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EXCEL - IDEA: XBRL DOCUMENT - Cole Credit Property Trust Inc | Financial_Report.xls |
EX-31.2 - EXHIBIT 31.2 - Cole Credit Property Trust Inc | c18161exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - Cole Credit Property Trust Inc | c18161exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Cole Credit Property Trust Inc | c18161exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the
transition period from to
Commission file number 000-51962
COLE CREDIT PROPERTY TRUST, INC.
(Exact name of registrant as specified in its charter)
Maryland | 20-0939158 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
2555 East Camelback Road, Suite 400 | ||
Phoenix, Arizona, 85016 | (602) 778-8700 | |
(Address of principal executive offices; zip code) | (Registrants telephone number, including area code) |
Not Applicable
(former name, former address and former fiscal year, if changed since last report)
(former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated file
in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
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
As of August 11, 2011, there were 10,090,951 shares of common stock, par value of $0.01, of
Cole Credit Property Trust, Inc. outstanding.
COLE CREDIT PROPERTY TRUST, INC.
INDEX
INDEX
Item 1. Financial Statements |
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4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
8 | ||||||||
14 | ||||||||
22 | ||||||||
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23 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
Table of Contents
PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
The accompanying condensed consolidated unaudited interim financial statements as of and for
the three and six months ended June 30, 2011 have been prepared by Cole Credit Property Trust, Inc.
(the Company, we, us or our) pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC) regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by accounting principles generally accepted
in the United States of America (GAAP) for complete financial statements, and should be read in
conjunction with the audited financial statements and related notes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2010. The financial
statements herein should also be read in conjunction with the notes to the financial statements and
Managements Discussion and Analysis of Financial Condition and Results of Operations contained in
this Quarterly Report on Form 10-Q. The results of operations for the three and six months ended
June 30, 2011 are not necessarily indicative of the operating results expected for the full year.
The information furnished in our accompanying condensed consolidated unaudited balance sheets and
condensed consolidated unaudited statements of operations, stockholders equity and cash flows
reflects all adjustments that are, in our opinion, necessary for a fair presentation of the
aforementioned financial statements. Such adjustments are of a normal recurring nature.
Forward-looking statements that were true at the time made may ultimately prove to be
incorrect or false. We caution readers not to place undue reliance on forward-looking statements,
which reflect our managements view only as of the date this Quarterly Report on Form 10-Q is filed
with the SEC. We make no representation or warranty (express or implied) about the accuracy of any
such forward-looking statements contained in this Quarterly Report on Form 10-Q. 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.
3
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COLE CREDIT PROPERTY TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(In thousands except share and per share amounts)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Investment in real estate assets: |
||||||||
Land |
$ | 54,233 | $ | 54,233 | ||||
Buildings and improvements, less accumulated depreciation of $22,072
and $20,255, respectively |
99,122 | 100,933 | ||||||
Acquired intangible lease assets, less accumulated amortization
of $12,056 and $11,094, respectively |
16,286 | 17,244 | ||||||
Total investment in real estate assets, net |
169,641 | 172,410 | ||||||
Cash and cash equivalents |
936 | 1,382 | ||||||
Restricted cash |
1,011 | 872 | ||||||
Rents and tenant receivables, less allowance for doubtful accounts
of $49 |
2,310 | 2,143 | ||||||
Prepaid expenses and other assets |
6 | 77 | ||||||
Deferred financing costs, less accumulated amortization of $1,171
and $962, respectively |
2,145 | 2,423 | ||||||
Total assets |
$ | 176,049 | $ | 179,307 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Notes payable |
$ | 118,225 | $ | 118,550 | ||||
Lines of credit with affiliate |
1,935 | 1,935 | ||||||
Accounts payable and accrued expenses |
671 | 804 | ||||||
Due to affiliates |
48 | 54 | ||||||
Acquired below market lease intangibles, less accumulated amortization
of $1,307 and $1,208, respectively |
890 | 989 | ||||||
Distributions payable |
415 | 429 | ||||||
Deferred rent |
288 | 660 | ||||||
Total liabilities |
122,472 | 123,421 | ||||||
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 |
(36,948 | ) | (34,639 | ) | ||||
Total stockholders equity |
53,577 | 55,886 | ||||||
Total liabilities and stockholders equity |
$ | 176,049 | $ | 179,307 | ||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
4
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COLE CREDIT PROPERTY TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(In thousands except share and per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Rental and other property income |
$ | 3,904 | $ | 3,941 | $ | 7,805 | $ | 7,887 | ||||||||
Tenant reimbursement income |
98 | 94 | 183 | 192 | ||||||||||||
Total revenue |
4,002 | 4,035 | 7,988 | 8,079 | ||||||||||||
Expenses: |
||||||||||||||||
General and administrative expenses |
130 | 150 | 303 | 297 | ||||||||||||
Property operating expenses |
162 | 139 | 333 | 264 | ||||||||||||
Property management expenses |
118 | 119 | 234 | 247 | ||||||||||||
Depreciation |
908 | 921 | 1,817 | 1,842 | ||||||||||||
Amortization |
451 | 451 | 901 | 901 | ||||||||||||
Total operating expenses |
1,769 | 1,780 | 3,588 | 3,551 | ||||||||||||
Operating income |
2,233 | 2,255 | 4,400 | 4,528 | ||||||||||||
Other expense: |
||||||||||||||||
Interest expense, net |
(2,117 | ) | (2,173 | ) | (4,207 | ) | (4,025 | ) | ||||||||
Loss on early extinguishment of debt |
| (254 | ) | | (259 | ) | ||||||||||
Total other expense |
(2,117 | ) | (2,427 | ) | (4,207 | ) | (4,284 | ) | ||||||||
Net income (loss) |
$ | 116 | $ | (172 | ) | $ | 193 | $ | 244 | |||||||
Weighted average number of common shares
outstanding: |
||||||||||||||||
Basic and diluted |
10,090,951 | 10,090,951 | 10,090,951 | 10,090,951 | ||||||||||||
Net income (loss) per common share: |
||||||||||||||||
Basic and diluted |
$ | 0.01 | $ | (0.02 | ) | $ | 0.02 | $ | 0.02 | |||||||
Distributions declared per common share: |
$ | 0.12 | $ | 0.12 | $ | 0.25 | $ | 0.28 | ||||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
5
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COLE CREDIT PROPERTY TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands, except share amounts)
Accumulated | ||||||||||||||||||||
Common Stock | Capital in | Distributions | Total | |||||||||||||||||
Number of | Excess | in Excess of | Stockholders | |||||||||||||||||
Shares | Par Value | of Par Value | Earnings | Equity | ||||||||||||||||
Balance, January 1, 2011 |
10,090,951 | $ | 101 | $ | 90,424 | $ | (34,639 | ) | $ | 55,886 | ||||||||||
Distributions |
| | | (2,502 | ) | (2,502 | ) | |||||||||||||
Net income |
| | | 193 | 193 | |||||||||||||||
Balance, June 30, 2011 |
10,090,951 | $ | 101 | $ | 90,424 | $ | (36,948 | ) | $ | 53,577 | ||||||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6
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COLE CREDIT PROPERTY TRUST, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 193 | $ | 244 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Depreciation |
1,817 | 1,842 | ||||||
Amortization of intangible lease assets and below market lease
intangibles, net |
863 | 860 | ||||||
Amortization of deferred financing costs |
278 | 199 | ||||||
Loss on early extinguishment of debt |
| 259 | ||||||
Changes in assets and liabilities: |
||||||||
Rents and tenant receivables |
(167 | ) | 157 | |||||
Prepaid expenses and other assets |
71 | 58 | ||||||
Accounts payable and accrued expenses |
(133 | ) | (198 | ) | ||||
Deferred rent |
(372 | ) | (354 | ) | ||||
Due to affiliates |
(6 | ) | 7 | |||||
Net cash provided by operating activities |
2,544 | 3,074 | ||||||
Cash flows from investing activities: |
||||||||
Additions to real estate and related assets |
(10 | ) | | |||||
Change in restricted cash |
(139 | ) | (407 | ) | ||||
Net cash used in investing activities |
(149 | ) | (407 | ) | ||||
Cash flows from financing activities: |
||||||||
Distributions to investors |
(2,516 | ) | (3,038 | ) | ||||
Proceeds from notes payable |
| 51,625 | ||||||
Repayment of notes payable and line of credit |
(325 | ) | (51,505 | ) | ||||
Proceeds from line of credit with affiliates |
| 1,935 | ||||||
Payment of loan deposits |
| (433 | ) | |||||
Refund of loan deposits |
| 433 | ||||||
Deferred financing costs paid |
| (2,170 | ) | |||||
Payment of costs related to the early extinguishment of debt |
| (212 | ) | |||||
Net cash used in financing activities |
(2,841 | ) | (3,365 | ) | ||||
Net decrease in cash and cash equivalents |
(446 | ) | (698 | ) | ||||
Cash and cash equivalents, beginning of period |
1,382 | 1,907 | ||||||
Cash and cash equivalents, end of period |
$ | 936 | $ | 1,209 | ||||
Supplemental Disclosures of Non-Cash Investing and Financing Activites: |
||||||||
Distributions declared and unpaid |
$ | 415 | $ | 415 | ||||
Supplemental Cash Flow Disclosures: |
||||||||
Interest paid |
$ | 3,945 | $ | 3,798 | ||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
7
Table of Contents
COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
June 30, 2011
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 a 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.
As of June 30, 2011, the Company owned 42 properties comprising 1.0 million square feet of
single-tenant retail and commercial space located in 19 states. As of June 30, 2011, 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
of the Company 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 the Company 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.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The condensed consolidated unaudited financial statements of the Company have been prepared in
accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and
Article 8 of Regulation S-X, and do not include all of the information and footnotes required by
GAAP for complete financial statements. In the opinion of management, the statements for the
interim periods presented include all adjustments, which are of a normal and recurring nature,
necessary to present a fair presentation of the results for such periods. Results for these
interim periods are not necessarily indicative of full year results. The information included in
this Quarterly Report on Form 10-Q should be read in conjunction with the Companys audited
consolidated financial statements as of and for the year ended December 31, 2010 and related notes
thereto set forth in the Companys Annual Report on Form 10-K.
The accompanying condensed consolidated unaudited financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.
Valuation of Real Estate and Related Assets
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.
8
Table of Contents
COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
The Company continues to monitor one property with a book value of $4.1 million for which it
has identified impairment indicators. For this property, the undiscounted future operating cash
flows expected from the use of this property and its eventual disposition exceeded its carrying
value as of June 30, 2011. Should the conditions related to this property, or any of our other properties
change, the underlying assumptions used to determine the expected undiscounted future operating
cash flows may change and adversely affect the recoverability of the carrying value related to such
property. No impairment losses were recorded during the three and six months ended June 30, 2011
and 2010.
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 carrying 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.
Restricted Cash
Included in restricted cash as of June 30, 2011, was $819,000 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 June 30, 2011, the Company had $192,000 in restricted cash held by lenders in a
lockbox account. As part of certain debt agreements discussed in Note 4, rents from 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.
Redemptions of Common Stock
In accordance with the Companys share redemption program, the purchase price paid for
redeemed shares will equal the lesser of (1) the price actually paid for those shares or (2) either
(i) $8.50 per share or (ii) 90.0% of the net asset value per share as determined by the Companys
board of directors. Therefore, the share redemption price would be $6.89 per share based on the
most recently disclosed estimated value of $7.65 per share as determined by the Companys board of
directors, effective January 1, 2011. However, the Companys share redemption program provides
that the Companys board of directors must determine at the beginning of each fiscal year the
maximum amount of shares that the Company may redeem during that year. The Companys board of
directors determined that no amounts were to be made available for redemption during the year
ending December 31, 2011.
NOTE 3 FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Accounting Standards Codification (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.
9
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COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
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 June 30, 2011 and
December 31, 2010. The estimated fair value of the notes payable and lines of credit with
affiliate was $119.7 million and $1.9 million, respectively, as of June 30, 2011, as compared to
the carrying value of $118.2 million and $1.9 million, respectively. The estimated fair value of
the notes payable and line 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.
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 NOTES PAYABLE AND LINES OF CREDIT
As of June 30, 2011, the Company had $120.2 million outstanding in mortgage notes payable and
lines of credit borrowings, with fixed interest rates ranging from 5.27% to 8.68% and a weighted
average interest rate of 6.61%, which mature on various dates from March 2012 through June 2031,
with a weighted average remaining term of 5.2 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 and may generally be prepaid subject to
meeting certain requirements and payment of a prepayment premium as specified in the respective
loan or line of credit agreement. 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.
Based on the Companys analysis and review of its results of operations and financial condition, as of June 30,
2011, the Company believes it was in compliance with the covenants of such mortgage notes payable.
During the three months ended June 30, 2011, the Company elected to extend the maturity date
of one mortgage note totaling $7.8 million from June 2011 to June 2031, in accordance with the
hyper-amortization provisions of the mortgage note. During the extended maturity period, the
lender will apply 100% of the rents collected from the property collateralizing the note to the
following items in the order indicated: (1) payment of accrued interest at the original fixed
interest rate of 6.68%, (2) all payments for escrow or reserve accounts, (3) any operating expenses
of the property pursuant to an approved annual budget and (4) any extraordinary operating or
capital expenses. The balance of the rents collected will be applied to the following items in
such order as the lender may determine: (1) any other amounts due in accordance with the loan
document, (2) the reduction of the principal balance of the mortgage note, and (3) interest accrued
at the Revised Interest Rate but not previously paid. As used herein, the Revised Interest Rate
means an interest rate equal to the greater of (A) the initial fixed interest rate as stated in the
loan agreement plus 2.0% per annum or (B) the then current Treasury Constant Maturity Yield Index
plus 2.0% per annum. The Revised Interest Rate on the mortgage note during the extended maturity
period is 8.68%.
10
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COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTE 5 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 pending legal proceedings of which the outcome is reasonably likely
to have a material 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 its properties which provides limited 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
effect on its results of operations or financial condition.
NOTE 6 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. No such fees were
incurred by the Company during the three and six months ended June 30, 2011. During the three and
six months ended June 30, 2010, the Company incurred $516,000 for such financing coordination fees.
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 three months ended June 30, 2011 and 2010, the Company incurred $118,000
and $119,000 for property management fees, respectively. During the six months ended June 30, 2011
and 2010, the Company incurred $234,000 and $247,000 for property management fees, respectively.
As of June 30, 2011 and December 31, 2010, $39,000 and $45,000, respectively, of such costs had
been incurred but not paid by the Company, and are included in due to affiliates on the condensed
consolidated unaudited balance sheets.
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
three and six months ended June 30, 2011 and 2010.
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COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
The Company is obligated to pay Cole Advisors an annualized asset management fee of up to
0.25% 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 three and six
months ended June 30, 2011 and 2010. 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 0.25% 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 three and six months ended June 30,
2011 and 2010 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 three
and six months ended June 30, 2011 and 2010.
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, LLC
(Series C), which is an affiliate of Cole Advisors, on which the Company borrowed $1.9 million
under one of the revolving lines of credit. 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
three months ended June 30, 2011 and 2010, the Company incurred $28,000 of interest expense related
to the aforementioned lines of credit. During the six months ended June 30, 2011 and 2010, the
Company incurred $56,000 and $28,000 of interest expense related to the aforementioned lines of
credit, respectively. As of June 30, 2011 and 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 condensed
consolidated unaudited balance sheets.
NOTE 7 ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged or will engage Cole Advisors and its
affiliates to provide certain services that are essential to the Company, including asset
management services, supervision of the management and leasing of properties owned by the Company,
asset acquisition and disposition decisions, the sale of shares of the Companys common stock
available for issue, as well as other administrative responsibilities for the Company including
accounting services and investor relations. As a result of these relationships, the Company is
dependent upon Cole Advisors and its affiliates. In the event that these companies are unable to
provide the Company with these services, the Company would be required to find alternative
providers of these services.
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COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
June 30, 2011
NOTE 8 NEW ACCOUNTING PRONOUNCEMENT
In December 2010, FASB issued Accounting Standards Update (ASU) 2010-29, Disclosure of
Supplementary Pro Forma Information for Business Combinations, (ASU 2010-29), which clarifies the
manner in which pro forma disclosures are calculated and provides additional disclosure
requirements regarding material nonrecurring adjustments recorded as a result of a business
combination. ASU 2010-29 was effective for the Company beginning on January 1, 2011. The adoption
of ASU 2010-29 has not had a material impact on the Companys consolidated financial statements.
In May 2011, FASB issued ASU 2011-04, Fair Value Measurements and Disclosures (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRS, (ASU 2011-04), which converges guidance between GAAP and International Financial Reporting
Standards (IFRS) on how to measure fair value and on what disclosures to provide about fair value
measurements. ASU 2011-04 will become effective for the Company on January 1, 2012. The adoption of ASU
2011-04 is not expected to have a material impact on the Companys consolidated financial
statements.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our condensed consolidated unaudited financial statements, the
notes thereto, and the other unaudited financial data included elsewhere in this Quarterly Report
on Form 10-Q. The following discussion should also be read in conjunction with our audited
consolidated financial statements, and the notes thereto, and Managements Discussion and Analysis
of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the
year ended December 31, 2010. The terms we, us, our and the Company refer to Cole Credit
Property Trust, Inc., and unless otherwise defined herein, capitalized terms used herein shall have
the same meanings as set forth in our condensed consolidated unaudited financial statements and the
notes thereto.
Forward-Looking Statements
Except for historical information, this section contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including discussion and analysis
of our financial condition and our subsidiaries, our anticipated capital expenditures, amounts of
anticipated cash distributions to our stockholders in the future and other matters. These
forward-looking statements are not historical facts but are the intent, belief or current
expectations of our management based on their knowledge and understanding of our business and
industry. Words such as may, will, anticipates, expects, intends, plans, believes,
seeks, estimates, would, could, should, or other similar words are intended to identify
forward-looking statements. All statements not based on historical fact are forward-looking
statements. These statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are difficult to predict and
could cause actual results to differ materially from those expressed or implied in the
forward-looking statements.
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 Quarterly Report on Form 10-Q is filed
with the SEC. 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.
Factors that could cause actual results to differ materially from any forward-looking statements
made in this Quarterly Report on Form 10-Q include, among others, changes in general economic
conditions, changes in real estate conditions, construction costs that may exceed estimates,
construction delays, increases in interest rates, lease-up risks, inability to obtain new tenants
upon the expiration or termination of existing leases, inability to obtain financing or refinance
existing debt, and the potential need to fund tenant improvements or other capital expenditures out
of operating cash flows.
Managements discussion and analysis of financial condition and results of operations are
based upon our condensed consolidated unaudited financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial statements requires our management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we
evaluate these estimates. These estimates are based on managements historical industry experience
and on various other assumptions that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates.
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 and commercial
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.
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As of June 30, 2011, we owned 42 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 our stockholders. We currently
have no formal 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 and
other property income accounted for 98% of total revenue during the three and six months ended June
30, 2011 and 2010. As 100% of our properties are under lease, with a weighted average remaining
lease term of 9.7 years, our exposure to changes in commercial rental rates and contractual lease
expirations is substantially mitigated, except for any vacancies caused by tenant bankruptcies or
other factors. Our advisor regularly monitors the creditworthiness of our tenants by reviewing the
tenants financial results, credit rating agency reports (if any) on the tenant or guarantor, the
operating history of the property with such tenant, the tenants market share and track record
within its industry segment, the general health and outlook of the tenants industry segment, and
other information for changes and possible trends. If our advisor identifies significant changes
or trends that may adversely affect the creditworthiness of a tenant, it will gather a more
in-depth knowledge of the tenants financial condition and, if necessary, attempt to mitigate the
tenants 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 June 30, 2011, 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 8.68%, with a weighted average remaining
term of 5.2 years. As we have no outstanding variable rate debt, our exposure to short-term
changes in interest rates is limited. However, we will be subject to changes in interest rates as
we refinance our debt as it matures. See our contractual obligations table in the section
captioned Liquidity and Capital Resources Long-term Liquidity and Capital Resources.
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. In 2010, the volume of mortgage lending for commercial real
estate began increasing and lending terms 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
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. If we are required to sell any of our properties to meet our liquidity requirements or
for any reason, such sale will result in lower rental revenue and may be at a price less than our
acquisition price for the property, each of which would adversely impact our results of operations
and the distribution rate we are able to pay 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 property values and occupancy and rental rates; however, in most
markets property values, occupancy and rental rates continue
to be below those previously experienced before the economic downturn. As of June 30, 2011, 100%
of our rentable square feet was leased. However, if the recent improvements in economic conditions
do not continue, 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.
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Results of Operations
Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010
Revenue Revenue remained relatively constant at $4.0 million for the three months ended June
30, 2011 and 2010, decreasing $33,000, or 1%. The decrease was primarily a result of a reduction
of rental income relating to one tenant that declared bankruptcy in September 2010 and on March 28,
2011, entered into a new long-term lease agreement that provides for lower fixed monthly lease
payments and potential percentage rent payments. Our revenue primarily consists of rental and
other property income from net leased commercial properties, which accounted for 98% of total
revenues during each of the three months ended June 30, 2011 and 2010.
General and Administrative Expenses General and administrative expenses decreased $20,000,
or 13%, to $130,000 for the three months ended June 30, 2011, compared to $150,000 for the three
months ended June 30, 2010. The decrease was primarily due to decreased accounting fees. Our
primary general and administrative expense items are state franchise and income taxes, transfer
agent fees, legal and accounting fees and other licenses and fees.
Property Operating Expenses Property operating expenses increased $23,000, or 17%, to
$162,000 for the three months ended June 30, 2011, compared to $139,000 for the three months ended
June 30, 2010. The increase was primarily due to an increase in non-reimbursable property taxes
incurred by us during the three months ended June 30, 2011, related to the new long-term lease
entered into with one tenant as discussed above, offset by a decrease in property repair and
maintenance expenses. The primary property operating expenses items are property taxes, insurance,
property repairs and maintenance, and bad debt expense.
Property Management Expenses Property management expenses remained relatively constant,
decreasing $1,000 or 1%, to $118,000 for the three months ended June 30, 2011, compared to $119,000
for the three months ended June 30, 2010. The decrease was primarily due to decreased rental income, as discussed above.
Depreciation and Amortization Expenses Depreciation and amortization expenses remained
relatively constant at $1.4 million during the three months ended June 30, 2011 and 2010,
decreasing $13,000, or 1%. The decrease was due to a write down of the carrying amount of one
property due to impairment in 2010.
Net Interest Expense Net interest expense decreased $56,000, or 3%, to $2.1 million for the
three months ended June 30, 2011, compared to $2.2 million for the three months ended June 30,
2010. The decrease was primarily due to monthly principal payments on amortizing mortgage notes
payable. The primary net interest expense items are interest expense, amortization of deferred
financing costs, and interest income.
Loss on Early Extinguishment of Debt There was no loss on early extinguishment of debt for
the three months ended June 30, 2011, compared to $254,000 loss on early extinguishment of debt for
the three months ended June 30, 2010. The loss during the three months ended June 30, 2010 was due
to the refinancing of 22 mortgage notes payable and one line of credit.
Results of Operations
Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010
Revenue Revenue decreased $91,000, or 1%, to $8.0 million for the six months ended June 30,
2011, compared to $8.1 million for the six months ended June 30, 2010. The decrease was primarily a
result of a reduction of rental income relating to short-term rent relief granted to one tenant
that declared bankruptcy in September 2010 and a new long-term lease entered into with this
tenant on March 28, 2011, that provides for lower monthly lease payments and potential
percentage rent payments. Our revenue primarily consists of rental and other property income from
net leased commercial properties, which accounted for 98% of total revenues during each of the six
months ended June 30, 2011 and 2010.
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General and Administrative Expenses General and administrative expenses increased $6,000, or
2%, to $303,000 for the six months ended June 30, 2011, compared to $297,000 for the six months
ended June 30, 2010. The increase was primarily due to an increase in transfer agent fees. 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 $69,000, or 26%, to
$333,000 for the six months ended June 30, 2011, compared to $264,000 for the six months ended June
30, 2010. The increase was primarily due to an increase in non-reimbursable property taxes incurred
by us during the six months ended June 30, 2011, related to the rent relief granted to one tenant
and the long-term lease entered into with that tenant, as discussed above. The primary property
operating expenses items are property taxes, insurance, property repairs and maintenance, and bad
debt expense.
Property Management Expenses Property management expenses decreased $13,000 or 5%, to
$234,000 for the six months ended June 30, 2011, compared to $247,000 for the six months ended June
30, 2010. The decrease was primarily due to decreased rental income, as discussed above.
Depreciation and Amortization Expenses Depreciation and amortization expenses remained
relatively constant at $2.7 million during the six months ended June 30, 2011 and 2010, decreasing
$25,000, or 1%. The decrease was due to the write down of the carrying amount of one property due
to impairment in 2010.
Net Interest Expense Net interest expense increased $182,000, or 5%, to $4.2 million for
the six months ended June 30, 2011, compared to $4.0 million for the six months ended June 30,
2010. The increase was primarily due to an increase in the weighted average interest rate on
outstanding debt to 6.61% at June 30, 2011, compared to 6.48% at June 30, 2010, and an increase in
amortization of deferred financing costs, which were incurred in the refinancing of certain
mortgage notes payable in 2010 at higher interest rates. The primary net interest expense items
are interest expense, amortization of deferred financing costs, and interest income.
Loss on Early Extinguishment of Debt There was no loss on early extinguishment of debt for
the six months ended June 30, 2011, compared to $259,000 loss on early extinguishment of debt for
the six months ended June 30, 2010. The loss during the six months ended June 30, 2010 was due to
the refinancing of 22 mortgage notes payable and one line of credit.
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.
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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. 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 the various ways in which our management evaluates the performance of
our real estate portfolio over time. However, not all REITs calculate FFO and MFFO the same way,
so comparisons with other REITs may not be meaningful. FFO and MFFO should not be considered as
alternatives to net income (loss) 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.
Neither the SEC, NAREIT, nor any other regulatory body has evaluated the acceptability of the
exclusions contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP
financial performance measure.
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 three and six
months ended June 30, 2011 and 2010 (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
NET INCOME (LOSS) |
$ | 116 | $ | (172 | ) | $ | 193 | $ | 244 | |||||||
Depreciation of real estate assets |
908 | 921 | 1,817 | 1,842 | ||||||||||||
Amortization of lease related costs |
451 | 451 | 901 | 901 | ||||||||||||
Funds and modified funds from
operations (FFO and MFFO) |
$ | 1,475 | $ | 1,200 | $ | 2,911 | $ | 2,987 | ||||||||
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 $51,000 and $85,000 during the three and six months ended June 30, 2011, respectively, and $34,000 and $82,000 during the three and six months ended June 30, 2010, respectively | ||
| Amortization of deferred financing costs totaled $139,000 and $278,000 during the three and six months ended June 30, 2011, respectively, and $123,000 and $199,000 during the three and six months ended June 30, 2010, respectively. | ||
| Loss on the early extinguishment of debt totaled $254,000 and $259,000 during the three and six months ended June 30, 2010, respectively, each of which includes the write-off of $47,000 of unamortized deferred financing costs related to the refinanced mortgage notes payable during 2010. There were no losses on the early extinguishment of debt during the three and six months ended June 30, 2011. |
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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 June 30, 2011, we had one revolving line of credit outstanding from an affiliate
of our advisor in the amount of $1.9 million maturing in March 2012. During the three months ended
June 30, 2011, we elected to extend the maturity date of one mortgage note totaling $7.8 million
from June 2011 to June 2031, as further described in Note 4 to our condensed consolidated unaudited
financial statements. In accordance with the hyper-amortization provisions, the loan requires us
to apply 100% of the rents received from the property securing the debt to pay interest due on the
loan, reserves, if any, and principal reductions until such balance is paid in full through the
extended maturity date, which will adversely affect our results of operations and may adversely impact the
dividend rate that we are able to pay to our investors. We are currently evaluating the possible
extension, financing, or refinancing of the $1.9 million revolving line of credit from an affiliate of our advisor maturing in March
2012. If we are unable to extend, 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 and/or the potential sale of certain properties. 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, which may adversely affect our results of operations and the dividend rate we are able to pay
to our investors.
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 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
outstanding as of June 30, 2011.
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 six months ended June 30, 2011 and 2010, we paid distributions of $2.5 million and
$3.0 million, respectively, which were funded entirely by cash flows from operations during such periods.
As of June 30, 2011, we had cash and cash equivalents of $936,000, 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 $819,000 held by lenders in escrow accounts for tenant and
capital improvements, leasing commissions, repairs and maintenance and other lender reserves for
certain properties, and $192,000 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 June 30, 2011, we had $120.2 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 8.68%, with a weighted average interest rate
of 6.61%, and matures on various dates from March 2012 through June 2031. 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 5.2 years.
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Our contractual obligations are as follows (in thousands):
Payments due by period(1) | ||||||||||||||||||||
Less Than 1 | More Than 5 | |||||||||||||||||||
Total | Year | 1-3 Years | 4-5 Years | Years | ||||||||||||||||
Principal payments
notes payable |
$ | 118,225 | $ | 655 | $ | 53,631 | $ | 54,462 | $ | 9,477 | ||||||||||
Interest payments notes
payable |
43,910 | 7,884 | 22,793 | 3,636 | 9,597 | |||||||||||||||
Principal payments
lines of credit |
1,935 | 1,935 | | | | |||||||||||||||
Interest payments lines
of credit |
85 | 85 | | | | |||||||||||||||
Total |
$ | 164,155 | $ | 10,559 | $ | 76,424 | $ | 58,098 | $ | 19,074 | ||||||||||
(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
Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010
Operating Activities. Net cash provided by operating activities decreased $530,000, or 17%, to
$2.5 million for the six months ended June 30, 2011, compared to $3.1 million for the six months
ended June 30, 2010. The decrease was primarily due to an increase in rents and tenant receivables,
in addition to the loss on early extinguishment of debt during the six months ended June 30, 2010,
as compared to no loss on early extinguishment of debt during the six months ended June 30, 2011.
See Results of Operations for a more complete discussion of the factors impacting our operating
performance.
Investing Activities. Net cash used in investing activities decreased $258,000, or 63%, to
$149,000 for the six months ended June 30, 2011, compared to $407,000 for the six months ended June
30, 2010. The change was due to a decrease in the change of cash deposited into required lender
reserve accounts in accordance with the respective loan agreements.
Financing Activities. Net cash used in financing activities decreased $524,000, or 16%, to
$2.8 million for the six months ended June 30, 2011, compared to $3.4 million for the six months
ended June 30, 2010. The decrease was due to a decrease in distributions paid to investors, in
addition to the payment of deferred financing costs during the six months ended June 30, 2010, as
compared to no payments of deferred financing costs during the six months ended June 30, 2011.
Election as a REIT
We are taxed as a REIT under the Internal Revenue Code of 1986, as amended. To maintain our
qualification 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 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. 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 maintain our
qualification for treatment as a REIT for federal income tax purposes. No provision for federal
income taxes has been made in our accompanying condensed consolidated unaudited 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 condensed consolidated
unaudited financial statements.
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Critical Accounting Policies and Estimates
Our accounting policies have been established to conform to GAAP. The preparation of
financial statements in conformity with GAAP requires us to use judgment in the application of
accounting policies, including making estimates and assumptions. These judgments affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenue and expenses during the
reporting periods. If our judgment or interpretation of the facts and circumstances relating to
the various transactions had been different, it is possible that different accounting policies
would have been applied, thus, resulting in a different presentation of the financial statements.
Additionally, other companies may utilize different estimates that may impact comparability of our
results of operations to those of companies in similar businesses. We consider our critical
accounting policies to be the following:
| Investment in and Valuation of Real Estate and Related Assets; | ||
| Allocation of Purchase Price of Real Estate and Related Assets; | ||
| Revenue Recognition; and | ||
| Income Taxes. |
A complete description of such policies and our considerations is contained in our Annual
Report on Form 10-K for the year ended December 31, 2010, and our critical accounting policies have
not changed during the six months ended June 30, 2011. The information included in this Quarterly
Report on Form 10-Q should be read in conjunction with our audited consolidated financial
statements as of and for the year ended December 31, 2010, and related notes thereto.
Commitments and Contingencies
We may be subject to certain commitments and contingencies with regard to certain
transactions. Refer to Note 5 of our condensed consolidated unaudited financial statements
accompanying this Quarterly Report on Form 10-Q 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 6 of our condensed consolidated unaudited financial statements
included in this Quarterly Report on Form 10-Q for a discussion of the various related-party
transactions, agreements, and fees.
New Accounting Pronouncements
There are no new accounting pronouncements that have been issued but not yet applied by us
that we believe will have a material impact on our consolidated financial statements.
Off Balance Sheet Arrangements
As of June 30, 2011 and December 31, 2010, 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.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not required for a smaller reporting company.
Item 4. | 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 Quarterly Report on Form 10-Q. Based on that
evaluation, our chief executive officer and chief financial officer concluded that our disclosure
controls and procedures, as of June 30, 2011, were effective to ensure
that information required to be disclosed by us in this Quarterly Report on Form 10-Q 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.
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 June 30, 2011 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
OTHER INFORMATION
Item 1. | Legal Proceedings |
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.
Item 1A. | Risk Factors |
Not required for a smaller reporting company.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
We did not sell any unregistered securities during the three months ended June 30, 2011. No
shares were redeemed during the three months ended June 30, 2011.
Item 3. | Defaults Upon Senior Securities |
No events occurred during the three months ended June 30, 2011 that would require a response
to this item.
Item 4. | [Removed and Reserved] |
Item 5. | Other Information |
No events occurred during the three months ended June 30, 2011 that would require a response
to this item.
Item 6. | Exhibits |
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly
Report on Form 10-Q) are included herewith, or incorporated by reference.
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SIGNATURES
Pursuant to the requirements 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.
Cole Credit Property Trust, Inc. (Registrant) |
||||
By: | /s/ Simon J. Misselbrook | |||
Simon J. Misselbrook | ||||
Vice President of Accounting
(Principal Accounting Officer) |
||||
Date: August 11, 2011
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EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2011 (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). | |
31.1*
|
Certification of the Chief Executive Officer of the Company pursuant to 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 Exchange Act Rule 13a-14 (a) or 15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1**
|
Certification of the Chief Executive Officer and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS***
|
XBRL Instance Document. | |
101.SCH***
|
XBRL Taxonomy Extension Schema Document. | |
101.CAL***
|
XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF***
|
XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB***
|
XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE***
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
* | Filed herewith. | |
** | 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. | |
*** | XBRL (Extensible Business Reporting Language) information is deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 as amended, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections. |
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