UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
COMMISSION FILE NUMBER: 000-51609
Inland American Real Estate Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
2901 Butterfield Road, Oak Brook, Illinois
(Address of principal executive offices)
630-218-8000
(Registrant’s telephone number, including area code)
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 the filing requirements for the past 90 days.
Yes X No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No X
As of August 5, 2011, there were 860,237,724 shares of the registrant’s common stock outstanding.
INLAND AMERICAN REAL ESTATE TRUST, INC.
TABLE OF CONTENTS
Item 1.
Consolidated Statements of Operations and Other Comprehensive Income for the three months and six months ended June 30, 2011 and 2010 (unaudited)
Item 2.
Item 3.
Item 4.
Item 1A.
Item 5.
Item 6.
This Quarterly Report on Form 10-Q includes references to certain trademarks. Courtyard by Marriott®, Marriott®, Marriott Suites®, Residence Inn by Marriott® and SpringHill Suites by Marriott® trademarks are the property of Marriott International, Inc. (“Marriott”) or one of its affiliates. Doubletree®, Embassy Suites®, Hampton Inn®, Hilton Garden Inn®, Hilton Hotels® and Homewood Suites by Hilton® trademarks are the property of Hilton Hotels Corporation (“Hilton”) or one or more of its affiliates. Hyatt Place® trademark is the property of Hyatt Corporation (“Hyatt”). Intercontinental Hotels ® trademark is the property of IHG. Wyndham ® and Baymont Inn & Suites® trademarks are the property of Wyndham Worldwide. Comfort Inn® trademark is the property of Choice Hotels International. The Aloft service name is the property of Starwood. For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be included wherever the above-referenced terms are used.
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(A Maryland Corporation)
Consolidated Balance Sheets
(Dollar amounts in thousands, except share data)
Assets:
Investment properties:
Land
Building and other improvements
Construction in progress
Total
Less accumulated depreciation
Net investment properties
Cash and cash equivalents
Restricted cash and escrows
Investment in marketable securities
Investment in unconsolidated entities
Accounts and rents receivable (net of allowance of $9,340 and $7,905)
Intangible assets, net
Deferred costs and other assets
Total assets
Liabilities:
Mortgages, notes and margins payable, net
Accounts payable and accrued expenses
Distributions payable
Accrued real estate taxes
Advance rent and other liabilities
Intangible liabilities, net
Other financings
Total liabilities
Noncontrolling redeemable interests
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.001 par value, 40,000,000 shares authorized, none outstanding
Common stock, $.001 par value, 1,460,000,000 shares authorized, 858,163,737 and 846,406,774 shares issued and outstanding
Additional paid in capital (net of offering costs of $828,434, of which $788,272 was paid to affiliates)
Accumulated distributions in excess of net loss
Accumulated other comprehensive income
Total Company stockholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
See accompanying notes to the consolidated financial statements.
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Consolidated Statements of Operations and Other Comprehensive Income
Income:
Rental income
Tenant recovery income
Other property income
Lodging income
Total income
Expenses:
General and administrative expenses
Property operating expenses
Lodging operating expenses
Real estate taxes
Depreciation and amortization
Business manager management fee
Provision for asset impairment
Total expenses
Operating income
Interest and dividend income
Other income (expense), net
Interest expense
Equity in earnings (losses) of unconsolidated entities
Realized gain and impairment on securities, net
Loss before income taxes
Income tax expense
Net loss from continuing operations
Income from discontinued operations, net
Net loss
Less: Net income attributable to noncontrolling interests
Net loss attributable to Company
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Other comprehensive loss:
Unrealized gain (loss) on investment securities
Reversal of unrealized (gain) loss to realized gain (loss) and impairment on investments securities
Unrealized gain (loss) on derivatives
Comprehensive loss
Net loss, per common share, from continuing operations
Income, per common share, from discontinued operations
Net loss, per common share, basic and diluted
Weighted average number of common shares outstanding, basic and diluted
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Consolidated Statements of Changes in Equity
(Dollar amounts in thousands)
For the six months ended June 30, 2011
(unaudited)
Balance at January 1, 2011
Net income (loss)
Reversal of unrealized gain to realized gain on investment securities
Distributions declared
Adjustment to redemption value for noncontrolling redeemable interest
Proceeds from distribution reinvestment program
Share repurchase program
Balance at June 30, 2011
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For the six months ended June 30, 2010
Balance at January 1, 2010
Unrealized gain on investment securities
Unrealized gain on derivatives
Contributions from noncontrolling interests
Balance at June 30, 2010
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Consolidated Statements of Cash Flows
Cash flows from operations:
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of above and below market leases, net
Amortization of debt premiums, discounts and financing costs
Straight-line rental income
Provision for asset and notes receivable impairment
Gain on extinguishment of debt
(Gain) loss on sale of property
Equity in (earnings) loss of unconsolidated entities
Distributions from unconsolidated entities
Realized gain on investments in securities, net
Impairment of investments in securities
Other non-cash adjustments
Changes in assets and liabilities:
Accounts and rents receivable
Other assets
Net cash flows provided by operating activities
Cash flows from investing activities:
Purchase of investment properties
Acquired in-place and market lease intangibles, net
Capital expenditures and tenant improvements
Investment in development projects
Sale of investment properties
Purchase of investment securities
Sale of investment securities
Payment of leasing and franchise fees
Purchase of note receivable
Payments from note receivable
Restricted escrows
Net cash flows used in investing activities
Cash flows from financing activities:
Proceeds from the distribution reinvestment plan
Shares repurchased
Distributions paid
Proceeds from mortgage debt and notes payable
Payoffs of mortgage debt
Principal payments of mortgage debt
Proceeds from margin securities debt
Payment of loan fees and deposits
Distributions paid to noncontrolling interests
Distributions paid to noncontrolling redeemable interests
Contributions from noncontrolling interest
Net cash flows provided by (used in) financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, at beginning of period
Cash and cash equivalents, at end of period
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(continued)
Supplemental disclosure of cash flow information:
Tenant and real estate tax liabilities assumed at acquisition
Assumption of mortgage debt at acquisition
Non-cash mortgage discount/premium
Cash paid for interest, net capitalized interest of $5,186 and $1,818
Supplemental schedule of non-cash investing and financing activities:
Property surrendered in exchange for extinguishment of debt
Property acquired through exchange of note receivable
Redemption value adjustment for noncontrolling redeemable interest
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Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except data amounts)
June 30, 2011
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Readers of this Quarterly Report should refer to the audited consolidated financial statements of Inland American Real Estate Trust, Inc. for the year ended December 31, 2010, which are included in the Company’s 2010 Annual Report on Form 10-K, as certain note disclosures contained in such audited consolidated financial statements have been omitted from this Report. In the opinion of management, all adjustments (consisting of normal recurring accruals, except as otherwise noted) necessary for a fair presentation have been included in these financial statements.
(1) Organization
Inland American Real Estate Trust, Inc. (the “Company”) was formed on October 4, 2004 (inception) to acquire and manage a diversified portfolio of commercial real estate, primarily retail properties and multi-family (both conventional and student housing), office, industrial and lodging properties.
The accompanying consolidated financial statements include the accounts of the Company, as well as all wholly owned subsidiaries and consolidated joint venture investments. Wholly owned subsidiaries generally consist of limited liability companies (LLCs) and limited partnerships (LPs). The effects of all significant intercompany transactions have been eliminated.
At June 30, 2011, the Company owned a portfolio of 981 commercial real estate properties compared to 980 properties at June 30, 2010. The breakdown by segment is as follows:
Retail
Lodging
Office
Industrial
Multi-Family
(2) Summary of Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies in the six months ended June 30, 2011. Refer to the Company’s 2010 Form 10-K for a summary of significant accounting policies.
(3) Acquired Properties
The Company records identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination at full fair value. During the six months ended June 30, 2011 and 2010, the Company incurred $503 and $1,205, respectively, of acquisition and transaction costs that were recorded in general and administrative expenses on the consolidated statements of operations and other comprehensive income.
The table below reflects acquisitions for the six months ended June 30, 2011.
Gross Acquisition
Price
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(4) Discontinued Operations
The table below reflects divestiture activity for the six months ended June 30, 2011.
Gross Disposition
For the six months ended June 30, 2011, the Company had proceeds from the sale of investment properties of $24,914, which included the sale of a land parcel held for development. Gains of $1,210 were realized from the two sales.
The Company has presented separately as discontinued operations in all periods the results of operations for all disposed assets in consolidated operations. The Company disposed of two and five assets for the six months ended June 30, 2011 and 2010, respectively.
The components of the Company’s discontinued operations are presented below and include the results of operations for the respective periods that the Company owned such assets or was involved with the operations of such ventures during the six months ended June 30, 2011 and 2010.
Revenues
Expenses (including interest expense and impairments of $0 and $945)
Operating income (loss) from discontinued operations
Gain (loss) on sale of properties
(5) Investment in Partially Owned Entities
Consolidated Entities
On October 11, 2005, the Company entered into a joint venture with Minto (Delaware), LLC, or Minto Delaware who owned all of the outstanding equity of Minto Builders (Florida), Inc. (“MB REIT”) prior to October 11, 2005. MB REIT is not considered a VIE as defined in FASB ASC 810, Consolidation, however the Company has a controlling financial interest in MB REIT, has the direct ability to make major decisions for MB REIT through its voting interests, and holds key management positions in MB REIT. Therefore this entity is consolidated by the Company and the outside ownership interests are reflected as noncontrolling interests in the accompanying consolidated financial statements. Refer to Commitments and Contingencies Footnote 14.
The Company has ownership interests in various other entities that are considered VIEs as defined in ASC 810, and the Company is considered the primary beneficiary of each of these entities. Therefore, these entities are consolidated by the Company. Refer to the Company’s Form 10-K for year-end December 31, 2010 for details on the consolidated entities.
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The applicable amounts for various consolidated VIEs are included in the consolidated balance sheets as presented in the table below.
Mortgages, notes and margins payable
Other liabilities
Net assets
Unconsolidated Entities
The entities listed below are owned by the Company and other unaffiliated parties in joint ventures. Net income, distributions and capital transactions for these properties are allocated to the Company and its joint venture partners in accordance with the respective partnership agreements. Refer to the Company’s Form 10-K for the year ended December 31, 2010 for details of each unconsolidated entity.
These entities are not consolidated by the Company and the equity method of accounting is used to account for these investments. Under the equity method of accounting, the net equity investment of the Company and the Company’s share of net income or loss from the unconsolidated entity are reflected in the consolidated balance sheets and the consolidated statements of operations and other comprehensive income
Entity
Description
Net Lease Strategic Asset Fund L.P.
Diversified portfolio of net lease assets
Cobalt Industrial REIT II
Industrial portfolio
D.R. Stephens Institutional Fund, LLC
Industrial and R&D assets
NRF Heathcare, LLC
Senior housing portfolio
Centro/IA JV, LLC
Retail Shopping Centers
Other Unconsolidated Entities
Various Real Estate investments
No impairment was recorded in the six months ended June 30, 2011 and 2010 for the Companies unconsolidated entities.
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Combined Financial Information
The following table presents the combined financial information for the Company’s investment in unconsolidated entities.
Balance Sheets:
Real estate assets, net of accumulated depreciation
Total Assets
Liabilities and Equity:
Mortgage debt
Equity
Total Liabilities and Equity
Company’s share of equity
Net excess of cost of investments over the net book value of underlying net assets (net of accumulated depreciation of $1,342 and $1,446, respectively)
Carrying value of investments in unconsolidated entities
Statements of Operations:
Interest expense and loan cost amortization
Operating expenses, ground rent and general and administrative expenses
Impairments
Net loss before gain on sale of real estate
Gain on sale of real estate
Company’s share of:
Net loss, net of excess basis depreciation of $104 and $670
Depreciation and amortization (real estate related)
The unconsolidated entities had total third party debt of $1,865,268 at June 30, 2011 that matures as follows:
2011
2012
2013
2014
2015
Thereafter
The debt maturities of the unconsolidated entities are not recourse to the Company and the Company has no obligation to fund such debt maturities. It is anticipated that the ventures will be able to repay or refinance all of their debt on a timely basis.
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(6) Transactions with Related Parties
The following table summarizes the Company’s related party transactions for the six months ended June 30, 2011 and 2010.
General and administrative:
General and administrative reimbursement
Loan servicing
Investment advisor fee
Total general and administrative to related parties
Property management fees
Business manager fee
Loan placement fees
As of June 30, 2011 and December 31, 2010, the Company had deposited $372 and $370, respectively, in Inland Bank and Trust, a subsidiary of Inland Bancorp, Inc., an affiliate of The Inland Real Estate Group, Inc.
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The Company is party to an agreement with an LLC formed as an insurance association captive (the “Captive”), which is wholly-owned by the Company and three related parties, Inland Real Estate Corporation (IRC), Inland Western Real Estate Trust, Inc. and Inland Diversified Real Estate Trust, Inc. The Company paid insurance premiums of $4,643 and $5,068 for the six months ended June 30, 2011 and June 30, 2010, respectively.
In addition, the Company held 908,820 shares of IRC valued $8,025 of June 30, 2011. As of June 30, 2010 the Company held 833,820 shares of IRC valued at $6,604.
(7) Investment in Marketable Securities
Investment in marketable securities of $279,796 and $268,726 at June 30, 2011 and December 31, 2010, respectively, consists of primarily preferred and common stock investments in other REITs and certain real estate related bonds which are classified as available-for-sale securities and recorded at fair value.
Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported as a separate component of comprehensive income until realized. Of the investment securities held as of June 30, 2011, the Company has net accumulated other comprehensive income of $44,718, which includes gross unrealized losses of $12,176.
Dividend income is recognized when earned. During the six months ended June 30, 2011 and 2010, dividend income of $8,406 and $8,728 was recognized and is included in interest and dividend income on the consolidated statements of operations and other comprehensive income.
(8) Mortgages, Notes and Margins Payable
Mortgage loans outstanding as of June 30, 2011 and December 31, 2010 were $5,533,380 and $5,508,668 and had a weighted average interest rate of 5.3% and 5.1% per annum, respectively. Mortgage premium and discount, net was a discount of $27,481 and $38,712 as of June 30, 2011 and December 31, 2010. As of June 30, 2011, scheduled maturities for the Company’s outstanding mortgage indebtedness had various due dates through December 2047.
The Company is negotiating refinancing debt maturing in 2011 with various lenders at terms that will most likely require us to pay higher interest rates. It is anticipated that the Company will be able to repay, refinance or extend the maturities and the Company believes it has adequate sources of funds to meet short term cash needs related to these refinancings. Of the outstanding debt, approximately $717,288 is recourse to the Company.
Some of the mortgage loans require compliance with certain covenants, such as debt service ratios, investment restrictions and distribution limitations. As of June 30, 2011, the Company was in compliance with all mortgage loan requirements except seven loans with a carrying value of approximately $105,060 and one loan for a consolidated joint venture with a carrying value of $10,135; none of which are cross collateralized with any other mortgage loans or recourse to the Company. The stated maturities of the mortgage loans in default are reflected as follows: $45,483 in 2011, $5,767 in 2012 and $63,945 in 2017.
During the first quarter of 2011, the Company fully amortized the $10,368 of a mark to market mortgage discount on three properties. The recognition of the $10,368 discount was recorded as a result of the properties’ mortgage loans, totaling $63,955, being in default. If the lender takes possession of any of the properties through a consensual transfer, we will likely recognize a gain on the forgiveness of debt comparable to the discount being recognized for the six months ended June 30, 2011.
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The Company has purchased a portion of its securities through margin accounts. As of June 30, 2011 and December 31, 2010, the Company has recorded a payable of $66,568 and $62,101, respectively, for securities purchased on margin. At June 30, 2011 and December 31, 2010, this rate was .539% and .609%. Interest expense in the amount of $84 and $169 and $133 and $201 was recognized in interest expense on the consolidated statements of operations and other comprehensive income for the three and six months ended June 30, 2011 and 2010, respectively.
(9) Derivatives
As of June 30, 2011, in connection with certain mortgages payable that have variable interest rates, the Company has entered into interest rate swap and cap agreements, with a notional value of $410,943. The Company’s interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up front premium. The interest rate swaps and cap were considered highly effective as of June 30, 2011. The change in the fair value of the Company’s swaps as reflected in other comprehensive loss on the consolidated statements of operations and other comprehensive income was $170 for the six months ended June 30, 2011.
The following table summarizes interest rate swap and cap contracts outstanding as of June 30, 2011 and December 31, 2010:
Fair
ValueDecember 31,2010
March 28, 2008
November 16, 2007
December 12, 2008
December 23, 2008
January 16, 2009
August 19, 2010
October 15, 2010
January 7, 2011
April 28, 2011
(1) Interest rate cap at 4.75%.
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to add stability to interest expense and to manage its exposure to interest rate movements.
Cash Flow Hedges of Interest Rate Risk
The Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the six months ended June 30, 2011 and 2010, such derivatives were used to hedge the variable
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cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company recorded $71 and $130 of ineffectiveness expense during the six months ended June 30, 2011 and 2010, which is included in interest expense on the consolidated statements of operations and other comprehensive income.
The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations and other comprehensive income for the six months ended June 30, 2011 and 2010:
Derivatives in
ASC 815 Cash
Flow Hedging
Relationships
Interest Rate
Products
Non-designated Hedges
The Company has entered into a put/call agreement as a part of the MB REIT transaction. This agreement is considered a derivative instrument and is accounted for as such. The fair value of the put/call agreement is estimated using the Black-Scholes model. The fair value of the option was $457 and $1,274 and is included as a liability in advance rent and other liabilities on the consolidated balance sheets as of June 30, 2011 and December 31, 2010, respectively, with $817 included in other income on the consolidated statements of operations and other comprehensive income at June 30, 2011. For the six months ended June 30, 2010, $412 of income was included in other income on the consolidated statements of operations and other comprehensive income. Refer to Commitments and Contingencies Footnote 14.
(10) Fair Value Measurements
In accordance with ASC 820, Fair Value Measurement and Disclosures, the Company defines fair value based on the price that would be received upon sale of an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:
Level 1 - Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2 - Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The Company has estimated the fair value of its financial and non-financial instruments using available market information and valuation methodologies the Company believes to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that would be realized upon disposition.
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For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of the fair value for each major category of assets and liabilities is presented below:
Available-for-sale real estate equity securities
Put/call agreement in MB REIT
Derivative interest rate instruments
Commercial mortgage backed securities
Level 1
At June 30, 2011 and December 31, 2010, the fair value of the available for sale real estate equity securities have been estimated based upon quoted market prices for the same or similar issues when current quoted market prices are available. Unrealized gains on investment are reflected in unrealized gain (loss) on investment securities in other comprehensive income on the consolidated statements of operations and other comprehensive income.
Level 2
To calculate the fair value of the derivative contracts, the Company primarily uses quoted prices for similar contracts. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2011, the Company has assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
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Level 3
The following table summarizes activity for the Company’s assets and liabilities measured at fair value on a recurring basis using Level 3 inputs as of June 30, 2011:
Balance, December 31, 2010
Purchases
Sales
Realized gains
Unrealized gains
Balance, June 30, 2011
The Company’s valuation of its put/call agreement in MB REIT is determined using present value estimates of the put liability based on probable dividend yields.
The following table summarizes activity for the Company’s assets measured at fair value on a non-recurring basis The Company recognized certain non-cash impairment charges to write the investments to their fair values for the six months ended June 30, 2011 and 2010. The asset groups that were impaired to fair value through this evaluation are:
Investment properties, Total
Investment Properties
A provision for asset impairment of $58,175 as of June 30, 2011 reduced the book value of six hotel properties, fifteen retail properties, and four office properties to their respective fair values. For the six months ended June 30, 2010, a provision for asset impairment of $3,779 was recorded to reflect one retail property at its respective fair value.
The Company’s estimated fair value relating to the investment properties’ impairment analysis is based on a comparison of letters of intent, broker opinion of value and discounted cash flow models, which includes contractual inflows and outflows over a specific holding period. The cash flows consist of unobservable inputs such as contractual revenues and forecasted revenues and expenses. These unobservable inputs are based on market conditions and the Company’s expected growth rates. Capitalization rates and discount rates are utilized in the model and are based upon observable rates that the Company believes to be within a reasonable range of current market rates. As of June 30, 2011 and June 30, 2010, the impairment of the investment properties was $ 58,175 and $3,799, respectively. Certain properties have been disposed and were impaired prior to disposition and the related impairment charge of $0 and $945 is included in discontinued operations for the six months ended June 30, 2011 and June 30, 2010, respectively.
Financial Instruments not Measured at Fair Value
The table below represents the fair value of financial instruments presented at carrying values in our consolidated financial statements as of June 30, 2011 and December 31, 2010.
Mortgage and notes payable
Margins payable
The Company estimates the fair value of its mortgages and margins payable by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s lenders.
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(11) Income Taxes
The Company is qualified and has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, for federal income tax purposes commencing with the tax year ending December 31, 2005. Since the Company qualifies for taxation as a REIT, the Company generally will not be subject to federal income tax on taxable income that is distributed to stockholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distributes at least 90% of its REIT taxable income (subject to certain adjustments) to its stockholders. If the Company fails to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, the Company will be subject to federal and state income tax on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and federal income and excise taxes on its undistributed income.
In 2007, the Company formed wholly-owned taxable REIT subsidiaries in connection with the acquisition of the lodging portfolios and student housing. Taxable income from non-REIT activities managed through these taxable REIT subsidiaries is subject to federal, state, and local income taxes. As such, the Company’s taxable REIT subsidiaries are required to pay income taxes at the applicable rates. In addition, the Company is also subject to certain state and local taxes. For the six months ended June 30, 2011 and 2010, an income tax expense of $938 and $548 was included on the consolidated statements of operations and other comprehensive income.
(12) Segment Reporting
The Company has five business segments: Office, Retail, Industrial, Lodging and Multi-family. The Company evaluates segment performance primarily based on net property operations. Net property operations of the segments do not include interest expense, depreciation and amortization, general and administrative expenses, net income of noncontrolling interest and other investment income from corporate investments. The non-segmented assets primarily include the Company’s cash and cash equivalents, investment in marketable securities, construction in progress, investment in unconsolidated entities and notes receivable.
Prior to October 1, 2010, the Company considered the net property operations of the assets of LIP Holdings, LLC, its 100% owned subsidiary (LIP-H), which consisted of eight operating office and retail properties, a segment. Due to the settlement and consolidation of the remaining Lauth assets and the disposition of four of eight LIP-H assets, the Company no longer evaluates the net property operations of these assets as a segment. For the six months ended June 30, 2011, the assets of the LIP-H segment were classified into the appropriate segment as identified above. The Company has restated the prior years’ comparatives to conform with current year presentation.
For the period ended June 30, 2011, approximately 8% of the Company’s rental revenue was generated by over 400 retail banking properties leased to SunTrust Banks, Inc. Also, as of June 30, 2011, approximately 7% of the Company’s rental revenue was generated by three properties leased to AT&T, Inc. As a result of the concentration of revenue generated from these properties, if SunTrust or AT&T were to cease paying rent or fulfilling its other monetary obligations, the Company could have significantly reduced rental revenues or higher expenses until the defaults were cured or the properties were leased to a new tenant or tenants.
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The following table summarizes net property operations income by segment as of and for the three months ended June 30, 2011.
Property rentals
Straight-line rents
Amortization of acquired above and below market leases, net
Total rental income
Operating expenses
Net property operations
Non allocated expenses (a)
Other income and expenses (b)
Equity in earnings of unconsolidated entities
Income from operations of disposed properties
Net income attributable to noncontrolling interests
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The following table summarizes net property operations income by segment as of and for the three months ended June 30, 2010
Equity in loss of unconsolidated entities
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The following table summarizes net property operations income by segment as of and for the six months ended June 30, 2011.
Balance Sheet Data:
Real estate assets, net
Non-segmented assets
Capital Expenditures
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The following table summarizes net property operations income by segment as of and for the six months ended June 30, 2010.
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(13) Earnings (loss) per Share
Basic earnings (loss) per share (“EPS”) are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period (the “common shares”). Diluted EPS is computed by dividing net income (loss) by the common shares plus potential common shares issuable upon exercising options or other contracts. There are an immaterial amount of potentially dilutive common shares.
The basic and diluted weighted average number of common shares outstanding was 852,915,215 and 829,534,862 for the six months ended June 30, 2011 and 2010.
(14) Commitments and Contingencies
As part of the Company’s consolidated MB REIT joint venture with Minto Delaware, the Company entered into a put/call agreement (the “Put/Call Agreement”) with MB REIT, Minto Delaware and Minto Holdings Inc. (“Minto Holdings”), an affiliate of Minto Delaware, whereby under certain circumstances specified in the Put/Call Agreement, Minto Delaware, of which its investment in MB REIT is its sole asset, can require its investment be repurchased. Specifically, on or after October 11, 2011 until October 11, 2012, Minto Holdings, and any other holders of Minto Delaware have the option to this purchase of their 100% membership interests and other equity interests (including rights to acquire equity, such as warrants and options) in Minto Delaware, for an aggregate price equal to approximately $293,480 million in cash, plus any accrued but unpaid dividends on the 3.5% Series A redeemable preferred stock, par value $0.01 per share, of MB REIT (the “Series A Preferred Stock”) owned by Minto Delaware.
On May 13, 2011, the Company received a notice of the exercise of the put right from the Sellers. Pursuant to the notice, the Sellers, on October 13, 2011, are entitled to receive, collectively, in cash, an aggregate amount equal to approximately $293,480, plus any accrued but unpaid dividends on the Series A Preferred Stock owned by Minto Delaware, in exchange for all of the equity interests in Minto Delaware. After completing this transaction, the Company will own 100% of Minto Delaware, including Minto Delaware’s investment in MB REIT. The Company anticipates the sources of the cash payment to be provided by one or a combination of the following: proceeds from financings, proceeds from property dispositions and proceeds from the distribution reinvestment program.
The Series A Preferred Interest in MB REIT was subject to redemption features outside of the Company’s control that results in presentation outside of permanent equity which historically had been reported at its redemption value as noncontrolling redeemable interests in the Company’s consolidated financial statements with a balance of $264,132. In conjunction with notice to exercise the put right, the Company determined its entire interest in the MB REIT is redeemable for a value of $293,480, and reclassified the noncontrolling interest in the joint venture as noncontrolling redeemable interest on the consolidated financial statements as of June 30, 2011.
Certain leases and operating agreements within the lodging segment require the Company to reserve funds relating to replacements and renewals of the hotels’ furniture, fixtures and equipment. As of June 30, 2011, the Company has funded $36,391 in reserves for future improvements. This amount is included in restricted cash and escrows on the consolidated balance sheet as of June 30, 2011.
On June 17, 2011, Crockett Capital Corporation and the Company agreed to a mutual customary release of all claims arising from or related to pending litigation, upon which, the Company made a payment of $5,100 which is reflected in other income (expense), net on the consolidated statements of operations and other comprehensive income.
The Company has also filed a number of eviction actions against tenants and is involved in a number of tenant bankruptcies. The tenants in some of the eviction cases may file counterclaims against the Company in an attempt to gain leverage against the Company in connection with the eviction. In the opinion of the Company, none of these counterclaims is likely to result in any material losses to the Company.
(15) Subsequent Events
As of to June 30, 2011, the Company acquired one lodging and one retail property for $69,000 and $95,000, respectively.
On July 17, 2011, the Company’s interest in NRF Healthcare, LLC was purchased by the joint venture partner for approximately $100,000. The Company had a Series A Convertible Preferred Membership interest and was entitled to a 10.5% preferred dividend. The venture was reflected as investment in unconsolidated entities on the consolidated balance sheet and had an investment balance of $92,864 as of June 30, 2011.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (“SEC”). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549-3628. The public may obtain information on the operation of the Public Reference room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.
Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical, including statements regarding management’s intentions, beliefs, expectations, representations, plans or predictions of the future and are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “will,” “should” and “could.” Similarly, statements that describe or contain information related to matters such as management’s intent, belief or expectation with respect to the Company’s financial performance, investment strategy and portfolio, cash flows, growth prospects, legal proceedings, amount and timing of anticipated future cash distributions, estimated per share value of the Company’s common stock and other matters are forward-looking statements. These forward-looking statements are not historical facts but are the intent, belief or current expectations of the Company’s management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under “Risk Factors” in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 11, 2011. These factors include, but are not limited to: market and economic challenges experienced by the U.S. economy or real estate industry as a whole, including in the lodging industry, and the local economic conditions in the markets in which the Company’s properties are located; the Company’s ability to refinance maturing debt or to obtain new financing on attractive terms; the availability of cash flow from operating activities to fund distributions; future increases in interest rates; and actions or failures by the Company’s joint venture partners or borrowers subject under our notes receivable, including development partners. The Company intends that such forward-looking statements be subject to the safe harbors created by Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
The following discussion and analysis relates to the three and six months ended June 30, 2011 and 2010 and as of June 30, 2011 and December 31, 2010. You should read the following discussion and analysis along with our Consolidated Financial Statements and the related notes included in this report.
Overview
We seek to invest in real estate assets that we believe will produce attractive current yields and long-term risk-adjusted returns to our stockholders and to generate sustainable cash flow from our operations to fund distributions to our stockholders. To achieve these objectives, we selectively acquire commercial real estate and actively manage, through affiliates of our business manager, investments in non-lodging commercial real estate. Our property managers for our non-lodging properties actively seek to lease space at favorable rates, control expenses, and maintain strong tenant relationships. We oversee the management of our lodging facilities through active engagement with our third party managers and franchisors to maximize occupancy and daily rates as well as control expenses.
On a consolidated basis, essentially all of our revenues and cash flows from operations for the six months ended June 30, 2011 were generated by collecting rental payments from our tenants, room revenues from lodging properties, interest income on our notes receivable investments, distributions from unconsolidated entities and dividend income earned from investments in marketable securities. Our largest cash expense relates to the operation of our properties as well as the interest expense on our mortgages and notes payable. Our property operating expenses include, but are not limited to, real estate taxes, regular repair and maintenance, management fees, non-lodging utilities and insurance (some of which are recoverable). Our lodging operating expenses include, but are not limited to, rooms, food and beverage, utility, administrative and marketing, payroll, franchise and management fees and repairs and maintenance expenses.
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In evaluating our financial condition and operating performance, management focuses on the following financial and non-financial indicators, discussed in further detail herein:
Cash flows from operations
Funds from Operations (“FFO”), a supplemental measure to net income determined in accordance with U.S. generally accepted accounting principles (“GAAP”).
Economic and physical occupancy and rental rates.
Leasing activity and lease rollover.
Managing operating expenses.
Average daily room rate, revenue per available room, and average occupancy to measure our lodging properties.
Debt maturities and leverage ratios.
Liquidity levels.
Results of Operations
Consolidated Results of Operations
This section describes and compares our results of operations for the three and six months ended June 30, 2011 and 2010. We generate most of our net operating income from property operations. Unless otherwise noted, all dollar amounts are stated in thousands (except share data, rent per square foot, revenue per available room and average daily rate).
Net loss per share
Net loss per share increased to $0.03 and $0.10 per share from $0.01 and $0.04 per share for the three and six months ended June 30, 2011, compared to the three and six months ended June 30, 2010. The primary reason for the increase in net loss per share is property impairments of $58,175 recorded on twenty-five properties for the six months ended June 30, 2011 as compared to $3,779 on one property for the same period 2010. For the six months ended June 30, 2010, we also had a gain on the extinguishment of debt of a joint venture of $19,227 resulting from the transfer of land held by the venture to the lender in the second quarter of 2010, which is included in discontinued operations on the consolidated statements of operations and other comprehensive income.
Rental Income, Tenant Recovery Income, Lodging Income and Other Property Income. Except for our lodging and multi-family properties, the majority of the revenue from the properties consists of rents received under long-term operating leases.
Rental income consists of basic monthly rent, straight-line rent adjustments, amortization of acquired above and below market leases, fee income, and percentage rental income recorded pursuant to tenant leases. Tenant recovery income consists of reimbursements for real estate taxes, common area maintenance costs, management fees, and insurance costs. Lodging income consists of room revenues, food and beverage revenues, telephone revenues and miscellaneous revenues. Other property income consists of lease termination fees and other miscellaneous property income.
Below is a summary of sources of revenue for the three and six months ended June 30, 2011 and 2010.
Total property revenues
Total property revenues increased $77,842 or 13% from six months ended June 30, 2010 to 2011, which is comprised primarily of an increase in lodging income of $47,529 and an increase in rental income of $24,039. Our overall revenue and occupancy remains stable across the segments with the exception of lodging and multi-family segments, which had much improved operating performance as compared to 2010. The increase is coupled with the full year of operations for the properties acquired or placed in service in 2010 and 2011.
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Property Operating Expenses and Real Estate Taxes. Property operating expenses for properties other than lodging consist of property management fees paid to property managers and operating expenses, including costs of owning and maintaining investment properties, real estate taxes, insurance, utilities, maintenance to the exterior of the buildings and the parking lots. Lodging operating expenses include the payroll, utilities, management fees paid to our third party operators, insurance, marketing, and other expenses required to maintain and operate our lodging facilities.
Total property expenses
Total operating expenses increased to $154,813 and $303,168 for the three and six months ended June 30, 2011 compared to the three and six months ended June 30, 2010 due primarily to effect of the properties acquired in 2010 and 2011. Lodging operating expenses increased due to increases in occupancy across the lodging segment.
General and Administrative Expenses. General and administrative expenses primarily consist of legal, audit and other professional fees, acquisition related expenses, insurance, board of director fees, state and local taxes as well as salary, information technology and other administrative cost reimbursements paid to our business manager and affiliates, and investment advisor fees. Our expenses were $7,600 and $14,214 for the three and six months ended June 30, 2011 and $10,092 and $21,335 for the three and six months ended June 30, 2010. The decrease is due primarily to a decrease in legal and consulting costs compared to 2010. Acquisition and transaction costs were $275 and $503 and $368 and $1,205 for the three and six months ended June 30, 2011 and 2010, respectively.
Business Manager Fee. After our stockholders have received a non-cumulative, non-compounded return of 5% per annum on their “invested capital,” we pay our business manager an annual business management fee of up to 1% of the “average invested assets,” payable quarterly in an amount equal to 0.25% of the average invested assets as of the last day of the immediately preceding quarter. We incurred a business management fee of $20,000 for the six months ended June 30, 2011 or .18% of average invested assets, waiving the remaining $36,642 for the six months ended June 30, 2011. We incurred a business management fee of $16,000 or .14% of average invested assets and waived the remaining $40,295 for the six months ended June 30, 2010. We paid investment advisory fees of approximately $781 and $710 for the six months ended June 30, 2011 and 2010, respectively.
Depreciation and amortization. Our expenses were $109,121 and $218,455 for the three and six months ended June 30, 2011 and $108,501 and $213,455 for the three and six months ended June 30, 2010. The $620 and $5,000 increase in depreciation and amortization expense for the three and six months ended June 30, 2011 relative to the three and six months ended June 30, 2010 was due substantially to the impact of the properties acquired in 2010 and the first quarter of 2011.
Provision for Asset Impairment.For the six months ended June 30, 2011, we recorded a provision for asset impairment of $58,175 to reduce the book value of six hotel properties, fifteen retail properties, and four office properties to their respective fair values. Sixteen of the twenty-five property impairments, totaling $30,208, were recognized for the three months ended June 30, 2011. The impairments were incurred as a result of a reduction in the expected holding period of these assets. For the three and six months ended June 30, 2010, a provision for asset impairment of $3,779 was recorded to reflect one retail property at its respective fair value and $945 is reflected in discontinued operations related to two hotel properties impaired for six months ended June 30, 2010 and subsequently disposed.
Interest and Dividend Income Interest income consists of interest earned on short term investments and notes receivable. Dividends are earned from investments in our portfolio of marketable securities.
Interest income
Dividend income
The decrease of $4,959 from six months ended June 30, 2010 to June 30, 2011 primarily resulted from the conversion of notes receivable to unconsolidated joint ventures and investment properties.
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Other Income (Expense). For the three and six months ended June 30, 2011, we incurred expense of $2,658 and $2,306, respectively, which includes a litigation settlement payment of $5,100 related to the Crockett Capital Corporation lawsuit. Refer to our Commitment and Contingencies in our Notes to Consolidated Financial Statements. For the three and six months ended June 30, 2010, we recognized other income of $687 and $864, respectively.
Interest expense.A summary of interest expense for the three and six months ended June 30, 2011 and 2010 appears below:
Debt Type:
Mortgages, margin and other interest expense
Amortization of mortgage discounts/premiums and loan fees
Interest expense increased by $17,107 for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010 due to an increase in overall mortgage debt resulting from property acquisitions completed in 2011, as well as a $10,368 amortization of a mark to market mortgage discount. The recognition of the $10,368 discount was recorded as a result of the three properties’ mortgage loans, totaling $63,955, being in default. If the lender takes possession of the any of the properties through a consensual transfer, we will mostly likely recognize a gain on the forgiveness of debt comparable to the discount being recognized this period.
Our weighted average interest rate was 5.3% and 5.1% per annum as of June 30, 2011 and 2010, respectively. Because we have variable rate debt, we have experienced a lower overall weighted average interest rate due to a historically low London InterBank Offered Rate (“LIBOR”). If LIBOR increases, we will experience higher weighted average interest rates, which would impact our financial results.
Equity in Earnings of Unconsolidated Entities. For the first six months of 2011, we have equity in earnings of unconsolidated entities of $5,435. This is an increase of $11,340 compared to the June 30, 2010 equity in losses of unconsolidated entities of $5,905. The increase is primary the result of our share of the gain on sales of properties with two unconsolidated entities during the three months ended June 30, 2011.
Discontinued Operations. For the three and six months ended June 30, 2011, we incurred net income of $973 and $1,321, respectively, which includes a gain on the sale of properties of $1,210. For the three and six months ended June 31, 2010, we recorded income of $17,811 and $15,879 from discontinued operations which includes a provision for asset impairment of $945 and a gain on the extinguishment of debt of $19,227.
Noncontrolling Interest. The noncontrolling interest represents the interests of the third parties in Minto Builders (Florida), Inc. (“MB REIT”) and various consolidated joint ventures. We received the notice to the exercise of the put right on May 13, 2011 whereby we will pay $293,480 plus unpaid dividends for all of the equity interest in Minto Delaware on October 13, 2011. We determined its entire interest in the MB REIT is redeemable for a value of $293,480 and we recorded it as noncontrolling redeemable interest on the consolidated financial statements as of June 30, 2011. Refer to Commitments and Contingencies Footnote 14.
Segment Reporting
An analysis of results of operations by segment and same store is below. The tables contained throughout summarize certain key operating performance measures for the six months ended June 30, 2011 and 2010. In order to evaluate our overall portfolio, management analyzes the operating performance of all properties from period to period and properties we have owned and operated for the same period during each year. A total of 961 and 936 of our investment properties satisfied the criteria of being owned for the entire three and six month period ended June 30, 2011 and 2010, respectively, and are referred to herein as “same store” properties. This analysis allows management to monitor the operations of our existing properties for comparable periods to measure the performance of our current portfolio. Additionally, we are able to isolate the effects of our new acquisitions on net income.
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Retail Segment
2010
Physical occupancy
Economic occupancy
Base rent per square foot
Gross investment in properties
The following table represents lease expirations for the retail segment:
Lease
Expiration
Year
Our retail business is not highly dependent on specific retailers or specific retail industries, which we believe shields the portfolio from significant revenue variances over time. The occupancy rates above are as of June 30, 2011 and 2010 and they do not represent the average rate during that period.
Our retail business is centered on multi-tenant properties with fewer than 120,000 square feet of total space, located in stable communities, primarily in the southwest and southeast regions of the country. Adding to this core investment profile is a select number of traditional mall properties and single-tenant properties. Among the single-tenant properties, the largest holdings are comprised of investments in bank branches operated by SunTrust Bank and Citizens Bank, where the tenant-occupant pays rent with contractual increases over time, and bears virtually all expenses associated with operating the facility.
Our retail tenants largely consist of necessity-based retailers such as grocery, pharmacy, moderate-fashion shoes and clothing, and services. We have limited exposure to retail categories such as books/music/video, big-box electronics, fast-food restaurants, new-concept, and other goods-providers, which we believe are being negatively impacted the greatest by the internet or existing economic conditions.
We have not experienced bankruptcies or receivable write-offs associated with tenants in our retail portfolio that have materially impacted our result of operations. We continue to actively monitor our retail tenants as a downturn in the economy could have negative impact on our tenants’ abilities to pay rent or our ability to fill space that is currently vacant, or space that becomes vacant in the near future.
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The table below represents operating information for the retail segment and same store properties as of June 30, 2011 and 2010. The properties in the same store portfolio were owned for the entire three and six months ended June 30, 2011 and June 30, 2010.
Revenues:
Total revenues
Total operating expenses
Net operating income
Average economic occupancy for the period
Number of properties
Our retail revenues increased from $175,111 for the six months ended June 30, 2010 to $193,756 for six months ended June 30, 2011 or approximately 11%, which is a result of the full year of operations on properties acquired in 2010. Retail properties real estate and operating expenses also increased from $46,428 in 2010 to $54,090 in 2011 or 17% as a result of these acquisitions. Tenant recovery income also increased $4,293 or 15% due to the increase in total operating expense.
On a same store basis, our retail segment’s revenues and expenses are stable comparing the six month ended June 30, 2010 and June 30, 2011. The stability in earnings is reflective of the stable occupancy of 93% for both June 30, 2010 and 2011 and re-leasing at rates consistent with expiring rates.
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Lodging Segment
Revenue per available room
Average daily rate
Occupancy
Lodging facilities have characteristics different from those found in office, retail, industrial, and multi-family properties (also known as “traditional asset classes”). Specifically, revenue, operating expenses, and net income are directly tied to the daily hotel sales operation whereas other traditional asset classes generate revenue from medium to long-term lease contracts. In this way, net operating income is somewhat more predictable among the properties in the other traditional asset classes, though we believe that opportunities to increase revenue are, in many cases, limited because of the duration of the existing lease contracts. Lodging facilities have the benefit of capturing increased revenue opportunities on a daily or weekly basis but are also subject to immediate decreases in revenue as a result of declines in daily rental rates and/or daily occupancy when demand falls off quickly. Due to seasonality, we expect our revenues to be greater during the second and third quarters with lower revenues in the first and fourth quarters.
Two practices are common in the lodging industry: 1) association with national franchise organizations and 2) professional management by specialized third-party hotel managers. Our portfolio consists of assets aligned with what we believe are the top franchise enterprises in the lodging industry: Marriott, Hilton, Intercontinental, Hyatt, Wyndham, and Choice Hotels. By doing so, we believe our lodging operations benefit from enhanced advertising, marketing, and sales programs through a franchise arrangement while the franchisee (in this case us) pays only a fraction of the overall cost for these programs. We believe effective TV, radio, print, on-line, and other forms of advertisement are necessary to draw customers to our lodging facilities, creating higher occupancy and rental rates, and increased revenue. Additionally, by using the franchise system we are also able to benefit from the frequent traveler rewards programs or “point awards” systems which we believe further bolsters occupancy and overall daily rental rates.
Our lodging facilities are generally classified in the upscale or upper-upscale lodging categories. All of our lodging facilities are managed by third-party managers with extensive experience and skill in hospitality operations. These third-party managers report to a dedicated, specialized group within our business manager that has, in our view, extensive expertise in lodging ownership and operation within a REIT environment. This group has daily interaction with all third-party managers, and closely monitors all aspects of our lodging interests. Additionally, this group also maintains close relationships with the franchisors to assure that each property maintains high levels of customer satisfaction, franchise conformity, and revenue-management.
Revenue per Available Room is predicted to increase 5%-8% in 2011 as compared to 2010. We believe revenues will continue to increase steadily as long as the Gross Domestic Product (“GDP”) continues to grow. For 2011, we believe that our revenue per available room has been and will continue to be consistent with the overall industry trends. Our third party managers and asset management are focusing on increasing average daily rates, maintaining and growing occupancy while controlling operating costs to improve cash flow to the owner.
The table below represents operating information for the lodging segment and same store properties as of June 30, 2011 and 2010. The properties in the same store portfolio were owned for the entire three and six months ended June 30, 2011 and June 30, 2010.
Lodging operating income
The lodging segment net operating income increased $17,020 or 23% for the six months ended June 30, 2011 as compared to 2010 primarily due to full operations of the hotel properties acquired in 2010. For the same period, the net income for the same stores increased by $9,518 which is due primarily in the increase in occupancy from 69% to 71%; and the average daily rate from $116 to $121. We continue to obtain reductions in real estate taxes as reflected in the $339 decrease from 2010 to 2011 in the segment portfolio and the $1,588 decrease in the same store portfolio. Overall operating expenses increased as a result of occupancy increases.
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Office Segment
The following table represents lease expirations for the office segment:
Percent
of TotalGLA
Our investments in office properties largely represent assets leased to and occupied by either a diverse group of tenants or leased to single tenants that fully occupy the space leased. Examples of the former include the IDS Center located in the central business district of Minneapolis, and Dulles Executive Plaza and Worldgate Plaza, both located in metropolitan Washington D.C. and catering to medium to high-technology companies and federal government contractors. Examples of the latter include three buildings leased and occupied by AT&T and located in three distinct US office markets—Chicago, St. Louis, and Cleveland. In addition, our office portfolio includes properties leased on a net basis to SunTrust, with the leased locations located in the east and southeast regions of the country.
The table below represents operating information for the office segment and same store properties as of June 30, 2011 and 2010. The properties in the same store portfolio were owned for the three and six months ended June 30, 2011 and June 30, 2010.
Office properties net operating income remained stable on a segment and same store basis with a 0.5% and (0.1)%, respectively. Our office portfolio had a 3% decrease in occupancy from 95% for June 30, 2010 to 92% for June 30, 2011 which was offset by an increase in base rent per square foot from $15.09 to $15.40. Stable occupancy on the same store properties contributed to the consistent operating performance for the comparative periods.
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Industrial Segment
Gross investments in properties
The following table represents lease expirations for the industrial segment:
Our industrial properties are located in what we believe are active and sought-after industrial markets, including the Memphis, Tennessee airport market and the O’Hare Airport market of Chicago, Illinois, commonly one of the largest industrial markets in the world. The specialty distribution centers are comprised of refrigeration or air conditioned buildings in various locations across the country. The charter schools and correctional facilities consist of nine properties under long-term triple net leases.
The table below represents operating information for the industrial segment and same store properties as of June 30, 2011 and 2010. The properties in the same store portfolio were owned for the three and six months ended June 30, 2011 and June 30, 2010.
Industrial properties real estate revenues increased from $44,770 for the six months ended June 30, 2010 to $47,251 for the six months ended June 30, 2011 mainly due to the full year of operations related to the acquisition of charter schools in 2010. Industrial properties real estate and operating expenses increased from $3,995 in 2010 to $5,168 in 2011, primarily as a result of higher real estate tax assessments. This increase in expense is offset by an increase in tenant recovery income from $1,224 to $2,417 for six months ended June 30, 2010 to 2011.
A majority of the tenants have net leases and they are directly responsible for operating costs and reimburse us for real estate taxes and insurance. Therefore, industrial segment operating expenses are lower than the other segments.
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Multi-family Segment
End of month scheduled base rent per unit per month
These rates are as of the end of the period and do not represent the average rate during the six months ended June 30, 2011 and 2010.
The table below represents operating information for the multi-family segment and same store properties as of June 30, 2011 and 2010. The properties in the same store portfolio were owned for the entire three and six months ended June 30, 2011 and June 30, 2010.
Multi-family real estate rental revenues increased from $42,063 for the six months ended June 30, 2010 to $51,140 for the six months ended June 30, 2011. The increase is mainly due to the acquired properties and properties placed in service in 2010 as well as an increase in occupancy of 5% during the same period. The property operating expense increased for the six months ended June 30, 2011 compared to 2010 as a result of these additional properties. The multi-family same store net operating income increased by $3,130 or 17% in is primarily due to the 6% increase in occupancy for the six months ended June 30, 2011 to June 30, 2010 coupled by a steady increase in base rent per unit over the same period. The real estate taxes have decreased 6% for the six months ended June 30, 2011 to June 30, 2010.
Liquidity and Capital Resources
We continually evaluate the economic and credit environment and its impact on our business. Maintaining significant capital reserves has become a priority for all companies. At this juncture we believe we are appropriately positioned to have significant cash to utilize in executing our strategy.
Our objectives are to invest in real estate assets that produce what we believe are attractive current yield and long-term risk-adjusted returns to our stockholders and to generate sustainable and predictable cash flow from our operations to distribute to our stockholders.
For 2011, we believe that our acquisitions will be fewer than in prior years.
Our principal demands for funds are:
to pay our expenses and the operating expenses of our properties;
to pay distributions to our stockholders;
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to service or pay-down our debt;
to fund capital expenditures;
to invest in properties; and
to fund development investments.
Generally, our cash needs are funded from:
income earned on our investment properties;
interest income on investments and dividend and gain on sale income earned on our investment in marketable securities;
distributions from our joint venture investments;
proceeds from sales of properties;
proceeds from borrowings on properties; and
issuance of shares under our distribution reinvestment plan.
Acquisitions and Investments
We completed approximately $64.1 million and $793.1 million of real estate acquisitions in the six months ended June 30, 2011 and 2010, respectively. These acquisitions were consummated through our subsidiaries and were funded with available cash, mortgage indebtedness, and the proceeds from the distribution reinvestment plan.
Investments in Consolidated Developments
We have development projects that are in various stages of pre-development and development. We fund cash needs for these development activities from our working capital and by borrowings secured by the properties. Specifically identifiable direct development and construction costs are capitalized, including, where applicable, salaries and related costs, real estate taxes and interest incurred in developing the property. These developments encompass the retail and multi-family segments. In addition, we have purchased land and incurred pre-development costs of $53.8 million for an additional four multi-family projects.
Although the economy, in general, has started to recover, our retail developments have experienced longer lease-up timelines and future leases could be at leasing rates less than originally underwritten, which will impact the returns that we realize in these investments.
The properties under development and all amounts set forth below are as of June 30, 2011. (Dollar amounts stated in thousands.)
Location
(City, State)
Woodbridge
Stone Creek
UCF Housing
UH Fullerton
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As part of the restructuring and foreclosure of the Stan Thomas Properties note, we began overseeing the infrastructure activities to further the development of the Sacramento Railyards. The Railyards project is a collaborative planning effort of various federal, state and local municipalities to develop an approximate 240 acre site north of Sacramento’s central business district. The current book value is $112.9 million as of June 30, 2011. The project is scheduled to be completed in phases, beginning in 2012-2030.
Distributions
We declared monthly cash distributions to our stockholders per weighted average number of shares outstanding during the period from January 1, 2010 to June 30, 2011 totaling $213.4 million or $.50 per share on an annualized basis. These cash distributions were paid with $195.7 million from our cash flow from operations, $14.2 million provided by distributions from unconsolidated entities and excess coverage from prior years. Our average dividend reinvestment program participation was 48% for the six months ended June 30, 2011 compared to 51% for the six months ended June 30, 2010.
One of our objectives is to provide cash distributions to our stockholders from cash generated by our operations. The following chart summarizes the sources of our cash used to pay distributions. Our primary source of cash is cash flow provided by operating activities from our investments as presented in our cash flow statement. We also include distributions from unconsolidated entities related to distributions provided by investments in unconsolidated entities since the underlying real estate operations in these entities generate these cash flows. Gain on sales of properties relate to net profits from the sale of certain properties. Our presentation is not intended to be an alternative to our consolidated statements of cash flow and does not present all the sources and uses of our cash.
The following chart presents a historical view of our distribution coverage.
Six months
ended
Cash flow provided by operations
Distribution from unconsolidated entities
Gain on sales of properties
Excess (deficiency)
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We had an increase in cash flow from operations and distribution from unconsolidated entities of $35.8 million from the six months ended 2010 to 2011. The increase resulted primarily from the same store operating results of our lodging and multi-family portfolios as well as a full year of operations on our acquired properties. Our cash flow from operations is higher during the second and third quarters as a result of the seasonality in our lodging portfolio.
Financing Activities and Contractual Obligations
Stock Offering
On March 31, 2009, we filed a registration statement to register 50,000,000 shares to be issued pursuant to the DRP. We terminated this registration on April 11, 2011. On March 16, 2011, we filed a registration statement to register an additional 100,000,000 shares to be issued pursuant to the DRP. We had sold a total of 101,147,437 shares under the distribution reinvestment plan as of June 30, 2011.
Share Repurchase Program
Our board of directors adopted an Amended and Restated Share Repurchase Program, effective April 11, 2011. Under this program, we may repurchase shares of our common stock, on a quarterly basis, upon the death of the beneficial owners of our shares. We are authorized to repurchase shares at a price per share equal to 90% of the most recently disclosed estimated per share value of our common stock, which currently is equal to $7.23 per share.
Our obligation to repurchase any shares under the program is conditioned upon our having sufficient funds available to complete the repurchase. Our board has initially reserved $5.0 million per calendar quarter for this purpose. In addition, notwithstanding anything to the contrary, at no time during any consecutive twelve month period may the aggregate number of shares repurchased under the program exceed 5.0% of the aggregate number of issued and outstanding shares of our common stock at the beginning of the twelve month period. If our funds are insufficient to repurchase all of the shares for which repurchase requests have been submitted in a particular quarter, or if the number of shares accepted for repurchase would cause us to exceed the 5.0% limit, we repurchase the shares in chronological order, based upon the beneficial owner’s date of death.
During the three months ended June 30, 2011, we received 595 repurchase requests for an aggregate of 1,886,214 shares of common stock. Of these requests, we repurchased 691,563 shares of common stock for $5 million during the three months ended June 30, 2011, and the remaining 1,194,651 shares will be included with all other shares for which we have received repurchase requests in the next calendar quarter in which funds are available (unless withdrawn). The average price per share for the shares repurchased during the three months ended June 30, 2011 was $7.23 and the repurchases were funded from proceeds from our dividend reinvestment plan.
MB Put/Call Agreement.
As part of our consolidated MB REIT joint venture with Minto Delaware, we entered into a put/call agreement with MB REIT, Minto Delaware and Minto Holdings Inc.
On May 13, 2011, we received a notice of the exercise of the put right from the Sellers. Pursuant to the notice, the Sellers, on October 13, 2011, are entitled to receive, collectively, in cash, an aggregate amount equal to approximately $293.5 million, plus any accrued but unpaid dividends on the Series A Preferred Stock owned by Minto Delaware, in exchange for all of the equity interests in Minto Delaware. After completing this transaction, we will own 100% of Minto Delaware, including Minto Delaware’s investment in MB REIT. We anticipate the sources of the cash payment to be provided by one or a combination of the following: proceeds from financings, proceeds from property dispositions and proceeds from the distribution reinvestment plan.
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Borrowings
Our interest rate risk is monitored using a variety of techniques, including periodically evaluating fixed interest rate quotes on all variable rate debt and the costs associated with converting the debt to fixed rate debt. Also, existing fixed and variable rate loans that are scheduled to mature in the next year or two are evaluated for possible early refinancing and or extension due to consideration given to current interest rates. The table below presents, on a consolidated basis, the principal amount, weighted average interest rates and maturity date (by year) on our mortgage debt as of June 30, 2011 (dollar amounts are stated in thousands).
Maturing debt :
Fixed rate debt (mortgage loans)
Variable rate debt (mortgage loans)
Weighted average interest rate on debt:
The debt maturity excludes mortgage discounts associated with debt assumed at acquisition of which a discount of $27.5 million, net of accumulated amortization, is outstanding as of June 30, 2011.
We have ten interest rate swap agreements that have converted $410.9 million or 26% of our variable rate mortgage loans from variable to fixed rates. The pay rates range from 0.63% to 4.45% with maturity dates from April 1, 2011 to April, 2013.
As of June 30, 2011, we had approximately $302 million and $705 million in mortgage debt maturing in 2011 and 2012, respectively. We are currently negotiating refinancing on certain debt with various lenders at terms that will most likely require us to pay higher interest rates and to invest additional equity in the outstanding loans. We currently anticipate that we will be able to repay or refinance our debt on a timely basis, and believe we have adequate sources of funds to meet our short term cash needs. However, there can be no assurance that we can obtain such refinancing on satisfactory terms. Continued volatility in the capital markets could expose us to the risk of not being able to borrow on terms and conditions acceptable to us for future acquisitions or refinancings.
Summary of Cash Flows
Cash provided by operating activities
Cash used in investing activities
Cash provided by (used in) financing activities
Decrease in cash and cash equivalents
Cash provided by operating activities was $196 million and $159 million for the six months ended June 30, 2011 and 2010, respectively, and was generated primarily from operating income from property operations and interest and dividends. Operating activities generated approximately $36 million more for the six months ended June 30, 2011 as compared to June 30, 2010 as a result of the full year of operations for our 2010 acquisitions coupled by increased operating results in our lodging and multi-family segments.
Cash used in investing activities was $(117) million and $(496) million for six months ended June 30, 2011 and 2010, respectively. During the six months ended June 30, 2011, cash was used primarily for purchases of investment properties. We used significantly less cash in our investing activities during the six months ended June 30, 2011 than the six months ended June 30, 2010 due to the decrease in acquisitions.
Cash used in or provided by financing activities was $(116) million and $55 million for the six months ended June 30, 2011 and 2010, respectively. During the six months ended June 30, 2011 and 2010, we generated proceeds from the distribution reinvestment plan of approximately $100 million and $106 million and repurchased shares as part of our share repurchase program for $5 million and $0. We generated approximately $4 million and $64 million by borrowing against our portfolio of marketable securities for the six months ended June 30, 2011 and 2010, respectively. We generated approximately $310 million from borrowings secured by mortgages on our properties for the six months ended June 30, 2011. During the six months ended June 30, 2010, we generated approximately $280 million from borrowings secured by mortgages on our properties. During the six months ended June 30, 2011 and
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2010, we paid approximately $213 million and $207 million, respectively, in distributions to our common stockholders. We also paid off mortgage debt in the amount of $281 million and $171 million for the six months ended June 30, 2011 and 2010.
Contractual Obligations
As part of our consolidated MB REIT joint venture with Minto (Delaware), LLC (“Minto Delaware”), the Company entered into a put/call agreement (the “Put/Call Agreement”) with MB REIT, Minto Delaware and Minto Holdings Inc. (“Minto Holdings”), an affiliate of Minto Delaware, whereby under certain circumstances specified in the Put/Call Agreement, Minto Delaware, of which its investment in MB REIT is its sole asset, can require its investment be repurchased. Specifically, on or after October 11, 2011 until October 11, 2012, Minto Holdings, and any other holders of Minto Delaware (each a “Seller” and collectively, the “Sellers”) have the option to this purchase of their 100% of the membership interests and other equity interests (including rights to acquire equity, such as warrants and options) in Minto Delaware, for an aggregate price equal to approximately $293.5 million in cash, plus any accrued but unpaid dividends on the 3.5% Series A redeemable preferred stock, par value $0.01 per share, of MB REIT (the “Series A Preferred Stock”) owned by Minto Delaware.
Off Balance Sheet Arrangements
Unconsolidated Real Estate Joint Ventures
Unconsolidated joint ventures are those where we have substantial influence over but do not control the entity. We account for our interest in these ventures using the equity method of accounting. For additional discussion of our investments in joint ventures, refer to the liquidity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Notes to Consolidated Financial Statements. Our ownership percentage and related investment in each joint venture is summarized in the following table. (Dollar amounts stated in thousands).
Joint Venture
NRF Healthcare, LLC.
Seasonality
The lodging segment is seasonal in nature, reflecting higher revenue and operating income during the second and third quarters. This seasonality can be expected to cause fluctuations in our net property operations for the lodging segment. All of our other segments are not seasonal in nature.
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Selected Financial Data
The following table shows our consolidated selected financial data relating to our consolidated historical financial condition and results of operations. Such selected data should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report (dollar amounts are stated in thousands, except per share data.)
As of
December 31, 2010
Total interest and dividend income
Net loss per common share, basic and diluted (a)
Distributions declared to common stockholders
Distributions declared per weighted average common share (a)
Funds From Operations (a)(b)
Cash flows provided by operating activities
Cash flows used in investing activities
Cash flows provided by (used in) financing activities
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Add:
Related to investment properties
Related to investment in unconsolidated entities
Less:
Gains from property sales
Gains from property sales reflected in equity in earnings of unconsolidated entities
Depreciation and amortization related to investment properties
Below is additional information related to certain items that significantly impact the comparability of our Funds from Operations and Net Income or significant non-cash items that impact our cash flow provided by operation activities from the periods presented:
Provision for asset impairment included in discontinued operations
Amortization of above/below market leases
Amortization of mark to market debt discounts
Acquisition and transaction costs
Subsequent Events
Subsequent to June 30, 2011, we acquired one lodging and one retail property for $69 million and $95 million, respectively.
On July 17, 2011, our interest in NRF Healthcare, LLC was purchased by the joint venture partner for approximately $100 million. We had a Series A Convertible Preferred Membership interest and was entitled to a 10.5% preferred dividend. The venture was reflected in investment in unconsolidated entities on the consolidated balance sheet and had an investment balance of $92.9 million as of June 30, 2011.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk associated with changes in interest rates both in terms of variable-rate debt and the price of new fixed-rate debt upon maturity of existing debt and for acquisitions. We are also subject to market risk associated with our marketable securities investments.
Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. If market rates of interest on all of the floating rate debt permanently increased by 1%, the increase in interest expense on the floating rate debt would decrease future earnings and cash flows by approximately $16.0 million. If market rates of interest on all of the floating rate debt permanently decreased by 1%, the decrease in interest expense on the floating rate debt would increase future earnings and cash flows by approximately $16.0 million.
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With regard to variable rate financing, we assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We maintain risk management control systems to monitor interest rate cash flow risk attributable to both of our outstanding or forecasted debt obligations as well as our potential offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on our future cash flows.
We monitor interest rate risk using a variety of techniques, including periodically evaluating fixed interest rate quotes on all variable rate debt and the costs associated with converting the debt to fixed rate debt. Also, existing fixed and variable rate loans that are scheduled to mature in the next year or two are evaluated for possible early refinancing and or extension due to consideration given to current interest rates. The table below presents mortgage debt principal amounts and weighted average interest rates by year and expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes (dollar amounts are stated in thousands).
We may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our properties. To the extent we do, we are exposed to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, it does not possess credit risk. It is our policy to enter into these transactions with the same party providing the financing. In the alternative, we will seek to minimize the credit risk in derivative instruments by entering into transactions with what we believe are high-quality counterparties. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
We have, and may in the future enter into, derivative positions that do not qualify for hedge accounting treatment. If these derivatives do not qualify for hedge accounting treatment, the gains or losses resulting from their mark-to-market at the end of each reporting period are recognized as an increase or decrease in “interest expense” on our consolidated statements of income. In addition, we are, and may in the future be, subject to additional expense based on the notional amount of the derivative positions and a specified spread over LIBOR.
Equity Price Risk
We are exposed to equity price risk as a result of our investments in marketable equity securities. Equity price risk changes as the volatility of equity prices changes or the values of corresponding equity indices change.
There were no other than temporary impairments recognized on our marketable securities for the six months ended June 30, 2011 and $676 thousand for the six months ended June 30, 2010. The overall stock market and REIT stocks, including our REIT stock investments, have declined since mid-2007, which have resulted in our recognizing impairments from time to time. We believe that our investments will continue to generate dividend income and, if the REIT market recovers, we could continue to recognize gains on sale. However, due to general economic and credit market uncertainties it is difficult to project where the REIT market and our portfolio value will be during 2011.
While it is difficult to project what factors may affect the prices of equity sectors and how much the effect might be, the table below illustrates the impact of a ten percent increase and a ten percent decrease in the price of the equities held by us would have on the value of the total assets and our book value of as of June 30, 2011. (dollar amounts stated in thousands)
Marketable securities
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Derivatives
The following table summarizes our interest rate swap and cap contracts outstanding as of June 30, 2011 (dollar amounts stated in thousands):
FairValue ofJune 30,
We and MB REIT entered into a put/call agreement as a part of the MB REIT transaction. This agreement is considered a derivative instrument and is accounted for pursuant to ASC 815. Derivatives are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. The fair value of the put/call agreement is estimated using the Black-Scholes model. The fair value of the option was $457 and $1,274 and is included in advance rent and other liabilities on the consolidated balance sheets as of June 30, 2011 and December 31, 2010. Refer to Commitments and Contingencies in Notes to Consolidated Financial Statements.
Item 4. Controls and Procedures
Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our principal executive officer and our principal financial officer, evaluated as of June 30, 2011, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures, as of June 30, 2011, were effective for the purpose of ensuring that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the principal executive officer and principal financial and accounting officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no significant changes to our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) or Rule 15d-15(f)) during the three months ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II - Other Information
Item 1. Legal Proceedings
Except as otherwise described below, there were no material developments during the six months ended June 30, 2011 in the legal proceedings described in our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 1A. Risk Factors
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our board of directors adopted a share repurchase program, which became effective August 31, 2005 and was suspended as of March 30, 2009. Our board later adopted an Amended and Restated Share Repurchase Program, effective April 11, 2011 (the “Amended Program”). Under this Amended Program, we may repurchase shares of our common stock, on a quarterly basis, upon the death of the beneficial owners of our shares. We are authorized to repurchase shares at a price per share equal to 90% of the most recently disclosed estimated per share value of our common stock, which currently is equal to $7.23 per share.
Our obligation to repurchase any shares under the Amended Program is conditioned upon our having sufficient funds available to complete the repurchase. Our board has initially reserved $5.0 million per calendar quarter for this purpose. In addition, notwithstanding anything to the contrary, at no time during any consecutive twelve month period may the aggregate number of shares repurchased under the program exceed 5.0% of the aggregate number of issued and outstanding shares of our common stock at the beginning of the twelve month period. If our funds are insufficient to repurchase all of the shares for which repurchase requests have been submitted in a particular quarter, or if the number of shares accepted for repurchase would cause us to exceed the 5.0% limit, we repurchase the shares in chronological order, based upon the beneficial owner’s date of death.
The Amended Program will immediately terminate if our shares are approved for listing on any national securities exchange. We may amend or modify any provision of the Amended Program, or reject any request for repurchase, at any time in our board’s sole discretion.
The table below outlines the shares of common stock we repurchased pursuant to the Amended Program during the three months ended June 30, 2011.
April 2011
May 2011
June 2011
Item 3. Defaults Upon Senior Securities
None.
Item 4. Reserved
Item 5. Other Information
Not Applicable.
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Item 6. Exhibits
The representations, warranties and covenants made by us in any agreement filed as an exhibit to this Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties or covenants to, or with, you. Moreover, these representations, warranties and covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.
The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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