UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-51962
COLE CREDIT PROPERTY TRUST,
INC.
(Exact name of registrant as
specified in its charter)
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Maryland
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20-0939158
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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2555 East Camelback Road, Suite 400
Phoenix, Arizona, 85016
(Address of principal
executive offices; zip code)
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(602) 778-8700
(Registrants telephone
number,
including area code)
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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None
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None
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Securities registered pursuant to Section 12(g) of the
Act:
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Title of Each Class
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Common Stock, par value $0.01 per share
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Annual Report on
Form 10-K
or any amendment to this Annual Report on
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company þ
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
While there is no established market for the registrants
shares of common stock, the registrant offered its shares of
common stock pursuant to an exemption from registration. The
registrant ceased offering shares of common stock in its
offering on September 16, 2005. The last price paid to
acquire a share in the registrants offering was $10.00. On
January 10, 2011, the board of directors of the registrant
approved an estimated value per share of the registrants
common stock of $7.65 as of December 31, 2010. There were
10,090,951 shares of common stock held by non-affiliates at
June 30, 2010, the last business day of the
registrants most recently completed second fiscal quarter.
The number of shares of common stock outstanding as of
March 30, 2011 was 10,090,951.
Documents
Incorporated by Reference:
The Registrant incorporates by reference portions of the Cole
Credit Property Trust, Inc. Definitive Proxy Statement for the
2011 Annual Meeting of Stockholders (into Items 10, 11, 12,
13 and 14 of Part III).
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on
Form 10-K
of Cole Credit Property Trust, Inc., other than historical facts
may be considered forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended
(the Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange
Act). We intend for all such forward-looking statements to
be covered by the safe harbor provisions for forward-looking
statements contained in Section 27A of the Securities Act
and Section 21E of the Exchange Act, as applicable by law.
Such statements include, in particular, statements about our
plans, strategies, and prospects and are subject to certain
risks and uncertainties, as well as known and unknown risks,
which could cause actual results to differ materially from those
projected or anticipated. Therefore, such statements are not
intended to be a guarantee of our performance in future periods.
Such forward-looking statements can generally be identified by
our use of forward-looking terminology such as may,
will, would, could,
should, expect, intend,
anticipate, estimate,
believe, continue, or other similar
words. Forward-looking statements that were true at the time
made may ultimately prove to be incorrect or false. We caution
investors not to place undue reliance on forward-looking
statements, which reflect our managements view only as of
the date this Annual Report on
Form 10-K
is filed with the Securities and Exchange Commission (the
SEC). We make no representation or warranty (express
or implied) about the accuracy of any such forward-looking
statements contained in this Annual Report on
Form 10-K.
We caution readers not to place undue reliance on
forward-looking statements, which reflect our managements
view only as of the date of this Annual Report on
Form 10-K.
Additionally, we undertake no obligation to update or revise
forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future
operating results.
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PART I
Formation
Cole Credit Property Trust, Inc. (the Company,
we, our, or us) is a
Maryland corporation formed on March 29, 2004 that elected
to be taxed, and currently qualifies, as a real estate
investment trust (REIT) for federal income tax
purposes. We were organized to acquire and operate commercial
real estate primarily consisting of freestanding, single-tenant,
retail properties net leased to investment grade and other
creditworthy tenants located throughout the United States. As of
December 31, 2010, we owned 42 properties comprising
1.0 million rentable square feet of single-tenant retail
and commercial space located in 19 states. As of
December 31, 2010, the rentable space at these properties
was 100% leased.
Substantially all of our business is conducted through our
operating partnership, Cole Operating Partnership I, LP
(Cole OP I), a Delaware limited partnership. The
Company is the sole general partner of and owns a 99.99%
interest in Cole OP I. Cole REIT Advisors, LLC (Cole
Advisors), the advisor to the Company, is the sole limited
partner and owns an insignificant noncontrolling partnership
interest of less than 0.01% of Cole OP I.
Our sponsor, Cole Real Estate Investments, is a group of
affiliated entities, which includes our advisor, that has
sponsored various prior real estate investment programs. Cole
Advisors, pursuant to a contractual arrangement, is responsible
for managing our affairs on a
day-to-day
basis, identifying and making acquisitions and investments on
our behalf, and recommending an appropriate exit strategy to our
board of directors. Our advisor also provides asset management,
marketing, legal, investor relations and other administrative
services on our behalf. The agreement with Cole Advisors is for
a one-year term and is reconsidered on an annual basis by our
board of directors. We have no paid employees and rely upon our
advisor to provide substantially all of our
day-to-day
management.
On April 26, 2004, we commenced a private placement of
shares of common stock offered at a price of $10.00 per share,
subject to certain volume and other discounts (the
Offering). We completed the Offering on
September 16, 2005, after having raised aggregate gross
proceeds of $100,331,320 through the sale of an aggregate of
10,097,251 shares of our common stock. As of March 30,
2011, 10,090,951 shares of our common stock were issued and
outstanding and held by 1,453 stockholders of record.
We issued our common stock in the Offering in reliance upon
exemptions from the registration requirements of the Securities
Act and state securities laws. As a result, our stockholders may
not transfer their shares of common stock except pursuant to an
effective registration statement or pursuant to an exemption
from registration. Our stock is not currently listed on a
national securities exchange. We may seek to list our stock for
trading on a national securities exchange if our board of
directors believes listing would be in the best interest of our
stockholders. We do not intend to list our shares at this time.
We do not anticipate that there would be any market for our
common stock until our shares are listed on a national
securities exchange. In the event we do not obtain listing prior
to February 1, 2016, our charter requires that we either:
(1) seek stockholder approval of an extension or amendment
of this listing deadline; or (2) seek stockholder approval
to adopt a plan of liquidation.
If we seek and do not obtain stockholder approval of an
extension or amendment to the listing deadline, we would then be
required to seek stockholder approval of our liquidation. If we
seek and fail to obtain stockholder approval of our liquidation,
our charter would not require us to list or liquidate and we
could continue to operate as before. In such event, there would
be no public market for shares of our common stock and
stockholders could be required to hold the shares indefinitely.
If we seek and obtain stockholder approval of our liquidation,
we would begin an orderly sale of our assets and distribute,
subject to our advisors subordinated participation, our
net proceeds to our stockholders.
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Investment
Objectives
General
Our primary investment objectives are:
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to provide current income for our stockholders through the
payment of cash distributions;
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to preserve and return our stockholders capital
contributions; and
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to realize growth in the value of our properties upon the
ultimate sale of such properties.
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Our board of directors may revise our investment policies, which
we describe in more detail below, without the approval of our
stockholders. Our board reviews our investment policies at least
annually to determine that our policies are in the best interest
of our stockholders.
Primary
Investment Focus
We primarily own and invest in net leased, freestanding,
single-tenant, income generating retail properties throughout
the United States. Our current investments are indirect
investments in such properties through wholly-owned subsidiaries
of Cole OP I. We may also invest in other entities that own or
invest in, directly or indirectly, interests in such properties.
We seek to own and maintain a portfolio of real estate that is
diversified by geographical location and by type and size of
retail centers. Our properties consist of real estate primarily
improved for use as retail establishments and principally are
freestanding, single-tenant retail properties. However, we are
not limited to investments in single-tenant retail properties.
Many of our properties are leased to tenants in the chain or
franchise retail industry, including but not limited to
convenience stores, drug stores, home improvement stores,
automobile dealerships and sporting goods properties. Our
advisor monitors industry trends and invests in properties that
we believe to provide the most favorable return balanced with
risk. Our management targets primarily retail businesses with
established operating track records. We do not anticipate
acquiring additional properties, unless we were to dispose of
any properties in the normal course of business, in which case
we may reinvest the sales proceeds in additional properties. See
Item 1. Business Disposition
Policies below.
We believe that our focus on the acquisition of net leased,
freestanding, single-tenant, income-generating retail properties
located throughout the United States presents lower investment
risks and greater stability than other sectors of todays
commercial real estate market. Unlike funds that invest in a
limited number of large investments in large multi-tenant
properties, our portfolio is diversified into a larger number of
assets, with the result that lower than expected results of
operations from one or a few investments will not preclude our
ability to realize our investment objectives of cash flow,
preservation of capital and capital appreciation from our
overall portfolio. Our management believes that freestanding
retail properties offer a distinct investment advantage since
these properties generally offer superior locations that are
less dependent on the financial stability of adjoining tenants.
In addition, since we acquired properties that are
geographically diverse, we may reduce the potential adverse
impact of economic downturns in local markets.
We apply credit underwriting criteria to the tenants of existing
properties and when re-leasing properties in our portfolio.
Tenants of our properties typically are large national or
super-regional retail chains that have significant net worth and
operating income. Generally these tenants
and/or the
lease guarantors are experienced
multi-unit
operators with a history of success as measured by profitable
unit-level store performance and positive cash from operations.
We attempt to manage our real estate portfolio by evaluating
changes or trends in the industries in which our tenants
operate, the creditworthiness of our tenants and changes or
trends in the area demographics surrounding our properties for
evidence that our properties will continue to meet our
investment objectives of cash flow, preservation of capital and
capital appreciation. We monitor such factors as tenant credit
ratings, financial condition and results of our tenants, and
overall real estate market conditions. If it were to be
advantageous for us to dispose of any of our properties based on
changes in the factors noted above we would do so if we believe
it would be in the best interest of our stockholders. See
Item 1. Business Disposition
Policies below.
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Our tenants include investment grade tenants, non-investment
grade tenants and non-rated tenants. Our policy does not limit
the percentage of our assets that may consist of properties
rented to non-investment grade and non-rated tenants. A tenant
is considered investment grade when the tenant has a
debt rating by Moodys Investor Services of Baa3 or better
or a credit rating by Standard & Poors of BBB-
or better, or its payments are guaranteed by a company with such
a debt rating. A tenant is considered non-investment
grade when the tenant has a debt rating by either Moodys
or Standard & Poors that is below investment
grade. A tenant is considered non-rated if it has
not been rated by a credit rating agency. As of
December 31, 2010, 30% of all scheduled lease payments were
projected to be derived from tenants that maintain an investment
grade credit rating, while 25% and 45% of scheduled lease
payments are projected to be derived from non-investment grade
tenants and non-rated tenants, respectively. Changes in tenant
credit ratings, coupled with future acquisition and disposition
activity, may increase or decrease our concentration of
investment grade tenants in the future.
Generally, our non-investment grade tenants have significant net
worth and operating income and financial profiles that our
advisor believes meet our investment objectives of cash flow,
preservation of capital and capital appreciation. In evaluating
the credit worthiness of a tenant or prospective tenant, our
advisor does not use specific quantifiable standards, but does
consider many factors, including the proposed terms of the
acquisition. The factors that our advisor considers include the
financial condition of the tenant
and/or
guarantor, credit agency reports (if any), Dun and Bradstreet
reports, the operating history of the property with such tenant,
the trade area demographics surrounding the property, the
tenants market share and track record within its industry
segment, the general health and outlook of the tenants
industry segment, and the lease length and terms at the time of
the acquisition.
Other
Possible Investments
Although most of our property acquisitions are of the types
described above, we have made, and may continue to make, other
investments. For example, we are not limited to investments in
single-tenant retail properties. We have invested, any may
continue to invest, in other commercial properties, such as
shopping centers, business and industrial parks, manufacturing
facilities, office buildings and warehouse and distribution
facilities in order to reduce overall portfolio risks or enhance
overall portfolio returns. We have made, or may make, such
investments only after our advisor determined that it would be
advantageous to do so. It is our policy to limit our investments
in non-freestanding, single-tenant retail properties and
mortgage loans to 20% of the aggregate value of our investment
portfolio at the time of the investment in such property or
mortgage loan. We may exceed this policy limit with the approval
of the board of directors.
We have not made, and do not intend to make, loans to other
persons, to underwrite securities of other issuers or to engage
in the purchase and sale of any types of investments other than
interests in real estate. We currently do not own any properties
that are in development and do not intend to acquire any
properties that are in development.
Investment
Decisions
Cole Advisors has substantial discretion with respect to the
selection of specific investments and the purchase and sale of
our properties, subject to the approval of our board of
directors. In pursuing our investment objectives and making
investment decisions for us, Cole Advisors evaluates the
proposed terms of the purchase against all aspects of the
transaction, including the condition and financial performance
of the property, the terms of existing leases and the
creditworthiness of the tenant
and/or lease
guarantor, and property and location characteristics. Because
the factors considered, including the specific weight we place
on each factor, vary for each investment, we do not, and are not
able to, assign a specific weight or level of importance to any
particular factor.
In addition to procuring and reviewing an independent valuation
estimate and property condition report, our advisor also
considers the following, when available:
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unit level store performance;
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property location, visibility and access;
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age of the property, physical condition and curb appeal;
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the prospects for long-range appreciation and liquidity;
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suitability of the property for any development contemplated or
in progress;
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the propertys income producing capacity;
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tax considerations;
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neighboring property uses;
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local market conditions including vacancy rates;
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area demographics, including trade area population and average
household income;
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neighborhood growth patterns and economic conditions;
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presence of nearby properties that may positively impact store
sales at the subject property; and
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lease terms including length of lease term, scope of landlord
responsibilities, presence and frequency of contractual rental
increases, renewal option provisions, exclusive and permitted
use provisions, co-tenancy requirements and termination options.
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Our advisor considers properties leased
and/or
guaranteed by companies that maintain an investment grade rating
by either Standard & Poors or Moodys
Investor Services. Our advisor also considers non-rated and
non-investment grade rated tenants that it believes have
significant net worth and operating income.
Conditions
to Closing Our Acquisitions
Generally, we condition our obligation to close the purchase of
any investment on the delivery and verification of certain
documents from the seller or developer, including, where
appropriate:
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plans and specifications;
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surveys;
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evidence of marketable title, subject to such liens and
encumbrances as are acceptable to Cole Advisors;
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financial statements covering recent operations of properties
having operating histories;
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title and liability insurance policies; and
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tenant estoppel certificates.
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We generally will not purchase, and have not purchased, any
property unless and until we obtain what is generally referred
to as a Phase I environmental site assessment and
are generally satisfied with the environmental status of the
property. However, we may purchase a property without obtaining
such an assessment if our advisor determines it is not
warranted. A Phase I environmental site assessment generally
consists of a visual survey of the building and the property in
an attempt to identify areas of potential environmental
concerns, visually observing neighboring properties to assess
surface conditions or activities that may have an adverse
environmental impact on the property, and contacting local
governmental agency personnel who perform a regulatory agency
file search in an attempt to determine any known environmental
concerns in the immediate identity of the property. A Phase I
environmental site assessment does not generally include any
sampling or testing of soil, ground water or building materials
from the property and may not reveal all environmental hazards
on the property.
Ownership
Structure
Our investment in real estate generally takes the form of
holding fee title or a long-term leasehold estate. We acquire
such interests either directly through our operating partnership
or indirectly through limited liability companies and limited
partnerships that are wholly-owned by our operating partnership.
In addition,
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in certain cases we purchased properties and leased them back to
the sellers of such properties and we may engage in these types
of sale-leaseback transactions in the future. While we use our
best efforts to structure any such sale-leaseback transaction
such that the lease is characterized as a true lease
so that we will be treated as the owner of the property for
federal income tax purposes, the Internal Revenue Service could
challenge such characterization. In the event that any such
sale-leaseback transaction is re-characterized as a financing
transaction for federal income tax purposes, deductions for
depreciation and cost recovery relating to such property would
be disallowed.
Borrowing
Policies
We believe that utilizing borrowings is consistent with our
investment objective of maximizing the return to investors. The
number of different properties that we acquired has been
affected by the amount of funds available to us. Accordingly,
utilizing borrowings enabled us to increase the number of our
acquisitions and our diversification. There is no limitation on
the amount we can borrow for the purchase of any property or
other investment. However, we intend to limit our borrowings so
that we generally will not borrow in the aggregate in excess of
60% of the value of our real estate related assets. As of
December 31, 2010, we had $120.5 million in aggregate
principal amount of borrowings outstanding, including
$1.9 million outstanding under one revolving line of
credit, which represented 60% of the aggregate value of our
total gross real estate assets net of gross intangible lease
liabilities. As of December 31, 2010, we had
$1.0 million of available borrowings under our revolving
lines of credit. See Item 2. Properties
Mortgage Information below for additional information on
our debt.
Disposition
Policies
We intend to hold each property we acquire for an extended
period of time, generally six to eight years from the time of
acquisition. However, circumstances might arise that could
result in the early sale of some properties. We may sell a
property before the end of the expected holding period if we
believe the sale of the property would be in the best interests
of our stockholders. As of December 31, 2010, we had not
sold any properties.
The determination of whether a particular property should be
sold or otherwise disposed of will be made after consideration
of relevant factors, including prevailing economic conditions
and current tenant creditworthiness, with a view to achieving
maximum capital appreciation. There can be no assurance that
this objective will be realized. The selling price of a property
that is net leased will be determined in part by the amount of
rent payable remaining under the lease and the economic
conditions at that time. In connection with our sales of
properties we may lend the purchaser all or a portion of the
purchase price. In these instances, our taxable income may
exceed the cash received in the sale. The terms of payment will
be affected by customs in the area in which the property being
sold is located and the then-prevailing economic conditions.
Conflicts
of Interest
We are subject to various conflicts of interest arising out of
our relationship with Cole Advisors and its affiliates,
including conflicts related to the arrangements pursuant to
which Cole Advisors and its affiliates will be compensated by
us. The agreements and compensation arrangements between us and
our advisor and its affiliates were not determined by
arms-length negotiations. Some of the conflicts of
interest in our transactions with our advisor and its
affiliates, and the limitations on our advisor adopted to
address these conflicts, are described below. Additionally, each
of our directors is an affiliate of Cole Advisors as well as
other real estate programs sponsored by Cole Real Estate
Investments.
Our advisor and its affiliates try to balance our interests with
their duties to other real estate programs sponsored by Cole
Real Estate Investments. However, to the extent that our advisor
or its affiliates take actions that are more favorable to other
entities than to us, these actions could have a negative impact
on our financial performance and, consequently, on distributions
to our stockholders and the value of our stock. In
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addition, our directors, officers and certain of our
stockholders may engage for their own account in business
activities of the types conducted or to be conducted by our
subsidiaries and us.
Interests
in Other Real Estate Programs
Affiliates of our advisor acts as an advisor to, and our
officers and certain directors act as officers and directors of,
Cole Credit Property Trust II, Inc., Cole Credit Property
Trust III, Inc. and Cole Corporate Income Trust, Inc., each
of which acquires assets and has investment objectives similar
to ours. Affiliates of our advisor also act as an advisor to,
and our executive officers act as officers
and/or
directors of two additional real estate investment programs that
have filed registration statements with the SEC for their
proposed initial public offerings. Affiliates of our directors
and officers and entities owned or managed by such affiliates
also may acquire or develop real estate for their own accounts,
and have done so in the past. Furthermore, affiliates of our
directors and officers and entities owned or managed by such
affiliates intend to form additional real estate investment
entities in the future, whether public or private, which can be
expected to have the same or similar investment objectives and
policies as we do and which may be involved in the same
geographic area. Our advisor, its affiliates and affiliates of
our directors and officers are not obligated to present to us
any particular investment opportunity that comes to their
attention, even if such opportunity is of a character that might
be suitable for investment by us. Our advisor and its
affiliates, as well as our officers and directors, likely will
experience conflicts of interest as they simultaneously perform
services for us and other affiliated real estate programs.
Any affiliated entity, whether or not currently existing, could
compete with us in the sale or operation of the properties. We
will seek to achieve any operating efficiency or similar savings
that may result from affiliated management of competitive
properties. However, to the extent that affiliates own or
acquire property that is adjacent, or in close proximity, to a
property we own, our property may compete with the
affiliates property for tenants or purchasers.
Every transaction that we enter into with our advisor or its
affiliates is subject to an inherent conflict of interest. Our
board of directors may encounter conflicts of interest in
enforcing our rights against any affiliate in the event of a
default by or disagreement with an affiliate or in invoking
powers, rights or options pursuant to any agreement between us
and our advisor, any of its affiliates or another real estate
program sponsored by Cole Real Estate Investments.
Other
Activities of Cole Advisors and its Affiliates
We rely on Cole Advisors for the
day-to-day
operation of our business pursuant to an advisory agreement. As
a result of the interests of members of its management in other
real estate programs sponsored by Cole Real Estate Investments
and the fact that they have also engaged and will continue to
engage in other business activities, Cole Advisors and its
affiliates have conflicts of interest in allocating their time
between us and other real estate programs sponsored by Cole Real
Estate Investments and other activities in which they are
involved. However, Cole Advisors believes that it and its
affiliates have sufficient personnel to discharge fully their
responsibilities to all of the real estate programs sponsored by
Cole Real Estate Investments and other ventures in which they
are involved.
Each of our executive officers, including Christopher H. Cole,
who also serves as the chairman of our board of directors, also
serves as an officer of our advisor, our property manager, and
other affiliated entities. As a result, these individuals owe
fiduciary duties to these other entities, which may conflict
with the fiduciary duties that they owe to us and our
stockholders.
We have purchased, and in the future may purchase properties or
interests in properties from affiliates of Cole Advisors. The
prices we pay to affiliates of our advisor for these properties
will not be the subject of arms-length negotiations, which
could mean that the acquisitions may be on terms less favorable
to us than those negotiated with unaffiliated parties.
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Potential
Conflicts in Acquiring, Leasing and Reselling of
Properties
Conflicts of interest will exist to the extent that we have
acquired, and in the future may acquire, properties in the same
geographic areas where properties owned by other real estate
programs sponsored by Cole Real Estate Investments are located.
In such a case, a conflict could arise in the leasing of
properties in the event that we and another real estate program
sponsored by Cole Real Estate Investments were to compete for
the same tenants in negotiating leases, or a conflict could
arise in connection with the resale of properties in the event
that we and another real estate program sponsored by Cole Real
Estate Investments were to attempt to sell similar properties at
the same time. Conflicts of interest may also exist at such time
as we or our affiliates managing property on our behalf seek to
employ developers, contractors or building managers, as well as
under other circumstances. Cole Advisors seeks to reduce
conflicts relating to the employment of developers, contractors
or building managers by making prospective employees aware of
all such properties seeking to employ such persons. In addition,
Cole Advisors seeks to reduce conflicts that may arise with
respect to properties available for sale or rent by making
prospective purchasers or tenants aware of all such properties.
However, these conflicts cannot be fully avoided in that there
may be established differing compensation arrangements for
employees at different properties or differing terms for resale
or leasing of the various properties.
Potential
Conflicts of Affiliated Dealer Manager
Cole Capital Corporation (Cole Capital), an
affiliate of Cole Advisors, acted as the dealer manager in our
Offering. As a result, we did not have the benefit of an
independent due diligence review and investigation of the type
normally performed by an unaffiliated, independent underwriter
in connection with our Offering.
Potential
Conflicts of Affiliated Property Manager
Our properties are, and we anticipate that properties we acquire
in the future, if any, will be managed and leased by our
affiliated property manager, Cole Realty Advisors, Inc.
(Cole Realty), pursuant to a property management and
leasing agreement. Cole Realty also serves as property manager
for properties owned by real estate programs sponsored by Cole
Real Estate Investments, some of which may be in competition
with our properties. Management fees to be paid to our property
manager are based on a percentage of the rental and other income
received by the managed properties.
Lack
of Separate Representation
Morris, Manning & Martin, LLP acts, and may in the
future act, as counsel to us, Cole Advisors, and certain of our
respective affiliates. There is a possibility that in the future
the interests of the various parties may become adverse, and
under the Code of Professional Responsibility of the legal
profession, Morris, Manning & Martin, LLP may be
precluded from representing any one or all of such parties. In
the event that a dispute were to arise between us, Cole
Advisors, or any of our respective affiliates, separate counsel
for such matters will be retained as and when appropriate.
Receipt
of Fees and Other Compensation by Cole Advisors and Its
Affiliates
We have incurred commissions, fees and expenses payable to Cole
Advisors and affiliates in connection with the Offering and
acquisition and management of our assets, including selling
commissions, dealer manager fees, organization and offering
expenses, acquisition and advisory fees, financing coordination
fees, asset management fees and acquisition expenses. In
addition, we have incurred, and expect to continue to incur,
commissions, fees and expenses payable to Cole Advisors and
affiliates in connection with the management of our assets,
including property management fees, leasing fees and operating
expenses. In connection with the sale of properties, we may pay
Cole Advisors and affiliates real estate commissions and
subordinated participation in net sale proceeds and subordinated
performance fees. However, the subordinated participation in net
sale proceeds and the subordinated performance fees payable or
reimbursable to Cole Advisors and its affiliates relating to the
net sale proceeds from the sale of properties will only be
payable after the return to the stockholders of their capital
contributions plus cumulative returns on such capital.
9
Subject to oversight by our board of directors, Cole Advisors
will have considerable discretion with respect to all decisions
relating to the terms and timing of all transactions. Therefore,
Cole Advisors may have conflicts of interest concerning certain
actions taken on our behalf, particularly due to the fact that
such fees will generally be payable to Cole Advisors and its
affiliates regardless of the quality of the properties acquired
or the services provided to us.
Policies
With Respect to Conflicts of Interest
In order to reduce or eliminate certain potential conflicts of
interest, we have adopted certain policies relating to
transactions we enter into with our affiliates and allocation of
investment opportunities among affiliated entities.
Transactions with Affiliates. Our policy is
that the terms on which our relationships are conducted with our
advisor or any of its affiliates will be fair to us and on terms
and conditions no less favorable to us than can be obtained from
independent third parties for comparable services in the same
location.
Conflict Resolution Procedures with Respect to Acquisition of
Properties. We, our advisor and its affiliates
have agreed on certain steps to eliminate potential conflicts in
connection with selecting properties for purchase when the
property is suitable, under all of the factors considered by our
advisor, for us and one or more other entities affiliated with
our advisor. The affiliated parties will first consider which
programs have funds for investment and will offer the property
first to the program that has had the largest period of time
elapse since it was offered an investment opportunity. In
determining suitability, the factors that will be considered
include cash requirements of each program, the effect of the
acquisition on diversification by type of property, geographic
area and type of tenant, anticipated cash flow, purchase price,
and size of the investment. We, our advisor and its affiliates
reserve the right to make adjustments in such determinations if
delays occur and an acquisition does not close when anticipated.
Employees
We have no direct employees. The employees of Cole Advisors and
other affiliates of our advisor provide services for us related
to acquisition, financing, property management, asset
management, disposition, accounting, investor relations, and
administration.
We are dependent on our advisor and its affiliates for services
that are essential to us, including asset acquisition and
disposition decisions, property management and other general
administrative responsibilities. In the event that these
companies were unable to provide these services to us, we would
be required to obtain such services from other sources.
We may reimburse Cole Advisors and its affiliates for expenses
incurred in connection with its provision of administrative
services to us, including personnel costs, subject to certain
limitations. During the years ended December 31, 2010 and
2009, no amounts were reimbursed, or required to be reimbursed,
to Cole Advisors or its affiliates for such services.
Insurance
Generally, our leases require each tenant to procure, at its own
expense, commercial general liability insurance, as well as
property insurance covering the building for the full
replacement value and naming the ownership entity and the
lender, if applicable, as the additional insured on the policy.
As a precautionary measure, our advisor has, and may continue
to, obtain, to the extent available, secondary liability
insurance, as well as loss of rents insurance that covers one
year of annual rent in the event of a rental loss. The secondary
insurance coverage names the ownership entity as the named
insured on the policy.
Some leases require that we procure the insurance for both
commercial general liability and property damage insurance;
however, the premiums are generally reimbursable from the
tenant. In the event we procure such insurance, the policy lists
us as the named insured on the policy and the tenant as the
additional insured.
10
Tenants are required to provide proof of insurance by furnishing
a certificate of insurance to our advisor on an annual basis.
The insurance certificates are tracked and reviewed for
compliance by our property manager.
Competition
While we currently do not intend to acquire additional
properties, in the event that we do so, we would be in
competition with other potential buyers for the same properties,
and may have to pay more to purchase the property than we would
if there were no other potential acquirers or will have to
locate another property that meets our investment criteria.
Although our properties currently are 100% leased and we have
acquired, and may continue to acquire in the future, properties
subject to existing leases, the leasing of real estate is highly
competitive in the current market, and we may experience
competition for tenants from owners and managers of competing
projects. If any of our existing leases were to be terminated
prior to expiration of the lease term we would need to find a
replacement tenant, which may be more challenging in the current
economic environment. As a result, we may have to provide free
rent, incur charges for tenant improvements, or offer other
inducements, or we might not be able to timely lease the space,
all of which may have an adverse impact on our results of
operations. At the time we elect to dispose of our properties,
we will also be in competition with sellers of similar
properties to locate suitable purchasers for our properties.
Concentration
of Credit Risk
At December 31, 2010, we had cash, including restricted
cash, on deposit in two financial institutions, which was
$1.8 million in excess of federally insured levels;
however, we have not experienced any losses in such accounts. We
limit investment of cash investments to financial institutions
with high credit standing; therefore, we believe we are not
exposed to any significant credit risk on cash.
As of December 31, 2010, three tenants in the drugstore
industry accounted for 37% of our 2010 rental revenues, of
which 21% was attributable to one tenant. As of
December 31, 2010, one tenant in the auto dealership
industry and one tenant in the home improvement industry each
accounted for 10% of our 2010 rental revenues. Additionally
we have certain geographic concentration in our property
holdings. In particular, as of December 31, 2010, eight of
our properties were located in Texas and five were located in
Kansas, accounting for 24% and 17%, respectively, of our
2010 rental revenues.
Litigation
In the ordinary course of business, we may become subject to
litigation or claims. We are not aware of any legal proceedings
of which the outcome is reasonably likely to have a material
adverse effect on its results of operations or financial
condition.
Environmental
Matters
In connection with the ownership and operation of real estate,
we may be potentially liable for costs and damages related to
environmental matters. We carry environmental liability
insurance on our properties which provides coverage for
remediation liability and pollution liability for third-party
bodily injury and property damage claims. We have not been
notified by any governmental authority of any non-compliance,
liability or other claim, nor are we aware of any other
environmental condition that we believe, in either case, will
have a material adverse effect on the consolidated financial
statements.
Available
Information
We electronically file our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and all amendments to those reports with the SEC. We have also
filed a registration statement on
Form 10-SB,
as amended. Copies of our filings with the SEC may be obtained
from the SECs website, at
http://www.sec.gov.
Access to these filings is free of charge.
11
Requirements
for Qualification as a REIT
We qualified as a REIT for federal income tax purposes
commencing with the taxable year ended December 31, 2004.
To continue to qualify as a REIT, we must meet, and we must
continue to meet, certain requirements relating to our
organization, sources of income, nature of assets, distributions
of income to our stockholders and recordkeeping. We generally
will not be subject to federal corporate income tax to the
extent we distribute our taxable income to our stockholders, and
so long as we distribute at least 90% of our taxable income
(excluding capital gains).
If we fail to maintain our qualification as a REIT for any
reason in a taxable year and applicable relief provisions do not
apply, we will be subject to tax, including any applicable
alternative minimum tax, on our taxable income at regular
corporate rates. We will not be able to deduct distributions
paid to our stockholders in any year in which we fail to qualify
as a REIT. We also will be disqualified for the four taxable
years following the year during which qualification was lost
unless we are entitled to relief under specific statutory
provisions.
Not required for a smaller reporting company.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
Not required for a smaller reporting company.
Overview
As of December 31, 2010, we owned, through separate
wholly-owned limited partnerships or limited liability
companies, a portfolio of 42 freestanding, single-tenant retail
and commercial properties, comprising 1.0 million rentable
square feet located in 19 states. As of December 31,
2010, 100% of the rentable square feet of these properties was
leased, with a weighted average remaining lease term of
10.1 years, excluding one property currently under a month
to month lease agreement, which accounted for 2% of the
2010 rental income. As of December 31, 2010, we had
outstanding debt of $120.5 million, secured by properties
in our portfolio and the related tenant leases.
12
Property
Statistics
The following table shows the tenant diversification of our real
estate assets, based on 2010 base rental income, as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
2010
|
|
|
Percentage of
|
|
|
|
Number of
|
|
|
Rentable
|
|
|
Rental Income
|
|
|
2010
|
|
Tenant
|
|
Leases
|
|
|
Square Feet
|
|
|
(In thousands)
|
|
|
Rental Income
|
|
|
Rite Aid drugstore
|
|
|
11
|
|
|
|
136,366
|
|
|
$
|
3,286
|
|
|
|
21
|
%
|
CarMax auto dealership
|
|
|
1
|
|
|
|
55,466
|
|
|
|
1,585
|
|
|
|
10
|
%
|
Lowes home improvement
|
|
|
2
|
|
|
|
256,902
|
|
|
|
1,617
|
|
|
|
10
|
%
|
Walgreens drugstore
|
|
|
6
|
|
|
|
81,575
|
|
|
|
1,402
|
|
|
|
9
|
%
|
Vanguard car rental
|
|
|
1
|
|
|
|
23,360
|
|
|
|
1,197
|
|
|
|
8
|
%
|
Gander Mountain sporting goods
|
|
|
1
|
|
|
|
88,492
|
|
|
|
1,148
|
|
|
|
8
|
%
|
WaWa convenience store
|
|
|
3
|
|
|
|
15,896
|
|
|
|
1,122
|
|
|
|
7
|
%
|
CVS drugstore
|
|
|
4
|
|
|
|
45,968
|
|
|
|
1,087
|
|
|
|
7
|
%
|
Conns electronics
|
|
|
3
|
|
|
|
75,150
|
|
|
|
954
|
|
|
|
6
|
%
|
Tractor Supply specialty retailer
|
|
|
4
|
|
|
|
90,762
|
|
|
|
837
|
|
|
|
5
|
%
|
Other
|
|
|
6
|
|
|
|
164,615
|
|
|
|
1,341
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
1,034,552
|
|
|
$
|
15,576
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the tenant industry diversification of
our real estate assets, based on 2010 base rental income,
as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
2010
|
|
|
Percentage of
|
|
|
|
Number of
|
|
|
Rentable
|
|
|
Rental Income
|
|
|
2010
|
|
Industry
|
|
Leases
|
|
|
Square Feet
|
|
|
(In thousands)
|
|
|
Rental Income
|
|
|
Drugstore
|
|
|
21
|
|
|
|
263,909
|
|
|
$
|
5,776
|
|
|
|
37
|
%
|
Auto Dealership
|
|
|
1
|
|
|
|
55,466
|
|
|
|
1,585
|
|
|
|
10
|
%
|
Home Improvement
|
|
|
2
|
|
|
|
256,902
|
|
|
|
1,617
|
|
|
|
10
|
%
|
Electronics Retail
|
|
|
4
|
|
|
|
95,150
|
|
|
|
1,251
|
|
|
|
8
|
%
|
Car Rental
|
|
|
1
|
|
|
|
23,360
|
|
|
|
1,197
|
|
|
|
8
|
%
|
Sporting Goods
|
|
|
1
|
|
|
|
88,492
|
|
|
|
1,148
|
|
|
|
7
|
%
|
Convenience Store
|
|
|
3
|
|
|
|
15,896
|
|
|
|
1,122
|
|
|
|
7
|
%
|
Specialty Retail
|
|
|
7
|
|
|
|
107,172
|
|
|
|
1,055
|
|
|
|
7
|
%
|
Fitness and Health
|
|
|
1
|
|
|
|
82,750
|
|
|
|
548
|
|
|
|
4
|
%
|
Theater
|
|
|
1
|
|
|
|
45,455
|
|
|
|
277
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
1,034,552
|
|
|
$
|
15,576
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The following table shows the geographic diversification of our
real estate assets, based on 2010 base rental income, as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
2010
|
|
|
Percentage of
|
|
|
|
Number of
|
|
|
Rentable
|
|
|
Rental Income
|
|
|
2010
|
|
Location
|
|
Properties
|
|
|
Square Feet
|
|
|
(In thousands)
|
|
|
Rental Income
|
|
|
Texas
|
|
|
8
|
|
|
|
331,995
|
|
|
$
|
3,760
|
|
|
|
24
|
%
|
Kansas
|
|
|
5
|
|
|
|
121,917
|
|
|
|
2,667
|
|
|
|
17
|
%
|
Georgia
|
|
|
1
|
|
|
|
23,360
|
|
|
|
1,197
|
|
|
|
8
|
%
|
Ohio
|
|
|
6
|
|
|
|
61,911
|
|
|
|
1,038
|
|
|
|
7
|
%
|
South Carolina
|
|
|
2
|
|
|
|
27,637
|
|
|
|
755
|
|
|
|
5
|
%
|
Arkansas
|
|
|
1
|
|
|
|
126,405
|
|
|
|
755
|
|
|
|
5
|
%
|
Pennsylvania
|
|
|
2
|
|
|
|
16,055
|
|
|
|
652
|
|
|
|
4
|
%
|
Indiana
|
|
|
2
|
|
|
|
87,760
|
|
|
|
634
|
|
|
|
4
|
%
|
Tennessee
|
|
|
2
|
|
|
|
22,264
|
|
|
|
604
|
|
|
|
4
|
%
|
Maine
|
|
|
2
|
|
|
|
24,280
|
|
|
|
559
|
|
|
|
4
|
%
|
Other
|
|
|
11
|
|
|
|
190,968
|
|
|
|
2,955
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
1,034,552
|
|
|
$
|
15,576
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
Although there are variations in the specific terms of the
leases of our properties, the following is a summary of the
general structure of our leases. Generally, the leases of the
properties owned provide for initial terms of 10 to
20 years. As of December 31, 2010, the weighted
average remaining lease term was 10.1 years, excluding one
property currently under a month to month lease agreement, which
accounted for 2% of the 2010 rental income. The properties
are generally leased under net leases pursuant to which the
tenant bears responsibility for substantially all property costs
and expenses associated with ongoing maintenance and operation,
including utilities, property taxes and insurance. Certain of
the leases require us to maintain the roof and structure of the
building. The leases of the properties generally provide for
annual base rental payments (payable in monthly installments)
ranging from $60,000 to $1.7 million (average of $375,000).
Certain leases provide for limited increases in rent as a result
of fixed increases, increases in the consumer price index,
and/or
increases in the tenants sales volume.
Generally, the property leases provide the tenant with one or
more multi-year renewal options, subject to generally the same
terms and conditions as the initial lease term. Certain leases
also provide that in the event we wish to sell the property
subject to that lease, we first must offer the lessee the right
to purchase the property on the same terms and conditions as any
offer which we intend to accept for the sale of the property.
14
The following table shows lease expirations of our real estate
assets as of December 31, 2010, during each of the next ten
years and thereafter, assuming no exercise of renewal options or
termination rights:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased
|
|
|
2010
|
|
|
Percentage of
|
|
|
|
Number of
|
|
|
Square Feet
|
|
|
Rental Income
|
|
|
2010
|
|
Year of Lease Expiration
|
|
Leases
|
|
|
Expiring
|
|
|
(In thousands)
|
|
|
Rental Income
|
|
|
2011
|
|
|
1
|
|
|
|
45,455
|
|
|
$
|
277
|
|
|
|
2
|
%
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
2013
|
|
|
1
|
|
|
|
12,885
|
|
|
|
218
|
|
|
|
1
|
%
|
2014
|
|
|
6
|
|
|
|
177,656
|
|
|
|
1,436
|
|
|
|
9
|
%
|
2015
|
|
|
3
|
|
|
|
218,257
|
|
|
|
1,496
|
|
|
|
10
|
%
|
2016
|
|
|
1
|
|
|
|
20,000
|
|
|
|
298
|
|
|
|
2
|
%
|
2017
|
|
|
2
|
|
|
|
49,920
|
|
|
|
747
|
|
|
|
5
|
%
|
2018
|
|
|
3
|
|
|
|
35,460
|
|
|
|
738
|
|
|
|
5
|
%
|
2019
|
|
|
6
|
|
|
|
180,630
|
|
|
|
2,356
|
|
|
|
15
|
%
|
2020
|
|
|
5
|
|
|
|
65,835
|
|
|
|
1,356
|
|
|
|
9
|
%
|
Thereafter
|
|
|
14
|
|
|
|
228,454
|
|
|
|
6,654
|
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
1,034,552
|
|
|
$
|
15,576
|
|
|
|
100
|
%
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Notes
Payable Information
As of December 31, 2010, we had $120.5 million
outstanding in mortgage notes payable and lines of credit
borrowings, with fixed interest rates ranging from 5.27% to
6.96% and a weighted average interest rate of 6.48%, and which
mature on various dates ranging from June 2011 through September
2017, with a weighted average remaining term of 4.4 years.
Each of the mortgage notes payable and lines of credit are
secured by the respective properties and their related tenant
leases on which the debt was placed.
The mortgage notes may generally be prepaid subject to meeting
certain requirements and payment of a prepayment premium as
specified in the respective loan agreement. Notwithstanding the
prepayment limitations, we may sell the properties to a buyer
that assumes the respective mortgage loan. The transfer would be
subject to the conditions set forth in the individual
propertys mortgage note document, including without
limitation, the lenders approval of the proposed buyer and
the payment of the lenders fees, costs and expenses
associated with the sale of the property and the assumption of
the loan.
Generally, in the event that a mortgage note is not paid off on
the respective maturity date, certain mortgage notes include
hyper-amortization
provisions. Under the
hyper-amortization
provisions, the individual mortgage note maturity date will be
extended by 20 years. During such period, the lender will
apply 100% of the rents collected to the following items in the
order indicated: (i) payment of accrued interest at the
original fixed interest rate, (ii) all payments for escrow
or reserve accounts, (iii) any operating expenses of the
property pursuant to an approved annual budget, (iv) any
extraordinary expenses and (v) the balance of the rents
collected will be applied to the following in such order as the
lender may determine: (1) any other amounts due in
accordance with the loan documents, (2) the reduction of
the principal balance of the mortgage note, and
(3) capitalized interest at an interest rate equal to the
greater of (A) the initial fixed interest rate as stated on
the respective mortgage note agreement plus 2.0% per annum or
(B) the then current Treasury Constant Maturity Yield Index
plus 2.0% per annum.
The mortgage notes and lines of credit are generally
non-recourse to the Company and Cole OP I, but both are
liable for customary non-recourse carve-outs. In the event a
mortgage note is not paid off on the maturity date, the mortgage
loans include default provisions. Upon the occurrence of an
event of default, interest on the mortgage notes will accrue at
an annual default interest rate equal to the lesser of
(a) the maximum rate permitted by applicable law, or
(b) the then-current interest rate plus 4.0%. Certain
mortgage notes payable contain customary affirmative, negative
and financial covenants, including requirements for minimum net
worth and debt service coverage ratios, in addition to limits on
leverage ratios and variable debt.
15
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ITEM 3.
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LEGAL
PROCEEDINGS
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In the ordinary course of business, we may become subject to
litigation or claims. We are not aware of any material pending
legal proceedings, other than ordinary routine litigation
incidental to our business.
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ITEM 4.
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REMOVED
AND RESERVED
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16
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market
Information
On April 26, 2004, we commenced the Offering. We completed
the Offering on September 16, 2005, after having raised
aggregate gross proceeds of $100,331,320 through the sale of an
aggregate of 10,097,251 shares of our common stock. As of
March 30, 2011, 10,090,951 shares of our common stock
were issued and outstanding and held by 1,453 stockholders of
record. The number of stockholders is based on the records of
DST Systems, Inc., who serves as our registrar and transfer
agent.
There is no established trading market for our common stock.
Therefore, there is a risk that a stockholder may not be able to
sell our stock at a time or price acceptable to the stockholder,
or at all. Pursuant to the Offering, we sold shares of our
common stock to our stockholders generally at a price of $10.00
per share. Additionally, we provided discounts in our Offering
for certain categories of purchasers, including discounts based
on the volume of purchases by single purchasers and certain of
their affiliates. Under our charter, certain restrictions are
imposed on the ownership and transfer of shares. The shares,
which are restricted securities as defined in
Rule 144 promulgated by the SEC under the Securities Act,
must be held indefinitely unless they are subsequently
registered under the Securities Act and any applicable state
securities laws or unless, upon the advice of counsel
satisfactory to us, the shares are sold in a transaction that is
exempt from the registration requirements of such laws.
Currently, shares of our common stock may be eligible for sale
under Rule 144.
We may seek to list our shares of common stock on a securities
exchange or inter-dealer quotation system if our board of
directors believes listing would be in the best interest of our
stockholders. In making the decision to apply for listing of our
shares or providing other forms of liquidity, such as selling
our properties and other assets, either on a portfolio basis or
individually, or engaging in a business combination transaction
approved by our board of directors, our board of directors will
evaluate whether listing the shares or liquidating would result
in greater value for our stockholders. It cannot be determined
at this time the circumstances, if any, under which the board of
directors would determine to list the shares. If we do not list
our shares of common stock on a national securities exchange by
February 1, 2016, our charter requires that we either:
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seek stockholder approval of an extension or amendment to this
listing deadline; or
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seek stockholder approval to adopt a plan of liquidation of the
corporation.
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If we seek and fail to obtain stockholder approval of an
extension or amendment to the listing deadline, we would then be
required to seek stockholder approval of our plan of
liquidation. If we seek and fail to obtain stockholder approval
of our plan of liquidation, our charter would not require us to
list or liquidate and we would continue to operate as before. If
we seek and obtain stockholder approval of our plan of
liquidation, we would begin an orderly sale of our properties
and distribute our net proceeds from liquidation to our
stockholders.
Unless and until our shares are listed on a national securities
exchange, it is not expected that a public market for our shares
will develop. To assist fiduciaries of plans subject to the
annual reporting requirements of the Employee Retirement Income
Security Act of 1974, as amended (ERISA) and IRA
trustees or custodians to prepare reports relating to an
investment in our shares, we provide reports of our
determinations of the current value of our net assets per
outstanding share to those fiduciaries (including IRA trustees
and custodians) who identify themselves to us and request the
reports. Accordingly, we have provided an annual statement of
value for stockholders subject to ERISA and to certain other
plan stockholders. The statement of value is only an estimate
and may not reflect the actual value of shares of our common
stock. In determining an estimated value of the our shares, the
board of directors relied upon information provided by an
independent consultant that specializes in valuing commercial
real estate companies, and the boards experience with, and
knowledge about, our real estate portfolio and debt obligations.
The board relied on valuation methodologies that are commonly
used in the commercial real estate industry, including, among
17
others, a discounted cash flow analysis, which projects a range
of the estimated future stream of cash flows reasonably likely
to be generated by our portfolio of properties, and discounts
the projected future cash flows to a present value. In addition,
the board reviewed current, historical and projected
capitalization rates for commercial properties similar to the
properties owned by us, and the values of publicly traded REITs
with portfolios comparable to us. The board also took into
account the estimated value of our other assets and liabilities,
including a reasonable estimate of the value of our debt
obligations. Based on the results of the methodologies, our
board of directors selected a value within the range of values
as the estimated per share value of our common stock of $7.65.
Because this is only an estimate, we may subsequently revise any
valuation that is provided.
As with any valuation, methodology, the methodologies utilized
by our board of directors, in reaching an estimate of the value
of our shares, are based upon a number of estimates,
assumptions, judgments and opinions that may, or may not, prove
to be correct. The use of different estimates, assumptions,
judgments or opinions would likely have resulted in
significantly difference estimates of the value of our shares.
In addition, the boards estimate of share value is not
based on fair values of our real estate, as determined by GAAP,
as our book value for most real estate is based on the amortized
cost of the property, subject to certain adjustments.
Furthermore, in reaching an estimate of the value of our shares,
the board did not include a liquidity discount, in order to
reflect the fact that our shares are not currently traded on a
national securities exchange; a discount for debt that may
include a prepayment obligation or a provision precluding
assumption of the debt by a third party; or the costs that are
likely to be incurred in connection with an appropriate exit
strategy, whether that strategy might be a listing of our shares
of common stock on a national securities exchange, a merger or a
sale of our portfolio. As a result, there can be no assurance
that:
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any stockholder will be able to realize the estimated share
value, upon attempting to sell their shares;
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we will be able to achieve, for our stockholders, the estimated
value per share, upon a listing of our shares of common stock on
a national securities exchange, a merger, or a sale of our
portfolio; or
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that the estimated share value, or the methodologies used by the
board to estimate the share value, will be found by an
regulatory authority to comply with ERISA, Internal Revenue Code
or other regulatory requirements.
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There are no outstanding options or warrants to purchase, or
securities convertible into, shares of our common stock. The
limited partners of our operating partnership have the right to
cause their limited partnership units to be redeemed by the
operating partnership or purchased by us for cash. In either
event, the cash amount to be paid will be equal to the cash
value of the number of our shares of common stock that would be
issuable if the limited partnership units were exchanged for our
shares of common stock on a
one-for-one
basis. Alternatively, we may elect to purchase the limited
partnership units by issuing one share of our common stock for
each limited partnership unit exchanged. These exchange rights
may not be exercised, however, if and to the extent that the
delivery of shares upon exercise would (1) result in any
person owning shares in excess of our ownership limits,
(2) result in shares being owned by fewer than
100 persons, (3) cause us to be closely
held within the meaning of Section 856(h) of the
Internal Revenue Code, (4) cause us to own 10.0% or more of
the ownership interests in a tenant within the meaning of
Section 856(d)(2)(B) of the Internal Revenue Code, or
(5) cause the acquisition of shares by a redeemed limited
partner to be integrated with any other distribution
of our shares for purposes of complying with the Securities Act.
As of March 30, 2011, an aggregate of nine limited
partnership units in our operating partnership were issued and
outstanding, all of which are held by our advisor. We are the
sole general partner of the operating partnership and, as of
March 30, 2011, we owned a 99.99% equity percentage
interest in the operating partnership. Our advisor is the only
limited partner and the owner of the other 0.01% equity
percentage interest in the operating partnership.
18
Share
Redemption Program
In order to provide stockholders with the possibility of
liquidity, stockholders who have held their shares of common
stock for at least one year may receive the benefit of limited
interim liquidity by presenting for redemption all or a minimum
portion of their shares to us at any time in accordance with the
procedures outlined below. At that time, we may, subject to the
conditions and limitations described below, redeem the shares
presented for redemption for cash to the extent that we have
sufficient funds available to us to fund such redemption.
We determine at the beginning of each fiscal year the maximum
amount of shares that we may redeem during that year. For the
years ended December 31, 2010 and 2009, we did not redeem
any shares under the share redemption program. Our board of
directors has determined that no amounts are to be made
available for redemption during the year ending
December 31, 2011. As of December 31, 2010, we had
redeemed a total of 7,300 shares, at an average of $9.35
per share, under the share redemption program.
In the event that we accept redemption requests, except as
described below for redemptions upon the death of a stockholder,
effective January 1, 2010, the purchase price paid for the
redeemed shares would equal the lesser of (1) the price
actually paid for those shares or (2) either (i) $8.50
per share or (ii) 90.0% of the net asset value per share as
determined by our board of directors. Therefore, the share
redemption price would be $6.89 per share based on the most
recently disclosed estimated value of $7.65 per share as
determined by our board of directors. Our board of directors
reserves the right in its sole discretion at any time and from
time to time to (1) waive the one-year holding period in
the event of the death or bankruptcy of a stockholder or other
exigent circumstances, (2) reject any request for
redemption, (3) change the purchase price for redemption,
or (4) otherwise amend the terms of our share redemption
program.
In the event that we accept redemption requests, the purchase
price for shares redeemed upon the death of a stockholder
generally would be equal to the price the stockholder actually
paid for the shares. If, at the time of redemption, our advisor
or another firm we might choose for that purpose has made a
determination of our net asset value per share, the purchase
price for shares redeemed upon the death of a stockholder will
be the net asset value of the shares as so determined. We will
redeem shares upon the death of a stockholder only to the extent
that we have sufficient funds available to us to fund such
redemption.
Redemption of shares, when requested, may generally be made
quarterly on a first-come, first-served basis. We cannot
guarantee that we will have sufficient available cash flow to
accommodate any or all requests made in any quarter. If we do
not have such sufficient funds available, at the time when
redemption is requested, our stockholders can (1) withdraw
its request for redemption or (2) ask that we honor the
request at such time, if any, when sufficient funds become
available. Such pending requests will generally be honored on a
first-come, first-served basis.
Stockholders may present to us fewer than all of their shares
for redemption, except that (1) a stockholder must present
for redemption at least 2,500 shares and (2) if the
stockholder retains any shares, it must retain at least
2,500 shares. The shares we redeem under our share
redemption program will be cancelled and return to the status of
authorized but unissued shares.
Our board of directors may amend, suspend or terminate our share
redemption program upon 30 days notice at any time.
Distributions
We elected to be taxed and qualified as a REIT for federal
income tax purposes commencing with our taxable year ended
December 31, 2004. As a REIT, we have made, and intend to
make, distributions each taxable year (not including a return of
capital for federal income tax purposes) equal to at least 90%
of our taxable income. One of our primary goals is to pay
regular (monthly) distributions to our stockholders.
For income tax purposes, distributions to common stockholders
are characterized as ordinary income, capital gains, or as a
return of a stockholders invested capital. To the extent
that we make a distribution in excess of our current or
accumulated earnings and profits, the distribution will be
treated as a tax-free return
19
of capital, reducing the tax basis in each
U.S. stockholders shares, and the amount of each
distribution of a U.S. stockholders tax basis in its
shares will be taxable as gain realized from the sale of its
shares.
The following table reflects the aggregate distributions we paid
during the years ended December 31, 2010 and 2009:
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Total
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Weighted Average
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Distributions Paid
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Distributions Paid
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Return of
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Ordinary
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Capital Gain
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Year
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(In thousands)
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per Common Share
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Capital
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Income
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Income
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2010
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$
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5,568
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$
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0.55
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$
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0.37
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$
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0.18
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$
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2009
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$
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7,064
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$
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0.70
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$
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0.40
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$
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0.30
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$
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Securities
Authorized for Issuance Under Equity Compensation
Plans
The Company does not have any compensation plans under which we
are authorized to issue equity securities.
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ITEM 6.
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SELECTED
FINANCIAL DATA
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Not required for a smaller reporting company.
20
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ITEM 7.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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The following discussion and analysis should be read in
conjunction with the accompanying consolidated financial
statements and notes thereto. See also Cautionary Note
Regarding Forward-Looking Statements preceding Part I.
Overview
We were formed on March 29, 2004, to acquire and operate
commercial real estate primarily consisting of net leased,
freestanding, single tenant, income-generating retail properties
located throughout the United States. We have no paid
employees and are externally managed by our advisor. We elected
to be taxed, and currently qualify, as a REIT for federal income
tax purposes.
As of December 31, 2010, we owned properties, which were
100% leased, comprising 1.0 million square feet of
single-tenant, retail and commercial space located in
19 states. We do not anticipate acquiring any additional
properties, unless we were to dispose of any of our properties
in the ordinary course of business, in which case we would
expect to reinvest the net sales proceeds in additional
properties or distribute the net proceeds to stockholders. We
currently have no plans to dispose of any of our properties.
Our operating results and cash flows are primarily influenced by
rental income from our commercial properties and interest
expense on our property acquisition indebtedness. Rental income
accounted for 98% of total revenue during the years ended
December 31, 2010 and 2009. As 100% of our properties are
under lease, with a weighted average remaining lease term of
10.1 years and the shortest remaining lease term of a
single property of 3.0 years, excluding one property
currently under a month to month lease agreement, which
accounted for 2% of our 2010 rental income, our exposure to
changes in commercial rental rates and contractual lease
expirations is substantially mitigated, except for any vacancies
caused by tenant bankruptcies or other factors. Our advisor
regularly monitors the creditworthiness of our tenants by
reviewing the tenants financial results, credit rating
agency reports (if any) on the tenant or guarantor, the
operating history of the property with such tenant, the
tenants market share and track record within its industry
segment, the general health and outlook of the tenants
industry segment, and other information for changes and possible
trends. If our advisor identifies significant changes or trends
that may adversely affect the creditworthiness of a tenant, it
will gather a more in-depth knowledge of the tenants
financial condition and, if necessary, attempt to mitigate the
tenant credit risk by evaluating the possible sale of the
property, or identifying a possible replacement tenant should
the current tenant fail to perform on the lease.
As of December 31, 2010, the debt leverage ratio of our
portfolio, which is the ratio of debt to total gross real estate
assets net of gross intangible lease liabilities, was 60%. All
of our debt is subject to fixed interest rates, ranging from
5.27% to 6.96%, with a weighted average remaining term of
4.4 years. As we have no outstanding variable rate debt,
our exposure to short-term changes in interest rates is limited.
However, we expect to refinance our existing debt as it matures,
including $7.8 million of fixed rate debt maturing during
the year ending December 31, 2011, for which we will be
subject to new interest rates. If this debt is refinanced with
variable interest rate debt, our exposure to short-term changes
in interest rates would increase.
Recent
Market Conditions
Beginning in late 2007, domestic and international financial
markets experienced significant disruptions that were brought
about in large part by challenges in the world-wide banking
system. These disruptions severely impacted the availability of
credit and have contributed to rising costs associated with
obtaining credit. Recently, the volume of mortgage lending for
commercial real estate has increased and lending terms have
improved; however, such lending activity is significantly less
than previous levels. Although lending market conditions have
improved, we have experienced, and may continue to experience,
more stringent lending criteria, which may affect our ability to
finance certain property acquisitions or refinance our debt at
maturity. For properties for which we are able to obtain
financing, the interest rates and other terms on such loans may
be unacceptable. Additionally, if we are able to refinance our
existing debt as it matures it may be
21
at lower leverage levels or at rates and terms which are less
favorable than our existing debt or, if we elect to extend the
maturity dates of the mortgage notes in accordance with the
hyper-amortization
provisions, the interest rates charged to us will be higher,
each of which may adversely affect our results of operations and
the distribution rate we are able to pay to our investors.
The economic downturn has led to high unemployment rates and a
decline in consumer spending. These economic trends have
adversely impacted the retail and real estate markets, causing
higher tenant vacancies, declining rental rates and declining
property values. Recently the economy has improved and continues
to show signs of recovery. Additionally, the real estate markets
have recently observed an improvement in occupancy rates;
however, occupancy and rental rates continue to be below those
previously experienced before the economic downturn. As of
December 31, 2010, 100% of our rentable square feet was
under lease, including one property currently under a month to
month lease, which accounted for 2% of our 2010 rental
income. However, if the current economic uncertainty persists,
we may experience vacancies or be required to further reduce
rental rates on occupied space. If we do experience vacancies,
our advisor will actively seek to lease our vacant space,
however, such space may be leased at lower rental rates and for
shorter lease terms than previously experienced. In addition, as
many retailers and other tenants have been delaying or
eliminating their store expansion plans, the amount of time
required to re-lease a property may increase as a result.
Application
of Critical Accounting Policies
Our accounting policies have been established to conform to
accounting principles generally accepted in the United States of
America (GAAP). The preparation of financial
statements in conformity with GAAP requires management to use
judgment in the application of accounting policies, including
making estimates and assumptions. These judgments affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses
during the reporting periods. If managements judgment or
interpretation of the facts and circumstances relating to
various transactions had been different, it is possible that
different accounting policies would have been applied, thus,
resulting in a different presentation of the financial
statements. Additionally, other companies may utilize different
estimates that may impact comparability of our results of
operations to those of companies in similar businesses.
Investment
in and Valuation of Real Estate and Related Assets
We are required to make subjective assessments as to the useful
lives of our depreciable assets. We consider the period of
future benefit of the asset to determine the appropriate useful
life of each asset. Real estate assets are stated at cost, less
accumulated depreciation and amortization. Amounts capitalized
to real estate assets consist of the cost of acquisition,
including acquisition related expenses incurred prior to
January 1, 2009, construction and any tenant improvements,
major improvements and betterments that extend the useful life
of the related asset and leasing costs. All repairs and
maintenance costs are expensed as incurred.
Assets, other than land, are depreciated or amortized on a
straight-line basis. The estimated useful lives of our assets by
class are generally as follows:
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Building
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40 years
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Tenant improvements
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Lesser of useful life or lease term
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Intangible lease assets
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Lesser of useful life or lease term
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We continually monitor events and changes in circumstances that
could indicate that the carrying amounts of our real estate and
related intangible assets may not be recoverable. Impairment
indicators that we consider include, but are not limited to,
bankruptcy or other credit concerns of a propertys major
tenant, such as a history of late payments, rental concessions
and other factors, a significant decrease in a propertys
revenues due to lease terminations, vacancies, co-tenancy
clauses, reduced lease rates or other circumstances. When
indicators of potential impairment are present, we assess the
recoverability of the assets by determining whether the carrying
value of the assets will be recovered through the undiscounted
future operating cash flows expected from the use of the assets
and their eventual disposition. In the event that such expected
22
undiscounted future cash flows do not exceed the carrying value,
we will adjust the real estate and related intangible assets to
their fair value and recognize an impairment loss.
During the year ended December 31, 2010, we identified one
property with impairment indicators. The tenant at this property
declared bankruptcy, rejected the original lease and entered
into a month to month lease with us that can be terminated with
a 30-day
written notice provided by the tenant or us. As a result, the
undiscounted future operating cash flows expected from the use
of the property and its eventual disposition were determined to
be less than the carrying value of the real estate assets.
Therefore, we reduced the carrying value of the real estate
assets related to the property to its estimated fair value and
recorded an impairment loss of $2.8 million during the year
ended December 31, 2010. In addition, we wrote off the
unamortized below market lease intangible liability related to
the original lease agreement of $31,000 during the year ended
December 31, 2010. No impairment losses or related
write-offs were recorded during the year ended December 31,
2009.
Projections of expected future cash flows require us to use
estimates such as future market rental income rates subsequent
to the expiration of current lease agreements, property
operating expenses, terminal capitalization and discount rates,
the number of months it takes to re-lease the property, required
tenant improvements and the number of years the property is
expected to be held for investment. The use of alternative
assumptions in the future cash flow analysis could result in a
different assessment of the propertys future cash flow and
a different conclusion regarding the existence of an impairment,
the extent of such loss, if any, as well as the fair value of
our real estate and related assets.
When a real estate asset is identified by management as held for
sale, we cease depreciation of the asset and estimate the sales
price, net of selling costs. If, in managements opinion,
the net sales price of the asset is less than the net book value
of the asset, an adjustment to the carrying value would be
recorded to reflect the estimated fair value of the property,
net of selling costs.
Allocation
of Purchase Price of Real Estate and Related
Assets
Upon the acquisition of real properties, we allocate the
purchase price of such properties to acquired tangible assets,
consisting of land, building and improvements, and identified
intangible assets and liabilities, consisting of the value of
above market and below market leases and the value of in-place
leases, based in each case on their fair values. We utilize
independent appraisals to assist in the determination of the
fair values of the tangible assets of an acquired property
(which includes land and building). We obtain an independent
appraisal for each real property acquisition. The information in
the appraisal, along with any additional information available
to us, is used in estimating the amount of the purchase price
that is allocated to land. Other information in the appraisal,
such as building value and market rents, may be used by us in
estimating the allocation of purchase price to the building and
to intangible lease assets and liabilities. The appraisal firm
has no involvement in managements allocation decisions
other than providing this market information.
The fair values of above market and below market in-place lease
values are recorded based on the present value (using an
interest rate which reflects the risks associated with the
leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases
and (ii) an estimate of fair market lease rates for the
corresponding in-place leases, which is generally obtained from
independent appraisals, measured over a period equal to the
non-cancelable term of the lease including any bargain renewal
periods, with respect to a below market lease. The above market
and below market lease values are capitalized as intangible
lease assets or liabilities. Above market lease values are
amortized as an adjustment of rental income over the remaining
terms of the respective leases. Below market leases are
amortized as an adjustment of rental income over the remaining
terms of the respective leases, including any bargain renewal
periods. If a lease were to be terminated prior to its stated
expiration, all unamortized amounts of above market and below
market in-place lease values relating to that lease would be
recorded as an adjustment to rental income.
The fair values of in-place leases include direct costs
associated with obtaining a new tenant and opportunity costs
associated with lost rentals which are avoided by acquiring an
in-place lease. Direct costs associated with obtaining a new
tenant include commissions and other direct costs and are
estimated in part by utilizing information obtained from
independent appraisals and managements consideration of
current market
23
costs to execute a similar lease. The value of opportunity costs
is calculated using the contractual amounts to be paid pursuant
to the in-place leases over a market absorption period for a
similar lease. These intangibles are capitalized as intangible
lease assets and are amortized to expense over the remaining
term of the respective leases. If a lease were to be terminated
prior to its stated expiration, all unamortized amounts of
in-place lease assets relating to that lease would be expensed.
The determination of the fair values of the assets and
liabilities acquired requires the use of significant assumptions
with regard to the current market rental rates, rental growth
rates, capitalization and discount rates, interest rates and
other variables. The use of alternate estimates would result in
a different assessment of our purchase price allocations, which
could impact the amount of our reported net income.
Revenue
Recognition
Certain properties have leases where minimum rent payments
increase during the term of the lease. We record rental revenue
for the full term of each lease on a straight-line basis. When
we acquire a property, the term of existing leases is considered
to commence as of the acquisition date for the purposes of this
calculation. We defer the recognition of contingent rental
income, such as percentage rents, until the specific target that
triggers the contingent rental income is achieved.
Reimbursements from tenants for recoverable real estate taxes
and operating expenses are included in rental income in the
period the related costs are incurred.
Income
Taxes
We elected to be taxed and currently qualify as a REIT under
Sections 856 through 860 of the Internal Revenue Code of
1986, as amended. We generally will not be subject to federal
corporate income tax to the extent we distribute our taxable
income to our stockholders, and so long as we distribute at
least 90% of our taxable income (excluding capital gains). REITs
are subject to a number of other complex organizational and
operational requirements. Even though we qualify for taxation as
a REIT, we may be subject to certain state and local taxes on
our income and property, and federal income and excise taxes on
our undistributed income.
Results
of Operations
Year
Ended December 31, 2010 Compared to the Year Ended
December 31, 2009:
Revenue Revenue decreased $203,000, or 1%, to
$16.1 million for the year ended December 31, 2010,
compared to $16.3 million for the year ended
December 31, 2009. The decrease was primarily a result of a
reduction of rental income relating to one property due to the
bankruptcy of its tenant and their change to percentage rent on
a month to month basis. Our revenue primarily consists of rental
income from net leased commercial properties, which accounted
for 98% of total revenues during each of the years ended
December 31, 2010 and 2009.
General and Administrative Expenses General
and administrative expenses decreased $115,000, or 16%, to
$597,000 for the year ended December 31, 2010, compared to
$712,000 for the year ended December 31, 2009. The decrease
was primarily due to decreased accounting and transfer agent
fees during the year ended December 31, 2010, as compared
to the year ended December 31, 2009. Our primary general
and administrative expense items are legal and accounting fees,
state franchise and income taxes, transfer agent fees and other
licenses and fees.
Property Operating Expenses Property
operating expenses increased $297,000, or 58%, to $809,000 for
the year ended December 31, 2010, compared to $512,000 for
the year ended December 31, 2009. The increase was
primarily due to an increase in bad debt expense in addition to
non-reimbursable property taxes now being incurred by us during
the year ended December 31, 2010, related to the bankruptcy
of one tenant as discussed above. The primary property operating
expenses items are property taxes, bad debt expense, insurance
and property repairs and maintenance.
Property Management Expenses Property
management expenses increased $9,000 or 2%, to $484,000 for the
year ended December 31, 2010, compared to $475,000 for the
year ended December 31, 2009. The increase was due to the
timing of gross cash receipts. In particular, we received
payment during the year
24
ended December 31, 2010 related to a cumulative consumer
price index adjustment, which was recognized as revenue during
the year ended December 31, 2009.
Depreciation and Amortization Expenses
Depreciation and amortization expenses remained constant at
$5.5 million during each of the years ended
December 31, 2010 and 2009.
Impairment of Real Estate Assets Impairment
of real estate assets was $2.8 million for the year ended
December 31, 2010, compared to no impairment for the year
ended December 31, 2009. The impairment during 2010 related
to one property for which the tenant declared bankruptcy, as
described in Note 2 of our consolidated financial
statements.
Net Interest Expense Net interest expense
increased $1.0 million, or 14%, to $8.3 million for
the year ended December 31, 2010, compared to
$7.3 million for the year ended December 31, 2009. The
increase was primarily due to an increase in the weighted
average interest rate on outstanding debt to 6.48% at
December 31, 2010, compared to 5.92% at December 31,
2009, which was due to the refinancing of certain mortgage notes
payable in 2010 at higher interest rates. The increase was also
due to higher interest rates on seven mortgage notes payable for
which we elected to extend the maturity dates in accordance with
the
hyper-amortization
provisions, prior to refinancing. The primary net interest
expense items are interest expense, amortization of deferred
financing costs and interest income.
Loss on Early Extinguishment of Debt Loss on
early extinguishment of debt was $259,000 for the year ended
December 31, 2010, compared to no loss for the year ended
December 31, 2009. The loss during 2010 was due to the
refinancing of $50.7 million of mortgage notes payable.
Portfolio
Information
As of December 31, 2010, we owned 42 properties located in
19 states, which were 100% leased to single tenants with a
weighted average remaining lease term of 10.1 years,
excluding one property currently under a month to month lease
agreement, which accounted for 2% of our 2010 rental income.
As of December 31, 2010, our five highest tenant
concentrations, based on 2010 base rental income, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
2010
|
|
|
Percentage of
|
|
|
|
Number of
|
|
|
Rentable
|
|
|
Rental Income
|
|
|
2010
|
|
Tenant
|
|
Leases
|
|
|
Square Feet
|
|
|
(In thousands)
|
|
|
Rental Income
|
|
|
Rite Aid drugstore
|
|
|
11
|
|
|
|
136,366
|
|
|
$
|
3,286
|
|
|
|
21
|
%
|
CarMax auto dealership
|
|
|
1
|
|
|
|
55,466
|
|
|
|
1,585
|
|
|
|
10
|
%
|
Lowes home improvement
|
|
|
2
|
|
|
|
256,902
|
|
|
|
1,617
|
|
|
|
10
|
%
|
Walgreens drugstore
|
|
|
6
|
|
|
|
81,575
|
|
|
|
1,402
|
|
|
|
9
|
%
|
Vanguard car rental
|
|
|
1
|
|
|
|
23,360
|
|
|
|
1,197
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
553,669
|
|
|
$
|
9,087
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, our five highest tenant industry
concentrations, based on 2010 base rental income, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
2010
|
|
|
Percentage of
|
|
|
|
Number of
|
|
|
Rentable
|
|
|
Rental Income
|
|
|
2010
|
|
Industry
|
|
Leases
|
|
|
Square Feet
|
|
|
(In thousands)
|
|
|
Rental Income
|
|
|
Drugstore
|
|
|
21
|
|
|
|
263,909
|
|
|
$
|
5,776
|
|
|
|
37
|
%
|
Auto Dealership
|
|
|
1
|
|
|
|
55,466
|
|
|
|
1,585
|
|
|
|
10
|
%
|
Home Improvement
|
|
|
2
|
|
|
|
256,902
|
|
|
|
1,617
|
|
|
|
10
|
%
|
Electronics Retail
|
|
|
4
|
|
|
|
95,150
|
|
|
|
1,251
|
|
|
|
8
|
%
|
Car Rental
|
|
|
1
|
|
|
|
23,360
|
|
|
|
1,197
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
694,787
|
|
|
$
|
11,426
|
|
|
|
73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
As of December 31, 2010, our five highest geographic
concentrations, based on 2010 base rental income, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
2010
|
|
|
Percentage of
|
|
|
|
Number of
|
|
|
Rentable
|
|
|
Rental Income
|
|
|
2010
|
|
Location
|
|
Properties
|
|
|
Square Feet
|
|
|
(In thousands)
|
|
|
Rental Income
|
|
|
Texas
|
|
|
8
|
|
|
|
331,995
|
|
|
$
|
3,760
|
|
|
|
24
|
%
|
Kansas
|
|
|
5
|
|
|
|
121,917
|
|
|
|
2,667
|
|
|
|
17
|
%
|
Georgia
|
|
|
1
|
|
|
|
23,360
|
|
|
|
1,197
|
|
|
|
8
|
%
|
Ohio
|
|
|
6
|
|
|
|
61,911
|
|
|
|
1,038
|
|
|
|
7
|
%
|
South Carolina
|
|
|
2
|
|
|
|
27,637
|
|
|
|
755
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
566,820
|
|
|
$
|
9,417
|
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For more information on our portfolio diversification and
statistics, see Item 2. Properties above.
Funds
From Operations and Modified Funds From Operations
Funds from Operations (FFO) is a non-GAAP financial
performance measure defined by the National Association of Real
Estate Investment Trusts (NAREIT) and widely
recognized by investors and analysts as one measure of operating
performance of a real estate company. FFO excludes items such as
real estate depreciation and amortization, and gains and losses
on the sale of real estate assets. Depreciation and amortization
as applied in accordance with GAAP implicitly assumes that the
value of real estate assets diminishes predictably over time.
Since real estate values have historically risen or fallen with
market conditions, it is managements view, and we believe
the view of many industry investors and analysts, that the
presentation of operating results for real estate companies by
using the historical cost accounting method alone is
insufficient. In addition, FFO excludes gains and losses from
the sale of real estate, which we believe provides management
and investors with a helpful additional measure of the
historical performance of our real estate portfolio, as it
allows for comparisons, year to year, that reflect the impact on
operations from trends in items such as occupancy rates, rental
rates, operating costs, general and administrative expenses and
interest costs.
In addition to FFO, we use Modified Funds from Operations
(MFFO) as a non-GAAP supplemental financial
performance measure to evaluate the historical operating
performance of our real estate portfolio. MFFO, as defined by
our company, excludes from FFO real estate impairment charges,
which are required to be expensed in accordance with GAAP. In
evaluating the performance of our portfolio over time,
management employs business models and analyses that
differentiate the costs to acquire investments from the
investments revenues and expenses. Impairment charges are
items that management does not include in its evaluation of the
historical operating performance of its real estate investments,
as management believes that the impact of these items will be
reflected over time through changes in rental income or other
related costs. As many other non-traded REITs exclude
impairments in reporting their MFFO, we believe that our
calculation and reporting of MFFO will assist investors and
analysts in comparing our performance versus other non-traded
REITs.
For all of these reasons, we believe FFO and MFFO, in addition
to net income (loss) and cash flows from operating activities,
as defined by GAAP, are helpful supplemental performance
measures and useful in understanding one of the ways in which
our management evaluates the performance of our real estate
portfolio over time. However, FFO and MFFO should not be
considered as alternatives to net income or to cash flows from
operating activities, and are not intended to be used as a
liquidity measure indicative of cash flow available to fund our
cash needs.
26
Our calculation of FFO and MFFO, and reconciliation to net
income (loss), which is the most directly comparable GAAP
financial measure, is presented in the table below for the years
ended December 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
NET (LOSS) INCOME
|
|
$
|
(2,626
|
)
|
|
$
|
1,847
|
|
Depreciation of real estate assets
|
|
|
3,675
|
|
|
|
3,685
|
|
Amortization of lease related costs
|
|
|
1,802
|
|
|
|
1,802
|
|
Gain on easement and condemnation of assets
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Funds from operations (FFO)
|
|
|
2,851
|
|
|
|
7,325
|
|
Impairment of real estate assets
|
|
|
2,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified funds from operations (MFFO)
|
|
$
|
5,686
|
|
|
$
|
7,325
|
|
|
|
|
|
|
|
|
|
|
Set forth below is additional information (often considered in
conjunction with FFO) that may be helpful in assessing our
operating results:
|
|
|
|
|
In order to recognize revenues on a straight-line basis over the
terms of the respective leases, we recognized additional revenue
by straight-lining rental revenue of $150,000 and $285,000
during the years ended December 31, 2010 and 2009,
respectively.
|
|
|
|
Amortization of deferred financing costs totaled $477,000 and
$385,000 during the years ended December 31, 2010 and 2009,
respectively.
|
|
|
|
Loss on the early extinguishment of debt totaled $259,000 during
the year ended December 31, 2010, which includes the
write-off of $47,000 of unamortized deferred financing costs
related to the refinanced mortgage notes payable. There were no
losses on the early extinguishment of debt during the year ended
December 31, 2009.
|
Liquidity
and Capital Resources
Short-term
Liquidity and Capital Resources
We expect to meet our short-term liquidity requirements through
net cash provided by operations. As of December 31, 2010,
we had one fixed rate note payable in the amount of
$7.8 million maturing in June 2011. The remaining
$112.7 million of our outstanding debt has a weighted
average remaining term of 4.7 years. We are currently
evaluating the possible financing or refinancing of the
$7.8 million note payable maturing in June 2011. If we are
unable to finance or refinance any portion of the amount
maturing, we expect to pay down any such amount through a
combination of the use of net cash provided by operations,
available borrowings under our revolving lines of credit,
short-term borrowings from an affiliate of our advisor
and/or the
potential sale of certain properties, or we may elect to extend
the maturity date of the loan in accordance with its
hyper-amortization
provisions. If we are able to refinance our existing debt as it
matures, it may be at rates and terms that are less favorable
than our existing debt or, if we elect to extend the maturity
date of the mortgage note in accordance with its
hyper-amortization
provisions, the interest rates charged to us will be higher,
each of which may adversely affect our results of operations and
the dividend rate we are able to pay to our investors. As of
December 31, 2010, we had $1.0 million of available
borrowings under our revolving lines of credit.
Long-term
Liquidity and Capital Resources
We expect to meet our long-term liquidity requirements through
proceeds from available borrowings under our revolving lines of
credit, secured or unsecured financings or refinancings from
banks and other lenders, the selective and strategic sale of
properties and net cash flows from operations. We expect that
our primary uses of capital will be for the payment of operating
expenses, including debt service payments on our
27
outstanding indebtedness, for the payment of tenant
improvements, leasing commissions and repairs and maintenance,
for the possible reinvestment of proceeds from the strategic
sale of properties in replacement properties and for the payment
of distributions to our stockholders, including special
distributions of the net proceeds from the sale of properties.
We did not have any material commitments for capital or leasing
expenditures as of December 31, 2010.
We expect that substantially all net cash generated from
operations will be used to pay distributions to our stockholders
after payments of principal on our outstanding indebtedness and
certain capital or leasing expenditures are made; however, we
may use other sources to fund distributions, as necessary, such
as proceeds from available borrowings under our revolving line
of credit. To the extent that cash flows from operations are
lower than our current expectations due to lower returns on the
properties, distributions paid to our stockholders may be
reduced.
During the years ended December 31, 2010 and 2009, we paid
distributions of $5.6 million and $7.1 million,
respectively, which were funded entirely by cash flows from
operations.
As of December 31, 2010, we had cash and cash equivalents
of $1.4 million, which we expect to be used primarily to
pay operating expenses, interest on our indebtedness and
stockholder distributions. In addition, we had restricted cash
of $825,000 held by lenders in escrow accounts for tenant and
capital improvements, leasing commissions, repairs and
maintenance and other lender reserves for certain properties and
$47,000 held by lenders in a lockbox account from which the
monthly debt service payment will be disbursed to the lender and
the excess funds will be disbursed to us.
As of December 31, 2010, we had $120.5 million of
fixed rate debt outstanding, including $1.9 million that
was outstanding under one of our revolving lines of credit. The
outstanding debt is subject to fixed interest rates ranging from
5.27% to 6.96%, with a weighted average interest rate of 6.48%,
and matures on various dates from June 2011 through September
2017. Our debt leverage ratio, which is the ratio of debt to
total gross real estate assets, net of gross intangible lease
liabilities, was 60%, with a weighted average remaining term to
maturity of 4.4 years.
Our contractual obligations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period(1)
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Principal payments notes payable
|
|
$
|
118,550
|
|
|
$
|
8,448
|
|
|
$
|
2,142
|
|
|
$
|
106,283
|
|
|
$
|
1,677
|
|
Interest payments notes payable
|
|
|
34,326
|
|
|
|
7,498
|
|
|
|
21,593
|
|
|
|
5,169
|
|
|
|
66
|
|
Principal payments lines of credit
|
|
|
1,935
|
|
|
|
|
|
|
|
1,935
|
|
|
|
|
|
|
|
|
|
Interest payments lines of credit
|
|
|
141
|
|
|
|
113
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
154,952
|
|
|
$
|
16,059
|
|
|
$
|
25,698
|
|
|
$
|
111,452
|
|
|
$
|
1,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The table does not include amounts due to our advisor or its
affiliates pursuant to our advisory agreement because such
amounts are not fixed and determinable. |
Cash Flow
Analysis
Year
Ended December 31, 2010 Compared to the Year Ended
December 31, 2009:
Operating Activities. Net cash provided by
operating activities decreased $647,000, or 9%, to
$6.6 million for the year ended December 31, 2010,
compared to $7.3 million for the year ended
December 31, 2009. The decrease was primarily due to a
decrease in net income from $1.8 million to a net loss of
$2.6 million, offset by the impairment on real estate
assets of $2.8 million, and a decrease in rents and tenant
receivables. See Results of Operations for a more
complete discussion of the factors impacting our operating
performance.
Investing Activities. Net cash used in
investing activities was $953,000 for the year ended
December 31, 2010, compared to net cash provided by
investing activities of $13,000 for the year ended
December 31, 2009. The change was primarily due to the
deposit of cash into required lender reserves related to the
debt
28
refinancing transaction, as discussed in Note 5 of our
consolidated financial statements, during the year ended
December 31, 2010.
Financing Activities. Net cash used in
financing activities decreased $104,000, or 2%, to
$6.2 million for the year ended December 31, 2010,
compared to $6.3 million for the year ended
December 31, 2009. The decrease was primarily due to the
repayment of $51.8 million of notes payable and line of
credit borrowings, the payment of deferred financing costs of
$2.2 million and the payment of costs related to the early
extinguishment of debt of $212,000, offset by $53.6 million
of notes payable proceeds and line of credit borrowings.
Election
as a REIT
We are taxed as a REIT under the Internal Revenue Code of 1986,
as amended. To qualify as a REIT, we must meet, and continue to
meet, certain requirements relating to our organization, sources
of income, nature of assets, distributions of income to our
stockholders and recordkeeping. As a REIT, we generally are not
subject to federal income tax on taxable income that we
distribute to our stockholders so long as we distribute at least
90% of our annual taxable income (computed with regard to the
dividends paid deduction excluding net capital gains).
If we fail to qualify as a REIT for any reason in a taxable year
and applicable relief provisions do not apply, we will be
subject to tax, including any applicable alternative minimum
tax, on our taxable income at regular corporate rates. We will
not be able to deduct distributions paid to our stockholders in
any year in which we fail to qualify as a REIT. We also will be
disqualified for the four taxable years following the year
during which qualification was lost unless we are entitled to
relief under specific statutory provisions. Such an event could
materially adversely affect our net income and net cash
available for distribution to stockholders. However, we believe
that we are organized and operate in such a manner as to qualify
for treatment as a REIT for federal income tax purposes. No
provision for federal income taxes has been made in our
accompanying consolidated financial statements. We are subject
to certain state and local taxes related to the operations of
properties in certain locations, which have been provided for in
our accompanying consolidated financial statements.
Inflation
We are exposed to inflation risk as income from long-term leases
is the primary source of our cash flows from operations. There
are provisions in certain of our tenant leases that are intended
to protect us from, and mitigate the risk of, the impact of
inflation. These provisions include rent steps and clauses
enabling us to receive payment of additional rent calculated as
a percentage of the tenants gross sales above
pre-determined thresholds. In addition, most of our leases
require the tenant to pay all or a majority of the operating
expenses, including real estate taxes, special assessments and
sales and use taxes, utilities, insurance and building repairs,
related to the property. However, due to the long-term nature of
the leases, the leases may not re-set frequently enough to
adequately offset the effects of inflation.
Commitments
and Contingencies
We may be subject to certain commitments and contingencies with
regard to certain transactions. Refer to Note 7 to our
consolidated financial statements accompanying this Annual
Report on
Form 10-K
for further explanations.
Related-Party
Transactions and Agreements
We have entered into agreements with Cole Advisors and its
affiliates, whereby we have paid, and may continue to pay,
certain fees to, or reimburse certain expenses of, Cole Advisors
or its affiliates for acquisition and advisory fees and
expenses, financing coordination fees, asset and property
management fees, interest expense on affiliate lines of credit
and reimbursement of certain operating costs. See Note 8 to
our consolidated financial statements included in this Annual
Report on
Form 10-K
for a discussion of the various related-party transactions,
agreements and fees.
29
Subsequent
Events
Certain events occurred subsequent to December 31, 2010
through the filing date of this Annual Report on
Form 10-K.
Refer to Note 13 to our consolidated financial statements
included in this Annual Report on
Form 10-K
for further explanation. Such events include:
|
|
|
|
|
update to the estimated value per share; and
|
|
|
|
update to the share redemption program
|
New
Accounting Pronouncements
Reference is made to Note 2 to the consolidated financial
statements included in this Annual Report on
Form 10-K
regarding the impact of recent accounting pronouncements. There
are no new accounting pronouncements that have been issued but
not yet applied by us that we believe will have a material
impact on our consolidated financial statements.
Off
Balance Sheet Arrangements
As of December 31, 2010 and 2009, we had no off-balance
sheet arrangements that had or are reasonably likely to have a
current or future effect on our financial condition, results of
operations, liquidity or capital resources.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Not required for a smaller reporting company.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The financial statements and supplementary data filed as part of
this report are set forth beginning on
page F-1
of this report.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
There were no changes in or disagreements with our independent
registered public accountants during the year ended
December 31, 2010.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
As required by
Rules 13a-15(b)
and
15d-15(b) of
the Securities Exchange Act of 1934, as amended (the
Exchange Act), we, under the supervision and with
the participation of our Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act) as of the end of the period covered by this
Annual Report on
Form 10-K.
Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures, as of December 31, 2010, were effective in all
material respects to ensure that information required to be
disclosed by us in this Annual Report on
Form 10-K
is recorded, processed, summarized and reported within the time
periods specified by the rules and forms promulgated under the
Exchange Act, and is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosures.
30
Managements
Report on Internal Control Over Financial Reporting
Cole Credit Property Trust, Inc.s management is
responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Exchange Act Rules 13a 15(f) and
15d-15(f).
Internal control over financial reporting is a process to
provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP. Because of its
inherent limitations, internal control over financial reporting
is not intended to provide absolute assurance that a
misstatement of our financial statements would be prevented or
detected. Also, projections of any evaluation of internal
control effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of Cole Credit Property Trust, Inc.s
internal control over financial reporting based on the framework
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Based on this evaluation, management has concluded that Cole
Credit Property Trust, Inc.s internal control over
financial reporting was effective as of December 31, 2010.
Changes
in Internal Control Over Financial Reporting
No change occurred in our internal control over financial
reporting (as defined in
Rules 13a-15(f)
and 15d -15(f) of the Exchange Act) in connection with the
foregoing evaluations that occurred during the three months
ended December 31, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
31
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with the
SEC with respect to our 2011 annual meeting of stockholders.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with the
SEC with respect to our 2011 annual meeting of stockholders.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with the
SEC with respect to our 2011 annual meeting of stockholders.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORS
INDEPENDENCE
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with the
SEC with respect to our 2011 annual meeting of stockholders.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required by this Item is incorporated by
reference to our definitive proxy statement to be filed with the
SEC with respect to our 2011 annual meeting of stockholders.
32
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) List of Documents Filed.
1. The list of the financial statements contained herein is
set forth on
page F-1
hereof.
2. Financial Statement Schedules None
All other schedules for which provision is made in the
applicable accounting regulations of the SEC are not required
under the related instructions or are not applicable and
therefore have been omitted.
3. The Exhibits filed in response to Item 601 of
Regulation S-K
are listed on the Exhibit Index attached hereto.
(b) See (a) 3 above.
(c) See (a) 2 above.
33
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Financial Statements
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cole Credit Property Trust, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of
Cole Credit Property Trust, Inc. and subsidiaries (the
Company) as of December 31, 2010 and 2009, and
the related consolidated statements of operations,
stockholders equity, and cash flows for the years then
ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Cole
Credit Property Trust, Inc. and subsidiaries as of
December 31, 2010 and 2009, and the results of their
operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE &
TOUCHE LLP
Phoenix, Arizona
March 30, 2011
F-2
(In thousands except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Investment in real estate assets:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
54,233
|
|
|
$
|
55,317
|
|
Buildings and improvements, less accumulated depreciation of
$20,255
|
|
|
|
|
|
|
|
|
and $17,273, respectively
|
|
|
100,933
|
|
|
|
106,278
|
|
Acquired intangible lease assets, less accumulated amortization
of $11,094 and $9,170, respectively
|
|
|
17,244
|
|
|
|
19,168
|
|
|
|
|
|
|
|
|
|
|
Total investment in real estate assets, net
|
|
|
172,410
|
|
|
|
180,763
|
|
Cash and cash equivalents
|
|
|
1,382
|
|
|
|
1,907
|
|
Restricted cash
|
|
|
872
|
|
|
|
|
|
Rents and tenant receivables, less allowance for doubtful
accounts of $49 and $167, respectively
|
|
|
2,143
|
|
|
|
2,478
|
|
Prepaid expenses and other assets
|
|
|
77
|
|
|
|
84
|
|
Deferred financing costs, less accumulated amortization of $962
and $1,518, respectively
|
|
|
2,423
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
179,307
|
|
|
$
|
186,002
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Notes payable and line of credit
|
|
$
|
118,550
|
|
|
$
|
118,738
|
|
Lines of credit with affiliate
|
|
|
1,935
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
804
|
|
|
|
878
|
|
Due to affiliates
|
|
|
54
|
|
|
|
41
|
|
Acquired below market lease intangibles, less accumulated
amortization of $1,208 and $1,018, respectively
|
|
|
989
|
|
|
|
1,221
|
|
Distributions payable
|
|
|
429
|
|
|
|
589
|
|
Deferred rent
|
|
|
660
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
123,421
|
|
|
|
122,082
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 10,000,000 shares
authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 90,000,000 shares
authorized, 10,090,951 shares issued and outstanding
|
|
|
101
|
|
|
|
101
|
|
Capital in excess of par value
|
|
|
90,424
|
|
|
|
90,424
|
|
Accumulated distributions in excess of earnings
|
|
|
(34,639
|
)
|
|
|
(26,605
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
55,886
|
|
|
|
63,920
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
179,307
|
|
|
$
|
186,002
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
(In thousands except share and per
share amounts)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Rental and other property income
|
|
$
|
15,759
|
|
|
$
|
15,944
|
|
Tenant reimbursement income
|
|
|
365
|
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
16,124
|
|
|
|
16,327
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
597
|
|
|
|
712
|
|
Property operating expenses
|
|
|
809
|
|
|
|
512
|
|
Property management expenses
|
|
|
484
|
|
|
|
475
|
|
Depreciation
|
|
|
3,675
|
|
|
|
3,685
|
|
Amortization
|
|
|
1,802
|
|
|
|
1,802
|
|
Impairment of real estate assets
|
|
|
2,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10,202
|
|
|
|
7,186
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,922
|
|
|
|
9,141
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(8,289
|
)
|
|
|
(7,294
|
)
|
Loss on early extinguishment of debt
|
|
|
(259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(8,548
|
)
|
|
|
(7,294
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,626
|
)
|
|
$
|
1,847
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
10,090,951
|
|
|
|
10,090,951
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.26
|
)
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
|
Capital in
|
|
|
Distributions
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
|
Excess of
|
|
|
in Excess of
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Par Value
|
|
|
Earnings
|
|
|
Equity
|
|
|
Balance, January 1, 2009
|
|
|
10,090,951
|
|
|
$
|
101
|
|
|
$
|
90,424
|
|
|
$
|
(21,388
|
)
|
|
$
|
69,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,064
|
)
|
|
|
(7,064
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,847
|
|
|
|
1,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
10,090,951
|
|
|
$
|
101
|
|
|
$
|
90,424
|
|
|
$
|
(26,605
|
)
|
|
$
|
63,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,408
|
)
|
|
|
(5,408
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,626
|
)
|
|
|
(2,626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
10,090,951
|
|
|
$
|
101
|
|
|
$
|
90,424
|
|
|
$
|
(34,639
|
)
|
|
$
|
55,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,626
|
)
|
|
$
|
1,847
|
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,675
|
|
|
|
3,685
|
|
Amortization of intangible lease assets and below market lease
intangibles, net
|
|
|
1,692
|
|
|
|
1,720
|
|
Amortization of deferred financing costs
|
|
|
477
|
|
|
|
385
|
|
Bad debt expense
|
|
|
200
|
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
259
|
|
|
|
|
|
Impairment of real estate assets
|
|
|
2,835
|
|
|
|
|
|
Property condemnation and easement gain
|
|
|
|
|
|
|
(9
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Rents and tenant receivables
|
|
|
135
|
|
|
|
(394
|
)
|
Prepaid expenses and other assets
|
|
|
7
|
|
|
|
20
|
|
Accounts payable and accrued expenses
|
|
|
(74
|
)
|
|
|
132
|
|
Deferred rent
|
|
|
45
|
|
|
|
25
|
|
Due to affiliates
|
|
|
13
|
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
6,638
|
|
|
|
7,285
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions to real estate and related assets
|
|
|
(81
|
)
|
|
|
|
|
Proceeds from sale of assets
|
|
|
|
|
|
|
13
|
|
Change in restricted cash
|
|
|
(872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(953
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Distributions to investors
|
|
|
(5,568
|
)
|
|
|
(7,064
|
)
|
Proceeds from notes payable and line of credit
|
|
|
51,625
|
|
|
|
1,450
|
|
Repayment of notes payable and line of credit
|
|
|
(51,813
|
)
|
|
|
(700
|
)
|
Proceeds from line of credit with affiliates
|
|
|
1,935
|
|
|
|
|
|
Payment of loan deposits
|
|
|
(433
|
)
|
|
|
|
|
Refund of loan deposits
|
|
|
433
|
|
|
|
|
|
Deferred financing costs paid
|
|
|
(2,177
|
)
|
|
|
|
|
Payment of costs related to the early extinguishment of debt
|
|
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(6,210
|
)
|
|
|
(6,314
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(525
|
)
|
|
|
984
|
|
Cash and cash equivalents, beginning of year
|
|
|
1,907
|
|
|
|
923
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
1,382
|
|
|
$
|
1,907
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Non-Cash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
Dividends declared and unpaid
|
|
$
|
429
|
|
|
$
|
589
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
7,774
|
|
|
$
|
6,913
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
|
|
NOTE 1
|
ORGANIZATION
AND BUSINESS
|
Cole Credit Property Trust, Inc. (the Company) is a
Maryland corporation that was formed on March 29, 2004 that
is organized and operates as a real estate investment trust
(REIT) for federal income tax purposes.
Substantially all of the Companys business is conducted
through Cole Operating Partnership I, LP (Cole
OP I), a Delaware limited partnership. The Company is
the sole general partner of and owns an 99.99% partnership
interest in Cole OP I. Cole REIT Advisors, LLC (Cole
Advisors), the affiliate advisor to the Company, is the
sole limited partner and owner of an insignificant
noncontrolling partnership interest of less than 0.01% of Cole
OP I.
At December 31, 2010, the Company owned 42 properties
comprising 1.0 million square feet of single-tenant, retail
and commercial space located in 19 states. At
December 31, 2010, these properties were 100% leased.
The Companys stock is not currently listed on a national
exchange. The Company may seek to list its common stock for
trading on a national securities exchange only if the board of
directors believes listing would be in the best interest of its
stockholders. The Company does not intend to list its shares at
this time. The Company does not anticipate that there would be
any market for its common stock until its shares are listed on a
national securities exchange. In the event it does not obtain
listing prior to February 1, 2016, its charter requires
that it either: (1) seek stockholder approval of an
extension or amendment of this listing deadline; or
(2) seek stockholder approval to adopt a plan of
liquidation of the corporation.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The summary of significant accounting policies presented below
is designed to assist in understanding the Companys
consolidated financial statements. These accounting policies
conform to accounting principles generally accepted in the
United States of America (GAAP), in all material
respects, and have been consistently applied in preparing the
accompanying consolidated financial statements.
Principles
of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Investment
in and Valuation of Real Estate and Related Assets
Real estate assets are stated at cost, less accumulated
depreciation and amortization. Amounts capitalized to real
estate assets consist of the cost of acquisition, including
acquisition related expenses incurred prior to January 1,
2009, construction and any tenant improvements, major
improvements and betterments that extend the useful life of the
related asset and leasing costs. All repairs and maintenance are
expensed as incurred.
Assets, other than land, are depreciated or amortized on a
straight-line basis. The estimated useful lives of our assets by
class are generally as follows:
|
|
|
Building
|
|
40 years
|
Tenant improvements
|
|
Lesser of useful life or lease term
|
Intangible lease assets
|
|
Lesser of useful life or lease term
|
F-7
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company continually monitors events and changes in
circumstances that could indicate that the carrying amounts of
its real estate and related intangible assets may not be
recoverable. Impairment indicators that the Company considers
include, but are not limited to, bankruptcy or other credit
concerns of a propertys major tenant, such as a history of
late payments, rental concessions and other factors, a
significant decrease in a propertys revenues due to lease
terminations, vacancies, co-tenancy clauses, reduced lease rates
or other circumstances. When indicators of potential impairment
are present, the Company assesses the recoverability of the
assets by determining whether the carrying value of the assets
will be recovered through the undiscounted future operating cash
flows expected from the use of the assets and their eventual
disposition. In the event that such expected undiscounted future
cash flows do not exceed the carrying value, the Company will
adjust the real estate and related intangible assets to their
fair value and recognize an impairment loss.
During the year ended December 31, 2010, the Company
identified one property with impairment indicators. The tenant
at this property declared bankruptcy, rejected the original
lease and entered into a month to month lease with the Company
that can be terminated with a
30-day
written notice provided by the tenant or the Company. As a
result, the undiscounted future operating cash flows expected
from the use of the property and its eventual disposition were
determined to be less than the carrying value of the real estate
assets. Therefore, the Company reduced the carrying value of the
real estate assets related to the property to its estimated fair
value and recorded an impairment loss of $2.8 million
during the year ended December 31, 2010. In addition, the
Company wrote-off the unamortized below market lease intangible
liability related to the original lease agreement of $31,000
during the year ended December 31, 2010. No impairment
losses or related write-offs were recorded during the year ended
December 31, 2009.
Projections of expected future cash flows require the Company to
use estimates such as future market rental income rates
subsequent to the expiration of current lease agreements,
property operating expenses, terminal capitalization and
discount rates, the number of months it takes to re-lease the
property, required tenant improvements and the number of years
the property is held for investment. The use of alternative
assumptions in the future cash flow analysis could result in a
different assessment of the propertys future cash flow and
a different conclusion regarding the existence of an impairment,
the extent of such loss, if any, as well as the fair value of
the Companys real estate and related assets.
When a real estate asset is identified as held for sale, the
Company will cease depreciation of the asset and estimate the
sales price, net of selling costs. If, in the Companys
opinion, the net sales price of the asset is less than the net
book value of the asset, an adjustment to the carrying value
would be recorded to reflect the estimated fair value of the
property, net of selling costs.
Allocation
of Purchase Price of Real Estate and Related
Assets
Upon the acquisition of real properties, the Company allocates
the purchase price to acquired tangible assets, consisting of
land, buildings and improvements, and identified intangible
assets and liabilities, consisting of the value of above market
and below market leases and the value of in-place leases, based
in each case on their fair values. The Company utilizes
independent appraisals to assist in the determination of the
fair values of the tangible assets of an acquired property
(which includes land and building). The Company obtains an
independent appraisal for each real property acquisition. The
information in the appraisal, along with any additional
information available to the Companys management, is used
by management in estimating the amount of the purchase price
that is allocated to land. Other information in the appraisal,
such as building value and market rents, may be used by the
Companys management in estimating the allocation of
purchase price to the building and to lease intangibles. The
appraisal firm has no involvement in managements
allocation decisions other than providing this market
information.
The fair values of above market and below market in-place lease
values are recorded based on the present value (using an
interest rate which reflects the risks associated with the
leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases
and (ii) an estimate of fair
F-8
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
market lease rates for the corresponding in-place leases, which
is generally obtained from independent appraisals, measured over
a period equal to the remaining non-cancelable term of the lease
including any bargain renewal periods, with respect to a below
market lease. The above market and below market lease values are
capitalized as intangible lease assets or liabilities. Above
market lease values are amortized as an adjustment of rental
income over the remaining terms of the respective leases. Below
market leases are amortized as an adjustment of rental income
over the remaining terms of the respective leases, including any
bargain renewal periods. If a lease is terminated prior to its
stated expiration, all unamortized amounts of above market and
below market in-place lease values relating to that lease would
be recorded as an adjustment to rental income.
The fair values of in-place leases include direct costs
associated with obtaining a new tenant and opportunity costs
associated with lost rentals which are avoided by acquiring an
in-place lease. Direct costs associated with obtaining a new
tenant include commissions and other direct costs and are
estimated in part by utilizing information obtained from
independent appraisals and managements consideration of
current market costs to execute a similar lease. The value of
the opportunity costs is calculated using the contractual
amounts to be paid pursuant to the in-place leases over a market
absorption period for a similar lease. These costs are
capitalized as intangible lease assets and are amortized to
expense over the remaining term of the respective leases. If a
lease is terminated prior to its stated expiration, all
unamortized amounts of in-place lease assets relating to that
lease would be expensed.
The determination of the fair values of the assets and
liabilities acquired requires the use of significant assumptions
with regard to the current market rental rates, rental growth
rates, discount and capitalization rates, interest rates and
other variables. The use of inappropriate estimates would result
in an incorrect assessment of the Companys purchase price
allocations, which could impact the amount of its reported net
income.
Cash
and Cash Equivalents
The Company considers all highly liquid instruments with
maturities when purchased of three months or less to be cash
equivalents. The Company considers investments in highly liquid
money market accounts to be cash equivalents.
Restricted
Cash
The Company had $825,000 in restricted cash as of
December 31, 2010, held by lenders in escrow accounts
primarily for tenant and capital improvements, leasing
commissions and repairs and maintenance for certain properties,
in accordance with the respective lenders loan agreement.
In addition, as of December 31, 2010 the Company had
$47,000 in restricted cash held by lenders in a lockbox account.
As part of the debt refinancing transaction discussed in
Note 5 below, rents collected by the encumbered properties
are deposited directly into a lockbox account, from which the
monthly debt service payment is disbursed to the lender and the
excess funds are disbursed to the Company.
Rents
and Tenant Receivables
Rents and tenant receivables primarily includes amounts to be
collected in future periods related to the recognition of rental
income on a straight-line basis over the lease term and cost
recoveries due from tenants. See Revenue Recognition
below. The Company makes estimates of the uncollectability of
its accounts receivable related to base rents, expense
reimbursements and other revenues. The Company analyzes accounts
receivable and historical bad debt levels, customer credit
worthiness and current economic trends when evaluating the
adequacy of the allowance for doubtful accounts. In addition,
tenants in bankruptcy are analyzed and estimates are made in
connection with the expected recovery of pre-petition and
post-petition claims. The Companys reported net income is
directly affected by managements estimate of the
collectability
F-9
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of accounts receivable. The Company records allowances for those
balances that the Company deems to be uncollectible, including
any amounts relating to straight-line rent receivables.
Other
Assets
Other assets consists primarily of prepaid expenses as of the
balance sheet date that relate to future periods and will be
expensed or reclassified to another account during the period to
which the costs relate. Any amounts with no future economic
benefit are charged to earnings when identified.
Deferred
Financing Costs
Deferred financing costs are capitalized and amortized on a
straight-line basis over the term of the related financing
arrangement, which approximates the effective interest method.
Amortization of deferred financing costs for the years ended
December 31, 2010 and 2009, was $477,000 and $385,000,
respectively, and was recorded in interest expense in the
consolidated statements of operations.
Revenue
Recognition
Certain properties have leases where minimum rent payments
increase during the term of the lease. The Company records
rental revenue for the full term of each lease on a
straight-line basis. When the Company acquires a property, the
term of existing leases is considered to commence as of the
acquisition date for the purposes of this calculation. The
Company defers the recognition of contingent rental income, such
as percentage rents, until the specific target that triggers the
contingent rental income is achieved. Expected reimbursements
from tenants for recoverable real estate taxes and operating
expenses are included in tenant reimbursement income in the
period the related costs are incurred.
Income
Taxes
The Company currently qualifies as a REIT under
Sections 856 through 860 of the Internal Revenue Code. The
Company generally will not be subject to federal corporate
income tax to the extent it distributes its taxable income to
its stockholders, so long as it distributes at least 90% of its
taxable income (excluding capital gains). REITs are subject to a
number of other organizational and operational requirements.
Even if the Company qualifies for taxation as a REIT, it may be
subject to certain state and local taxes on its income and
property, and federal income and excise taxes on its
undistributed income.
Concentration
of Credit Risk
As of December 31, 2010, the Company had cash, including
restricted cash, on deposit in two financial institutions, which
was $1.8 million in excess of federally insured levels;
however, the Company has not experienced any losses in such
accounts. The Company limits cash investments to financial
institutions with high credit standing; therefore, the Company
believes it is not exposed to any significant credit risk on
cash.
As of December 31, 2010, three tenants in the drugstore
industry accounted for 37% of the Companys
2010 rental revenues, of which 21% was attributable to one
tenant. As of December 31, 2010, one tenant in the auto
dealership industry and one tenant in the home improvement
industry each accounted for 10% of the Companys
2010 rental revenues. Additionally the Company has certain
geographic concentration in its property holdings. In
particular, as of December 31, 2010, eight of the
Companys properties were located in Texas and five were
located in Kansas, accounting for 24% and 17%, respectively, of
the Companys 2010 rental revenues.
F-10
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stockholders
Equity
As of each of December 31, 2010 and 2009, the Company was
authorized to issue 90,000,000 shares of common stock and
10,000,000 shares of preferred stock. All shares of such
stock have a par value of $0.01 per share. The Companys
board of directors may authorize additional shares of capital
stock and amend their terms without obtaining stockholder
approval.
The par value of investor proceeds raised was classified as
common stock, with the remainder allocated to capital in excess
of par value. As the Companys share redemption program
allows the Companys board of directors to reject any
request for redemption, the Company accounts for the common
stock issued as permanent equity, in accordance with the
Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 480,
Distinguishing Liabilities from Equity (ASC
480).
Redemptions
of Common Stock
The Company will determine at the beginning of each fiscal year
the maximum amount of shares that it may redeem during that
year. The Company may use up to 1.0% of its annual cash flow to
meet these redemption needs, including cash proceeds generated
from new offerings, operating cash flow not intended for
dividends, borrowings and capital transactions such as asset
sales or refinancing. On January 10, 2011, the
Companys board of directors determined that no amounts
were to be made available for redemption during the year ending
December 31, 2011. The shares the Company redeems under its
share redemption program will be cancelled and returned to the
status of authorized but unissued shares. The Company does not
intend to resell such shares to the public unless they are first
registered with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and under appropriate state
securities laws or otherwise sold in compliance with such laws.
As of December 31, 2010, the Company had redeemed a total
of 7,300 shares, at an average of $9.35 per share, under
the share redemption program. During the years ended
December 31, 2010 and 2009, the Company did not redeem any
shares under the share redemption program.
Earnings
Per Share
Earnings per share are calculated based on the weighted average
number of common shares outstanding during each period
presented. The weighted average number of common shares
outstanding is identical for basic and fully diluted earnings
per share. The Company has no stock options issued or
outstanding.
Reportable
Segments
ASC 280, Segment Reporting, establishes standards for
reporting financial and descriptive information about an
enterprises reportable segments. The Company has one
reportable segment, commercial properties, which consists of
activities related to investing in real estate. The commercial
properties are geographically diversified throughout the United
States, and the Companys chief operating decision maker
evaluates operating performance on an overall portfolio level.
These commercial properties have similar economic
characteristics, therefore the Companys properties have
been aggregated into one reportable segment.
Interest
Interest is charged to interest expense as it accrues. No
interest costs were capitalized during the years ended
December 31, 2010 and 2009.
Distributions
Payable and Distribution Policy
In order to maintain its status as a REIT, the Company is
required to make distributions each taxable year equal to at
least 90% of its taxable income excluding capital gains. To the
extent funds are available, the
F-11
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company intends to pay regular monthly distributions to
stockholders. Distributions are paid to stockholders of record
as of the applicable record dates.
Recent
Accounting Pronouncements
In January 2010, the FASB issued Accounting Standard Update
(ASU)
2010-06,
Fair Value Measurements and Disclosures (Topic 820),
(ASU
2010-06),
which amends ASC 820 to add new requirements for
disclosures about transfers into and out of Levels 1 and 2
and separate disclosures about purchases, sales, issuances, and
settlements relating to Level 3 measurements. ASU
2010-06 also
clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to
measure fair value. ASU
2010-06 is
effective for the first reporting period (including interim
periods) beginning after December 15, 2009, except for the
requirement to provide the Level 3 activity of purchases,
sales, issuances, and settlements on a gross basis, which will
be effective on January 1, 2011. The adoption of
ASC 820 has not had, and is not expected to have, a
material impact on the consolidated financial statement
disclosures.
|
|
NOTE 3
|
FAIR
VALUE MEASUREMENTS
|
ASC 820, Fair Value Measurements and Disclosures
(ASC 820) defines fair value, establishes a
framework for measuring fair value in GAAP and expands
disclosures about fair value measurements. ASC 820
emphasizes that fair value is intended to be a market-based
measurement, as opposed to a transaction-specific measurement.
Fair value is defined by ASC 820 as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. Depending on the nature of the asset or
liability, various techniques and assumptions can be used to
estimate the fair value. Assets and liabilities are measured
using inputs from three levels of the fair value hierarchy, as
follows:
Level 1 Inputs are quoted prices
(unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the
measurement date. An active market is defined as a market in
which transactions for the assets or liabilities occur with
sufficient frequency and volume to provide pricing information
on an ongoing basis.
Level 2 Inputs include quoted prices for
similar assets and liabilities in active markets, quoted prices
for identical or similar assets or liabilities in markets that
are not active (markets with few transactions), inputs other
than quoted prices that are observable for the asset or
liability (i.e., interest rates, yield curves, etc.), and inputs
that are derived principally from or corroborated by observable
market data correlation or other means (market corroborated
inputs).
Level 3 Unobservable inputs, only used
to the extent that observable inputs are not available, reflect
the Companys assumptions about the pricing of an asset or
liability.
As discussed in Note 2 above, during the year ended
December 31, 2010, real estate assets related to one
property with a carrying amount of $7.0 million were deemed
to be impaired and their carrying values were reduced to their
estimated fair value of $4.2 million, resulting in an
impairment charge of $2.8 million, which is included in
impairment of real estate assets on the consolidated statement
of operations for the year ended December 31, 2010.
The Company used a discounted cash flow analysis and recent
comparable sales transactions to estimate the fair value of real
estate assets relating to the property. The discounted cash flow
analysis utilized internally prepared probability-weighted cash
flow estimates including estimated discount ranges and terminal
capitalization rates, which were within historical average
ranges and gathered for specific geographic areas based on
information obtained from third-party service providers.
F-12
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys real estate assets measured at
fair value on a non-recurring basis during the year ended
December 31, 2010 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-Measured
|
|
Fair Value Measurement of Reporting Data Using
|
|
Total
|
Description:
|
|
Balance
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Losses
|
|
Investment in real estate assets
|
|
$
|
4,166
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,166
|
|
|
$
|
(2,835
|
)
|
The following describes the methods the Company uses to estimate
the fair value of the Companys financial assets and
liabilities:
Cash and cash equivalents, restricted cash, rents and tenant
receivables, prepaid expenses, and accounts payable and accrued
expenses The Company considers the carrying
values of these financial instruments to approximate fair value
because of the short period of time between origination of the
instruments and their expected realization.
Notes payable and lines of credit The fair
value is estimated using a discounted cash flow technique based
on estimated borrowing rates available to the Company as of
December 31, 2010 and 2009. The estimated fair value of the
notes payable and lines of credit with affiliate was
$118.2 million and $1.9 million, respectively, as of
December 31, 2010, as compared to the carrying value of
$118.6 million and $1.9 million, respectively. The
estimated fair value of the notes payable and line of credit was
$113.2 million and $720,000, respectively, as of
December 31, 2009, as compared to the carrying value of
$118.0 million and $750,000, respectively.
Considerable judgment is necessary to develop estimated fair
values of certain financial instruments. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize on disposition of the
financial instruments.
|
|
NOTE 4
|
ACQUIRED
INTANGIBLE LEASE ASSETS
|
Acquired intangible lease assets consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Acquired in place leases, net of accumulated amortization of
$10,313 and $8,511, respectively (with a weighted average life
of 129 and 141 months, respectively)
|
|
$
|
15,933
|
|
|
$
|
17,735
|
|
Acquired above market leases, net of accumulated amortization of
$781 and $659, respectively (with a weighted average life of 133
and 145 months, respectively)
|
|
|
1,311
|
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,244
|
|
|
$
|
19,168
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on the intangible lease assets,
for each of the years ended December 31, 2010 and 2009, was
$1.9 million.
F-13
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Estimated amortization expense to be recorded on the intangible
lease assets as of December 31, 2010 for each of the five
succeeding years is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Leases
|
|
Above Market
|
Year
|
|
In-Place
|
|
Leases
|
|
2011
|
|
$
|
1,802
|
|
|
$
|
122
|
|
2012
|
|
$
|
1,802
|
|
|
$
|
122
|
|
2013
|
|
$
|
1,801
|
|
|
$
|
122
|
|
2014
|
|
$
|
1,584
|
|
|
$
|
122
|
|
2015
|
|
$
|
1,415
|
|
|
$
|
122
|
|
|
|
NOTE 5
|
NOTES PAYABLE
AND LINES OF CREDIT
|
During the year ended December 31, 2010, the Company
refinanced $50.7 million of mortgage notes payable,
including $750,000 outstanding under the revolving line of
credit and $15.2 million outstanding under
hyper-amortization
provisions of 7 mortgage notes payable, through loan agreements
with two lenders, in the aggregate principal amount of
$51.6 million (the Loans), and two revolving
line of credit agreements that provide for an aggregate of
$2.9 million of available borrowings from Series C,
LLC (Series C), which is an affiliate of the
Companys advisor, on which the Company had borrowed
$1.9 million under one of the revolving lines of credit
(the Revolving Loans). The Loans are collateralized
by the Companys direct and indirect interest in 22
single-tenant commercial properties with an aggregate purchase
price of $87.3 million. The Loans bear interest at a
weighted average fixed rate of 6.96% per annum and principal and
interest payments are due monthly, with any remaining principal
amounts due on the maturity date, April 11, 2015. The
Revolving Loans are collateralized by the Companys direct
and indirect interest in two single-tenant commercial properties
with an aggregate purchase price of $10.8 million. The
Revolving Loans have a fixed interest rate of 5.75% with monthly
interest-only payments, and the outstanding principal and
accrued and unpaid interest due on March 31, 2012. The
Company recorded a loss on early extinguishment of debt related
to the refinancing transaction of $259,000, consisting of
$212,000 of prepayment costs and the write-off of $47,000 of
unamortized deferred financing costs related to the refinanced
mortgage notes payable.
As of December 31, 2010, the Company had
$120.5 million outstanding in mortgage notes payable and
lines of credit borrowings, with fixed interest rates ranging
from 5.27% to 6.96% and a weighted average interest rate of
6.48%, and which mature on various dates from June 2011 through
September 2017, with a weighted average remaining term of
4.4 years. Each of the mortgage notes payable and lines of
credit are secured by the respective properties and their
related leases on which the debt was placed. The mortgage notes
and lines of credit are generally non-recourse to the Company
and Cole OP I, but both are liable for customary
non-recourse carve-outs. The mortgage notes and lines of credit
are collateralized by all of the Companys real estate
assets. The mortgage notes payable and lines of credit contain
customary default provisions. Generally, upon the occurrence of
an event of default, interest on the mortgage notes will accrue
at an annual default interest rate equal to the lesser of
(a) the maximum rate permitted by applicable law, or
(b) the then-current interest rate plus a percentage
specified in the respective loan agreement. Certain mortgage
notes payable contain customary affirmative, negative and
financial covenants, including requirements for minimum net
worth and debt service coverage ratios, in addition to limits on
leverage ratios and variable rate debt. The Company was in
compliance with the covenants as of December 31, 2010.
Generally, the mortgage notes may not be prepaid, in whole or in
part, except under the following circumstances: (i) the
prepayment may be made subject to payment of a yield maintenance
premium or through defeasance, (ii) full prepayment may be
made on any of the three monthly payment dates occurring
immediately prior to the maturity date, and (iii) partial
prepayments resulting from the application of insurance or
condemnation proceeds to reduce the outstanding principal
balance of the mortgage notes. Notwithstanding the prepayment
limitations, the Company may sell the properties to a buyer that
assumes the
F-14
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respective mortgage loan. The transfer would be subject to the
conditions set forth in the individual propertys mortgage
note document, including without limitation, the lenders
approval of the proposed buyer and the payment of the
lenders fees, costs and expenses associated with the sale
of the property and the assumption of the loan.
Generally, in the event that a mortgage note is not paid off on
the respective maturity date, certain mortgage notes include
hyper-amortization
provisions. Under the
hyper-amortization
provisions, the individual mortgage note maturity date will be
extended by 20 years. During such period, the lender will
apply 100% of the rents collected to the following items in the
order indicated: (i) payment of accrued interest at the
original fixed interest rate, (ii) all payments for escrow
or reserve accounts, (iii) any operating expenses of the
property pursuant to an approved annual budget, (iv) any
extraordinary expenses and (v) the balance of the rents
collected will be applied to the following in such order as the
lender may determine: (1) any other amounts due in
accordance with the loan documents, (2) the reduction of
the principal balance of the mortgage note, and
(3) capitalized interest at an interest rate equal to the
greater of (A) the initial fixed interest rate as stated on
the respective mortgage note agreement plus 2.0% per annum or
(B) the then current Treasury Constant Maturity Yield Index
plus 2.0% per annum.
The following table summarizes the scheduled aggregate principal
repayments, including principal payments on amortizing debt, for
the five years subsequent to December 31, 2010 and
thereafter (in thousands):
|
|
|
|
|
|
|
Principal
|
|
For the Year Ending December 31,
|
|
Repayments
|
|
|
2011
|
|
$
|
8,448
|
|
2012
|
|
|
2,606
|
|
2013
|
|
|
716
|
|
2014
|
|
|
754
|
|
2015
|
|
|
74,903
|
|
Thereafter
|
|
|
33,058
|
|
|
|
|
|
|
Total
|
|
$
|
120,485
|
|
|
|
|
|
|
|
|
NOTE 6
|
ACQUIRED
BELOW MARKET LEASE INTANGIBLES
|
Acquired below market lease intangibles consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2010
|
|
2009
|
|
Acquired below market leases, net of accumulated amortization of
$1,208 and $1,018, respectively (with a weighted average life of
68 and 82 months, respectively)
|
|
$
|
989
|
|
|
$
|
1,221
|
|
|
|
|
|
|
|
|
|
|
Amortization income recorded on the intangible lease liability
for each of the years ended December 31, 2010 and 2009 was
$232,000, including the $31,000 write-off relating to one
property as discussed in Note 2, and $204,000, respectively.
F-15
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Estimated amortization income of the intangible lease liability
as of December 31, 2010 for each of the five succeeding
fiscal years is as follows (in thousands):
|
|
|
|
|
|
|
Below Market
|
|
Year
|
|
Leases
|
|
|
2011
|
|
$
|
198
|
|
2012
|
|
$
|
198
|
|
2013
|
|
$
|
198
|
|
2014
|
|
$
|
132
|
|
2015
|
|
$
|
55
|
|
|
|
NOTE 7
|
COMMITMENTS
AND CONTINGENCIES
|
Litigation
In the ordinary course of business, the Company may become
subject to litigation or claims. The Company is not aware of any
material pending legal proceedings of which the outcome is
reasonably likely to have a material adverse effect on its
results of operations or financial condition.
Environmental
Matters
In connection with the ownership and operation of real estate,
the Company may be potentially liable for costs and damages
related to environmental matters. The Company carries
environmental liability insurance on our properties which
provides coverage for remediation liability and pollution
liability for third-party bodily injury and property damage
claims. The Company has not been notified by any governmental
authority of any non-compliance, liability or other claim, and
the Company is not aware of any other environmental condition
that it believes will have a material adverse effect on its
consolidated financial statements.
|
|
NOTE 8
|
RELATED-PARTY
TRANSACTIONS AND ARRANGEMENTS
|
Certain affiliates of the Company received fees and compensation
in connection with the Companys private placement of
shares of its common stock. Certain affiliates of the Company
have received, and may continue to receive, fees and
compensation in connection with the acquisition, financing and
management of the assets of the Company. Other various
transactions may result in the receipt of commissions, fees and
other compensation by Cole Advisors and its affiliates,
including disposition fees, subordinated participation in net
sale proceeds and subordinated performance fees.
If Cole Advisors provides substantial services, as determined by
the Company, in connection with the origination or refinancing
of any debt financing obtained by the Company that is used to
acquire properties or to make other permitted investments, or
that is assumed, directly or indirectly, in connection with the
acquisition of properties, the Company will pay Cole Advisors a
financing coordination fee equal to 1% of the amount available
under such financing; provided, however, that Cole Advisors
shall not be entitled to a financing coordination fee in
connection with the refinancing of any loan secured by any
particular property that was previously subject to a refinancing
in which Cole Advisors received such a fee. Financing
coordination fees payable on loan proceeds from permanent
financing will be paid to Cole Advisors as the Company acquires
such permanent financing. However, no fees will be paid on loan
proceeds from any line of credit until such time as all net
offering proceeds have been invested by the Company. During the
year ended December 31, 2010, the Company incurred $516,000
for financing coordination fees in connection with the
refinancing of its mortgage notes payable described in
Note 5 above; however, none were incurred related to the
borrowings on the Revolving Loans. No such fees were incurred by
the Company during the year ended December 31, 2009.
F-16
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company paid, and expects to continue to pay, Cole Realty
Advisors, Inc. (Cole Realty), its affiliated
property manager, fees for the management and leasing of the
Companys properties. Property management fees are equal to
3% of gross revenues, and leasing fees are at prevailing market
rates, not to exceed the greater of $4.50 per square foot or
7.5% of the total lease obligation. During the years ended
December 31, 2010 and 2009, the Company incurred $484,000
and $475,000 for property management fees, respectively. As of
December 31, 2010 and 2009, $45,000 and $41,000,
respectively, of such costs had been incurred but not paid by
the Company, and are included in due to affiliates on the
consolidated financial statements.
Cole Realty, or its affiliates, also receives acquisition and
advisory fees of up to 3% of the contract purchase price of each
property. No such fees were incurred by the Company during the
years ended December 31, 2010 and 2009.
The Company is obligated to pay Cole Advisors an annualized
asset management fee of up to 0.75% of the aggregate asset value
of the Companys assets. Pursuant to a waiver of the fee by
Cole Advisors, no asset management fees were incurred by the
Company during the years ended December 31, 2010 and 2009.
The Company is not obligated to pay any amounts for such
periods. However, Cole Advisors may elect to charge asset
management fees in future periods up to the 0.75% fee.
If Cole Advisors, or its affiliates, provides a substantial
amount of services, as determined by the Company, in connection
with the sale of one or more properties, the Company will pay
Cole Advisors an amount equal to 3% of the contract price of
each asset sold. In no event will the combined disposition fee
paid to Cole Advisors, its affiliates and unaffiliated third
parties exceed the reasonable, customary and competitive amount
for such services. In addition, after investors have received a
return of their net capital contributions and a 7.5% annual
cumulative, non-compounded return, then Cole Advisors is
entitled to receive 20% of the remaining net sale proceeds. No
such fees were incurred by the Company during the years ended
December 31, 2010 and 2009 relating to the sale of
properties.
In the event the Companys common stock is listed in the
future on a national securities exchange, a subordinated
incentive listing fee equal to 20% of the amount by which the
market value of the Companys outstanding stock plus all
distributions paid by the Company prior to listing exceeds the
sum of the total amount of capital raised from investors and the
amount of cash flow necessary to generate a 7.5% annual
cumulative, non-compounded return to investors will be paid to
Cole Advisors.
The Company may reimburse Cole Advisors for expenses it incurs
in connection with its provision of administrative services,
including related personnel costs. The Company does not
reimburse for personnel costs in connection with services for
which Cole Advisors receives acquisition fees or disposition
fees. No such costs were incurred by the Company during the
years ended December 31, 2010 and 2009.
During the year ended December 31, 2010, the Company
entered into two revolving line of credit agreements that
provide for an aggregate of $2.9 million of available
borrowings from Series C, which the Company borrowed
$1.9 million under one agreement. No financing coordination
fee was paid, or will be paid, to Cole Advisors or its
affiliates in connection with these revolving lines of credit.
The line of credit agreements bear a fixed interest rate of
5.75% and mature in March 2012. During the year ended
December 31, 2010, the Company incurred $85,000 of interest
expense related to the aforementioned lines of credit. As of
December 31, 2010, $9,000 of such expense had been incurred
but not paid by the Company, and is included in due to
affiliates on the consolidated financial statements.
|
|
NOTE 9
|
ECONOMIC
DEPENDENCY
|
Under various agreements, the Company has engaged or will engage
Cole Advisors and its affiliates to provide certain services
that are essential to the Company, including asset management
services, supervision of the management and leasing of
properties owned by the Company, asset acquisition and
disposition decisions,
F-17
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the sale of shares of the Companys common stock available
for issue, as well as other administrative responsibilities for
the Company including accounting services and investor
relations. As a result of these relationships, the Company is
dependent upon Cole Advisors and its affiliates. In the event
that these companies are unable to provide the Company with
these services, the Company would be required to find
alternative providers of these services.
|
|
NOTE 10
|
STOCKHOLDERS
EQUITY
|
Share
Redemption Program
The Companys common stock is currently not listed on a
national securities exchange, and the Company currently does not
intend to list its common stock. In order to provide
stockholders with the possibility of liquidity, stockholders who
have held their shares for at least one year may receive the
benefit of limited interim liquidity by presenting for
redemption all or a minimum portion of their shares to the
Company at any time in accordance with the procedures outlined
below. At that time, the Company may, subject to the conditions
and limitations described below, redeem the shares presented for
redemption for cash to the extent that the Company has
sufficient funds available to it to fund such redemption. The
Company will not pay its advisor or its affiliates any fees to
complete any transactions under the share redemption program.
The Company determines at the beginning of each fiscal year the
maximum amount of shares that it may redeem during that year.
The Company may use up to 1.0% of its annual cash flow to meet
these redemption needs, including cash proceeds generated from
new offerings, operating cash flow not intended for dividends,
borrowings, and capital transactions such as asset sales or
refinancings. During the years ended December 31, 2010 and
2009, the Company redeemed no shares under the share redemption
program.
In the event that the Company accepts redemption requests,
except as described below for redemptions upon the death of a
stockholder, the purchase price for the redeemed shares would
equal the lesser of (1) the price actually paid for those
shares or (2) either (i) $8.50 per share or
(ii) 90.0% of the net asset value per share as determined
by the Companys board of directors. Therefore, the share
redemption price would be $6.89 per share based on the most
recently disclosed estimated value of $7.65 per share as
determined by the Companys board of directors. The
Companys board of directors reserves the right in its sole
discretion at any time and from time to time to (1) waive
the one-year holding period in the event of the death or
bankruptcy of a stockholder or other exigent circumstances,
(2) reject any request for redemption, (3) change the
purchase price for redemption, or (4) otherwise amend the
terms of the share redemption program.
In the event that the Company accepts redemption requests, the
purchase price for shares redeemed upon the death of a
stockholder generally would be equal to the price the
stockholder actually paid for the shares. If, at the time of
redemption, the Companys advisor or another firm it might
choose for that purpose has made a determination of the net
asset value per share, the purchase price for shares redeemed
upon the death of a stockholder would be the net asset value of
the shares as so determined. On January 10, 2011, the
Companys board of directors established an estimated value
of the Companys common stock, as of December 31,
2010, of $7.65 per share. The Company will redeem shares upon
the death of a stockholder only to the extent that it has
sufficient funds available for such redemptions.
Redemptions of shares, when requested, generally are made
quarterly on a first-come, first-served basis. The Company
cannot guarantee that it will have sufficient available cash
flow to accommodate any or all requests made in any quarter. If
the Company does not have such sufficient funds available, at
the time when redemption is requested, a stockholder can
(1) withdraw his or her request for redemption or
(2) ask that the Company honor such stockholder request at
such time, if any, when sufficient funds become available. Such
pending requests will generally be honored on a first-come,
first-served basis.
F-18
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stockholders may present to the Company fewer than all of their
shares for redemption, except that (1) any participating
stockholder must present for redemption at least
2,500 shares and (2) if any participating stockholder
retains any shares, such stockholder must retain at least
2,500 shares.
The shares the Company redeems under its share redemption
program will be cancelled and returned to the status of
authorized but unissued shares. The Company does not intend to
resell such shares to the public unless they are first
registered with the Securities and Exchange Commission under the
Securities Act and under appropriate state securities laws or
otherwise sold in compliance with such laws.
For federal income tax purposes, distributions to stockholders
are characterized as ordinary dividends, capital gain dividends,
or a return of a stockholders invested capital. The
following table represents the character of distributions to
stockholders for the years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
Character of Distributions:
|
|
2010
|
|
|
2009
|
|
|
Dividend income
|
|
|
33
|
%
|
|
|
43
|
%
|
Capital gain
|
|
|
|
%
|
|
|
|
%
|
Return of capital
|
|
|
67
|
%
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 and 2009, the tax basis carrying
value of the Companys land and depreciable real estate
assets was $183.6 million and $187.3 million,
respectively. During each of the years ended December 31,
2010 and 2009, the Company incurred state and local income and
franchise taxes of $94,000, which has been recorded in general
and administrative expenses in the consolidated statements of
operations.
|
|
NOTE 12
|
OPERATING
LEASES
|
All of the Companys real estate assets are leased to
tenants under operating leases, for which the terms and
expirations vary. The leases frequently have provisions to
extend the lease agreement and other terms and conditions as
negotiated. The Company retains substantially all of the risks
and benefits of ownership of the real estate assets leased to
tenants.
The future minimum rental income from the Companys
investment in real estate assets under non-cancelable operating
leases, as of December 31, 2010, is as follows (in
thousands):
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
|
2011
|
|
$
|
15,407
|
|
2012
|
|
|
15,407
|
|
2013
|
|
|
15,407
|
|
2014
|
|
|
14,093
|
|
2015
|
|
|
13,084
|
|
Thereafter
|
|
|
83,277
|
|
|
|
|
|
|
|
|
$
|
156,675
|
|
|
|
|
|
|
|
|
NOTE 13
|
SUBSEQUENT
EVENTS
|
Estimated
Value Per Share
The Company reported an estimated per share value of its common
stock on January 10, 2011 for purposes of assisting
fiduciaries of plans subject to the annual reporting
requirements of ERISA, and IRA
F-19
COLE
CREDIT PROPERTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
trustees or custodians, in preparing reports relating to an
investment in the Companys shares. The Companys
board of directors established an estimated value of the
Companys common stock, as of December 31, 2010, of
$7.65 per share, which is unchanged from the estimated value of
the Companys common stock as of December 31, 2009.
Share
Redemption Program
The Companys share redemption program provides that the
Companys board of directors must determine at the
beginning of each fiscal year the maximum amount of shares that
the Company may redeem during that year. The Companys
board of directors has determined that the Company will not
redeem any shares pursuant to its share redemption program
during the year ending December 31, 2011.
F-20
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, this 30th day of March 2011.
Cole Credit Property Trust, Inc.
(Registrant)
|
|
|
|
By:
|
/s/ Christopher
H. Cole
|
Christopher H. Cole
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities as and on the
date indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Christopher
H. Cole
Christopher
H. Cole
|
|
Chairman, President and Chief Executive Officer (Principal
Executive Officer)
|
|
March 30, 2011
|
|
|
|
|
|
/s/ D.
Kirk McAllaster, Jr.
D.
Kirk McAllaster, Jr.
|
|
Executive Vice President and Chief Financial Officer and
Director (Principal Financial Officer)
|
|
March 30, 2011
|
|
|
|
|
|
/s/ Simon
J. Misselbrook
Simon
J. Misselbrook
|
|
Vice President of Accounting (Principal Accounting Officer)
|
|
March 30, 2011
|
|
|
|
|
|
/s/ Marc
T. Nemer
Marc
T. Nemer
|
|
Director
|
|
March 30, 2011
|
The following exhibits are included, or incorporated by
reference, in this Annual Report on
Form 10-K
for the year ended December 31, 2010 (and are numbered in
accordance with Item 601 of
Regulation S-K).
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
3
|
.1
|
|
Articles of Incorporation (Incorporated by reference to
Exhibit 2.1 of the Companys
Form 10-SB
(File
No. 000-51962),
filed on May 1, 2006).
|
|
3
|
.2
|
|
Amended and Restated Bylaws (Incorporated by reference to
Exhibit 2.2 to the Companys
Form 10-SB
(File
No. 000-51962),
filed on May 1, 2006).
|
|
10
|
.1
|
|
Agreement of Limited Partnership of Cole Operating
Partnership I, LP, dated April 6, 2004, between Cole
Credit Property Trust, Inc. and the limited partners thereto
(Incorporated by reference to Exhibit 6.1 to the
Companys
Form 10-SB
(File
No. 000-51962),
filed on May 1, 2006).
|
|
10
|
.2
|
|
Property Management and Leasing Agreement, dated April 6,
2004, among Cole Credit Property Trust, Inc., Cole Operating
Partnership I, LP and Cole Realty Advisors, Inc.
(Incorporated by reference to Exhibit 6.2 to the
Companys
Form 10-SB
(File
No. 000-51962),
filed on May 1, 2006).
|
|
10
|
.3
|
|
Advisory Agreement, dated April 6, 2004, as amended,
between Cole Credit Property Trust, Inc. and Cole REIT Advisors,
LLC (Incorporated by reference to Exhibit 6.3 to the
Companys
Form 10-SB
(File
No. 000-51962),
filed on May 1, 2006).
|
|
10
|
.4
|
|
Loan Agreement, dated April 1, 2010, by and between Cole
Credit Property Trust, Inc., and certain of its wholly-owned
subsidiaries, collectively as Borrower, and The Royal Bank of
Scotland PLC as lender (Incorporated by reference to the
Companys Quarterly Report on
Form 10-Q
(File
No. 000-51962),
filed on May 14, 2010).
|
|
10
|
.5
|
|
Loan Agreement, dated April 1, 2010, by and between Cole
Mezzco CCPT I, LLC as Borrower, and IVI Cole Mezz, LLC as
lender (Incorporated by reference to the Companys
Quarterly Report on
Form 10-Q
(File
No. 000-51962),
filed on May 14, 2010).
|
|
21
|
.1
|
|
List of Subsidiaries (Incorporated by reference to the
companys Annual Report on
Form 10-K
(File
No 000-51962),
filed on March 29, 2010).
|
|
31
|
.1*
|
|
Certification of the Chief Executive Officer of the Company
pursuant to Securities Exchange Act
Rule 13a-14(a) or
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2*
|
|
Certification of the Chief Financial Officer of the Company
pursuant to Securities Exchange Act
Rule 13a-14(a) or
15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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32
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.1**
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Certification of the Chief Executive Officer and Chief Financial
Officer of the Company pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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* |
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Filed herewith. |
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** |
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In accordance with Item 601(b)(32) of
Regulation S-K,
this Exhibit is not deemed filed for purposes of
Section 18 of the Exchange Act or otherwise subject to the
liabilities of that section. Such certifications will not be
deemed incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Exchange Act, except
to the extent that the registrant specifically incorporates it
by reference. |