Attached files
| file | filename |
|---|---|
| EX-31.1 - EXHIBIT 31.1 - Q1 2016 - Lightstone Value Plus REIT V, Inc. | ex311-q12016.htm |
| EX-32.1 - EXHIBIT 32.1 - Q1 2016 - Lightstone Value Plus REIT V, Inc. | ex321-q12016.htm |
| EX-31.2 - EXHIBIT 31.2 - Q1 2016 - Lightstone Value Plus REIT V, Inc. | ex312-q12016.htm |
| EX-32.2 - EXHIBIT 32.2 - Q1 2016 - Lightstone Value Plus REIT V, Inc. | ex322-q12016.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
Commission File Number: 000-53650
Behringer Harvard Opportunity REIT II, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Maryland | 20-8198863 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
15601 Dallas Parkway, Suite 600, Addison, Texas 75001
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (866) 655-3650
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 April 30, 2016, Behringer Harvard Opportunity REIT II, Inc. had 25,453,730 shares of common stock outstanding.
BEHRINGER HARVARD OPPORTUNITY REIT II, INC.
FORM 10-Q
Quarter Ended March 31, 2016
Page | ||
PART I | ||
FINANCIAL INFORMATION | ||
Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015 | ||
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2016 and 2015 | ||
Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2016 and 2015 | ||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 | ||
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Behringer Harvard Opportunity REIT II, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except shares)
(unaudited)
March 31, 2016 | December 31, 2015 | |||||||
Assets | ||||||||
Real estate | ||||||||
Land and improvements, net | $ | 43,154 | $ | 51,382 | ||||
Buildings and improvements, net | 136,531 | 185,213 | ||||||
Real estate under development | 35 | 176 | ||||||
Total real estate | 179,720 | 236,771 | ||||||
Assets associated with real estate held for sale | 55,792 | — | ||||||
Cash and cash equivalents | 37,990 | 76,815 | ||||||
Restricted cash | 3,837 | 4,581 | ||||||
Accounts receivable, net | 2,235 | 2,426 | ||||||
Prepaid expenses and other assets | 953 | 1,078 | ||||||
Investment in unconsolidated joint venture | 14,614 | 14,482 | ||||||
Furniture, fixtures and equipment, net | 4,488 | 5,702 | ||||||
Lease intangibles, net | 336 | 334 | ||||||
Total assets | $ | 299,965 | $ | 342,189 | ||||
Liabilities and Equity | ||||||||
Notes payable, net | $ | 143,609 | $ | 177,036 | ||||
Accounts payable | 374 | 479 | ||||||
Payables to related parties | 432 | 433 | ||||||
Acquired below-market leases, net | 76 | 80 | ||||||
Distributions payable to common shareholders | — | 38,378 | ||||||
Distributions payable to noncontrolling interest | 19 | 52 | ||||||
Income taxes payable | 1,036 | 986 | ||||||
Accrued and other liabilities | 6,219 | 8,166 | ||||||
Obligations associated with real estate held for sale | 33,261 | — | ||||||
Total liabilities | 185,026 | 225,610 | ||||||
Commitments and contingencies | — | — | ||||||
Equity | ||||||||
Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none outstanding | — | — | ||||||
Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 outstanding | — | — | ||||||
Common stock, $.0001 par value per share; 350,000,000 shares authorized, 25,494,946 and 25,585,198 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively | 3 | 3 | ||||||
Additional paid-in capital | 229,333 | 229,796 | ||||||
Accumulated distributions and net loss | (120,682 | ) | (119,609 | ) | ||||
Accumulated other comprehensive loss | (215 | ) | (372 | ) | ||||
Total Behringer Harvard Opportunity REIT II, Inc. equity | 108,439 | 109,818 | ||||||
Noncontrolling interest | 6,500 | 6,761 | ||||||
Total equity | 114,939 | 116,579 | ||||||
Total liabilities and equity | $ | 299,965 | $ | 342,189 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
Behringer Harvard Opportunity REIT II, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except per share amounts)
(unaudited)
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Revenues | ||||||||
Rental revenue | $ | 7,319 | $ | 8,486 | ||||
Hotel revenue | 5,131 | 4,828 | ||||||
Total revenues | 12,450 | 13,314 | ||||||
Expenses | ||||||||
Property operating expenses | 2,283 | 2,897 | ||||||
Hotel operating expenses | 3,448 | 3,158 | ||||||
Interest expense, net | 1,524 | 1,821 | ||||||
Real estate taxes | 1,465 | 1,584 | ||||||
Property management fees | 414 | 446 | ||||||
Asset management fees | 614 | 725 | ||||||
General and administrative | 802 | 921 | ||||||
Depreciation and amortization | 3,165 | 4,453 | ||||||
Total expenses | 13,715 | 16,005 | ||||||
Interest income, net | 14 | 50 | ||||||
Loss on early extinguishment of debt | — | (119 | ) | |||||
Other income (loss) | 284 | (39 | ) | |||||
Loss before gain on sale of real estate and income tax expense | (967 | ) | (2,799 | ) | ||||
Gain on sale of real estate | — | 5,320 | ||||||
Income tax expense | — | (2,183 | ) | |||||
Net income (loss) | (967 | ) | 338 | |||||
Net income attributable to the noncontrolling interest | (106 | ) | (511 | ) | ||||
Net loss attributable to the Company | $ | (1,073 | ) | $ | (173 | ) | ||
Weighted average shares outstanding: | ||||||||
Basic and diluted | 25,553 | 25,776 | ||||||
Basic and diluted loss per share | $ | (0.04 | ) | $ | (0.01 | ) | ||
Distributions declared per common share | $ | — | $ | 1.00 | ||||
Comprehensive income (loss): | ||||||||
Net income (loss) | $ | (967 | ) | $ | 338 | |||
Other comprehensive income (loss): | ||||||||
Reclassification of unrealized loss on currency translation to net income | — | 596 | ||||||
Foreign currency translation gain (loss) | 157 | (769 | ) | |||||
Total other comprehensive income (loss) | 157 | (173 | ) | |||||
Comprehensive income (loss) | (810 | ) | 165 | |||||
Comprehensive income attributable to noncontrolling interest | (106 | ) | (511 | ) | ||||
Comprehensive loss attributable to the Company | $ | (916 | ) | $ | (346 | ) | ||
See Notes to Unaudited Condensed Consolidated Financial Statements.
4
Behringer Harvard Opportunity REIT II, Inc.
Condensed Consolidated Statements of Equity
(in thousands)
(unaudited)
Convertible Stock | Common Stock | Accumulated Distributions and Net Income(Loss) | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||
Number of Shares | Par Value | Number of Shares | Par Value | Additional Paid-in Capital | Noncontrolling Interest | Total Equity | |||||||||||||||||||||||||||
Balance at January 1, 2015 | 1 | $ | — | 25,802 | $ | 3 | $ | 231,240 | $ | (62,477 | ) | $ | (246 | ) | $ | 8,036 | $ | 176,556 | |||||||||||||||
Net income | (173 | ) | 511 | 338 | |||||||||||||||||||||||||||||
Redemption of common stock | (70 | ) | (498 | ) | (498 | ) | |||||||||||||||||||||||||||
Distributions declared on common stock | (25,732 | ) | (25,732 | ) | |||||||||||||||||||||||||||||
Contributions from noncontrolling interest | 62 | 62 | |||||||||||||||||||||||||||||||
Distributions to noncontrolling interest | (988 | ) | (988 | ) | |||||||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||
Reclassification of unrealized loss on currency translation to net income | 596 | 596 | |||||||||||||||||||||||||||||||
Foreign currency translation loss | (769 | ) | (769 | ) | |||||||||||||||||||||||||||||
Balance at March 31, 2015 | 1 | $ | — | 25,732 | $ | 3 | $ | 230,742 | $ | (88,382 | ) | $ | (419 | ) | $ | 7,621 | $ | 149,565 | |||||||||||||||
Balance at January 1, 2016 | 1 | $ | — | 25,585 | $ | 3 | $ | 229,796 | $ | (119,609 | ) | $ | (372 | ) | $ | 6,761 | $ | 116,579 | |||||||||||||||
Net loss | (1,073 | ) | 106 | (967 | ) | ||||||||||||||||||||||||||||
Redemption of common stock | (90 | ) | (463 | ) | (463 | ) | |||||||||||||||||||||||||||
Contributions from noncontrolling interest | 60 | 60 | |||||||||||||||||||||||||||||||
Distributions to noncontrolling interest | (427 | ) | (427 | ) | |||||||||||||||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||||||||||||
Foreign currency translation gain | 157 | 157 | |||||||||||||||||||||||||||||||
Balance at March 31, 2016 | 1 | $ | — | 25,495 | $ | 3 | $ | 229,333 | $ | (120,682 | ) | $ | (215 | ) | $ | 6,500 | $ | 114,939 | |||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
5
Behringer Harvard Opportunity REIT II, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended March 31, | ||||||||
2016 | 2015 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (967 | ) | $ | 338 | |||
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities: | ||||||||
Depreciation and amortization | 3,126 | 4,389 | ||||||
Amortization of deferred financing fees | 137 | 187 | ||||||
Gain on sale of real estate | — | (5,320 | ) | |||||
Loss on early extinguishment of debt | — | 119 | ||||||
Loss on derivatives | 1 | 15 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | 188 | 507 | ||||||
Prepaid expenses and other assets | 125 | 269 | ||||||
Accounts payable | (110 | ) | (252 | ) | ||||
Income taxes payable | 12 | 2,223 | ||||||
Accrued and other liabilities | (1,786 | ) | (6 | ) | ||||
Payables to related parties | (1 | ) | 47 | |||||
Addition of lease intangibles | (27 | ) | (6 | ) | ||||
Cash provided by operating activities | 698 | 2,510 | ||||||
Cash flows from investing activities: | ||||||||
Investment in unconsolidated joint venture | (132 | ) | (125 | ) | ||||
Proceeds from sale of real estate | — | 18,244 | ||||||
Additions of property and equipment | (668 | ) | (640 | ) | ||||
Change in restricted cash | 744 | 385 | ||||||
Cash provided by (used in) investing activities | (56 | ) | 17,864 | |||||
Cash flows from financing activities: | ||||||||
Financing costs | — | (106 | ) | |||||
Payments on notes payable | (424 | ) | (9,086 | ) | ||||
Redemptions of common stock | (463 | ) | (498 | ) | ||||
Distributions paid on common stock | (38,378 | ) | (25,732 | ) | ||||
Contributions from noncontrolling interest holders | 60 | 62 | ||||||
Distributions to noncontrolling interest holders | (459 | ) | (988 | ) | ||||
Cash used in financing activities | (39,664 | ) | (36,348 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 197 | (565 | ) | |||||
Net change in cash and cash equivalents | (38,825 | ) | (16,539 | ) | ||||
Cash and cash equivalents at beginning of period | 76,815 | 72,949 | ||||||
Cash and cash equivalents at end of period | $ | 37,990 | $ | 56,410 | ||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
6
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Business and Organization
Business
Behringer Harvard Opportunity REIT II, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”) was organized as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.
We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines. We have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality and multifamily. We have purchased existing, income-producing properties, and newly-constructed properties. We have also invested in a mortgage loan and a mezzanine loan. We are not actively seeking to purchase additional assets at this time, but may invest capital in our current assets in order to position them for sale in the normal course of business. We intend to hold the various real properties in which we have invested until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met. Consistent with our investment objectives of commencing a liquidation within three to six years after the termination of our initial public offering, we have entered our disposition phase and our board of directors is in the process of considering the orderly disposition of our assets. As of March 31, 2016, we had nine real estate investments, eight of which were consolidated. One of our consolidated properties is wholly owned and seven properties are consolidated through investments in joint ventures. As of March 31, 2016, Lakewood Flats, a 435-unit multifamily community located in Dallas, Texas, was classified as real estate held for sale on our condensed consolidated balance sheet. See Note 8, Real Estate Held for Sale, for further detail.
Substantially all of our business is conducted through Behringer Harvard Opportunity OP II LP, a limited partnership organized in Delaware (the “Operating Partnership”). As of March 31, 2016, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, owned a 0.1% partnership interest in the Operating Partnership as its sole general partner. As of March 31, 2016, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of the Operating Partnership and owned the remaining 99.9% interest in the Operating Partnership.
We are externally managed and advised by Behringer Harvard Opportunity Advisors II, LLC (the “Advisor”). The Advisor is responsible for managing our day-to-day affairs and for services related to the sale of our assets.
Organization
In connection with our initial capitalization, we issued 22,471 shares of our common stock and 1,000 shares of our convertible stock to Behringer Harvard Holdings, LLC (“Behringer”) on January 19, 2007. Behringer transferred its shares of convertible stock to one of its affiliates on April 2, 2010. As of March 31, 2016, we had 25.5 million shares of common stock outstanding and 1,000 shares of convertible stock outstanding held by an affiliate of Behringer.
Our common stock is not currently listed on a national securities exchange. The timing of a liquidity event will depend upon then prevailing market conditions. We are in the process of disposing of assets and can provide no assurances as to the timing of our ultimate liquidation. As we make disposals, we will liquidate and distribute the net proceeds to our stockholders. Economic or market conditions may, however, result in different holding periods for different assets.
7
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
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, 2015, which was filed with the SEC on March 16, 2016. 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 sheet as of March 31, 2016, the condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2016 and 2015 and condensed consolidated statements of equity and cash flows for the three months ended March 31, 2016 and 2015 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 March 31, 2016 and December 31, 2015 and our condensed consolidated results of operations and cash flows for the periods ended March 31, 2016 and 2015. Such adjustments are of a normal recurring nature.
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.
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.
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 impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts. Actual results could differ from those estimates.
Principles of Consolidation and Basis of Presentation
Our 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, substantive participating rights or both under the respective ownership agreement. For entities in which we have less than a controlling interest or entities which we are not deemed to be the primary beneficiary, we account for the investment using the equity method of accounting.
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.
8
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Real Estate
As of March 31, 2016 and December 31, 2015, accumulated depreciation and amortization related to our consolidated investments in real estate assets and intangibles were as follows:
March 31, 2016 | Buildings and Improvements | Land and Improvements | Lease Intangibles | Acquired Below-Market Leases | ||||||||||||
Cost(1) | $ | 162,514 | $ | 45,872 | $ | 1,508 | $ | (137 | ) | |||||||
Less: depreciation and amortization(1) | (25,983 | ) | (2,718 | ) | (1,172 | ) | 61 | |||||||||
Net | $ | 136,531 | $ | 43,154 | $ | 336 | $ | (76 | ) | |||||||
______________________________________________
(1) | Excludes Lakewood Flats, which was classified as held for sale as of March 31, 2016. Net book values included in assets associated with real estate held for sale in the condensed consolidated balance sheet were buildings and improvements of $47 million and land and improvements of $8.1 million. See Note 8, Real Estate Held for Sale. |
December 31, 2015 | Buildings and Improvements | Land and Improvements | Lease Intangibles | Acquired Below-Market Leases | ||||||||||||
Cost | $ | 211,635 | $ | 54,068 | $ | 3,083 | $ | (184 | ) | |||||||
Less: depreciation and amortization | (26,422 | ) | (2,686 | ) | (2,749 | ) | 104 | |||||||||
Net | $ | 185,213 | $ | 51,382 | $ | 334 | $ | (80 | ) | |||||||
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. 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.
Anticipated net amortization expense associated with the acquired lease intangibles for each of the following five years as of March 31, 2016 is as follows:
Year | Lease / Other Intangibles | |||
April 1, 2016 - December 31, 2016 | $ | 28 | ||
2017 | 20 | |||
2018 | (14 | ) | ||
2019 | (12 | ) | ||
2020 | (10 | ) | ||
Real Estate Held for Sale and Discontinued Operations
We classify properties as held for sale when certain criteria are met in accordance with GAAP. At that time, we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property. Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell. As of March 31, 2016, Lakewood Flats, a 435-unit multifamily community located in Dallas, Texas, was classified as real estate held for sale on our condensed consolidated balance sheet. We received an unsolicited offer from an unaffiliated third party and on April 7, 2016, we entered into a purchase and sale agreement (“PSA”) for the investment with the unaffiliated third party. See Note 8, Real Estate Held for Sale, for further detail. We did not have any real estate assets classified as held for sale as of December 31, 2015.
9
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Investment Impairment
For all of our real estate and real estate-related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable. Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the 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 those 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 Company’s principal executive officer and principal financial officer 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.
In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, and the projected sales price of each of the properties. A future change in these estimates and assumptions could result in understating or overstating the carrying value of our investments, which could be material to our financial statements. In addition, we may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the asset upon classification as held for sale exceeds the estimated fair value, less costs to sell.
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.
We believe the carrying value of our operating real estate assets and our investment in an unconsolidated joint venture is currently recoverable. Accordingly, there were no impairment charges for the three months ended March 31, 2016 and 2015. However, if market conditions worsen unexpectedly or if changes in our strategy significantly affect any key assumptions used in our fair value calculations, we may need to take charges in future periods for impairments related to our existing investments. Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.
Investment in Unconsolidated Joint Venture
We provide funding to third-party developers for the acquisition, development and construction of real estate (“ADC Arrangement”). Under an ADC Arrangement, we may participate in the residual profits of the project through the sale or refinancing of the property. We evaluate this arrangement to determine if it has characteristics similar to a loan or if the characteristics are more similar to a joint venture or partnership such as participating in the risks and rewards of the project as an owner or an investment partner. When we determine that the characteristics are more similar to a jointly-owned investment or partnership, we account for the arrangement as an investment in an unconsolidated joint venture under the equity method of accounting or a direct investment (consolidated basis of accounting) instead of applying loan accounting. The ADC Arrangement is reassessed at each reporting period. See Note 9, Investment in Unconsolidated Joint Venture, for further discussion.
10
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Revenue Recognition
We recognize rental income generated from leases of our operating properties on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any. Straight-line rent was income of less than $0.1 million recognized in rental revenues for the three months ended March 31, 2016 and 2015. Leases associated with our multifamily, student housing, and hotel assets are generally short-term in nature, and thus have no straight-line rent. Net above-market lease amortization was a charge of less than $0.1 million recognized in rental revenues for the three months ended March 31, 2016. Net below-market lease amortization was income of less than $0.1 million recognized in rental revenues for the three months ended March 31, 2015.
Hotel revenue is derived from the operations of the Courtyard Kauai Coconut Beach Hotel and consists primarily of guest room, food and beverage, and other ancillary revenues such as laundry and parking. Hotel revenue is recognized as the services are rendered.
Accounts Receivable
Accounts receivable primarily consist of receivables related to our consolidated properties of $2.2 million and $2.4 million as of March 31, 2016 and December 31, 2015, respectively, and included straight-line rental revenue receivables of $0.3 million as of March 31, 2016 and December 31, 2015.
Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment are recorded at cost and are depreciated according to the Company’s capitalization policy, which uses the straight-line method over their estimated useful lives of five to seven years. Furniture, fixtures and equipment associated with properties classified as held for sale are not depreciated. Maintenance and repairs are charged to operations as incurred. Accumulated depreciation associated with our furniture, fixtures, and equipment was $8.7 million and $8.1 million as of March 31, 2016 and December 31, 2015, respectively.
Deferred Financing Fees
Deferred financing fees are recorded at cost and are amortized to interest expense using a straight-line method that approximates the effective interest method over the life of the related debt. Deferred financing fees, net of accumulated amortization, were $1.5 million and $1.7 million as of March 31, 2016 and December 31, 2015, respectively. Accumulated amortization of deferred financing fees were $1.7 million and $2.5 million as of March 31, 2016 and December 31, 2015, respectively. In April 2015, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2015-03”) to ASC Topic 835, Interest - Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs. The adoption of ASU 2015-03, effective January 1, 2016, requires companies to present debt issuance costs related to a recognized debt liability as a direct reduction from the carrying amount of the related debt liability, retrospectively. See Note 4, New Accounting Pronouncements, for further details.
The adoption of the new standard resulted in the following reclassifications of unamortized deferred financing fees as of December 31, 2015:
December 31, 2015 | Originally Reported | Reclassification | Adjusted | ||||||||
Deferred financing fees, net | $ | 1,656 | $ | (1,656 | ) | $ | — | ||||
Notes payable | 178,692 | (1,656 | ) | 177,036 | |||||||
As of March 31, 2016, we reported $1.1 million of deferred financing fees as a reduction to the carrying amount of notes payable and $0.4 million of deferred financing fees as a reduction to the carrying amount of obligations associated with real estate held for sale.
Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and have qualified as a REIT since the year ended December 31, 2008. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax at the corporate level. We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code and intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as
11
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
a REIT. Taxable income from non-REIT activities managed through a taxable REIT subsidiary (“TRS”) is subject to applicable federal, state, and local income and margin taxes. We have no taxable income associated with a TRS. Our operating partnerships are flow-through entities and are not subject to federal income taxes at the entity level.
As a result of the sale of one of our foreign investments during the first quarter of 2015, Alte Jakobstraße (“AJS”), we recorded estimated foreign income tax of approximately $2.2 million during the period ended March 31, 2015. We recorded no income tax during the three months ended March 31, 2016. The foreign income tax was calculated on gains recognized at the exchange rate in effect on the date of sale and calculated using current tax rates.
We have reviewed our tax positions under GAAP guidance that clarify the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. We believe it is more likely than not that the tax positions taken relative to our federal tax status as a REIT will be sustained in any tax examination.
Foreign Currency Translation
For our international investments where the functional currency is other than the U.S. dollar, assets and liabilities are translated using period-end exchange rates, while the statement of operations amounts are translated using the average exchange rates for the respective period. Gains and losses resulting from the change in exchange rates from period to period are reported separately as a component of other comprehensive income (loss) (“OCI”). Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations and comprehensive income (loss).
The Euro is the functional currency for the operations of AJS and Holstenplatz, which were both sold in 2015. We sold AJS in February 2015 and Holstenplatz in September 2015. We also maintain a Euro-denominated bank account that is translated into U.S. dollars at the current exchange rate at each reporting period. For the three months ended March 31, 2016 and 2015, the foreign currency translation adjustment was a gain of $0.2 million and a loss of $0.8 million, respectively.
When the Company has substantially liquidated its investment in a foreign entity, the cumulative translation adjustment (“CTA”) balance is required to be released into earnings. In accordance with ASU 2013-05, upon disposal of the property, we would recognize the CTA as an adjustment to the gain on sale. During the first quarter of 2015, we recognized a CTA of approximately $0.6 million as a reduction to the gain on sale of our AJS office building, which we sold on February 21, 2015.
Concentration of Credit Risk
At March 31, 2016 and December 31, 2015, we had cash and cash equivalents deposited in certain financial institutions in excess of federally insured levels. We have diversified our cash and cash equivalents among several banking institutions in an attempt to minimize exposure to any one of these entities. We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents or restricted cash.
Geographic and Asset Type Concentration
Our investments may at times be concentrated in certain asset types that are subject to higher risk of foreclosure, or secured by assets concentrated in a limited number of geographic locations. For the three months ended March 31, 2016, excluding Lakewood Flats, which was classified as real estate held for sale, 48% and 14% of our total revenues were derived from our properties located in Hawaii and Florida, respectively. Additionally, excluding our property classified as held for sale as of March 31, 2016, 48%, 28% and 21% of our total revenues for the three months ended March 31, 2016 were from our hotel, multifamily and student housing investments, respectively. To the extent that our portfolio is concentrated in limited geographic regions or types of assets, downturns relating generally to such region or type of asset may result in defaults on a number of our investments within a short time period, which may reduce our net income and the value of our common stock and accordingly limit our ability to fund our operations.
Noncontrolling Interest
Noncontrolling interest represents the noncontrolling ownership interest’s proportionate share of the equity in our consolidated real estate investments. Income and losses are allocated to noncontrolling interest holders based generally on their ownership percentage. In certain instances, our joint venture agreement provides for liquidating distributions based on achieving certain return metrics (“promoted interest”). If a property reaches a defined return threshold, then it will result in distributions to noncontrolling interest which is different from the standard pro-rata allocation percentage.
12
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Earnings per Share
Net loss per share is calculated based on the weighted average number of common shares outstanding during each period. The weighted average shares outstanding used to calculate both basic and diluted loss per share were the same for each of the three months ended March 31, 2016 and 2015, as there were no potentially dilutive securities outstanding.
Subsequent Events
We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements.
4. New Accounting Pronouncements
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 public companies for interim and annual reporting periods beginning after December 15, 2017. In addition, early adoption will be permitted beginning after December 15, 2016, including interim reporting periods within those annual periods. Either full retrospective adoption or modified retrospective adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In August 2014, the FASB issued an update (“ASU 2014-15”) to ASC Topic 205, 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 do not believe the adoption of this guidance will have a material impact on our disclosures.
In January 2015, the FASB issued (“ASU 2015-01”) to ASC Topic 225, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates the concept of an extraordinary item from U.S. GAAP. An entity is no longer required to (i) segregate an extraordinary item from the results of ordinary operations; (ii) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and (iii) disclose income taxes and earnings per share data applicable to an extraordinary item. ASU 2015-01 does not affect disclosure guidance for events or transactions that are unusual in nature or infrequent in occurrence. ASU 2015-01 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015. The adoption of ASU 2015-01, effective January 1, 2016, did not impact our consolidated financial position, results of operations, or cash flows.
In February 2015, the FASB issued an update (“ASU No. 2015-02”) to ASC Topic 810, Amendments to the Consolidation Analysis. ASU 2015-02 makes several modifications to the consolidation guidance for VIEs and general partners’ investments in limited partnerships, as well as modifications to the evaluation of whether limited partnerships are VIEs or voting interest entities. The adoption of ASU 2015-02, effective January 1, 2016, did not impact our consolidated financial position, results of operations, or cash flows. See Note 10 for further details.
In April 2015, the FASB issued an update (“ASU 2015-03”) to ASC Topic 835, Interest - Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs. Effective January 1, 2016, the amendments in ASU 2015-03 require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of being presented as a deferred charge. We adopted ASU 2015-03 on January 1, 2016. The recognition and measurement guidance for debt issuance costs is not affected. The new guidance requires retrospective application. As of December 31, 2015, we had $1.7 million of net deferred financing costs that were reclassified from assets to a reduction in the carrying amount of our debt.
In January 2016, the FASB issued an update ("ASU 2016-01") to ASC Topic 825-10, Financial Instruments - Overall, Recognition and Measurement of Financial Assets and Liabilities. ASU 2016-01 will require certain investments in equity securities to be measured at fair value with changes in fair value recognized in net income, and will modify the impairment assessment of certain equity securities. The new guidance is effective January 1, 2018. Certain aspects of the guidance may require a cumulative-effect adjustment and other aspects of the guidance are required to be adopted prospectively. We are currently evaluating the impact of the adoption of ASU 2016-01 on our consolidated financial statements.
13
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
In February 2016, the FASB issued an update ("ASU 2016-02") to ASC Topic 842, Leases. ASU 2016-02 supersedes the existing lease accounting model, and modifies both lessee and lessor accounting. The new guidance will require a lessee to reflect most operating lease arrangements on the balance sheet by recording a right-of-use asset and a lease liability that will initially be measured at the present value of lease payments. Among other changes, the new standard also modifies the definition of a lease, and requires expanded lease disclosures. The new standard will be effective January 1, 2019, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.
In April 2016, the FASB issued an update ("ASU 2016-10") to ASC Topic 606, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing. The new guidance will require companies to apply a five-step model in accounting for revenue arising from contracts with customers, as well as enhance disclosures regarding revenue recognition. Lease contracts will be excluded from this revenue recognition criteria; however, the sale of real estate will be required to follow the new model. The new guidance is effective January 1, 2018, with early adoption permitted beginning January 1, 2017, and allows full or modified retrospective application. We are currently evaluating the impact of the adoption of ASU 2016-10 on our consolidated financial statements.
5. Assets and Liabilities Measured at Fair Value
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Recurring Fair Value Measurements
Currently, we use interest rate swaps and caps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, and foreign currency exchange rates.
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2016, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis as of December 31, 2015:
December 31, 2015 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Derivative financial instruments | $ | — | $ | 2 | $ | — | $ | 2 | ||||||||
14
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Courtyard Kauai Coconut Beach Hotel was our only remaining asset with an interest rate cap as of March 31, 2016 and it had a nominal value.
Derivative financial instruments classified as assets are included in prepaid expenses and other assets on the balance sheet.
Nonrecurring Fair Value Measurements
During the year ended December 31, 2015, we recorded a $1.4 million non-cash impairment charge as a result of a measurable decrease in the fair value of 22 Exchange, one of our student housing investments. In estimating the fair value of 22 Exchange, we used management’s internal discounted cash flow analysis prepared with consideration of the current local market. The discounted cash flow 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 year ended December 31, 2015:
As of December 31, 2015 | Level 1 | Level 2 | Level 3 | Total Fair Value | Loss | |||||||||||||||
Assets | ||||||||||||||||||||
Buildings and improvements, net(1) | $ | — | $ | — | $ | 25,000 | $ | 25,000 | $ | (1,417 | ) | |||||||||
______________________________________
(1) | Due to the local market in Akron, Ohio during the fourth quarter of 2015, we recorded a non-cash impairment charge of $1.4 million on our investment in 22 Exchange, one of our student housing investments. |
Quantitative Information about Level 3 Fair Value Measurements
Description | Fair Value at December 31, 2015 (in 000s) | Valuation Techniques | Unobservable Input | Range (Weighted Average) | ||||||
Buildings and improvements, net(1) | $ | 25,000 | Discounted cash flow | Discount rate Terminal capitalization rate | 7.5% - 8.0% 6.5% - 7.5% | |||||
______________________________________
(1) | Due to the local market in Akron, Ohio during the fourth quarter of 2015, we recorded a non-cash impairment charge of $1.4 million on our investment in 22 Exchange, a student housing property. |
There were no impairment charges recorded during the three months ended March 31, 2016 and 2015.
6. Financial Instruments not Reported at Fair Value
We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. The use of different market assumptions or only estimation methodologies may have a material effect on the estimated fair value amounts.
As of March 31, 2016 and December 31, 2015, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses, other liabilities, payables/receivables from related parties, and distributions payable to noncontrolling interests were at amounts that reasonably approximated their fair value based on their highly-liquid nature and short-term maturities. As of March 31, 2016, we had notes payable of $143.6 million, net of deferred financing fees of $1.1 million and excluding $33.1 million of net contractual obligations related to real estate held for sale, with a fair value of approximately $145.4 million. As of December 31, 2015, we had notes payable of $177 million, net of deferred financing fees of $1.7 million, with a fair value of approximately $179.3 million. The fair value of the notes payable is categorized as a Level 2 in the fair value hierarchy. The fair value was estimated using a discounted cash flow analysis valuation on the borrowing rates currently available for loans with similar terms and maturities. The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate. Disclosure about fair value of financial instruments is based on pertinent information available to management as of March 31, 2016 and December 31, 2015.
15
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
7. Real Estate and Real Estate-Related Investments
As of March 31, 2016, we consolidated eight real estate assets, including Lakewood Flats which is classified as real estate held for sale in our condensed consolidated balance sheet. The following table presents certain information about our consolidated investments as of March 31, 2016:
Property Name | Description | Location | Date Acquired | Ownership Interest | ||||
Gardens Medical Pavilion(1) | Medical office building | Palm Beach Gardens, Florida | October 20, 2010 | 80.9% | ||||
Courtyard Kauai Coconut Beach Hotel | Hotel | Kauai, Hawaii | October 20, 2010 | 80% | ||||
River Club and the Townhomes at River Club | Student housing | Athens, Georgia | April 25, 2011 | 85% | ||||
Lakes of Margate | Multifamily | Margate, Florida | October 19, 2011 | 92.5% | ||||
Arbors Harbor Town | Multifamily | Memphis, Tennessee | December 20, 2011 | 94% | ||||
22 Exchange | Student housing | Akron, Ohio | April 16, 2013 | 90% | ||||
Parkside Apartments (“Parkside”) | Multifamily | Sugar Land, Texas | August 8, 2013 | 90% | ||||
Lakewood Flats(2) | Multifamily | Dallas, Texas | October 10, 2014 | 100% | ||||
(1) | We acquired a portfolio of eight medical office buildings, known as the Original Florida MOB Portfolio on October 8, 2010. We acquired a medical office building known as Gardens Medical Pavilion on October 20, 2010. Collectively, the Original Florida MOB Portfolio and Gardens Medical Pavilion were referred to as the Florida MOB Portfolio. The Florida MOB Portfolio consisted of nine medical office buildings. On September 20, 2013, we sold the Original Florida MOB Portfolio. As of March 31, 2016, we own approximately 80.9% of the remaining building, Gardens Medical Pavilion. |
(2) | We received an unsolicited offer from an unaffiliated third party for our Lakewood Flats investment. On April 7, 2016, we entered into a PSA for the investment with the unaffiliated third party. |
Sales of Real Estate Reported in Continuing Operations
The following table presents our sale of real estate for the three months ended March 31, 2015 (in millions):
Date of Sale | Property | Ownership Interest | Sales Contract Price | Net Cash Proceeds(1) | Gain on Sale of Real Estate | |||||||||||
January 8, 2015 | Babcock Self Storage | 85% | $ | 5.4 | $ | 5.2 | $ | 2.0 | ||||||||
February 21, 2015 | Alte Jakobstraße | 99.7% | $ | 14.1 | $ | 13.0 | $ | 3.3 | ||||||||
______________________________________
(1) | A portion of the net cash proceeds was used to pay off the property-associated debt of $2.1 million and $6.5 million for Babcock Self Storage (“Babcock”) and AJS, respectively. |
The Company does not view the 2015 disposals of Babcock and AJS as a strategic shift. Therefore, the results of operations for Babcock and AJS are presented in continuing operations in the condensed consolidated statements of operations for the three months ended March 31, 2015. Net income attributable to the Company for the three months ended March 31, 2015 related to Babcock and AJS was $2.4 million and includes the gains on sale of Babcock and AJS for a total of $5.3 million.
16
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
8. Real Estate Held for Sale
As of March 31, 2016, Lakewood Flats was classified as real estate held for sale on our condensed consolidated balance sheet. In 2014, we acquired Lakewood Flats, a 435-unit multifamily community located in Dallas, Texas, for a purchase price of $60.5 million. We received an unsolicited offer from an unaffiliated third party. On April 7, 2016, we entered into an agreement to sell Lakewood Flats to the unaffiliated third party for a contract sales price of $68.8 million. The Company does not view the impending sale of Lakewood Flats as a strategic shift. Therefore, the results of operations for Lakewood Flats are presented in continuing operations for the three months ended March 31, 2016 and 2015. At the time of this filing, closing of the sale is subject to the buyers satisfactory completion of due diligence.
We did not have any real estate assets classified as held for sale as of December 31, 2015.
The major classes of assets and liabilities associated with our real estate held for sale as of March 31, 2016 were as follows:
Description | Amount | |||
Land and improvements, net | $ | 8,050 | ||
Building and improvements, net | 46,970 | |||
Furniture, fixtures and equipment, net | 772 | |||
Assets associated with real estate held for sale | $ | 55,792 | ||
Notes payable | $ | 33,500 | ||
Deferred financing fees(1) | (403 | ) | ||
Notes payable, net | 33,097 | |||
Other | 164 | |||
Obligations associated with real estate held for sale | $ | 33,261 | ||
______________________________________
(1) Effective January 1, 2016, we adopted ASU 2015-03, which requires companies to present the debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of the related debt liability. See Note 4, New Accounting Pronouncements, for further details.
9. Investment in Unconsolidated Joint Venture
We (the “Lender”) provided mezzanine financing totaling $15.3 million to an unaffiliated third-party entity (the “Borrower”) that owns an apartment complex under development in Denver, Colorado (“Prospect Park”). The Borrower also has a senior construction loan with a third-party construction lender (the “Senior Lender”) in an aggregate principal amount up to $40 million. The senior construction loan is guaranteed by the owners of the developer. We also have a personal guaranty from the owners of the developer guaranteeing completion of the project and payment of cost overruns. Our mezzanine loan is secured by all of the membership interests of the Borrower and is subordinate to the senior construction loan. Our advances of $15.3 million have annual stated interest rates ranging from 10% to 18%. We evaluated this ADC Arrangement and determined that the characteristics are similar to a jointly-owned investment or partnership. Accordingly, the investment was accounted for as an unconsolidated joint venture under the equity method of accounting instead of loan accounting since we will participate in the residual interests through the sale or refinancing of the property.
Both the senior loan and our mezzanine loan were in technical default at December 31, 2015 due to a delay in completion of the project. The Senior Lender executed a loan amendment waiving the event of default and extending the completion date of the project to May 31, 2016. The other terms in the loan agreement remained the same. We, in turn, amended the mezzanine loan agreement to mirror the terms of the senior loan. As of March 31, 2016, the outstanding principal balance under our mezzanine loan was $15.3 million. The borrower has been funding any cost overruns.
We considered the impact of these events on the accounting treatment and determined the ADC Arrangement will continue to be accounted for as an unconsolidated joint venture under the equity method of accounting. We will continue to monitor this situation and any impact these events might have on our ability to ultimately realize our investment. The ADC Arrangement is reassessed at each reporting period.
17
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
In connection with this investment, we capitalized interest totaling $0.1 million during the three months ended March 31, 2016 and 2015, respectively. For the three months ended March 31, 2016 and 2015, we recorded no equity in earnings (losses) of unconsolidated joint venture related to our investment in Prospect Park.
The following table sets forth our ownership interest in Prospect Park:
Ownership Interest | Carrying Amount | |||||||||||
Property Name | March 31, 2016 | December 31, 2015 | March 31, 2016 | December 31, 2015 | ||||||||
Prospect Park | N/A | N/A | $ | 14,614 | $ | 14,482 | ||||||
10. Variable Interest Entities
As discussed in Note 4, effective January 1, 2016, we have adopted the guidance in ASU 2015-02. As a result, the Operating Partnership (see Note 1) and each of our less than wholly-owned real estate partnerships (22 Exchange, LLC, Gardens Medical Pavilion, LLC, SL Parkside Apartments, LLC and the ADC Arrangement associated with Prospect Park) have been deemed to have the characteristics of a VIE. However, we were not required to consolidate any previously unconsolidated entities or deconsolidate any previously consolidated entities as a result of the change in classification. Accordingly, there has been no change to the amounts reported in our condensed consolidated balance sheets and statements of cash flows or amounts recognized in our condensed consolidated statements of operations.
Consolidated VIEs
The Company consolidates the Operating Partnership, 22 Exchange, LLC, Gardens Medical Pavilion, LLC through BH-AW-Florida MOB Venture, LLC, and SL Parkside Apartments, LLC, which are variable interest entities, or VIEs, for which we are the primary beneficiary. Generally, a VIE, is a legal entity in which the equity investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A limited partnership, or legal entities such as an LLC, are considered a VIE when the majority of the limited partners unrelated to the general partner possess neither the right to remove the general partner without cause, nor certain rights to participate in the decisions that most significantly affect the financial results of the partnership. In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; and the similarity with and significance to our business activities and the business activities of the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.
Unconsolidated VIEs
Included in the Company’s joint venture investments at March 31, 2016, is the ADC Arrangement associated with Prospect Park, accounted for as an unconsolidated joint venture, which is a VIE. Refer to Note 9 for further details on the ADC Arrangement. This arrangement was established to provide mezzanine financing to an unaffiliated third party that owns Prospect Park, an apartment complex under development in Denver, Colorado. Based on our reevaluation under ASU 2015-02, we determined that we are not the primary beneficiary of this VIE based on the rights of the general partner. The arrangement does not allow for substantive kick-out rights over the general partner and we do not have the power to direct the activities of Prospect Park that most significantly affect the entity’s economic performance. Accordingly, we have determined it is appropriate, consistent with past accounting, that the Prospect Park ADC Arrangement will continue to be accounted for under the equity method.
As of March 31, 2016 and December 31, 2015, total assets of the property under development were approximately $69.3 million and $63.9 million, respectively. Total assets as of March 31, 2016 and December 31, 2015 were made up of construction in progress of $59.0 million and $53.5 million, respectively, land of $9.8 million, and other assets of $0.4 million and $0.5 million, respectively. The outstanding balance on the senior construction loan as of March 31, 2016 and December 31, 2015 was $31.5 million and $26.9 million, respectively. At March 31, 2016 and December 31, 2015, the outstanding principal balance of our mezzanine loan was $15.3 million.
The Company’s maximum exposure to losses associated with its unconsolidated joint venture is limited to its carrying value in this investment. As of March 31, 2016 and December 31, 2015, the Company’s carrying value and maximum exposure to loss in this investment was $14.6 million and $14.5 million, respectively.
18
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
11. Notes Payable
The following table sets forth information on our notes payable as of March 31, 2016 and December 31, 2015:
Notes Payable as of | ||||||||||||
Description | March 31, 2016 | December 31, 2015 | Interest Rate | Maturity Date | ||||||||
Courtyard Kauai Coconut Beach Hotel | $ | 38,000 | $ | 38,000 | 30-day LIBOR + .95% | (1) | 5/9/2017 | |||||
Florida MOB Portfolio - Gardens Medical Pavilion | 13,200 | 13,298 | 4.9% | 1/1/2018 | ||||||||
River Club and the Townhomes at River Club | 24,203 | 24,299 | 5.26% | 5/1/2018 | ||||||||
Lakes of Margate | 14,433 | 14,496 | 5.49% and 5.92% | 1/1/2020 | ||||||||
Arbors Harbor Town | 25,011 | 25,130 | 3.985% | 1/1/2019 | ||||||||
22 Exchange | 19,500 | 19,500 | 3.93% | 5/5/2023 | ||||||||
Parkside(2) | 10,378 | 10,469 | 5% | 6/1/2018 | ||||||||
Lakewood Flats(3) | — | 33,500 | 30-day LIBOR + 1.5% | (1) | 11/5/2019 | |||||||
Total debt | 144,725 | 178,692 | ||||||||||
Deferred financing fees(4) | (1,116 | ) | (1,656 | ) | ||||||||
Notes payable, net of deferred financing fees | 143,609 | 177,036 | ||||||||||
Notes Payable included with obligations related to real estate held for sale: | ||||||||||||
Lakewood Flats debt(3) | 33,500 | — | 30-day LIBOR + 1.5% | (1) | 11/5/2019 | |||||||
Deferred financing fees(4) | (403 | ) | — | |||||||||
Notes Payable included with obligations related to real estate held for sale, net of deferred financing fees: | 33,097 | — | ||||||||||
Total notes payable obligations | $ | 176,706 | $ | 177,036 | ||||||||
_________________________________
(1) | 30-day London Interbank Offer Rate (“LIBOR”) was 0.44% at March 31, 2016. |
(2) | Includes approximately $0.4 million of unamortized premium related to debt we assumed at acquisition. |
(3) | As of March 31, 2016, Lakewood Flats was classified as real estate held for sale on our condensed consolidated balance sheet. |
(4) Effective January 1, 2016, we adopted ASU 2015-03, which requires companies to present the debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of the related debt liability. See Note 4, New Accounting Pronouncements, for further details.
At March 31, 2016, our notes payable balance was $143.6 million, net of deferred financing fees of $1.1 million and excluding $33.1 million of net contractual obligations related to real estate held for sale. We have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the Courtyard Kauai Coconut Beach Hotel, 22 Exchange, and Parkside notes payable. Interest capitalized in connection with our equity method investment in Prospect Park for the three months ended March 31, 2016 and 2015 was $0.1 million.
We are subject to customary affirmative, negative, and financial covenants and representations, warranties, and borrowing conditions, all as set forth in our loan agreements, including, among other things, maintaining minimum debt service coverage ratios, loan to value ratios and liquidity. As of March 31, 2016, we believe we were in compliance with the covenants under our loan agreements.
19
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes our contractual obligations for principal payments as of March 31, 2016:
Year | Amount Due(1) | |||
April 1, 2016 - December 31, 2016 | $ | 1,491 | ||
2017 | 40,135 | |||
2018 | 46,841 | |||
2019 | 24,309 | |||
2020 | 13,772 | |||
Thereafter | 17,813 | |||
Total contractual obligations for principal payments | 144,361 | |||
Unamortized premium | 364 | |||
Total notes payable | 144,725 | |||
Less: Deferred financing fees, net | (1,116 | ) | ||
Notes payable, net | $ | 143,609 | ||
____________________________________________
(1) | Our debt secured by Lakewood Flats, with a balance at March 31, 2016 of $33.5 million and deferred financing fees of $0.4 million is not included in the table as the investment was classified as held for sale at March 31, 2016. We received an unsolicited offer for Lakewood Flats from an unaffiliated third party. We entered into an agreement with the unaffiliated third party on April 7, 2016 to sell Lakewood Flats for a contract sales price of $68.8 million. |
12. Leasing Activity
Future minimum base rental payments of our remaining office property due to us under non-cancelable leases in effect as of March 31, 2016 are as follows:
Year | Amount Due | |||
April 1, 2016 - December 31, 2016 | $ | 920 | ||
2017 | 1,224 | |||
2018 | 917 | |||
2019 | 836 | |||
2020 | 841 | |||
Thereafter | 2,685 | |||
Total | $ | 7,423 | ||
The schedule above does not include rental payments due to us from our multifamily, hotel, and student housing properties, as leases associated with these properties typically are for periods of one year or less. We have one remaining office property at March 31, 2016, Gardens Medical Pavilion, located in Palm Beach Gardens, Florida.
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Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
13. Derivative Instruments and Hedging Activities
We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of operations. The hedging strategy of entering into interest rate caps and swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows. As of March 31, 2016, we had one remaining interest rate cap which was not designated as a hedging instrument. At March 31, 2016 and December 31, 2015, the fair value of our derivative instrument had a nominal value and was reported in prepaid expenses and other assets.
The following table summarizes the notional value of our derivative financial instrument. The notional value provides an indication of the extent of our involvement in this instrument, but does not represent exposure to credit, interest rate, or market risks:
Type / Description | Notional Value | Interest Rate / Strike Rate | Index | Maturity Date | ||||||
Not designated as hedging instrument | ||||||||||
Interest rate cap - Courtyard Kauai Coconut Beach Hotel | $ | 38,000 | 3.00% | 30-day LIBOR | May 15, 2017 | |||||
The table below presents the fair value of our derivative financial instrument, as well as its classification on the consolidated balance sheets as of March 31, 2016 and December 31, 2015:
Derivative not designated as hedging instrument: | Asset Derivative | |||||||||
Balance Sheet Location | March 31, 2016(1) | December 31, 2015 | ||||||||
Interest rate derivative contract | Prepaid expenses and other assets | $ | — | $ | 2 | |||||
______________________________________
(1) | The interest rate cap for Courtyard Kauai Coconut Beach Hotel had a nominal value at March 31, 2016. |
The table below presents the effect of our derivative financial instruments on the condensed consolidated statements of operations for the three months ended March 31, 2016 and 2015:
Derivatives Not Designated as Hedging Instruments | ||||||
Amount of Loss | ||||||
Three months ended March 31, | ||||||
2016(1) | 2015 | |||||
$ | 1 | $ | 15 | |||
______________________________________
(1) | Courtyard Kauai Coconut Beach Hotel interest rate cap had a nominal value and was our only remaining asset with an interest rate cap during the three months ended March 31, 2016. |
14. Distributions
Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board deems relevant. The board’s decision will be substantially influenced by its obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all. We expect that any future distributions authorized by our board of directors will be periodic, special distributions as opposed to regular monthly or quarterly distributions
On November 20, 2015, our board of directors authorized a special cash distribution of $1.50 per share of common stock, payable to stockholders of record as of December 31, 2015. The Company paid this special cash distribution of $38.4 million on January 5, 2016. On March 18, 2015, our board of directors authorized a special cash distribution of $1.00 per share of common stock, payable to stockholders of record as of March 30, 2015. This special cash distribution of $25.7 million was paid on March 31, 2015. These special cash distributions represented a portion of proceeds from asset sales.
21
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
We have paid and may in the future pay some or all of our distributions from sources other than operating cash flow. We have utilized cash from refinancing and dispositions, the components of which may represent a return of capital and/or the gains on sale. In addition, from time to time, our Advisor may agree to waive or defer all or a portion of the asset management or other fees or incentives due to it, pay general administrative expenses or otherwise supplement investor returns which may increase the amount of cash that we have available to pay distributions to our stockholders.
15. Related Party Transactions
Advisor
The Advisor and certain of its affiliates may receive fees and compensation in connection with the management and sale of our assets based on the advisory management agreement, as amended and restated.
Fourth Amended and Restated Advisory Management Agreement
On June 6, 2014, we entered into the Fourth Amended and Restated Advisory Management Agreement with our Advisor to, among other things, revise the acquisition and advisory fees, asset management fee, and the debt financing fee that may be paid to the Advisor and to fix certain expense reimbursement provisions. The Fourth Advisory Agreement was effective as of January 1, 2014. Effective as of June 6, 2015, we entered into the First Amendment to the Fourth Amended and Restated Advisory Management Agreement (“Amended Advisory Agreement”) to (i) reduce the administrative services fee to be paid to the Advisor for calendar year 2015 from $1.8 million to $1.5 million and (ii) reimburse the Advisor for certain due diligence services provided in connection with asset dispositions or debt financings separately from the administrative services fee. In addition, we renewed the term of the Fourth Advisory Agreement for one year. As amended, the Fourth Advisory Agreement will expire on June 6, 2016. In all other material respects, the terms of the Fourth Advisory Agreement remain unchanged. The following discussion reflects the terms of the Fourth Advisory Agreement, as amended, and the fees and expenses paid or reimbursed to the Advisor thereunder since January 1, 2014.
The Advisor or its affiliates receive acquisition and advisory fees of 1.5% of the amount paid in respect of the purchase, development, construction, or improvement of each asset we acquire, including any debt attributable to those assets. In addition, the Advisor and its affiliates will receive acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment. We incurred no acquisition and advisory fees payable to the Advisor for the three months ended March 31, 2016 and 2015. During the three months ended March 31, 2016 and 2015, we had no acquisitions.
The Advisor or its affiliates also receive an acquisition expense reimbursement in the amount of (i) 0.25% of the funds paid for purchasing an asset, including any debt attributable to the asset, plus 0.25% of the funds budgeted for development, construction, or improvement in the case of assets that we acquire and intend to develop, construct, or improve or (ii) 0.25% of the funds advanced in respect of a loan investment. We also pay third parties, or reimburse the Advisor or its affiliates, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finder's fees, title insurance, premium expenses, and other closing costs.
The Advisor is responsible for paying all of the expenses it incurs associated with persons employed by the Advisor to the extent that they are dedicated to managing our day-to-day affairs and for providing services related to the sale of our assets, such as wages and benefits of the investment personnel. The Advisor and its affiliates are also responsible for paying all of the investment-related expenses that we or the Advisor or its affiliates incur that are due to third parties or related to the additional services provided by the Advisor as described above with respect to investments we do not make, other than certain non-refundable payments made in connection with any acquisition. For the three months ended March 31, 2016 and 2015, we incurred no acquisition expense reimbursements.
We pay the Advisor or its affiliates a debt financing fee of 0.5% of the amount available under any loan or line of credit made available to us and will pay directly all third-party costs associated with obtaining the debt financing. We incurred no debt financing fees for the three months ended March 31, 2016 and 2015.
We pay the Advisor or its affiliates a development fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project if such affiliate provides the development services and if a majority of our independent directors determines that such development fee is fair and reasonable to us. We incurred no such fees for the three months ended March 31, 2016 and 2015.
22
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
We pay the Advisor or its affiliates a monthly asset management fee of one-twelfth of 0.7% of the value of each asset. The value of our assets will be the value as determined in connection with the establishment and publication of an estimated value per share unless the asset was acquired after our publication of an estimated value per share (in which case the value of the asset will be the contract purchase price of the asset). For the three months ended March 31, 2016 and 2015, we expensed $0.6 million and $0.7 million, respectively, of asset management fees payable to the Advisor. The total for the three months ended March 31, 2015 includes asset management fees related to our disposed properties.
Instead of reimbursing the Advisor for specific expenses paid or incurred in connection with providing services to us, we pay the Advisor an administrative services fee based on a budget of expenses prepared by the Advisor. The administrative services fee is intended to reimburse for all costs associated with providing services to us. On June 6, 2015, we amended the agreement to reduce the administrative services fee to $1.5 million for calendar year 2015. The administrative services fee is payable in four equal quarterly installments within 45 days of the end of each calendar quarter. For the three months ended March 31, 2016 and 2015, we incurred and expensed such costs for administrative services of approximately $0.3 million. In addition, effective January 1, 2015, the amended Advisory Agreement includes a provision to reimburse the Advisor for certain due diligence services provided in connection with asset dispositions or debt financings separately from the administrative services fee. We incurred less than $0.1 million for such costs during the three months ended March 31, 2016.
Notwithstanding the fees and cost reimbursements payable to our Advisor pursuant to the Amended Advisory Agreement, under our charter we may not reimburse the Advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (i) 2% of our average invested assets, or (ii) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of our assets for that period unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended March 31, 2016, our total operating expenses (including the asset management fee) were not excessive.
Property Manager
We pay our property manager and affiliate of the Advisor, Behringer Harvard Opportunity II Management Services, LLC (“BHO II Management”), or its affiliates, fees for the management, leasing, and construction supervision of our properties which is 4.0% of gross revenues of the properties managed by BHO II Management or its affiliates. We pay BHO II Management or its affiliates an oversight fee equal to 0.5% of the gross revenues of the property managed for any property for which we contract directly with a third-party property manager. In no event will BHO II Management or its affiliates receive both a property management fee and an oversight fee with respect to any particular property. In the event we own a property through a joint venture that does not pay BHO II Management directly for its services, we will pay BHO II Management a management fee or oversight fee, as applicable, based only on our economic interest in the property. We incurred and expensed property management fees or oversight fees to BHO II Management of approximately $0.1 million and $0.2 million for the three months ended March 31, 2016 and 2015, respectively.
We pay the Advisor or its affiliates a construction management fee in an amount not to exceed 5% of all hard construction costs incurred in connection with, but not limited to capital repairs and improvements, major building reconstruction and tenant improvements, if such affiliate supervises construction performed by or on behalf of us or our affiliates. We incurred no construction management fees for the three months ended March 31, 2016 and 2015.
We are dependent on the Advisor and BHO II Management for certain services that are essential to us, including asset disposition decisions, property management and leasing services, and other general administrative responsibilities. In the event that these companies were unable to provide us with their respective services, we would be required to obtain such services from other sources.
23
Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
16. Supplemental Cash Flow Information
Supplemental cash flow information is summarized below:
Three months ended March 31, | ||||||||
Description | 2016 | 2015 | ||||||
Interest paid, net of amounts capitalized | $ | 1,422 | $ | 1,630 | ||||
Non-cash investing activities and financing activities: | ||||||||
Proceeds held in escrow through sale of real estate interests | — | 912 | ||||||
Capital expenditures for real estate in accounts payable | 5 | — | ||||||
Capital expenditures for real estate in accrued liabilities | 130 | 86 | ||||||
Accrued distributions to noncontrolling interest | 19 | 19 | ||||||
17. Subsequent Events
Lakewood Flats
We received an unsolicited offer from an unaffiliated third party to purchase Lakewood Flats. We entered into an agreement with the unaffiliated third party on April 7, 2016 to sell Lakewood Flats for a contract sales price of $68.8 million. As of March 31, 2016, Lakewood Flats was classified as real estate held for sale on our condensed consolidated balance sheet. At the time of this filing, closing of the sale is subject to the buyers satisfactory completion of due diligence.
Share Redemption Program
On May 11, 2016, our board of directors approved redemptions for the second quarter of 2016 totaling 41,216 shares with an aggregate redemption payment of approximately $0.2 million. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” for a full description of the price at which we redeem shares under our share redemption program.
******
24
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 and the notes thereto.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include discussion and analysis of the financial condition of Behringer Harvard Opportunity REIT II, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, to sell our assets when we believe advantageous to achieve our investment objectives, our anticipated capital expenditures, the amount and timing of anticipated future special cash distributions to our stockholders, the estimated per share value of our common stock, and other matters. Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described herein and under “Item 1A, Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2016 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 investments are located; |
• | the availability of cash flow from operating activities for special distributions, if any; |
• | 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 obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt; |
• | our ability to make accretive investments in a diversified portfolio of assets; |
• | future changes in market factors that could affect the ultimate performance of our development or redevelopment projects, including but not limited to construction costs, plan or design changes, schedule delays, availability of construction financing, performance of developers, contractors and consultants and growth in rental rates and operating costs; |
• | our ability to secure leases at favorable rental rates; |
• | our ability to sell our assets at a price and on a timeline consistent with our investment objectives; |
• | impairment charges; |
• | unfavorable changes in laws or regulations impacting our business, our assets or our key relationships; and |
• | factors that could affect our ability to qualify as a real estate investment trust. |
Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results, except as required by applicable law. We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.
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Cautionary Note
The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Quarterly Report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties. Moreover, these representations, warranties or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.
Executive Overview
We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who were distressed or faced time-sensitive deadlines. In addition, our opportunistic and value-add investment strategy has included investments in real estate-related assets that present opportunities for higher current income. We have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily. We have purchased existing, income-producing properties and newly constructed properties. We have also invested in a mortgage loan and a mezzanine loan. We have made our investments in or in respect of real estate assets located in the United States and other countries based on our view of existing market conditions. We are not actively seeking to purchase additional assets at this time and have entered our disposition phase. Consistent with our investment objectives of commencing a liquidation within three to six years after the termination of our initial public offering, we have entered our disposition phase and our board of directors is in the process of considering the orderly disposition of our assets.
Liquidity and Capital Resources
We had unrestricted cash and cash equivalents of $38 million at March 31, 2016. Our principal demands for funds going forward will be for the payment of (a) operating expenses, (b) interest and principal on our outstanding indebtedness, and (c) special distributions. Generally, we expect to meet cash needs for the payment of operating expenses and interest on our outstanding indebtedness from our cash flow from operations and to fund special distributions (if any) from our proceeds from asset sales. To the extent that our cash flow from operations is not sufficient to cover our operating expenses, interest on our outstanding indebtedness, redemptions or special distributions, we expect to use borrowings and asset sales to fund such needs.
We are not actively seeking to purchase additional properties, but may invest capital in our current assets in order to position them for sale in the normal course of business. We intend to hold our various real properties until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met. We are in the process of disposing of assets. We sold four properties in 2015. We received an unsolicited offer from an unaffiliated third party to purchase Lakewood Flats, our 435-unit multifamily community located in Dallas, Texas. On April 7, 2016, we entered into an agreement with the unaffiliated third party to sell Lakewood Flats for a contract sales price of $68.8 million. As of March 31, 2016, Lakewood Flats was classified as real estate held for sale on our condensed consolidated balance sheet.
On January 5, 2016, we paid a special cash distribution of $38.4 million, or $1.50 per share of common stock. On March 31, 2015, we paid a special cash distribution of $25.7 million, or $1.00 per share of common stock. Both distributions were funded from proceeds of asset sales.
We continually evaluate our liquidity and ability to fund future operations and debt obligations. The next debt maturity for the Company is May 2017. In addition to our debt obligations, we consider other factors in evaluating our liquidity. For example, to the extent our portfolio is concentrated in certain geographic regions and types of assets, downturns relating generally to such regions and assets may result in tenants defaulting on their lease obligations at a number of our properties within a short time period. Such defaults could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations. For the three months ended March 31, 2016, excluding Lakewood Flats classified as assets held for sale, 48% and 14% of our total revenues were derived from our properties located in Hawaii and Florida, respectively. Additionally, excluding Lakewood Flats, 48% of our total revenues were from our hotel property and 28% were from our multifamily properties.
We may, but are not required to, establish capital reserves from cash flow generated by operating properties and other investments, or net sales proceeds from the sale of our properties and other investments. Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions, and major capital expenditures. Alternatively, a lender may establish its own criteria for escrow of capital reserves.
26
We have borrowed money to acquire properties and make other investments. Under our charter, the maximum amount of our indebtedness is limited to 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors. In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Our policy limitation, however, does not apply to individual real estate assets.
Commercial real estate debt markets may experience volatility and uncertainty as a result of certain related factors, including the tightening of underwriting standards by lenders and credit rating agencies, macro-economic issues related to fiscal, tax and regulatory policies, and global financial issues. Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our developments and investments. This may result in our investment operations generating lower overall economic returns and a reduced level of cash flow, which could potentially impact our ability to make special distributions to our stockholders. In addition, disruptions in the debt markets may reduce the amount of capital that is available to finance real estate, which in turn could: (i) lead to a decline in real estate values generally; (ii) slow real estate transaction activity; (iii) reduce the loan to value ratio upon which lenders are willing to extend debt; and (iv) result in difficulty in refinancing debt as it becomes due, all of which may reasonably be expected to have a material adverse impact on the value of real estate investments and the revenues, income or cash flow from the operations of real properties and mortgage loans.
Debt Financings
From time to time, we have obtained mortgage, bridge, or mezzanine loans for acquisitions and investments, as well as property development. In the future, we may obtain financing for property development or refinance our existing real estate assets, depending on multiple factors.
At March 31, 2016, our notes payable balance was $143.6 million, net of deferred financing fees of $1.1 million and excluding $33.1 million of contractual obligations on real estate held for sale which was net of deferred financing fees of $0.4 million and had a weighted average interest rate of 3.8%. As of December 31, 2015, the Company had notes payable of $177 million, net of deferred financing fees of $1.7 million, with a weighted average interest rate of 3.5%. We have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the Courtyard Kauai Coconut Beach Hotel, 22 Exchange, and Parkside notes payable.
Our loan agreements stipulate that we comply with certain reporting and financial covenants. These covenants include, among other things, maintaining minimum debt service coverage ratios, loan to value ratios, and liquidity. As of March 31, 2016, we believe we were in compliance with the debt covenants under our loan agreements.
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 March 31, 2016. Interest payments on variable rate debt are based on rates in effect as of March 31, 2016. The table does not represent any extension options (in thousands):
Payments Due by Period(1)(2)(3) | ||||||||||||||||||||||||||||
April 1, 2016 -December 31, 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||||||||
Principal payments - fixed rate debt | $ | 1,491 | $ | 2,135 | $ | 46,841 | $ | 24,309 | $ | 13,772 | $ | 17,813 | $ | 106,361 | ||||||||||||||
Principal payments - variable rate debt | — | 38,000 | — | — | — | — | 38,000 | |||||||||||||||||||||
Interest payments - fixed rate debt | 3,789 | 4,940 | 3,308 | 1,580 | 784 | 1,665 | 16,066 | |||||||||||||||||||||
Interest payments - variable rate debt | 403 | 190 | — | — | — | — | 593 | |||||||||||||||||||||
Total(4) | $ | 5,683 | $ | 45,265 | $ | 50,149 | $ | 25,889 | $ | 14,556 | $ | 19,478 | $ | 161,020 | ||||||||||||||
_________________________________
(1) | Does not include approximately $0.4 million of unamortized premium related to debt we assumed on our acquisition of Parkside. |
(2) | Our debt secured by Lakewood Flats with a balance of $33.5 million at March 31, 2016 was not included in the table as the investment was classified as held for sale. We received an unsolicited offer from an unaffiliated third party to purchase Lakewood Flats. We entered into an agreement with the unaffiliated third party on April 7, 2016 to sell Lakewood Flats for a contract sales price of $68.8 million. |
(3) | Effective January 1, 2016, we adopted ASU 2015-03, which requires companies to present debt issuance costs related to a recognized debt liability as a direct reduction from the carrying amount of the related debt liability. See Note 4, New Accounting Pronouncements, for further details. |
(4) | Does not include assumptions for any available extension options. |
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Results of Operations
As of March 31, 2016, we had nine real estate investments including Lakewood Flats (which was classified as held for sale in our condensed consolidated balance sheet) eight of which were consolidated, (one wholly owned and seven properties consolidated through investments in joint ventures).
As of March 31, 2015, we had 11 real estate investments, ten of which were consolidated (two wholly owned and eight properties consolidated through investments in joint ventures). We sold four properties during 2015: Babcock and AJS in the first quarter and Holstenplatz and Wimberly at Deerwood in the third quarter.
Three months ended March 31, 2016 as compared to the three months ended March 31, 2015.
The following table provides summary information about our results of operations for the three months ended March 31, 2016 and 2015 ($ in thousands):
Three Months Ended March 31, | Increase (Decrease) | Percentage Change | $ Change due to Dispositions(1) | $ Change due to Same Store(2) | $ Change due to Held for Sale(3) | |||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||||||||
Rental revenue | $ | 7,319 | $ | 8,486 | $ | (1,167 | ) | (13.8 | )% | $ | (1,482 | ) | $ | 301 | $ | 14 | ||||||||||
Hotel revenue | 5,131 | 4,828 | 303 | 6.3 | % | — | 303 | — | ||||||||||||||||||
Property operating expenses | 2,283 | 2,897 | (614 | ) | (21.2 | )% | (467 | ) | (118 | ) | (29 | ) | ||||||||||||||
Hotel operating expenses | 3,448 | 3,158 | 290 | 9.2 | % | — | 290 | — | ||||||||||||||||||
Interest expense, net | 1,524 | 1,821 | (297 | ) | (16.3 | )% | (305 | ) | (14 | ) | 22 | |||||||||||||||
Real estate taxes | 1,465 | 1,584 | (119 | ) | (7.5 | )% | (171 | ) | 30 | 22 | ||||||||||||||||
Property management fees | 414 | 446 | (32 | ) | (7.2 | )% | (55 | ) | 24 | (1 | ) | |||||||||||||||
Asset management fees(4) | 614 | 725 | (111 | ) | (15.3 | )% | (123 | ) | 7 | 5 | ||||||||||||||||
General and Administrative | 802 | 921 | (119 | ) | (12.9 | )% | n/a | n/a | n/a | |||||||||||||||||
Depreciation and amortization | 3,165 | 4,453 | (1,288 | ) | (28.9 | )% | (630 | ) | 130 | (788 | ) | |||||||||||||||
Gain on sale of real estate | — | 5,320 | (5,320 | ) | (100.0 | )% | (5,320 | ) | — | — | ||||||||||||||||
Income tax expense | — | (2,183 | ) | 2,183 | n/a | n/a | n/a | n/a | ||||||||||||||||||
______________________
(1) | Represents the dollar amount increase (decrease) for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 related to the 2015 dispositions of AJS, Babcock, Holstenplatz and Wimberly at Deerwood. |
(2) | Represents the dollar amount increase (decrease) for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 with respect to real estate and real estate-related investments owned by us during the entire periods presented (“Same Store”). Same Store for the periods ended March 31, 2016 and 2015 include Gardens Medical Pavilion, River Club and the Townhomes at River Club, Lakes of Margate, Arbors Harbor Town, Courtyard Kauai Coconut Beach Hotel, 22 Exchange, and Parkside. |
(3) | Represents the dollar amount increase (decrease) for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 related to Lakewood Flats, which was classified as real estate held for sale as of March 31, 2016. |
(4) | Asset management fees payable to the Advisor are an obligation of the Company, and as such, asset management fees associated with all investments owned during the period are classified in continuing operations. Therefore, the amounts above include asset management fees associated with any property owned during a particular period, including those related to our disposed properties. |
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The following table reflects rental revenue and property operating expenses for the three months ended March 31, 2016 and 2015 for: (i) our Same Store operating portfolio; (ii) our 2015 dispositions of Babcock, AJS, Holstenplatz and Wimberly at Deerwood; and (iii) Lakewood Flats (in thousands):
Three Months Ended March 31, | ||||||||||||
Description | 2016 | 2015 | Change | |||||||||
Rental revenue | ||||||||||||
Same Store | $ | 5,670 | $ | 5,369 | $ | 301 | ||||||
Dispositions | 65 | 1,547 | (1,482 | ) | ||||||||
Real Estate Held for Sale | 1,584 | 1,570 | 14 | |||||||||
Total rental revenue | $ | 7,319 | $ | 8,486 | $ | (1,167 | ) | |||||
Property operating expenses | ||||||||||||
Same Store | $ | 1,898 | $ | 2,016 | $ | (118 | ) | |||||
Dispositions | 52 | 519 | (467 | ) | ||||||||
Real Estate Held for Sale | 333 | 362 | (29 | ) | ||||||||
Total property operating expenses | $ | 2,283 | $ | 2,897 | $ | (614 | ) | |||||
The tables below reflect occupancy and effective monthly rental rates for our Same Store operating properties and occupancy and average daily rate (“ADR”) for Courtyard Kauai Coconut Beach Hotel:
Occupancy (%) | Effective Monthly Rent per Square Foot/Unit/Bed ($)(2) | |||||||||||||
As of March 31, | As of March 31, | |||||||||||||
Property(1) | 2016 | 2015 | 2016 | 2015 | ||||||||||
Gardens Medical Pavilion | 62% | 60% | $ | 2.14 | $ | 2.08 | per sq ft | |||||||
River Club and the Townhomes at River Club | 98% | 98% | 380.96 | 360.47 | per bed | |||||||||
Lakes of Margate | 94% | 92% | 1,227.37 | 1,158.20 | per unit | |||||||||
Arbors Harbor Town | 93% | 89% | 1,139.11 | 1,160.75 | per unit | |||||||||
22 Exchange | 94% | 83% | 586.38 | 582.93 | per bed | |||||||||
Parkside | 80% | 80% | 1,149.31 | 1,067.39 | per unit | |||||||||
______________________________
(1) | Occupancy and effective monthly rental rates for Lakewood Flats, our held for sale property, was as follows: 95% and 94% and $1,183.16 per unit and $1,189.74 per unit at March 31, 2016 and 2015, respectively. |
(2) | Effective monthly rent is calculated as in-place contracted monthly rental revenue, including any premiums due for short-term or month-to-month leases, less any concessions or discounts. |
Occupancy (%)(1) | ADR ($) | |||||||||||||
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||
Property | 2016 | 2015 | 2016 | 2015 | ||||||||||
Courtyard Kauai Coconut Beach Hotel | 90 | % | 90 | % | $ | 150.34 | $ | 145.18 | ||||||
_______________________________________
(1) | Represents average occupancy for the three months ended March 31. The Courtyard Kauai Coconut Beach Hotel has 311 rooms and approximately 6,200 square feet of meeting space. Occupancy is for the entire three-month period and is based on standard industry metrics, including rooms available for rent. |
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Continuing Operations
Our results of operations for the respective periods presented reflect decreases in most categories. During the three months ended March 31, 2016, we had decreases in rental revenue and property operating expenses of $1.5 million and $0.5 million, respectively, from the impact of the four dispositions in 2015. Management expects decreases in most categories in the future as we dispose of additional real estate and real estate-related assets. We are not actively seeking to purchase additional assets at this time, but may invest capital in our current assets in order to position them for sale in the normal course of business.
Revenues. Revenues for the three months ended March 31, 2016, including Courtyard Kauai Coconut Beach Hotel, were $12.5 million, a decrease of approximately $0.9 million from the three months ended March 31, 2015. Same Store rental revenue (including our hotel revenue) for the three months ended March 31, 2016 and 2015 was $10.8 million and $10.2 million, respectively. Rental revenue from Babcock, AJS, Holstenplatz and Wimberly at Deerwood, disposed of in 2015, was $1.5 million for the three months ended March 31, 2015. Rental revenue from Lakewood Flats was $1.6 million for the three months ended March 31, 2016 and 2015.
The change in revenue is primarily due to:
• | a decrease in rental revenue of $1.5 million for the first quarter of 2016 as a result of our 2015 dispositions. This decrease was partially offset by an increase of approximately $0.3 million related to our Same Store operations; and |
• | an increase in hotel revenue of $0.3 million, or 6.3%, at the Courtyard Kauai Coconut Beach Hotel due to a 4% increase in ADR resulting in a 3% increase in total revenue per available room (“RevPar”) period-over-period. The improvements in ADR and RevPar are primarily the result of improved operating performance. Occupancy remained constant at 90% in the first quarters of 2016 and 2015. In addition, food and beverage revenue increased $0.1 million during the three months ended March 31, 2016. |
Property Operating Expenses. Property operating expenses for the three months ended March 31, 2016 and 2015 were approximately $2.3 million and $2.9 million, respectively. The decrease of approximately $0.6 million was primarily due to a decrease of $0.5 million related to our dispositions in 2015 and a decrease of $0.1 million related to our Same Store operations.
Hotel Operating Expenses. Hotel operating expenses for the three months ended March 31, 2016 and 2015 were $3.4 million and $3.2 million, respectively. The increase in hotel operating expenses was primarily due to an increase of $0.2 million in food and beverage costs incurred during 2016 at the Courtyard Kauai Coconut Beach Hotel .
Interest Expense, net. Interest expense for the three months ended March 31, 2016 and 2015 was $1.5 million and $1.8 million, respectively. The approximate $0.3 million decrease was primarily due to a decrease of $0.3 million related to our dispositions in 2015. For the three months ended March 31, 2016 and 2015, we capitalized interest of $0.1 million in connection with our equity method investment in Prospect Park, which is currently under development.
Real Estate Taxes. Real estate taxes were $1.5 million and $1.6 million for the three months ended March 31, 2016 and 2015, respectively. Our four dispositions in 2015 accounted for a decrease of $0.2 million. This decrease was partially offset by increases of less than $0.1 million in our Same Store operations and Lakewood Flats.
Property Management Fees. Property management fees, which are based on revenues, were $0.4 million for the three months ended March 31, 2016 and 2015, and were composed of property management fees paid to unaffiliated third parties and our Property Manager or its affiliates.
Asset Management Fees. Asset management fees for the three months ended March 31, 2016 and 2015 were $0.6 million and $0.7 million, respectively, and were composed of asset management fees paid to our Advisor and third parties with respect to our investments. Asset management fees for the three months ended March 31, 2015 includes fees of $0.1 million related to our disposed properties.
General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2016 and 2015 were $0.8 million and $0.9 million, respectively, and were composed of audit fees, legal fees, board of directors’ fees, and other administrative expenses.
Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, 2016 and 2015 was approximately $3.2 million and $4.5 million, respectively. The decrease of $1.3 million during the first quarter of 2016 was primarily due to a $0.6 million decrease related to our 2015 dispositions and a decrease of $0.8 million related to our held for sale property. These decreases were partially offset by a period-over-period increase of $0.1 million related to our Same Store operations.
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Gain on Sale of Real Estate. During the three months ended March 31, 2015, we recorded gains on sale of approximately $2 million for Babcock, which was sold on January 8, 2015, and $3.3 million for AJS, which was sold on February 21, 2015. As discussed in Note 7, Real Estate and Real Estate-Related Investments, the Company did not view the disposals of Babcock and AJS as a strategic shift and the results of operations are presented in continuing operations. We did not sell any real estate during the three months ended March 31, 2016.
Income Tax Expense. We recorded a provision for income tax of approximately $2.2 million for the first quarter of 2015
as a result of foreign income tax related to the sale of AJS. The foreign income tax was calculated on gains recognized at the
exchange rate in effect on the sale date of February 21, 2015 and calculated using current tax rates. We had no income tax
expense in the first quarter of 2016.
Cash Flow Analysis
Three months ended March 31, 2016 as compared to the three months ended March 31, 2015.
During the three months ended March 31, 2016, net cash provided by operating activities was $0.7 million compared to $2.5 million for the three months ended March 31, 2015. The primary reason for the decrease in cash flow from operating activities was the changes in working capital.
During the three months ended March 31, 2016, net cash used in investing activities was less than $0.1 million compared to $17.9 million net cash provided by investing activities for the three months ended March 31, 2015. In the first quarter of 2015, we received aggregate sales proceeds of $18.2 million from the sales of Babcock and AJS. We had no dispositions in the first quarter of 2016.
During the three months ended March 31, 2016, net cash used in financing activities was $39.7 million compared to net cash used of $36.3 million for the same period of 2015. We paid special cash distributions to our stockholders totaling $38.4 million and $25.7 million during the three months ended March 31, 2016 and 2015, respectively. During the three months ended March 31, 2015, we also paid off the existing indebtedness totaling approximately $8.7 million associated with the Babcock and AJS investments with proceeds from the sales.
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. In October 2011, NAREIT clarified the FFO definition to exclude impairment charges 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).
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 income (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
31
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 months ended March 31, 2016 and 2015 is presented below ($ in thousands except per share amounts):
Three Months Ended March 31, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
Amount | Per Share | Amount | Per Share | |||||||||||||
Net loss attributable to the Company | $ | (1,073 | ) | $ | (0.04 | ) | $ | (173 | ) | $ | (0.01 | ) | ||||
Adjustments for: | ||||||||||||||||
Real estate depreciation and amortization(1) | 2,854 | 0.11 | 4,029 | 0.16 | ||||||||||||
Gain on sale of real estate(2) | — | — | (4,700 | ) | (0.18 | ) | ||||||||||
Income tax expense associated with real estate sale(3) | — | — | 2,135 | 0.08 | ||||||||||||
NAREIT Defined Funds from Operations (FFO) attributable to common stockholders | $ | 1,781 | $ | 0.07 | $ | 1,291 | $ | 0.05 | ||||||||
GAAP weighted average shares: | ||||||||||||||||
Basic and diluted | 25,553 | 25,776 | ||||||||||||||
_________________________________
(1) | Includes our consolidated amount, 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. |
(2) | For the three months ended March 31, 2015, includes our proportionate share of the gain on sale of real estate related to the Babcock and AJS investments. The gain on sale of AJS is net of a cumulative foreign currency translation loss of approximately $0.6 million due to the substantial liquidation of AJS. |
(3) | During the first quarter of 2015, we recorded an estimated provision for income tax of approximately $2.2 million as a result of foreign income tax related to the sale of AJS. |
Provided below is additional information related to selected items included in net income (loss) above, which may be helpful in assessing our operating results.
• | Straight-line rental revenue was income of less than $0.1 million recognized in rental revenues for the three months ended March 31, 2016 and 2015. The noncontrolling interest portion of straight-line rental revenue for the three months ended March 31, 2016 and 2015 was income of less than $0.1 million. |
• | Net above-market lease amortization of less than $0.1 million was recognized as a charge to rental revenue for the three months ended March 31, 2016. Net below-market lease amortization of less than $0.1 million was recognized as an increase to rental revenue for the three months ended March 31, 2015. The noncontrolling interest portion of the net above-market and net below-market lease amortization for the three months ended March 31, 2016 and 2015 was less than $0.1 million. |
• | Amortization of deferred financing costs of $0.1 million and $0.2 million was recognized as interest expense for our notes payable for the three months ended March 31, 2016 and 2015, respectively. |
In addition, 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 special distributions to our stockholders.
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Distributions
Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board deems relevant. The board’s decision will be substantially influenced by its obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all. We expect that any future distributions authorized by our board of directors will be periodic, special distributions as opposed to regular monthly or quarterly distributions.
On November 20, 2015, our board of directors authorized a special cash distribution of $1.50 per share of common stock, payable to stockholders of record as of December 31, 2015. The Company paid this special cash distribution of $38.4 million on January 5, 2016. On March 18, 2015, our board of directors authorized a special cash distribution of $1.00 per share of common stock, payable to stockholders of record as of March 30, 2015. This special cash distribution of $25.7 million was paid on March 31, 2015. These special cash distributions represented a portion of proceeds from asset sales.
We have paid and may in the future pay some or all of our distributions from sources other than operating cash flow. We have utilized cash from refinancing and dispositions, the components of which may represent a return of capital and/or the gains on sale. In addition, from time to time, our Advisor may agree to waive or defer all or a portion of the asset management or other fees or incentives due to it, pay general administrative expenses or otherwise supplement investor returns which may increase the amount of cash that we have available to pay distributions to our stockholders.
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 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. On a regular basis, we evaluate these estimates, including investment impairment. These estimates include such items as impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts. Actual results could differ from those estimates.
Our critical accounting policies and estimates have not changed significantly from the discussion found in the Management Discussion and Analysis and Results of Operations in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2016.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Risk
The Euro is the functional currency for the operations of AJS and Holstenplatz, which were sold in 2015. As of March 31, 2016, we maintained approximately $13.1 million in Euro-denominated accounts, which are composed primarily of the remaining proceeds from the sale of these properties.
Interest Rate Risk
We may be exposed to interest rate changes primarily as a result of long-term 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 $143.6 million in notes payable at March 31, 2016, excluding Lakewood Flats, $38 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 $0.4 million. Our Lakewood Flats note payable, with a balance of $33.5 million at March 31, 2016, also has a variable interest rate and if its rate increased 100 basis points, we estimate that total annual interest cost, including interest expensed and interest capitalized, would increase by $0.3 million.
Our interest rate cap, which is classified as an asset, had a nominal fair value within prepaid expenses and other assets at March 31, 2016. A 100 basis point decrease in interest rates would not result in a decrease in the fair value of our remaining interest rate cap. A 100 basis point increase in interest rates would result in an increase of less than $0.1 million in the fair value of our interest rate cap.
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 principal executive officer and principal financial officer, evaluated, as of March 31, 2016, 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 Internal Control-New Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective, as of March 31, 2016, 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 principal executive officer and principal 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 March 31, 2016 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 a 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, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
During the three months ended March 31, 2016, we did not sell any equity securities that were not registered under the Securities Act of 1933.
Share Redemption Program
Our board of directors has adopted a share redemption program that permits stockholders to sell their shares back to us, subject to the significant conditions and limitations of the program. Our board of directors can amend the provisions of our share redemption program at any time without the approval of our stockholders.
The terms on which we redeem shares may differ between redemptions upon a stockholder’s death, “qualifying disability” (as defined in the share redemption program) or confinement to a long-term care facility (collectively, Exceptional Redemptions) and all other redemptions, or Ordinary Redemptions.
Any shares approved for redemption will be redeemed on a periodic basis as determined from time to time by our board of directors, and no less frequently than annually. We will not redeem, during any 12-month period, more than 5% of the weighted average number of shares outstanding during the 12-month period immediately prior to the date of redemption. In addition, the cash available for redemptions is limited to no more than $10 million in any twelve-month period. The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions.
The per share redemption price for Ordinary Redemptions and Exceptional Redemptions is equal to the lesser of 80% and 90%, respectively, of (i) the current estimated per share value and (ii) the average price per share the investor paid for all of his shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) less the Special Distributions (as defined in the share redemption program).
Effective November 20, 2015, our estimated value per share was $9.19. As of December 31, 2015, the estimated value per share of our common stock was reduced by $1.50 per share, from $9.19 to $7.69, in accordance with the valuation policy to take into account the special cash distribution authorized by our board of directors on November 20, 2015, paid to stockholders of record as of December 31, 2015 on January 5, 2016. As a result, the redemption price for shares redeemed after December 31, 2015 will be based on the estimated value per share, as adjusted, of $7.69. For a full description of the methodologies used to estimate the value of our common stock as of October 31, 2015, see Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Market Information” included in our Annual Report on Form 10-K for the year ended December 31, 2015.
Notwithstanding the redemption prices set forth above, our board of directors may determine, whether pursuant to formulas or processes approved or set by our board of directors, the redemption price of the shares, which may differ between Ordinary Redemptions and Exceptional Redemptions; provided, however, that we must provide at least 30 days’ notice to stockholders before applying this new price determined by our board of directors.
Any redemption requests are honored pro rata among all requests received based on funds available and are not honored on a first come, first served basis. During the three months ended March 31, 2016, our board of directors redeemed all 33 Ordinary Redemption requests received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 86,262 shares redeemed for $0.4 million (approximately $5.10 per share). All redemptions were funded with cash on hand.
35
During the three months ended March 31, 2016, our board of directors redeemed all seven Exceptional Redemption requests received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 3,990 shares redeemed for less than $0.1 million (approximately $5.84 per share). All redemptions were funded with cash on hand.
During the first quarter ended March 31, 2016, we redeemed shares as follows (including both Ordinary Redemptions and Exceptional Redemptions):
2016 | Total Number of Shares Redeemed | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Be Purchased Under the Plans or Programs | ||||||||
January | — | $ | — | — | ||||||||
February | 90,252 | 5.13 | 90,252 | (1) | ||||||||
March | — | — | — | |||||||||
90,252 | $ | 5.13 | 90,252 | |||||||||
_______________________________
(1) | A description of the maximum number of shares that may be purchased under our redemption program is included in the narrative preceding this table. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
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 II, INC. | ||
Dated: May 13, 2016 | By: | /s/ S. Jason Hall |
S. Jason Hall | ||
Chief Financial Officer | ||
Principal Financial Officer | ||
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Index to Exhibits
Exhibit Number | Description | |
3.1 | Third Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to Form 10-Q filed on November 14, 2012) | |
3.2 | Second Amended and Restated Bylaws, as amended by Amendment No. 1. (incorporated by reference to Exhibit 3.2 to Form 10-Q filed on November 13, 2013) | |
4.1 | Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.1 to Form 10-K filed on March 28, 2013) | |
99.1 | Third Amended and Restated Share Redemption Program of Behringer Harvard Opportunity REIT II, Inc. adopted as of May 15, 2014 (incorporated by reference to Exhibit 99.2 to Form 8-K filed on May 16, 2014) | |
31.1* | Rule 13a-14(a)/15d-14(a) Certification | |
31.2* | Rule 13a-14(a)/15d-14(a) Certification | |
32.1* | Section 1350 Certification** | |
32.2* | Section 1350 Certification** | |
101* | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, filed on May 13, 2016, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements. | |
* | Filed or furnished herewith |
** | In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
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