Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - Landmark Apartment Trust, Inc. | c08238exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Landmark Apartment Trust, Inc. | c08238exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Landmark Apartment Trust, Inc. | c08238exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | 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
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-52612
Grubb & Ellis Apartment REIT, Inc.
(Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization) |
20-3975609 (I.R.S. Employer Identification No.) |
|
1551 N. Tustin Avenue, Suite 300, Santa Ana, California (Address of principal executive offices) |
92705 (Zip Code) |
(714) 667-8252
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Sections 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.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o Yes þ No
As of October 31, 2010, there were 19,457,083 shares of common stock of Grubb & Ellis
Apartment REIT, Inc. outstanding.
Grubb & Ellis Apartment REIT, Inc.
(A Maryland Corporation)
TABLE OF CONTENTS
(A Maryland Corporation)
TABLE OF CONTENTS
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
1
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Grubb & Ellis Apartment REIT, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2010 and December 31, 2009
(Unaudited)
As of September 30, 2010 and December 31, 2009
(Unaudited)
September 30, 2010 | December 31, 2009 | |||||||
ASSETS |
||||||||
Real estate investments: |
||||||||
Operating properties, net |
$ | 353,738,000 | $ | 324,938,000 | ||||
Cash and cash equivalents |
7,334,000 | 6,895,000 | ||||||
Accounts and other receivables |
716,000 | 662,000 | ||||||
Restricted cash |
4,827,000 | 4,007,000 | ||||||
Real estate and escrow deposits |
2,370,000 | | ||||||
Identified intangible assets, net |
342,000 | | ||||||
Other assets, net |
2,232,000 | 1,801,000 | ||||||
Total assets |
$ | 371,559,000 | $ | 338,303,000 | ||||
LIABILITIES AND EQUITY |
||||||||
Liabilities: |
||||||||
Mortgage loan payables, net |
$ | 244,251,000 | $ | 217,434,000 | ||||
Unsecured note payable to affiliate |
7,750,000 | 9,100,000 | ||||||
Short term notes |
1,570,000 | | ||||||
Accounts payable and accrued liabilities |
7,532,000 | 5,698,000 | ||||||
Accounts payable due to affiliates |
155,000 | 140,000 | ||||||
Security deposits, prepaid rent and other liabilities |
1,350,000 | 1,162,000 | ||||||
Total liabilities |
262,608,000 | 233,534,000 | ||||||
Commitments and contingencies (Note 7) |
||||||||
Redeemable noncontrolling interest (Note 9) |
| | ||||||
Equity: |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value; 50,000,000 shares authorized;
none issued and outstanding |
| | ||||||
Common stock, $0.01 par value; 300,000,000 shares authorized;
19,236,268 and 17,028,454 shares issued and outstanding as of
September 30, 2010 and December 31, 2009, respectively |
192,000 | 170,000 | ||||||
Additional paid-in capital |
171,181,000 | 151,542,000 | ||||||
Accumulated deficit |
(62,422,000 | ) | (46,943,000 | ) | ||||
Total stockholders equity |
108,951,000 | 104,769,000 | ||||||
Noncontrolling interest (Note 10) |
| | ||||||
Total equity |
108,951,000 | 104,769,000 | ||||||
Total liabilities and equity |
$ | 371,559,000 | $ | 338,303,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents
Grubb & Ellis Apartment REIT, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)
For the Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Rental income |
$ | 8,864,000 | $ | 8,445,000 | $ | 26,130,000 | $ | 25,169,000 | ||||||||
Other property revenues |
1,066,000 | 960,000 | 2,940,000 | 2,873,000 | ||||||||||||
Total revenues |
9,930,000 | 9,405,000 | 29,070,000 | 28,042,000 | ||||||||||||
Expenses: |
||||||||||||||||
Rental expenses |
4,829,000 | 4,793,000 | 13,677,000 | 13,737,000 | ||||||||||||
General and administrative |
326,000 | 333,000 | 1,082,000 | 1,311,000 | ||||||||||||
Acquisition related expenses |
2,806,000 | | 3,606,000 | 12,000 | ||||||||||||
Depreciation and amortization |
3,182,000 | 2,911,000 | 9,367,000 | 8,924,000 | ||||||||||||
Total expenses |
11,143,000 | 8,037,000 | 27,732,000 | 23,984,000 | ||||||||||||
(Loss) income from operations |
(1,213,000 | ) | 1,368,000 | 1,338,000 | 4,058,000 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest expense (including amortization of deferred financing
costs and debt discount): |
||||||||||||||||
Interest expense related to unsecured note payables to affiliate |
(89,000 | ) | (154,000 | ) | (286,000 | ) | (401,000 | ) | ||||||||
Interest expense related to mortgage loan payables |
(2,906,000 | ) | (2,723,000 | ) | (8,454,000 | ) | (8,086,000 | ) | ||||||||
Interest expense related to line of credit |
| (56,000 | ) | | (201,000 | ) | ||||||||||
Interest and dividend income |
6,000 | | 12,000 | 1,000 | ||||||||||||
Net loss |
(4,202,000 | ) | (1,565,000 | ) | (7,390,000 | ) | (4,629,000 | ) | ||||||||
Less: Net loss attributable to noncontrolling interests |
| | | | ||||||||||||
Net loss attributable to controlling interest |
$ | (4,202,000 | ) | $ | (1,565,000 | ) | $ | (7,390,000 | ) | $ | (4,629,000 | ) | ||||
Net loss per common share attributable to controlling
interest basic and diluted |
$ | (0.22 | ) | $ | (0.10 | ) | $ | (0.41 | ) | $ | (0.29 | ) | ||||
Weighted average number of common shares
outstanding basic and diluted |
18,782,212 | 16,384,198 | 18,022,870 | 16,040,551 | ||||||||||||
Distributions declared per common share |
$ | 0.15 | $ | 0.15 | $ | 0.45 | $ | 0.47 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
Grubb & Ellis Apartment REIT, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Nine Months Ended September 30, 2010 and 2009 (Unaudited)
For the Nine Months Ended September 30, 2010 and 2009 (Unaudited)
Stockholders Equity | ||||||||||||||||||||||||||||||||
Common Stock | Redeemable | |||||||||||||||||||||||||||||||
Number of | Additional | Preferred | Accumulated | Noncontrolling | Noncontrolling | |||||||||||||||||||||||||||
Shares | Amount | Paid-In Capital | Stock | Deficit | Interest | Total Equity | Interest | |||||||||||||||||||||||||
BALANCE December 31, 2009 |
17,028,454 | $ | 170,000 | $ | 151,542,000 | $ | | $ | (46,943,000 | ) | $ | | $ | 104,769,000 | $ | | ||||||||||||||||
Issuance of common stock |
2,051,147 | 21,000 | 20,467,000 | | | | 20,488,000 | | ||||||||||||||||||||||||
Offering costs |
| | (2,229,000 | ) | | | | (2,229,000 | ) | | ||||||||||||||||||||||
Issuance of vested and nonvested
restricted common stock |
3,000 | | 6,000 | | | | 6,000 | | ||||||||||||||||||||||||
Issuance of common stock under the DRIP |
342,633 | 3,000 | 3,251,000 | | | | 3,254,000 | | ||||||||||||||||||||||||
Amortization of nonvested common
stock compensation |
| | 14,000 | | | | 14,000 | | ||||||||||||||||||||||||
Repurchase of common stock |
(188,966 | ) | (2,000 | ) | (1,870,000 | ) | | | | (1,872,000 | ) | | ||||||||||||||||||||
Distributions declared |
| | | | (8,089,000 | ) | | (8,089,000 | ) | | ||||||||||||||||||||||
Net loss |
| | | | (7,390,000 | ) | | (7,390,000 | ) | | ||||||||||||||||||||||
BALANCE September 30, 2010 |
19,236,268 | $ | 192,000 | $ | 171,181,000 | $ | | $ | (62,422,000 | ) | $ | | $ | 108,951,000 | $ | | ||||||||||||||||
Stockholders Equity | ||||||||||||||||||||||||||||||||
Common Stock | Redeemable | |||||||||||||||||||||||||||||||
Number of | Additional | Preferred | Accumulated | Noncontrolling | Noncontrolling | |||||||||||||||||||||||||||
Shares | Amount | Paid-In Capital | Stock | Deficit | Interest | Total Equity | Interest | |||||||||||||||||||||||||
BALANCE December 31, 2008 |
15,488,810 | $ | 155,000 | $ | 137,775,000 | $ | | $ | (31,225,000 | ) | $ | | $ | 106,705,000 | $ | | ||||||||||||||||
Issuance of common stock |
919,862 | 9,000 | 9,187,000 | | | | 9,196,000 | | ||||||||||||||||||||||||
Offering costs |
| | (1,010,000 | ) | | | | (1,010,000 | ) | | ||||||||||||||||||||||
Issuance of vested and nonvested
restricted common stock |
4,000 | | 8,000 | | | | 8,000 | | ||||||||||||||||||||||||
Issuance of common stock under the
DRIP |
350,131 | 4,000 | 3,323,000 | | | | 3,327,000 | | ||||||||||||||||||||||||
Amortization of nonvested common
stock compensation |
| | 13,000 | | | | 13,000 | | ||||||||||||||||||||||||
Forfeiture of nonvested shares
of commom stock |
(2,000 | ) | | (2,000 | ) | | | | (2,000 | ) | | |||||||||||||||||||||
Repurchase of common stock |
(192,676 | ) | (2,000 | ) | (1,858,000 | ) | | | | (1,860,000 | ) | | ||||||||||||||||||||
Distributions declared |
| | | | (7,481,000 | ) | | (7,481,000 | ) | | ||||||||||||||||||||||
Net loss |
| | | | (4,629,000 | ) | | (4,629,000 | ) | | ||||||||||||||||||||||
BALANCE September 30, 2009 |
16,568,127 | $ | 166,000 | $ | 147,436,000 | $ | | $ | (43,335,000 | ) | $ | | $ | 104,267,000 | $ | | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial
statements.
4
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Grubb & Ellis Apartment REIT, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2010 and 2009
(Unaudited)
For the Nine Months Ended September 30, 2010 and 2009
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (7,390,000 | ) | $ | (4,629,000 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation and amortization (including deferred financing costs and debt discount) |
9,649,000 | 9,277,000 | ||||||
Gain on property insurance settlements |
| (101,000 | ) | |||||
Stock based compensation, net of forfeitures |
20,000 | 19,000 | ||||||
Bad debt expense |
160,000 | 388,000 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts and other receivables |
(315,000 | ) | (427,000 | ) | ||||
Other assets, net |
(270,000 | ) | 90,000 | |||||
Accounts payable and accrued liabilities |
1,319,000 | 939,000 | ||||||
Accounts payable due to affiliates |
6,000 | (563,000 | ) | |||||
Security deposits, prepaid rent and other liabilities |
(347,000 | ) | (340,000 | ) | ||||
Net cash provided by operating activities |
2,832,000 | 4,653,000 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Acquisition of real estate operating properties |
(36,713,000 | ) | (469,000 | ) | ||||
Capital expenditures |
(1,197,000 | ) | (975,000 | ) | ||||
Proceeds from property insurance settlements |
153,000 | 194,000 | ||||||
Restricted cash |
(820,000 | ) | (924,000 | ) | ||||
Real estate and escrow deposits |
(800,000 | ) | | |||||
Net cash used in investing activities |
(39,377,000 | ) | (2,174,000 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Borrowings on mortgage loan payables |
27,200,000 | | ||||||
Payments on mortgage loan payables |
(484,000 | ) | (309,000 | ) | ||||
Payments on unsecured note payables to affiliate |
(1,350,000 | ) | | |||||
Payments on the line of credit |
| (1,800,000 | ) | |||||
Deferred financing costs |
(293,000 | ) | (4,000 | ) | ||||
Security deposits |
255,000 | 296,000 | ||||||
Proceeds from issuance of common stock |
20,488,000 | 9,193,000 | ||||||
Repurchase of common stock |
(1,872,000 | ) | (1,860,000 | ) | ||||
Payment of offering costs |
(2,220,000 | ) | (1,167,000 | ) | ||||
Distributions paid |
(4,740,000 | ) | (4,226,000 | ) | ||||
Net cash provided by financing activities |
36,984,000 | 123,000 | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
439,000 | 2,602,000 | ||||||
CASH AND CASH EQUIVALENTS Beginning of period |
6,895,000 | 2,664,000 | ||||||
CASH AND CASH EQUIVALENTS End of period |
$ | 7,334,000 | $ | 5,266,000 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid for: |
||||||||
Interest |
$ | 8,420,000 | $ | 8,373,000 | ||||
Income taxes |
$ | 148,000 | $ | 97,000 | ||||
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: |
||||||||
Investing Activities: |
||||||||
Accrued capital expenditures |
$ | 83,000 | $ | 35,000 | ||||
The following represents the increase in certain assets and liabilities
in connection with our acquisitions of operating properties: |
||||||||
Other assets |
$ | 49,000 | $ | | ||||
Accounts payable and accrued liabilities |
$ | 364,000 | $ | | ||||
Security deposits, prepaid rent and other liabilities |
$ | 230,000 | $ | | ||||
Financing Activities: |
||||||||
Issuance of common stock under the DRIP |
$ | 3,254,000 | $ | 3,327,000 | ||||
Distributions declared but not paid |
$ | 942,000 | $ | 826,000 | ||||
Accrued offering costs |
$ | 53,000 | $ | 30,000 | ||||
Receivable for issuance of common stock |
$ | | $ | 87,000 | ||||
Investing and Financing Activities: |
||||||||
Issuance of short term notes for real estate deposits |
$ | 1,570,000 | $ | |
The accompanying notes are an integral part of these condensed consolidated financial
statements.
5
Table of Contents
Grubb & Ellis Apartment REIT, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three and Nine Months Ended September 30, 2010 and 2009
For the Three and Nine Months Ended September 30, 2010 and 2009
The use of the words we, us or our refers to Grubb & Ellis Apartment REIT, Inc. and its
subsidiaries, including Grubb & Ellis Apartment REIT Holdings, LP, except where the context
otherwise requires.
1. Organization and Description of Business
Grubb & Ellis Apartment REIT, Inc., a Maryland corporation, was incorporated on December 21,
2005. We were initially capitalized on January 10, 2006, and therefore, we consider that our date
of inception. We seek to purchase and hold a diverse portfolio of quality apartment communities
with stable cash flows and growth potential in select United States of America, or U.S.,
metropolitan areas. We may also acquire real estate-related investments. We focus primarily on
investments that produce current income. We have qualified and elected to be taxed as a real estate
investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, for federal income
tax purposes and we intend to continue to be taxed as a REIT.
We commenced a best efforts initial public offering on July 19, 2006, or our initial offering,
in which we offered 100,000,000 shares of our common stock for $10.00 per share and up to 5,000,000
shares of our common stock pursuant to the distribution reinvestment plan, or the DRIP, for $9.50
per share, for a maximum offering of up to $1,047,500,000. We terminated our initial offering on
July 17, 2009. As of July 17, 2009, we had received and accepted subscriptions in our initial
offering for 15,738,457 shares of our common stock, or $157,218,000, excluding shares of our common
stock issued pursuant to the DRIP.
On July 20, 2009, we commenced a best efforts follow-on public offering, or our follow-on
offering, in which we are offering to the public up to 105,000,000 shares of our common stock. Our
follow-on offering includes up to 100,000,000 shares of our common stock for sale at $10.00 per
share in our primary offering and up to 5,000,000 shares of our common stock for sale pursuant to
the DRIP at $9.50 per share, for a maximum offering of up to $1,047,500,000. We reserve the right
to reallocate the shares of our common stock we are offering between the primary offering and the
DRIP. As of September 30, 2010, we had received and accepted subscriptions in our follow-on
offering for 2,642,006 shares of our common stock, or $26,390,000, excluding shares of our common
stock issued pursuant to the DRIP.
We conduct substantially all of our operations through Grubb & Ellis Apartment REIT Holdings,
LP, or our operating partnership. We are currently externally advised by Grubb & Ellis Apartment
REIT Advisor, LLC, or our advisor, pursuant to an advisory agreement, as amended and restated, or
the Advisory Agreement, between us and our advisor. The Advisory Agreement expires
on December 31, 2010. Our advisor supervises and manages our day-to-day operations and selects the
real estate and real estate-related investments we acquire, subject to the oversight and approval
of our board of directors. Our advisor also provides marketing, sales and client services on our
behalf. Our advisor is affiliated with us in that we and our advisor have common officers, some of
whom also own an indirect equity interest in our advisor. Our advisor engages affiliated entities,
including Grubb & Ellis Residential Management, Inc., or Residential Management, to provide various
services to us, including property management services. Our advisor is managed by, and is a wholly
owned subsidiary of, Grubb & Ellis Equity Advisors, LLC, or Grubb & Ellis Equity Advisors, which is
a wholly owned subsidiary of Grubb & Ellis Company, or Grubb & Ellis, or our sponsor. Effective
January 13, 2010, Grubb & Ellis Equity Advisors purchased all of the rights, title and interests in
our advisor and Grubb & Ellis Apartment Management, LLC, held by Grubb & Ellis Realty Investors,
LLC, or Grubb & Ellis Realty Investors, which previously served as the managing member of our
advisor. See Note 15, Subsequent Events Termination of Advisory Agreement, for a further
discussion of the termination of the Advisory Agreement.
As of September 30, 2010, we owned nine properties in Texas consisting of 2,573 apartment units,
two properties in Georgia consisting of 496 apartment units, two properties in Virginia consisting
of 394 apartment units, one property in Tennessee consisting of 350 apartment units and one
property in North Carolina consisting of 160
apartment units for an aggregate of 15
properties consisting of 3,973 apartment units, which had an aggregate purchase price of
$377,787,000.
6
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Grubb & Ellis Apartment REIT, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
We entered into definitive agreements on August 27, 2010 to acquire nine multifamily apartment
properties from affiliates of MR Holdings, LLC, or MR Holdings, and to acquire substantially all of
the assets and certain liabilities of Mission Residential Management, LLC, or Mission Residential
Management, for total consideration valued at approximately $182,357,000, based on purchase price.
We are not affiliated with MR Holdings or Mission Residential Management. See Note 15, Subsequent
Events Acquisition of Substantially all of the Assets and Certain Liabilities of Mission
Residential Management, for a further discussion of the acquisition of substantially all of the
assets and certain liabilities of Mission Residential Management.
On September 30, 2010, we acquired the first of the nine multifamily apartment properties,
Mission Rock Ridge Apartments located in Arlington, Texas, or the Mission Rock Ridge property. The
remaining eight proposed property acquisitions from Delaware
statutory trusts for which an affiliate of MR Holdings serves as
trustee, or the DST properties, are still
subject to substantial closing conditions. There is no assurance that any of these conditions will
be satisfied and we currently cannot predict if or when any of these additional proposed property
acquisitions will close. See Note 3, Real Estate Investments Acquisitions in Real Estate
Investments, for a further discussion.
2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding our condensed consolidated financial statements. Such condensed consolidated
financial statements and the accompanying notes thereto are the representations of our management,
who are responsible for their integrity and objectivity. These accounting policies conform to
accounting principles generally accepted in the United States of America, or GAAP, in all material
respects, and have been consistently applied in preparing our accompanying condensed consolidated
financial statements.
Basis of Presentation
Our accompanying condensed consolidated financial statements include our accounts and those of
our operating partnership, the wholly owned subsidiaries of our operating partnership and any
variable interest entities, or VIEs, as defined in Financial Accounting Standards Board, or FASB,
Accounting Standards Codification, or ASC, Topic 810, Consolidation, or ASC Topic 810, which we
have concluded should be consolidated. We operate in an umbrella partnership REIT structure in
which wholly owned subsidiaries of our operating partnership own all properties we acquire. We are
the sole general partner of our operating partnership, and as of September 30, 2010 and December
31, 2009, we owned a 99.99% general partnership interest in our operating partnership. As of
September 30, 2010 and December 31, 2009, our advisor owned a 0.01% limited partnership interest in
our operating partnership and is a special limited partner in our operating partnership. Our
advisor is also entitled to certain special limited partnership rights under the partnership
agreement for our operating partnership. Because we are the sole general partner of our operating
partnership and have unilateral control over its management and major operating decisions, the
accounts of our operating partnership are consolidated in our condensed consolidated financial
statements. All significant intercompany accounts and transactions are eliminated in consolidation.
We had an accumulated deficit of $62,422,000 as of September 30, 2010. As discussed further in
Note 6, Mortgage Loan Payables, Net, Unsecured Note Payable to Affiliate and Short Term Notes
Unsecured Note Payable to Affiliate, as of September 30, 2010, we had an outstanding principal
amount under an unsecured note payable to affiliate of $7,750,000, which is due on July 17, 2012.
We plan to either repay the unsecured note payable to affiliate using cash on hand or replace the
unsecured note payable with permanent financing or an interim line of credit.
Interim Unaudited Financial Data
Our accompanying condensed consolidated financial statements have been prepared by us in
accordance with GAAP in conjunction with the rules and regulations of the U. S. Securities and
Exchange Commission, or the SEC.
Certain information and footnote disclosures required for annual financial statements have
been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying
condensed consolidated financial statements do not include all of the information and footnotes
required by GAAP for complete financial statements.
7
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Grubb & Ellis Apartment REIT, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Our accompanying condensed consolidated financial statements reflect all adjustments which
are, in our view, of a normal recurring nature and necessary for a fair presentation of our
financial position, results of operations and cash flows for the interim period. Interim results of
operations are not necessarily indicative of the results to be expected for the full year; such
full year results may be less favorable.
In preparing our accompanying condensed consolidated financial statements, management has
evaluated subsequent events through the financial statement issuance date. We believe that although
the disclosures contained herein are adequate to prevent the information presented from being
misleading, our accompanying condensed consolidated financial statements should be read in
conjunction with our audited consolidated financial statements and the notes thereto included in
our 2009 Annual Report on Form 10-K, as filed with the SEC on March 19, 2010.
Real Estate and Escrow Deposits
Real estate and escrow deposits consists of deposits paid on real estate investments that we
anticipate acquiring in future periods. As of September 30, 2010, this includes $800,000 in earnest
money deposits paid in relation to the proposed acquisition of substantially all of the assets and
certain liabilities of Mission Residential Management and will be applied towards the purchase
price and $1,570,000 in short term promissory notes signed as earnest money deposits in connection
with the proposed acquisition of the DST properties. See Note 6, Mortgage Loan Payables, Net,
Unsecured Note Payable to Affiliate and Short Term Notes Short Term Notes, for a further
discussion.
Segment Disclosure
ASC Topic 280, Segment Reporting, establishes standards for reporting financial and
descriptive information about a public entitys reportable segments. We have determined that we
have one reportable segment, with activities related to investing in apartment communities. Our
investments in real estate are geographically diversified and management evaluates operating
performance on an individual property level. However, as each of our apartment communities has
similar economic characteristics, tenants and products and services, our apartment communities have
been aggregated into one reportable segment for the three and nine months ended September 30, 2010
and 2009.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 166,
Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140, or SFAS No.
166 (now contained in ASC Topic 860, Transfer and Servicing, or ASC Topic 860). SFAS No. 166
removes the concept of a qualifying special-purpose entity from SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (now contained in ASC
Topic 860), and removes the exception from applying Financial Accounting Standards Board
Interpretation, or FIN, No. 46(R), Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51, as revised, or FIN No. 46(R) (now contained in ASC Topic
810). SFAS No. 166 also clarifies the requirements for isolation and limitations on portions of
financial assets that are eligible for sale accounting. SFAS No. 166 is effective for financial
asset transfers occurring after the beginning of an entitys first fiscal year that begins after
November 15, 2009. Early adoption was prohibited. We adopted SFAS No. 166 on January 1, 2010. The
adoption of SFAS No. 166 did not have a material impact on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), or
SFAS No. 167 (now contained in ASC Topic 810), which amends the consolidation guidance applicable
to VIEs. The amendments to the overall consolidation guidance affect all entities previously within
the scope of FIN No. 46(R), as well as qualifying special-purpose entities that were excluded from
the scope of FIN No. 46(R). Specifically, an enterprise will need to reconsider its conclusion
regarding whether an entity is a VIE, whether the enterprise is the VIEs primary beneficiary and
what type of financial statement disclosures are required. SFAS No. 167 is effective as of the
beginning of the first fiscal year that begins after November 15, 2009. Early adoption was
prohibited. We adopted SFAS No. 167 on January 1, 2010. The adoption of SFAS No. 167 did not have a
material impact on our consolidated financial statements.
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Grubb & Ellis Apartment REIT, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
In January 2010, the FASB issued Accounting Standards Update, or ASU, 2010-06, Improving
Disclosures about Fair Value Measurements, or ASU 2010-06. ASU 2010-06 amends ASC Topic 820, Fair
Value Measurements and Disclosures, or ASC Topic 820, to require additional disclosure and clarify
existing disclosure requirements about fair value measurements. ASU 2010-06 requires entities to
provide fair value disclosures by each class of assets and liabilities, which may be a subset of
assets and liabilities within a line item in the statement of financial position. The additional
requirements also include disclosure regarding the amounts and reasons for significant transfers in
and out of Level 1 and 2 of the fair value hierarchy and separate presentation of purchases, sales,
issuances and settlements of items within Level 3 of the fair value hierarchy. The guidance
clarifies existing disclosure requirements regarding the inputs and valuation techniques used to
measure fair value for measurements that fall in either Level 2 or Level 3 of the hierarchy. ASU
2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009
except for the disclosures about purchases, sales, issuances and settlements, which disclosure
requirements are effective for fiscal years beginning after December 15, 2010 and for interim
periods within those fiscal years. We adopted ASU 2010-06 on January 1, 2010, which only applies to
our disclosures on fair value of financial instruments. The adoption of ASU 2010-06 did not have a
material impact on our footnote disclosures. We have provided these disclosures in Note 11, Fair
Value of Financial Instruments.
In August 2010, the FASB issued ASU 2010-21, Accounting for Technical Amendments to Various
SEC Rules and Schedules, or ASU 2010-21. ASU 2010-21 updates various SEC paragraphs pursuant to the
issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification
of Financial Reporting Policies. The changes affect provisions relating to consolidation and
reporting requirements under conditions of majority and minority ownership positions and ownership
by both controlling and noncontrolling entities. The amendments also deal with redeemable and
non-redeemable preferred stocks and convertible preferred stocks. We adopted ASU 2010-21 upon
issuance in August 2010. The adoption of ASU 2010-21 did not have a material impact on our
consolidated financial statements.
In August 2010, the FASB issued ASU 2010-22, Accounting for Various Topics Technical
Corrections to SEC Paragraphs, or ASU 2010-22. ASU 2010-22 amends various SEC paragraphs based on
external comments received and the issuance of Staff Accounting Bulletin, or SAB, 112, which amends
or rescinds portions of certain SAB topics. The topics affected include reporting of inventories in
condensed financial statements for Form 10-Q, debt issue costs in conjunction with a business
combination, business combinations prior to an initial public offering, accounting for
divestitures, and accounting for oil and gas exchange offers. We adopted ASU 2010-22 upon issuance
in August 2010. The adoption of ASU 2010-22 did not have a material impact on our consolidated
financial statements.
3. Real Estate Investments
Our investments in our consolidated properties consisted of the following as of September 30,
2010 and December 31, 2009:
September 30, 2010 | December 31, 2009 | |||||||
Land |
$ | 45,747,000 | $ | 41,926,000 | ||||
Land improvements |
24,266,000 | 22,066,000 | ||||||
Building and improvements |
304,550,000 | 274,199,000 | ||||||
Furniture, fixtures and equipment |
12,239,000 | 10,799,000 | ||||||
386,802,000 | 348,990,000 | |||||||
Less: accumulated depreciation |
(33,064,000 | ) | (24,052,000 | ) | ||||
$ | 353,738,000 | $ | 324,938,000 | |||||
Depreciation expense for the three months ended September 30, 2010 and 2009 was $3,072,000 and
$2,911,000, respectively, and for the nine months ended September 30, 2010 and 2009 was $9,147,000
and $8,675,000, respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Acquisitions of Real Estate Investments
Acquisitions during the nine months ended September 30, 2010 are detailed below. We reimburse
our advisor or its affiliates for acquisition expenses related to selecting, evaluating, acquiring
and investing in properties. The reimbursement of acquisition expenses, acquisition fees and real
estate commissions and other fees paid to unaffiliated parties will not exceed, in the aggregate,
6.0% of the purchase price or total development costs, unless fees in excess of such limits are
approved by a majority of our disinterested independent directors. As of September 30, 2010 and
December 31, 2009, such fees and expenses did not exceed 6.0% of the purchase price of our
acquisitions.
Acquisitions in 2010
Bella Ruscello Luxury Apartment Homes Duncanville, Texas
On March 24, 2010, we purchased Bella Ruscello Luxury Apartment Homes, located in Duncanville,
Texas, or the Bella Ruscello property, for a purchase price of $17,400,000, plus closing costs,
from an unaffiliated party. We financed the purchase price of the Bella Ruscello property with a
$13,300,000 secured loan and the remaining balance using proceeds from our follow-on offering. We
paid an acquisition fee of $522,000, or 3.0% of the purchase price, to our advisor and its
affiliate.
Mission Rock Ridge Apartments Arlington, Texas
On September 30, 2010, we purchased the Mission Rock Ridge property for a purchase price of
$19,857,000, plus closing costs, from an unaffiliated party. We financed the purchase price of the
Mission Rock Ridge property with a $13,900,000 secured loan and the remaining balance using
proceeds from our follow-on offering. We paid an acquisition fee of $596,000, or 3.0% of the
purchase price, to our advisor and its affiliate.
Proposed Acquisitions
We entered into definitive agreements on August 27, 2010 to acquire nine multifamily apartment
properties from affiliates of MR Holdings and to acquire substantially all of the assets and
certain liabilities of Mission Residential Management, for total consideration valued at
approximately $182,357,000, based on purchase price. We are not affiliated with MR Holdings or
Mission Residential Management.
As
disclosed above, we acquired the first of the nine multifamily
apartment properties, the
Mission Rock Ridge property, on September 30, 2010. The proposed acquisition of the remaining eight
DST properties from Delaware statutory trusts for which an affiliate
of MR Holdings serves as trustee for a total consideration valued at approximately $157,000,000,
including approximately $32,400,000 of limited partnership interests in our operating partnership,
or OP Units, with each OP Unit valued at $9.00 per unit,
and the assumption of approximately $124,600,000 of in-place mortgage indebtedness encumbering
the DST properties, is still subject to substantial closing conditions. There is no assurance that
any of these conditions will be satisfied and we currently cannot predict if or when any of these
additional proposed acquisitions will close.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
4. Identified Intangible Assets, Net
Identified intangible assets, net are a result of the purchase of the Bella Ruscello property
and the Mission Rock Ridge property and consisted of the following as of September 30, 2010 and
December 31, 2009:
September 30, 2010 | December 31, 2009 | |||||||
In place leases, net of accumulated amortization of $0 as of September 30, 2010
and December 31, 2009 (with a weighted average remaining life of 5
months and 0 months as of September 30, 2010 and December 31, 2009, respectively) |
$ | 211,000 | $ | | ||||
Tenant relationships, net of accumulated amortization of $25,000 and $0 as of September 30, 2010
and December 31, 2009, respectively, (with a weighted average remaining life of 15
months and 0 months as of September 30, 2010 and December 31, 2009, respectively) |
131,000 | | ||||||
$ | 342,000 | $ | | |||||
Amortization expense recorded on the identified intangible assets for the three months ended
September 30, 2010 and 2009 was $110,000 and $0, respectively, and for the nine months ended
September 30, 2010 and 2009 was $220,000 and $249,000, respectively.
Estimated amortization expense on the identified intangible assets as of September 30, 2010,
for the three months ending December 31, 2010 and for each of the next four years ending December
31 and thereafter, is as follows:
Year | Amount | |||
2010 |
$ | 153,000 | ||
2011 |
$ | 179,000 | ||
2012 |
$ | 10,000 | ||
2013 |
$ | | ||
2014 |
$ | | ||
Thereafter |
$ | |
5. Other Assets, Net
Other assets, net consisted of the following as of September 30, 2010 and December 31, 2009:
September 30, 2010 | December 31, 2009 | |||||||
Deferred financing costs, net of accumulated amortization of
$621,000 and
$440,000 as of September 30, 2010 and December 31, 2009, respectively |
$ | 1,547,000 | $ | 1,435,000 | ||||
Prepaid expenses and deposits |
685,000 | 366,000 | ||||||
$ | 2,232,000 | $ | 1,801,000 | |||||
Amortization expense recorded on the deferred financing costs for the three months ended
September 30, 2010 and 2009 was $62,000 and $85,000, respectively, and for the nine months ended
September 30, 2010 and 2009 was $181,000 and $251,000, respectively, which is included in interest
expense in our accompanying condensed consolidated statements of operations.
6. Mortgage Loan Payables, Net, Unsecured Note Payable to Affiliate and Short Term Notes
Mortgage Loan Payables, Net
Mortgage loan payables were $244,811,000 ($244,251,000, net of discount) and $218,095,000
($217,434,000, net of discount) as of September 30, 2010 and December 31, 2009, respectively. As of
September 30, 2010, we had 12 fixed rate and three variable rate mortgage loans with effective
interest rates ranging from 2.51% to 5.94% per annum and a weighted average effective interest rate
of 4.74% per annum. As of September 30, 2010, we had $183,811,000 ($183,251,000, net of discount)
of fixed rate debt, or 75.1% of mortgage loan payables, at a weighted average interest rate of
5.47% per annum and $61,000,000 of variable rate debt, or 24.9% of mortgage loan payables, at a
weighted average effective interest rate of 2.54% per annum. As of December 31, 2009, we had 10
fixed rate mortgage loans and three variable rate mortgage loans with effective interest rates
ranging from 2.42% to
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
5.94% per annum and a weighted average effective interest rate of 4.70% per annum. As of
December 31, 2009, we had $157,095,000 ($156,434,000, net of discount) of fixed rate debt, or 72.0%
of mortgage loan payables, at a weighted average interest rate of 5.58% per annum and $61,000,000
of variable rate debt, or 28.0% of mortgage loan payables, at a weighted average effective interest
rate of 2.45% per annum.
We are required by the terms of certain loan documents to meet certain financial covenants,
such as minimum net worth and liquidity amounts, and reporting requirements. As of September 30,
2010 and December 31, 2009, we were in compliance with all such requirements. Most of the mortgage
loan payables may be prepaid in whole but not in part, subject to prepayment premiums. Eleven of
our mortgage loan payables currently have monthly interest-only payments. The mortgage loan
payables associated with Residences at Braemar, Towne Crossing Apartments, Arboleda Apartments and
the Bella Ruscello property currently require monthly principal and interest payments.
Mortgage loan payables, net consisted of the following as of September 30, 2010 and December
31, 2009:
Property | Interest Rate | Maturity Date | September 30, 2010 | December 31, 2009 | ||||||||||||
Fixed Rate Debt: |
||||||||||||||||
Hidden Lake Apartment Homes |
5.34 | % | 01/11/17 | $ | 19,218,000 | $ | 19,218,000 | |||||||||
Walker Ranch Apartment Homes |
5.36 | % | 05/11/17 | 20,000,000 | 20,000,000 | |||||||||||
Residences at Braemar |
5.72 | % | 06/01/15 | 9,231,000 | 9,355,000 | |||||||||||
Park at Northgate |
5.94 | % | 08/01/17 | 10,295,000 | 10,295,000 | |||||||||||
Baypoint Resort |
5.94 | % | 08/01/17 | 21,612,000 | 21,612,000 | |||||||||||
Towne Crossing Apartments |
5.04 | % | 11/01/14 | 14,588,000 | 14,789,000 | |||||||||||
Villas of El Dorado |
5.68 | % | 12/01/16 | 13,600,000 | 13,600,000 | |||||||||||
The Heights at Olde Towne |
5.79 | % | 01/01/18 | 10,475,000 | 10,475,000 | |||||||||||
The Myrtles at Olde Towne |
5.79 | % | 01/01/18 | 20,100,000 | 20,100,000 | |||||||||||
Arboleda Apartments |
5.36 | % | 04/01/15 | 17,559,000 | 17,651,000 | |||||||||||
Bella Ruscello Luxury Apartment
Homes |
5.53 | % | 04/01/20 | 13,233,000 | | |||||||||||
Mission Rock Ridge Apartments |
4.20 | % | 10/01/20 | 13,900,000 | | |||||||||||
183,811,000 | 157,095,000 | |||||||||||||||
Variable Rate Debt: |
||||||||||||||||
Creekside Crossing |
2.51 | %* | 07/01/15 | 17,000,000 | 17,000,000 | |||||||||||
Kedron Village |
2.53 | %* | 07/01/15 | 20,000,000 | 20,000,000 | |||||||||||
Canyon Ridge Apartments |
2.56 | %* | 10/01/15 | 24,000,000 | 24,000,000 | |||||||||||
61,000,000 | 61,000,000 | |||||||||||||||
Total fixed and variable rate debt |
244,811,000 | 218,095,000 | ||||||||||||||
Less: discount |
(560,000 | ) | (661,000 | ) | ||||||||||||
Mortgage loan payables, net |
$ | 244,251,000 | $ | 217,434,000 | ||||||||||||
* | Represents the per annum interest rate in effect as of September 30, 2010. In addition, pursuant to the terms of the related loan documents, the maximum variable interest rate allowable is capped at rates ranging from 6.5% to 6.75% per annum. |
The principal payments due on our mortgage loan payables as of September 30, 2010, for the
three months ending December 31, 2010 and for each of the next four years ending December 31 and
thereafter, is as follows:
Year | Amount | |||
2010 |
$ | 213,000 | ||
2011 |
$ | 875,000 | ||
2012 |
$ | 953,000 | ||
2013 |
$ | 1,571,000 | ||
2014 |
$ | 15,380,000 | ||
Thereafter |
$ | 225,819,000 |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The table above does not reflect any available extension options. Of the amounts maturing in
2014, $13,346,000 in mortgage loan payables have a one year extension available.
Unsecured Note Payable to Affiliate
The unsecured note payable to NNN Realty Advisors, Inc., or NNN Realty Advisors, a wholly
owned subsidiary of our sponsor, is evidenced by an unsecured promissory note, which required
monthly interest-only payments for the term of the note, had a fixed interest rate of 4.50% per
annum that was subject to a one-time adjustment, had a default interest rate of 2.00% per annum in
excess of the interest rate then in effect and had a maturity date of January 1, 2011. On
August 11, 2010, we executed an amended and restated consolidated unsecured promissory note, or the
Amended Consolidated Promissory Note. The material terms of the Amended Consolidated Promissory
Note amended the principal amount outstanding to $7,750,000 due to our pay down of the principal
balance, extended the maturity date from January 1, 2011 to July 17, 2012 and fixed the interest
rate at 4.50% per annum and the default interest rate at 6.50% per annum. As of September 30, 2010
and December 31, 2009, the outstanding principal amount under the unsecured note payable to
affiliate was $7,750,000 and $9,100,000, respectively.
Because this loan is a related party loan, the terms of the loan and the unsecured promissory
note were approved by our board of directors, including a majority of our independent directors,
and were deemed fair, competitive and commercially reasonable by our board of directors.
Short Term Notes
In connection with the proposed acquisition of the eight DST properties, we issued promissory
notes as earnest money deposits in the aggregate amount of $1,570,000, or the DST promissory notes,
to MR Holdings which equates to 1.0% of the purchase price of each property. The DST promissory
notes do not bear interest. The DST promissory notes shall be returned to us in the event the
acquisitions fail to close by MR Holdings default of the purchase agreement or upon the close of
each acquisition pursuant to the terms and conditions of each respective purchase agreement and
will not be credited toward the purchase price of each respective acquisition. However, if we
default under the terms of a purchase agreement, the respective DST promissory note shall be due
and payable to MR Holdings as liquidated damages and its sole remedy.
7. Commitments and Contingencies
Litigation
We are not presently subject to any material litigation nor, to our knowledge, is any material
litigation threatened against us, which if determined unfavorably to us, would have a material
adverse effect on our consolidated financial position, results of operations or cash flows.
Environmental Matters
We follow a policy of monitoring our properties for the presence of hazardous or toxic
substances. While there can be no assurance that a material environmental liability does not exist
at our properties, we are not currently aware of any environmental liability with respect to our
properties that would have a material effect on our consolidated financial position, results of
operations or cash flows. Further, we are not aware of any material environmental liability or any
unasserted claim or assessment with respect to an environmental liability that we believe would
require additional disclosure or the recording of a loss contingency.
Other Organizational and Offering Expenses
Our organizational and offering expenses, other than selling commissions and the dealer
manager fee, incurred in connection with our follow-on offering are paid by our advisor or its
affiliates on our behalf. Other organizational and offering expenses include all expenses (other
than selling commissions and the dealer manager fee, which generally represent 7.0% and 3.0% of the
gross proceeds of our follow-on offering, respectively) to be paid by us in connection with our
follow-on offering. These other organizational and offering expenses will only become our
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
liability to the extent other organizational and offering expenses do not exceed 1.0% of the gross offering
proceeds from the sale of shares of our common stock in our follow-on offering, other than shares
of our common stock sold pursuant to the DRIP. As of September 30, 2010 and December 31, 2009, our
advisor or its affiliates had incurred cumulative expenses on our behalf of $2,339,000 and
$1,551,000, respectively, in excess of 1.0% of the gross proceeds from our follow-on offering, and,
therefore, these expenses are not recorded in our accompanying condensed consolidated financial
statements as of September 30, 2010 and December 31, 2009. To the extent we raise additional funds
from our follow-on offering, these amounts may become our liability.
When recorded by us, other organizational expenses will be expensed as incurred, and offering
expenses are deferred and charged to stockholders equity as such amounts are reimbursed to our
advisor or its affiliates from the gross proceeds of our follow-on offering. See Note 8, Related
Party Transactions Offering Stage, for a further discussion of other organizational and offering
expenses.
Other
Our other commitments and contingencies include the usual obligations of real estate owners
and operators in the normal course of business. In our view, these matters are not expected to have
a material adverse effect on our consolidated financial position, results of operations or cash
flows.
8. Related Party Transactions
Fees and Expenses Paid to Affiliates
All of our executive officers and our non-independent directors are also executive officers
and employees and/or holders of a direct or indirect interest in our advisor or our sponsor. We
entered into the Advisory Agreement with our advisor and a dealer manager agreement with Grubb &
Ellis Securities, Inc., or Grubb & Ellis Securities, or our dealer manager. These agreements
entitle our advisor, our dealer manager and their affiliates to specified compensation for certain
services, as well as reimbursement of certain expenses. In the aggregate, for the three months
ended September 30, 2010 and 2009, we incurred $2,883,000 and $1,675,000, respectively, and for the
nine months ended September 30, 2010 and 2009, we incurred $7,618,000 and $5,171,000, respectively,
in compensation and expense reimbursements to our advisor or its affiliates as detailed below. Each
of these agreements will terminate on December 31, 2010.
Offering Stage
Selling Commissions
Initial Offering
Pursuant to our initial offering, our dealer manager received selling commissions of up to
7.0% of the gross offering proceeds from the sale of shares of our common stock in our initial
offering, other than shares of our common stock sold pursuant to the DRIP. Our dealer manager
re-allowed all or a portion of these fees to participating broker-dealers. For the three and nine
months ended September 30, 2009, we incurred $30,000 and $510,000, respectively, in selling
commissions to our dealer manager. Such selling commissions were charged to stockholders equity as
such amounts were reimbursed to our dealer manager from the gross proceeds of our initial offering.
Follow-On Offering
Until December 31, 2010, pursuant to our follow-on offering, our dealer manager receives
selling commissions of up to 7.0% of the gross offering proceeds from the sale of shares of our
common stock in our follow-on offering, other than shares of our common stock sold pursuant to the
DRIP. Our dealer manager may re-allow all or a portion of these fees to participating
broker-dealers. For the three and nine months ended September 30, 2010, we incurred $506,000 and
$1,410,000, respectively, in selling commissions to our dealer manager. For the three and nine
months ended September 30, 2009, we incurred $131,000 in selling
commissions to our dealer manager. Such selling commissions are charged to stockholders equity as
such amounts are reimbursed to our dealer manager from the gross proceeds of our follow-on
offering.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Initial Offering Marketing Support Fees and Due Diligence Expense Reimbursements and Follow-On
Offering Dealer Manager Fees
Initial Offering
Pursuant to our initial offering, our dealer manager received non-accountable marketing
support fees of up to 2.5% of the gross offering proceeds from the sale of shares of our common
stock in our initial offering, other than shares of our common stock sold pursuant to the DRIP. Our
dealer manager re-allowed a portion up to 1.5% of the gross offering proceeds for non-accountable
marketing support fees to participating broker-dealers. In addition, we reimbursed our dealer
manager or its affiliates an additional 0.5% of the gross offering proceeds from the sale of shares
of our common stock in our initial offering, other than shares of our common stock sold pursuant to
the DRIP, as reimbursements for accountable bona fide due diligence expenses. Our dealer manager or
its affiliates re-allowed all or a portion of these reimbursements up to 0.5% of the gross offering
proceeds from the sale of shares of our common stock in our initial offering to participating
broker-dealers for accountable bona fide due diligence expenses. For the three and nine months
ended September 30, 2009, we incurred $11,000 and $183,000, respectively, in marketing support fees
and due diligence expense reimbursements to our dealer manager or its affiliates. Such fees and
reimbursements were charged to stockholders equity as such amounts were reimbursed to our dealer
manager or its affiliates from the gross proceeds of our initial offering.
Follow-On Offering
Until December 31, 2010, pursuant to our follow-on offering, our dealer manager receives a
dealer manager fee of up to 3.0% of the gross offering proceeds from the shares of our common stock
sold pursuant to our follow-on offering, other than shares of our common stock sold pursuant to the
DRIP. Our dealer manager may re-allow all or a portion of the dealer manager fee to participating
broker-dealers. For the three and nine months ended September 30, 2010, we incurred $221,000 and
$615,000, respectively, in dealer manager fees to our dealer manager or its affiliates. For the
three and nine months ended September 30, 2009, we incurred $56,000 in dealer manager fees to our
dealer manager or its affiliates. Such dealer manager fees are charged to stockholders equity as
such amounts are reimbursed to our dealer manager or its affiliates from the gross proceeds of our
follow-on offering.
Other Organizational and Offering Expenses
Initial Offering
Our other organizational and offering expenses for our initial offering were paid by our
advisor or its affiliates on our behalf. Our advisor or its affiliates were reimbursed for actual
expenses incurred up to 1.5% of the gross offering proceeds from the sale of shares of our common
stock in our initial offering, other than shares of our common stock sold pursuant to the DRIP. For
the three and nine months ended September 30, 2009, we incurred $7,000 and $110,000, respectively,
in offering expenses to our advisor or its affiliates. Offering expenses were charged to stockholders equity as such amounts were reimbursed to our advisor or its
affiliates from the gross proceeds of our initial offering.
Follow-On Offering
Until December 31, 2010, our other organizational and offering expenses for our follow-on
offering are paid by our advisor or its affiliates on our behalf. Our advisor or its affiliates are
reimbursed for actual expenses incurred up to 1.0% of the gross offering proceeds from the sale of
shares of our common stock in our follow-on offering, other than shares of our common stock sold
pursuant to the DRIP. For the three and nine months ended September 30, 2010, we incurred $74,000
and $205,000, respectively, in offering expenses to our advisor or its affiliates. For the three
and nine months ended September 30, 2009, we incurred $19,000 in offering expenses to our advisor
or its affiliates. Other organizational expenses are expensed as incurred and offering expenses are
charged to stockholders equity as such amounts are reimbursed to our advisor or its affiliates
from the gross proceeds of our follow-on offering.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Acquisition and Development Stage
Acquisition Fee
Until December 31, 2010, our advisor or its affiliates receive, as compensation for services
rendered in connection with the investigation, selection and acquisition of properties, an
acquisition fee of up to 3.0% of the contract purchase price for each property acquired or up to
4.0% of the total development cost of any development property acquired, as applicable.
Additionally, effective July 17, 2009, our advisor or its affiliates receive a 2.0% origination fee
as compensation for any real estate-related investment acquired. For the three months ended
September 30, 2010 and 2009, we incurred $596,000 and $0, respectively, in acquisition fees to our
advisor and its affiliate. For the nine months ended September 30, 2010 and 2009, we incurred
$1,118,000 and $0, respectively, in acquisition fees to our advisor and its affiliate. Acquisition
fees in connection with the acquisition of properties are expensed as incurred in accordance with
ASC Topic 805, Business Combinations, or ASC Topic 805, and are included in acquisition related
expenses in our accompanying condensed consolidated statements of operations.
Reimbursement of Acquisition Expenses
Until December 31, 2010, our advisor or its affiliates are reimbursed for acquisition expenses
related to selecting, evaluating, acquiring and investing in properties. Until July 17, 2009,
acquisition expenses, excluding amounts paid to third parties, were not to exceed 0.5% of the
contract purchase price of our properties. The reimbursement of acquisition expenses, acquisition
fees and real estate commissions and other fees paid to unaffiliated parties will not exceed, in
the aggregate, 6.0% of the purchase price or total development costs, unless fees in excess of such
limits are approved by a majority of our disinterested independent directors. Effective July 17,
2009, our advisor or its affiliates are reimbursed for all acquisition expenses actually incurred
related to selecting, evaluating and acquiring assets, which will be paid regardless of whether an
asset is acquired, subject to the aggregate 6.0% limit on reimbursement of acquisition expenses,
acquisition fees and real estate commissions and other fees paid to unaffiliated parties. As of
September 30, 2010 and 2009, such fees and expenses did not exceed 6.0% of the purchase price of
our acquisitions.
For the three and nine months ended September 30, 2010, we incurred $4,000 and $8,000,
respectively, for such acquisition expenses to our advisor or its affiliates, including amounts our
advisor or its affiliates paid directly to third parties. For the three and nine months ended
September 30, 2009, we did not incur any such acquisition expenses to our advisor or its
affiliates, excluding amounts paid to third parties. Acquisition expenses are expensed as incurred
in accordance with ASC Topic 805 and are included in acquisition related expenses in our
accompanying condensed consolidated statements of operations.
Operational Stage
Asset Management Fee
Until December 31, 2010, our advisor or its affiliates receive a monthly fee for services
rendered in connection with the management of our assets in an amount that equals one-twelfth of
0.5% of our average invested assets calculated as of the close of business on the last day of each
month, subject to our stockholders receiving annualized distributions in an amount equal to 5.0%
per annum, cumulative, non-compounded, of invested capital. The asset management fee is calculated
and payable monthly in cash or shares of our common stock, at the option of our advisor, not to
exceed one-twelfth of 1.0% of our average invested assets as of the last day of the immediately
preceding quarter. Effective January 1, 2009, no asset management fee is due or payable to our
advisor or its affiliates until the quarter following the quarter in which we generate funds from
operations, excluding non-recurring charges, sufficient to cover 100% of the distributions declared
to our stockholders for such quarter.
For the three and nine months ended September 30, 2010 and 2009, we did not incur any asset
management fees to our advisor and its affiliates. When incurred by us, asset management fees will
be included in general and administrative in our accompanying condensed consolidated statements of
operations.
Property Management Fee
Our advisor or its affiliates are paid a monthly property management fee of up to 4.0% of the
monthly gross cash receipts from any property managed for us. For the three months ended September
30, 2010 and 2009, we incurred property management fees of $291,000 and $277,000, respectively, and
for the nine months ended September 30, 2010 and 2009, we incurred $852,000 and $813,000,
respectively, to Residential Management, which is included in rental expenses in our accompanying
condensed consolidated statements of operations.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
On-site Personnel Payroll
For the three months ended September 30, 2010 and 2009, Residential Management incurred
payroll for on-site personnel on our behalf of $1,050,000 and $970,000, respectively, and for the
nine months ended September 30, 2010 and 2009, Residential Management incurred payroll for on-site
personnel on our behalf of $2,993,000 and $2,869,000, respectively, which is included in rental
expenses in our accompanying condensed consolidated statements of operations.
Operating Expenses
Until December 31, 2010, we reimburse our advisor or its affiliates for operating expenses
incurred in rendering services to us, subject to certain limitations. However, we cannot reimburse
our advisor or its affiliates for operating expenses that exceed the greater of: (1) 2.0% of our
average invested assets, as defined in the Advisory Agreement; or (2) 25.0% of our net income, as
defined in the Advisory Agreement, unless our independent directors determine that such excess
expenses are justified based on unusual and non-recurring factors. For the 12 months ended
September 30, 2010, our operating expenses did not exceed this limitation. Our operating expenses
as a percentage of average invested assets and as a percentage of net income were 0.3% and 23.2%,
respectively, for the 12 months ended September 30, 2010.
For the three months ended September 30, 2010 and 2009, Grubb & Ellis Equity Advisors or Grubb
& Ellis Realty Investors incurred operating expenses on our behalf of $9,000 and $8,000,
respectively, and for the nine months ended September 30, 2010 and 2009, Grubb & Ellis Equity
Advisors or Grubb & Ellis Realty Investors incurred operating expenses on our behalf of $26,000 and
$17,000, respectively, which is included in general and administrative in our accompanying
condensed consolidated statements of operations.
Compensation for Additional Services
Our advisor or its affiliates are paid for services performed for us other than those required
to be rendered by our advisor or its affiliates under the Advisory Agreement. The rate of
compensation for these services must be approved by a majority of our board of directors, including
a majority of our independent directors, and cannot exceed an amount that would be paid to
unaffiliated parties for similar services.
We entered into a services agreement, effective January 1, 2008, or the Services Agreement, with
Grubb & Ellis Realty Investors for subscription agreement processing and investor services. The
Services Agreement had an initial one-year term and was automatically renewed for successive
one-year terms. On January 31, 2010, we terminated the Services Agreement with Grubb & Ellis Realty
Investors. On February 1, 2010, we entered into an agreement, or the Transfer Agent Services
Agreement, with Grubb & Ellis Equity Advisors, Transfer Agent, LLC, or Grubb & Ellis Equity
Advisors, Transfer Agent, a wholly owned subsidiary of Grubb & Ellis Equity Advisors, for transfer
agent and investor services. The Transfer Agent Services Agreement has an initial one year term and
is automatically renewed for successive one year terms. Since Grubb & Ellis Equity Advisors is the
managing member of our advisor, the terms of the Transfer Agent Services Agreement were approved
and determined by a majority of our directors, including a majority of our independent directors,
as fair and reasonable to us and at fees charged to us in an amount no greater than that which
would be paid to an unaffiliated party for similar services. The Transfer Agent Services Agreement
requires Grubb & Ellis Equity Advisors, Transfer Agent to provide us with a 180 day advance written
notice for any termination, while we have the right to terminate upon 60 days advance written
notice. On November 3, 2010, we received notification of termination of the Transfer Agent Services
Agreement from Grubb & Ellis Equity Advisors, Transfer Agent. The Transfer Agent Services Agreement
will expire on May 2, 2011. See Note 15, Subsequent Events Termination of Transfer Agent Services
Agreement, for a further discussion.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
For the three months ended September 30, 2010 and 2009, we incurred expenses of $15,000 and
$12,000, respectively, and for the nine months ended September 30, 2010 and 2009, we incurred
$57,000 and $55,000, respectively, for investor services that Grubb & Ellis Equity Advisors,
Transfer Agent or Grubb & Ellis Realty Investors provided to us, which is included in general and
administrative in our accompanying condensed consolidated statements of operations.
For the three months ended September 30, 2010 and 2009, our advisor or its affiliates incurred
expenses of $3,000 and $3,000, respectively, and for the nine months ended September 30, 2010 and
2009, our advisor or its affiliates incurred expenses of $8,000 and $16,000, respectively, in
subscription agreement processing services that Grubb & Ellis Equity Advisors, Transfer Agent or
Grubb & Ellis Realty Investors provided to us. As an other organizational and offering expense,
these subscription agreement processing expenses will only become our liability to the extent other
organizational and offering expenses do not exceed 1.5% and 1.0% of the gross proceeds from the
sale of shares of our common stock in our initial offering and our follow-on offering,
respectively, other than shares of our commons stock sold pursuant to the DRIP.
For the three months ended September 30, 2010 and 2009, we incurred $28,000 and $0,
respectively, for tax and internal controls compliance services that affiliates provided to us. For
the nine months ended September 30, 2010 and 2009, we incurred $48,000 and $7,000, respectively,
for tax and internal controls compliance services that affiliates provided to us. Such amounts
incurred are included in general and administrative in our accompanying condensed consolidated
statements of operations.
Liquidity Stage
Disposition Fees
Until December 31, 2010, for services relating to the sale of one or more properties, our
advisor or its affiliates will be paid a disposition fee equal to the lesser of 1.75% of the
contract sales price or 50.0% of a customary competitive real estate commission given the circumstances surrounding the sale, as determined
by our board of directors, which will not exceed normal market rates. Until July 17, 2009, such fee
was not to exceed an amount equal to 3.0% of the contract sales price. Effective July 17, 2009, the
amount of disposition fees paid, plus any real estate commissions paid to unaffiliated parties,
will not exceed the lesser of a customary competitive real estate disposition fee given the
circumstances surrounding the sale or an amount equal to 6.0% of the contract sales price. For the
three and nine months ended September 30, 2010 and 2009, we did not incur any such disposition
fees.
Incentive Distribution upon Sales
Until December 31, 2010, in the event of liquidation, our advisor will be paid an incentive
distribution equal to 15.0% of net sales proceeds from any disposition of a property after
subtracting: (1) the amount of capital we invested in our operating partnership and (2) any
shortfall with respect to the overall annual 8.0% cumulative, non-compounded return on the capital
invested in our operating partnership. Actual amounts to be received depend on the sale prices of
properties upon liquidation. For the three and nine months ended September 30, 2010 and 2009, we
did not incur any such incentive distributions.
Incentive Distribution upon Listing
Until December 31, 2010, in the event of a termination of the Advisory Agreement upon the
listing of shares of our common stock on a national securities exchange, our advisor will be paid
an incentive distribution equal to 15.0% of the amount, if any, by which the market value of our
outstanding common stock plus distributions paid by us prior to listing, exceeds the sum of the
amount of capital we invested in our operating partnership plus an annual 8.0% cumulative,
non-compounded return on such invested capital. Actual amounts to be received depend upon the
market value of our outstanding stock at the time of listing among other factors. Upon our
advisors receipt of such incentive distribution, our advisors special limited partnership units
will be redeemed and our advisor will not be entitled to receive any further incentive
distributions upon sale of our properties. For the three and nine months ended September 30, 2010
and 2009, we did not incur any such incentive distributions.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Fees Payable upon Internalization of the Advisor
Until June 3, 2010, in the event of a termination of the Advisory Agreement due to an
internalization of our advisor in connection with our conversion to a self-administered REIT, our
advisor would have been paid a fee determined by negotiation between our advisor and our
independent directors. Upon our advisors receipt of such compensation, our advisors special
limited partnership units would have been redeemed and our advisor would not have been entitled to
receive any further incentive distributions upon the sale of our properties. Effective June 3,
2010, we eliminated any compensation or remuneration payable by us or our operating partnership to
our advisor or any of its affiliates in connection with any internalization of the management
functions provided by our advisor in the future. However, the elimination of such internalization
fee is not intended to limit any other compensation or distributions that we or our operating
partnership may pay our advisor in accordance with the Advisory Agreement or any other agreement,
including but not limited to the agreement of limited partnership of our operating partnership.
Accounts Payable Due to Affiliates
The following amounts were outstanding to affiliates as of September 30, 2010 and December 31,
2009:
Entity | Fee | September 30, 2010 | December 31, 2009 | |||||||||
Grubb & Ellis Equity Advisors/
Grubb & Ellis Realty Investors |
Operating Expenses | $ | 6,000 | $ | 6,000 | |||||||
Grubb & Ellis Equity Advisors/
Grubb & Ellis Realty Investors |
Offering Costs | 12,000 | 14,000 | |||||||||
Grubb & Ellis Securities |
Selling Commissions and Dealer Manager Fees | 41,000 | 30,000 | |||||||||
Residential Management |
Property Management Fees | 96,000 | 90,000 | |||||||||
$ | 155,000 | $ | 140,000 | |||||||||
Unsecured Note Payable to Affiliate
For the three months ended September 30, 2010 and 2009, we incurred $89,000 and $154,000,
respectively, and for the nine months ended September 30, 2010 and 2009, we incurred $286,000 and
$401,000, respectively, in interest expense to NNN Realty Advisors. See Note 6, Mortgage Loan
Payables, Net, Unsecured Note Payable to Affiliate and Short Term Notes Unsecured Note Payable to
Affiliate, for a further discussion.
9. Redeemable Noncontrolling Interest
Upon a termination of the Advisory Agreement, in connection with any event other than the
listing of shares of our common stock on a national securities exchange or a national market
system, our advisors special limited partnership interest will be redeemed by us (as the general
partner of our operating partnership) for a redemption price equal to the amount of the incentive
distribution that our advisor would have received upon property sales as discussed in further
detail in Note 8, Related Party Transactions Liquidity Stage, as if our operating partnership
immediately sold all of its properties at fair market value. Such incentive distribution is payable
in cash, units of limited partnership interest in our operating partnership or shares of our common
stock, if agreed to by us and our advisor, except that our advisor is not permitted to elect to
receive shares of our common stock to the extent that doing so would cause us to fail to qualify as
a REIT. In addition, effective June 3, 2010, pursuant to the First Amendment to Agreement of
Limited Partnership of Grubb & Ellis Apartment REIT Holdings, LP with our advisor, our advisor may
elect to defer its right to a redemption of its special limited partnership units in connection
with the termination of the Advisory Agreement, other than due to a listing of the shares of our
common stock on a national securities exchange, until either a listing or other liquidity event,
including a liquidation, sale of substantially all of our assets or merger that results in a change
of control of our company. We recognize any changes in the redemption value as they occur and
adjust the redemption value of the special limited partnership interest (redeemable noncontrolling
interest) as of each balance sheet date. As of September 30, 2010 and December 31, 2009, we have
not recorded any redemption amounts as the redemption value of the special limited partnership
interest was $0.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
10. Equity
Preferred Stock
Our charter authorizes us to issue 50,000,000 shares of our preferred stock, par value $0.01
per share. As of September 30, 2010 and December 31, 2009, no shares of our preferred stock were
issued and outstanding.
Common Stock
Through July 17, 2009, we were offering and selling to the public up to 100,000,000 shares of
our common stock, par value $0.01 per share, for $10.00 per share and up to 5,000,000 shares of our
common stock, par value $0.01 per share, to be issued pursuant to the DRIP for $9.50 per share in
our initial offering. On July 20, 2009, we commenced a best efforts follow-on offering through
which we are offering for sale to the public 105,000,000 shares of our common stock. Our follow-on
offering includes up to 100,000,000 shares of our common stock to be offered for sale at $10.00 per
share and up to 5,000,000 shares of our common stock to be offered for sale pursuant to the DRIP at
$9.50 per share, for a maximum offering of up to $1,047,500,000. Our charter authorizes us to issue
300,000,000 shares of our common stock.
On January 10, 2006, our advisor purchased 22,223 shares of our common stock for total cash
consideration of $200,000 and was admitted as our initial stockholder. Through September 30, 2010,
we had granted an aggregate of 17,000 shares of our restricted common stock to our independent
directors pursuant to the terms and conditions of our 2006 Incentive Award Plan, or our 2006 Plan,
2,800 of which had been forfeited through September 30, 2010. Through September 30, 2010, we had
issued an aggregate of 15,738,457 shares of our common stock in connection with our initial
offering, 2,642,006 shares of our common stock in connection with our follow-on offering and
1,337,610 shares of our common stock pursuant to the DRIP, and we had also repurchased 518,228
shares of our common stock under our share repurchase plan. As of September 30, 2010 and December
31, 2009, we had 19,236,268 and 17,028,454 shares, respectively, of our common stock issued and
outstanding.
Noncontrolling Interest
As of September 30, 2010 and December 31, 2009, we owned a 99.99% general partnership interest
in our operating partnership and our advisor owned a 0.01% limited partnership interest in our
operating partnership. As such, 0.01% of the earnings and losses of our operating partnership are
allocated to noncontrolling interest, subject to certain limitations.
Distribution Reinvestment Plan
We adopted the DRIP, which allows stockholders to purchase additional shares of our common
stock through the reinvestment of distributions, subject to certain conditions. We registered and
reserved 5,000,000 shares of our common stock for sale pursuant to the DRIP in both our initial
offering and in our follow-on offering. For the three months ended September 30, 2010 and 2009,
$1,125,000 and $1,052,000, respectively, in distributions were reinvested and 118,509 and 110,696
shares of our common stock, respectively, were issued pursuant to the DRIP. For the nine months
ended September 30, 2010 and 2009, $3,254,000 and $3,327,000, respectively, in distributions were
reinvested and 342,633 and 350,131 shares of our common stock, respectively, were issued pursuant
to the DRIP. As of September 30, 2010 and December 31, 2009, a total of $12,707,000 and $9,453,000,
respectively, in distributions were reinvested and 1,337,610 and 994,976 shares of our common
stock, respectively, were issued pursuant to the DRIP.
Share Repurchase Plan
Our share repurchase plan allows for repurchases of shares of our common stock by us upon
request by stockholders when certain criteria are met by requesting stockholders. Share repurchases
are made at the sole discretion of our board of directors. Subject to the availability of funds for
share repurchases, we will limit the number of shares of our common stock repurchased during any
calendar year to 5.0% of the weighted average number of shares of our common stock outstanding
during the prior calendar year. Funds for the repurchase of shares of our common stock come exclusively from the proceeds we receive from the sale of shares of our common stock pursuant to
the DRIP.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Under our share repurchase plan, repurchase prices range from $9.25, or 92.5% of the price
paid per share, following a one year holding period to an amount not less than 100% of the price
paid per share following a four year holding period. In order to effect the repurchase of shares of
our common stock held for less than one year due to the death of a stockholder or a stockholder
with a qualifying disability, as defined in our share repurchase plan, we must receive written
notice within one year after the death of the stockholder or the stockholders qualifying
disability, as applicable. Furthermore, our share repurchase plan provides that if there are
insufficient funds to honor all repurchase requests, pending requests will be honored among all
requests for repurchase in any given repurchase period, as follows: first, pro rata as to
repurchases sought upon a stockholders death; next, pro rata as to repurchases sought by
stockholders with a qualifying disability; and, finally, pro rata as to other repurchase requests.
Our share repurchase plan provides that our board of directors may, in its sole discretion,
repurchase shares of our common stock on a quarterly basis. Since the first quarter of 2009, in
accordance with the discretion given it under our share repurchase plan, our board of directors
determined to repurchase shares of our common stock only with respect to requests made in
connection with a stockholders death or qualifying disability and in accordance with the terms and
conditions set forth in our share repurchase plan. Our board of directors determined that it was in
our best interest to conserve cash and, therefore, no other repurchases requested prior to or
during 2009 or during the first, second and third quarters of 2010 were made. Our board of
directors considers requests for repurchase quarterly. If a stockholder previously submitted a
request for repurchase of his or her shares of our common stock that has not yet been effected, we
will consider those requests at the end of the fourth quarter of 2010, unless the stockholder
withdraws the request.
For the three months ended September 30, 2010 and 2009, we repurchased 60,467 shares of our
common stock for an aggregate of $603,000 and 28,173 shares of our common stock for an aggregate of
$282,000, respectively. For the nine months ended September 30, 2010 and 2009, we repurchased
188,966 shares of our common stock for an aggregate of $1,872,000 and 192,676 shares of our common
stock for an aggregate of $1,860,000, respectively. As of September 30, 2010 and December 31, 2009,
we had repurchased 518,228 shares of our common stock for an aggregate amount of $5,052,000 and
329,262 shares of our common stock for an aggregate amount of $3,180,000, respectively.
2006 Incentive Award Plan
We adopted our 2006 Plan, pursuant to which our board of directors or a committee of our
independent directors may make grants of options, restricted common stock awards, stock purchase
rights, stock appreciation rights or other awards to our independent directors, employees and
consultants. The maximum number of shares of our common stock that may be issued pursuant to our
2006 Plan is 2,000,000, subject to adjustment under specified circumstances.
On June 22, 2010, in connection with their re-election, we granted an aggregate of 3,000
shares of our restricted common stock to our independent directors under our 2006 Plan, of which
20.0% vested on the date of grant and 20.0% will vest on each of the first four anniversaries of
the date of the grant. The fair value of each share of our restricted common stock was estimated at
the date of grant at $10.00 per share, the per share price of shares in our initial offering and
our follow-on offering, and with respect to the initial 20.0% of shares that vested on the date of
grant, expensed as compensation immediately, and with respect to the remaining shares, amortized on
a straight-line basis over the vesting period. Shares of our restricted common stock may not be
sold, transferred, exchanged, assigned, pledged, hypothecated or otherwise encumbered. Such
restrictions expire upon vesting. Shares of our restricted common stock have full voting rights and
rights to dividends. For the three months ended September 30, 2010 and 2009, we recognized
compensation expense of $5,000 and $4,000, respectively, and for the nine months ended September
30, 2010 and 2009, we recognized compensation expense of $20,000 and $19,000, respectively, related
to the restricted common stock grants, ultimately expected to vest, which has been reduced for
estimated forfeitures. ASC Topic 718, Compensation Stock Compensation, requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Stock compensation expense is included in general and
administrative in our accompanying condensed consolidated statements of operations.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
As of September 30, 2010 and December 31, 2009, there was $49,000 and $39,000, respectively,
of total unrecognized compensation expense, net of estimated forfeitures, related to the nonvested
shares of our restricted common stock. As of September 30, 2010, this expense is expected to be
recognized over a remaining weighted average period of 3.03 years.
As of September 30, 2010 and December 31, 2009, the fair value of the nonvested shares of our
restricted common stock was $54,000 and $48,000, respectively. A summary of the status of the
nonvested shares of our restricted common stock as of September 30, 2010 and December 31, 2009, and
the changes for the nine months ended September 30, 2010, is presented below:
Number of Nonvested | ||||||||
Shares of Our | Weighted | |||||||
Restricted | Average Grant | |||||||
Common Stock | Date Fair Value | |||||||
Balance December 31, 2009 |
4,800 | $ | 10.00 | |||||
Granted |
3,000 | 10.00 | ||||||
Vested |
(2,400 | ) | 10.00 | |||||
Forfeited |
| | ||||||
Balance September 30, 2010 |
5,400 | $ | 10.00 | |||||
Expected to vest September 30, 2010 |
5,400 | $ | 10.00 | |||||
11. Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial
instruments, whether or not recognized on the face of the balance sheet. Fair value is defined
under ASC Topic 820.
Our condensed consolidated balance sheets include the following financial instruments: cash
and cash equivalents, restricted cash, accounts and other receivables, real estate and escrow
deposits, accounts payable and accrued liabilities, accounts payable due to affiliates, mortgage
loan payables, net, unsecured note payable to affiliate and short term notes.
We consider the carrying values of cash and cash equivalents, restricted cash, accounts and
other receivables, real estate and escrow deposits, accounts payable and accrued liabilities and
short term notes to approximate fair value for these financial instruments because of the short
period of time between origination of the instruments and their expected realization. The fair
value of accounts payable due to affiliates and unsecured note payable to affiliate is not
determinable due to the related party nature of the accounts payable and the unsecured note
payable.
The fair value of the mortgage loan payables is estimated using borrowing rates available to
us for debt instruments with similar terms and maturities. As of September 30, 2010 and December
31, 2009, the fair value of the mortgage loan payables was $257,659,000 and $218,400,000,
respectively, compared to the carrying value of $244,251,000 and $217,434,000, respectively.
12. Business Combinations
For the nine months ended September 30, 2010, we completed the acquisition of two consolidated
properties, adding a total of 442 apartment units to our property portfolio. The aggregate purchase
price was $37,257,000, plus closing costs and acquisition fees of $1,118,000, which are included in
acquisition related expenses in our accompanying condensed consolidated statements of operations.
See Note 3, Real Estate Investments Acquisitions of Real Estate Investments, for a listing of the
properties acquired, the dates of acquisition and the amount of mortgage debt initially incurred or
assumed in connection with such acquisition.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Results of operations for the property acquisitions are reflected in our condensed
consolidated statements of operations for the three and nine months ended September 30, 2010 for
the period subsequent to the acquisition dates. For the period from the acquisition dates through
September 30, 2010, we recognized $1,255,000 in revenues and $267,000 in net loss for the Bella
Ruscello property and $7,000 in revenues and $4,000 in net income for the Mission Rock Ridge
property.
The fair value of the two properties at the time of acquisition is shown below:
Bella Ruscello Property | Mission Rock Ridge Property | |||||||
Land |
$ | 1,619,000 | $ | 2,201,000 | ||||
Land improvements |
1,226,000 | 974,000 | ||||||
Building and improvements |
13,599,000 | 15,669,000 | ||||||
Furniture, fixtures and
equipment |
686,000 | 721,000 | ||||||
In place leases |
194,000 | 211,000 | ||||||
Tenant relationships |
76,000 | 81,000 | ||||||
Total assets acquired |
$ | 17,400,000 | $ | 19,857,000 | ||||
Assuming the property acquisitions discussed above had occurred on January 1, 2010, for the
three and nine months ended September 30, 2010, pro forma revenues, net loss, net loss attributable
to controlling interest and net loss per common share attributable to controlling interest basic
and diluted would have been as follows:
Three Months Ended | Nine Months Ended | |||||||
September 30, 2010 | September 30, 2010 | |||||||
Revenues |
$ | 10,572,000 | $ | 31,528,000 | ||||
Net loss |
$ | (2,620,000 | ) | $ | (7,738,000 | ) | ||
Net loss attributable to controlling interest |
$ | (2,620,000 | ) | $ | (7,738,000 | ) | ||
Net loss per common share |
||||||||
attributable to controlling interest
basic and diluted |
$ | (0.14 | ) | $ | (0.43 | ) |
Assuming the property acquisitions discussed above had occurred on January 1, 2009, for the
three and nine months ended September 30, 2009, pro forma revenues, net loss, net loss attributable
to controlling interest and net loss per common share attributable to controlling interest basic
and diluted would have been as follows:
Three Months Ended | Nine Months Ended | |||||||
September 30, 2009 | September 30, 2009 | |||||||
Revenues |
$ | 10,510,000 | $ | 31,743,000 | ||||
Net loss |
$ | (1,664,000 | ) | $ | (7,570,000 | ) | ||
Net loss attributable to controlling interest |
$ | (1,664,000 | ) | $ | (7,569,000 | ) | ||
Net loss per common share |
||||||||
attributable to controlling interest
basic and diluted |
$ | (0.10 | ) | $ | (0.46 | ) |
The pro forma results are not necessarily indicative of the operating results that would have
been obtained had the acquisition occurred at the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
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Grubb & Ellis Apartment REIT, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
13. Concentration of Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk are
primarily cash and cash equivalents, escrow deposits, restricted cash and accounts receivable from
tenants. Cash is generally invested in investment-grade, short-term instruments with a maturity of
three months or less when purchased. We have cash in financial institutions that is insured by the
Federal Deposit Insurance Corporation, or FDIC. As of September 30, 2010 and December 31, 2009, we
had cash and cash equivalents, escrow deposits and restricted cash accounts in excess of FDIC
insured limits. We believe this risk is not significant. Concentration of credit risk with respect
to accounts receivable from tenants is limited. We perform credit evaluations of prospective
tenants, and security deposits are obtained upon lease execution.
As of September 30, 2010, we owned 13 properties in states for which each state accounted for
10.0% or more of our total revenues for the nine months ended September 30, 2010. Nine of these
properties are located in Texas, two properties are in Georgia and two properties are in Virginia.
The properties in these states accounted for 59.3%, 14.5% and 13.4%, respectively, of our total
revenues for the nine months ended September 30, 2010. As of September 30, 2009, we owned nine
properties in states for which each state accounted for 10.0% or more of our total revenue for the
nine months ended September 30, 2009. Seven of these properties are located in Texas and two
properties are located in Georgia. The properties in these states accounted for 56.3% and 15.0%,
respectively, of our total revenues for the nine months ended September 30, 2009. Accordingly,
there is a geographic concentration of risk subject to fluctuations in each states economy.
14. Per Share Data
We report earnings (loss) per share pursuant to ASC Topic 260, Earnings Per Share. Basic
earnings (loss) per share attributable for all periods presented are computed by dividing net
income (loss) attributable to controlling interest by the weighted average number of shares of our
common stock outstanding during the period. Diluted earnings (loss) per share are computed based on
the weighted average number of shares of our common stock and all potentially dilutive securities,
if any. Nonvested shares of our restricted common stock give rise to potentially dilutive shares of
our common stock. As of September 30, 2010 and 2009, there were 5,400 shares and 4,800 shares,
respectively, of nonvested shares of our restricted common stock outstanding, but such shares were
excluded from the computation of diluted earnings per share because such shares were anti-dilutive
during these periods.
15. Subsequent Events
Share Repurchases
In October 2010, we repurchased 74,464 shares of our common stock for an aggregate amount of
$741,000 under our share repurchase plan.
Status of our Follow-On Offering
As of October 31, 2010, we had received and accepted subscriptions in our follow-on offering
for 2,898,070 shares of our common stock, or $28,938,000, excluding shares of our common stock
issued pursuant to the DRIP.
New Chief Financial Officer
Effective November 1, 2010, Shannon K S Johnson resigned from her position as our chief
financial officer. Effective November 3, 2010, our board of directors elected Stanley J. Olander,
Jr. to serve as our chief financial
officer, filling the vacancy that was created by Ms. Johnsons resignation. Mr. Olander also
serves as our chief executive officer and chairman of our board of directors.
Termination of Advisory Agreement
On November 1, 2010, we received written notice from our advisor that our advisor has elected
to terminate the Advisory Agreement. Pursuant to the Advisory Agreement, either party may terminate
the Advisory Agreement upon 60 days written notice without cause or penalty. Therefore, we expect
that the Advisory Agreement will terminate on December 31, 2010. Accordingly, we intend to
enter into a new advisory agreement with a new advisor entity owned by American Realty Capital,
LLC, an unaffiliated entity, and ROC REIT Advisors, LLC, which owns a 25.0% non-managing interest
in our advisor and whose members are our chief executive officer, chief financial officer and chairman of our
board of directors, our president and secretary and our executive vice president and chief
operating officer. We intend for the new advisory agreement to be effective upon the termination of
the Advisory Agreement. This new advisory agreement is currently being negotiated and is subject to
approval by our board of directors, and thus, we cannot make any assurances that we will enter into
such an agreement.
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Grubb & Ellis Apartment REIT, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Termination of Dealer Manager Agreement
On November 1, 2010, we received written notice from Grubb & Ellis Securities that Grubb &
Ellis Securities has elected to terminate the dealer manager agreement between us and Grubb & Ellis
Securities. Pursuant to the dealer manager agreement, either party may terminate the dealer manager
agreement upon 60 days written notice. Therefore, we expect that the dealer manager agreement will
terminate on December 31, 2010. Accordingly, on November 5, 2010, we entered into an
agreement with Realty Capital Securities, LLC, or RCS, whereby RCS will agree to assume the role of
dealer manager after the termination of our dealer manager agreement with Grubb & Ellis Securities
for the remainder of our follow-on offering, subject to, among other conditions, the receipt of
required regulatory approvals.
Termination of Transfer Agent Services Agreement
On November 3, 2010, we received written notice from Grubb & Ellis Equity Advisors, Transfer
Agent that Grubb & Ellis Equity Advisors, Transfer Agent has elected to terminate the Transfer
Agent Services Agreement. Pursuant to the Transfer Agent Services Agreement, Grubb & Ellis Equity
Advisors, Transfer Agent may terminate the Transfer Agent Services Agreement upon 180 days written
notice. Therefore, we expect that the Transfer Agent Services Agreement will terminate on May 2, 2011. Accordingly, we intend to enter into a new transfer agent services agreement with a
third party prior to May 2, 2011.
Acquisition of Substantially all of the Assets and Certain Liabilities of Mission Residential Management
On November 5, 2010, we, through MR Property Management LLC, a taxable REIT subsidiary of our
operating partnership, completed the acquisition of substantially all of the assets and certain
liabilities of Mission Residential Management, an affiliate of MR Holdings, including the in-place
workforce of approximately 300 employees. In connection with the closing, we assumed property
management agreements, or entered into sub-management agreements pending receipt of lender
consents, with respect to 41 multifamily apartment properties containing approximately 12,000
units, including the Mission Rock Ridge property that we acquired on September 30, 2010 and the
eight additional DST properties our operating partnership has contracted to
acquire from Delaware statutory trusts for which an affiliate of MR
Holdings serves as trustee. We paid total consideration of $5,500,000 of cash plus the assumption of
certain liabilities and other payments totaling approximately $1,500,000, subject to certain
post-closing pro rations and adjustments. In connection with the acquisition, we paid an
acquisition fee of 2.0% of the purchase price to our advisor and its affiliate. At the closing of
the transaction, we entered into various ancillary agreements, including:
| an asset management agreement pursuant to which we assumed the asset management and investor relations responsibilities for all of the aforementioned properties; and |
| a termination fee agreement pursuant to which the lessees of the managed properties under the master lease structures and certain other affiliates of Mission Residential Management agreed to pay us termination fees if any of the property management agreements we assumed or sub-management agreements we entered into is terminated by the lessee of the property under its master lease structure other than for cause, is not extended by the lessee or is terminated by the manager without good reason. The termination fee provisions will survive for five years after the closing. The termination fee will not be payable if a property management agreement is terminated as a result of our acquisition of the managed property. The obligations of the lessees of the properties to pay these termination fees are guaranteed by MR Holdings and by Mission Residential Holdings, LLC. |
Legal Proceedings
On November 9, 2010, seven of the 277 investors who hold interests in the eight Delaware
statutory trusts that hold the remaining eight DST properties that we have
contracted to acquire from such trusts filed a complaint in the United States District Court for
the Eastern District of Virginia (Civil Action No. 3:10CV824(HEH)) against the trustee of each of
these trusts and certain of the trustees affiliates, as well as against our operating partnership,
seeking, among other things, to enjoin the closing of our proposed acquisition of the remaining
eight DST properties that we have contracted to acquire. The complaint alleges, among other things, that the trustee has breached its fiduciary duties to the
beneficial owners of the trusts by entering into the eight purchase and sale agreements with our
operating partnership. The complaint further alleges that our operating partnership aided and
abetted the trustees alleged breaches of fiduciary duty and tortiously interfered with the
contractual relations between the trusts and the trust beneficiaries. We believe the allegations
contained in the complaint are without merit and we intend to defend the claims vigorously.
However, there is no assurance that we will be successful in our defense. If the plaintiffs are
able to obtain the injunctive relief they seek, we may be prevented from closing the acquisitions
of the remaining eight DST properties that we have contracted to acquire. A hearing regarding the request for injunctive relief is expected to occur within
the next 90 days. In a Consent Order dated November 10, 2010, the parties agreed that none of the eight
transactions will be closed during the 90-day period following the date of such Consent Order.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The use of the words we, us or our refers to Grubb & Ellis Apartment REIT, Inc. and its
subsidiaries, including Grubb & Ellis Apartment REIT Holdings, LP, except where the context
otherwise requires.
The following discussion should be read in conjunction with our accompanying condensed
consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on
Form 10-Q. Such condensed consolidated financial statements and information have been prepared to
reflect our financial position as of September 30, 2010 and December 31, 2009, together with our
results of operations for the three and nine months ended September 30, 2010 and 2009 and cash
flows for the nine months ended September 30, 2010 and 2009.
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our
statements contained in this report that are not historical facts are 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. Actual results may differ materially from those
included in the forward-looking statements. We intend those forward-looking statements to be
covered by the safe-harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and we are including this statement for purposes of
complying with those safe-harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations, are generally identifiable by
use of the words expect, project, may, will, should, could, would, intend, plan,
anticipate, estimate, believe, continue, predict, potential or the negative of such
terms and other comparable terminology. Our ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a material adverse
effect on our operations and future prospects on a consolidated basis include, but are not limited
to: changes in economic conditions generally and the real estate market specifically; legislative
and regulatory changes, including changes to laws governing the taxation of real estate investment
trusts, or REITs; the availability of capital; changes in interest rates; competition in the real
estate industry; the supply and demand for operating properties in our proposed market areas;
changes in accounting principles generally accepted in the United States of America, or GAAP;
policies and guidelines applicable to REITs; the success of our follow-on public offering; the
availability of properties to acquire; the availability of financing; and our ongoing relationship
with Grubb & Ellis Company, or Grubb & Ellis, or our sponsor, and its affiliates. These risks and
uncertainties should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements. Additional information concerning us and our business,
including additional factors that could materially affect our financial results, is included herein
and in our other filings with the United States, or U.S., Securities and Exchange Commission, or
the SEC.
Overview and Background
Grubb & Ellis Apartment REIT, Inc., a Maryland corporation, was incorporated on December 21,
2005. We were initially capitalized on January 10, 2006, and therefore, we consider that our date
of inception. We seek to purchase and hold a diverse portfolio of quality apartment communities
with stable cash flows and growth potential in select U.S. metropolitan areas. We may also acquire
real estate-related investments. We focus primarily on investments that produce current income. We
have qualified and elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended, or the Code, for federal income tax purposes and we intend to continue to be taxed as a
REIT.
We commenced a best efforts initial public offering on July 19, 2006, or our initial offering,
in which we offered 100,000,000 shares of our common stock for $10.00 per share and up to 5,000,000
shares of our common stock pursuant to the distribution reinvestment plan, or the DRIP, for $9.50
per share, for a maximum offering of up to $1,047,500,000. We terminated our initial offering on
July 17, 2009. As of July 17, 2009, we had received and accepted subscriptions in our initial
offering for 15,738,457 shares of our common stock, or $157,218,000, excluding shares of our common
stock issued pursuant to the DRIP.
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On July 20, 2009, we commenced a best efforts follow-on public offering, or our follow-on
offering, in which we are offering to the public up to 105,000,000 shares of our common stock. Our
follow-on offering includes up to 100,000,000 shares of our common stock for sale at $10.00 per
share in our primary offering and up to 5,000,000 shares of our common stock for sale pursuant to
the DRIP at $9.50 per share, for a maximum offering of up to $1,047,500,000. We reserve the right
to reallocate the shares of common stock we are offering between the primary offering and the DRIP.
As of September 30, 2010, we had received and accepted subscriptions in our follow-on offering for
2,642,006 shares of our common stock, or $26,390,000, excluding shares of our common stock issued
pursuant to the DRIP.
We conduct substantially all of our operations through Grubb & Ellis Apartment REIT Holdings,
LP, or our operating partnership. We are currently externally advised by Grubb & Ellis Apartment
REIT Advisor, LLC, or our advisor, pursuant to an advisory agreement, or the Advisory Agreement,
between us and our advisor. The Advisory Agreement expires on December 31, 2010. Our advisor
supervises and manages our day-to-day operations and selects the real estate and real
estate-related investments we acquire, subject to the oversight and approval of our board of
directors. Our advisor also provides marketing, sales and client services on our behalf. Our
advisor is affiliated with us in that we and our advisor have common officers, some of whom also
own an indirect equity interest in our advisor. Our advisor engages affiliated entities, including
Grubb & Ellis Residential Management, Inc., to provide various services to us, including property
management services. Our advisor is managed by, and is a wholly owned subsidiary of, Grubb & Ellis
Equity Advisors, LLC, or Grubb & Ellis Equity Advisors, which is a wholly owned subsidiary of Grubb
& Ellis, our sponsor. Effective January 13, 2010, Grubb & Ellis Equity Advisors purchased all of
the rights, title and interests in our advisor and Grubb & Ellis Apartment Management, LLC held by
Grubb & Ellis Realty Investors, LLC, or Grubb & Ellis Realty Investors, which previously served as
the managing member of our advisor. See Note 15, Subsequent Events Termination of Advisory
Agreement, to our accompanying condensed consolidated financial statements for a discussion of the
termination of the Advisory Agreement.
As of September 30, 2010, we owned nine properties located in Texas consisting of 2,573
apartment units, two properties in Georgia consisting of 496 apartment units, two properties in
Virginia consisting of 394 apartment units, one property in Tennessee consisting of 350 apartment
units and one property in North Carolina consisting of 160 apartment units for an aggregate of 15
properties consisting of 3,973 apartment units, which had an aggregate purchase price of
$377,787,000.
We entered into definitive agreements on August 27, 2010 to acquire nine multifamily apartment
properties from affiliates of MR Holdings, LLC, or MR Holdings, and to acquire substantially all of
the assets and certain liabilities of Mission Residential Management, LLC, or Mission Residential
Management, for total consideration valued at approximately $182,357,000, based on purchase price.
We are not affiliated with MR Holdings or Mission Residential Management.
On September 30, 2010, we acquired the first of the nine multifamily apartment properties,
Mission Rock Ridge Apartments located in Arlington, Texas, or the Mission Rock Ridge property. The
remaining eight proposed property acquisitions from MR Holdings, or the DST properties, are still
subject to substantial closing conditions. There is no assurance that any of these conditions will
be satisfied and we currently cannot predict if or when any of these additional proposed property
acquisitions will close. See Note 3, Real Estate Investments Acquisitions in Real Estate
Investments, to our accompanying condensed consolidated financial statements for a further
discussion.
On November 5, 2010, we, through MR Property Management LLC, a taxable REIT subsidiary of our
operating partnership, completed the acquisition of substantially all of the assets and certain
liabilities of Mission Residential Management, an affiliate of MR Holdings, including the in-place
workforce of approximately 300 employees. In connection with the closing, we assumed property
management agreements, or entered into sub-management agreements pending receipt of lender
consents, with respect to 41 multifamily apartment properties containing approximately 12,000
units, including the Mission Rock Ridge property that we acquired on September 30, 2010 and the
eight additional DST properties our operating partnership has contracted to
acquire from Delaware statutory trusts for which an affiliate of MR
Holdings serves as trustee. We paid total consideration of $5,500,000 of cash plus the assumption of
certain liabilities and other payments totaling approximately $1,500,000, subject to certain
post-closing pro rations and adjustments. In connection with the acquisition, we paid an
acquisition fee of 2.0% of the purchase price to our advisor and its affiliate. At the closing of
the transaction, we entered into various ancillary agreements, including:
| an asset management agreement pursuant to which we assumed the asset management and investor relations responsibilities for all of the aforementioned properties; and |
| a termination fee agreement pursuant to which the lessees of the managed properties under the master lease structures and certain other affiliates of Mission Residential Management agreed to pay us termination fees if any of the property management agreements we assumed or sub-management agreements we entered into is terminated by the lessee of the property under its master lease structure other than for cause, is not extended by the lessee or is terminated by the manager without good reason. The termination fee provisions will survive for five years after the closing. The termination fee will not be payable if a property management agreement is terminated as a result of our acquisition of the managed property. The obligations of the lessees of the properties to pay these termination fees are guaranteed by MR Holdings and by Mission Residential Holdings, LLC. |
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Critical Accounting Policies
The complete listing of our Critical Accounting Policies was previously disclosed in our 2009
Annual Report on Form 10-K, as filed with the SEC on March 19, 2010, and there have been no
material changes to our Critical Accounting Policies as disclosed therein.
Interim Unaudited Financial Data
Our accompanying condensed consolidated financial statements have been prepared by us in
accordance with GAAP in conjunction with the rules and regulations of the SEC. Certain information
and footnote disclosures required for annual financial statements have been condensed or excluded
pursuant to SEC rules and regulations. Accordingly, our accompanying interim consolidated financial
statements do not include all of the information and footnotes required by GAAP for complete
financial statements. Our accompanying condensed consolidated financial statements reflect all
adjustments which are, in our view, of a normal recurring nature and necessary for a fair
presentation of our financial position, results of operations and cash flows for the interim
period. Interim results of operations are not necessarily indicative of the results to be expected
for the full year; such full year results may be less favorable. Our accompanying condensed
consolidated financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in our 2009 Annual Report on Form 10-K, as
filed with the SEC on March 19, 2010.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2, Summary of
Significant Accounting Policies Recently Issued Accounting Pronouncements, to our accompanying
condensed consolidated financial statements.
Acquisitions in 2010
For a discussion of our acquisition in 2010, see Note 3, Real Estate Investments
Acquisitions of Real Estate Investments, to our accompanying condensed consolidated financial
statements.
Factors Which May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic
conditions affecting real estate generally, that may reasonably be expected to have a material
impact, favorable or unfavorable, on revenues or income from the acquisition, management and
operation of properties other than those risks listed in Part II, Item 1A. Risk Factors, of this
report and those Risk Factors previously disclosed in our 2009 Annual Report on Form 10-K, as filed
with the SEC on March 19, 2010.
Rental Income
The amount of rental income generated by our properties depends principally on our ability to
maintain the occupancy rates of currently leased space and to lease currently available space and
space available from lease terminations at the then existing rental rates. Negative trends in one
or more of these factors could adversely affect our rental income in future periods.
Offering Proceeds
If we fail to raise significant proceeds from the sale of shares of our common stock in our
follow-on offering, we will not have enough proceeds to continue to expand or further
geographically diversify our real estate portfolio, which could result in increased exposure to
local and regional economic downturns and the poor performance of one or more of our properties
whereby our stockholders would be exposed to increased risk. In addition, some of our general and
administrative expenses are fixed regardless of the size of our real estate portfolio. Therefore,
depending on the amount of gross offering proceeds we raise in our follow-on offering, we would
expend a larger portion of our income on operating expenses. This would reduce our profitability
and, in turn, the amount of net income available for distribution to our stockholders.
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Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and related laws,
regulations and standards relating to corporate governance and disclosure requirements applicable
to public companies have increased the costs of compliance with corporate governance, reporting and
disclosure practices, which are now
required of us. These costs may have a material adverse effect on our results of operations
and could impact our ability to continue to pay distributions at current rates to our stockholders.
Furthermore, we expect that these costs
will increase in the future due to our continuing implementation of compliance programs
mandated by these requirements. Any increased costs may affect our ability to distribute funds to
our stockholders. As part of our compliance with the Sarbanes-Oxley Act, we provided managements
assessment of our internal control over financial reporting as of December 31, 2009 and continue to
comply with such regulations.
In addition, these laws, rules and regulations create new legal bases for potential
administrative enforcement, civil and criminal proceedings against us in the event of
non-compliance, thereby increasing the risks of liability and potential sanctions against us. We
expect that our efforts to comply with these laws and regulations will continue to involve
significant and potentially increasing costs, and that our failure to comply with these laws could
result in fees, fines, penalties or administrative remedies against us.
Strategic Plan
Our long-term strategic plan is to work towards becoming a fully self-managed entity. As the
first step in this transition, we intend to internalize our property management function. We
believe that this will reduce the costs of managing our properties when compared to the fees
currently being paid to third party vendors; however, we cannot make any assurances that such costs
will be reduced. In addition, our officers and directors may face increasing demands related to
their time and resources as a result of our strategic plan to transition to becoming a fully
self-managed entity. If our officers and directors are unable to devote their full time and
resources to our business, this could adversely affect our results of operations. Furthermore, we
cannot make any assurances that we will be able to successfully become a fully self-managed entity.
We could have difficulty integrating the functions currently performed by third party vendors and
we may fail to properly identify the appropriate mix of personnel and capital needs to operate as a
self-managed entity. An inability to manage this transition effectively could thus result in our
incurring excess costs and/or suffering deficiencies in our disclosure controls and procedures or
our internal control over financial reporting. Such deficiencies could cause us to incur additional
costs and our managements attention could be diverted from most effectively managing our
properties.
In addition, on November 1, 2010, we received written notice from our advisor that our advisor
has elected to terminate the Advisory Agreement. We expect that the Advisory Agreement will
terminate on December 31, 2010. Furthermore, on November 3, 2010, we received written
notice from Grubb & Ellis Equity Advisors, Transfer Agent that Grubb & Ellis Equity Advisors,
Transfer Agent has elected to terminate its transfer agent services agreement with us. We expect
this transfer agent services agreement to terminate on May 2, 2011. We intend to enter
into a new advisory agreement with a new advisor entity and a new transfer agent services agreement
with a third party prior to the expiration of the current agreements. However, our management may
have to devote considerable time and resources toward reaching an agreement with a new advisor
entity and/or a new transfer agent and transitioning advisory and/or transfer agent functions to
such entities. The use of such time and resources by our management may adversely affect our
results of operations. Furthermore, we cannot make any assurances that we will enter into any such
agreements. If we are not able to enter into such agreements on economically favorable terms, or at
all, this could adversely affect our results of operations.
Results of Operations
Our operating results are primarily comprised of income derived from our portfolio of
apartment communities.
Revenues
For the three months ended September 30, 2010 and 2009, revenues were $9,930,000 and
$9,405,000, respectively. For the three months ended September 30, 2010, revenues were comprised of
rental income of $8,864,000 and other property revenues of $1,066,000. For the three months ended
September 30, 2009, revenues were comprised of rental income of $8,445,000 and other property
revenues of $960,000.
For the nine months ended September 30, 2010 and 2009, revenues were $29,070,000 and
$28,042,000, respectively. For the nine months ended September 30, 2010, revenues were comprised of
rental income of
$26,130,000 and other property revenues of $2,940,000. For the nine months ended September 30,
2009, revenues were comprised of rental income of $25,169,000 and other property revenues of
$2,873,000.
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Other property revenues consist primarily of utility rebillings and administrative,
application and other fees charged to tenants, including amounts recorded in connection with early
lease terminations. The increase in revenues for the three and nine months ended September 30, 2010
of $525,000 and $1,028,000, respectively, as compared to the three and nine months ended September
30, 2009, was primarily due to higher occupancy rates and additional revenue during the three and
nine months ended September 30, 2010 of $602,000 and $1,255,000, respectively, earned by Bella
Ruscello Luxury Apartment Homes, or the Bella Ruscello property, that was acquired in the first
quarter of 2010. The additional revenue was partially offset by lower lease rental rates as a
result of the downturn in the current economic environment.
The aggregate occupancy for our properties was 95.2% as of September 30, 2010, as compared to
94.0% as of September 30, 2009.
Rental Expenses
For the three months ended September 30, 2010 and 2009, rental expenses were $4,829,000 and
$4,793,000, respectively. For the nine months ended September 30, 2010 and 2009, rental expenses
were $13,677,000 and $13,737,000, respectively. Rental expenses consisted of the following for the
periods then ended:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Administration |
$ | 1,599,000 | $ | 1,454,000 | $ | 4,599,000 | $ | 4,363,000 | ||||||||
Real estate taxes |
1,301,000 | 1,554,000 | 3,851,000 | 4,423,000 | ||||||||||||
Utilities |
800,000 | 778,000 | 2,089,000 | 2,078,000 | ||||||||||||
Repairs and maintenance |
682,000 | 581,000 | 1,840,000 | 1,630,000 | ||||||||||||
Property management fees |
291,000 | 277,000 | 852,000 | 813,000 | ||||||||||||
Insurance |
156,000 | 149,000 | 446,000 | 430,000 | ||||||||||||
Total rental expenses |
$ | 4,829,000 | $ | 4,793,000 | $ | 13,677,000 | $ | 13,737,000 | ||||||||
The increase in rental expenses of $36,000 for the three months ended September 30, 2010, as
compared to the three months ended September 30, 2009, was primarily due to an additional $304,000
in rental expenses incurred during the third quarter of 2010 by the Bella Ruscello property that
was acquired in the first quarter of 2010. This increase in rental expenses noted above for the
three months ended September 30, 2010, as compared to the three months ended September 30, 2009,
was partially offset by a $349,000 decrease in real estate taxes mainly as a result of successful
property tax appeals and a $34,000 decrease in utilities on the first 13 properties in our
portfolio.
The decrease in rental expenses of $60,000 for the nine months ended September 30, 2010, as
compared to the nine months ended September 30, 2009, was primarily due to a $764,000 decrease in
real estate taxes on the first 13 properties in our portfolio mainly as a result of successful
property tax appeals, partially offset by an additional $593,000 in rental expenses incurred during
the first nine months of 2010 by the Bella Ruscello property that was acquired in the first quarter
of 2010.
As a percentage of revenue, rental expenses remained materially consistent. For the three
months ended September 30, 2010 and 2009, rental expenses as a percentage of revenue were 48.6% and
51.0%, respectively, and for the nine months ended September 30, 2010 and 2009, rental expenses as
a percentage of revenue were 47.0% and 49.0%, respectively.
General and Administrative
For the three months ended September 30, 2010 and 2009, general and administrative was
$326,000 and $333,000, respectively. For the nine months ended September 30, 2010 and 2009, general
and administrative was $1,082,000 and $1,311,000, respectively. General and administrative
consisted of the following for the periods then ended:
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Professional and legal fees |
$ | 104,000 | $ | 90,000 | $ | 345,000 | $ | 338,000 | ||||||||
Postage and delivery |
8,000 | 16,000 | 80,000 | 67,000 | ||||||||||||
Directors and officers insurance premiums |
55,000 | 58,000 | 170,000 | 173,000 | ||||||||||||
Bad debt expense |
63,000 | 59,000 | 160,000 | 388,000 | ||||||||||||
Directors fees |
24,000 | 35,000 | 81,000 | 80,000 | ||||||||||||
Investor-related services |
15,000 | 12,000 | 57,000 | 55,000 | ||||||||||||
Franchise taxes |
19,000 | 24,000 | 72,000 | 78,000 | ||||||||||||
Bank charges |
27,000 | 28,000 | 72,000 | 87,000 | ||||||||||||
Stock compensation expense |
5,000 | 4,000 | 20,000 | 19,000 | ||||||||||||
Other |
6,000 | 7,000 | 25,000 | 26,000 | ||||||||||||
Total general and administrative |
$ | 326,000 | $ | 333,000 | $ | 1,082,000 | $ | 1,311,000 | ||||||||
The decrease in general and administrative of $7,000 for the three months ended September 30,
2010, as compared to the three months ended September 30, 2009, was primarily due to a $11,000
decrease in directors fees due to a decrease in the number of meetings. The decrease in general
and administrative of $229,000 for the nine months ended September 30, 2010, as compared to the
nine months ended September 30, 2009, was primarily due to a $228,000 decrease in bad debt expense.
Acquisition Related Expenses
For the three months ended September 30, 2010 and 2009, we incurred acquisition related
expenses of $2,806,000 and $0, respectively. For the three months ended September 30, 2010,
acquisition related expenses related to the purchase of the Mission Rock Ridge property and the
proposed acquisition of substantially all of the assets and certain liabilities of Mission
Residential Management and the eight proposed property acquisitions
from Delaware statutory trusts for which an affiliate of MR Holdings
serves as trustee, including
acquisition fees of $596,000 paid to our advisor and its affiliate. For the nine months ended
September 30, 2010 and 2009, we incurred acquisition related expenses of $3,606,000 and $12,000,
respectively. For the nine months ended September 30, 2010, acquisition related expenses related to
expenses associated with the purchase of the Bella Ruscello property, the Mission Rock Ridge
property and the proposed acquisition of substantially all of the assets and certain liabilities of
Mission Residential Management and the eight proposed property
acquisitions from Delaware statutory trusts for which an affiliate of
MR Holdings serves as trustee,
including acquisition fees of $1,118,000 paid to our advisor and its affiliate.
Depreciation and Amortization
For the three months ended September 30, 2010 and 2009, depreciation and amortization was
$3,182,000 and $2,911,000, respectively. For the three months ended September 30, 2010,
depreciation and amortization was comprised of depreciation on our properties of $3,072,000 and
amortization of identified intangible assets of
$110,000. For the three months ended September 30, 2009, depreciation and amortization was
comprised of depreciation on our properties of $2,911,000 and amortization of identified intangible
assets of $0. The increase in depreciation and amortization of $271,000 for the three months ended
September 30, 2010, as compared to the three months ended September 30, 2009, was primarily due to
additional depreciation on capital expenditures as well as an additional $261,000 in depreciation
and amortization incurred by the Bella Ruscello property that was acquired during the first quarter
of 2010, partially offset by assets becoming fully depreciated or amortized in 2009.
For the nine months ended September 30, 2010 and 2009, depreciation and amortization was
$9,367,000 and $8,924,000, respectively. For the nine months ended September 30, 2010, depreciation
and amortization was comprised of depreciation on our properties of $9,147,000 and amortization of
identified intangible assets of $220,000. For the nine months ended September 30, 2009,
depreciation and amortization was comprised of depreciation on our properties of $8,675,000 and
amortization of identified intangible assets of $249,000. The increase in depreciation and
amortization of $443,000 for the nine months ended September 30, 2010, as compared to the nine
months ended September 30, 2009, was primarily due to additional depreciation on capital
expenditures as well as an additional $522,000 in depreciation and amortization incurred by the
Bella Ruscello property that was acquired during the first quarter of 2010, partially offset by
assets becoming fully depreciated or amortized in 2009.
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Interest Expense
For the three months ended September 30, 2010 and 2009, interest expense was $2,995,000 and
$2,933,000, respectively. For the nine months ended September 30, 2010 and 2009, interest expense
was $8,740,000 and $8,688,000, respectively. Interest expense consisted of the following for the
periods then ended:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest expense on mortgage loan payables (a) |
$ | 2,811,000 | $ | 2,632,000 | $ | 8,172,000 | $ | 7,811,000 | ||||||||
Amortization
of deferred financing fees
mortgage loan payables (a) |
62,000 | 57,000 | 181,000 | 173,000 | ||||||||||||
Amortization of debt discount |
33,000 | 34,000 | 101,000 | 102,000 | ||||||||||||
Interest expense on the Wachovia Loan (b) |
| 28,000 | | 123,000 | ||||||||||||
Amortization
of deferred financing fees
Wachovia Loan (b) |
| 28,000 | | 78,000 | ||||||||||||
Interest expense on unsecured note payables
to affiliate (c) |
89,000 | 154,000 | 286,000 | 401,000 | ||||||||||||
Total interest expense |
$ | 2,995,000 | $ | 2,933,000 | $ | 8,740,000 | $ | 8,688,000 | ||||||||
The increase in interest expense of $62,000 for the three months ended September 30, 2010, as
compared to the three months ended September 30, 2009, and the increase of $52,000 for the nine
months ended September 30, 2010, as compared to the nine months ended September 30, 2009, was due
to the following:
(a) | The increase in interest expense on mortgage loan payables and the associated amortization of deferred financing fees of $184,000 for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, was primarily due to an additional $191,000 in interest expense and amortization of deferred financing costs incurred on the mortgage loan payable for the Bella Ruscello property, partially offset by lower interest expense on the mortgage loan payables with amortizing principal balances. The increase in interest expense on mortgage loan payables and the associated amortization of deferred financing fees of $369,000 for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, was primarily due to an additional $396,000 in interest expense and amortization of deferred financing costs incurred on the mortgage loan payable for the Bella Ruscello property, partially offset by lower interest expense on the mortgage loan payables with amortizing principal balances. | |
(b) | For the three months ended September 30, 2009, we recorded $28,000 in interest expense and $28,000 in amortization of deferred financing costs on a loan of up to $10,000,000 that we had with Wachovia Bank, National Association, or the Wachovia Loan. For the nine months ended September 30, 2009, we recorded $123,000 in interest expense and $78,000 in amortization of deferred financing costs on the Wachovia Loan. In October 2009, we repaid the remaining outstanding principal balance on the Wachovia Loan, which had a maturity date of November 1, 2009. As such, we did not incur such interest expense and amortization of deferred financing costs on the Wachovia Loan for the three and nine months ended September 30, 2010. | |
(c) | The decrease in interest expense on unsecured note payables to affiliate of $65,000 for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, and the decrease in interest expense on unsecured note payables to affiliate of $115,000 for the nine months ended September 30, 2010, as compared to the nine months ended September 30, 2009, was a result of the decrease in the outstanding principal amount as of the periods then ended and the decrease in interest rates on the unsecured note payables during the periods then ended. As of September 30, 2010 and 2009, the outstanding principal amount under the unsecured note payables to affiliate was $7,750,000 and $9,100,000, respectively. The interest rate on the unsecured note was 4.50% per annum during the three months ended September 30, 2010, and the interest rates on the unsecured notes ranged from 5.00% to 8.43% per annum during the three months ended September 30, 2009. The interest rate on the unsecured note was 4.50% per annum during the nine months ended September 30, 2010, and the interest rates on the unsecured notes ranged from 4.99% to 8.43% per annum during the nine months ended September 30, 2009. |
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Interest and Dividend Income
For the three months ended September 30, 2010 and 2009, interest and dividend income was
$6,000 and $0, respectively. For the nine months ended September 30, 2010 and 2009, interest and
dividend income was $12,000 and $1,000, respectively. For such periods, interest and dividend
income was primarily related to interest earned on our money market accounts. The change in
interest and dividend income was due to higher cash balances and higher interest rates during 2010, as compared to 2009.
Liquidity and Capital Resources
We are dependent upon the net proceeds from our follow-on offering to provide the capital
required to purchase real estate and real estate-related investments, net of any indebtedness that
we may incur, and to repay our unsecured note payable to affiliate. Our ability to raise funds
through our follow-on offering is dependent on general economic conditions, general market
conditions for REITs and our operating performance. The capital required to purchase real estate
and real estate-related investments is obtained primarily from our follow-on offering and from any
indebtedness that we may incur.
We expect to experience a relative increase in liquidity as additional subscriptions for
shares of our common stock are received and a relative decrease in liquidity as net offering
proceeds are expended in connection with the acquisition, management and operation of our real
estate and real estate-related investments.
Our principal demands for funds will be for the acquisitions of real estate and real
estate-related investments, to pay operating expenses, to pay principal and interest on our
outstanding indebtedness and to make distributions to our stockholders. We estimate that we will
require approximately $3,662,000 to pay interest on our outstanding indebtedness in the remaining
three months of 2010, based on rates in effect as of September 30, 2010. In addition, we estimate
that we will require $213,000 to pay principal on our outstanding indebtedness in the remaining
three months of 2010. We are required by the terms of certain mortgage loan documents to meet
certain financial covenants, such as minimum net worth and liquidity amounts, and reporting
requirements. As of September 30, 2010, we were in compliance with all such requirements. If we are
unable to obtain financing in the future, it may have a material effect on our operations,
liquidity and/or capital resources.
In addition, we will require resources to make certain payments to our advisor and Grubb &
Ellis Securities, Inc., or Grubb & Ellis Securities, or our dealer manager, which, during our
follow-on offering, includes payments for reimbursement of certain organizational and offering
expenses and for selling commissions and dealer manager fees.
Generally, cash needs for items other than acquisitions of real estate and real estate-related
investments will be met from operations, borrowings and the net proceeds from our follow-on
offering. We believe that these cash resources will be sufficient to satisfy our cash requirements
for the foreseeable future, and we do not anticipate a need to raise funds from other than these
sources within the next 12 months.
Our advisor evaluates potential additional investments and engages in negotiations with real
estate sellers, developers, brokers, investment managers, lenders and others on our behalf. Until
we invest the majority of the net proceeds from our follow-on offering in real estate and real
estate-related investments, we may invest in short-term, highly liquid or other authorized
investments. Such short-term investments will not earn significant returns, and we cannot predict
how long it will take to fully invest the proceeds from our offering in real estate and real
estate-related investments. The number of properties we may acquire and other investments we will
make will depend upon the number of shares of our common stock sold in our follow-on offering and
the resulting amount of net proceeds available for investment. However, there may be a delay
between the sale of shares of our common stock and our investments in real estate and real
estate-related investments, which could result in a delay in the benefits to our stockholders, if
any, of returns generated from our investments operations.
When we acquire a property, our advisor prepares a capital plan that contemplates the
estimated capital needs of that investment. In addition to operating expenses, capital needs may
also include costs of refurbishment or other major capital expenditures. The capital plan will also
set forth the anticipated sources of the necessary capital, which may include a line of credit or
other loan established with respect to the investment, operating cash generated by the investment,
additional equity investments from us or joint venture partners or, when necessary, capital
reserves. Any capital reserve would be established from the net proceeds of our follow-on offering,
proceeds from sales of other investments, operating cash generated by other investments or other
cash on hand. In some cases, a lender may require us to establish capital reserves for a particular
investment. The capital plan for each investment will be adjusted through ongoing, regular reviews
of our portfolio or as necessary to respond to unanticipated additional capital needs.
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Other Liquidity Needs
In the event that there is a shortfall in net cash available due to various factors,
including, without limitation, the timing of distributions or the timing of the collection of
receivables, we may seek to obtain capital to pay distributions by means of secured or unsecured
debt financing through one or more third parties, or our advisor or its affiliates. There are
currently no limits or restrictions on the use of proceeds from our advisor or its affiliates which
would prohibit us from making the proceeds available for distribution. We may also pay
distributions with cash from capital transactions, including, without limitation, the sale of one
or more of our properties or from proceeds from our follow-on offering.
As of September 30, 2010, we estimate that our expenditures for capital improvements will
require approximately $269,000 for the remaining three months of 2010. As of September 30, 2010, we
had $314,000 of restricted cash in loan impounds and reserve accounts for such capital expenditures
and any remaining expenditures will be paid with net cash from operations or borrowings. We cannot
provide assurance, however, that we will not exceed these estimated expenditure levels or be able
to obtain additional sources of financing on commercially favorable terms or at all to fund such
expenditures.
If we experience lower occupancy levels, reduced rental rates, reduced revenues as a result of
asset sales, increased capital expenditures and leasing costs compared to historical levels due to
competitive market conditions for new and renewal leases, the effect would be a reduction of net
cash provided by operating activities. If such a reduction of net cash provided by operating
activities is realized, we may have a cash flow deficit in subsequent periods. Our estimate of net
cash available is based on various assumptions, which are difficult to predict, including the
levels of leasing activity and related leasing costs. Any changes in these assumptions could impact
our financial results and our ability to fund working capital and unanticipated cash needs.
Cash Flows
Cash flows provided by operating activities for the nine months ended September 30, 2010 and
2009 were $2,832,000 and $4,653,000, respectively. For the nine months ended September 30, 2010,
cash flows provided by operating activities primarily related to the operations of our 15
properties, as well as the payment of acquisition related expenses of $3,122,000. In addition,
there was a $1,319,000 increase in accounts payable and accrued liabilities primarily due to the
additional accrual of 2010 real estate and business taxes offset by the payment of 2009 real estate
and business taxes. In addition to the operations of our 15 properties, the decrease in cash flows
provided by operating activities in 2010, as compared to 2009, was related to the payment of
acquisition related expenses in 2010 versus not paying any in 2009. For the nine months ended
September 30, 2009, cash flows provided by operating activities primarily related to the operations
of our 13 properties, partially offset by the $563,000 decrease in accounts payable due to
affiliates, net primarily due to the $581,000 payment of the asset management fees related to the
fourth quarter 2008, as well as no accrual for asset management fees during the nine months ended
September 30, 2009. We anticipate cash flows provided by operating activities to increase as we
purchase more properties.
Cash flows used in investing activities for the nine months ended September 30, 2010 and 2009
were $39,377,000 and $2,174,000, respectively. For the nine months ended September 30, 2010, cash
flows used in investing activities related primarily to the acquisition of real estate operating
properties in the amount of $36,713,000. For the nine months ended September 30, 2009, cash flows
used in investing activities related primarily to the payment of the sellers allocation of accrued
liabilities on our 2008 acquisitions of real estate operating properties in the amount of $469,000
and a $924,000 increase in restricted cash for property taxes, insurance and capital expenditures.
We anticipate cash flows used in investing activities to increase as we purchase properties.
Cash flows provided by financing activities for the nine months ended September 30, 2010 and
2009 were $36,984,000 and $123,000, respectively. For the nine months ended September 30, 2010,
cash flows provided by financing activities related primarily to borrowings on our mortgage loan
payables of $27,200,000 and funds raised from investors in our follow-on offering of $20,488,000,
partially offset by payments on our unsecured note payable to affiliate of $1,350,000, share
repurchases of $1,872,000, payment of offering costs of $2,220,000 and cash distributions in the
amount of $4,740,000. For the nine months ended September 30, 2009, cash flows provided by
financing activities related primarily to funds raised from investors of $9,193,000, partially
offset by share repurchases of $1,860,000, repayments under our lines of credit of $1,800,000, the
payment of offering costs of
$1,167,000 and distributions in the amount of $4,226,000. We anticipate cash flows provided by
financing activities to increase in the future as we raise additional funds in our follow-on
offering or subsequent offerings from investors and incur additional debt to purchase properties.
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Distributions
The amount of the distributions we pay to our stockholders is determined by our board of
directors and is dependent on a number of factors, including funds available for the payment of
distributions, our financial condition, capital expenditure requirements and annual distribution
requirements needed to maintain our status as a REIT under the Code. We have not established any
limit on the amount of our follow-on offering proceeds that may be used to fund distributions,
except that, in accordance with our organizational documents and Maryland law, we may not make
distributions that would: (1) cause us to be unable to pay our debts as they become due in the
usual course of business; (2) cause our total assets to be less than the sum of our total
liabilities plus senior liquidation preferences; or (3) jeopardize our ability to maintain our
qualification as a REIT. Therefore, all or any portion of a distribution to our stockholders may be
paid from the net proceeds of our follow-on offering.
On February 10, 2009, our board of directors approved a decrease in our distribution to a 6.0%
per annum, or $0.60 per common share, distribution to be paid monthly to our stockholders beginning
with our March 2009 distribution, which was paid in April 2009. The 6.0% per annum distribution
assumes a purchase price of $10.00 per share. On March 19, 2010, our board of directors authorized
a daily distribution to our stockholders of record as of the close of business on each day of the
period commencing on April 1, 2010 and ending on June 30, 2010. The distributions declared for each
record date in the April 2010, May 2010 and June 2010 periods were paid in May 2010, June 2010 and
July 2010, respectively. On June 22, 2010, our board of directors authorized a daily distribution
to our stockholders of record as of the close of business on each day of the period commencing on
July 1, 2010 and ending on September 30, 2010. The distributions declared for each record date in
the July 2010, August 2010 and September 2010 periods were paid in August 2010, September 2010 and
October 2010, respectively. Effective as of September 24, 2010, our board of directors authorized a
daily distribution to our stockholders of record as of the close of business on each day of the
period commencing on October 1, 2010 and ending on December 31, 2010. The distributions declared
for each record date in the October 2010, November 2010 and December 2010 periods will be paid in
November 2010, December 2010 and January 2011, respectively, only from legally available funds. The
distributions are calculated based on 365 days in the calendar year and are equal to $0.0016438 per
day per share of common stock, which is equal to an annualized distribution rate of 6.0%, assuming
a purchase price of $10.00 per share. These distributions are aggregated and paid in cash or DRIP
shares monthly in arrears.
For the nine months ended September 30, 2010, we paid distributions of $7,994,000 ($4,740,000
in cash and $3,254,000 in shares of our common stock pursuant to the DRIP), of which $2,832,000, or
35.4%, were paid from cash flows from operations. For the nine months ended September 30, 2009, we
paid distributions of $7,553,000 ($4,226,000 in cash and $3,327,000 in shares of our common stock
pursuant to the DRIP), of which $4,653,000, or 61.6%, were paid from cash flows from operations.
The distributions paid in excess of our cash flows from operations were paid using net proceeds
from our initial offering and our follow-on offering, or our offerings. Under GAAP, acquisition
related expenses are expensed and therefore subtracted from cash flows from operations. However,
these expenses are paid from offering proceeds. Cash flows from operations of $2,832,000 adding
back acquisition related expenses of $3,606,000 for the nine months ended September 30, 2010 are
$6,438,000, or 80.5% of distributions paid.
Our distributions of amounts in excess of our current and accumulated earnings and profits
have resulted in a return of capital to our stockholders. We have not established any limit on the
amount of offering proceeds that may be used to fund distributions other than those limits imposed
by our organizational documents and Maryland law. Therefore, all or any portion of a distribution
to our stockholders may be paid from offering proceeds. The payment of distributions from our
offering proceeds could reduce the amount of capital we ultimately invest in assets and negatively
impact the amount of income available for future distributions.
As of September 30, 2010, we had an amount payable of $102,000 to our advisor and its
affiliates for operating expenses and property management fees, which will be paid from cash flows
from operations in the future as they become due and payable by us in the ordinary course of
business consistent with our past practice.
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As of September 30, 2010, no amounts due to our advisor or its affiliates have been deferred
or forgiven. Effective January 1, 2009, our advisor has agreed to waive the asset management fee
until the quarter following the quarter in which we generate funds from operations, or FFO,
excluding non-recurring charges, sufficient to cover 100% of the distributions declared to our
stockholders for such quarter. Our advisor and its affiliates have no other obligations to defer,
waive or forgive amounts due to them. In the future, if our advisor or its affiliates do not defer,
waive or forgive amounts due to them, this would negatively affect our cash flows from operations,
which could result in us paying distributions, or a portion thereof, with the net proceeds from our
follow-on offering or borrowed funds. As a result, the amount of proceeds available for investment
and operations would be reduced, or we may incur additional interest expense as a result of
borrowed funds.
For the nine months ended September 30, 2010 and 2009, our FFO was $1,977,000 and $4,295,000,
respectively. For the nine months ended September 30, 2010, we paid distributions of $1,977,000, or
24.7%, from FFO and $6,017,000, or 75.3%, from proceeds from our follow-on offering. For the nine
months ended September 30, 2009, we paid distributions of $4,295,000, or 56.9%, from FFO and
$3,258,000, or 43.1%, from proceeds from our offerings. The payment of distributions from sources
other than FFO may reduce the amount of proceeds available for investment and operations or cause
us to incur additional interest expense as a result of borrowed funds. For a further discussion of
FFO, see Funds from Operations and Modified Funds from Operations below.
Financing
We generally anticipate that aggregate borrowings, both secured and unsecured, will not exceed
65.0% of all of our real estate and real estate-related investments combined fair market values,
as defined, as determined at the end of each calendar year. For these purposes, the fair market
value of each asset will be equal to the purchase price paid for the asset or, if the asset was
appraised subsequent to the date of purchase, then the fair market value will be equal to the value
reported in the most recent independent appraisal of the asset. Our policies do not limit the
amount we may borrow with respect to any individual investment. However, we may incur higher
leverage during the period prior to the investment of all of the net proceeds of our follow-on
offering. As of September 30, 2010, our aggregate borrowings were 66.9% of our real estate and real
estate-related investments combined fair market values, as defined, and such excess over 65.0% was
due to the unsecured note payable to an affiliate we incurred to purchase Kedron Village and Canyon
Ridge Apartments.
Our charter precludes us from borrowing in excess of 300.0% of our net assets, unless approved
by a majority of our independent directors and the justification for such excess borrowing is
disclosed to our stockholders in our next quarterly report. For purposes of this determination, net
assets are our total assets, other than intangibles, valued at cost before deducting depreciation,
amortization, bad debt or other similar non-cash reserves, less total liabilities. We compute our
leverage at least quarterly on a consistently-applied basis. Generally, the preceding calculation
is expected to approximate 75.0% of the aggregate cost of our real estate and real estate-related
investments before depreciation, amortization, bad debt and other similar non-cash reserves. We may
also incur indebtedness to finance improvements to properties and, if necessary, for working
capital needs or to meet the distribution requirements applicable to REITs under the federal income
tax laws. As of November 12, 2010 and September 30, 2010, our leverage did not exceed 300.0% of our
net assets.
Mortgage Loan Payables, Net and Unsecured Note Payable to Affiliate
For a discussion of our mortgage loan payables, net and our unsecured note payable to
affiliate, see Note 6, Mortgage Loan Payables, Net, Unsecured Note Payable to Affiliate and Short
Term Notes, to our accompanying condensed consolidated financial statements.
Termination of Dealer Manager Agreement
On November 1, 2010, we received written notice from Grubb & Ellis Securities that Grubb &
Ellis Securities has elected to terminate the dealer manager agreement between us and Grubb & Ellis
Securities. We expect that the dealer manager agreement will terminate on December 31,
2010. Accordingly, on November 5, 2010, we entered into an agreement with Realty Capital
Securities, LLC, or RCS, whereby RCS will agree to assume the role of dealer manager after the
termination of our dealer manager agreement with Grubb & Ellis Securities for the remainder of our
follow-on offering; provided, however, that until the DMA Effective Date, as defined below, RCS will not have
any authority, and will not be an agent or distributor for us with respect to the sale of shares of
our common stock pursuant to our follow-on offering. The DMA Effective Date shall be the first date
upon which all of the following have occurred: (i) the Advisory Agreement has expired or has been
terminated; (ii) our dealer manager agreement with Grubb & Ellis Securities has expired or has been
terminated; and (iii) RCS has received a No-Objections notice from the Financial Industry
Regulatory Authority in connection with our follow-on offering. As a result of these conditions, we
may not be able to transition the dealer manager functions to RCS immediately after the termination
of our dealer manager agreement with Grubb & Ellis Securities, or at all. Any such inability or
delay in transitioning the dealer manager functions to RCS, or any other successor dealer manager
entity, would require us to temporarily suspend our follow-on offering.
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In addition, Grubb & Ellis Securities has temporarily suspended our follow-on offering until
such time as we file with the SEC a supplement to the prospectus regarding our follow-on offering
that provides disclosure regarding the transfer of the dealer manager functions related to our
follow-on offering. Although we intend to file such a supplement to the prospectus in the near
future, we cannot make any assurances regarding when such a supplement will be filed. Moreover,
prior to the DMA Effective Date, we will be required to substantially revise the prospectus for our
follow-on public offering in order to reflect the transfer of our advisory functions to a new
advisor entity, the transfer of our dealer manager functions stated above, and the removal of Grubb
& Ellis as our sponsor. While we intend to file such a revised prospectus with the SEC prior to
the DMA Effective Date, we cannot make any assurances that we will be able to do so. If we do not
file such a revised prospectus prior to the DMA Effective Date, we will be required to suspend our
offering until such a revised prospectus is filed.
Furthermore, the soliciting dealer agreements between Grubb & Ellis Securities and the
participating broker-dealers in our follow-on offering are not transferable to RCS. Therefore, the
participating broker-dealers and RCS will need to engage in a due diligence review before entering
into new soliciting dealer agreements. Once the dealer manager agreement with Grubb & Ellis
Securities is terminated, participating broker-dealers will not be able to sell shares of our
common stock pursuant to our follow-on offering until they enter into new soliciting dealer
agreements with RCS. If RCS is not able to enter into new soliciting dealer agreements with
participating broker-dealers, or there is a delay in the execution of soliciting dealer agreements
between RCS and participating broker-dealers, our ability to raise capital in our follow-on
offering would be adversely affected.
Similarly, RCS would not be able to use any supplemental sales material prepared by our
current advisor or Grubb & Ellis Securities. RCS and our intended new advisor entity may prepare
additional supplemental sales material for use in the future, but we cannot make any assurances
regarding when, or if, such material will be available for use in connection with our follow-on
offering. While any supplemental sales material must be accompanied by or preceded by the delivery
of a prospectus related to our follow-on offering, the inability to use such previously prepared
supplemental sales material may adversely affect our ability to raise capital in our follow-on
offering.
Any suspension of our follow-on offering or delay in the execution of new soliciting dealer
agreements with participating broker-dealers would adversely affect our ability to raise capital in
our follow-on offering and our liquidity and capital resources. In addition, we have used proceeds
of our follow-on offering to pay, in part, distributions to our stockholders. Therefore, an
adverse affect on our ability to raise capital could also adversely affect our ability to pay
distributions to our stockholders.
Furthermore, a suspension of our follow-on offering may also require us to suspend the DRIP.
If the DRIP is suspended, we would be required to pay any distributions to stockholders in cash,
and we may not have sufficient funds available to do so. In addition, funds from the DRIP are
used, in part, to repurchase shares from our stockholders pursuant to our share repurchase plan.
If the DRIP is suspended, we may not have sufficient funds available to repurchase shares pursuant
to the share repurchase plan, and thus, we may suspend that plan.
REIT Requirements
In order to continue to qualify as a REIT for federal income tax purposes, we are required to
make distributions to our stockholders of at least 90.0% of our annual taxable income, excluding
net capital gains. In the event that there is a shortfall in net cash available due to factors
including, without limitation, the timing of such distributions or the timing of the collection of
receivables, we may seek to obtain capital to pay distributions by means of secured or unsecured
debt financing through one or more third parties, or our advisor or its affiliates. We may also pay
distributions with cash from capital transactions including, without limitation, the sale of one or
more of our properties or from proceeds from our follow-on offering.
Commitments and Contingencies
For a discussion of our commitments and contingencies, see Note 7, Commitments and
Contingencies, to our accompanying condensed consolidated financial statements.
Debt Service Requirements
One of our principal liquidity needs is the payment of interest and principal on our
outstanding indebtedness. As of September 30, 2010, we had 15 mortgage loan payables outstanding in
the aggregate principal amount of $244,811,000 ($244,251,000, net of discount).
As of September 30, 2010, we had $7,750,000 outstanding under an amended and restated
consolidated unsecured promissory note with NNN Realty Advisors, Inc., or NNN Realty Advisors, which has an interest rate
of 4.50% per annum and a maturity date of July 17, 2012.
We are required by the terms of certain loan documents to meet certain financial covenants,
such as minimum net worth and liquidity amounts, and reporting requirements. As of September 30,
2010, we were in compliance with all such requirements and we expect to remain in compliance with
all such requirements for the next 12 months. As of September 30, 2010, the weighted average
effective interest rate on our outstanding debt was 4.73% per annum.
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Contractual Obligations
The following table provides information with respect to the maturities and scheduled
principal repayments of our indebtedness as of September 30, 2010. The table does not reflect any
available extension options. Of the amounts maturing in 2014, $13,346,000 in mortgage loan payables
have a one year extension available.
Payments Due by Period | ||||||||||||||||||||
Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | |||||||||||||||||
(2010) | (2011-2012) | (2013-2014) | (After 2014) | Total | ||||||||||||||||
Principal payments fixed rate debt |
$ | 213,000 | $ | 9,578,000 | $ | 16,741,000 | $ | 165,029,000 | $ | 191,561,000 | ||||||||||
Interest payments fixed rate debt |
2,481,000 | 20,736,000 | 19,563,000 | 22,459,000 | 65,239,000 | |||||||||||||||
Principal payments variable rate debt |
| | 210,000 | 60,790,000 | 61,000,000 | |||||||||||||||
Interest payments variable rate debt
(based on rates in effect as of
September 30, 2010) |
1,181,000 | 3,140,000 | 3,133,000 | 1,062,000 | 8,516,000 | |||||||||||||||
Total |
$ | 3,875,000 | $ | 33,454,000 | $ | 39,647,000 | $ | 249,340,000 | $ | 326,316,000 | ||||||||||
Off-Balance Sheet Arrangements
As of September 30, 2010, we had no off-balance sheet transactions nor do we currently have
any such arrangements or obligations.
Funds from Operations and Modified Funds from Operations
One of our objectives is to provide cash distributions to our stockholders from cash generated
by our operations. Due to certain unique operating characteristics of real estate companies, the
National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has
promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to
reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as
a supplemental performance measure. FFO is not equivalent to our net income or loss as defined
under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White
Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the
White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP,
excluding gains or losses from sales of property but including asset impairment write-downs, plus
depreciation and amortization and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect
FFO. Our FFO calculation complies with NAREITs policy described above.
However, changes in the accounting and reporting rules under GAAP that have been put into
effect since the establishment of NAREITs definition of FFO have prompted an increase in the
non-cash and non-operating items included in FFO. As such, in addition to FFO, we use modified
funds from operations, or MFFO, to further evaluate our operating performance. MFFO excludes from
FFO mezzanine interest expense on the unsecured note payable to an affiliate incurred in connection
with the acquisition of properties, acquisition related expenses and amortization of debt discount.
The historical accounting convention used for real estate assets requires straight-line
depreciation of buildings and improvements, which implies that the value of real estate assets
diminishes predictably over time. Since real estate values historically rise and fall with market
conditions, presentations of operating results for a REIT, using historical accounting for
depreciation, we believe, may be less informative. As a result, we believe that the use of FFO
provides a more complete understanding of our performance. In addition, we believe that the use of
MFFO is useful for investors as a measure of our operating performance because it excludes non-cash
and non-operating items that we consider more reflective of investing and financing activities.
Presentation of this information is intended to assist the reader in comparing the operating
performance of different REITs, although it should be noted that not all REITs calculate FFO and
MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO
are not necessarily indicative of cash flow available to fund cash needs and should not be
considered as alternatives to net income as an indication of our performance.
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The following is a reconciliation of net loss, which is the most directly comparable GAAP
financial measure, to FFO and MFFO for the three and nine months ended September 30, 2010 and 2009:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss |
$ | (4,202,000 | ) | $ | (1,565,000 | ) | $ | (7,390,000 | ) | $ | (4,629,000 | ) | ||||
Add: |
||||||||||||||||
Net loss attributable to noncontrolling interests |
| | | | ||||||||||||
Depreciation and amortization
consolidated properties |
3,182,000 | 2,911,000 | 9,367,000 | 8,924,000 | ||||||||||||
FFO |
$ | (1,020,000 | ) | $ | 1,346,000 | $ | 1,977,000 | $ | 4,295,000 | |||||||
Add: |
||||||||||||||||
Mezzanine interest expense |
89,000 | 182,000 | 286,000 | 524,000 | ||||||||||||
Acquisition related expenses |
2,806,000 | | 3,606,000 | 12,000 | ||||||||||||
Amortization of debt discount |
33,000 | 34,000 | 101,000 | 102,000 | ||||||||||||
MFFO |
$ | 1,908,000 | $ | 1,562,000 | $ | 5,970,000 | $ | 4,933,000 | ||||||||
Weighted average common shares outstanding
basic and diluted |
18,782,212 | 16,384,198 | 18,022,870 | 16,040,551 | ||||||||||||
FFO per common share basic and diluted |
$ | (0.05 | ) | $ | 0.08 | $ | 0.11 | $ | 0.27 | |||||||
MFFO per common share basic and diluted |
$ | 0.10 | $ | 0.10 | $ | 0.33 | $ | 0.31 | ||||||||
Net Operating Income
Net operating income is a non-GAAP financial measure that is defined as net income (loss),
computed in accordance with GAAP, generated from properties before general and administrative
expenses, acquisition related expenses, depreciation and amortization, interest expense and
interest and dividend income. We believe that net operating income is useful for investors as it
provides an accurate measure of the operating performance of our operating assets because net
operating income excludes certain items that are not associated with the management of our
properties. Additionally, we believe that net operating income is a widely accepted measure of
comparative operating performance in the real estate community. However, our use of the term net
operating income may not be comparable to that of other real estate companies as they may have
different methodologies for computing this amount.
The following is a reconciliation of net loss, which is the most directly comparable GAAP
financial measure, to net operating income for the three and nine months ended September 30, 2010
and 2009:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net loss |
$ | (4,202,000 | ) | $ | (1,565,000 | ) | $ | (7,390,000 | ) | $ | (4,629,000 | ) | ||||
Add: |
||||||||||||||||
General and administrative |
326,000 | 333,000 | 1,082,000 | 1,311,000 | ||||||||||||
Acquisition related expenses |
2,806,000 | | 3,606,000 | 12,000 | ||||||||||||
Depreciation and amortization |
3,182,000 | 2,911,000 | 9,367,000 | 8,924,000 | ||||||||||||
Interest expense |
2,995,000 | 2,933,000 | 8,740,000 | 8,688,000 | ||||||||||||
Less: |
||||||||||||||||
Interest and dividend income |
(6,000 | ) | | (12,000 | ) | (1,000 | ) | |||||||||
Net operating income |
$ | 5,101,000 | $ | 4,612,000 | $ | 15,393,000 | $ | 14,305,000 | ||||||||
Subsequent Events
For a discussion of subsequent events, see Note 15, Subsequent Events, to our accompanying
condensed consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There were no material changes in the information regarding market risk, or in the methods we
use to manage market risk, that was provided in our 2009 Annual Report on Form 10-K, as filed with
the SEC on March 19, 2010.
The table below presents, as of September 30, 2010, the principal amounts and weighted average
interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to
interest rate changes. The table below does not reflect any available extension options. Of the
amounts maturing in 2014, $13,346,000 in mortgage loan payables have a one year extension
available.
Expected Maturity Date | ||||||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||
Fixed rate
debt
principal payments |
$ | 213,000 | $ | 875,000 | $ | 8,703,000 | $ | 1,541,000 | $ | 15,200,000 | $ | 165,029,000 | $ | 191,561,000 | $ | * | ||||||||||||||||
Weighted average interest
rate on maturing debt |
5.36 | % | 5.36 | % | 4.59 | % | 5.28 | % | 5.07 | % | 5.51 | % | 5.43 | % | | |||||||||||||||||
Variable
rate debt
principal
payments |
$ | | $ | | $ | | $ | 30,000 | $ | 180,000 | $ | 60,790,000 | $ | 61,000,000 | $ | 56,724,000 | ||||||||||||||||
Weighted average interest
rate on maturing debt
(based on rates in
effect as
of September 30, 2010) |
| % | | % | | % | 2.56 | % | 2.56 | % | 2.54 | % | 2.54 | % | |
* | The estimated fair value of our fixed rate mortgage loan payables was $200,935,000 as of September 30, 2010. The estimated fair value of the $7,750,000 principal amount outstanding under the unsecured note payable to affiliate as of September 30, 2010 is not determinable due to the related party nature of the note. |
Mortgage loan payables were $244,811,000 ($244,251,000, net of discount) as of September 30,
2010. As of September 30, 2010, we had 12 fixed rate and three variable rate mortgage loans with
effective interest rates ranging from 2.51% to 5.94% per annum and a weighted average effective
interest rate of 4.74% per annum. As of September 30, 2010, we had $183,811,000 ($183,251,000, net
of discount) of fixed rate debt, or 75.1% of mortgage loan payables, at a weighted average interest
rate of 5.47% per annum and $61,000,000 of variable rate debt, or 24.9% of mortgage loan payables,
at a weighted average effective interest rate of 2.54% per annum.
As of September 30, 2010, we had $7,750,000 outstanding under an amended and restated
consolidated unsecured promissory note with NNN Realty Advisors, with a fixed interest rate of
4.50% per annum and a maturity date of July 17, 2012.
Borrowings as of September 30, 2010 bore interest at a weighted average effective interest
rate of 4.73% per annum.
An increase in the variable interest rate on our three variable interest rate mortgages
constitutes a market risk. As of September 30, 2010, a 0.50% increase in London Interbank Offered
Rate, or LIBOR, would have increased our overall annual interest expense by $305,000, or 2.71%.
In addition to changes in interest rates, the value of our future properties is subject to
fluctuations based on changes in local and regional economic conditions and changes in the
creditworthiness of tenants, which may affect our ability to refinance our debt if necessary.
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Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports
pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded,
processed, summarized and reported within the time periods specified in the rules and forms, and
that such information is accumulated and communicated to us, including our chief executive officer,
who also serves as our chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of
September 30, 2010 was conducted under the supervision and with the participation of our
management, including our chief executive officer, who also serves as our chief financial officer,
of the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures, as of September 30, 2010,
were effective.
(b) Changes in internal control over financial reporting. There were no changes in our
internal control over financial reporting that occurred during the fiscal quarter ended September
30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
On November 9, 2010, seven of the 277 investors who hold
interests in the eight Delaware statutory trusts that hold the
remaining eight multifamily apartment properties, or the DST
properties, that we
have contracted to acquire from such trusts filed a complaint in the United States District Court
for the Eastern District of Virginia (Civil Action No.
3:10CV824(HEH)) against the trustee of each of these trusts and certain of
the trustees affiliates, as well as against our operating partnership, seeking, among other things, to enjoin the
closing of our proposed acquisition of the remaining eight DST properties that we have contracted
to acquire. The complaint alleges, among other things, that the trustee has breached its fiduciary
duties to the beneficial owners of the trusts by entering into the eight purchase and sale agreements with our operating
partnership. Our operating partnership is named as a defendant because it is a party to the agreements relating to the
transactions that the plaintiffs are seeking to enjoin. The complaint further alleges that our operating partnership aided
and abetted the trustees alleged breaches of fiduciary duty and tortiously interfered with the contractual relations between
the trusts and the trust beneficiaries. We believe the allegations contained in the complaint are without merit and we
intend to defend the claims vigorously. However, there is no assurance that we will be successful in our defense. If
the plaintiffs are able to obtain the injunctive relief they seek, we may be prevented from closing the acquisitions of the
remaining eight DST properties that we have contracted to acquire. A hearing regarding the
request for injunctive relief is expected to occur within the next 90
days. In a Consent Order dated November 10, 2010, the parties
agreed that none of the eight transactions will be closed during the 90-day period following the date of such Consent Order.
Item 1A. Risk Factors.
There were no material changes from the risk factors previously disclosed in our 2009 Annual
Report on Form 10-K, as filed with the United States, or U.S., Securities and Exchange Commission,
or the SEC, on March 19, 2010, except as noted below.
Some or all of the following factors may affect the returns we receive from our investments,
our results of operations, our ability to pay distributions to our stockholders, availability to
make additional investments or our ability to dispose of our investments.
We have paid distributions from sources other than our cash flows from operations, including from
the net proceeds from our initial offering and our follow-on offering, or our offerings, and from
borrowed funds. We may continue to pay distributions from the net proceeds from our follow-on
offering, or from borrowings in anticipation of future cash flows. Any such distributions may
reduce the amount of capital we ultimately invest in assets and negatively impact the value of our
stockholders investments.
Distributions payable to our stockholders may include a return of capital, rather than a
return on capital. We expect to continue to pay distributions to our stockholders. The actual
amount and timing of distributions are determined by our board of directors in its discretion and
typically will depend on the amount of funds available for distribution, which will depend on items
such as our financial condition, current and projected capital expenditure requirements, tax
considerations and annual distribution requirements needed to maintain our qualification as a real
estate investment trust, or REIT. As a result, our distribution rate and payment frequency may vary
from time to time. We expect to have little cash flows from operations available for distribution
until we make substantial investments. Therefore, we may use proceeds from our follow-on offering
or borrowed funds to pay cash distributions to our stockholders, including to maintain our
qualification as a REIT, which may reduce the amount of proceeds available for investment and
operations or cause us to incur additional interest expense as a result of borrowed funds. Further,
if the aggregate amount of cash distributed in any given year exceeds the amount of our current and
accumulated earnings and profits, the excess amount will be deemed a return of capital. We have not
established any limit on the amount of offering proceeds that may be used to fund distributions,
except that, in accordance with our organizational documents and Maryland law, we may not make
distributions that would: (1) cause us to be unable to pay our debts as they become due in the
usual course of business; (2) cause our total assets to be less than the sum of our total
liabilities plus senior liquidation preferences; or (3) jeopardize our ability to maintain our
qualification as a REIT. Therefore, all or any portion of a distribution to our stockholders may be
paid from the net proceeds from our follow-on offering.
For the nine months ended September 30, 2010, we paid distributions of $7,994,000 ($4,740,000
in cash and $3,254,000 in shares of our common stock pursuant to the distribution reinvestment
plan, or the DRIP), of which $2,832,000, or 35.4%, were paid from cash flows from operations. The
distributions paid in excess of our cash flows from operations were paid using net proceeds from
our offerings. Under accounting principles generally accepted in the United States of America,
acquisition related expenses are expensed and therefore subtracted from cash flows from operations.
However, these expenses are paid from offering proceeds. Cash flows from operations of $2,832,000
adding back acquisition related expenses of $3,606,000 for the nine months ended September 30, 2010
are $6,438,000, or 80.5% of distributions paid.
Our distributions of amounts in excess of our current and accumulated earnings and profits
have resulted in a return of capital to our stockholders. We have not established any limit on the
amount of offering proceeds that may be used to fund distributions other than those limits imposed
by our organizational documents and Maryland law. Therefore, all or any portion of a distribution
to our stockholders may be paid from offering proceeds. The payment of distributions from our
offering proceeds could reduce the amount of capital we ultimately invest in assets and negatively
impact the amount of income available for future distributions. For a further discussion of
distributions,
see Part I, Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources Distributions.
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As of September 30, 2010, we had an amount payable of $102,000 to our advisor or its
affiliates for operating expenses and property management fees, which will be paid from cash flows
from operations in the future as they become due and payable by us in the ordinary course of
business consistent with our past practice.
As of September 30, 2010, no amounts due to our advisor or its affiliates have been deferred
or forgiven. Effective January 1, 2009, our advisor waived the asset management fee it is entitled
to receive until the quarter following the quarter in which we generate funds from operations, or
FFO, excluding non-recurring charges, sufficient to cover 100% of the distributions declared to our
stockholders for such quarter. Our advisor and its affiliates have no other obligations to defer,
waive or forgive amounts due to them. In the future, if our advisor or its affiliates do not defer,
waive or forgive amounts due to them, this would negatively affect our cash flows from operations,
which could result in us paying distributions, or a portion thereof, with the net proceeds from our
follow-on offering or borrowed funds. As a result, the amount of proceeds available for investment
and operations would be reduced, or we may incur additional interest expense as a result of
borrowed funds.
For the nine months ended September 30, 2010, our FFO was $1,977,000. For the nine months
ended September 30, 2010, we paid distributions of $1,977,000, or 24.7%, from FFO and $6,017,000,
or 75.3%, from proceeds from our follow-on offering. The payment of distributions from sources
other than FFO may reduce the amount of proceeds available for investment and operations or cause
us to incur additional interest expense as a result of borrowed funds. For a further discussion of
FFO, see Part I, Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations Funds from Operations and Modified Funds from Operations.
We have received notices of the termination of the Advisory Agreement with our advisor, our
dealer manager agreement with Grubb & Ellis Securities, Inc. and our transfer agent
services agreement with Grubb & Ellis Equity Advisors, Transfer Agent. We may not be
successful in hiring third party service providers to perform advisory services, dealer
manager services and/or transfer agent services for us, which could impact our ability to
achieve our investment objectives.
On November 1, 2010, we received written notice from our advisor that our advisor has elected
to terminate the Advisory Agreement, and we received written notice from Grubb & Ellis Securities,
Inc., or our dealer manager, that our dealer manager has elected to terminate our dealer manager
agreement with them. Both of these agreements will terminate on December 31, 2010. On November 3,
2010, we received written notice from Grubb & Ellis Equity Advisors, Transfer Agent that Grubb &
Ellis Equity Advisors, Transfer Agent has elected to terminate our transfer agent services
agreement with them. We expect that such transfer agent services agreement will terminate on May 2,
2011. After the termination of the Advisory Agreement, we will not be able to rely on Grubb & Ellis
Apartment REIT Advisor, LLC to provide services to us, including asset management services and
investor relations services. After the termination of the dealer manager agreement, we will not be
able to rely on Grubb & Ellis Securities, Inc. to manage our follow-on offering. After termination
of the transfer agent services agreement, we will not be able to rely on Grubb & Ellis Equity
Advisors, Transfer Agent to provide transfer agent services for us.
We intend to engage new third party service providers to perform advisory services, dealer
manager services and transfer agent services for us. However, such third party service providers
may require the payment of fees that are greater than the terms of our current agreements or may
pay fewer expenses than our current third party service providers. For example, our current advisor has paid organizational and offering expenses in excess of the amount we
reimburse pursuant to the Advisory Agreement. We cannot make any assurances that our successor
advisor entity will pay organizational and offering expenses in excess of the amount we agree to
reimburse. In addition, although the Advisory Agreement contains a provision whereby our current advisor has
agreed to waive the right to receive an asset management fee until the quarter following the
quarter in which we generate funds from operations sufficient to cover 100% of the distributions
declared to our stockholders for such quarter, and we are currently negotiating an advisory
agreement with an intended successor advisor entity that contains a similar waiver, we cannot
guarantee that any advisory agreement with a successor advisor will contain a similar waiver.
Therefore, we may not be able to enter into agreements on terms that are as
economically favorable as our agreements with our current third party service providers, or at all.
As we implement our self-management program, we expect to rely less on our advisor and will
increasingly rely on internal employees we will hire to manage our investments and operate our
day-to-day activities. If we are unsuccessful in hiring third party service providers to perform
advisory, dealer manager and/or transfer agent services for us, if we are not able to enter into
agreements with third party service providers that are as economically favorable as our agreements
with our current third party service providers, or if we are unsuccessful in hiring our own
employees, our ability to achieve our investment objectives and pay distributions to stockholders
could suffer.
As we transition to self-management, our success is increasingly dependent on the performance of
our board of directors and our chairman of the board, chief executive officer and chief financial officer.
As we transition to self-management, our ability to achieve our investment objectives and to
pay distributions will become increasingly dependent upon the performance of our board of directors
and Stanley J. Olander, Jr., chairman of our board of directors and our chief executive officer and
chief financial officer, in the identification and acquisition of investments, the determination of
any financing arrangements, the management of our investments and the operation of our day-to-day
activities. We currently do not have an employment agreement with Mr. Olander. If we were to lose
the benefit of Mr. Olanders experience, efforts and abilities, or the benefit of any of our other
directors, we may not be able to achieve our investment objectives and our operating results could
suffer.
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If we raise proceeds substantially less than the maximum offering amount in our follow-on
offering, we may not be able to invest in a diverse portfolio of real estate and real
estate-related investments, and the value of our stockholders investment may fluctuate more
widely with the performance of specific investments.
Our follow-on offering is being made on a best efforts basis, whereby our dealer manager and
the broker-dealers participating in our follow-on offering are only required to use their best
efforts to sell shares of our common stock and have no firm commitment or obligation to purchase
any of the shares of our common stock. As a result, we cannot assure our stockholders as to the
amount of proceeds that will be raised in our follow-on offering or that we will achieve sales of
the maximum offering amount.
On November 1, 2010, we received written notice from Grubb & Ellis Securities, Inc. that Grubb
& Ellis Securities, Inc. has elected to terminate our dealer manager agreement with them. We expect
that the dealer manager agreement will terminate on December 31, 2010. On November 5, 2010, we
entered into an agreement with Realty Capital Securities, LLC, or RCS, whereby RCS will agree to
assume the role of dealer manager after the termination of our dealer manager agreement with Grubb
& Ellis Securities, Inc. for the remainder of the follow-on offering; provided, however, that until
the DMA Effective Date, as defined below, RCS will not have any authority, and will not be an agent
or distributor for us with respect to the sale of shares of our common stock pursuant to our
follow-on offering. The DMA Effective Date shall be the first date upon which all of the following
have occurred: (i) the Advisory Agreement has expired or has been terminated; (ii) our dealer
manager agreement with Grubb & Ellis Securities, Inc. has expired or has been terminated; and (iii)
RCS has received a No-Objections notice from the Financial Industry Regulatory Authority in
connection with our follow-on offering. As a result of these conditions, we may not be able to
transition the dealer manager functions to RCS immediately after the termination of our dealer
manager agreement with Grubb & Ellis Securities, Inc. or at all. Any such inability or delay in
transitioning the dealer manager functions to RCS, or any other successor dealer manager entity,
would require us to temporarily suspend our follow-on offering and would make it more difficult for
us to raise the maximum offering amount.
If we are unable to raise substantial funds, we will have limited diversification in terms of
the number of investments owned, the geographic regions in which our investments are located and
the types of investments that we make. Our stockholders investment in shares of our common stock
will be subject to greater risk to the extent that we lack a diversified portfolio of investments.
In such event, the likelihood of our profitability being affected by the poor performance of any
single investment will increase. In addition, our fixed operating expenses, as a percentage of
gross income, would be higher, and our financial condition and ability to pay distributions could
be adversely affected if we are unable to raise substantial funds.
The transfer of our dealer manager services to RCS or any successor dealer manager may
adversely affect our ability to raise capital pursuant to our follow-on offering, which
could reduce the amount of cash available to pay distributions to our stockholders.
On November 5, 2010, we entered into an agreement with RCS, whereby RCS will agree to assume
the role of dealer manager after the termination of our dealer manager agreement with Grubb & Ellis
Securities, Inc. for the remainder of the follow-on offering; provided, however, that until the DMA
Effective Date, RCS will not have any authority, and will not be an agent or distributor for us
with respect to the sale of shares of our common stock pursuant to our follow-on offering. As a
result of these conditions, we may not be able to transition the dealer manager functions to RCS
immediately after the termination of our dealer manager agreement with Grubb & Ellis Securities,
Inc., or at all. Any such inability or delay in transitioning the dealer manager functions to RCS,
or any other successor dealer manager entity, would require us to temporarily suspend our follow-on
offering.
In addition, Grubb & Ellis Securities, Inc. has temporarily suspended our follow-on offering
until such time as we file with the SEC a supplement to the prospectus regarding our follow-on
offering that provides disclosure regarding the transfer of the dealer manager functions related to
our follow-on offering. Although we intend to file such a supplement to the prospectus in the near
future, we cannot make any assurances regarding when such a supplement will be filed. Moreover,
prior to the DMA Effective Date, we will be required to substantially revise the prospectus for our
follow-on public offering in order to reflect the transfer of our advisory functions to a new
advisor entity, the transfer of our dealer manager functions to RCS or a successor dealer manager,
and the removal of Grubb & Ellis Company as our sponsor. While we intend to file such a revised
prospectus with the SEC prior to the DMA Effective Date, we cannot make any assurances that we will
be able to do so. If we do not file such a revised prospectus prior to the DMA Effective Date, we
will be required to suspend our offering until such a revised prospectus is filed.
Furthermore, the soliciting dealer agreements between Grubb & Ellis Securities, Inc. and the
participating broker-dealers in our follow-on offering are not transferable to RCS. Therefore, the
participating broker-dealers and RCS will need to engage in a due diligence review before entering
into new soliciting dealer agreements. Once the dealer manager agreement with Grubb & Ellis
Securities, Inc. is terminated, participating broker-dealers will not be able to sell shares of our
common stock pursuant to our follow-on offering until they enter into new soliciting dealer
agreements with RCS. If RCS is not able to enter into new soliciting dealer agreements with
participating broker-dealers, or there is a delay in the execution of soliciting dealer agreements
between RCS and participating broker-dealers, our ability to raise capital in our follow-on
offering would be adversely affected.
Similarly, RCS would not be able to use any supplemental sales material prepared by our
current advisor or Grubb & Ellis Securities, Inc. RCS and our intended new advisor entity may
prepare additional supplemental sales material for use in the future, but we cannot make any
assurances regarding when, or if, such material will be available for use in connection with our
follow-on offering. While any supplemental sales material must be accompanied by or preceded by
the delivery of a prospectus related to our follow-on offering, the inability to use such
previously prepared supplemental sales material may adversely affect our ability to raise capital
in our follow-on offering.
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Any suspension of our follow-on offering or delay in the execution of new soliciting dealer
agreements with participating broker-dealers would adversely affect our ability to raise capital in
our follow-on offering. In addition, we have used proceeds of our follow-on offering to pay, in
part, distributions to our stockholders. Therefore, an adverse affect on our ability to raise
capital could also adversely affect our ability to pay distributions to our stockholders.
Furthermore, a suspension of our follow-on offering may also require us to suspend the DRIP.
If the DRIP is suspended, we would be required to pay any distributions to stockholders in cash,
and we may not have sufficient funds available to do so. In addition, funds from the DRIP are
used, in part, to repurchase shares from our stockholders pursuant to our share repurchase plan.
If the DRIP is suspended, we may not have sufficient funds available to repurchase shares pursuant
to the share repurchase plan, and thus, we may suspend that plan.
If we are unable to find suitable investments, we may not have sufficient cash flows available for
distributions to our stockholders.
Our ability to achieve our investment objectives and to pay distributions to our stockholders
is dependent upon the performance of our advisor or any successor advisor in selecting additional
investments for us to acquire in the future, selecting property managers for our properties and
securing financing arrangements. Except for stockholders who purchased shares of our common stock
in our offerings after such time as we supplemented our prospectus to describe one or more
identified investments, our stockholders generally have no opportunity to evaluate the terms of
transactions or other economic or financial data concerning our investments. Our stockholders must
rely entirely on the management ability of our advisor or any successor advisor and the oversight
of our board of directors. Our advisor or any successor advisor may not be successful in
identifying additional suitable investments on financially attractive terms or that, if it
identifies suitable investments, our investment objectives will be achieved. If we, through our
advisor or any successor advisor, are unable to find suitable additional investments, we will hold
the net proceeds from our follow-on offering in an interest-bearing account or invest the net
proceeds in short-term, investment-grade investments. In such an event, our ability to pay
distributions to our stockholders would be adversely affected.
Our success is dependent on the performance of our advisor.
Our ability to achieve our investment objectives and to conduct our operations is dependent
upon the performance of our external advisor in identifying and acquiring investments, the
determination of any financing arrangements, the asset management of our investments and the
management of our day-to-day activities. Our Advisory Agreement with our current external advisor
will terminate on December 31, 2010. Accordingly, we intend to enter into a new advisory
agreement with a new external advisor entity. We may not be successful in negotiating an agreement
with a new advisor entity, or we may not be successful in transitioning the advisory function to
the new advisor entity.
Our advisor has, and any successor advisor will have, broad discretion over the use of
proceeds from our follow-on offering, and our stockholders will have no opportunity to evaluate the
terms of transactions or other economic or financial data concerning our investments that are not
described in our prospectus or our other periodic filings with the Securities and Exchange
Commission. In addition, we rely on the day-to-day management ability of our advisor, and will
similarly rely on any successor advisor, subject to the oversight and approval of our board of
directors. If our advisor or any successor advisor is unable to allocate sufficient resources to
oversee and perform our operations for any reason, we may be unable to achieve our investment
objectives or to pay distributions to our stockholders. In addition, our success depends to a
significant degree upon the continued contributions of Stanley J. Olander, Jr., David L. Carneal
and Gustav G. Remppies. If any of Messrs. Olander, Carneal or Remppies were to become unavailable
to us, and if our advisor or any successor advisor is unable to find, or suffers a delay in
finding, a replacement with equivalent skills and experience, it could adversely impact our ability
to acquire properties and the operation of our properties. Accordingly, our stockholders should not
purchase shares of our common stock unless they are willing to entrust all aspects of our
day-to-day management to our current or successor external advisor.
The conflicts of interest described below may mean we are not managed solely in our stockholders
best interest, which may adversely affect our results of operations and the value of an investment
in shares of our common stock.
Many of our officers and all of our non-independent directors and our advisors officers have
conflicts of interest in managing our business and properties. Thus, they may make decisions or
take actions that do not solely reflect our stockholders best interest. The owners of our advisor
are also involved in the advising and ownership of other real estate investment trusts and various
real estate entities, which may give rise to conflicts of interest. These other real estate
investment programs may compete with us for the time and attention of these persons, or otherwise
compete with us or have similar business interests.
Messrs. Olander, Carneal and Remppies and Andrea R. Biller each own less than a 1.0% interest
in our sponsor. Ms. Biller holds options to purchase a de minimis amount of additional shares of
our sponsors common stock. Messrs. Olander, Carneal and Remppies are each a member of ROC REIT
Advisors, LLC, which owns a 25.0% non-managing membership interest in our advisor and would likely own a 50.0% interest in our intended successor advisor entity, and each owns a
de minimis interest in several other programs managed by our sponsor and its affiliates. Ms. Biller
also owns a de minimis interest in several other programs managed by our sponsor and its
affiliates.
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Our sponsor and its affiliates are not prohibited from engaging, directly or indirectly, in
any other business or from possessing interests in any other business venture or ventures,
including businesses and ventures involved in the acquisition, development, ownership, management,
leasing or sale of real estate projects of the type that we will seek to acquire. None of our
sponsors affiliated entities are prohibited from raising money for another entity that makes the
same types of investments that we target and we may co-invest with any such entity. All such
potential co-investments will be subject to a majority of our directors, including a majority of
our independent directors, not otherwise interested in such transaction approving the transaction
as being fair and reasonable and on substantially the same terms and conditions as those received
by the co-investment entity.
Because other real estate programs advised by affiliates of our intended successor advisor
and offered through RCS may conduct offerings concurrently with our follow-on offering, our
intended successor advisor and RCS will face potential conflicts of interest arising from
competition among us and these other programs for investors and investment capital, and
such conflicts may not be resolved in our favor.
An affiliate of our intended successor advisor is also the advisor of several other non-traded
real estate investment trusts that are raising capital in ongoing public offerings of common stock.
In addition, RCS is the dealer manager or is named in the registration statement as the dealer
manager in several offerings that are either effective or in registration. Furthermore, our
intended successor advisor or its affiliates may decide to advise future programs that would seek
to raise capital through public offerings conducted concurrently with our follow-on offering. As a
result, our intended successor advisor and RCS may face conflicts of interest arising from
potential competition with these other programs for investors and investment capital. Such
conflicts may not be resolved in our favor, and stockholders will not have the opportunity to
evaluate the manner in which these conflicts of interest are resolved before or after making their
investment.
If we internalize our management functions, we could incur significant costs associated with being
self-managed.
Our long-term strategy involves internalizing our management functions. If we internalize
our management functions, we would no longer bear the costs of the various fees and expenses we
expect to pay to an external advisor; however our direct expenses would include general and
administrative costs, including legal, accounting, and other expenses related to corporate
governance, SEC reporting and compliance. We would also incur the compensation and benefits costs
of our officers and other employees and consultants that are now paid by our advisor or its
affiliates. In addition, we may issue equity awards to officers, employees and consultants, which
would decrease net income and funds from operations, or FFO, and may further dilute our
stockholders investment. We cannot reasonably estimate the amount of fees to an external advisor
we would save and the costs we would incur if we became self-managed. If the expenses we assume as
a result of an internalization are higher than the expenses we no longer pay to an external
advisor, our net income per share and FFO per share may be lower as a result of the
internalization than it otherwise would have been, potentially decreasing the amount of funds
available to distribute to our stockholders.
As the first step toward our long-term strategy of
internalizing our management functions, we intend to internalize our property management function.
Accordingly, we have acquired substantially all of the assets and certain liabilities of Mission Residential
Management, LLC, or Mission Residential Management, including the in-place workforce of approximately 300
employees. Mission Residential Management is the property manager of 41 multifamily apartment properties containing
approximately 12,000 units. As a result of employing such personnel, or if we employ any additional personnel as
a result of an election to internalize our operations, we are subject to potential liabilities faced by employers, such as
workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances.
If we internalize our management functions, we could have difficulty integrating these
functions as a stand-alone entity, and we
may fail to properly identify the appropriate mix of personnel and capital needs to operate as a
stand-alone entity. An inability to manage an internalization transaction effectively could,
therefore, result in our incurring additional costs and/or experiencing deficiencies in our
disclosure controls and procedures or our internal control over financial reporting. Such
deficiencies could cause us to incur additional costs, and our managements attention could be
diverted from most effectively managing our properties.
Our operating partnership has been named as a defendant in
a complaint seeking an injunction to prevent the acquisition of the eight multifamily apartment properties that we have
contracted to acquire from Delaware statutory trusts for which an
affiliate of MR Holdings, LLC serves as trustee.
On November 9, 2010, seven of the 277 investors who hold
interests in the eight Delaware statutory trusts that hold the
remaining eight multifamily apartment properties, or the DST
properties, that we
have contracted to acquire from such trusts filed a complaint in the United States District Court
for the Eastern District of Virginia (Civil Action No.
3:10CV824(HEH)) against the trustee of each of these trusts and certain of
the trustees affiliates, as well as against our operating partnership, seeking, among other things, to enjoin the
closing of our proposed acquisition of the remaining eight DST properties that we have contracted
to acquire. The complaint alleges, among other things, that the trustee has breached its fiduciary
duties to the beneficial owners of the trusts by entering into the eight purchase and sale agreements with our operating
partnership. Our operating partnership is named as a defendant because it is a party to the agreements relating to the
transactions that the plaintiffs are seeking to enjoin. The complaint further alleges that our operating partnership aided
and abetted the trustees alleged breaches of fiduciary duty and tortiously interfered with the contractual relations between
the trusts and the trust beneficiaries. We believe the allegations contained in the complaint are without merit and we
intend to defend the claims vigorously. However, there is no assurance that we will be successful in our defense. If
the plaintiffs are able to obtain the injunctive relief they seek, we may be prevented from closing the acquisitions of the
remaining eight DST properties that we have contracted to acquire. A hearing regarding the
request for injunctive relief is expected to occur within the next 90
days. In a Consent Order dated November 10, 2010, the parties
agreed that none of the eight transactions will be closed during the 90-day period following the date of such Consent Order.
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Legislative or regulatory action with respect to taxes could adversely affect the returns to our
investors.
In recent years, numerous legislative, judicial and administrative changes have been made in
the provisions of the federal income tax laws applicable to investments similar to an investment in
shares of our common stock. On March 30, 2010, the President signed into law the Health Care and
Education Reconciliation Act of 2010, or the Reconciliation Act. The Reconciliation Act will
require certain U.S. stockholders who are individuals, estates or trusts to pay a 3.8% Medicare tax
on, among other things, dividends on and capital gains from the sale or other disposition of stock,
subject to certain exceptions. This additional tax will apply broadly to essentially all dividends
and all gains from dispositions of stock, including dividends from REITs and gains from
dispositions of REIT shares, such as our common stock. As enacted, the tax will apply for taxable
years beginning after December 31, 2012.
Additional changes to the tax laws are likely to continue to occur, and we cannot assure our
stockholders that any such changes will not adversely affect the taxation of a stockholder. Any
such changes could have an adverse effect on an investment in our stock or on the market value or
the resale potential of our assets. Our stockholders are urged to consult with their own tax
advisor with respect to the impact of recent legislation on their investment in our stock and the
status of legislative, regulatory or administrative developments and proposals and their potential
effect on an investment in shares of our common stock.
Congress passed major federal tax legislation in 2003, with modifications to that legislation
in 2005. One of the changes effected by that legislation generally reduced the tax rate on
dividends paid by companies to individuals to a maximum of 15.0% prior to 2011. REIT distributions
generally do not qualify for this reduced rate. The tax changes did not, however, reduce the
corporate tax rates. Therefore, the maximum corporate tax rate of 35.0% has not been affected.
However, as a REIT, we generally would not be subject to federal or state corporate income taxes on
that portion of our ordinary income or capital gain that we distribute to our stockholders, and we
thus expect to avoid the double taxation to which other companies are typically subject.
Although REITs continue to receive substantially better tax treatment than entities taxed as
corporations, it is possible that future legislation would result in a REIT having fewer tax
advantages, and it could become more advantageous for a company that invests in real estate to
elect to be taxed for federal income tax purposes as a corporation. As a result, our charter
provides our board of directors with the power, under certain circumstances, to revoke or otherwise
terminate our REIT election and cause us to be taxed as a corporation, without the vote of our
stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only
cause such changes in our tax treatment if it determines in good faith that such changes are in our
stockholders best interest.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Use of Public Offering Proceeds
Follow-on Offering
Our Registration Statement on Form S-11 (File No. 333-157375), registering a best efforts
follow-on public offering, or our follow-on offering, of up to 105,000,000 shares of our common
stock, was declared effective under the Securities Act of 1933, as amended, or the Securities Act,
on July 17, 2009. Grubb & Ellis Securities, Inc., or our dealer manager, is the dealer manager in
our follow-on offering. Our follow-on offering includes up to 100,000,000 shares of our common
stock for sale at $10.00 per share in our primary offering and up to 5,000,000 shares of our common
stock pursuant to the distribution reinvestment plan, or the DRIP, for sale at $9.50 per share, for
a maximum offering of up to $1,047,500,000. We commenced sales of shares of our common stock to the
public pursuant to our follow-on offering on July 20, 2009.
As of September 30, 2010, we had received and accepted subscriptions in our follow-on offering
for 2,642,006 shares of our common stock, or $26,390,000, excluding shares of our common stock
issued pursuant to the DRIP. As of September 30, 2010, a total of $5,001,000 in distributions were
reinvested and 526,452 shares of our common stock were issued pursuant to the DRIP.
In our follow-on offering, as of September 30, 2010, we had incurred selling commissions of
$1,817,000 and dealer manager fees of $792,000. We had also incurred other offering expenses of
$264,000 as of such date. Such fees and reimbursements were incurred to our affiliates and are
charged to stockholders equity as such amounts are reimbursed from the gross proceeds of our
follow-on offering. The cost of raising funds in our follow-on offering as a percentage of gross
proceeds received in our primary offering will not exceed 11.0%. As of September 30, 2010, net
offering proceeds were $28,518,000, including proceeds from the DRIP and after deducting offering
expenses.
As of September 30, 2010, $53,000 remained payable to our dealer manager, our advisor or its
affiliates for offering related costs in connection with our follow-on offering.
As of September 30, 2010, we had used $9,513,000 in proceeds from our follow-on offering to
purchase Bella Ruscello Luxury Apartment Homes located in Duncanville, Texas and Mission Rock Ridge
Apartments located in Arlington, Texas from unaffiliated parties, $800,000 to pay for escrow
deposits for the proposed acquisition of substantially all of the assets and certain liabilities of
Mission Residential Management, LLC, $1,126,000 for acquisition related expenses paid to affiliated
parties, $1,996,000 for acquisition related expenses paid to unaffiliated parties, $1,350,000 to
repay borrowings from an affiliate incurred in connection with previous property acquisitions and
$3,058,000 to repay borrowings from unaffiliated parties incurred in connection with previous
property acquisitions.
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Purchase of Equity Securities by the Issuer and Affiliated Purchasers
Our share repurchase plan allows for share repurchases by us when certain criteria are met by
our stockholders. Share repurchases will be made at the sole discretion of our board of directors.
All repurchases are subject to a one year holding period, except for repurchases made in
connection with a stockholders death or qualifying disability, as defined in our share
repurchase plan. Repurchases are limited to (1) those that could be funded from the cumulative
proceeds we receive from the sale of shares of our common stock pursuant to the DRIP and (2) 5.0%
of the weighted average number of shares of our common stock outstanding during the prior calendar
year.
Under our share repurchase plan, repurchase prices range from $9.25, or 92.5% of the price
paid per share, following a one year holding period to an amount not less than 100% of the price
paid per share following a four year holding period. In order to effect the repurchase of shares of
our common stock held for less than one year due to the death of a stockholder or a stockholder
with a qualifying disability, as defined in our share repurchase plan, we must receive written
notice within one year after the death of the stockholder or the stockholders qualifying
disability, as applicable. Furthermore, our share repurchase plan provides that if there are
insufficient funds to honor all repurchase requests, pending requests will be honored among all
requests for repurchase in any given repurchase period, as follows: first, pro rata as to
repurchases sought upon a stockholders death; next, pro rata as to repurchases sought by
stockholders with a qualifying disability; and, finally, pro rata as to other repurchase requests.
Our share repurchase plan provides that our board of directors may, in its sole discretion,
repurchase shares of our common stock on a quarterly basis. Since the first quarter of 2009, in
accordance with the discretion given it under the share repurchase plan, our board of directors
determined to repurchase shares of our common stock only with respect to requests made in
connection with a stockholders death or qualifying disability, as determined by our board of
directors and in accordance with the terms and conditions set forth in the share repurchase plan.
Our board of directors determined that it was in our best interest to conserve cash and, therefore,
no other repurchases requested prior to or during 2009 or during the first and second quarters of
2010 were made. Our board of directors considers requests for repurchase quarterly. If a
stockholder previously submitted a request for repurchase of his or her shares of our common stock
that has not yet been effected, we will consider those requests at the end of the third quarter of
2010, unless the stockholder withdraws the request.
During the three months ended September 30, 2010, we repurchased shares of our common stock as
follows:
(c) | (d) | |||||||||||||||
Total Number of | Maximum Approximate | |||||||||||||||
Shares Purchased As | Dollar Value of Shares | |||||||||||||||
(a) | (b) | Part of | that May Yet Be | |||||||||||||
Total Number of | Average Price | Publicly Announced | Purchased Under the Plans | |||||||||||||
Period | Shares Purchased | Paid per Share | Plan or Program(1) | or Programs | ||||||||||||
July 1, 2010 to July 31, 2010 |
60,467 | $ | 9.97 | 60,467 | (2 | ) | ||||||||||
August 1, 2010 to August 31, 2010 |
| $ | | | (2 | ) | ||||||||||
September 1, 2010 to September
30, 2010 |
| $ | | | (2 | ) | ||||||||||
Total |
60,467 | 60,467 | ||||||||||||||
(1) | Our board of directors adopted a share repurchase plan effective July 19, 2006. Our board of directors approved an amended share repurchase plan effective August 25, 2008. On September 30, 2009, our board of directors approved an amendment and restatement of our share repurchase plan. As of September 30, 2010, we had repurchased 518,228 shares of our common stock pursuant to our share repurchase plan. Our share repurchase plan does not have an expiration date. | |
(2) | Subject to funds being available, we will limit the number of shares of our common stock repurchased during any calendar year to 5.0% of the weighted average number of shares of our common stock outstanding during the prior calendar year. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. [Removed and Reserved.]
Item 5. Other Information.
None.
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly
Report on Form 10-Q) are included, or incorporated by reference, in this Quarterly Report on Form
10-Q.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Grubb & Ellis Apartment REIT, Inc. (Registrant) |
||||
November 12, 2010 | By: | /s/ Stanley J. Olander, Jr. | ||
Date | Stanley J. Olander, Jr. | |||
Chief Executive Officer, Chief Financial Officer and Chairman of the Board of Directors (principal executive officer, principal financial officer and principal accounting officer) |
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EXHIBIT INDEX
Following the consummation of the merger of NNN Realty Advisors, Inc., which previously served
as our sponsor, with and into a wholly owned subsidiary of our sponsor, Grubb & Ellis Company, on
December 7, 2007, NNN Apartment REIT, Inc., NNN Apartment REIT Holdings, L.P., NNN Apartment REIT
Advisor, LLC, NNN Apartment Management, LLC, Triple Net Properties, LLC, NNN Residential
Management, Inc. and NNN Capital Corp. changed their names to Grubb & Ellis Apartment REIT, Inc.,
Grubb & Ellis Apartment REIT Holdings, LP, Grubb & Ellis Apartment REIT Advisor, LLC, Grubb & Ellis
Apartment Management, LLC, Grubb & Ellis Realty Investors, LLC, Grubb & Ellis Residential
Management, Inc. and Grubb & Ellis Securities, Inc., respectively. The following Exhibit List
refers to the entity names used prior to such name changes in order to accurately reflect the names
of the parties on the documents listed.
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the
exhibits.
The following exhibits are included, or incorporated by reference, in this Quarterly Report on
Form 10-Q for the period ended September 30, 2010 (and are numbered in accordance with Item 601 of
Regulation S-K).
3.1
|
Articles of Amendment and Restatement of NNN Apartment REIT, Inc. dated July 18, 2006 (included as Exhibit 3.1 to our Form 10-Q filed November 9, 2006 and incorporated herein by reference) | |
3.2
|
Articles of Amendment to the Articles of Amendment and Restatement of Grubb & Ellis Apartment REIT, Inc. dated December 7, 2007 (included as Exhibit 3.1 to our Current Report on Form 8-K filed on December 10, 2007 and incorporated herein by reference) | |
3.3
|
Second Articles of Amendment to the Articles of Amendment and Restatement of Grubb & Ellis Apartment REIT, Inc., dated June 22, 2010 (included as Exhibit 3.1 to our Current Report on Form 8-K filed on June 23, 2010 and incorporated herein by reference) | |
3.4
|
Amended and Restated Bylaws of NNN Apartment REIT, Inc. dated July 19, 2006 (included as Exhibit 3.2 to our Form 10-Q filed November 9, 2006 and incorporated herein by reference) | |
3.5
|
Amendment to Amended and Restated Bylaws of NNN Apartment REIT, Inc. dated December 6, 2006 (included as Exhibit 3.6 to Post-Effective Amendment No. 1 to the registrants Registration Statement on Form S-11 (File No. 333-130945) filed January 31, 2007 and incorporated herein by reference) | |
3.6
|
Agreement of Limited Partnership of NNN Apartment REIT Holdings, L.P. (included as Exhibit 3.3 to our Form 10-Q filed on November 9, 2006 and incorporated herein by reference) | |
3.7
|
First Amendment to Agreement of Limited Partnership of Grubb & Ellis Apartment REIT Holdings, L.P., dated June 3, 2010 (included as Exhibit 10.2 to our Current Report on Form 8-K filed on June 3, 2010 and incorporated herein by reference) | |
4.1
|
Form of Subscription Agreement of Grubb & Ellis Apartment REIT, Inc. (included as Exhibit B to Supplement No. 4 to our Prospectus filed pursuant to Rule 424(b)(3) (File No. 333-157375) filed August 23, 2010 and incorporated herein by reference) | |
4.2
|
Amended and Restated Share Repurchase Plan (included as Exhibit D to our Prospectus filed pursuant to Rule 424(b)(3) (File No. 333-157375) filed April 28, 2010 and incorporated herein by reference) | |
4.3
|
Amended and Restated Distribution Reinvestment Plan (included as Exhibit C to our Prospectus filed pursuant to Rule 424(b)(3) (File No. 333-157375) filed April 28, 2010 and incorporated herein by reference) | |
10.1
|
Amended and Restated Consolidated Promissory Note between Grubb & Ellis Apartment REIT Holdings, L.P. and NNN Realty Advisors, Inc., dated August 11, 2010 (included as Exhibit 10.1 of our Current Report on Form 8-K filed August 17, 2010 and incorporated herein by reference) | |
10.2
|
Asset Purchase Agreement, dated August 27, 2010, by and among MR Property Management, LLC, Mission Residential Management, LLC, MR Holdings, LLC and Christopher C. Finlay (included as Exhibit 10.1 of our Current Report on Form 8-K filed August 31, 2010 and incorporated herein by reference) | |
10.3
|
Purchase and Sale Agreement, dated August 27, 2010, by and between Mission Tanglewood, DST and Grubb & Ellis Apartment REIT Holdings, L.P. (included as Exhibit 10.2 of our Current Report on Form 8-K filed August 31, 2010 and incorporated herein by reference) | |
10.4
|
Purchase and Sale Agreement, dated August 27, 2010, by and between Mission Capital Crossing, DST and Grubb & Ellis Apartment REIT Holdings, L.P. (included as Exhibit 10.3 of our Current Report on Form 8-K filed August 31, 2010 and incorporated herein by reference) |
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10.5
|
Purchase and Sale Agreement, dated August 27, 2010, by and between Mission Barton Creek, DST and Grubb & Ellis Apartment REIT Holdings, L.P. (included as Exhibit 10.4 of our Current Report on Form 8-K filed August 31, 2010 and incorporated herein by reference) | |
10.6
|
Purchase and Sale Agreement, dated August 27, 2010, by and between Mission Briley Parkway, DST and Grubb & Ellis Apartment REIT Holdings, L.P. (included as Exhibit 10.5 of our Current Report on Form 8-K filed August 31, 2010 and incorporated herein by reference) | |
10.7
|
Purchase and Sale Agreement, dated August 27, 2010, by and between Mission Preston Wood, DST and Grubb & Ellis Apartment REIT Holdings, L.P. (included as Exhibit 10.6 of our Current Report on Form 8-K filed August 31, 2010 and incorporated herein by reference) | |
10.8
|
Purchase and Sale Agreement, dated August 27, 2010, by and between Mission Battleground Park, DST and Grubb & Ellis Apartment REIT Holdings, L.P. (included as Exhibit 10.7 of our Current Report on Form 8-K filed August 31, 2010 and incorporated herein by reference) | |
10.9
|
Purchase and Sale Agreement, dated August 27, 2010, by and between Mission Mayfield Downs, DST and Grubb & Ellis Apartment REIT Holdings, L.P. (included as Exhibit 10.8 of our Current Report on Form 8-K filed August 31, 2010 and incorporated herein by reference) | |
10.10
|
Purchase and Sale Agreement, dated August 27, 2010, by and between Mission Brentwood, DST and Grubb & Ellis Apartment REIT Holdings, L.P. (included as Exhibit 10.9 of our Current Report on Form 8-K filed August 31, 2010 and incorporated herein by reference) | |
10.11
|
Purchase and Sale Agreement, dated August 27, 2010, by and between Mission Rock Ridge, L.P. and Grubb & Ellis Apartment REIT Holdings, L.P. (included as Exhibit 10.10 of our Current Report on Form 8-K filed August 31, 2010 and incorporated herein by reference) | |
31.1*
|
Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2*
|
Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1**
|
Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith. | |
** | Furnished herewith. |
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