was designated as the acquiring
entity in the business combination for accounting purposes. Accordingly,
historical financial information for Waterfront has also been presented in this
Annual Report on Form 10-K. Explanatory notations have been made where
appropriate in this Annual Report on Form 10-K to distinguish the
historical financial information of Waterfront from that of the
Company.
Certain
amounts in the combined consolidated financial statements for prior periods have
been reclassified to conform to the current period presentation with no
corresponding net effect on the previously reported consolidated results of
operations, or financial position of the Company.
Principles
of Consolidation
The
accompanying combined consolidated financial statements include the account
balances and transactions of consolidated subsidiaries, which are wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Investment
in Unconsolidated Joint Ventures
Our
investments in joint ventures that are not variable interest entities are
accounted for under the equity method of accounting because we exercise
significant influence over, but do not control, our joint ventures. Our joint
venture partners have substantive participating rights, including approval of
and participation in setting operating budgets. Accordingly, we have determined
that the equity method of accounting is appropriate for our investments in joint
ventures. We have determined that one of our joint ventures is a
variable interest entity. We are not deemed to be the primary beneficiary of
that variable interest entity.
Investments
in unconsolidated joint ventures are initially recorded at cost and are
subsequently adjusted for our proportionate equity in the net income or net loss
of the joint ventures, contributions made to, or distributions received from,
the joint ventures and other adjustments. We record distributions of operating
profit from our investments as part of cash flows from operating activities and
distributions related to a capital transaction, such as a refinancing
transaction or sale, as investing activities in the combined consolidated
statements of cash flows. A description of our impairment policy is set forth in
this Note 2.
The
difference between the initial cost of the investment in our joint ventures
included in our consolidated balance sheet and the underlying equity in net
assets of the respective joint ventures (“JV Basis Differential”) is amortized
as an adjustment to equity in net income or net loss of the joint ventures in
our combined consolidated statement of operations over the estimated useful
lives of the underlying assets of the respective joint ventures.
F-9
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
Income
Taxes
We have
elected to be taxed as a REIT under the Internal Revenue Code (“Code”). To
qualify as a REIT, we must meet a number of organizational and operational
requirements, including a requirement that we currently distribute at least 90%
of our REIT taxable income to our stockholders. Also, at least 95% of gross
income in any year must be derived from qualifying sources. We intend to adhere
to these requirements and maintain our REIT status. As a REIT, we generally will
not be subject to corporate level federal income tax on taxable income that we
distribute currently to our stockholders. However, we may be subject to certain
state and local taxes on our income and property, and to federal income and
excise taxes on our undistributed taxable income, if any. Management believes
that it has distributed and will continue to distribute a sufficient majority of
its taxable income in the form of dividends and distributions to its
stockholders and unit holders. Accordingly, no provision for income taxes has
been recognized by the Company.
Pursuant
to the Code, we may elect to treat certain of our newly created corporate
subsidiaries as taxable REIT subsidiaries (“TRS”). In general, a TRS may perform
non-customary services for our tenants, hold assets that we cannot hold directly
and generally engage in any real estate or non-real estate related business. A
TRS is subject to corporate federal income tax. As of December 31, 2009 and
December 31, 2008, none of our subsidiaries was considered a
TRS.
Earnings
per Share
Pacific
Office Properties Trust, Inc.
We
present both basic and diluted earnings per share (“EPS”). Basic EPS is computed
by dividing net income available to common stockholders by the weighted average
number of common shares outstanding during each period.
Diluted
EPS is computed by dividing net income available to common stockholders for the
period by the number of common shares that would have been outstanding assuming
the issuance of common shares for all potentially dilutive common shares
outstanding during such period.
Waterfront
We
computed net loss per Common Unit for the periods prior to the Transactions by
increasing the historical net loss of Waterfront by the 2% cumulative
distributions payable on the Preferred Units received by the former owners of
Waterfront and dividing that total by the weighted average number of Common
Units received by the former owners of Waterfront. We did not include the
dilution impact of Preferred Units because the units are contingently
convertible and the probability that the contingency will be satisfied is
currently not determinable.
Real
Estate Properties
Acquisitions
We
account for acquisitions utilizing the acquisition method and, accordingly, the
results of operations of acquired properties are included in our results of
operations from the respective dates of acquisition.
Investments
in real estate are stated at cost, less accumulated depreciation and
amortization, except for the assets of Waterfront and certain assets comprising
the Contributed Properties. The assets of Waterfront are stated at their
historical net cost basis as Waterfront was designated as the acquiring entity
in the business combination for accounting purposes. A portion of certain assets
comprising the Contributed Properties are stated at their historical net cost
basis in an amount attributable to the ownership interests in the Contributed
Properties owned by the controlling owner of Waterfront. Additions to land,
buildings and improvements, furniture, fixtures and equipment and construction
in progress are recorded at cost.
F-10
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
Costs
associated with developing space for its intended use are capitalized and
amortized over their estimated useful lives, commencing at the earlier of the
lease execution date or the lease commencement date.
Estimates
of future cash flows and other valuation techniques are used to allocate the
acquisition cost of acquired properties among land, buildings and improvements,
and identifiable intangible assets and liabilities such as amounts related to
in-place at-market leases, acquired above- and below-market leases, and acquired
above- and below-market ground leases.
The fair
values of real estate assets acquired are determined on an “as-if-vacant” basis.
The “as-if-vacant” fair value is allocated to land, and where applicable,
buildings, tenant improvements and equipment based on comparable sales and other
relevant information obtained in connection with the acquisition of the
property.
Fair
value is assigned to above-market and below-market leases based on the
difference between (a) the contractual amounts to be paid by the tenant based on
the existing lease and (b) management’s estimate of current market lease rates
for the corresponding in-place leases, over the remaining terms of the in-place
leases. Capitalized above and below-market lease amounts are reflected in
“Acquired below market leases, net” in the consolidated balance sheets.
Capitalized above-market lease amounts are amortized as a decrease to rental
revenue over the remaining terms of the respective leases. Capitalized
below-market lease amounts are amortized as an increase in rental revenue over
the remaining terms of the respective leases. If a tenant vacates its space
prior to the contractual termination of the lease and no rental payments are
being made on the lease, any unamortized balance, net of the security deposit,
of the related intangible is written off.
The
aggregate value of other acquired intangible assets consists of acquired
in-place leases. The fair value allocated to acquired in-place leases consists
of a variety of components including, but not necessarily limited to: (a) the
value associated with avoiding the cost of originating the acquired in-place
lease (i.e. the market cost to execute a lease, including leasing commissions
and legal fees, if any); (b) the value associated with lost revenue related to
tenant reimbursable operating costs estimated to be incurred during the assumed
lease-up period (i.e. real estate taxes, insurance and other operating
expenses); (c) the value associated with lost rental revenue from existing
leases during the assumed lease-up period; and (d) the value associated with any
other inducements to secure a tenant lease. The value assigned to acquired
in-place leases is amortized over the remaining lives of the related
leases.
We
record the excess
of the cost of an acquired entity over the net of the amounts assigned to assets
acquired (including identified intangible assets) and liabilities assumed as
goodwill. Goodwill is not amortized but is tested for impairment at a level of
reporting referred to as a reporting unit on an annual basis, during the fourth
quarter of each calendar year, or more frequently, if events or changes in
circumstances indicate that the asset might be impaired. An impairment loss for
an asset group is allocated to the long-lived assets of the group on a pro-rata
basis using the relative carrying amounts of those assets, except that the loss
allocated to an individual long-lived asset shall not reduce the carrying amount
of that asset below its fair value. A description of our testing policy is set
forth in this Note 2.
In
connection with the Transactions, we received a representation from our
predecessor, AZL, that it qualified as a REIT under the provisions of the Code.
However, during 2009 we became aware that AZL historically invested excess cash
from time to time in money market funds that, in turn, were invested exclusively
or primarily in short-term federal government
securities. Additionally, during 2009 we became aware that AZL made
two investments in local government obligations. Our predecessor,
AZL, with no objection from outside advisors, treated these investments as
qualifying assets for purposes of the 75% gross asset test. However,
if these investments were not qualifying assets for purposes of the 75% gross
asset test, then AZL may not have satisfied the REIT gross asset tests for
certain quarters, in part, because they may have exceeded 5% of the gross value
of AZL’s assets. If these investments resulted in AZL’s noncompliance
with the REIT gross asset tests, however, we and our predecessor, AZL, would
retain qualification as a REIT pursuant to certain mitigation provisions of the
Code, which provide that so long as any noncompliance was due to reasonable
cause and not due to willful neglect, and certain other requirements are met,
qualification as a REIT may be retained but a penalty tax would be
owed. Any potential noncompliance with the gross asset tests would be
due to reasonable cause and not due to willful neglect so long as ordinary
business care and prudence were exercised in attempting to satisfy such
tests. Based on our review of the circumstances surrounding the
investments, we believe that any noncompliance was due to reasonable cause and
not due to willful neglect. Additionally, we believe that we have
complied with the other requirements of the mitigation provisions of the Code
with respect to such potential noncompliance with the gross asset tests (and
have paid the appropriate penalty tax), and, therefore, our qualification, and
that of our predecessor, AZL, as a REIT should not be affected. The
Internal Revenue Service is not bound by our determination, however, and no
assurance can be provided that the Internal Revenue Service will not assert that
AZL failed to comply with the REIT gross asset tests as a result of the money
market fund investments and the local government securities investments and that
such failures were not due to reasonable cause. If the Internal
Revenue Service were to successfully challenge this position, then it could
determine that we and AZL failed to qualify as a REIT in one or more of our
taxable years. As a result, we recorded an adjustment to and
finalized the purchase price allocation we previously recorded upon consummation
of the Transactions. This adjustment resulted in an increase to goodwill by
approximately $0.5 million in our consolidated balance sheet at December 31,
2009. During 2009, we paid $0.07 million in fees and penalties and
recognized the remaining amount as non-operating income.
F-11
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
Mortgage
and Other Loans
Mortgage
and other loans assumed upon acquisition of related real estate properties are
stated at estimated fair value upon their respective dates of assumption, net of
unamortized discounts or premiums to their outstanding contractual
balances.
Amortization
of discount and the accretion of premiums on mortgage and other loans assumed
upon acquisition of related real estate properties are recognized from the date
of assumption through their contractual maturity date using the straight line
method, which approximates the effective interest method.
Depreciation
and Amortization
Depreciation
and amortization are computed using the straight-line method for financial
reporting purposes. Buildings and improvements are depreciated over their
estimated useful lives which range from 18 to 42 years. Tenant improvement costs
recorded as capital assets are depreciated over the shorter of (i) the tenant’s
remaining lease term or (ii) the life of the improvement. Furniture, fixtures
and equipment are depreciated over three to seven years. Properties
that are acquired that are subject to ground leases are depreciated over the
lesser of the useful life or the remaining life of the related leases as of the
date of assumption of the lease.
Pro
Forma Financial Information
The
following unaudited supplemental pro forma information is presented for the year
ended December 31, 2008, as if the Transactions and our acquisition of
interests in investments in unconsolidated joint ventures had occurred on
January 1, 2008.
Pro forma financial
information is presented for informational purposes only and may not be
indicative of what actual results of operations would have been had the
Transactions and our acquisition of interests in investments in unconsolidated
joint ventures been consummated when indicated, nor does it purport to represent
the results of the operations for future periods (in thousands except per share
data):
|
Year
Ended December 31,
2008
|
|||
Proforma
revenue
|
$ | 75,440 | ||
Proforma
net loss — basic and diluted
|
$ | (8,156 | ) | |
Proforma
net loss per share — basic and diluted
|
$ | (2.69 | ) |
The
revenues and expenses attributable to the Contributed Properties are included in
the Company’s historical results of operations from the Effective Date. We
recognized a one-time non-cash compensation charge in the amount of
$16.2 million during the first quarter of 2008. See Note 14 for a more
detailed discussion.
F-12
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
Revenue
Recognition
All of
our tenant leases are classified as operating leases. For all leases with
scheduled rent increases or other adjustments, minimum rental income is
recognized on a straight-line basis over the terms of the related leases.
Straight line rent receivable represents rental revenue recognized on a
straight-line basis in excess of billed rents and this amount is included in
“Rents and other receivables, net” on the accompanying consolidated balance
sheets. Reimbursements from tenants for real estate taxes, excise taxes and
other recoverable operating expenses are recognized as revenues in the period
the applicable costs are incurred.
We have
leased space to certain tenants under non-cancelable operating leases, which
provide for percentage rents based upon tenant revenues. Percentage rental
income is recorded in rental revenues in the combined consolidated statements of
operations.
Rental
revenue from parking operations and month-to-month leases or leases with no
scheduled rent increases or other adjustments is recognized on a monthly basis
when earned.
Lease
termination fees, net of the write-off of associated intangible assets and
liabilities and straight-line rent balances which are included in other revenues
on the accompanying combined consolidated statements of operations, are
recognized when the related leases are canceled and we have no continuing
obligation to provide services to such former tenants.
Other
revenue on the accompanying combined consolidated statements of operations
generally includes income incidental to our operations and is recognized when
earned.
Cash
and Cash Equivalents
We
consider all short-term cash investments with maturities of three months or less
when purchased to be cash equivalents. Restricted cash is excluded from cash and
cash equivalents for the purpose of preparing our combined consolidated
statements of cash flows.
We
maintain cash balances in various financial institutions. At times, the amounts
of cash held in financial institutions may exceed the maximum amount insured by
the Federal Deposit Insurance Corporation. We do not believe that we are exposed
to any significant credit risk on our cash and cash equivalents.
Restricted
Cash
Restricted
cash includes escrow accounts for real property taxes, insurance, capital
expenditures and tenant improvements, debt service and leasing costs held by
lenders.
Impairment
We assess
the potential for impairment of our long-lived assets, including real estate
properties, whenever events occur or a change in circumstances indicate that the
recorded value might not be fully recoverable. We determine whether impairment
in value has occurred by comparing the estimated future undiscounted cash flows
expected from the use and eventual disposition of the asset to its carrying
value. If the undiscounted cash flows do not exceed the carrying value, the real
estate or intangible carrying value is reduced to fair value and impairment loss
is recognized. Assets to be disposed of are reported at the lower of the
carrying amount or fair value, less costs to sell. Based upon such periodic
assessments, no impairment was identified for the periods presented in the
accompanying combined consolidated statements of operations.
F-13
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
Goodwill
is reviewed for impairment on an annual basis during the fourth quarter of each
calendar year, or more frequently if circumstances indicate that a possible
impairment has occurred. The assessment of impairment involves a two-step
process whereby an initial assessment for potential impairment is performed,
followed by a measurement of the amount of impairment, if any. Impairment
testing is performed using the fair value approach, which requires the use of
estimates and judgment, at the “reporting unit” level. A reporting unit is the
operating segment, or a business that is one level below the operating segment
if discrete financial information is prepared and regularly reviewed by
management at that level. GAAP allows for impairment analysis done at the
segment level when reporting units share similar economic
characteristics. The determination of a reporting unit’s fair value
is based on management’s best estimate, which generally considers the
market-based earning multiples of the unit’s peer companies or expected future
cash flows. If the carrying value of a reporting unit exceeds its fair value,
the second step of the goodwill impairment test is performed to measure the
amount of impairment loss, if any. An impairment is recognized as a
charge against income equal to the excess of the carrying value of goodwill over
its implied value on the date of the impairment. The factors that may cause an
impairment in goodwill include, but may not be limited to, a sustained decline
in our stock price and the occurrence, or sustained existence, of adverse
economic conditions. The impairment analysis performed as of December
31, 2009 resulted in no impairment.
Impairment
of Investments in Unconsolidated Joint Ventures
Our
investment in unconsolidated joint ventures is subject to a periodic impairment
review and is considered to be impaired when a decline in fair value is judged
to be other-than-temporary. An investment in an unconsolidated joint venture
that we identify as having an indicator of impairment is subject to further
analysis to determine if the investment is other than temporarily impaired, in
which case we write down the investment to its estimated fair value. We did not
recognize an impairment loss on our investment in unconsolidated joint ventures
during the years ended December 31, 2009 and December 31,
2008.
Repairs,
Maintenance and Major Improvements
The costs
of ordinary repairs and maintenance are included when incurred in rental
property operating expenses in the accompanying combined consolidated statements
of operations. Major improvements that extend the life of an asset are
capitalized and depreciated over the remaining useful life of the asset. Various
lenders have required us to maintain reserve accounts for the funding of future
repairs and capital expenditures, and the balances of these accounts are
classified as restricted cash on the accompanying consolidated balance
sheets.
Tenant
Receivables
Tenant
receivables are recorded and carried at the amount billable per the applicable
lease agreement, less any allowance for doubtful accounts. An allowance for
doubtful accounts is made when collection of the full amounts is no longer
considered probable. Tenant receivables are included in “Rents and other
receivables, net”, in the accompanying consolidated balance sheets. If a tenant
fails to make contractual payments beyond any allowance, we may recognize bad
debt expense in future periods equal to the amount of unpaid rent and deferred
rent. We take into consideration factors including historical termination,
default activity and current economic conditions to evaluate the level of
reserve necessary. At December 31, 2009, the balance of the allowance for
doubtful accounts was $1.1 million, compared to $0.8 million at December 31,
2008.
Preferred
Units
Preferred
Units have fixed rights to distributions at an annual rate of 2% of their
liquidation preference of $25 per Preferred Unit. Accordingly, income or loss of
the Operating Partnership is allocated among the general partner interest and
limited partner common interests after taking into consideration distribution
rights allocable to the Preferred Units. As a result of changes to
the redemption features on December 30, 2009, we recorded an increase in
the recorded amount of the Preferred Units to their current fair
value. See Note 12 for additional detail.
Deferred
Loan Fees
Deferred
loan fees include fees and costs incurred in conjunction with long-term
financings and are amortized over the terms of the related debt using a method
that approximates the interest method. Deferred loan fees are included in other
assets, net in the accompanying consolidated balance
sheets. Amortization of deferred loan fees is included in interest in
the accompanying combined consolidated statements of operations.
F-14
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
Equity
Offering Costs
Costs
from potential equity offerings are reflected in other assets, net in the
accompanying consolidated balance sheets and will be reclassified as a reduction
in additional paid-in capital upon successful completion of the offering, if
any.
Leasing
Commissions
Leasing
commissions are capitalized and amortized on a straight line basis over the life
of the related lease. The payment of leasing commissions is included
in cash used in investing activities on the accompanying combined consolidated
statement of cash flows because we believe that paying leasing commissions for
good tenants is a prudent investment in increasing the value of our
income-producing assets.
Use
of Estimates in Financial Statements
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those
estimates.
Stock-Based
Compensation
All
share-based payments to employees, including directors, are recognized in the
combined consolidated statement of operations based on their fair values. See
Note 14 for a more detailed discussion.
Segments
We own
and operate office properties in the western United States. We have
concentrated initially on two long-term growth submarkets, Honolulu and the
western United States mainland (in particular, southern California and the
greater Phoenix metropolitan area). We consider each of our
properties to be an operating segment. We aggregate the operating
segments into two geographic segments on the basis of how the properties are
managed and how our chief operating decision maker allocates resources and their
similar economic characteristics.
Recent
Accounting Pronouncements
Pronouncements
Affecting Fair Value Measurement
In
September 2006, the FASB issued guidance for using fair value to measure assets
and liabilities. We adopted this guidance for the valuation of financial assets
and liabilities in 2008 and the valuation of non-financial assets and
liabilities as of January 1, 2009. Our adoption of this guidance did
not have a material impact on our consolidated results of operations, financial
position or cash flow, as our derivative value is not significant.
In April
2009, the FASB issued guidance requiring disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. Our adoption of this guidance on
April 1, 2009 resulted in additional disclosures but did not have a material
impact on our consolidated financial position, results of operations or cash
flows.
Pronouncements
Affecting Future Property Acquisitions
In
December 2007, the FASB issued guidance broadening the fair value measurement
and recognition of assets acquired, liabilities assumed and interests
transferred as a result of business combinations. Under this pronouncement,
acquisition-related costs must be expensed rather than capitalized as part of
the basis of the acquired business. Companies are also required to enhance
disclosure to improve the ability of financial statement users to evaluate the
nature and financial effects of business combinations. We adopted the guidance
on January 1, 2009 and believe that such adoption could materially impact our
future consolidated financial results to the extent that we acquire significant
amounts of real estate or real estate related businesses, as related acquisition
costs will be expensed as incurred compared to the current practice of
capitalizing such costs and amortizing them over the estimated useful life of
the assets or real estate related businesses acquired.
F-15
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
In April
2009, the FASB issued guidance to address application issues raised by
preparers, auditors, and members of the legal profession on initial recognition
and measurement, subsequent measurement and accounting, and disclosure of assets
and liabilities arising from contingencies in a business
combination. Assets and liabilities arising from contingencies are
recognized at fair value on the acquisition date. We adopted this
guidance on July 1, 2009 and will apply it prospectively to business
combinations completed on or after that date. The impact of the
adoption will depend on the nature of acquisitions completed after July 1,
2009.
Pronouncements
Pertaining to our Investment in Unconsolidated Joint Ventures
In
November 2008, the FASB provided guidance for the accounting of contingent
consideration, recognition of other-than-temporary impairment (OTTI) of an
equity method investee, and change in level of ownership or degree of influence.
The accounting of contingent consideration might result in the recording of a
liability with an increase to the corresponding investment balance. The investor
must recognize its share of the investee’s impairment charges. A gain or loss to
the investor resulting from a change in level of ownership or influence must be
recognized in earnings of the investor. We adopted the guidance on January 1,
2009 and it did not have an impact on our consolidated financial position,
results of operations or cash flows. In the event that we acquire a controlling
interest in our existing investments in unconsolidated joint ventures, we
believe that the adoption of this guidance could materially impact our future
consolidated financial results.
In
June 2009, the FASB issued guidance which requires us to
perform an on-going reassessment of whether our enterprise is the primary
beneficiary of a variable interest entity. This analysis identifies the
primary beneficiary of a variable interest entity as the enterprise that has
both of the following characteristics: (i) the power to direct the activities of
a variable interest entity that most significantly impact the entity’s economic
performance, and (ii) the obligation to absorb losses of the entity that could
potentially be significant to the variable interest entity or the right to
receive benefits from the entity that could potentially be significant to the
variable interest entity. This guidance is effective for us beginning
January 1, 2010 and the adoption of this standard on our consolidated financial
statements will not have an impact on our consolidated financial position,
results of operations or cash flows.
Pronouncements
Pertaining to the Non-controlling Interests in our Operating
Partnership
In
December 2007, the FASB issued guidance which requires a non-controlling
interest in a subsidiary to be reported as equity and the amount of consolidated
net income specifically attributable to the non-controlling interest to be
identified in the combined consolidated financial statements. We must also be
consistent in the manner of reporting changes in the parent’s ownership interest
and the guidance requires fair value measurement of any non-controlling equity
investment retained in a deconsolidation. We adopted the guidance on January 1,
2009.
Concurrently
with the adoption of the guidance regarding non-controlling interests, we also
adopted guidance which required us to present the Common Units and Preferred
Units of the UPREIT in the mezzanine section of our consolidated balance sheets
because the decision to redeem for cash or Company shares is not solely within
the control of the Company. Because some of the Company’s directors also own
Common Units and Preferred Units indirectly through Venture, combined with the
existence of the Proportionate Voting Preferred Stock, we have determined that
there are hypothetical situations where the holders of the Common Units and
Preferred Units could control the method of redemption (cash or Company shares)
and therefore these partnership units required mezzanine presentation in our
consolidated balance sheet at December 31, 2008. In addition, we were required
to measure our outstanding Common Units at redemption value because the units
are considered redeemable for shares or cash outside the control of the Company
after March 19, 2010. Our Preferred Units did not require redemption
value measurement because these units were not considered redeemable until the
later of (i) March 19, 2010, and (ii) the date we consummate an underwritten
public offering (of at least $75 million) of our common stock. In the
capital market environment at the time, management did not consider the
completion of the public stock offering probable at the
time. Furthermore, in the event that we acquire a controlling
interest in our existing investments in unconsolidated joint ventures, we
believe that the adoption of this guidance could materially impact our future
consolidated financial results, as our existing investments would be adjusted to
fair value at the date of acquisition of the controlling
interest. See Note 12 for additional information regarding
non-controlling interests.
F-16
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
Pronouncement
Affecting Treatment of Nonvested Share-Based Payments in Net Loss Available to
Common Stockholders per Share
In June
2008, the FASB issued guidance that requires that share-based payment awards
that are not fully vested and contain non-forfeitable rights to receive
dividends or dividend equivalents declared on our common stock be treated as
participating securities in the computation of EPS pursuant to the two-class
method. Dividend equivalents corresponding to the cash dividends
declared on our common stock are forfeitable for unvested restricted stock
unit awards granted to our board of directors, as described in Note 14,
“Share-Based Payments”. We applied this guidance retrospectively to
all periods presented for fiscal years beginning after December 15, 2008, which
for us means January 1, 2009. The adoption of this guidance did not have an
impact on our consolidated financial position, results of operations and cash
flows.
Pronouncements
Resulting in Modified Disclosures in the Financial Statements
In May
2009, the FASB established general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued. We adopted this guidance during the quarter ended June
30, 2009 and it resulted in additional disclosure but did not have a material
impact on our financial statements. In February 2010, the guidance
was amended, eliminating the requirement to disclose the date through which
subsequent events were evaluated.
In June
2009, the FASB Accounting Standards Codification was established as the source
of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with GAAP. The guidance does not change GAAP but changed
how we reference GAAP in our consolidated financial statements beginning with
the Form 10-Q for the period ended September 30, 2009.
3. Investments
in Real Estate
Our
investments in real estate, net, at December 31, 2009, and at December 31, 2008,
are summarized as follows (in thousands):
December
31, 2009
|
December
31, 2008
|
|||||||
Land
and land improvements
|
$ | 76,054 | $ | 76,008 | ||||
Building
and building improvements
|
310,507 | 308,125 | ||||||
Tenant
improvements
|
27,707 | 24,489 | ||||||
Furniture,
fixtures and equipment
|
1,401 | 1,210 | ||||||
Construction
in progress
|
3,311 | 4,082 | ||||||
Investments
in real estate
|
418,980 | 413,914 | ||||||
Less: accumulated
depreciation
|
(36,030 | ) | (21,257 | ) | ||||
Investments
in real estate, net
|
$ | 382,950 | $ | 392,657 | ||||
F-17
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
Acquisitions
of Consolidated Properties
See Transactions in Note 1 for a
discussion of the properties acquired on March 19, 2008.
The
following table summarizes the allocations of estimated fair values of the
assets acquired and liabilities assumed as of the Effective Date (in
thousands):
Investments
in real estate, net
|
$ | 337,162 | ||
Rents
and other receivables, net
|
2,502 | |||
Intangible
assets, net
|
44,087 | |||
Other
assets, net
|
2,381 | |||
Assets,
net, acquired on the Effective Date
|
386,132 | |||
Accounts
payable and other liabilities
|
4,595 | |||
Mortgage
and other collateralized loans, net
|
286,060 | |||
Acquired
below market leases, net
|
14,392 | |||
Liabilities,
net, assumed on the Effective Date
|
305,047 | |||
Net
assets acquired
|
$ | 81,085 |
F-18
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
4. Intangible
Assets and Acquired Below Market Leases Liabilities
Our
identifiable intangible assets and acquired above and below market leases, net
at December 31 2009, and at December 31, 2008, are summarized as follows (in
thousands):
|
December
31, 2009
|
December
31, 2008
|
||||||
|
|
|||||||
Acquired
leasing commissions
|
|
|
||||||
Gross
amount
|
$ | 8,857 | $ | 8,316 | ||||
Accumulated
amortization
|
(4,212 | ) | (2,950 | ) | ||||
Net
balance
|
$ | 4,645 | $ | 5,366 | ||||
Acquired
leases in place
|
||||||||
Gross
amount
|
$ | 17,171 | $ | 18,109 | ||||
Accumulated
amortization
|
(10,234 | ) | (6,724 | ) | ||||
Net
balance
|
$ | 6,937 | $ | 11,385 | ||||
Acquired
tenant relationship costs
|
||||||||
Gross
amount
|
$ | 19,581 | $ | 19,588 | ||||
Accumulated
amortization
|
(4,419 | ) | (1,941 | ) | ||||
Net
balance
|
$ | 15,162 | $ | 17,647 | ||||
Acquired
other intangibles
|
||||||||
Gross
amount
|
$ | 7,767 | $ | 7,879 | ||||
Accumulated
amortization
|
(1,283 | ) | (898 | ) | ||||
Net
balance
|
$ | 6,484 | $ | 6,981 | ||||
Intangible
assets, net
|
$ | 33,228 | $ | 41,379 | ||||
Acquired
below market leases
|
||||||||
Gross
amount
|
$ | 15,571 | $ | 16,608 | ||||
Accumulated
amortization
|
(5,447 | ) | (3,755 | ) | ||||
Net balance
|
10,124 | 12,853 | ||||||
Acquired
above market leases
|
||||||||
Gross
amount
|
$ | 2,218 | $ | 2,449 | ||||
Accumulated
amortization
|
(1,606 | ) | (1,413 | ) | ||||
Net balance
|
612 | 1,036 | ||||||
Acquired
below market leases, net
|
$ | 9,512 | $ | 11,817 | ||||
F-19
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
The
following table summarizes the estimated net amortization of intangible assets
and net below market lease accretion at December 31, 2009 for the next five
years:
|
|
|
|
|
|
|
|
Amortization
|
||||||||||||||||||||||||
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
Period
(In years)
|
||||||||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||||||||||
Leasing
Commissions
|
$ | 1,523 | $ | 1,122 | $ | 851 | $ | 431 | $ | 278 | $ | 440 | $ | 4,645 | 2.7 | |||||||||||||||||
Other
Intangibles
|
360 | 273 | 219 | 176 | 167 | 5,289 | 6,484 | 18.4 | ||||||||||||||||||||||||
Leases
in Place
|
2,790 | 1,760 | 1,033 | 429 | 242 | 683 | 6,937 | 2.6 | ||||||||||||||||||||||||
Tenant
Relationship Costs
|
2,480 | 2,480 | 2,479 | 2,337 | 2,916 | 2,470 | 15,162 | 3.7 | ||||||||||||||||||||||||
Total,
Intangible Assets, net
|
$ | 7,153 | $ | 5,635 | $ | 4,582 | $ | 3,373 | $ | 3,603 | $ | 8,882 | $ | 33,228 | ||||||||||||||||||
Net
below market lease accretion
|
$ | 1,947 | $ | 1,551 | $ | 1,058 | $ | 588 | $ | 443 | $ | 3,925 | $ | 9,512 | 6.1 | |||||||||||||||||
As shown
in the following table, we recognized accretion, net of amortization, of
acquired below/above market leases. The accretion of acquired below-market
leases and the amortization of acquired above-market leases, respectively, are
included in rental revenues in the accompanying combined consolidated statements
of operations.
We
recognized amortization of acquired intangible assets, including acquired
leasing commissions, acquired leases in place, acquired legal and marketing
costs, acquired tenant relationship costs, and acquired other intangibles. The
amortization of acquired intangible assets is included in depreciation and
amortization in the accompanying combined consolidated statements of operations
(in thousands).
Year
Ended
|
Year
Ended
|
|||||||
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Total
acquired below/above- market lease accretion
|
$ | 2,306 | $ | 2,439 | ||||
Total
intangibles amortization expense
|
$ | 9,243 | $ | 9,176 |
5. Investment
in Unconsolidated Joint Ventures
We own
interests in seven joint ventures (including managing ownership interests in six
of those seven), consisting of 16 office properties, including 34 office
buildings, comprising approximately 2.4 million rentable square feet. Our
ownership interest percentages in these joint ventures range from approximately
5.0% to 32.2%. In exchange for our managing ownership interest and
related equity investment in these joint ventures, we are entitled to fees,
preferential allocations of earnings and cash flows from each respective joint
venture. We are also entitled to incentive interests in excess of our ownership
percentages ranging from approximately 21.4% to 36.0%, subject to returns on
invested capital.
At
December 31, 2009, the JV Basis Differential, net, was approximately $1.5
million and is included in investments in unconsolidated joint ventures in our
consolidated balance sheet. For the year ended December 31, 2009, we recognized
approximately $0.04 million of amortization expense attributable to the JV Basis
Differential, which is included in equity in net earnings of unconsolidated
joint ventures in our combined consolidated statement of operations. At
December 31, 2008, the JV Basis Differential, net, was approximately
$1.1 million and is included in investments in unconsolidated joint
ventures in our consolidated balance sheet. For the year ended December 31,
2008, amortization expense attributable to the JV Basis Differential was not
significant.
F-20
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
The
following tables summarize financial information for our unconsolidated joint
ventures (in thousands):
Year
ended December 31, 2009
|
Year
ended December 31, 2008
|
|||||||
Revenues:
|
||||||||
Rental
|
$ | 37,569 | $ | 37,187 | ||||
Other
|
8,098 | 8,595 | ||||||
Total
revenues
|
45,667 | 45,782 | ||||||
Expenses:
|
||||||||
Rental
operating expenses
|
19,697 | 19,382 | ||||||
Depreciation
and amortization
|
18,259 | 19,642 | ||||||
Interest
|
16,884 | 17,341 | ||||||
Total
expenses
|
54,840 | 56,365 | ||||||
Net
loss
|
$ | (9,173 | ) | $ | (10,583 | ) | ||
Equity
in net income (loss)
|
||||||||
of
unconsolidated joint ventures
|
$ | 313 | $ | 93 | ||||
|
|
As
of
|
As
of
|
||||||
|
December
31, 2009
|
December
31, 2008
|
||||||
Investment
in real estate, net
|
$ | 400,700 | $ | 336,409 | ||||
Other
assets
|
61,225 | 61,591 | ||||||
Total
assets
|
$ | 461,925 | $ | 398,000 | ||||
Mortgage
and other collateralized loans
|
$ | 366,543 | $ | 314,324 | ||||
Other
liabilities
|
14,856 | 18,139 | ||||||
Total
liabilities
|
$ | 381,399 | $ | 332,463 | ||||
Investment
in unconsolidated joint ventures
|
$ | 10,911 | $ | 11,590 | ||||
Acquisitions of Unconsolidated Joint
Ventures
2009
Acquisitions
On
December 29, 2009, we consummated the acquisition from an institutional
investor, through the Operating Partnership, of a 5% ownership interest in a
joint venture that owns a commercial office campus with five buildings totaling
356,504 rentable square feet, located in San Diego, California. We
paid $1.5 million in cash for our 5% interest. The Company has an option
to increase its ownership percentage to 20%, which expires on April 29,
2010.
2008
Acquisitions
On April
1, 2008, we and our joint venture partner in Seville Plaza entered into an
Amended Operating Agreement. Based on this amendment, which served to modify and
provide substantive participating rights to the non-managing member, we have
accounted for our 7.5% investment in Seville Plaza under the equity method of
accounting. Prior to the date of such amendment, we had consolidated our 7.5%
investment in Seville Plaza. The JV Basis Differential attributable to Seville
Plaza upon the Effective Date was $0.04 million.
F-21
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
In a
series of transactions occurring on April 30, 2008, May 30, 2008 and June 19,
2008, following exercise of an option granted to us by Venture and its
affiliates as part of the Transactions (the “Option”), we consummated the
acquisition, through the Operating Partnership, of a 32.167% managing ownership
interest in the POP San Diego I Joint Venture that owns a portfolio of seven
commercial office buildings totaling 181,664 rentable square feet located
throughout San Diego, California and Carlsbad, California. We acquired the
managing ownership interest pursuant to the Option and assumed the rights and
obligations of an affiliate of The Shidler Group (a “Shidler Affiliate”) under a
previously executed purchase and sale agreement. The acquisition price for our
managing ownership interest was approximately $2.6 million. This acquisition
price was funded by issuing 396,526 Common Units on April 30, 2008 which Common
Units were valued at $6.5589 per unit. Upon acquisition, there was no JV Basis
Differential attributable to the POP San Diego I Joint Venture, including with
respect to the acquisitions consummated on May 30, 2008 and June 19,
2008.
On April
30, 2008, following the exercise of the Option, we consummated the acquisition
from certain Shidler Affiliates, through the Operating Partnership, of a 17.5%
managing ownership interest in a joint venture that owns a commercial office
building totaling 221,784 rentable square feet located in Phoenix, Arizona (the
“Black Canyon Corporate Center”). The acquisition price for the managing
ownership interest in the Black Canyon Corporate Center was $1.0 million,
payable in the form of a subordinated note issued by the Operating Partnership
to a Shidler Affiliate. The purchase price for the managing ownership interest
in the Black Canyon Corporate Center was approximately equal to the Shidler
Affiliates’ cost of investment in the Black Canyon Corporate Center. The JV
Basis Differential attributable to the Black Canyon Corporate Center upon
acquisition was $0.08 million.
On May
23, 2008, following the exercise of the Option, we consummated the acquisition
from certain Shidler Affiliates, through the Operating Partnership, of a 7.5%
managing ownership interest in a joint venture that owns a commercial office
building and a separate parking and retail complex totaling approximately
355,000 rentable square feet of office space and approximately 15,000 rentable
square feet of retail space, located in Phoenix, Arizona (the “US Bank Center”).
The acquisition price for the managing ownership interest in the US Bank Center
was $1.2 million, payable in the form of a subordinated note issued by the
Operating Partnership. The purchase price for the managing ownership interest in
the US Bank Center was approximately equal to the Shidler Affiliates’ cost of
investment in the US Bank Center. The JV Basis Differential attributable to the
US Bank Center upon acquisition was $0.89 million.
On May
23, 2008, following the exercise of the Option, we consummated the acquisition
from certain Shidler Affiliates, through the Operating Partnership, of a 17.5%
managing ownership interest in a joint venture that owns a commercial office
building totaling 152,288 rentable square feet, located in Honolulu, Hawaii (the
“Bank of Hawaii Waikiki Center”; which was formerly known as Kalakaua Business
Center). The acquisition price for the managing ownership interest in the Bank
of Hawaii Waikiki Center was $0.79 million, payable in the form of a
subordinated note issued by the Operating Partnership. The purchase price for
the managing ownership interest in the Bank of Hawaii Waikiki Center was
approximately equal to the Shidler Affiliates’ cost of investment in the Bank of
Hawaii Waikiki Center. The JV Basis Differential attributable to the Bank of
Hawaii Waikiki Center upon acquisition was $(0.09) million.
On May
30, 2008, the POP San Diego I Joint Venture consummated the acquisition from
certain Shidler Affiliates of the managing ownership interest in the Scripps
Ranch Business Park. Pursuant to the terms of the Option, the POP San Diego I
Joint Venture assumed the rights and obligations of a Shidler Affiliate to
acquire the managing ownership interest in the Scripps Ranch Business Park for
approximately $2.8 million in cash, including customary closing costs, and the
assumption of approximately $5.3 million of existing mortgage
indebtedness.
On June
19, 2008, the POP San Diego I Joint Venture acquired two commercial office
buildings totaling approximately 81,000 rentable square feet located in San
Diego, California. Pursuant to the terms of the Option, the POP San Diego I
Joint Venture assumed the rights and obligations of a Shidler Affiliate, under
the respective purchase agreements. The acquisition price for such buildings was
approximately $19.2 million, including assumption of approximately $12.7 million
of mortgage debt and customary closing costs. The acquisition price was funded
by issuing 326,576 Common Units on June 19, 2008, which Common Units were valued
at $6.8107 per unit.
F-22
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
On August
14, 2008, following exercise of the Option, we consummated the acquisition from
certain Shidler Affiliates, through the Operating Partnership, of a 10% managing
ownership interest in a joint venture (the “SoCal II Joint Venture”) that owns a
portfolio of fifteen office and flex buildings totaling over 1,000,000 rentable
square feet, situated on seven properties in Los Angeles, Orange and San Diego
counties in Southern California. The acquisition price for the managing
ownership interest was approximately $4.2 million, payable in the form of a
subordinated note issued by the Operating Partnership to a Shidler Affiliate.
The purchase price for the managing ownership interest was approximately equal
to the Shidler Affiliates’ cost of investment in the SoCal II Joint Venture. The
JV Basis Differential attributable to the SoCal II Joint Venture upon
acquisition was $0.2 million.
We
account for our investment in joint ventures under the equity method of
accounting.
6. Other
Assets
Other
assets consist of the following (in thousands):
|
December
31, 2009
|
December 31,
2008
|
||||||
Deferred
loan fees, net of accumulated amortization of $1.2 million
|
||||||||
and
$0.8 million at December 31, 2009 and December 31, 2008,
respectively
|
$ | 2,008 | $ | 3,447 | ||||
Prepaid
expenses
|
1,204 | 1,232 | ||||||
Equity
offering costs
|
1,842 | - | ||||||
Other
|
1 | 1 | ||||||
Total
other assets, net
|
$ | 5,055 | $ | 4,680 |
7. Minimum
Future Lease Rentals
Future
minimum base rentals on non-cancelable office leases for the years succeeding
December 31, 2009 are as follows (in thousands):
Year
|
|
|||
2010
|
$ | 35,749 | ||
2011
|
30,738 | |||
2012
|
24,527 | |||
2013
|
13,387 | |||
2014
|
9,688 | |||
Thereafter
|
23,560 | |||
Total
future minimum base rental revenue
|
$ | 137,649 |
The above
future minimum base rental revenue excludes tenant reimbursements, amortization
of deferred rent receivables and above/below-market lease intangibles. Some
leases are subject to termination options. In general, these leases provide for
termination payments should the termination options be exercised. The preceding
table is prepared assuming such options are not exercised. Lease termination fee
revenues were not significant for all periods presented.
We and
our predecessor have leased space to certain tenants under non-cancelable
operating leases, which provide for percentage rents based upon tenant revenues.
Percentage rental income is recorded in rental revenues in the combined
consolidated statements of operations. We and our predecessor recorded $0.1
million and $0.1 million of percentage rental income during the years ended
December 31, 2009 and 2008, respectively.
F-23
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
8. Accounts
Payable and Other Liabilities
Accounts
payable and other liabilities consist of the following (in
thousands):
|
December
31, 2009
|
December
31, 2008
|
||||||
Accounts
payable
|
$ | 597 | $ | 1,276 | ||||
Interest
payable
|
2,644 | 1,353 | ||||||
Deferred
revenue
|
2,039 | 1,278 | ||||||
Security
deposits
|
2,782 | 2,558 | ||||||
Deferred
straight-line ground rent
|
6,620 | 2,811 | ||||||
Related
party payable (Note 13 )
|
1,113 | 1,060 | ||||||
Accrued
expenses
|
5,599 | 6,281 | ||||||
Asset
retirement obligations
|
606 | 471 | ||||||
Total
accounts payable and other liabilities
|
$ | 22,000 | $ | 17,088 | ||||
9. Mortgage and Other Loans
A summary
of our mortgage and other loans, net, at December 31, 2009 is as follows (in
thousands):
PROPERTY
|
OUTSTANDING
PRINCIPAL BALANCE
|
UNAMORTIZED
PREMIUM (DISCOUNT)
|
NET
|
INTEREST
RATE AT DECEMBER 31, 2009
|
MATURITY
DATE
|
AMORTIZATION
|
||||||||||||
Clifford
Center
|
$ | 3,501 | $ | - | $ | 3,501 | 6.00 | % |
8/15/2011(a)
|
132
months
|
||||||||
Davies
Pacific Center
|
95,000 | (925 | ) | 94,075 | 5.86 | % |
11/11/2016
|
Interest
Only
|
||||||||||
First
Insurance Center
|
38,000 | (561 | ) | 37,439 | 5.74 | % |
1/1/2016
|
Interest
Only
|
||||||||||
First
Insurance Center
|
14,000 | (209 | ) | 13,791 | 5.40 | % |
1/6/2016
|
Interest
Only
|
||||||||||
Pacific
Business News Building
|
11,653 | 13 | 11,666 | 6.98 | % |
4/6/2010
|
360
months
|
|||||||||||
Pan
Am Building
|
60,000 | (36 | ) | 59,964 | 6.17 | % |
8/11/2016
|
Interest
Only
|
||||||||||
Waterfront
Plaza
|
100,000 | - | 100,000 | 6.37 | % |
9/11/2016
|
Interest
Only
|
|||||||||||
Waterfront
Plaza
|
11,000 | - | 11,000 | 6.37 | % |
9/11/2016
|
Interest
Only
|
|||||||||||
City
Square
|
27,500 | (86 | ) | 27,414 | 5.58 | % |
9/1/2010
|
Interest
Only
|
||||||||||
City
Square (b)
|
27,017 | - | 27,017 |
LIBOR + 2.35
|
% |
9/1/2010
|
Interest
Only
|
|||||||||||
Sorrento
Technology Center
|
11,800 | (175 | ) | 11,625 | 5.75 | % |
1/11/2016
|
Interest
Only
|
||||||||||
Subtotal
|
$ | 399,471 | $ | (1,979 | ) | $ | 397,492 |
|
|
|||||||||
Revolving
line of credit (c)
|
8,947 | - | 8,947 | 1.85 | % |
9/2/2011
|
Interest
Only
|
|||||||||||
Total
|
$ | 408,418 | $ | (1,979 | ) | $ | 406,439 | |||||||||||
F-24
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
____________
(a)
|
The
terms of the Clifford Center note payable provide the Company with the
option to extend the maturity date to August 15, 2014 subject to a nominal
fee, which the Company expects to
exercise.
|
(b)
|
With
regard to the City Square note payable with an outstanding balance of
$27.0 million at December 31, 2009, the Company has an interest rate cap
on this loan for the notional amount of $28.5 million, which effectively
limits the LIBOR rate on this loan to 7.45%. The interest rate cap expires
on September 1, 2010, commensurate with the maturity date of this note
payable.
|
(c)
|
The
revolving line of credit matures on September 2, 2011. Amounts borrowed
under the FHB Credit Facility will bear interest at a fluctuating annual
rate equal to the effective rate of interest paid by the Lender on time
certificates of deposit, plus 1.00%. See “Revolving Line of
Credit” below.
|
The
lenders’ collateral for notes payable, with the exception of the Clifford Center
note payable, is the property and, in some instances, cash reserve accounts,
ownership interests in the underlying entity owning the real property, leasehold
interests in certain ground leases, rights under certain service agreements, and
letters of credit posted by certain related parties of the Company. The lenders’
collateral for the Clifford Center note payable is the leasehold property as
well as guarantees from affiliates of the Company, for which the Operating
Partnership indemnifies the guarantors.
At
December 31, 2009, the Operating Partnership was subject to a $0.5 million
recourse commitment that it provided on behalf of POP San Diego I joint venture
in connection with certain of that joint venture’s mortgage loans. The
contractual provisions of these mortgage loans provide for the full release of
this recourse commitment upon the satisfaction of certain conditions within our
control. We believe that the subject conditions will be satisfied by management
prior to, or during, the second quarter ending June 30, 2010, and will
therefore result in the immediate and full release of the Operating Partnership
from this recourse commitment. As such, we have not recorded this as
a liability because the probability for recourse is remote.
The
scheduled maturities for our mortgages and other loans for the periods
succeeding December 31, 2009 are as follows (in thousands and includes schedule
principal paydowns):
|
||||
2010
|
$ | 66,445 | ||
2011
|
12,156 | |||
2012
|
- | |||
2013
|
- | |||
2014
|
- | |||
Thereafter
|
329,800 | |||
Total
|
$ | 408,401 | ||
Revolving
Line of Credit
On
September 2, 2009, we entered into a Credit Agreement (the “FHB Credit
Facility”) with First Hawaiian Bank (the “Lender”). The FHB Credit
Facility initially provided us with a revolving line of credit in the principal
sum of $10 million. On December 31, 2009, we amended the FHB Credit
Facility to increase the maximum principal amount available for borrowing under
the revolving line of credit to $15 million. Amounts borrowed under
the FHB Credit Facility will bear interest at a fluctuating annual rate equal to
the effective rate of interest paid by the Lender on time certificates of
deposit, plus 1.00%. We are permitted to use the proceeds of the line
of credit for working capital and general corporate purposes, consistent with
our real estate operations and for such other purposes as the Lender may
approve. As of December 31, 2009, we had outstanding borrowings of
$8.9 million under the FHB Credit Facility.
F-25
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
The FHB
Credit Facility matures on September 2, 2011. As security for the FHB
Credit Facility, as amended, Shidler Equities, L.P., a Hawaii limited
partnership controlled by Mr. Shidler (“Shidler LP”), has pledged to FHB a
certificate of deposit in the principal amount of $15 million. As a
condition to this pledge, the Operating Partnership and Shidler LP entered into
an indemnification agreement pursuant to which the Operating Partnership agreed
to indemnify Shidler LP from any losses, damages, costs and expenses incurred by
Shidler LP in connection with the pledge. In addition, to the extent
that all or any portion of the certificate of deposit is withdrawn by FHB and
applied to the payment of principal, interest and/or charges under the FHB
Credit Facility, the Operating Partnership agreed to pay to Shidler LP interest
on the withdrawn amount at a rate of 7.00% per annum from the date of the
withdrawal until the date of repayment in full by the Operating Partnership to
Shidler LP. Pursuant to this indemnification agreement, as amended,
the Operating Partnership also agreed to pay to Shidler LP an annual fee of
2.00% of the entire $15 million principal amount of the certificate of
deposit.
The FHB
Credit Facility contains various customary covenants, including covenants
relating to disclosure of financial and other information to the Lender,
maintenance and performance of our material contracts, our maintenance of
adequate insurance, payment of the Lender’s fees and expenses, and other
customary terms and conditions.
We
entered into a Credit Agreement dated as of August 25, 2008 (the “KeyBank Credit
Facility”) with KeyBank National Association (“KeyBank”) and KeyBanc Capital
Markets. As of December 31, 2008, we had outstanding borrowings of $3.0 million
under the KeyBank Credit Facility.
On
September 3, 2009, we entered into a Termination and Release Agreement (the
“Termination Agreement”) with KeyBank terminating the KeyBank Credit
Facility. In connection with the Termination Agreement, we paid to
KeyBank on September 3, 2009 a total payoff amount of approximately $2.8
million, representing the total principal amount owed together with all accrued
and unpaid contractual interest and fees, less a prorated amount of certain fees
paid by us in connection with the origination of the KeyBank Credit
Facility. KeyBank has released all claims to the assets held as
security for the KeyBank Credit Facility, and KeyBank and the Company have
provided each other with a general release of all claims arising in connection
with the KeyBank Credit Facility or any of the related loan
documents.
10.
Unsecured Notes Payable to Related Parties
At
December 31, 2009 and 2008, we had promissory notes payable by the Operating
Partnership to certain affiliates in the aggregate principal amount of $21.1
million and $23.8 million, respectively, which were originally issued upon the
exercise of the Option. The promissory notes accrue interest at a rate of 7% per
annum, with interest payable quarterly, subject to the Operating Partnership’s
right to defer the payment of interest for any or all periods up until the date
of maturity. The promissory notes mature on various dates commencing on March
19, 2013 through August 31, 2013, but the Operating Partnership may elect to
extend maturity for one additional year. Maturity accelerates upon the
occurrence of a) a qualified public offering, as defined under the Master
Agreement; b) the sale of substantially all the assets of the Company; or c) the
merger of the Company with another entity. The promissory notes are unsecured
obligations of the Operating Partnership.
On
September 23, 2009, the Operating Partnership entered into an Exchange Agreement
(the “Exchange Agreement”) with certain of our affiliates (collectively, the
“Transferors”). Pursuant to the terms and conditions of the Exchange
Agreement, on September 25, 2009, certain unsecured subordinated promissory
notes, in the aggregate outstanding amount (including principal and accrued
interest) of approximately $3.0 million, issued by the Operating Partnership to
the Transferors were exchanged for 789,095 shares of common stock, par value
$0.0001 per share, of the Company. The price per share of the
Company’s common stock issued pursuant to the Exchange Agreement was $3.82,
which represented the volume-weighted average closing market price per share of
the Company’s common stock on the NYSE Amex for the thirty trading days
preceding the date of the Exchange Agreement.
For the
period from March 20, 2008 through December 31, 2009, interest payments on the
unsecured notes payable to related parties have been deferred with the exception
of $0.3 million which was related to the notes exchanged pursuant to the
Exchange Agreement. At December 31, 2009 and at December 31, 2008,
$2.6 million and $1.2 million, respectively, of accrued interest attributable to
unsecured notes payable to related parties is included in accounts payable and
other liabilities in the accompanying consolidated balance sheets.
F-26
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
11. Commitments
and Contingencies
Minimum
Future Ground Rents
We have
ground lease agreements for both Clifford Center and Waterfront
Plaza. The Clifford Center property ground lease expires May 31,
2035. The annual rental obligation is a combination of a base rent amount plus
3% of base rental income from tenants. On June 1, 2016 and 2026, the annual
rental obligation will reset to an amount equal to 6% of the fair market value
of the land. However, the ground rent cannot be less than the rent for the prior
period. For the period prior to June 1, 2016, only the base rent component is
included in the minimum future payments. For the periods succeeding May 31,
2016, we estimated the annual minimum future rental payments to be an amount
equal to the rent paid for the immediately preceding 12-month
period.
The
Waterfront Plaza ground lease expires December 31, 2060. The annual rental
obligation has fixed increases at 5-year intervals until it resets on January 1,
2036, 2041, 2046, 2051, and 2056 to an amount equal to 8.0% of the fair market
value of the land. However, the ground lease rent cannot be less than the rent
for the prior period. For the periods succeeding December 31, 2035, we estimated
the annual minimum future rental payments to be an amount equal to the rent paid
for the immediately preceding 12-month period.
Ground
lease rent expense, including minimum rent and percentage rent, recorded during
the years ended December 31, 2009 and 2008 was $4.5 million and $3.9 million,
respectively.
The
following table indicates our future minimum ground lease payments for the years
succeeding December 31, 2009 (in thousands):
Year
|
|
|||
2010
|
$ | 2,430 | ||
2011
|
2,440 | |||
2012
|
2,451 | |||
2013
|
2,463 | |||
2014
|
2,474 | |||
Thereafter
|
215,803 | |||
Total
future minimum ground lease payments
|
$ | 228,061 |
Contingencies
From time
to time, we may be subject to various legal proceedings and claims that arise in
the ordinary course of business. These matters are generally covered by
insurance, subject to deductibles and other customary limitations on recoveries.
We believe that the ultimate settlement of these actions will not have a
material adverse effect on our consolidated financial position and results of
operations or cash flows.
Concentration
of Credit Risk
Our
operating properties are located in Honolulu, San Diego, Los Angeles, Orange
County and Phoenix. The ability of the tenants to honor the terms of their
respective leases is dependent upon the economic, regulatory and social factors
affecting the markets in which the tenants operate. No single tenant accounts
for 10% or more of our total annualized base rents. We perform
ongoing credit evaluations of our tenants for potential credit
losses.
Financial
instruments that subject us to credit risk consist primarily of cash, accounts
receivable, deferred rents receivable and an interest rate contract. We maintain
our cash and cash equivalents and restricted cash on deposit with what
management believes are relatively stable financial institutions. Accounts at
each institution are insured by the Federal Deposit Insurance Corporation up to
the maximum amount; and, to date, we have not experienced any losses on our
invested cash. Restricted cash held by lenders is held by those lenders in
accounts maintained at major financial institutions.
F-27
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
Conditional
Asset Retirement Obligations
We record
a liability for a conditional asset retirement obligation, defined as a legal
obligation to perform an asset retirement activity in which the timing and/or
method of settlement is conditional on a future event that may or may not be
within a company’s control, when the fair value of the obligation can be
reasonably estimated. Depending on the age of the construction,
certain properties in our portfolio may contain non-friable asbestos. If these
properties undergo major renovations or are demolished, certain environmental
regulations are in place, which specify the manner in which the asbestos, if
present, must be handled and disposed. Based on our evaluation of the physical
condition and attributes of certain of our properties acquired in the
Transactions, we recorded conditional asset retirement obligations related to
asbestos removal. As of December 31, 2009 and December 31, 2008, the liability
in our consolidated balance sheets for conditional asset retirement obligations
related to asbestos removal was $0.3 million for both periods. The accretion
expense related to asbestos removal was $0.02 million for each of the years
ended December 31, 2009 and 2008.
Clifford Center Ground
Lease
We are
subject to a surrender clause under the Clifford Center property ground lease
that provides the lessor with the right to require us, at our own expense, to
raze and remove all improvements from the leased land if we have not complied
with certain other provisions of the ground lease. These provisions require us
to: (1) only make significant improvements or alterations to the building under
the supervision of a licensed architect and/or structural engineer with lessor’s
written approval; (2) comply with the Americans with Disabilities Act of 1990;
and (3) comply with all federal, state, and local laws regarding the handling
and use of hazardous materials. The requirement to remove the improvements is
contingent, first, on our failure to comply with the terms of the lease and,
second, upon the cost of compliance with the lease exceeding the estimated value
of the improvements. To our knowledge, we are in substantial compliance with the
Americans with Disabilities Act of 1990, all work is supervised by licensed
professionals, and we are not aware of any violations of laws regarding the
handling or use of hazardous materials at the Clifford Center property. If we
fail to satisfy any of these requirements in the future, the obligation is
subject to the lessor’s decision to require the improvements to be removed. We
believe that it is improbable that there will ever be an obligation to retire
the Clifford Center improvements pursuant to this provision.
Waterfront Plaza Ground
Lease
We are
subject to a surrender clause under the Waterfront Plaza ground lease that
provides the lessor with the right to require us, at our own expense, to raze
and remove all improvements from the leased land, contingent on the lessor’s
decision at the time the ground lease expires on December 31, 2060. Accordingly,
as of December 31, 2009 and December 31, 2008, the liability in our consolidated
balance sheets for this asset retirement obligation was $0.3 million for both
periods. The accretion expense was $0.02 million and $0.06 million for the years
ended December 31, 2009 and December 31, 2008, respectively.
Restaurant Row Theatre Venture Lease
Termination
We
entered into a Termination of Lease Agreement on October 29, 2007 with a tenant
that had been leasing 21,541 square feet at the Waterfront Property under a long
term lease since 1993, at rates that we believe were below market rates. The
total termination fee paid to the tenant under the Termination of Lease
Agreement was $2.5 million, $0.3 million of which we deposited in escrow upon
executing the Termination of Lease Agreement. The remaining balance
due at termination of $2.2 million was included in accounts payable and other
liabilities on the accompanying consolidated balance sheets at December 31,
2008. On July 13, 2009, we exercised our option to terminate the lease and paid
the balance of the lease termination fee into escrow. The tenant vacated
the space on August 7, 2009, and the lease termination fee was paid to the
tenant out of escrow. We have no further liabilities related to this
lease termination.
F-28
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
We follow
the policy of monitoring 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 flow. Further, we are
not aware of any environmental liability or any unasserted claim or assessment
with respect to an environmental liability other than our conditional asset
retirement obligations that we believe would require additional disclosure or
the recording of a loss contingency.
Purchase
Commitments
We are
required by certain leases and loan agreements to complete tenant and building
improvements. As of December 31, 2009, this amount is projected to be $12.2
million, of which $1.7 million will be funded through reserves currently
classified as restricted cash. We anticipate that our reserves, as
well as other sources of liquidity, including existing cash on hand, our cash
flows from operations, financing and investing activities will be sufficient to
fund our capital expenditures.
Tax
Protection Arrangements
A sale of
any of the Contributed Properties that would not provide continued tax deferral
to Venture is prohibited under the Master Agreement and the contribution
agreements for such properties for ten years after the Effective
Date. In addition, we have agreed that, during such ten-year period,
we will not prepay or defease any mortgage indebtedness of such properties,
other than in connection with a concurrent refinancing with non-recourse
mortgage debt of an equal or greater amount and subject to certain other
restrictions. Furthermore, if any such sale or defeasance is
foreseeable, we are required to notify Venture and to cooperate with it in
considering strategies to defer or mitigate the recognition of gain under the
Code by any of the equity interest holders of the recipient of the Operating
Partnership units.
12. Description of Equity
Securities and Calculation of Non-Controlling Interests and Earnings per Share/Earnings per
Unit
The
partnership interests of the Operating Partnership are divided into (i) the
general partnership interest and (ii) the limited partnership interests,
consisting of Common Units and Preferred Units. The general partnership interest
may be expressed as a number of Common Units, Preferred Units or any other
Operating Partnership unit. The general partnership interest is denominated as a
number of Common Units equal to the number of shares of common stock and Class B
Common Stock outstanding.
Upon
initial issuance in March 2008, each Preferred Unit was convertible into 7.1717
Common Units, but no earlier than the later of (i) March 19, 2010, and (ii) the
date we consummate an underwritten public offering (of at least $75 million) of
our common stock. Upon conversion of the Preferred Units to Common Units, the
Common Units were redeemable by the holders on a one-for-one basis for shares of
our common stock or cash, as elected by the Company, but no earlier than one
year after the date of their conversion from Preferred Units to Common Units.
The Preferred Units had fixed rights to annual distributions at an annual rate
of 2% of their liquidation preference of $25 per Preferred Unit and priority
over Common Units in the event of a liquidation of the Operating Partnership. At
December 31, 2009, the cumulative unpaid distributions attributable to Preferred
Units were $0.6 million.
On
December 30, 2009, we amended certain provisions of the Partnership Agreement
relating the redemption rights of the Common Units and Preferred Units.
The Common Units issued on the Effective Date were reclassified as Class B
Common Units, which are redeemable by the holder on a one-for-one basis for
shares of common stock or a new class of C Common Units, which have no
redemption rights, as elected by a majority of our independent directors.
All other outstanding Common Units were reclassified as Class A Common
Units, which are redeemable by the holders on a one-for-one basis for shares of
common stock or cash, as elected by a majority of our independent
directors. If converted, the Preferred Units will convert into Class B
Common Units. Furthermore, the Preferred Unit put option was modified by
eliminating the various alternative currencies possible upon exercise of the put
and permitting only the issuance of new preferred units in settlement of an
exercised put. The modification of the terms of
the Preferred Units was more than inconsequential and
therefore triggered a revaluation of the Preferred Units to their fair
value on the modification date. As a result of the amendments to the
Partnership Agreement, the Non-Controlling Interests attributable to the Common
Units and Preferred Units were reclassified from mezzanine equity to permanent
equity on the consolidated balance sheet. Simultaneously, the excess of
market value over carrying value for the Preferred Units was booked as Fair
value adjustment of Preferred Units on the combined consolidated statement of
operations.
F-29
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
Common
Units of all classes and Preferred Units of the Operating Partnership do not
have any right to vote on any matters presented to our stockholders. However,
Venture, has the contractual right to require the Advisor to vote the
Proportionate Voting Preferred Stock as directed by Venture. The Proportionate
Voting Preferred Stock has no dividend rights and minimal rights to
distributions in the event of liquidation. The Proportionate Voting Preferred
Stock entitles the Advisor to vote on all matters for which the common
stockholders are entitled to vote. The number of votes that the Advisor is
entitled to cast at the direction of Venture, as the Operating Partnership unit
holder, equals the total number of common shares issuable upon redemption for
shares of the Common Units and Preferred Units issued in connection with the
Transactions. This number will decrease to the extent that these Operating
Partnership units are redeemed for shares of common stock in the future. The
number will not increase in the event of future unit issuances by the Operating
Partnership. The Company has the option to redeem the Proportionate
Voting Preferred Stock at the Company’s election if the Advisory Agreement is
terminated and the Company becomes self-advised.
Our
common stock and Class B Common Stock are identical in all respects, except that
in the event of liquidation the Class B Common Stock will not be entitled to any
portion of our net assets, which will be allocated and distributed to the
holders of the common stock. Shares of our common stock and Class B Common Stock
vote together as a single class and each share is entitled to one vote on each
matter to be voted upon by our stockholders. Dividends on the common stock and
Class B Common Stock are payable at the discretion of our Board of
Directors.
Non-controlling
interests include the interests in the Operating Partnership that are not owned
by the Company, which amounted to 78.78% of the Common Units and all of the
Preferred Units outstanding as of December 31, 2009. During the year ended
December 31, 2009, no Common Units or Preferred Units were redeemed or issued.
As of December 31, 2009, 46,896,795 shares of our common stock were reserved for
issuance upon redemption of outstanding Common Units and Preferred
Units.
We
present both basic and diluted earnings per share. Basic EPS is computed by
dividing net loss available to common stockholders by the weighted average
number of common shares outstanding during each period. Diluted EPS is computed
by dividing net loss available to common stockholders for the period by the
number of common shares that would have been outstanding assuming the issuance
of common shares for all potentially dilutive common shares outstanding during
each period. Net income or loss in the Operating Partnership is allocated in
accordance with the Partnership Agreement among our general partner and limited
partner Common Unit holders in accordance with their ownership percentages in
the Operating Partnership of 21.22% and 78.78%, respectively, after taking into
consideration the priority distributions allocated to the limited partner
preferred unit holders in the Operating Partnership.
F-30
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
Loss
per Share/Loss per Unit
The
following is the basic and diluted loss per share/unit (in thousands, except
share/unit and per share/unit amounts):
|
Pacific
Office Properties Trust, Inc.
|
Total
|
Pacific
Office Properties Trust, Inc.
|
Waterfront
|
||||||||||||
For
the year ended December 31, 2009
|
Year
ended December 31, 2008
|
For
the period from March 20, 2008 through December 31, 2008
|
For
the period from January 1, 2008 through March 19, 2008
|
|||||||||||||
Net
loss attributable to common
|
||||||||||||||||
share/unit
holders - basic and diluted (1)
|
$ | (15,613 | ) | $ | (7,820 | ) | $ | (6,741 | ) | $ | (1,079 | ) | ||||
Weighted
average number of common shares
|
3,259,013 | 3,031,125 | ||||||||||||||
Potentially
dilutive common shares (2)
|
||||||||||||||||
Restricted
Stock Units (RSU)
|
— | — | ||||||||||||||
Weighted
average number of common
|
||||||||||||||||
shares/units
outstanding — basic and diluted
|
3,259,013 | 3,031,125 | ||||||||||||||
Net
loss per share — basic and diluted
|
$ | (4.79 | ) | $ | (2.22 | ) | ||||||||||
Weighted
average number of units
|
||||||||||||||||
outstanding —
basic and diluted
|
3,494,624 | |||||||||||||||
Net
loss per unit — basic and diluted (3)
|
$ | (0.31 | ) | |||||||||||||
_________________________
Notes:
(1)
|
For
the year ended December 31, 2009, net loss attributable to common
stockholders includes $58.6 million of priority allocation to preferred
unit holders, which is included in non-controlling interests in the
combined consolidated statements of operations. For the period
from March 20, 2008 through December 31, 2008, net loss attributable to
common stockholders includes $1.8 million of priority allocation to
preferred unit holders, which is included in non-controlling interests in
the combined consolidated statements of operations. For the period from
January 1, 2008 through March 19, 2008, net loss attributable to common
stockholders included $0.1 million of priority allocation to preferred
unit holders.
|
(2)
|
For
the year ended December 31, 2009, the potentially dilutive effect of
52,630 restricted stock units was not included in the net loss per share
calculation as their effect is anti-dilutive. For the year ended December
31, 2008, the potentially dilutive effect of 24,240 restricted stock units
was not included in the net loss per share calculation as their effect is
anti-dilutive.
|
(3)
|
We
computed net loss per Common Unit for the period prior to the Transactions
by increasing the historical net loss of Waterfront by the 2% cumulative
distributions payable on the Preferred Units received by the former owners
of Waterfront and dividing that total by the weighted average number of
Common Units received by the former owners of Waterfront. We did not
include the dilution impact of Preferred Units because the units are
contingently convertible and the probability that the contingency will be
satisfied is currently not
determinable.
|
Dividends
and Distributions
During
fiscal year 2008, we declared cash dividends of $0.05 per share for each of the
third and fourth quarters of 2008, which were paid on October 15, 2008 and
January 15, 2009 to our common stockholders of record as of September 30, 2008
and December 31, 2008, respectively. Commensurate with our declaration of
these dividends, we declared cash distributions in the amount of $0.05 per
Common Unit and 2% cumulative unpaid and current distributions per Preferred
Unit, which were paid on October 15, 2008 and January 15, 2009 to holders of
record as of September 30, 2008 and December 31, 2008,
respectively.
F-31
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
During
fiscal year 2009, we declared quarterly cash dividends of $0.05 per share, which
were paid on April 15, July 15, October 15, 2009 and January 15, 2010 to our
common stockholders of record as of March 31, June 30, September 30, 2009 and
December 31, 2009, respectively. Commensurate with our declaration of these
quarterly cash dividends, we also declared quarterly cash distributions of $0.05
per Common Unit and $0.125 per Preferred Unit, which were paid on April 15, July
15, October 15, 2009 and January 15, 2010 to holders of record as of March 31,
June 30, September 30, 2009 and December 31, 2009, respectively.
Amounts
accumulated for distribution to stockholders and UPREIT unit holders are
invested primarily in interest-bearing accounts which are consistent with our
intention to maintain our qualification as a REIT. At December 31, 2009, the
cumulative unpaid distributions attributable to Preferred Units were $0.57
million, which were paid on January 15, 2010.
Dividends
declared are included in retained deficit in the accompanying consolidated
balance sheets. Distributions on Common and Preferred Units are included in
non-controlling interests in the accompanying consolidated balance
sheets.
13.
Related Party Transactions
We are
externally advised by the Advisor, an entity owned and controlled by Mr. Shidler
and by its directors and officers, certain of whom are also our executive
officers and who own substantial beneficial interests in our Company. The
Advisor manages, operates and administers the Company’s day-to-day operations,
business and affairs pursuant to the Advisory Agreement. The Advisor is entitled
to an annual corporate management fee of one tenth of one percent (0.1%) of the
gross cost basis of our total property portfolio less accumulated depreciation
and amortization, but in no event less than $1.5 million per annum. Although we
are responsible for all direct expenses incurred by us for certain services for
which we are the primary service obligee, our Advisor bears the cost and is not
reimbursed by us for any expenses incurred by it in the course of performing
operational advisory services for us, which expenses include, but are not
limited to, salaries and wages, office rent, equipment costs, travel costs,
insurance costs, telecommunications and supplies. The corporate
management fee is subject to reduction of up to $750,000 based upon the amounts
of the direct costs that we bear. Additionally, the Advisor and its affiliates
are entitled to receive real property management fees of 2.5% to 4.5% of the
rental cash receipts collected by the properties, leasing fees consistent with
the prevailing market as well as property transaction management fees in an
amount equal to 1% of the contract price of any acquired or disposed property;
however, such property management fees, leasing fees, and property transaction
fees must be consistent with prevailing market rates for similar services
provided on an arm’s-length basis in the area in which the subject property is
located.
The
Advisor is also entitled to certain fees related to any placement of debt or
equity that we may undertake, including (i) 0.50% of the total amount of
co-investment equity capital procured, (ii) 0.50% of the total gross offering
proceeds including, but not limited to, the issuance or placement of equity
securities and the issuance of Operating Partnership units, and (iii) 0.50% of
the principal amount of any new indebtedness related to properties that we
wholly own, and on properties owned in a joint venture with co-investment
partners or entity-level financings, as well as on amounts available on our
credit facilities and on the principal amount of indebtedness we may
issue.
The
Advisory Agreement terminates on March 19, 2018. Prior to that date, however, we
retain the right to terminate the Advisory Agreement upon 30 days written
notice. In the event we decide to terminate the Advisory Agreement in order to
internalize management and become self-managed, we would be obligated to pay the
Advisor an internalization fee equal to $1.0 million, plus certain accrued and
unreimbursed expenses. Further, the Advisor retains the right to terminate the
Advisory Agreement upon 30 days prior written notice in the event we default in
the performance or observance of any material provision of the Advisory
Agreement.
F-32
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
During
the year ended December 31, 2009, we incurred $0.8 million, net, in corporate
management fees attributable to the Advisor which have been included in general
and administrative expenses in the combined consolidated statements of
operations. During the year ended December 31, 2008, we incurred $0.6 million,
net, in corporate management fees attributable to the Advisor. Other
than as indicated below, no other amounts were incurred under the Advisory
Agreement during the year ended December 31, 2009. Included in accounts payable
and other liabilities in our consolidated balance sheets at December 31, 2009
and December 31, 2008, was $1.2 million and $1.1 million, respectively, of
amounts payable to related parties which primarily consist of rental revenues
received by us subsequent to the date of the Transactions, but that related to
the Contributed Properties prior to the Effective Date.
We
and Waterfront paid amounts to our Advisor and its related parties for services
provided relating to property management, leasing, property transactions and
debt placement. The fees paid are summarized in the table below for the
indicated periods (in thousands):
|
For
the year ended December 31, 2009
|
For
the year ended December 31, 2008
|
||||||
Property
management fees
|
||||||||
to affiliates of
Advisor (1)
|
$ | 3,327 | $ | 2,573 | ||||
Leasing commissions (2)
|
342 | 388 | ||||||
Corporate
management fees to Advisor
|
750 | 587 | ||||||
Interest
|
1,835 | 1,172 | ||||||
Construction
management fees and other
|
82 | 111 | ||||||
Total
|
$ | 6,336 | $ | 4,831 | ||||
___________
(1) Property
management fees are calculated as a percentage of the rental cash receipts
collected by the properties (ranging from 2.5% to 4.5%), plus the payroll costs
of on-site employees.
(2) Leasing
commissions are capitalized as deferred leasing costs and are amortized over the
life of the related lease.
We lease
commercial office space to affiliated entities. The annual rents from these
leases totaled $0.7 million and $0.5 million for the years ended December 31,
2009 and December 31, 2008, respectively.
During
2008, following exercise of the Option, we consummated the acquisition of
managing ownership interests in five joint ventures. Additionally, we and our
joint venture partner in Seville Plaza entered into an Amended Operating
Agreement, which caused the method of accounting to change to the equity method.
Please see Note 5 for further discussion on our acquisitions of unconsolidated
joint ventures.
Related
Party Financing Transactions
On August
19, 2009, we entered into an interim financing agreement with Shidler
LP. Upon execution, Shidler LP provided us with a principal sum of
$3.0 million, bearing interest of 7.0% per annum. The maturity date
of the note was ninety days following the date of the promissory
note. We repaid the $3.0 million note on September 22, 2009, in
addition to $0.02 million of accrued interest.
On
September 2, 2009, as security for the FHB Credit Facility, Shidler LP pledged
to the Lender (the “Shidler LP Pledge”) a certificate of deposit in the
principal amount of $10 million (the “Certificate of Deposit”). As a
condition to the Shidler LP Pledge, our Operating Partnership and Shidler LP
entered into an Indemnification Agreement, effective as of September 2, 2009
(the “Indemnification Agreement”), pursuant to which we agreed to indemnify
Shidler LP from any losses, damages, costs and expenses incurred by Shidler LP
in connection with the Shidler LP Pledge. In addition, to the extent
that all or any portion of the Certificate of Deposit is withdrawn by the Lender
and applied to the payment of principal, interest and/or charges under the FHB
Credit Facility, we agreed to pay to Shidler LP interest on the withdrawn amount
at a rate of 7.0% per annum from the date of the withdrawal until the date of
repayment in full to Shidler LP. Pursuant to the Indemnification
Agreement, we also agreed to pay to Shidler LP an annual fee of 2.0% of the
entire $10.0 million principal amount of the Certificate of
Deposit. As of December 30, 2009, the amount of the security was
increased to $15.0 million. As of December 31, 2009, we have $0.05
million of accrued interest attributable to the Shidler LP Pledge included in
accounts payable and other liabilities in the accompanying consolidated balance
sheets. See Note 9 for more discussion on the FHB Credit
Facility.
F-33
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
At
December 31, 2009 and December 31, 2008, $2.6 million and $1.2 million of
accrued interest attributable to unsecured notes payable to related parties,
respectively, is included in accounts payable and other liabilities in the
accompanying consolidated balance sheets. See Note 10 for a detailed discussion
on these notes payable.
14.
Share-Based Payments
On May
21, 2008, the Board of Directors of the Company adopted the 2008 Directors’
Stock Plan, as amended and restated (the “2008 Directors’ Plan”), subject to
stockholder approval. The Company reserved 150,000 shares of the Company’s
common stock under the 2008 Directors’ Plan for the issuance of stock options,
restricted stock awards, stock appreciation rights and performance awards. The
2008 Directors’ Plan was approved by our stockholders at our annual meeting of
stockholders on May 12, 2009.
On May
21, 2008, the Company issued restricted stock unit awards representing 24,240
shares under the 2008 Directors’ Plan, which awards vested upon receipt of
stockholder approval at the Company’s 2009 annual meeting. The grant date fair
value of each restricted stock unit was $6.60, which was the closing stock price
on May 21, 2008. On June 19, 2009, the Company issued a restricted stock unit
award representing 6,060 shares under the 2008 Directors’ Plan, which vested
immediately upon issuance. The grant date fair value of each such restricted
stock unit was $3.80, which was the closing stock price on June 19, 2009.
Accordingly, the Company recognized $0.2 million and $0.1 million of
compensation expense attributable to the 2008 Directors’ Plan during the years
ended December 31, 2009 and 2008, respectively. These amounts are included in
general and administrative expenses in the accompanying combined consolidated
statement of operations for the years then ended. As of December 31, 2009, all
of our share-based payments to directors in 2008 are vested.
On June
19, 2009, the Company issued restricted stock units representing 52,630 shares
under the 2008 Directors’ Plan, which awards vest on the first anniversary of
the grant date. The grant date fair value of each such restricted
stock unit was $3.80, which was the Company’s closing stock price on June 19,
2009.
Upon the
Effective Date and in connection with the Transactions, certain employees and
officers of the Advisor and the Company were granted fully vested indirect
ownership interests in the Operating Partnership with an estimated fair value
upon the Effective Date of $16.2 million. Accordingly, the Company recognized a
one-time non-cash compensation charge in the amount of $16.2 million for the
year ended December 31, 2008. This amount has been included in general and
administrative expenses on the combined consolidated statements of operations
for the year ended December 31, 2008.
15.
Segment Reporting
We are
primarily focused on acquiring, owning and operating office properties in
selected submarkets of long term growth markets in Honolulu and the western
United States, including southern California and the greater Phoenix
metropolitan area. We are aggregating our operations by geographic region into
two reportable segments (Honolulu and the Western United States mainland) based
on the similar economic characteristics of the properties located in each of
these regions. The products at all our properties include primarily rental of
office space and other tenant services, including parking and storage space
rental. We also have certain corporate level income and expenses
related to our credit facility and legal, accounting, finance and management
activities, which are not considered separate operating
segments.
F-34
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
The
following tables summarize the statements of operations by region of our
wholly-owned consolidated properties for the years ended December 31, 2009 and
2008 (in thousands):
For
the year ended December 31, 2009
|
||||||||||||||||
|
Honolulu
|
Western
U.S.
|
Corporate
|
Total
|
||||||||||||
Revenue:
|
||||||||||||||||
Rental
|
$ | 29,605 | $ | 12,842 | $ | 15 | $ | 42,462 | ||||||||
Tenant
reimbursements
|
20,510 | 1,152 | — | 21,662 | ||||||||||||
Parking
|
7,165 | 985 | — | 8,150 | ||||||||||||
Other
|
123 | 45 | 197 | 365 | ||||||||||||
Total
revenue
|
57,403 | 15,024 | 212 | 72,639 | ||||||||||||
Expenses:
|
||||||||||||||||
Rental
property operating
|
31,659 | 7,821 | — | 39,480 | ||||||||||||
General
and administrative
|
— | — | 2,649 | 2,649 | ||||||||||||
Depreciation
and amortization
|
19,667 | 7,573 | — | 27,240 | ||||||||||||
Interest
|
21,196 | 3,367 | 2,488 | 27,051 | ||||||||||||
Loss
on extinguishment of debt
|
— | — | 171 | 171 | ||||||||||||
Total
expenses
|
72,522 | 18,761 | 5,308 | 96,591 | ||||||||||||
Loss
before equity in net earnings of unconsolidated
|
||||||||||||||||
joint
ventures and non-operating income
|
$ | (15,119 | ) | $ | (3,737 | ) | $ | (5,096 | ) | $ | (23,952 | ) | ||||
Equity
in net earnings of unconsolidated joint ventures
|
313 | |||||||||||||||
Non-operating
income
|
434 | |||||||||||||||
Fair
value adjustment of Preferred Units
|
(58,645 | ) | ||||||||||||||
Net
loss attributable to non-controlling interests
|
66,237 | |||||||||||||||
Net
loss attributable to common stockholders
|
$ | (15,613 | ) | |||||||||||||
For
the year ended December 31, 2008
|
||||||||||||||||
|
Honolulu
|
Western
U.S.
|
Corporate
|
Total
|
||||||||||||
Revenue:
|
||||||||||||||||
Rental
|
$ | 26,550 | $ | 10,885 | $ | 12 | $ | 37,447 | ||||||||
Tenant
reimbursements
|
18,400 | 975 | — | 19,375 | ||||||||||||
Parking
|
6,065 | 825 | — | 6,890 | ||||||||||||
Other
|
190 | 85 | 119 | 394 | ||||||||||||
Total
revenue
|
51,205 | 12,770 | 131 | 64,106 | ||||||||||||
Expenses:
|
||||||||||||||||
Rental
property operating
|
31,201 | 6,513 | — | 37,714 | ||||||||||||
General
and administrative
|
— | — | 18,577 | 18,577 | ||||||||||||
Depreciation
and amortization
|
15,613 | 6,682 | — | 22,295 | ||||||||||||
Interest
|
18,326 | 3,146 | 1,460 | 22,932 | ||||||||||||
Other
|
108 | 35 | — | 143 | ||||||||||||
Total
expenses
|
65,248 | 16,376 | 20,037 | 101,661 | ||||||||||||
Loss
before equity in net earnings of unconsolidated
|
||||||||||||||||
joint
ventures and non-operating income
|
$ | (14,043 | ) | $ | (3,606 | ) | $ | (19,906 | ) | $ | (37,555 | ) | ||||
Equity
in net earnings of unconsolidated joint ventures
|
93 | |||||||||||||||
Non-operating
income
|
85 | |||||||||||||||
Net
loss attributable to non-controlling interests
|
29,557 | |||||||||||||||
Net
loss attributable to common stockholders
|
$ | (7,820 | ) |
F-35
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
The
following table summarizes total assets, goodwill and capital expenditures, by
region, of our wholly-owned consolidated properties as of December 31, 2009 and
December 31, 2008 (in thousands):
|
Honolulu
|
Western U.S.
|
Corporate
|
Total
|
||||||||||||
As
of December 31, 2009:
|
||||||||||||||||
Total
assets
|
$ | 372,403 | $ | 124,454 | $ | 13,479 | $ | 510,336 | ||||||||
Goodwill
|
$ | 40,416 | $ | 21,603 | $ | — | $ | 62,019 | ||||||||
Capital
expenditures
|
$ | 5,700 | $ | 1,005 | $ | — | $ | 6,705 | ||||||||
As
of December 31, 2008:
|
||||||||||||||||
Total
assets
|
$ | 383,966 | $ | 130,062 | $ | 15,869 | $ | 529,897 | ||||||||
Goodwill
|
$ | 48,549 | $ | 13,470 | $ | — | $ | 61,519 | ||||||||
Capital
expenditures
|
$ | 7,000 | $ | 1,514 | $ | — | $ | 8,514 |
16.
Fair Value of Financial Instruments
We are
required to disclose fair value information about all financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. We measure and disclose the estimated fair value of
financial assets and liabilities utilizing a fair value hierarchy that
distinguishes between data obtained from sources independent of the reporting
entity and the reporting entity’s own assumptions about market participant
assumptions. This hierarchy consists of three broad levels as follows: 1) using
quoted prices in active markets for identical assets or liabilities, 2)
“significant other observable inputs” and 3) “significant unobservable inputs.”
“Significant other observable inputs” can include quoted prices for similar
assets or liabilities in active markets, as well as inputs that are observable
for the asset or liability, such as interest rates, foreign exchange rates and
yield curves that are observable at commonly quoted intervals. “Significant
unobservable inputs” are typically based on an entity’s own assumptions, since
there is little, if any, related market activity. In instances where the
determination of the fair value measurement is based on inputs from different
levels of the fair value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the lowest level input
that is significant to the fair value measurement in its entirety. Our
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to
the asset or liability. The fair market value of debt is determined using the
trading price of public debt or a discounted cash flow technique that
incorporates a market interest yield curve with adjustments for duration,
optionality and risk profile, including the Company’s non-performance risk.
Considerable judgment is necessary to interpret market data and develop
estimated fair value. The use of different market assumptions or estimation
methods may have a material effect on the estimated fair value
amounts.
The
carrying amounts for cash and cash equivalents, restricted cash, rents and other
receivables, accounts payable and other liabilities approximate fair value
because of the short-term nature of these instruments. We calculate the fair
value of our mortgage and other loans, and unsecured notes payable by using
“significant other observable inputs” such as available market information and
discounted cash flows analyses based on borrowing rates we believe we could
obtain with similar terms and maturities. Because the valuations of our
financial instruments are based on these types of estimates, the actual fair
value of our financial instruments may differ materially if our estimates do not
prove to be accurate. Additionally, the use of different market assumptions or
estimation methods may have a material effect on the estimated fair value
amounts. The carrying value of the FHB Credit Facility approximates
its fair value.
At
December 31, 2009, the carrying value and estimated fair value of the mortgage
and other loans were $406.4 million and $376.8 million,
respectively. At December 31, 2008, the carrying value and
estimated fair value of the mortgage and other loans were $400.1 million
and $390.4 million, respectively. At December 31, 2009, the carrying value
and estimated fair value of the unsecured notes payable to related parties were
$21.1 million and $23.1 million, respectively. At December 31,
2008, the carrying value and estimated fair value of the unsecured notes payable
to related parties were $23.8 million and $24.6 million,
respectively.
F-36
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
17.
Quarterly Financial Information (unaudited)
The table
below reflects the selected quarterly information for the years ended
December 31, 2009 and 2008:
|
Pacific
Office Properties Trust, Inc.
|
|||||||||||||||
|
Three
Months Ended
|
|||||||||||||||
|
December 31,
|
September 30,
|
June 30,
|
March 31,
|
||||||||||||
|
2009
|
2009
|
2009
|
2009
|
||||||||||||
(In
thousands, except common share information)
|
||||||||||||||||
Total
revenue
|
$ | 18,106 | $ | 17,744 | $ | 18,019 | $ | 18,770 | ||||||||
Net
loss
|
$ | (5,808 | ) | $ | (6,104 | ) | $ | (5,810 | ) | $ | (5,483 | ) | ||||
Net
loss attributable to common stockholders
|
$ | (12,200 | ) (1) | $ | (1,241 | ) | $ | (1,116 | ) | $ | (1,056 | ) | ||||
Net
loss per common share — basic and diluted
|
$ | (3.17 | ) (1) | $ | (0.40 | ) | $ | (0.37 | ) | $ | (0.35 | ) | ||||
Weighted
average number of common shares outstanding — basic and
diluted
|
3,850,520 | 3,112,888 | 3,034,122 | 3,031,125 |
Pacific Office Properties Trust,
Inc.
|
|
|||||||||||||||||||
|
Three Months Ended
|
|
Waterfront
|
|||||||||||||||||
|
December 31,
2008
|
September 30,
2008
|
June 30, 2008
|
March 20,
2008 to
March 31, 2008 (2)
|
January 1,
2008 to
March 19, 2008
|
|||||||||||||||
(In
thousands, except common share information)
|
||||||||||||||||||||
Total
revenue
|
$ | 19,765 | $ | 18,599 | $ | 18,254 | $ | 2,326 | $ | 5,162 | ||||||||||
Loss
before non-controlling interests
|
$ | (6,157 | ) | $ | (6,221 | ) | $ | (7,106 | ) | $ | (16,922 | ) | $ | (971 | ) | |||||
Net
loss
|
$ | (1,077 | ) | $ | (1,188 | ) | $ | (1,374 | ) | $ | (3,102 | ) | $ | (971 | ) | |||||
Net
loss per common share — basic and diluted
|
$ | (0.36 | ) | $ | (0.39 | ) | $ | (0.45 | ) | $ | (1.02 | ) | ||||||||
Weighted
average number of common shares outstanding — basic and
diluted
|
3,031,125 | 3,031,125 | 3,031,125 | 3,031,125 |
___________
(1) Includes
a one-time non-cash, fair value adjustment of preferred units of approximately
$58.6 million.
(2) Amounts have been updated to reflect
the deconsolidation of a property, in which we own 7.5% managing interest, which
was consolidated in the financial statements reported in our Form 10-Q for the
quarter ended March 31, 2008. On April 1, 2008, the partnership
agreement was modified which provided substantive participating rights to the
non-managing member.
18.
Subsequent Events
On
January 5, 2010, the Company filed with the Maryland State Department of
Assessments and Taxation (i) articles of amendment to its charter increasing the
number of authorized shares of common stock by 400,000,000 shares and (ii)
classifying and designating 40,000,000 shares of common stock as a series of
“Senior Common Stock” and establishing the terms of such series. The
Senior Common Stock ranks senior to the Company’s common stock and Class B
Common Stock with respect to payments of dividends and distribution of amounts
upon liquidation, dissolution or winding up. It has a $10.00 per share
(plus accrued and unpaid dividends) liquidation preference. Subject to the
preferential rights of any future series of preferred shares, holders of Senior
Common Stock will be entitled to receive, when and as declared by the Company’s
Board of Directors, cumulative cash dividends in an amount per share equal to a
minimum of $0.725 per share per annum, payable monthly. Should the
dividend payable on the Company’s common stock exceed its current rate of $0.20
per share per annum, the Senior Common Stock dividend would increase by 25% of
the amount by which the common stock dividend exceeds $0.20 per share per
annum. Holders of Senior Common Stock have the right to vote on all
matters presented to stockholders as a single class with holders of the Listed
Common Stock, the Class B Common Stock and the Proportionate Voting Preferred
Stock. Each share of Senior Common Stock is entitled to one vote on
each matter to be voted upon by our stockholders. Shares of Senior
Common Stock may be exchanged, at the option of the holder, for shares of common
stock after the fifth anniversary of the issuance of such shares of Senior
Common Stock.
F-37
Pacific
Office Properties Trust, Inc.
Notes
to Combined Consolidated Financial Statements
18.
Subsequent Events (continued)
On
January 12, 2010, the Securities and Exchange Commission (the “SEC”) declared
effective the Company’s registration statement on Form S-11 providing for the
issuance and sale of up to 40,000,000 shares of Senior Common Stock at a price
of $10.00 per share. The Senior Common Stock is being sold in a continuous
offering through an affiliated dealer-manager on a “best efforts” basis.
The Company does not intend to list the Senior Common Stock on any exchange. The
Company intends to use substantially all of the net proceeds from the offering
to acquire office properties, either directly or through joint ventures with
institutional investors, to make other real estate-related investments and to
fund other capital needs such as repayment of debt and other property and
corporate expenses.
On
March 11, 2010, our Board of Directors declared a cash dividend of $0.05 per
share of our common stock for the first quarter of 2010. The dividend will be
paid on April 15, 2010 to stockholders of record as of March 31, 2010.
Commensurate with our declaration of this cash dividend, we also declared cash
distributions of $0.05 per Common Unit and $0.125 per Preferred Unit of the
Operating Partnership, which will be paid on April 15, 2010 to holders of record
as of March 31, 2010.
F-38
PACIFIC
OFFICE PROPERTIES TRUST, INC.
SCHEDULE III
CONSOLIDATED
REAL ESTATE AND ACCUMULATED DEPRECIATION
(dollars
in thousands)
Gross Amounts
|
|||||||||||||||||||||||||||||||||||||||||||||
Costs
|
at
Which Carried
|
||||||||||||||||||||||||||||||||||||||||||||
Initial Costs
|
Capitalized
|
at December 31, 2009
|
Depreciable
|
||||||||||||||||||||||||||||||||||||||||||
Office
|
Bldg.
and
|
Subsequent
to
|
Bldg.
and
|
Accumulated
|
Date
|
Date
|
Life
|
||||||||||||||||||||||||||||||||||||||
Property Name
|
Location
|
Encumbrances
|
Land
|
Imp.(1)
|
Acquisition
|
Land
|
Imp.(1)
|
Total
|
Depreciation
|
Built(2)
|
Acquired
|
(Years)
|
|||||||||||||||||||||||||||||||||
Clifford
Center
|
Hawaii
|
$ | 3,501 | $ | 50 | $ | 8,279 | $ | 990 | $ | 50 | $ | 9,268 | $ | 9,318 | $ | 1,051 | 1964 | 2008 | 5-39 | |||||||||||||||||||||||||
Pacific
Business News Building
|
Hawaii
|
11,653 | 5,414 | 5,911 | 1,565 | 5,472 |
7,417
|
12,889 | 832 | 1964 | 2008 | 5-39 | |||||||||||||||||||||||||||||||||
Davies
Pacific Center
|
Hawaii
|
95,000 | 15,587 | 83,181 | 3,274 | 15,587 | 86,453 | 102,040 | 6,725 | 1972 | 2008 | 3-34 | |||||||||||||||||||||||||||||||||
Pan
Am Building
|
Hawaii
|
60,000 | 17,700 | 52,027 | 1,415 | 17,700 | 53,442 | 71,142 | 4,343 | 1969 | 2008 | 4-42 | |||||||||||||||||||||||||||||||||
City
Square
|
Arizona
|
54,517 | 20,208 | 61,099 | 2,326 | 20,208 | 63,425 | 83,633 | 6,979 |
1961/’65/’71
|
2008 | 2-40 | |||||||||||||||||||||||||||||||||
Sorrento
Technology Center
|
California
|
11,800 | 5,872 | 7,711 | 15 | 5,872 | 7,726 | 13,598 | 835 | 1984 | 2008 | 5-35 | |||||||||||||||||||||||||||||||||
First
Insurance Center
|
Hawaii
|
52,000 | 10,588 | 43,482 | 1,144 | 10,588 | 44,629 | 55,217 | 2,542 | 1983 | 2008 | 5-41 | |||||||||||||||||||||||||||||||||
Waterfront
|
Hawaii
|
111,000 | — | 63,068 | 8,393 | — | 71,087 | 71,087 | 12,723 | 1988/2006 | (3) | 2004 | 5-42 | ||||||||||||||||||||||||||||||||
AZL
Land
|
Arizona
|
— | 56 | — | — | 56 | — | 56 | — | 2008 | |||||||||||||||||||||||||||||||||||
Total
|
$ | 399,471 | $ | 75,475 | $ | 324,758 | $ | 19,122 | $ | 75,533 | $ | 343,447 | $ | 418,980 | $ | 36,030 |
(1)
Includes building and
improvements; land improvements; tenant improvements, furniture, fixtures and
equipment; and construction in progress.
(3) Year
built/renovated.
Pacific Office Properties Trust, Inc. |
Waterfront
|
|||||||||||
From
January 1, 2009 through December 31, 2009
|
From
March 20, 2008 through December 31, 2008
|
From
January 1, 2008 through March 19, 2008
|
||||||||||
(in
thousands)
|
||||||||||||
Real
Estate Properties:
|
||||||||||||
Balance,
beginning of period
|
$ | 413,914 | $ | 68,062 | $ | 68,373 | ||||||
Additions
and improvements
|
6,708 | 346,168 | ||||||||||
Write
off of property
|
(1,642 | ) | (316 | ) | (311 | ) | ||||||
Balance,
end of period
|
$ | 418,980 | $ | 413,914 | $ | 68,062 | ||||||
Accumulated
depreciation:
|
||||||||||||
Balance,
beginning of period
|
$ | 21,257 | $ | 9,015 | $ | 8,786 | ||||||
Depreciation
|
15,861 | 12,379 | 229 | |||||||||
Write
off of property
|
(1,088 | ) | (137 | ) | - | |||||||
Balance,
end of period
|
$ | 36,030 | $ | 21,257 | $ | 9,015 |
F-39