Cogdell Spencer Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-32649
COGDELL SPENCER INC.
(Exact name of registrant as specified in its charter)
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Maryland
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20-3126457 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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4401 Barclay Downs Drive, Suite 300 |
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Charlotte, North Carolina
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28209 |
(Address of principal executive offices)
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(Zip code) |
(704) 940-2900
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filed, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ.
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of
the Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock as
of the latest practicable date: 7,995,574 shares of common stock, par value $.01 per share,
outstanding as of October 31, 2006.
TABLE OF CONTENTS
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Page |
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PART I |
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FINANCIAL INFORMATION |
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Item 1 |
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Condensed Consolidated and Combined Financial Statements (Unaudited) |
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1 |
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Item 2 |
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Managements Discussion and Analysis of Financial Condition and
Results of Operations |
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13 |
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Item 3 |
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Quantitative and Qualitative Disclosures about Market Risk |
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22 |
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Item 4 |
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Controls and Procedures |
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22 |
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PART II |
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Other Information |
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Item 1 |
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Legal Proceedings |
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23 |
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Item 1A |
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Risk Factors |
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23 |
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Item 2 |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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23 |
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Item 3 |
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Defaults Upon Senior Securities |
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23 |
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Item 4 |
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Submission of Matters to a Vote of Security Holders |
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23 |
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Item 5 |
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Other Information |
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23 |
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Item 6 |
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Exhibits |
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24 |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COGDELL SPENCER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
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As of |
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As of |
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September 30, 2006 |
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December 31, 2005 |
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Assets |
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Real estate properties: |
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Land |
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$ |
22,734 |
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$ |
16,798 |
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Buildings and improvements |
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336,101 |
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241,946 |
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Construction in progress |
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6,234 |
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1,099 |
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Less: Accumulated depreciation |
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(17,759 |
) |
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(2,699 |
) |
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Total operating real estate properties, net |
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347,310 |
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257,144 |
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Real estate properties, net held for sale |
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1,379 |
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Total real estate properties, net |
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347,310 |
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258,523 |
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Cash and cash equivalents |
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2,383 |
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9,571 |
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Restricted cash |
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1,056 |
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779 |
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Investment in capital lease |
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6,270 |
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6,499 |
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Acquired above market leases, net of accumulated
amortization of $208 in 2006 and $25 in 2005 |
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1,048 |
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852 |
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Acquired in place lease value and deferred leasing
costs, net of accumulated amortization of $8,655 in
2006 and $1,399 in 2005 |
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20,688 |
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21,220 |
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Acquired ground leases, net of accumulated
amortization of $55 in 2006 and $15 in 2005 |
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2,889 |
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2,768 |
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Deferred financing costs, net of accumulated
amortization of $239 in 2006 and $31 in 2005 |
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966 |
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913 |
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Goodwill |
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5,112 |
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2,875 |
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Other assets |
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5,179 |
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4,331 |
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Other assets held for sale |
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151 |
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Total assets |
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$ |
392,901 |
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$ |
308,482 |
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Liabilities and stockholders equity |
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Notes payable under line of credit |
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$ |
97,850 |
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$ |
19,600 |
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Mortgage loans |
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155,472 |
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139,374 |
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Accounts payable and accrued liabilities |
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8,160 |
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4,857 |
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Accrued dividends and distributions |
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4,326 |
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Acquired below market leases, net of accumulated
amortization of $1,042 in 2006 and $164 in 2005 |
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3,434 |
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2,893 |
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Other liabilities held for sale |
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1,272 |
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Total liabilities |
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269,242 |
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167,996 |
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Commitments and contingencies |
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Minority interests |
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60,298 |
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62,018 |
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Stockholders equity: |
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Preferred stock, $0.01 par value; 50,000 shares
authorized, none issued or outstanding |
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Common Stock; $0.01 par value; 200,000 shares
authorized, 7,996 shares issued and
outstanding in 2006
and 8,000 shares issued and outstanding in 2005 |
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80 |
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80 |
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Additional paid-in capital |
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85,121 |
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85,855 |
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Accumulated deficit |
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(21,840 |
) |
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(7,467 |
) |
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Total stockholders equity |
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63,361 |
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78,468 |
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Total liabilities and stockholders equity |
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$ |
392,901 |
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$ |
308,482 |
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See notes to condensed consolidated and combined financial statements.
1
COGDELL SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
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Company |
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Predecessor |
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Company |
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Predecessor |
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Revenues: |
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Rental |
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$ |
13,394 |
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$ |
4,116 |
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$ |
38,492 |
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$ |
12,513 |
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Rental related party |
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6,550 |
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19,501 |
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Fee revenue |
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212 |
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451 |
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881 |
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1,299 |
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Expense reimbursements |
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88 |
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146 |
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398 |
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475 |
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Interest and other income |
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198 |
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235 |
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711 |
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700 |
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Total revenues |
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13,892 |
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11,498 |
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40,482 |
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34,488 |
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Expenses: |
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Property operating |
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5,050 |
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4,063 |
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14,139 |
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11,759 |
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General and administrative |
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1,387 |
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1,717 |
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4,822 |
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4,425 |
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Depreciation |
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5,120 |
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2,535 |
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14,288 |
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7,561 |
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Amortization |
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2,617 |
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15 |
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7,375 |
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54 |
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Interest |
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4,195 |
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2,330 |
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9,979 |
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7,421 |
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Prepayment penalty on early extinguishment of debt |
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37 |
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37 |
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Total expenses |
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18,406 |
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10,660 |
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50,640 |
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31,220 |
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Income (loss) from continuing operations before equity
in earnings (loss) of unconsolidated real estate
partnerships, minority interest in real estate
partnership, minority interests in operating
partnership and discontinued operations |
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(4,514 |
) |
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838 |
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(10,158 |
) |
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3,268 |
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Equity in earnings (loss) of unconsolidated real
estate partnerships |
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2 |
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(5 |
) |
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7 |
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(45 |
) |
Gain from sale of real estate partnership interests |
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484 |
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484 |
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Minority interests in real estate partnership |
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(24 |
) |
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(77 |
) |
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Minority interests in operating partnership |
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1,430 |
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3,438 |
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Income (loss) from continuing operations |
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(2,622 |
) |
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833 |
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(6,306 |
) |
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3,223 |
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Discontinued operations: |
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Income (loss) from discontinued operations |
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2 |
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9 |
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(9 |
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40 |
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Gain from sale of real estate property |
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435 |
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435 |
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Minority interests in operating partnership |
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(154 |
) |
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(150 |
) |
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Total discontinued operations |
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283 |
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9 |
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276 |
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40 |
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Net income (loss) |
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$ |
(2,339 |
) |
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$ |
842 |
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$ |
(6,030 |
) |
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$ |
3,263 |
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Per share data basic and diluted |
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Loss from continuing operations basic and diluted |
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$ |
(0.33 |
) |
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$ |
(0.79 |
) |
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Income from discontinued operations basic and
diluted |
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0.04 |
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0.03 |
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Net loss basic and discontinued |
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$ |
(0.29 |
) |
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$ |
(0.76 |
) |
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Weighted average common shares basic and diluted |
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7,976 |
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7,975 |
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See notes to condensed consolidated and combined financial statements.
2
COGDELL SPENCER INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)
(Unaudited)
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Number of |
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Additional |
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Common |
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Common |
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Paid-in |
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Accumulated |
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Shares |
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Stock |
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Capital |
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Deficit |
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Total |
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Balance at December 31, 2005 |
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8,000 |
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|
$ |
80 |
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$ |
85,855 |
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$ |
(7,467 |
) |
|
$ |
78,468 |
|
Cumulative effect adjustment
associated with the
implementation of EITF 04-5 |
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|
(785 |
) |
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53 |
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|
(732 |
) |
Forfeiture of restricted shares |
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(4 |
) |
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Amortization of restricted
stock compensation, net of
minority interests |
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51 |
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51 |
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Dividends |
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(8,396 |
) |
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(8,396 |
) |
Net loss |
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(6,030 |
) |
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|
(6,030 |
) |
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|
|
|
|
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|
Balance at September 30, 2006 |
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|
7,996 |
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|
$ |
80 |
|
|
$ |
85,121 |
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|
$ |
(21,840 |
) |
|
$ |
63,361 |
|
|
|
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|
|
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|
|
|
|
|
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|
See notes to condensed consolidated and combined financial statements.
3
COGDELL SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
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Company |
|
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Predecessor |
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Nine Months Ended |
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Nine Months Ended |
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|
September 30, 2006 |
|
|
September 30, 2005 |
|
Operating activities: |
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|
|
|
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Net income (loss) |
|
$ |
(6,030 |
) |
|
$ |
3,263 |
|
Adjustments to reconcile net income (loss) to cash
provided by operating activities: |
|
|
|
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|
|
|
|
Minority interests in operating partnership |
|
|
(3,288 |
) |
|
|
|
|
Minority interests in real estate partnership |
|
|
77 |
|
|
|
|
|
Gain from sale of real estate partnership interests |
|
|
(484 |
) |
|
|
|
|
Gain from sale of property discontinued operations |
|
|
(435 |
) |
|
|
|
|
Depreciation of real estate properties |
|
|
14,247 |
|
|
|
7,911 |
|
Corporate depreciation and amortization |
|
|
128 |
|
|
|
75 |
|
Amortization of acquired ground leases, acquired in place lease
value and deferred leasing costs |
|
|
7,311 |
|
|
|
72 |
|
Amortization of acquired above market leases and acquired below
market leases, net |
|
|
(696 |
) |
|
|
|
|
Amortization of debt premium |
|
|
(150 |
) |
|
|
(9 |
) |
Amortization of deferred finance costs |
|
|
208 |
|
|
|
|
|
Amortization of restricted stock compensation |
|
|
79 |
|
|
|
|
|
Equity in (earnings) loss of unconsolidated real estate partnerships |
|
|
(7 |
) |
|
|
45 |
|
Prepayment penalty for early extinguishment of debt |
|
|
37 |
|
|
|
|
|
Change in fair value of interest rate swap agreements |
|
|
(59 |
) |
|
|
(2,129 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Other assets |
|
|
(210 |
) |
|
|
(1,410 |
) |
Accounts payable and accrued expenses |
|
|
2,015 |
|
|
|
1,883 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
12,743 |
|
|
|
9,701 |
|
Investing activities: |
|
|
|
|
|
|
|
|
Investment in real estate properties and businesses |
|
|
(97,194 |
) |
|
|
(5,062 |
) |
Proceeds from sale of real estate property and capital lease |
|
|
2,143 |
|
|
|
54 |
|
Proceeds from sale of real estate partnership interests |
|
|
546 |
|
|
|
|
|
Advances to unconsolidated real estate joint ventures |
|
|
|
|
|
|
(82 |
) |
Distributions received from real estate partnerships |
|
|
2 |
|
|
|
|
|
(Increase) decrease in restricted cash |
|
|
(277 |
) |
|
|
65 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(94,780 |
) |
|
|
(5,025 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from mortgage notes payable |
|
|
13,270 |
|
|
|
1,938 |
|
Repayments of mortgage notes payable |
|
|
(7,799 |
) |
|
|
(3,751 |
) |
Proceeds from line of credit |
|
|
82,750 |
|
|
|
2,797 |
|
Repayments to line of credit |
|
|
(4,500 |
) |
|
|
|
|
Prepayment penalty for early extinguishment of debt |
|
|
(37 |
) |
|
|
|
|
Equity contributions |
|
|
|
|
|
|
142 |
|
Dividends and distributions |
|
|
(8,653 |
) |
|
|
(7,026 |
) |
Distributions to minority interests in real estate partnership |
|
|
(134 |
) |
|
|
|
|
Payment of deferred financing costs |
|
|
(261 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
74,636 |
|
|
|
(5,949 |
) |
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(7,401 |
) |
|
|
(1,273 |
) |
Balance at beginning of period |
|
|
9,571 |
|
|
|
13,459 |
|
Cumulative effect adjustment associated with the implementation of
EITF 04-5 |
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
2,383 |
|
|
$ |
12,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest |
|
$ |
9,673 |
|
|
$ |
9,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information noncash
investing and financing activities: |
|
|
|
|
|
|
|
|
Debt assumed with purchase of property |
|
|
5,178 |
|
|
|
|
|
Accrued dividends and distributions |
|
|
4,326 |
|
|
|
|
|
Issuance of operating partnership units as consideration for
investments in real estate properties and businesses |
|
|
6,018 |
|
|
|
|
|
See notes to condensed consolidated and combined financial statements.
4
COGDELL SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Ownership
Cogdell Spencer Inc. (the Company) is engaged in the business of owning, developing,
redeveloping, acquiring, and managing medical office buildings and other healthcare related
facilities primarily in the southeastern United States. The Company was incorporated on July 5,
2005, in Maryland and has elected to operate as a fully-integrated and self-administered real
estate investment trust (a REIT) under Sections 856 through 860 of the Internal Revenue Code of
1986, as amended. The Company continues the operations of Cogdell Spencer Inc. Predecessor (the
Predecessor). The Predecessor is not a legal entity, but represents a combination of certain real
estate entities based on common management. During all periods presented in the Predecessors
accompanying condensed combined financial statements the Predecessor had the responsibility for the
day-to-day operations of such combined entities. Cogdell Spencer Advisors, Inc. had management
agreements with other entities which were not combined with the Predecessor as other partners or
members did not contribute their interests in the formation transactions discussed below.
The Company completed its initial public offering (the Offering) on November 1, 2005. On
November 1, 2005, concurrent with the consummation of the Offering, the Company and a newly formed
majority-owned limited partnership, Cogdell Spencer LP (the Operating Partnership), and its
taxable REIT subsidiary (the TRS), together with the partners and members of the affiliated
partnerships and limited liability companies of the Predecessor, engaged in certain formation
transactions (the Formation Transactions). The Operating Partnership received a contribution of
interests in the Predecessor in exchange for units of limited partnership interest in the Operating
Partnership, shares of the Companys common stock and/or cash. Substantially all of the operations
of the Company are carried out through the Operating Partnership.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated and combined financial statements have been prepared in
conformity with accounting principles generally accepted in the United States (GAAP) and
represent the assets and liabilities and operating results of the Company and the Predecessor. The
condensed consolidated financial statements include the Companys accounts, its wholly-owned
subsidiaries, as well as the Operating Partnership and its subsidiaries. The condensed
consolidated financial statements also include any partnerships for which the Company or its
subsidiaries is the general partner or the managing member and the rights of the limited partners
do not overcome the presumption of control by the general partner or managing member. All
significant intercompany balances and transactions have been eliminated in consolidation and
combination. The accounting policies of the Predecessor and the Company are consistent with each
other, except as noted in the accompanying financial statements or in the Companys Annual Report
on Form 10-K for the year ended December 31, 2005.
Interim Financial Information
The financial information for the three and nine months ended September 30, 2006 and 2005 is
unaudited, but includes all adjustments, consisting of normal recurring adjustments that, in the
opinion of management, are necessary for a fair presentation of the Companys and the Predecessors
financial position, results of operations, and cash flows for such periods. Operating results for
the three and nine months ended September 30, 2006 and 2005 are not necessarily indicative of
results that may be expected for any other interim period or for the full fiscal years of 2006 or
2005 or any other future period. These condensed consolidated and combined financial statements do
not include all disclosures required by GAAP for annual consolidated and combined financial
statements. The Companys audited consolidated financial statements and the Predecessors audited
combined financial statements are contained in the Companys Annual Report on Form 10-K for the
year ended December 31, 2005.
5
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect amounts reported in the financial statements and accompanying
notes. Significant estimates and assumptions are used by management in determining the useful lives
of real estate properties and the initial valuations and underlying allocations of purchase price
in connection with real estate property acquisitions. Actual results may differ from those
estimates.
Adoption of Recent Accounting Pronouncement
In June 2005, the Financial Accounting Standards Board ratified the Emerging Issues Task Forces
consensus on Issue No. 04-5 Determining Whether a General Partner, or the General Partners as a
Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights (EITF 04-5). This consensus establishes the presumption that general partners in a
limited partnership control that limited partnership regardless of the extent of the general
partners ownership interest in the limited partnership. The consensus further establishes that
the rights of the limited partners can overcome the presumption of control by the general partners,
if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited
partnership or otherwise remove the general partners without cause or (b) substantive participating
rights. Whether the presumption of control is overcome is a matter of judgment based on facts and
circumstances, for which the consensus provides additional guidance. This consensus was applicable
in 2005 for new or modified partnerships, and is applicable to existing partnerships beginning in
2006. This consensus applies to limited partnerships or similar entities, such as limited
liability companies that have governing provisions that are the functional equivalent of a limited
partnership.
The Company implemented EITF 04-5 effective January 1, 2006 for existing partnerships. As a result
of the implementation, the Company determined that Rocky Mount MOB LLC (Rocky Mount MOB) is
required to be included in the Companys consolidated financial results. The Company owns 34.5% of
Rocky Mount MOB. Pursuant to the transition guidance contained in EITF 04-5, the Company has
included a cumulative effect adjustment related to the consolidation of Rocky Mount MOB effective
January 1, 2006. The Companys investment in Rocky Mount MOB of $0.8 million has been eliminated,
which reduced other assets and additional paid in capital. The following was Rocky Mount MOBs
balance sheet as of January 1, 2006, which has been added to the Companys consolidated balance
sheet (in thousands):
|
|
|
|
|
Assets |
|
|
|
|
Real estate property: |
|
|
|
|
Land |
|
$ |
229 |
|
Buildings and improvements |
|
|
4,992 |
|
Less: Accumulated depreciation |
|
|
(856 |
) |
|
|
|
|
Total real estate property, net |
|
|
4,365 |
|
Cash and cash equivalents |
|
|
213 |
|
Other assets |
|
|
8 |
|
|
|
|
|
Total assets |
|
$ |
4,586 |
|
|
|
|
|
|
|
|
|
|
Liabilities and members equity |
|
|
|
|
Mortgage loans |
|
|
4,340 |
|
Accounts payable and accrued liabilities |
|
|
128 |
|
|
|
|
|
Total liabilities |
|
|
4,468 |
|
Members equity |
|
|
118 |
|
|
|
|
|
Total liabilities and members equity |
|
$ |
4,586 |
|
|
|
|
|
Recent
Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for
uncertainty in tax positions. FIN 48 requires that the Company recognizes the impact of a tax
position in its financial statements if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of
January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting
FIN 48 on its financial statements.
6
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements, or SAB 108. SAB 108 provides interpretive guidance on how the effects of
prior-year uncorrected misstatements should be considered when quantifying misstatements in the
current year financial statements. SAB 108 requires registrants to quantify misstatements using
both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate
whether either approach results in a misstatement that, when all relevant quantitative and
qualitative factors are considered, is material. If prior year errors that had been previously
considered immaterial now are considered material based on either approach, no restatement is
required so long as management properly applied its previous approach and all relevant facts and
circumstances were considered. If prior years are not restated, the cumulative effect adjustment is
recorded in opening accumulated earnings as of the beginning of the fiscal year of adoption. SAB
108 is effective for fiscal years ending after November 15, 2006. The Company currently does not
believe SAB 108 will have a material impact on its results from operations or financial position.
3. Property acquisitions and dispositions
During the nine months ended September 30, 2006, the Company, through its Operating Partnership,
acquired for investment purposes, real estate properties and businesses as follows:
|
|
|
Methodist Professional Center One was acquired on February 15, 2006, for $39.9
million inclusive of credits from the seller in the amount of $0.5 million related
to potential future capital improvements, reducing the initial purchase price to
$39.4 million. The property has 171,755 square feet of medical office space, which
was 94.7% leased at the time of purchase, and an adjacent 951-space parking deck. |
|
|
|
|
On March 30, 2006, the Company acquired Hanover Medical Office Building One and
the 1808/1818 Verdugo Boulevard properties. The combined portfolio purchase price
was $36.2 million, inclusive of $0.8 million in credits from the seller relating to
potential future capital improvements, reducing the initial purchase price to $35.4
million. The properties have 163,403 square feet of medical office space and was
98.5% leased on the date of acquisition. |
|
|
|
|
Mary Black Westside MOB was acquired on August 4, 2006, for $5.2 million. The
Company received credits from the seller of $0.7 million related to potential future
capital improvements, which reduced the initial purchase price to $4.5 million. The
building has 37,455 square feet of medical office space and was 100.0% leased on the
date of acquisition. |
|
|
|
|
On September 28, 2006, the Company acquired Parkridge MOB for approximately $19.1
million. The Company received credits from the seller of $1.5 million related to
potential future capital improvements, which reduced the initial purchase price to
$17.6 million. The property has 89,451 square feet of medical office space and was
94.6% leased at the time of acquisition. |
|
|
|
|
On September 28, 2006, the Company acquired Consera Healthcare Real Estate, LLC,
a medical office building management company based in Columbia, SC. Consera manages
38 properties containing approximately 1.6 million square feet in South Carolina,
Kentucky, Virginia and Florida. |
The following table is a preliminary allocation of the purchase price of the acquisitions during
the nine months ended September 30, 2006 (in thousands):
|
|
|
|
|
Land |
|
$ |
5,638 |
|
Building and improvements |
|
|
84,847 |
|
Acquired in place lease value and deferred leasing costs |
|
|
7,291 |
|
Acquired ground leases, net |
|
|
41 |
|
Acquired above market leases |
|
|
376 |
|
Acquired below market leases |
|
|
(1,405 |
) |
Other assets |
|
|
1,232 |
|
Interest rate cap transaction agreement |
|
|
245 |
|
Goodwill |
|
|
2,237 |
|
|
|
|
|
Total purchase price allocated |
|
$ |
100,502 |
|
|
|
|
|
The following summary of selected unaudited pro forma results of operations presents
information as if the purchase of Methodist Professional Center One, Hanover Medical Office
Building One, 1808 and 1818 Verdugo Boulevard, Parkridge MOB, Mary Black Westside and Consera
Healthcare Real Estate, LLC properties and businesses had occurred at the
7
beginning of each period
presented. The pro forma information is provided for informational purposes only and is not
indicative of results that would have occurred or which may occur in the future (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Predecessor |
|
|
Company |
|
|
Predecessor |
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Total revenues |
|
$ |
18,421 |
|
|
$ |
15,207 |
|
|
$ |
44,015 |
|
|
$ |
45,636 |
|
Net loss |
|
$ |
(1,742 |
) |
|
$ |
(607 |
) |
|
$ |
(3,563 |
) |
|
$ |
(1,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
(0.22 |
) |
|
|
|
|
|
$ |
(0.45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, net income and gain on disposition of real estate for real estate properties sold are
reflected in the consolidated statements of operations as discontinued operations for all periods
presented. In addition, the assets and liabilities of this property are separately reflected in
Other assets held for sale in the condensed consolidated balance sheets for all periods
presented. Below is a summary of discontinued operations for the property sold during 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Predecessor |
|
|
Company |
|
|
Predecessor |
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
8 |
|
|
$ |
59 |
|
|
$ |
129 |
|
|
$ |
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
8 |
|
|
|
59 |
|
|
|
129 |
|
|
|
176 |
|
|
Property operating expenses |
|
|
2 |
|
|
|
19 |
|
|
|
44 |
|
|
|
57 |
|
Depreciation and amortization |
|
|
|
|
|
|
12 |
|
|
|
51 |
|
|
|
32 |
|
Interest expense |
|
|
4 |
|
|
|
19 |
|
|
|
43 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before gain from sale
of real estate property and minority interests in operating
partnership |
|
|
2 |
|
|
|
9 |
|
|
|
(9 |
) |
|
|
40 |
|
Gain on disposition of discontinued operations |
|
|
435 |
|
|
|
|
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before minority interest |
|
|
437 |
|
|
|
9 |
|
|
|
426 |
|
|
|
40 |
|
|
Minority interests in operating partnership |
|
|
(154 |
) |
|
|
|
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
$ |
283 |
|
|
$ |
9 |
|
|
$ |
276 |
|
|
$ |
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no properties being actively marketed for sale as of September 30, 2006.
4. Mortgages and Notes Payable Under Line of Credit
In February 2006, the Company refinanced the St. Francis Medical Plaza mortgage note payable that
matured on February 15, 2006. In connection with this refinancing, the Company repaid $2.0 million
in principal related to this note payable and repaid $2.0 million in principal related to the St.
Francis Property MOB mortgage note payable. The St. Francis Medical Plaza mortgage note payable
now matures in December 2006 and has an interest rate of LIBOR plus 1.425% (6.75% at September 30,
2006).
On March 30, 2006, as part of the Hanover Medical Office Building One acquisition, the Company
assumed $5.2 million of mortgage debt. The mortgage note payable matures on November 1, 2009, and
requires monthly principal and interest payments of $35,630 based on a fixed interest rate of 6.00%
and a 25-year amortization. The fair value of the mortgage note payable was $5.2 million at March
30, 2006.
In August 2006, the unsecured credit facility (the Credit Facility) capacity was increased from
$100.0 million to $130.0 million. As of September 30, 2006, the Company had $97.9 million
outstanding under this Credit Facility.
In connection with the acquisition of Parkridge MOB, the Company obtained an interest only mortgage
note payable with a principal amount of $13.3 million that matures on October 1, 2007. The
interest rate is LIBOR plus 1.45% (6.77% at September 30, 2006).
8
On October 10, 2006, the Company refinanced the Mulberry Medical Park mortgage note payable that
matured on October 15, 2006. The Mulberry Medical Park note payable now matures on October 15,
2007 and has a fixed interest rate of 6.75%. The balance at the time of refinance was $1.1
million. This amount also represents the new loan amount.
On October 31, 2006, the Company obtained a $30.0 million note payable that is collateralized by
Methodist Professional Center I. The mortgage note payable matures on October 31, 2009 and has a
two-year extension option with customary conditions. The note payable requires interest only
payments until October 31, 2009, and principal and interest payments using a 30-year amortization
during the two-year extension option period. The interest rate is LIBOR plus 1.30% (6.62% at
October 31, 2006). Proceeds from the financing were used to reduce the outstanding balance on the
Credit Facility.
5. Derivative Financial Instruments Interest Rate Swap Agreements
Interest rate swap agreements are utilized to reduce exposure to variable interest rates associated
with certain mortgage notes payable. These agreements involve an exchange of fixed and floating
interest payments without the exchange of the underlying principal amount (the notional amount).
The net difference between the interest paid and the interest received is reflected as an
adjustment to interest expense.
The interest rate swap agreements have been recorded on the balance sheet at their estimated fair
values and included in Other assets or Accounts payable and accrued expenses. The agreements
have not been designated for hedge accounting and, accordingly, any changes in fair values are
recorded in interest expense. For the three months ended September 30, 2006 and 2005, $0.4 million
and ($0.9) million, respectively was recorded as a increase (decrease) to interest expense as a
result of the change in the interest rate swap agreements fair value. For the nine months ended
September 30, 2006 and 2005, $59,000 and $2.1 million, respectively, was recorded as a decrease to
interest expense as a result of the change in the interest rate swap agreements fair value. The
following table summarizes the terms of the agreements and their fair values at September 30, 2006
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount as of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
Expiration |
|
|
September 30, 2006 |
|
Entity |
|
2006 |
|
|
Receive Rate |
|
|
Pay Rate |
|
Date |
|
|
Date |
|
|
Asset |
|
|
Liability |
|
Beaufort Medical Plaza, LLC |
|
$ |
5,079 |
|
|
1 Month LIBOR |
|
|
5.81 |
% |
|
|
10/25/1999 |
|
|
|
7/25/2008 |
|
|
$ |
|
|
|
$ |
71 |
|
Gaston MOB, LLC |
|
|
16,764 |
|
|
1 Month LIBOR |
|
|
3.25 |
% |
|
|
1/23/2003 |
|
|
|
11/22/2007 |
|
|
|
371 |
|
|
|
|
|
Medical Investors I, LLC |
|
|
8,844 |
|
|
1 Month LIBOR |
|
|
4.82 |
% |
|
|
2/10/2003 |
|
|
|
12/10/2007 |
|
|
|
26 |
|
|
|
|
|
River Hills Medical Associates, LLC |
|
|
3,093 |
|
|
1 Month LIBOR |
|
|
3.63 |
% |
|
|
3/10/2003 |
|
|
|
12/15/2008 |
|
|
|
87 |
|
|
|
|
|
Roper MOB, LLC |
|
|
9,938 |
|
|
1 Month LIBOR |
|
|
4.45 |
% |
|
|
7/26/2004 |
|
|
|
7/10/2009 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
611 |
|
|
$ |
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent to September 30, 2006, the Company terminated the five interest rate swap
agreements. The Company then entered into new interest rate swap agreements and had cash flow
hedge documentation in place to qualify for hedge accounting. The Company will receive cash for
the value of the existing agreements upon termination, which was approximately $0.5 million. A
charge to interest expense of $0.1 million will be recorded in the fourth quarter of 2006 for the
change in fair value from September 30, 2006 to the termination date. In addition, the Company
entered into a new interest rate swap agreement related to the financing obtained for Methodist
Professional Center I. The following table summarizes the terms of the new agreements at November
2, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount as of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2, |
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
Expiration |
|
Entity |
|
2006 |
|
|
Receive Rate |
|
|
Pay Rate |
|
Date |
|
|
Date |
|
Beaufort Medical Plaza, LLC |
|
$ |
5,069 |
|
|
1 Month LIBOR |
|
|
5.01 |
% |
|
|
11/2/2006 |
|
|
|
7/25/2008 |
|
Gaston MOB, LLC |
|
|
16,632 |
|
|
1 Month LIBOR |
|
|
5.18 |
% |
|
|
11/3/2006 |
|
|
|
11/22/2007 |
|
Medical Investors I, LLC |
|
|
8,831 |
|
|
1 Month LIBOR |
|
|
5.15 |
% |
|
|
11/2/2006 |
|
|
|
12/10/2007 |
|
River Hills Medical Associates, LLC |
|
|
3,084 |
|
|
1 Month LIBOR |
|
|
4.97 |
% |
|
|
11/2/2006 |
|
|
|
12/15/2008 |
|
Roper MOB, LLC |
|
|
9,910 |
|
|
1 Month LIBOR |
|
|
4.95 |
% |
|
|
11/2/2006 |
|
|
|
7/10/2009 |
|
Methodist Professional Center I |
|
|
30,000 |
|
|
1 Month LIBOR |
|
|
4.95 |
% |
|
|
11/2/2006 |
|
|
|
10/31/2009 |
|
As part of the asset purchase of Parkridge MOB, the Company assumed an Interest Rate Cap
Transaction agreement with a notional amount of $13.3 million at September 30, 2006. The Cap Rate
is 4.50% per annum on 1 month LIBOR. The termination date of the agreement is January 1, 2010.
Due to differences in principal amounts, payment dates, payment amounts, and maturity dates, the
agreement has been determined to be ineffective for hedge accounting and changes in fair
9
value are
recorded in interest expense. As of September 30, 2006, the fair value of this agreement was $0.2
million and included in Other assets. Subsequent to September 30, 2006, the Company terminated
the Interest Rate Cap Transaction agreement and received cash proceeds of $0.2 million, which was
the value of the agreement at the termination date.
6. Investments in Real Estate Partnerships
As of September 30, 2006, the Company had an ownership interest in four limited liability companies
or limited partnerships. The following is a description of each of the entities:
|
|
|
McLeod Medical Partners, LLC, a South Carolina limited liability company, founded in
1982, 1.1% owned by the Company, and owns three medical office buildings; |
|
|
|
|
Shannon Health/MOB Limited Partnership No. 1, a Delaware limited partnership, founded in
2001, 2.0% owned by the Company, and owns ten medical office buildings |
|
|
|
|
BSB Health/MOB Limited Partnership No. 2, a Delaware limited partnership, founded in
2002, 2.0% owned by the Company, and owns nine medical office buildings; and |
|
|
|
|
Rocky Mount MOB, LLC, a North Carolina limited liability company, founded in 2002, 34.5%
owned by the Company, and owns one medical office building. |
The Company is the general partner or managing member of these real estate partnerships and manages
the properties owned by these entities. The Company, through its taxable REIT subsidiaries,
receives property management fees, leasing fees, and expense reimbursements from the partnerships.
The 2.0% ownerships in the Shannon Health/MOB Limited Partnership No. 1 and BSB Health/MOB Limited
Partnership No. 2 were assumed as part of the Consera acquisition. The partnership agreements and
tenant leases of the limited partners are designed to give preferential treatment to the limited
partners as to cash flows from the partnerships. The Company, as the general partner, does not
generally participate in the cash flows from these entities other than to receive property
management fees. The limited partners can remove the Company as the property manager and as the
general partner.
Rocky Mount MOB is included in the Companys consolidated financial statements because the limited
partners do not have sufficient participation rights in the partnership to overcome the presumption
of control by the Company as the managing member. The limited partners do have certain protective
rights such as the ability to prevent the sale of building, the dissolution of the partnership, or
the incurrence of additional indebtedness. The information set forth below reflects the financial
position and operations of Rocky Mount MOB in its entirety, not just the Companys interest in the
real estate partnership (in thousands):
|
|
|
|
|
|
|
September 30, 2006 |
Financial position: |
|
|
|
|
Total assets |
|
$ |
4,515 |
|
Total liabilities |
|
|
4,310 |
|
Members equity |
|
|
205 |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Nine Months |
|
|
Ended |
|
Ended |
|
|
September 30, 2006 |
|
September 30, 2006 |
Results of operations: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
234 |
|
|
$ |
650 |
|
Operating and general and administrative expenses |
|
|
65 |
|
|
|
198 |
|
Net income |
|
|
82 |
|
|
|
163 |
|
10
The Companys other three real estate partnerships are unconsolidated and accounted for under
the equity method of accounting based on the Companys ability to exercise significant influence.
The following is a summary of financial information for the limited liability companies and limited
partnerships as of September 30, 2006 and for the three and nine months ended September 30, 2006.
The information set forth below reflects the financial position and operations of the entity in its
entirety, not just the Companys interest in the real estate partnerships (in thousands):
|
|
|
|
|
|
|
September 30, 2006 |
Financial position: |
|
|
|
|
Total assets |
|
$ |
58,590 |
|
Total liabilities |
|
|
51,633 |
|
Members equity |
|
|
6,957 |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Nine Months |
|
|
Ended |
|
Ended |
|
|
September 30, 2006 |
|
September 30, 2006 |
Results of operations: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
2,837 |
|
|
$ |
9,042 |
|
Operating and general and administrative expenses |
|
|
1,360 |
|
|
|
3,770 |
|
Net income |
|
|
30 |
|
|
|
934 |
|
During the three months ended September 30, 2006, the Company acquired the remaining 95%
interest in Mary Black Westside that it did not previously own. The Company sold its interest in
Mary Black MOB Limited Partnership and Mary Black MOB II Limited Partnership. Prior to the
disposal the Company owned 9.6% of Mary Black MOB Limited Partnership and 1.0% of Mary Black MOB II
Limited Partnership. The Company recorded a gain of $0.5 million on the sale of these interests.
Also during the three months ended September 30, 2006, the Company sold its interest in Cabarrus
Land Company, LLC. Prior to the sale, the Company owned 5.0%. The Company recorded a gain of $0.4
million on the sale of this interest. These investments were previously accounted for under the
equity method of accounting.
7. Dividends and Distributions
On September 15, 2006, the Company declared a dividend to common stockholders of record and the
Operating Partnership declared a distribution to holders of record of units of limited partnership
interests (OP units), in each case as of September 26, 2006, totaling $4.3 million or $0.35 per
share or unit, covering the period from July 1, 2006 through September 30, 2006. The dividend and
distribution were paid on October 17, 2006. The dividend and distribution were equivalent to an
annual rate of $1.40 per share or OP unit.
8. Loss per Share
The following is a summary of the elements used in calculating basic and diluted loss per share (in
thousands, except per share amount):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2006 |
|
Net loss |
|
$ |
(2,339 |
) |
|
$ |
(6,030 |
) |
Weighted average shares outstanding basic and diluted (1) |
|
|
7,976 |
|
|
|
7,975 |
|
Loss from continuing operations basic and diluted (1) |
|
$ |
(0.33 |
) |
|
$ |
(0.79 |
) |
Income from discontinued operations basic and diluted (1) |
|
|
0.04 |
|
|
|
0.03 |
|
|
|
|
|
|
|
|
Net loss per share basic and diluted (1) |
|
$ |
(0.29 |
) |
|
$ |
(0.76 |
) |
|
|
|
(1) |
|
For the three and nine months ended September 30, 2006, 20 and 23 shares of
unvested restricted common stock, respectively, are anti-dilutive due to the net loss . |
11
9. Minority Interests in Operating Partnership
Minority interests of holders of OP units in the Operating Partnership at September 30, 2006, were
$60.3 million.
As of September 30, 2006, there were 12,649,810 OP units outstanding, of which 7,995,574, or 63.2%,
were owned by the Company and 4,654,236, or 36.8%, were owned by other partners (including certain
of the Companys directors and members of senior management).
10. Segment Reporting
The Company defines business segments by their distinct customer base and service provided based on
the financial information used by the Companys chief operating decision maker to make resource
allocation decisions and assess performance. There are two identified reportable segments: (1)
property operations and (2) real estate services. Management evaluates each segments performance
based on net operating income, which is defined as income before corporate general and
administrative expenses, depreciation, amortization, interest expense, loss on early extinguishment
of debt, gain on sale of real estate property, equity in earnings of unconsolidated real estate
partnerships, minority interests in operating partnership, and discontinued operations. Management
does not include the property revenues and property operating expenses of Rocky Mount MOB in
evaluating the property operations segment. Intersegment revenues and expenses are reflected at
the contractually stipulated amounts and eliminated in consolidation or combination. The following
table represents the segment information for the three and nine months ended September 30, 2006 and
2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Predecessor |
|
|
Company |
|
|
Predecessor |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
Property operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues |
|
$ |
13,197 |
|
|
$ |
10,651 |
|
|
$ |
37,883 |
|
|
$ |
31,998 |
|
Interest and other income |
|
|
124 |
|
|
|
236 |
|
|
|
501 |
|
|
|
699 |
|
Property operating expenses |
|
|
(5,004 |
) |
|
|
(4,054 |
) |
|
|
(13,998 |
) |
|
|
(11,750 |
) |
Intersegment expenses |
|
|
(881 |
) |
|
|
(810 |
) |
|
|
(2,563 |
) |
|
|
(2,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
7,436 |
|
|
$ |
6,023 |
|
|
$ |
21,823 |
|
|
$ |
18,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets, end of period |
|
$ |
379,565 |
|
|
$ |
171,636 |
|
|
$ |
379,565 |
|
|
$ |
171,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee revenue |
|
$ |
221 |
|
|
$ |
451 |
|
|
$ |
906 |
|
|
$ |
1,299 |
|
Expense reimbursements |
|
|
96 |
|
|
|
146 |
|
|
|
421 |
|
|
|
475 |
|
Interest and other income |
|
|
37 |
|
|
|
(1 |
) |
|
|
169 |
|
|
|
1 |
|
Intersegment revenues |
|
|
881 |
|
|
|
810 |
|
|
|
2,563 |
|
|
|
2,430 |
|
Real estate operating expenses |
|
|
(797 |
) |
|
|
(809 |
) |
|
|
(2,565 |
) |
|
|
(1,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
438 |
|
|
$ |
597 |
|
|
$ |
1,494 |
|
|
$ |
2,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets, end of period |
|
$ |
6,173 |
|
|
$ |
4,838 |
|
|
$ |
6,173 |
|
|
$ |
4,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues |
|
$ |
14,556 |
|
|
$ |
12,293 |
|
|
$ |
42,443 |
|
|
$ |
36,902 |
|
Elimination of intersegment revenues |
|
|
(881 |
) |
|
|
(810 |
) |
|
|
(2,563 |
) |
|
|
(2,430 |
) |
Rocky Mount MOB and elimination of
related intersegment revenues |
|
|
217 |
|
|
|
|
|
|
|
602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
13,892 |
|
|
$ |
11,483 |
|
|
$ |
40,482 |
|
|
$ |
34,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net operating income |
|
$ |
7,874 |
|
|
$ |
6,620 |
|
|
$ |
23,317 |
|
|
$ |
21,106 |
|
Corporate general and administrative
expenses |
|
|
(588 |
) |
|
|
(908 |
) |
|
|
(2,248 |
) |
|
|
(2,808 |
) |
Depreciation and amortization expense |
|
|
(7,717 |
) |
|
|
(2,546 |
) |
|
|
(21,577 |
) |
|
|
(7,611 |
) |
Interest expense |
|
|
(4,128 |
) |
|
|
(2,349 |
) |
|
|
(9,776 |
) |
|
|
(7,468 |
) |
Prepayment penalties on early
extinguishment of debt |
|
|
(37 |
) |
|
|
|
|
|
|
(37 |
) |
|
|
|
|
Equity in earnings (loss) of
unconsolidated real estate
partnerships |
|
|
2 |
|
|
|
(5 |
) |
|
|
7 |
|
|
|
(45 |
) |
Gain from sale of real estate
partnership interests |
|
|
484 |
|
|
|
|
|
|
|
484 |
|
|
|
|
|
Net income of Rocky Mount MOB, net
of minority interests |
|
|
58 |
|
|
|
|
|
|
|
86 |
|
|
|
|
|
Minority interests in operating
partnership |
|
|
1,430 |
|
|
|
|
|
|
|
3,438 |
|
|
|
|
|
Total discontinued operations |
|
|
283 |
|
|
|
30 |
|
|
|
276 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(2,339 |
) |
|
$ |
842 |
|
|
$ |
(6,030 |
) |
|
$ |
3,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets |
|
$ |
385,738 |
|
|
$ |
176,474 |
|
|
$ |
385,738 |
|
|
$ |
176,474 |
|
Corporate total assets |
|
|
2,648 |
|
|
|
|
|
|
|
2,648 |
|
|
|
|
|
Rocky Mount MOB total assets |
|
|
4,515 |
|
|
|
|
|
|
|
4,515 |
|
|
|
|
|
Total discontinued operations |
|
|
|
|
|
|
1,111 |
|
|
|
|
|
|
|
1,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets, end of period |
|
$ |
392,901 |
|
|
$ |
177,585 |
|
|
$ |
392,901 |
|
|
$ |
177,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When used in this discussion and elsewhere in this Quarterly Report on Form 10-Q, the words
believes, anticipates, projects, should, estimates, expects, and similar expressions
are intended to identify forward-looking statements with the meaning of that term in Section 27A of
the Securities Act of 1933, as amended, and in Section 21F of the Securities and Exchange Act of
1934, as amended. Actual results may differ materially due to uncertainties including:
|
|
|
the Companys business strategy; |
|
|
|
|
the Companys ability to obtain future financing arrangements; |
|
|
|
|
estimates relating to the Companys future distributions; |
|
|
|
|
the Companys understanding of the Companys competition; |
|
|
|
|
the Companys ability to renew the Companys ground leases; |
|
|
|
|
changes in the reimbursement available to the Companys tenants by government or private payors; |
|
|
|
|
the Companys tenants ability to make rent payments; |
|
|
|
|
defaults by tenants; |
|
|
|
|
market trends; and |
|
|
|
|
projected capital expenditures. |
Forward-looking statements are based on estimates as of the date of this report. The Company
disclaims any obligation to publicly release the results of any revisions to these forward-looking
statements reflecting new estimates, events or circumstances after the date of this report.
Overview
The Company is a fully-integrated, self-administered and self-managed REIT that invests in
specialty office buildings for the medical profession, including medical offices, ambulatory
surgery and diagnostic centers. The Company focuses on the ownership, development,
redevelopment, acquisition and management of strategically located medical office buildings and
other healthcare related facilities primarily in the southeastern United States. The Company has
been built around understanding and addressing the specialized real estate needs of the healthcare
industry. The Company believes the southeastern United States is a large and growing market with
favorable macro healthcare trends and favorable demographic trends that prompt expanding healthcare
needs.
The Company derives a significant portion of its revenues from rents received from tenants under
existing leases in medical office buildings and other healthcare related facilities. The Companys
portfolio is stable with a 94.1% occupancy rate as of September 30, 2006, and favorable leases
generally with consumer price index, or CPI, increases and cost pass throughs to the tenants. The
Company derives a lesser portion of its revenues from fees that are paid for managing and
developing medical office buildings and other healthcare related facilities for third parties. The
Companys management believes a strong internal property management capability is a vital component
of the Companys business, both for the properties the Company owns and for those that the Company
manages. Strong internal property management allows the Company to control costs, increase tenant
satisfaction, and reduce tenant turnover, which reduces capital costs.
13
The Companys management team has developed long-term and extensive relationships through
developing and maintaining modern, customized medical office buildings and healthcare related
facilities. Approximately 79% of the net rentable square feet of the Companys wholly-owned
properties are situated on hospital campuses. As such, the Company believes its assets occupy a
premier franchise location in relationship to local hospitals, providing its properties with a
distinct competitive advantage over alternative medical office space in an area. The Company
believes that its property locations and relationships with hospitals will allow the Company to
capitalize on the increasing healthcare trend of outpatient procedures.
The Companys growth strategy includes leveraging strategic relationships for new developments and
off-market acquisitions. The Company will also continue to enter into development joint ventures
with hospitals and physicians. The Company is active in seeking new client relationships in new
markets. During the nine months ended September 30, 2006, the Company acquired properties totaling
approximately $100.2 million.
As of September 30, 2006, the Companys portfolio consisted of 111 medical office buildings and
healthcare related facilities, serving 27 hospital systems in ten states. The Companys aggregate
portfolio was comprised of:
|
|
50 wholly owned properties; |
|
|
four joint venture properties; and |
|
|
57 properties owned by third parties. |
At September 30, 2006, the Companys aggregate portfolio contains approximately 5.4 million net
rentable square feet, consisting of approximately 2.6 million net rentable square feet from
wholly-owned properties, approximately 0.3 million net rentable square feet from joint venture
properties, and approximately 2.5 million net rental square feet from properties owned by third
parties and managed by the Company.
Factors Which May Influence Future Results of Operations
Generally, the Companys revenues and expenses have remained consistent except for development fees
and changes in the fair value of interest rate swap agreements reflected in interest expense.
Development fees from wholly-owned and consolidated joint venture projects are eliminated in
consolidation and will continue to vary to the extent there are fees from third party projects.
Changes in fair values related to the Companys interest rate swap agreements, which vary from
period to period based on changes in market interest rates, are recorded in interest expense.
Generally, increases (decreases) in market interest rates will increase (decrease) the fair value
of the derivative, which will decrease (increase) current period interest expense for the change in
fair value. During the fourth quarter of 2006, the Company closed several derivative transactions
and entered into new agreements with the appropriate hedge documentation in place, which will
reduce the variances previously experienced in interest expense.
The Company has used, and will continue to use, external consultants to assist management with the
documentation, remediation, and testing of financial reporting internal controls in order to comply
with Section 404 of the Sarbanes-Oxley Act of 2002. These costs are variable and may be
significant depending on the volume of remediation and testing necessary to be in compliance with
Section 404 reporting requirements of the Sarbanes-Oxley Act of 2002 at December 31, 2006.
Critical Accounting Policies
The Companys discussion and analysis of financial condition and results of operations are based
upon the Companys condensed consolidated financial statements and the Companys Predecessors
condensed combined financial statements, which have been prepared on the accrual basis of
accounting in conformity with GAAP. All significant intercompany balances and transactions have
been eliminated in consolidation and combination.
14
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 at the date of
the financial statements and the reported amount of revenues and expenses in the reporting period.
The Companys actual results may differ from these estimates. Management has provided a summary of
the Companys significant accounting policies in Note 2 to the Companys consolidated and combined
financial statements included in its Annual Report on Form 10-K for the year ended December 31,
2005. Critical accounting policies are those judged to involve accounting estimates or assumptions
that may be material due to the levels of subjectivity and judgment necessary to account for
uncertain matters or susceptibility of such matters to change. Other companies in similar
businesses may utilize different estimation policies and methodologies, which may impact the
comparability of the Companys results of operations and financial condition to those companies.
Investments in Real Estate
Acquisition of real estate. The price that the Company pays to acquire a property is impacted by
many factors, including the condition of the buildings and improvements, the occupancy of the
building, the existence of above and below market tenant leases, the creditworthiness of the
tenants, favorable or unfavorable financing, above or below market ground leases and numerous other
factors. Accordingly, the Company is required to make subjective assessments to allocate the
purchase price paid to acquire investments in real estate among the assets acquired and liabilities
assumed based on the Companys estimate of the fair values of such assets and liabilities. This
includes determining the value of the buildings and improvements, land, any ground leases, tenant
improvements, in-place tenant leases, tenant relationships, the value (or negative value) of above
(or below) market leases and any debt assumed from the seller or loans made by the seller to the
Company. Each of these estimates requires significant judgment and some of the estimates involve
complex calculations. The Companys calculation methodology is summarized in Note 2 to the
Companys audited consolidated and combined financial statements included in its Annual Report on
Form 10-K for the year ended December 31, 2005. These allocation assessments have a direct impact
on the Companys results of operations because if the Company were to allocate more value to land
there would be no depreciation with respect to such amount or if the Company were to allocate more
value to the buildings as opposed to allocating to the value of tenant leases, this amount would be
recognized as an expense over a much longer period of time, since the amounts allocated to
buildings are depreciated over the estimated lives of the buildings whereas amounts allocated to
tenant leases are amortized over the terms of the leases. Additionally, the amortization of value
(or negative value) assigned to above (or below) market rate leases is recorded as an adjustment to
rental revenue as compared to amortization of the value of in-place leases and tenant
relationships, which is included in depreciation and amortization in the Companys consolidated and
combined statements of operations.
Useful lives of assets. The Company is required to make subjective assessments as to the useful
lives of the Companys properties for purposes of determining the amount of depreciation to record
on an annual basis with respect to the Companys investments in real estate. These assessments have
a direct impact on the Companys net income (loss) because if the Company were to shorten the
expected useful lives of the Companys investments in real estate the Company would depreciate such
investments over fewer years, resulting in more depreciation expense on an annual basis.
Asset impairment valuation. The Company reviews the carrying value of the Companys properties when
circumstances, such as adverse market conditions, indicate a potential impairment may exist. The
Company bases its review on an estimate of the future cash flows (excluding interest charges)
expected to result from the real estate investments use and eventual disposition. The Company
considers factors such as future operating income, trends and prospects, as well as the effects of
leasing demand, competition and other factors. If the Companys evaluation indicates that it may be
unable to recover the carrying value of a real estate investment, an impairment loss is recorded to
the extent that the carrying value exceeds the estimated fair value of the property. These losses
have a direct impact on the Companys net income because recording an impairment loss results in an
immediate negative adjustment to operating results. The evaluation of anticipated cash flows is
highly subjective and is based in part on assumptions regarding future occupancy, rental rates and
capital requirements that could differ materially from actual results in future periods. Since cash
flows on properties considered to be long-lived assets to be held and used are considered on an
undiscounted basis to determine whether an asset has been impaired, the Companys strategy of
holding properties over the long-term directly decreases the likelihood of recording an impairment
loss. If the Companys strategy changes or market conditions otherwise dictate an earlier sale
date, an impairment loss may be recognized and such loss could be material. If the Company
determines that impairment has occurred, the affected assets must be reduced to their fair value.
No such impairment losses have been recognized to date. The Company estimates the fair value of
rental properties utilizing a discounted cash flow analysis that includes projections of future
revenues, expenses and capital improvement costs, similar to the income approach that is commonly
utilized by appraisers. The Company reviews the value of Goodwill using an income approach on an
annual basis and when circumstances indicate a potential impairment may exist.
15
Revenue Recognition
Rental income related to non-cancelable operating leases is recognized using the straight line
method over the terms of the tenant leases. Deferred rents included in the Companys consolidated
balance sheets represent the aggregate excess of rental revenue recognized on a straight line basis
over the rental revenue that would be recognized under the cash flow received, based on the terms
of the leases. The Companys leases generally contain provisions under which the tenants reimburse
the Company for all property operating expenses and real estate taxes incurred by the Company. Such
reimbursements are recognized in the period that the expenses are incurred. Lease termination fees
are recognized when the related leases are canceled and the Company has no continuing obligation to
provide services to such former tenants. As discussed above, the Company recognizes amortization of
the value of acquired above or below market tenant leases as a reduction of rental income in the
case of above market leases or an increase to rental revenue in the case of below market leases.
The Company receives fees for property management and development and consulting services from time
to time from third parties which is reflected as fee revenue. Management fees are generally based
on a percentage of revenues for the month as defined in the related property management agreements.
Development and consulting fees are recorded on a percentage of completion method using
managements best estimate of time and costs to complete projects. The Company has a long history
of developing reasonable and dependable estimates related to development or consulting contracts
with clear requirements and rights of the parties to the contracts. Although not frequent,
occasionally revisions to estimates of costs are necessary and are reflected as a change in
estimate when known. Due to the amount of control retained by the Company, most joint venture
developments will be consolidated, therefore those development fees will be eliminated in
consolidation. Other income shown in the statement of operations, generally includes interest
income, primarily from the amortization of unearned income on a sales-type capital lease recognized
in accordance with Statement of Financial Accounting Standards No. 13, and other income incidental
to the Companys operations and is recognized when earned.
The Company must make subjective estimates as to when the Companys revenue is earned and the
collectibility of the Companys accounts receivable related to minimum rent, deferred rent, expense
reimbursements, lease termination fees and other income. The Company specifically analyzes accounts
receivable and historical bad debts, tenant concentrations, tenant creditworthiness, and current
economic trends when evaluating the adequacy of the allowance for bad debts. These estimates have a
direct impact on the Companys net income because a higher bad debt allowance would result in lower
net income, and recognizing rental revenue as earned in one period versus another would result in
higher or lower net income for a particular period.
REIT Qualification Requirements
The Company is subject to a number of operational and organizational requirements to qualify and
then maintain qualification as a REIT. If the Company does not qualify as a REIT, its income would
become subject to U.S. federal, state and local income taxes at regular corporate rates that would
be substantial and the Company cannot re-elect to qualify as a REIT for five years. The resulting
adverse effects on the Companys results of operations, liquidity and amounts distributable to
stockholders would be material.
Results of Operations
The Companys income (loss) from operations is generated primarily from operations of its
properties and development and property management fee revenue. The changes in operating results
from period to period reflect changes in existing property performance and changes in the number of
properties due to development, acquisition, or disposition of properties.
16
Property Summary
The following is an activity summary of the Companys property portfolio (excluding unconsolidated
real estate partnerships) for the nine months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Predecessor |
|
|
|
2006 |
|
|
2005 |
|
Properties at January 1 |
|
|
44 |
|
|
|
44 |
|
Consolidation of Rocky Mount MOB LLC |
|
|
1 |
|
|
|
|
|
Acquisitions |
|
|
6 |
|
|
|
|
|
Disposition |
|
|
(1 |
) |
|
|
|
|
Development that began rental operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties at September 30 |
|
|
50 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
The above table excludes East Jefferson Medical Specialty Building, which is accounted for as
a sales-type capital lease.
Comparison of the three months ended September 30, 2006 and September 30, 2005
Overview. During the three months ended September 30, 2006, the Companys portfolio changed due to
the acquisition of two properties and the disposition of one property. There were no changes to
the Companys property portfolio during the three months ended September 30, 2005.
Revenue. Total revenue increased $2.4 million, or 20.8%, for the three months ended September 30,
2006. This increase is primarily due to an increase in property rental revenue of $2.7 million
offset by lower development fees of $0.2 million.
Property rental revenue increased $2.7 million, or 25.6%, for the three months ended September 30,
2006. Same-property rental revenue increased $0.3 million, or 3.2%, which is due primarily to
general increases in rent related to CPI escalation clauses. Rental revenue from acquisition
properties increased $2.4 million.
Property operating expenses. Property operating expenses increased $1.0 million, or 24.3%, for the
three months ended September 30, 2006. Same-property operating expenses increased approximately
$0.1 million, or 3.2%. Operating expenses from acquisition properties increased $0.9 million.
Interest expense. Interest expense increased approximately $1.9 million, or 80.0%, for the three
months ended September 30, 2006. Excluding the change in interest expense in each period due to
changes in interest rate swap fair values, interest expense increased $0.5 million from $3.3
million for the three months ended September 30, 2005 to $3.8 million for the three months ended
September 30, 2006. This increase is primarily due to the increased borrowing to fund the
acquisitions during 2006 and increased variable interest rates offset by the change in the
Companys capital structure as a result of the Offering. Proceeds from the Offering were used in
part to reduce debt principal balances which in turn reduced interest expense.
Changes in interest rate swap fair values are recorded as a decrease or increase to interest
expense. For the three months ended September 30, 2006, the interest rate swap agreement fair
values decreased $0.4 million, which resulted in an increase in interest expense of $0.4 million.
For the three months ended September 30, 2005, the interest rate swap agreement fair values
increased $0.9 million, which resulted in a decrease in interest expense of the same amount. For
the three months ended September 30, 2006, there were five derivative interest rate swap agreements
with an aggregate notional amount of $43.7 million versus seven instruments with an aggregate
notional amount of $80.7 million in the same quarter in 2005.
Depreciation and amortization expenses. Depreciation and amortization expenses increased $5.2
million, or 203.4%, for the three months ended September 30, 2006. Same-property depreciation and
amortization expenses increased approximately $4.4 million, or 174.4%. The increase was primarily
due to the increase in the cost basis for the real estate
properties and intangible assets as a result of the purchase accounting for the Formation
Transactions on November 1, 2005. Depreciation and amortization expenses from acquisition
properties increased $0.8 million.
17
General and administrative expenses. General and administrative expenses decreased $0.3 million,
or 19.2%, for the three months ended September 30, 2006 compared to the same period in 2005
primarily due to decreased personnel costs. During the three months ended September 30, 2006,
performance based compensation decreased $0.2 million compared to the same period for 2005.
Increased capitalized development costs decreased general and administrative expenses by $0.2
million due to a greater number of wholly-owned and consolidated joint venture projects under
development. For the three months ended September 30, 2006, financial statement audit expense
decreased compared to the three months ended September 30, 2005. However, this decrease was offset
by first year expenses related to implementing Section 404 of the Sarbanes Oxley Act of 2002.
Comparison of the nine months ended September 30, 2006 and September 30, 2005
Revenue. Total revenue increased $6.0 million, or 17.4%, for the nine months ended September 30,
2006. This increase is primarily due to the five new buildings added in 2006 which resulted in an
increase in property rental revenue of $5.3 million.
Property rental revenue increased $6.5 million, or 20.2%, for the nine months ended September 30,
2006. Same-property rental revenue increased $1.2 million, or 3.9%, which is due primarily to
general increases in rent related to CPI escalation clauses. Rental revenue from acquisition and
development properties increased $5.3 million.
Fee revenue decreased $0.4 million, or 32.2%, for the nine months ended September 30, 2006 due to
the timing of services performed related to third party development projects. For the nine months
ended September 30, 2006, there were no significant third party development projects compared to
three significant projects for the nine months ended September 30, 2005 for which development fees
were earned.
Property operating expenses. Property operating expenses increased $2.4 million, or 20.2%, for the
nine months ended September 30, 2006. Same-property operating expenses increased approximately
$0.7 million, or 6.1%. Acquisition and new development property operating expenses increased $1.7
million.
Interest expense. Interest expense increased $2.6 million, or 34.5%, for the nine months ended
September 30, 2006. Excluding the decrease in interest expense in each period due to changes in
interest rate swap fair values, interest expense increased approximately $0.5 million from $9.6
million for the nine months ended September 30, 2005. This increase is primarily due to the
increased borrowing to fund the acquisitions during 2006 and increased variable interest rates
offset by the change in the Companys capital structure as a result of the Offering. Proceeds from
the Offering were used in part to reduce debt principal balances which in turn reduced interest
expense.
Changes in interest rate swap fair values are recorded as a decrease or increase to interest
expense. For the nine months ended September 30, 2006, the interest rate swap agreement fair
values increased $59,000, which resulted in a reduction of interest expense of the same amount.
For the nine months ended September 30, 2005, the interest rate swap agreement fair values
increased $2.1 million, which resulted in a reduction of interest expense of the same amount. For
the nine months ended September 30, 2006, there were five derivative interest rate swap agreements
with an aggregate notional amount of $43.7 million versus seven instruments with an aggregate
notional amount of $80.7 million in the same quarter in 2005.
Depreciation and amortization expenses. Depreciation and amortization expenses increased $14.0
million, or 184.5%, for the nine months ended September 30, 2006. Same-property depreciation and
amortization expenses increased approximately $11.2 million, or 148.3%. The increase was primarily
due to the increase in the cost basis for the real estate properties and intangible assets as a
result of the purchase accounting for the Formation Transactions on November 1, 2005. Depreciation
and amortization expenses from acquisition properties increased $2.8 million.
General and administrative expenses. General and administrative expenses increased $0.4 million,
or 9.0% for the nine months ended September 30, 2006 primarily due to an increase in professional
fees related to public company administrative expenses including increased audit, legal, tax, and
Sarbanes-Oxley related compliance fees.
18
Cash Flows
Comparison of the nine months ended September 30, 2006 and September 30, 2005
Cash provided by operating activities was $12.7 million and $9.7 million during the nine months
ended September 30, 2006 and 2005, respectively. The increase of $3.0 million was primarily due to
(1) a $1.8 million increase in earnings before non-cash depreciation, amortizations and change in
fair value of interest rate swap agreements and (2) a $1.4 million net increase due to changes in
operating assets and liabilities primarily resulting from increased collected prepaid rent,
increased accruals for interest, and decreased accounts receivable.
Cash used in investing activities was $94.8 million and $5.0 million during the nine months ended
September 30, 2006 and 2005, respectively. The increase of $89.8 million was primarily due to
investments in real estate properties and businesses offset by the proceeds from the sale of real
estate property and partnership interests.
Cash provided by (used in) financing activities was $74.6 million and ($5.9 million) for the nine
months ended September 30, 2006 and 2005, respectively. The net change of $80.5 million was
primarily due to net proceeds from debt of $83.7 million, primarily drawn from the Credit Facility
in order to fund the current period acquisitions.
Construction in Progress
The following is a summary of the construction in progress balance (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
Completion |
|
|
Net Rentable |
|
|
Investment |
|
|
Total |
|
|
|
Percentage |
Property |
|
Location |
|
Date |
|
|
Square Feet |
|
|
to Date |
|
|
Investment |
|
|
|
Leased |
Carolina Forest Medical Plaza |
|
Horry County, SC |
|
2Q 2007 |
|
|
|
39,000 |
|
|
$ |
2,664 |
|
|
$ |
7,425 |
|
|
|
43.2 |
% |
Lancaster Rehabilitation Hospital |
|
Lancaster, PA |
|
2Q 2007 |
|
|
|
52,800 |
|
|
|
1,870 |
|
|
|
12,720 |
|
|
|
100.0 |
% |
Land and pre-construction developments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,800 |
|
|
$ |
6,234 |
|
|
$ |
20,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 25, 2006, the Company broke ground on the Lancaster General Health Campus Medical
Office Building. The Company is developing the three-story medical office building that will be
anchored by an Ambulatory Surgery Center (ASC), to be called Physicians Surgery Center, which will
include four operating rooms and two procedure rooms. The ASC ownership is composed of an operating
joint venture that includes Lancaster General Hospital and several local area surgeons. The
project is scheduled for completion in the fourth quarter of 2007.
Liquidity and Capital Resources
As of September 30, 2006, the Company had $2.4 million available in cash and cash equivalents. The
Company will be required to distribute at least 90% of the Companys net taxable income, excluding
net capital gains, to the Companys stockholders on an annual basis due to qualification
requirements as a REIT. Therefore, as a general matter, it is unlikely that the Company will have
any substantial cash balances that could be used to meet the Companys liquidity needs. Instead,
these needs must be met from cash generated from operations and external sources of capital.
The Company has a $130.0 million unsecured revolving Credit Facility with a syndicate of financial
institutions (including Bank of America, N.A., Citicorp North America, Inc. and Branch Banking &
Trust Company) (collectively, the Lenders). The Credit Facility is available to fund working
capital and for other general corporate purposes; to finance acquisition and development activity;
and to refinance existing and future indebtedness. The Credit Facility permits the Company to
borrow up to $130.0 million of revolving loans, with sub-limits of $25.0 million for swingline
loans and $25.0 million for letters of credit.
The Credit Facility shall terminate and all amounts outstanding thereunder shall be due and payable
in full, three years from November 1, 2005, subject to a one-year extension at the Companys
option. The Credit Facility also allows for up to $120.0 million of increased availability (to a
total aggregate available amount of $250.0 million), at the Companys option but subject to each
Lenders option to increase its commitment. The interest rate on loans under the Credit Facility
equals,
19
at the Companys election, either (1) LIBOR plus a margin of between 100 to 130 basis
points based on the Companys leverage ratio or (2) the higher of the federal funds rate plus 50
basis points or Bank of America, N.A.s prime rate.
The Credit Facility contains customary terms and conditions for credit facilities of this type,
including: (1) limitations on the Companys ability to (A) incur additional indebtedness, (B) make
distributions to the Companys stockholders, subject to complying with REIT requirements, and (C)
make certain investments; (2) maintenance of a pool of unencumbered assets subject to certain
minimum valuations thereof; and (3) requirements for us to maintain certain financial coverage
ratios. These customary financial coverage ratios and other conditions include a maximum leverage
ratio (65%, with flexibility for one two quarter increase to not more than 75%), minimum fixed
charge coverage ratio (150%), maximum combined secured indebtedness (50%), maximum recourse
indebtedness (15%), maximum unsecured indebtedness (60%, with flexibility for one two quarter
increase to not more than 75%), minimum unencumbered interest coverage ratio (175%, with the
flexibility for one two quarter decrease to 150%) and minimum combined tangible net worth ($30
million plus 85% of net proceeds of equity issuances by the Company and its subsidiaries after
November 1, 2005).
As of September 30, 2006, there was $29.3 million available under the Credit Facility. There was
$97.9 million outstanding at September 30, 2006 and $2.8 million of availability is restricted
related to outstanding letters of credit. On October 16, 2006, the Company borrowed $4.0 million
to fund the quarterly distribution and development projects. The proceeds from the Methodist
Professional Center I financing were used to reduce the balance under the Credit Facility.
The Company believes that it will have sufficient capital resources as a result of operations and
the borrowings in place to fund ongoing operations.
On September 15, 2006, the Company declared a dividend to common stockholders of record and the
Operating Partnership declared a distribution to holders of record of OP units, in each case as of
September 26, 2006, totaling $4.3 million or $0.35 per share or unit, covering the period from July
1, 2006 through September 30, 2006. The dividend and distribution were paid on October 17, 2006.
The dividend and distribution were equivalent to an annual rate of $1.40 per share and OP unit.
Long-Term Liquidity Needs
The Companys principal long-term liquidity needs consist primarily of new property development,
property acquisitions, principal payments under various mortgages and other credit facilities and
non-recurring capital expenditures. The Company does not expect that its net cash provided by
operations will be sufficient to meet all of these long-term liquidity needs. Instead, the Company
expects to finance new property developments through modest cash equity capital contributed by the
Company together with construction loan proceeds, as well as through cash equity investments by its
tenants. The Company expects to fund property acquisitions through a combination of borrowings
under its Credit Facility and traditional secured mortgage financing. In addition, the Company
expects to use OP units issued by the operating partnership to acquire properties from existing
owners seeking a tax deferred transaction. The Company expects to meet other long-term liquidity
requirements through net cash provided by operations and through additional equity and debt
financings, including loans from banks, institutional investors or other lenders, bridge loans,
letters of credit, and other lending arrangements, most of which will be secured by mortgages. The
Company may also issue unsecured debt in the future. However, in view of the Companys strategy to
grow its portfolio over time, the Company does not, in general, expect to meet its long-term
liquidity needs through sales of its properties. In the event that, notwithstanding this intent,
the Company was in the future to consider sales of its properties from time to time, the proceeds
that would be available to the Company from such sales, may be reduced by amounts that the Company
may owe under the tax protection agreements entered into in connection with the Formation
Transactions or those properties would need to be sold in a tax deferred transaction which would
require reinvestment of the proceeds in another property. In addition, the Companys ability to
sell certain of its assets could be adversely affected by the general illiquidity of real estate
assets and certain additional factors particular to our portfolio such as the specialized nature of
its target property type, property use restrictions and the need to obtain consents or waivers of
rights of first refusal or rights of first offers from ground lessors in the case of sales of its
properties that are subject to ground leases.
The Company intends to repay indebtedness incurred under its Credit Facility from time to time, for
acquisitions or otherwise, out of cash flow and from the proceeds of additional debt or equity
issuances. In the future, the Company may seek to increase the amount of the Credit Facility,
negotiate additional credit facilities or issue corporate debt instruments. Any indebtedness
incurred or issued by the Company may be secured or unsecured, short-, medium- or long-term, fixed
or
20
variable interest rate and may be subject to other terms and conditions the Company deems
acceptable. The Company intends to refinance at maturity the mortgage notes payable that have
balloon payments at maturity.
Contractual Obligations
The following table summarizes the Companys contractual obligations as of September 30, 2006,
including the maturities and scheduled principal repayments and the commitments due in connection
with the Companys ground leases and operating leases for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of 2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Thereafter |
|
|
Total |
|
Obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt principal payments and
maturities (1) |
|
$ |
10,423 |
|
|
$ |
52,457 |
|
|
$ |
125,400 |
|
|
$ |
16,438 |
|
|
$ |
1,456 |
|
|
$ |
46,596 |
|
|
$ |
252,770 |
|
Standby letters of credit (2) |
|
|
500 |
|
|
|
2,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,852 |
|
Interest payments (3) |
|
|
3,619 |
|
|
|
12,671 |
|
|
|
7,519 |
|
|
|
3,639 |
|
|
|
3,032 |
|
|
|
7,685 |
|
|
|
38,165 |
|
Ground leases (4) |
|
|
49 |
|
|
|
195 |
|
|
|
195 |
|
|
|
195 |
|
|
|
195 |
|
|
|
6,977 |
|
|
|
7,806 |
|
Operating leases (5) |
|
|
88 |
|
|
|
334 |
|
|
|
400 |
|
|
|
406 |
|
|
|
350 |
|
|
|
384 |
|
|
|
1,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,679 |
|
|
$ |
68,009 |
|
|
$ |
133,514 |
|
|
$ |
20,678 |
|
|
$ |
5,033 |
|
|
$ |
61,642 |
|
|
$ |
303,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes notes payable under the Companys Credit Facility |
|
(2) |
|
As collateral for performance on a mortgage note payable, the Company is
contingently liable under a standby letter of credit, which also reduces the availability
under the Credit Facility |
|
(3) |
|
Assumes one-month LIBOR 5.32% and Prime Rate of 8.25% |
|
(4) |
|
Substantially all of the ground leases effectively limit our control over various
aspects of the operation of the applicable property, restrict our ability to transfer the
property and allow the lessor the right of first refusal to purchase the building and
improvements. All of the ground leases provide for the property to revert to the lessor for no
consideration upon the expiration or earlier termination of the ground lease. |
|
(5) |
|
Payments under operating lease agreements relate to various of our properties
equipment and office space leases. The future minimum lease commitments under these leases are
as indicated. |
Off-Balance Sheet Arrangements
The Company guarantees debt in connection with certain of its development activities, including
joint ventures. The Company has guaranteed, in the event of a default, the mortgage notes payable
for one limited liability company. An initial liability of $0.1 million has been recorded for this
guarantee using expected present value measurement techniques. The guarantee, with a principal
balance of $9.1 million at September 30, 2006, will be released upon the full repayment of the
mortgage note payable, which matures in December 2006. The mortgage is collateralized by property
and the collateral will revert to the guarantor in the event the guarantee is performed.
As the Company has never had to perform on debt that the Company has guaranteed, the probability
the Company will have to perform on any guarantees in the future is minimal and therefore the
Company does not expect the Companys guarantees to have a material impact on the Companys
financial statements.
Real Estate Taxes
The Companys leases generally require the tenants to be responsible for all real estate taxes.
Inflation
Inflation in the United States has been relatively low in recent years and did not have a material
impact on the results of operations for the periods shown in the consolidated and combined
financial statements. Although the impact of inflation has been relatively insignificant in recent
years, it remains a factor in the United States economy and may increase the cost of acquiring or
replacing properties.
Seasonality
The Company does not consider its business to be subject to material seasonality fluctuations.
21
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for
uncertainty in tax positions. FIN 48 requires that the Company recognizes the impact of a tax
position in its financial statements if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of
January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting
FIN 48 on its financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements, or SAB 108. SAB 108 provides interpretive guidance on how the effects of
prior-year uncorrected misstatements should be considered when quantifying misstatements in the
current year financial statements. SAB 108 requires registrants to quantify misstatements using
both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate
whether either approach results in a misstatement that, when all relevant quantitative and
qualitative factors are considered, is material. If prior year errors that had been previously
considered immaterial now are considered material based on either approach, no restatement is
required so long as management properly applied its previous approach and all relevant facts and
circumstances were considered. If prior years are not restated, the cumulative effect adjustment is
recorded in opening accumulated earnings as of the beginning of the fiscal year of adoption. SAB
108 is effective for fiscal years ending after November 15, 2006. The Company currently does not
believe SAB 108 will have a material impact on its results from operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys future income, cash flows and fair values relevant to financial instruments are
dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse
changes in market prices and interest rates. The Company uses some derivative financial instruments
to manage, or hedge, interest rate risks related to the Companys borrowings. The Company does not
use derivatives for trading or speculative purposes and only enters into contracts with major
financial institutions based on their credit rating and other factors.
As of September 30, 2006, the Company had $252.8 million of consolidated debt outstanding
(excluding any discounts or premiums related to assumed debt). Of the Companys total
consolidated debt, $122.7 million, or 48.5%, was variable rate debt that are not subject to
variable to fixed rate interest rate swap agreements. Of the Companys total indebtedness, $130.1
million, or 51.5%, was subject to fixed interest rates, including variable rate debt that is
subject to variable to fixed rate swap agreements.
If LIBOR were to increase by 100 basis points, the increase in interest expense on the Companys
variable rate debt would decrease future annual earnings and cash flows by approximately $1.2
million. Interest rate risk amounts were determined by considering the impact of hypothetical
interest rates on the Companys financial instruments. These analyses do not consider the effect of
any change in overall economic activity that could occur in that environment. Further, in the event
of a change of that magnitude, the Company may take actions to further mitigate the Companys
exposure to the change. However, due to the uncertainty of the specific actions that would be taken
and their possible effects, these analyses assume no changes in the Companys financial structure.
ITEM 4. CONTROLS AND PROCEDURES
The Companys Chief Executive Officer and Chief Financial Officer, based on the evaluation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule
15d-15, have concluded that as of the end of the period covered by this report, the Companys
disclosure controls and procedures were effective to give reasonable assurances to the timely
collection, evaluation and disclosure of information relating to the Company that would potentially
be subject to disclosure under the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.
During the nine month period ended September 30, 2006, there was no change in the Companys
internal control over financial reporting that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
22
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can
provide only reasonable, not absolute assurance that it will detect or uncover failures within the
Company to disclose material information otherwise required to be set forth in our periodic
reports.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any material litigation nor, to the Companys knowledge, is any
material litigation pending or threatened against us, other than routine litigation arising out of
the ordinary course of business or which is expected to be covered by insurance and not expected to
harm the Companys business, financial condition or results of operations.
ITEM 1A. RISK FACTORS
See the Companys Annual Report on Form 10-K for the year ended December 31, 2005, for risk
factors. There have been no significant changes to the Companys risk factors during the three and
nine months ended September 30, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On September 28, 2006, the Operating Partnership issued an aggregate of 289,197 OP units, having an
aggregate value of $6.0 million. These OP units were issued in exchange for ownership interest in
limited liability companies as part of private placement transactions under Section 4(2) of the
Securities Act of 1933, as amended (the Securities Act) and the rules and regulations promulgated
thereunder. In light of the manner of sale and information obtained by the Operating Partnership
from persons receiving OP units in connection with these transactions, the Opearting Partnership
believes it may rely on this exemption. OP units are redeemable for the cash equivalent thereof at
a time one year after the date of issuance, or, at the option of the Company and Operating
Partnership, exchangeable into shares of common stock in the Company on a one-for-one basis. No
underwriters were used in connection with such issuance.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
23
ITEM 6. EXHIBITS
10.1 |
|
Amendment No. 1 to Credit Agreement and Waiver, dated August 23, 2006 by and among Cogdell
Spencer LP,
Cogdell Spencer Inc., each subsidiary of Cogdell Spencer LP to the guaranty, several lenders
and Bank of
America, N.A., as the administrative agent for the Lenders, Swing Line Lender and L/C
Issuer. |
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002. |
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002. |
|
32.1 |
|
Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adapted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
COGDELL SPENCER INC.
|
|
|
|
|
Registrant |
|
|
|
|
|
|
|
Date: November 14, 2006 |
|
/s/ Frank C. Spencer |
|
|
|
|
|
|
|
|
|
Frank C. Spencer |
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
Date: November 14, 2006 |
|
/s/ Charles M. Handy |
|
|
|
|
|
|
|
|
|
Charles M. Handy |
|
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
25