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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

 

Commission File Number: 000-53650

 

Behringer Harvard Opportunity REIT II, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland

 

20-8198863

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer

Identification No.)

 

15601 Dallas Parkway, Suite 600, Addison, Texas 75001

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code:  (866) 655-3600

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x   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 x 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of April 30, 2012, Behringer Harvard Opportunity REIT II, Inc. had 26,096,970 shares of common stock outstanding.

 

 

 



Table of Contents

 

BEHRINGER HARVARD OPPORTUNITY REIT II, INC.

FORM 10-Q

Quarter Ended March 31, 2012

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Page

 

 

 

 

Item 1.

Financial Statements (Unaudited).

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

 

3

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2012 and 2011

 

4

 

 

 

 

 

Consolidated Statements of Equity for the Three Months Ended March 31, 2012 and 2011

 

5

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011

 

6

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

24

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

35

 

 

 

 

Item 4.

Controls and Procedures.

 

36

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings.

 

37

 

 

 

 

Item 1A.

Risk Factors.

 

37

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

37

 

 

 

 

Item 3.

Defaults Upon Senior Securities.

 

39

 

 

 

 

Item 4.

Mine Safety Disclosures

 

39

 

 

 

 

Item 5.

Other Information.

 

39

 

 

 

 

Item 6.

Exhibits.

 

39

 

 

 

 

Signature

 

40

 

2



Table of Contents

 

PART I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

Behringer Harvard Opportunity REIT II, Inc.

Consolidated Balance Sheets

(in thousands, except shares)

(unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Real estate

 

 

 

 

 

Land and improvements, net

 

$

86,703

 

$

86,962

 

Buildings and improvements, net

 

219,035

 

218,839

 

Real estate under development

 

431

 

105

 

Total real estate

 

306,169

 

305,906

 

 

 

 

 

 

 

Assets associated with real estate held for sale

 

 

29,420

 

Cash and cash equivalents

 

93,169

 

80,130

 

Restricted cash

 

5,953

 

5,616

 

Accounts receivable, net

 

1,808

 

1,704

 

Receivable from related party

 

3,450

 

3,485

 

Prepaid expenses and other assets

 

1,922

 

1,596

 

Furniture, fixtures and equipment, net

 

7,138

 

7,219

 

Deferred financing fees, net

 

3,836

 

4,533

 

Lease intangibles, net

 

7,039

 

8,387

 

Total assets

 

$

430,484

 

$

447,996

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Notes payable

 

$

219,897

 

$

239,757

 

Accounts payable

 

2,377

 

3,718

 

Acquired below-market leases, net

 

1,156

 

1,271

 

Distributions payable

 

14,152

 

1,069

 

Accrued and other liabilities

 

6,486

 

5,140

 

Obligations associated with real estate held for sale

 

 

37

 

Total liabilities

 

244,068

 

250,992

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none outstanding

 

 

 

Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 outstanding

 

 

 

Common stock, $.0001 par value per share; 350,000,000 shares authorized, 26,021,623 and 25,267,048 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

 

3

 

3

 

Additional paid-in capital

 

232,897

 

225,968

 

Accumulated distributions and net loss

 

(56,221

)

(43,657

)

Accumulated other comprehensive income

 

179

 

83

 

Total Behringer Harvard Opportunity REIT II, Inc. equity

 

176,858

 

182,397

 

Noncontrolling interest

 

9,558

 

14,607

 

Total equity

 

186,416

 

197,004

 

Total liabilities and equity

 

$

430,484

 

$

447,996

 

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

Rental revenue

 

$

9,832

 

$

6,382

 

Hotel revenue

 

2,475

 

1,638

 

Interest income from real estate loan receivable

 

 

1,225

 

 

 

 

 

 

 

Total revenues

 

12,307

 

9,245

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Property operating expenses

 

5,897

 

4,230

 

Interest expense

 

2,636

 

1,810

 

Real estate taxes

 

1,444

 

1,074

 

Property management fees

 

449

 

295

 

Asset management fees

 

818

 

618

 

General and administrative

 

624

 

479

 

Acquisition expense

 

 

345

 

Depreciation and amortization

 

4,396

 

3,711

 

Total expenses

 

16,264

 

12,562

 

 

 

 

 

 

 

Interest income, net

 

31

 

62

 

Other income

 

30

 

 

 

 

 

 

 

 

Loss from continuing operations before income taxes and equity in losses’of unconsolidated joint ventures

 

(3,896

)

(3,255

)

Equity in losses of unconsolidated joint ventures

 

 

(152

)

 

 

 

 

 

 

Loss from continuing operations

 

(3,896

)

(3,407

)

 

 

 

 

 

 

Income (loss) from discontinued operations

 

8,018

 

(29

)

 

 

 

 

 

 

Net income (loss)

 

4,122

 

(3,436

)

 

 

 

 

 

 

Noncontrolling interest in continuing operations

 

375

 

446

 

Noncontrolling interest in discontinued operations

 

(804

)

23

 

Net (income) loss attributable to the noncontrolling interest

 

(429

)

469

 

 

 

 

 

 

 

Net income (loss) attributable to the Company

 

$

3,693

 

$

(2,967

)

 

 

 

 

 

 

Amounts attributable to the Company

 

 

 

 

 

Continuing operations

 

$

(3,522

)

$

(2,961

)

Discontinuing operations

 

7,215

 

(6

)

Net income (loss) attributable to the Company

 

$

3,693

 

$

(2,967

)

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic and diluted

 

25,728

 

22,824

 

 

 

 

 

 

 

Net income (loss) per share

 

 

 

 

 

Continuing operations

 

$

(0.14

)

$

(0.13

)

Discontinued operations

 

0.28

 

 

Basic and diluted income (loss) per share

 

$

0.14

 

$

(0.13

)

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

Net income (loss)

 

$

4,122

 

$

(3,436

)

Other comprehensive income (loss):

 

 

 

 

 

Unrealized losses on interest rate derivatives

 

(1

)

(4

)

Foreign currency translation gain

 

97

 

189

 

Total other comprehensive income

 

96

 

185

 

Comprehensive income (loss)

 

4,218

 

(3,251

)

Comprehensive income (loss) attributable to noncontrolling interest

 

(429

)

469

 

Comprehensive income (loss) attributable to the Company

 

$

3,789

 

$

(2,782

)

 

See Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Consolidated Statements of Equity

(unaudited)

(in thousands)

 

 

 

Convertible Stock

 

Common Stock

 

Additional

 

Accumulated

 

Accumulated
Other

 

 

 

 

 

 

 

Number

 

Par

 

Number

 

Par

 

Paid-in

 

Distributions and

 

Comprehensive

 

Noncontrolling

 

Total

 

 

 

of Shares

 

Value

 

of Shares

 

Value

 

Capital

 

Net (Loss)

 

Income (loss)

 

Interest

 

Equity

 

Balance at Janauary 1, 2011

 

1

 

$

 

22,330

 

$

2

 

$

195,149

 

$

(23,883

)

$

410

 

$

10,533

 

$

182,211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock, net

 

 

 

 

 

995

 

 

9,101

 

 

 

 

 

 

 

9,101

 

Redemption of common stock

 

 

 

 

 

(59

)

 

 

(542

)

 

 

 

 

 

 

(542

)

Distributions declared on common stock

 

 

 

 

 

 

 

 

 

 

 

(2,815

)

 

 

 

 

(2,815

)

Contributions from noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

673

 

673

 

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(170

)

(170

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on interest rate derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

(4

)

Foreign currency translation gain

 

 

 

 

 

 

 

 

 

 

 

 

 

189

 

 

 

189

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,967

)

 

 

(469

)

(3,436

)

Balance at March 31, 2011

 

1

 

$

 

23,266

 

$

2

 

$

203,708

 

$

(29,665

)

$

595

 

$

10,567

 

$

185,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2012

 

1

 

$

 

25,267

 

$

3

 

$

225,968

 

$

(43,657

)

$

83

 

$

14,607

 

$

197,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock, net

 

 

 

 

 

835

 

 

7,654

 

 

 

 

 

 

 

7,654

 

Redemption of common stock

 

 

 

 

 

(80

)

 

 

(725

)

 

 

 

 

 

 

(725

)

Distributions declared on common stock

 

 

 

 

 

 

 

 

 

 

 

(16,257

)

 

 

 

 

(16,257

)

Contributions from noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,209

 

1,209

 

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,687

)

(6,687

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on interest rate derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

(1

)

Foreign currency translation gain

 

 

 

 

 

 

 

 

 

 

 

 

 

97

 

 

 

97

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

3,693

 

 

 

429

 

4,122

 

Balance at March 31, 2012

 

1

 

$

 

26,022

 

$

3

 

$

232,897

 

$

(56,221

)

$

179

 

$

9,558

 

$

186,416

 

 

See Notes to Consolidated Financial Statements.

 

5



Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

4,122

 

$

(3,436

)

Adjustments to reconcile net income (loss) to net cash flows used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,382

 

4,002

 

Amortization of deferred financing fees

 

253

 

264

 

Equity in losses of unconsolidated joint venture

 

 

152

 

Gain on sale of discontinued operations

 

(9,264

)

 

Loss on early extinguishment of debt

 

1,236

 

 

Change in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(104

)

(38

)

Interest receivable-real estate loan receivable

 

 

(609

)

Prepaid expenses and other assets

 

(328

)

(188

)

Accounts payable

 

(2,219

)

(389

)

Accrued and other liabilities

 

1,166

 

260

 

Net payables to related parties

 

28

 

(157

)

Addition of lease intangibles

 

(103

)

(273

)

Cash used in operating activities

 

(831

)

(412

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition deposits

 

 

(259

)

Investment in unconsolidated joint venture

 

 

(20

)

Proceeds from sale of discontinued operations

 

38,684

 

 

Investment in real estate loans receivable

 

 

(116

)

Additions of property and equipment

 

(1,839

)

(1,289

)

Change in restricted cash

 

(337

)

1,448

 

Cash provided by (used in) investing activities

 

36,508

 

(236

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Financing costs

 

(788

)

(16

)

Proceeds from notes payable

 

25

 

1,584

 

Payments on notes payable

 

(20,188

)

(362

)

Issuance of common stock

 

6,141

 

7,973

 

Redemptions of common stock

 

(725

)

 

Offering costs

 

(553

)

(740

)

Distributions

 

(1,100

)

(901

)

Contributions from noncontrolling interest holders

 

1,209

 

673

 

Distributions to noncontrolling interest holders

 

(6,687

)

(170

)

Cash provided by (used in) financing activities

 

(22,666

)

8,041

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

28

 

 

Net change in cash and cash equivalents

 

13,039

 

7,393

 

Cash and cash equivalents at beginning of period

 

80,130

 

49,375

 

Cash and cash equivalents at end of period

 

$

93,169

 

$

56,768

 

 

See Notes to Consolidated Financial Statements.

 

6



Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1.                                      Business and Organization

 

Business

 

Behringer Harvard Opportunity REIT II, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”) was organized as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

 

We acquire and operate commercial real estate and real estate-related assets.  In particular, we focus generally on acquiring commercial properties with significant possibilities for short-term capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines.  In addition, our opportunistic investment strategy also includes investments in real estate-related assets that present opportunities for higher current income.  Such investments may have capital gain characteristics, whether as a result of a discount purchase or related equity participations.  We may acquire a wide variety of commercial properties, including office, industrial, retail, hospitality, recreation and leisure, single-tenant, multifamily, and other real properties.  These properties may be existing, income-producing properties, newly constructed properties, or properties under development or construction.  They may include multifamily properties purchased for conversion into condominiums and single-tenant properties that may be converted for multi-tenant use.  We may invest in real estate-related securities, including securities issued by other real estate companies, either for investment or in change of control transactions completed on a negotiated basis or otherwise.  Further, we also may originate or invest in collateralized mortgage-backed securities and mortgage, bridge or mezzanine loans, or in entities that make investments similar to the foregoing.  We expect to make our investments in or in respect of real estate assets located in the United States and other countries based on our view of existing market conditions.  We completed our first property acquisition, an office building located in Denver, Colorado, on October 28, 2008.  As of March 31, 2012, we had ten real estate investments, all of which were consolidated into our consolidated financial statements.

 

Substantially all of our business is conducted through Behringer Harvard Opportunity OP II LP, a limited partnership organized in Delaware on January 12, 2007 (“Behringer Harvard Opportunity OP II”).  As of March 31, 2012, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, was the sole general partner of Behringer Harvard Opportunity OP II and owned a 0.1% partnership interest in Behringer Harvard Opportunity OP II.  As of March 31, 2012, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of Behringer Harvard Opportunity OP II and owned the remaining 99.9% interest in Behringer Harvard Opportunity OP II.

 

We are externally managed and advised by Behringer Harvard Opportunity Advisors II, LLC, a Texas limited liability company that was formed on March 16, 2010 (the “Advisor”) when Behringer Harvard Opportunity Advisors II LP, a Texas limited partnership formed in January 2007, was converted to a limited liability company.  The Advisor is responsible for managing our day-to-day affairs and for identifying and making acquisitions and investments on our behalf.

 

Organization

 

On February 26, 2007, we filed a Registration Statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer up to 125,000,000 shares of common stock for sale to the public (the “Initial Offering”), of which 25,000,000 shares were being offered pursuant to our distribution reinvestment plan (the “DRP”). The SEC declared our Registration Statement effective on January 4, 2008, and we commenced the Initial Offering on January 21, 2008. On July 3, 2011, the Initial Offering terminated in accordance with its terms.

 

Prior to termination of the Initial Offering, on September 13, 2010, we filed a second Registration Statement on Form S-11 with the SEC to register a follow-on public offering of up to 75,000,000 shares of our common stock for sale to the public (the “Follow-On Offering” and, together with the Initial Offering, the “Offerings”), of which 25,000,000 shares were being offered pursuant to the DRP.  On July 5, 2011, the Follow-On Offering was declared effective by the SEC, and we commenced offering shares under the Follow-On Offering.  We terminated the primary portion of the follow-on offering effective March 15, 2012 and discontinued offering shares of our common stock under the DRP effective April 2, 2012. Through March 31, 2012, we raised gross offering proceeds of approximately $264.6 million from the sale of approximately 26.6 million shares under the Offerings, including shares sold under the DRP.

 

In connection with our initial capitalization, on January 19, 2007, we issued 22,471 shares of our common stock and 1,000 shares of our convertible stock to Behringer Harvard Holdings.  Behringer Harvard Holdings transferred its shares of convertible stock to the Advisor on April 2, 2010.  As of March 31, 2012, we had 26 million shares of common stock outstanding, which includes the 22,471 shares issued to Behringer Harvard Holdings.  As of March 31, 2012, we had 1,000 shares of convertible stock issued and outstanding to the Advisor.

 

7



Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

We commenced operations on April 1, 2008 upon satisfaction of the conditions of our escrow agreement and our acceptance of initial subscriptions of common stock in the Initial Offering. Upon admission of new stockholders, subscription proceeds for the primary offerings were used for payment of dealer manager fees and selling commissions and may be utilized in the offerings as consideration for investments and the payment or reimbursement of offering expenses and operating expenses. Until required for such purposes, net offering proceeds are held in short-term, liquid investments. We are currently using the net proceeds from the Offerings primarily to acquire real estate and real estate-related assets consistent with our opportunistic investment strategy.  As of March 31, 2012, we had issued 26.6 million shares of our common stock, including 22,471 shares owned by Behringer Harvard Holdings and 2.1 million shares issued through the DRP.  As of March 31, 2012, we had redeemed 0.6 million shares of our common stock.

 

Our common stock is not currently listed on a national securities exchange.  Depending upon then prevailing market conditions, it is our intention to consider beginning the process of liquidating our assets and distributing the net proceeds to our stockholders within three to six years after the termination of the Initial Offering.  If we do not begin an orderly liquidation within that period, we may seek to have our shares listed on a national securities exchange.

 

2.                                      Interim Unaudited Financial Information

 

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the SEC on March 28, 2012.

 

The results for the interim periods shown in this report are not necessarily indicative of future financial results.  The accompanying consolidated balance sheet as of March 31, 2012, the consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2012 and 2011 and consolidated statements of equity and cash flows for the three months ended March 31, 2012 and 2011 have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to fairly present our consolidated financial position as of March 31, 2012 and December 31, 2011 and our consolidated results of operations and cash flows for the periods ended March 31, 2012 and 2011.  Such adjustments are of a normal recurring nature.

 

3.                                      Summary of Significant Accounting Policies

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates include such items as purchase price allocation for real estate acquisitions, impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts. Actual results could differ from those estimates.

 

Principles of Consolidation and Basis of Presentation

 

Our consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control. All inter-company transactions, balances, and profits have been eliminated in consolidation. Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary. If the interest in the entity is determined not to be a VIE, then the entity will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement. In the Notes to Consolidated Financial Statements, all dollar and share amounts in tabulation are in thousands of dollars and shares, respectively, unless otherwise noted.

 

There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether we are the primary beneficiary.  The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity.  Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses. A change in the judgments, assumptions, and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment using the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.

 

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Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

We have evaluated subsequent events for recognition or disclosure in our consolidated financial statements.

 

Real Estate

 

Upon the acquisition of real estate properties, we recognize the assets acquired, the liabilities assumed and any noncontrolling interest as of the acquisition date, measured at their fair values. The acquisition date is the date on which we obtain control of the real estate property. The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities and asset retirement obligations. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships. Identified intangible liabilities generally consist of below-market leases. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired. Acquisition-related costs are expensed in the period incurred. Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.

 

The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings. Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants. The value of buildings is depreciated over the estimated useful life of 25 years using the straight-line method.

 

We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.

 

We determine the value of above-market and below-market leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management’s estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining non-cancelable lease term for above-market leases, or (b) the remaining non-cancelable lease term plus any below-market fixed rate renewal options that, based on a qualitative assessment of several factors, including the financial condition of the lessee, the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, are reasonably assured to be exercised by the lessee for below-market leases. We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the determined lease term.

 

The total value of identified real estate intangible assets acquired is further allocated to in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. The aggregate value for tenant improvements and leasing commissions is based on estimates of these costs incurred at inception of the acquired leases, amortized through the date of acquisition. The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model. The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces considering current market conditions. In estimating the carrying costs that would have otherwise been incurred had the leases not been in place, we include such items as real estate taxes, insurance and other operating expenses as well as lost rental revenue during the expected lease-up period based on current market conditions. The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal fees and tenant improvements as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis.

 

We amortize the value of in-place leases, in-place tenant improvements and in-place leasing commissions to expense over the initial term of the respective leases.  The tenant relationship values are amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense.

 

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Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Anticipated amortization expense associated with the acquired lease intangibles for each of the following five years ended December 31 is as follows:

 

Year

 

Lease / Other
Intangibles

 

April 1, 2012 - December 31,

2012

 

$

1,658

 

 

2013

 

1,233

 

 

2014

 

729

 

 

2015

 

376

 

 

2016

 

241

 

 

Accumulated depreciation and amortization related to our consolidated investments in real estate assets and intangibles were as follows:

 

 

 

 

 

 

 

 

 

Acquired

 

 

 

Buildings and

 

Land and

 

Lease

 

Below-Market

 

March 31, 2012

 

Improvements

 

Improvements

 

Intangibles

 

Leases

 

Cost

 

$

231,536

 

$

88,396

 

$

15,276

 

$

2,221

 

Less: depreciation and amortization

 

(12,501

)

(1,693

)

(8,237

)

(1,065

)

 

 

 

 

 

 

 

 

 

 

Net

 

$

219,035

 

$

86,703

 

$

7,039

 

$

1,156

 

 

 

 

 

 

 

 

 

 

Acquired

 

 

 

Buildings and

 

Land and

 

Lease

 

Below-Market

 

December 31, 2011

 

Improvements

 

Improvements

 

Intangibles

 

Leases

 

Cost

 

$

228,999

 

$

88,292

 

$

16,210

 

$

2,232

 

Less: depreciation and amortization

 

(10,160

)

(1,330

)

(7,823

)

(961

)

 

 

 

 

 

 

 

 

 

 

Net (1)

 

$

218,839

 

$

86,962

 

$

8,387

 

$

1,271

 

 


(1)         Excludes Palms of Monterrey, which was sold on January 5, 2012 (classified as held for sale at December 31, 2011)

 

Real Estate Held for Sale

 

We classify properties as held for sale when certain criteria are met, in accordance with GAAP. At that time, we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property.  Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell.  Our Palms of Monterrey property was classified as held for sale at December 31, 2011, and a sale of the property was completed on January 5, 2012.  There were no properties classified as held for sale as of March 31, 2012.

 

Cash and Cash Equivalents

 

We consider investments in highly liquid money market funds or investments with original maturities of three months or less to be cash equivalents.  The carrying amount of cash and cash equivalents reported on the balance sheet approximates fair value.

 

Restricted Cash

 

As required by our lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate taxes and other reserves for our consolidated properties.  Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions and major capital expenditures.  Alternatively, a lender may require its own formula for an escrow of capital reserves.

 

Investment Impairment

 

For all of our real estate and real estate related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to:  a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the

 

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Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions.  Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at a portion of our properties within a short time period, which may result in asset impairments.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.  We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist.  While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

 

In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, and the projected sales price of each of the properties.  A future change in these estimates and assumptions could result in understating or overstating the carrying value of our investments, which could be material to our financial statements.

 

We believe the carrying value of our operating real estate is currently recoverable.  Accordingly, there were no impairment charges for the three months ended March 31, 2012 or 2011.  However, if market conditions worsen beyond our current expectations, or if changes in our strategy significantly affect any key assumptions used in our fair value calculations, we may need to take charges in future periods for impairments related to our existing investments.  Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.

 

Revenue Recognition

 

We recognize rental income generated from leases on real estate assets on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  Straight-line rental revenue of $0.1 million was recognized in rental revenues for each of the three months ended March 31, 2012 and 2011.  Net below market lease amortization of less than $0.1 million and $0.1 million was recognized in rental revenues for the three months ended March 31, 2012 and 2011, respectively.

 

Hotel revenue is derived from the operations of the Courtyard Kauai at Coconut Beach Hotel, consisting of guest room, food and beverage, and other revenue, and is recognized as the services are rendered.

 

We recognize interest income from real estate loans receivable on an accrual basis over the life of the loan using the interest method.  Direct loan origination fees and origination or acquisition costs, as well as acquisition premiums or discounts, are amortized over the life of the loan as an adjustment to interest income.

 

Accounts Receivable

 

Accounts receivable primarily consist of receivables from our tenants related to our consolidated properties of $0.4 million and straight-line rental revenue receivables of $1 million as of March 31, 2012.  As of December 31, 2011, accounts receivable primarily consist of receivables from our tenants related to our consolidated properties of $0.4 million and straight-line rental revenue receivables of $0.9 million.

 

Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets include prepaid directors’ and officers’ insurance, as well as prepaid insurance of our consolidated properties.

 

Furniture, Fixtures, and Equipment

 

Furniture, fixtures, and equipment are recorded at cost and are depreciated using the straight-line method over their estimated useful lives of five to seven years.  Maintenance and repairs are charged to operations as incurred while improvements to such assets are capitalized.  Accumulated depreciation associated with our furniture, fixtures, and equipment was $1.5 million and $1.2 million as of March 31, 2012 and December 31, 2011, respectively.

 

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Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Deferred Financing Fees

 

Deferred financing fees are recorded at cost and are amortized to interest expense of our notes payable using a straight-line method that approximates the effective interest method over the life of the related debt.  Accumulated amortization of deferred financing fees was $1.5 million and $1.2 million as of March 31, 2012 and December 31, 2011, respectively.

 

Derivative Financial Instruments

 

Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate movements or other identified risks and to minimize the variability caused by foreign currency translation risk related to our net investment in foreign real estate.  To accomplish these objectives, we use various types of derivative instruments to manage fluctuations in cash flows resulting from interest rate risk attributable to changes in the benchmark interest rate of LIBOR.  These instruments include LIBOR-based interest rate swaps and caps.  For our net investments in foreign real estate, we may use foreign exchange put/call options to eliminate the impact of foreign currency exchange movements on our financial position.

 

We measure our derivative instruments and hedging activities at fair value and record them as an asset or liability, depending on our rights or obligations under the applicable derivative contract.  For derivatives designated as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged items are recorded in earnings.  Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.  For derivatives designated as cash flow hedges, the effective portions of changes in fair value of the derivatives are reported in other comprehensive income (loss) and are subsequently reclassified into earnings when the hedged item affects earnings.  We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction.

 

As of March 31, 2012, we do not have any derivatives designated as net investment hedges or fair value hedges.  No derivatives were being used for trading or speculative purposes.  See Notes 5 and 12 for further information regarding our derivative financial instruments.

 

Organization and Offering Expenses

 

We reimbursed the Advisor and its affiliates for organization and offering expenses (other than selling commissions and the dealer manager fee) incurred on our behalf in connection with the primary offering component of the Offerings.  In connection with the Initial Offering, we reimbursed the Advisor for $7.5 million of organization and offering expenses (other than selling commissions and the dealer manager fee) that it had incurred on our behalf.  On July 5, 2011, in connection with the Follow-On Offering, we entered into the Third Amended and Restated Advisory Management Agreement with the Advisor.  Pursuant to the Third Amended and Restated Advisory Management Agreement, we did not reimburse the Advisor for any additional organization and offering expenses (other than selling commissions and the dealer manager fee) incurred on our behalf in connection with the Follow-On Offering.  We terminated the primary portion of the follow-on offering effective March 15, 2012 and discontinued offering of shares of our common stock under the DRP effective April 2, 2012.

 

The Advisor will reimburse us to the extent that the total amount spent on organization and offering expenses in the Offerings (other than selling commissions and the dealer manager fee) exceeds 1.5% of the gross proceeds raised in the primary component of the Offerings.  Based on our current review of gross proceeds from our Offerings, we have recorded a receivable from the Advisor for approximately $3.9 million of organization and offering expenses that were previously reimbursed to the Advisor.  The receivable of $3.9 million is presented net of other payables of $0.5 million to the Advisor on our consolidated balance sheet.  We expect to receive payment from the Advisor for this receivable during the first quarter of 2013.

 

Organization and offering expenses are defined generally as any and all costs and expenses incurred by us in connection with our formation, preparing for the Offerings, the qualification and registration of the Offerings, and the marketing and distribution of our shares.  Organization and offering expenses include, but are not limited to, accounting and legal fees; costs to amend the registration statement and supplement the prospectus; printing, mailing and distribution costs; filing fees; amounts to reimburse our Advisor or its affiliates for the salaries of employees; and other costs in connection with preparing supplemental sales literature; telecommunication costs; fees of the transfer agent, registrars, trustees, escrow holders, depositories and experts; and fees and costs for employees of our Advisor or its affiliates to attend industry conferences.

 

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Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

All offering costs are recorded as an offset to additional paid-in capital, and all organization costs are recorded as an expense at the time we become liable for the payment of these amounts.

 

Income Taxes

 

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and have qualified as a REIT since the year ended December 31, 2008.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level.  We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code and intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT.

 

We have reviewed our tax positions under GAAP guidance that clarifies the relevant criteria and approach for the recognition and measurement of uncertain tax positions.  The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return.  A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination.  We believe it is more likely than not that the tax positions taken relative to our status as a REIT will be sustained in any tax examination.

 

Foreign Currency Translation

 

For our international investment where the functional currency is other than the U.S. dollar, assets and liabilities are translated using period-end exchange rates, while the statement of operations amounts are translated using the average exchange rates for the respective period.  Gains and losses resulting from the change in exchange rates from period to period are reported  separately as a component of accumulated other comprehensive income (loss) (“AOCI”).  Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations and comprehensive income (loss).

 

The Euro is the functional currency for the operations of Holstenplatz.  We also maintain a Euro-denominated bank account that is translated into U.S. dollars at the current exchange rate at each reporting period.  For the three months ended March 31, 2012, the foreign currency translation adjustment was a gain of $0.1 million.  For the three months ended March 31, 2011, the foreign currency translation adjustment was a gain of $0.2 million.

 

Accumulated Other Comprehensive Income (Loss)

 

AOCI, which is reported in the accompanying consolidated statement of equity, consists of gains and losses affecting equity that are excluded from net income (loss) under GAAP.  The components of AOCI consist of cumulative foreign currency translation gains and losses and the unrealized gain on derivative instruments.

 

Stock-Based Compensation

 

We have adopted a stock-based incentive award plan for our directors and consultants and for employees, directors and consultants of our affiliates.  We have not issued any stock-based awards under the plan as of March 31, 2012.

 

Concentration of Credit Risk

 

At March 31, 2012 and December 31, 2011, we had cash and cash equivalents deposited in certain financial institutions in excess of federally insured levels.  We have diversified our cash and cash equivalents among several banking institutions in an attempt to minimize exposure to any one of these entities.  We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents or restricted cash.

 

Noncontrolling Interest

 

Noncontrolling interest represents the noncontrolling ownership interest’s proportionate share of the equity in our consolidated real estate investments.  Income and losses are allocated to noncontrolling interest holders based on their ownership percentage.

 

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Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Earnings per Share

 

Net income (loss) per share is calculated based on the weighted average number of common shares outstanding during each period.  The weighted average shares outstanding used to calculate both basic and diluted income (loss) per share were the same for the three months ended March 31, 2012 and 2011, as there were no potentially dilutive securities outstanding.

 

Reportable Segments

 

GAAP establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments.  We have determined that we have one reportable segment, with activities related to the ownership, development and management of real estate assets.  Our chief operating decision maker evaluates operating performance on an individual property level.  Therefore, our properties are aggregated into one reportable segment.

 

4.                                      New Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued updated guidance for fair value measurements.  The guidance amends existing guidance to provide common fair value measurements and related disclosure requirements between GAAP and International Financial Reporting Standards.  This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this guidance did not have a material impact on our financial statements except for disclosures.

 

In June 2011, the FASB issued updated guidance related to comprehensive income.  The guidance requires registrants to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, registrants will be required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of this guidance did not have a material impact on our financial statements.

 

5.                                      Assets and Liabilities Measured at Fair Value

 

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.

 

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access.  Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s own assumptions, as there is little, if any, related market activity.  In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

Recurring Fair Value Measurements

 

Currently, we use interest rate swaps and caps to manage our interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative.  This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, and foreign currency exchange rates.

 

We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the

 

14



Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

likelihood of default by itself and its counterparties.  However, as of March 31, 2012, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

The following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011.

 

March 31, 2012

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

12

 

$

 

$

12

 

 

December 31, 2011

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

19

 

$

 

$

19

 

 

6.                                      Fair Value Disclosure of Financial Instruments

 

We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies.  However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

As of March 31, 2012 and December 31, 2011, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses, other liabilities, payables/receivables from related parties, and distributions payable were at amounts that reasonably approximated their fair value based on their highly-liquid nature and/or short-term maturities.  The notes payable of $219.9 million and $239.8 million as of March 31, 2012 and December 31, 2011, respectively, have a fair value of approximately $222.4 million and $242.2 million as of March 31, 2012 and December 31, 2011, respectively, based upon interest rates for debt with similar terms and remaining maturities that management believes we could obtain.  The fair value of the notes payable is categorized as a Level 2 basis.  The fair value is estimated using a discounted cash flow analysis valuation on the borrowing rates currently available for loans with similar terms and maturities.  The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate.  Disclosure about fair value of financial instruments is based on pertinent information available to management as of March 31, 2012 and December 31, 2011.

 

7.                                      Real Estate and Real Estate-Related Investments

 

As of March 31, 2012, we consolidated ten real estate investments.  The following table presents certain information about our consolidated investments as of March 31, 2012:

 

Property Name

 

Location

 

Date Acquired

 

Ownership
Interest

 

1875 Lawrence

 

Denver, Colorado

 

October 28, 2008

 

100

%

Holstenplatz

 

Hamburg, Germany

 

June 30, 2010

 

100

%

Parrot’s Landing

 

North Lauderdale, Florida

 

September 17, 2010

 

90

%

Florida MOB Portfolio

(1)

South Florida

 

October 8, 2010/October 20, 2010

 

90

%(2)

Courtyard Kauai Coconut Beach Hotel

 

Kauai, Hawaii

 

October 20, 2010

 

80

%

Interchange Business Center

 

San Bernardino, California

 

November 23, 2010

 

80

%

River Club and the Townhomes at River Club (formerly referred to as the UGA Portfolio)

 

Athens, Georiga

 

April 25, 2011

 

85

%

Babcock Self Storage

 

San Antonio, Texas

 

August 30, 2011

 

85

%

Lakes of Margate

 

Margate, Florida

 

October 19, 2011

 

92.5

%

Arbors Harbor Town

 

Memphis, Tennessee

 

December 20, 2011

 

94

%

 


(1)

We acquired a portfolio of eight medical office buildings, known as the Original Florida MOB Portfolio on October 8, 2010. We acquired a medical office building

 

known as Gardens Medical Pavilion on October 20, 2010. Collectively, the Original Florida MOB Portfolio and Gardens Medical Pavilion are referred to as the Florida MOB Portfolio.

(2)

The Florida MOB Portfolio consists of nine Medical Office Buildings. We own 90% of each of eight of the buildings. We own 90% of a 90% JV interest in the ninth building, Gardens Medical Pavilion.

 

15



Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Real Estate Asset Dispositions

 

Palms of Monterrey

 

On January 5, 2012, we sold the Palms of Monterrey for a contract sales price of $39.3 million, excluding transaction costs.  A portion of the proceeds from the sale was used to fully satisfy the existing indebtedness of $19.7 million associated with the property.  The Palms of Monterrey was classified as held for sale on our consolidated balance sheet as of December 31, 2011.  See Note 17 for further information regarding discontinued operations.

 

8.             Real Estate Loan Receivable

 

PAL Loan

 

On August 14, 2009, we entered into a loan agreement with an unaffiliated third party borrower to provide up to $25 million of second lien financing for the privatization of, and improvements to, approximately 3,200 hotel lodging units on ten U.S. Army installations.  On August 15, 2011, the debtor associated with the PAL Loan exercised its option to prepay the entire balance of the loan.  We had no investments in real estate loans receivable as of March 31, 2012 and December 31, 2011.  During the three months ended March 31, 2011, we earned $1.2 million in interest income from the PAL Loan.

 

9.             Notes Payable

 

The following table sets forth information on our notes payable as of March 31, 2012 and December 31, 2011.

 

 

 

Notes Payable as of

 

Interest

 

Maturity

 

Description

 

March 31, 2012

 

December 31, 2011

 

Rate

 

Date

 

1875 Lawrence

 

$

20,982

 

$

21,016

 

30-day LIBOR + 2.5% (1)(2)

 

12/31/2012 (5)

 

Interchange Business Center

 

19,619

 

19,619

 

30-day LIBOR + 5% (1)(3)

 

12/01/13

 

Holstenplatz

 

10,332

 

10,084

 

3.887%

 

04/30/15

 

Courtyard Kauai at Coconut Beach Hotel

 

38,000

 

38,000

 

30-day LIBOR + .95% (1)

 

11/09/15

 

Florida MOB Portfolio - Palmetto Building

 

6,186

 

6,222

 

4.55%

 

01/01/16

 

Florida MOB Portfolio - Victor Farris Building

 

12,470

 

12,542

 

4.55%

 

01/01/16

 

Palms of Monterrey

 

 

19,700

 

30-day LIBOR + 3.35% (4)

 

07/01/17

 

Parrot’s Landing

 

28,888

 

29,013

 

4.23%

 

10/01/17

 

Florida MOB Portfolio - Gardens Medical Pavilion

 

14,632

 

14,713

 

4.9%

 

01/01/18

 

River Club and the Townhomes at River Club (formerly referred to as the UGA Portfolio)

 

25,200

 

25,200

 

5.26%

 

05/01/18

 

Babcock Self Storage

 

2,255

 

2,265

 

5.80%

 

08/30/18

 

Lakes of Margate

 

15,333

 

15,383

 

5.49% and 5.92%

 

01/01/20

 

Arbors Harbor Town

 

26,000

 

26,000

 

3.985%

 

01/01/19

 

 

 

$

219,897

 

$

239,757

 

 

 

 

 

 


(1) 30-day LIBOR was 0.2% at March 31, 2012. 

(2) The loan has a minimum interest rate of 6.25%.

(3) The 30-day LIBOR rate is set at a minimum value of 2.5%.

(4) On January 5, 2012, we sold the Palms of Monterrey to an unaffiliated third party.

(5) The note payable contains a one year extension option, subject to certain conditions.

 

At March 31, 2012, our notes payable balance was $219.9 million and consisted of the notes payable related to our consolidated properties.  We have unconditionally guaranteed payment of the note payable related to 1875 Lawrence for an amount not to exceed the lesser of (i) $11.75 million and (ii) 50% of the total amount advanced under the loan agreement if the aggregate amount advanced is less than $23.5 million.  We currently plan on refinancing the note payable or exercising the one year extension option pursuant to the terms under the loan agreement. We have guaranteed payment of certain recourse liabilities with respect to certain nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the notes payable related to the Courtyard Kauai at Coconut Beach Hotel.  On January 5, 2012, the Palms of Monterrey was sold to an unaffiliated third party.  A portion of the proceeds from the sale of the assets were used to fully satisfy the existing indebtedness of $19.7 million associated with the property.

 

We are subject to customary affirmative, negative and financial covenants and representations, warranties and       borrowing conditions, all as set forth in our loan agreements.  As of March 31, 2012, we believe we were in compliance with the covenants under our loan agreements.  We were not in compliance with a certain covenant under the Interchange Business Center loan at April 1, 2012 and as a result, we made an immediately due principal payment of $0.8 million and, subject to certain covenants, an additional amount of up to $1.9 million may be due by July 1, 2012.

 

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Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table summarizes our contractual obligations for principal payments as of March 31, 2012:

 

Year

 

Amount Due

 

April 1, 2012 - December 31, 2012

 

$

22,473

 

2013

 

21,855

 

2014

 

2,857

 

2015

 

50,497

 

2016

 

19,288

 

Thereafter

 

102,927

 

 

 

 

 

 

 

$

219,897

 

 

10.          Leasing Activity

 

Future minimum base rental payments due to us under non-cancelable leases in effect as of March 31, 2012 for our consolidated properties are as follows:

 

April 1, 2012 - December 31, 2012

 

$

14,947

 

2013

 

12,852

 

2014

 

9,728

 

2015

 

7,367

 

2016

 

4,830

 

Thereafter

 

6,889

 

 

 

 

 

Total

 

$

56,613

 

 

The schedule above does not include rental payments due to us from our multifamily properties, as leases associated with these properties typically are for periods of one year or less.  As of March 31, 2012, none of our tenants accounted for 10% or more of our aggregate annual rental revenues from our consolidated properties.

 

11.          Derivative Instruments and Hedging Activities

 

We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of operations.  The hedging strategy of entering into interest rate caps and swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows.

 

In October 2010, we entered into a new interest rate cap agreement related to the debt on the Courtyard Kauai at Coconut Beach Hotel, and in November 2010, we entered into an interest rate cap agreement related to our debt on Interchange Business Center.

 

Derivative instruments classified as assets were reported at their combined fair values of less than $0.1 million in prepaid expenses and other assets at both March 31, 2012 and December 31, 2011.  During the three months ended March 31, 2012 and 2011, we recorded an unrealized loss of less than $0.1 million to AOCI in our statement of equity to adjust the carrying amount of the interest rate caps qualifying as hedges at both March 31, 2012 and 2011, respectively.

 

The following table summarizes the notional values of our derivative financial instruments.  The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate, or market risks:

 

Type / Description

 

Notional
Value

 

Interest Rate /
Strike Rate

 

Index

 

Maturity

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

 

Interest rate cap - Courtyard Kauai at Coconut Beach Hotel

 

$

38,000

 

3.00% - 6.00%

 

30-day LIBOR

 

October 15, 2014

 

Interest rate cap - Interchange Business Center

 

$

5,000

 

2.50%

 

30-day LIBOR

 

December 1, 2013

 

 

17



Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

The table below presents the fair value of our derivative financial instruments, as well as their classification on the consolidated balance sheets as of March 31, 2012 and December 31, 2011.

 

 

 

Balance

 

 

 

Derivatives designated as

 

Sheet

 

Asset Derivatives

 

hedging instruments:

 

Location

 

March 31, 2012

 

December 31, 2011

 

 

 

 

 

 

 

 

 

Interest rate derivative contracts

 

Prepaid expenses and other assets

 

$

12

 

$

19

 

 

The table below presents the effect of our derivative financial instruments on the consolidated statements of operations for the three months ended March 31, 2012 and 2011.

 

 

 

Derivatives in Cash Flow Hedging Relationships

 

 

 

Amount of Gain or (Loss)
Recognized in AOCI on
 Derivative (Effective
Portion)

 

Amount of Gain or (Loss)
Recognized in AOCI on
 Derivative (Effective
Portion)

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31, 2012

 

March 31, 2011

 

Interest rate derivative

 

$

(1

)

$

(4

)

 

12.          Commitments and Contingencies

 

Our operating leases consist of ground leases on each of eight buildings acquired in connection with the purchase of the Original Florida MOB Portfolio.  Each ground lease is for a term of 50 years, with a 25-year extension option.  The annual payment for each ground lease increases by 10% every five years.  For each of the three months ended March 31, 2012 and 2011, we incurred $0.1 million in lease expense related to our ground leases.  Future minimum lease payments for all operating leases from March 31, 2012 are as follows:

 

April 1, 2012 - December 31, 2012

 

$

220

 

2013

 

293

 

2014

 

293

 

2015

 

301

 

2016

 

301

 

Thereafter

 

21,528

 

 

 

 

 

 

Total

 

$

22,936

 

 

13.          Distributions

 

Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous period and expectations of performance for future periods.  These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions and other factors that our board deems relevant.  The board’s decision will be influenced, in substantial part, by its obligation to ensure that we maintain our status as a REIT.  In light of the continued uncertainty in the global financial and real estate markets, we cannot provide assurance that we will be able to achieve expected cash flows necessary to pay distributions at any particular level, or at all.  On March 20, 2012, our board of directors declared a special distribution of $0.50 per share of common stock payable to our stockholders of record as of April 3, 2012 and determined to cease regular, monthly distributions in favor of payment of periodic distributions from excess proceeds from asset dispositions or from other sources as necessary to maintain our REIT tax status.  The payment date for special distribution was on May 10, 2012.

 

Until proceeds from the Offerings are fully invested and generating sufficient operating cash flow to fully fund the payment of distributions to our stockholders, we have paid and may continue to pay some or all of our distributions from sources other than operating cash flow.  We have, for example, generated cash to pay distributions from financing activities, components of which may include proceeds from the Offerings and borrowings (including borrowings secured by our assets) in anticipation of future operating cash flow.  We have also utilized cash from refinancings and dispositions, the components

 

18



Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

of which may represent a return of capital and/or the gains on sale.  In addition, from time to time, our Advisor may agree to waive or defer all or a portion of the acquisition, asset management or other fees or incentives due to it, pay general administrative expenses or otherwise supplement investor returns in order to increase the amount of cash that we have available to pay distributions to our stockholders.

 

For the three months ended March 31, 2012 and 2011, both cash distributions and the operating shortfalls were funded from financing activities including proceeds from the Offerings and borrowings.  Future distributions declared and paid may exceed cash flow from operating activities until such time as we invest in additional real estate or real estate-related assets at favorable yields and our investments reach stabilization.

 

Distributions paid to stockholders are funded through various sources, including cash flow from operating activities, proceeds raised as part of our Offerings, reinvestment through our DRP and additional borrowings.  The following summarizes certain information related to the sources of recent distributions:

 

 

 

March 31,

 

 

 

2012

 

2011

 

Total Distributions Paid

 

$

3,174

 

$

2,773

 

 

 

 

 

 

 

Principal Sources of Funding:

 

 

 

 

 

Distribution Reinvestment Plan

 

$

2,074

 

$

1,872

 

Cash flow used in operating activities

 

$

(831

)

$

(412

)

Cash available at the beginning of the period (1)

 

$

80,130

 

$

49,375

 

 


(1)         Represents the cash available at the beginning of the reporting period primarily attributable to excess funds raised from the issuance of common stock and borrowings, after the impact of historical operating activities, other investing and financing activities.

 

Distributions for the first quarters of 2012 and 2011 were as follows ($ in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

Cash Flow

 

Total

 

Declared

 

 

 

Distributions Paid

 

Used In

 

Distributions

 

Distribution

 

2012 first quarter distributions

 

Cash

 

Reinvested

 

Total

 

Operations

 

Declared

 

Per Share

 

Regular distribution

 

$

1,100

 

$

2,074

 

$

3,174

 

$

(831

)

$

3,209

 

$

0.125

 

Special cash distribution (a)

 

 

 

 

 

13,048

 

0.500

 

 

 

$

1,100

 

$

2,074

 

$

3,174

 

$

(831

)

$

16,257

 

$

0.625

 

 

 

 

 

 

 

 

 

 

Cash Flow

 

 

 

Declared

 

 

 

Distributions Paid

 

Used In

 

Distributions

 

Distribution

 

2011 first quarter distribution

 

Cash

 

Reinvested

 

Total

 

Operations

 

Declared

 

Per Share

 

Regular distribution

 

$

901

 

$

1,872

 

$

2,773

 

$

(412

)

$

2,815

 

$

0.123

 

 


(a)         Declared amount is based upon number of stockholders as of April 3, 2012.

 

Distributions declared per share assume the share was issued and outstanding each day during the period.  Beginning June 2009 through March 2012, the declared daily distribution rate was $0.0013699 per share of common stock, which is equivalent to an annualized distribution rate of 5.0% assuming the share was purchased for $10.00.

 

14.          Related Party Transactions

 

The Advisor and certain of its affiliates will receive fees and compensation in connection with the Offerings, and in connection with the acquisition, management, and sale of our assets.

 

Pursuant to a Dealer Manager Agreement, we engaged Behringer Securities LP (“Behringer Securities”) to act as our dealer manager in connection with the initial offering and the Follow-On Offering.  The Follow-On Offering terminated as to the primary portion on March 15, 2012 and discontinued offering shares of our common stock under the DRP effective April 2, 2012.  The terms of the Dealer Manager Agreement were the same in all material respects as the terms of the agreement entered with Behringer Securities dated January 4, 2008 pursuant to which Behringer Securities acted as the dealer manager for the Initial Offering.

 

Behringer Securities received commissions of up to 7% of gross primary offering proceeds.  Behringer Securities reallowed 100% of selling commissions earned to participating broker-dealers.  In addition, we paid Behringer Securities a dealer manager fee of up to 2.5% of gross offering proceeds.  Pursuant to separately negotiated agreements, Behringer Securities reallowed a portion of its dealer manager fee in an aggregate amount up to 2% of gross offering proceeds to broker-dealers participating in the Offerings; provided, however, that Behringer Securities reallowed, in the aggregate, no more than 1.5% of gross offering proceeds for marketing fees and expenses, conference fees and non-itemized, non-invoiced

 

19



Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

due diligence efforts and no more than 0.5% of gross offering proceeds for out-of-pocket and bona fide, separately invoiced due diligence expenses incurred as fees, costs or other expenses from third parties.  Further, in special cases pursuant to separately negotiated agreements and subject to applicable limitations imposed by the Financial Industry Regulatory Authority, Behringer Securities used a portion of its dealer manager fee to reimburse certain broker-dealers participating in the Offerings for technology costs and expenses associated with the Offerings and costs and expenses associated with the facilitation of the marketing and ownership of our shares by such broker-dealers’ customers.  No selling commissions, dealer manager fees or organization and offering expenses were paid for sales under the DRP.  For the three months ended March 31, 2012, Behringer Securities earned selling commissions and dealer manager fees of $0.4 million and $0.2 million, respectively, which were recorded as a reduction to additional paid-in capital.  For the three months ended March 31, 2011, Behringer Securities earned selling commissions and dealer manager fees of $0.5 million and $0.2 million, respectively, which were recorded as a reduction to additional paid-in capital.

 

We reimbursed the Advisor and its affiliates for organization and offering expenses (other than selling commissions and the dealer manager fee) incurred on our behalf in connection with the primary offering component of the Offerings.  The total we are required to remit to the Advisor for organization and offering expenses (other than selling commissions and the dealer manager fee) is limited to 1.5% of the gross proceeds raised in the completed primary offering components of the Offerings as determined upon completion of the Offerings.  The Advisor or its affiliates determines the amount of organization and offering expenses owed based on specific invoice identification, as well as an allocation of costs to us and other Behringer Harvard programs, based on respective equity offering results of those entities in offering.

 

In connection with the Initial Offering, we reimbursed the Advisor for $7.5 million of organization and offering expenses (other than selling commissions and dealer manager fees) that it had incurred on our behalf since January 1, 2009.  On July 5, 2011, in connection with the Follow-On Offering, we entered into the Third Amended and Restated Advisory Management Agreement with the Advisor.  Pursuant to the Third Amended and Restated Advisory Management Agreement, we did not reimburse the Advisor for any additional organization and offering expenses (other than selling commissions and the dealer manager fee) incurred on our behalf during the Follow-On Offering.  We terminated the primary portion of the Follow-On Offering effective March 15, 2012 and discontinued offering shares of our common stock under the DRP effective April 2, 2012.

 

The Advisor will reimburse us to the extent that the total amount spent on organization and offering expenses (other than selling commissions and the dealer manager fee) in the Offerings exceeds 1.5% of the gross proceeds raised in the primary component of the Offerings.  Based on the gross proceeds from our Offerings, we have recorded a receivable from the Advisor for approximately $3.9 million of organization and offering expenses that were previously reimbursed to the Advisor.  The receivable of $3.9 million is presented net of other payables of $0.5 million to the Advisor on our consolidated balance sheet.  We expect to receive payment from the Advisor for this receivable during the first quarter of 2013.

 

Since our inception through March 31, 2012, approximately $16.4 million of organization and offering expenses was incurred by the Advisor or its affiliates on our behalf.  Of this amount, $7.5 million has been reimbursed by us.  As of March 31, 2012, we had no amounts payable to the Advisor for organization and offering expenses.

 

The Advisor or its affiliates will also receive acquisition and advisory fees of 2.5% of the amount paid and/or in respect of the purchase, development, construction, or improvement of each asset we acquire, including any debt attributable to those assets.  The Advisor and its affiliates will also receive acquisition and advisory fees of 2.5% of the funds advanced in respect of a loan or other investment.  We incurred no acquisition and advisory fees payable to the Advisor for the three months ended March 31, 2012 and $0.1 million for the three months ended March 31, 2011.

 

The Advisor or its affiliates also receive an acquisition expense reimbursement in the amount of 0.25% of (i) the funds paid for purchasing an asset, including any debt attributable to the asset, (ii) the funds budgeted for development, construction, or improvement in the case of assets that we acquire and intend to develop, construct, or improve, and (iii) the funds advanced in respect of a loan or other investment.  In addition, to the extent the Advisor or its affiliates directly provide services formerly provided or usually provided by third parties, including, without limitation, accounting services related to the preparation of audits required by the SEC, property condition reports, title services, title insurance, insurance brokerage or environmental services related to the preparation of environmental assessments in connection with a completed investment, the direct employee costs and burden to the Advisor of providing these services will be acquisition expenses for which we will reimburse the Advisor.  We also pay third parties, or reimburse the Advisor or its affiliates, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finder’s fees, title insurance, premium expenses, and other closing costs.  In addition, acquisition expenses for which we will reimburse the Advisor, include any payments made to (i) a prospective seller of an asset, (ii) an agent of a prospective seller

 

20



Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

of an asset, or (iii) a party that has the right to control the sale of an asset intended for investment by us that are not refundable and that are not ultimately applied against the purchase price for such asset.  Except as described above with respect to services customarily or previously provided by third parties, the Advisor is responsible for paying all of the expenses it incurs associated with persons employed by the Advisor to the extent that they are dedicated to making investments for us, such as wages and benefits of the investment personnel.  The Advisor and its affiliates are also responsible for paying all of the investment-related expenses that we or the Advisor or its affiliates incur that are due to third parties or related to the additional services provided by the Advisor as described above with respect to investments we do not make, other than certain non-refundable payments made in connection with any acquisition.  We incurred no acquisition expense reimbursements for the three months ended March 31, 2012 and less than $0.1 million for the three months ended March 31, 2011.

 

We pay the Advisor or its affiliates a debt financing fee of 1% of the amount available under any loan or line of credit made available to us.  It is anticipated that the Advisor will pay some or all of these fees to third parties with whom it subcontracts to coordinate financing for us.  We incurred no debt financing fees for the three months ended March 31, 2012 and 2011.

 

We pay the Advisor or its affiliates a development fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project if such affiliate provides the development services and if a majority of our independent directors determines that such development fee is fair and reasonable and on terms and conditions not less favorable than those available from unaffiliated third parties.  We incurred no such fees for the three months ended March 31, 2012 or 2011.

 

We pay our property manager and affiliate of the Advisor, Behringer Harvard Opportunity II Management Services, LLC (“BHO II Management”), or its affiliates, fees for the management, leasing, and construction supervision of our properties.  Property management fees are 4.5% of the gross revenues of the properties managed by BHO II Management or its affiliates, plus leasing commissions based upon the customary leasing commission applicable to the same geographic location of the respective property.  In the event that we contract directly with a third-party property manager in respect of a property, BHO II Management or its affiliates receives an oversight fee equal to 0.5% of the gross revenues of the property managed.  In no event will BHO II Management or its affiliates receive both a property management fee and an oversight fee with respect to any particular property.  In the event we own a property through a joint venture that does not pay BHO II Management directly for its services, we will pay BHO II Management a management fee or oversight fee, as applicable, based only on our economic interest in the property.  We incurred and expensed property management fees or oversight fees to BHO II Management of approximately $0.1 million for each of the three months ended March 31, 2012 and 2011.

 

We pay the Advisor or its affiliates a monthly asset management fee of one-twelfth of 1.0% of the sum of the higher of the cost or value of each asset.  For the three months ended March 31, 2012 and 2011, we expensed $0.7 million and $0.6 million, respectively, of asset management fees.

 

We reimburse the Advisor or its affiliates for all expenses paid or incurred by the Advisor in connection with the services provided to us, subject to the limitation that we will not reimburse the Advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of:  (A) 2% of our average invested assets, or (B) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of our assets for that period.  Notwithstanding the above, we may reimburse the Advisor for expenses in excess of this limitation if a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the three months ended March 31, 2012 and 2011, we incurred and expensed such costs for administrative services of $0.3 million and $0.2 million, respectively.

 

We are dependent on Behringer Securities, the Advisor, and BHO II Management for certain services that are essential to us, including asset acquisition and disposition decisions, property management and leasing services, and other general administrative responsibilities.  In the event that these companies were unable to provide us with their respective services, we would be required to obtain such services from other sources.

 

21



Table of Contents

 

Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

15.          Supplemental Cash Flow Information

 

Supplemental cash flow information is summarized below:

 

 

 

Three months ended March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Interest paid

 

$

2,406

 

$

1,855

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Capital expenditures for real estate in accounts payable

 

$

879

 

$

543

 

Capital expenditures for real estate in accrued liabilities

 

$

339

 

$

510

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Common stock issued in distribution reinvestment plan

 

$

2,074

 

$

1,872

 

Accrued dividends payable

 

$

14,152

 

$

982

 

Offering costs payable to related parties

 

$

 

$

23

 

Redemption of stock in accrued liabilities

 

$

 

$

541

 

 

16.          Discontinued Operations

 

On December 22, 2011, we sold Archibald Business Center for a contract price of $15 million.  The results of operations for Archibald Business Center and the Palms of Monterrey which was sold on January 5, 2012 have been classified as discontinued operations in the accompanying consolidated statements of operations.

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Rental revenue

 

$

94

 

$

1,419

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Property operating expenses

 

63

 

422

 

Interest expense

 

28

 

423

 

Real estate taxes

 

3

 

108

 

Property management fees

 

11

 

34

 

Asset management fees

 

 

5

 

Depreciation and amortization

 

 

456

 

Total expenses

 

105

 

1,448

 

Interest income, net

 

1

 

 

Loss on early extinguishment of debt (1)

 

(1,236

)

 

Gain on sale of real estate property

 

9,264

 

 

Income (loss) from discontinued operations

 

$

8,018

 

$

(29

)

 


(1)         Loss on early extinguishment of debt for the three months ended March 31, 2012 was approximately $1.2 million and was comprised of the write-off of deferred financing fees and an early termination fee.

 

The major classes of assets and liabilities associated with the real estate held for sale as of December 31, 2011was as follows (in thousands):

 

 

 

December 31, 2011

 

Land and improvements, net

 

$

6,316

 

Building and improvements, net

 

22,294

 

Furniture, fixtures and equipment, net

 

810

 

Assets associated with real estate held for sale

 

$

29,420

 

 

 

 

 

Obligations associated with real estate held for sale

 

$

37

 

 

17.          Subsequent Events

 

On April 5, 2012, we acquired Alte Jakobstraße 79-80 (“Alte Jakobstraße”), a multi-tenant office building located in Berlin, Germany, from an unaffiliated third party.  The purchase price for Alte Jakobstraße, excluding closing costs, was approximately €8.4 million or approximately $11.1 million based on the exchange rate in effect on April 5, 2012.  We funded the purchase price with proceeds from the Follow-On Offering and financing activities.  In connection with the acquisition of

 

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Alte Jakobstraße, on April 5, 2012, we entered into a loan for €5.9 million or approximately $7.8 million based on the exchange rate in effect on April 5, 2012 (the “Loan”) with an unaffiliated third party.  The Loan bears interest at a fixed annual rate of approximately 2.3% for three years and must be repaid in the amount of 4% annually of the original loan amount plus interest.  The Loan must be repaid in its entirety by December 30, 2015. The Loan is secured by Alte Jakobstraße, including the leases and rents.

 

*****

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with our accompanying financial statements and the notes thereto.

 

Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of Behringer Harvard Opportunity REIT II, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, the value of our assets, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions to our stockholders, the estimated per share value of our common stock and other matters.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.

 

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions.  These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described herein and under Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2012 and the factors described below:

 

·                  no trading market for our shares exists, and we can provide no assurance that one will ever develop;

 

·                  possible delays in locating suitable investments;

 

·                  our potential inability to invest in a diverse portfolio;

 

·                  investments in foreign properties are susceptible to currency exchange rate fluctuations, adverse political developments, and changes in foreign laws;

 

·                  adverse market and economic challenges experienced by the U.S. and global economies or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;

 

·                  the availability of credit generally, and any failure to refinance or extend our debt as it comes due or a failure to satisfy the conditions and requirements of that debt;

 

·                  future increases in interest rates;

 

·                  our ability to raise capital in the future by issuing additional equity or debt securities, selling our assets or otherwise;

 

·                  payment of distributions from sources other than cash flows from operating activities;

 

·                  our obligation to pay substantial fees to our Advisor and its affiliates;

 

·                  our ability to retain our executive officers and other key personnel of our Advisor, our property manager and their affiliates;

 

·                  conflicts of interest arising out of our relationships with our Advisor and its affiliates;

 

·                  unfavorable changes in laws or regulations impacting our business or our assets; and

 

·                  factors that could affect our ability to qualify as a real estate investment trust.

 

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect.  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, except as required by applicable law.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

 

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Cautionary Note

 

The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Quarterly Report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties.  Moreover, these representations, warranties or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.

 

Executive Overview

 

We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic basis.  In particular, we focus generally on acquiring commercial properties with significant possibilities for short-term capital appreciation, such as those requiring development, redevelopment or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines.  In addition, our opportunistic investment strategy may also include investments in loans secured by or related to real estate at more attractive rates of current return than have been available for some time.  Such loan investments may have capital gain characteristics, whether as a result of a discount purchase or related equity participations.  We may acquire a wide variety of commercial properties, including office, industrial, retail, hospitality, recreation and leisure, single-tenant, multifamily, and other real properties.  These properties may be existing, income-producing properties, newly constructed properties or properties under development or construction and may include multifamily properties purchased for conversion into condominiums or single-tenant properties that may be converted for multi-tenant use.  Further, we may invest in real estate-related securities, including securities issued by other real estate companies, either for investment or in change of control transactions completed on a negotiated basis or otherwise.  We also may originate or invest in collateralized mortgage-backed securities and mortgage, bridge or mezzanine loans, or in entities that make investments similar to the foregoing.  We expect to make our investments in or in respect of real estate assets located in the United States and other countries based on current market conditions.

 

On February 26, 2007, we filed an initial Registration Statement on Form S-11 with the SEC to offer up to 125,000,000 shares in the Initial Offering, of which 25,000,000 shares were being offered pursuant to DRP.  The SEC declared our Registration Statement effective on January 4, 2008, and we commenced the Initial Offering on January 21, 2008.  On July 3, 2011, the Initial Offering terminated in accordance with its terms.

 

Prior to termination of the Initial Offering, on September 13, 2010, we filed a second Registration Statement on Form S-11 with the SEC to register up to 75,000,000 shares of our common stock for sale to the public in the Follow-On Offering, of which 25,000,000 shares were offered pursuant to the DRP.  On July 5, 2011, the Follow-On Offering registration statement was declared effective by the SEC and we commenced offering shares under the Follow-on Offering.  We terminated the primary portion of the Follow-On Offering on March 15, 2012 and discontinued offering shares under the DRP effective April 2, 2012.  Through March 31, 2012, we raised gross offering proceeds of approximately $264.6 million from the sale of approximately 26.6 million shares under the Offerings, including shares sold under the DRP.

 

Market Outlook

 

After several months of positive economic reports, March 2012 was a disappointment.  Economic data related to employment, housing and manufacturing were below analysts’ expectations.  Whether 2012 will be a repeat of the last two years, when the year started off favorably but slowed in the spring remains to be seen.  On the positive side, there are a few differences between this period and the other years.  Oil prices, which were a significant cause for last year’s slump, have begun to moderate and with demand down, these trends may continue.  The European debt crisis, although still not fully resolved, does not appear to have the same effect on the U.S. as in the past.  Also, the natural disasters that disrupted global supply chains have not reoccurred.

 

As an owner of office and industrial real estate properties, the majority of our income and cash flow is derived from rental revenue received pursuant to tenant leases for space at our properties.  Over the past several months there has been some improvement in fundamental benchmarks such as occupancy, rental rates and pricing.  Continued improvement in these fundamentals is dependent upon sustained economic growth.  Occupancy and rental rate stabilization will vary by market and property type.

 

The demand for health care services, and consequently health care properties, is projected to reach unprecedented levels in the near future.  The Centers for Medicare and Medicaid Services project that national health care expenditures will rise to $3.5 trillion in 2015, or 18.2% of gross domestic product.  The annual growth in national health expenditures for 2012 through 2019 is expected to be 6.3%, which is 0.2% faster than pre-health care reform estimates.  While demographics are the primary driver of demand, economic conditions and availability of services contribute to health care service utilization rates.  We believe the health care property market may be less susceptible to fluctuations and economic downturns relative to other property sectors.

 

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The total U.S. population is projected to increase by 20.4% through 2030.  The population aged 65 and over is projected to increase by 79.2% through 2030.  This population is an important component of health care utilization.  Most health care services are provided within a health care facility such as a hospital, a physician’s office or a senior housing facility.

 

The hospitality industry is beginning to see early signs of a recovering economy.  Smith Travel Research indicates that the national overall occupancy rate for hospitality properties in the United States rose from 54.9% in the first quarter of 2011 to 56.8% in the first quarter of 2012.  The national overall Average Daily Rate has also risen, from $99.37 in the first quarter of 2011 to $103.54 in the first quarter of 2012.  This positive growth in the hospitality industry is expected to continue.

 

Although a slower U.S. economy may provide some resistance, primarily with respect to overall job growth, the favorable demand/supply fundamentals present in multifamily investments should still support reasonable growth.  On the demand side, the demographics for the targeted multifamily renter, the age group from 20 to 34 years old, are still positive in the sector.  This group is growing in size and while the other age segments have experienced employment declines, their aggregate employment has increased.  Further, while this age group in previous economic cycles experienced increasing single family home ownership, higher credit standards for single family mortgages and more reluctance to commit to home ownership are currently leading to more rental demand.  At the same time on the supply side, developments of new multifamily communities decreased substantially since 2008, such that supply has not been keeping up with demand.  We believe that this demand will lead to increased development activity; however, since high quality multifamily developments can take 18 to 36 months to entitle, permit and construct, we believe there is, even in the most aggressive outlook, a continued window of limited supply.  Accordingly, many analysts are still projecting continued multifamily rental growth, albeit at a slower pace. However, multifamily performance is highly correlated with job and income growth.  While the factors noted above should position the multifamily sector to perform better in a slow growth environment, eventually the multifamily sector will need stronger employment to maintain rental growth.

 

Current interest rates and the availability of multifamily financing are also favorable factors in the multifamily sector.  In the last 15 months, five and ten year treasury rates have declined approximately 1%, and as of March 31, 2012 are approximately 1% and 2%, respectively.  Competition for multifamily financing, particularly high quality, stabilized communities such as ours, has also added to the favorable financing environment.  In addition to government sponsored entities, insurance companies and commercial banks have been aggressive lenders in our sector.  While there is a risk that the European debt crisis, future legislative restrictions on Fannie Mae and Freddie Mac multifamily lending, or inflationary or capital pressures could eventually reverse these trends resulting in increased lending costs for multifamily, thus far this has not occurred.

 

Unlike traditional multifamily housing, all leases for student housing property typically commence and terminate on the same dates.  In the case of our typical student housing leases, this date coincides with the commencement of the fall academic term with the leases typically terminating at the completion of the last summer school session of the academic year. As such, we must re-lease each property in its entirety each year, resulting in significant turnover in our tenant population from year to year.  As a result, we are highly dependent upon the effectiveness of our marketing and leasing efforts during the annual leasing season that typically begins in January and ends in August of each year.  Our properties’ occupancy rates are therefore typically relatively stable during the August to July academic year, but are susceptible to fluctuation at the commencement of each new academic year, which may be greater than the fluctuation in occupancy rates experienced by traditional multifamily properties.

 

Liquidity and Capital Resources

 

Our principal demands for funds will be for the (a) acquisition of real estate and real estate-related assets, (b) payment of operating expenses and (c) payment of interest on our outstanding indebtedness.  Generally, we expect to meet cash needs for the payment of operating expenses and interest on our outstanding indebtedness from our cash flow from operations.  To the extent that our cash flow from operations is not sufficient to cover our operating expenses, interest on our outstanding indebtedness, redemptions or distributions, we expect to use any proceeds not invested from the Offerings, borrowings and asset sales to fund such needs.

 

We continually evaluate our liquidity and ability to fund future operations and debt obligations.  As part of those analyses, we consider lease expirations and other factors.  Leases at our consolidated office and industrial properties representing 33% of our annualized base rent will expire by the end of 2013.  As a normal course of business, we are pursuing renewals, extensions and new leases.  If we are unable to renew or extend the expiring leases under similar terms or are unable to negotiate new leases, it would negatively impact our liquidity and adversely affect our ability to fund our ongoing operations.

 

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Portfolio Lease Expirations

 

The following table presents lease expirations for non-cancelable leases for our consolidated office and industrial properties as of March 31, 2012 ($ in thousands):

 

Year of
Expiration

 

Number of
Leases
Expiring

 

Annualized
Base Rent(1)

 

Percent of
Portfolio
Annualized Base
Rent Expiring

 

Leased
Rentable
Sq. Ft.

 

Percent of
Portfolio
Rentable Sq. Ft.
Expiring

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

47

 

$

2,573

 

15

%

122,564

 

12

%

2013

 

46

 

3,099

 

18

%

282,147

 

28

%

2014

 

34

 

3,079

 

17

%

198,551

 

20

%

2015

 

43

 

2,387

 

14

%

107,388

 

11

%

2016

 

36

 

2,890

 

16

%

133,689

 

13

%

Thereafter

 

32

 

3,514

 

20

%

157,356

 

16

%

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

238

 

$

17,542

 

100

%

1,001,695

 

100

%

 


(1) Represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to the expiration multiplied by 12, without consideration of tenant contraction or termination rights.  Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges.

 

Geographic Diversification

 

The following table shows the geographic diversification of our real estate portfolio for those properties that we consolidate into our financial statements as of March 31, 2012 ($ in thousands):

 

Location

 

2012 Revenue(1)

 

Percentage of
2012 Revenue

 

Florida

 

$

5,106

 

46

%

Hawaii

 

2,474

 

22

%

Georgia

 

1,147

 

10

%

Tennessee

 

993

 

9

%

Colorado

 

854

 

8

%

International

 

249

 

2

%

California

 

233

 

2

%

Texas

 

116

 

1

%

 

 

$

11,172

 

100

%

 


(1) 2012 Revenue represents contractual base rental income of our office and industrial properties and does not take into account any rent concessions or prospective rent increase, as well as revenue from our multifamily, hotel properties, student housing and self-storage excluding tenant reimbursements, without consideration of tenant contraction or termination rights.

 

Tenant Diversification

 

As of March 31, 2012, no single tenant represented more than 10% of our revenues.  As an opportunistic fund, we utilize a business model driven by investment strategy and expected performance characteristics. Accordingly, we have investments in several types of real estate, including office, hotel, multifamily, industrial, student housing and self-storage.

 

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The following table shows the tenant diversification of our real estate portfolio for those office and industrial properties we consolidate on our financial statements as of March 31, 2012.  In addition, we have approximately 1,107 leases at our three multifamily properties.  These multifamily leases are short-term in nature and are not reflected in the table below ($ in thousands).

 

Tenant Diversification

 

Leases at March 31, 2012

 

Percentage of
March 31, 2012
Leases

 

2012 Annualized
Base Rent (1)

 

Percentage of
2012 Annualized
Base Rent

 

Leased Rentable
Sq. Ft.

 

Percentage of
Leased Rentable
Sq. Ft.

 

Health Care and Social Assistance

 

202

 

85

%

$

11,958

 

68

%

533,408

 

53

%

Professional, Scientific, and Technical Services

 

14

 

6

%

2,104

 

12

%

99,332

 

10

%

Transportation and Warehousing

 

3

 

1

%

1,171

 

7

%

272,576

 

27

%

Finance and Insurance

 

3

 

1

%

1,066

 

6

%

45,429

 

5

%

Utilities

 

2

 

1

%

399

 

2

%

13,892

 

1

%

Retail Trade

 

7

 

3

%

305

 

2

%

10,613

 

1

%

Real Estate and Rental & Leasing

 

3

 

1

%

271

 

1

%

11,173

 

1

%

Educational Services

 

3

 

1

%

264

 

2

%

15,000

 

1

%

Accommodation and Food Services

 

1

 

1

%

4

 

0

%

272

 

1

%

 

 

238

 

100

%

$

17,542

 

100

%

1,001,695

 

100

%

 


(1) Represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to the expiration multiplied by 12, without consideration of tenant contraction or termination rights.  Tenant reimbursements generally include payment of real estate taxes, operating expenses and common area maintenance and utility charges.

 

Please see Note 3 to the Consolidated Financial Statements for information regarding how tenant industry diversification may be considered in the evaluation of our investments for impairment.

 

We expect to fund our short-term liquidity requirements by using the net proceeds from the Follow-On Offering, cash flow from the operations of investments we acquire, and asset sales.  Operating cash flows are expected to increase as additional real estate assets are added to the portfolio and our existing portfolio stabilizes.  Although we intend to diversify our real estate portfolio, to the extent our portfolio is concentrated in certain geographic regions, types of assets, industries or business sectors, downturns relating generally to such regions, assets, industry or business sectors may result in tenants defaulting on their lease obligations at a number of our properties within a short time period.  Such defaults could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations.

 

For both our short-term and long-term liquidity requirements, other potential future sources of capital may include proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of our investments, if and when any are sold, and undistributed funds from operations or cash flow.  If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.

 

We may, but are not required to, establish capital reserves from net offering proceeds, cash flow generated by operating properties and other investments, or net sale proceeds from the sale of our properties and other investments.  Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions and major capital expenditures.  Alternatively, a lender may establish its own criteria for escrow of capital reserves.

 

We intend to borrow money to acquire properties and make other investments.  There is no limitation on the amount we may invest in any single property or other asset or on the amount we can borrow for the purchase of any individual property or other investment.  Under our charter, the maximum amount of our indebtedness is limited to 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors.  In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests.  Our policy limitation, however, does not apply to individual real estate assets and apply once we have invested substantially all of our capital from the Follow-On Offering.  We terminated the primary portion of the follow-on offering effective March 15, 2012 and discontinued offering of shares of our common stock under the DRP effective April 2, 2012.  As a result, we expect to borrow more than 75% of the contract purchase price of each real estate asset we acquire during the early periods of our operations to the extent our board of directors determines that borrowing at these levels is prudent.

 

The debt markets have experienced pervasive and fundamental disruptions.  Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our acquisitions, developments and investments.  This may result in our investment operations generating lower overall economic returns and a reduced level of cash flow, which could potentially impact our ability to make distributions to our stockholders.  In addition, the dislocations in the debt markets have reduced the amount of capital that is available to finance real estate, which in turn: (a) leads to a decline in real estate values generally; (b) slows real estate transaction activity; (c) reduces the loan to value ratio upon which lenders are willing to extend debt; and (d) results in difficulty in refinancing debt as it becomes due, all of which may reasonably be expected to have a material adverse impact on the value

 

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of real estate investments and the revenues, income or cash flow from the operations of real properties and mortgage loans. In addition, the current state of the debt markets has negatively impacted our ability to raise equity capital.

 

Debt Financings

 

We may, from time to time, obtain mortgage, bridge or mezzanine loans for acquisitions and investments, as well as property development.  We may obtain financing at the time an asset is acquired or an investment is made or at such later time as determined to be necessary, depending on multiple factors.

 

At March 31, 2012, our notes payable balance was $219.9 million.  We have unconditionally guaranteed payment of the note payable related to 1875 Lawrence which has a maturity date of December 31, 2012 for an amount not to exceed the lesser of (i) $11.75 million and (ii) 50% of the total amount advanced under the loan agreement if the aggregate amount advanced is less than $23.5 million.  We currently plan on refinancing the note payable or exercising the one year extension option pursuant to the terms under the loan agreement.  We have guaranteed payment of certain recourse liabilities with respect to certain nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the notes payable related to the Courtyard Kauai at Coconut Beach Hotel.

 

Our loan agreements stipulate that we comply with certain reporting and financial covenants.  These covenants include, among other things, maintaining minimum debt service coverage ratios and liquidity.  As of March 31, 2012, we believe we were in compliance with the debt covenants under our loan agreements.  We were not in compliance with a certain covenant under the Interchange Business Center loan at April 1, 2012 and as a result, we made an immediately due principal payment of $0.8 million and, subject to certain covenants, an additional amount of up to $1.9 million may be due by July 1, 2012.

 

One of our principal long-term liquidity requirements includes the repayment of maturing debt.  The following table provides information with respect to the maturities and scheduled principal repayments of our indebtedness as of March 31, 2012.  The table does not represent any extension options ($ in thousands).

 

 

 

Payments Due by Period

 

 

 

April 1, 2012 -
December 31,
2012