Attached files
| file | filename |
|---|---|
| EX-10.4 - EXHIBIT - Behringer Harvard Opportunity REIT I, Inc. | ex104chaseparkguarnon-recc.htm |
| EX-31.1 - EXHIBIT-CERT - Behringer Harvard Opportunity REIT I, Inc. | ex311-q314.htm |
| EX-32.1 - EXHIBIT-CERT - Behringer Harvard Opportunity REIT I, Inc. | ex321-q314.htm |
| EX-10.3 - EXHIBIT - Behringer Harvard Opportunity REIT I, Inc. | ex103chaseparkcompletiongu.htm |
| EX-10.1 - EXHIBIT - Behringer Harvard Opportunity REIT I, Inc. | ex101chaseparknote.htm |
| EX-10.2 - EXHIBIT - Behringer Harvard Opportunity REIT I, Inc. | ex102chaseparkdeedtrust.htm |
| EX-31.2 - EXHIBIT-CERT - Behringer Harvard Opportunity REIT I, Inc. | ex312-q314.htm |
| EX-32.2 - EXHIBIT-CERT - Behringer Harvard Opportunity REIT I, Inc. | ex322-q314.htm |
| EXCEL - IDEA: XBRL DOCUMENT - Behringer Harvard Opportunity REIT I, Inc. | Financial_Report.xls |
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 September 30, 2014
Commission File Number: 000-51961
Behringer Harvard Opportunity REIT I, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Maryland | 20-1862323 | |
(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 ý 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 ý 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 (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
As of October 31, 2014, the Registrant had 56,500,472 shares of common stock outstanding.
BEHRINGER HARVARD OPPORTUNITY REIT I, INC.
FORM 10-Q
Quarter Ended September 30, 2014
Page | ||
Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 | ||
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013 | ||
Condensed Consolidated Statements of Equity for the Nine Months Ended September 30, 2014 and 2013 | ||
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 | ||
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Behringer Harvard Opportunity REIT I, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
September 30, 2014 | December 31, 2013 | |||||||
Assets | ||||||||
Real estate | ||||||||
Land and improvements, net | $ | 66,571 | $ | 71,244 | ||||
Buildings and improvements, net | 159,046 | 163,731 | ||||||
Real estate under development | 8,208 | 905 | ||||||
Total real estate | 233,825 | 235,880 | ||||||
Condominium inventory | 2,967 | 2,967 | ||||||
Cash and cash equivalents | 44,456 | 36,796 | ||||||
Restricted cash | 7,593 | 4,890 | ||||||
Accounts receivable, net | 8,068 | 7,237 | ||||||
Prepaid expenses and other assets | 1,177 | 1,553 | ||||||
Investments in unconsolidated joint ventures | 16,330 | 18,495 | ||||||
Furniture, fixtures and equipment, net | 2,607 | 2,430 | ||||||
Deferred financing fees, net | 2,074 | 1,383 | ||||||
Lease intangibles, net | 4,587 | 5,093 | ||||||
Other intangibles, net | 4,950 | 5,396 | ||||||
Total assets | $ | 328,634 | $ | 322,120 | ||||
Liabilities and Equity | ||||||||
Notes payable | $ | 153,967 | $ | 138,085 | ||||
Accounts payable | 1,498 | 927 | ||||||
Payables to related parties | 836 | 771 | ||||||
Acquired below-market leases, net | 1,165 | 1,437 | ||||||
Accrued and other liabilities | 23,400 | 21,530 | ||||||
Total liabilities | 180,866 | 162,750 | ||||||
Commitments and contingencies | — | — | ||||||
Equity | ||||||||
Behringer Harvard Opportunity REIT I, Inc. 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 shares issued and outstanding | — | — | ||||||
Common stock, $.0001 par value per share; 350,000,000 shares authorized, and 56,500,472 shares issued and outstanding at September 30, 2014 and December 31, 2013 | 6 | 6 | ||||||
Additional paid-in capital | 507,303 | 505,167 | ||||||
Accumulated distributions and net loss | (358,484 | ) | (348,541 | ) | ||||
Accumulated other comprehensive income (loss) | (1,370 | ) | 366 | |||||
Total Behringer Harvard Opportunity REIT I, Inc. equity | 147,455 | 156,998 | ||||||
Noncontrolling interest | 313 | 2,372 | ||||||
Total equity | 147,768 | 159,370 | ||||||
Total liabilities and equity | $ | 328,634 | $ | 322,120 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
Behringer Harvard Opportunity REIT I, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share amounts)
(unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenues | ||||||||||||||||
Rental revenue | $ | 5,044 | $ | 5,020 | $ | 15,134 | $ | 15,775 | ||||||||
Hotel revenue | 9,794 | 9,060 | 27,131 | 22,378 | ||||||||||||
Condominium sales | — | — | — | 409 | ||||||||||||
Total revenues | 14,838 | 14,080 | 42,265 | 38,562 | ||||||||||||
Expenses | ||||||||||||||||
Property operating expenses | 1,831 | 2,268 | 6,051 | 8,405 | ||||||||||||
Hotel operating expenses | 6,941 | 6,924 | 19,988 | 17,103 | ||||||||||||
Bad debt expense (recovery) | 62 | (17 | ) | (87 | ) | 1,714 | ||||||||||
Cost of condominium sales | — | — | — | 417 | ||||||||||||
Interest expense | 2,929 | 2,481 | 7,784 | 7,306 | ||||||||||||
Real estate taxes | 1,076 | 873 | 3,017 | 2,956 | ||||||||||||
Impairment charge | — | 119 | — | 119 | ||||||||||||
Property management fees | 498 | 505 | 1,377 | 1,280 | ||||||||||||
Asset management fees | 564 | 553 | 1,692 | 1,741 | ||||||||||||
General and administrative | 1,293 | 1,076 | 4,264 | 4,248 | ||||||||||||
Depreciation and amortization | 3,092 | 2,968 | 9,457 | 9,619 | ||||||||||||
Total expenses | 18,286 | 17,750 | 53,543 | 54,908 | ||||||||||||
Interest income | 9 | 12 | 34 | 42 | ||||||||||||
Loss on early extinguishment of debt | (246 | ) | — | (246 | ) | — | ||||||||||
Other income (expense) net | — | (87 | ) | 759 | (60 | ) | ||||||||||
Loss from continuing operations before reorganization items, income taxes and equity in losses of unconsolidated joint ventures | (3,685 | ) | (3,745 | ) | (10,731 | ) | (16,364 | ) | ||||||||
Reorganization items, net | — | (29 | ) | — | (152 | ) | ||||||||||
Provision for income taxes | (34 | ) | (46 | ) | (98 | ) | (110 | ) | ||||||||
Equity in gains (losses) of unconsolidated joint ventures | 173 | (3,113 | ) | 105 | (2,699 | ) | ||||||||||
Loss from continuing operations | (3,546 | ) | (6,933 | ) | (10,724 | ) | (19,325 | ) | ||||||||
Income from discontinued operations | — | — | — | 3,890 | ||||||||||||
Gain on sale of real estate | — | — | 476 | 95 | ||||||||||||
Net loss | (3,546 | ) | (6,933 | ) | (10,248 | ) | (15,340 | ) | ||||||||
Add: Net loss (gain) attributable to the noncontrolling interest | ||||||||||||||||
Continuing operations | 104 | 137 | 305 | 407 | ||||||||||||
Discontinued operations | — | — | — | (1,459 | ) | |||||||||||
Net loss attributable to common shareholders | $ | (3,442 | ) | $ | (6,796 | ) | $ | (9,943 | ) | $ | (16,392 | ) | ||||
Weighted average shares outstanding: | ||||||||||||||||
Basic and diluted | 56,500 | 56,500 | 56,500 | 56,500 | ||||||||||||
Gain (loss) per share attributable to common shareholders: | ||||||||||||||||
Basic and diluted: | ||||||||||||||||
Continuing operations | $ | (0.06 | ) | $ | (0.12 | ) | $ | (0.18 | ) | $ | (0.33 | ) | ||||
Discontinued operations | — | — | — | 0.04 | ||||||||||||
Basic and diluted loss per share | $ | (0.06 | ) | $ | (0.12 | ) | $ | (0.18 | ) | $ | (0.29 | ) | ||||
Amounts attributable to common shareholders: | ||||||||||||||||
Continuing operations | $ | (3,442 | ) | $ | (6,796 | ) | $ | (9,943 | ) | $ | (18,823 | ) | ||||
Discontinued operations | — | — | — | 2,431 | ||||||||||||
Net loss attributable to common shareholders | $ | (3,442 | ) | $ | (6,796 | ) | $ | (9,943 | ) | $ | (16,392 | ) | ||||
Comprehensive income (loss) | ||||||||||||||||
Net loss | $ | (3,546 | ) | $ | (6,933 | ) | $ | (10,248 | ) | $ | (15,340 | ) | ||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation gain (loss) | (1,614 | ) | 866 | (1,818 | ) | 999 | ||||||||||
Reclassifications to net income: | ||||||||||||||||
Unrealized foreign currency translation loss | — | — | — | 3,624 | ||||||||||||
Unrealized loss on interest rate derivatives | 41 | 22 | 86 | 67 | ||||||||||||
Total other comprehensive income (loss) | (1,573 | ) | 888 | (1,732 | ) | 4,690 | ||||||||||
Comprehensive loss | (5,119 | ) | (6,045 | ) | (11,980 | ) | (10,650 | ) | ||||||||
Comprehensive loss (income) attributable to noncontrolling interest | 104 | 137 | 305 | (1,149 | ) | |||||||||||
Comprehensive loss attributable to common shareholders | $ | (5,015 | ) | $ | (5,908 | ) | $ | (11,675 | ) | $ | (11,799 | ) | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
Behringer Harvard Opportunity REIT I, Inc.
Condensed Consolidated Statements of Equity
(in thousands, except share amounts)
(unaudited)
Convertible Stock | Common Stock | |||||||||||||||||||||||||||||||||
Number of Shares | Par Value | Number of Shares | Par Value | Additional Paid-In Capital | Accumulated Distributions and Net Loss | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interest | Total Equity | ||||||||||||||||||||||||||
Balance at January 1, 2013 | 1,000 | $ | — | 56,500,472 | $ | 6 | $ | 505,167 | $ | (328,285 | ) | $ | (4,660 | ) | $ | 1,364 | $ | 173,592 | ||||||||||||||||
Net loss | — | — | — | — | — | (16,392 | ) | — | 1,052 | (15,340 | ) | |||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||
Foreign currency translation gain | — | — | — | — | — | — | 902 | 97 | 999 | |||||||||||||||||||||||||
Reclassification of unrealized foreign currency translation loss to net income | — | — | — | — | — | — | 3,624 | — | 3,624 | |||||||||||||||||||||||||
Reclassification of unrealized loss on interest rate derivatives to net loss | — | — | — | — | — | — | 64 | 3 | 67 | |||||||||||||||||||||||||
Balance at September 30, 2013 | 1,000 | $ | — | 56,500,472 | $ | 6 | $ | 505,167 | $ | (344,677 | ) | $ | (70 | ) | $ | 2,516 | $ | 162,942 | ||||||||||||||||
Balance at January 1, 2014 | 1,000 | $ | — | 56,500,472 | $ | 6 | $ | 505,167 | $ | (348,541 | ) | $ | 366 | $ | 2,372 | $ | 159,370 | |||||||||||||||||
Net loss | — | — | — | — | — | (9,943 | ) | — | (305 | ) | (10,248 | ) | ||||||||||||||||||||||
Contributions from noncontrolling interest | — | — | — | — | — | — | — | 378 | 378 | |||||||||||||||||||||||||
Transfer of noncontrolling interest | — | — | — | — | 2,136 | — | — | (2,136 | ) | — | ||||||||||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||||
Foreign currency translation loss | — | — | — | — | — | — | (1,818 | ) | — | (1,818 | ) | |||||||||||||||||||||||
Reclassification of unrealized loss on interest rate derivatives to net loss | — | — | — | — | — | — | 82 | 4 | 86 | |||||||||||||||||||||||||
Balance at September 30, 2014 | 1,000 | $ | — | 56,500,472 | $ | 6 | $ | 507,303 | $ | (358,484 | ) | $ | (1,370 | ) | $ | 313 | $ | 147,768 | ||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
Behringer Harvard Opportunity REIT I, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine months ended September 30, | ||||||||
2014 | 2013 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (10,248 | ) | $ | (15,340 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 9,213 | 9,483 | ||||||
Amortization of deferred financing fees | 1,095 | 589 | ||||||
Loss on early extinguishment of debt | 246 | — | ||||||
Gain on troubled debt restructuring | — | (8,132 | ) | |||||
Gain on sale of real estate | (476 | ) | (95 | ) | ||||
Foreign currency translation loss | — | 3,624 | ||||||
Impairment charge | — | 424 | ||||||
Bad debt expense (recovery) | (87 | ) | 1,603 | |||||
Equity in losses of unconsolidated joint ventures | (105 | ) | 2,699 | |||||
Loss on derivatives | 86 | 68 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | (744 | ) | (500 | ) | ||||
Condominium inventory | — | 395 | ||||||
Prepaid expenses and other assets | 431 | 2,023 | ||||||
Accounts payable | 327 | (788 | ) | |||||
Accrued and other liabilities | 1,162 | 2,325 | ||||||
Payables to related parties | 66 | (801 | ) | |||||
Lease intangibles | (433 | ) | (984 | ) | ||||
Cash provided by (used in) operating activities | 533 | (3,407 | ) | |||||
Cash flows from investing activities: | ||||||||
Proceeds from sale of real estate | 1,743 | 29,034 | ||||||
Additions of property and equipment | (6,711 | ) | (1,910 | ) | ||||
Change in restricted cash | (2,703 | ) | (2,782 | ) | ||||
Net assets consolidated from hotel operations | — | 143 | ||||||
Distributions from unconsolidated joint venture | 452 | — | ||||||
Cash provided by (used in) investing activities | (7,219 | ) | 24,485 | |||||
Cash flows from financing activities: | ||||||||
Financing costs | (1,450 | ) | — | |||||
Borrowing costs paid on extinguishment of debt | (590 | ) | — | |||||
Proceeds from notes payable | 63,465 | 2,945 | ||||||
Payments on related parties note payable | — | (1,500 | ) | |||||
Payments on notes payable | (47,457 | ) | (20,940 | ) | ||||
Contributions from noncontrolling interest holders | 378 | — | ||||||
Cash provided by (used in) financing activities | 14,346 | (19,495 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | — | (8 | ) | |||||
Net change in cash and cash equivalents | 7,660 | 1,575 | ||||||
Cash and cash equivalents at beginning of the year | 36,796 | 34,825 | ||||||
Cash and cash equivalents at end of the period | $ | 44,456 | $ | 36,400 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
6
Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Business
Behringer Harvard Opportunity REIT I, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”) was incorporated in November 2004 as a Maryland corporation and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.
We operate commercial real estate and real estate-related assets located in and outside the United States on an opportunistic and value-add basis. We have focused on acquiring properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, or those located in markets and submarkets with higher volatility, lower barriers to entry, and high growth potential. We have acquired a wide variety of properties, including office, retail, hospitality, recreation and leisure, multifamily, industrial, and other properties. We have purchased existing and newly constructed properties and properties under development or construction. As of September 30, 2014, we wholly owned four properties and consolidated three properties through investments in joint ventures on our condensed consolidated balance sheet. We are the mezzanine lender for one multifamily property. In addition, we have a noncontrolling, unconsolidated ownership interest in a joint venture consisting of 21 properties that are accounted for using the equity method. Substantially all of our business is conducted through Behringer Harvard Opportunity OP I, LP, a Texas limited partnership organized in November 2004 (“Behringer Harvard OP I”), or its subsidiaries. Our wholly owned subsidiary, BHO, Inc., a Delaware corporation, owns less than a 0.1% interest in Behringer Harvard OP I as its sole general partner. The remaining interest of Behringer Harvard OP I is held as a limited partnership interest by our wholly owned subsidiary, BHO Business Trust, a Maryland business trust. We have entered our disposition phase and are currently considering liquidity options for our stockholders. Therefore, we are not actively seeking to purchase additional properties. We will seek stockholder approval prior to liquidating our entire portfolio. Our investment properties are located in Colorado, Missouri, Nevada, Texas, The Commonwealth of The Bahamas, the Czech Republic, Poland, Hungary, and Slovakia.
We are externally managed and advised by Behringer Harvard Opportunity Advisors I, LLC (“Behringer Harvard Opportunity Advisors I” or the “Advisor”), a Texas limited liability company. Behringer Harvard Opportunity Advisors I is responsible for managing our day-to-day affairs and for identifying and making acquisitions, dispositions, and investments on our behalf.
Presentation of Financial Statements
Our financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business as we proceed through our disposition phase. As is usual for opportunity-style real estate investment programs, we are structured as a finite life entity, and have entered the final phase of operations. This phase includes the selling of our assets, retiring our liabilities, and distributing net proceeds to shareholders. We have experienced significant losses and may generate negative cash flows as mortgage note obligations and expenses exceed revenues. If we are unable to sell a property when we determine to do so, it could have a significant adverse effect on our cash flows that are necessary to meet our mortgage obligations and our ability to satisfy our other liabilities in the normal course of business.
Our ability to continue as a going concern is dependent upon our ability to sell real estate investments to pay down debt as it matures if extensions or new financings are unavailable, and our ability to fund ongoing costs of our Company, including our development and operating properties.
2. Interim Unaudited Financial Information
The accompanying condensed 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, 2013, which was filed with the Securities and Exchange Commission (“SEC”) on March 25, 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this report on Form 10-Q pursuant to the rules and regulations of the SEC.
The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated balance sheets and condensed consolidated statements of equity as of September 30, 2014, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2014 and 2013, and the condensed consolidated statements of equity and cash flows for the nine months ended
7
Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
September 30, 2014 and 2013 have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to fairly present our condensed consolidated financial position as of September 30, 2014 and our condensed consolidated results of operations, equity, and cash flows for the periods ended September 30, 2014 and 2013. Such adjustments are normal and recurring in nature.
3. Summary of Significant Accounting Policies
Described below are certain of our significant accounting policies. The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q. Please see our Annual Report on Form 10-K for a complete listing of all of our significant accounting policies.
In the Notes to Condensed Consolidated Financial Statements, all dollar and share amounts in tabulation are in thousands of dollars and shares, respectively, unless otherwise noted.
Real Estate
We amortize the value of in-place leases acquired to expense over the term of the respective leases. The value of tenant relationship intangibles is amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and tenant relationship intangibles would be charged to expense. As of September 30, 2014, the estimated remaining useful lives for acquired lease intangibles range from less than 1 year to approximately 8 years.
Anticipated amortization expense associated with the acquired lease intangibles for each of the following five years as of September 30, 2014 is as follows (in thousands):
Year | Lease Intangibles | |||
October 1, 2014 - December 31, 2014 | $ | 84 | ||
2015 | 312 | |||
2016 | 300 | |||
2017 | 300 | |||
2018 | 127 | |||
Accumulated depreciation and amortization related to our consolidated investments in real estate assets and intangibles were as follows (in thousands):
September 30, 2014 | Buildings and Improvements | Land and Improvements | Lease Intangibles | Acquired Below-Market Leases | Other Intangibles | |||||||||||||||
Cost | $ | 213,223 | $ | 68,204 | $ | 11,415 | $ | (3,578 | ) | $ | 9,626 | |||||||||
Less: depreciation and amortization | (54,177 | ) | (1,633 | ) | (6,828 | ) | 2,413 | (4,676 | ) | |||||||||||
Net | $ | 159,046 | $ | 66,571 | $ | 4,587 | $ | (1,165 | ) | $ | 4,950 | |||||||||
December 31, 2013 | Buildings and Improvements | Land and Improvements | Lease Intangibles | Acquired Below-Market Leases | Other Intangibles | |||||||||||||||
Cost | $ | 210,980 | $ | 72,646 | $ | 11,022 | $ | (3,578 | ) | $ | 9,626 | |||||||||
Less: depreciation and amortization | (47,249 | ) | (1,402 | ) | (5,929 | ) | 2,141 | (4,230 | ) | |||||||||||
Net | $ | 163,731 | $ | 71,244 | $ | 5,093 | $ | (1,437 | ) | $ | 5,396 | |||||||||
8
Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Condominium Inventory
Condominium inventory is stated at the lower of cost or fair market value and consists of acquisition costs, construction costs, interest, and real estate taxes, which are capitalized during the period beginning with the commencement of development and ending with the completion of construction. At September 30, 2014 and December 31, 2013, condominium inventory consisted of $3 million for our one remaining unit at Chase — The Private Residences.
For condominium inventory, at each reporting date, management compares the estimated fair value less costs to sell to the carrying value. An adjustment is recorded to the extent that the fair value less costs to sell is less than the carrying value. We determine the estimated fair value of condominiums based on comparable sales in the normal course of business under existing and anticipated market conditions. This evaluation takes into consideration estimated future selling prices, costs incurred to date, estimated additional future costs, and management’s plans for the property.
Accounts Receivable
Accounts receivable primarily consist of straight-line rental revenue receivables of $6.1 million and $6.2 million as of September 30, 2014 and December 31, 2013, respectively, and receivables from our hotel operators and tenants related to our other consolidated properties of $2.2 million and $3.4 million as of September 30, 2014 and December 31, 2013, respectively. The allowance for doubtful accounts was $0.3 million and $2.4 million as of September 30, 2014 and December 31, 2013, respectively.
Reorganization Items, Net
Reorganization items are expense or income items that were incurred or realized by our special purpose entity Behringer Harvard Frisco Square, LP along with our indirect subsidiaries, BHFS I, LLC, BHFS II, LLC, BHFS III, LLC, BHFS IV, LLC and BHFS Theater, LLC as a result of the 2012 restructuring and are presented separately in the condensed consolidated statements of operations and comprehensive loss.
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 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 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. These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Chief Executive Officer and Chief Financial Officer of the Company review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. We consider trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. 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. 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.
We also evaluate our investments in notes receivable as of each reporting date. If we believe that it is probable we will not collect all principal and interest in accordance with the terms of the notes, we consider the loan impaired. When evaluating loans for potential impairment, we compare the carrying amount of the loans to the present value of future cash flows discounted at the loan's effective interest rate, or, if a loan is collateral dependent, to the estimated fair value of the related collateral net of any senior loans. For impaired loans, a provision is made for loan losses to adjust the reserve for loan losses. The reserve for loan losses is a valuation allowance that reflects our current estimate of loan losses as of the balance sheet date.
9
Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The reserve is adjusted through the provision for loan losses account on our condensed consolidated statements of operations and comprehensive loss.
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, planned development 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 book value of our investments, which could be material to our financial statements.
We also evaluate our investments in unconsolidated joint ventures at each reporting date. If we believe there is an other than temporary decline in market value, we will record an impairment charge based on these evaluations. We assess potential impairment by comparing our portion of estimated future undiscounted operating cash flows expected to be generated by the joint venture over the life of the joint venture's assets to the carrying amount of the joint venture. In the event that the carrying amount exceeds our portion of estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the joint venture to its estimated fair value.
The value of our properties held for development depends on market conditions, including estimates of the project start date, as well as estimates of future demand for the property type under development. We have analyzed trends and other information related to each potential development and incorporated this information, as well as our current outlook, into the assumptions we use in our impairment analyses. Due to the judgment and assumptions applied in the estimation process with respect to impairments, including the fact that limited market information regarding the value of comparable land exists at this time, it is possible actual results could differ substantially from those estimated.
We believe the carrying value of our operating real estate assets, our property under development, investments in unconsolidated joint ventures, and notes receivable is currently recoverable. However, if market conditions worsen beyond our current expectations, or if our assumptions regarding expected future cash flows from the use and eventual disposition of our assets decrease or our expected hold periods decrease, or if changes in our development strategy significantly affect any key assumptions used in our fair value calculations, we may need to take additional charges in future periods for impairments related to existing assets. Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with 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, allowance for doubtful accounts, and allowance for loan losses. Actual results could differ from those estimates.
Subsequent Events
We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements.
New Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-08 (“ASU 2014-08”), Presentation of Financial Statements and Property, Plant, and Equipment (Topics 205 and 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The updated guidance revised the definition of a discontinued operation by limiting discontinued operations reporting to disposals of components of an entity that represent a strategic shift, or change in the entity's strategy, that has, or will have, a major effect on an entity’s operations and financial results. This guidance applies to a component of an entity or a group of components of an entity classified as held for sale or disposed of by sale or by means other than a sale, such as an abandonment. Examples of a strategic shift could include a disposal of all assets in a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity. In addition, ASU 2014-08 requires expanded disclosures for discontinued operations so users of the financial statements will be provided with more information about the assets, liabilities, revenues and expenses of discontinued operations. ASU 2014-08 is effective prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued or available
10
Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
for issuance. We are currently evaluating the impact this guidance will have on our consolidated financial statements when adopted.
In May 2014, the FASB issued an update (“ASU 2014-09”) to ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In July 2014, the FASB issued an update ("ASU 2014-15"), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU 2014-15 requires management's assessment of a company's ability to continue as a going concern and provide related footnote disclosures when conditions give rise to substantial doubt about a company's ability to continue as a going concern within one year from the financial statement issuance date. ASU 2014-15 applies to all companies and is effective for the annual period ending after December 15, 2016, and all annual and interim periods thereafter. We are currently evaluating the impact of the adoption of ASU 2014-15 on our consolidated financial statements and notes therein.
4. 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
Historically, we have used interest rate caps to manage our interest rate risk. The valuation of these instruments was determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs, including interest rate curves, implied volatilities, and foreign currency exchange rates.
We incorporated 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 determined that the majority of the inputs used to value our derivatives fell within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilized Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2013, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of our derivatives. As a result, we determined that our derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy.
As of December 31, 2013, our derivatives had a fair value of zero. As of September 30, 2014, we had no derivatives.
11
Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Nonrecurring Fair Value Measurements
We recorded no non-cash impairment charges during the nine months ended September 30, 2014.
For the year ended December 31, 2013, we recorded the following non-cash impairment charges. During the fourth quarter, we recorded $0.3 million of impairment expense to reduce the carrying value of condominiums at Chase—The Private Residences to current market prices and an additional $0.2 million of impairment was recorded on a related intangible asset. We recorded $0.3 million in discontinued operations related to a reduction in the fair value of the Becket House leasehold interest based upon the final negotiated sales price. On April 5, 2013, we sold Becket House. In addition, we recorded non-cash impairment charges of $0.1 million in continuing operations related to 4950 S. Bowen Road land based upon the sale price. The sale was completed on October 22, 2013.
The inputs used to calculate the fair value of these assets included bona fide purchase offers, or the expected sales price of an executed sales agreement and market comparables. The market comparable estimate is considered Level 3 under the fair value hierarchy described above.
The following fair value hierarchy table presents information about our assets measured at fair value on a nonrecurring basis during the period presented (in thousands):
As of December 31, 2013 | Level 1 | Level 2 | Level 3 | Total Fair Value | Gain / (Loss)(1) | |||||||||||||||
Assets | ||||||||||||||||||||
Land and improvements, net | $ | — | $ | 1,523 | $ | — | $ | 1,523 | $ | (119 | ) | |||||||||
Condominium inventory (finished units) | — | — | 3,158 | 3,158 | (264 | ) | ||||||||||||||
Other intangibles | — | — | — | — | (244 | ) | ||||||||||||||
$ | — | $ | 1,523 | $ | 3,158 | $ | 4,681 | $ | (627 | ) | ||||||||||
_________________________________
(1) | Excludes $0.3 million in impairment losses recorded in the first quarter of 2013 and included in discontinued operations for Becket House that was disposed of as of December 31, 2013. |
Quantitative Information about Level 3 Fair Value Measurements
($ in thousands, except per square feet)
Description | Fair Value at December 31, 2013 | Valuation Techniques | Unobservable Input | Range (Weighted Average) | ||||||
Condominium inventory (finished units)(1) | $ | 3,158 | Market comparable | Amount per condo unit due to limited market comparables | $455 to $607 per square feet | |||||
(1) | In the fourth quarter of 2013, we recorded an impairment of $0.3 million associated with units sold. |
There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the nine months ended September 30, 2014 and the year ended December 31, 2013.
5. Fair Value Measurement of Financial Instruments
We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop the related estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
As of September 30, 2014 and December 31, 2013, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, 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, and the carrying value of notes receivable reasonably approximated fair value based on expected interest rates for notes to similar borrowers with similar terms and remaining maturities.
12
Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The notes payable totaling $154 million as of September 30, 2014 and $138.1 million as of December 31, 2013, with balances, net of unamortized premium, of $153.7 million and $137.7 million, respectively, have a fair value of approximately $154.6 million and $135.8 million, respectively. The fair values are based upon interest rates for mortgages with similar terms and remaining maturities that management believes we could obtain. Interest rate swaps and caps are recorded at their respective fair values in prepaid expenses and other assets. 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.
The fair value estimates presented herein are based on information available to our management as of September 30, 2014 and December 31, 2013. Although our management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these condensed consolidated financial statements since those respective dates, and current estimates of fair value may differ significantly from the amounts presented herein.
6. Real Estate Investments
As of September 30, 2014, we wholly owned four properties and consolidated three properties through investments in joint ventures on our condensed consolidated balance sheets. We are the mezzanine lender for one multifamily property. In addition, we have a noncontrolling, unconsolidated ownership interest in a joint venture consisting of 21 properties that are accounted for using the equity method. Capital contributions, distributions, and profits and losses of these properties are allocated in accordance with the terms of the applicable partnership agreement.
The following table presents certain information about our consolidated properties as of September 30, 2014:
Property Name | Location | Approximate Rentable Square Footage | Description | Ownership Interest | Year Acquired | ||||||||
Chase Park Plaza | St. Louis, Missouri | — | hotel and condominium development property | 100% | (1) | 2006 | |||||||
Las Colinas Commons | Irving, Texas | 239,000 | 3-building office complex | 100% | 2006 | ||||||||
Frisco Square | Frisco, Texas | (2) | mixed-use development (multifamily, retail, office, restaurant and land) | (2) (3) | 2007 | ||||||||
Northpoint Central | Houston, Texas | 180,000 | 9-story office building | 100% | 2007 | ||||||||
The Lodge & Spa at Cordillera | Edwards, Colorado | — | land, hotel and development property | 94% | 2007 | ||||||||
Northborough Tower | Houston, Texas | 207,000 | 14-story office building | 100% | 2008 | ||||||||
Royal Island(4) | Commonwealth of Bahamas | — | land | 87% | 2012 | ||||||||
_________________________________
(1) | On August 5, 2014, we received the 5% interests of Chase Park Plaza Hotel and Chase — The Private Residences held by Kingsdell, L.P. and now own 100% of the entities. |
(2) | Our Frisco Square mixed-use development consists of 101,000 square feet of office space, 71,000 square feet of retail, a 41,500 square foot movie theater, 144 multifamily units, approximately 27 acres of land which we own 100%, and a 90% interest in a 3.4 acre multifamily project in development. |
(3) | On August 26, 2014, we contributed 3.4 acres of land held by our Frisco Square mixed-use project to a joint venture. We own a 90% interest in the venture which was formed to construct a 275-unit multifamily project. Construction on the development began on September 2, 2014. |
(4) | Our initial investment in Royal Island was made in May 2007. We consolidated Royal Island as of June 6, 2012 when we obtained all of the outstanding shares of Royal Island (Australia) Pty Limited. A third party indirectly owns 12.71% of Royal Island. |
We recorded non-cash impairment charges within discontinued operations of approximately $0.3 million related to a reduction in the fair value of certain of our real estate assets during the nine months ended September 30, 2013. See Note 4, Assets and Liabilities Measured at Fair Value - Nonrecurring Fair Value Measurements, for additional information.
13
Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Real Estate Development
The Ablon at Frisco Square
On August 26, 2014, we contributed 3.4 acres of land held by our Frisco Square mixed-use project to The Ablon at Frisco Square, LLC (“Ablon Frisco Square Venture”), a special purpose entity in which we own a 90% limited partnership interest. The venture was formed to construct a 275-unit multifamily project. Construction on the development began on September 2, 2014. Total construction costs are expected to be approximately $42.1 million. Concurrently with the land contribution, we closed on a $26.3 million construction loan. See Note 7, Notes Payable, for additional information.
Real Estate Asset Dispositions
Frisco Square Land Sale
On June 13, 2014, we sold 1.62 acres of land to an unrelated third party at our Frisco Square development for approximately $1.8 million and recorded a $0.5 million gain on sale of real estate. The gain on sale of real estate is included in continuing operations. The land will be used for a building and parking garage development (the "Gearbox" development). The City of Frisco holds a lien on all of the undeveloped Frisco land as security to provide parking under our development agreement. We escrowed $0.6 million of the sales proceeds for the benefit of the City of Frisco as substitute security to obtain a lien release on the 1.62 acres. Concurrently, we contributed 1.66 acres of land to the unrelated third party for the development of the Gearbox garage that will meet a portion of an obligation to provide parking under our development agreement with the City of Frisco (see Note 9, Commitments and Contingencies). As the public parking to be constructed is an amenity of the Frisco Square development, we allocated the cost basis of the contributed land to the remaining 34 undeveloped acres.
The Lodge & Spa at Cordillera
On October 31, 2014, we signed an agreement to sell The Lodge & Spa at Cordillera to an unrelated third party at a contract price that is in excess of our book value. The sale is expected to close in mid-December 2014. The agreement has a 45-day due diligence period during which the Purchaser may terminate the agreement without penalty. There can be no assurances that we will complete the sale.
Investment in Unconsolidated Joint Venture
The following table presents certain information about our unconsolidated investment as of September 30, 2014 and December 31, 2013 ($ in thousands):
Carrying Value of Investment | |||||||||||
Property Name | Ownership Interest | September 30, 2014 | December 31, 2013 | ||||||||
Central Europe Joint Venture | 47.01 | % | $ | 16,330 | $ | 18,495 | |||||
Our investment in the unconsolidated joint venture as of September 30, 2014 and December 31, 2013 consisted of our proportionate share of the combined assets and liabilities of our investment property, shown at 100%, as follows (in thousands):
September 30, 2014 | December 31, 2013 | |||||||
Real estate assets, net | $ | 93,228 | $ | 108,795 | ||||
Cash and cash equivalents | 3,948 | 3,627 | ||||||
Other assets | 1,817 | 2,022 | ||||||
Total assets | $ | 98,993 | $ | 114,444 | ||||
Notes payable | $ | 69,540 | $ | 80,968 | ||||
Other liabilities | 2,507 | 3,139 | ||||||
Total liabilities | 72,047 | 84,107 | ||||||
Equity | 26,946 | 30,337 | ||||||
Total liabilities and equity | $ | 98,993 | $ | 114,444 | ||||
14
Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Our equity in earnings and losses from our investment is our proportionate share of the combined earnings and (losses) of our unconsolidated joint venture for the three and nine months ended September 30, 2014 and 2013, shown at 100%, as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Revenue | $ | 2,650 | $ | 2,668 | $ | 8,245 | $ | 8,484 | |||||||
Operating expenses: | |||||||||||||||
Operating expenses | 637 | 708 | 1,884 | 2,139 | |||||||||||
Property taxes | 79 | 80 | 246 | 239 | |||||||||||
Total operating expenses | 716 | 788 | 2,130 | 2,378 | |||||||||||
Operating income | 1,934 | 1,880 | 6,115 | 6,106 | |||||||||||
Non-operating expenses: | |||||||||||||||
Depreciation and amortization | 1,033 | 1,162 | 3,269 | 3,629 | |||||||||||
Impairment charges | — | 5,913 | — | 5,913 | |||||||||||
Interest and other, net | 938 | 1,429 | 3,026 | 2,306 | |||||||||||
Gain on sale | (404 | ) | — | (404 | ) | — | |||||||||
Total non-operating expenses | 1,567 | 8,504 | 5,891 | 11,848 | |||||||||||
Net income (loss) | $ | 367 | $ | (6,624 | ) | $ | 224 | $ | (5,742 | ) | |||||
Equity in earnings (losses) of unconsolidated joint ventures(1) | $ | 173 | $ | (3,113 | ) | $ | 105 | $ | (2,699 | ) | |||||
________________________________
(1) | Company’s share of net income (loss). |
On August 7, 2014 one of our Central Europe Joint Venture properties was sold for €3.6 million. For the three and nine months ended September 30, 2014, we recognized our portion of the net gain of €0.1 million (or $0.2 million) related to this sold asset as equity in earnings of unconsolidated joint venture. The net proceeds to the joint venture, after the repayment of debt and closing costs, were approximately €1.3 million. The joint venture distributed €0.8 million of proceeds. Our portion was approximately €0.4 million. The remaining proceeds from the sale were retained for working capital and to pay down debt for other assets in the venture.
15
Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
7. Notes Payable
The following table sets forth our notes payable on our consolidated properties at September 30, 2014 and December 31, 2013 ($ in thousands):
Notes Payable as of | ||||||||||||
Description | September 30, 2014 | December 31, 2013 | Interest Rate | Maturity Date | ||||||||
Northborough Tower | $ | 19,207 | $ | 19,600 | 5.67% | 1/11/2016 | ||||||
Royal Island(1) | 13,872 | 12,907 | 15.00% | 10/10/2016 | ||||||||
Northpoint Central | 15,635 | 15,813 | 5.15% | 5/9/2017 | ||||||||
Las Colinas Commons | 11,530 | 11,661 | 5.15% | 5/9/2017 | ||||||||
Chase Park Plaza Hotel and Chase — The Private Residences | 62,500 | 46,511 | 4.95%(2) | 8/11/2017 | ||||||||
BHFS II, LLC | 7,000 | 7,083 | 30-day LIBOR + 3%(3) | 2/1/2018 | ||||||||
BHFS III, LLC | 6,284 | 6,358 | 30-day LIBOR + 3%(3) | 2/1/2018 | ||||||||
BHFS IV, LLC | 13,053 | 13,208 | 30-day LIBOR + 3%(3) | 2/1/2018 | ||||||||
BHFS Theatre, LLC | 4,886 | 4,944 | 30-day LIBOR + 3%(3) | 2/1/2018 | ||||||||
$ | 153,967 | $ | 138,085 | |||||||||
_________________________________
(1) | In February 2013, the lenders agreed to increase the amount available to draw on the loan to $11.6 million. In June 2013, the lenders further increased the amount available to draw to $12.4 million. Beginning in October 2013 through June 2014, the lenders increased the availability each month by the amount of the monthly operating costs. The lender ceased funding the monthly operating costs in July 2014. As of September 30, 2014, the outstanding balance on the loan was $13.9 million. See New Financing and Modification below. |
(2) | On August 11, 2014, we refinanced the Chase Park Plaza Hotel debt with a new lender for $62.5 million in proceeds. The interest rate went from 30-day London Interbank Offer Rate (“LIBOR”) + 6.75%, with LIBOR subject to a floor of 0.75%, to 4.95% on the new debt. See below for additional terms of the new loan. |
(3) | 30-day LIBOR was 0.15% at September 30, 2014. LIBOR interest rate subject to floor of 0.75%. |
Our notes payable balance was $154 million at September 30, 2014, as compared to $138.1 million as of December 31, 2013, and consisted of new financing and loan assumptions related to our consolidated property acquisitions.
Each of our notes payable is collateralized by one or more of our properties. At September 30, 2014, our notes payable interest rates ranged from 3.2% to 15%, with a weighted average interest rate of approximately 6%. Of our $154 million in notes payable at September 30, 2014, $31.2 million represented debt subject to variable interest rates. At September 30, 2014, our notes payable had maturity dates that ranged from January 2016 to February 2018. We have unconditionally guaranteed payment of the notes payable related to the four loan tranches associated with our Frisco Square investment (the “BHFS Loans”) up to $11.2 million. The BHFS loans had an outstanding balance at September 30, 2014 of $31.2 million.
Our debt secured by Chase Park Plaza Hotel and Chase — The Private Residences (the "Chase Park Plaza Hotel" debt) was scheduled to mature on December 9, 2014. The loan became available for prepayment without penalty in December 2013. On August 11, 2014, we refinanced the Chase Park Plaza Hotel debt with a new lender for $62.5 million in proceeds. A fee of $590,000 was paid and recorded to interest expense at the time of payment. The loan bears interest at 4.95% and matures in three years with two one-year extensions available. The new loan requires interest-only payments in the first year and principal payments based upon a 25-year amortization schedule during the remaining term, including extension periods. The loan is not prepayable in the first year and requires a prepayment penalty for months 13 through 30 of the original term. A portion of the proceeds from the new loan were used to repay the old debt, which had a balance of approximately $46.5 million, and closing costs. We recognized approximately $0.2 million loss on early extinguishment of debt in our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2014 related to unamortized deferred borrowing costs on the old debt. We have guaranteed that $6.5 million of the proceeds will be utilized for a room and retail renovation program at the Chase Park Plaza Hotel.
16
Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
New Financing and Modification
In February 2011, Behringer Harvard Royal Island Debt, L.P. secured a $10.4 million loan (the "Debt LP Loan") for the purpose of preserving and protecting the collateral securing the bridge loan. The operating costs of our Royal Island property have been funded primarily through the Debt LP Loan. In February 2013, the lenders agreed to increase the amount available to draw on the Debt LP Loan to $11.6 million. In June 2013, the lenders further increased the amount available to draw to $12.4 million. Beginning in October 2013, the lenders increased the availability each month by the amount of the monthly operating costs. The lender ceased funding the monthly operating costs in July 2014. The Debt LP Loan bears interest at 15% per annum. Payments are due from proceeds from sales or refinancing of the project or from payments received on the bridge loan. The Debt LP Loan matures at the earlier of (a) the date that the cash proceeds from sales of the collateral or refinancing of the bridge loan repay all accrued principal and interest outstanding, or (b) October 10, 2016. On September 30, 2014 and December 31, 2013, the outstanding balance of the Debt LP Loan was $13.9 million and $12.9 million, respectively.
On August 26, 2014 the Ablon Frisco Square Venture obtained a $26.3 million construction loan. The loan incurs interest at 30-day LIBOR plus 2.5% and has a 3-year term with two 12-month extensions available. Payments of interest-only are required during the initial 3-year term. Equity of $15.8 million must be contributed to the project before any draws under the loan. As of September 30, 2014, the partners have funded $4 million of equity (which includes land) towards the construction. We have not drawn any funds under the construction loan to date. Our joint venture partner, or one of its affiliates, has provided the completion guaranty and any other carve-out guaranties for the construction loan.
The following table summarizes our aggregate contractual obligations for principal payments as of September 30, 2014 (in thousands):
Principal Payments Due: | Amount | ||
October 1, 2014 - December 31, 2014 | $ | 321 | |
2015 | 2,168 | ||
2016 | 35,871 | ||
2017 | 85,921 | ||
2018 | 29,455 | ||
Total contractual obligations | 153,736 | ||
Unamortized premium | 231 | ||
Total | $ | 153,967 | |
8. 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. Our hedging strategy of entering into interest rate caps and swaps, therefore, has been to eliminate or reduce, to the extent possible, the volatility of cash flows.
In November 2011, we entered into an interest rate cap agreement related to the debt on our Chase Park Plaza Hotel and Chase—The Private Residences. We refinanced this debt on August 11, 2014 and the interest rate cap was cancelled. The new loan bears interest at a fixed rate of 4.95%; therefore we will not enter into an interest rate cap agreement for this loan.
Derivative instruments classified as assets had a combined fair value of zero at December 31, 2013. We had no derivative instruments classified as liabilities as of December 31, 2013. During the nine months ended September 30, 2014 and 2013, we recorded a reclassification of unrealized loss of less than $0.1 million to interest expense to adjust the carrying amount of the interest rate caps qualifying as non-hedges at September 30, 2014 and 2013. We had no derivative instruments as of September 30, 2014.
17
Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The table below presents the effect of our derivative financial instruments on the condensed consolidated statements of operations and comprehensive loss as of September 30, 2014 and 2013 (in thousands):
Derivatives Not Designated as Hedging Instruments | ||||||||||||||||
Amount of Loss (1) | Amount of Loss (1) | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Interest rate | $ | (41 | ) | $ | (22 | ) | $ | (86 | ) | $ | (67 | ) | ||||
_________________________________
(1) Amounts related to interest rate derivative contracts are included in interest expense.
Credit risk and collateral
Our credit exposure related to interest rates is represented by the fair value of contracts with a net liability fair value at the reporting date. These outstanding instruments may expose us to credit loss in the event of nonperformance by the counterparties to the agreements. However, we have not experienced any credit loss as a result of counterparty nonperformance in the past. To manage credit risk, we select and will periodically review counterparties based on credit ratings and limit our exposure to any single counterparty.
9. Commitments and Contingencies
Frisco Square
In connection with our investment in the Frisco Square property, we are responsible, through our wholly owned subsidiaries who hold title to the Frisco Square property, for half of the bond debt service related to the $12.5 million of bonds (the “Bond Obligation”) the City of Frisco issued to fund public improvements within the Frisco Square Management District (the “MMD”). For each $1 million increase in assessed value for the real property within the MMD above $125 million, the Bond Obligation will be reduced by 0.5% and will be terminated at $225 million of real property values. At September 30, 2014, the total outstanding Bond Obligation was $5.2 million.
Although, as described above, we are ultimately responsible for half of the bond debt service, the Frisco Square Property Owner’s Association (the “POA”) has the authority to assess its members for various monetary obligations related to the Frisco Square development, including the Bond Obligation, based upon the value of the real property and real property improvements. We are not the sole member of the POA. The annual bond debt service assessed by the POA is approximately $0.5 million. For the year ended December 31, 2013, we estimated our annual pro rata share of the expense at approximately $0.4 million. As a result of land sales and new assessed values within the POA, the revised estimate of our annual obligation has decreased to $0.2 million. For the nine months ended September 30, 2014, we have an expense credit of less than $0.1 million as a result of an adjustment of previously accrued amounts based upon the new estimate of the obligation. This credit is included in the accompanying condensed consolidated statements of operations and other comprehensive loss.
We are also obligated to construct a minimum of two parking garages with 720 spaces by February 1, 2018 (the “Parking Obligation”). The City of Frisco has secured the Bond Obligation and the Parking Obligation by placing liens on the vacant land held by our indirect, wholly owned Frisco Square subsidiaries. In the event we sell all or a part of the vacant land, 33% of the net sales proceeds are to be deposited into an escrow account for the benefit of the City of Frisco to secure the Parking Obligations until the amount in the escrow is $7 million. Currently, the escrow account balance is $1.4 million. The book value of the vacant land is approximately $28 million. On February 4, 2014, the City of Frisco amended the Parking Obligation with respect to its lien on the vacant land. Under the amended Parking Obligation, if we contribute land for the development of a garage (the "Gearbox Garage") and build two additional garages that provide at least 108 parking spaces that are open and free to the public at all times, the City of Frisco will not require any further escrow of funds from the sale of the Frisco Square land and will release the lien on the Frisco Square land. As discussed in Note 6, Real Estate Investments, on June 13, 2014, we sold 1.62 acres of land to an unrelated third party for a building and parking garage development (the “Gearbox” development) and escrowed $0.6 million of the proceeds from the sale. Concurrently, we contributed 1.66 acres of land for the development of the Gearbox Garage. We are currently in negotiations with the Gearbox developer to contribute funds to provide additional parking that will meet a portion of our Parking Obligation.
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Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
On August 7, 2014, Ablon Frisco Square Venture, a special purpose entity in which we own a 90% limited partnership investment, executed a $33.2 million general construction contract for a 275-unit multifamily development located in Frisco Square. Construction commenced on September 2, 2014.
Also, on September 2, 2014, we commenced construction on the public structured garage. We anticipate completing the multifamily garage and the public structured garage in the fourth quarter of 2015, which, along with the completion of the Gearbox garage, would fulfill our Parking Obligation with the City of Frisco.
Chase Park Plaza Hotel
On February 19, 2013, we terminated the hotel operating lease between Chase Park Plaza Hotel, LLC (“CPPH” or the "Plaintiff"), a 95% owned subsidiary of the Company that owns Chase Park Plaza Hotel, and Kingsdell, L.P., an unrelated entity that owned 5% of CPPH, and terminated CWE Hospitality Services, LLC as the Hotel’s management company.
Also on February 19, 2013, CPPH filed a lawsuit in the Circuit Court of the City of St. Louis, State of Missouri against James L. Smith, Francine V. Smith, Marcia Smith Niedringhaus, Kingsdell, L.P., and CWE Hospitality Services, LLC (collectively, the “Smith Defendants”). As part of the lawsuit, CPPH also filed a Motion for a Temporary Restraining Order, Preliminary and Permanent Injunction requesting the Court remove the Smith Defendants from the property and from interfering with Plaintiff and the Hotel. The Temporary Restraining Order was granted on February 19, 2013.
On March 22, 2013, the Smith Defendants filed counterclaims in connection with CPPH taking control of the Hotel and seeking unspecified damages.
On March 3, 2014, the Court granted CPPH’s request to amend its complaint to assert claims of fraud and conspiracy against the attorneys and accountants advising the Smith Defendants.
On May 5, 2014, the attorneys and accountants were served and filed motions to dismiss.
On August 5, 2014, we entered into a Mutual General Waiver, Settlement, and Permanent Release with the Smith Defendants, pursuant to which all claims made by us against the Smith Defendants and all counterclaims of the Smith Defendants against us were settled, and as a result of the settlement, we received the 5% interests of Chase Park Plaza Hotel and Chase — The Private Residences held by Kingsdell, L.P. We now own 100% of the entities.
On August 8, 2014, we and the Smith Defendants filed a joint motion of dismissal with respect to the claims and counterclaims against each other.
10. Related Party Transactions
Behringer Harvard Opportunity Advisors I and certain of its affiliates receive fees and compensation in connection with the acquisition, financing, management, and sale of our assets.
Since our inception, the Advisor or its predecessors have been responsible for managing our day-to-day affairs and for, among other things, identifying and making acquisitions and other investments on our behalf. Our relationship with the Advisor, including the fees paid by us to the Advisor or the reimbursement of expenses by us for amounts paid, or incurred by the Advisor, on our behalf is governed by an advisory management agreement that has been in place since September 20, 2005 and amended at various times thereafter. We are currently party to the Third Amended and Restated Advisory Management Agreement (the "Advisory Agreement") which became effective May 15, 2013 and was set to expire May 15, 2014. On May 6, 2014, the Advisory Agreement was renewed for a term of one year, effective May 15, 2014 with an expiration date of May 15, 2015. The terms of the Advisory Agreement remain unchanged.
During the three and nine months ended September 30, 2014 and 2013, Behringer Harvard Opportunity Advisors I received an asset management fee of 0.575% of the aggregate asset value of acquired real estate and real estate related assets other than Alexan Black Mountain and Royal Island. The fee is payable monthly in arrears in an amount equal to one-twelfth of 0.575% of the aggregate asset value as of the last day of the month. For the three months ended September 30, 2014 and 2013, we incurred $0.6 million of asset management fees. For the nine months ended September 30, 2014 and 2013, we incurred $1.7 million and $1.8 million, respectively, of asset management fees. Amounts include asset management fees that were classified to discontinued operations for our held for sale property and our disposed properties for the three and nine months ended September 30, 2013.
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Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Behringer Harvard Opportunity Advisors I, or its affiliates, receive acquisition and advisory fees of 2.5% of the contract purchase price of each asset for the acquisition, development or construction of real property or 2.5% of the funds advanced in respect of a loan investment. For the three and nine months ended September 30, 2014, we incurred acquisition and advisory fees of less than $0.1 million related to The Ablon at Frisco Square development. For the three and nine months ended September 30, 2013, there were no acquisition and advisory fees.
Under the Advisory Agreement, the debt financing fee paid to the Advisor for a Loan (as defined in the Advisory Agreement) will be 1% of the loan commitment amount. Amounts due to the Advisor for a Revised Loan (as defined in the agreement) will be 40 basis points of the loan commitment amount for the first year of any extension (provided the extension is for at least 120 days), an additional 30 basis points for the second year of an extension, and another 30 basis points for the third year of an extension in each case, prorated for any extension period less than a full year. The maximum debt financing fee for any extension of three or more years is 1% of the loan commitment amount. We incurred $0.6 million in debt financing fees for the three and nine months ended September 30, 2014 related to the Chase Park Plaza Hotel debt that we refinanced on August 11, 2014. We did not incur any debt financing fees for the three and nine months ended September 30, 2013.
We reimburse Behringer Harvard Opportunity Advisors I or its affiliates for all expenses paid or incurred by them in connection with the services they provide to us, including direct expenses and the costs of salaries and benefits of persons employed by those entities and performing services for us, subject to the limitation that we will not reimburse for any amount by which our Advisor’s operating expenses (including the asset management fee) at the end of the four fiscal quarters immediately preceding the date reimbursement is sought exceeds the greater of: (1) 2% of our average invested assets or (2) 25% of our net income for that four quarter period other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and any gain from the sale of our assets for that period. Notwithstanding the preceding sentence, 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. We do not reimburse our Advisor for the salaries and benefits that our Advisor or its affiliates pay to our named executive officers. For the three months ended September 30, 2014 and 2013, we incurred costs for administrative services of $0.4 million and $0.2 million, respectively. For the nine months ended September 30, 2014 and 2013, we incurred costs for administrative services of $1.2 million and $0.9 million, respectively.
We pay our property manager and affiliate of the Advisor, Behringer Harvard Opportunity Management Services, LLC or its affiliates (collectively, “BH Property Management”), fees for management, leasing, and maintenance supervision of our properties. Such fees are equal to 4.5% of gross revenues 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 non-affiliated third-party property manager in respect of a property, we will pay BH Property Management an oversight fee equal to 0.5% of gross revenues of the property managed. In no event will we pay both a property management fee and an oversight fee to BH Property Management with respect to any particular property. In the event we own a property through a joint venture that does not pay BH Property Management directly for its services, we will pay BH Property Management a management fee or oversight fee, as applicable, based only on our economic interest in the property. We incurred property management fees or oversight fees of $0.3 million during the three months ended September 30, 2014 and 2013. We incurred property management fees or oversight fees of $0.7 million during the nine months ended September 30, 2014 and 2013.
On March 29, 2011, we obtained a $2.5 million loan from our Advisor to bridge our short-term liquidity needs. The $2.5 million loan bore interest at a rate of 5% and had a maturity date of the earliest of (i) March 29, 2013, (ii) the termination without cause of the advisory management agreement, or (iii) the termination without cause of the property management agreement. On March 25, 2013, we fully repaid the loan and the accrued interest.
At September 30, 2014 and December 31, 2013, we had a payable to our Advisor and its affiliates of $0.8 million. These balances consist of accrued fees, including asset management fees, administrative service expenses, property management fees and other miscellaneous costs payable to Behringer Harvard Opportunity Advisors I and BH Property Management.
We are dependent on Behringer Harvard Opportunity Advisors I and BH Property 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 are unable to provide us with the respective services, we would be required to obtain such services from other sources.
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Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
11. Supplemental Cash Flow Information
Supplemental cash flow information is summarized below:
Nine months ended September 30, | ||||||||
Description | 2014 | 2013 | ||||||
Supplemental disclosure: | ||||||||
Interest paid, net of amounts capitalized | $ | 5,277 | $ | 9,852 | ||||
Reorganization expenses paid | — | 720 | ||||||
Income taxes paid, net of refunds | 150 | 250 | ||||||
Non-cash investing and financing activities: | ||||||||
Property and equipment additions and purchases of real estate in accrued liabilities | 971 | 146 | ||||||
Capital expenditures for real estate under development in accounts payable and accrued liabilities | 1,418 | — | ||||||
Additions to real estate under development reclassified from land | 3,346 | — | ||||||
Additions to land and land improvements reclassed from real estate under development | 170 | — | ||||||
Additions to furniture, fixtures and equipment reclassed from real estate under development | 211 | — | ||||||
Capitalized deferred financing costs in accrued liabilities | 8 | — | ||||||
Consolidation of hotel operations with no consideration paid: | ||||||||
Assets consolidated | — | (2,649 | ) | |||||
Liabilities consolidated | — | 2,649 | ||||||
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Behringer Harvard Opportunity REIT I, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
12. Discontinued Operations and Real Estate Held for Sale
We had no properties classified as held for sale at September 30, 2014 and December 31, 2013. We sold no properties during the nine months ended September 30, 2014.
The following table summarizes the disposition of our properties during 2013 (in millions):
Property Name | Date of Disposition | Contract Sales Price | ||||
Becket House | April 5, 2013 | $ | 19.8 | |||
Rio Salado(1) | May 28, 2013 | 9.3 | ||||
4950 S. Bowen Road(1) | October 22, 2013 | 1.6 | ||||
_________________________________
(1) Rio Salado and 4950 S. Bowen Road represented land-only interests and, therefore, did not qualify as discontinued operations.
We classified the results of operations for Becket House into discontinued operations in the accompanying condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2013, as summarized in the following table (in thousands):
Nine Months Ended September 30, 2013 | ||||
Revenues | ||||
Rental revenue | $ | 429 | ||
Expenses | ||||
Property operating expenses | 189 | |||
Bad debt recovery | (111 | ) | ||
Interest expense | 634 | |||
Real estate taxes | (9 | ) | ||
Impairment charge | 305 | |||
Property management fees | 23 | |||
Asset management fees | 16 | |||
Total expenses | 1,047 | |||
Realized loss on currency translation(1) | (3,624 | ) | ||
Gain on troubled debt restructuring(1) | 8,132 | |||
Income from discontinued operations | 3,890 | |||
Income attributable to noncontrolling interests | (1,459 | ) | ||
Income from discontinued operations attributable to the Company | $ | 2,431 | ||
________________________________
(1) | Due to the sale of Becket House on April 4, 2013, $3.6 million was reclassified from unrealized foreign currency translation loss in OCI to net loss and $8.1 million was recorded as a gain on troubled debt restructuring. There were no discontinued operations for the three months ended September 30, 2013. |
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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 the accompanying condensed consolidated financial statements of the Company 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 I, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “REIT,” “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 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 under Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 25, 2014, and the factors described below:
• | 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 cash flow from operating activities for capital expenditures; |
• | conflicts of interest arising out of our relationships with 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; |
• | our level of debt and the terms and limitations imposed on us by our debt agreements; |
• | 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; |
• | the need to invest additional equity in connection with debt financings as a result of reduced asset values and requirements to reduce overall leverage; |
• | 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; |
• | impairment charges; |
• | 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. 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.
Cautionary Note
The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this 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.
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Executive Overview
We are a Maryland corporation that was formed in November 2004 to invest in and operate commercial real estate or real-estate related assets located in or outside the United States on an opportunistic and value-add basis. We conduct substantially all of our business through our operating partnership and its subsidiaries. We are organized and qualify as a REIT for federal income tax purposes.
We are externally managed and advised by Behringer Harvard Opportunity Advisors I, a Texas limited liability company formed in June 2007. Behringer Harvard Opportunity Advisors I is responsible for managing our day-to-day affairs and for identifying and making acquisitions, dispositions and investments on our behalf.
As of September 30, 2014, we wholly owned four properties and consolidated three properties through investments in joint ventures, all of which were consolidated in our condensed consolidated financial statements. We are the mezzanine lender for one multifamily property. In addition, we have a noncontrolling, unconsolidated ownership interest in an investment in a joint venture consisting of 21 properties that are accounted for using the equity method. Our investment properties are located in Colorado, Missouri, Nevada, Texas, the Commonwealth of The Bahamas, the Czech Republic, Poland, Hungary, and Slovakia.
Liquidity and Capital Resources
Liquidity Demands
The primary objectives of our current business plan are to continue to preserve capital, as well as sustain and enhance property values, while continuing to focus on the disposition of our properties. Our ability to continue to execute this plan is contingent on our ability to dispose of our properties in an orderly fashion thus providing needed liquidity. Our cash balance at September 30, 2014 is $44.5 million.
Our financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business as we proceed through our disposition phase. As is usual for opportunity-style real estate investment programs, we are structured as a finite-life entity, and have entered the final phase of operations. This phase includes the selling of our assets, retiring our liabilities, and distributing net proceeds to stockholders. It is possible that we will invest additional capital in some of our assets in order to position these assets for sale in the normal course of business. See "Strategic Asset Sales" below. We have experienced significant losses and may generate negative cash flows as mortgage note obligations and expenses exceed revenues. If we are unable to sell a property when we determine to do so as contemplated in our business plan, it could have a significant adverse effect on our cash flows that are necessary to meet our mortgage obligations and to satisfy our other liabilities in the normal course of business.
Our ability to continue as a going concern is, therefore, dependent upon our ability to sell real estate investments, to pay or retire debt as it matures if extensions or new financings are unavailable, and to fund certain ongoing costs of our company, including our development and operating properties. Our principal demands for funds for the next twelve months and beyond will be for the payment of costs associated with the lease-up of available space at our operating properties (including commissions, tenant improvements, and capital improvements), certain ongoing costs at our development properties, Company operating expenses, and interest and principal on our outstanding indebtedness. We expect to fund a portion of these demands by using cash flow from operations of our current investments and borrowings. Additionally, we will use proceeds from our strategic asset sales.
On March 29, 2011, we obtained a $2.5 million loan from our Advisor to bridge our liquidity needs. The $2.5 million loan bore interest at a rate of 5% and had a maturity date of the earliest of (i) March 29, 2013, (ii) the termination without cause of the advisory management agreement or (iii) the termination without cause of the property management agreement. On March 25, 2013, we fully repaid the loan and accrued interest.
We continually evaluate our liquidity and ability to fund future operations and debt obligations (See Note 7, Notes Payable, in the Notes to Unaudited Condensed Consolidated Financial Statements for more details). As part of those analyses, we consider lease expirations at our consolidated office properties and other factors. Operating leases for our office buildings representing less than 1% of our annualized base rent and less than 1% of our rentable square footage (effective annual rent per square foot of $23.86) will expire by the end of 2014. In the 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 consequently adversely affect our ability to fund our ongoing operations. In addition, our portfolio is concentrated in certain geographic regions and industries, and downturns relating generally to such regions or industries may result in defaults on a number of our investments within a short time period. Such defaults would negatively affect our liquidity and adversely affect our ability to fund our ongoing operations. As of September 30, 2014, 60% and 31% of our 2014 contractual base rental income from our office properties, as well as revenue from our multifamily and
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hotel properties, without consideration of tenant contraction or termination rights, was derived from tenants in Missouri and Texas, respectively.
Strategic Asset Sales
Our portfolio of operating properties are either in markets that would benefit from anticipated rental increases and improving local markets before sale, or are in various stages of the stabilization process. As the properties stabilize, they may require additional time and capital resources to lease-up vacancy, retain key tenants or create value through reinvestment before their ultimate disposition. As of September 30, 2014, we have the penthouse unit at Chase — The Private Residences, LLC in condominium inventory, three development projects, one note receivable, and an investment in land. A final exit of these assets is contingent upon a stabilized economy and resurgent demand for the respective product types. It is possible that we will invest additional capital in some assets, which we believe will enhance their value. We are marketing our Royal Island project for sale. On October 31, 2014, we signed an agreement to sell The Lodge & Spa at Cordillera to an unrelated third party at a contract price that is in excess of our book value. The sale is expected to close in mid-December 2014. The agreement has a 45-day due diligence period during which the Purchaser may terminate the agreement without penalty. There can be no assurances that we will complete the sale. On August 7, 2014, one of the properties owned by our Central Europe Joint Venture was sold for €3.6 million. On June 13, 2014, we sold 1.62 acres of land at our Frisco Square development to an unrelated third party for $1.8 million. However, there can be no assurance that future dispositions will occur as planned, or if they occur, that they will help us to meet our liquidity demands. Once we anticipate selling all or substantially all of our assets, we will seek stockholder approval prior to liquidating our entire portfolio.
Debt Financings
One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt. The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of September 30, 2014. The table does not represent any extension options (in thousands):
Payments Due by Period(1) | ||||||||||||||||||||||||
2014 | 2015 | 2016 | 2017 | 2018 | Total | |||||||||||||||||||
Principal payments - fixed rate debt | $ | 195 | $ | 814 | $ | 32,824 | $ | 26,180 | $ | — | $ | 60,013 | ||||||||||||
Interest payments - fixed rate debt | 1,154 | 4,587 | 3,225 | 564 | — | 9,530 | ||||||||||||||||||
Principal payments - variable rate debt | 126 | 1,354 | 3,047 | 59,741 | 29,455 | 93,723 | ||||||||||||||||||
Interest payments - variable rate debt (based on rates in effect as of September 30, 2014) | 1,031 | 4,118 | 4,007 | 2,904 | 160 | 12,220 | ||||||||||||||||||
Total | $ | 2,506 | $ | 10,873 | $ | 43,103 | $ | 89,389 | $ | 29,615 | $ | 175,486 | ||||||||||||
________________________________
(1) Does not include approximately $0.2 million of unamortized premium related to debt we assumed on our acquisition of Northborough Tower.
The debt related to Chase Park Plaza Hotel was scheduled to mature in December 2014. The loan opened to prepayment without penalty in December 2013. On August 11, 2014, we refinanced the Chase Park Plaza Hotel with a new lender for $62.5 million in proceeds. A fee of $590,000 was paid and recorded to interest expense at the time of payment. The loan bears interest at 4.95% and matures in three years with two one-year extensions available. The new loan requires interest-only payments in the first year and principal payments based upon a 25-year amortization during the remaining term, including extension periods. The loan is not prepayable in the first year and requires a prepayment penalty for months 13 through 30 of the original term. A portion of the proceeds from the new loan were used to repay the current debt and closing costs. We have guaranteed that $6.5 million of the proceeds will be utilized for a room and retail renovation program at the Chase Park Plaza Hotel. The outstanding balance on this loan as of September 30, 2014 was $62.5 million.
On April 5, 2013, we sold Becket House and the lender accepted the sales proceeds as full satisfaction of the outstanding debt.
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On August 26, 2014 the Ablon Frisco Square Venture obtained a $26.3 million construction loan. The loan incurs interest at 30-day LIBOR plus 2.5% and has a 3-year term with two 12-month extensions available. Payments of interest-only are required during the initial 3-year term. Equity of $15.8 million must be contributed to the project before any draws are made under the loan. As of September 30, 2014, the partners have funded $4 million of equity (which includes land) towards the construction. We have not drawn any funds under the construction loan to date. Our joint venture partner, or one of its affiliates, has provided the completion guaranty and any other carve-out guaranties for the construction loan.
The operating costs of our Royal Island property were funded through the Debt LP Loan through June 2014. The initial loan had an availability to draw of $10.4 million. In February 2013, the lender agreed to increase the amount available to draw on the Debt LP Loan to $11.6 million. In June 2013, the lenders further increased the amount available to draw to $12.4 million. Beginning in October 2013, the lender increased the availability each month by the amount of the monthly operating costs. The lender ceased funding the monthly operating costs in July 2014. As of September 30, 2014, the balance of the Debt LP Loan was $13.9 million.
We currently expect to use funds generated by our operating properties, additional borrowings, and proceeds from the disposition of properties to continue making our scheduled debt service payments until the maturity dates of the loans are extended, the loans are refinanced, or the loans are completely paid off. However, there is no guarantee that we will be able to refinance our borrowings with more or less favorable terms or extend the maturity dates of such loans. In addition, the tepid economic environment and limited availability of credit to buyers for certain asset classes could delay or inhibit our ability to dispose of our properties in an orderly manner, or cause us to have to dispose of our properties for a lower than anticipated return. To the extent we are unable to reach agreeable terms with respect to extensions or refinancings, we may not have the cash necessary to repay our debt as it matures, which could result in an event of default that could allow lenders to foreclose on the property in satisfaction of the debt, seek repayment of the full amount of the debt outstanding from us or pursue other remedies.
Each of our loans is secured by one or more of our properties. At September 30, 2014, interest rates on our notes payable ranged from 3.2% to 15%, with a weighted average interest rate of approximately 6%. Generally, our notes payable mature at approximately two to nine years from origination and require payments of interest-only for approximately two to five years, with all principal and interest due at maturity. Notes payable associated with our Northborough Tower, Frisco Square, Las Colinas Commons, and Northpoint Central investments require monthly payments of principal and interest. At September 30, 2014, our notes payable had maturity dates that ranged from January 2016 to February 2018.
Our ability to fund our liquidity requirements is expected to come from cash and cash equivalents (which total $44.5 million on our condensed consolidated balance sheet as of September 30, 2014), operating cash flow from properties, new borrowings, additional borrowings that may become available under our existing loan agreements by satisfying certain terms, and proceeds from the disposition of our properties. As necessary, we may seek alternative sources of financing, including using the proceeds from the sale of our properties to achieve our investment objectives.
As of September 30, 2014, restricted cash on the condensed consolidated balance sheet of $7.6 million included amounts set aside related to certain operating properties for tenant improvements and commission reserves, tax reserves, maintenance and capital expenditures reserves, and other amounts as may be required by our lenders.
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Results of Operations
As of September 30, 2014, we were invested in nine assets, seven of which were consolidated (four of those were wholly owned and three properties consolidated through investments in joint ventures). In addition, we are the mezzanine lender for one multifamily property. We also have a noncontrolling, unconsolidated ownership interest in a joint venture consisting of 21 properties that are accounted for using the equity method. Our investment properties are located in Colorado, Missouri, Nevada, Texas, the Commonwealth of The Bahamas, the Czech Republic, Poland, Hungary, and Slovakia.
As of September 30, 2013, we were invested in ten assets, eight of which were consolidated (five of those were wholly owned and three properties consolidated through investments in joint ventures). In addition, we were the mezzanine lender for one multifamily property. We also have a noncontrolling, unconsolidated ownership interest in a joint venture consisting of 21 properties that are accounted for using the equity method. As of September 30, 2013, our investment properties were located in Colorado, Missouri, Nevada, Texas, the Commonwealth of The Bahamas, the Czech Republic, Poland, Hungary, and Slovakia.
Three months ended September 30, 2014 as compared to three months ended September 30, 2013
The following table provides summary information about our results of operations for the three months ended September 30, 2014 and 2013 ($ in thousands):
2014 | 2013 | $ Amount Change Incr (Decr) | Percentage Change Incr/(Decr) | ||||||||||||
Revenues | |||||||||||||||
Rental revenue | $ | 5,044 | $ | 5,020 | $ | 24 | 0.5 | % | |||||||
Hotel revenue | 9,794 | 9,060 | 734 | 8.1 | % | ||||||||||
Total revenues | 14,838 | 14,080 | 758 | 5.4 | % | ||||||||||
Expenses | |||||||||||||||
Property operating expenses | 1,831 | 2,268 | (437 | ) | (19.3 | )% | |||||||||
Hotel operating expenses | 6,941 | 6,924 | 17 | 0.2 | % | ||||||||||
Bad debt expense (recovery) | 62 | (17 | ) | 79 | 464.7 | % | |||||||||
Interest expense | 2,929 | 2,481 | 448 | 18.1 | % | ||||||||||
Real estate taxes | 1,076 | 873 | 203 | 23.3 | % | ||||||||||
Impairment charge | — | 119 | (119 | ) | (100.0 | )% | |||||||||
Property management fees | 498 | 505 | (7 | ) | (1.4 | )% | |||||||||
Asset management fees | 564 | 553 | 11 | 2.0 | % | ||||||||||
General and administrative | 1,293 | 1,076 | 217 | 20.2 | % | ||||||||||
Depreciation and amortization | 3,092 | 2,968 | 124 | 4.2 | % | ||||||||||
Total expenses | $ | 18,286 | $ | 17,750 | $ | 536 | 3.0 | % | |||||||
Other income, net | $ | — | $ | (87 | ) | $ | 87 | 100.0 | % | ||||||
Loss on early extinguishment of debt | $ | (246 | ) | $ | — | $ | (246 | ) | (100.0 | )% | |||||
Equity in gains (losses) of unconsolidated joint ventures | $ | 173 | $ | (3,113 | ) | $ | 3,286 | 105.6 | % | ||||||
Reorganization items, net | $ | — | $ | (29 | ) | $ | 29 | 100.0 | % | ||||||
Continuing Operations
Revenues. Overall, our total revenues increased by approximately $0.8 million to $14.8 million for the three months ended September 30, 2014. The change in revenues was primarily due to:
• | Hotel revenue increased $0.7 million to $9.8 million for the three months ended September 30, 2014. Hotel revenue for Chase Park Plaza Hotel increased approximately $0.8 million primarily due to an 11% increase in occupancy year-over-year. The Lodge & Spa at Cordillera decreased less than $0.1 million in the third quarter of 2014 as compared to the third quarter of 2013. |
• | Rental revenue remained relatively flat between the third quarter of 2014 and the third quarter of 2013. |
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• | We had no condominium sales in the third quarters of 2014 and 2013. |
Property operating expenses. Property operating expenses were approximately $1.9 million for the three months ended September 30, 2014 as compared to $2.3 million for the three months ended September 30, 2013, a decrease of approximately $0.4 million, and were comprised of operating expenses from our consolidated properties. Royal Island operating expenses decreased $0.3 million as a result of lower operating expenditures as we explore the disposition of this property. Operating expenses at Las Colinas Commons, Northpoint and Northborough remained fairly constant.
Hotel operating expenses. Hotel operating expenses were approximately $6.9 million for the three months ended September 30, 2014 and 2013. Operating expenses at our Chase Park Plaza Hotel increased approximately $0.2 million primarily due to an 11% increase in occupancy year-over-year. This increase was partially offset by a decrease of approximately $0.1 million in hotel operating expenses at The Lodge & Spa at Cordillera due to transitional expenses incurred in the third quarter of 2013 as a result of a change in the management company.
Bad debt expense (recovery). Bad debt expense in the third quarter of 2014 was less than $0.1 million compared to bad debt recovery of less than $0.1 million in the third quarter of 2013.
Cost of condominium sales. There were no condominium sales during the three months ended September 30, 2014 and 2013.
Interest expense. Interest expense for the three months ended September 30, 2014 and 2013 was $2.9 million and $2.5 million, respectively. The increase in interest expense was primarily due to amortization of $0.6 million of deferred borrowing costs during the third quarter of 2014.
Real Estate Taxes. Real estate taxes were approximately $1.1 million and $0.9 million for the three months ended September 30, 2014 and 2013, respectively, for an increase of $0.2 million. During the three months ended September 30, 2014, real estate tax expense increased $0.2 million at Frisco Square due to an increase in assessed values in 2014. Real estate tax expense for our remaining properties were comparable year-over-year.
Impairment charge. During the third quarter of 2013, we recorded a non-cash impairment charge of $0.1 million in continuing operations related to 4950 S. Bowen Road land based upon the sale price. The sale was completed on October 22, 2013. We did not record any impairment charges during the third quarter of 2014.
Property management fees. Property management fees remained flat at $0.5 million for the three months ended September 30, 2014 and 2013.
Asset management fees. Asset management fees remained fairly constant at approximately $0.6 million for the three months ended September 30, 2014 and 2013.
General and administrative. General and administrative expense was $1.3 million for the three months ended September 30, 2014, an increase of $0.2 million over the expense for the same period in 2013. We had an increase of $0.2 million in corporate overhead allocation during the third quarter of 2014 as compared to the third quarter of 2013.
Depreciation and amortization. Depreciation and amortization were comparable year-over-year at $3.1 million and $3 million for the three months ended September 30, 2014 and 2013, respectively.
Other income, net. Other income was a charge of less than $0.1 million for the third quarter of 2013. We had no other income in the third quarter of 2014.
Loss on early extinguishment of debt. On August 11, 2014, we refinanced the Chase Park Plaza Hotel debt with a new lender for $62.5 million in proceeds. A portion of the proceeds from the new loan were used to repay the old debt, which had a balance of approximately $46.5 million, and closing costs. We recognized approximately $0.2 million loss on early extinguishment of debt in our condensed consolidated statements of operations and comprehensive loss for the three months ended September 30, 2014 related to unamortized deferred borrowing costs on the old debt. We had no losses on early extinguishment of debt in the third quarter of 2013.
Equity in gains (losses) of unconsolidated joint ventures. Equity in gains (losses) of unconsolidated joint ventures was a gain of $0.2 million for the three months ended September 30, 2014 compared to a loss of $3.1 million for the three months ended September 30, 2013. On August 7, 2014 one of our Central Europe Joint Venture properties was sold and we recorded our portion of the gain on sale which totaled $0.2 million. During the third quarter of 2013, our Central Europe Joint Venture recorded a $5.9 million impairment. The Company's portion of the impairment was approximately $2.8 million, which was recorded in the Company's statement of operations through the equity in losses of unconsolidated joint ventures line item.
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Reorganization items, net. During the third quarter of 2013, we recorded reorganization expense of less than $0.1 million, related to the Frisco Square loan restructuring. We did not incur any reorganization expense during the third quarter of 2014.
Gain on sale of real estate. We did not sell any real estate assets in the third quarters of 2014 and 2013.
Nine months ended September 30, 2014 as compared to nine months ended September 30, 2013
The following table provides summary information about our results of operations for the nine months ended September 30, 2014 and 2013 ($ in thousands):
2014 | 2013 | $ Amount Change Incr (Decr) | Percentage Change Incr/(Decr) | ||||||||||||
Revenues | |||||||||||||||
Rental revenue | $ | 15,134 | $ | 15,775 | $ | (641 | ) | (4.1 | )% | ||||||
Hotel revenue | 27,131 | 22,378 | 4,753 | 21.2 | % | ||||||||||
Condominium sales | — | 409 | (409 | ) | (100.0 | )% | |||||||||
Total revenues | 42,265 | 38,562 | 3,703 | 9.6 | % | ||||||||||
Expenses | |||||||||||||||
Property operating expenses | 6,051 | 8,405 | (2,354 | ) | (28.0 | )% | |||||||||
Hotel operating expenses | 19,988 | 17,103 | 2,885 | 16.9 | % | ||||||||||
Bad debt expense (recovery) | (87 | ) | 1,714 | (1,801 | ) | (105.1 | )% | ||||||||
Cost of condominium sales | — | 417 | (417 | ) | (100.0 | )% | |||||||||
Interest expense | 7,784 | 7,306 | 478 | 6.5 | % | ||||||||||
Real estate taxes | 3,017 | 2,956 | 61 | 2.1 | % | ||||||||||
Impairment charge | — | 119 | (119 | ) | (100.0 | )% | |||||||||
Property management fees | 1,377 | 1,280 | 97 | 7.6 | % | ||||||||||
Asset management fees | 1,692 | 1,741 | (49 | ) | (2.8 | )% | |||||||||
General and administrative | 4,264 | 4,248 | 16 | 0.4 | % | ||||||||||
Depreciation and amortization | 9,457 | 9,619 | (162 | ) | (1.7 | )% | |||||||||
Total expenses | $ | 53,543 | $ | 54,908 | $ | (1,365 | ) | (2.5 | )% | ||||||
Other Income, net | $ | 759 | $ | (60 | ) | $ | 819 | 1,365.0 | % | ||||||
Loss on early extinguishment of debt | $ | (246 | ) | $ | — | $ | (246 | ) | (100.0 | )% | |||||
Equity in gains (losses) of unconsolidated joint ventures | $ | 105 | $ | (2,699 | ) | $ | 2,804 | 103.9 | % | ||||||
Reorganization items, net | $ | — | $ | (152 | ) | $ | 152 | 100.0 | % | ||||||
Gain on sale of real estate | $ | 476 | $ | 95 | $ | 381 | 401.1 | % | |||||||
Continuing Operations
Revenues. Overall, our total revenues increased by approximately $3.7 million to $42.3 million for the nine months ended September 30, 2014. The change in revenues was primarily due to:
• | Rental revenue decreased $0.6 million for the nine months ended September 30, 2014 as compared to the same period of 2013. In the first quarter of 2013, Chase Park Plaza Hotel was accounted for as a lease and recorded $1 million in rental revenue. As of February 19, 2013, we began consolidating the hotel operations. As a result, the lease payment was eliminated and we began reporting Chase Park Plaza Hotel's operations in hotel revenues and hotel operating expenses (see below). In addition, rental revenue decreased $0.3 million at Las Colinas Commons due to a decrease in tenant reimbursable income. These decreases in rental revenue were partially offset by increases of $0.3 million at Frisco Square, $0.2 million at Northpoint and $0.1 million at Northborough primarily due to higher recovery income. |
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• | Hotel revenue increased $4.8 million to $27.1 million for the nine months ended September 30, 2014. The consolidation of the operations of Chase Park Plaza Hotel effective February 19, 2013 and an increase of 11% in occupancy at the Chase Park Plaza Hotel year-over-year, resulted in an approximate $5.1 million increase in hotel revenue. Hotel revenue at The Lodge & Spa at Cordillera increased less than $0.1 million in the nine months ended September 30, 2014 as compared to the same period of 2013. These increases were partially offset by a decrease in hotel revenue for Royal Island of $0.4 million due to the suspension of the rental program as we explore the disposition of this property. |
• | Income from condominium sales was zero for the nine months ended September 30, 2014 compared to $0.4 million for the nine months ended September 30, 2013. No condominium units were sold at Chase — The Private Residences during the nine months ended September 30, 2014 as compared to one unit sold during the nine months ended September 30, 2013. We have one unit remaining in inventory. |
Property operating expenses. Property operating expenses were approximately $6 million for the nine months ended September 30, 2014 as compared to $8.4 million for the nine months ended September 30, 2013, a decrease of approximately $2.4 million, and were comprised of operating expenses from our consolidated properties. Property operating expenses at Frisco Square decreased $1.2 million during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. During the nine months ended September 30, 2013, we incurred a one-time expense of $0.8 million in accordance with the development agreement. Additionally, the POA dues at Frisco Square decreased $0.2 million for the nine months ended September 30, 2014 compared to the same period in 2013. For the year ended 2013, we estimated our annual pro rata share of the expense at approximately $0.4 million. As a result of land sales and new assessed values within the POA, the estimate of our annual obligation has decreased to $0.2 million resulting in the reversal of $0.1 million expense in June 2014. Royal Island operating expenses decreased $0.9 million as a result of lower operating expenditures as we explore the disposition of this property. Operating expenses at Las Colinas Commons, Northpoint and Northborough combined accounted for a decrease in property operating expenses of approximately $0.3 million.
Hotel operating expenses. Hotel operating expenses were approximately $20 million for the nine months ended September 30, 2014 compared to $17.1 million for the nine months ended September 30, 2013, for an increase of $2.9 million. The consolidation of the operations of Chase Park Plaza Hotel effective February 19, 2013 and an 11% increase in occupancy year-over-year contributed a $3 million increase in hotel operating expenses. This increase was partially offset by a $0.2 million decrease in expense at Royal Island due to the suspension of the rental program as we explore the disposition of this investment.
Bad debt expense (recovery). Bad debt expense (recovery) for the nine months ended September 30, 2014 was a recovery of less than $0.1 million compared to a charge of $1.7 million for the same period of 2013 for a decrease of approximately $1.8 million. Chase Park Plaza Hotel's bad debt expense decreased $1.6 primarily due to a provision recorded in 2013 related to the termination of the hotel operating lease between Kingsdell, L.P. and Chase Park Plaza Hotel. Bad debt expense for Frisco Square decreased $0.2 million due to a recovery of funds in 2014 that were recognized as bad debt expense in 2013.
Cost of condominium sales. Cost of condominium sales relating to the sale of condominium units at Chase — The Private Residences was zero for the nine months ended September 30, 2014 compared to $0.4 million for the same period of 2013. During the nine months ended September 30, 2013, we sold one condominium unit. We did not sell any units during the nine months ended September 30, 2014.
Interest expense. Interest expense was approximately $7.8 million and $7.3 million for the nine months ended September 30, 2014 and 2013, respectively. The increase in interest expense was primarily due to amortization of $0.6 million of deferred borrowing costs during the nine months ended September 30, 2014.
Real Estate Taxes. Real estate taxes were approximately $3 million for the nine months ended September 30, 2014 and 2013. During the nine months ended September 30, 2014, real estate tax expense at The Lodge & Spa at Cordillera decreased $0.2 million compared to the same period of 2013 due to a successful tax appeal in 2014. This is offset by an increase of $0.1 million in real estate tax expense at Frisco Square due to building improvements and an increase of less than $0.1 million at Northborough due to a higher valuation by the taxing authorities. Real estate tax expense for the remaining of our properties were comparable year-over-year.
Impairment charge. During the third quarter of 2013, we recorded a non-cash impairment charge of $0.1 million in continuing operations related to 4950 S. Bowen Road land based upon the sale price. The sale was completed on October 22, 2013. We did not record any impairment charges during the nine months ended September 30, 2014.
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Property management fees. Property management fees for the nine months ended September 30, 2014 were approximately $1.4 million compared to approximately $1.3 million for the nine months ended September 30, 2013. Property management fees, which are based upon revenue collections, increased $0.1 million at Chase Park Plaza Hotel due to increased revenues at the hotel. Property management fees for our other properties were comparable year-over-year.
Asset management fees. Asset management fees were $1.7 million for the nine months ended September 30, 2014 and 2013.
General and administrative. General and administrative expense remained fairly constant at $4.3 million and $4.2 million for the nine months ended September 30, 2014 and 2013, respectively. We had an increase in corporate overhead allocation of $0.2 million during the nine months ended September 30, 2014 compared to the same period of 2013. In addition, we had an increase of $0.2 million in board and board committee fees for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 due to an increase in the number of board and board committee meetings. These increases were partially offset by a decrease in legal expense of $0.3 million related to our Chase Park Plaza Hotel litigation and Frisco Square restructuring.
Depreciation and amortization. Depreciation and amortization were comparable year-over-year at $9.5 million and $9.6 million for the nine months ended September 30, 2014 and 2013, respectively.
Other income, net. Other income was $0.8 million for the nine months ended September 30, 2014 compared to a charge of less than $0.1 million for the nine months ended September 30, 2013. In May 2014, a lot option agreement at Royal Island expired. We recognized $0.8 million in other income related to the expiration of the lot option.
Loss on early extinguishment of debt. On August 11, 2014, we refinanced the Chase Park Plaza Hotel debt with a new lender for $62.5 million in proceeds. A portion of the proceeds from the new loan were used to repay the old debt, which had a balance of approximately $46.5 million, and closing costs. We recognized approximately $0.2 million loss on early extinguishment of debt in our condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2014 related to unamortized deferred borrowing costs on the old debt. We had no losses on early extinguishment of debt during the nine months ended September 30, 2013.
Equity in gains (losses) of unconsolidated joint ventures. Equity in gains (losses) of unconsolidated joint ventures was a gain of $0.1 million for the nine months ended September 30, 2014 compared to a loss of $2.7 million for the nine months ended September 30, 2013. On August 7, 2014 one of our Central Europe Joint Venture properties was sold and we recorded our portion of the gain on sale which totaled $0.2 million. During the third quarter of 2013, our Central Europe Joint Venture recorded a $5.9 million impairment. The Company's portion of the impairment was approximately $2.8 million, which was recorded in the Company's statement of operations through the equity in losses of unconsolidated joint ventures line item.
Reorganization items, net. During the nine months ended September 30, 2013, we recorded reorganization expense of $0.2 million related to the Frisco Square loan restructuring. We did not incur any reorganization expense during the first nine months of 2014.
Gain on sale of real estate. On June 13, 2014, we sold 1.62 acres of land at our Frisco Square development to an unrelated third party for approximately $1.8 million. We recorded a $0.5 million gain on sale of real estate. On May 28, 2013, we sold Rio Salado to an unrelated third party for $9.3 million and recorded a $0.1 million gain on sale of real estate. The gain on sale of real estate for both of these sales was included in continuing operations.
Cash Flow Analysis
During the nine months ended September 30, 2014, net cash provided by operating activities was $0.5 million as compared to net cash used in operating activities of $3.4 million for the same period of 2013. The primary reason for the increase in cash from operating activities was the improved operations at our Chase Park Plaza Hotel.
Net cash used in investing activities for the nine months ended September 30, 2014 was $7.2 million as compared to net cash provided by investing activities of $24.5 million for the nine months ended September 30, 2013. The difference of $31.7 million is primarily a result of sales proceeds of $29 million from the sale of Becket House and Rio Salado in the nine months ended September 30, 2013. We received sales proceeds of $1.7 million on June 13, 2014 for the sale of 1.62 acres at our Frisco Square property. In addition, we purchased property and equipment totaling $6.7 million for the nine months ended September 30, 2014 compared to $1.9 million for the same period of 2013. The $4.8 million increase in fixed asset additions was primarily due to tenant improvements and building renovations at our Northborough, Frisco Square, Chase Park Plaza Hotel and Las Colinas Commons properties during the nine months ended September 30, 2014. In addition, we commenced construction on a 275-unit multifamily development located in Frisco Square on September 2, 2014.
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Net cash provided by financing activities for the nine months ended September 30, 2014 was $14.3 million compared to net cash used in financing activities of $19.5 million for the comparable period of 2013. The $33.8 million difference is primarily the result of proceeds of $62.5 million received on the refinance of the Chase Park Plaza Hotel debt with a new lender on August 11, 2014, partially offset by the repayment of the old Chase Park Plaza Hotel debt, which had a balance of approximately $46.5 million. In addition, we paid off the debt totaling $19.8 million for the Becket House property which we sold in the second quarter of 2013.
Funds from Operations
Funds from operations ("FFO") is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts ("NAREIT") in the April 2002 "White Paper of Funds From Operations" which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property and impairments of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership), plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, subsidiaries, and noncontrolling interests as one measure to evaluate our operating performance.
Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance.
We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, impairments of depreciable assets, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income.
FFO should not be considered as an alternative to net loss, as an indication of our liquidity, nor as an indication of funds available to fund our cash needs, including our ability to make distributions and should be reviewed in connection with other GAAP measurements. Additionally, the exclusion of impairments limits the usefulness of FFO as a historical operating performance measure since an impairment charge indicates that operating performance has been permanently affected. FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO. Our FFO, as presented, may not be comparable to amounts calculated by other REITs that do not define these terms in accordance with the current NAREIT definition or that interpret the definition differently.
Our calculation of FFO for the three and nine months ended September 30, 2014 and 2013 is presented below (shares and $ in thousands, except per share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
Description | 2014 | Per Share | 2013 | Per Share | 2014 | Per Share | 2013 | Per Share | ||||||||||||||||||||||||
Net loss attributable to common shareholders | $ | (3,442 | ) | $ | (0.06 | ) | $ | (6,796 | ) | $ | (0.12 | ) | $ | (9,943 | ) | $ | (0.17 | ) | $ | (16,392 | ) | $ | (0.29 | ) | ||||||||
Adjustments for(1): | ||||||||||||||||||||||||||||||||
Impairment charge(2) | — | — | 2,898 | 0.05 | — | — | 3,142 | 0.05 | ||||||||||||||||||||||||
Real estate depreciation and amortization(3) | 3,600 | 0.06 | 3,461 | 0.06 | 10,938 | 0.19 | 11,155 | 0.20 | ||||||||||||||||||||||||
Gain on sale of real estate(4) | (190 | ) | — | — | — | (666 | ) | (0.01 | ) | (95 | ) | — | ||||||||||||||||||||
Funds from operations (FFO) | $ | (32 | ) | $ | — | $ | (437 | ) | $ | (0.01 | ) | $ | 329 | $ | 0.01 | $ | (2,190 | ) | $ | (0.04 | ) | |||||||||||
GAAP weighted average shares: | ||||||||||||||||||||||||||||||||
Basic and diluted | 56,500 | 56,500 | 56,500 | 56,500 | ||||||||||||||||||||||||||||
_________________________________
(1) | Reflects the adjustments for continuing operations as well as discontinued operations (2013). |
(2) | Includes impairment of our investments in unconsolidated entities which resulted from a decrease in the fair value of the depreciable real estate held by the joint venture or partnership. |
(3) | Includes our consolidated depreciation and amortization expense, as well as our pro rata share of those unconsolidated investments which we account for under the equity method of accounting and the noncontrolling interest adjustment for the third-party partners' share. |
(4) | The gain on sale of real estate for the three and nine months ended September 30, 2014 includes our pro rata share, $0.2 million, of the gain from the sale of one of our unconsolidated joint venture properties in August 2014. |
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Cash flows generated from FFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO, such as capital expenditures and payments of principal on debt, each of which may impact the amount of cash available for future distributions to our stockholders.
Distributions
Distributions are authorized at the discretion of our board of directors based on its analysis of our forthcoming cash needs, earnings, cash flow, anticipated cash flow, capital expenditure requirements, cash on hand, general financial condition 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 connection with entering our disposition phase, on March 28, 2011, our board of directors discontinued regular quarterly distributions. Any future distributions will be based on available cash after weighing operational needs.
Historically, distributions paid to stockholders have been funded through various sources, including cash flow from operating activities, proceeds raised as part of our initial public offering, reinvestment through our distribution reinvestment plan and/or additional borrowings. We had no distributions in the nine months ended September 30, 2014 and 2013.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates, including investment impairment, on a regular basis. These estimates will be based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.
Principles of Consolidation and Basis of Presentation
Our condensed 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.
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.
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
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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.
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 hotels and all other buildings is depreciated over the estimated useful lives of 39 years and 25 years, respectively, 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. The estimated remaining average useful lives for acquired lease intangibles range from less than one year to approximately ten years.
Other intangible assets include the value of identified hotel trade names and in-place property tax abatements. These fair values are based on management's estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods. The value of the trade names is amortized over its respective estimated useful life of 20 years using the straight-line method and the value of the in-place property tax abatement is amortized over its estimated term of 10 years using the straight-line method.
Investment Impairments
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 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 resulting loss of revenues; natural
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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. These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Chief Executive Officer and Chief Financial Officer of the Company review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data and with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. We consider trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. 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. 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.
We also evaluate our investments in notes receivable as of each reporting date. If we believe that it is probable we will not collect all principal and interest in accordance with the terms of the notes, we consider the loan impaired. When evaluating loans for potential impairment, we compare the carrying amount of the loans to the present value of future cash flows discounted at the loans effective interest rate, or, if a loan is collateral dependent, to the estimated fair value of the related collateral net of any senior loans. For impaired loans, a provision is made for loan losses to adjust the reserve for loan losses. The reserve for loan losses is a valuation allowance that reflects our current estimate of loan losses as of the balance sheet date. The reserve is adjusted through the provision for loan losses account on our condensed consolidated statements of operations.
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, planned development 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 book value of our investments, which could be material to our financial statements.
We also evaluate our investments in unconsolidated joint ventures at each reporting date. If we believe there is an other than temporary decline in market value, we will record an impairment charge based on these evaluations. We assess potential impairment by comparing our portion of estimated future undiscounted operating cash flows expected to be generated by the joint venture over the life of the joint venture’s assets to the carrying amount of the joint venture. In the event that the carrying amount exceeds our portion of estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the joint venture to its estimated fair value.
The value of our properties held for development depends on market conditions, including estimates of the project start date as well as estimates of future demand for the property type under development. We have analyzed trends and other information related to each potential development and incorporated this information, as well as our current outlook, into the assumptions we use in our impairment analyses. Due to the judgment and assumptions applied in the estimation process with respect to impairments, including the fact that limited market information regarding the value of comparable land exists at this time, it is possible actual results could differ substantially from those estimated.
We believe the carrying value of our operating real estate assets, properties under development, investments in unconsolidated joint ventures, and notes receivable is currently recoverable. However, if market conditions worsen beyond our current expectations, or if our assumptions regarding expected future cash flows from the use and eventual disposition of our assets decrease or our expected hold periods decrease, or if changes in our development strategy significantly affect any key assumptions used in our fair value calculations, we may need to take additional charges in future periods for impairments related to existing assets. Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.
Condominium Inventory
Condominium inventory is stated at the lower of cost or fair market value. In addition to land acquisition costs, land development costs, and construction costs, costs include interest and real estate taxes, which are capitalized during the period beginning with the commencement of development and ending with the completion of construction.
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For condominium inventory, at each reporting date, management compares the estimated fair value less costs to sell to the carrying value. An adjustment is recorded to the extent that the fair value less costs to sell is less than the carrying value. We determine the estimated fair value of condominiums based on comparable sales in the normal course of business under existing and anticipated market conditions. This evaluation takes into consideration estimated future selling prices, costs incurred to date, estimated additional future costs, and management's plans for the property. We currently have one remaining condominium unit in inventory at Chase—The Private Residences.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We may be exposed to interest rate changes, primarily as a result of long-term variable rate debt used to acquire properties and make loans and other permitted investments. Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps, or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt. Of our $154 million in notes payable, at September 30, 2014, $31.2 million represented debt subject to variable interest rates. If our variable interest rates increased 100 basis points, we estimate that total annual interest cost, including interest expensed and interest capitalized, would increase by $0.3 million.
Foreign Currency Exchange Risk
At September 30, 2014, we own an approximately 47% interest in a joint venture consisting of 21 properties in the Czech Republic, Poland, Hungary, and Slovakia that holds $3.9 million in local currency-denominated accounts at European financial institutions. As the cash is held in the same currency as the real estate assets and related loans, we believe that we are not materially exposed to any significant foreign currency fluctuations related to these accounts as it relates to ongoing property operations. Material movements in the exchange rate of Euros could materially impact distributions from our foreign investments.
Inflation
The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. However, we include provisions in the majority of our tenant leases that would protect us from the impact of inflation. These provisions include reimbursement billings for common area maintenance charges, real estate tax and insurance reimbursements on a per square foot basis, or in some cases, annual reimbursement of operating expenses above a certain per square foot allowance.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of September 30, 2014, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e) using the criteria established in the Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2014, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
There has been no change in internal control over financial reporting that occurred during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
We are not party to, and none of our properties are subject to, any material pending legal proceedings.
Item 1A. Risk Factors.
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Common Stock
During the period covered by this quarterly report, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.
Share Redemption Program
In February 2006, our board of directors authorized a share redemption program for stockholders who held their shares for more than one year. Under the program, our board reserved the right in its sole discretion at any time, and from time to time, to (1) waive the one-year holding period in the event of the death, disability or bankruptcy of a stockholder or other exigent circumstances, (2) reject any request for redemption, (3) change the purchase price for redemptions, or (4) terminate, suspend or amend the share redemption program.
On March 30, 2009, our board of directors voted to accept all redemption requests submitted during the first quarter of 2009 from stockholders whose requests were made on circumstances of death, disability, or confinement to a long-term care facility (referred to herein as “Exceptional Redemptions”). However, the board determined to not accept, and to suspend until further notice, redemptions other than Exceptional Redemptions, referred to herein as “Ordinary Redemptions”.
On January 10, 2011, the board suspended the redemption program with respect to all redemption requests until further notice. Therefore, we did not redeem any shares of our common stock during the nine months ended September 30, 2014.
We have not presented information regarding submitted and unfulfilled redemptions during the nine months ended September 30, 2014, as our board of directors suspended all redemptions as of the first quarter of 2011 and we believe many stockholders who may otherwise desire to have their shares redeemed have not submitted a request due to the program’s suspension.
Any redemption requests submitted while the program is suspended will be returned to investors and must be resubmitted upon resumption of the share redemption program. If the share redemption program is resumed, we will give all stockholders notice that we are resuming redemptions, so that all stockholders will have an equal opportunity to submit shares for redemption. Upon resumption of the program, any redemption requests will be honored pro rata among all requests received based on funds available. Requests will not be honored on a first come, first served basis.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
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Item 5. Other Information.
Determination of Estimated Per Share Value
On November 10, 2014, pursuant to the Amended and Restated Policy for Estimation of Common Stock Value (the “Estimated Valuation Policy”), our board of directors met and established an estimated per share value of the Company’s common stock as of October 31, 2014 of $3.58.
Process and Methodology
Our board of directors’ objective in determining an estimated value per share was to arrive at an estimated value that it believes is reasonable after consultation with our Advisor and with an independent, third-party valuation and advisory firm engaged by the Company, using what the board of directors deems to be appropriate valuation methodologies and assumptions under current circumstances.
In arriving at an estimated value per share for the board’s consideration, the Advisor utilized valuation methodologies that it believes are standard and acceptable in the real estate industry for the types of assets held by the Company. As a part of the Company’s valuation process, the Company obtained the opinion of Capright Property Advisors, LLC (“Capright”), an independent third party, to estimate the “as is” market value of the Company’s real estate investments and to render an opinion as to the reasonableness of the valuation methodology and valuation conclusions of the Advisor for the Company’s other assets and liabilities.
Our board of directors met on November 10, 2014 to review and consider the valuation analyses prepared by the Advisor and Capright. The Advisor presented a report to the board of directors with an estimated per share value, and the board of directors conferred with the Advisor and a representative from Capright regarding the methodologies and assumptions used. The board of directors, which is responsible for determining the estimated per share valuation, considered all information provided in light of its own familiarity with our assets and unanimously approved an estimated value of $3.58 per share.
In forming their conclusion of the value of the real estate investments held by the Company as of September 30, 2014, Capright’s conclusion was subject to various limitations, and the scope of their work included:
• | Review of the Company’s real estate investments’ historical performance and business plans related to operations of the investments; |
• | Review of the applicable markets by means of publications and other resources to measure current market conditions, supply and demand factors, and growth patterns; |
• | Review of key market assumptions for mortgage liabilities, including but not limited to, interest rates and collateral; |
• | Review of the data models prepared by the Advisor supporting the valuation for each investment; |
• | Review of key assumptions utilized by the Advisor in the valuation models, including but not limited to, terminal capitalization rates, discount rates, and growth rates; |
• | Review of the Advisor's calculations related to value allocations to non-controlling interests and joint venture interests, based on contractual terms and market assessments; and |
• | Review of valuation methodology used by the Advisor for other assets and liabilities. |
In forming their opinion of the value of the nine investments held by the Company as of October 31, 2014, Capright performed appraisals on six of our investment properties for which we did not have a recent appraisal. For the remaining three investments not appraised by Capright, they reviewed the reasonableness of and relied upon third-party appraisals for one of our investments. The Company's remaining investments were valued based on sales contracts, purchase offers, and valuation information provided by the Advisor.
Capright provided an opinion that the resulting “as is” market value for the Company’s properties as calculated by the Advisor, and the other assets and liabilities as valued by the Advisor, along with the corresponding net asset value (NAV) valuation methodologies and assumptions used by the Advisor to arrive at a recommended value of $3.58 per share as of October 31, 2014, were appropriate and reasonable.
Capright has acted as a valuation advisor to the Company in connection with this assignment. The compensation paid to Capright in connection with this assignment was not contingent upon the successful completion of any transaction or conclusion reached by Capright. Capright has rendered valuation advisory services to another Behringer Harvard sponsored investment programs during this year for which it received usual and customary compensation. Capright may be engaged to provide financial advisory services to the Company, its Advisor or other Behringer Harvard sponsored investment programs or their affiliates in the future.
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The estimated valuation of $3.58 per share as of October 31, 2014, reflects an increase from the estimated valuation of $3.08 per share as of November 11, 2013. The investment that was most significant to the increase in our real estate asset value related to Chase Park Plaza Hotel. As a result of improved hotel operations and improving market conditions the valuation of the asset increased. A redevelopment plan for asset is currently underway. Additionally, on August 5, 2014, we received the 5% interests of Chase Park Plaza Hotel and Chase — The Private Residences held by Kingsdell, L.P. and now own 100% of the entities. The real estate valuation for The Lodge & Spa at Cordillera also increased based upon a current sale contract. Our office and mixed-use properties were all increases to the estimated share valuation. These increases were offset by a decrease related to our unconsolidated joint venture investment in Central Europe. A decline in real estate values as well as a weakened currency led to the decrease.
The following is a summary of the valuation methodologies used for each type of asset:
Investments in Real Estate. The Company has focused on acquiring commercial real estate properties in different asset classes. Due to the opportunistic or value-added nature of the Company’s real estate investments, both Capright and our Advisor utilized a variety of valuation methodologies, each as appropriate for the asset type under consideration to assign an estimated value to each real estate asset.
Our Advisor estimated the value of our investments in real estate utilizing multiple valuation methods, including an income approach using discounted cash flow analysis and a sales comparable analysis. The key assumptions used in the discounted cash flow approach were specific to each property type, market location, and quality of each property, and were based on similar investors’ return expectations and market assessments and are reflected in the table included under “Allocation of Estimated Value” below. In calculating values for our assets, our Advisor used balance sheet and cash flow estimates as of September 30, 2014. In addition, for one of our assets our Advisor used a sales comparable analysis based on a sales contract.
Capright prepared appraisals on seven of our properties in connection with the valuation. The appraisals estimated values by using discounted cash flow, sale comparable, or a weighting of these approaches in determining each property’s value. The appraisals employed a range of terminal capitalization rates, discount rates, growth rates, and other variables that fell within ranges that Capright and the Advisor believed would be used by similar investors to value the properties we own. The assumptions used in developing these estimates were specific to each property (including holding periods) and were determined based upon a number of factors including the market in which the property is located, the specific location of the property within the market, property and market vacancy, tenant demand for space and investor demand and return requirements.
The value of our unconsolidated joint venture investment in a portfolio of retail and industrial properties located in Central Europe was calculated using bank valuations prepared for the European lenders using the September 30, 2014 exchange rate. Capright reviewed each of these independent valuations to confirm the reasonableness of their assumptions and methodologies.
We calculated the value of the one remaining residential condominium unit from the Chase Park Plaza asset using recent comparable sales data, listing price information, and offers to date.
While our Advisor believes that the approaches used by appraisers in valuing our real estate assets, including an income approach using discounted cash flow analysis and sales comparable analysis, is standard in the real estate industry, the estimated values for our investments in real estate may or may not represent current market values or fair values determined in accordance with GAAP. Real estate is currently carried at its amortized cost basis in our financial statements, subject to any adjustments applicable under GAAP.
Investment in Mezzanine Loan. To calculate the value of our mezzanine loan, we estimated the underlying collateral value of the multifamily project and compared that estimated value to the amount of the senior indebtedness, which has priority of payment to our mezzanine loan.
Construction in Progress. The Company has one multifamily development currently under construction. As the construction on this project commenced on September 2, 2014, we estimated the value of the project as the land value of the parcel per the Capright appraisal plus construction costs as of September 30, 2014.
Mortgage Loans. Values for mortgage loans were estimated by the Advisor using a discounted cash flow analysis, which used inputs based on the remaining loan terms and estimated current market interest rates for mortgage loans with similar characteristics, including remaining loan term and loan-to-value ratios. The current market interest rate was generally determined based on market rates for available comparable debt. The estimated current market interest rates for mortgage loans ranged from 1.93% to 11.10%.
Other Assets and Liabilities. For a majority of our other assets and liabilities, consisting of cash and cash equivalents, short-term investments, accounts payable and other liabilities, the carrying values as of September 30, 2014 were considered equal to fair value by the Advisor due to their cost-based characteristics or short maturities. In connection with our estimated valuation of operating properties and mortgage loans payable, certain GAAP balances related to accumulated depreciation and
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amortization, straight-lining of rents, deferred revenues and expenses, and debt and notes receivable premiums and discounts have been eliminated as the accounts were already considered in the estimated values.
Noncontrolling Interests. In those situations where our consolidated assets and liabilities are held in joint venture structures in which other equity holders have an interest, the Advisor has valued those noncontrolling interests based on the terms of the joint venture agreement applied in the liquidation of the joint venture. The resulting noncontrolling interests are a deduction to the estimated value.
Common Stock Outstanding. In deriving an estimated per share value, the total estimated value was divided by 56.5 million, the total number of common shares outstanding as of October 31, 2014, on a fully diluted basis, which includes financial instruments that can be converted into a known or determinable number of common shares. As of the valuation date, none of the financial instruments that could be converted into common shares are currently convertible into a known or determinable number of common shares. The determination of the number of common shares outstanding used in the estimated value per share is the same as used in GAAP computations for per share amounts.
Our estimated value per share was calculated by aggregating the value of our assets, subtracting the value of our liabilities, and dividing the net total by the fully-diluted common stock outstanding. Our estimated value per share is effective as of October 31, 2014.
The estimated per share value does not reflect a liquidity discount for the fact that the shares are not traded on a national securities exchange, a discount for the non-assumability or prepayment obligations associated with certain of the Company’s debt, or a discount for our corporate level overhead and other costs that may be incurred, including any costs related to the sale of the Company’s assets. Different parties using different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The markets for real estate can fluctuate and values are expected to change in the future.
This value does not reflect “enterprise value,” which could include premiums or discounts for:
• | The size of our portfolio: although some buyers may pay more for a portfolio compared to prices for individual properties; |
• | Characteristics of our working capital, leverage, credit facility and other financial structures where some buyers may ascribe different values based on synergies, cost savings or other attributes; |
• | Disposition and other expenses that would be necessary to realize the value; |
• | The provisions under our advisory agreement and our potential ability to secure the services of a management team on a long-term basis; or |
• | The potential difference in our share value if we were to list our shares on a national securities exchange. |
Allocation of Estimated Value
As of October 31, 2014, we are invested in nine assets. We excluded Royal Island from the allocation as it is valued at less than the amount of its nonrecourse debt and liabilities. Therefore, we have not attributed any value to this property in the Company’s estimate of value. As of November 11, 2013, we were invested in ten assets. The following is our estimated per share value allocated among our asset types (amounts in thousands, except per share):
October 31, 2014 | November 11, 2013 | |||||||||
Estimated | Estimated | |||||||||
Value per Share | Value per Share | |||||||||
Consolidated real estate properties (1) | $ | 5.14 | $ | 4.60 | ||||||
Unconsolidated joint ventures (2) | 0.21 | 0.28 | ||||||||
Construction in Progress | 0.12 | — | ||||||||
Mezzanine loan investment | — | — | ||||||||
Mortgage debt (3) | (2.49 | ) | (2.25 | ) | ||||||
Other assets and liabilities | 0.61 | 0.49 | ||||||||
Noncontrolling interests | (0.01 | ) | (0.04 | ) | ||||||
Estimated net asset value per share | 3.58 | 3.08 | ||||||||
Estimated enterprise value premium | — | — | ||||||||
Total estimated value per share (4) | $ | 3.58 | $ | 3.08 | ||||||
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(1) | The following are the key assumptions (shown on a weighted average basis) which are used in the discounted cash flow models to estimate the value of the real estate assets. |
Office Buildings | Hotels | Condominiums | Mixed-Use | |||||
Exit capitalization rate | 8.29% | 8.00% | n/a | 7.31% | ||||
Discount rate | 9.05% | 10.00% | n/a | 8.14% | ||||
Annual market rent growth rate | 3.00% | 4.12% | n/a | 3.00% | ||||
Average holding period | 10.28 years | 10.00 years | n/a | 10.27 years | ||||
(2) | The following is the key assumption (shown on a weighted average basis) which is used in the direct capitalization method in order to estimate the value of our unconsolidated joint ventures investment: |
Direct capitalization rate | 8.56 | % | |
(3) | Notes payable net of $(906,000) mark to market adjustment. |
(4) | As of September 30, 2014 we had 56,500,472 shares outstanding. The potential dilutive effect of our common stock equivalents does not impact our estimated per share value as there were no potentially dilutive securities outstanding at September 30, 2014. |
The consolidated real estate assets (excluding Royal Island) we owned as of September 30, 2014 reflect an overall decrease of 13% from the original purchase price (excluding acquisition costs and operating deficits) plus post-acquisition capital investments.
While we believe that our assumptions utilized are reasonable, a change in these assumptions would affect the calculation of value of our real estate assets. The table below presents the estimated increase or decrease to our estimated value per share for a 25 basis point increase and decrease in the discount rates and capitalization rates. The table is only hypothetical to illustrate possible results if only one change in assumptions was made, with all other factors held constant. Further, each of these assumptions could change by more than 25 basis points or not change at all. We have also invested in non-U.S. dollar denominated real property and real estate-related securities exposing us to fluctuating currency rates. A change in the foreign exchange currency rates may have an adverse impact on our value.
Change in Estimated Value per Share | |||||||||||||
Increase of 25 basis points | Decrease of 25 basis points | ||||||||||||
Capitalization rate | $ | (0.18 | ) | $ | 0.20 | ||||||||
Discount rate* | $ | (0.07 | ) | $ | 0.08 | ||||||||
* Discount rate calculation does not include Central Europe Properties
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Historical Estimated Values per Share
The historical reported estimated values per share of the Company's common stock approved by the board of directors are set forth below:
Estimated Value per Share | Effective Date of Valuation | Filing with the Securities and Exchange Commission | ||
$3.08 | November 11, 2013 | Quarterly Report on Form 10-Q, filed November 14, 2013 | ||
$3.58 | December 14, 2012 | Current Report on Form 8-K, filed December 20, 2012 | ||
$4.12 | December 20, 2011 | Current Report on Form 8-K, filed December 28, 2011 | ||
$7.66 | January 10, 2011 | Current Report on Form 8-K, filed January 14, 2011 | ||
$8.03 | January 8, 2010 | Current Report on Form 8-K, filed January 15, 2010 | ||
$8.17 | June 22, 2009 | Current Report on Form 8-K, filed June 22, 2009 | ||
Limitations of Estimated Value Per Share
As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may prove later to be inaccurate or incomplete. Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our board’s estimated value per share. The estimated per share value determined by our board of directors neither represents the fair value according to GAAP of our assets less liabilities, nor does it represent the amount our shares would trade at on a national securities exchange or the amount a shareholder would obtain if he tried to sell his shares or if we liquidated our assets. Accordingly, with respect to the estimated value per share, the Company can give no assurance that:
• | a stockholder would be able to resell his or her shares at this estimated value; |
• | a stockholder would ultimately realize distributions per share equal to the Company’s estimated value per share upon liquidation of the Company’s assets and settlement of its liabilities or a sale of the Company; |
• | the Company’s shares would trade at the estimated value per share on a national securities exchange; or |
• | the methodologies used to estimate the Company’s value per share would be acceptable to FINRA or under ERISA for compliance with their respective reporting requirements. |
For further information regarding the limitations of the estimated value per share, see the Estimated Valuation Policy filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 22, 2009. Although our Estimated Valuation Policy requires us to update our estimated per share value at least every 18 months, we intend to update our estimated per share value on an annual basis.
The estimated value of our shares was calculated as of a particular point in time. The value of the Company’s shares will fluctuate over time in response to developments related to individual assets in the portfolio and the management of those assets and in response to the real estate and finance markets. There is no assurance of the extent to which the current estimated valuation should be relied upon for any purpose after its effective date regardless that it may be published on any statement issued by the Company or otherwise.
The Company is diligently working to secure new leases with quality tenants to: increase net operating income and the ultimate value of our assets; complete, market, and sell development assets; execute on other value creation strategies; and minimize expenses when possible.
Item 6. Exhibits.
The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Behringer Harvard Opportunity REIT I, Inc. | |||
Dated: | November 12, 2014 | By: | /s/ LISA ROSS |
Lisa Ross | |||
Chief Financial Officer | |||
(Principal Financial Officer) | |||
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Index to Exhibits
Exhibit Number | Description | |
3.1 | Second Articles of Amendment and Restatement of the Registrant (previously filed in and incorporated by reference to Form 8-K, filed on July 29, 2008) | |
3.2 | Certificate of Correction to Second Articles of Amendment and Restatement of the Registrant (previously filed in and incorporated by reference to Form 8-K, filed on June 9, 2011) | |
3.3 | Amended and Restated Bylaws of the Registrant (previously filed in and incorporated by reference to Form 8-K filed on March 11, 2010) | |
3.4 | First Amendment to the Amended and Restated Bylaws of the Registrant (previously filed and incorporated by reference to Form 8-K filed on January 24, 2012) | |
10.1* | Promissory Note by and between Chase Park Plaza Hotel, LLC, as Borrower, and Great American Life Insurance Company, as Lender, effective as of August 11, 2014 | |
10.2* | Deed of Trust, Fixture Filing, Assignment of Rents, and Security Agreement, executed by Chase Park Plaza Hotel, LLC, for the Benefit of Great American Life Insurance Company, effective as of August 11, 2014 | |
10.3* | Agreement of Guaranty and Suretyship (Completion) by Behringer Harvard Opportunity REIT I, Inc., as Guarantor, in favor of Great American Life Insurance Company, as Lender, effective as of August 11, 2014 | |
10.4* | Indemnity, Guaranty and Suretyship Agreement by Behringer Harvard Opportunity REIT I, Inc., as Indemnitor, in favor of Great American Life Insurance Company, as Lender, effective as of August 11, 2014 | |
31.1* | Rule 13a-14(a)/15d-14(a) Certification | |
31.2* | Rule 13a-14(a)/15d-14(a) Certification | |
32.1*(1) | Section 1350 Certification | |
32.2*(1) | Section 1350 Certification | |
101* | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed on November 12, 2014, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements. | |
_____________________________________________
*filed herewith
(1) | In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
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