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EX-31.2 - EXHIBIT 31.2 - Cole Credit Property Trust Inc | c98491exv31w2.htm |
EX-21.1 - EXHIBIT 21.1 - Cole Credit Property Trust Inc | c98491exv21w1.htm |
EX-32.1 - EXHIBIT 32.1 - Cole Credit Property Trust Inc | c98491exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Cole Credit Property Trust Inc | c98491exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-51962
COLE CREDIT PROPERTY TRUST, INC.
(Exact name of registrant as specified in its charter)
Maryland | 20-0939158 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
2555 East Camelback Road, Suite 400 | ||
Phoenix, Arizona, 85016 | (602) 778-8700 | |
(Address of principal executive offices; zip code) | (Registrants telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Exchange on Which Registered | |
None | None |
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, par value $0.01 per share
Common Stock, par value $0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes 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 Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes 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 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 is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated file
in Rule 12b-2 of the Exchange Act. (Check one.)
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if 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 the voting stock held by non-affiliates as of June 30, 2009:
approximately $100.9 million assuming a market value of $10.00 per share. No established market
exists for the Registrants common stock.
The number of shares of common stock outstanding as of March 29, 2010 was 10,090,951.
Documents Incorporated by Reference:
The Registrant incorporates by reference portions of the Cole Credit Property Trust, Inc.
Definitive Proxy Statement for the 2010 Annual Meeting of Stockholders (into Items 10, 11, 12, 13
and 14 of Part III).
TABLE OF CONTENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
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CONSOLIDATED BALANCE SHEETS |
F-3 | |||||||
CONSOLIDATED STATEMENTS OF OPERATIONS |
F-4 | |||||||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY |
F-5 | |||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
F-7 | |||||||
Exhibit 21.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K of Cole Credit Property Trust,
Inc. other than historical facts may be considered forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of
the Securities Exchange Act of 1934, as amended (the Exchange Act). We intend for all such
forward-looking statements to be covered by the safe harbor provisions for forward-looking
statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as
applicable by law. Such statements include, in particular, statements about our plans, strategies,
and prospects and are subject to certain risks and uncertainties, as well as known and unknown
risks, which could cause actual results to differ materially from those projected or anticipated.
Therefore, such statements are not intended to be a guarantee of our performance in future periods.
Such forward-looking statements can generally be identified by our use of forward-looking
terminology such as may, will, would, could, should, expect, intend, anticipate,
estimate, believe, continue, or other similar words. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date this Annual
Report on Form 10-K is filed with the Securities and Exchange Commission (SEC). We make no
representation or warranty (express or implied) about the accuracy of any such forward-looking
statements contained in this Annual Report on Form 10-K, and we do not undertake to publicly update
or revise any forward-looking statements, whether as a result of new information, future events, or
otherwise.
Forward-looking statements that were true at the time made may ultimately prove to be
incorrect or false. We caution investors not to place undue reliance on forward-looking
statements, which reflect our managements view only as of the date of this Annual Report on Form
10-K. We undertake no obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future operating results.
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PART I
ITEM 1. BUSINESS
Formation
Cole Credit Property Trust, Inc. (the Company, we, our, or us) is a Maryland
corporation that was formed on March 29, 2004 that is organized and operates as a real estate
investment trust (REIT) for federal income tax purposes. We were organized to acquire and
operate commercial real estate primarily consisting of net leased, freestanding, single-tenant,
income-generating retail properties located throughout the United States. As of December 31, 2009,
we owned 42 properties located in 19 states, comprising approximately 1.0 million rentable square
feet. As of December 31, 2009, these properties were 100% leased.
Substantially all of our business is conducted through our operating partnership, Cole
Operating Partnership I, LP (Cole OP I), a Delaware limited partnership. The Company is the sole
general partner of and owns an approximately 99.99% interest in Cole OP I. Cole REIT Advisors, LLC
(Cole Advisors), the affiliate advisor to the Company, is the sole limited partner and owns an
insignificant noncontrolling partnership interest of less than 0.01%
of Cole OP I.
Cole Advisors acts as our advisor pursuant to an advisory agreement. Cole Advisors is
responsible for managing our affairs on a day-to-day basis, identifying and making acquisitions and
investments on our behalf and making recommendations as to dispositions of assets. Our board of
directors exercises its fiduciary duties in reviewing these recommendations and determining to
approve or reject proposed transactions. Our advisor also provides asset management, marketing,
legal, investor relations and other administrative services on our behalf. Our agreement with Cole
Advisors is for a one-year term and is reconsidered on an annual basis by our board of directors.
We have no paid employees and rely upon our advisor to provide substantially all of our services.
On April 26, 2004, we commenced a private placement of shares of common stock offered at a
price of $10.00 per share, subject to certain volume and other discounts (the Offering). We
completed the Offering on September 16, 2005, after having raised aggregate gross proceeds of
$100,331,320 through the sale of an aggregate of 10,097,251 shares of our common stock. As of
March 29, 2010, 10,090,951 shares of our common stock were issued and outstanding and held by 1,438
stockholders of record.
We issued our common stock in the Offering in reliance upon exemptions from the registration
requirements of the Securities Act and state securities laws. As a result, our stockholders may
not transfer their shares of common stock except pursuant to an effective registration statement or
pursuant to an exemption from registration. Our common stock is not currently listed on a national
securities exchange and there currently is no market for our common stock. We do not intend to
list our shares at this time. We do not anticipate that there will be any market for our common
stock until our shares are listed on a national securities exchange. However, once a stockholder
has held our shares for at least one year, he or she may be able to have the shares repurchased by
us pursuant to our share redemption program.
Alternatively, our board of directors may decide to list our shares of common stock on a
national securities exchange. Pursuant to our charter, if we do not list our shares of common
stock on a national securities exchange on or before February 1, 2016, we will be required to
either:
| seek stockholder approval of an extension or amendment to this listing deadline; or | ||
| seek stockholder approval to adopt a plan of liquidation of the Company |
If we do not list the shares by such date, and do not obtain stockholder approval of an
extension or amendment to the listing deadline, we then would be required to seek stockholder
approval of our plan of liquidation of the Company. If we seek and fail to obtain stockholder
approval of our plan of liquidation, our charter would not require us to list or liquidate and we
could continue to operate as before. If we seek and obtain stockholder approval of our plan of
liquidation, we would begin an orderly sale of our properties and distribute our net proceeds from
liquidation to our stockholders.
Our principal executive offices are located at 2555 East Camelback Road, Suite 400, Phoenix,
Arizona 85016. Our telephone number is (602) 778-8700.
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Investment Objectives and Policies
General
Our primary investment objectives are:
| to provide current income for our stockholders through the payment of cash distributions; | ||
| to preserve and return our stockholders capital contributions; and | ||
| to realize growth in the value of our properties upon the ultimate sale of such properties. |
Our board of directors may revise our investment policies, which we describe in more detail
below, without the approval of our stockholders. Our board reviews our investment policies at
least annually to determine that our policies are in the best interest of our stockholders.
Primary Investment Focus
We primarily own and invest in net leased, freestanding, single-tenant, income-generating
retail properties located throughout the United States. Our current investments are indirect
investments in such properties through wholly-owned subsidiaries of Cole OP I. We may also invest
in other entities that own or invest in, directly or indirectly, interests in such properties. We
seek to own and maintain a portfolio of real estate that is diversified by geographical location
and by type and size of retail centers. Our properties consist of real estate primarily improved
for use as retail establishments and principally are freestanding, single-tenant retail properties.
However, we are not limited to investments in single-tenant retail properties. Many of our
properties are leased to tenants in the chain or franchise retail industry, including but not
limited to convenience stores, drug stores, home improvement stores, automobile dealerships and
sporting goods properties. Our advisor monitors industry trends and invests in properties that we
believe to provide the most favorable return balanced with risk. Our management targets primarily
retail businesses with established operating track records.
We believe that our focus on the acquisition of net leased, freestanding, single-tenant,
income-generating retail properties located throughout the United States presents lower investment
risks and greater stability than other sectors of todays commercial real estate market. Unlike
funds that invest in a limited number of large investments in large, multi-tenant properties, our
portfolio is diversified into a larger number of assets, with the result that lower than expected
results of operations from one or a few investments will not preclude our ability to realize our
investment objectives of cash flow, preservation of capital and capital appreciation from our
overall portfolio. Our management believes that freestanding retail properties offer a distinct
investment advantage since these properties generally offer superior locations that are less
dependent on the financial stability of adjoining tenants. In addition, since we acquired
properties that are geographically diverse, we may reduce the potential adverse impact of economic
downturns in local markets.
We apply credit underwriting criteria to the tenants of existing properties and when
re-leasing properties in our portfolio. Tenants of our properties typically are large national or
super-regional retail chains that have significant net worth and operating income. Generally these
tenants and/or the lease guarantors are experienced multi-unit operators with a history of success
as measured by profitable unit-level store performance and positive cash from operations. We
attempt to manage our real estate portfolio by evaluating changes or trends in the industries in
which our tenants operate, the creditworthiness of our tenants and changes or trends in the area
demographics surrounding our properties for evidence that our properties will continue to meet our
investment objectives of cash flow, preservation of capital and capital appreciation. We monitor
such factors as tenant credit ratings, financial condition and results of our tenants, and overall
real estate market conditions. If it were to be advantageous for us to dispose of any of our
properties based on changes in the factors noted above we would do so if we believe it would be in
the best interest of our stockholders. See Item 1. Business Disposition Policies below.
Our tenants include investment grade tenants, non-investment grade tenants and non-rated
tenants. Our policy does not limit the percentage of our assets that may consist of properties
rented to non-investment grade and non-rated tenants. A tenant is considered investment grade
when the tenant has a debt rating by Moodys Investor Services of Baa3 or better or a credit rating
by Standard & Poors of BBB- or better, or its payments are guaranteed by a company with such a
debt rating. A tenant is considered non-investment grade when the tenant has a debt rating by
either Moodys or Standard & Poors that is below investment grade. A tenant is considered
non-rated if it has not been rated by a credit rating agency. As of December 31, 2009,
approximately 29% of all scheduled lease payments were projected to be derived from tenants that
maintain an investment grade credit rating, while approximately 24% and 47% of scheduled lease
payments are projected to be derived from non-investment grade tenants and non-rated tenants,
respectively. Changes in tenant credit ratings, coupled with future acquisition and disposition
activity, may increase or decrease our concentration of investment grade tenants in the future.
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Generally, our non-investment grade tenants have significant net worth and operating income
and financial profiles that our advisor believes meet our investment objectives of cash flow,
preservation of capital and capital appreciation. In evaluating the credit worthiness of a tenant
or prospective tenant, our advisor does not use specific quantifiable standards, but does consider
many factors, including the proposed terms of the acquisition. The factors that our advisor
considers include the financial condition of the tenant and/or guarantor, credit agency reports (if
any), Dun and Bradstreet reports, the operating history of the property with such tenant, the trade
area demographics surrounding the property, the tenants market share and track record within its
industry segment, the general health and outlook of the tenants industry segment, and the lease
length and terms at the time of the acquisition.
Other Possible Investments
Although most of our property acquisitions are of the type described above, we have made, and
may continue to make, other investments. For example, we are not limited to investments in
single-tenant retail properties or properties leased to investment grade tenants. Our policy does
not limit the percentage of our assets that may consist of properties rented to non-investment
grade and non-rated tenants. We have invested, or may in the future invest, in other commercial
properties, such as shopping centers, business and industrial parks, manufacturing facilities,
office buildings and warehouse and distribution facilities in order to reduce overall portfolio
risks or enhance overall portfolio returns. We have made, or may make, such investments only after
our advisor determined that it would be advantageous to do so. It is our policy to limit our
investments in non-freestanding, single-tenant retail properties and mortgage loans to 20% of the
aggregate value of our investment portfolio at the time of the investment in such property or
mortgage loan. We may exceed this policy limit with the approval of the board of directors.
We have not made, and do not intend to make, loans to other persons, to underwrite securities
of other issuers or to engage in the purchase and sale of any types of investments other than
interests in real estate.
Investment Decisions
Cole Advisors has substantial discretion with respect to the selection of specific investments
and the purchase and sale of our properties, subject to the approval of our board of directors. In
pursuing our investment objectives and making investment decisions for us, Cole Advisors evaluates
the proposed terms of the purchase against all aspects of the transaction, including the condition
and financial performance of the property, the terms of existing leases and the creditworthiness of
the tenant and/or lease guarantor, and property and location characteristics. Because the factors
considered, including the specific weight we place on each factor, vary for each investment, we do
not, and are not able to, assign a specific weight or level of importance to any particular factor.
In addition to procuring and reviewing an independent valuation estimate and property
condition report, our advisor also considers the following, when available:
| unit level store performance; | ||
| property location, visibility and access; | ||
| age of the property, physical condition and curb appeal; | ||
| the prospects for long-range appreciation and liquidity; | ||
| suitability of the property for any development contemplated or in progress; | ||
| the propertys income producing capacity; | ||
| tax considerations; | ||
| neighboring property uses; | ||
| local market conditions including vacancy rates; | ||
| area demographics, including trade area population and average household income; | ||
| neighborhood growth patterns and economic conditions; | ||
| presence of nearby properties that may positively impact store sales at the subject property; and | ||
| lease terms including length of lease term, scope of landlord responsibilities, presence and frequency of contractual rental increases, renewal option provisions, exclusive and permitted use provisions, co-tenancy requirements and termination options. |
Our advisor considers properties leased and/or guaranteed by companies that maintain an
investment grade rating by either Standard & Poors or Moodys Investor Services. Our advisor also
considers non-rated and non-investment grade rated tenants that it believes have significant net
worth and operating income.
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Conditions to Closing Our Acquisitions
Generally, we condition our obligation to close the purchase of any investment on the delivery
and verification of certain documents from the seller or developer, including, where appropriate:
| plans and specifications; | ||
| surveys; | ||
| evidence of marketable title, subject to such liens and encumbrances as are acceptable to Cole Advisors; | ||
| financial statements covering recent operations of properties having operating histories; | ||
| title and liability insurance policies; and | ||
| tenant estoppel certificates. |
We generally will not purchase, and have not purchased, any property unless and until we
obtain what is generally referred to as a Phase I environmental site assessment and are generally
satisfied with the environmental status of the property. However, we may purchase a property
without obtaining such an assessment if our advisor determines it is not warranted. A Phase I
environmental site assessment generally consists of a visual survey of the building and the
property in an attempt to identify areas of potential environmental concerns, visually observing
neighboring properties to assess surface conditions or activities that may have an adverse
environmental impact on the property, and contacting local governmental agency personnel who
perform a regulatory agency file search in an attempt to determine any known environmental concerns
in the immediate identity of the property. A Phase I environmental site assessment does not
generally include any sampling or testing of soil, ground water or building materials from the
property and may not reveal all environmental hazards on the property. We currently do not own any
properties that are in development and do not intend to acquire any properties that are in
development.
Ownership Structure
Our investment in real estate generally takes the form of holding fee title or a long-term
leasehold estate. We acquire such interests either directly through our operating partnership or
indirectly through limited liability companies and limited partnerships that are wholly-owned by
our operating partnership. In addition, in certain cases we purchased properties and leased them
back to the sellers of such properties and we may engage in these types of sale-leaseback
transactions in the future. While we use our best efforts to structure any such sale-leaseback
transaction such that the lease is characterized as a true lease so that we will be treated as
the owner of the property for federal income tax purposes, the Internal Revenue Service could
challenge such characterization. In the event that any such sale-leaseback transaction is
re-characterized as a financing transaction for federal income tax purposes, deductions for
depreciation and cost recovery relating to such property would be disallowed.
Borrowing Policies
We believe that utilizing borrowings is consistent with our investment objective of maximizing
the return to investors. The number of different properties that we acquired has been affected by
the amount of funds available to us. Accordingly, utilizing borrowings enabled us to increase the
number of our acquisitions and our diversification. There is no limitation on the amount we can
borrow for the purchase of any property or other investment. However, we intend to limit our
borrowings so that we generally will not borrow in the aggregate in excess of 60% of the value of
our real estate related assets. As of December 31, 2009, we had approximately $118.7 million in
aggregate principle amount of borrowings outstanding, which represented approximately 58% of the
aggregate value of our total gross real estate assets net of gross intangible lease liabilities.
We had approximately $750,000 outstanding under an approximately $1.5 million revolving line of
credit. See Item 2. Properties Mortgage Information below for additional information on our
debt.
Disposition Policies
We intend to hold each property we acquire for an extended period of time, generally six to
eight years from the time of acquisition. However, circumstances might arise that could result in
the early sale of some properties. We may sell a property before the end of the expected holding
period if we believe the sale of the property would be in the best interests of our company and our
stockholders. As of December 31, 2009, we had not sold any properties.
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The determination of whether a particular property should be sold or otherwise disposed of
will be made after consideration of relevant factors, including prevailing economic conditions and
current tenant creditworthiness, with a view to achieving maximum capital appreciation. We cannot
assure you that this objective will be realized. The selling price of a property that is net
leased will be determined in large part by the amount of rent payable remaining under the lease.
In connection with our sales of properties we may lend the purchaser all or a portion of the
purchase price. In these instances, our taxable income may exceed the cash received in the sale.
The terms of payment will be affected by customs in the area in which the property being sold is
located and the then-prevailing economic conditions.
Conflicts of Interest
We are subject to various conflicts of interest arising out of our relationship with Cole
Advisors, our advisor, and its affiliates, including conflicts related to the arrangements pursuant
to which Cole Advisors and its affiliates will be compensated by us. Additionally, each of our
directors is an affiliate of Cole Advisors as well as other Cole-sponsored real estate programs.
The agreements and compensation arrangements between us, our advisor and its affiliates were
not determined by arms-length negotiations. Some of the conflicts of interest in our transactions
with our advisor and its affiliates, and the limitations on our advisor adopted to address these
conflicts, are described below.
Our advisor and its key personnel and affiliates try to balance our interests with their
duties to other Cole-sponsored programs. However, to the extent that our advisor or its key
personnel and affiliates take actions that are more favorable to other entities than to us, these
actions could have a negative impact on our financial performance and, consequently, on
distributions to our stockholders and the value of our stock. In addition, our directors, officers
and certain of our stockholders may engage for their own account in business activities of the
types conducted or to be conducted by our subsidiaries and us.
Interests in Other Real Estate Programs
An affiliate of our directors and our advisor acts as an advisor to, and two of our officers
and directors act as officers and directors of, Cole Credit Property Trust II, Inc. and Cole Credit
Property Trust III, Inc., each of which acquires assets and has investment objectives similar to
ours. Affiliates of our directors and officers and entities owned or managed by such affiliates
also may acquire or develop real estate for their own accounts, and have done so in the past.
Furthermore, affiliates of our directors and officers and entities owned or managed by such
affiliates intend to form additional real estate investment entities in the future, whether public
or private, which can be expected to have the same or similar investment objectives and policies as
we do and which may be involved in the same geographic area. Our advisor, its affiliates and
affiliates of our directors and officers are not obligated to present to us any particular
investment opportunity that comes to their attention, even if such opportunity is of a character
that might be suitable for investment by us. Our advisor and its affiliates, as well as our
officers and directors, likely will experience conflicts of interest as they simultaneously perform
services for us and other affiliated real estate programs. Any affiliated entity, whether or not
currently existing, could compete with us in the sale or operation of the properties. We will seek
to achieve any operating efficiency or similar savings that may result from affiliated management
of competitive properties. However, to the extent that affiliates own or acquire property that is
adjacent, or in close proximity, to a property we own, our property may compete with the
affiliates property for tenants or purchasers.
Every transaction that we enter into with our advisor or its affiliates is subject to an
inherent conflict of interest. Our board of directors may encounter conflicts of interest in
enforcing our rights against any affiliate in the event of a default by or disagreement with an
affiliate or in invoking powers, rights or options pursuant to any agreement between us and our
advisor or any of its affiliates.
Other Activities of Cole Advisors and its Affiliates
We rely on Cole Advisors for the day-to-day operation of our business pursuant to an advisory
agreement. As a result of the interests of members of its management, as well as the interests of
our directors and officers, in other Cole-sponsored programs and the fact that they have also
engaged and will continue to engage in other business activities, Cole Advisors and its key
personnel and affiliates, as well as our directors and officers, have conflicts of interest in
allocating their time between us and other Cole-sponsored programs and other activities in which
they are involved. However, Cole Advisors believes that it and its affiliates have sufficient
personnel to discharge fully their responsibilities to all of the Cole-sponsored programs and other
ventures in which they are involved.
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Each of our directors and executive officers, including Christopher H. Cole, who also serves
as the chairman of our board of directors, also serves as an officer of our advisor, our property
manager, and other affiliated entities. As a result, these individuals owe duties to these other
entities that may conflict with the duties that they owe to us and our stockholders.
We have purchased, and in the future may purchase properties or interests in properties from
affiliates of Cole Advisors. The prices we pay to affiliates of our advisor for these properties
will not be the subject of arms-length negotiations, which could mean that the acquisitions may be
on terms less favorable to us than those negotiated with unaffiliated parties.
Competition in Acquiring, Leasing and Operating of Properties
Conflicts of interest will exist to the extent that we have acquired, and in the future may
acquire, properties in the same geographic areas where properties owned by other Cole-sponsored
programs are located. In such a case, a conflict could arise in the leasing of properties in the
event that we and another Cole-sponsored program were to compete for the same tenants in
negotiating leases, or a conflict could arise in connection with the resale of properties in the
event that we and another Cole-sponsored program were to attempt to sell similar properties at the
same time. Conflicts of interest may also exist at such time as we or our affiliates managing
property on our behalf seek to employ developers, contractors or building managers, as well as
under other circumstances. Cole Advisors seeks to reduce conflicts relating to the employment of
developers, contractors or building managers by making prospective employees aware of all such
properties seeking to employ such persons. In addition, Cole Advisors seeks to reduce conflicts
that may arise with respect to properties available for sale or rent by making prospective
purchasers or tenants aware of all such properties. However, these conflicts cannot be fully
avoided in that there may be established differing compensation arrangements for employees at
different properties or differing terms for resale or leasing of the various properties.
Affiliated Dealer Manager
Cole Capital Corporation (Cole Capital), an affiliate of Cole Advisors, acted as the dealer
manager in our Offering. As a result, we did not have the benefit of an independent due diligence
review and investigation of the type normally performed by an unaffiliated, independent underwriter
in connection with our Offering.
Affiliated Property Manager
Our properties are, and we anticipate that properties we acquire in the future, if any, will
be managed and leased by our affiliated property manager, Cole Realty Advisors, Inc. (Cole
Realty), pursuant to a property management and leasing agreement. Cole Realty also serves as
property manager for properties owned by Cole affiliated real estate programs, some of which may be
in competition with our properties. Management fees to be paid to our property manager are based
on a percentage of the rental and other income received by the managed properties.
Lack of Separate Representation
Morris, Manning & Martin, LLP acts, and may in the future act, as counsel to us, Cole
Advisors, and certain of our respective affiliates. There is a possibility that in the future the
interests of the various parties may become adverse, and under the Code of Professional
Responsibility of the legal profession, Morris, Manning & Martin, LLP may be precluded from
representing any one or all of such parties. In the event that a dispute were to arise between us,
Cole Advisors, or any of our respective affiliates, separate counsel for such matters will be
retained as and when appropriate.
Receipt of Fees and Other Compensation by Cole Advisors and Its Affiliates
We have paid, and will continue to pay, fees to Cole Advisors and its affiliates in connection
with our operation, purchases and sales of properties, commissions, fees and other compensation,
including acquisition and advisory fees, the dealer manager fee, property management and leasing
fees, real estate brokerage commissions and participation in nonliquidating net sale proceeds.
However, the fees and compensation payable to Cole Advisors and its affiliates relating to the net
sale proceeds from the sale of properties will only be payable after the return to the stockholders
of their capital contributions plus cumulative returns on such capital. Subject to oversight by
our board of directors, Cole Advisors will have considerable discretion with respect to all
decisions relating to the terms and timing of all transactions. Therefore, Cole Advisors may have
conflicts of interest concerning certain actions taken on our behalf, particularly due to the fact
that such fees will generally be payable to Cole Advisors and its affiliates regardless of the
quality of the properties acquired or the services provided to us.
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Policies With Respect to Conflicts of Interest
In order to reduce or eliminate certain potential conflicts of interest, we have adopted
certain policies relating to transactions we enter into with our affiliates and allocation of
investment opportunities among affiliated entities.
Transactions with Affiliates. Our policy is that the terms on which our relationships are
conducted with our advisor or any of its affiliates will be fair to us and on terms and conditions
no less favorable to us than can be obtained from independent third parties for comparable services
in the same location.
Conflict Resolution Procedures with Respect to Acquisition of Properties. We, our advisor and
its affiliates have agreed on certain steps to eliminate potential conflicts in connection with
selecting properties for purchase when the property is suitable, under all of the factors
considered by our advisor, for us and one or more other entities affiliated with our advisor. The
affiliated parties will first consider which programs have funds for investment and will offer the
property first to the program that has had the largest period of time elapse since it was offered
an investment opportunity. In determining suitability, the factors that will be considered include
cash requirements of each program, the effect of the acquisition on diversification by type of
property, geographic area and type of tenant, anticipated cash flow, purchase price, and size of
the investment. We, our advisor and its affiliates reserve the right to make adjustments in such
determinations if delays occur and an acquisition does not close when anticipated.
Employees
We have no direct employees. The employees of Cole Advisors and other affiliates of our
advisor provide services for us related to acquisition, financing, property management, asset
management, disposition, accounting, investor relations, and all other administrative services.
We are dependent on our advisor and its affiliates for services that are essential to us,
including asset acquisition and disposition decisions, property management and other general
administrative responsibilities. In the event that these companies were unable to provide these
services to us, we would be required to obtain such services from other sources.
We may reimburse Cole Advisors and its affiliates for expenses incurred in connection with its
provision of administrative services to us, including personnel costs, subject to certain
limitations. During the years ended December 31, 2009 and 2008, no amounts were reimbursed, or
required to be reimbursed, to Cole Advisors and its affiliates for such services.
Insurance
Generally, our leases require each tenant to procure, at its own expense, commercial general
liability insurance, as well as property insurance covering the building for the full replacement
value and naming the ownership entity and the lender, if applicable, as the additional insured on
the policy. As a precautionary measure, our advisor has, and may continue to, obtain, to the
extent available, secondary liability insurance, as well as loss of rents insurance that covers one
year of annual rent in the event of a rental loss. The secondary insurance coverage names the
ownership entity as the named insured on the policy.
Some leases require that we procure the insurance for both commercial general liability and
property damage insurance; however, the premiums are generally reimbursable from the tenant. In
the event we procure such insurance, the policy lists us as the named insured on the policy and the
tenant as the additional insured.
Tenants are required to provide proof of insurance by furnishing a certificate of insurance to
our advisor on an annual basis. The insurance certificates are tracked and reviewed for compliance
by our property manager.
Competition
While we currently do not intend to acquire additional properties, in the event that we do so,
we would be in competition with other potential buyers for the same properties, and may have to pay
more to purchase the property then we would if there were no other potential acquirers or will have
to locate another property that meets our investment criteria. Although our properties currently
are 100% leased and we have acquired, and may continue to acquire in the future, properties subject
to existing leases, the leasing of real estate is highly competitive in the current market, and we
may experience competition for tenants from owners and managers of competing projects. If any of
our existing leases were to be terminated prior to expiration of the lease term we would need to
find a replacement tenant, which may be more challenging in the current economic environment. As a
result, we may have to provide free rent, incur charges for tenant improvements, or offer other
inducements, or we might not be able to timely lease the space, all of which may have an adverse
impact on our results of operations. At the time we elect to dispose of our properties, we will
also be in competition with sellers of similar properties to locate suitable purchasers for our
properties.
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Concentration of Credit Risk
At December 31, 2009, we had cash on deposit in one financial institution, which was
approximately $1.7 million in excess of federally insured levels, however, we have not experienced
any losses in such accounts. We limit investment of cash investments to financial institutions
with high credit standing; therefore, we believe we are not exposed to any significant credit risk
on cash.
As of December 31, 2009, three tenants in the drugstore industry, one tenant in the auto sales
industry and one tenant in the home improvement industry accounted for approximately 36%, 11%, and
10%, respectively, of our 2009 gross annualized base rental revenues. Additionally we have certain
geographic concentration in our property holdings. In particular, as of December 31, 2009, eight
of our properties were located in Texas and five of our properties were located in Kansas,
accounting for approximately 24% and 17%, respectively, of our 2009 gross annualized base rental
revenues.
Litigation
In the ordinary course of business, we may become subject to litigation or claims. There are
no material pending legal proceedings, or known to be contemplated, against us.
Environmental Matters
In connection with the ownership and operation of real estate, we may be potentially liable
for costs and damages related to environmental matters. We have not been notified by any
governmental authority of any non-compliance, liability or other claim, nor are we aware of any
other environmental condition that we believe, in either case, will have a material adverse effect
on the consolidated financial statements.
Available Information
We electronically file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and all amendments to those reports with the SEC. We have also filed a
registration statement on Form 10-SB, as amended. Copies of our filings with the SEC may be
obtained from the SECs website, at http://www.sec.gov. Access to these filings is free of
charge.
Requirements for Qualification as a REIT
We qualified as a REIT commencing with the taxable year ended December 31, 2004. To continue
to qualify as a REIT, we must meet, and we must continue to meet, certain requirements relating to
our organization, sources of income, nature of assets, distributions of income to our stockholders
and recordkeeping. We generally will not be subject to federal corporate income tax to the extent
we distribute our taxable income to our stockholders, and so long as we distribute at least 90% of
our taxable income.
If we fail to qualify as a REIT for any reason in a taxable year and applicable relief
provisions do not apply, we will be subject to tax, including any applicable alternative minimum
tax, on our taxable income at regular corporate rates. We will not be able to deduct distributions
paid to our stockholders in any year in which we fail to qualify as a REIT. We also will be
disqualified for the four taxable years following the year during which qualification was lost
unless we are entitled to relief under specific statutory provisions.
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ITEM 1A. RISK FACTORS
Not required for a smaller reporting company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not required for a smaller reporting company.
ITEM 2. PROPERTIES
Overview
As of December 31, 2009, we owned, through separate wholly-owned limited partnerships or
limited liability companies, a portfolio of 42 freestanding, single-tenant retail properties,
located in 19 states, comprising approximately 1.0 million rentable square feet. As of December
31, 2009, we had outstanding debt of approximately $118.7 million, secured by properties in our
portfolio and the related tenant leases. As of December 31, 2009, all of our rentable square feet
was leased, with a weighted average remaining lease term of 11 years.
We have included a description of the types of real estate in which we may invest, and our
investment policies and limitations on investment and the competitive conditions in which we
operate under Item 1. Business above. We believe our properties are suitable for their intended
use and are adequately insured. We have no plans for renovation, or improvement of such
properties. We do not anticipate acquiring any additional properties, unless we were to dispose of
any properties in the ordinary course of business, in which case we may reinvest the sales proceeds
in additional properties. We currently have no plans to dispose of any of our properties.
Property Statistics
The following table shows the tenant diversification of our portfolio, based on annualized
gross base rent, as of December 31, 2009:
2009 Annualized | Percentage of Total | |||||||||||||||
Total Number of | Leased Square | Gross Base Rent | 2009 Annualized | |||||||||||||
Tenant | Leases | Feet | (in thousands) | Gross Base Rent | ||||||||||||
Rite Aid drugstore |
11 | 136,366 | $ | 3,281 | 21 | % | ||||||||||
CarMax auto dealership |
1 | 55,466 | 1,692 | 11 | % | |||||||||||
Lowes home improvement |
2 | 256,902 | 1,617 | 10 | % | |||||||||||
Walgreens drugstore |
6 | 81,575 | 1,402 | 9 | % | |||||||||||
Vanguard car rental |
1 | 23,360 | 1,178 | 7 | % | |||||||||||
Gander Mountain sporting goods |
1 | 88,492 | 1,148 | 7 | % | |||||||||||
Wawa convenience store |
3 | 15,896 | 1,122 | 7 | % | |||||||||||
CVS drugstore |
4 | 45,968 | 1,087 | 7 | % | |||||||||||
Conns electronics |
3 | 75,150 | 954 | 6 | % | |||||||||||
Tractor Supply specialty retailer |
4 | 90,762 | 837 | 5 | % | |||||||||||
CineMagic theater |
1 | 45,455 | 642 | 4 | % | |||||||||||
Apria healthcare |
1 | 82,750 | 548 | 3 | % | |||||||||||
Best Buy electronics |
1 | 20,000 | 298 | 2 | % | |||||||||||
Sherwin Williams specialty retailer |
3 | 16,410 | 219 | 1 | % | |||||||||||
42 | 1,034,552 | $ | 16,025 | 100 | % | |||||||||||
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The following table shows the tenant industry diversification of our portfolio, based on
annualized gross base rent, as of December 31, 2009:
2009 Annualized | Percentage of Total | |||||||||||||||
Total Number of | Leased Square | Gross Base Rent | 2009 Annualized | |||||||||||||
Industry | Leases | Feet | (in thousands) | Gross Base Rent | ||||||||||||
Drugstore |
21 | 263,909 | $ | 5,770 | 36 | % | ||||||||||
Auto sales |
1 | 55,466 | 1,692 | 11 | % | |||||||||||
Home improvement |
2 | 256,902 | 1,617 | 10 | % | |||||||||||
Electronics |
4 | 95,150 | 1,252 | 8 | % | |||||||||||
Car rental |
1 | 23,360 | 1,178 | 7 | % | |||||||||||
Sporting goods |
1 | 88,492 | 1,148 | 7 | % | |||||||||||
Convenience store |
3 | 15,896 | 1,122 | 7 | % | |||||||||||
Specialty retail |
7 | 107,172 | 1,056 | 7 | % | |||||||||||
Theatre |
1 | 45,455 | 642 | 4 | % | |||||||||||
Healthcare |
1 | 82,750 | 548 | 3 | % | |||||||||||
42 | 1,034,552 | $ | 16,025 | 100 | % | |||||||||||
The following table shows the geographic diversification of our portfolio, based on annualized
gross base rent, as of December 31, 2009:
2009 Annualized | Percentage of Total | |||||||||||||||
Total Number of | Leased Square | Gross Base Rent | 2009 Annualized | |||||||||||||
Location | Properties | Feet | (in thousands) | Gross Base Rent | ||||||||||||
Texas |
8 | 331,995 | $ | 3,760 | 24 | % | ||||||||||
Kansas |
5 | 121,917 | 2,774 | 17 | % | |||||||||||
Georgia |
1 | 23,360 | 1,178 | 7 | % | |||||||||||
Ohio |
6 | 61,911 | 1,038 | 7 | % | |||||||||||
South Carolina |
2 | 27,637 | 755 | 5 | % | |||||||||||
Arkansas |
1 | 126,405 | 755 | 5 | % | |||||||||||
Pennsylvania |
2 | 16,055 | 677 | 4 | % | |||||||||||
Minnesota |
1 | 45,455 | 643 | 4 | % | |||||||||||
Indiana |
2 | 87,760 | 634 | 4 | % | |||||||||||
Tennessee |
2 | 22,264 | 604 | 4 | % | |||||||||||
Maine |
2 | 24,280 | 559 | 4 | % | |||||||||||
Virginia |
2 | 36,483 | 552 | 3 | % | |||||||||||
Delaware |
1 | 5,599 | 399 | 2 | % | |||||||||||
Kentucky |
2 | 43,365 | 376 | 2 | % | |||||||||||
New Jersey |
1 | 5,603 | 361 | 2 | % | |||||||||||
Mississippi |
1 | 20,000 | 298 | 2 | % | |||||||||||
Missouri |
1 | 10,908 | 283 | 2 | % | |||||||||||
Illinois |
1 | 13,500 | 193 | 1 | % | |||||||||||
North Carolina |
1 | 10,055 | 186 | 1 | % | |||||||||||
42 | 1,034,552 | $ | 16,025 | 100 | % | |||||||||||
Leases
Although there are variations in the specific terms of the leases of our properties, the
following is a summary of the general structure of our leases. Generally, the leases of our
properties provide for initial terms of ten to 20 years. As of December 31, 2009, the weighted
average remaining lease term was approximately 11 years. The properties are generally leased under
net leases pursuant to which the tenant bears responsibility for substantially all property costs
and expenses associated with ongoing maintenance and operation, including utilities, property taxes
and insurance. The leases of our properties provide for annual base rental payments (payable in
monthly installments) ranging from approximately $60,000 to approximately $1.7 million, with an
average of approximately $382,000. Certain leases provide for limited increases in rent as a result
of fixed increases, increases in the consumer price index, and/or increases in the tenants sales
volume.
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Generally, the property leases provide the tenant with one or more multi-year renewal options,
subject to the same terms and conditions as the initial lease term. Certain leases also provide
that in the event we wish to sell the property subject to that lease, we first must offer the
lessee the right to purchase the property on the same terms and conditions as any offer which we
intend to accept for the sale of the property.
The following table shows lease expirations of our portfolio as of December 31, 2009, during
each of the next ten years and thereafter, assuming no exercise of renewal options or termination
rights:
2009 Annualized | Percentage of Total | |||||||||||||||
Total Number of | Leased Square | Gross Base Rent | 2009 Annualized | |||||||||||||
Year of Lease Expiration | Leases | Feet Expiring | (in thousands) | Gross Base Rent | ||||||||||||
2010 - 2012 |
0 | | $ | | 0 | % | ||||||||||
2013 |
1 | 12,885 | 218 | 1 | % | |||||||||||
2014 |
6 | 177,656 | 1,436 | 9 | % | |||||||||||
2015 |
3 | 218,257 | 1,496 | 9 | % | |||||||||||
2016 |
1 | 20,000 | 298 | 2 | % | |||||||||||
2017 |
2 | 49,920 | 747 | 5 | % | |||||||||||
2018 |
3 | 35,460 | 738 | 5 | % | |||||||||||
2019 |
6 | 180,630 | 2,351 | 15 | % | |||||||||||
Thereafter |
20 | 339,744 | 8,741 | 54 | % | |||||||||||
42 | 1,034,552 | $ | 16,025 | 100 | % | |||||||||||
Mortgage Information
At December 31, 2009, we had a total of approximately $118.0 million of fixed rate debt
outstanding. Other than those notes that we have extended in
accordance with the hyper-amortization provisions discussed below, the fixed rate mortgage notes
require monthly interest-only payments with the principal balance due on various dates from April
2010 through December 2029. The weighted average interest rate relating to the fixed rate mortgage
notes as of December 31, 2009 and 2008 was approximately 5.92% and approximately 5.76%,
respectively. Each of the mortgage notes is secured by the respective properties on which the debt
was placed. The mortgage notes are generally non-recourse to the Company and Cole OP I, but both
are liable for customary non-recourse carve-outs.
At December 31, 2009, we had approximately $750,000 outstanding under an approximately $1.5
million revolving line of credit. The revolving line of credit bears interest at a variable rate
equal to the one-month LIBOR plus 175 basis points and matures in March 2011. The revolving line
of credit is secured by one property.
Generally, the mortgage notes may not be prepaid, in whole or in part, except under the
following circumstances: (i) full prepayment may be made on any of the three monthly payment dates
occurring immediately prior to the maturity date, and (ii) partial prepayments resulting from the
application of insurance or condemnation proceeds to reduce the outstanding principal balance of
the mortgage notes. Notwithstanding the prepayment limitations, we may sell the properties to a
buyer that assumes the respective mortgage loan. The transfer would be subject to the conditions
set forth in the individual propertys mortgage note document, including without limitation, the
lenders approval of the proposed buyer and the payment of the lenders fees, costs and expenses
associated with the sale of the property and the assumption of the loan.
As of December 31, 2009, we had elected to extend the maturity date of six mortgage notes
totaling approximately $9.0 million to various dates in November and December 2029 in accordance
with the hyper-amortization provisions of the respective promissory notes. Under the
hyper-amortization provisions, the maturity dates were extended by 20 years. During such period,
the lender will apply 100% of the rents collected by the encumbered property to the following items
in the order indicated: (i) payment of accrued interest at the original fixed interest rate, (ii)
all payments for escrow or reserve accounts, (iii) any operating expenses of the property pursuant
to an approved annual budget, (iv) any extraordinary operating or capital expenses and (v) the
balance of the rents collected will be applied to the following in such order as the lender may
determine: (1) any other amounts due in accordance with the loan documents, (2) the reduction of
the principal balance of the promissory notes, and (3) interest accrued at the Revised Interest
Rate but not previously paid. As used herein, Revised Interest Rate means an interest rate equal
to the greater of (A) the initial fixed interest rate as stated in the respective promissory note
agreement plus 2.0% per annum or (B) the then current Treasury Constant Maturity Yield Index plus
2.0% per annum. The Company expects the interest rates on the extended loans to range from 6.62%
to 7.36%.
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ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we may become subject to litigation or claims. There are
no material pending legal proceedings or proceedings known to be contemplated against us or any of
our subsidiaries, or which any of our properties is the subject.
ITEM 4. REMOVED AND RESERVED
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PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
On April 26, 2004, we commenced the Offering. We completed the Offering on September 16,
2005, after having raised aggregate gross proceeds of $100,331,320 through the sale of an aggregate
of 10,097,251 shares of our common stock. As of March 29, 2010, 10,090,951 shares of our common
stock were issued and outstanding and held by 1,438 stockholders of record. The number of
stockholders is based on the records of DST Systems, Inc., who serves as our registrar and transfer
agent.
There is no established trading market for our common stock. Therefore, there is a risk that
a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder,
or at all. Pursuant to the Offering, we sold shares of our common stock to our stockholders
generally at a price of $10.00 per share. Additionally, we provided discounts in our Offering for
certain categories of purchasers, including discounts based on the volume of purchases by single
purchasers and certain of their affiliates. Under our charter, certain restrictions are imposed on
the ownership and transfer of shares. The shares, which are restricted securities as defined in
Rule 144 promulgated by the SEC under the Securities Act, must be held indefinitely unless they are
subsequently registered under the Securities Act and any applicable state securities laws or
unless, upon the advice of counsel satisfactory to us, the shares are sold in a transaction that is
exempt from the registration requirements of such laws. Currently, shares of our common stock may
be eligible for sale under Rule 144.
We may seek to list our shares of common stock on a securities exchange or inter-dealer
quotation system if our board of directors believes listing would be in the best interest of our
stockholders. In making the decision to apply for listing of our shares or providing other forms
of liquidity, such as selling our properties and other assets, either on a portfolio basis or
individually, or engaging in a business combination transaction approved by our board of directors,
our board of directors will evaluate whether listing the shares or liquidating would result in
greater value for our stockholders. It cannot be determined at this time the circumstances, if
any, under which the board of directors would determine to list the shares. If we do not list our
shares of common stock on a national securities exchange by February 1, 2016, our charter requires
that we either:
| seek stockholder approval of an extension or amendment to this listing deadline; or | ||
| seek stockholder approval to adopt a plan of liquidation of the corporation. |
If we seek and fail to obtain stockholder approval of an extension or amendment to the listing
deadline, we would then be required to seek stockholder approval of our plan of liquidation. If we
seek and fail to obtain stockholder approval of our plan of liquidation, our charter would not
require us to list or liquidate and we would continue to operate as before. If we seek and obtain
stockholder approval of our plan of liquidation, we would begin an orderly sale of our properties
and distribute our net proceeds from liquidation to our stockholders.
Unless and until our shares are listed on a national securities exchange, it is not expected
that a public market for our shares will develop. To assist fiduciaries of plans subject to the
annual reporting requirements of the Employee Retirement Income Security Act, as amended (ERISA)
and IRA trustees or custodians to prepare reports relating to an investment in our shares, we
provide reports of our determinations of the current value of our net assets per outstanding share
to those fiduciaries (including IRA trustees and custodians) who identify themselves to us and
request the reports. Accordingly, we have provided an annual statement of value for stockholders
subject to ERISA and to certain other plan stockholders. The annual statement of value is only an
estimate and may not reflect the actual value of shares of our common stock. Our board of
directors engaged a third-party valuation company to develop the estimates and to provide advice in
determining the estimated net asset value per share. The estimated net asset value per share was
derived by using various valuation methodologies, which employed a range of assumptions and
considered the impact of trends in the economy and the real estate industry. Based on the results
of the methodologies, our board of directors selected a value within the range of values as the
estimated net asset value per share of $7.65 as of December 31, 2009. Because this is only an
estimate, we may subsequently revise any annual valuation that is provided. There can be no
assurance, however, with respect to the estimated net asset value per share, that:
| the estimated value per share would actually be realized by our stockholders upon liquidation, because these estimates do not necessarily indicate the price at which properties can be sold; | ||
| our stockholders would be able to realize estimated net asset values if they were to attempt to sell their shares, because no public market for our shares exists or is likely to develop; or | ||
| that the value, or method used to establish value, would comply with ERISA or Internal Revenue Code requirements described above. |
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There are no outstanding options or warrants to purchase, or securities convertible into,
shares of our common stock. The limited partners of our operating partnership have the right to
cause their limited partnership units to be redeemed by the operating partnership or purchased by
us for cash. In either event, the cash amount to be paid will be equal to the cash value of the
number of our shares of common stock that would be issuable if the limited partnership units were
exchanged for our shares of common stock on a one-for-one basis. Alternatively, we may elect to
purchase the limited partnership units by issuing one share of our common stock for each limited
partnership unit exchanged. These exchange rights may not be exercised, however, if and to the
extent that the delivery of shares upon exercise would (1) result in any person owning shares in
excess of our ownership limits, (2) result in shares being owned by fewer than 100 persons, (3)
cause us to be closely held within the meaning of Section 856(h) of the Internal Revenue Code,
(4) cause us to own 10.0% or more of the ownership interests in a tenant within the meaning of
Section 856(d)(2)(B) of the Internal Revenue Code, or (5) cause the acquisition of shares by a
redeemed limited partner to be integrated with any other distribution of our shares for purposes
of complying with the Securities Act. As of March 29, 2010, an aggregate of nine limited
partnership units in our operating partnership were issued and outstanding, all of which are held
by our advisor. We are the sole general partner of the operating partnership and, as of March 29,
2010, we owned an approximately 99.99% equity percentage interest in the operating partnership.
Our advisor is the only limited partner and the owner of the other approximately 0.01% equity
percentage interest in the operating partnership.
Share Redemption Program
In order to provide stockholders with the possibility of liquidity, stockholders who have held
their shares of common stock for at least one year may receive the benefit of limited interim
liquidity by presenting for redemption all or a minimum portion of their shares to us at any time
in accordance with the procedures outlined below. At that time, we may, subject to the conditions
and limitations described below, redeem the shares presented for redemption for cash to the extent
that we have sufficient funds available to us to fund such redemption.
We determine at the beginning of each fiscal year the maximum amount of shares that we may
redeem during that year. For the years ending December 31, 2009 and 2008, we did not redeem any
shares under the share redemption program. Our board of directors has determined that no amounts
are to be made available for redemption during the year ending December 31, 2010. The board
reserved the right to reject any requests for redemption and to amend the terms of the redemption
plan. As of December 31, 2009, we had redeemed a total of 7,300 shares, at an average of $9.35 per
share, under the share redemption program.
Except as described below for redemptions upon the death of a stockholder, the purchase price
for the redeemed shares will equal the lesser of (1) the price actually paid for those shares or
(2) either (i) $8.50 per share or (ii) 90.0% of the net asset value per share, or $6.89 per share.
Our board of directors reserves the right in its sole discretion at any time and from time to time
to (1) waive the one-year holding period in the event of the death or bankruptcy of a stockholder
or other exigent circumstances, (2) reject any request for redemption, (3) change the purchase
price for redemption, or (4) otherwise amend the terms of our share redemption program.
The purchase price for shares redeemed upon the death of a stockholder generally will be equal
to the price the stockholder actually paid for the shares. If, at the time of redemption, our
advisor or another firm we might choose for that purpose, has made a determination of our net asset
value per share, the purchase price for shares redeemed upon the death of a stockholder will be the
net asset value of the shares as so determined. We will redeem shares upon the death of a
stockholder only to the extent that we have sufficient funds available to us to fund such
redemption.
Redemption of shares, when requested, may generally be made quarterly on a first-come,
first-served basis. We cannot guarantee that we will have sufficient available cash flow to
accommodate any or all requests made in any quarter. If we do not have such sufficient funds
available, at the time when redemption is requested, our stockholders can (1) withdraw its request
for redemption or (2) ask that we honor the request at such time, if any, when sufficient funds
become available. Such pending requests will generally be honored on a first-come, first-served
basis.
Stockholders may present to us fewer than all of their shares for redemption, except that (1)
a stockholder must present for redemption at least 2,500 shares and (2) if the stockholder retains
any shares, it must retain at least 2,500 shares. The shares we redeem under our share redemption
program will be cancelled and return to the status of authorized but unissued shares.
Our board of directors may amend, suspend or terminate our share redemption program upon
30 days notice at any time.
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Distributions
We qualified as a REIT for federal income tax purposes commencing with our taxable year ended
December 31, 2004. As a REIT, we have made, and intend to make, distributions each taxable year
(not including a return of capital for federal income tax purposes) equal to at least 90% of our
taxable income. One of our primary goals is to pay regular (monthly) distributions to our
stockholders.
For income tax purposes, distributions to common stockholders are characterized as ordinary
income, capital gains, or as a return of a stockholders invested capital. To the extent that we
make a distribution in excess of our current or accumulated earnings and profits, the distribution
will be treated as a tax-free return of capital, reducing the tax basis in each U.S. stockholders
shares, and the amount of each distribution of a U.S. stockholders tax basis in its shares will be
taxable as gain realized from the sale of its shares.
The following table reflects the aggregate distributions we paid during the years ended
December 31, 2009 and 2008:
Weighted Average | ||||||||||||||||||||
Total | Distributions paid | Capital | ||||||||||||||||||
Year | Distributions Paid | per Common Share | Return of Capital | Ordinary Income | Gain Income | |||||||||||||||
2009 |
$ | 7,063,543 | $ | 0.70 | $ | 0.40 | $ | 0.30 | $ | | ||||||||||
2008 |
7,062,391 | 0.70 | 0.40 | 0.30 | |
Securities Authorized for Issuance Under Equity Compensation Plans
The Company does not have any compensation plans under which we are authorized to issue equity
securities.
ITEM 6. SELECTED FINANCIAL DATA
Not required for a smaller reporting company.
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. See also Cautionary Note Regarding Forward
Looking Statements preceding Part I.
Overview
We were formed on March 29, 2004, to acquire and operate commercial real estate primarily
consisting of net leased, freestanding, single tenant, income-generating retail properties located
throughout the United States. We have no paid employees and are externally managed by Cole
Advisors, an affiliate of ours. We currently qualify, and intend to continue to elect to qualify,
as a REIT for federal income tax purposes.
As of December 31, 2009, we owned 42 properties, which were 100% leased, comprising
approximately 1.0 million square feet of single-tenant, retail space located in 19 states. We do
not anticipate acquiring any additional properties, unless we were to dispose of any of our
properties in the ordinary course of business, in which case we would expect to reinvest the sales
proceeds in additional properties. We currently have no plans to dispose of any of our properties.
Our operating results and cash flows are primarily influenced by rental income from our
commercial properties and interest expense on our property acquisition indebtedness. Rental income
accounted for approximately 98% of total revenue during the years ended December 31, 2009 and 2008.
As 100% of our properties are under lease, with a weighted average remaining lease term of
approximately 11 years and the shortest remaining lease term of a single property of approximately
four years, our exposure to changes in commercial rental rates and contractual lease expirations is
substantially mitigated, except for any vacancies caused by tenant bankruptcies or other factors.
Our advisor regularly monitors the creditworthiness of our tenants by reviewing the tenants
financial results, credit rating agency reports (if any) on the tenant or guarantor, the operating
history of the property with such tenant, the tenants market share and track record within its
industry segment, the general health and outlook of the tenants industry segment, and other
information for changes and possible trends. If our advisor identifies significant changes or
trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth
knowledge of the tenants financial condition and, if necessary, attempt to mitigate the tenant
credit risk by evaluating the possible sale of the property, or identifying a possible replacement
tenant should the current tenant fail to perform on the lease.
As of December 31, 2009, the debt leverage ratio of our portfolio, which is the ratio of debt
to total gross real estate assets net of gross intangible lease liabilities, was approximately 58%.
Approximately 99% of our debt is subject to fixed interest rates, ranging from 4.87% to 7.36%,
with a weighted average remaining term of approximately 4.9 years. As we have little outstanding
variable rate debt, our exposure to short-term changes in interest rates is limited. However, we
expect to refinance our existing debt as it matures, including approximately $41.6 million of fixed
rate debt maturing during the year ending December 31, 2010, for which we will be subject to new
interest rates. If this debt is refinanced with variable interest rate debt, our exposure to
short-term changes in interest rates will increase.
Recent Market Conditions
Although there are signs of recovery, the current mortgage lending and interest rate
environment for real estate in general continues to be disrupted, and the overall economic
fundamentals remain uncertain. Domestic and international financial markets experienced
significant disruptions that were brought about in large part by challenges in the world-wide
banking system. These disruptions have severely impacted the availability of credit and have
contributed to rising costs associated with obtaining credit. We have experienced and may continue
to experience more stringent lending criteria, which may affect our ability to refinance our debt
at maturity. Additionally, if we are able to refinance our existing debt as it matures it may be
at rates and terms which are less favorable than our existing debt or, if we elect to extend the
maturity dates of the mortgage notes in accordance with the hyper-amortization provisions, the
interest rates charged to use will be higher, each of which may adversely affect our results of
operations and the dividend rate we are able to pay to our investors. Additionally, if we are
required to sell any of our properties to meet our liquidity requirements it will result in lower
rental revenue and it may be at a price less than our acquisition price for the property, each of
which would adversely impact our results of operations and the dividend rate we are able to pay to
our investors.
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The current economic environment has lead to higher unemployment and a decline in consumer
spending. These economic trends have adversely impacted the retail and real estate markets causing
higher tenant vacancies, declining rental rates and declining property values. As of December 31,
2009, 100% of our rentable square feet were under lease. However, if the current economic
recession persists, we may experience vacancies or be required to reduce rents on occupied space.
If we do experience vacancies, our advisor will actively seek to lease our vacant space; however,
as retailers and other tenants have been delaying or eliminating their store expansion plans, the
amount of time required to re-tenant a property has been increasing.
Application of Critical Accounting Policies
Our accounting policies have been established to conform to accounting principles generally
accepted in the United States (GAAP). The preparation of financial statements in conformity with
GAAP requires us to use judgment in the application of accounting policies, including making
estimates and assumptions. These judgments affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expenses during the reporting periods. If our judgment or
interpretation of the facts and circumstances relating to the various transactions had been
different, it is possible that different accounting policies would have been applied, thus,
resulting in a different presentation of the financial statements. Additionally, other companies
may utilize different estimates that may impact comparability of our results of operations to those
of companies in similar businesses.
Investment in and Valuation of Real Estate and Related Assets
We are required to make subjective assessments as to the useful lives of our depreciable
assets. We consider the period of future benefit of the asset to determine the appropriate useful
life of each asset. Real estate assets are stated at cost, less accumulated depreciation and
amortization. Amounts capitalized to real estate assets consist of the cost of acquisition,
including acquisition related expenses incurred prior to January 1, 2009, construction and any
tenant improvements, major improvements and betterments that extend the useful life of the related
asset and leasing costs. All repairs and maintenance are expensed as incurred.
Assets, other than land, are depreciated or amortized on a straight line basis. The estimated
useful lives of our assets by class are generally as follows:
Building |
40 years | |||
Tenant improvements |
Lesser of useful life or lease term | |||
Intangible lease assets |
Lesser of useful life or lease term |
We continually monitor events and changes in circumstances that could indicate that the
carrying amounts of our real estate and related intangible assets may not be
recoverable. Impairment indicators that we consider include, but are not limited to, bankruptcy of
a propertys major tenant, a significant decrease in a propertys revenues due to circumstances,
such as lease terminations, vacancies, or reduced lease rates. When indicators of potential
impairment are present, we assess the recoverability of the assets by determining whether the
carrying value of the assets will be recovered through the undiscounted future operating cash flows
expected from the use of the assets and their eventual disposition. In the event that such expected
undiscounted future cash flows do not exceed the carrying value, we will adjust the real estate and
related intangible assets to their fair value and recognize an impairment loss.
Projections of expected future cash flows require us to use estimates such as future market
rental income amounts subsequent to the expiration of current lease agreements, property operating
expenses, terminal capitalization and discount rates, the number of months it takes to release the
property, required tenant improvements and the number of years the property is held for investment.
The use of inappropriate assumptions in the future cash flow analysis would result in an incorrect
assessment of the propertys future cash flow and fair value and could result in the misstatement
of the carrying value of our real estate and related intangible assets and net income. We monitor
several properties for which tenants have experienced financial difficulties. The undiscounted
future operating cash flow scenarios expected from the use of these properties and their related
intangible assets and their eventual disposition continue to exceed the carrying value of the
assets as of December 31, 2009. Should the conditions of any of these properties change, the
undiscounted future operating cash flows expected may change and adversely affect the
recoverability of the carrying values related to these properties. To the extent that an
impairment were to exist we would measure the loss as the excess of the propertys carrying amount
over the estimated fair value of the property.
When a real estate asset is identified by management as held for sale, we cease depreciation
of the asset and estimate the sales price, net of selling costs. If, in managements opinion, the
net sales price of the asset is less than the net book value of the asset, an adjustment to the
carrying value would be recorded to reflect the estimated fair value of the property. There were no
assets identified as held for sale as of December 31, 2009 and 2008.
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Allocation of Purchase Price of Real Estate and Related Assets
Upon the acquisition of real properties, we allocate the purchase price of such properties to
acquired tangible assets, consisting of land, building and improvements, and identified intangible
assets and liabilities, consisting of the value of above market and below market leases, and the
value of in-place leases, based in each case on their fair values. We utilize independent
appraisals to assist in the determination of the fair values of the tangible assets of an acquired
property (which includes land and building). We obtain an independent appraisal for each real
property acquisition. The information in the appraisal, along with any additional information
available to us, is used in estimating the amount of the purchase price that is allocated to land.
Other information in the appraisal, such as building value and market rents, may be used by us in
estimating the allocation of purchase price to the building and to lease intangibles. The
appraisal firm has no involvement in our allocation decisions other than providing this market
information.
The fair values of above market and below market in-place lease values are recorded based on
the present value (using an interest rate which reflects the risks associated with the leases
acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place
leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases, which
is generally obtained from independent appraisals, measured over a period equal to the remaining
non-cancelable term of the lease including any bargain renewal periods with respect to a below
market lease. The above market and below market lease values are capitalized as intangible lease
assets or liabilities. Above market lease values are amortized as an adjustment of rental income
over the remaining terms of the respective leases. Below market leases are amortized as an
adjustment of rental income over the remaining terms of the respective leases including any bargain
renewal periods. If a lease were to be terminated prior to its stated expiration, all unamortized
amounts of above market and below market in-place lease values relating to that lease would be
recorded as an adjustment to rental income.
The fair values of in-place leases include direct costs associated with obtaining a new tenant
and opportunity costs associated with lost rentals which are avoided by acquiring an in-place
lease. Direct costs associated with obtaining a new tenant include commissions, tenant
improvements and other direct costs and are estimated in part by utilizing information obtained
from independent appraisals and managements consideration of current market costs to execute a
similar lease. The value of opportunity costs is calculated using the contractual amounts to be
paid pursuant to the in-place leases over a market absorption period for a similar lease. These
intangibles are capitalized and included in intangible lease assets in the accompanying
consolidated balance sheet and are amortized to expense over the lesser of the useful life or the
remaining term of the respective leases. If a lease were to be terminated prior to its stated
expiration, all unamortized amounts of in-place lease assets relating to that lease would be
expensed.
The determination of the fair values of the assets and liabilities acquired requires the use
of significant assumptions with regard to the current market rental rates, rental growth rates,
discount and capitalization rates, interest rates and other variables. The use of inappropriate
estimates would result in an incorrect assessment of our purchase price allocations, which could
impact the amount of our reported net income.
Revenue Recognition
Upon the acquisition of real estate, certain properties have leases where minimum rent
payments increase during the term of the lease. We record rental revenue for the full term of each
lease on a straight-line basis. When we acquire a property, the term of existing leases is
considered to commence as of the acquisition date for the purposes of this calculation. We defer
the recognition of contingent rental income, such as percentage rents or increases related to
changes in the consumer price index, until the specific event that triggers the contingent rental
income is achieved. Expected reimbursements from tenants for recoverable real estate taxes and
operating expenses are included in tenant reimbursement income in the period the related costs are
incurred.
Income Taxes
We generally will not be subject to federal corporate income tax to the extent we distribute
our taxable income to our stockholders, and so long as we distribute at least 90% of our taxable
income (excluding capital gains). REITs are subject to a number of other complex organizational
and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to
certain state and local taxes on our income and property, and federal income and excise taxes on
our undistributed income.
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Results of Operations
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008:
Revenue - Revenue remained relatively constant, increasing approximately $94,000, or
approximately 1%, to approximately $16.3 million for the year ended December 31, 2009, compared to
approximately $16.2 million for the year ended December 31, 2008. The increase was primarily due
to contractual rent increases, offset by a reduction in rental rates on one property. Our revenue
primarily consists of rental income from net leased commercial properties, which accounted for
approximately 98% of total revenues during each of the years ended December 31, 2009 and 2008.
General and Administrative Expenses General and administrative expenses increased
approximately $77,000, or approximately 12%, to approximately $712,000 for the year ended December
31, 2009, compared to approximately $635,000 for the year ended December 31, 2008. The increase
was primarily due to increased legal and accounting fees offset by decreased transfer agent fees
during the year ended December 31, 2009, as compared to the year ended December 31, 2008. Our
primary general and administrative expense items are legal and accounting fees, state franchise and
income taxes, transfer agent fees and other licenses and fees.
Property Operating Expenses Property operating expenses decreased approximately $134,000, or
approximately 21%, to approximately $512,000 for the year ended December 31, 2009, compared to
approximately $646,000 for the year ended December 31, 2008. The decrease was primarily due to a
decrease in bad debt expense and property repairs and maintenance. The primary property operating
expenses items are property taxes, insurance, property repairs and maintenance and bad debt
expense.
Property and Asset Management Expenses Property and asset management expenses decreased
approximately $491,000 or approximately 51%, to approximately $475,000 for the year ended December
31, 2009, compared to approximately $966,000 for the year ended December 31, 2008. The decrease
was due to our advisor waiving asset management fees for the year ended December 31, 2009.
Depreciation and Amortization Expenses Depreciation and amortization expenses remained
constant at approximately $5.5 million during each of the years ended December 31, 2009 and 2008.
Interest and Other Income Interest and other income decreased approximately $9,000, or
approximately 36%, to approximately $16,000 for the year ended December 31, 2009, compared to
approximately $25,000 for the year ended December 31, 2008. The decrease was primarily due to a
reduction in average interest rates being earned on uninvested cash, partially offset by the gain
on sale as a result of an easement condemnation during the year ended December 31, 2009.
Interest Expense Interest expense remained constant at approximately $7.3 million during
each of the years ended December 31, 2009 and 2008. Substantially all of our debt bears interest
at fixed rates.
Portfolio Information
As of December 31, 2009, we owned 42 properties located in 19 states, all of which were 100%
leased to single tenants with a weighted average remaining lease term of approximately 11 years.
As of December 31, 2009, our five highest tenant concentrations were, as a percentage of total
2009 annualized gross base rent, as follows:
2009 Annualized | Percentage of Total | |||||||||||||||
Total Number of | Leased Square | Gross Base Rent | 2009 Annualized Gross | |||||||||||||
Tenant | Properties | Feet | (in thousands) | Base Rent | ||||||||||||
Rite Aid drugstore |
11 | 136,366 | $ | 3,281 | 21 | % | ||||||||||
CarMax auto dealership |
1 | 55,466 | 1,692 | 11 | % | |||||||||||
Lowes home improvement |
2 | 256,902 | 1,617 | 10 | % | |||||||||||
Walgreens drugstore |
6 | 81,575 | 1,402 | 9 | % | |||||||||||
Vanguard car rental |
1 | 23,360 | 1,178 | 7 | % | |||||||||||
21 | 553,669 | $ | 9,170 | 58 | % | |||||||||||
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As of December 31, 2009, our five highest tenant industry concentrations, as a percentage of
total 2009 annualized gross base rent, were as follows:
2009 Annualized | Percentage of Total | |||||||||||||||
Total Number of | Leased Square | Gross Base Rent | 2009 Annualized Gross | |||||||||||||
Industry | Properties | Feet | (in thousands) | Base Rent | ||||||||||||
Drugstore |
21 | 263,909 | $ | 5,770 | 36 | % | ||||||||||
Auto sales |
1 | 55,466 | 1,692 | 11 | % | |||||||||||
Home improvement |
2 | 256,902 | 1,617 | 10 | % | |||||||||||
Electronics |
4 | 95,150 | 1,252 | 8 | % | |||||||||||
Car rental |
1 | 23,360 | 1,178 | 7 | % | |||||||||||
29 | 694,787 | $ | 11,509 | 72 | % | |||||||||||
As of December 31, 2009, our five highest geographic concentrations, as a percentage of total
2009 annualized gross base rent, were as follows:
2009 Annualized | Percentage of Total | |||||||||||||||
Total Number of | Leased Square | Gross Base Rent | 2009 Annualized Gross | |||||||||||||
Location | Properties | Feet | (in thousands) | Base Rent | ||||||||||||
Texas |
8 | 331,995 | $ | 3,760 | 24 | % | ||||||||||
Kansas |
5 | 121,917 | 2,774 | 17 | % | |||||||||||
Georgia |
1 | 23,360 | 1,178 | 7 | % | |||||||||||
Ohio |
6 | 61,911 | 1,038 | 7 | % | |||||||||||
South Carolina |
2 | 27,637 | 755 | 5 | % | |||||||||||
22 | 566,820 | $ | 9,505 | 60 | % | |||||||||||
For more information on our portfolio diversification and statistics, see Item 2. Properties
above.
Funds From Operations
We believe that funds from operations (FFO) is a useful indicator of the performance of a
REIT. Because FFO calculations exclude such factors as depreciation and amortization of real
estate assets and gains or losses from sales of operating real estate assets (which can vary among
owners of identical assets in similar conditions based on historical cost accounting and
useful-life estimates), they facilitate comparisons of operating performance between periods and
between other REITs. Our management believes that accounting for real estate assets in accordance
with GAAP implicitly assumes that the value of real estate assets diminishes predictability over
time. Since real estate values have historically risen or fallen with market conditions, many
industry investors and analysts have considered the presentation of operating results for real
estate companies that use historical cost accounting to be insufficient by themselves. As a
result, we believe that the use of FFO, together with the required GAAP presentations, provides a
more complete understanding of our performance relative to our competitors and a more informed and
appropriate basis on which to make decisions involving operating, financing and investing
activities. Other REITs may not define FFO in accordance with the current National Association of
Real Estate Investment Trusts (NAREIT) definition or may interpret the current NAREIT definition
differently than we do.
FFO is a non-GAAP financial measure and does not represent net income as defined by GAAP. Net
income as defined by GAAP is the most relevant measure in determining our operating performance
because FFO includes adjustments that investors may deem subjective, such as adding back expenses
such as depreciation and amortization. Accordingly, FFO should not be considered as an alternative
to net income as an indicator of our operating performance.
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Our calculation of FFO is presented in the following table for the period ended as indicated
(dollar amounts in thousands):
Year Ended December 31, | ||||||||
2009 | 2008 | |||||||
Net income |
$ | 1,847 | $ | 1,218 | ||||
Add: |
||||||||
Depreciation of real estate assets |
3,685 | 3,684 | ||||||
Amortization of lease related costs |
1,802 | 1,802 | ||||||
Less: |
||||||||
Gain on sale of easement |
(9 | ) | | |||||
FFO |
$ | 7,325 | $ | 6,704 | ||||
Set forth below is additional information (often considered in conjunction with FFO) that may
be helpful in assessing our operating results:
| In order to recognize revenues on a straight-line basis over the terms of the respective leases, we recognized additional revenue by straight-lining rental revenue of approximately $285,000 and $610,000 during the years ended December 31, 2009 and 2008, respectively. | ||
| Amortization of deferred financing costs totaled approximately $385,000 and $395,000 during the years ended December 31, 2009 and 2008, respectively. |
Liquidity and Capital Resources
Short-term Liquidity and Capital Resources
We expect to meet our short-term liquidity requirements through net cash provided by property
operations during the year ending December 31, 2010. We have a total of approximately
$41.6 million of fixed rate debt maturing during the year ending December 31, 2010. During the
year ended December 31, 2009, we extended the maturity dates of six mortgage loans totaling
approximately $9.0 million to various dates in November and December 2029, as further described in
Note 5 to our consolidated financial statements. In accordance with the hyper-amortization
provisions, these loans will require us to apply 100% of the rents received from the properties
securing the debt to pay interest due on the loans, reserves, if any, and principal reductions
until such balance is paid in full through the extended maturity dates, all of which will adversely
affect our results of operations and the dividend rate that we are able to pay to our investors.
We continue to evaluate the possible financing or refinancing of the $9.0 million of fixed rate
debt for which the maturity dates were extended. In addition, we are currently evaluating the
possible financing or refinancing of the $41.6 million maturing during the year ending December 31,
2010. If we are unable to finance or refinance the amounts maturing we expect to pay down any
remaining amounts through a combination of the use of net cash provided by property operations,
available borrowings under our $1.5 million revolving line of credit, from short term borrowings
from an affiliate of our advisor, the potential sale of certain properties or, as each of the loans
maturing contain hyper-amortization provisions, we may elect to extend the maturity dates of the
mortgage notes in accordance with the hyper-amortization provisions. If we are able to refinance
our existing debt as it matures it may be at rates and terms that are less favorable than our
existing debt or, if we elect to extend the maturity dates of the mortgage notes in accordance with
the hyper-amortization provisions, the interest rates charged to us will be higher, each of which
may adversely affect our results of operations and the dividend rate we are able to pay to our
investors. As of December 31, 2009 we had approximately $700,000 of available borrowings under our
revolving line of credit.
Long-term Liquidity and Capital Resources
We expect to meet our long-term liquidity requirements through proceeds from available
borrowings under our revolving line of credit, secured or unsecured financings or refinancings from
banks and other lenders, the selective and strategic sale of properties and net cash flows from
operations. We expect that our primary uses of capital will be for the payment of operating
expenses, including interest expense on any outstanding indebtedness, for the payment of tenant
improvements and repairs and maintenance, for the possible reinvestment of proceeds from the
strategic sale of properties in replacement properties and for the payment of distributions to our
stockholders.
We expect that substantially all net cash generated from operations will be used to pay
distributions to our stockholders after payments of principal on our outstanding indebtedness and
certain capital expenditures, including tenant improvements and leasing commissions, are paid at
the properties; however, we may use other sources to fund distributions as necessary. To the
extent that cash flows from operations are lower than our current expectations due to lower returns
on the properties, distributions paid to our stockholders may be lower.
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During the year ended December 31, 2009, the Company paid distributions of approximately $7.1
million, which were funded by cash flows from operations of approximately $7.3 million. During the
year ended December 31, 2008, the Company paid distributions of approximately $7.1 million, which
were funded by cash flows from operations of approximately $7.2 million.
We expect that substantially all net cash resulting from debt financing will be used to fund
certain repayments of outstanding debt, possible replacement properties, certain capital
expenditures or distributions to our stockholders. We did not have any material commitments for
capital expenditures as of December 31, 2009.
As of December 31, 2009, we had cash and cash equivalents of approximately $1.9 million, which
we expect to be used primarily to pay operating expenses, interest on our indebtedness and
stockholder distributions.
As of December 31, 2009, we had approximately $118.7 million of debt outstanding, consisting
of approximately $118.0 million subject to fixed interest rates (Fixed Rate Debt) and
approximately $750,000 outstanding under a revolving line of credit (Credit Facility). The Fixed
Rate Debt has interest rates ranging from 4.87% to 7.36%, with a weighted average interest rate of
approximately 5.92%, and matures on various dates from April 2010 through December 2029. See Note
5 to our consolidated financial statements in this Annual Report on Form 10-K for terms of the
Credit Facility. Our debt leverage ratio, which is the ratio of debt to total gross real estate
assets net of gross intangible lease liabilities, was approximately 58%, with a weighted average
remaining term to maturity of approximately 4.9 years.
Our contractual obligations as of December 31, 2009 were as follows (dollar amounts in
thousands):
Payments due by period (1) | ||||||||||||||||||||
Less than 1 year | 1-3 years | 4-5 years | More than 5 years | Total | ||||||||||||||||
Principal payments fixed rate debt |
$ | 41,614 | $ | 7,800 | $ | 26,476 | $ | 42,098 | $ | 117,988 | ||||||||||
Interest payments fixed rate debt |
5,852 | 12,987 | 7,950 | 10,371 | 37,160 | |||||||||||||||
Principal payments line of credit |
| 750 | | | 750 | |||||||||||||||
Interest payments line of credit (2) |
15 | 4 | | | 19 | |||||||||||||||
Total |
$ | 47,481 | $ | 21,541 | $ | 34,426 | $ | 52,469 | $ | 155,917 | ||||||||||
(1) | The table above does not include amounts due to our advisor or its affiliates pursuant to our advisory agreement because such amounts are not fixed and determinable. | |
(2) | Based on interest rate in effect as of December 31, 2009. |
Cash Flow Analysis
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008:
Operating Activities. Net cash provided by operating activities increased approximately
$120,000, or approximately 2%, to approximately $7.3 million for the year ended December 31, 2009,
compared to approximately $7.2 million for the year ended December 31, 2008. The increase was
primarily due to an increase in net income and a decrease in the change in rents and tenant
receivables, offset primarily by a decrease in the change in due to affiliates and deferred rent
and other liabilities. See Results of Operations for a more complete discussion of the factors
impacting our operating performance.
Investing Activities. Net cash provided by investing activities was approximately $13,000 for
the year ended December 31, 2009, compared to net cash used in investing activities of
approximately $45,000 million for the year ended December 31, 2008. The change was due to proceeds
from the sale of an easement during the year ended December 31, 2009, as compared to a use of cash
to fund capital expenditures during the year ended December 31, 2008.
Financing Activities. Net cash used in financing activities decreased approximately $796,000,
or approximately 11%, to approximately $6.3 million for the year ended December 31, 2009, compared
to approximately $7.1 million for the year ended December 31, 2008. The decrease was primarily due
to a $1,450,000 borrowing on our revolving line of credit, of which $700,000 was repaid, during the
year ended December 31, 2009. There were no borrowings or repayments on our revolving line of
credit during the year ended December 31, 2008.
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Election as a REIT
We are taxed as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a
REIT, we must meet certain organizational and operational requirements, including a requirement to
distribute at least 90% of our ordinary taxable income to stockholders. As a REIT, we generally
will not be subject to federal income tax on taxable income that we distribute to our stockholders.
If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income
taxes on our taxable income for four years following the year during which qualification is lost,
unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an
event could materially adversely affect our net income and net cash available for distribution to
stockholders. However, we believe that we are organized and operate in such a manner as to qualify
for treatment as a REIT for federal income tax purposes. No provision for federal income taxes has
been made in our accompanying consolidated financial statements. We are subject to certain state
and local taxes related to the operations of properties in certain locations, which have been
provided for in our accompanying financial statements.
Inflation
We are exposed to inflation risk as income from long-term leases is the primary source of our
cash flows from operations. There are provisions in certain of our tenant leases that would
protect us from the impact of inflation, such as step rental increases and percentage rent
provisions. However, due to the long-term nature of the leases, the leases may not adjust
frequently enough to adequately offset the effects of inflation. In addition, most of our leases
require the tenant to pay all or a majority of the operating expenses, including real estate taxes,
special assessments and sales and use taxes, utilities, insurance and building repairs related to
the property.
Commitments and Contingencies
We are subject to certain commitments and contingencies with regard to certain transactions.
Refer to Note 7 to our consolidated financial statements included in this Annual Report on Form
10-K for further explanations.
Related-Party Transactions and Agreements
We have entered into agreements with Cole Advisors and its affiliates, whereby we pay certain
fees to, or reimburse certain expenses of, Cole Advisors or its affiliates for acquisition and
advisory fees and expenses, organization and offering costs, sales commissions, dealer manager
fees, asset and property management fees and reimbursement of operating costs. See Note 8 to our
consolidated financial statements included in this Annual Report on Form 10-K for a discussion of
the various related-party transactions, agreements and fees.
Subsequent Events
Certain events occurred subsequent to December 31, 2009 through the date of this Annual Report
on Form 10-K. Refer to Note 13 to our consolidated financial statements included in this Annual
Report on Form 10-K for further explanation. Such events include:
| update to the estimated value per share; | ||
| update to the share redemption program; and | ||
| declaration of daily distribution rate. |
New Accounting Pronouncements
Refer to Note 2 to our consolidated financial statements included in this Annual Report on
Form 10-K for further explanation of applicable new accounting pronouncements. There are no new
accounting pronouncements that have been issued but not yet applied by us that we believe will have
a material impact on our consolidated financial statements.
Off Balance Sheet Arrangements
We had no off balance sheet arrangements as of December 31, 2009.
25
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Conflicts of Interest
Affiliates of Cole Advisors act as sponsor, general partner or advisor to various private real
estate limited partnerships, and other real-estate related programs, a REIT that offered its shares
pursuant to a registration statement on Form S-11, and a REIT that currently is offering its shares
pursuant to a Registration Statement on Form S-11. As such, there are conflicts of interest where
Cole Advisors or its affiliates, while serving in the capacity as sponsor, general partner, key
personnel or advisor for another Cole-sponsored program, may be in competition with us in
connection with property acquisitions, property dispositions, and property management. The
compensation arrangements between affiliates of Cole Advisors and these other Cole sponsored
programs could influence its advice to us. See Item 1. Business Conflicts of Interest in
this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not required for a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data filed as part of this report are set forth
beginning on page F-1 of this report.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
There were no changes in or disagreements with our independent registered public accountants
during the year ended December 31, 2009.
ITEM 9A(T). CONTROLS AND PROCEDURES
As required by Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), we, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange
Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures, as of December 31, 2009, were effective in all material respects to ensure
that information required to be disclosed by us in this Annual Report on Form 10-K is recorded,
processed, summarized and reported within the time periods specified by the rules and forms
promulgated under the Exchange Act, and is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosures.
No change occurred in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) in connection with the foregoing evaluations
that occurred during the three months ended December 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial reporting.
26
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Managements Report on Internal Control over Financial Reporting
Cole Credit Property Trust, Inc.s management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Internal control over financial reporting is a process to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally
accepted in the United States. Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance that a misstatement of our
financial statements would be prevented or detected. Also, projections of any evaluation of
internal control effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
Cole Credit Property Trust, Inc.s internal control over financial reporting based on the framework
in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
Based on this evaluation, management has concluded that Cole Credit Property Trust, Inc.s
internal control over financial reporting was effective as of December 31, 2009.
This Annual Report on Form 10-K does not include an attestation report of the Companys
registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company
to provide only managements report in this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
None
27
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference to our definitive proxy
statement to be filed with respect to our 2010 annual meeting of stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to our definitive proxy
statement to be filed with respect to our 2010 annual meeting of stockholders.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated by reference to our definitive proxy
statement to be filed with respect to our 2010 annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to our definitive proxy
statement to be filed with respect to our 2010 annual meeting of stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to our definitive proxy
statement to be filed with respect to our 2010 annual meeting of stockholders.
28
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of Documents Filed.
1. | The list of the financial statements contained herein is set forth on page F-1 hereof. | ||
2. | Financial Statement Schedules None |
All other schedules for which provision is made in the applicable accounting regulations of
the SEC are not required under the related instructions or are not applicable and therefore
have been omitted.
3. | The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto. |
(b) See (a) 3 above.
(c) See (a) 2 above.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements | Page | |||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 |
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cole Credit Property Trust, Inc.
Phoenix, Arizona
Cole Credit Property Trust, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Cole Credit Property Trust, Inc.
and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity, and cash flows
for the years then ended. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
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. The
Company is not required to have, nor were we engaged to perform, an audit of its 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 Companys 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,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements presents fairly, in all material respects,
the financial position of Cole Credit Property Trust, Inc. and subsidiaries as of December 31, 2009
and 2008, and the results of their operations and their cash flows
for the years then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 29, 2010
March 29, 2010
F-2
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COLE CREDIT PROPERTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share and per share amounts)
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS: |
||||||||
Investment in real estate assets: |
||||||||
Land |
$ | 55,317 | $ | 55,321 | ||||
Buildings and improvements, less accumulated depreciation of $17,273 and $13,588, respectively |
106,278 | 109,963 | ||||||
Acquired intangible lease assets, less accumulated amortization of $9,170 and $7,246, respectively |
19,168 | 21,092 | ||||||
Total investment in real estate assets |
180,763 | 186,376 | ||||||
Cash and cash equivalents |
1,907 | 923 | ||||||
Rents and tenant receivables, less allowance for doubtful accounts of $167 and $167, respectively |
2,478 | 2,084 | ||||||
Prepaid expenses and other assets |
84 | 104 | ||||||
Deferred financing costs, less accumulated amortization of $1,518 and $1,415, respectively |
770 | 1,155 | ||||||
Total assets |
$ | 186,002 | $ | 190,642 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
||||||||
Notes payable and line of credit |
$ | 118,738 | $ | 117,977 | ||||
Accounts payable and accrued expenses |
878 | 757 | ||||||
Due to affiliates |
41 | 167 | ||||||
Acquired below market lease intangibles, less accumulated amortization of $1,018 and $814,
respectively |
1,221 | 1,425 | ||||||
Distributions payable |
589 | 589 | ||||||
Deferred rent and other liabilities |
615 | 590 | ||||||
Total liabilities |
122,082 | 121,505 | ||||||
STOCKHOLDERS EQUITY: |
||||||||
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding |
| | ||||||
Common stock, $0.01 par value; 90,000,000 shares authorized, 10,090,951 shares issued and
outstanding |
101 | 101 | ||||||
Capital in excess of par value |
90,424 | 90,424 | ||||||
Accumulated distributions in excess of earnings |
(26,605 | ) | (21,388 | ) | ||||
Total stockholders equity |
63,920 | 69,137 | ||||||
Total liabilities and stockholders equity |
$ | 186,002 | $ | 190,642 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
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COLE CREDIT PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except share and per share amounts)
Year Ended December 31, | ||||||||
2009 | 2008 | |||||||
Revenues: |
||||||||
Rental and other income |
$ | 15,944 | $ | 15,860 | ||||
Tenant reimbursement income |
383 | 373 | ||||||
Total revenue |
16,327 | 16,233 | ||||||
Expenses: |
||||||||
General and administrative |
712 | 635 | ||||||
Property operating expenses |
512 | 646 | ||||||
Property and asset management expenses |
475 | 966 | ||||||
Depreciation |
3,685 | 3,684 | ||||||
Amortization |
1,802 | 1,802 | ||||||
Total operating expenses |
7,186 | 7,733 | ||||||
Real estate operating income |
9,141 | 8,500 | ||||||
Other income (expense): |
||||||||
Interest and other income |
16 | 25 | ||||||
Interest expense |
(7,310 | ) | (7,307 | ) | ||||
Total other expense |
(7,294 | ) | (7,282 | ) | ||||
Net income |
$ | 1,847 | $ | 1,218 | ||||
Weighted average number of common shares
outstanding: |
||||||||
Basic and diluted |
10,090,951 | 10,090,951 | ||||||
Net income per common share: |
||||||||
Basic and diluted |
$ | 0.18 | $ | 0.12 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
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COLE CREDIT PROPERTY TRUST, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(Dollar amounts in thousands, except share and per share amounts)
Common Stock | Accumulated | |||||||||||||||||||
Number of | Capital in Excess in | Distributions in | Total Stockholders | |||||||||||||||||
Shares | Par Value | Par Value | Excess of Earnings | Equity | ||||||||||||||||
Balance, January 1, 2008 |
10,090,951 | $ | 101 | $ | 90,424 | $ | (15,544 | ) | $ | 74,981 | ||||||||||
Distributions |
| | | (7,062 | ) | (7,062 | ) | |||||||||||||
Net income |
| | | 1,218 | 1,218 | |||||||||||||||
Balance, December 31, 2008 |
10,090,951 | $ | 101 | $ | 90,424 | $ | (21,388 | ) | $ | 69,137 | ||||||||||
Distributions |
| | | (7,064 | ) | (7,064 | ) | |||||||||||||
Net income |
| | | 1,847 | 1,847 | |||||||||||||||
Balance, December 31, 2009 |
10,090,951 | $ | 101 | $ | 90,424 | $ | (26,605 | ) | $ | 63,920 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
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COLE CREDIT PROPERTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Year Ended December 31, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,847 | $ | 1,218 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation |
3,685 | 3,684 | ||||||
Amortization |
2,105 | 2,115 | ||||||
Gain on sale of assets |
(9 | ) | | |||||
Changes in assets and liabilities: |
||||||||
Rents and tenant receivables |
(394 | ) | (461 | ) | ||||
Prepaid expenses and other assets |
20 | (38 | ) | |||||
Accounts payable and accrued expenses |
132 | 20 | ||||||
Due to affiliates |
(126 | ) | 167 | |||||
Deferred rent and other liabilities |
25 | 460 | ||||||
Net cash provided by operating activities |
7,285 | 7,165 | ||||||
Cash flows from investing activities: |
||||||||
Investment in real estate and property improvements |
| (45 | ) | |||||
Proceeds from sale of easement |
13 | | ||||||
Net cash provided by (used in) investing activities |
13 | (45 | ) | |||||
Cash flows from financing activities: |
||||||||
Distributions to investors |
(7,064 | ) | (7,062 | ) | ||||
Proceeds from notes payable and line of credit |
1,450 | | ||||||
Repayment of notes payable and line of credit |
(700 | ) | | |||||
Deferred financing costs paid |
| (48 | ) | |||||
Net cash used in financing activities |
(6,314 | ) | (7,110 | ) | ||||
Net increase in cash and cash equivalents |
984 | 10 | ||||||
Cash and cash equivalents, beginning of year |
923 | 913 | ||||||
Cash and cash equivalents, end of year |
$ | 1,907 | $ | 923 | ||||
Supplemental Disclosures of Non-Cash Investing and Financing Activities: |
||||||||
Dividends declared and unpaid |
$ | 589 | $ | 589 | ||||
Supplemental Cash Flow Disclosures: |
||||||||
Interest paid |
$ | 6,913 | $ | 6,912 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
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NOTE 1 ORGANIZATION AND BUSINESS
Cole Credit Property Trust, Inc. (the Company) is a Maryland corporation that was formed on
March 29, 2004 that is organized and operates as a real estate investment trust (REIT) for
federal income tax purposes. Substantially all of the Companys business is conducted through Cole
Operating Partnership I, LP (Cole OP I), a Delaware limited partnership. The Company is the sole
general partner of and owns an approximately 99.99% partnership interest in Cole OP I. Cole REIT
Advisors, LLC (Cole Advisors), the affiliate advisor to the Company, is the sole limited partner
and owner of an insignificant noncontrolling partnership interest of less than 0.01% of Cole OP I.
At December 31, 2009, the Company owned 42 properties comprising approximately 1.0
million square feet of single-tenant, retail space located in 19 states. As of December 31, 2009,
these properties were 100% leased.
The Companys stock is not currently listed on a national exchange. The Company may seek to
list its common stock for trading on a national securities exchange only if the board of directors
believes listing would be in the best interest of its stockholders. The Company does not intend to
list its shares at this time. The Company does not anticipate that there would be any market for
its common stock until its shares are listed on a national securities exchange. In the event it
does not obtain listing prior to February 1, 2016, its charter requires that it either: (1) seek
stockholder approval of an extension or amendment of this listing deadline; or (2) seek stockholder
approval to adopt a plan of liquidation of the corporation.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in
understanding the Companys consolidated financial statements. Such financial statements and
accompanying notes are the representations of its management, who is responsible for their
integrity and objectivity. These accounting policies conform to accounting principles generally
accepted in the United States (GAAP), in all material respects, and have been consistently
applied in preparing the accompanying consolidated financial statements.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
Certain reclassifications related to our amortization and allowance for doubtful accounts have been
made to prior years Consolidated Statement of Cash Flows in order to conform to current year
presentation. Such reclassifications had no impact on previously reported net cash provided by
operating activities.
Use of Estimates
The preparation of financial statements in conformity with GAAP necessarily 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 consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Redemptions of Common Stock
The Company will determine at the beginning of each fiscal year the maximum amount of shares
that it may redeem during that year. The Company may use up to 1.0% of its annual cash flow to
meet these redemption needs, including cash proceeds generated from new offerings, operating cash
flow not intended for dividends, borrowings and capital transactions such as asset sales or
refinancing. On December 15, 2008, the Companys board of directors determined that no amounts
were to be made available for redemption during the year ended December 31, 2009. The shares the
Company redeems under its share redemption program will be cancelled and returned to the status of
authorized but unissued shares. The Company does not intend to resell such shares to the public
unless they are first registered with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, and under appropriate state securities laws or otherwise sold in
compliance with such laws. As of December 31, 2009, the Company had redeemed a total of 7,300
shares, at an average of $9.35 per share, under the share redemption program. During the years
ended December 31, 2009 and 2008, the Company did not redeem any shares under the share redemption
program.
F-7
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COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment in and Valuation of Real Estate and Related Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization.
Amounts capitalized to real estate assets consist of the cost of
acquisition, including acquisition
related expenses incurred prior to January 1, 2009, construction and any tenant improvements, major
improvements and betterments that extend the useful life of the related asset and leasing costs.
All repairs and maintenance are expensed as incurred.
Assets, other than land, are depreciated or amortized on a straight line basis. The estimated
useful lives of our assets by class are generally as follows:
Building |
40 years | |
Tenant improvements |
Lesser of useful life or lease term | |
Intangible lease assets |
Lesser of useful life or lease term |
The Company continually monitors events and changes in circumstances that could indicate that the
carrying amounts of its real estate and related intangible assets may not be
recoverable. Impairment indicators that the Company considers include, but are not limited to,
bankruptcy of a propertys major tenant, a significant decrease in a propertys revenues due to
circumstances, such as lease terminations, vacancies, or reduced lease rates. When indicators of
potential impairment are present, the Company assesses the recoverability of the assets by
determining whether the carrying value of the assets will be recovered through the undiscounted
future operating cash flows expected from the use of the assets and their eventual disposition. In
the event that such expected undiscounted future cash flows do not exceed the carrying value, the
Company will adjust the real estate and related intangible assets to their fair value and recognize
an impairment loss. The Company continues to monitor several properties for which tenants have
experienced financial difficulties. The undiscounted future operating cash flows expected from the
use of these properties and their related intangible assets and their eventual disposition continue
to exceed the carrying value of the assets as of December 31, 2009. Should the conditions of any
of these properties change, the undiscounted future operating cash flows expected may change and
adversely affect the recoverability of the carrying values related to these properties. No
impairment losses were recorded for the years ended December 31, 2009 and 2008.
Projections of expected future cash flows require the Company to use estimates such as future
market rental income amounts subsequent to the expiration of current lease agreements, property
operating expenses, terminal capitalization and discount rates, the number of months it takes to
release the property, required tenant improvements and the number of years the property is held for
investment. The use of inappropriate assumptions in the future cash flow analysis would result in
an incorrect assessment of the propertys future cash flow and fair value and could result in the
misstatement of the carrying value of our real estate and related intangible assets and net income.
When a real estate asset is identified as held for sale, the Company will cease depreciation
of the asset and estimate the sales price, net of selling costs. If, in the Companys opinion, the
net sales price of the asset is less than the net book value of the asset, an adjustment to the
carrying value would be recorded to reflect the estimated fair value of the property. There were no
assets identified as held for sale as of December 31, 2009 and 2008.
Allocation of Purchase Price of Real Estate and Related Assets
Upon the acquisition of real properties, the Company allocates the purchase price to acquired
tangible assets, consisting of land, building and improvements and identified intangible assets and
liabilities, consisting of the value of above market and below market leases and the value of
in-place leases, based in each case on their fair values. The Company utilizes independent
appraisals to assist in the determination of the fair values of the tangible assets of an acquired
property (which includes land and building). The Company obtains an independent appraisal for each
real property acquisition. The information in the appraisal, along with any additional information
available to the Companys management, is used by management in estimating the amount of the
purchase price that is allocated to land. Other information in the appraisal, such as building
value and market rents, may be used by the Companys management in estimating the allocation of
purchase price to the building and to lease intangibles. The appraisal firm has no involvement in
managements allocation decisions other than providing this market information.
The fair values of above market and below market in-place lease values are recorded based on
the present value (using an interest rate which reflects the risks associated with the leases
acquired) of the difference between (i) the contractual amounts to be paid
pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the
corresponding in-place leases, which is generally obtained from independent appraisals, measured
over a period equal to the remaining non-cancelable term of the lease including any bargain renewal
periods with respect to a below market lease. The above market and below market lease values are
capitalized as intangible lease assets or liabilities. Above market lease values are amortized as
an adjustment of rental income over the remaining terms of the respective leases. Below market
leases are amortized as an adjustment of rental income over the remaining terms of the respective
leases including any bargain renewal periods.
F-8
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COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair values of in-place leases include direct costs associated with obtaining a new
tenant, and opportunity costs associated with lost rentals which are avoided by acquiring an
in-place lease. Direct costs associated with obtaining a new tenant include commissions, tenant
improvements and other direct costs and are estimated in part by utilizing information obtained
from independent appraisals and managements consideration of current market costs to execute a
similar lease. These direct costs are included in intangible lease assets in the accompanying
consolidated balance sheet and are amortized to expense over the lesser of the useful life or the
remaining terms of the respective leases. The value of opportunity costs is calculated using the
contractual amounts to be paid pursuant to the in-place leases over a market absorption period for
a similar lease. These intangibles are included in intangible lease assets in the accompanying
consolidated balance sheet and are amortized to expense over the lesser of the useful life or the
remaining term of the respective leases.
The determination of the fair values of the assets and liabilities acquired requires the use
of significant assumptions with regard to the current market rental rates, rental growth rates,
discount and capitalization rates, interest rates and other variables. The use of inappropriate
estimates would result in an incorrect assessment of the Companys purchase price allocations,
which could impact the amount of its reported net income.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturities when purchased of three
months or less to be cash equivalents. The Company considers investments in highly liquid money
market funds with maturities when purchased of three months or less, if any, to be cash
equivalents.
Rents and Tenant Receivables
Rents and tenant receivables primarily includes amounts to be collected in future periods
related to the recognition of rental income on a straight-line basis over the lease term and cost
recoveries due from tenants. See Revenue Recognition below. The Company makes estimates of the
uncollectability of its accounts receivable related to base rents, expense reimbursements and other
revenues. The Company analyzes its accounts receivable balances and historical bad debt levels,
customer credit worthiness and current economic trends when evaluating the adequacy of the
allowance for doubtful accounts. In addition, tenants in bankruptcy, if any, are analyzed and
estimates are made in connection with the expected recovery of pre-petition and post-petition
claims. The Companys reported net income is directly affected by managements estimate of the
collectability of accounts receivable. The Company records allowances for those balances that the
Company deems to be uncollectible, including any amounts relating to straight-line rent
receivables.
Other Assets
Other assets consists primarily of prepaid expenses as of the balance sheet date that relate
to future periods and will be expensed or reclassified to another account during the period to
which the costs relate. Any amounts with no future economic benefit are charged to earnings when
identified.
Deferred Financing Costs
Deferred financing costs are capitalized and amortized on a straight-line basis over the term
of the related financing arrangement, which approximates the effective interest method.
Amortization of deferred financing costs for the years ended December 31, 2009 and 2008 was
approximately $385,000 and approximately $395,000, respectively, and was recorded in interest
expense in the consolidated statements of operations.
Revenue Recognition
Upon the acquisition of real estate, certain properties have leases where minimum rent
payments increase during the term of the lease. The Company records rental revenue for the full
term of each lease on a straight-line basis. When the Company acquires a property, the term of
existing leases is considered to commence as of the acquisition date for the purposes of this
calculation. The Company defers the recognition of contingent rental income, such as percentage
rents or increases related to changes in the consumer price index, until the specific event that
triggers the contingent rental income is achieved. Expected reimbursements from tenants for
recoverable real estate taxes and operating expenses are included in tenant reimbursement income in
the period the related costs are incurred.
F-9
Table of Contents
COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes
The Company generally will not be subject to federal corporate income tax to the extent it
distributes at least 90% of its taxable income to its stockholders. REITs are subject to a number
of other organizational and operational requirements. Even if the Company qualifies for taxation
as a REIT, it may be subject to certain state and local taxes on its income and property, and
federal income and excise taxes on its undistributed income.
Concentration of Credit Risk
As of December 31, 2009, the Company had cash on deposit in one financial institution, which
was approximately $1.7 million in excess of federally insured levels; however, the Company has not
experienced any losses in such account. The Company limits investment of cash investments to
financial institutions with high credit standing; therefore, the Company believes it is not exposed
to any significant credit risk on cash.
As of December 31, 2009, three tenants in the drugstore industry, one tenant in the auto sales
industry and one tenant in the home improvement industry accounted for approximately 36%, 11%, and
10% of the Companys 2009 gross annualized base rental revenues, respectively. Additionally, we
have certain geographic concentration in our property holdings. In particular, as of December 31,
2009, eight of our properties were located in Texas and five of our properties were located in
Kansas, accounting for approximately 24% and 17% of our 2009 gross annualized base rental revenues,
respectively.
Stockholders Equity
As of December 31, 2009 and December 31, 2008, the Company was authorized to issue
90,000,000 shares of common stock and 10,000,000 shares of preferred stock. All shares of such
stock have a par value of $0.01 per share. The Companys board of directors may authorize
additional shares of capital stock and amend their terms without obtaining stockholder approval.
The par value of investor proceeds raised from the Offering was classified as common stock,
with the remainder allocated to capital in excess of par value. As the Companys share redemption
program allows the Companys board of directors to reject any request for redemption, the Company
accounts for the common stock issued in the Offering as permanent equity, in accordance with the
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 480,
Distinguishing Liabilities from Equity (ASC 480). During the years ended December 31, 2009 and
2008, the Company redeemed no shares under the share redemption program.
Earnings Per Share
Earnings per share is calculated based on the weighted average number of common shares
outstanding during each period. The weighted average number of common shares outstanding is
identical for basic and fully diluted earnings per share. The Company has no stock options issued
or outstanding.
Reportable Segments
The FASB ASC 280, Segment Reporting (ASC 280), establishes standards for reporting financial
and descriptive information about an enterprises reportable segments. The Company has one
reportable segment, commercial properties, which consists of
activities related to investing in real estate. The commercial properties are geographically
diversified throughout the United States, and the Companys chief operating decision maker
evaluates operating performance on an overall portfolio level. These commercial properties have
similar economic characteristics, therefore the Companys properties have been aggregated into one
reportable segment.
Interest
Interest is charged to interest expense as it accrues. No interest costs were capitalized
during the years ended December 31, 2009 and 2008.
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COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Distributions Payable and Distribution Policy
In order to maintain its status as a REIT, the Company is required to make distributions each
taxable year equal to at least 90% of its taxable income, excluding capital gains. To the extent
funds are available, the Company intends to pay regular monthly distributions to stockholders.
Distributions are paid to those stockholders who are stockholders of record as of applicable record
dates.
New Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 141
(revised 2007), Business Combinations, codified primarily in ASC 805, Business Combinations (ASC
805). ASC 805 clarifies and amends the accounting guidance for how an acquirer in a business
combination recognizes and measures the assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree. The provisions of ASC 805 became effective for the
Company for any business combinations occurring on or after January 1, 2009. If the Company
acquires real estate properties in the future the Company expects ASC 805 will have a material
impact on its condensed consolidated unaudited financial statements. The adoption of ASC 805
requires the Company to expense acquisition costs related to real estate transactions as incurred,
compared to the former practice of capitalizing such costs and amortizing them over the estimated
useful life of the assets acquired. There were no property acquisitions during the year ended
December 31, 2009, therefore the adoption of ASC 805 has not had a material impact on the Companys
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an Amendment of ARB 51, codified primarily in ASC 810, Consolidation (ASC
810). This statement amends ARB 51 and revises accounting and reporting requirements for
noncontrolling interest (formerly minority interest) in a subsidiary and for the deconsolidation of
a subsidiary. ASC 810 was effective for the Company on January 1, 2009. The provisions of this
standard are applied retrospectively upon adoption. The adoption of ASC 810 has not had a material
impact on the Companys consolidated financial statements.
In May 2009, the FASB issued ASC 855-10, Subsequent Events, to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The new disclosure requirement is
effective for interim reporting periods ending after June 15, 2009. The Company adopted ASC 855-10
on April 1, 2009 and provided the required disclosures. In February 2010, FASB issued Accounting
Standards Update (ASU) 2010-09, Subsequent Events (Topic 855) Amendments to Certain Recognition
and Disclosure Requirements, (ASU 2010-09), which removes the requirement for an SEC filer to
disclose a date in both issued and revised financial statements. The Company adopted ASU 2010-09
in February 2010 and did not disclose the date the financial statements are available to be issued.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards
Codification (the Codification) will become the source of authoritative GAAP. Rules and
interpretive releases of the Securities and Exchange Commission under authority of federal
securities laws are also sources of authoritative GAAP for Securities and Exchange Commission
registrants. The Codification became effective on July 1, 2009 and superseded all then-existing
non-Securities and Exchange Commission accounting and reporting standards. All other
non-grandfathered non-Securities and Exchange Commission accounting literature not included in the
Codification is nonauthoritative. The Company adopted the Codification beginning on July 1, 2009.
Because the Codification is not intended to change GAAP, it did not have a material impact on the
Companys consolidated financial statements.
In August 2009, the FASB issued ASU 2009-05, Fair Value Measurements and Disclosures (ASU
2009-05), which provides alternatives to measuring the fair value of liabilities when a quoted
price for an identical liability traded in an active market does not exist. The alternatives
include using either (1) a valuation technique that uses quoted prices for identical or similar
liabilities or (2) another valuation technique, such as a present value technique or a technique
that is based on the amount paid or received by the reporting entity to transfer an identical
liability. The amended guidance was effective for the Company beginning October 1, 2009. The
adoption of ASU 2009-05 has not had a material impact on the Companys consolidated financial
statements.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic
820), (ASU 2010-06), which amends ASC 820 to add new requirements for disclosures about transfers
into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and
settlements relating to Level 3 measurements. ASU 2010-06 also clarifies existing fair value
disclosures about the level of disaggregation and about inputs and valuation techniques used to
measure fair value. Further, ASU 2010-06 amends guidance on employers disclosures about
postretirement benefit plan assets under ASC 715, CompensationRetirement Benefits, to require that
disclosures be provided by classes of assets instead of by major categories of assets. ASU 2010-06
is effective for the first reporting period (including interim periods) beginning after December
15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales,
issuances, and settlements on a gross basis, which will be effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years. The Company does not
expect the adoption of ASU 2010-06 to have a material impact on the consolidated financial
statement disclosures.
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COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3 FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurements and Disclosures (ASC 820), defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Depending on the nature of the asset or
liability, various techniques and assumptions can be used to estimate the fair value. Assets and
liabilities are measured using inputs from three levels of the fair value hierarchy as follows:
Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date. An active market
is defined as a market in which transactions for the assets or liabilities occur with sufficient
frequency and volume to provide pricing information on an ongoing basis.
Level 2 Inputs include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active
(markets with few transactions), inputs other than quoted prices that are observable for the asset
or liability (i.e., interest rates, yield curves, etc.), and inputs that derived principally from
or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 Unobservable inputs, only used to the extent that observable inputs are not
available, reflect the Companys assumptions about the pricing of an asset or liability.
The following describes the methods the Company uses to estimate the fair value of the
Companys financial assets and liabilities:
Cash and cash equivalents, rents and tenant receivables, and accounts payable and accrued
expenses - The Company considers the carrying values of these financial instruments to approximate
fair value because of the short period of time between origination of the instruments and their
expected realization. The Companys investments in highly liquid money market funds are valued
using level 1 inputs.
Mortgage notes payable and line of credit - The fair value is estimated using a discounted
cash flow technique based on estimated borrowing rates available to the Company as of December 31,
2009. The estimated fair value of the mortgage notes payable and line of credit as of December 31,
2009 was approximately $113.9 million, as compared to the carrying value of approximately $118.7
million. The estimated fair value of the mortgage notes payable as of December 31, 2008 was
approximately $114.7 million, as compared to the carrying value of approximately $118.0 million.
Considerable judgment is necessary to develop estimated fair values of certain financial
instruments. Accordingly, the estimates presented herein are not necessarily indicative of the
amounts the Company could realize on disposition of the financial instruments.
NOTE 4 ACQUIRED INTANGIBLE LEASE ASSETS
Acquired intangible assets consisted of the following (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Acquired in place leases, net of accumulated
amortization of $8,511 and $6,709 as of
December 31, 2009 and 2008, respectively (with a
weighted average life of 141 and 153 months,
respectively). |
$ | 17,735 | $ | 19,537 | ||||
Acquired above market leases, net of accumulated
amortization of $659 and $537 as of December 31,
2009 and 2008, respectively (with a weighted
average life of 145 and 157 months, respectively). |
1,433 | 1,555 | ||||||
$ | 19,168 | $ | 21,092 | |||||
Amortization expense on the identified intangible assets, for each of the years ended
December 31, 2009 and 2008 was $1.9 million, respectively.
F-12
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COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Estimated amortization expense of the respective intangible lease assets as of December 31,
2009 for each of the five succeeding fiscal years is as follows (in thousands):
Amount | ||||||||
Year | Leases In-Place | Above Market Leases | ||||||
2010 |
$ | 1,802 | $ | 122 | ||||
2011 |
1,802 | 122 | ||||||
2012 |
1,802 | 122 | ||||||
2013 |
1,801 | 122 | ||||||
2014 |
1,584 | 122 |
NOTE 5 MORTGAGE NOTES PAYABLE
As of December 31, 2009, the Company had 38 mortgage notes payable totaling approximately
$118.0 million, with fixed interest rates ranging from 4.87% to 7.36% and a weighted average
interest rate of approximately 5.92%. The mortgage notes payable
mature on various dates from April 2010 through December 2029, with a weighted average remaining term of approximately 4.9
years. Each of the mortgage notes is secured by the respective properties on which the debt was
placed. The mortgage notes are generally non-recourse to the Company and Cole OP I, but both are
liable for customary non-recourse carve-outs. The mortgage notes are secured by substantially all
of the Companys real estate assets. As of December 31, 2009, the Company had $750,000 outstanding
under an approximately $1.5 million revolving line of credit. The revolving line of credit bears
interest at a variable rate equal to the one-month LIBOR plus 175 basis points and matures in March
2011. The revolving line of credit is secured by one property. The aggregate balance of gross real
estate assets, net of gross intangible lease liabilities securing the notes payable and revolving
line of credit, was approximately $197.3 million as of December 31, 2009.
Generally, the mortgage notes may not be prepaid, in whole or in part, except under the
following circumstances: (i) full prepayment may be made on any of the three monthly payment dates
occurring immediately prior to the maturity date, and (ii) partial prepayments resulting from the
application of insurance or condemnation proceeds to reduce the outstanding principal balance of
the mortgage notes. Notwithstanding the prepayment limitations, the Company may sell the
properties to a buyer that assumes the respective mortgage loan. The transfer would be subject to
the conditions set forth in the individual propertys mortgage note document, including without
limitation, the lenders approval of the proposed buyer and the payment of the lenders fees, costs
and expenses associated with the sale of the property and the assumption of the loan.
As of December 31, 2009, the Company elected to extend the maturity date of six mortgage notes
totaling approximately $9.0 million to various dates in November and December 2029 in accordance
with the hyper-amortization provisions of the respective promissory notes. Under the
hyper-amortization provisions, the maturity dates were extended by 20 years. During such period,
the lender will apply 100% of the rents collected from the properties collateralizing the notes to
the following items in the order indicated: (i) payment of accrued interest at the original fixed
interest rate, (ii) all payments for escrow or reserve accounts, (iii) any operating expenses of
the property pursuant to an approved annual budget, (iv) any extraordinary operating or capital
expenses and (v) the balance of the rents collected will be applied to the following in such order
as the lender may determine: (1) any other amounts due in accordance with the loan documents, (2)
the reduction of the principal balance of the promissory notes, and (3) interest accrued at the
Revised Interest Rate but not previously paid. As used herein, Revised Interest Rate means an
interest rate equal to the greater of (A) the initial fixed interest rate as stated in the
respective promissory note agreement plus 2.0% per annum or (B) the then current Treasury Constant
Maturity Yield Index plus 2.0% per annum. The Company expects the interest rates on the extended
loans to range from 6.62% to 7.36%.
F-13
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COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the scheduled aggregate principal repayments for the five years
subsequent to December 31, 2009 (in thousands):
For the Year Ending December 31: | Principal Repayments | |||
2010 |
$ | 41,614 | ||
2011 |
8,550 | |||
2012 |
| |||
2013 |
| |||
2014 |
| |||
Thereafter |
68,574 | |||
Total |
$ | 118,738 | ||
The Company expects to pay down the current maturities of its outstanding fixed rate debt of
approximately $41.6 million through the use of net cash provided by property operations, borrowings
on its existing revolving line of credit, through the possible liquidation of one or more of its
investment properties, from short term borrowings from an affiliate of its advisor or from the
election of the hyper-amortization provisions set forth in certain promissory notes. As of
December 31, 2009, the Company had approximately $700,000 of available borrowings under its
revolving line of credit.
NOTE 6 ACQUIRED BELOW MARKET LEASE INTANGIBLES
Acquired below market lease intangibles consisted of the following (in thousands):
December 31, | ||||||||
2009 | 2008 | |||||||
Acquired below-market leases, net of accumulated
amortization of $1,018 and $814 as of December 31,
2009 and 2008, respectively (with a weighted
average life of 82 and 94 months, respectively). |
$ | 1,221 | $ | 1,425 | ||||
Amortization income on the intangible liability, for each of the years ended December 31,
2009 and 2008 was approximately $204,000.
Estimated amortization income of the intangible lease liability as of December 31, 2009 for
each of the five succeeding fiscal years is as follows (in thousands):
Year | Below Market Lease | |||
2010 |
$ | 202 | ||
2011 |
200 | |||
2012 |
200 | |||
2013 |
200 | |||
2014 |
134 |
NOTE 7 COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims.
There are no material legal proceedings pending, or known to be contemplated, against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may be potentially
liable for costs and damages related to environmental matters. The Company has not been notified
by any governmental authority of any non-compliance, liability
or other claim, and the Company is not aware of any other environmental condition that it
believes will have a material adverse effect on its consolidated financial statements.
F-14
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COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
Certain affiliates of the Company received fees and compensation in connection with the
Companys private placement of shares of its common stock, and receive fees and compensation in
connection with the acquisition, management and sale of the assets of the Company.
If Cole Advisors provides substantial services, as determined by the Company, in connection
with the origination or refinancing of any debt financing obtained by the Company that is used to
acquire properties or to make other permitted investments, or that is assumed, directly or
indirectly, in connection with the acquisition of properties, the Company will pay Cole Advisors a
financing coordination fee equal to 1% of the amount available under such financing; provided,
however, that Cole Advisors shall not be entitled to a financing coordination fee in connection
with the refinancing of any loan secured by any particular property that was previously subject to
a refinancing in which Cole Advisors received such a fee. Financing coordination fees payable from
loan proceeds from permanent financing will be paid to Cole Advisors as the Company acquires such
permanent financing. However, no fees are paid on loan proceeds from any line of credit until such
time as all net offering proceeds have been invested by the Company. No such fees were incurred by
Cole Advisors for the year ended December 31, 2009. During the year ended December 31, 2008, the
Company paid approximately $15,000 for financing coordination fees to Cole Advisors.
The Company paid, and expects to continue to pay, Cole Realty Advisors, Inc. (Cole Realty),
its affiliated property manager, fees for the management and leasing of the Companys properties.
Property management fees are equal to 3% of gross revenues, and leasing commissions are at
prevailing market rates, not to exceed the greater of $4.50 per square foot or 7.5% of the total
lease obligation. During the years ended December 31, 2009 and 2008, the Company recorded
approximately $475,000 and approximately $468,000 for property management fees incurred by Cole
Realty, respectively. As of December 31, 2009 and 2008, approximately $41,000 and $42,000,
respectively, of such costs had been incurred by Cole Realty but had not been reimbursed by the
Company, and is included in due to affiliates on the consolidated financial statements.
Cole Realty, or its affiliates, also receives acquisition and advisory fees of up to 3% of the
contract purchase price of each property. During each of the years ended December 31, 2009 and
2008, no such fees were incurred by the Company.
The Company is obligated to pay Cole Advisors an annualized asset management fee of up to
0.75% of the aggregate asset value of the Companys assets. Pursuant to a waiver of the fee by
Cole Advisors, no asset management fees were incurred during the year ended December 31, 2009. The
Company is not obligated to pay any amounts for such period. However, Cole Advisors may elect to
increase its asset management fees in future periods up to 0.75% of the aggregate asset value of
the Companys assets. During the year ended December 31, 2008, the Company recorded approximately
$498,000 for asset management fees incurred by Cole Advisors. As of December 31, 2009, no amounts
were payable to Cole Advisors for asset management fees. As of December 31, 2008, approximately
$125,000 of such costs had been incurred by Cole Advisors but had not been reimbursed by the
Company, and is included in due to affiliates on the consolidated financial statements.
If Cole Advisors, or its affiliates, provides a substantial amount of services, as determined
by the Company, in connection with the sale of one or more properties, the Company will pay Cole
Advisors an amount equal to 3% of the contract price of each asset sold. In no event will the
combined disposition fee paid to Cole Advisors, its affiliates and unaffiliated third parties
exceed the reasonable, customary and competitive amount for such services. In addition, after
investors have received a return of their net capital contributions and a 7.5% annual cumulative,
non-compounded return, then Cole Advisors is entitled to receive 20% of the remaining net sale
proceeds. During the years ended December 31, 2009 and 2008, the Company did not pay any fees or
amounts to Cole Advisors relating to the sale of properties.
In the event the Companys common stock is listed in the future on a national securities
exchange, a subordinated incentive listing fee equal to 20% of the amount by which the market value
of the Companys outstanding stock plus all distributions paid by the Company prior to listing
exceeds the sum of the total amount of capital raised from investors and the amount of cash flow
necessary to generate a 7.5% annual cumulative, non-compounded return to investors would be paid to
Cole Advisors.
The Company may reimburse Cole Advisors for expenses it incurs in connection with its
provision of administrative services,
including related personnel costs. The Company does not reimburse for personnel costs in
connection with services for which Cole Advisors receives acquisition fees or disposition fees.
During the years ended December 31, 2009 and 2008, the Company did not incur or reimburse Cole
Advisors for any such costs.
F-15
Table of Contents
COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9 ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged or will engage Cole Advisors and its
affiliates to provide certain services that are essential to the Company, including asset
management services, supervision of the management and leasing of properties owned by the Company,
asset acquisition and disposition decisions, the sale of shares of the Companys common stock
available for issue, as well as other administrative responsibilities for the Company including
accounting services and investor relations. As a result of these relationships, the Company is
dependent upon Cole Advisors and its affiliates. In the event that these companies were unable to
provide the Company with the respective services, the Company would be required to find alternative
providers of these services.
NOTE 10 STOCKHOLDERS EQUITY
Share Redemption Program
The Companys common stock is currently not listed on a national securities exchange, and the
Company currently does not intend to list its common stock. In order to provide stockholders with
the possibility of liquidity, stockholders who have held their shares for at least one year may
receive the benefit of limited interim liquidity by presenting for redemption all or a minimum
portion of their shares to the Company at any time in accordance with the procedures outlined
below. At that time, the Company may, subject to the conditions and limitations described below,
redeem the shares presented for redemption for cash to the extent that the Company has sufficient
funds available to it to fund such redemption. The Company will not pay its advisor or its
affiliates any fees to complete any transactions under the share redemption program.
The Company determines at the beginning of each fiscal year the maximum amount of shares that
it may redeem during that year. The Company may use up to 1.0% of its annual cash flow to meet
these redemption needs, including cash proceeds generated from new offerings, operating cash flow
not intended for dividends, borrowings, and capital transactions such as asset sales or
refinancings. During the years ended December 31, 2009 and 2008, the Company redeemed no shares
under the share redemption program.
Except as described below for redemptions upon the death of a stockholder, the purchase price
for the redeemed shares will equal the lesser of (1) the price actually paid for those shares or
(2) either (i) $8.50 per share or (ii) 90.0% of the net asset value per share of $7.65, as
determined by the board of directors. The Companys board of directors reserves the right in its
sole discretion at any time and from time to time to (1) waive the one-year holding period in the
event of the death or bankruptcy of a stockholder or other exigent circumstances, (2) reject any
request for redemption, (3) change the purchase price for redemption, or (4) otherwise amend the
terms of the share redemption program.
The purchase price for shares redeemed upon the death of a stockholder generally will be equal
to the price the stockholder actually paid for the shares. If, at the time of redemption, the
Companys advisor or another firm it might choose for that purpose has made a determination of the
net asset value per share, the purchase price for shares redeemed upon the death of a stockholder
will be the net asset value of the shares as so determined. As of January 1, 2010, the Company has
estimated its net asset value per share to be $7.65. The Company will redeem shares upon the death
of a stockholder only to the extent that it has sufficient funds available to the Company to fund
such redemption.
Redemptions of shares, when requested, generally are made quarterly on a first-come,
first-served basis. The Company cannot guarantee that it will have sufficient available cash flow
to accommodate any or all requests made in any quarter. If the Company does not have such
sufficient funds available, at the time when redemption is requested, a stockholder can
(1) withdraw his or her request for redemption or (2) ask that the Company honor such stockholder
request at such time, if any, when sufficient funds become available. Such pending requests will
generally be honored on a first-come, first-served basis.
Stockholders may present to the Company fewer than all of their shares for redemption, except
that (1) any participating stockholder must present for redemption at least 2,500 shares and (2) if
any participating stockholder retains any shares, such
stockholder must retain at least 2,500 shares.
The shares the Company redeems under its share redemption program will be cancelled and
returned to the status of authorized but unissued shares. The Company does not intend to resell
such shares to the public unless they are first registered with the Securities and Exchange
Commission under the Securities Act and under appropriate state securities laws or otherwise sold
in compliance with such laws.
F-16
Table of Contents
COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11 INCOME TAXES
For federal income tax purposes, distributions to common stockholders are characterized as
dividend income, capital gains, or as a return of a stockholders invested capital. The following
table represents the character of distributions to stockholders for the years ended December 31,
2009 and 2008:
Character of Distributions: | 2009 | 2008 | ||||||
Dividend income |
43 | % | 42 | % | ||||
Capital gain |
| % | | % | ||||
Return of capital |
57 | % | 58 | % | ||||
100 | % | 100 | % | |||||
At December 31, 2009, the tax basis carrying value of the Companys land and depreciable
real estate assets was approximately $187.3 million. During the years ended December 31, 2009 and
2008, the Company incurred state income taxes of approximately $39,000 and approximately $76,000,
respectively, which has been recorded in general and administrative expenses in the consolidated
statements of operations.
NOTE 12 OPERATING LEASES
All of the Companys real estate assets are leased to tenants under operating leases, for
which the terms and expirations vary. The leases frequently have provisions to extend the lease
agreement and other terms and conditions as negotiated. The Company retains substantially all of
the risks and benefits of ownership of the real estate assets leased to tenants.
The future minimum rental income from the Companys investment in real estate assets under
non-cancellable operating leases, as of December 31, 2009 is as follows (in thousands):
Year Ending December 31: | Amount | |||
2010 |
$ | 16,025 | ||
2011 |
16,025 | |||
2012 |
16,025 | |||
2013 |
16,025 | |||
2014 |
14,712 | |||
Thereafter |
102,933 | |||
Total |
$ | 181,745 | ||
NOTE 13 SUBSEQUENT EVENTS
Estimated Value Per Share
The Company reported an estimate of the net asset value per share of its common stock on
February 1, 2010, for purposes of assisting fiduciaries of plans subject to the annual reporting
requirements of the ERISA, and IRA trustees or custodians, which prepare reports relating to an
investment in the Companys shares.
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Table of Contents
COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The annual statement of value for stockholders subject to ERISA and to certain other plan
stockholders is only an estimate and may not reflect the actual value of shares of the Companys
common stock. The Companys board of directors engaged a third-party valuation company to develop
the estimates and to provide advice in determining the estimated net asset value per share. The
estimated net asset value per share was derived by using various valuation methodologies, which
employed a range of assumptions and considered the impact of trends in the economy and the real
estate industry. Based on the results of the methodologies, the Companys board of directors
selected a value within the range of values as the estimated net asset value per share of $7.65 as
of December 31, 2009. Because this is only an estimate, the Company may subsequently revise any
annual valuation that is provided. There can be no assurance, however, with respect to the
estimated net asset value per share, that:
| the estimated value per share would actually be realized by the Companys stockholders upon liquidation, because this estimate does not necessarily indicate the price at which properties can be sold; | ||
| the Companys stockholders would be able to realize estimated net asset values if they were to attempt to sell their shares, because no public market for the Companys shares exists or is likely to develop; | ||
| this estimate of value reflects the price or prices at which the Companys common stock would or could trade if it were listed on a national stock exchange; or | ||
| the annual statement of value, or method used to establish such value, complies with any reporting and disclosure or annual valuation requirements under ERISA or the Internal Revenue Code. |
Share Redemption Program
In accordance with the Companys share redemption program, effective January 1, 2010, the
purchase price for the redeemed shares will equal the lesser of (1) the price actually paid for
those shares or (2) either (i) $8.50 per share or (ii) 90.0% of the net asset value per share as
determined by the Companys board of directors. Therefore, the share redemption price would be
$6.89 per share based on the net asset value per share as determined by the Companys board of
directors. However, the Companys share redemption program provides that the Companys board of
directors must determine at the beginning of each fiscal year the maximum amount of shares that the
Company may redeem during that year. The Companys board of directors has determined that no
amounts were to be made available for redemption during the year ended December 31, 2010.
Distribution
The board of directors of the Company authorized a daily distribution, based on 365 days in
the calendar year, of $0.001369999 per share for stockholders of record as of the close of business
on each day in the month of March 2010.
F-18
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cole Credit Property Trust, Inc. (Registrant) |
||||
Date: March 29, 2010 | By: | /s/ CHRISTOPHER H. COLE | ||
Name: | Christopher H. Cole | |||
Title: | Chief Executive Officer and President | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed by the following persons on behalf of the Registrant in the capacities and on the dates
indicated.
Signature | Title | Date | ||
/s/ CHRISTOPHER H. COLE
|
Chief Executive Officer, President, and Director (Principal Executive Officer) | March 29, 2010 | ||
/s/ D. KIRK MCALLASTER, JR.
|
Executive Vice President, Chief Financial Officer, and Director (Principal Financial Officer and Accounting Officer) | March 29, 2010 | ||
/s/ JOHN M. PONS
|
Secretary and Director | March 29, 2010 |
Table of Contents
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Annual Report on
Form 10-K for the year ended December 31, 2009 (and are numbered in accordance with Item 601 of
Regulation S-K).
Exhibit Number | Description | |||
3.1 | Articles of Incorporation (Incorporated by reference to
Exhibit 2.1 to the Companys Form 10-SB (File No.
000-51962), filed on May 1, 2006). |
|||
3.2 | Amended and Restated Bylaws (Incorporated by reference to
Exhibit 2.2 to the Companys Form 10-SB (File No.
000-51962), filed on May 1, 2006). |
|||
10.1 | Agreement of Limited Partnership of Cole Operating
Partnership I, LP, dated April 6, 2004, between Cole Credit
Property Trust, Inc. and the limited partners thereto
(Incorporated by reference to Exhibit 6.1 to the Companys
Form 10-SB (File No. 000-51962), filed on May 1, 2006). |
|||
10.2 | Property Management and Leasing Agreement, dated April 6,
2004, among Cole Credit Property Trust, Inc., Cole
Operating Partnership I, LP and Cole Realty Advisors, Inc.
(Incorporated by reference to Exhibit 6.2 to the Companys
Form 10-SB (File No. 000-51962), filed on May 1, 2006). |
|||
10.3 | Advisory Agreement, dated April 6, 2004, as amended,
between Cole Credit Property Trust, Inc. and Cole REIT
Advisors, LLC (Incorporated by reference to Exhibit 6.3 to
the Companys Form 10-SB (File No. 000-51962), filed on May
1, 2006). |
|||
10.4 | Dealer Manager Agreement, dated April 6, 2004, between Cole
Credit Property Trust, Inc. and Cole Capital Corporation
(Incorporated by reference to Exhibit 6.4 to the Companys
Form 10-SB (File No. 000-51962), filed on May 1, 2006). |
|||
21.1 | * | List of Subsidiaries. |
||
31.1 | * | Certification of the Chief Executive Officer of the Company
pursuant to Securities Exchange Act Rule 13a-14 (a) or
15d-14 (a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
||
31.2 | * | Certification of the Chief Financial Officer of the Company
pursuant to Securities Exchange Act Rule 13a-14 (a) or
15d-14 (a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
||
32.1 | * | Certification of the Chief Executive Officer and Chief
Financial Officer of the Company pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |