Attached files
file | filename |
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EX-31.1 - CapLease, Inc. | v200850_ex31-1.htm |
EX-32.2 - CapLease, Inc. | v200850_ex32-2.htm |
EX-32.1 - CapLease, Inc. | v200850_ex32-1.htm |
EX-31.2 - CapLease, Inc. | v200850_ex31-2.htm |
EX-12.1 - CapLease, Inc. | v200850_ex12-1.htm |
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2010
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ____________to _____________
Commission
file number 001-32039
CapLease,
Inc.
(Exact
name of registrant as specified in its charter)
Maryland
|
52-2414533
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
Incorporation
or Organization)
|
|
1065 Avenue of the Americas, New York,
NY
|
10018
|
(Address
of Principal Executive Offices)
|
(ZIP
Code)
|
Registrant’s
Telephone Number, Including Area Code:
|
(212)
217-6300
|
Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the Registrant was required to submit
and post such files). Yes ¨ No ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “accelerated filer,” “large
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
|
Smaller reporting
company ¨
|
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
November 5, 2010, there were 57,184,965 shares of common stock of CapLease,
Inc., $0.01 par value per share, outstanding (“Common Stock”).
CapLease,
Inc.
Index
to Form 10-Q
Page
|
||
PART
I. FINANCIAL INFORMATION
|
2
|
|
Item
1.
|
Financial
Statements
|
2
|
Consolidated
Balance Sheets as of September 30, 2010 (unaudited) and December 31,
2009
|
2
|
|
Consolidated
Statements of Operations (unaudited) for the Three and Nine Months Ended
September 30, 2010 and 2009
|
3
|
|
Consolidated
Statement of Changes in Equity (unaudited) for the Nine Months Ended
September 30, 2010
|
4
|
|
Consolidated
Statements of Cash Flows (unaudited) for the Nine Months Ended September
30, 2010 and 2009
|
5
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
7
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
33
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
45
|
Item
4.
|
Controls
and Procedures
|
48
|
PART
II. OTHER INFORMATION
|
49
|
|
Item
1.
|
Legal
Proceedings
|
49
|
Item
1A.
|
Risk
Factors
|
49
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
50
|
Item
3.
|
Defaults
Upon Senior Securities
|
50
|
Item
4.
|
[Removed
and Reserved]
|
50
|
Item
5.
|
Other
Information
|
50
|
Item
6.
|
Exhibits
|
50
|
SIGNATURES
|
51
|
1
PART
I.
|
FINANCIAL
INFORMATION
|
Item
1.
|
Financial
Statements
|
CapLease,
Inc. and Subsidiaries
As of
September 30, 2010 (unaudited) and December 31, 2009
(Amounts in thousands, except share and per share
amounts)
|
As Of
September 30,
2010
|
As Of
December 31,
2009
|
||||||
Assets
|
||||||||
Real
estate investments, net
|
$ | 1,373,428 | $ | 1,408,819 | ||||
Loans
held for investment, net
|
212,963 | 221,211 | ||||||
Commercial
mortgage-backed securities
|
151,938 | 153,056 | ||||||
Cash
and cash equivalents
|
57,798 | 38,546 | ||||||
Asset
held for sale
|
– | 3,410 | ||||||
Structuring
fees receivable
|
474 | 1,094 | ||||||
Other
assets
|
79,104 | 78,279 | ||||||
Total
Assets
|
$ | 1,875,705 | $ | 1,904,415 | ||||
Liabilities
and Equity
|
||||||||
Mortgages
on real estate investments
|
$ | 933,170 | $ | 943,811 | ||||
Collateralized
debt obligations
|
256,504 | 263,310 | ||||||
Credit
facility
|
93,092 | 126,262 | ||||||
Secured
term loan
|
104,783 | 114,070 | ||||||
Convertible
senior notes
|
33,785 | 49,452 | ||||||
Other
long-term debt
|
30,930 | 30,930 | ||||||
Total
Debt Obligations
|
1,452,264 | 1,527,835 | ||||||
Intangible
liabilities on real estate investments
|
37,952 | 39,591 | ||||||
Accounts
payable, accrued expenses and other liabilities
|
19,493 | 18,700 | ||||||
Dividends
and distributions payable
|
5,066 | 3,822 | ||||||
Total
Liabilities
|
1,514,775 | 1,589,948 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, $0.01 par value, 100,000,000 shares authorized, Series A cumulative
redeemable preferred, liquidation preference $25.00 per share, 3,200,600
and 1,400,000 shares issued and outstanding, respectively
|
73,776 | 33,657 | ||||||
Common
stock, $0.01 par value, 500,000,000 shares authorized, 57,184,965 and
51,709,511 shares issued and outstanding, respectively
|
572 | 517 | ||||||
Additional
paid in capital
|
308,105 | 303,368 | ||||||
Accumulated
other comprehensive loss
|
(22,729 | ) | (24,332 | ) | ||||
Total
Stockholders' Equity
|
359,724 | 313,210 | ||||||
Non-controlling
interest in consolidated subsidiaries
|
1,206 | 1,257 | ||||||
Total
Equity
|
360,930 | 314,467 | ||||||
Total
Liabilities and Equity
|
$ | 1,875,705 | $ | 1,904,415 |
See notes
to consolidated financial statements.
2
CapLease,
Inc. and Subsidiaries
Consolidated
Statements of Operations
(Unaudited)
For the Three Months
Ended September 30,
|
For the Nine Months
Ended September 30,
|
|||||||||||||||
(Amounts in thousands, except per share
amounts)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Revenues:
|
||||||||||||||||
Rental
revenue
|
$ | 31,278 | $ | 34,479 | $ | 94,356 | $ | 102,004 | ||||||||
Interest
income from loans and securities
|
6,888 | 7,621 | 20,902 | 23,592 | ||||||||||||
Property
expense recoveries
|
2,982 | 2,700 | 8,775 | 8,416 | ||||||||||||
Other
revenue
|
218 | 161 | 645 | 524 | ||||||||||||
Total
revenues
|
41,366 | 44,961 | 124,678 | 134,536 | ||||||||||||
Expenses:
|
||||||||||||||||
Interest
expense
|
21,011 | 22,386 | 64,041 | 68,120 | ||||||||||||
Property
expenses
|
6,190 | 4,726 | 18,498 | 14,859 | ||||||||||||
Loss
on investments
|
– | 5,912 | – | 13,739 | ||||||||||||
General
and administrative expenses
|
2,462 | 2,596 | 7,899 | 7,750 | ||||||||||||
General
and administrative expenses-stock based compensation
|
662 | 550 | 1,879 | 1,570 | ||||||||||||
Depreciation
and amortization expense on real property
|
12,121 | 12,596 | 36,253 | 39,178 | ||||||||||||
Loan
processing expenses
|
67 | 76 | 202 | 232 | ||||||||||||
Total
expenses
|
42,513 | 48,842 | 128,772 | 145,448 | ||||||||||||
(Loss)
gain on extinguishment of debt
|
(14 | ) | 415 | (293 | ) | 9,829 | ||||||||||
Loss
from continuing operations
|
(1,161 | ) | (3,466 | ) | (4,387 | ) | (1,083 | ) | ||||||||
Income
from discontinued operations
|
– | 80 | 37 | 435 | ||||||||||||
Net
loss before non-controlling interest in consolidated
subsidiaries
|
(1,161 | ) | (3,386 | ) | (4,350 | ) | (648 | ) | ||||||||
Non-controlling
interest in consolidated subsidiaries
|
8 | 13 | 23 | 9 | ||||||||||||
Net
loss
|
(1,153 | ) | (3,373 | ) | (4,327 | ) | (639 | ) | ||||||||
Dividends
allocable to preferred shares
|
(1,625 | ) | (711 | ) | (3,992 | ) | (2,133 | ) | ||||||||
Net
loss allocable to common stockholders
|
$ | (2,778 | ) | $ | (4,084 | ) | $ | (8,319 | ) | $ | (2,772 | ) | ||||
Earnings
per share:
|
||||||||||||||||
Net
loss per common share, basic and diluted
|
$ | (0.05 | ) | $ | (0.08 | ) | $ | (0.15 | ) | $ | (0.06 | ) | ||||
Weighted
average number of common shares outstanding, basic and
diluted
|
57,185 | 50,179 | 55,822 | 48,539 | ||||||||||||
Dividends
declared per common share
|
$ | 0.06 | $ | 0.05 | $ | 0.18 | $ | 0.15 | ||||||||
Dividends
declared per preferred share
|
$ | 0.51 | $ | 0.51 | $ | 1.52 | $ | 1.52 |
See notes
to consolidated financial statements.
3
CapLease,
Inc. and Subsidiaries
Consolidated
Statement of Changes in Equity
(Unaudited)
(in
thousands)
Stockholders'
Equity
|
||||||||||||||||||||||||
Preferred
Stock
|
Common
Stock
at
Par
|
Additional
Paid-In
Capital
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Non-controlling
Interest
|
Total
Equity
|
|||||||||||||||||||
Balance
at December 31, 2009
|
$ | 33,657 | $ | 517 | $ | 303,368 | $ | (24,332 | ) | $ | 1,257 | $ | 314,467 | |||||||||||
Incentive
stock plan compensation expense
|
– | – | 1,879 | – | – | 1,879 | ||||||||||||||||||
Incentive
stock plan grants issued and forfeited
|
– | 5 | (5 | ) | – | – | – | |||||||||||||||||
Net
loss
|
– | – | (4,327 | ) | – | – | (4,327 | ) | ||||||||||||||||
Non-controlling
interest in consolidated subsidiaries
|
– | – | – | – | (23 | ) | (23 | ) | ||||||||||||||||
Issuance
of common stock
|
– | 50 | 23,408 | – | – | 23,458 | ||||||||||||||||||
Issuance
of preferred stock
|
40,119 | – | – | – | – | 40,119 | ||||||||||||||||||
Repurchase
of convertible senior notes-equity component
|
– | – | (1,050 | ) | – | – | (1,050 | ) | ||||||||||||||||
Dividends
declared-preferred
|
– | – | (4,876 | ) | – | – | (4,876 | ) | ||||||||||||||||
Dividends
declared-common
|
– | – | (10,292 | ) | – | – | (10,292 | ) | ||||||||||||||||
Distributions
declared-operating partnership units
|
– | – | – | – | (28 | ) | (28 | ) | ||||||||||||||||
Amortization
of unrealized loss on securities previously classified as available for
sale
|
– | – | – | 516 | – | 516 | ||||||||||||||||||
Increase
in fair value of securities available for sale
|
– | – | – | 640 | – | 640 | ||||||||||||||||||
Reclassification
of derivative items into earnings
|
– | – | – | 447 | – | 447 | ||||||||||||||||||
Balance
at September 30, 2010
|
$ | 73,776 | $ | 572 | $ | 308,105 | $ | (22,729 | ) | $ | 1,206 | $ | 360,930 |
See notes
to consolidated financial statements.
4
CapLease,
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Unaudited)
(in
thousands)
For the Nine Months
Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Operating
activities
|
||||||||
Net
loss
|
$ | (4,327 | ) | $ | (639 | ) | ||
Adjustments
to reconcile net loss to cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
36,317 | 39,619 | ||||||
Stock
based compensation
|
1,879 | 1,570 | ||||||
Amortization
of above and below market leases
|
1,247 | 1,016 | ||||||
Loss
attributable to non-controlling interest in consolidated
subsidiaries
|
(23 | ) | (9 | ) | ||||
Loss
(gain) on extinguishment of debt
|
293 | (9,829 | ) | |||||
Loss
on investments
|
– | 13,739 | ||||||
Straight-lining
of rents
|
1,371 | 5,825 | ||||||
Amortization
of discounts/premiums, and origination fees/costs, net
|
(417 | ) | (350 | ) | ||||
Amortization
of debt issuance costs, leasing commissions and fair market value of debt
issued or assumed
|
2,188 | 2,710 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Structuring
fees receivable
|
619 | 572 | ||||||
Other
assets
|
(2,377 | ) | (6,356 | ) | ||||
Accounts
payable, accrued expenses and other liabilities
|
483 | 1,523 | ||||||
Deposits
and escrows
|
1 | 1 | ||||||
Net
cash provided by operating activities
|
37,254 | 49,392 | ||||||
Investing
activities
|
||||||||
Proceeds
from sale of loans
|
– | 41,206 | ||||||
Additions
to loans held for investment
|
– | (790 | ) | |||||
Principal
received from borrowers
|
8,274 | 12,817 | ||||||
Purchase
of commercial mortgage-backed securities
|
– | (496 | ) | |||||
Proceeds
from sale of securities
|
– | 7,475 | ||||||
Repayments
of commercial mortgage-backed securities
|
2,664 | 2,681 | ||||||
Proceeds
from lease termination and sale of real estate investments
|
3,410 | 6,544 | ||||||
Real
estate improvements, additions, rebates and construction in
progress
|
(3,587 | ) | (794 | ) | ||||
Leasing
commission costs
|
(1,070 | ) | (756 | ) | ||||
Deposits
on potential equity investments
|
(50 | ) | – | |||||
Return
of deposits on potential equity investments
|
50 | – | ||||||
Purchases
of furniture, fixtures, equipment and leasehold
improvements
|
(29 | ) | (5 | ) | ||||
Net
cash provided by investing activities
|
9,662 | 67,882 | ||||||
Financing
activities
|
||||||||
Borrowings
from mortgages on real estate investments
|
1,296 | 1,164 | ||||||
Repayments
of mortgages on real estate investments
|
(11,151 | ) | (9,594 | ) | ||||
Repayments
of collateralized debt obligations
|
(6,835 | ) | – | |||||
Collateralized
debt obligations repurchased
|
– | (2,881 | ) | |||||
Repayments
on credit facility
|
(33,170 | ) | (60,074 | ) | ||||
Repayments
on secured term loan
|
(9,288 | ) | (7,022 | ) | ||||
Convertible
senior notes repurchased
|
(17,335 | ) | (9,583 | ) | ||||
Debt
issuance costs
|
(804 | ) | (6 | ) | ||||
Escrows
held with mortgage lender
|
– | 212 | ||||||
Common
stock issued, net of offering costs
|
23,458 | 10,280 | ||||||
Preferred
stock issued, net of offering costs
|
40,119 | – | ||||||
Distributions
to non-controlling interest
|
(28 | ) | (16 | ) | ||||
Dividends
paid on common and preferred stock
|
(13,926 | ) | (6,962 | ) | ||||
Net
cash used in financing activities
|
(27,664 | ) | (84,482 | ) | ||||
Net
increase in cash and cash equivalents
|
19,252 | 32,792 | ||||||
Cash
and cash equivalents at beginning of period
|
38,546 | 8,439 | ||||||
Cash
and cash equivalents at end of period
|
$ | 57,798 | $ | 41,231 |
See notes
to consolidated financial statements.
5
CapLease,
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows – continued
(Unaudited)
(in
thousands)
For the Nine Months
Ended September 30,
|
||||||||
2010
|
2009
|
|||||||
Supplemental
disclosure of cash flow information
|
||||||||
Cash
paid for interest expense
|
$ | 60,253 | $ | 64,217 | ||||
Cash
paid for income taxes
|
200 | – | ||||||
Distributions
declared but not paid
|
9 | 8 | ||||||
Dividends
declared but not paid
|
5,056 | 3,288 | ||||||
Supplemental
disclosure of noncash operating, investing and financing
information
|
||||||||
Mortgage
notes payable transferred on properties sold
|
$ | – | $ | 14,400 |
See notes
to consolidated financial statements.
6
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
1.
|
Organization
|
CapLease,
Inc. (“CapLease” and collectively with its majority-owned subsidiaries, the
“Company”) is a diversified real estate investment trust, or REIT, that invests
primarily in single tenant commercial real estate assets subject to long-term
leases to high credit quality tenants. The Company focuses on
properties that are subject to a net lease, or a lease that requires the tenant
to pay all or substantially all expenses normally associated with the ownership
of the property, such as utilities, real estate taxes, insurance and routine
maintenance. The Company also has made and expects to continue to
make investments in single tenant properties where the owner has exposure to
property expenses when it determines it can sufficiently underwrite that
exposure and isolate a predictable cash flow.
The
Company has two complementary business lines: owning single tenant
properties and making first mortgage loans and other debt investments on single
tenant properties.
CapLease
has made an election to qualify, and believes it is operating so as to qualify,
as a REIT for federal income tax purposes. As such, it will generally
not be subject to federal income tax on that portion of its taxable income that
is distributed to stockholders if it distributes at least 90% of its taxable
income to its stockholders by prescribed dates and complies with various other
requirements.
CapLease
conducts its business through a variety of subsidiaries. CapLease
owns most of its owned properties through its predecessor and operating
partnership, Caplease, LP (the “Operating Partnership”). CapLease is
the indirect sole general partner of, and owns approximately 99.7% of the common
equity of, the Operating Partnership.
The
accompanying consolidated financial statements and related notes of the Company
have been prepared in accordance with accounting principles generally accepted
in the United States, or GAAP, for interim financial reporting and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain
information and footnote disclosures normally included in the financial
statements prepared under GAAP have been condensed or omitted. In the
opinion of management, all adjustments considered necessary for a fair
presentation of the Company’s financial position, results of operations and cash
flows have been included and are of a normal and recurring
nature. The operating results presented for interim periods are not
necessarily indicative of the results that may be expected for any other interim
period or for the entire year. These financial statements should be
read in conjunction with the Company’s consolidated financial statements for the
fiscal year ended December 31, 2009 and notes thereto, included in the Company’s
Form 10-K filed with the SEC on March 4, 2010.
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements include the assets, liabilities,
and results of operations of the Company. Results of operations of
properties acquired are included in the Consolidated Statements of Operations
from the date of acquisition. The Company accounts for properties
that it intends to dispose of in accordance with the Financial Accounting
Standards Board (“FASB”) Accounting Codification Statement (“ASC”)
360-10-45. All significant intercompany transactions, balances and
accounts have been eliminated in consolidation.
Accounting
for Real Estate
Real
estate is carried on the Company’s Consolidated Balance Sheet at cost, net of
accumulated depreciation and amortization. Depreciation and
amortization are determined by the straight-line method over the remaining
estimated economic useful lives of the properties. The Company has
allocated the purchase price of its owned properties to the following based on
estimated fair values on the acquisition date: land (no
depreciation), building and improvements (depreciated over periods not exceeding
40 years), above-market leases (amortized as a reduction of base rental revenue
over the remaining term of the respective lease), below-market leases (amortized
as an increase to base rental revenue over the remaining initial term plus the
term of any below-market renewal options of the respective lease), and in-place
leases (amortized as a component of depreciation and amortization expense over
the remaining initial term of the respective lease). As a result of
the Company’s adoption of FASB ASC 805 on January 1, 2009, direct costs incurred
in acquiring completed properties are now required to be charged to operations
as incurred. Prior to January 1, 2009 and under previous accounting
guidance, these costs were required to be capitalized and amortized over the
estimated useful life of the asset acquired. Expenditures for
maintenance and repairs are charged to operations as
incurred. Significant renovations which extend the useful life of the
properties are capitalized.
7
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
The
Company reviews its owned real properties for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, in accordance with FASB ASC 360-10-35-21. Upon
determination of impairment, the Company would record a write-down of the asset,
which would be charged to earnings. Significant judgment is required
both in determining impairment and in estimating the resulting write-down,
including an evaluation of factors such as the credit quality of the tenant, the
anticipated cash flows of the property, based on current leases in place, and an
estimate of what lease rents will be if the property is vacated coupled with an
estimate of proceeds to be realized upon sale. These estimates are
highly subjective and could differ materially from actual
results. The Company did not recognize any impairment losses on
long-lived assets during the three and nine months ended September 30,
2010. The Company recognized impairment losses on long-lived assets
during the three and nine months ended September 30, 2009, of $0 and $2,853,
respectively. See Note 6.
Development
Activities
Project
costs and expenses associated with the development, construction and lease-up of
a real estate project are capitalized as construction in
progress. Once the development and construction of the building is
substantially completed, the costs capitalized to construction in progress are
transferred to (i) land and (ii) buildings and improvements.
Loan
Investments
The
Company classifies its loans as long-term investments, as its strategy is to
hold the loans for the foreseeable future or until maturity. Loan
investments are carried on the Company's Consolidated Balance Sheet at amortized
cost (unpaid principal balance adjusted for unearned discount or premium and
loan origination fees), net of any allowance for loan
losses. Unearned discounts or premiums and loan origination fees are
amortized as a component of interest income using the effective interest method
over the life of the loan.
From time
to time, the Company may determine to sell a loan in which case it must
reclassify the asset as held for sale. Loans held for sale are
carried at lower of cost or market value. As of September 30, 2010,
the Company had not classified any of its loans as held for sale.
The
Company evaluates its loan investments for possible impairment on a quarterly
basis. The Company’s impairment analysis includes both a general
reserve component under FASB ASC 310-10-35-10, and an asset-specific component
under FASB ASC 310-10-35-16. The general reserve component covers
performing loans and in accordance with FASB ASC 310-10-35-10 provisions for
loan losses are recorded when (i) available information as of each balance sheet
date indicates that it is probable a loss has occurred in the portfolio and (ii)
the amount of the loss can be reasonably estimated. Actual loan
losses are then charged against the allowance when management believes that
uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Significant
judgment is required in determining reserve balances for the performing loan
portfolio, including estimates of the likelihood of default and lease rejection
given the credit characteristics of the tenant, and estimates of stressed
collateral values and potential bankruptcy claim recoveries. These
estimates are highly subjective and could differ materially from actual
results. As of September 30, 2010, the Company has a general loan
loss reserve in accordance with FASB ASC 310-10-35-10 of $500. See
Note 4.
The
asset-specific component of the loan loss impairment analysis is conducted in
accordance with FASB ASC 310-10-35-16, and covers specific loans where the
Company has deemed it probable that it will not be able to collect all amounts
due according to the contractual terms of the loan. Any resulting
loan specific loss is measured based on the present value of expected future
cash flows from the loan or the fair value of the loan collateral, if the loan
is collateral dependent. Significant judgment is required in
determining any resulting loan specific loss, including factors such as the
status of the loans (i.e., current or actual or expected payment or other
defaults), the credit quality of the underlying tenants, the present value of
expected future cash flows on the loans, the fair value of any collateral, and
the amount and status of any senior debt. These estimates are highly
subjective and could differ materially from actual results. The
Company’s accounting policy is to continue to accrue interest income on specific
impaired loans as long as it concludes it is likely to collect it. As
of September 30, 2010, the Company had an asset-specific loan loss reserve of
$444 on a single impaired loan. See Note 4.
8
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
Commercial
Mortgage-Backed Securities
The
Company designates its commercial mortgage-backed securities and other real
estate securities (“CMBS”) investments pursuant to FASB ASC
320-10. FASB ASC 320-10 creates two classifications that are relevant
with respect to the Company’s securities investments:
|
·
|
“Held
to maturity” are those securities that the Company has the positive intent
and ability to hold until maturity. All of the Company’s
securities classified as held to maturity were transferred to this
classification (from “available for sale” classification) in January
2008. For a security transferred into the held to maturity
category, the security is recorded at estimated fair value on the date of
transfer, with any unrealized gain or loss amortized against the related
fair value adjustment recorded as a component of Other Comprehensive
Income (Loss) within Stockholders’ Equity over the expected term of the
security using the effective interest
method.
|
|
·
|
“Available
for sale” are those securities that the Company does not hold for the
purpose of selling in the near-term, but may dispose of prior to
maturity. They are presented on the Consolidated Balance Sheet
at fair value with the net unrealized gains or losses included in
Accumulated Other Comprehensive Income (Loss), a component of
Stockholders’ Equity on the Company’s Consolidated Balance
Sheet.
|
The
Company classifies its securities investments that are financed in its March
2005 collateralized debt obligation or in the December 2007 secured term loan
transaction discussed at Note 9, as “held to maturity,” and all other securities
investments, including those financed within the credit facility discussed at
Note 9, as “available for sale.”
Any
premiums or discounts on securities are amortized as a component of interest
income using the effective interest method.
The
Company estimates fair value on all securities investments quarterly based on a
variety of inputs. Under applicable accounting guidance, securities
where the fair value is less than the Company’s cost are deemed “impaired,” and,
therefore, must be measured for “other-than-temporary impairment.” If
an impaired security (i.e., fair value below cost) is intended to be sold or
required to be sold prior to expected recovery of the impairment loss, the full
amount of the loss is charged to earnings as other-than-temporary
impairment. Otherwise, impairment losses on the security must be
further analyzed for separation into two categories: (i) credit losses and (ii)
losses due to factors other than credit. The portion which is
considered credit loss is charged to earnings as other-than-temporary
impairment. The portion which is due to other factors is not charged
to earnings. Also, if the security is classified as available for
sale, the non-credit portion of the impairment loss is charged to other
comprehensive income (loss), a component of equity on the Company’s Consolidated
Balance Sheet.
In
estimating credit or other-than-temporary impairment losses, management
considers a variety of factors including (1) the financial condition and
near-term prospects of the credit, including credit rating of the security and
the underlying tenant and an estimate of the likelihood, amount and expected
timing of any default, (2) whether the Company expects to hold the investment
for a period of time sufficient to allow for anticipated recovery in fair value,
(3) the length of time and the extent to which the fair value has been below
cost, (4) current market conditions, (5) expected cash flows from the underlying
collateral and an estimate of underlying collateral values, and (6)
subordination levels within the securitization pool. These estimates
are highly subjective and could differ materially from actual
results. The Company had no other-than-temporary impairment losses on
securities charged to the Statement of Operations during each of the three and
nine months ended September 30, 2010. During the three
and nine months ended September 30, 2009, the Company had other-than-temporary
impairment losses on securities charged to the Statement of Operations of $0 and
$133, respectively. See Note 5.
9
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
Deferred
Fees and Costs
In
connection with its leasing efforts, the Company may incur primarily two types
of costs: (i) allowances paid to the tenant or on its behalf for the
construction of leasehold improvements, or tenant improvement allowances, and
(ii) commissions paid to leasing brokers, or leasing
commissions. Tenant improvement allowances are initially capitalized
as part of “Construction in progress” and then transferred to “Building and
improvements” at completion and depreciated on a straight-line basis over
periods not exceeding 40 years. Leasing commissions are capitalized
as “Deferred leasing costs” and amortized on a straight-line basis over the term
of the related lease.
In
accordance with applicable accounting guidance, the Company defers the
recognition of fees and expenses associated with the origination of its loans
held for investment. These items include lender fee income, rate lock
income, direct loan origination costs, certain legal fees, insurance costs,
rating agency fees and certain other expenses. Deferred fees and
costs are recognized as an adjustment to the effective yield over the life of
the related asset.
Risk
Management Transactions
The
Company may enter into risk management transactions as part of its overall
portfolio financing strategy. These transactions are intended to
manage the Company’s exposure to changes in interest rates associated with its
expected future debt issuances.
If the
Company employs risk management transactions, they will be treated as cash flow
hedges under applicable accounting guidance as long as they have been designated
and qualify as such, which basically means so long as the Company has satisfied
a variety of technical requirements, such as hedge documentation requirements
and initial and subsequent quarterly hedge effectiveness tests. If
the cash flow hedge criteria are met, the transactions are marked to fair value
at each reporting date and recorded as an asset or liability, depending on the
Company’s rights or obligations under the applicable contract. The
effective portion of the Company’s realized and unrealized gains and losses on
such transactions are treated as a component of “Other Comprehensive Income
(Loss)” on the Company’s Consolidated Balance Sheet and are not reported as a
component of current income or loss on the Company’s Consolidated Statement of
Operations. The effective portion of the Company’s realized gains and
losses, which generally represent the net payments the Company makes or receives
on the interest rate swaps, are then reclassified and amortized as part of
interest expense on the Company’s Consolidated Statement of Operations beginning
at issuance of the related debt and continuing over the expected term of such
debt.
If cash
flow hedge criteria are not met or the hedge is deemed ineffective, some or all
of the realized and unrealized gains and losses on such transactions are treated
as a component of current income or loss on the Company’s Consolidated Statement
of Operations.
If the
Company employs risk management transactions, no assurance can be made that the
Company will satisfy the cash flow hedge requirements and as to the portion of
the Company’s gains and losses that will be deemed effective under applicable
accounting guidance. Changes in management’s initial assumptions
regarding any proposed debt issuance (e.g., timing and the amount and type of
debt) and changes in the shape of the swap curve (which represents the market’s
expectations for future LIBOR rates) are among the factors that could cause the
Company to include a greater portion of its gains and losses from the associated
risk management transactions as current income or loss.
Cash
and Cash Equivalents
The
Company defines cash equivalents as highly liquid investments purchased with
maturities of three months or less at date of purchase. From time to
time, the Company’s account balance held at financial institutions exceeds
Federal Depository Insurance Corporation (“FDIC”) insurance coverage and, as a
result, there is a concentration of credit risk related to the balance on
deposit in excess of FDIC insurance coverage. The Company believes
that the risk of loss is not significant.
10
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
Revenue
Recognition
The
Company recognizes rental revenue on real estate on a straight-line basis over
the non-cancelable term of the lease. The excess of straight-line
rents over base rents under the lease is included in “Accrued rental income” on
the Company’s Consolidated Balance Sheet and any excess of base rents over the
straight-line amount is included as “Deferred rental income” on the Company’s
Consolidated Balance Sheet. The Company’s leases also generally
require the tenants to pay directly or reimburse the Company for occupancy and
operating costs of the properties, or in certain cases reimburse the Company for
increases in certain operating costs and real estate taxes above their base year
costs. The Company recognizes such income in the period the related
expenses are incurred.
Interest
income from loans, securities, and structuring fees receivable, is recognized on
the accrual basis of accounting. Interest income from securities
(including interest-only strips) is recognized over the life of the investment
using the effective interest method. The cost basis of interest-only
strips is adjusted to reflect any prepayments from underlying assets, using the
initial yield-to-maturity at the purchase date. The Company has
adopted the cost-recovery method, in which all receipts are applied to reduce
the Company’s cost basis, on a limited number of its securities
investments.
On
occasion, the Company may consider a loan to be non-performing and place the
loan on non-accrual status. While on non-accrual status, the loan is accounted
for on either a cash basis, in which case interest income is recognized only
upon actual receipt, or on a cost-recovery basis based upon management’s
judgment as to the collectibility of the investment.
Income
Taxes
CapLease
has made an election to qualify, and believes it is operating so as to qualify,
as a REIT for federal income tax purposes. As such, it will generally
not be subject to federal income tax on that portion of its taxable income that
is distributed to stockholders if it distributes at least 90% of its taxable
income to its stockholders by prescribed dates and complies with various other
requirements. From time to time, the Company may conduct a portion of
its business through a taxable REIT subsidiary (“TRS”), and the income from the
activities of the TRS is subject to federal and state taxation at the applicable
corporate rates.
Earnings
per Share
In
accordance with FASB ASC 260-10-15, the Company presents both basic and diluted
earnings per share (“EPS”). Basic EPS excludes dilution and is
computed by dividing net income (loss) allocable to common stockholders by the
weighted average number of shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, where such exercise or conversion would result in a lower EPS
amount. The Company’s computation of diluted earnings per share does
not include shares of common stock that may be issued in the future upon
conversion of the convertible senior notes issued in October 2007, as the impact
would not be dilutive. The number of weighted average common shares
not included was 3,154,408 and 3,835,804, respectively, for the three and nine
months ended September 30, 2010, and 4,653,228 and 5,142,024, respectively, for
the three and nine months ended September 30, 2009.
The
following summarizes the Company’s EPS computations for the three and nine
months ended September 30, 2010 and September 30, 2009 (in thousands, except per
share amounts):
For the three months
ended September 30,
|
For the nine months
ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
loss allocable to common stockholders
|
$ | (2,778 | ) | $ | (4,084 | ) | $ | (8,319 | ) | $ | (2,772 | ) | ||||
Weighted
average number of common shares outstanding, basic and
diluted
|
57,185 | 50,179 | 55,822 | 48,539 | ||||||||||||
Loss
per share, basic and diluted
|
$ | (0.05 | ) | $ | (0.08 | ) | $ | (0.15 | ) | $ | (0.06 | ) | ||||
Non-vested
shares included in weighted average number of shares outstanding
above
|
1,739 | 1,803 | 1,739 | 1,803 |
11
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
Recently
Issued Accounting Pronouncements
In
June 2009, the FASB issued new accounting guidance (formerly SFAS
No. 166, Accounting for
Transfers of Financial Assets — an amendment of FASB Statement
No. 140) which requires additional information regarding transfers
of financial assets, including securitization transactions, and where companies
have continuing exposure to the risks related to transferred financial assets.
The guidance eliminates the concept of a “qualifying special-purpose entity,”
changes the requirements for derecognizing financial assets, and requires
additional disclosures. The guidance was effective for the Company on
January 1, 2010. The Company’s adoption of this guidance on January
1, 2010 did not have a material effect on the Company’s consolidated financial
statements.
In
June 2009, the FASB issued new accounting guidance (formerly SFAS
No. 167, Amendments to
FASB Interpretation No. 46(R)) which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be
consolidated. The guidance clarifies that the determination of
whether a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s economic
performance. The guidance requires an ongoing reassessment of whether
a company is the primary beneficiary of a variable interest
entity. The guidance also requires additional disclosures about a
company’s involvement in variable interest entities and any significant changes
in risk exposure due to that involvement. The guidance was effective
for the Company on January 1, 2010. The Company’s adoption of this
guidance on January 1, 2010 did not have a material effect on the Company’s
consolidated financial statements.
In
January 2010, the FASB issued new accounting guidance ASU 2010-06, Fair Value Measurements and
Disclosures, requiring new disclosures and clarification of existing
disclosures for assets and liabilities that are measured at fair value on either
a recurring or non-recurring basis. The guidance requires the separate
disclosure of significant transfers in and out of Level 1 and Level 2 fair value
measurements along with the reasons for the transfers. The guidance also
requires separate information about purchases, sales, issuances and settlement
activity within Level 3 fair value measurements on a gross basis rather than one
net number. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances and
settlement activity within Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company’s adoption of this ASU on
January 1, 2010 did not have a material effect on the Company’s consolidated
financial statements.
In
February 2010, the FASB issued new accounting guidance ASU 2010-09, Subsequent Events, which
amends ASC 855. The amendments remove the requirement for an SEC filer to
disclose the date through which subsequent events have been evaluated in both
issued and revised financial statements. This amendment alleviates potential
conflicts between GAAP and SEC requirements. The new guidance became effective
immediately upon final issuance. The Company’s adoption of this ASU did not have
a material effect on its consolidated financial statements.
In March
2010, the FASB issued new accounting guidance ASU 2010-11, Derivatives and Hedging,
which amends ASC 815-15. The amendments clarify the scope exemption for embedded
credit derivative features related to the transfer of credit risk in the form of
subordination of one financial instrument to another. The new guidance is
effective for each reporting entity at the beginning of its first fiscal quarter
beginning after June 15, 2010. The Company’s adoption of this ASU on July 1,
2010 did not have a material effect on its consolidated financial
statements.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current
presentation. There was no effect on net income (loss) or equity
related to these reclassifications.
12
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
3.
|
Real
Estate Investments
|
Real
estate held for investment and related intangible liabilities on real estate
investments consisted of the following at September 30, 2010 and December 31,
2009:
Sep 30, 2010
|
Dec 31, 2009
|
|||||||
Unaudited
|
||||||||
Real
estate investments, at cost:
|
||||||||
Land
|
$ | 189,021 | $ | 189,021 | ||||
Building
and improvements
|
1,239,064 | 1,237,249 | ||||||
Construction
in progress
|
2,082 | 310 | ||||||
Intangible
assets
|
180,722 | 180,722 | ||||||
Less:
Accumulated depreciation and amortization
|
(237,461 | ) | (198,483 | ) | ||||
Real
estate investments, net
|
$ | 1,373,428 | $ | 1,408,819 | ||||
Intangible
liabilities on real estate investments:
|
||||||||
Intangible
liabilities
|
$ | 47,908 | $ | 47,908 | ||||
Less:
Accumulated amortization
|
(9,956 | ) | (8,317 | ) | ||||
Intangible
liabilities on real estate investments, net
|
$ | 37,952 | $ | 39,591 |
Except
for the joint venture investment described below, the Company did not make any
real estate investments during the three months ended September 30,
2010. The Company did not make any real estate investments during the
three months ended September 30, 2009.
Development
In Process
In August
2010, the Company entered into a joint venture that is developing a
warehouse/distribution building for Michelin North America, Inc. in Louisville,
Kentucky with a construction budget of $8,391. The Company owns a 99%
ownership interest in and will fund all of the construction costs associated
with the project. Therefore, the Company consolidates the joint
venture for financial accounting purposes.
Construction
activity and funding of the project commenced during the third quarter and the
project is scheduled to be completed during the first quarter of
2011.
The table
below details the Company’s construction in progress associated with the
Michelin joint venture as of September 30, 2010. The information
included in the table below represents management’s estimates and expectations
at September 30, 2010 which are subject to change. The Company’s
disclosures regarding certain projections or estimates of completion dates may
not reflect actual results.
13
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
Location
|
Tenant
|
Property
Type
|
Approximate
Square
Feet
|
Lease
Term (years)(1)
|
Construction
in Progress at
9/30/10
|
Estimated
Remaining
Funding
|
Estimated
Total
Investment
|
Estimated
Completion
Date
|
|||||||||||||||||||
Louisville,
Kentucky
|
Michelin
North
America,
Inc.
|
Warehouse/
distribution
|
150,000 | 10 | $ | 1,461 | $ | 6,930 | $ | 8,391 |
1Q
2011
|
(1)
|
The
lease is scheduled to commence upon substantial completion of the building
and the satisfaction of certain other
conditions.
|
The
impact on rental revenue of the straight-line rent adjustment under FASB ASC
840-20-25-1 is recorded on the Company’s Consolidated Balance Sheet through
accrued rental income and deferred rental income. Amounts for accrued
rental income and deferred rental income as of September 30, 2010 and December
31, 2009, were as follows:
Sep 30, 2010
|
Dec 31, 2009
|
|||||||
Unaudited
|
||||||||
Accrued
Rental Income
|
$ | 34,256 | $ | 35,317 | ||||
Deferred
Rental Income
|
311 | - |
Accrued
rental income is included in “Other assets” on the Company’s Consolidated
Balance Sheet. See Note 8. Deferred rental income is included in
“Accounts payable, accrued expenses and other liabilities” on the Company’s
Consolidated Balance Sheet. See Note 10.
Depreciation
expense and amortization of intangible assets and liabilities on real estate
investments for the three and nine months ended September 30, 2010 and September
30, 2009, were as follows:
For the three months
ended September 30,
|
For the nine months
ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Depreciation
on real estate (included in depreciation and amortization
expense)
|
$ | 8,040 | $ | 8,204 | $ | 24,103 | $ | 24,600 | ||||||||
Amortization
of in-place leases (included in depreciation and amortization
expense)
|
3,996 | 4,359 | 11,988 | 14,534 | ||||||||||||
Amortization
of above-market leases (included as a reduction of rental
revenue)
|
962 | 962 | 2,887 | 2,887 | ||||||||||||
Amortization
of below-market leases (included as a component of rental
revenue)
|
547 | 634 | 1,640 | 1,901 |
As of
September 30, 2010, the Company’s weighted average amortization period on
intangible assets was 7.4 years, and the weighted average amortization period on
intangible liabilities was 26.2 years.
Scheduled
amortization on existing intangible assets and liabilities on real estate
investments as of September 30, 2010 was as follows:
Intangible
Assets
|
Intangible
Liabilities
|
|||||||
3
Months Ending December 31, 2010
|
$ | 4,958 | $ | 547 | ||||
2011
|
19,120 | 2,186 | ||||||
2012
|
14,702 | 2,186 | ||||||
2013
|
9,030 | 2,051 | ||||||
2014
|
8,672 | 1,954 | ||||||
Thereafter
|
31,241 | 29,028 | ||||||
$ | 87,723 | $ | 37,952 |
14
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
Substantially
all of the Company’s owned properties are subject to financing and have been
pledged as collateral to the Company’s lender that has provided the applicable
financing. The Company’s strategy is to own and finance on a
long-term basis each property through a separate and distinct single purpose
entity, or SPE, with each property and the related lease or leases on the
property generally representing the sole assets of the SPE and the sole
collateral available to the Company’s lender in the event the Company defaults
on the debt that finances the property. Also see Note 9.
4.
|
Loans
Held for Investment
|
Loans
held for investment at September 30, 2010 and December 31, 2009, are summarized
in the following table. These investments consist predominantly of
mortgage loans on properties subject to leases to investment grade
tenants. Except as described below, as of September 30, 2010, none of
the Company’s loans held for investment were on non-accrual status or past due
90 days or more.
Sep 30, 2010
|
Dec 31, 2009
|
|||||||
Unaudited
|
||||||||
Principal
|
$ | 216,968 | $ | 225,242 | ||||
(Discount)
Premium
|
(2,650 | ) | (2,642 | ) | ||||
Cost
basis
|
214,318 | 222,600 | ||||||
Allowance
for loan losses
|
(944 | ) | (944 | ) | ||||
Carrying
amount of loans
|
213,374 | 221,656 | ||||||
Deferred
origination fees, net
|
(411 | ) | (445 | ) | ||||
Total
|
$ | 212,963 | $ | 221,211 |
As of
September 30, 2010, the Company’s loan investments carried interest rates
ranging from 5.00% to 9.32%, compared to 5.28% to 10.00% as of December 31,
2009. At September 30, 2010 and December 31, 2009, the weighted
average effective interest rate on the Company’s loan investments, as measured
against its cost basis, was 6.7% and 6.8%, respectively.
As of
September 30, 2010, the Company has a general loan loss reserve in accordance
with FASB ASC 310-10-35-10 of $500, reflecting management’s estimate of losses
that have probably occurred in its mortgage loan portfolio. The loan
loss reserve was established at December 31, 2008, and to date the Company has
not had any actual losses charged against the allowance.
As of
September 30, 2010, the Company had one loan investment which is on non-accrual
status and past due more than 90 days. The loan, which has remaining
principal outstanding of $1,444, has been classified as impaired in accordance
with FASB ASC 310-10-35-16. The Company intends to account for any
interest income it collects on the impaired loan on a cost-recovery
basis. The Company performed an impairment analysis for the impaired
loan as of September 30, 2010, and concluded that no loss reserve beyond a
reserve of $444 recorded at June 30, 2009, was warranted.
15
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
The
following tables summarize certain financial information with respect to the
Company’s impaired loan:
Average
carrying amount
|
||||||||||||||||||||||||
Carrying
Amount
|
For
the three months
ended
September 30,
|
For
the nine months
ended
September 30,
|
||||||||||||||||||||||
Borrower
|
9/30/2010
|
12/31/2009
|
2010
|
2009
|
2010
|
2009
|
||||||||||||||||||
West
End Mortgage Finance Fund I L.P.
|
$ | 1,000 | $ | 1,000 | $ | 1,000 | $ | 1,000 | 1,000 | 2,305 |
Interest
Income Recognized
|
||||||||||||||||||||||||||||||||
For
the three months
ended
September 30,2010
|
For
the nine months
ended
September 30,2010
|
For
the three months
ended
September 30,2009
|
For
the nine months
ended
September 30,2009
|
|||||||||||||||||||||||||||||
Borrower
|
Accrual
|
Cash
|
Accrual
|
Cash
|
Accrual
|
Cash
|
Accrual
|
Cash
|
||||||||||||||||||||||||
West
End Mortgage Finance Fund I L.P.
|
$ | – | $ | – | $ | – | $ | – | $ | – | $ | – | 115 | 115 |
5.
|
Commercial
Mortgage-Backed Securities and Structuring Fees
Receivable
|
The
following is a summary of the Company’s securities investments at September 30,
2010:
Description
|
Number of
Securities
|
Face
Value
|
Carry
Value
|
Amortized
Cost
|
Fair
Value
|
Gross
Unrecognized
Gain
|
Gross
Unrecognized
Loss
|
|||||||||||||||||||||
Held
to Maturity
|
16 | $ | 153,638 | $ | 138,772 | $ | 148,128 | $ | 104,542 | $ | 1,678 | $ | (45,264 | ) | ||||||||||||||
Available
For Sale
|
8 | 36,011 | 13,166 | 22,243 | 13,166 | - | (9,077 | ) | ||||||||||||||||||||
Total
|
24 | $ | 189,649 | $ | 151,938 | $ | 170,371 | $ | 117,708 | $ | 1,678 | $ | (54,341 | ) |
16
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
A
detailed schedule of the Company’s securities investments at September 30, 2010
follows:
Description
|
Classification
|
Sep
30, 2010
|
||||
Unaudited
|
||||||
BSCMS
1999 CLF1, Class E Face Amount
|
Available
For Sale
|
$ | 3,326 | |||
BSCMS
1999 CLF1, Class F Face Amount
|
Available
For Sale
|
251 | ||||
CMLBC
2001-CMLB-1, Class H Face Amount
|
Available
For Sale
|
11,907 | ||||
CMLBC
2001-CMLB-1, Class J Face Amount
|
Available
For Sale
|
6,383 | ||||
NLFC
1999-LTL-1, Class X (IO) Carry Value
|
Available
For Sale
|
4,654 | ||||
WBCMT
2004-C15 180E Face Amount
|
Available
For Sale
|
8,000 | ||||
BACMS
2002-2, Class V-1 (7-Eleven, Inc.) Face Amount
|
Available
For Sale
|
589 | ||||
BACMS
2002-2, Class V-2 (Sterling Jewelers) Face Amount
|
Available
For Sale
|
901 | ||||
BACM
2006-4, Class H Face Amount
|
Held
To Maturity
|
8,000 | ||||
Banc
of America 2007-1, Class C Face Amount
|
Held
To Maturity
|
500 | ||||
CALFS
1997-CTL1, Class D Face Amount
|
Held
To Maturity
|
6,000 | ||||
CMLBC
2001-CMLB-1, Class E Face Amount
|
Held
To Maturity
|
9,526 | ||||
CMLBC
2001-CMLB-1, Class G Face Amount
|
Held
To Maturity
|
9,526 | ||||
JP
Morgan 2006-LDP9 Face Amount
|
Held
To Maturity
|
200 | ||||
NLFC
1999-LTL-1, Class E Face Amount
|
Held
To Maturity
|
11,081 | ||||
Wachovia
2007-C30, Class AJ Face Amount
|
Held
To Maturity
|
200 | ||||
Wachovia
2007-C31, Class AJ Face Amount
|
Held
To Maturity
|
200 | ||||
Wachovia
2007-C33, Class AJ Face Amount
|
Held
To Maturity
|
200 | ||||
WBCMT
2004-C15 180D Face Amount
|
Held
To Maturity
|
15,000 | ||||
WBCMT
2006-C27, Class C Face Amount
|
Held
To Maturity
|
11,000 | ||||
CVS
Corporation Face Amount
|
Held
To Maturity
|
17,628 | ||||
Koninklijke
Ahold, N.V. 7.82% Jan 2020 Face Amount
|
Held
To Maturity
|
8,032 | ||||
Lucent
6.70% due 9/1/2020 Face Amount
|
Held
To Maturity
|
34,722 | ||||
Yahoo,
Inc. Face Amount
|
Held
To Maturity
|
21,824 | ||||
Unearned
Discount
|
(19,279 | ) | ||||
Cost
Basis
|
170,371 | |||||
Net
unrealized gain (loss) on securities
|
(18,433 | ) | ||||
Total
|
$ | 151,938 |
During
the three and nine months ended September 30, 2009, the Company recognized
other-than-temporary impairment losses on securities investments of $0 and $133,
respectively. The losses are included in “Loss on investments” in the
Company’s Consolidated Statement of Operations and were recorded on one CMBS
investment: BSCMS Class E. These losses represent management’s
determination that other-than-temporary declines in the fair value of the
security below its cost basis had occurred. The loss reflects
management’s estimate of expected losses from underlying credits in the
collateral pool (including Circuit City Stores, Inc.). The loss
estimate is highly subjective and reflects a variety of assumptions, including
estimates of the likelihood of default and lease rejection given the credit
characteristics of the tenant, and estimates of appraised values and/or stressed
collateral values and potential bankruptcy claim recoveries.
Unrealized
gains and losses on securities at September 30, 2010 and December 31, 2009,
included as a component of Other Comprehensive Income (Loss) on the Company’s
Consolidated Balance Sheet, consisted of the following:
Sep 30, 2010
|
Dec 31, 2009
|
|||||||
Unaudited
|
||||||||
Unrealized
gains on securities previously available for sale
|
$ | 768 | $ | 801 | ||||
Unrealized
losses on securities previously available for sale
|
(10,124 | ) | (10,673 | ) | ||||
Unrealized
losses on securities available for sale
|
(9,077 | ) | (9,717 | ) |
17
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
The
following table summarizes the Company’s securities in an unrealized loss
position as of September 30, 2010.
Aggregate
Fair Value
|
Aggregate
Unrealized
Loss
|
Number of
Securities
|
||||||||||
In
unrealized loss position less than 12 months
|
$ | 324 | $ | 53 | 4 | |||||||
In
unrealized loss position 12 or more months
|
88,745 | 54,288 | 15 |
The
collateral backing our securities investments is primarily net lease loan assets
and loss experience on the assets has historically been de
minimis. The 15 securities in a continuous unrealized loss position
for more than 12 months as of September 30, 2010, have a weighted average
maturity of approximately 7.3 years. The Company believes that none
of the unrealized losses on investment securities are other-than-temporary
because management expects the Company will receive all contractual principal
and interest related to these investments. In addition, the Company
expects to hold these securities for a period of time sufficient to allow for a
full recovery in fair value.
At
September 30, 2010 and December 31, 2009, the weighted average effective
interest rate (yield to maturity on adjusted cost basis) on securities was
approximately 7.5% and 7.5%, respectively.
Structuring
fees receivable of $474 and $1,094 at September 30, 2010 and December 31, 2009,
respectively, represented fees earned by the Company in conjunction with the
structuring and subsequent sale of certain net lease loans. Such fees
are payable to the Company monthly without interest through March 2020 and,
accordingly, have been discounted based on imputed interest rates estimated by
management to approximate market. Structuring fees receivable are
shown at their amortized cost.
6.
|
Assets Sold
and Discontinued Operations
|
Nine
Months Ended September 30, 2010
The
Company sold one owned property during the nine months ended September 30,
2010. The property, which is located in Wyomissing, Pennsylvania and
was leased to Cott Corporation, had been reclassified to discontinued operations
at December 31, 2009, in connection with the Company’s expected disposal of the
asset. The impact of the expected sale, as well as a lease
termination with the tenant in a separate transaction, was recognized at the
time of the reclassification. The Company recognized a loss on the
lease termination and sale of $1,223, which was included in “Loss on
investments” on the Company’s Consolidated Statement of Operations during the
quarter and year ended December 31, 2009.
Nine
Months Ended September 30, 2009
During
September 2009, the Company sold a $22,244 outstanding principal balance 7.90%
long-term mortgage loan on a property in Danvers, Massachusetts backed by a
Koninklijke Ahold N.V. lease. In connection with the sale of this
asset, the Company recognized a loss of $3,807 during the quarter ended
September 30, 2009. The loss was included in “Loss on investments” in
the Company’s Consolidated Statement of Operations.
During
August 2009, the Company sold $9,500 of face amount of 6.65% pass through
certificates backed by loans on two office buildings in Sunnyvale, California
leased to Yahoo!, Inc. At the time of the sale, the security was
classified as available for sale. In connection with the sale
of this asset, the Company recognized a loss of $2,105 during the quarter ended
September 30, 2009. The loss was included in “Loss on investments” in
the Company’s Consolidated Statement of Operations.
As of
March 31, 2009, the Company recorded a loss of $2,853 in connection with
the expected sale of the OSHA technological laboratory facility in Sandy, Utah
leased to the United States Government. The loss was included in
“Loss on investments” in the Company’s Consolidated Statement of Operations
during the quarter ended March 31, 2009, and the property was subsequently sold
during April 2009. In accordance with FASB ASC 205-20-45-1, operating
results from this property are reflected as discontinued operations in the
Company’s Consolidated Statement of Operations.
18
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
Also as
of March 31, 2009, the Company recorded a loss of $4,397 in connection with the
expected sale of a majority participation interest in a long-term mortgage loan
on a property in Framingham, Massachusetts backed by a Lowe’s Companies Inc.
lease. The loss was included in “Loss on investments” in the
Company’s Consolidated Statement of Operations during the quarter ended March
31, 2009, and the loan was subsequently sold during April 2009.
7.
|
Fair
Value
|
FASB ASC
825-10-50-10 requires disclosure of fair value information about all of the
Company’s financial instruments, whether or not these instruments are measured
at fair value on the Company’s Consolidated Balance Sheet.
For
purposes of FASB ASC 825-10-50-10, substantially all of the Company’s assets and
liabilities other than its owned property investments are classified as
financial instruments.
The
Company estimates that the fair values of cash and cash equivalents, other
assets, accounts payable, accrued expenses and other liabilities, and dividends
payable approximate their carrying values due to the short-term maturities of
these items.
The
carrying amounts and estimated fair values of the Company’s other financial
instruments at September 30, 2010 and December 31, 2009 are as
follows:
Carrying Amount
|
Notional Amount
|
Estimated Fair Value
|
||||||||||||||||||||||
9/30/2010
|
12/31/2009
|
9/30/2010
|
12/31/2009
|
9/30/2010
|
12/31/2009
|
|||||||||||||||||||
Assets:
|
||||||||||||||||||||||||
Loans
held for investment
|
$ | 213,374 | $ | 221,656 | $ | 216,968 | $ | 225,242 | $ | 236,180 | $ | 219,185 | ||||||||||||
Commercial
mortgage-backed securities
|
151,938 | 153,056 | 189,649 | 191,876 | 117,708 | 113,306 | ||||||||||||||||||
Structuring
fees receivable
|
474 | 1,094 | N/A | N/A | 474 | 1,094 | ||||||||||||||||||
Liabilities:
|
||||||||||||||||||||||||
Mortgages
on real estate investments
|
$ | 933,170 | $ | 943,811 | $ | 929,761 | $ | 939,616 | $ | 1,001,384 | $ | 902,408 | ||||||||||||
Collateralized
debt obligations
|
256,504 | 263,310 | 256,665 | 263,500 | 229,172 | 150,114 | ||||||||||||||||||
Credit
facility
|
93,092 | 126,262 | 93,092 | 126,262 | 93,092 | 126,262 | ||||||||||||||||||
Secured
term loan
|
104,783 | 114,070 | 104,783 | 114,070 | 96,103 | 98,641 | ||||||||||||||||||
Convertible
senior notes
|
33,785 | 49,452 | 35,009 | 52,444 | 35,971 | 46,956 | ||||||||||||||||||
Other
long-term debt
|
30,930 | 30,930 | 30,930 | 30,930 | 27,989 | 21,925 |
The fair
values indicated above are indicative of the interest rate and credit spread
environment as of September 30, 2010 and December 31, 2009, respectively, and
may not take into consideration the effects of subsequent interest rate, credit
spread fluctuations, or changes in the ratings of the underlying tenants on the
related leases. The methodologies used and key assumptions made to
estimate fair values are as follows:
Loans held for investment—The
fair value of the Company’s fixed-rate loan portfolio is estimated with a
discounted cash flow analysis, utilizing scheduled cash flows and discount rates
estimated by management to approximate those that a willing buyer and seller
might use.
Commercial mortgage-backed
securities—The fair values of the securities reflect management’s best
estimate and require a considerable amount of judgment and
assumptions. Management evaluates a variety of inputs and then
estimates fair value based on those inputs. The primary inputs
evaluated by management are broker quotations, index pricing, market yields and
credit spreads on securities with similar credit ratings and duration,
collateral values, and liquidity of the security.
Structuring fees
receivable—The fair value of structuring fees receivable is estimated
with a discounted cash flow analysis, utilized scheduled cash flows and discount
rates estimated by management to approximate those that a willing buyer and
seller might use.
19
CapLease, Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
Credit facility—Management
believes that the stated interest rate (which floats based on short-term
interest rates) approximates market rates (when compared to similar credit
facilities with similar credit risk). As such, the fair value of
these obligations is estimated to be equal to the outstanding principal
amount.
Mortgages on real estate
investments, collateralized debt obligations and secured term loan —The
fair value of mortgages payable on real estate investments, collateralized debt
obligations and the secured term loan is estimated using a discounted cash flow
analysis, based on management’s estimates of market interest
rates. For mortgages where the Company has an early prepayment right,
management also considers the prepayment amount to evaluate the fair
value.
Convertible senior notes —The
carry value of convertible senior notes reflects the impact of new accounting
guidance for the notes adopted as of January 1, 2009. See Note
9. The fair value is estimated using a discounted cash flow analysis,
based on management’s estimates of market interest rates, and indications of
market yields, where available.
Other long-term debt—The fair
value of the Company’s other long-term debt is estimated using a discounted cash
flow analysis, based on management’s estimates of market interest
rates.
On
January 1, 2008, the Company adopted new accounting guidance (codified at FASB
ASC 820) that defines fair value, establishes a framework for measuring fair
value in GAAP, and expands disclosures about fair value
measurements. The guidance does not impose any new requirements
around which assets and liabilities are to be measured at fair value, and
instead applies to asset and liability balances required or permitted to be
measured at fair value under existing accounting pronouncements.
The
guidance applies only to the Company’s securities classified as “available for
sale,” as that is the only asset or liability which the Company measures at fair
value.
FASB ASC
820-10-35-37 establishes a valuation hierarchy based on the transparency of
inputs used in the valuation of an asset or liability. Classification
is based on the lowest level of inputs that is significant to the fair value
measurement. The valuation hierarchy contains three
levels:
|
·
|
Level
1 – Quoted prices are available in active markets for identical assets or
liabilities at the reporting date. As of September 30, 2010,
the Company has not classified any of its securities available for sale as
Level 1.
|
|
·
|
Level
2 – Pricing inputs other than quoted prices included within Level 1 that
are observable for substantially the full term of the asset or
liability. Level 2 assets include quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or
similar assets or liabilities that are not active; and inputs other than
quoted prices that are observable, such as models or other valuation
methodologies. As of September 30, 2010, the Company has not
classified any of its securities available for sale as Level
2.
|
|
·
|
Level
3 – Inputs reflect management’s best estimate of what market participants
would use in pricing the asset or liability at the measurement date. These
valuations require a considerable amount of judgment and
assumptions. As of September 30, 2010, the Company has
classified all of its securities available for sale as Level
3. Management evaluates a variety of inputs and then estimates
fair value based on those inputs. The primary inputs evaluated
by management are broker quotations (observable), index pricing
(observable), market yields and credit spreads on securities with similar
credit ratings and duration (observable), collateral values (observable),
and liquidity of the security (unobservable). These inputs are
the factors employed by management and to its knowledge other parties in
determining where to price actual transactions. Broker quotes
generally reflect expected pricing rather than actual trades and may also
reflect distressed transactions in inactive and dislocated
markets.
|
20
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
The table
below presents the fair value of the Company’s securities available for sale as
of September 30, 2010, aggregated by the level in the fair value hierarchy
within which those measurements fall.
Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
|
Significant Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Balance at
September 30,2010
|
|||||||||||||
Assets
|
||||||||||||||||
Securities
available for sale
|
$ | – | $ | – | $ | 13,166 | $ | 13,166 |
The
following table summarizes the change in the fair value for Level 3 items for
the three and nine months ended September 30, 2010 and September 30,
2009:
Three months ended September 30,
|
Nine months ended September 30,
|
|||||||||||||||
Securities available for
sale
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Beginning
balance
|
$ | 13,049 | $ | 10,815 | $ | 13,044 | $ | 13,483 | ||||||||
Gains
(losses) included in net income (loss)
|
– | – | – | (133 | ) | |||||||||||
Gains
(losses) included in other comprehensive income
|
311 | 1,613 | 639 | (492 | ) | |||||||||||
Amortization
included in interest income
|
(34 | ) | (52 | ) | (116 | ) | (176 | ) | ||||||||
Settlements
or repayments
|
(160 | ) | (203 | ) | (401 | ) | (509 | ) | ||||||||
Ending
balance
|
$ | 13,166 | $ | 12,173 | $ | 13,166 | $ | 12,173 |
8.
Other
Assets
Other
assets as of September 30, 2010 and December 31, 2009, consisted of the
following:
Sep 30, 2010
|
Dec 31, 2009
|
|||||||
Unaudited
|
||||||||
Receivables
and accrued interest
|
$ | 7,234 | $ | 11,304 | ||||
Prepaid
expenses and deposits
|
2,978 | 1,267 | ||||||
Reserve
accounts
|
19,246 | 14,868 | ||||||
Funds
with CDO trustee pending distribution
|
4,915 | 4,697 | ||||||
Restricted
cash
|
322 | 276 | ||||||
Amounts
held by servicer
|
355 | 261 | ||||||
Accrued
rental income
|
34,256 | 35,317 | ||||||
Debt
issuance costs, net
|
6,448 | 7,653 | ||||||
Deferred
leasing costs, net
|
1,625 | 718 | ||||||
Investment
in statutory trust
|
930 | 930 | ||||||
Other
|
795 | 988 | ||||||
Total
|
$ | 79,104 | $ | 78,279 |
9.
Debt
Obligations
Credit
Agreement
The
Company has financed certain of its portfolio assets pursuant to a credit
agreement it entered into with Wells Fargo Bank, N.A. (as successor to Wachovia
Bank, N.A.) in April 2008. The Company and Wells Fargo entered into
an amendment and restatement of the credit agreement in July 2010, which, among
other things:
21
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
|
·
|
established
a maximum revolving credit commitment of
$140,000;
|
|
·
|
extended
the maturity date of the credit agreement to July 16, 2013, from April 28,
2011; and
|
|
·
|
set
the Company’s interest rate on its borrowings at one-month LIBOR plus 275
basis points (an increase from one-month LIBOR plus 250 basis points at
June 30, 2010).
|
Also in
connection with the July 2010 amendment and restatement, the Company made a
$13,419 principal payment to the lender and agreed to repay another $10,000 of
principal in four equal quarterly installments beginning on October 1, 2010, the
first installment of which was made in September 2010. The Company’s
outstanding borrowings under the agreement were $93,092 as of September 30,
2010.
The
agreement is a floating rate LIBOR based facility. As of September
30, 2010, the Company’s effective financing rate on the credit agreement was
3.4%.
The
Company’s borrowings under the facility are secured by a combination of first
mortgage loan investments, intercompany mortgage loans on owned property
investments, commercial mortgage backed securities and a first lien on the
Company’s ownership interest in the real property located in Johnston, Rhode
Island. The Company’s obligations under the credit agreement are also
fully recourse to all of its other assets. In the event Wells Fargo
determines in its sole discretion that the value of the Company’s collateral
assets has declined, including as a result of an underlying tenant credit rating
downgrade or other adverse tenant-credit event, Wells Fargo may require the
Company to prepay a portion of its borrowings, provided that Wells Fargo may not
reduce the value of any of the Company’s collateral other than CMBS securities
due to general credit spread or interest rate fluctuations.
The
Company may utilize the undrawn amount of the lender’s revolving credit
commitment to finance assets approved by the lender in its sole discretion at an
advance rate of 60% of the asset’s value (as determined by the
lender).
The
Company is required to comply with the following financial covenants under the
credit agreement: minimum liquidity (basically cash and cash equivalents) of at
least $12,000, minimum consolidated tangible net worth (basically stockholders’
equity before accumulated depreciation and amortization) of at least $360,000
plus 75% of the aggregate net proceeds from equity offerings or capital
contributions after July 16, 2010, maximum corporate leverage (basically total
liabilities divided by total assets before accumulated depreciation and
amortization) of 80% and minimum interest coverage (basically EBITDA, or net
income before income taxes, interest expense, depreciation and amortization,
divided by interest expense) of 105%.
Amounts
related to the Company’s credit agreement as of September 30, 2010 and December
31, 2009, were as follows:
At September 30, 2010
|
At December 31, 2009
|
|||||||||||||||
Borrowings
|
Collateral
Carry Value
|
Borrowings
|
Collateral
Carry Value
|
|||||||||||||
Credit Agreement
|
(unaudited)
|
(unaudited)
|
||||||||||||||
Loans
held for investment
|
$ | 6,497 | $ | 11,231 | $ | 6,757 | $ | 11,481 | ||||||||
Intercompany
mortgage loans and investments in CapLease CDO
|
83,222 | 105,106 | 115,857 | 141,332 | ||||||||||||
Commercial
mortgage-backed securities
|
3,373 | 9,692 | 3,648 | 11,485 | ||||||||||||
Owned
property
|
– | 27,142 | – | 28,131 | ||||||||||||
Total
|
$ | 93,092 | $ | 153,171 | $ | 126,262 | $ | 192,429 |
22
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
The
following interest rates apply with respect to the Company’s credit agreement
borrowings for the three and nine months ended September 30, 2010 and September
30, 2009:
For the three months
ended September 30,
|
For the nine months
ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
unaudited
|
unaudited
|
unaudited
|
unaudited
|
|||||||||||||
Weighted
average effective financing rate
|
3.63 | % | 3.72 | % | 3.68 | % | 3.71 | % | ||||||||
One-Month
LIBOR rate
|
0.32 | % | 0.29 | % | 0.28 | % | 0.39 | % |
Mortgage
Notes on Real Estate Investments
The
Company has financed most of its owned real properties with third party mortgage
debt. The Company’s mortgage notes payable are summarized in the
following table:
Sep 30, 2010
|
Dec 31, 2009
|
Effective
Financing
|
|||||||||||||||||||||||
Property Level Debt - Fixed Rate
|
Face
|
Carry Value
|
Face
|
Carry Value
|
Coupon
|
Rate (1)
|
Maturity
|
||||||||||||||||||
(unaudited)
|
(unaudited)
|
||||||||||||||||||||||||
$ | 14,764 | $ | 14,764 | $ | 14,920 | $ | 14,920 | 5.11 | % | 5.2 | % | ||||||||||||||
Aetna
Life Insurance Company, Fresno, CA
|
16,043 | 16,043 | 16,043 | 16,043 | 5.63 | % | 5.7 | % |
Dec
2016
|
||||||||||||||||
Allstate
Insurance Company, Charlotte, NC
|
19,788 | 19,788 | 19,981 | 19,981 | 5.68 | % | 5.7 | % |
Jan
2016
|
||||||||||||||||
Allstate
Insurance Company, Roanoke, VA
|
21,067 | 21,067 | 21,273 | 21,273 | 5.68 | % | 5.8 | % |
Jan
2016
|
||||||||||||||||
AmeriCredit
Corp., Arlington, TX
|
27,317 | 27,055 | 27,682 | 27,395 | 5.28 | % | 5.5 | % |
Sep
2017
|
||||||||||||||||
AMVESCAP
PLC, Denver, CO
|
43,700 | 43,700 | 43,700 | 43,700 | 6.03 | % | 6.1 | % |
Jul
2016
|
||||||||||||||||
Aon
Corporation, Glenview, IL
|
61,244 | 61,244 | 62,313 | 62,313 | 5.23 | % | 5.8 | % |
Nov
2014
|
||||||||||||||||
Bunge
North America, Inc., Fort Worth, TX
|
6,262 | 6,262 | 6,262 | 6,262 | 5.45 | % | 5.5 | % |
May
2017
|
||||||||||||||||
Cadbury
Schweppes Plc, Whippany, NJ
|
33,403 | 33,403 | 33,881 | 33,881 | 5.26 | % | 5.3 | % |
Mar
2015
|
||||||||||||||||
Capital
One Financial Corporation, Plano, TX
|
19,966 | 19,966 | 20,277 | 20,277 | 5.24 | % | 5.3 | % |
May
2013
|
||||||||||||||||
Choice
Hotels International, Inc., Silver Spring, MD
|
28,310 | 28,310 | 29,094 | 29,094 | 5.30 | % | 5.3 | % |
May
2013
|
||||||||||||||||
County
of Yolo, California, Woodland, CA
|
10,332 | 10,332 | 10,332 | 10,332 | 5.68 | % | 5.7 | % |
Feb
2017
|
||||||||||||||||
Farmers
Group, Inc., Simi Valley, CA
|
25,620 | 25,620 | 25,620 | 25,620 | 5.81 | % | 5.8 | % |
Jan
2017
|
||||||||||||||||
Farmers
New World Life Insurance Company,
Mercer
Island, WA
|
30,200 | 30,200 | 30,200 | 30,200 | 5.69 | % | 5.7 | % |
Jan
2016
|
||||||||||||||||
ITT
Industries, Inc., Herndon, VA
|
40,530 | 40,530 | 40,902 | 40,902 | 5.33 | % | 5.4 | % |
Jun
2015
|
||||||||||||||||
Johnson
Controls, Inc., Largo, FL
|
16,200 | 16,200 | 16,200 | 16,200 | 5.48 | % | 5.5 | % |
Jan
2017
|
||||||||||||||||
Koninklijke
Ahold, N.V., Levittown, PA
|
14,093 | 14,093 | 14,246 | 14,246 | 6.05 | % | 6.1 | % |
Jul
2016
|
||||||||||||||||
Lowes
Companies, Inc., Aliso Viejo, CA
|
42,037 | 42,037 | 42,125 | 42,125 | 5.10 | % | 5.4 | % |
Jul
2015
|
||||||||||||||||
Nestle
Holdings, Inc., Breinigsville, PA; Fort Wayne, IN; and
Lathrop,
CA
|
117,000 | 117,000 | 117,000 | 117,000 | 6.32 | % | 5.7 | % |
Aug
2012
|
||||||||||||||||
Omnicom
Group, Inc., Irving, TX
|
12,860 | 12,860 | 13,080 | 13,080 | 5.24 | % | 5.3 | % |
May
2013
|
||||||||||||||||
Pearson
Plc., Lawrence, KS
|
15,867 | 15,867 | 16,009 | 16,009 | 5.84 | % | 5.9 | % |
May
2016
|
||||||||||||||||
T-Mobile
USA, Inc., Nashville, TN
|
10,784 | 10,784 | 10,885 | 10,885 | 5.59 | % | 5.7 | % |
Dec
2016
|
||||||||||||||||
The
Travelers Corporation, Hartford, CT
|
6,397 | 6,522 | 10,298 | 10,674 | 9.80 | % | 5.5 | % |
Sep
2011
|
||||||||||||||||
The
Travelers Corporation, Hartford, CT
|
16,795 | 17,323 | 15,499 | 16,360 | 10.76 | % | 7.7 | % |
Oct
2011
|
||||||||||||||||
Tiffany
& Co., Parsippany, NJ
|
58,400 | 58,400 | 58,400 | 58,400 | 5.33 | % | 5.3 | % |
Oct
2015
|
||||||||||||||||
Time
Warner Entertainment Company, L.P., Milwaukee, WI
|
17,500 | 17,500 | 17,500 | 17,500 | 5.55 | % | 5.6 | % |
Dec
2016
|
||||||||||||||||
TJX
Companies, Inc., Philadelphia, PA
|
69,719 | 69,719 | 70,209 | 70,209 | 5.57 | % | 5.6 | % |
Mar
2016
|
||||||||||||||||
United
States Government (DEA), Birmingham, AL
|
11,126 | 11,126 | 11,242 | 11,242 | 5.23 | % | 5.4 | % |
Sep
2015
|
||||||||||||||||
United
States Government (EPA), Kansas City, KS
|
19,678 | 22,368 | 19,676 | 22,535 | 7.57 | % | 5.4 | % |
Oct
2022
|
||||||||||||||||
United
States Government (FBI), Albany, NY
|
10,137 | 10,137 | 10,137 | 10,137 | 5.50 | % | 5.7 | % |
Nov
2016
|
||||||||||||||||
United
States Government (FBI), Birmingham, AL
|
18,575 | 18,575 | 18,747 | 18,747 | 5.23 | % | 5.3 | % |
Sep
2015
|
||||||||||||||||
United
States Government (NIH), N. Bethesda, MD
|
59,836 | 59,836 | 60,929 | 60,929 | 5.32 | % | 5.6 | % |
Sep
2015
|
||||||||||||||||
United
States Government (SSA), Austin, TX
|
5,316 | 5,316 | 5,372 | 5,372 | 5.23 | % | 5.5 | % |
Sep
2015
|
||||||||||||||||
United
States Government (VA), Ponce, PR
|
4,862 | 5,000 | 5,308 | 5,477 | 7.30 | % | 6.4 | % |
Apr
2016
|
||||||||||||||||
Walgreen
Co., Pennsauken, NJ
|
1,350 | 1,413 | 1,478 | 1,554 | 7.65 | % | 6.0 | % |
Oct
2016
|
||||||||||||||||
Walgreen Co., Portsmouth,
VA
|
2,683 | 2,810 | 2,796 | 2,937 | 7.20 | % | 6.2 | % |
Jul
2018
|
||||||||||||||||
Total
|
$ | 929,761 | $ | 933,170 | $ | 939,616 | $ | 943,811 |
(1)
|
The
effective rate is the Company’s approximate borrowing cost, including the
effect of hedge gains or losses and other deferred financing costs
associated with the related
borrowing.
|
23
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
The
mortgage notes are non-recourse to the Company subject to limited non-recourse
exceptions and are secured by the respective properties and an assignment of the
relevant leases on the properties. See Note 3 regarding the separate
and distinct nature of the Company’s SPEs. The Company’s book value
before accumulated depreciation and amortization on owned properties encumbered
with mortgage debt aggregated $1,433,013 at September 30, 2010 and $1,431,947 at
December 31, 2009.
Collateralized
Debt Obligations
During
March 2005, the Company issued a collateralized debt obligation, or
CDO. The CDO is an entirely fixed rate on-balance sheet
financing. The Company aggregated approximately $300,000 face amount
of assets and then transferred these assets into a wholly-owned securitization
vehicle, and initially issued $285,000 face amount of multi-class notes and
$15,000 face amount of preferred equity through the securitization
vehicle. The assets serve as collateral for the Company’s obligations
under the notes. The securitization vehicle is an SPE, with its
business limited to the issuance of the notes and the preferred equity, the
acquisition of the collateral and certain other related matters. The
net amount of the debt the Company issued was $268,130, inclusive of a $370
discount to face, as the Company retained the three most junior note classes
aggregating a face amount of $16,500 and the full $15,000 face amount of
preferred equity.
The CDO
notes have a stated maturity in January 2040, although the actual life of the
notes could be substantially shorter. The Company’s weighted average
effective financing rate (inclusive of original issue discount and debt issuance
and hedge costs) on its CDO is approximately 5.6%. The CDO debt is
non-recourse to the Company but is secured by the collateral
assets. The Company reduced the debt outstanding under the CDO by
repurchasing $5,000 of the Class A CDO notes during the year ended December 31,
2009. The following table summarizes the type and carry value of the
assets posted as CDO collateral as of September 30, 2010.
Carry Value
|
||||
$ | 165,004 | |||
Intercompany
mortgage loans on CapLease properties
|
33,954 | |||
Commercial
mortgage-backed securities
|
82,553 | |||
Total
|
$ | 281,511 |
Secured
Term Loan
During
December 2007, the Company completed a $129,521 secured term loan with KBC Bank,
N.V. Upon closing of the financing, the Company pledged approximately
$163,145 principal amount of collateral to secure its obligations under the
loan. The interest coupon on the loan is fixed at 5.81% annually
until the loan matures in January 2018. The Company’s effective
financing rate on the loan is approximately 6.0% annually (inclusive of hedge
and closing costs). The loan is non-recourse to the Company, subject
to limited non-recourse exceptions. The following table summarizes
the type and carry value of the assets pledged as collateral for the Company’s
obligations under the loan as of September 30, 2010.
Carry Value
|
||||
$ | 36,535 | |||
Intercompany
mortgage loans on CapLease properties
|
42,849 | |||
Commercial
mortgage-backed securities
|
56,219 | |||
Total
|
$ | 135,603 |
24
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
Convertible
Senior Notes
During
October 2007, CapLease issued $75,000 principal amount of 7.50% convertible
senior notes due 2027. The notes represent general unsecured recourse
obligations of CapLease and rank equally in right of payment with all of its
other existing and future obligations that are unsecured and
unsubordinated. The notes are jointly and severally, fully and
unconditionally guaranteed, on a senior unsecured basis by four of CapLease’s
subsidiaries, Caplease, LP, Caplease Debt Funding, LP, Caplease Services Corp.
and Caplease Credit LLC.
Since
original issuance, CapLease has repurchased an aggregate of $39,991 principal
amount of the notes and, therefore, as of September 30, 2010, the Company had
outstanding $35,009 principal amount of convertible senior notes
outstanding.
As of
January 1, 2009, the Company adopted new accounting guidance (codified primarily
at FASB ASC 470) that retrospectively changed the accounting for the convertible
senior notes. The guidance affected the accounting for the Company’s
convertible senior notes by requiring the initial proceeds from their sale to be
allocated between a liability component and an equity component in a manner that
results in interest expense on the liability component at the Company’s
estimated nonconvertible debt borrowing rate on the date of
issue. The initial bifurcation between the liability and equity
components of the convertible senior notes at January 1, 2009, was $67,761 and
$7,239, respectively. The equity component carry value remained at
$7,239 at December 31, 2009, and was reduced to $6,189 at September 30, 2010,
with the decline caused primarily by the Company’s repurchase of convertible
senior notes at par as part of the note tender offer the Company closed during
the quarter ended June 30, 2010.
Convertible
senior notes included the following amounts at September 30, 2010 and December
31, 2009:
Sep 30, 2010
|
Dec 31, 2009
|
|||||||
(Unaudited)
|
||||||||
Convertible
notes - principal
|
$ | 35,009 | $ | 52,444 | ||||
Unamortized
debt discount
|
(1,224 | ) | (2,992 | ) | ||||
Convertible
senior notes - net
|
$ | 33,785 | $ | 49,452 |
The
remaining debt discount will be amortized over the next 25 months, ending in
October 2012.
During
the quarter ended September 30, 2010, the Company repurchased $1,435 of
principal of the convertible senior notes at a price of par, or $1,000 for each
$1,000 in principal amount of notes repurchased. In connection with
the repurchase, the Company recorded a net loss on extinguishment of debt in the
quarter ended September 30, 2010 of $14, after write-offs of associated
transaction costs.
During
the quarter ended June 30, 2010, the Company completed a cash tender offer for
any and all of the convertible senior notes at a price of par, or $1,000 for
each $1,000 in principal amount of notes tendered. An aggregate of
$13,500 principal amount of notes were validly tendered and not withdrawn, all
of which were accepted and repurchased by the Company. In connection
with the repurchase, the Company recorded a net loss on extinguishment of debt
in the quarter ended June 30, 2010 of $184, after write-offs of associated
transaction costs.
During
the quarter ended March 31, 2010, the Company repurchased $2,500 of principal of
the convertible senior notes at a price of $2,400, plus accrued interest on the
notes, or a 4% discount from the principal amount of the notes. In
connection with that repurchase, the Company recorded a net loss on
extinguishment of debt in the quarter ended March 31, 2010 of $96, after
write-offs of associated transaction costs.
During
the quarter ended June 30, 2009, the Company repurchased $12,316 of the
convertible senior notes at a price of $6,512, plus accrued interest on the
notes, or a 47.1% discount from the principal of the notes. In
connection with that repurchase, the Company recorded a gain on extinguishment
of debt in the quarter ended June 30, 2009 of $4,581.
During
the quarter ended March 31, 2009, the Company repurchased $5,500 of principal of
the convertible senior notes at a price of $2,090, plus accrued interest on the
notes, or a 62.6% discount from the principal amount of the notes. In
connection with that repurchase, the Company recorded a gain on extinguishment
of debt in the quarter ended March 31, 2009 of $2,821.
25
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
The notes
bear interest at an annual fixed rate of 7.50% and are scheduled to mature on
October 1, 2027, unless earlier converted, redeemed or
repurchased. The Company’s effective financing rate on the notes,
which includes the effect of the offering discount and expenses of the
transaction, is approximately 8.1%. The Company’s effective interest
rate on the liability component of the instrument as measured under the new
accounting guidance was 10.2% and 12.7%, respectively, at September 30, 2010 and
December 31, 2009. The Company recorded interest expense relating to
the convertible senior notes under the new accounting guidance of $854 and
$1,284, respectively, for the quarters ended September 30, 2010 and September
30, 2009, and $3,216 and $4,293, respectively, for the nine months ended
September 30, 2010 and September 30, 2009.
Holders
may require CapLease to repurchase their notes, in whole or in part, on October
1, 2012, October 1, 2017 and October 1, 2022, for a cash price equal to 100% of
the principal amount of the notes to be repurchased, plus any accrued and unpaid
interest. CapLease may redeem the notes, in whole or in part, at any
time or from time to time, on or after October 1, 2012, for a cash price equal
to 100% of the principal amount of the notes to be repurchased, plus any accrued
and unpaid interest.
Trust
Preferred Securities
In
December 2005, the Operating Partnership issued $30,000 in aggregate principal
amount of fixed/floating rate preferred securities through its wholly-owned
subsidiary, Caplease Statutory Trust I. The trust preferred
securities represent an unsecured subordinated recourse debt obligation of the
Company and require quarterly interest payments calculated at a fixed interest
rate equal to 7.68% per annum through January 30, 2016, and subsequently at a
variable interest rate equal to LIBOR plus 2.60% per annum. The
securities must be redeemed on January 30, 2036, and may be redeemed, in whole
or in part, at par, at the Company’s option, beginning on January 30,
2011. The Company’s effective financing rate on the trust preferred
securities, inclusive of deferred issuance costs, is approximately 8.3% per
annum.
Scheduled
principal amortization and balloon payments for all of the Company’s outstanding
debt obligations as of September 30, 2010, for the next five years and
thereafter are as follows:
10. Accounts
payable, accrued expenses and other liabilities
Accounts
payable, accrued expenses and other liabilities as of September 30, 2010 and
December 31, 2009 consisted of the following:
26
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
11.
Risk
Management Transactions
As part
of its financing strategy, the Company may use interest rate swap transactions
to manage its exposure to interest rate fluctuations on assets not yet financed
with long-term fixed rate debt. During the first nine months of 2010
and all of 2009, the Company had no open interest rate swap
positions.
As of
September 30, 2010, the Company had $4,296 of net realized losses on derivatives
deferred on the Company’s Consolidated Balance Sheet as a component of
Accumulated Other Comprehensive Income/(Loss) related to prior interest rate
swaps for certain of the Company’s long-term debt issuances. Within
the next twelve months, the Company estimates that $569 of these losses will be
reclassified to the Company's Consolidated Statements of Operations as
additional interest expense.
The
Company classifies the cash flows from derivatives as a financing activity on
the Consolidated Statements of Cash Flows.
12.
Commitments
and Contingencies
The
Company is involved from time to time in litigation arising in the ordinary
course of business. The Company is not currently involved in any
matter which management believes will have a material adverse effect on the
Company’s business, results of operations or financial
condition. However, periodic settlements and/or professional or other
fees and expenses related to any matter could have an adverse impact on our
results of operations in the quarterly or annual period in which they are
recognized.
As an
owner of commercial real estate, the Company is subject to potential
environmental costs. At September 30, 2010, the Company was not aware
of any environmental concerns that would have a material adverse effect on the
Company’s business, results of operations or financial condition.
13.
Stockholders’
Equity
Stock
Issuances
CapLease’s
authorized capital stock consists of 500,000,000 shares of common stock, par
value $0.01 per share, and 100,000,000 shares of preferred stock, par value
$0.01 per share. As of September 30, 2010, CapLease had issued and
outstanding 57,184,965 shares of common stock, and 3,200,600 shares of 8.125%
Series A cumulative redeemable preferred stock.
On March
30, 2010, CapLease issued 3,144,654 shares of its common stock to an
institutional investor for a price of $4.77 per share, or net proceeds of
$14,984 (after deducting offering expenses).
On March
31, 2010, CapLease issued 1,800,000 shares of 8.125% Series A cumulative
redeemable preferred stock in a public offering at a price of $23.06 per share,
resulting in an effective annual yield of 9.00%. The Company received
net proceeds in the transaction (after deducting underwriting discounts and
commissions and offering expenses) of approximately $40,109, including $884 of
accrued dividends.
During
the nine months ended September 30, 2010, CapLease issued an aggregate of
1,851,300 shares of common stock and 600 shares of 8.125% Series A cumulative
redeemable preferred stock through its “at the market offering” program with
Brinson Patrick Securities Corporation, at an average price of $4.67 per share
of common stock and $25.05 per share of Series A preferred stock, for aggregate
net proceeds of $8,485. During the nine months ended September 30,
2009, CapLease issued an aggregate of 2,239,100 shares of common stock through
its “at the market offering” program at an average price of $3.30 per share, for
aggregate net proceeds of $7,397.
27
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
During
the nine months ended September 30, 2010, CapLease did not issue any shares of
common stock through its dividend reinvestment and stock purchase
plan. During the nine months ended September 30, 2009, CapLease
issued 807,661 shares of common stock through its dividend reinvestment and
stock purchase plan at a price of $3.60 per share.
During
the nine months ended September 30, 2010, CapLease issued 479,500 shares of
common stock to its executive officers, other employees and directors pursuant
to the Company’s stock incentive plan. During the nine months ended
September 30, 2009, CapLease issued 1,107,600 shares of common stock to its
executive officers, other employees and directors pursuant to the Company’s
stock incentive plan. As of September 30, 2010, the Company had
awarded 3,369,955 shares of common stock under the stock plan, all in the form
of stock awards to executive officers, other employees and directors of the
Company (see Note 14 below).
CapLease
continues to deploy the approximately $63,577 of net proceeds from the share
issuances completed in 2010 for a variety of general corporate purposes, such as
reducing recourse indebtedness and adding new portfolio
investments. Through September 30, 2010, CapLease has utilized
$46,905 of the offering proceeds to reduce recourse indebtedness.
Dividends
The
following table summarizes the dividend history on shares of CapLease common
stock for the periods indicated.
Quarter Ended
|
Record
Date
|
Payment
Date
|
Dividend
Per Share
|
Total
Amount
|
||||||||
3/31/2009
|
3/31/2009
|
4/15/2009
|
$ | 0.05 | $ | 2,396 | ||||||
6/30/2009
|
6/30/2009
|
7/15/2009
|
0.05 | 2,433 | ||||||||
9/30/2009
|
9/30/2009
|
10/15/2009
|
0.05 | 2,577 | ||||||||
12/31/2009
|
12/31/2009
|
1/15/2010
|
0.06 | 3,103 | ||||||||
3/31/2010
|
3/31/2010
|
4/15/2010
|
0.06 | 3,431 | ||||||||
6/30/2010
|
6/30/2010
|
7/15/2010
|
0.06 | 3,431 | ||||||||
9/30/2010
|
9/30/2010
|
10/15/2010
|
0.06 | 3,431 |
The
Company did not declare a dividend on CapLease common stock during the fourth
quarter of 2008.
The
following table summarizes the dividend history on shares of CapLease Series A
preferred stock for the periods indicated.
Quarter Ended
|
Record
Date
|
Payment
Date
|
Dividend
Per Share
|
Total
Amount
|
||||||||
12/31/2008
|
12/31/2008
|
1/15/2009
|
$ | 0.5078125 | $ | 711 | ||||||
3/31/2009
|
3/31/2009
|
4/15/2009
|
0.5078125 | 711 | ||||||||
6/30/2009
|
6/30/2009
|
7/15/2009
|
0.5078125 | 711 | ||||||||
9/30/2009
|
9/30/2009
|
10/15/2009
|
0.5078125 | 711 | ||||||||
12/31/2009
|
12/31/2009
|
1/15/2010
|
0.5078125 | 711 | ||||||||
3/31/2010
|
3/31/2010
|
4/15/2010
|
0.5078125 | 1,625 | ||||||||
6/30/2010
|
6/30/2010
|
7/15/2010
|
0.5078125 | 1,625 | ||||||||
9/30/2010
|
9/30/2010
|
10/15/2010
|
0.5078125 | 1,625 |
28
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
14.
Stock
Based Compensation
The
Company adopted a stock incentive plan for its employees and directors during
March 2004 in connection with its initial public offering. 5,123,000
shares of common stock are authorized for issuance under the stock
plan. As of September 30, 2010, the Company had awarded 3,369,955
shares of common stock under the stock plan, all in the form of stock awards to
executive officers, other employees and directors of the Company. The
Company has not awarded any options, stock appreciation rights or other stock
based compensation under the stock plan.
A summary
of the Company’s activity under the stock plan from January 1, 2009 through the
nine months ended September 30, 2010, is presented below:
Number of
Shares
|
||||
Stock
Awards at January 1, 2009
|
1,791,195 | |||
Granted
During the Year Ended December 31, 2009
|
1,107,600 | (1) | ||
Forfeited
During the Year Ended December 31, 2009
|
(8,340 | ) | ||
Stock
Awards at January 1, 2010
|
2,890,455 | |||
Granted
During the Period Ended September 30, 2010
|
479,500 | (2) | ||
Stock
Awards at September 30, 2010
|
3,369,955 |
|
(1)
|
Shares
are scheduled to vest between March 2010 and March 2014, but will
generally be forfeited if the recipient either terminates his employment
with the Company or ceases to be a member of CapLease’s Board of Directors
at any time prior to the vesting date. Vesting of an aggregate
of 523,572 shares is also subject to satisfaction of objective and
subjective performance criteria, to be determined by CapLease’s
Compensation Committee.
|
|
(2)
|
Shares
are scheduled to vest between March 2011 and March 2015, but will
generally be forfeited if the recipient either terminates his employment
with the Company or ceases to be a member of CapLease’s Board of Directors
at any time prior to the vesting date. Vesting of an aggregate
of 241,125 shares is also subject to satisfaction of objective and
subjective performance criteria, to be determined by CapLease’s
Compensation Committee.
|
A summary
of the status of unvested shares from January 1, 2009 through the nine months
ended September 30, 2010, is presented below:
Shares
Awarded
Under Plan
|
Shares Priced
Under FASB
ASC 718-10-30
|
Weighted
Average
Fair Value
|
||||||||||
Nonvested
at January 1, 2009
|
930,232 | 606,800 | $ | 9.66 | ||||||||
Current
period awards
|
1,107,600 | 688,741 | 2.23 | |||||||||
Prior
period awards
|
N/A | 119,140 | 1.88 | |||||||||
Vested
|
(228,476 | ) | (228,476 | ) | 6.77 | |||||||
Forfeited
|
(8,340 | ) | (8,340 | ) | 4.31 | |||||||
Nonvested
at January 1, 2010
|
1,801,016 | 1,177,865 | 4.17 | |||||||||
Current
period awards
|
479,500 | 286,600 | 4.84 | |||||||||
Prior
period awards
|
N/A | 198,966 | 4.84 | |||||||||
Vested
|
(541,149 | ) | (541,149 | ) | 3.84 | |||||||
Nonvested
at September 30, 2010
|
1,739,367 | 1,122,282 | 4.62 |
The
Company uses the closing stock price on the grant date as its estimate of the
fair value of the award.
As the
immediately preceding table indicates, not all Company share awards have been
valued for purposes of FASB ASC 718-10-30, as the Company’s stock awards include
shares awarded with vesting dependent upon satisfaction of performance criteria
and with the performance criteria on a portion of the shares to be determined in
the future. “Prior period awards” represent share awards made in a
prior period which have been valued for purposes of FASB ASC 718-10-30 in the
current period when the CapLease Compensation Committee determined the
performance criteria.
29
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
As of
September 30, 2010, $3,815 of unvested shares (fair value at the grant dates) is
expected to be charged to the Company’s Consolidated Statement of Operations
ratably over the remaining vesting period (through March 2015). As of
September 30, 2010, the grant date fair value for awards of 31,350 restricted
shares made in 2007, 78,690 restricted shares made in 2008, 314,145 restricted
shares made in 2009 and 192,900 restricted shares made in 2010, has not yet been
determined because the grant date (as defined under at FASB ASC 718-10-20) has
not yet occurred.
15.
Other
Comprehensive Income (Loss)
Comprehensive
income (loss) is defined as the change in equity of a business enterprise during
a period from transactions and other events and circumstances, excluding those
resulting from investments by and distributions to owners. For the
Company’s purposes, comprehensive income (loss) represents net income (loss), as
presented in the Company’s Consolidated Statements of Operations, adjusted for
unrealized gains or losses on securities available for sale and amortization of
unrealized losses on securities previously classified as available for sale, and
amortization of realized losses on derivatives reclassified into interest
expense.
The
Company’s comprehensive income (loss) for the three and nine months ended
September 30, 2010 and September 30, 2009 is summarized below:
For the three months
ended September 30,
|
For the nine months
ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
loss
|
$ | (1,153 | ) | $ | (3,373 | ) | $ | (4,327 | ) | $ | (639 | ) | ||||
Increase
in fair value on securities available for sale
|
314 | 3,714 | 640 | 1,411 | ||||||||||||
Amortization
of unrealized loss on securities previously classified as available for
sale
|
187 | 197 | 516 | 419 | ||||||||||||
Reclassification
of derivative items into earnings
|
145 | 165 | 447 | 596 | ||||||||||||
Comprehensive
(loss) income
|
$ | (507 | ) | $ | 703 | $ | (2,724 | ) | $ | 1,787 |
FASB ASC
220-10-45-6 divides comprehensive income (loss) into “net income (loss)” and
“other comprehensive income (loss).” Other comprehensive income
(loss) is defined as revenues, expenses, gains and losses that under GAAP are
included in comprehensive income (loss) but excluded from net income
(loss). Other comprehensive income (loss) is a component of
Stockholders’ Equity and is shown on the Company’s Consolidated Statement of
Changes in Stockholders’ Equity (fourth column). The following table
summarizes the Company’s Accumulated Other Comprehensive Income (Loss) as
reported on the Consolidated Statement of Changes in Stockholders’
Equity.
Sep 30, 2010
|
Dec 31, 2009
|
|||||||
Net
unrealized losses on securities available for sale
|
$ | (9,077 | ) | $ | (9,717 | ) | ||
Net
unrealized losses on securities previously classified as available for
sale
|
(9,356 | ) | (9,872 | ) | ||||
Net
realized losses on derivatives
|
(4,296 | ) | (4,743 | ) | ||||
Accumulated
other comprehensive loss
|
$ | (22,729 | ) | $ | (24,332 | ) |
30
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
16.
Non-Controlling
Interests
During
June 2006, CapLease’s Operating Partnership issued 263,157 units of limited
partnership to an unaffiliated third party. All of these units were
issued in connection with the Company’s acquisition of a property in June 2006
from the third party. During June 2008, the units of limited
partnership became redeemable by the holder, at its option, on the basis of one
unit for either one share of CapLease common stock or cash equal to the fair
market value of a share of common stock at the time of the
redemption. The units of limited partnership do not have a
liquidation preference. During September 2008, the non-controlling
interest holder redeemed 107,131 units for the same number of shares of CapLease
common stock. As of September 30, 2010, the Operating Partnership had
issued and outstanding 156,026 units of limited partnership.
Cash
distributions by the Operating Partnership are paid in the following priority:
first, to the non-controlling interest holder until such holder receives the
amount it would have received if the holder’s units of limited partnership
interest were converted to an equal number of shares of CapLease common stock,
and then, to CapLease. Since July 2006, at the same time CapLease has
paid a cash dividend to its common stockholders, the non-controlling interest
holder has been paid a cash dividend of the same amount per limited partnership
unit.
17.
Rental
Income
The
Company is the lessor to tenants under operating leases with expiration dates
ranging from 2010 to 2026. The minimum rental amounts due under the
leases are generally subject to scheduled fixed increases. The leases
generally also require that the tenants pay directly or reimburse the Company
for the occupancy and operating costs of the properties, or in certain cases
reimburse the Company for increases in certain operating costs and real estate
taxes above their base year costs. Approximate future minimum rents
to be received over the next five years and thereafter for non-cancelable
operating leases in effect at September 30, 2010 are as follows:
3
Months Ending December 31, 2010
|
$ | 25,547 | ||
2011
|
123,773 | |||
2012
|
122,481 | |||
2013
|
94,415 | |||
2014
|
91,378 | |||
Thereafter
|
429,864 | |||
$ | 887,458 |
18.
Segment
Reporting
FASB ASC
280 establishes the manner in which public businesses report information about
operating segments in annual and interim financial reports issued to
stockholders. FASB ASC 280-10-50 defines a segment as a component of
an enterprise about which separate financial information is available and that
is evaluated regularly to allocate resources and assess
performance. The Company conducts its business through two
segments: operating real estate (including its investments in owned
properties) and debt investments (including its loan investments as well as its
investments in securities). For segment reporting purposes, the
Company does not allocate interest income on short-term investments or general
and administrative expenses.
Selected
results of operations by segment for the three months ended September 30, 2010
and September 30, 2009, are as follows:
Corporate /
Unallocated
|
Operating
Real Estate
|
Debt
Investments
|
||||||||||||||||||||||
Sep 30, 2010
|
Sep 30, 2009
|
Sep 30, 2010
|
Sep 30, 2009
|
Sep 30, 2010
|
Sep 30, 2009
|
|||||||||||||||||||
Total
revenues
|
$ | 203 | $ | 136 | $ | 34,411 | $ | 37,330 | $ | 6,752 | $ | 7,495 | ||||||||||||
Total
expenses
|
4,613 | 5,061 | 33,460 | 33,004 | 4,440 | 10,777 | ||||||||||||||||||
(Loss)
gain on extinguishment of debt
|
(14 | ) | 415 | – | – | – | – | |||||||||||||||||
Income
(loss) from continuing operations
|
(4,424 | ) | (4,510 | ) | 951 | 4,326 | 2,312 | (3,282 | ) | |||||||||||||||
Total
assets
|
73,139 | 56,767 | 1,435,566 | 1,504,813 | 367,000 | 379,006 |
31
CapLease,
Inc. and Subsidiaries
Notes to
Consolidated Financial Statements
(Dollar
amounts in thousands, except per share amounts)
September
30, 2010 (unaudited)
Selected
results of operations by segment for the nine months ended September 30, 2010
and September 30, 2009, are as follows:
Corporate /
Unallocated
|
Operating
Real Estate
|
Debt
Investments
|
||||||||||||||||||||||
Sep 30, 2010
|
Sep 30, 2009
|
Sep 30, 2010
|
Sep 30, 2009
|
Sep 30, 2010
|
Sep 30, 2009
|
|||||||||||||||||||
Total
revenues
|
$ | 690 | $ | 313 | $ | 103,627 | $ | 110,861 | $ | 20,361 | $ | 23,362 | ||||||||||||
Total
expenses
|
14,894 | 15,603 | 100,265 | 103,931 | 13,613 | 25,914 | ||||||||||||||||||
(Loss)
gain on extinguishment of debt
|
(293 | ) | 9,829 | – | – | – | – | |||||||||||||||||
Income
(loss) from continuing operations
|
(14,497 | ) | (5,461 | ) | 3,362 | 6,930 | 6,748 | (2,552 | ) | |||||||||||||||
Total
assets
|
73,139 | 56,767 | 1,435,566 | 1,504,813 | 367,000 | 379,006 |
19. Subsequent
Events
During
November 2010, the Company entered into a purchase and sale agreement to acquire
a warehouse/distribution facility for a purchase price of approximately $30,000.
The closing of the purchase of the property is scheduled for December 2010 and
is subject to satisfactory completion of the Company’s due diligence and various
customary closing conditions.
32
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following discussion should be read in conjunction with the consolidated
financial statements and the notes to those financial statements, included
elsewhere in this filing. Except where otherwise indicated or where
the context is clear, the portfolio statistics in Item 2 of this Form 10-Q
represent or are calculated from our carry value for financial reporting
purposes before depreciation and amortization. With respect to our
loan portfolio, we have adjusted our carry value to exclude a $0.5 million
general loss reserve.
Overview
We are a
diversified REIT that invests primarily in single tenant commercial real estate
assets subject to long-term leases to high credit quality tenants. We
focus on properties that are subject to a net lease, or a lease that requires
the tenant to pay all or substantially all expenses normally associated with the
ownership of the property, such as utilities, real estate taxes, insurance and
routine maintenance. We also have made and expect to continue to make
investments in single tenant properties where the owner has exposure to property
expenses when we determine we can sufficiently underwrite that exposure and
isolate a predictable cash flow.
We have
two complementary business lines: owning single tenant properties and
making first mortgage loans and other debt investments on single tenant
properties. As a result of lease non-renewals or lease terminations,
we have classified three properties as “multi-tenant properties,” as each is no
longer leased primarily by a single tenant. As of September 30, 2010,
we had an approximately $2.0 billion investment portfolio, including $1.6
billion of owned properties and $0.4 billion of loans and other debt
investments.
Our
primary business objective is to generate stable, long-term and attractive
returns based on the spread between the yields generated by our assets and the
cost of financing our portfolio. We believe that our focus on assets
leased to high credit quality tenants subject to long-term leases will provide
us with a stable and predictable stream of cash flows that will support our
business and the payment of dividends to our stockholders for the foreseeable
future.
The
principal sources of our revenues are rental income on our owned real properties
and interest income from our debt investments (loans and
securities). In order to grow our revenues, we will be primarily
dependent on our ability to add new assets to our portfolio. We are
also intensely focused on growing revenues by re-letting vacant space within our
portfolio. As of September 30, 2010, the occupancy rate in our owned
property portfolio was 95.3% with virtually all of the vacant space being in our
office property in Johnston, Rhode Island and our two office buildings in Omaha,
Nebraska. We cannot provide any assurance as to when and on what
terms we will be able to re-let properties that are or may become vacant in our
portfolio.
The
principal sources of our expenses are interest expense on our assets financed,
depreciation expense on our real properties, general and administrative expenses
and property expenses (net of expense recoveries). With the exception
of our credit facility, all of our debt is fixed rate and, therefore, the
interest expense we pay is not subject to fluctuation based on changes in market
interest rates. Our credit agreement with Wells Fargo Bank is
floating rate debt and, therefore, the interest expense we pay is expected to
increase if interest rates, in particular the one-month LIBOR rate,
increases.
The
average remaining lease term on our owned properties is approximately 7 years,
although we have some leases that are scheduled to mature over the next few
years. We are subject to the risk that our tenants do not renew their
leases at maturity and that we are unable to promptly re-let the property, or
the terms of re-letting may be less favorable to us than the current lease
terms, any of which could result in a reduction in our revenues and an increase
in our property operating costs.
We rely
on leverage to allow us to invest in a greater number of assets and enhance our
asset returns. Our overall portfolio leverage, expressed as a
percentage of our total debt to our total assets before depreciation and
amortization on owned properties and with other minor adjustments, was
approximately 72% as of September 30, 2010. Our leverage ratios by
segment as of September 30, 2010 were approximately 67% for the owned properties
segment and 84% for the debt investments segment. See “Liquidity and
Capital Resources—Leverage” below for information about our use of leverage
ratios and how we compute them.
We expect
our leverage level to decrease over time, as a result of one or more of the
following factors: scheduled principal amortization on our debt, voluntary debt
reduction including potentially through selected asset sales, and lower or no
leverage on new asset acquisitions. During 2010, we have been
focusing and expect to continue to focus our portfolio activity on strengthening
our balance sheet through debt repayment and/or repurchase and also
opportunistically resume portfolio growth as market conditions
permit.
33
Our
portfolio financing strategy is to finance our assets with long-term fixed rate
debt as soon as practicable after we invest, generally on a secured,
non-recourse basis. Through non-recourse debt, we seek to limit the
overall company exposure in the event we default on the debt to the amount we
have invested in the asset or assets financed. We also had
$157.8 million of recourse debt obligations outstanding as of
September 30, 2010, including $93.1 million outstanding under our credit
agreement with Wells Fargo Bank which is scheduled to mature in July
2013.
We will
be required to repay or refinance our debt obligations at maturity, which we
expect, although cannot provide any assurance, that we will be able to
do. To the extent we are unable to refinance debt obligations,
we may rely on a combination of cash on hand, cash from asset sales, and cash
from future debt or equity capital raises to fund the liquidity needed to repay
the obligations. Our ability to refinance debt, sell assets and/or
raise capital on favorable terms will be highly dependent upon prevailing market
conditions. Credit and capital markets entered a period of
significant weakness in the summer of 2007 and while they have improved they
remain significantly stressed and highly uncertain.
Business
Environment
While
credit market conditions have improved dramatically from the historic levels of
dislocation and stress that began in the summer of 2007, economic conditions
remain weak and have triggered a deterioration of commercial real estate
fundamentals, such as higher vacancy rates, lower rents, higher landlord
concessions and declines in the value of commercial real estate. Our
business continues to be impacted in a variety of ways by these factors,
including by:
|
·
|
impacting
our pace of investment activity. Our ability to add assets
continues to be hindered by market conditions. Overall
transaction volumes, while improving, remain depressed and interest rates
remain at historic lows, resulting in downward pressure on capitalization
rates on new investment opportunities. We cannot provide any
assurance as to when and at what yields and other terms we will be able to
add additional new assets to our
portfolio.
|
|
·
|
causing
us to maintain higher levels of liquidity due to the significant weakness
and uncertainty regarding economic
conditions.
|
Deteriorating
commercial real estate fundamentals and limited market trading activity for real
estate securities continue to result in depressed valuations on our real estate
securities. If these conditions do not improve, we may be required to
record impairment losses on our securities, and these losses may be
significant.
We do not
know when market conditions will normalize, if adverse conditions will intensify
or the full extent to which the disruptions will affect us. If market
weakness and/or uncertainty persists or intensifies, the trends discussed above
may continue and we may be impacted in a variety of additional
ways. For example, we may experience challenges in refinancing debt
as it matures or raising additional capital, margin calls on our Wells Fargo
Bank credit agreement and impairment charges on our assets. If weak
economic conditions continue and capital for commercial real estate remains
muted, certain collateral within our CDO may default, which could cause the CDO
to fail to satisfy certain cash flow coverage tests, which would result in a
redirection of the cash distributions payable to us from the CDO until the tests
are back into compliance.
We have
taken and may continue to take a variety of cash conservation measures such as
asset sales, expense reductions and dividend adjustments to increase our
liquidity levels until market conditions normalize. Our ability to
sell collateral to generate liquidity could also be impacted by factors such as
market conditions, the relative illiquidity of certain of our assets (i.e., our
owned property and loan investments) and limitations on sale imposed pursuant to
the debt financing terms of our assets.
Current
economic weakness may cause market rental rates to decline. These
declines could adversely impact us in a number of ways, including by causing us
to record losses on our assets, reducing the proceeds we receive upon sale or
refinance of our assets or adversely impacting our ability to re-let, sell or
refinance our owned properties. Continued weakness and/or uncertainty
in economic conditions also make it more likely that our tenants do not extend
their leases at maturity, as the tenants look to reduce their costs through a
variety of means such as lower fixed rent costs and by consolidating
operations.
34
Current
economic conditions have contributed to unexpected bankruptcies and rapid
declines in financial condition at a number of companies, particularly in the
retail and financial sectors. These conditions could cause one or
more of the tenants to whom we have exposure to fail or default in their payment
obligations, which could cause us to record material losses or a material
reduction in our revenue and cash flows.
Application
of Critical Accounting Policies
A summary
of our critical accounting policies is included in our Annual Report on Form
10-K for the year ended December 31, 2009 in Management’s Discussion and
Analysis of Financial Condition and Results of Operations. There have been
no significant changes to those policies during 2010.
Investment
and Financing Activities
Except
for the joint venture investment described below, during the three months ended
September 30, 2010, we did not make any new portfolio investments. We
did not make any new portfolio investments during the three months ended
September 30, 2009. Except for the amendment to our credit facility
during the 2010 period, we did not complete any new or modify any existing asset
financings during the three months ended September 30, 2010, and September 30,
2009.
During
the three months ended September 30, 2010, we entered into and commenced funding
a joint venture that is developing and constructing a warehouse/distribution
building for Michelin North America, Inc. in Louisville, Kentucky, with a
construction budget of $8.4 million. Pursuant to the joint venture
agreement, we will fund all of the construction costs associated with the
project. The project is scheduled to be completed in the first
quarter of 2011. The lease with Michelin North America, Inc. is for a
ten year term commencing upon completion of the project.
Business
Segments
We
conduct our business through two operating segments:
|
·
|
operating
real estate (including our investments in owned real properties);
and
|
|
·
|
debt
investments (including our loan investments as well as our investments in
securities).
|
Selected
results of operations by segment for the three months ended September 30, 2010
and September 30, 2009, are as follows (dollar amounts in
thousands):
Corporate /
Unallocated
|
Operating
Real Estate
|
Debt
Investments
|
||||||||||||||||||||||
Sep 30, 2010
|
Sep 30, 2009
|
Sep 30, 2010
|
Sep 30, 2009
|
Sep 30, 2010
|
Sep 30, 2009
|
|||||||||||||||||||
Total
revenues
|
$ | 203 | $ | 136 | $ | 34,411 | $ | 37,330 | $ | 6,752 | $ | 7,495 | ||||||||||||
Total
expenses
|
4,613 | 5,061 | 33,460 | 33,004 | 4,440 | 10,777 | ||||||||||||||||||
(Loss)
gain on extinguishment of debt
|
(14 | ) | 415 | – | – | – | – | |||||||||||||||||
Income
(loss) from continuing operations
|
(4,424 | ) | (4,510 | ) | 951 | 4,326 | 2,312 | (3,282 | ) | |||||||||||||||
Total
assets
|
73,139 | 56,767 | 1,435,566 | 1,504,813 | 367,000 | 379,006 |
Selected
results of operations by segment for the nine months ended September 30, 2010
and September 30, 2009, are as follows (dollar amounts in
thousands):
Corporate /
Unallocated
|
Operating
Real Estate
|
Debt
Investments
|
||||||||||||||||||||||
Sep 30, 2010
|
Sep 30, 2009
|
Sep 30, 2010
|
Sep 30, 2009
|
Sep 30, 2010
|
Sep 30, 2009
|
|||||||||||||||||||
Total
revenues
|
$ | 690 | $ | 313 | $ | 103,627 | $ | 110,861 | $ | 20,361 | $ | 23,362 | ||||||||||||
Total
expenses
|
14,894 | 15,603 | 100,265 | 103,931 | 13,613 | 25,914 | ||||||||||||||||||
(Loss)
gain on extinguishment of debt
|
(293 | ) | 9,829 | – | – | – | – | |||||||||||||||||
Income
(loss) from continuing operations
|
(14,497 | ) | (5,461 | ) | 3,362 | 6,930 | 6,748 | (2,551 | ) | |||||||||||||||
Total
assets
|
73,139 | 56,767 | 1,435,566 | 1,504,813 | 367,000 | 379,006 |
Comparison
of the Quarter Ended September 30, 2010 to the Quarter Ended September 30,
2009
The
following discussion compares our operating results for the quarter ended
September 30, 2010 to the comparable period in 2009.
35
Revenue.
Total
revenue decreased $3.6 million, or 8%, to $41.4 million. The decrease
was attributable to decreases in rental revenue and interest
income.
Rental
revenue and property expense recoveries, in the aggregate, decreased $2.9
million, or 8%, to $34.3 million, primarily reflecting the vacancy of our
property in Johnston, Rhode Island during the fourth quarter of
2009.
Interest
income decreased $0.7 million, or 10%, to $6.9 million, primarily as a result of
lower loan balances and lower interest rates on cash balances.
Expenses.
Total
expenses decreased $6.3 million, or 13%, to $42.5 million. The
decrease in expenses was primarily attributable to the investment losses in the
2009 period, and lower interest expense and depreciation expense in the 2010
period, offset in part by higher property expenses in the 2010
period.
Interest
expense decreased $1.4 million, or 6%, to $21.0 million, from $22.4
million. The decrease in the 2010 period resulted primarily from $0.5
million of lower interest expense on floating rate borrowings (resulting from
lower borrowings in the 2010 period), $0.4 million of lower interest expense on
convertible debt due to repurchases of the convertible debt, $0.2 million of
lower interest expense on property mortgages and $0.2 million of lower interest
expense on the secured term loan. The Company’s average balance
outstanding and effective financing rate under its floating rate borrowings was
approximately $98 million at 3.63% during the 2010 period (average one-month
LIBOR of 0.32%), compared with approximately $148 million at 3.72% during the
2009 period (average one-month LIBOR of 0.29%).
Property
expenses increased $1.5 million, or 31%, to $6.2 million, primarily reflecting
carrying costs associated with the Johnston, Rhode Island property and expenses
on the Omaha, Nebraska properties where the leases were converted to gross from
net as part of the lease termination transaction we completed at December 31,
2009. The net amount of property expenses we incurred (net of expense
recoveries) was $3.2 million in 2010, compared to $2.0 million in the 2009
period.
We had no
losses on investments during the 2010 period, compared to losses on investments
of $5.9 million in the 2009 period. The amount in the 2009 period
reflects losses on two assets we sold in the third quarter which are discussed
in greater detail at Note 6 of the consolidated financial statements included in
this Form 10-Q.
General
and administrative expense decreased $0.1 million, or 5%, to $2.5 million,
primarily reflecting higher legal expenses in the 2009 period related to
litigation involving certain of our properties.
General
and administrative expense-stock based compensation increased 20%, to $0.7
million. The increase was primarily a result of higher share prices
year over year, which primarily impacted the value of prior year performance
share grants that do not price until the eligible vesting year. As of
September 30, 2010, $3.8 million of unvested shares (fair value at the grant
dates) is expected to be charged to our Consolidated Statement of Operations
ratably over the remaining vesting period (through March 2015). As of
September 30, 2010, the grant date fair value for awards of 31,350 restricted
shares made in 2007, 78,690 restricted shares made in 2008, 314,145 restricted
shares made in 2009 and 192,900 restricted shares made in 2010, has not yet been
determined because the grant date (as defined under FASB ASC 718-10-20) has not
yet occurred.
Depreciation
and amortization expense on real property decreased $0.5 million, or 4%, from
$12.6 million to $12.1 million, primarily due to the value of our in place lease
on the property in Johnston, Rhode Island being fully amortized at the scheduled
lease maturity in July 2009.
Gain/loss
on extinguishment of debt.
We had
$0.4 million of non-cash gain on extinguishment of debt in the 2009 period,
compared to a de minimis loss in the 2010 period. All of these
amounts related to repurchases of our convertible senior notes. See
Note 9 of the consolidated financial statements included in this Form
10-Q.
36
Net
loss.
Net loss
decreased to $(1.2) million, from $(3.4) million, primarily as a result of lower
expenses in the 2010 period, offset in part by lower revenue in the 2010
period. Net loss allocable to common stockholders was $(2.8) million
in the third quarter of 2010, reflecting dividends to preferred stockholders of
$1.6 million.
Comparison
of the Nine Months Ended September 30, 2010 to the Nine Months Ended September
30, 2009
The
following discussion compares our operating results for the nine months ended
September 30, 2010 to the comparable period in 2009.
Revenue.
Total
revenue decreased $9.9 million, or 7%, to $124.7 million. The
decrease was attributable to decreases in rental revenue and interest
income.
Rental
revenue and property expense recoveries, in the aggregate, decreased $7.3
million, or 7%, to $103.1 million, primarily reflecting the vacancy of our
property in Johnston, Rhode Island during the fourth quarter of
2009.
Interest
income decreased $2.7 million, or 11%, to $20.9 million, primarily as a result
of lower loan balances and lower interest rates on cash balances.
Expenses.
Total
expenses decreased $16.7 million, or 11%, to $128.8 million. The
decrease in expenses was primarily attributable to the investment losses in the
2009 period, and lower interest expense and depreciation expense in the 2010
period, offset in part by higher property expenses in the 2010
period.
Interest
expense decreased $4.1 million, or 6%, to $64.0 million, from $68.1
million. The decrease in the 2010 period resulted primarily from $1.7
million of lower interest expense on floating rate borrowings (resulting from
lower borrowings in the 2010 period), $1.1 million of lower interest expense on
convertible debt due to repurchases of the convertible debt, $0.6 million of
lower interest expense on property mortgages, $0.5 million of lower interest
expense on the secured term loan and $0.3 million of lower interest expense on
the collateralized debt obligations. The Company’s average balance
outstanding and effective financing rate under its floating rate borrowings was
approximately $111 million at 3.68% during the 2010 period (average one-month
LIBOR of 0.28%), compared with approximately $167 million at 3.71% during the
2009 period (average one-month LIBOR of 0.39%).
Property
expenses increased $3.6 million, or 24%, to $18.5 million, primarily reflecting
carrying costs associated with the Johnston, Rhode Island property and expenses
on the Omaha, Nebraska properties where the leases were converted to gross from
net as part of the lease termination transaction we completed at December 31,
2009. The net amount of property expenses we incurred (net of expense
recoveries) was $9.7 million in the 2010 period, compared to $6.4 million in the
2009 period.
We had no
losses on investments during the 2010 period, compared to losses on investments
of $13.7 million in the 2009 period. The losses in the 2009 period
include $13.2 million of losses on four assets that were sold during the
year. The 2009 losses are discussed in greater detail at Note 6 of
the consolidated financial statements included in this Form 10-Q.
General
and administrative expense increased $0.1 million, or 2%, to $7.9 million, as
lower legal expenses in the second and third quarter of 2010 were offset by
higher legal expenses in the first quarter.
General
and administrative expense-stock based compensation increased $0.3 million, or
20%, to $1.9 million. The increase was primarily a result of higher
share prices year over year, which primarily impacted the value of prior year
performance share grants that do not price until the eligible vesting
year.
Depreciation
and amortization expense on real property decreased $2.9 million, primarily due
to the value of our in place lease on the property in Johnston, Rhode Island
being fully amortized at the scheduled leased maturity in July
2009.
37
Gain/loss
on extinguishment of debt.
We had
$9.8 million of non-cash gain on extinguishment of debt in the 2009 period,
compared to a loss of $0.3 million in the 2010 period. All of these
amounts related to repurchases of our convertible senior notes. See
Note 9 of the consolidated financial statements included in this Form
10-Q.
Net
loss.
Net loss
increased to $(4.3) million, from $(0.6) million, primarily as a result of the
gain on debt extinguishment in the 2009 period and lower revenue in the 2010
period, offset in part by lower expenses in the 2010 period, including loss on
investments. Net loss allocable to common stockholders was $(8.3)
million in the 2010 period, reflecting dividends to preferred stockholders of
$4.0 million.
Funds
from Operations
Funds
from operations, or FFO, is a non-GAAP financial measure. We believe
FFO is a useful additional measure of our performance because it facilitates an
understanding of our operating performance after adjustment for real estate
depreciation, a non-cash expense which assumes that the value of real estate
assets diminishes predictably over time. In addition, we believe that
FFO provides useful information to the investment community about our financial
performance as compared to other REITs, since FFO is generally recognized as an
industry standard for measuring the operating performance of an equity
REIT. FFO does not represent cash generated from operating activities
in accordance with GAAP and is not indicative of cash available to fund cash
needs. FFO should not be considered as an alternative to net income
or earnings per share determined in accordance with GAAP as an indicator of our
operating performance or as an alternative to cash flow as a measure of
liquidity. Since all companies and analysts do not calculate FFO in a
similar fashion, our calculation of FFO may not be comparable to similarly
titled measures reported by other companies.
We
calculate FFO in accordance with standards established by the National
Association of Real Estate Investment Trusts (“NAREIT”) which defines FFO as net
income (loss) (computed in accordance with GAAP) excluding gains (or losses)
from sales of property, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures.
The
following table reconciles our net income (loss) allocable to common
stockholders to FFO for the three and nine months ended September 30, 2010 and
September 30, 2009.
For the Three Months
Ended September 30,
|
For the Nine Months
Ended September 30,
|
|||||||||||||||
(Amounts in thousands, except per share
amounts)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Net
loss allocable to common stockholders
|
$ | (2,778 | ) | $ | (4,084 | ) | $ | (8,319 | ) | $ | (2,772 | ) | ||||
Add
(deduct):
|
||||||||||||||||
Non-controlling
interest in consolidated subsidiaries
|
(8 | ) | (13 | ) | (23 | ) | (9 | ) | ||||||||
Depreciation
and amortization expense on real property
|
12,121 | 12,596 | 36,253 | 39,178 | ||||||||||||
Depreciation
and amortization expense on discontinued operations
|
– | 33 | – | 249 | ||||||||||||
Funds
from operations
|
$ | 9,335 | $ | 8,532 | $ | 27,911 | $ | 36,646 | ||||||||
Weighted
average number of common shares outstanding, basic and
diluted
|
57,185 | 50,179 | 55,822 | 48,539 | ||||||||||||
Weighted
average number of OP units outstanding
|
156 | 156 | 156 | 156 | ||||||||||||
Weighted
average number of common shares and OP units outstanding,
diluted
|
57,341 | 50,335 | 55,978 | 48,695 | ||||||||||||
Net
loss per common share, basic and diluted
|
$ | (0.05 | ) | $ | (0.08 | ) | $ | (0.15 | ) | $ | (0.06 | ) | ||||
Funds
from operations per share
|
$ | 0.16 | $ | 0.17 | $ | 0.50 | $ | 0.75 |
Liquidity
and Capital Resources
Short-Term
Liquidity.
We define
our short-term liquidity as our ability to generate adequate amounts of cash to
meet day-to-day operating expenses and material cash commitments over the next
twelve months. Our primary sources of short-term liquidity are
available cash and cash equivalents, cash provided by operations, and a portion
of the cash proceeds from issuances of debt and equity capital. We
may also use revolving loan borrowings under our credit agreement with Wells
Fargo Bank to finance, likely on a short-term basis, a portion of our new
investment activity. As of September 30, 2010, we had $57.8
million in available cash and cash equivalents. As of November 5,
2010, we had $51.5 million in available cash and cash equivalents. We
believe that our sources of short-term liquidity will be sufficient to enable us
to satisfy our short-term liquidity requirements, including the payment of our
dividend.
38
As a
REIT, we are required to distribute at least 90% of our taxable income to our
stockholders on an annual basis, and we intend to distribute all or
substantially all of our REIT taxable income in order to comply with the
distribution requirements of the Code and to avoid federal income tax and the
nondeductible excise tax. We declared a cash dividend of $0.06 per
share of common stock in each of the quarters ended September 30, 2010, June 30,
2010 and March 31, 2010. We also declared a cash dividend of
$0.5078125 per share of 8.125% Series A cumulative redeemable preferred stock in
each of the quarters ended September 30, 2010, June 30, 2010 and March 31,
2010. Our dividend policy is subject to revision at the discretion of
our board of directors. All distributions will be made at the
discretion of our board of directors and will depend on our cash available for
distribution, our funds from operations, our maintenance of REIT status, market
conditions and such other factors as our board of directors deems
relevant.
While we
believe we will be able to satisfy our short-term liquidity requirements, the
following are the primary factors that we believe could have a material adverse
effect on our plans:
|
·
|
payment
defaults on our assets which we expect could be triggered primarily in the
event of the bankruptcy of the underlying tenant or
tenants;
|
|
·
|
unexpected
capital expenditures on our owned
properties;
|
|
·
|
margin
calls on our Wells Fargo Bank credit agreement;
or
|
|
·
|
margin
calls on any future risk management
transactions.
|
Long-Term
Liquidity.
We define
our long-term liquidity as our ability to generate adequate amounts of cash to
meet cash demands and commitments beyond the next 12 months, including balloon
payments on our debt obligations and capital expenditures on our owned
properties. Our primary sources of long-term liquidity are our cash
and cash equivalents, cash provided by operations, cash from long-term
financings on our asset investments and issuances of debt and equity
capital. We may continue to selectively sell assets to allow us to
generate additional long-term liquidity. We believe that our various
sources of long-term liquidity will be sufficient to enable us to satisfy our
long-term liquidity requirements.
Our
primary long-term liquidity requirement is repayment of our debt
obligations. We intend generally to manage our debt maturities by
refinancing or repaying the related debt at maturity. We expect to
utilize a combination of (i) cash on hand, (ii) cash from sales of assets which
may include the collateral for the debt, and (iii) cash from future debt or
equity capital raises to fund any liquidity needed to satisfy these
obligations. These actions, however, may not enable us to generate
sufficient liquidity to satisfy our borrowings and, therefore, we cannot provide
any assurance we will be able to refinance or repay our debt obligations as they
come due. Our ability to refinance debt, sell assets and/or raise
capital on favorable terms will be highly dependent upon prevailing market
conditions. See “Item 1A—Risk Factors—Our use of debt financing could
have a material adverse effect on our financial condition.” in our most recent
Annual Report on Form 10-K.
We have
two recourse debt obligations that are scheduled to mature over the next few
years. Our convertible senior notes can be put to us at the option of
the note holders for a repurchase price of 100% of the principal amount of the
notes in October 2012 and our credit agreement with Wells Fargo Bank is
scheduled to mature in July 2013. The convertible senior notes are
unsecured obligations and the credit agreement with Wells Fargo Bank is a
secured borrowing agreement. With respect to the convertible notes,
we repurchased another $1.4 million of notes during the third quarter and have
reduced the principal amount of notes outstanding to $35.0 million as of
September 30, 2010. We may continue to seek to opportunistically
repurchase this debt over time and then intend to repay or refinance any
remaining obligation at or prior to maturity. With respect to the
Wells Fargo Bank agreement, we entered into an amendment and restatement of the
agreement in July 2010, which, among other things, extended the maturity date
until July 2013.
While we
believe we will be successful in either refinancing or repaying these
obligations at or prior to maturity, we cannot provide any assurance we will be
able to do so. If we are unsuccessful in refinancing these
obligations, we may not have sufficient liquidity to repay the debt in full at
maturity. Our failure to do so is a default under the debt and could
materially adversely affect our financial condition and operating results in a
variety of ways. For example, if we default under the Wells Fargo
Bank agreement, the bank could foreclose on the related collateral causing us to
lose some of our assets. Wells Fargo Bank and the convertible note
holders also would have general recourse against our company if we default in
our obligations to them. In addition, each of these obligations is
cross-defaulted with the other, meaning that a default under one obligation
could result in the other lender accelerating the maturity of our obligations to
them.
39
We have
various non-recourse mortgage debt obligations that are scheduled to mature in
the future beginning in September 2011. See the schedule of mortgage
note maturities included at Note 9 in our consolidated financial statements
included in this Form 10-Q. In connection with the maturity of our
mortgage debt obligations, we intend to evaluate a variety of alternatives with
respect to our investment in the subject property, including refinancing the
debt, utilizing cash on hand and other sources of liquidity to repay the
mortgage debt, and selling the property. If we are unsuccessful with
one or more of these alternatives, we could deed the property back to the lender
to satisfy in full our obligations under the non-recourse debt. Our
mortgage debt obligations are non-recourse and not cross-defaulted with our
other debt obligations, and therefore, default of any of our mortgage debt
obligations will not threaten the viability of our company, although it could
result in us losing all or some of our remaining investment in the
property.
As an
owner of commercial real estate, we will be required to make capital
expenditures to maintain and upgrade our properties. We expect the
vast majority of these expenditures will be made as the leases mature and we
renew existing leases or find new tenants to occupy the property. Any
estimates we make of expected capital expenditures are highly subjective and
actual amounts we spend may differ materially and will be impacted by a variety
of factors, including market conditions which are beyond our
control. We may be required to incur additional debt, sell assets
and/or raise capital to generate the liquidity needed to pay for capital
expenditures on our properties. Our ability to satisfy our long-term
liquidity requirements could be materially adversely affected by capital
expenditures we make on our owned properties.
Sources
of Equity Capital.
We have
implemented a dividend reinvestment and direct stock purchase plan and an “at
the market offering” program (as defined in Rule 415 of the Securities Act of
1933, as amended), each of which may be utilized by us from time to time to sell
shares of our common stock and increase liquidity. During March 2010,
we expanded our “at the market offering” program to enable us to sell shares of
our Series A preferred stock and increase liquidity. We also have an
effective shelf registration statement under which we can offer an aggregate of
$416.4 million of common stock, preferred stock and/or senior or
subordinated debt securities from time to time.
In March
2007, we implemented a dividend reinvestment and direct stock purchase
plan. The plan allows interested stockholders to reinvest all or a
portion of their cash dividends in shares of our common stock and to make
monthly purchases of our common stock generally up to a maximum of $10,000
(unless a higher amount is approved by us in our sole
discretion). Shares purchased through the plan may be either (i)
newly issued by us or (ii) purchased by the plan administrator in the open
market, at our discretion. During the nine months ended September 30,
2010, we did not issue any shares of common stock through the
plan. During the year ended December 31, 2009, we issued 807,661
shares of common stock through the plan at an average price of $3.60 per
share. As of September 30, 2010, we have reserved an aggregate of
6,857,843 shares of common stock for future issuance pursuant to the dividend
reinvestment and direct stock purchase plan. We are not currently
issuing new shares through the plan, although we reserve the right to elect to
do so in our sole discretion at any time in the future.
We have
entered into a sales agreement with Brinson Patrick Securities Corporation that
permits us to issue and sell through Brinson Patrick, from time to time, shares
of our common stock and Series A preferred stock, and Brinson Patrick agrees to
use its best efforts to sell such shares during the term of the agreement and on
the terms set forth therein. Our Board of Directors has authorized
the sale of up to 5,000,000 shares of common stock and 1,000,000 shares of
Series A preferred stock through the program from time to time, of which
2,023,000 shares of common stock and 600 shares of Series A preferred stock have
been sold. We are not obligated to sell any shares pursuant to the
agreement and we may start and stop selling shares pursuant to the program at
any time in our sole discretion. We must pay Brinson Patrick a
commission of 1.5% of the gross sales price per share sold.
During
the nine months ended September 30, 2010, we sold an aggregate of 1,851,300
shares of common stock and 600 shares of 8.125% Series A cumulative redeemable
preferred stock through the “at the market offering” program with Brinson
Patrick, at an average price of $4.67 per share of common stock and $25.05 per
share of Series A preferred stock, and raised aggregate net proceeds of $8.5
million. We ceased selling shares of common stock and Series A
preferred stock through the program during March 2010 in connection with the
common stock and Series A preferred stock offerings discussed below, although we
may resume selling shares through the program in our sole discretion at any time
in the future.
40
As of
September 30, 2010, we have an effective shelf registration statement under
which we can offer an aggregate of $416.4 million of common stock,
preferred stock and/or senior or subordinated debt securities from time to time,
including an aggregate of 2,977,000 shares of common stock and 999,400 shares of
Series A preferred stock reserved for sale under the Brinson Patrick sales
agreement. We intend to continue to raise additional capital from
time to time to enable us to continue to implement our strategy. Our
ability to raise capital is influenced by market conditions, and we cannot
assure you that conditions for raising capital will be favorable for us at any
time. In addition to the stock issuances through our “at the market
offering” program discussed above, we executed the following transactions off of
our shelf registration statement during the nine months ended September 30,
2010.
On March
30, 2010, we issued 3,144,654 shares of our common stock to an institutional
investor for a price of $4.77 per share, or net proceeds of approximately $15
million.
On March
31, 2010, we issued 1,800,000 shares of 8.125% Series A cumulative redeemable
preferred stock in a public offering at a price of $23.06 per share, resulting
in an effective annual yield of 9.00%. We received net proceeds in
the transaction (after deducting underwriting discounts and commissions and
estimated offering expenses) of approximately $40.1 million, including $0.9
million of accrued dividends.
We
continue to deploy the approximately $63.6 million of net proceeds from the
share issuances we completed in 2010 for a variety of general corporate
purposes, such as reducing recourse indebtedness and adding new portfolio
investments. Through September 30, 2010, we have utilized $46.9
million of the offering proceeds to reduce recourse indebtedness.
Leverage.
We rely
on leverage to allow us to invest in a greater number of assets and enhance our
asset returns. Leverage also exposes us to a variety of risks which
are discussed in more detail in our most recent Annual Report on Form 10-K under
the heading “Risk Factors.” In reviewing and analyzing our debt, we
look at a variety of financial metrics such as our leverage ratios, weighted
average and individual interest rates on the debt, weighted average and
individual maturity dates and scheduled principal amortization and balloon
balances due at maturity. We also evaluate a variety of subjective
factors such as present and expected future market conditions.
Leverage
ratios are a widely used financial measure by the real estate investment
community, especially for REITs. We measure our leverage ratios by
dividing total debt by total assets, as adjusted. We measure total
assets, as adjusted, at historical cost before depreciation and amortization on
owned properties. Therefore, our leverage ratios do not account for
any fluctuations in value, up or down, that may have occurred since we acquired
our owned properties. Other companies including other REITs may
compute leverage ratios in a different manner and, therefore, our leverage
ratios may not be comparable to similarly titled measures reported by other
companies.
41
The
following table sets forth the computation of our overall portfolio leverage
ratio as of September 30, 2010, and December 31, 2009 (dollars in
thousands).
Sep 30, 2010
|
Dec 31, 2009
|
|||||||
Debt
|
||||||||
Mortgages
on real estate investments
|
$ | 933,170 | $ | 943,811 | ||||
Collateralized
debt obligations
|
256,504 | 263,310 | ||||||
Credit
facility
|
93,092 | 126,262 | ||||||
Secured
term loan
|
104,783 | 114,070 | ||||||
Convertible
senior notes
|
33,785 | 49,452 | ||||||
Other
long-term debt
|
30,930 | 30,930 | ||||||
Total
Debt
|
$ | 1,452,264 | $ | 1,527,835 | ||||
Assets
|
||||||||
Total
assets
|
$ | 1,875,705 | $ | 1,904,415 | ||||
Accumulated
depreciation and amortization on owned properties
|
227,505 | 190,166 | ||||||
Intangible
liabilities on real estate investments
|
(37,952 | ) | (39,591 | ) | ||||
Prepaid
expenses and deposits
|
(2,978 | ) | (1,267 | ) | ||||
Accrued
rental income
|
(34,256 | ) | (35,317 | ) | ||||
Deferred
rental income
|
311 | – | ||||||
Debt
issuance costs, net
|
(6,448 | ) | (7,653 | ) | ||||
Other
|
(795 | ) | (988 | ) | ||||
Total
Assets, as adjusted
|
$ | 2,021,092 | $ | 2,009,765 | ||||
Leverage
(Total Debt/Total Assets, as adjusted)
|
72 | % | 76 | % |
The
following table sets forth the computation of our leverage ratios by segment as
of September 30, 2010 (dollars in thousands).
(1)
Represents our carry value for financial reporting purposes before depreciation
and amortization on owned properties. The carry value of our debt investments
has been adjusted to exclude a $500 general loss reserve.
We expect
our leverage level to decrease over time, as a result of one or more of the
following factors: scheduled principal amortization on our debt, voluntary debt
reduction including potentially through selected asset sales, and lower or no
leverage on new asset acquisitions.
Our
portfolio financing strategy is to finance our assets with long-term fixed rate
debt as soon as practicable after we invest, generally on a secured,
non-recourse basis. Through non-recourse debt, we seek to limit the
overall company exposure in the event we default on the debt to the amount we
have invested in the asset or assets financed. We seek to finance our
assets with “match-funded” or substantially “match-funded” debt, meaning that we
seek to obtain debt whose maturity matches as closely as possible the maturity
of the asset financed. Through September 30, 2010, our long-term
fixed rate asset financings have been in the form of traditional third party
non-recourse mortgage financings (on most of our owned real properties) and two
non-recourse term financings, including a secured term loan (completed in
December 2007) and one CDO (completed in March 2005). As of September
30, 2010, we have financed on a long-term basis an aggregate of approximately
$1.78 billion of portfolio assets with third party mortgage debt of $933.2
million and term financings of $361.3 million.
Long-Term
Mortgage Financings.
We have
financed most of our owned properties through traditional mortgage financings
provided through the commercial mortgage-backed securitization
market. We also have utilized the term financings described below to
add incremental leverage on many of our owned properties.
42
During
the quarter ended September 30, 2010, we did not obtain any new mortgage
financings.
Our
mortgage financings are all fixed rate financings. The notes
typically mature over a long-term period of approximately ten years, and debt
service is payable monthly. The notes are non-recourse to us subject
to limited recourse exceptions and are secured by a mortgage on the property and
an assignment of the underlying lease and rents on the property. The
notes are often interest only for all or a portion of the note term, and thus
require a balloon payment at maturity. As described above, we cannot
provide any assurance we will be able to refinance or repay these obligations at
maturity and our ability to do so on favorable terms will be highly dependent
upon prevailing market conditions. See “Business Environment” above
and “Item 1A—Risk Factors” in our most recent Annual Report on Form
10-K.
Term
Financings.
We have
financed most of our loan and securities investments as well as a select number
of our owned properties through the term financings described
below. As noted above, we have also utilized term financings to add
incremental leverage on our owned properties financed with mortgage
debt.
In
December 2007, we completed a $129.5 million original principal balance secured
term loan. Upon closing of the financing, we pledged approximately
$163.1 million principal amount of collateral to secure our obligations under
the loan. The interest coupon on the loan is fixed at 5.81% annually
until the loan matures in January 2018. Our effective financing rate
on the loan is 6.0% annually (inclusive of hedge and closing
costs). The loan is non-recourse to us, subject to limited
non-recourse exceptions.
We also
completed an entirely fixed rate CDO financing in March 2005. We
aggregated approximately $300 million face amount of assets and then transferred
these assets into a wholly-owned securitization vehicle, and issued $285 million
face amount of multi-class notes and $15 million face amount of preferred equity
through the securitization vehicle. The assets serve as collateral
for our obligations under the notes. The securitization vehicle is an
SPE, with its business limited to the issuance of the notes and the preferred
equity, the acquisition of the collateral and certain other matters related
thereto. The net amount of the debt we initially issued was $268.1
million, inclusive of a $0.4 million discount to face, as we retained the three
most junior note classes aggregating a face amount of $16.5 million and the full
$15 million face amount of preferred equity.
The CDO
notes have a stated maturity in January 2040, although the actual life of the
notes is expected to be substantially shorter. Our weighted average
effective financing rate (inclusive of original issue discount and debt issuance
and hedge costs) on our CDO is approximately 5.6%. Our CDO debt is
non-recourse to us but is secured by the collateral assets. We
reduced the debt outstanding under our CDO by repurchasing $5 million of our
Class A CDO notes during the year ended December 31, 2009.
We have
financed certain of our portfolio assets pursuant to a credit agreement we
entered into with Wells Fargo Bank in April 2008. We entered into an
amendment and restatement of the credit agreement with Wells Fargo in July 2010,
which, among other things:
|
·
|
established
a maximum revolving credit commitment of $140
million;
|
|
·
|
extended
the maturity date of the credit agreement to July 16, 2013, from April 28,
2011; and
|
|
·
|
set
the interest rate on our borrowings at one-month LIBOR plus 275 basis
points (an increase from one-month LIBOR plus 250 basis points at June 30,
2010).
|
Also in
connection with the July 2010 amendment and restatement, we made a $13.4 million
principal payment to the lender and agreed to repay another $10 million of
principal in four equal quarterly installments beginning on October 1, 2010, the
first installment of which was made in September 2010. Our
outstanding borrowings under the agreement were $93.1 million as of September
30, 2010.
43
The
agreement is a floating rate LIBOR based facility. Our borrowings
under the facility are secured by a combination of first mortgage loan
investments, intercompany mortgage loans on our owned property investments,
commercial mortgage-backed securities and a first lien on our ownership interest
in the real property located in Johnston, Rhode Island. Our
obligations under the credit agreement are also fully recourse to all of our
other assets and, pursuant to the margin call provisions in the agreement, we
may be obligated to prepay a portion of the debt if Wells Fargo determines the
value of our collateral has declined, including as a result of an underlying
tenant credit rating downgrade or other adverse tenant-credit event, Wells Fargo
may require us to prepay a portion of our borrowings, provided that Wells Fargo
may not reduce the value of any of our collateral other than CMBS securities due
to general credit spread or interest rate fluctuations. As of
September 30, 2010, we had $3.4 million borrowed against collateral classified
as CMBS securities by Wells Fargo.
We may
utilize the undrawn amount of the lender’s revolving credit commitment to
finance assets approved by the lender in its sole discretion at an advance rate
of 60% of the asset’s value (as determined by the lender).
We are
required to comply with the following financial covenants under the credit
agreement: minimum liquidity (basically cash and cash equivalents) of at least
$12 million, minimum consolidated tangible net worth (basically stockholders’
equity before accumulated depreciation and amortization) of at least $360
million plus 75% of the aggregate net proceeds from equity offerings or capital
contributions after July 16, 2010, maximum corporate leverage (basically total
liabilities divided by total assets before accumulated depreciation and
amortization) of 80% and minimum interest coverage (basically EBITDA, or net
income before income taxes, interest expense, depreciation and amortization,
divided by interest expense) of 105%.
We had
$93.1 million outstanding as of September 30, 2010 under our Wells Fargo credit
agreement, which borrowings were secured by loan investments with an aggregate
carry value of $11.2 million, intercompany mortgage loans and investments in our
CDO with an aggregate carry value of $105.1 million, CMBS investments with a
carry value of $9.7 million and a single owned property with a carry value of
$27.1 million.
We may
pursue a variety of strategies for the assets financed on the facility, which
may include obtaining long-term fixed rate financing when market conditions
permit, pursuing selected asset sales, and retiring the debt on selected assets
and holding the assets unlevered. We expect credit market conditions
to impact our ability to achieve these objectives and, therefore, we cannot
provide any assurance as to the timing or our ability to do so.
Statement
of Cash Flows
Operating
activities provided $37.3 million of cash during the nine months ended September
30, 2010, primarily driven by net (loss) as adjusted by various non-cash gains,
losses, income and charges of $38.5 million, partially offset by increases in
other assets of $2.4 million. Operating activities provided $49.4
million of cash during the nine months ended September 30, 2009, primarily
driven by net (loss) as adjusted by various non-cash gains, losses, income and
charges of $53.7 million, partially offset by increases in other assets of $6.4
million. We recognize rental income on our owned properties on a
straight line basis in accordance with FASB ASC 840-20-25-1. As of
September 30, 2010, this has resulted in the Company accruing $33.9 million,
net, of rental income in excess of actual rents due under the various
leases. During the nine months ended September 30, 2010, actual rents
due under the leases exceeded rents on a straight-line basis by $1.4
million. We expect the impact of straight-lining of rents to
fluctuate over time as contractual rents step up and actual rents due increase
under the various leases and market conditions improve and we purchase
additional properties. Certain of our owned properties are also
subject to rents which pay semi-annually, rather than monthly, and this also
impacts the quarter-to-quarter changes due to straight-lining of
rents.
Investing
activities provided $9.7 million of cash during the nine months ended September
30, 2010, which primarily resulted from net proceeds from the sale of owned
properties of $3.4 million and net principal received on loans of $8.3 million
and securities of $2.7 million, partially offset by real estate improvements and
construction in progress of $3.6 million and leasing commission costs of $1.1
million. Investing activities provided $67.9 million of cash during
the nine months ended September 30, 2009, which primarily resulted from net
proceeds from the sale of loans and securities of $48.7 million, net proceeds
from the sale of owned properties of $6.5 million and net principal received on
loans of $12.8 million and securities of $2.7 million.
Cash used
in financing activities during the nine months ended September 30, 2010 was
$27.7 million, which primarily resulted from net repayments of principal on debt
of $59.1 million ($33.2 million on the Wells Fargo credit facility, $9.9
million, net, on property mortgages, $9.3 million on the secured term loan with
KBC Bank, and $6.8 million on the collateralized debt obligations), $17.4
million used to repurchase our convertible senior notes, and dividends and
distributions paid of $14.0 million, partially offset by proceeds from preferred
stock issuances of $40.1 million and proceeds from common stock issuances of
$23.5 million. Cash used in financing activities during the nine
months ended September 30, 2009 was $84.5 million, which primarily resulted
from net repayments of principal on debt of $75.5 million ($60.1 million on the
Wells Fargo credit facility, $8.4 million, net, on property mortgages, and $7.0
million on the secured term loan with KBC Bank), $12.5 million used to
repurchase our convertible senior notes and collateralized debt obligations, and
dividends and distributions paid of $7.0 million, partially offset by proceeds
from common stock issuances of $10.3 million.
44
See our
consolidated statements of cash flows included in the historical consolidated
financial statements included elsewhere in this filing for a reconciliation of
our cash position for the periods described above.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We may
from time to time make written or oral forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including statements
contained in our filings with the Securities and Exchange Commission and in our
press releases and webcasts. Forward-looking statements relate to
expectations, beliefs, projections, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not
historical facts. In some cases, you can identify forward-looking
statements by terms such as “anticipate,” “believe,” “could,” “estimate,”
“expect,” “intend,” “may,” “plan,” “potential,” “should,” “strategy,” “will” and
other words of similar meaning. The forward-looking statements are
based on our beliefs, assumptions and expectations of future performance, taking
into account all information currently available to us. These
beliefs, assumptions and expectations can change as a result of many possible
events or factors, not all of which are known to us or are within our
control. If a change occurs, our business, financial condition,
liquidity and results of operations may vary materially from those expressed in
our forward-looking statements. In connection with the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995, we are
hereby identifying important factors that could cause actual results and
outcomes to differ materially from those contained in any forward-looking
statement made by or on our behalf. Such factors include, but are not
limited to:
|
·
|
our
ability to renew leases as they expire or lease-up vacant
space;
|
|
·
|
our
ability to close new investment transactions that we have under
contract;
|
|
·
|
our
ability to make additional investments in a timely manner or on acceptable
terms;
|
|
·
|
current
credit market conditions and our ability to obtain long-term financing for
our asset investments in a timely manner and on terms that are consistent
with those we project when we invest in the
asset;
|
|
·
|
access
to capital markets and capital market
conditions;
|
|
·
|
adverse
changes in the financial condition of the tenants underlying our
investments;
|
|
·
|
our
ability to make scheduled payments on our debt
obligations;
|
|
·
|
increases
in our financing costs (including as a result of LIBOR rate increases),
our general and administrative costs and/or our property
expenses;
|
|
·
|
changes
in our industry, the industries of our tenants, interest rates or the
general economy;
|
|
·
|
impairments
in the value of the collateral underlying our investments;
and
|
|
·
|
the
degree and nature of our
competition.
|
These
risks and uncertainties should be considered in evaluating any forward-looking
statement we may make from time to time. Any forward-looking
statement speaks only as of its date. All subsequent written and oral
forward-looking statements attributable to us or any person acting on our behalf
are qualified by the cautionary statements in this section. We
undertake no obligation to update or publicly release any revisions to
forward-looking statements to reflect events, circumstances or changes in
expectations after the date made.
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Market
risk refers to the risk of loss from adverse changes in the level of one or more
market prices, rate indices or other market factors. We are exposed
to market risk primarily from changes in interest rates, credit spreads, tenant
credit ratings and equity prices. We may attempt to mitigate certain
of these risks by entering into hedge and other risk management transactions
during the short-term and fixed-rate financings for the long-term. We
seek to obtain long-term fixed rate financing as soon as practicable after we
make an asset investment. There can be no assurance, however, that
such mitigation strategies will be completely or even partially
successful. The level of our exposure to market risk is subject to
factors beyond our control, including political risk (including terrorism),
monetary and tax policy, general economic conditions and a variety of other
associated risks.
45
Interest
Rate Exposure
We are
exposed to interest rate risk in various aspects of our business. The
most significant ways we can be impacted by interest rates are as follows:
increases in the level of interest rates may impact our ability to add new
assets, as spreads on assets we are targeting may compress (unless there is a
corresponding increase in asset returns). Declines in interest rates could
result in increased competition for our asset class.
Also, to
the extent we finance assets in our portfolio on our floating rate borrowing
facilities, our net income from these fixed rate assets will decrease as
interest rates rise (particularly LIBOR rates) and our borrowing cost
increases. Our Wells Fargo credit facility is currently our only
floating rate borrowing facility. Low market interest rates kept our
borrowing cost on the Wells Fargo credit facility low during 2009 and through
the third quarter of 2010 although we cannot predict the level of market
interest rates in the future. In addition, as interest rates rise,
our anticipated cost to finance these assets on a long-term fixed rate basis may
rise, causing our expected spread on these assets to be reduced. We
may attempt to mitigate these risks by entering into risk management
transactions that react in a manner that offsets our increased interest costs
and by locking our long-term financing cost as soon as practicable after we
commit to an asset. As a result of market conditions, we are not
currently carrying an open interest rate hedge to manage our exposure to
interest rate fluctuations for assets for which we may obtain long-term
financing for in the future. Our decision to do so leaves us exposed
to increases in long-term interest rates for those assets and, therefore, may
make it more difficult or more costly to obtain long-term
financing. As noted above, there can be no assurance that our
mitigation strategies will be successful.
Furthermore,
shifts in the U.S. Treasury yield curve, which represents the market’s
expectations of future interest rates, would also affect the yield required on
our loans and real estate securities. Changes in the required yield
would result in a higher or lower value for these assets. If the
required market yields increase as a result of these interest rate changes, the
value of our loans and real estate securities would decline relative to U.S.
Treasuries. Conversely, if the required market yields decrease as a
result of interest rate changes, the value of our loans and real estate
securities would increase relative to U.S. Treasuries. These changes
in the market value may affect the equity on our balance sheet or, if the value
is less than our cost basis and we determine the losses to be
other-than-temporary, our Statement of Operations through impairment losses on
our loans or securities. These value changes may also affect our
ability to borrow and access capital.
Credit
Spread Curve Exposure
We are
subject to credit spread risk in various aspects of our
business. Credit spreads represent the portion of the required yield
on an income investment attributable to credit quality. Credit
spreads fluctuate over time as investor appetite for credit risk
changes.
Changes
in credit spreads can have many of the same impacts on us as a change in
interest rates, or principally:
|
·
|
increases
in credit spreads can result in spread compression on investments we
target and, thus, a slowing of our new investment
pace;
|
|
·
|
increases
in credit spreads can increase our anticipated cost to finance assets not
yet financed with long-term fixed rate debt, causing our expected spread
on these assets to be reduced; and
|
|
·
|
increases
in credit spreads can lower the value of our loans and securities as
required yields on these assets
increase.
|
Market
conditions since the summer of 2007 have resulted in increases in credit spreads
and generally lower fair valuations for our securities. If these
conditions continue or persist, we may be required to record impairment losses
on our securities, and these losses may be significant.
Tenant
Credit Rating Exposure
Substantially
all of our portfolio assets are subject to risks due to credit rating changes of
the underlying tenant or tenants. Deterioration in the underlying tenant’s
credit rating can result in a lower value for the related asset, which could
result in a reduction in the equity on our balance sheet or, if the value is
less than our cost basis and we determine the loss to be other-than-temporary,
an impairment loss on our Statement of Operations. In addition,
declines in the credit rating of a particular tenant prior to our obtaining
long-term fixed rate financing could result in a margin call by the related
lender, and precipitous declines may significantly impede or eliminate our
ability to finance the asset. We manage these risks by maintaining
diversity among our credits and assessing our aggregate exposure to ratings
classes, in particular lower rated classes. We also seek to lock or
procure long-term financing on our assets as promptly as practicable after we
commit to invest.
46
Equity
Price Risk Exposure
We may
seek to raise capital by sale of our common stock. Our ability to do
so is dependent upon the market price of our common stock and general market
conditions. Any sales we make may be dilutive to existing
stockholders.
Fair
Value
For
certain of our financial instruments, fair values are not readily available
since there are no active trading markets as characterized by current exchanges
between willing parties. Accordingly, we derive or estimate fair
values using various valuation techniques, such as computing the present value
of estimated future cash flows using discount rates commensurate with the risks
involved. However, the determination of estimated cash flows may be subjective
and imprecise. Changes in assumptions or estimation methodologies can
have a material affect on these estimated fair values. The fair
values indicated below are indicative of the interest rate and credit spread
environment as of September 30, 2010, and may not take into consideration the
effects of subsequent interest rate or credit spread fluctuations, or changes in
the ratings of the underlying tenants.
The
following summarizes certain data regarding our interest rate sensitive
instruments as of September 30, 2010:
Carrying
Amount
|
Notional
Amount
|
Weighted
Average
Effective
Interest /
Financing Rate |
Maturity Date
|
Fair Value
|
|||||||||||||||
(dollars
in thousands)
|
|||||||||||||||||||
Assets:
|
|||||||||||||||||||
Loans
held for investment (1)
|
$ | 213,374 | $ | 216,968 | 6.7 | % |
Various
|
$ | 236,180 | ||||||||||
Commercial
mortgage-backed securities (2)
|
151,938 | 189,649 | 7.5 | % |
2012-2028
|
117,708 | |||||||||||||
Structuring
fees receivable
|
474 | N/A | 8.6 | % |
2010-2020
|
474 | |||||||||||||
Liabilities
|
|||||||||||||||||||
Mortgage
notes payable (4)
|
$ | 933,170 | $ | 929,761 | 5.6 | % |
2011-2022
|
$ | 1,001,384 | ||||||||||
Collateralized
debt obligations (4)
|
256,504 | 256,665 | 5.6 | % |
2015
|
229,172 | |||||||||||||
Credit
facility (3)
|
93,092 | 93,092 | 3.4 | % |
2013
|
93,092 | |||||||||||||
Secured
term loan (4)
|
104,783 | 104,783 | 6.0 | % |
2018
|
96,103 | |||||||||||||
Convertible
senior notes (5)
|
33,785 | 35,009 | 10.2 | % |
2012
|
35,971 | |||||||||||||
Other
long-term debt (6)
|
30,930 | 30,930 | 8.3 | % |
2016
|
27,989 |
47
(1)
|
This
portfolio of loans bears interest at fixed rates. We have
estimated the fair value of this portfolio of loans based on sales of
loans with similar credit and structural characteristics where available,
and management’s estimate of fair values where comparable sales
information is not available. The maturity dates for the loans
range from 2011 through 2033.
|
(2)
|
Commercial
mortgage-backed securities represent subordinate interests in
securitizations, as well as pass-through certificates representing our pro
rata investments in a pool of mortgage loans (collectively,
CMBS). Structuring fees receivable represent cash flows
receivable by us from the sale of loans to third-party
purchasers. The notional values for the CMBS are shown at their
respective face amounts. The fair values of CMBS reflect
management’s best estimate and require a considerable amount of judgment
and assumptions. Management evaluates a variety of inputs and
then estimates fair value based on those inputs. The primary
inputs evaluated by management are broker quotations, index pricing,
market yields and credit spreads on securities with similar credit ratings
and duration, collateral values, and liquidity of the
security. Fair value for the structuring fees receivable is
shown at our amortized cost for these items. For the CMBS, we
expect to receive monthly interest coupon payments, and contractual
principal payments as scheduled.
|
(3)
|
Our
credit facility bears interest at floating rates, and we believe that for
similar financial instruments with comparable credit risks, the effective
rates approximate market value. Accordingly, the carrying
amounts outstanding are believed to approximate fair
value.
|
(4)
|
We
estimate the fair value of mortgage notes on real estate investments,
collateralized debt obligations and the secured term loan using a
discounted cash flow analysis, based on our estimates of market interest
rates. For mortgages where we have an early payment right, we
also consider the prepayment amount to evaluate the fair
value. The maturity date of the collateralized debt obligations
of January 2015 reflects the first date the auction call mechanism in the
notes is triggered and is used to compute the related fair value and
weighted average effective interest
rate.
|
(5)
|
The
carry value and effective financing rate on the convertible senior notes
reflect the impact of the new accounting guidance applicable to the notes
as of January 1, 2009. See Note 9 in our consolidated financial
statements included in this Form 10-Q. We estimate the fair
value of our convertible senior notes using a discounted cash flow
analysis, based upon management’s estimates of market interest rates, and
indications of market yields, where available. The maturity
date of our convertible senior notes reflects our expected maturity date
in October 2012 when the note investors have the right to require us to
repurchase their notes for cash and is used to compute the related fair
value and weighted average effective interest
rate.
|
(6)
|
We
estimate the fair value of our other long-term debt using a discounted
cash flow analysis, based upon management’s estimates of market interest
rates. The maturity date of our other long-term debt reflects
our expected maturity date in January 2016 and is used to compute the
related fair value and weighted average effective interest
rate.
|
Scheduled
maturities of interest rate sensitive instruments as of September 30, 2010 are
as follows:
Expected Maturity Dates
|
||||||||||||||||||||||||
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
|||||||||||||||||||
(in thousands, notional amounts where appropriate,
otherwise carrying amounts)
|
||||||||||||||||||||||||
$ | 2,919 | $ | 13,721 | $ | 12,884 | $ | 10,034 | $ | 7,520 | $ | 169,890 | |||||||||||||
Commercial
mortgage-backed securities
|
351 | 3,241 | 26,715 | 4,305 | 7,319 | 147,718 | ||||||||||||||||||
Structuring
fees receivable
|
148 | 72 | 79 | 86 | 49 | 40 | ||||||||||||||||||
Mortgages
on real estate investments
|
4,741 | 35,929 | 131,486 | 69,445 | 67,678 | 623,891 | ||||||||||||||||||
Collateralized
debt obligations
|
2,294 | 10,266 | 10,949 | 26,065 | 19,221 | 187,709 | ||||||||||||||||||
Credit
facility
|
835 | 10,929 | 7,647 | 73,681 | – | – | ||||||||||||||||||
Secured
term loan
|
2,903 | 13,737 | 15,380 | 13,602 | 12,349 | 46,812 | ||||||||||||||||||
Convertible
senior notes
|
(142 | ) | (596 | ) | 34,523 | – | – | – | ||||||||||||||||
Other
long-term debt
|
– | – | – | – | – | 30,930 |
The above
table includes regularly scheduled principal amortization and balloon payments
due to maturity on our debt obligations. See Note 9 in our
consolidated financial statements included in this Form
10-Q. Negative amounts with respect to our convertible senior notes
represent amortization of the debt discount related to the liability component
of the instrument as measured in accordance with the accounting guidance
applicable to the notes. See Note 9 in our consolidated financial
statements included in this Form 10-Q.
The
expected maturity dates shown for loan investments, commercial mortgage-backed
securities and structuring fees receivable are based on the contractual terms of
the underlying assets. These assets, based on our current operating
strategy, are held for investment. The material assumptions used to
determine fair value are included in footnotes 1 through 6 in the immediately
preceding table.
Item
4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined under Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that
are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
48
Pursuant
to Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were
effective.
Changes
in Internal Controls
There has
been no change in our internal control over financial reporting during the
quarter ended September 30, 2010, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II.
|
OTHER
INFORMATION
|
Item
1.
|
Legal
Proceedings
|
From time
to time, we are involved in legal proceedings in the ordinary course of
business. We do not believe that any matter we are currently involved
in will have a material adverse effect on our business, results of operations or
financial condition. However, periodic settlements and/or
professional or other fees and expenses related to any matter could have an
adverse impact on our results of operations in the quarterly or annual period in
which they are recognized.
Item
1A.
|
Risk
Factors
|
The
following additional risk factors should be considered together with the other
Risk Factors included at Item 1A of our Form 10-K for the fiscal year ended
December 31, 2009 filed with the SEC on March 4, 2010.
We
are subject to risks associated with the development of properties.
We have
begun and expect to continue to make new investments through our construction to
acquisition program, where we fund all or substantially all of the construction
costs for a build-to-suit project through a joint venture with the developer
during the construction period, and then acquire the developer’s interest in the
joint venture upon completion of the project. We entered into our
first joint venture under this program during the third quarter 2010 which
contemplates the construction of a warehouse/distribution building in
Louisville, Kentucky with a construction budget of $8.4 million. We
are subject to certain risks associated with the development of this or any
other property we intend to develop, including the following:
|
·
|
Completion
of the project in a timely and workmanlike manner will be dependent upon
the efforts of various parties outside of our control, such as our
developer partner and the general contractor and any
subcontractors. Construction could be delayed if these parties
fail to perform their obligations or for a variety of other reasons
outside of our control, which could subject us to losses for failure to
timely deliver the completed project to the tenant or result in a
termination of the underlying
lease.
|
|
·
|
Unanticipated
environmental conditions at the property could also delay completion of
the project or force us to abandon the project if we determine that
remediation of the conditions would be too
expensive.
|
|
·
|
Construction
costs may exceed original estimates, which could adversely impact our
expected return from the
investment.
|
49
New
rules relating to the accounting for leases could adversely affect our
business.
The
Financial Accounting Standards Board and International Accounting Standards
Board have proposed accounting rules that may take effect in 2012 or 2013 and
would require companies to capitalize all leases on their balance sheets by
recognizing the tenant’s rights and obligations. If the proposal is adopted in
its current form, our financial statements could be materially
impacted. We would be required to account for leases with tenants “on
balance sheet,” with offsetting asset and liability accounts for the expected
future cash flows from the leases. The timing of recognition of
income (but not the amount) from the lease would also change, with generally
greater income expected in the earlier years and lower amounts in the later
years of the lease. Further, because this accounting change would
remove many of the differences in the way companies account for owned property
versus leased property, it could cause companies to favor owning as opposed to
leasing properties. If the proposal is adopted in its current form,
it could also cause companies that lease properties to prefer shorter lease
terms, in an effort to reduce the lease liability required to be recorded on the
balance sheet. The proposal could also make lease renewal options
less attractive, as, under certain circumstances, the rules would require a
tenant to assume that a renewal right would be exercised and accrue a liability
relating to the longer lease term.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None.
Item
3.
|
Defaults
Upon Senior Securities
|
None.
Item
4.
|
[Removed
and Reserved]
|
Item
5.
|
Other
Information
|
None.
Item
6.
|
Exhibits
|
12.1
|
Computation
of ratio of earnings to fixed charges and ratio of earnings to combined
fixed charges and preferred stock dividends
|
31.1
|
Certification
of the Registrant’s Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
31.2
|
Certification
of the Registrant’s Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
32.1
|
Certification
of the Registrant’s Chief Executive Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Certification
of the Registrant’s Chief Financial Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
50
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CAPLEASE,
INC.
|
||
Registrant
|
||
Date: November
5, 2010
|
/s/ Paul H. McDowell
|
|
Paul
H. McDowell
Chairman
and Chief Executive Officer
|
||
Date: November
5, 2010
|
/s/ Shawn P. Seale
|
|
Shawn
P. Seale
Senior
Vice President, Chief Financial Officer
and
Treasurer
|
51