Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - Cole Real Estate Investments, Inc. | c24253exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Cole Real Estate Investments, Inc. | c24253exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - Cole Real Estate Investments, Inc. | c24253exv31w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - Cole Real Estate Investments, Inc. | Financial_Report.xls |
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 September 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 000-53960
COLE CREDIT PROPERTY TRUST III, INC.
(Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization) |
26-1846406 (I.R.S. Employer Identification Number) |
|
2555 East Camelback Road, Suite 400 Phoenix, Arizona, 85016 (Address of principal executive offices; zip code) |
(602)778-8700 (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
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
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 (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No 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 definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of November 10, 2011, there were 359,059,103 shares of common stock, par value $0.01, of Cole
Credit Property Trust III, Inc. outstanding.
COLE CREDIT PROPERTY TRUST III, INC.
INDEX
INDEX
2
Table of Contents
PART I
FINANCIAL INFORMATION
FINANCIAL INFORMATION
The accompanying condensed consolidated unaudited interim financial statements as of and
during the three and nine months ended September 30, 2011, have been prepared by Cole Credit
Property Trust III, 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 consolidated 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 during the three and nine months ended September 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 of this Quarterly Report on Form 10-Q. We
make no representation or warranty (expressed or implied) about the accuracy of any such
forward-looking statements contained in the 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. The
forward-looking statements should be read in light of the risk factors identified in the Item 1A
Risk Factors section of the Companys Annual Report on Form 10-K as of and for the year ended
December 31, 2010.
3
Table of Contents
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(in thousands except share and per share amounts)
September 30, 2011 | December 31, 2010 | |||||||
ASSETS |
||||||||
Investment in real estate and related assets: |
||||||||
Land |
$ | 1,088,711 | $ | 722,698 | ||||
Buildings and improvements, less accumulated depreciation of $77,609
and $28,898, respectively |
3,020,082 | 1,850,690 | ||||||
Acquired intangible lease assets, less accumulated amortization of $48,454
and $19,004, respectively |
626,275 | 414,319 | ||||||
Total investment in real estate assets, net |
4,735,068 | 2,987,707 | ||||||
Investment in mortgage notes receivable, net |
64,618 | 63,933 | ||||||
Investment in marketable securities, net |
24,506 | | ||||||
Total investment in real estate, marketable securities and mortgage assets, net |
4,824,192 | 3,051,640 | ||||||
Cash and cash equivalents |
117,120 | 109,942 | ||||||
Restricted cash |
16,220 | 12,123 | ||||||
Investment in unconsolidated joint ventures |
22,080 | 14,966 | ||||||
Rents and tenant receivables, less allowance for doubtful accounts of
$160 and $89, respectively |
49,645 | 24,581 | ||||||
Prepaid expenses, mortgage loan deposits and other assets |
5,709 | 3,323 | ||||||
Deferred financing costs, less accumulated amortization of $8,434
and $2,918, respectively |
46,943 | 27,083 | ||||||
Total assets |
$ | 5,081,909 | $ | 3,243,658 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Notes payable and credit facility |
$ | 2,148,518 | $ | 1,061,207 | ||||
Accounts payable and accrued expenses |
32,114 | 15,744 | ||||||
Escrowed investor proceeds |
1,548 | 448 | ||||||
Due to affiliates |
3,958 | 804 | ||||||
Acquired below market lease intangibles, less accumulated amortization of
$7,164 and $3,066, respectively |
91,066 | 66,815 | ||||||
Distributions payable |
17,752 | 14,448 | ||||||
Derivative liabilities, deferred rent and other liabilities |
45,923 | 21,142 | ||||||
Total liabilities |
2,340,879 | 1,180,608 | ||||||
Commitments and contingencies |
||||||||
Redeemable common stock |
112,348 | 65,898 | ||||||
STOCKHOLDERS EQUITY: |
||||||||
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued
and outstanding |
| | ||||||
Common stock, $0.01 par value; 990,000,000 shares authorized,
338,884,823 and 248,070,364 shares issued and outstanding,
respectively |
3,388 | 2,481 | ||||||
Capital in excess of par value |
2,931,323 | 2,164,528 | ||||||
Accumulated distributions in excess of earnings |
(279,021 | ) | (163,040 | ) | ||||
Accumulated other comprehensive loss |
(27,655 | ) | (7,188 | ) | ||||
Total stockholders equity |
2,628,035 | 1,996,781 | ||||||
Noncontrolling interests |
647 | 371 | ||||||
Total equity |
2,628,682 | 1,997,152 | ||||||
Total liabilities and equity |
$ | 5,081,909 | $ | 3,243,658 | ||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
4
Table of Contents
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(in thousands except share and per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Rental and other property income |
$ | 88,990 | $ | 38,881 | $ | 229,710 | $ | 79,814 | ||||||||
Tenant reimbursement income |
7,279 | 2,177 | 17,010 | 4,538 | ||||||||||||
Interest income on mortgage notes receivable |
1,384 | 1,361 | 4,088 | 2,262 | ||||||||||||
Interest income on marketable securities |
13 | | 13 | | ||||||||||||
Total revenue |
97,666 | 42,419 | 250,821 | 86,614 | ||||||||||||
Expenses: |
||||||||||||||||
General and administrative expenses |
3,123 | 1,546 | 7,213 | 4,202 | ||||||||||||
Property operating expenses |
7,776 | 2,430 | 18,515 | 4,968 | ||||||||||||
Property and asset management expenses |
8,052 | 3,461 | 21,065 | 7,384 | ||||||||||||
Acquisition related expenses |
24,480 | 16,203 | 47,201 | 34,131 | ||||||||||||
Depreciation |
19,318 | 7,664 | 48,755 | 14,945 | ||||||||||||
Amortization |
9,631 | 3,923 | 24,096 | 8,514 | ||||||||||||
Total operating expenses |
72,380 | 35,227 | 166,845 | 74,144 | ||||||||||||
Operating income |
25,286 | 7,192 | 83,976 | 12,470 | ||||||||||||
Other income (expense): |
||||||||||||||||
Equity in income (loss) of unconsolidated joint ventures |
354 | 213 | 1,131 | (303 | ) | |||||||||||
Interest and other income |
74 | 284 | 296 | 1,053 | ||||||||||||
Interest expense |
(24,432 | ) | (7,697 | ) | (59,082 | ) | (14,994 | ) | ||||||||
Total other expense |
(24,004 | ) | (7,200 | ) | (57,655 | ) | (14,244 | ) | ||||||||
Net income (loss) |
1,282 | (8 | ) | 26,321 | (1,774 | ) | ||||||||||
Net income allocated to noncontrolling interests |
11 | | 310 | | ||||||||||||
Net income (loss) attributable to the Company |
$ | 1,271 | $ | (8 | ) | $ | 26,011 | $ | (1,774 | ) | ||||||
Weighted average number of common shares outstanding: |
||||||||||||||||
Basic and diluted |
320,524,336 | 196,134,561 | 291,885,880 | 155,417,335 | ||||||||||||
Net income (loss) attributable to the Company per common share: |
||||||||||||||||
Basic and diluted |
$ | 0.00 | $ | (0.00 | ) | $ | 0.09 | $ | (0.01 | ) | ||||||
Distributions declared per common share: |
$ | 0.16 | $ | 0.18 | $ | 0.49 | $ | 0.52 | ||||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
5
Table of Contents
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands, except share amounts)
Accumulated | Accumulated | |||||||||||||||||||||||||||||||
Common Stock | Capital in | Distributions | Other | Total | Non- | |||||||||||||||||||||||||||
Number of | Par | Excess | in Excess of | Comprehensive | Stockholders | controlling | Total | |||||||||||||||||||||||||
Shares | Value | of Par Value | Earnings | Loss | Equity | Interests | Equity | |||||||||||||||||||||||||
Balance, January 1, 2011 |
248,070,364 | $ | 2,481 | $ | 2,164,528 | $ | (163,040 | ) | $ | (7,188 | ) | $ | 1,996,781 | $ | 371 | $ | 1,997,152 | |||||||||||||||
Issuance of common stock |
94,108,456 | 940 | 934,823 | | | 935,763 | | 935,763 | ||||||||||||||||||||||||
Distributions to noncontrolling interests |
| | | | | | (34 | ) | (34 | ) | ||||||||||||||||||||||
Distributions to investors |
| | | (141,992 | ) | | (141,992 | ) | | (141,992 | ) | |||||||||||||||||||||
Commissions on stock sales and
related dealer manager fees |
| | (76,137 | ) | | | (76,137 | ) | | (76,137 | ) | |||||||||||||||||||||
Other offering costs |
| | (12,879 | ) | | | (12,879 | ) | | (12,879 | ) | |||||||||||||||||||||
Redemptions of common stock |
(3,293,997 | ) | (33 | ) | (31,855 | ) | | | (31,888 | ) | | (31,888 | ) | |||||||||||||||||||
Redeemable common stock |
| | (46,450 | ) | | | (46,450 | ) | | (46,450 | ) | |||||||||||||||||||||
Purchase of investment from
noncontrolling interest |
| | (707 | ) | | | (707 | ) | | (707 | ) | |||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Allocation of net income |
| | | 26,011 | | 26,011 | 310 | 26,321 | ||||||||||||||||||||||||
Unrealized loss on marketable
securities |
| | | | (1,082 | ) | (1,082 | ) | | (1,082 | ) | |||||||||||||||||||||
Unrealized loss on interest
rate swaps |
| | | | (19,385 | ) | (19,385 | ) | | (19,385 | ) | |||||||||||||||||||||
Total comprehensive income |
| | | | | 5,544 | 310 | 5,854 | ||||||||||||||||||||||||
Balance, September 30, 2011 |
338,884,823 | $ | 3,388 | $ | 2,931,323 | $ | (279,021 | ) | $ | (27,655 | ) | $ | 2,628,035 | $ | 647 | $ | 2,628,682 | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
6
Table of Contents
COLE CREDIT PROPERTY TRUST III, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 26,321 | $ | (1,774 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Depreciation |
48,755 | 14,945 | ||||||
Amortization of intangible lease assets and below market lease intangibles, net |
25,411 | 8,514 | ||||||
Amortization of deferred financing costs |
5,516 | 1,728 | ||||||
Amortization of fair value adjustments of mortgage notes payable assumed |
64 | 36 | ||||||
Net accretion of discount on marketable securities |
(3 | ) | | |||||
Net accretion on mortgage notes receivable |
(760 | ) | (397 | ) | ||||
Bad debt expense |
147 | 78 | ||||||
Equity in (income) loss of unconsolidated joint ventures |
(1,131 | ) | 303 | |||||
Return on investment from unconsolidated joint ventures |
1,131 | 497 | ||||||
Changes in assets and liabilities: |
||||||||
Rents and tenant receivables |
(25,211 | ) | (13,234 | ) | ||||
Prepaid expenses and other assets |
(1,994 | ) | (1,434 | ) | ||||
Accounts payable and accrued expenses |
10,817 | 6,021 | ||||||
Deferred rent and other liabilities |
5,537 | 6,573 | ||||||
Due to affiliates |
2,509 | 163 | ||||||
Net cash provided by operating activities |
97,109 | 22,019 | ||||||
Cash flows from investing activities: |
||||||||
Investment in real estate, marketable securities and mortgage assets |
(1,813,152 | ) | (1,391,513 | ) | ||||
Investment in unconsolidated joint ventures |
(7,725 | ) | (16,126 | ) | ||||
Return of investment from unconsolidated joint ventures |
611 | | ||||||
Principal repayments from mortgage notes receivable |
75 | | ||||||
Payment of property escrow deposits |
(37,375 | ) | (40,153 | ) | ||||
Refund of property escrow deposits |
37,144 | 30,150 | ||||||
Change in restricted cash |
(4,097 | ) | (6,898 | ) | ||||
Net cash used in investing activities |
(1,824,519 | ) | (1,424,540 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock |
857,425 | 1,132,591 | ||||||
Offering costs on issuance of common stock |
(88,371 | ) | (109,996 | ) | ||||
Redemptions of common stock |
(31,888 | ) | (7,930 | ) | ||||
Distributions to investors |
(60,350 | ) | (30,972 | ) | ||||
Proceeds from notes payable and credit facilities |
1,158,188 | 530,375 | ||||||
Repayment of notes payable and credit facilities |
(75,804 | ) | (730 | ) | ||||
Payment of loan deposits |
(5,238 | ) | (13,356 | ) | ||||
Refund of loan deposits |
4,936 | 13,157 | ||||||
Change in escrowed investor proceeds liability |
1,100 | (164 | ) | |||||
Deferred financing costs paid |
(25,376 | ) | (15,234 | ) | ||||
Distributions to noncontrolling interests |
(34 | ) | | |||||
Net cash provided by financing activities |
1,734,588 | 1,497,741 | ||||||
Net increase in cash and cash equivalents |
7,178 | 95,220 | ||||||
Cash and cash equivalents, beginning of period |
109,942 | 278,717 | ||||||
Cash and cash equivalents, end of period |
$ | 117,120 | $ | 373,937 | ||||
The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
7
Table of Contents
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
September 30, 2011
NOTE 1 ORGANIZATION AND BUSINESS
Cole Credit Property Trust III, Inc. (the Company) is a Maryland corporation that was formed
on January 22, 2008 (Date of Inception), which has elected to be taxed, and currently qualifies as
a real estate investment trust (REIT) for federal income tax purposes. Substantially all of the
Companys business is conducted through Cole REIT III Operating Partnership, LP (CCPT III OP), a
Delaware limited partnership. The Company is the sole general partner of, and owns a 99.99%
partnership interest in, CCPT III OP. Cole REIT Advisors III, LLC (CR III 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 CCPT III OP.
As of September 30, 2011, the Company owned 632 properties, comprising 29.8 million rentable
square feet of single and multi-tenant retail and commercial space located in 45 states. As of
September 30, 2011, the rentable space at these properties was 99% leased. As of September 30,
2011, the Company also owned two mortgage notes receivable secured by two office buildings, each of
which is subject to a net lease, and one commercial mortgage-backed securities (CMBS) bond. In
addition, through four joint venture arrangements, as of September 30, 2011, the Company had
interests in eight properties comprising 1.1 million gross rentable square feet of commercial space
and a land parcel under development comprising 139,000 square feet of land.
On October 1, 2008, pursuant to a Registration Statement on Form S-11 under the Securities Act
of 1933, as amended, the Company commenced its initial public offering on a best efforts basis of
up to 230.0 million shares of its common stock at a price of $10.00 per share and up to 20.0
million additional shares pursuant to a distribution reinvestment plan (the DRIP), under which
its stockholders could elect to have distributions reinvested in additional shares at the higher of
$9.50 per share or 95% of the estimated value of a share of the Companys common stock (the
Initial Offering).
On January 6, 2009, the Company satisfied the conditions of its escrow agreement, issued
approximately 262,000 shares under the Initial Offering and commenced its principal operations.
The Company terminated the Initial Offering on October 1, 2010. At the completion of the Initial
Offering, a total of approximately 217.5 million shares of common stock had been issued, including
approximately 211.6 million shares issued in the primary offering and approximately 5.9 million
shares issued pursuant to the Companys DRIP. The remaining 32.5 million unsold shares in the
Initial Offering were deregistered.
On September 22, 2010, the registration statement for a follow-on offering of 275.0 million
shares of the Companys common stock was declared effective by the SEC (the Follow-on Offering,
and collectively with the Initial Offering, the Offerings). Of the shares registered in the
Follow-on Offering, the Company is offering up to 250.0 million shares in a primary offering at a
price of $10.00 per share and up to 25.0 million shares under an amended and restated DRIP, under
which its stockholders may elect to have distributions reinvested in additional shares at a price
of $9.50 per share during the Follow-on Offering and until such time as the Companys board of
directors has determined a reasonable estimate of the value of the shares of common stock, at which
time the shares of common stock will be offered under the DRIP at a purchase price equal to the
most recently disclosed per share value. The Company commenced sales of its common stock pursuant
to the Follow-on Offering after the termination of the Initial Offering on October 1, 2010. As of
September 30, 2011, the Company had issued approximately 125.9 million shares of its common stock
in the Follow-on Offering, including approximately 115.3 million shares issued in the primary
offering and approximately 10.6 million shares issued pursuant to the Companys DRIP. The Company
had aggregate gross proceeds from the Offerings of $3.4 billion (including shares issued pursuant
to the Companys DRIP) as of September 30, 2011, before share redemptions of $43.8 million and
offering costs, selling commissions, and dealer manager fees of $330.0 million.
The Companys board of directors has approved closing the primary offering in early 2012. The
Company currently expects to stop selling shares of its common stock in the primary offering on or
about February 29, 2012. The Company intends to continue to sell shares of its common stock in the
Follow-on Offering pursuant to the Companys DRIP following the termination of the primary
offering.
8
Table of Contents
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
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 10 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 condensed consolidated unaudited financial statements include the accounts of the Company,
its wholly-owned subsidiaries and consolidated joint venture arrangements in which the Company has
controlling financial interests. The portion of the consolidated joint venture arrangements not
owned by the Company is presented as noncontrolling interests as of and during the period
consolidated. All intercompany balances and transactions have been eliminated in consolidation.
The Company is required to continually evaluate its variable interest entity (VIE)
relationships and consolidate investments in these entities when it is determined to be the primary
beneficiary of their operations. A VIE is broadly defined as an entity where either (i) the equity
investors as a group, if any, lack the power through voting or similar rights to direct the
activities of an entity that most significantly impact the entitys economic performance or (ii)
the equity investment at risk is insufficient to finance that entitys activities without
additional subordinated financial support.
A variable interest holder is considered to be the primary beneficiary of a VIE if it has the
power to direct the activities of a variable interest entity that most significantly impact the
entitys economic performance and has the obligation to absorb losses of, or the right to receive
benefits from, the entity that could potentially be significant to the VIE. The Company
qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of
various factors include, but are not limited to, the Companys ability to direct the activities
that most significantly impact the entitys economic performance, its form of ownership interest,
its representation on the entitys governing body, the size and seniority of its investment, its
ability and the rights of other investors to participate in policy making decisions and to replace
the manager of and/or liquidate the entity.
The Company evaluates the need to consolidate joint ventures based on standards set forth in
the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 810,
Consolidation (ASC 810). In determining whether the Company has a controlling interest in a
joint venture and the requirement to consolidate the accounts of that entity, management considers
factors such as ownership interest, power to make decisions and contractual and substantive
participating rights of the partners/members as well as whether the entity is a VIE for which the
Company is the primary beneficiary. As of September 30, 2011, the Company consolidated the accounts
of two joint ventures (the Consolidated Joint Ventures).
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 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 the Companys assets by class are generally as follows:
Building and improvements
|
40 years | |
Tenant improvements
|
Lesser of useful life or lease term | |
Intangible lease assets
|
Lesser of useful life or lease term |
9
Table of Contents
COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
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 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
operating cash flows expected from the Companys use of the assets and the eventual disposition of
such assets. In the event that such expected undiscounted operating cash flows do not exceed the
carrying value, the Company will adjust the real estate and related intangible assets and
liabilities to their respective fair values and recognize an impairment loss. No impairment losses
were recorded during the three and nine months ended September 30, 2011 and 2010.
Projections of expected future cash flows require the Company to use estimates such as future
market rental income amounts subsequent to the expiration of current lease agreements, property
operating expenses, terminal capitalization and discount rates, the expected number of months it
takes to re-lease the property, required tenant improvements and the number of years the property
will be held for investment. The use of alternative assumptions in the future cash flow analysis
could result in a different determination of the propertys future cash flows and a different
conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as
the carrying value of the real estate and related intangible assets.
When a property is identified as held for sale, the Company will cease depreciation and
amortization of the asset and liabilities related to the property and estimate the sales price, net
of selling costs. If, in the Companys opinion, the expected net sales price of the property is
less than the carrying value of the property, an adjustment to the carrying value would be recorded
to reflect the estimated fair value of the property, net of selling costs. There were no assets
identified as held for sale as of September 30, 2011 or December 31, 2010.
Allocation of Purchase Price of Real Estate and Related Assets
Upon the acquisition of real properties, the Company allocates the purchase price of such
properties 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 respective fair values.
Acquisition related expenses are expensed as incurred. 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 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 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 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, respectively. 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 estimates of direct costs associated with obtaining
a new tenant and opportunity costs associated with lost rental and other property income, 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 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.
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
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 alternative
estimates may result in a different determination of the Companys purchase price allocations,
which could impact the Companys results of operations.
The Company estimates the fair value of assumed mortgage notes payable based upon indications
of current market pricing for similar types of debt with similar maturities. Assumed mortgage
notes payable are initially recorded at their estimated fair value as of the assumption date, and
the difference between such estimated fair value and the mortgage notes outstanding principal
balance is amortized to interest expense over the term of the mortgage note payable.
Restricted Cash and Escrows
Included in restricted cash was $13.5 million and $9.6 million as of September 30, 2011 and
December 31, 2010, respectively, held by lenders in escrow accounts for tenant and capital
improvements, leasing commissions, repairs and maintenance and other lender reserves for certain
properties, in accordance with the respective lenders loan agreement. In addition, the Company had
escrowed investor proceeds for which shares of common stock had not been issued of $1.5 million and
$448,000 in restricted cash as of September 30, 2011 and December 31, 2010, respectively. Also
included in restricted cash was $1.2 million and $2.1 million held by lenders in a lockbox account,
as of September 30, 2011 and December 31, 2010, respectively. As part of certain debt agreements,
rents from certain encumbered properties are deposited directly into a lockbox account, from which
the monthly debt service payment is disbursed to the lender and the excess is disbursed to the
Company.
Investment in Marketable Securities
Investments in marketable securities consist of investments in CMBS. ASC 320, Investments-
Debt and Equity Securities, requires the Company to classify its investments in real estate
securities as trading, available-for-sale or held-to-maturity. The Company classifies its
investments as available-for-sale as the Company intends to hold its investments until maturity,
however the Company may sell them prior to their maturity. These investments are carried at
estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive
income (loss). Estimated fair values are based on estimated quoted market prices from third party
trading desks, where available. Upon the sale of a security, the realized net gain or loss is
computed on a specific identification basis.
The Company monitors its available-for-sale securities for impairments. A loss is recognized
when the Company determines that a decline in the estimated fair value of a security below its
amortized cost is other-than-temporary. The Company considers many factors in determining whether
the impairment of a security is deemed to be other-than-temporary, including, but not limited to,
the length of time the security has had a decline in estimated fair value below its amortized cost,
the amount of the unrealized loss, the intent and ability of the Company to hold the security for a
period of time sufficient for a recovery in value, recent events specific to the issuer or
industry, external credit ratings and recent changes in such ratings. The analysis of determining
whether the impairment of a security is deemed to be other-than-temporary requires significant
judgments and assumptions. The use of alternative judgments and assumptions could result in a
different conclusion.
Amortization and accretion of premiums and discounts on securities available-for-sale are
recognized in interest income on marketable securities over the contractual life, adjusted for
actual prepayments, of the securities using the effective interest method.
Investment in Unconsolidated Joint Ventures
Investment in unconsolidated joint ventures as of September 30, 2011 consists of the Companys
interest in two joint ventures that own seven multi-tenant properties (the Unconsolidated Joint
Ventures). Consolidation of these investments is not required as the entities do not qualify as
VIEs and do not meet the control requirements for consolidation, as defined in ASC 810. Both the
Company and the respective joint venture partner must approve decisions about the
respective entitys activities that significantly influence the economic performance of the entity.
As of September 30, 2011, the Unconsolidated Joint Ventures held
total assets of $72.6 million and non-recourse mortgage notes payable of $45.9 million.
11
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
The Company accounts for the Unconsolidated Joint Ventures using the equity method of
accounting per guidance established under ASC 323, Investments Equity Method and Joint Ventures
(ASC 323). The equity method of accounting requires the investment to be initially recorded at
cost and subsequently adjusted for the Companys share of equity in the joint ventures earnings
and distributions. The Company evaluates the carrying amount of the investments for impairment in
accordance with ASC 323. Each of the Unconsolidated Joint Ventures is evaluated for potential
impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is
recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment
is other-than-temporary, the Company considers whether it has the ability and intent to hold the
investment until the carrying value is fully recovered. The evaluation of an investment in a joint
venture for potential impairment requires the Companys management to exercise significant judgment
and to make certain assumptions. No impairment losses were recorded related to the Unconsolidated Joint Ventures
for the three and nine months ended September 30, 2011 and 2010.
Concentration of Credit Risk
As of September 30, 2011, the Company had cash on deposit, including restricted cash, in ten
financial institutions, seven of which had deposits in excess of current federally insured levels
totaling $34.9 million; however the Company has not experienced any losses in such accounts. The
Company limits investment of cash investments to financial institutions with high credit standing;
therefore, the Company believes it is not exposed to any significant credit risk on its cash
deposits.
As of September 30, 2011, no single tenant accounted for greater than 10% of the Companys
2011 gross annualized rental revenues. As of September 30, 2011, tenants in the specialty retail,
drugstore and grocery industries comprised 16%, 12% and 10%, respectively, of 2011 gross annualized
rental revenues. Additionally, the Company has certain geographic concentrations in its property
holdings. In particular, as of September 30, 2011, 115 of the Companys properties were located in
Texas and 27 properties were located in Arizona, accounting for 17% and 10%, respectively, of the
Companys 2011 gross annualized rental revenues.
Redeemable Common Stock
The Companys share redemption program provides that the Company will not redeem in excess of
5% of the weighted average number of shares outstanding during the trailing twelve months prior to
the redemption date (the Trailing Twelve-month Cap); provided, however, that while shares subject
to a redemption requested upon the death of a stockholder will be included in calculating the
maximum number of shares that may be redeemed, such shares will not be subject to the Trailing
Twelve-month Cap. In addition, all redemptions, including those upon death or qualifying
disability, are limited to those that can be funded with cumulative net proceeds from the sale of
shares through the Companys DRIP. As of September 30, 2011 and December 31, 2010, the Company had
issued approximately 16.4 million and approximately 8.2 million shares of common stock under the
Companys DRIP, respectively, for cumulative proceeds of $156.1 million and $77.8 million,
respectively, which are recorded as redeemable common stock, net of redemptions, in the respective
condensed consolidated unaudited balance sheets. As of September 30, 2011 and December 31, 2010,
the Company had redeemed approximately 4.5 million and approximately 1.2 million shares of common
stock, respectively, for an aggregate price of $43.8 million and $11.9 million, respectively.
Redeemable common stock is recorded at the greater of the carrying amount or redemption value each
reporting period. Changes in the value from period to period are recorded as an adjustment to
capital in excess of par value.
In addition to the caps discussed above, the redemptions are limited quarterly to 1.25% of the
weighted average number of shares outstanding during the trailing twelve-month period. In addition,
the funding for redemptions each quarter generally will be limited to the net proceeds the Company
receives from the sale of shares in the respective quarter under the Companys DRIP. The amended
share redemption program further provides that while shares subject to a redemption requested upon
the death of a stockholder will be included in calculating the maximum number of shares that may be
redeemed, such shares will not be subject to the quarterly caps. The Companys board of directors
may waive these quarterly caps in its sole discretion, subject to the Trailing Twelve-month Cap.
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.
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
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.
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
mortgage loan deposits, accounts payable and accrued expenses and other assets and liabilities The Company considers the
carrying values of these financial instruments, assets and liabilities to approximate fair value
because of the short period of time between origination of the instruments and their expected
realization.
Mortgage notes receivable The fair value is estimated by discounting the expected cash
flows on the notes at current rates at which management believes similar loans would be made. The
estimated fair value of these notes was $71.0 million and $64.0 million as of September 30, 2011
and December 31, 2010, respectively, as compared to the carrying values of $64.6 million and $63.9
million as of September 30, 2011 and December 31, 2010, respectively.
Notes payable and credit facility The fair value is estimated using a discounted cash flow
technique based on estimated borrowing rates available to the Company as of September 30, 2011 and
December 31, 2010. The estimated fair value of the notes payable and credit facility was $2.2
billion and $1.0 billion as of September 30, 2011 and December 31, 2010, respectively, as compared
to the carrying value of $2.1 billion and $1.1 billion as of September 30, 2011 and December 31,
2010, respectively.
Marketable securities The Companys marketable securities are carried at fair value and are
valued using Level 3 inputs. The Company primarily uses estimated non-binding quoted market prices
from the trading desks of financial institutions that are dealers in such bonds, where available,
for similar CMBS tranches that actively participate in the CMBS market, which may be adjusted for industry
benchmarks, such as CMBX Index, where applicable. Market conditions, such as interest rates,
liquidity, trading activity and credit spreads may cause significant variability to the received
quotes. If the Company is unable to obtain quotes from third parties or if the Company believes
the quotes received are inaccurate, the Company would estimate fair value using internal models
that primarily consider the CMBX Index, expected cash flows, known and expected defaults and rating
agency reports. Changes in market conditions, as well as changes in the assumptions or methodology
used to estimate fair value, could result in a significant increase or decrease in the recorded
amount of the securities. As of September 30, 2011, no marketable securities were valued using
internal models. As of December 31, 2010, the Company did not own any marketable securities.
Significant judgment is involved in valuations and different judgments and assumptions used in
managements valuation could result in alternative valuations. If there continues to be
significant disruptions to the financial markets, the Companys estimates of fair value may have
significant volatility.
Derivative Instruments The Companys derivative instruments represent interest rate swaps.
All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair
value of these instruments is determined using interest rate market pricing models. The Company
includes the impact of credit valuation adjustments on derivative instruments measured at fair
value.
Considerable judgment is necessary to develop estimated fair values of financial instruments.
Accordingly, the estimates presented herein are not necessarily indicative of the amounts the
Company could realize, or be liable for, on disposition of the financial instruments.
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
In accordance with the fair value hierarchy described above, the following table shows the
fair value of the Companys financial assets and liabilities that are required to be measured at
fair value on a recurring basis as of September 30, 2011 and December 31, 2010 (in thousands):
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Balance as of | Identical Assets | Observable Inputs | Inputs | |||||||||||||
September 30, 2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: |
||||||||||||||||
Marketable securities |
$ | 24,506 | $ | | $ | | $ | 24,506 | ||||||||
Liabilities: |
||||||||||||||||
Interest rate swaps |
$ | (26,573 | ) | $ | | $ | (26,573 | ) | $ | | ||||||
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||||||
Balance as of | Identical Assets | Observable Inputs | Inputs | |||||||||||||
December 31, 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: |
||||||||||||||||
Interest rate swap |
$ | 141 | $ | | $ | 141 | $ | | ||||||||
Liabilities: |
||||||||||||||||
Interest rate swaps |
$ | (7,329 | ) | $ | | $ | (7,329 | ) | $ | | ||||||
NOTE 4 REAL ESTATE ACQUISITIONS
2011 Property Acquisitions
During the nine months ended September 30, 2011, the Company acquired a 100% interest in 184
commercial properties for an aggregate purchase price of $1.8 billion (the 2011 Acquisitions).
The Company purchased the 2011 Acquisitions with net proceeds from the Offerings and through the
issuance of mortgage notes. The Company allocated the purchase price of these properties to the
fair value of the assets acquired and liabilities assumed. The following table summarizes the
purchase price allocation (in thousands):
September 30, 2011 | ||||
Land |
$ | 366,134 | ||
Building and improvements |
1,219,257 | |||
Acquired in-place leases |
191,521 | |||
Acquired above-market leases |
49,776 | |||
Acquired below-market leases |
(28,421 | ) | ||
Fair value adjustment of assumed notes payable |
438 | |||
Total purchase price |
$ | 1,798,705 | ||
The Company recorded revenue for the three and nine months ended September 30, 2011 of $27.4
million and $41.5 million, respectively, and a net loss for the three and nine months ended
September 30, 2011 of $11.0 million and $24.7 million, respectively, related to the 2011
Acquisitions. The Company expensed $24.5 million and $47.2 million of acquisition costs for the
three and nine months ended September 30, 2011, respectively.
14
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
The following information summarizes selected financial information of the Company, as if all
of the 2011 Acquisitions were completed on January 1, 2010 for each period presented below. The
table below presents the Companys estimated revenue and net income, on a pro forma basis, for the
three and nine months ended September 30, 2011 and 2010 (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Pro forma basis: |
||||||||||||||||
Revenue |
$ | 164,605 | $ | 136,736 | $ | 323,911 | $ | 201,091 | ||||||||
Net income attributable to the Company |
$ | 79,045 | $ | 65,663 | $ | 108,848 | $ | 10,731 |
The unaudited pro forma information is presented for informational purposes only and may not
be indicative of what actual results of operations would have been had the transactions occurred at
the beginning of each year, nor does it purport to represent the results of future operations.
2011 Investments in Joint Ventures
The Company acquired a single tenant retail store for an aggregate purchase price of $5.9
million through the repayment of a construction loan facility (the Rice Lake JV Construction
Facility) and the purchase of the joint venture partners noncontrolling interest during the nine
months ended September 30, 2011. This purchase is included in the 2011 Acquisitions.
During
the nine months ended September 30, 2011, the Company also acquired a controlling
financial interest in one of the Consolidated Joint Ventures, which purchased a land parcel for
$1.0 million, upon which a single tenant commercial store will be developed (the Marana Joint
Venture). Upon completion of the building, the Company will be obligated to purchase the property
from the joint venture subject to certain criteria being met. The construction will be funded by a
construction loan facility of $5.2 million (the Marana JV Construction Facility). As of September
30, 2011, $149,000 had been drawn on the Marana JV Construction Facility.
In addition, during the nine months ended September 30, 2011, the Company acquired an interest
in a joint venture arrangement, which has $28.4 million of real estate assets and $20.4 million of
mortgage notes payable, which is secured by the real estate assets. This joint venture is included
in the Unconsolidated Joint Ventures as discussed in Note 2 to these condensed consolidated
unaudited financial statements.
2011 Earnout Agreement
During the three months ended September 30, 2011, the Company purchased a property subject to
an earnout provision obligating the Company to pay additional consideration to the seller
contingent on the future leasing and occupancy of vacant space at the properties. This earnout
payment is based on a predetermined formula and has a set time period regarding the obligation to
make the payment. If, at the end of the time period, certain space has not been leased and
occupied, the Company will have no further obligation. Assuming all the conditions are satisfied,
the Company estimates that it would be obligated to pay $5.5 million in accordance with the
purchase agreement. This estimate is included in the accompanying
September 30, 2011 condensed consolidated
balance sheet in accounts payable and accrued expenses.
15
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
2010 Property Acquisitions
During the nine months ended September 30, 2010, the Company acquired a 100% interest in 175
commercial properties, for an aggregate purchase price of $1.3 billion (the 2010 Acquisitions).
The Company purchased the 2010 Acquisitions with net proceeds of the Initial Offering and through
the issuance of mortgage notes. The Company allocated the purchase price of these properties to the
fair value of the assets acquired and liabilities assumed. The following table summarizes the
purchase price allocation (in thousands):
September 30, 2010 | ||||
Land |
$ | 298,466 | ||
Building and improvements |
907,066 | |||
Acquired in-place leases |
140,129 | |||
Acquired above-market leases |
27,007 | |||
Acquired below-market leases |
(40,837 | ) | ||
Fair value adjustment of assumed notes |
965 | |||
Total purchase price |
$ | 1,332,796 | ||
The Company recorded revenue for the three and nine months ended September 30, 2010 of $24.7
million and $35.1 million, respectively, and net loss for the three and nine months ended September
30, 2010 of $5.4 million and $17.4 million, respectively, related to the 2010 Acquisitions. In
addition, the Company expensed $16.2 million and $34.1 million of acquisition costs for the three
and nine months ended September 30, 2010, respectively.
2010 Investments in Joint Ventures
During the nine months ended September 30, 2010, the Company acquired a controlling financial
interest in a joint venture arrangement, which included an investment of $1.7 million in land and
related construction costs. As of September 30, 2010, $340,000 had been drawn on the Rice Lake JV
Construction Facility used to develop a single tenant retail store.
In addition, during the nine months ended September 30, 2010, the Company acquired an interest
in a joint venture arrangement, which acquired six multi-tenant properties for $42.6 million. The
acquisitions were financed with a mortgage note payable of $26.0 million, which is secured by the
properties on which the debt was placed. This joint venture is included in the Unconsolidated Joint
Ventures as discussed in Note 2 to these condensed consolidated unaudited financial statements.
NOTE 5 INVESTMENT IN MORTGAGE NOTES RECEIVABLE
As of September 30, 2011, the Company owned two mortgage notes receivable, each of which is
secured by an office building. As of September 30, 2011, the mortgage notes balance of $64.6
million consisted of the outstanding face amount of the mortgage notes of $73.9 million, a $12.0 million
discount, $1.3 million of acquisition costs and net accumulated accretion of discounts and
amortization of acquisition costs of $1.4 million. As of December 31, 2010, the mortgage notes
balance of $63.9 million consisted of the face amount of the mortgage notes of $74.0 million, a
$12.0 million discount, $1.3 million of acquisition costs and net accumulated accretion of
discounts and amortization of acquisition costs of $642,000. The discount is accreted and
acquisition costs are amortized over the terms of each respective mortgage note using the effective
interest rate method. The mortgage notes have a fixed interest rate of 5.93% per annum and mature
on October 1, 2018. Interest only payments are due each month until September 1, 2011, and
interest and principal payments are due each month from October 1, 2011 until October 1, 2018.
There were no amounts past due as of September 30, 2011.
The Company evaluates the collectability of both interest and principal on each mortgage note
receivable to determine whether it is collectible, primarily through the evaluation of credit
quality indicators, such as underlying collateral and payment history. No impairment losses or
allowances were recorded related to mortgage notes receivable for the nine months ended September
30, 2011 and 2010.
16
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTE 6 INVESTMENT IN MARKETABLE SECURITIES
As of September 30, 2011, the Company owned one CMBS bond, with an estimated aggregate fair
value of $24.5 million. The Company did not own any CMBS bonds as of December 31, 2010. The
following table provides the activity for the CMBS bond during the nine months ended September 30,
2011 (in thousands):
Amortized Cost | ||||||||||||
Basis | Unrealized Loss | Total | ||||||||||
Marketable securities as of December 31, 2010 |
$ | | $ | | $ | | ||||||
Face value of marketable securities |
32,822 | | 32,822 | |||||||||
Discounts on purchase of marketable securities, net
of acquisition costs |
(7,237 | ) | | (7,237 | ) | |||||||
Net accretion of discounts on marketable securities |
3 | | 3 | |||||||||
Decrease in fair value of marketable securities |
| (1,082 | ) | (1,082 | ) | |||||||
Marketable securities as of September 30, 2011 |
$ | 25,588 | $ | (1,082 | ) | $ | 24,506 | |||||
The following table shows the fair value and gross unrealized losses of the Companys CMBS
bond and its holding period as of September 30, 2011 (in thousands):
Holding Period of Gross Unrealized Losses of Marketable Securities | ||||||||||||||||||||||||
Less than 12 months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Description of Securities | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
CMBS |
$ | 24,506 | $ | (1,082 | ) | $ | | $ | | $ | 24,506 | $ | (1,082 | ) |
The cumulative unrealized loss as of September 30, 2011, was deemed to be a temporary
impairment based upon the following: (i) the Company having no intent to sell these securities, (ii) it is more
likely than not that the Company will not be required to sell the securities before recovery and
(iii) the Companys expectation to recover the entire amortized cost basis of these securities. The
Company determined that the cumulative unrealized loss resulted from volatility in interest rates
and credit spreads and other qualitative factors relating to macro-credit conditions in the
mortgage market. Additionally, as of September 30, 2011, the Company had determined that the
subordinate CMBS tranches below the Companys CMBS investment adequately protected the Companys
ability to recover its investment and that the Companys estimates of anticipated future cash flows
from the CMBS investment had not been adversely impacted by any deterioration in the
creditworthiness of the specific CMBS issuers.
The scheduled maturity of the Companys CMBS bond as of September 30, 2011 is as follows (in
thousands):
Available-for-sale | ||||||||
Amortized Cost | Estimated Fair Value | |||||||
Due within one year |
$ | | $ | | ||||
Due after one year through five years |
| | ||||||
Due after five years through ten years |
25,588 | 24,506 | ||||||
Due after ten years |
| | ||||||
$ | 25,588 | $ | 24,506 | |||||
Actual maturities of marketable securities can differ from contractual maturities because
borrowers may have the right to prepay obligations. In addition, factors such as prepayments and
interest rates may affect the yields on the marketable securities.
17
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTE 7 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Company uses certain types of derivative instruments for
the purpose of managing or hedging its interest rate risks. The following table summarizes the
notional amount and fair value of the Companys derivative instruments (in thousands):
Outstanding | Fair Value of (Liability) Asset | ||||||||||||||||||||||||||||
Balance Sheet | Notional | Interest | Effective | Maturity | September 30, | December 31, | |||||||||||||||||||||||
Location | Amount | Rate(1) | Date | Date | 2011 | 2010 | |||||||||||||||||||||||
Derivatives designated as hedging instruments | |||||||||||||||||||||||||||||
Interest Rate Swaps(2) | Derivative liabilities, deferred rent and other liabilities |
$ | 19,275 | 5.95 | % | 9/8/2009 | 8/29/2012 | $ | (308 | ) | $ | (505 | ) | ||||||||||||||||
Interest Rate Swap | Derivative liabilities, deferred rent and other liabilities |
17,500 | 5.75 | % | 12/18/2009 | 1/1/2017 | (1,691 | ) | (716 | ) | |||||||||||||||||||
Interest Rate Swap | Derivative liabilities, deferred rent and other liabilities |
156,000 | 3.99 | % | 7/30/2010 | 8/5/2015 | (9,884 | ) | (4,155 | ) | |||||||||||||||||||
Interest Rate Swap(3) | Derivative liabilities, deferred rent and other liabilities |
15,000 | 4.31 | % | 7/30/2010 | 7/15/2017 | (837 | ) | 141 | ||||||||||||||||||||
Interest Rate Swap | Derivative liabilities, deferred rent and other liabilities |
105,000 | 4.72 | % | 8/25/2010 | 9/5/2015 | (5,629 | ) | (1,440 | ) | |||||||||||||||||||
Interest Rate Swaps(4) | Derivative liabilities, deferred rent and other liabilities |
23,200 | 6.83 | % | 12/16/2010 | 7/6/2016 | (1,717 | ) | (513 | ) | |||||||||||||||||||
Interest Rate Swap | Derivative liabilities, deferred rent and other liabilities |
7,800 | 5.73 | % | 3/4/2011 | 4/1/2021 | (1,226 | ) | | ||||||||||||||||||||
Interest Rate Swaps(5) | Derivative liabilities, deferred rent and other liabilities |
30,000 | 6.06 | % | 3/30/2011 | 3/30/2016 | (2,029 | ) | | ||||||||||||||||||||
Interest Rate Swap | Derivative liabilities, deferred rent and other liabilities |
200,000 | 3.45 | % | 6/30/2011 | 6/27/2014 | (2,940 | ) | | ||||||||||||||||||||
Interest Rate Swap | Derivative liabilities, deferred rent and other liabilities |
79,000 | 4.29 | % | 6/29/2012 | (6) | 4/30/2016 | (312 | ) | | |||||||||||||||||||
$ | 652,775 | $ | (26,573 | ) | $ | (7,188 | ) | ||||||||||||||||||||||
(1) | The interest rate consists of the underlying index swapped to a fixed rate and the applicable interest rate spread. | |
(2) | On September 8, 2009, the Company executed 15 swap agreements with identical terms and with an original aggregate notional amount of $20.0 million. | |
(3) | As of December 31, 2010, the fair value of the interest rate swap agreement was in a financial asset position and was included in the accompanying December 31, 2010 condensed consolidated balance sheet in prepaid expenses, mortgage loan deposits and other assets. | |
(4) | On December 16, 2010, the Company executed 17 swap agreements with identical terms and with an aggregate notional amount of $23.2 million. | |
(5) | On March 30, 2011, the Company executed 23 swap agreements with identical terms and with an aggregate notional amount of $30.0 million. | |
(6) | On September 2, 2011, the Company executed a swap agreement with an effective date of June 29, 2012. |
18
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
Additional disclosures related to the fair value of the Companys derivative instruments are
included in Note 3 to these condensed consolidated unaudited financial statements. The notional
amount under the agreements is an indication of the extent of the Companys involvement in each
instrument at the time, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended
use and designation of the derivative instrument. The Company designated the interest rate swaps
as cash flow hedges, to hedge the variability of the anticipated cash flows on its variable rate
notes payable. The change in fair value of the effective portion of the derivative instrument that
is designated as a hedge is recorded as other comprehensive income or loss.
The following table summarizes the unrealized losses and gains on the Companys derivative
instruments and hedging activities (in thousands):
Amount of (Loss) Gain Recognized in | ||||||||||||||||
Other Comprehensive (Loss) Income on Derivatives | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Derivatives in Cash Flow Hedging Relationships | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Interest Rate Swaps (1) |
$ | (13,477 | ) | $ | 11,574 | $ | (19,385 | ) | $ | 10,336 |
(1) | There were no portions of the change in the fair value of the interest rate swap agreements that were considered ineffective during the nine months ended September 30, 2011 and 2010. No previously effective portion of gains or losses that were recorded in accumulated other comprehensive loss during the term of the hedging relationship was reclassified into earnings during the nine months ended September 30, 2011 and 2010. |
The Company has agreements with each of its derivative counterparties that contain a provision
whereby if the Company defaults on certain of its unsecured indebtedness, then the Company could
also be declared in default on its derivative obligations resulting in an acceleration of payment.
In addition, the Company is exposed to credit risk in the event of non-performance by its
derivative counterparties. The Company believes it mitigates its credit risk by entering into
agreements with credit-worthy counterparties. The Company records credit risk valuation adjustments
on its interest rate swaps based on the respective credit quality of the Company and the
counterparty. As of September 30, 2011 and December 31, 2010, respectively, there were no
termination events or events of default related to the interest rate swaps.
NOTE 8 NOTES PAYABLE AND CREDIT FACILITY
As
of September 30, 2011, the Company and its Consolidated Joint Ventures had $2.1 billion of debt
outstanding, with a weighted average years to maturity of 5.4 years and weighted average interest
rate of 4.69%. The aggregate balance of gross real estate assets, net of gross intangible lease
liabilities, securing the total debt outstanding was $4.0 billion as of September 30, 2011.
Each of the mortgage notes payable is secured by the respective properties on which the debt
was placed. The following table summarizes the debt activity during the nine months ended and as of
September 30, 2011 (in thousands).
During the Nine Months Ended September 30, 2011 | ||||||||||||||||||||
Balance as of | Debt Issuance | Balance as of | ||||||||||||||||||
December 31, 2010 | and Assumptions | Repayments | Other (1) | September 30, 2011 | ||||||||||||||||
Fixed rate debt (2) |
$ | 987,825 | $ | 388,794 | $ | (1,376 | ) | $ | (374 | ) | $ | 1,374,869 | ||||||||
Variable rate debt |
3,382 | 92,695 | (4,428 | ) | | 91,649 | ||||||||||||||
Credit facilities (3) |
70,000 | 682,000 | (70,000 | ) | | 682,000 | ||||||||||||||
Total(4) |
$ | 1,061,207 | $ | 1,163,489 | $ | (75,804 | ) | $ | (374 | ) | $ | 2,148,518 | ||||||||
(1) | Represents fair value adjustment of assumed mortgage notes payable, net of amortization. | |
(2) | As of September 30, 2011, the fixed rate debt includes $373.8 million of variable rate debt fixed through the use of interest rate swaps. In addition, the fixed rate debt includes a mortgage note assumed with a face amount of $5.3 million and a fair value of $4.9 million. |
19
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
(3) | During the nine months ended September 30, 2011, CCPT III OP entered into a credit facility providing borrowings up to $700.0 million (the Credit Facility), which includes a $200.0 million term loan (the Term Loan) and up to $500.0 million in revolving loans (the Revolving Loans). As of September 30, 2011, the Company had $18.0 million available under the Credit Facility based on the underlying borrowing base of $1.2 billion. The Credit Facility may be increased to a maximum of $950.0 million. In addition, the Company repaid all amounts outstanding and terminated its obligations under two credit facilities during the nine months ended September 30, 2011. | |
(4) | The table above does not include loan amounts associated with the Unconsolidated Joint Ventures of $45.9 million, which mature on various dates ranging from July 2020 to July 2021, as the loans are non-recourse to the Company. | |
The
fixed rate debt has interest rates ranging
from 3.99% to 6.83% per annum. The variable rate debt has variable interest rates ranging from
LIBOR plus 275 basis points to 300 basis points per annum, with certain debt containing LIBOR
floors. As of September 30, 2011, the fixed rate debt and
variable rate debt had a combined weighted average interest rate of
5.17%. The debt outstanding matures on various dates from August 2012 through October 2021.
Depending
upon the type of loan specified and overall leverage ratio, the
Revolving Loans bear interest at either LIBOR plus an interest rate
spread ranging from 2.25% to 3.00% or a base rate plus an interest
rate spread ranging from 1.25% to 2.00%. The base rate is the greater
of (i) LIBOR plus 1.00%, (ii) Bank of America N.A.s Prime Rate
or (iii) the Federal Funds Rate plus 0.50%. During the nine months
ended September 30, 2011, the Company executed a swap
agreement associated with the Term Loan, which had the effect of fixing the variable interest rate
per annum through the maturity date of the respective loan at 3.45%.
The Revolving Loans and Term Loan had a combined weighted average
interest rate of 3.51% during the nine months ended
September 30, 2011.
The Credit Facility and certain notes payable contain customary affirmative, negative and
financial covenants, representations, warranties and borrowing conditions. These agreements also
include usual and customary events of default and remedies for facilities of this nature. Based on
the Companys analysis and review of its results of operations and financial condition, the Company
believes it was in compliance with the covenants of the Credit Facility and such notes payable as
of September 30, 2011.
NOTE 9 SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the nine months ended September 30, 2011 and 2010 are
as follows (in thousands):
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Supplemental Disclosures of Non-Cash Investing and Financing
Activities: |
||||||||
Distributions declared and unpaid |
$ | 17,752 | $ | 12,020 | ||||
Fair value of mortgage notes assumed in real estate acquisitions
at date of assumption |
$ | 4,863 | $ | 4,875 | ||||
Common stock issued through distribution reinvestment plan |
$ | 78,338 | $ | 43,061 | ||||
Net unrealized (loss) gain on interest rate swaps |
$ | (19,385 | ) | $ | 10,336 | |||
Unrealized loss on marketable securities |
$ | (1,082 | ) | $ | | |||
Earnout liability |
$ | 5,519 | $ | | ||||
Accrued other offering costs |
$ | 827 | $ | 453 | ||||
Accrued capital expenditures |
$ | 34 | $ | 490 | ||||
Supplemental Cash Flow Disclosures: |
||||||||
Interest
paid, net of capitalized interest of $42,000 and $26,000, respectively |
$ | 51,274 | $ | 11,240 |
NOTE 10 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, financial condition or liquidity.
Purchase Commitments
As of September 30, 2011, the Company had entered into agreements of purchase and sale, with
unaffiliated third-party sellers, to purchase a 100% interest in five retail properties, subject to
meeting certain criteria, for an aggregate purchase price of $30.0 million, exclusive of closing
costs. As of September 30, 2011, the Company had $731,000 of property escrow deposits held by
escrow agents in connection with these future property acquisitions, of which $325,000 will be
forfeited if the transactions are not completed. These deposits are
included in the accompanying September 30, 2011 condensed
consolidated balance sheet in prepaid expenses, mortgage loan
deposits and other assets. As of November 10, 2011, the Company had purchased
all of these properties for $30.0 million, exclusive of closing costs, and no escrow deposits were
forfeited.
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
In addition, the Company will be obligated to purchase a property from the Marana Joint
Venture for an expected purchase price of $7.7 million, subject to certain criteria being met,
including the completion of the building.
Environmental Matters
In connection with the ownership and operation of real estate, the Company potentially may be
liable for costs and damages related to environmental matters. The Company owns certain properties
that are subject to environmental remediation. In each case, the seller of the property, the tenant
of the property and/or another third party has been identified as the responsible party for
environmental remediation costs related to the property. Additionally, in connection with the
purchase of certain of the properties, the respective sellers and/or tenants have indemnified the
Company against future remediation costs. The Company also 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 does not believe
that the environmental matters identified at such properties will have a material effect on its
results of operations, financial condition or liquidity, nor is it aware of any environmental
matters at other properties which it believes will have a material effect on its results of
operations, financial condition or liquidity.
NOTE 11 RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
The Company has incurred, and will continue to incur, commissions, fees and expenses payable
to its advisor and certain affiliates in connection with the Offerings and the acquisition,
management and sale of the assets of the Company.
Offerings
In connection with the Offerings, Cole Capital Corporation (Cole Capital), the Companys
affiliated dealer manager, received and expects to continue to receive, a selling commission of up
to 7.0% of gross offering proceeds, before reallowance of commissions earned by participating
broker-dealers. Cole Capital has and intends to continue to reallow 100% of selling commissions
earned to participating broker-dealers. In addition, Cole Capital received, and will continue to
receive, 2.0% of gross offering proceeds, before reallowance to participating broker-dealers, as a
dealer manager fee in connection with the Offerings. Cole Capital, in its sole discretion, may
reallow all or a portion of its dealer manager fee to such participating broker-dealers as a
marketing and due diligence expense reimbursement, based on factors such as the volume of shares
sold by such participating broker-dealers and the amount of marketing support provided by such
participating broker-dealers. No selling commissions or dealer manager fees are paid to Cole
Capital or other broker-dealers with respect to shares sold under the Companys DRIP.
All other organization and offering expenses associated with the sale of the Companys common
stock (excluding selling commissions and the dealer manager fee) are paid by CR III Advisors or its
affiliates and are reimbursed by the Company up to 1.5% of aggregate gross offering proceeds. A
portion of the other organization and offering expenses may be underwriting compensation. As of
September 30, 2011, CR III Advisors had paid organization and offering costs of $3.4 million in
connection with the Follow-on Offering. These costs were not included in the financial statements
of the Company because such costs were not a liability of the Company as they exceeded 1.5% of
gross proceeds from the Follow-on Offering. As the Company raises additional proceeds from the
Follow-on Offering, these costs may become payable.
The Company recorded commissions, fees and expense reimbursements as shown in the table below
for services provided by CR III Advisors and its affiliates related to the services described above
during the periods indicated (in thousands).
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Offering: |
||||||||||||||||
Selling commissions |
$ | 21,292 | $ | 25,232 | $ | 58,999 | $ | 77,723 | ||||||||
Selling commissions reallowed by Cole Capital |
$ | 21,292 | $ | 25,232 | $ | 58,999 | $ | 77,723 | ||||||||
Dealer manager fee |
$ | 6,191 | $ | 7,313 | $ | 17,138 | $ | 22,590 | ||||||||
Dealer manager fee reallowed by Cole Capital |
$ | 3,227 | $ | 3,672 | $ | 8,822 | $ | 11,223 | ||||||||
Other organization and offering expenses |
$ | 4,651 | $ | 2,729 | $ | 12,879 | $ | 9,646 |
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
Acquisitions and Operations
CR III Advisors or its affiliates also receive acquisition and advisory fees of up to 2.0% of
the contract purchase price of each asset for the acquisition, development or construction of
properties and will be reimbursed for acquisition expenses incurred in the process of acquiring
properties, so long as the total acquisition fees and expenses relating to the transaction does not
exceed 6.0% of the contract purchase price.
The Company paid, and expects to continue to pay, CR III Advisors a monthly asset management
fee of 0.0417%, which is one-twelfth of 0.5%, of the Companys average invested assets for that
month (the Asset Management Fee). The Company will reimburse costs and expenses incurred by Cole
Realty Advisors in providing asset management services.
The Company paid, and expects to continue to pay, Cole Realty Advisors, Inc. (Cole Realty
Advisors), its affiliated property manager, fees for the management and leasing of the Companys
properties. Property management fees are up to 2.0% of gross revenue for single-tenant properties
and 4.0% of gross revenue for multi-tenant properties and leasing commissions will be at prevailing
market rates; provided however, that the aggregate of all property management and leasing fees paid
to affiliates plus all payments to third parties will not exceed the amount that other
nonaffiliated management and leasing companies generally charge for similar services in the same
geographic location. Cole Realty Advisors may subcontract its duties for a fee that may be less
than the fee provided for in the property management agreement. The Company reimburses Cole Realty
Advisors costs of managing and leasing the properties.
The Company reimburses CR III Advisors for all expenses it paid or incurred in connection with
the services provided to the Company, subject to the limitation that the Company will not reimburse
CR III Advisors for any amount by which its operating expenses (including the Asset Management Fee)
at the end of the four preceding fiscal quarters exceeds the greater of (i) 2% of average invested
assets, or (ii) 25% of net income other than any additions to reserves for depreciation, bad debts
or other similar non-cash reserves and excluding any gain from the sale of assets for that period,
unless the Companys independent directors find that a higher level of expense is justified for
that year based on unusual and non-recurring factors. The Company will not reimburse CR III
Advisors for personnel costs in connection with services for which CR III Advisors receives
acquisition fees and real estate commissions.
If CR III Advisors, or its affiliates, provides substantial services, as determined by the
independent directors, 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 CR III Advisors or its affiliates a financing coordination fee equal to 1% of the
amount available and/or outstanding under such financing; provided however, that CR III Advisors or
its affiliates 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 CR III Advisors or its affiliates received such a fee. Financing coordination
fees payable from loan proceeds from permanent financing will be paid to CR III Advisors or its
affiliates as the Company acquires and/or assumes such permanent financing. With respect to any
revolving line of credit, no financing coordination fees will be paid on loan proceeds from any
line of credit unless all net offering proceeds received as of the date proceeds from the line of
credit are drawn for the purpose of acquiring properties have been invested. In addition, with
respect to any revolving line of credit, CR III Advisors or its affiliates will receive financing
coordination fees only in connection with amounts being drawn for the first time and not upon any
re-drawing of amounts that had been repaid by the Company.
The Company recorded fees and expense reimbursements as shown in the table below for services
provided by CR III Advisors and its affiliates related to the services described above during the
periods indicated (in thousands).
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Acquisitions and Operations: |
||||||||||||||||
Acquisition fees and expenses |
$ | 19,617 | $ | 13,950 | $ | 37,764 | $ | 29,961 | ||||||||
Asset management fees and expenses |
$ | 5,379 | $ | 2,426 | $ | 13,936 | $ | 4,989 | ||||||||
Property management and leasing
fees and expenses |
$ | 2,419 | $ | 959 | $ | 6,493 | $ | 2,264 | ||||||||
Operating expenses |
$ | 553 | $ | 277 | $ | 1,663 | $ | 1,142 | ||||||||
Financing coordination fees |
$ | 5,115 | $ | 3,043 | $ | 11,472 | $ | 5,567 |
22
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
Liquidation/Listing
If CR III Advisors or its affiliates provides a substantial amount of services, as determined
by the Companys independent directors, in connection with the sale of one or more properties, the
Company will pay CR III Advisors or its affiliates up to one-half of the brokerage commission paid,
but in no event to exceed an amount equal to 3% of the sales price of each property sold. In no
event will the combined real estate commission paid to CR III Advisors, its affiliates and
unaffiliated third parties exceed 6% of the contract sales price. In addition, after investors have
received a return of their net capital contributions and an 8% cumulative, non-compounded annual
return, then CR III Advisors is entitled to receive 15% of the remaining net sale proceeds.
Upon listing of the Companys common stock on a national securities exchange, a fee equal to
15% 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 an 8% cumulative,
non-compounded annual return to investors will be paid to CR III Advisors (the Subordinated
Incentive Listing Fee).
Upon termination of the advisory agreement with CR III Advisors, other than termination by the
Company because of a material breach of the advisory agreement by CR III Advisors, a performance
fee of 15% of the amount, if any, by which the appraised asset value at the time of such
termination plus total distributions paid to stockholders through the termination date exceeds the
aggregate capital contribution contributed by investors less distributions from sale proceeds plus
payment to investors of an 8% annual, cumulative, non-compounded return on capital. No subordinated
performance fee will be paid to the extent that the Company has already paid or become obligated to
pay CR III Advisors a subordinated participation in net sale proceeds or the Subordinated Incentive
Listing Fee.
During the three and nine months ended September 30, 2011, and 2010, no commissions or fees
were incurred for services provided by CR III Advisors and its affiliates related to the services
described above.
Other
As of September 30, 2011 and December 31, 2010, $4.0 million and $804,000, respectively, had
been incurred primarily for other organization and offering, operating and acquisition expenses by
CR III Advisors and its affiliates, but had not yet been reimbursed by the Company and were
included in due to affiliates on the condensed consolidated balance sheets.
NOTE 12 ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged or will engage CR III 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 CR III 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 13 NEW ACCOUNTING PRONOUNCEMENTS
In December 2010, FASB issued 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 2010-20 was effective
for the Company beginning on January 1, 2011, and its provisions were applied to the pro forma
information presented in Note 4 to these condensed consolidated unaudited financial statements. 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 is 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.
23
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COLE CREDIT PROPERTY TRUST III, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)
September 30, 2011
In June 2011, FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income, (ASU 2011-05), which improves the comparability, consistency, and
transparency of financial reporting and increases the prominence of items reported in other
comprehensive income. ASU 2011-05 is effective for the Company on January 1, 2012. The adoption
of ASU 2011-05 is not expected to have a material impact on the
Companys consolidated financial statements.
NOTE 14 SUBSEQUENT EVENTS
Status of the Offerings
As
of November 10, 2011, the Company had received $1.5 billion in gross offering proceeds
through the issuance of approximately 147.1 million shares of its common stock in the Follow-on
Offering (including shares issued pursuant to the Companys DRIP). As of November 10, 2011,
approximately 115.7 million shares remained available for sale to the public in the Follow-on
Offering, exclusive of shares available under the Companys DRIP. Combined with the Initial
Offering, the Company had received a total of $3.6 billion in gross offering proceeds as of
November 10, 2011.
Subsequent
to September 30, 2011, the Company redeemed approximately 1.0 million shares for
$9.9 million.
Investment in Real Estate and Related Assets
Subsequent
to September 30, 2011, the Company acquired a 100% interest in 15 commercial real
estate properties for an aggregate purchase price of $119.8 million. The acquisitions were funded
with net proceeds of the Offerings. The Company has not completed its initial purchase price
allocations with respect to these properties and therefore cannot
provide similar disclosures to those included in Note 4 to these
condensed consolidated unaudited financial statements for these
properties. Acquisition related expenses totaling $3.1 million were expensed as incurred. In addition, the
Company purchased five CMBS bonds with a face amount of
$82.0 million at a discounted price of $51.9 million.
Notes Payable and Credit Facility
Subsequent
to September 30, 2011, the Company incurred $42.0 million
of variable rate debt, effectively fixed at an interest rate of 4.62% per
annum pursuant to a swap agreement. This variable rate debt matures
in December 2018. The loan is secured by one
commercial property with a purchase price of $76.4 million.
Subsequent to September 30, 2011, no amounts had been drawn or
repaid under the Credit Facility or the Marana JV Construction
Facility.
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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 and
the notes thereto, included in this Quarterly Report on Form 10-Q. The following discussion should
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 III, Inc. and unless 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 certain 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 comparable words, variations and similar
expressions 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. A full discussion of our risk factors may
be found under Item 1A Risk Factors in our Annual Report on Form 10-K as of and for the year
ended December 31, 2010.
Forward-looking statements that were true at the time made may ultimately prove to be
incorrect or false. Investors are cautioned not to place undue reliance on forward-looking
statements, which reflect our managements view only as of the date of this Quarterly Report on
Form 10-Q. 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, rent relief, inability to obtain
new tenants upon the expiration or termination of existing leases, and the potential need to fund
tenant improvements or other capital expenditures out of operating cash flows. The forward-looking
statements should be read in light of the risk factors identified in the Risk Factors section of
our Annual Report on Form 10-K for the year ended December 31, 2010.
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 January 22, 2008 to acquire and operate a diverse portfolio of core
commercial real estate investments primarily consisting of necessity retail properties located
throughout the United States, including U.S. protectorates. We commenced our principal operations
on January 6, 2009. Prior to such date, we were considered a development stage company. We
acquired our first real estate property on January 6, 2009. We commenced sales under our Follow-on
Offering after the termination of the Initial Offering on October 1, 2010. We have no paid
employees and are externally advised and managed by our advisor. We elected to be taxed, and
currently qualify, as a real estate investment trust for federal income tax purposes.
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Our operating results and cash flows are primarily influenced by rental income from our
commercial properties, interest expense on our property acquisition indebtedness and acquisition
and operating expenses. Rental and other property income accounted for 91% and 92% of total revenue
during the three months ended September 30, 2011 and 2010, respectively, and 92% of total revenue
during each of the nine months ended September 30, 2011 and 2010. As 99% of our rentable
square feet was under lease as of September 30, 2011, with an average remaining lease term of 14.3
years, we believe our exposure to changes in commercial rental rates on our portfolio is
substantially mitigated, except for 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 September 30, 2011, the debt leverage ratio
of our consolidated real estate assets, which is the ratio of debt to total gross real estate and
related assets net of gross intangible lease liabilities, was 44%. As we acquire additional
commercial real estate, we will be subject to changes in real estate prices and changes in interest
rates on any new indebtedness used to acquire the properties. We may manage our risk of changes in
real estate prices on future property acquisitions by entering into purchase agreements and loan
commitments simultaneously, or through loan assumption, so that our operating yield is determinable
at the time we enter into a purchase agreement, by contracting with developers for future delivery
of properties, or by entering into sale-leaseback transactions. We manage our interest rate risk by
monitoring the interest rate environment in connection with future property acquisitions or
upcoming debt maturities to determine the appropriate financing or refinancing terms, which may
include fixed rate loans, variable rate loans or interest rate hedges. If we are unable to acquire
suitable properties or obtain suitable financing for future acquisitions or refinancing, our
results of operations may be adversely affected.
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 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 continues to be significantly
less than previous levels. Although lending market conditions have
improved, certain factors continue
to negatively affect the lending environment, including the
sovereign credit issues of certain countries in the European Union. 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. Additionally, for properties for
which we are able to obtain financing, the interest rates and other terms on such loans may be
unacceptable. We have managed, and expect to continue to manage, the current mortgage lending
environment by considering alternative lending sources, including the securitization of debt,
utilizing fixed rate loans, borrowing on the Credit Facility, short-term variable rate loans,
assuming existing mortgage loans in connection with property acquisitions, or entering into
interest rate lock or swap agreements, or any combination of the foregoing. We have acquired, and
expect to continue to acquire, our properties for cash without financing. If we are unable to
obtain suitable financing for future acquisitions or we are unable to identify suitable properties
at appropriate prices in the current credit environment, we may have a larger amount of uninvested
cash, which may adversely affect our results of operations. We will continue to evaluate
alternatives in the current market, including purchasing or originating debt backed by real estate,
which could produce attractive yields in the current market environment.
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
observed an improvement in property values, occupancy and rental
rates; however, in many markets
property values, occupancy and rental rates continue to be below those previously experienced
before the economic downturn. As of September 30, 2011, 99% of our rentable square feet was under
lease. However, if the recent improvements in economic conditions do not continue, we may
experience significant vacancies or be required to reduce rental rates on occupied space. If we do
experience significant 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
Our results of operations are influenced by the timing of acquisitions and the operating
performance of our real estate investments. The following table shows the property statistics of
our real estate assets as of September 30, 2011 and 2010.
September 30, 2011(1) | September 30, 2010(1) | |||||||
Number of commercial properties |
632 | 308 | ||||||
Approximate rentable square feet (2) |
29.8 million | 12.4 million | ||||||
Percentage of rentable square feet leased |
99.2 | % | 99.7 | % |
(1) | Excludes properties owned through our Consolidated Joint Ventures and Unconsolidated Joint Ventures. | |
(2) | Including square feet of the buildings on land that is subject to ground leases. |
The following table summarizes our real estate investment activity during the nine months
ended September 30, 2011 and 2010:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Commercial properties acquired |
92 | 41 | 184 | 175 | ||||||||||||
Approximate purchase price of acquired
properties |
$ | 967.7 million | $ | 675.9 million | $ | 1.8 billion | $ | 1.3 billion | ||||||||
Approximate rentable square feet (1) |
6.3 million | 3.4 million | 12.2 million | 7.6 million |
(1) | Including square feet of the buildings on land that is subject to ground leases. |
As shown in the tables above, we owned 632 commercial properties as of September 30, 2011,
compared to 308 commercial properties as of September 30, 2010. Accordingly, our results of
operations for the three and nine months ended September 30, 2011, as compared to the three and
nine months ended September 30, 2010, reflect significant increases in most categories.
Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010
Revenue. Revenue increased $55.3 million, or 130%, to $97.7 million for the three months
ended September 30, 2011, compared to $42.4 million for the three months ended September 30, 2010.
Our revenue consisted primarily of rental and other property income from net leased commercial
properties, which accounted for 91% and 92% of total revenues during the three months ended
September 30, 2011 and 2010, respectively.
Rental and other property income increased $50.1 million, or 129%, to $89.0 million for the
three months ended September 30, 2011, compared to $38.9 million for the three months ended
September 30, 2010. The increase was primarily due to the acquisition of 324 rental
income-producing properties subsequent to September 30, 2010. We also pay certain operating
expenses subject to reimbursement by our tenants, which resulted in $7.3 million of tenant
reimbursement income during the three months ended September 30, 2011, compared to $2.2 million
during the three months ended September 30, 2010.
Interest income on mortgage notes receivable remained relatively constant at $1.4 million for
the three months ended September 30, 2011 and 2010, as we recorded interest income on two
amortizing mortgage notes receivable during each of the three months ended September 30, 2011 and
2010.
In addition, we recorded interest income on marketable securities of $13,000 for the three
months ended September 30, 2011. During the three months ended September 30, 2010, we did not own
any marketable securities.
General and Administrative Expenses. General and administrative expenses increased $1.6
million, or 102%, to $3.1 million for the three months ended September 30, 2011, compared to $1.5
million for the three months ended September 30, 2010. The increase was primarily due to increased
trustee fees and operating expense reimbursements as a result of acquiring 324 rental
income-producing properties subsequent to September 30, 2010 and an increase in the number of
stockholders of record. The primary general and administrative
expense items are trustee fees,
operating expenses reimbursable to our advisor, state franchise and
income taxes, accounting fees and unused credit facility fees.
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Property Operating Expenses. Property operating expenses increased $5.4 million, or 220%, to
$7.8 million for the three months ended September 30, 2011, compared to $2.4 million for the three
months ended September 30, 2010. The increase was primarily due to increased property taxes,
repairs and maintenance and insurance expenses relating to the acquisition of 324 rental
income-producing properties subsequent to September 30, 2010. The primary property operating
expense items are property taxes, repairs and maintenance and
property related insurance.
Property and Asset Management Expenses. Pursuant to the advisory agreement with our advisor,
we are required to pay to our advisor a monthly asset management fee equal to one-twelfth
of 0.50% of the average invested assets. Additionally, we may be required to reimburse
expenses incurred by our advisor in providing asset management services, subject to limitations as
set forth in the advisory agreement. Pursuant to the property management agreement with our
affiliated property manager, we are required to pay to our property manager a property management
fee in an amount up to 2% of gross revenues from each of our single tenant properties and up to 4%
of gross revenues from each of our multi-tenant properties. We may also be required to reimburse
our property manager expenses it incurred relating to managing or leasing the properties, subject
to limitations as set forth in the advisory agreement.
Property and asset management expenses increased $4.6 million, or 133%, to $8.1 million for
the three months ended September 30, 2011, compared to $3.5 million for the three months ended
September 30, 2010. Property management fees increased
$1.5 million, or 214%, to $2.2 million for
the three months ended September 30, 2011 from $715,000 for the three months ended September 30,
2010. The increase in property management fees was primarily due to an increase in rental and
other property income to $89.0 million for the three months ended September 30, 2011, from $38.9
million for the three months ended September 30, 2010, related to revenues from the 324 properties,
including 32 multi-tenant properties, acquired subsequent to September 30, 2010.
Asset
management fees increased $3.0 million, or 121%, to $5.4 million for the three months
ended September 30, 2011, from $2.4 million for the three months ended September 30, 2010. The
increase in asset management fees was primarily due to an increase in the average invested assets
to $4.4 billion for the three months ended September 30, 2011, from $1.8 billion for the three
months ended September 30, 2010.
In addition, during the three months ended September 30, 2011, we recorded $518,000 related to
reimbursement of expenses incurred by our advisor in performing property and asset management
services, compared to $385,000 for the three months ended September 30, 2010. The increase was
primarily due to expenses incurred by our advisor related to management of 324 rental
income-producing properties acquired subsequent to September 30, 2010.
Acquisition Related Expenses. Acquisition related expenses increased $8.3 million, or 51%, to
$24.5 million for the three months ended September 30, 2011, compared to $16.2 million for the
three months ended September 30, 2010. The increase is due to the recording of acquisition related
expenses incurred in connection with the purchase of 92 commercial properties, for an aggregate
purchase price of $967.7 million, during the three months ended September 30, 2011, compared to 41
commercial properties, for an aggregate purchase price of $675.9 million, during the three months
ended September 30, 2010. Pursuant to the advisory agreement with our advisor, we pay an
acquisition fee to our advisor of 2% of the contract purchase price of each property or asset
acquired. We also reimburse our advisor for acquisition expenses incurred in the process of
acquiring property or in the origination or acquisition of a loan other than for personnel costs
for which our advisor receives acquisition fees.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $17.3
million, or 149%, to $28.9 million for the three months ended September 30, 2011, compared to $11.6
million for the three months ended September 30, 2010. The increase was primarily due to an
increase in the average invested assets to $4.4 billion for the three months ended September 30,
2011, from $1.8 billion for the three months ended September 30, 2010.
Equity in Income of Unconsolidated Joint Ventures. Equity in income of unconsolidated joint
ventures increased $141,000, or 66%, to $354,000 for the three months ended September 30, 2011,
compared to $213,000 for the three months ended September 30,
2010, as we recorded our interests in the
Unconsolidated Joint Ventures during the three months ended September 30, 2011 compared to one
of the Unconsolidated Joint Ventures during the three months ended September 30, 2010.
Interest and Other Income. Interest and other income decreased $210,000, or 74%, to $74,000
for the three months ended September 30, 2011, compared to $284,000 for the three months ended
September 30, 2010. The decrease was primarily due to lower average uninvested cash of $217.0
million during the three months ended September 30, 2011, as compared to $402.0 million during the
three months ended September 30, 2010, as a result of acquiring 324 rental income-producing
properties subsequent to September 30, 2010.
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Interest Expense. Interest expense increased $16.7 million, or 217%, to $24.4 million for the
three months ended September 30, 2011, compared to $7.7 million during the three months ended
September 30, 2010. The increase was primarily due to an increase in the average aggregate amount
of notes payable outstanding to $1.9 billion during the three months ended September 30, 2011, from
$511.8 million for the three months ended September 30, 2010.
Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010
Revenue. Revenue increased $164.2 million, or 190%, to $250.8 million for the nine months
ended September 30, 2011, compared to $86.6 million for the nine months ended September 30, 2010.
Our revenue consisted primarily of rental and other property income from net leased commercial
properties, which accounted for 92% of total revenues during each of the nine months ended
September 30, 2011 and 2010.
Rental and other property income increased $149.9 million, or 188%, to $229.7 million for the
nine months ended September 30, 2011, compared to $79.8 million for the nine months ended September
30, 2010. The increase was primarily due to the acquisition of 324 rental income-producing
properties subsequent to September 30, 2010. We also pay certain operating expenses subject to
reimbursement by our tenants, which resulted in $17.0 million of tenant reimbursement income during
the nine months ended September 30, 2011, compared to $4.5 million during the nine months ended
September 30, 2010.
Interest income on mortgage notes receivable increased $1.8 million, or 81%, to $4.1 million
for the nine months ended September 30, 2011, compared to $2.3 million for the nine months ended
September 30, 2010 as we acquired the mortgage notes receivable on April 30, 2010.
In addition, we recorded interest income on marketable securities of $13,000 for the nine
months ended September 30, 2011. During the nine months ended September 30, 2010, we did not own
any marketable securities.
General and Administrative Expenses. General and administrative expenses increased $3.0
million, or 72%, to $7.2 million for the nine months ended September 30, 2011, compared to $4.2
million for the nine months ended September 30, 2010. The increase was primarily due to increased
trustee fees and operating expense reimbursements as a result of acquiring 324 rental
income-producing properties subsequent to September 30, 2010 and an increase in the number of
stockholders of record. The primary general and administrative
expense items are operating expense
reimbursements to our advisor, trustee fees, accounting fees, state franchise and income taxes and
unused credit facility fees.
Property Operating Expenses. Property operating expenses increased $13.5 million, or 273%, to
$18.5 million for the nine months ended September 30, 2011, compared to $5.0 million for the nine
months ended September 30, 2010. The increase was primarily due to increased property taxes,
repairs and maintenance and insurance expenses relating to the acquisition of 324 rental
income-producing properties subsequent to September 30, 2010. The primary property operating
expense items are property taxes, repairs and maintenance and
property related insurance.
Property and Asset Management Expenses. Pursuant to the advisory agreement with our advisor,
we are required to pay to our advisor a monthly asset management fee equal to one-twelfth
of 0.50% of the average invested assets. Additionally, we may be required to reimburse
expenses incurred by our advisor in providing asset management services, subject to limitations as
set forth in the advisory agreement. Pursuant to the property management agreement with our
affiliated property manager, we are required to pay to our property manager a property management
fee in an amount up to 2% of gross revenues from each of our single tenant properties and up to 4%
of gross revenues from each of our multi-tenant properties. We may also be required to reimburse
our property manager expenses it incurred relating to managing or leasing the properties, subject
to limitations as set forth in the advisory agreement.
Property and asset management expenses increased $13.7 million, or 185%, to $21.1 million for
the nine months ended September 30, 2011, compared to $7.4 million for the nine months ended
September 30, 2010. Property management fees increased
$4.1 million, or 256%, to $5.7 million for
the nine months ended September 30, 2011 from $1.6 million for the nine months ended September 30,
2010. The increase in property management fees was primarily due to an increase in rental and
other property income to $229.7 million for the nine months ended September 30, 2011, from $79.8
million for the nine months ended September 30, 2010, related to revenues from the 324 properties,
including 32 multi-tenant properties, acquired subsequent to September 30, 2010.
Asset management fees increased $9.1 million, or 194%, to $13.8 million for the nine months
ended September 30, 2011, from $4.7 million for the nine months ended September 30, 2010. The
increase in asset management fees was primarily due to an increase in the average invested assets
to $4.0 billion for the nine months ended September 30, 2011, from $1.4 billion for the nine months
ended September 30, 2010.
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In addition, during the nine months ended September 30, 2011, we recorded $1.6 million related
to reimbursement of expenses incurred by our advisor in performing property and asset management
services, compared to $1.1 million for the nine months ended September 30, 2010. The increase was
primarily due to expenses incurred by our advisor related to management of 324 rental
income-producing properties acquired subsequent to September 30, 2010.
Acquisition Related Expenses. Acquisition related expenses increased $13.1 million, or 38%,
to $47.2 million for the nine months ended September 30, 2011, compared to $34.1 million for the
nine months ended September 30, 2010. The increase is due to the recording of acquisition related
expenses incurred in connection with the purchase of 184 commercial properties, for an aggregate
purchase price of $1.8 billion, during the nine months ended
September 30, 2011, compared to 175
commercial properties, for an aggregate purchase price of $1.3 billion, during the nine months
ended September 30, 2010. Pursuant to the advisory agreement with our advisor, we pay an
acquisition fee to our advisor of 2% of the contract purchase price of each property or asset
acquired. We also reimburse our advisor for acquisition expenses incurred in the process of
acquiring property or in the origination or acquisition of a loan other than for personnel costs
for which our advisor receives acquisition fees.
Depreciation and Amortization Expenses. Depreciation and amortization expenses increased $49.4
million, or 210%, to $72.9 million for the nine months ended September 30, 2011, compared to $23.5
million for the nine months ended September 30, 2010. The increase was primarily due to an
increase in the average invested assets to $4.0 billion for the nine months ended September 30,
2011, from $1.4 billion for the nine months ended September 30, 2010.
Equity in Income (Loss) of Unconsolidated Joint Ventures. We recorded income of $1.1 million
for the nine months ended September 30, 2011, which represented our share of the Unconsolidated
Joint Ventures net income. During the nine months ended September 30, 2010, we recorded our share
of one of the Unconsolidated Joint Ventures net loss of $303,000. The net loss was primarily due
to acquisition related expenses.
Interest and Other Income. Interest and other income decreased $757,000, or 72%, to $296,000
for the nine months ended September 30, 2011, compared to $1.1 million for the nine months ended
September 30, 2010. The decrease was primarily due to lower average uninvested cash of $113.5
million during the nine months ended September 30, 2011, as compared to $326.3 million during the
nine months ended September 30, 2010, as a result of acquiring 324 rental income-producing
properties subsequent to September 30, 2010.
Interest Expense. Interest expense increased $44.1 million, or 294%, to $59.1 million for the
nine months ended September 30, 2011, compared to $15.0 million during the nine months ended
September 30, 2010. The increase was primarily due to an increase in the average aggregate amount
of notes payable outstanding to $1.6 billion during the nine months ended September 30, 2011, from
$396.6 million for the nine months ended September 30, 2010.
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. The FFO calculation
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 cost accounting method alone is insufficient. In
addition, FFO excludes gains and losses from the sale of real estate and real estate impairment
charges on depreciable real estate, which we believe provides management and investors with a
helpful additional measure of the 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. We compute FFO in accordance with NAREITs definition.
In addition to FFO, we use Modified Funds From Operations (MFFO) as a non-GAAP supplemental
financial performance measure to evaluate the operating performance of our real estate portfolio.
MFFO, as defined by our company, excludes from FFO acquisition related costs, 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. Management believes that excluding acquisition costs
from MFFO provides investors with supplemental performance information that is consistent with the
performance models and analysis used by management, and provides investors a view of the
performance of our portfolio over time, including after the Company ceases to acquire properties on
a frequent and regular basis. MFFO also allows for a comparison of the performance of our
portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison
of our performance with that of other non-traded REITs, as MFFO, or an equivalent
measure, is routinely reported by non-traded REITs, and we believe often used by analysts and
investors for comparison purposes.
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For all of these reasons, we believe FFO and MFFO, in addition to net income 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 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.
MFFO may provide investors with a useful indication of our future performance, particularly
after our acquisition stage, and of the sustainability of our current distribution policy.
However, because MFFO excludes acquisition expenses, which are an important component in an
analysis of the historical performance of a property, MFFO should not be construed as a historic
performance measure. 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 nine
months ended September 30, 2011 and 2010 (in thousands). FFO and MFFO are influenced by the timing
of acquisitions and the operating performance of our real estate investments.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY |
$ | 1,271 | $ | (8 | ) | $ | 26,011 | $ | (1,774 | ) | ||||||
Depreciation of real estate assets |
19,318 | 7,664 | 48,755 | 14,945 | ||||||||||||
Amortization of lease related costs |
9,631 | 3,923 | 24,096 | 8,514 | ||||||||||||
Depreciation and amortization of real estate assets in
unconsolidated joint ventures |
395 | 518 | 1,224 | 546 | ||||||||||||
Funds from operations (FFO) |
30,615 | 12,097 | 100,086 | 22,231 | ||||||||||||
Acquisition related expenses |
24,480 | 16,203 | 47,201 | 34,131 | ||||||||||||
Acquisition related expenses in unconsolidated joint ventures |
| 10 | | 747 | ||||||||||||
Modified funds from operations (MFFO) |
$ | 55,095 | $ | 28,310 | $ | 147,287 | $ | 57,109 | ||||||||
Set forth below is additional information 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 $6.8 million and $17.8 million during the three and nine months ended September 30, 2011, respectively, and $6.7 million and $9.5 million during the three and nine months ended September 30, 2010, respectively. In addition, related to the Unconsolidated Joint Ventures, straight-line revenue of $53,000 and $65,000 for the three and nine months ended September 30, 2011, respectively, and $35,000 and $36,000 for the three and nine months ended September 30, 2010, respectively, is included in equity in income (loss) of unconsolidated joint ventures on the consolidated statements of operations. | ||
| Amortization of deferred financing costs and amortization of fair value adjustments of mortgage notes assumed totaled $2.5 million and $5.6 million during the three and nine months ended September 30, 2011, respectively, and $853,000 and $1.8 million during the three and nine months ended September 30, 2010, respectively. In addition, related to the Unconsolidated Joint Ventures, amortization of deferred financing costs of $13,000 and $40,000 for the three and nine months ended September 30, 2011, respectively, and $14,000 and $16,000 for the three and nine months ended September 30, 2010, respectively, is included in equity in income (loss) of unconsolidated joint ventures on the consolidated statements of operations. |
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Distributions
In May 2011, the Companys board of directors authorized a daily distribution, based on 365
days in the calendar year, of $0.001781016 per share (which equates to 6.50% on an annualized basis
calculated at the current rate, assuming a $10.00 per share purchase price) for stockholders of
record as of the close of business on each day of the period, commencing on July 1, 2011 and ending
on September 30, 2011. In August 2011, the Companys board of directors authorized a daily
distribution, based on 365 days in the calendar year, of $0.001781016 per share (which equates to
6.50% on an annualized basis calculated at the current rate, assuming a $10.00 per share purchase
price) for stockholders of record as of the close of business on each day of the period, commencing
on October 1, 2011 and ending on December 31, 2011.
During the nine months ended September 30, 2011 and 2010, respectively, we paid distributions
of $138.7 million and $74.0 million, including $78.3 million and $43.1 million, respectively,
through the issuance of shares pursuant to our DRIP. The distributions paid during the nine months
ended September 30, 2011 were funded by net cash provided by
operating activities of $97.1
million, return of capital from the Unconsolidated Joint Ventures of $611,000 and proceeds from the
issuance of common stock of $41.0 million. The distributions paid during the nine months ended
September 30, 2010 were funded by net cash provided by operating activities of $22.0 million,
proceeds from the issuance of common stock of $34.1 million and borrowings of $17.9 million. Net
cash provided by operating activities for the nine months ended September 30, 2011 and 2010,
reflects a reduction for real estate acquisition related expenses incurred and expensed of $47.2
million and $34.1 million, respectively, in accordance with ASC 805, Business Combinations. As set
forth in the Estimated Use of Proceeds section of the prospectuses for the Offerings, we treat
our real estate acquisition expenses as funded by proceeds from the offering of our shares.
Therefore, for consistency, proceeds from the issuance of common stock for the nine months ended
September 30, 2011 and 2010, respectively, have been reported as a source of distributions to the
extent that acquisition expenses have reduced net cash flows from operating activities.
Share Redemptions
Our share redemption program provides that we will not redeem in excess of 5% of the weighted
average number of shares outstanding during the trailing twelve months prior to the redemption
date; provided, however, that while shares subject to a redemption requested upon the death of a
stockholder will be included in calculating the maximum number of shares that may be redeemed, such
shares will not be subject to the Trailing Twelve-month Cap. In addition, all redemptions,
including those upon death or qualifying disability, are limited to those that can be funded with
cumulative net proceeds from the sale of shares through our DRIP. During the nine months ended
September 30, 2011, we received valid redemption requests relating to approximately 3.3 million
shares, which we redeemed in full for $31.9 million (an average of $9.68 per share). A valid
redemption request is one that complies with the applicable requirements and guidelines of our
current share redemption program set forth in the prospectus relating to the Follow-on Offering.
We have funded and intend to continue funding share redemptions with proceeds of our DRIP.
Subsequent to September 30, 2011, we redeemed approximately
1.0 million shares for a total of $9.9 million, or an
average price per share of $9.71.
In addition to the caps discussed above, the redemptions are limited quarterly to 1.25% of the
weighted average number of shares outstanding during the trailing twelve-month period. In
addition, the funding for redemptions each quarter generally will be limited to the net proceeds we
receive from the sale of shares in the respective quarter under our DRIP. The amended share
redemption program further provides that while shares subject to redemption requested upon the
death of a stockholder will be included in calculating the maximum number of shares that may be
redeemed, such shares will not be subject to the quarterly caps. Our board of directors may waive
these quarterly caps in its sole discretion, subject to the Trailing Twelve-month Cap.
Liquidity and Capital Resources
As of September 30, 2011, we had cash and cash equivalents of $117.1 million and available
borrowings of 18.0 million under our Credit Facility. Additionally, as of September 30, 2011, we
had unencumbered properties with a gross book value of $1.9 billion, including $1.2 billion of
assets that are part of the Credit Facilitys unencumbered borrowing base (the Borrowing Base
Assets), which may be used as collateral to secure additional financing in future periods, subject
to certain covenants and leverage and borrowing base restrictions related to our Credit Facility;
however, the use of any Borrowing Base Assets as collateral would reduce the available borrowings
under our Credit Facility.
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Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for operating expenses,
distributions and redemptions to stockholders and interest and principal on current and any future
indebtedness. In addition, as of September 30, 2011, we had entered into agreements of purchase
and sale to acquire five retail properties for an aggregate purchase price of $30.0 million, as
discussed in Note 10 to our condensed consolidated unaudited financial statements included in this
Quarterly Report on Form 10-Q. We expect to meet our short-term liquidity requirements through cash
provided by property operations and proceeds from the Follow-on Offering. Operating cash flows are
expected to increase as additional properties are added to our portfolio. The offering and
organization costs associated with the Offerings are initially paid by our advisor, which will be
reimbursed for such costs up to 1.5% of the aggregate gross capital raised by us in the Offerings.
As of September 30, 2011, we recorded $40.3 million of such offering and organization costs.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the acquisition of real
estate and real estate-related investments and the payment of acquisition related expenses,
operating expenses, distributions and redemptions to stockholders and interest and principal on any
future indebtedness. Generally, we expect to meet cash needs for items other than acquisitions and
acquisition related expenses and debt maturities from our cash flow from operations, and we expect
to meet cash needs for acquisitions and debt maturities from the net proceeds from the Follow-on
Offering and from secured or unsecured borrowings on our current unencumbered properties and future
properties, refinancing of current debt and borrowings on our Credit Facility. We expect that
substantially all cash generated from operations will be used to pay distributions to our
stockholders after certain capital expenditures, including tenant improvements and leasing
commissions, are paid at the properties; however, we may use other sources to fund distributions as
necessary, including the proceeds of the Follow-on Offering, cash advanced to us by our advisor,
borrowing on the Credit Facility and/or future borrowings on our unencumbered assets. During the
nine months ended September 30, 2011, we funded distributions to our stockholders with cash flows
from operations, offering proceeds and distributions from joint ventures as
discussed above in the section captioned Distributions. The Credit Facility and certain notes
payable contain customary affirmative, negative and financial covenants, including requirements for
minimum net worth, debt service coverage ratios, and leverage ratios. These covenants may limit our
ability to incur additional debt and make borrowings on the Credit Facility.
As of September 30, 2011, we had received and accepted subscriptions for approximately 343.4
million shares of common stock in the Offerings for gross proceeds of $3.4 billion. As of
September 30, 2011, we had redeemed a total of approximately 4.5 million shares of common stock for
a cost of $43.8 million, at an average price per share of $9.68.
As of September 30, 2011, we and the Consolidated Joint Ventures had $2.1 billion of debt
outstanding. See Note 8 to our condensed consolidated unaudited financial statements in this
Quarterly Report on Form 10-Q for certain terms of the debt outstanding. Additionally, the ratio of
debt to total gross real estate assets net of gross intangible lease liabilities, as of September
30, 2011, was 44% and the weighted average years to maturity was 5.4 years.
Our contractual obligations as of September 30, 2011, were as follows (in thousands):
Payments due by period (1) (2) (3) | ||||||||||||||||||||
Less Than 1 | More Than 5 | |||||||||||||||||||
Total | Year | 1-3 Years | 4-5 Years | Years (7) | ||||||||||||||||
Principal payments fixed rate debt(4) |
$ | 1,375,963 | $ | 23,225 | $ | 394,930 | $ | 112,908 | $ | 844,900 | ||||||||||
Interest payments fixed rate debt |
509,385 | 73,763 | 208,266 | 100,135 | 127,221 | |||||||||||||||
Principal payments variable rate debt |
91,649 | | 899 | 90,750 | | |||||||||||||||
Interest payments variable rate debt(5) |
10,888 | 2,950 | 7,761 | 177 | | |||||||||||||||
Principal payments credit facility |
682,000 | | 682,000 | | | |||||||||||||||
Interest payments credit facility(6) |
51,868 | 18,913 | 32,955 | | | |||||||||||||||
Total |
$ | 2,721,753 | $ | 118,851 | $ | 1,326,811 | $ | 303,970 | $ | 972,121 | ||||||||||
(1) | The table above does not include amounts due to our advisor or its affiliates pursuant to our advisory agreement because such amounts are not fixed and determinable. | |
(2) | As of September 30, 2011, we had $573.8 million of variable rate debt fixed through the use of interest rate swaps. We used the fixed rates under the swap agreement to calculate the debt payment obligations in future periods. |
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(3) | The table above does not include loan amounts associated with the Unconsolidated Joint Ventures of $45.9 million, which mature on various dates ranging from July 2020 to July 2021, as the loans are non-recourse to us. | |
(4) | Principal payment amounts reflect actual payments based on the face amount of notes payable secured by our wholly-owned properties and our Consolidated Joint Ventures. As of September 30, 2011, the fair value adjustment, net of amortization, of mortgage notes assumed was $1.1 million. | |
(5) | Rates ranging from 3.00% to 4.50% were used to calculate the variable debt payment obligations in future periods. These were the rates effective as of September 30, 2011. | |
(6) | Payment obligations for the Term Loan outstanding under the Credit Facility are based on an interest rate of 3.45%, which is the fixed rate under the executed swap agreement that had the effect of fixing the variable interest rate per annum through the maturity date of June 2014. Payment obligations for the Revolving Loans outstanding under the Credit Facility are based on an interest rate in effect subsequent to September 30, 2011 of 2.49%. | |
(7) | Assumes the Company accepts the interest rates that one lender may reset on September 1, 2013 and February 1, 2015, respectively, related to mortgage notes payable of $30.0 million and $32.0 million, respectively. |
Our charter prohibits us from incurring debt that would cause our borrowings to exceed the
greater of 75% of our gross assets, valued at the greater of the aggregate cost (before
depreciation and other non-cash reserves) or fair value of all assets owned by us, unless approved
by a majority of our independent directors and disclosed to our stockholders in our next quarterly
report.
As of September 30, 2011, we had entered into agreements of purchase and sale, with
unaffiliated third-party sellers, to purchase a 100% interest in five retail properties, subject to
meeting certain criteria, for an aggregate purchase price of $30.0 million, exclusive of closing
costs. As of September 30, 2011, we had $731,000 of property escrow deposits held by escrow agents
in connection with these future property acquisitions, of which $325,000 will be forfeited if the
transactions are not completed. As of November 10, 2011, we had
purchased all of these properties
for $30.0 million, exclusive of closing costs, and no escrow deposits were forfeited.
In addition, we will be obligated to purchase a property from the Marana Joint Venture for an
expected purchase price of $7.7 million, subject to certain criteria being met, including the
completion of the building. We also purchased a property subject to an earnout provision obligating
us to pay additional consideration to the seller contingent on the future leasing and occupancy of
vacant space at the properties. Assuming all the conditions are satisfied, we estimate that we
would be obligated to pay $5.5 million in accordance with the purchase agreement.
Cash Flow Analysis
Operating Activities. During the nine months ended September 30, 2011, net cash provided by
operating activities increased $75.1 million to $97.1 million, compared to $22.0 for the nine
months ended September 30, 2010. The change was primarily due to increases in net income of $28.1
million, depreciation and amortization expenses, including amortization of deferred financing
costs, totaling $54.5 million and the change in accounts payable
and accrued expenses of $4.8 million, partially offset by an increase in the change in rents and tenant receivables of $12.0
million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. See Results of Operations for a more
complete discussion of the factors impacting our operating performance.
Investing
Activities. Net cash used in investing activities increased $400.0 million to $1.8
billion for the nine months ended September 30, 2011 compared to $1.4 billion for the nine months
ended September 30, 2010. The increase was primarily due to the acquisition of 184 properties for
an aggregate purchase price of $1.8 billion during the nine months ended September 30, 2011,
compared to the acquisition of 175 properties and mortgage assets for an aggregate purchase price
of $1.4 billion during the nine months ended September 30, 2010.
Financing Activities. Net cash provided by financing activities increased $236.8 million to
$1.7 billion for the nine months ended September 30, 2011, compared to $1.5 billion for the nine
months ended September 30, 2010. The change was primarily due to an increase in proceeds from
mortgage notes payable of $627.8 million, partially offset by a decrease in the issuance of common
stock of $275.2 million and increases in repayment of notes payable of $75.1 million, redemptions
of common stock of $24.0 million and distributions to investors of $29.4 million during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.
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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.
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; | ||
| Investment in Unconsolidated Joint Ventures; | ||
| Investment in Mortgage Notes Receivable; | ||
| Investment in Marketable Securities; | ||
| Income Taxes; and | ||
| Derivative Instruments and Hedging Activities. |
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. Investment in Marketable Securities was
not considered a critical accounting policy at year ended December 31, 2010 because such
transactions had not occurred at that time. 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.
Investment in Marketable Securities
Investments in marketable securities consist of investments in CMBS. ASC 320 requires us to
classify our investments in real estate securities as trading, available-for-sale or
held-to-maturity. We classify our investments as available-for-sale as we intend to hold our
investments until maturity, however we may sell them prior to their maturity. These investments are
carried at estimated fair value, with unrealized gains and losses reported in accumulated other
comprehensive income (loss). Estimated fair values are based on estimated quoted market prices from
third party trading desks, where available. Upon the sale of a security, the realized net gain or
loss is computed on a specific identification basis.
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We monitor our available-for-sale securities for impairments. A loss is recognized when we
determine that a decline in the estimated fair value of a security below its amortized cost is
other-than-temporary. We consider many factors in determining whether the impairment of a security
is deemed to be other-than-temporary, including, but not limited to, the length of time the
security has had a decline in estimated fair value below its amortized cost, the amount of the
unrealized loss, the intent and ability of us to hold the security for a period of time sufficient
for a recovery in value, recent events specific to the issuer or industry, external credit ratings
and recent changes in such ratings. The analysis of determining whether the impairment of a
security is deemed to be other-than-temporary requires significant judgments and assumptions. The
use of alternative judgments and assumptions could result in a different conclusion.
Amortization and accretion of premiums and discounts on securities available-for-sale are
recognized in interest income on marketable securities over the contractual life, adjusted for
actual prepayments, of the securities using the effective interest method.
Commitments and Contingencies
We may be subject to certain contingencies and commitments with regard to certain
transactions. Refer to Note 10 to our condensed consolidated unaudited financial statements in
this Quarterly Report on Form 10-Q for further explanations.
Related-Party Transactions and Agreements
We have entered into agreements with CR III Advisors and its affiliates, whereby we have paid
and may continue to pay certain fees to, or reimburse certain expenses of, CR III Advisors or its
affiliates such as acquisition and advisory fees and expenses, financing coordination fees,
organization and offering costs, sales commissions, dealer manager fees, asset and property
management fees and expenses, leasing fees and reimbursement of certain operating costs. See Note
11 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form
10-Q for a discussion of the various related-party transactions, agreements and fees.
Subsequent Events
Certain events occurred subsequent to September 30, 2011 through the filing date of this
Quarterly Report on Form 10-Q. Refer to Note 14 to our condensed consolidated unaudited financial
statements in this Quarterly Report on Form 10-Q for further explanation. Such events are:
| Status of the Offerings; | ||
| Investment in real estate and related assets; and | ||
| Notes payable and credit facility |
New Accounting Pronouncements
There are no accounting pronouncements that have been issued but not yet adopted by us that
will have a material impact on our consolidated financial statements.
Off Balance Sheet Arrangements
As of September 30, 2011 and December 31, 2010, we had no material 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 |
As of September 30, 2011, we and a consolidated joint venture had $573.6 million of variable
rate debt and therefore we are exposed to interest rate changes in LIBOR. As of September 30,
2011, a change of 50 basis points in interest rates would result in a change in interest expense of
$2.9 million per annum, assuming all of our derivatives remain effective hedges. In the future we
may obtain additional variable rate debt financing to fund certain property acquisitions, and may
be further exposed to interest rate changes. Our objectives in managing interest rate risks will
be to limit the impact of interest rate changes on operations and cash flows, and to lower overall
borrowing costs. To achieve these objectives, we will borrow primarily at interest rates with the
lowest margins available and, in some cases, with the ability to convert variable interest rates to
fixed rates. We have entered, and expect to continue to enter, into derivative financial
instruments, such as interest rate swaps, in order to mitigate our interest rate risk on a given
variable rate financial instrument. We will not enter into derivative or interest rate
transactions for speculative purposes. We may also enter into rate lock arrangements to lock
interest rates on future borrowings.
As of September 30, 2011, we had 62 interest rate swap agreements outstanding, which mature on
various dates from August 2012 through April 2021, with an aggregate notional amount under the swap
agreements of $652.8 million and an aggregate net fair value of $(26.6) million. The fair value of
these interest rate swap agreements is dependent upon existing market interest rates and swap
spreads. As of September 30, 2011, an increase of 50 basis points in interest rates would result
in an increase to the fair value of these interest rate swaps of $12.5 million.
We do not have any foreign operations and thus we are not exposed to foreign currency
fluctuations.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) of 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 September 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 September 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 |
There have been no material changes from the risk factors set forth in our Annual Report on
Form 10-K for the year ended December 31, 2010.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
As of September 30, 2011, we had issued approximately 343.4 million shares in the Offerings
for gross proceeds of $3.4 billion, out of which we paid $289.7 million in selling commissions and
dealer manager fees and $40.3 million in organization and offering costs to our advisor or its
affiliates. With the net offering proceeds, we and the Consolidated Joint Ventures acquired $4.8
billion in real estate and related assets and an interest in the Unconsolidated Joint Venture of
$23.8 million and paid costs of $124.2 million in acquisition related expenses. As of November 10,
2011, we have sold approximately 364.6 million shares in the Offerings for gross offering proceeds
of $3.6 billion.
Our board of directors has adopted a share redemption program that enables our stockholders
who hold their shares for more than one year to sell their shares to us in limited circumstances.
The purchase price we will pay for redeemed shares is set forth in the prospectuses for our
Offerings of common stock, as supplemented from time to time. Our board of directors reserves the
right in its sole discretion at any time, and from time to time, to waive the one-year holding
period in the event of death, bankruptcy or other exigent circumstances or terminate, suspend or
amend the share redemption program. Under the terms of the share redemption program, share
redemptions are subject to the Trailing Twelve-month Cap; provided, however shares subject to
redemption requests upon death of a stockholder will not be subject to the Trailing Twelve-month
Cap. In addition, all redemptions, including those upon death or qualifying disability, are
limited to those that can be funded with the cumulative net proceeds from our DRIP. In addition to
these caps, the redemptions are limited quarterly to 1.25% of the weighted average number of shares
outstanding during the trailing twelve-month period. In addition, the funding for redemptions each
quarter generally will be limited to the net proceeds we receive from the sale of shares in the
respective quarter under the DRIP. The amended share redemption program further provides that
while shares subject to a redemption requested upon the death of a stockholder will be included in
calculating the maximum number of shares that may be redeemed, such shares will not be subject to
the quarterly caps. Our board of directors may waive these quarterly caps in its sole discretion,
subject to the Trailing Twelve-month Cap.
The provisions of the share redemption program in no way limit our ability to repurchase
shares from stockholders by any other legally available means for any reason that our board of
directors, in its discretion, deems to be in our best interest. During the three months ended
September 30, 2011, we redeemed shares as follows:
Total Number of Shares | Maximum Number of | |||||||||||||||
Total Number | Purchased as Part | Shares that May Yet Be | ||||||||||||||
of Shares | Average Price | of Publicly Announced | Purchased Under the | |||||||||||||
Redeemed | Paid per Share | Plans or Programs | Plans or Programs | |||||||||||||
July 2011 |
| $ | | | (1 | ) | ||||||||||
August 2011 |
1,264,698 | $ | 9.69 | 1,264,698 | (1 | ) | ||||||||||
September 2011 |
103 | $ | 9.75 | 103 | (1 | ) | ||||||||||
Total |
1,264,801 | 1,264,801 | (1 | ) | ||||||||||||
(1) | A description of the maximum number of shares that may be purchased under our redemption program is included in the narrative preceding this table. |
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Item 3. | Defaults Upon Senior Securities |
No events occurred during the three months ended September 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 September 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 herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cole Credit Property Trust III, Inc. | ||||||||
(Registrant) | ||||||||
By: | /s/ Simon J. Misselbrook | |||||||
Name: | Simon J. Misselbrook | |||||||
Title: | Vice President of Accounting | |||||||
(Principal Accounting Officer) |
Date: November 14, 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 September 30, 2011 (and are numbered in accordance with
Item 601 of Regulation S-K).
Exhibit No. | Description | |||
3.1 | Third Articles of Amendment and Restatement of Cole Credit Property Trust III, Inc. (Incorporated by
reference to Exhibit 3.1 to the Companys pre-effective amendment to Form S-11 (File No. 333-149290),
filed on September 29, 2008). |
|||
3.2 | Amended and Restated Bylaws of Cole Credit Property Trust III, Inc. (Incorporated by reference to
Exhibit 3.2 to the Companys pre-effective amendment to Form S-11 (File No. 333-149290), filed on
May 7, 2008). |
|||
3.3 | Articles of Amendment (Incorporated by reference to the Companys Current Report on Form 8-K
(File No. 333-149290) filed on April 9, 2010). |
|||
3.4 | Second Articles of Amendment of Cole Credit Property Trust III, Inc. (Incorporated by reference to the
Companys post-effective amendment to Form S-11 (File No. 333-164884), filed July 22, 2011). |
|||
4.1 | Form of Subscription Agreement and Subscription Agreement Signature Page (Incorporated by reference to
Exhibit 4.1 to the Companys post-effective amendment to Form S-11 (File No. 333-164884), filed July 22, 2011). |
|||
4.2 | Form of Additional Investment Subscription Agreement (Incorporated by reference to Exhibit 4.2 to the
Companys post-effective amendment to Form S-11 (File No. 333-164884), filed July 22, 2011). |
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4.3 | Form of Alternative Subscription Agreement (Incorporated by reference to Exhibit 4.3 to the Companys
post-effective amendment to Form S-11 (File No. 333-164884), filed July 22, 2011). |
|||
4.4 | Form of Alternative Additional Investment Subscription Agreement (Incorporated by reference to Exhibit 4.4 to
the Companys post-effective amendment to Form S-11 (File No. 333-164884), filed July 22, 2011). |
|||
4.5 | Form of Alternative Subscription Agreement (Incorporated by reference to Exhibit 4.5 to the Companys
post-effective amendment to Form S-11 (File No. 333-164884), filed April 22, 2011). |
|||
4.6 | Form of Alternative Additional Investment Subscription Agreement (Incorporated by reference to Exhibit 4.6 to
the Companys post-effective amendment to Form S-11 (File No. 333-164884), filed April 22, 2011). |
|||
31.1 | * | Certification of the Chief Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14 (a) or
15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
31.2 | * | Certification of the Chief Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14 (a) or
15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
32.1 | ** | Certification of the Chief Executive Officer and Chief Financial Officer of the Company pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
||
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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