UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-51609
Inland American Real Estate Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland
34-2019608
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2901 Butterfield Road, Oak Brook, Illinois
60523
(Address of principal executive offices)
(Zip Code)
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act). (Check one)
Large accelerated filer o Accelerated filer o Non-accelerated filer X Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No X
As of November 10, 2009, there were 819,763,459 shares of the registrant's common stock outstanding.
INLAND AMERICAN REAL ESTATE TRUST, INC.TABLE OF CONTENTS
Part I - Financial Information
Page
Item 1.
Financial Statements
Consolidated Balance Sheets at September 30, 2009 (unaudited) and December 31, 2008
1
Consolidated Statements of Operations and Other Comprehensive Income for the three and nine months ended September 30, 2009 and 2008 (unaudited)
2
Consolidated Statements of Equity for the nine months ended September 30, 2009 and 2008 (unaudited)
4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (unaudited)
6
Notes to Consolidated Financial Statements (unaudited)
9
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
31
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
54
Item 4T.
Controls and Procedures
56
Part II - Other Information
Legal Proceedings
57
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
60
Defaults upon Senior Securities
Item 4.
Submission of Matters to a Vote of Security Holders
Item 5.
Other information
Item 6.
Exhibits
Signatures
61
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 ® trademark is the property of Wyndham Worldwide. Comfort Inn ® trademark is the property of Choice Hotels International. For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be includ ed wherever the above-referenced terms are used.
-i-
INLAND AMERICAN REAL ESTATE TRUST, INC.
(A Maryland Corporation)
Consolidated Balance Sheets
(Dollar amounts in thousands)
September 30, 2009
December 31, 2008
Assets
(unaudited)
Assets:
Investment properties:
Land
$
1,655,143
1,481,920
Building and other improvements
7,670,668
6,735,022
Construction in progress
365,797
318,440
Total
9,691,608
8,535,382
Less accumulated depreciation
(635,734)
(406,235)
Net investment properties
9,055,874
8,129,147
Cash and cash equivalents
631,115
945,225
Restricted cash and escrows
66,652
72,704
Investment in marketable securities (Note 8)
213,116
229,149
Investment in unconsolidated entities (Note 3)
490,247
742,510
Accounts and rents receivable (net of allowance of $6,262 and $3,064)
82,571
70,212
Notes receivable, net (Note 7)
474,807
480,774
Due from related parties (Note 6)
-
750
Intangible assets, net
425,320
383,509
Deferred costs, net
49,789
45,323
Other assets
22,059
34,585
Deferred tax asset
2,978
Total assets
11,514,528
11,136,866
Liabilities and Equity
Liabilities:
Mortgages, notes and margins payable (Note 9)
5,084,519
4,437,997
Accounts payable and accrued expenses
36,559
49,305
Distributions payable
34,076
40,777
Accrued real estate taxes
54,100
31,371
Advance rent and other liabilities
75,610
82,568
Intangible liabilities, net
75,266
43,722
Other financings
47,762
Due to related parties (Note 6)
10,785
4,607
Deferred income tax liability
1,470
Total liabilities
5,420,147
4,739,579
Noncontrolling redeemable interests (Note 4)
264,132
Commitments and contingencies (Note 14)
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,
817,815,351 and 794,574,007 shares issued and outstanding
818
795
Additional paid in capital (net of offering costs of $828,434 and $800,019,
of which $788,272 and $762,612 was paid or accrued to affiliates)
7,342,702
7,129,945
Accumulated distributions in excess of net income (loss)
(1,552,587)
(1,011,757)
Accumulated other comprehensive income (loss)
19,775
(6,421)
Total Company stockholders’ equity
5,810,708
6,112,562
Noncontrolling interests (Note 4)
19,541
20,593
Total equity
5,830,249
6,133,155
Total liabilities and equity
See accompanying notes to the consolidated financial statements.
-1-
Consolidated Statements of Operations and Other Comprehensive Income
(Dollar amounts in thousands, except per share amounts)
Three months ended
Nine months ended
September 30, 2008
Income:
Rental income
141,995
105,168
405,624
304,589
Tenant recovery income
20,815
18,335
60,719
53,634
Other property income
5,900
4,368
16,973
11,642
Lodging income
118,205
135,366
365,913
400,588
Total income
286,915
263,237
849,229
770,453
Expenses:
General and administrative expenses to related parties
2,587
2,095
8,098
6,565
General and administrative expenses to non-related parties
4,848
6,261
27,697
15,543
Property and lodging operating expenses to related parties
6,664
4,992
18,979
14,677
Property operating expenses to non- related parties
22,631
16,490
65,185
47,421
Lodging operating expenses
76,848
81,335
229,213
231,943
Real estate taxes
22,458
18,830
66,242
52,439
Depreciation and amortization
101,790
79,246
293,724
232,029
Business manager management fee
9,000
6,000
27,000
18,500
Provision for asset impairment
14,492
Impairment of notes receivable
8,724
22,949
Total expenses
270,042
215,249
773,579
619,117
Operating income
16,873
47,988
75,650
151,336
Interest and dividend income
10,242
18,242
47,634
54,101
Other income (expense)
345
(321)
1,187
(40)
Interest expense
(63,832)
(56,245)
(183,712)
(161,205)
Loss on consolidated investment
(148,887)
Gain on extinguishment of debt
2,310
Equity in earnings (loss) of
unconsolidated entities
(9,936)
3,373
(48,137)
7,608
Impairment of investment in unconsolidated entities
(2,706)
(1,284)
(4,625)
Realized gain (loss) and impairment on securities, net
20,961
(26,508)
27,910
(75,699)
Income (loss) before income taxes
(28,053)
(12,445)
(231,061)
(26,214)
Income tax (expense) benefit (Note 11)
1,004
149
(354)
(4,550)
Net income (loss)
(27,049)
(12,296)
(231,415)
(30,764)
Less: Net income attributable to noncontrolling interests
(2,409)
(2,276)
(6,790)
(6,967)
Net income (loss) applicable to Company
(29,458)
(14,572)
(238,205)
(37,731)
-2-
Other comprehensive income:
Unrealized gain on investment securities
49,154
21,996
50,780
8,095
Reversal of unrealized (gain) loss to realized gain (loss) or impairment on investments securities
(20,961)
26,508
(27,910)
75,699
Unrealized gain (loss) on derivatives
520
(853)
3,326
3,182
Comprehensive income (loss)
(745)
33,079
(212,009)
49,245
Net income (loss) available to common stockholders per common share, basic and diluted
(.04)
(.02)
(.29)
(.06)
Weighted average number of common shares outstanding, basic and diluted
815,129,571
703,516,765
808,157,928
641,555,461
-3-
Consolidated Statements of Equity
For the nine months ended September 30, 2009
Number of Shares
Common Stock
Additional Paid-in Capital
Accumulated Distributions in excess of Net Income
Accumulated Other Comprehensive Income (Loss)
Noncontrolling Interests
Noncontrolling Redeemable Interests
Balance at
794,574,007
(143)
(238,348)
6,933
Reversal of unrealized (gain) loss to realized gain (loss) on investment securities
Unrealized gain on derivatives
Distributions declared
(302,625)
(2,211)
(304,836)
(6,933)
Contributions from noncontrolling interests
1,302
Proceeds from offering
24,869,350
25
253,961
253,986
Offering costs
(28,415)
Proceeds from distribution
reinvestment plan
18,543,257
18
176,153
176,171
Shares repurchased
(20,171,263)
(20)
(188,956)
(188,976)
Issuance of stock options and discounts on shares issued to affiliates
14
817,815,351
-4-
For the nine months ended September 30, 2008
December 31, 2007
548,168,989
548
4,905,710
(227,885)
(64,278)
23,783
4,637,878
Net income
34
(37,697)
(298,596)
(2,355)
(300,951)
185,420,423
185
1,856,381
1,856,566
(194,077)
Proceeds from distribution reinvestment plan
18,071,789
171,664
171,682
(4,175,970)
(4)
(38,749)
(38,753)
125
747,485,231
747
6,701,054
(564,212)
22,698
21,462
6,181,749
-5-
Consolidated Statements of Cash Flows
Cash flows from operations:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation
233,634
181,563
Amortization
60,090
50,466
Amortization of loan fees
6,787
6,966
Amortization on acquired above market leases
2,144
1,863
Amortization on acquired below market leases
(3,231)
(2,727)
Amortization of mortgage discount/premium
1,252
1,271
Amortization of lease inducement
144
Amortization of note receivable discount
(8,107)
(394)
Amortization of above/below market ground leases
170
76
148,887
Straight-line rental income
(13,860)
(13,327)
Straight-line rental expense
89
80
Extinguishment of debt
(2,310)
Other expense (income)
(293)
40
Equity in (earnings) loss of unconsolidated entities
48,137
(7,608)
Distributions from unconsolidated entities
1,779
15,985
2,706
4,625
Discount on shares issued to affiliates and issuance of stock options
Realized gain on investments in securities, net
(31,948)
(793)
Impairment of investments in securities
4,038
76,492
Changes in assets and liabilities:
Accounts and rents receivable
1,874
(3,421)
Accounts payable and other liabilities
(15,533)
(2,802)
Due to related parties
8,187
6,653
7,365
(5,420)
20,016
12,904
Prepaid rental and recovery income
4,112
10,227
(121)
Net cash flows provided by operating activities
284,479
299,649
Cash flows from investing activities:
Purchase of RLJ Hotels
(503,065)
Consolidation of LIP-H
1,757
Purchase of investment securities
(49,216)
(161,685)
Sale of investment securities
116,032
36,847
Restricted escrows
6,997
(29,864)
Rental income under master leases
(539)
269
Acquired in-place lease intangibles
(79,507)
(23,658)
Tenant improvement payable
(94)
(106)
Purchase of investment properties
(300,358)
(507,195)
Capital expenditures and tenant improvements
(50,644)
(36,836)
Acquired above market leases
(10,697)
Acquired below market leases
34,918
474
Investment in development projects
(110,099)
(22,592)
Investment in unconsolidated entities
(19,617)
(345,578)
29,672
12,722
-6-
(continued)
Payment of leasing and franchise fees
(2,880)
(3,225)
(Funding) payoff of note receivable, net
275
(194,964)
Acquisition of joint venture interest
(10,823)
5,824
49,175
Net cash flows used in investing activities
(428,176)
(1,740,104)
Cash flows from financing activities:
Proceeds from the distribution reinvestment plan
176,166
(192,543)
Payment of offering costs
(29,616)
(192,341)
Proceeds from mortgage debt and notes payable
145,951
885,137
Payoffs of mortgage debt
(154,700)
(13,090)
Principal payments of mortgage debt
(4,662)
(2,026)
(Payoff) proceeds from margin securities debt
(37,884)
55,263
Payment of loan fees and deposits
(9,775)
(12,587)
Distributions paid
(309,326)
(288,524)
Distributions paid to noncontrolling interests
(2,354)
Distributions paid to noncontrolling redeemable interests
Contribution from noncontrolling interests
Due from related parties
(168)
1,026
492
Net cash flows provided by (used in) financing activities
(170,413)
2,413,558
Net increase (decrease) in cash and cash equivalents
(314,110)
973,103
Cash and cash equivalents, at beginning of period
409,360
Cash and cash equivalents, at end of period
1,382,463
Supplemental disclosure of cash flow information:
(913,259)
(532,623)
Tenant and real estate tax liabilities assumed at acquisition
13,099
989
Assumption of mortgage debt at acquisition
594,795
25,438
Non-cash mortgage discount/premium
5,007
(1,964)
965
(932,200)
426,654
Liabilities assumed at acquisition
2,481
Cash paid for interest
180,340
160,521
-7-
Supplemental schedule of non-cash investing and financing activities:
38,080
Write off of in-place lease intangibles, net
3,970
3,021
Write off of above market lease intangibles, net
10
Write off of below market lease intangibles, net
32
603
Write off of loan fees, net
431
50
Write off of leasing commissions, net
15
Consolidation of LIP-H assets
135,686
Assumption of mortgage debt at consolidation of LIP-H
(96,763)
Liabilities assumed at consolidation of LIP-H
(3,584)
-8-
Notes To Consolidated Financial Statements
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, 2008, which are included in the Company's 2008 Annual Report on Form 10-K, as certain note disclosures contained in such audited consolidated financial statements have been omitted from this Report. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the operating results for the full fiscal year. In the opinion of management, all adjustments (consisting of normal recurring accru als, except as otherwise noted) necessary for a fair presentation of financial position 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, multi-family (both conventional and student housing), office, industrial and lodging properties, located in the United States and Canada. Under the Business Management Agreement (the "Agreement") between the Company and Inland American Business Manager & Advisor, Inc. (the "Business Manager"), an affiliate of the Company's sponsor, the Business Manager serves as the business manager to the Company. On August 31, 2005, the Company commenced an initial public offering (the "Initial Offering") of up to 500,000,000 shares of common stock ("Shares") at $10.00 each and the issuance of 40,000,000 shares at $9.50 each distributed pursuant to the Company's distribution reinvestment plan. On August 1, 2007, the Comp any commenced a second public offering (the "Second Offering") of up to 500,000,000 shares of common stock at $10.00 each and up to 40,000,000 shares at $9.50 each pursuant to the distribution reinvestment plan. On March 31, 2009, the Company filed a registration statement to register 50,000,000 shares to be issued under the distribution reinvestment plan. Effective April 6, 2009, the Company elected to terminate the Second Offering.
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 September 30, 2009, the Company owned a portfolio of 946 commercial real estate properties, compared to 904 and 891 properties at December 31, 2008 and September 30, 2008, respectively. The portfolio consisted of approximately 42,714,108 square feet, 15,125 rooms and 8,544 units. The breakdown by segment is as follows:
Segment
Property Count
Square Ft/Rooms/Units
Retail
711
16,241,484
Lodging
99
15,125 rooms
Office
10,081,518
Industrial
64
15,358,012
Multi-Family
24
8,544 units
LIP-Holdings, LLC
8
1,033,094
(2) Real Estate Activity during 2009
Acquisitions
The Company records most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination at full fair value. The Company further reviews the acquired assets for triggering events that may require impairment. As of September 30, 2009, triggering events have occurred on certain portfolio properties and an impairment of $14,492 has been recognized for the nine months ended September 30, 2009. See Note 15 for further discussion of these impairments. All costs related to the acquisition of a business that were previously capitalized as a component of the acquisition are now expensed. During the nine months ended September 30, 2009, the Company incurred $3,240 of acquisition costs that were recorded in general and administrative expenses on the consolidated statements of operations and other comprehensive income.
-9-
The table below reflects acquisition activity for the nine months ended September 30, 2009.
Property
Date
Gross Acquisition Price
Sq Ft/Units
Macquarie Portfolio
01/14/09- 4/29/09
275,400
2,126,074
Alcoa Exchange II
01/29/09
7,300
43,750
Fultondale Promenade
02/02/09
30,700
249,554
Pavilion at La Quinta
02/18/09
41,200
166,039
Dothan Pavilion
42,600
327,555
Sanofi-aventis
01/28/09
230,000
736,572
AmEx Service Center – Greensboro
04/30/09
53,000
389,377
AmEx Service Center – Taylorsville
46,000
395,787
Computershare
06/24/09
62,600
185,171
Brazos Ranch
01/13/09
27,700
308 units
Woodlands Portfolio
07/08/09- 09/25/09
126,900
1,881 units
943,400
LIP-H Consolidation
On June 8, 2007, the Company, through a 100% owned subsidiary, entered into the LIP Holdings, LLC (LIP-H) operating agreement for the purpose of funding the development and ownership of real estate projects in the office, distribution, retail, healthcare and mixed-use markets. The Company’s subsidiary invested $227,000 in exchange for the Class A Participating Preferred Interests of LIP-H, which entitles the Company’s subsidiary to a 9.5% preferred dividend and two of the five board seats of LIP-H. The Company’s investment was used to acquire eight operating properties and funding for a mezzanine loan to LIP Development. As of December 31, 2008, the Company accounted for this investment as an unconsolidated entity.
On January 6, 2009, the Company’s subsidiary was granted a third seat on the board of LIP-H. The third board seat gave effective control over LIP-H to the Company’s subsidiary, resulting in the consolidation of LIP-H as of January 6, 2009. The assets of LIP-H consist of eight operating office and retail projects and a mezzanine loan to LIP Development (LIP-D), an entity related to Lauth (the other venture partner of LIP-H). The mezzanine loan to LIP-D was secured primarily by partnership interests owning development projects at various stages of completion, including vacant land.
On April 27, 2009, the Company took actions through LIP-H to secure the collateral and protect LIP-H’s rights under the mezzanine loan. On May 1, 2009, the borrowers under the mezzanine loan filed for bankruptcy protection. LIP-H is in the process of asserting its rights under the mezzanine loan and initiating actions to protect its collateral.
The Company’s control of LIP-H was accounted as a business combination, which required the Company to record the assets and liabilities of LIP-H at fair value. The Company valued the eight operating properties using a discounted cash flow model, including discount rates and capitalization rates on the expected future cash flows of the properties. The Company estimated fair value of the debt by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments. The mezzanine loan was based on the expected contractual cash flows discounted using a rate adjusted for the risks associated with the bankruptcy and litigation process and time and effort in working through a bankruptcy to access the collateral under the mezzanine loan. The bankruptcy will most likely extend the development and leasing timeline and cost for the collateral as third party lenders, contractors and potential tenants are expected to not be willing to t ransact with an entity during the bankruptcy process or will need significant cost concessions as additional risk consideration. These factors resulted in the valuation of the mezzanine loan at $10,200 and loss on a consolidated investment of $148,887. The Company also valued the non-controlling interest in LIP-H at zero. No consideration was given by the Company as part of this consolidation.
-10-
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Investments in properties
124,187
Notes receivable
10,200
Cash
1,299
Total assets acquired
137,443
Debt
96,763
Other liabilities
3,584
Net assets acquired
37,096
The following table summarizes the investment in LIP-H from December 31, 2008 to January 6, 2009.
Investments in unconsolidated entities at December 31, 2008
185,983
Net assets acquired at January 6, 2009
(3) Investment in Unconsolidated Entities
The entities listed below are owned by the Company and other unaffiliated parties in joint ventures. Net income, cash flow from operations and capital transactions for these properties are allocated to the Company and its joint venture partners in accordance with the respective partnership agreements. The Company's partners manage the day-to-day operations of the properties and hold key management positions. 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.
Entity
Description
Ownership %
Investment at September 30, 2009
Investment at December 31, 2008
Net Lease Strategic Asset Fund L.P.
Diversified portfolio of net lease assets
85%
186,635
201,798
Cobalt Industrial REIT II
Industrial portfolio
27%
75,298
66,217
LIP Holdings, LLC
Diversified real estate fund
(a)
D.R. Stephens Institutional Fund, LLC
Industrial and R&D assets
90%
72,062
76,258
Concord Debt Holdings, LLC
Real estate loan fund
(b)
25,018
67,859
Wakefield Capital, LLC
Senior housing portfolio
(c)
87,588
97,267
Other Unconsolidated Entities
Various Real Estate Investments
Various
43,646
47,128
On June 8, 2007, the Company entered into the venture for the purpose of funding the development and ownership of real estate projects in the office, distribution, retail, healthcare and mixed-use markets. On January 6, 2009, the Company was
-11-
granted a third board seat of five on the LIP Holdings, LLC board of managers. As of September 30, 2009, this joint venture is consolidated into the financial statements of the Company (See Note 2).
On August 2, 2008, the Company entered into a joint venture with Lex-Win Concord LLC, for the purpose of originating and acquiring real estate securities and real estate related loans. On May 22, 2009, the Company filed an action against Lex-Win Concord LLC seeking a declaration that the Company is not required to fund any additional capital calls per the terms of the agreement and that it has priority with regard to its existing capital. A negative outcome could impact the priority of future capital calls or a future liquidation, including a loss of the Company’s preferred position. The court set a trial date for the week of February 22, 2010. The parties are now undertaking discovery on an expedited basis. The Company’s remaining commitment is $24,000.
The Company evaluated the fair value of its preferred equity investment and determined the amount was in excess of the carrying value of its interest. A continued deterioration in the credit market may affect the ability of the venture to refinance its near term debt or a further decrease in the fair value of the ventures debt investments and could have a material impact on the Company’s carrying value of its investment, and the Company could recognize additional losses.
Summarized unaudited information for Concord Debt Holdings, LLC is as follows:
As of
713,318
1,006,686
597,476
712,309
Concord Debt shareholders' equity
115,842
294,377
The Company’s carrying value of investment
For the three months ended
For the nine months ended
Total revenue
8,611
18,095
31,380
54,988
Total impairment
38,247
7,205
154,907
65,221
Total income (loss) from operations
(36,446)
5,841
(168,904)
(27,911)
The Company’s share of net income (loss)
(8,563)
(39,693)
On July 9, 2008, the Company invested $100,000 in Wakefield Capital, LLC in exchange for a Series A Convertible Preferred Membership interest and is entitled to a 10.5% preferred dividend. Wakefield owns 117 senior living properties containing 7,298 operating units/beds, one medical office building and a research campus totaling 313,204 square feet.
Combined Financial Information
The Company's carrying value of its Investment in Unconsolidated Entities differs from its share of the partnership or members equity reported in the balance sheet of the Unconsolidated Entities due to the Company's cost of its investment in excess of the historical net book values of the Unconsolidated Entities. The Company's additional basis allocated to depreciable assets is recognized on a straight-line basis over 30 years.
(Dollars in thousands)
Balance Sheets:
Real estate, net of accumulated depreciation
2,290,887
2,354,601
Real estate debt and securities investments
704,240
984,158
270,322
481,621
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Total Assets
3,265,449
3,820,380
Liabilities and Partners' and Shareholders’/Members’ Equity:
Mortgage debt
2,092,631
2,210,938
92,884
129,360
Partners' and Shareholders'/Members’ Equity
1,079,934
1,480,082
Total Liabilities and Partners' and Shareholders'/Members’ Equity
Company’s share of Partners' and Shareholders'/Members’ Equity
473,942
724,197
Net excess of cost of investments over the net book value of underlying net assets (net of accumulated depreciation of $1,222 and $775, respectively)
16,305
18,313
Carrying value of investments in unconsolidated entities
Statements of Operations:
Revenues
212,636
202,094
Interest expense and loan cost amortization
76,189
62,270
85,652
67,817
Operating expenses, ground rent and general and administrative expenses
84,012
79,808
Impairments and realized losses
71,721
400,760
281,616
Net loss
(188,124)
(79,522)
Company’s share of:
Net income (loss), net of excess basis depreciation of $447 and $637
Depreciation and amortization (real estate related)
38,309
39,139
In the table above, the balances as of December 31, 2008 and for the nine months ended September 30, 2008 include amounts for LIP-H, which has been consolidated as of January 6, 2009 (See Note 2).
The debt maturities of the unconsolidated entities are not recourse to the Company and the Company has no obligation to fund, however, it is anticipated that the ventures will be able to repay or refinance all of their debt on a timely basis.
(4) Noncontrolling Interests
On January 1, 2009, the Company adopted the new requirements of Accounting Standards Codification (“ASC”) 810 as it relates to noncontrolling interests (formerly Statement of Financial Accounting Standards (SFAS) No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin (ARB) No. 51”). The new requirements of ASC 810 amend prior accounting and reporting standards for the noncontrolling interest (previously referred to as a minority interest) in a subsidiary. ASC 810 generally requires noncontrolling interests to be treated as a separate component of equity (not as a liability or other item outside of permanent equity) and consolidated net income and comprehensive income to include the noncontrolling interest’s share. The calculation of earnings per share continues to be based on income amounts attributable to the parent. ASC 810 also contains a single method of accounting for transact ions that change a parent’s ownership interest in a subsidiary by requiring that all such transactions be accounted for as equity transactions if the parent retains its controlling financial interest in the subsidiary.
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The consolidated financial statements presented include reclassifications to previously reported amounts to conform to the new presentation requirements of ASC 810. These reclassifications did not affect the amounts previously reported as net income attributable to common shareowners or earnings per share.
As of September 30, 2009 and December 31, 2008, noncontrolling interests in the Company are comprised of the ownership interests of (1) noncontrolling redeemable interests (Series A Preferred Interest) and other interests in Minto Builders (Florida), Inc. (MB REIT), and (2) noncontrolling interests in various joint ventures controlled by the Company through ownership or contractual arrangements. Balances attributable to these noncontrolling interests were reclassified either as a separate component of equity or outside of permanent equity, as appropriate, as of all dates presented.
The Series A Preferred Interest in MB REIT is subject to redemption features outside of the Company's control that results in presentation outside of permanent equity, reported at greater of carrying value or redemption value. The noncontrolling interest is reported at its redemption value as Noncontrolling redeemable interests in the Company's financial statements with a balance of $264,132 as of September 30, 2009 and December 31, 2008.
Consolidated net income and comprehensive income have been reclassified to include the amounts attributable to the noncontrolling interests. The noncontrolling interests reported in equity are not subject to any mandatory redemption requirements or other redemption features outside of the Company's control that would result in presentation outside of permanent equity.
(5) Fair Value of Financial Instruments
The table below represents the fair value of financial instruments as of September 30, 2009 and December 31, 2008.
Carrying Value
Estimated Fair Value
Mortgages Payable
5,083,300
4,898,199
4,405,558
4,268,709
Notes Receivable
463,959
478,561
The Company estimates the fair value of its mortgages 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. The Company estimates the fair value of its notes receivable by discounting the future cash flows of each instrument at rates currently available to the Company for similar instruments or in the case of certain impaired loans, by determining the fair value of the collateral supporting the loan. At September 30, 2009 and December 31, 2008, the carrying amounts of certain of the Company’s other financial instruments were representative of their fair values due to the short-term nature of these instruments.
(6) Transactions with Related Parties
The following table summarizes the Company’s related party transactions for the respective periods.
Unpaid amounts as of
General and administrative:
General and administrative reimbursement
2,079
1,455
6,773
4,355
1,651
2,401
Loan servicing
157
350
240
Affiliate share purchase discounts
59
123
Investment advisor fee
(d)
351
961
1,847
116
197
Total general and administrative to related parties
1,767
2,598
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Property management fees
(e)
5,192
19,379
15,277
(f)
Acquisition reimbursements capitalized
692
1,236
Acquisition fees
(g)
22,326
Loan placement fees
(h)
221
1,829
1,351
(i)
70,154
25,660
185,817
693
The Business Manager and its related parties are entitled to reimbursement for general and administrative expenses of the Business Manager and its related parties relating to the Company's administration.
A related party of the Business Manager provides loan servicing to the Company for an annual fee. Effective May 1, 2009, the loan servicing fees were reduced to 200 dollars per month, per loan for the Company’s non-lodging properties. The Company’s lodging properties will continue to be billed at 225 dollars per month, per loan and MB REIT properties at 200 dollars per month, per loan.
The Company established a discount stock purchase policy for related parties and related parties of the Business Manager that enables the related parties to purchase shares of common stock at either $8.95 or $9.50 a share depending on when the shares are purchased. The Company sold 18,067 and 136,739 shares to related parties and recognized an expense related to these discounts of $14 and $123 for the nine months ended September 30, 2009 and 2008, respectively.
The Company pays a related party of the Business Manager to purchase and monitor its investment in marketable securities.
The property manager, an entity owned principally by individuals who are related parties of the Business Manager, is entitled to receive property management fees up to 4.5% of gross operating income (as defined), for management and leasing services. Of the $19,379 paid for the nine months ended September 30, 2009, $400 was capitalized for the leasing department and is included in deferred costs, net on the consolidated balance sheets. In addition, the property manager is entitled to receive an oversight fee of 1% of gross operating income (as defined) in operating companies purchased by the Company.
After the Company's stockholders have received a non-cumulative, non-compounded return of 5% per annum on their "invested capital," the Company will pay its 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. For these purposes, "invested capital" means the original issue price paid for the shares of the common stock reduced by prior distributions from the sale or financing of properties. For these purposes, "average invested assets" means, for any period, the average of the aggregate book value of assets, including lease intangibles, invested, directly or indirectly, in financial instruments, debt and equity securities and equity interests in and loans secured by real estate assets, including amounts invested in REITs and ot her real estate operating companies, before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of these values at the end of each month during the period. The Company will pay this fee for services provided or arranged by the Business Manager, such as managing day-to-day business operations, arranging for the ancillary services provided by other related parties and overseeing these services, administering bookkeeping and accounting functions, consulting with the board, overseeing real estate assets and providing other services as the board deems appropriate. This fee terminates if the Company acquires the Business Manager. Separate and distinct from any business management fee, the Company also will reimburse the Business Manager or any related party for all expenses that it, or any related party including the sponsor, pays or incurs on its behalf including the salaries and benefits of persons employed by the Business Manager or i ts related parties and performing services for the Company except for the salaries and benefits of persons who also serve as one of the executive officers of the Company or as an executive officer of the Business Manager. For any year in which the Company qualifies as a REIT, its Business Manager must reimburse it for the amounts, if any, by which the total operating expenses paid during the previous fiscal year exceed the greater of: 2% of the average invested assets for that fiscal year; or 25% of net income for that fiscal year, subject to certain
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adjustments described herein. For these purposes, items such as organization and offering expenses, property expenses, interest payments, taxes, non-cash charges, any incentive fees payable to the Business Manager and acquisition fees and expenses are excluded from the definition of total operating expenses. For the nine months ended September 30, 2009 and 2008, average invested assets were $10,259,917 and $8,247,976 and operating expenses, as defined, were $54,502 and $44,588 or .71%, and .72%, respectively, of average invested assets. The Company incurred fees of $27,000 and $18,500 for the nine months ended September 30, 2009 and September 30, 2008, respectively. The Business Manager has agreed to waive all fees allowed but not taken, except for the $27,000 for the nine months ended September 30, 2009.
The Company pays the Business Manager a fee for services performed in connection with acquiring a controlling interest in a REIT or other real estate operating company. Acquisition fees, however, are not paid for acquisitions solely of a fee interest in property. The amount of the acquisition fee is equal to 2.5% of the aggregate purchase price paid to acquire the controlling interest.
The Company pays a related party of the Business Manager 0.2% of the principal amount of each loan placed for the Company. Such costs are capitalized as loan fees in deferred costs and amortized over the respective loan term.
The Business Manager and its related parties are entitled to reimbursement for salaries and expenses of employees of the Business Manager and its related parties relating to the offerings. In addition, a related party of the Business Manager was entitled to receive selling commissions, and the marketing contribution and due diligence expense allowance from the Company in connection with the offerings. Such costs are offset against the stockholders' equity accounts.
As of September 30, 2009, the Company has $25,238 on deposit with Inland Bank and Trust, a subsidiary of Inland Bancorp, Inc., an affiliate of The Inland Real Estate Group, Inc.
On February 24, 2009, the Company purchased 35,000 Inland Real Estate Corporation (IRC) convertible bonds for $24,959 with a face value of $35,000 from an unaffiliated third party. The bonds are each convertible into 48.2824 shares of IRC common stock, for a total of 1,689,884 potential shares of IRC. The Company sold these bonds in the third quarter for a total gain of $6,000.
On April 30, 2009, the Company purchased two properties from Inland Western Retail Real Estate Trust, Inc. (“Inland Western”), another REIT previously sponsored by Inland Real Estate Investment Corporation, for approximately $99,000. The Company assumed debt of $63,100, with a rate of 4.3% per annum in the transaction.
On June 24, 2009, the Company purchased a property from Inland Western for approximately $62,600. The Company assumed debt of $44,500, with a rate of 5.34% per annum in the transaction.
(7) Notes Receivable
The Company's notes receivable balance was $474,807 and $480,774 as of September 30, 2009 and December 31, 2008, respectively, and consisted of installment notes from unrelated parties that mature on various dates through July 2012. The notes are secured by mortgages on vacant land, shopping centers and hotel properties and guaranteed by the owners. Interest is due each month at rates ranging from 1.87% to 10.38% per annum. For the three and nine months ended September 30, 2009 and 2008, the Company recorded interest income from notes receivable of $5,960 and $31,278 and $5,861 and $18,679, which is included in the interest and dividend income on the consolidated statements of operations.
Some of the Company’s mortgage notes receivable, with an aggregate outstanding balance of $289,091, are considered impaired. The company evaluates the collectibility of the notes, including an evaluation of the fair value of the collateral, which includes the review of third party appraisals. The Company has determined that the fair value of the collateral was in excess of the outstanding note receivable balance, except for four loans for which a $22,949 impairment loss was recorded for the nine months ended September 30, 2009.
If the Company considers a loan to be non-performing or the collectability is uncertain based on the underlying collateral, it will place the loan on non-accrual status. The Company will recognize interest income on a cash basis, as received. If the fair value of the loan collateral decreases to less than the amortized cost basis of the loan, any interest received will be recorded as a reduction of the loan basis. If the fair value of the collateral subsequently recovers to greater than the cost basis of the loan, and if the loan is not otherwise in default, any interest payment will be recognized as interest income.
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(8) Investment in Marketable Securities
Investment in marketable securities of $213,116 at September 30, 2009 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.
The Company also has an investment in commercial mortgage backed securities which is classified as available-for-sale. This security has a fair value of $11,400 as of September 30, 2009, with a maturity date of July 2017, and is included in investment in marketable securities balance of $213,116.
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 on September 30, 2009, the Company has accumulated other comprehensive gain of $25,503, which includes gross unrealized losses of $6,193. All such unrealized losses on investments have been in an unrealized loss position for less than twelve months and such investments have a related fair value of $54,184 as of September 30, 2009.
Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. The Company's policy for assessing recoverability of its available-for-sale securities is to record a charge against net earnings when the Company determines that a decline in the fair value of a security drops below the cost basis and believes that decline to be other-than-temporary, which includes determining whether (1) the Company intends to sell the debt security, and (2) it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery. During the nine months ended September 30, 2009, the Company recorded an impairment of $4,038 compared to $76,492 for the nine months ended September 30, 2008 for other-than-temporary declines on certain available-for-sale securities, which is included as a component of realized gain (loss) and impairment on securities, net on the consolidated statements of operations.
Dividend income is recognized when earned. During the nine months ended September 30, 2009 and 2008, dividend income of $14,288 and $21,757 was recognized and is included in interest and dividend income on the consolidated statements of operations.
(9) Mortgages, Notes and Margins Payable
The table below reflects financing activity for the nine months ended September 30, 2009:
Date of Financing
Interest per Annum
Amount of Loan
Maturity Date
United Healthcare Cypress
01/15/09
LIBOR + 280 bps
22,000
01/13/12
01/21/09
5.67%
15,200
02/01/14
Sanofi-aventis (1)
5.75%
190,000
12/06/15
5.6%
16,900
Pavilions at La Quinta (1)
LIBOR + 185 bps
24,000
04/28/12
Dothan Pavilion (1)
LIBOR + 170 bps
37,200
12/18/12
Macquarie (1)
03/25/09
4.44%-5.05%
36,700
05/01/10-01/08/12
The Radian Apartments
04/15/09
5.85%
58,500
05/01/14
Home Depot – Valdosta
LIBOR + 350 bps (floor of 5%)
15,500
04/05/12
Home Depot – Birmingham
17,100
04/15/12
4.44%-7.00%
109,500
07/01/10-05/01/28
AmEx Service Center – Greensboro (1)
4.27%
33,000
01/01/15
AmEx Service Center – Taylorsville (1)
4.30%
30,100
04/01/15
Computershare (1)
5.34%
44,500
10/02/35
McKinney Outlots
06/25/09
6.50%
3,400
06/25/14
Coweta Crossing
06/29/09
6.35%
3,100
05/29/12
Woodlands
07/08/09
5.24%
56,400
08/01/14
Woodlands (Parkside) (1)
09/25/09
5.15%
18,000
09/30/15
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Retail Portfolio
09/29/09
LIBOR + 325 bps (floor of 5.5%)
39,100
09/29/12
770,200
(1)
Debt was assumed at acquisition of property
Mortgage loans outstanding as of September 30, 2009 were $5,083,300 and had a weighted average interest rate of 4.8%. Mortgage premium and discount, net was a premium of $756 as of September 30, 2009. As of September 30, 2009, scheduled maturities for the Company's outstanding mortgage indebtedness had various due dates through December 2047.
As of September 30, 2009
Weighted average interest rate
2009
39,681
5.73%
2010
941,394
3.16%
2011
476,434
3.46%
2012
287,911
4.15%
2013
730,419
4.85%
Thereafter
2,607,461
5.68%
The Company is negotiating refinancing certain debt maturing in 2010 with the existing lenders at terms that will most likely be at higher credit spreads and lower loan to value. It is anticipated that the Company will be able to repay or refinance all of the debt on a timely basis, 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 $500,000 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. Although all of the mortgage loans are current with payments, as of September 30, 2009, the Company was in technical default on one loan in its LIP-H segment, with a carrying value of $14,681.
The Company has purchased a portion of its securities through margin accounts. As of September 30, 2009 and December 31, 2008, the Company has recorded a payable of $463 and $38,346, respectively, for securities purchased on margin. This debt bears a variable interest rate of the London InterBank Offered Rate ("LIBOR") plus 50 basis points. At September 30, 2009 and December 31, 2008, this rate was .604% and 1.777%. Interest expense in the amount of $15 and $1,105 and $152 and $3,284 was recognized in interest expense on the consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008, respectively.
(10) Derivatives
As of September 30, 2009, in connection with eight mortgages payable that have variable interest rates, the Company has entered into interest rate swap and cap agreements, with a notional value of $401,819. The Company’s interest rate swaps involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable 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 September 30, 2009. The fair value of the Company’s swaps increased $3,326 during the nine months ended September 30, 2009 and is reflected in other comprehensive income (loss) on the consolidated statements of operations and other comprehensive income.
The following table summarizes interest rate swap contracts outstanding as of September 30, 2009:
Date Entered
Effective Date
End Date
Pay Fixed Rate
Receive Floating Rate Index
Notional Amount
Fair Value as of September 30, 2009
November 16, 2007
November 20, 2007
April 1, 2011
4.45%
1 month LIBOR
24,425
(1,301)
February 6, 2008
January 29, 2010
4.39%
200,000
(1,538)
March 28, 2008
March 27, 2013
3.32%
33,062
(1,488)
March 31, 2011
2.81%
50,000
(1,447)
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March 27, 2010
2.40%
35,450
(363)
December 12, 2008
January 1, 2009
December 12, 2011
20,245
43
December 23, 2008
January 5, 2009
December 22, 2011
1.86%
16,637
(197)
January 16, 2009
January 13, 2009
January 13, 2012
1.62%
(136)
401,819
(6,427)
(1) Interest rate cap at 4.75%.
Derivative Instruments and Hedging Activities
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of t he hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. 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 manage exposures that arise from business activities that result in the payment of future uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. 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. The Company has elected to designate the interest rate swaps as cash flow hedging relationships.
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 loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the nine months ended September 30, 2009 and 2008, such derivatives were used to hedge the variable 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. During the nine months ended September 30, 2009, the Company recorded $196 of ineffectiveness, which is included in interest expense on the consolidated statements of operations. The Company recorded a gain of $12 for the period of ineffectiveness during the nine months ended September 30, 2008, which is included in interest expense on the consolidated statements of operations.
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Amounts reported in “Accumulated other comprehensive loss” related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $5,191 will be reclassified to interest expense.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2009 and December 31, 2008.
Liability Derivatives
As of December 31, 2008
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments under SFAS 133:
Interest Rate Products
$6,427
$9,753
The derivative instruments were reported at their fair value of $6,427 and $9,753 in advance rent and other liabilities at September 30, 2009 and December 31, 2008, respectively, with a corresponding adjustment to other comprehensive income for the unrealized gains and losses. Over time, the unrealized gains and losses held in Accumulated other comprehensive income will be reclassified to earnings. This reclassification will correlate with the recognition of the hedged interest payments in earnings.
The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2009 and 2008:
Derivatives in SFAS 133 Cash Flow Hedging Relationships
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income
(Effective Portion)
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
September 30,
2008
(2,239)
(234)
(66)
776
During the three months ended September 30, 2009, the Company recognized additional other comprehensive gain of $520 to adjust the carrying amount of the interest rate swaps to fair values at September 30, 2009. During the three months ended September 30, 2008, the Company recognized additional other comprehensive loss of $(853) to adjust the carrying amount of the interest rate swaps to fair values at September 30, 2008. The interest rate swap settlements were offset by a corresponding adjustment in interest expense related to the interest payments being hedged.
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(6,439)
(2,869)
(196)
12
During the nine months ended September 30, 2009, the Company recognized additional other comprehensive gain of $3,326 to adjust the carrying amount of the interest rate swaps to fair values at September 30, 2009. During the nine months ended September 30, 2008, the Company recognized additional other comprehensive gain of $3,182 to adjust the carrying amount of the interest rate swaps to fair values at September 30, 2008. The interest rate swap settlements were offset by a corresponding adjustment in interest expense related to the interest payments being hedged.
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 $2,250 and $3,000 and is included as a liability in advance rent and other liabilities on the consolidated balance sheets as of September 30, 2009 and December 31, 2008, respectively, with $750 included in other income on the consolidated statements of operations and other comprehensive income at September 30, 2009.
The Company does not use derivatives for trading or speculative purposes.
(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 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.
The Company has elected to treat certain of its consolidated subsidiaries, and may in the future elect to treat newly formed subsidiaries, as taxable REIT subsidiaries pursuant to the Internal Revenue Code. Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform non-customary services for tenants and are subject to federal, state, and local income tax at regular corporate tax rates. The Company’s hotels are leased to certain of the Company’s taxable REIT subsidiaries. Lease revenue from these taxable REIT subsidiaries and its wholly-owned subsidiaries is eliminated in consolidation. 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.
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(12) Segment Reporting
The Company has six business segments: Office, Retail, Industrial, Lodging, Multi-family and LIP-H. 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, noncontrolling interest expense or interest and other investment income from corporate investments. The non-segmented assets include the Company’s cash and cash equivalents, investment in marketable securities, construction in progress, investment in unconsolidated entities and notes receivable.
The Company considers LIP-H a reportable segment as of January 6, 2009 (Note 2) as the operating results of LIP-H are reviewed by the Company’s chief operating decision maker for performance and strategic decisions. The Company previously accounted for its investment in LIP-H under the equity method and as such has not revised prior period segment disclosures.
As of September 30, 2009, approximately 10% of the Company’s rental revenue was generated by over 400 retail banking properties leased to SunTrust Banks, Inc., which are located throughout the country. Also, as of September 30, 2009, approximately 8% of the Company’s rental revenue was generated by properties leased to AT&T, Inc., the SBC Center in Hoffman Estates, Illinois, One AT&T Center in St. Louis, Missouri and AT&T Center in Cleveland, Ohio. One tenant, AT&T, Inc., leases 100% of the total gross leasable area of two of these three properties. 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 September 30, 2009.
LIP-H
Property rentals
137,067
37,358
60,614
17,935
17,805
3,355
Straight-line rents
4,471
1,707
1,631
857
164
112
Amortization of acquired above and below market leases, net
457
721
(96)
(47)
Total rental income
38,944
62,966
18,696
17,969
3,420
6,706
13,137
635
35
302
1,826
2,445
1,572
39
47,476
78,548
19,349
19,576
3,761
Operating expenses
128,601
11,486
19,890
1,961
83,817
10,345
1,102
Net property operations
158,314
35,990
58,658
17,388
34,388
9,231
2,659
(101,790)
(9,000)
General and administrative
(7,435)
Interest and other investment income
Income tax benefit (expense)
Other income (loss)
(8,724)
Equity in loss of unconsolidated entities
(14,492)
Net income attributable to noncontrolling interests
Net (loss) attributable to Company
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The following table summarizes net property operations income by segment for the three months ended September 30, 2008.
100,164
26,161
49,890
17,084
7,029
4,830
1,660
1,844
1,326
174
(132)
406
(100)
Total rentals
27,689
52,140
18,310
Tenant recoveries
6,355
11,338
642
Other income
1,964
1,441
132
831
Lodging operating income
Total revenues
36,008
64,919
19,084
7,860
121,647
10,882
17,413
1,723
87,458
4,171
141,590
25,126
47,506
17,361
47,908
3,689
(79,246)
(6,000)
(8,356)
Income tax expenses
Equity in earnings of unconsolidated entities
Net income attributable to noncontrolling interest
Net income (loss) attributable to Company
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The following table summarizes net property operations income by segment as of and for the nine months ended September 30, 2009.
390,677
105,999
174,868
53,729
46,384
9,697
13,861
5,045
5,396
2,729
324
367
1,086
(326)
1,846
(292)
(142)
110,718
182,110
56,166
46,708
9,922
18,705
37,719
3,340
91
864
5,745
6,710
589
3,872
135,168
226,539
60,095
50,671
10,843
379,619
33,515
59,874
6,600
250,267
25,601
3,762
469,610
101,653
166,665
53,495
115,646
25,070
7,081
(293,724)
(27,000)
(35,795)
Income tax expense
(22,949)
Balance Sheet Data:
Real estate assets, net
9,115,398
1,759,642
3,200,215
836,973
2,499,533
694,908
124,127
Non-segmented assets
2,399,130
Capital Expenditures
40,483
5,024
1,702
32,235
639
883
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The following table summarizes net property operations income by segment for the nine months ended September 30, 2008.
290,398
78,084
144,975
49,349
17,990
13,326
4,151
5,387
3,788
865
(560)
1,713
(288)
81,675
152,075
52,849
19,267
32,082
2,285
5,853
3,455
463
1,871
106,795
187,612
55,597
19,861
346,480
32,099
49,464
5,190
249,163
10,564
423,973
74,696
138,148
50,407
151,425
9,297
(232,029)
(18,500)
(22,108)
Realized (gain) loss and impairment on securities, net
7,661,181
1,230,888
2,773,596
834,623
2,464,305
357,769
3,502,730
11,163,911
Capital expenditures
56,127
5,126
1,079
49,888
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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. As a result of the net loss for the three and nine months ended September 30, 2009 and 2008, the diluted weighted average shares outstanding do not give effect to potential common shares as to do so would be anti-dilutive because of a net loss.
(14) Commitments and Contingencies
The Company has closed on several properties which have earnout components, meaning the Company did not pay for portions of these properties that were not rent producing. The Company is obligated, under certain agreements, to pay for those portions when the tenant moves into its space and begins to pay rent. The earnout payments are based on a predetermined formula. Each earnout agreement has a limited obligation period to pay any additional monies. If at the end of the time period allowed certain space has not been leased and occupied, the Company will own that space without any further obligation. Based on pro forma leasing rates, the Company may pay as much as $30,777 in the future as vacant space covered by earnout agreements is occupied and becomes rent producing.
The Company has entered into interest rate and treasury rate lock agreements with lenders to secure interest rates on mortgage debt on properties the Company owns or will purchase in the future. The deposits are applied as credits to the mortgage funding as they occur. As of September 30, 2009, the Company has approximately $4,954 of rate lock deposits outstanding. The agreements locked interest rates at 5.63% on approximately $25,000 in principal.
As of September 30, 2009, the Company had outstanding commitments to fund approximately $111,612 into joint ventures. The Company intends on funding these commitments with cash on hand of $631,115. Additionally, as of September 30, 2009, the Company has commitments totaling $124,405 for various development projects.
Contemporaneous with the Company’s merger with Winston Hotels, Inc., its wholly-owned subsidiary, Inland American Winston Hotels, Inc., referred to herein as “Inland American Winston,” WINN Limited Partnership, or “WINN,” and Crockett Capital Corporation, or “Crockett,” memorialized in a development memorandum their intentions to subsequently negotiate and enter into a series of contracts to develop certain hotel properties, including without limitation a Westin Hotel in Durham, North Carolina, a Hampton Inn & Suites/Aloft Hotel in Raleigh, North Carolina, an Aloft Hotel in Chapel Hill, North Carolina and an Aloft Hotel in Cary, North Carolina (collectively referred to herein as the “development hotels”).
On March 6, 2008, Crockett filed an amended complaint in the General Court of Justice of the State of North Carolina against Inland American Winston and WINN. The complaint alleges that the development memorandum reflecting the parties’ intentions regarding the development hotels was instead an agreement that legally bound the parties. The complaint further claims that Inland American Winston and WINN breached the terms of the alleged agreement by failing to take certain actions to develop the Cary, North Carolina hotel and by refusing to convey their rights in the three other development hotels to Crockett. The complaint seeks, among other things, monetary damages in an amount not less than $4,800 with respect to the Cary, North Carolina property. With respect to the remaining three development hotels, the complaint seeks specific performance in the form of an order directing Inland American Winston and WINN to transfer their rights in the hot els to Crockett or, alternatively, monetary damages in an amount not less than $20,100. Inland American Winston and WINN deny these claims and, on March 26, 2008, filed a motion to dismiss the amended complaint. On March 13, 2009, the court denied the motion to dismiss. Inland American Winston and WINN have filed answers and affirmative defenses to the amended complaint as well as counter claims against the plaintiff. The parties are now undertaking discovery. The outcome of this lawsuit cannot be predicted with any certainty and management is currently unable to estimate an amount or range of potential loss that could result if an unfavorable outcome occurs.
On May 22, 2009, Inland American Concord (Sub), LLC (“IA Sub”) filed an action against Lex-Win Concord LLC (“Concord”) in the Delaware Court of Chancery seeking a declaration in connection with certain of the Company’s rights/obligations under the Limited Liability Company Agreement (“Agreement”) that governs this venture. IA Sub filed this action, in part, due to a capital call demanded by Concord, which was, in purpose or effect, directed toward satisfying a lender’s concerns about the venture’s ability to perform under its existing credit facilities. IA Sub claims, as a result of the foregoing, that it was not required to fund the capital call. In response to this action, Concord has answered and filed counterclaims against IA Sub. It claims that IA Sub is required to fund the additional capital and it also claims damages against IA Sub for not contributing the additional capital. A negative outcome in the
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litigation could impact the priority of future capital calls or a future liquidation, including a loss of the Company’s preferred position. A negative outcome on the counterclaim could also subject IA Sub to damages. The Company believes, however that there are good and valid defenses to any claim for damages against IA Sub. IA Sub intends to vigorously pursue its case and defend its position with regard to the counterclaim. Upon motion of Concord, the court set a trial date for the week of February 22, 2010. The parties are now undertaking discovery on an expedited basis. The outcome of this lawsuit cannot be predicted with any certainty and management is currently unable to estimate an amount or range of potential loss that could result if an unfavorable outcome occurs.
On July 21 2009, Inland American (LIP) Sub, L.L.C., (“IA LIP Sub”) filed an action against Robert Lauth, Michael Curless, Gregory Gurnick, Lawrence Palmer, (collectively “the Defendants”) and Thomas Peck (the “Peck Defendant”) for civil fraud, deception, racketeering, conspiracy and other violations of law (the “Lawsuit”) in order to recover damages with regard to certain losses of IA LIP Sub which occurred as a result with IA LIP Sub’s investment LIP Holdings, L.L.C.(“Holdings”) On September 10, 2009, the Defendants filed answers and counterclaims against IA LIP Sub claiming breach of contract, promissory estoppel, constructive fraud, and breach of duty of good faith and fair dealing, claiming that IA LIP Sub promised to contribute additional funds to Holdings. IA LIP Sub denies all aspects of this counterclaim, and believes that it was filed, without basis in fact, in an attempt to gain leverage over IA L IP Sub in connection with the Lawsuit. On September 16, 2009, the Peck Defendant filed answers and counterclaims against IA LIP Sub claiming, inter alia, that the Lawsuit was filed against Peck for the purpose of inducing Peck to cooperate with IA LIP Sub in its prosecution of its claims against the Defendants. IA LIP Sub denies all aspects of this counterclaim. The parties are now undertaking discovery. The outcome of this lawsuit cannot be predicted with any certainty and management is currently unable to estimate an amount or range of potential loss that could result if an unfavorable outcome occurs.
While management does not believe that an adverse outcome in the above lawsuits would have a material adverse effect on the Company’s financial condition, there can be no assurance that an adverse outcome would not have a material effect on the Company’s results of operations for any particular period.
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) Fair Value Measurements
The Company has estimated the fair value of its 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.
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.
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:
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Fair Value Measurements at September 30, 2009
Using Quoted Prices in Active Markets for Identical Assets
Using Significant Other Observable Inputs
Using Significant Other Unobservable Inputs
(Level 1)
(Level 2)
(Level 3)
Available-for-sale real estate equity securities
201,716
Commercial mortgage backed securities
11,400
Put/call agreement in MB REIT
2,250
Derivative interest rate instruments
6,427
At September 30, 2009 and December 31, 2008, 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 (Level 1). To calculate the fair value of the derivative contracts, the Company primarily uses quoted prices for similar contracts (Level 2). The fair value of the commercial mortgage backed securities (“CMBS”) that do not have current quoted market prices available has been estimated by discounting the estimated future cash flows. The lack of activity in the CMBS market has resulted in a lack of observable market inputs to use in determining fair value. The Company incorporated its own assumptions about future cash flows and the appropriate discount rate adjusted for credit and liquidity factors. In developing these assumptions, the Company incorporated the contractual terms of the securities, the type of collateral, any credit enhancements available, and relevant market data, where available (Level 3). 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 (Level 3).
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 September 30, 2009, 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.
The following table summarizes activity for the Company’s assets measured at fair value on a recurring basis using level 3 inputs as of September 30, 2009:
Balance, December 31, 2008
22,615
Purchases
2,218
Sales
(16,934)
Realized gains
3,447
Unrealized gains
Balance, September 30, 2009
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.
The Company recognized certain non-cash impairment charges to write the investments to their fair values in the third quarter of 2009. The fair values of the investments were determined based on discounted future cash flows, using management’s estimates of
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cash flows from operations, necessary capital expenditures, any collateral considerations, the eventual disposition of the investments and appropriate discount and capitalization rates.
The asset groups that were impaired to fair value through this evaluation are:
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Total Impairment Losses
Investment Properties
25,683
49,965
Investment in Unconsolidated Entities
Consolidated Investment
213,091
189,034
(16) New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement No. 167 “Amendments to FASB Interpretation No. 46(R).” This Statement amends Interpretation 46(R) to eliminate certain scope exceptions previously permitted, provide additional guidance for determining whether an entity is a variable interest entity, and require companies to more frequently reassess whether they must consolidate variable interest entities. Statement No. 167 also replaces the previously required quantitative approach to determining the primary beneficiary of a variable interest entity with a requirement for an enterprise to perform a qualitative analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. Statement No. 167 is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company is currently evaluating the application of this Statement.
(17) Subsequent Events
The Company has evaluated all subsequent events that have occurred up through the date of issuance of these financial statements on November 12, 2009.
The Company paid distributions to its stockholders of $.04167 per share totaling $34,076 and $34,157 in October and November 2009.
Subsequent to quarter end, the Company purchased a multi-family property located in The Woodlands, Texas for $16,090. The property consists of 216 units. The Company assumed $13,450 of debt at 5.166% upon acquisition.
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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." The Company intends that such forward-looking statements be subject to the safe harbors created by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve numerous risks and unce rtainties that could cause our actual results to be materially different from those set forth in the forward-looking statements. These forward-looking statements are qualified by the factors which could affect our performance, as set forth in our Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 31, 2009, under the heading "Risk Factors," and as set forth in Part II, Item 1A of this report.
The following discussion and analysis relates to the three and nine months ended September 30, 2009 and 2008 and as of September 30, 2009 and December 31, 2008. 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 and actively manage, through affiliates of our business manager, investments in 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.
The credit market disruptions and lack of liquidity continue to impact the overall economy and real estate sector. The overall economic environment has experienced a significant slow-down, including lower consumer spending, increasing unemployment with many business sectors experiencing slowing to negative growth. These factors will continue to impact the real estate market, including increased tenant bankruptcies and lower occupancies and rental rates across all segments. Our segments will experience challenges from this slowdown all of which have adversely affected our business and results of operations as well as impacted the amount we pay as distributions.
On a consolidated basis, essentially all of our revenues and cash flows from operations for the nine months ended September 30, 2009 were generated by collecting rental payments from our tenants, room revenues from lodging properties, interest income on our notes receivable investments, 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, 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.
In evaluating our financial condition and operating performance, management focuses on the following financial and non-financial indicators, discussed in further detail herein:
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 - new leases, renewals and expirations.
Average daily room rate, revenue per available room, and average occupancy to measure our lodging properties.
Debt leverage.
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Results of Operations
General
Consolidated Results of Operations
This section describes and compares our results of operations for the three and nine months ended September 30, 2009 and 2008. We generate most of our net operating income from property operations. 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 880 and 716 of our investment properties satisfied the criteria of being owned for the entire three and nine month period ended September 30, 2009 and 2008, 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 determine the effects of our new acquisitions on net income. All dollar amounts are stated in thousands (except per share amou nts, revenue per available room and average daily rate).
Comparison of the three and nine months ended September 30, 2009 and September 30, 2008
Net income (loss) per share
Net loss per share increased from $(.02) per share to $(.04) per share for the three months ended September 30, 2009 and net loss per share increased from $(.06) per share to $(.29) per share for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. The primary reason for the increase in net loss for the nine month period was a loss on consolidation of an investment of approximately $149 million recorded in the first quarter of 2009 as well as our equity in losses of unconsolidated entities of $48 million for the nine months ended September 30, 2009.
Rental Income, Tenant Recovery Income, Lodging Income and Other Property Income. Except for our lodging properties, the majority of the revenue from the properties consists of rents received under long-term operating leases. Some leases provide for the payment of fixed base rent paid monthly in advance, and for the reimbursement by tenants of the tenant's pro rata share of certain operating expenses including real estate taxes, special assessments, insurance, utilities, common area maintenance, management fees, and certain building repairs paid by the landlord and recoverable under the terms of the lease. Under these leases, we pay all expenses and are reimbursed by the tenant for the tenant's pro rata share of recoverable expenses. Certain other tenants are subject to net leases which provide that the tenant is responsible for fixed base rent as well as all costs and expenses associated with occupancy. Under net leases, where all expenses are paid directly by the tenant, expenses are not included in the consolidated statements of operations. Under net leases where all expenses are paid by us, subject to reimbursement by the tenant, the expenses are included within property operating expenses, and reimbursements are included in tenant recovery income on the consolidated statements of operations.
Our lodging properties generate revenue through sales of rooms and associated food and beverage services. We measure our financial performance by revenue generated per available room known as RevPAR, which is an operational measure commonly used in the hotel industry to evaluate hotel performance. RevPAR represents the product of the average daily room rate charged and the average daily occupancy achieved but excludes other revenue generated by a hotel property, such as food and beverage, parking, telephone and other guest service revenues.
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.
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2009 increase (decrease) from 2008
36,903
(359)
283
36,827
2,480
1,532
(17,161)
Total property revenues
23,678
100,279
535
101,035
7,085
5,331
(34,675)
78,776
Total property revenues increased $23,678 and $78,776 for the three and nine months ended September 30, 2009 over the same period of the prior year. The increase in property revenues in 2009 was due primarily to a full period of operations reflected in 2009 for properties acquired during 2008 and 2009, offset by decreases in our lodging segment, as discussed below.
Property Operating Expenses, Lodging Operating Expenses and Real Estate Taxes. Property operating expenses consist of property management fees paid to property managers and operating expenses. This includes costs of owning and maintaining investment properties, real estate taxes, insurance, utilities and repair and maintenance. 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.
Property operating expenses
29,295
21,482
7,813
(4,487)
3,628
Total property expenses
6,954
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84,164
62,098
22,066
(2,730)
13,803
33,139
Total operating expenses increased $6,954 and $33,139 for the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008 due primarily to the effect of the properties acquired in 2008 and 2009, offset in the third quarter by a reduction in lodging expenses due to the decreased occupancy in 2009.
Other Operating Income and Expenses
Other operating expenses are summarized as follows:
22,544
63,832
56,245
7,587
General and administrative (1)
7,435
8,356
(921)
Business manager fee to affiliate
3,000
182,057
149,847
32,210
(1) Includes expenses paid to affiliates of our sponsor as described below.
61,695
183,712
161,205
22,507
35,795
22,108
13,687
8,500
540,231
433,842
106,389
Depreciation and Amortization. The $22,544 and $61,695 increase in depreciation and amortization expense for the three and nine months ended September 30, 2009 relative to the three and nine months ended September 30, 2008 was due substantially to the impact of the properties acquired in 2008 and 2009.
Interest Expense. The $7,587 and $22,507 increase in interest expense for the three and nine months ended September 30, 2009 as compared to the three and nine months ended September 30, 2008 was primarily due to mortgage debt financings during 2008 and 2009 which increased to $5,083,300 at September 30, 2009 from $4,279,283 at September 30, 2008.
We have experienced a lower overall weighted average interest rate due to the decline in LIBOR. If LIBOR increases, we will experience higher weighted average interest rates, which would impact our financial results.
A summary of interest expense for the three and nine months ended September 30, 2009 and 2008 appears below:
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Debt Type:
Margin and other interest expense
3,169
3,066
103
Mortgages
60,663
53,179
7,484
Debt Type
8,621
10,288
(1,667)
175,091
150,917
24,174
4.8%
5.4%
(.6%)
General and Administrative Expenses. General and administrative expenses primarily consist of investment advisor fees, professional services, salaries and computerized information services costs reimbursed to affiliates or related parties of the business manager for, among other things, maintaining our accounting and investor records, directors' and officers' insurance, postage, board of directors fees, printer costs and state tax based on property or net worth. Our expenses were $7,435 and $35,795 for the three and nine months ended September 30, 2009 and $8,356 and $22,108 for the three and nine months ended September 30, 2008, respectively. The increase is due primarily to the growth of our asset and stockholder base during 2009 and 2008, as well as $8,293 of acquisition and dead deal costs for the nine months ended September 30, 2009.
During 2009, we expensed acquisition costs of all transactions as incurred. Thus all costs related to finding, analyzing and negotiating a transaction will be expensed as incurred as a general and administrative expense, whether or not the acquisition is completed. These expenses would include acquisition fees, if any, paid to an affiliate of our business manager. In the nine months ended September 30, 2009, we incurred $3,240 of acquisition costs that are included in the general and administrative expenses of $35,795. Separately, we expensed $5,053 of dead deal costs for the nine months ended September 30, 2009.
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, or $25,650 for the three months ended September 30, 2009. We incurred a business manager management fee of $9,000 for the three months ended September 30, 2009 or .09% of average invested assets, waiving the remaining $16,650 for the three months ended September 30, 2009.
Interest and Dividend Income and Realized Gain (Loss) on Securities. Interest income consists of interest earned on short term investments and notes receivable. Dividends are earned from investments in our portfolio of marketable securities.
Three months ended September 30, 2009
Three months ended September 30, 2008
Nine months ended September 30, 2009
Nine months ended September 30, 2008
Interest Income
6,681
12,110
33,346
32,344
Dividend Income
3,561
6,132
14,288
21,757
Realized gains (loss) on investment securities
20,947
(86)
31,948
793
Other than temporary impairments
(26,422)
(4,038)
(76,492)
Interest income was $6,681 and $12,110 and $33,346 and $32,344 for the three and nine months ended September 30, 2009 and 2008, respectively. Interest income is earned on our cash balances and notes receivable.
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During June 2009, we transferred our cash into interest bearing accounts. We earned $2.1 million for the nine months ended September 30, 2009. We currently do not expect to earn a significant return on our cash balances for the remainder of 2009.
Our notes receivable balance of $474,807 as of September 30, 2009 consisted of installment notes from unrelated parties that mature on various dates through July 2012. The notes are secured by mortgages on land, shopping centers and lodging facilities. Interest only is due each month at rates ranging from 1.87% to 10.38% per annum. For the three and nine months ended September 30, 2009 and 2008, we recorded interest income from notes receivable of $5,960 and $31,278 and $5,861 and $18,679, respectively. See Notes Receivable section in Liquidity and Capital Resources for more discussion.
Dividend income decreased by $2,571 and $7,469 for the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008 as a result of reduced dividend payout rates. Our investments continue to generate dividends, however most REITs we have invested in have reduced their payout rates compared to the prior year and we could continue to see further reductions in the future. The following analysis outlines our yield earned on our portfolio of securities.
Dividend income
Margin interest expense
(152)
(3,284)
(961)
(1,847)
13,175
16,626
Average investment in marketable securities (1)
483,186
439,310
Average margin payable balance
(29,924)
(131,415)
Net investment
453,262
307,895
Leveraged yield (annualized)
3.9%
7.2%
The average investment in marketable securities represents our original cost basis of these securities. Unrealized gains and losses, including impairments, are not reflected.
Noncontrolling Interest. The noncontrolling interest represents the interests of the outside venture partners in Minto Builders (Florida), Inc. ("MB REIT") and various consolidated joint ventures.
Equity in Earnings of Unconsolidated Entities. For the first nine months of 2009, we have equity in losses of unconsolidated entities of $48,137. This is a decrease of $55,745 from equity in earnings of unconsolidated entities of $7,608 for the nine months ended September 30, 2008. The change is mainly due to significant losses incurred and impairment recorded by one of our joint ventures of which our portion was $39,693.
Provision for Asset Impairment. For the three and nine months ended September 30, 2009, we recorded a provision for asset impairment of $14,492 to reduce the book value of certain of our investment properties to fair value. No provision was recorded for the three and nine months ended September 30, 2008.
Impairment of Notes Receivable. For the three and nine months ended September 30, 2009, we have recorded an impairment of notes receivable of $8,724 and $22,949, respectively. No impairment was recorded for the three and nine months ended September 30, 2008.
Impairment of Investment in Unconsolidated Entities. For the three and nine months ended September 30, 2009, we recorded an impairment of $2,706 on our investment in unconsolidated entities. For the three and nine months ended September 30, 2008, we recorded an impairment of $1,284 and $4,625 loss, respectively, on our investment in unconsolidated entities.
An analysis of results of operations by segment follows:
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Retail Segment
Total Retail Properties
As of September 30,
Retail Properties
Physical occupancy
93%
94%
Economic occupancy
96%
Base rent per square foot
15.68
16.47
Gross investment in properties
3,385,896
2,880,657
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 the end of the period and do not represent the average rate during the nine months ended September 30, 2009 and 2008.
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 tenants largely consist of basic-need retailers such as grocery, pharmacy, moderate-fashion shoes and clothing, and services. We have only 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 impacted the greatest by the internet and existing economic conditions.
During the nine months ended September 30, 2009, our retail portfolio had a limited number of tenant issues related to retailer bankruptcy. As of September 30, 2009, our retail portfolio contained only 12 retailers, renting approximately 289,348 square feet, that had filed for bankruptcy protection. We do not believe these bankruptcies will have a material adverse effect on our results of operations, financial condition and ability to pay distributions.
We have not experienced bankruptcies or receivable write-offs in our retail portfolio that have materially impacted our result of operations notwithstanding the overall decline in the economy or retail environment. However, we continue to actively monitor our retail tenants as a continued downturn in the economy could have negative impact on our tenants’ abilities to pay rent or our ability to lease space.
Comparison of Three Months Ended September 30, 2009 to 2008
The table below represents operating information for the retail segment of 711 properties and for the same store portfolio consisting of 684 properties acquired prior to July 1, 2008. The properties in the same store portfolio were owned for the entire three months ended September 30, 2009 and September 30, 2008.
Total Retail Segment
Same Store Retail Segment
Increase/
(Decrease)
Revenues:
10,826
49,724
51,663
(1,939)
1,799
10,110
11,282
(1,172)
1,811
1,440
371
13,629
61,645
64,385
(2,740)
11,286
10,188
1,098
8,417
10,252
(1,835)
8,604
7,225
1,379
6,915
7,148
(233)
Total operating expenses
2,477
15,332
17,400
(2,068)
Net operating income
11,152
46,313
46,985
(672)
Average occupancy for the period
(3%)
(2%)
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Retail properties real estate rental revenues increased from $64,919 in the third quarter of 2008 to $78,548 in the third quarter of 2009 mainly due to the acquisition of 22 retail properties since September 30, 2008. Retail properties real estate and operating expenses also increased from $17,413 in 2008 to $19,890 in 2009 as a result of these acquisitions.
The primary reason for the decrease in revenue and net property operations for the retail same store comparison is a decrease in economic occupancy of 2% between the three months ended September 30, 2008 and the three months ended September 30, 2009. The decrease in occupancy has resulted from an overall decline in the economy and the impact on demand for retail space. The primary reason for the decrease in property operating expenses was an overall decline in repair and maintenance in addition to 2008 experiencing hurricane related repairs.
Comparison of Nine Months Ended September 30, 2009 to September 30, 2008
The table below represents operating information for the retail segment of 711 properties and for the same store portfolio consisting of 545 properties acquired prior to January 1, 2008. The properties in the same store portfolio were owned for the entire nine months ended September 30, 2009 and September 30, 2008.
30,035
136,844
142,322
(5,478)
5,637
30,325
31,919
(1,594)
3,255
4,973
3,198
1,775
38,927
172,142
177,439
(5,297)
34,981
29,310
5,671
27,217
28,903
(1,686)
24,893
20,154
4,739
20,986
20,051
935
10,410
48,203
48,954
(751)
28,517
123,939
128,485
(4,546)
Retail properties real estate rental revenues increased from $187,612 in the nine months ended 2008 to $226,539 in the nine months ended 2009 mainly due to the acquisition of 22 retail properties since September 30, 2008. Retail properties real estate and operating expenses also increased from $49,464 in 2008 to $59,874 in 2009 as a result of these acquisitions.
The primary reason for the decrease in revenue and net property operations in the retail same store comparison is a decrease in economic occupancy of 3% from September 30, 2008 to September 30, 2009. The primary reason for the decrease in property operating expenses was an overall decline in repair and maintenance in addition to 2008 experiencing hurricane related repairs.
Lodging Segment
Total Lodging Properties
For the nine months ended September 30,
Lodging Properties
Revenue per available room
93
Average daily rate
117
128
Occupancy
66%
72%
2,729,988
2,621,000
We believe the decreases in revenue per available room, average daily rate and occupancy are primarily a result of the current economic slowdown that has affected all industries and travel segments.
Lodging facilities have characteristics different from those found in office, retail, industrial, and multi-family properties (also known as "traditional asset classes"). Revenue, operating expenses, and net income are directly tied to the daily hotel sales operation whereas
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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. We believe 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 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.
During the second half of 2008, the hotel industry began to experience declines in both occupancy levels and rental rates (better known as "Average Daily Rate" or "ADR"). The downturn in performance affected all major segments of the travel industry (e.g. corporate travel, group travel, and leisure travel). During the first six months of 2009, the industry continued to experience declines greater than the ones experienced in the fourth quarter of 2008. The industry is projecting to see ongoing declines in Revenue per Available Room growth through most of 2009. For 2009, the industry is predicting Revenue per Available Room ranging from negative 15-18% compared to 2008. We believe this slowdown will continue until Gross National Product (“GNP”) begins a period of consistent growth. For 2009, we expect our revenue per available room will be consistent with the overall industry trends. For the nine months ended Septemb er 30, 2009, our revenue per available room decreased by 18%.
Our third party managers and asset management are focusing on reducing variable costs and gaining market share from competitors as a result of the declines in revenues.
Comparison of Three Months Ended September 30, 2009 to September 30, 2008
The table below represents operating information for the lodging segment of 99 properties and for the same store portfolio consisting of 98 properties acquired prior to July 1, 2008. The properties in the same store portfolio were owned for the entire three months ended September 30, 2009 and September 30, 2008.
Total Lodging Segment
Same Store Lodging Segment
111,424
(23,942)
Lodging operating expenses to non-related parties
71,559
(9,776)
6,969
6,123
846
6,633
510
(3,641)
78,192
(9,266)
(13,520)
33,232
(14,676)
On a same store basis, the lodging segment’s net operating income decrease, is primarily attributable to a decrease in same store occupancy from 71% to 68%, a reduction in the Average Daily Rate from $126 to $111 and a reduction in Rev/Par from $91 to $75. The reduction is attributable to the current economic recession which has reduced travel from all major segments of the lodging industry (business transient and group, and leisure group and transient travel).
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The table below represents operating information for the lodging segment of 99 properties and for the same store portfolio consisting of 76 properties acquired prior to January 1, 2008. The properties in the same store portfolio were owned for the entire nine months ended September 30, 2009 and September 30, 2008.
227,842
277,121
(49,279)
138,490
160,625
(22,135)
21,054
17,220
3,834
12,774
11,566
1,208
1,104
151,264
172,191
(20,927)
(35,779)
76,578
104,930
(28,352)
On a same store basis, the lodging segment’s net operating income decrease, is primarily attributable to a decrease in same store occupancy from 70% to 64%, a reduction in the Average Daily Rate from $123 to $110 and a reduction in Rev/Par from $86 to $71. The reduction is attributable to the current economic recession which has reduced travel from all major segments of the lodging industry (business transient, leisure transient, and business leisure group travel).
Office Segment
Total Office Properties
Office Properties
97%
15.32
15.07
1,949,573
1,359,021
Our investments in office properties largely represent assets leased and occupied to either a diverse group of tenants or 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. 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 AT&T, with the leased locations located in the east and southeast regions of the country.
Our office properties continue to experience consistent occupancy rates and stable rental rates for more recent acquisitions. For example, in the Minneapolis, Minnesota and Dulles, Virginia office markets, where a majority of our multi-tenant office properties are located, our high occupancy rate is consistent with the strength of the market. The increase in our base rent per square foot from $15.07 to $15.32 was primarily a result of acquisitions during 2008 and 2009. These rates are as of the end of the period and do not represent the average rate during the nine months ended September 30, 2009 and 2008.
The table below represents operating information for the office segment of 40 properties and for the same store portfolio consisting of 30 properties acquired prior to July 1, 2008. The properties in the same store portfolio were owned for the three months ended September 30, 2009 and September 30, 2008.
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Total Office Segment
Same Store Office Segment
11,255
26,929
(760)
6,194
6,356
(162)
(138)
11,468
34,949
36,009
(1,060)
7,711
7,176
6,759
7,266
(507)
3,775
3,706
69
3,755
49
604
10,514
10,972
(458)
10,864
24,435
25,037
(602)
(1%)
Office properties real estate rental revenues increased from $36,008 in 2008 to $47,476 in 2009 mainly due to the acquisition of 10 properties since September 30, 2008. Office properties’ real estate taxes and operating expenses also increased from $10,882 in 2008 to $11,486 in 2009 as a result of these acquisitions.
The decrease in net property operations for the office same store comparison resulted primarily from a decrease in same store occupancy and a decrease in repairs and maintenance and utility costs.
The table below represents operating information for the office segment of 40 properties and for the same store portfolio consisting of 28 properties acquired prior to January 1, 2008. The properties in the same store portfolio were owned for the nine months ended September 30, 2009 and September 30, 2008.
29,043
80,270
81,317
(1,047)
(562)
18,175
(1,092)
(108)
5,746
5,843
(97)
28,373
104,191
106,427
(2,236)
22,826
21,665
1,161
21,177
21,901
(724)
10,689
10,434
255
10,658
224
1,416
31,835
32,335
(500)
26,957
72,356
74,092
(1,736)
Office properties real estate rental revenues increased from $106,795 in 2008 to $135,168 in 2009 mainly due to the acquisition of 10 properties since September 30, 2008. Office properties real estate and operating expenses also increased from $32,099 in 2008 to $33,515 in 2009 as a result of these acquisitions.
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The decrease in net property operations for the office same store comparison resulted primarily from a lower recovery of operating expenses and a decrease in same store occupancy as well as a decrease in repairs and maintenance and utility costs.
Industrial Segment
Total Industrial Properties
Industrial Properties
95%
92%
99%
4.79
5.08
917,627
883,014
During 2009, our industrial holdings have continued to experience high economic occupancy rates. The majority of the properties are located in what we believe are active and sought-after industrial markets, including the Memphis Airport market of Memphis, Tennessee and the O’Hare Airport market of Chicago, Illinois, one of the largest industrial markets in the world.
The table below represents operating information for the industrial segment of 64 properties and for the same store portfolio consisting of 61 properties acquired prior to July 1, 2008.
Total Industrial Segment
Same Store Industrial Segment
386
16,727
17,328
(601)
(7)
(114)
265
17,380
18,102
(722)
1,291
1,209
82
1,245
1,195
670
514
156
238
1,915
1,709
206
27
15,465
16,393
(928)
Industrial properties real estate revenues increased from $19,084 for the three months ended September 30, 2008 to $19,349 for the three months ended September 30, 2009 mainly due to the acquisition of two properties since September 30, 2008. Industrial properties real estate and operating expenses also increased from $1,723 in 2008 to $1,961 in 2009 as a result of these acquisitions.
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.
Our overall decrease in net operating income for the industrial same store comparison reflects a decrease in overall economic occupancy.
The table below represents operating information for the industrial segment of 64 properties and for the same store portfolio consisting of 60 properties acquired prior to January 1, 2008.
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3,317
47,555
48,600
(1,045)
1,055
2,284
1,056
126
(374)
4,498
50,984
51,347
3,838
3,589
249
3,554
3,465
2,762
1,601
1,410
6,316
5,066
1,250
3,088
44,668
46,281
(1,613)
98%
Industrial properties real estate revenues increased from $55,597 for the nine months ended September 30, 2008 to $60,095 for the nine months ended September 30, 2009 mainly due to the acquisition of two properties since September 30, 2008. Industrial properties real estate and operating expenses also increased from $5,190 in 2008 to $6,600 in 2009 as a result of these acquisitions.
The increase in real estate taxes resulted from billing certain tenants for real estate taxes we paid in 2009, where in 2008, the tax was paid directly by the tenants. This activity took place in the first quarter of 2009, thus affecting the nine month same store analysis. The overall decrease in net operating income is a result of lower occupancy.
Multi-family Segment
Total Multi-family Properties
Multi-Family Properties
88%
91%
End of month scheduled base rent per unit per month
851
758,220
384,863
Our portfolio contains 24 multi-family properties, each reporting stable rental rate levels. These rates are as of the end of the period and do not represent the average rate during the nine months ended September 30, 2009 and 2008. We believe that recent changes in the housing market have made rentals a more attractive option and we expect the portfolio to continue its stable occupancy levels.
The table below represents operating information for the multi-family segment of 24 properties and for the same store portfolio consisting of seven properties acquired prior to July 1, 2008. The properties in the same store portfolio were owned for the entire three months ended September 30, 2009 and September 30, 2008.
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Total Multi-Family Segment
Same Store Multi-Family Segment
10,940
4,755
4,881
(126)
1,607
445
459
(14)
11,716
5,200
5,340
(140)
8,067
2,888
5,179
2,244
2,597
(353)
2,278
1,283
995
775
936
(161)
6,174
3,019
3,533
(514)
5,542
2,181
1,807
374
89%
1%
Multi–family real estate rental revenues increased from $7,860 for the three months ended September 30, 2008 to $19,576 for the three months ended September 30, 2009. The increases are mainly due to the acquisition of 12 properties since September 30, 2008. Multi-family properties real estate and operating expenses also increased from $4,171 in 2008 to $10,345 in 2009 as a result of these acquisitions.
The increase in net operating income was primarily caused by a decrease in overall operating expenses in 2009.
The table below represents operating information for the multi-family segment of 24 properties and for the same store portfolio consisting of seven properties acquired prior to January 1, 2008. The properties in the same store portfolio were owned for the entire nine months ended September 30, 2009 and September 30, 2008.
28,718
14,743
14,639
104
3,963
2,092
1,182
1,232
(50)
30,810
15,925
15,871
19,119
7,534
11,585
6,149
6,559
(410)
6,482
3,030
3,452
2,838
2,683
155
15,037
8,987
9,242
(255)
15,773
6,938
6,629
309
Multi–family real estate rental revenues increased from $19,861 for the nine months ended September 30, 2008 to $50,671 for the nine months ended September 30, 2009. The increases are mainly due to the acquisition of 12 properties since September 30, 2008. Multi-family properties real estate and operating expenses also increased from $10,564 in 2008 to $25,601 in 2009 as a result of these acquisitions.
The increase in net operating income was caused by an overall decrease in operating expenses in 2009.
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LIP-H Segment
On June 8, 2007, we, through a 100% owned subsidiary, entered into the LIP Holdings, LLC (LIP-H) operating agreement for the purpose of funding the development and ownership of real estate projects in the office, distribution, retail, healthcare and mixed-use markets. Our subsidiary invested $227,000 in exchange for the Class A Participating Preferred Interests of LIP-H, which entitles our subsidiary to a 9.5% preferred dividend and two of the five board seats of LIP-H.
On January 6, 2009, our subsidiary was granted a third seat on the board of LIP-H. The third board seat gave effective control over LIP-H to our subsidiary, resulting in the consolidation of LIP-H as of January 6, 2009. The assets of LIP-H consist of eight operating office and retail projects and a mezzanine loan to LIP Development (LIP-D), an entity related to Lauth (the other venture partner of LIP-H). The mezzanine loan to LIP-D was secured primarily by partnership interests owning development projects at various stages of completion, including vacant land.
On April 27, 2009, we took actions through LIP-H to secure the collateral and protect LIP-H rights under the mezzanine loan. On May 1, 2009, the borrowers under the mezzanine loan filed for bankruptcy protection. LIP-H is in the process of asserting its rights under the mezzanine loan and initiating actions to protect its collateral.
Our control of LIP-H on January 6, 2009 was accounted as a business combination, which required us to record the assets and liabilities of LIP-H at fair value. We valued the eight operating properties using a discounted cash flow model, including discount rates and capitalization rates on the expected future cash flows of the properties. We estimated fair value of the debt by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments. The mezzanine loan was based on the expected contractual cash flows discounted using a rate adjusted for the risks associated with the bankruptcy and litigation process and time and effort in working through a bankruptcy to access the collateral under the mezzanine loan. The bankruptcy will most likely extend the development and leasing timeline and cost for the collateral as third party lenders, contractors and potential tenants are expected to not be willing to transact with an entity during the ban kruptcy process or will need significant cost concessions as additional risk consideration. These factors resulted in the valuation of the mezzanine loan at $10,200 and loss on a consolidated investment of approximately $149,000. We also valued the non-controlling interest in LIP-H at zero. No consideration was given by us as part of this consolidation.
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 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 2009, we believe that our acquisitions will be fewer than prior years as our primary capital raise was completed in April of 2009.
Our principal demands for funds will be:
to service or pay-down our debt;
to pay our expenses and the operating expenses of our properties;
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to make distributions to our stockholders;
to invest in properties;
to fund joint ventures and development commitments;
to fund notes receivable; and
to invest in REIT marketable securities.
Generally, our cash needs will be 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;
proceeds from borrowings on properties;
distributions from our joint venture investments; and
issuance of shares under our distribution reinvestment plan.
Acquisitions and Investments
We completed approximately $943.4 million and $1.2 billion of real estate and real estate company acquisitions and investments during the nine months ended September 30, 2009 and 2008, respectively. These acquisitions and investments were consummated through our subsidiaries and were funded with available cash, mortgage indebtedness, and the proceeds from the offerings of our shares of common stock. We do not expect to acquire a significant amount of real estate for the balance of 2009.
Investments in Unconsolidated Joint Ventures
We have entered into a number of joint ventures that invest in operating properties, developments and real estate loans. The joint ventures that are focused on operating properties continue to generate positive cash flows. Certain of our development joint ventures are experiencing longer lease-up timelines and could be at rates less than originally expected. The development joint ventures also have construction loans from third parties that could mature before the completion of the development. These lenders might not be willing to extend their loans or extend on terms acceptable to us or our partners. Although we have no additional obligation to fund these ventures other than as noted below, our investment could be at risk without the funding of additional capital. It is anticipated that the entities will be able to repay or refinance all of their debt on a timely basis, however, the debt maturities of the entities are not recourse to us and we have no obligation to fund.
Joint Venture
(000s) (a)
Remaining Commitment
(000s)
Primarily Development
L-Street Marketplace, LLC
Retail Center Development
5,430
Weber/Inland American Lewisville TC, LP
7,992
Skyport Hotels JV, LLC
Lodging Development
14,674
13,422
Primarily Operating
Industrial and R&D Assets
10,900
Industrial Portfolio
62,038
Net lease assets
Senior Housing Portfolio
Other operating joint ventures
Lodging Facilities
30,224
451,807
72,938
Real Estate Loan Fund
111,612
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(a) Represents our investment balance as reported for GAAP purposes on our balance sheet at September 30, 2009.
On August 2, 2008, we entered into the Concord Debt Holdings, LLC joint venture (“Concord”) with Lex-Win Concord LLC, which originates and acquires real estate securities and real estate related loans. We have invested $76 million in the venture as of September 30, 2009 and have accounted for this investment under the equity method. During 2009, Concord received margin calls on certain of its loan facilities that required the entity to identify certain loans that will be disposed of to provide liquidity to meet the required pay down requirements. In addition, Concord has recorded impairment losses and loan loss reserves of $154.9 million for the nine months ended September 30, 2009. The carrying value of $25 million reflects the reduction in our investment in Concord from our share of the net loss at the venture level and distributions.
We evaluated the fair value of our preferred equity investment and determined the amount was in excess of the carrying value of its interest. A continued deterioration in the credit market may affect the ability of the venture to refinance its near term debt or a further decrease in the fair value of the ventures debt investments and could have a material impact on our carrying value of our investment, and we could recognize additional losses.
On May 22, 2009, Inland American Concord (Sub), LLC (“IA Sub”) filed an action against Lex-Win Concord LLC (“Concord”) in the Delaware Court of Chancery seeking a declaration in connection with certain of our rights/obligations under the Limited Liability Company Agreement (“Agreement”) that governs this venture. IA Sub filed this action, in part, due to a capital call demanded by Concord, which was, in purpose or effect, directed toward satisfying a lender’s concerns about the venture’s ability to perform under its existing credit facilities. IA Sub claims, as a result of the foregoing, that it was not required to fund the capital call. In response to this action, Concord has answered and filed counterclaims against IA Sub. It claims that IA Sub is required to fund the additional capital and it also claims damages against IA Sub for not contributing the additional capital. A negative outcome in the litigation could i mpact the priority of future capital calls or a future liquidation, including a loss of our preferred position. A negative outcome on the counterclaim could also subject IA Sub to damages. We believe, however that there are good and valid defenses to any claim for damages against IA Sub. IA Sub intends to vigorously pursue its case and defend its position with regard to the counterclaim.
Investments in Consolidated Developments
We have entered into certain 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. In addition, we have purchased land and incurred pre-development costs of $87 million for an additional four multi-family and student housing projects. We will most likely not commence construction on these projects until construction financing becomes available at appropriate rates and terms; however it is still our intent to develop these projects.
The overall economic difficulties continue to impact the real estate industry and developments in particular. The current and projected slow-down in consumer spending has negatively impacted the retail environment and is causing many retailers to pull back from new leasing and expansion plans. While the overall retail sector will be negatively impacted, retail development will be particularly exposed. Our retail developments will experience longer lease-up periods and future leasing will be at leasing rates less than originally underwritten.
The properties under development and all amounts set forth below are as of September 30, 2009. (Dollar amounts stated in thousands)
Name
Location
(City, State)
Property Type
Square Feet
Costs Incurred to Date ($)
Total Estimated Costs ($) (a)
Estimated Placed in Service
Date (b)
Note Payable as of September 30, 2009 ($)
Percentage Pre-Leased as of September 30, 2009 (d)
Cityville Oak Park
Dallas, TX
Multi-family
557,504
73,429
100,007
58,048
34%
Cityville Carlisle
211,512
17,265
40,775
Q3 2010
11,091
0% (e)
Cityville Block 121
Birmingham, AL
272,960
12,256
37,314
1,176
Aloft Hotel
Chapel Hill, NC
Hotel
130 rooms
12,831
22,891
Q2 2010
879
0%
Stone Creek
San Marcos, TX
453,535
45,435
65,952
9,629
Woodbridge
Wylie, TX
511,282
33,149
71,638
6,628
41%
Hudson Correctional Facility
Hudson, CO
Correctional Facility
81,972
100,000
Q4 2009
100%
276,337
438,577
87,451
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The Total Estimated Costs represent 100% of the development's estimated costs, including the acquisition cost of the land and building, if any. The Total Estimated Costs are subject to change upon, or prior to, the completion of the development and include amounts required to lease the property.
The Estimated Placed in Service Date represents the date the certificate of occupancy is currently anticipated to be obtained. Subsequent to obtaining the certificate of occupancy, each property will go through a lease-up period.
Stone Creek and Woodbridge are retail shopping centers and development is planned to be completed in phases. As the construction and lease-up of individual phases are completed, the respective phase will be placed in service resulting in a range of estimated placed in service dates through 2011. The occupancy presented includes anchor tenants for the project who own their respective square feet.
The Percentage Pre-Leased represents the percentage of square feet leased of the total projected square footage of the entire development.
Leasing activities related to multi-family properties do not begin until six to nine months prior to the placed in service date.
We are developing a $100 million correctional facility that is triple-net-leased for 10 years.
Development consists of three phases. Phase I will be placed in service in the fourth quarter of 2009. The remaining phases are considered in the pre-development phase.
Our notes receivable balance was $474.8 million and $480.8 million as of September 30, 2009 and December 31, 2008, respectively, with maturity dates through July 2012. The notes are secured by mortgages on land for prospective developments, shopping centers and hotel properties. Interest only is due each month at rates ranging from 1.87% to 10.38% per annum. For the nine months ended September 30, 2009 and 2008, we recorded interest income from notes receivable of $31.2 million and $18.7 million, respectively, which is included in the interest and dividend income on the Consolidated Statement of Operations.
Some of our notes receivable with an aggregate outstanding balance of $289.1 million are considered impaired. We evaluate the collectibility of the notes, including an evaluation of the fair value of the collateral, which includes the review of third party appraisals. We determined that the fair value of the collateral was in excess of the outstanding note receivable balance, except for four loans for which a $22.9 million impairment loss was recorded. The impaired loans generated $12.9 million of interest income for the nine months ended September 30, 2009. We do not believe we will recognize additional interest income for the remainder of 2009 for the impaired loans.
If we consider a loan to be non-performing or the collectability is uncertain based on the underlying collateral, we will place the loan on non-accrual status. We recognize interest income on a cash basis, as received. If the fair value of the loan collateral decreases to less than the amortized cost basis of the loan, any interest received will be recorded as a reduction of the loan basis. If the fair value of the collateral subsequently recovers to greater than the cost basis of the loan, and if the loan is not otherwise in default, any interest payment will be recognized as interest income.
Distributions
We declared cash distributions to our stockholders during the period from January 1, 2009 to September 30, 2009 totaling $302.6 million or $.50 per share on an annualized basis. These cash distributions were paid with $284.5 million from our cash flow from operations as well as $18.1 million in distributions from our unconsolidated entities that are included in cash flows from investing activities. The distributions from unconsolidated entities are primarily generated from our share of the operating cash flow of these entities.
On January 20, 2009, our board of directors voted unanimously to determine each monthly distribution rate on an adjustable basis, with a floor of $.50/share on an annualized basis, which equates to a 5% annualized yield on a share purchase of $10 (the price at which we last offered shares of our common stock in the primary offering completed in April 2009).
Financing Activities and Contractual Obligations
Stock Offering
Our initial offering of shares of common stock terminated as of the close of business on July 31, 2007. We had sold a total of 469,598,762 shares in the primary offering and approximately 9,720,991 shares pursuant to the offering of shares through the distribution reinvestment plan. A follow-on registration statement for an offering of up to 500,000,000 shares of common stock at $10.00 each and up to 40,000,000 shares at $9.50 each pursuant to our distribution reinvestment plan was declared effective by the SEC on August 1, 2007 and terminated on April 6, 2009. On March 31, 2009, we filed a registration statement to register 50,000,000 shares to be issued under the distribution reinvestment plan. As of September 30, 2009, we sold a total of 320,636,231 shares in the
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follow-on primary offering and 60,107,488 shares pursuant to the offering of shares through the distribution reinvestment plan. Our total offering costs for offerings as of September 30, 2009 were approximately $828 million.
Under rules published by the Financial Industry Regulatory Authority (“FINRA”), registered broker-dealers must disclose in a customer’s account statement an estimated value for a REIT’s securities if the annual report of that REIT discloses a per share estimated value. The FINRA rules prohibit broker-dealers from using a per share estimated value developed from data that is more than eighteen months old. We are currently evaluating the method that we will use to assist broker-dealers with this requirement. Because of the uncertainties in the marketplace generally and the factors described herein and in our other reports filed under the Exchange Act, which could continue to impact our results of operations and financial condition, the future per share estimated value of our shares may be less than the price at which we last offered shares in a primary offering or the price of our shares currently offered through our distribution reinve stment plan.
Share Repurchase Program
As of September 30, 2009, we had repurchased 32,527,130 shares for $304 million under the share repurchase program. Effective March 30, 2009, our board of directors voted to suspend the share repurchase program until further notice.
Borrowings
We repaid approximately $38 million and borrowed approximately $55 million against our portfolio of marketable securities during the nine months ended September 30, 2009 and 2008, respectively. We borrowed debt of approximately $146 million secured by mortgages on our properties for the nine months ended September 30, 2009. We borrowed approximately $885 million secured by mortgages on our properties for the nine months ended September 30, 2008.
We have entered into interest rate lock agreements with lenders to fix interest rates on mortgage debt on identified properties we own or expect to purchase in the future. These agreements require us to deposit certain amounts with the lenders. The deposits are applied as credits as the loans are funded. As of September 30, 2009, we had approximately $4.9 million of rate lock deposits outstanding. The agreements fixed interest rates at 5.63% on approximately $25 million in principal.
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 September 30, 2009 (dollar amounts are stated in thousands).
Maturing debt :
Fixed rate debt (mortgage loans)
256,575
115,080
115,410
542,546
2,548,961
3,578,572
Variable rate debt (mortgage loans)
684,819
361,354
172,501
187,873
1,504,728
Weighted average interest rate on debt:
5.25%
5.11%
5.37%
5.70%
5.62%
2.38%
2.93%
3.33%
2.42%
2.85%
The debt maturity excludes mortgage discounts and premiums associated with debt assumed at acquisition of which a premium of $756 thousand, net of accumulated amortization, is outstanding as of September 30, 2009.
We have entered into eight interest rate swap and cap agreements that have converted $401.8 million of our mortgage loans from variable to fixed rates. The pay rates range from 1.62% to 4.75% with maturity dates from January 29, 2010 to March 27, 2013.
As of September 30, 2009, we had approximately $40 million and $941 million in mortgage debt maturing in 2009 and 2010, respectively. We are currently negotiating refinancing the debt maturing in 2010 with the existing lenders at terms that will most likely be at higher credit spreads and lower loan to value, which will require us to use a portion of our cash balance to pay-down existing principal balances and pay higher interest costs. We currently anticipate that we will be able to repay or refinance all of 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. Of the outstanding debt,
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approximately $500 million is recourse to us at the corporate level. The remainder is recourse only to the property securing the indebtedness.
Summary of Cash Flows
Nine months ended September 30,
(In thousands)
Cash provided by operating activities
Cash used in investing activities
Cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash provided by operating activities was $284.5 million and $299.6 million for the nine months ended September 30, 2009 and 2008, respectively, and was generated primarily from operating income from property operations and interest and dividends. The decrease in cash flows from the nine months ended September 30, 2009 was primarily due to the decrease in lodging operating cash flow and distribution from unconsolidated entities.
Cash used in investing activities was $428.2 million and $1.7 billion for nine months ended September 30, 2009 and 2008, respectively. During the nine months ended September 30, 2008, cash was used primarily for purchases of investment properties, the RLJ portfolio and investment securities as well as used for funding of our unconsolidated joint ventures and notes receivable. We used less cash in our investing activities during the nine months ended September 30, 2009 than the nine months ended September 30, 2008 primarily due to the decrease in acquisitions and investments in unconsolidated entities.
Cash used by financing activities was $170.4 million for the nine months ended September 30, 2009, and cash provided by financing activities was $2.4 billion for the nine months ended September 30, 2008. During the nine months ended September 30, 2009 and 2008, we generated proceeds from the sale of shares, net of offering costs paid and share repurchases, of approximately $208 million and $1.8 billion, respectively. We generated approximately $146 million from borrowings secured by mortgages on our properties for the nine months ended September 30, 2009. During the nine months ended September 30, 2008, we generated approximately $885 million from borrowings secured by mortgages on our properties. During the nine months ended September 30, 2009 and 2008, we paid approximately $309 and $289 million, respectively, in distributions to our common stockholders. We also paid off mortgage debt in the amount of $155 and $13 million for the nine months ended Septemb er 30, 2009 and 2008, respectively.
We consider all demand deposits, money market accounts and investments in certificates of deposit and repurchase agreements with a maturity of six months or less, at the date of purchase, to be cash equivalents. We maintain our cash and cash equivalents at financial institutions. The combined account balances at one or more institutions periodically exceed the Federal Depository Insurance Corporation ("FDIC") insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage.
Contractual Obligations
The table below presents, on a consolidated basis, obligations and commitments to make future payments under debt obligations (including interest), and lease agreements as of September 30, 2009 (dollar amounts are stated in thousands).
Payments due by period
Less than
More than
1 year (a)
1-3 years
3-5 years
5 years
Long-Term Debt Obligations
7,071,427
143,283
2,317,592
1,721,430
2,889,122
Ground Lease Payments
60,680
272
3,167
3,320
53,921
Represents remaining three months of 2009 only.
We have acquired several properties subject to the obligation to pay the seller additional monies depending on the future leasing and occupancy of the property. These earnout payments are based on a predetermined formula. Each earnout agreement has a time limit regarding the obligation to pay any additional monies. If at the end of the time period, certain space has not been leased and occupied, we will not have any further obligation. Assuming all the conditions are satisfied, as of September 30, 2009, we would be obligated to pay as much as $30.8 million in the future as vacant space covered by these earnout agreements is occupied and becomes rent producing. The information in the above table does not reflect these contractual obligations.
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As of September 30, 2009, we had outstanding commitments to fund approximately $111.6 million into joint ventures. As of September 30, 2009, we had commitments totaling $124.4 million for various development projects. We intend on funding these commitments with cash on hand of approximately $631.1 million.
As part of our consolidated MB REIT joint venture with Minto Delaware, we could be required to redeem Minto Delaware’s interest in MB REIT beginning on October 11, 2011 subject to the terms and conditions below:
On or after October 11, 2011 until October 11, 2012, Minto Holdings, an affiliate of Minto Delaware, has the option to require us to purchase, in whole, but not in part, 100% of the Minto Delaware's investment in the MB REIT (consisting of the series A preferred stock and common stock) for a price equal to (A) if our shares of common stock are not listed, on the earlier of (x) the date we purchase Minto Delaware's investment or (y) 150 days after the date written notice of the exercise of the initial purchase right is given, the sum of (1) the series A liquidation preference, payable in cash and (2) $29.3 million or (B) if the shares of our stock are listed, on the earlier of (x) the date we purchase Minto Delaware's investment or (y) 150 days after the date written notice of the exercise of the initial purchase right is given, the sum of (1) the series A liquidation preference, payable in cash and (2) 2,934,800 shares of our common stock. The series A liquidati on preference is equal to $1,276 per share for 207,000 shares of series A preferred stock plus accrued and unpaid dividends.
On or after October 11, 2012, Minto Holdings has an option to require us to purchase, in whole, but not in part, 100% of the Minto Delaware investment for a price equal to (A) if the shares of our common stock are not listed, on the earlier of (x) the date we purchase the Minto Delaware investment or (y) 150 days after written notice of a subsequent purchase right is given, the sum of (1) the series A liquidation preference, payable in cash and (2) the fair market value (pursuant to a specified formula) of the common stock held by Minto Delaware on the date written notice of the subsequent purchase right is given, payable in cash, or (B) if the shares of our common stock are listed, on the earlier of (x) the date we purchase the Minto Delaware equity or (y) 150 days after written notice of the subsequent purchase right is given, the sum of (1) the series A liquidation preference, payable in cash and (2) 2,934,800 shares of our common stock.
On or after October 11, 2015, so long as the MB REIT qualifies as a “domestically controlled REIT,” MB REIT has the right to purchase, in whole, but not in part, 100% of Minto Delaware's investment for a price equal to (A) if the shares of our common stock are not listed, the sum of (1) the series A liquidation preference, payable in cash and (2) the fair market value (pursuant to a specified formula) of the common stock of MB REIT held by Minto Delaware or (B) if the shares of our common stock are listed, the sum of (1) the series A liquidation preference, payable in cash and (2) 2,934,800 shares of our common stock.
Critical Accounting Policies and Estimates
Please refer to our 10-K filing as of and for the year ended December 31, 2008. During the nine months ended September 30, 2009, there were no material changes to these policies.
Off Balance Sheet Arrangements
Unconsolidated Real Estate Joint Ventures
Unconsolidated joint ventures are those where we are not the primary beneficiary of a VIE and 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, please 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).
Other Unconsolidated Joint Ventures
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We have contributed $76,000 to the venture in exchange for a 10% preferred membership interests in the venture.
We invested $100,000 in Wakefield Capital, LLC in exchange for a Series A Convertible Preferred Membership interest and are entitled to a 10.5% preferred dividend.
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. None of our other segments are seasonal in nature.
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 and for the nine months ended
Mortgages, notes and margins payable
4,399,510
Total interest and dividend income
Net income (loss) per common share, basic and diluted (a)
Distributions declared to common stockholders
302,625
298,596
Distributions per weighted average common share (a)
.37
.47
Funds From Operations (a)(b)
91,540
231,262
Cash flows provided by operating activities
Cash flows used in investing activities
Cash flows provided by (used in) financing activities
The net income (loss) per share basic and diluted is based upon the weighted average number of common shares outstanding for the nine months ended September 30, 2009 and 2008, respectively. The distributions per common share are based upon the weighted average number of common shares outstanding for the nine months ended September 30, 2009 and 2008. See Footnote (b) below for information regarding our calculation of FFO.
Cash generated from operations is not equivalent to our net income from continuing operations as determined under U.S. generally accepted accounting principles or GAAP. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts or NAREIT, an industry trade group, has promulgated a standard known as "Funds from Operations, or "FFO" for short, which it believes more accurately reflects the operating performance of a REIT such as us. As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization on real property and after adjustments for unconsolidated partnerships and joint ventures in which we hold an interest. FFO is not intended to be an alternative to "Net Income" as an indicator of our performance nor to "Cash Flows from Operating Ac tivities" as determined by GAAP as a measure of our capacity to pay distributions. We believe that FFO is a better measure of our operating performance because FFO excludes non-cash items from GAAP net income. This allows us to compare our property performance to our investment objectives.
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Management uses the calculation of FFO for several reasons. We use FFO to compare our performance to that of other REITs. Additionally, we use FFO in conjunction with our acquisition policy to determine investment capitalization strategy. FFO is calculated as follows (in thousands):
Net income (loss) applicable to common shares
Add:
Depreciation and amortization:
Related to investment properties
293,339
231,777
Related to investment in unconsolidated entities
Less:
Noncontrolling interests' share:
Depreciation and amortization related to investment properties
1,903
1,923
Funds from operations
Below is additional information related to certain items that significantly impact the comparability of our Funds from operations and Net income from the periods presented:
Nine Months ended September 30,
Additions (deductions) to net income, FFO
Equity in loss of Concord Debt Holdings, LLC
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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 $15 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 $15 million. The impact at September 30, 2008 would have been $4 million. The change is a result of additional financing on the acquisitions made since September 30, 2008.
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 assoc iated 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.
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Other than temporary impairments were $4 million and $76.5 million for the nine months ended September 30, 2009 and 2008, respectively. 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 above our book value. However, due to general economic and credit market uncertainties it is difficult to project the REIT market and our portfolio value.
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 September 30, 2009. (dollar amounts stated in thousands)
Hypothetical 10% Decrease in
Hypothetical 10% Increase in
Cost
Market Value
Real estate equity securities
314,070
199,088
179,179
218,997
Derivatives
The following table summarizes our interest rate swap contracts outstanding as of September 30, 2009 (dollar amounts stated in thousands):
Fair Value of September 30, 2009
November 16,2007
(1) Interest rate CAP at 4.75%.
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 SFAS No. 133. 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. See Note 10 in the notes to consolidated financial statements for additional information.
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Item 4T. 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 September 30, 2009, 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 September 30, 2009, 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 disclo sures.
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 September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 1. Legal Proceedings
Contemporaneous with our merger with Winston Hotels, Inc., its wholly-owned subsidiary, Inland American Winston Hotels, Inc., referred to herein as “Inland American Winston,” WINN Limited Partnership, or “WINN,” and Crockett Capital Corporation, or “Crockett,” memorialized in a development memorandum their intentions to subsequently negotiate and enter into a series of contracts to develop certain hotel properties, including without limitation a Westin Hotel in Durham, North Carolina, a Hampton Inn & Suites/Aloft Hotel in Raleigh, North Carolina, an Aloft Hotel in Chapel Hill, North Carolina and an Aloft Hotel in Cary, North Carolina (collectively referred to herein as the “development hotels”).
On March 6, 2008, Crockett filed an amended complaint in the General Court of Justice of the State of North Carolina against Inland American Winston and WINN. The complaint alleges that the development memorandum reflecting the parties’ intentions regarding the development hotels was instead an agreement that legally bound the parties. The complaint further claims that Inland American Winston and WINN breached the terms of the alleged agreement by failing to take certain actions to develop the Cary, North Carolina hotel and by refusing to convey their rights in the three other development hotels to Crockett. The complaint seeks, among other things, monetary damages in an amount not less than $4.8 million with respect to the Cary, North Carolina property. With respect to the remaining three development hotels, the complaint seeks specific performance in the form of an order directing Inland American Winston and WINN to transfer their rights in the hotels to C rockett or, alternatively, monetary damages in an amount not less than $20.1 million. Inland American Winston and WINN deny these claims and, on March 26, 2008, filed a motion to dismiss the amended complaint. On March 13, 2009, the court denied the motion to dismiss. Inland American Winston and WINN have filed answers and affirmative defenses to the amended complaint as well as counter claims against the plaintiff. The parties are now undertaking discovery. The outcome of this lawsuit cannot be predicted with any certainty and we are currently unable to estimate an amount or range of potential loss that could result if an unfavorable outcome occurs.
On May 22, 2009, Inland American Concord (Sub), LLC (“IA Sub”) filed an action against Lex-Win Concord LLC (“Concord”) in the Delaware Court of Chancery seeking a declaration in connection with certain of our rights/obligations under the Limited Liability Company Agreement (“Agreement”) that governs this venture. IA Sub filed this action, in part, due to a capital call demanded by Concord, which was, in purpose or effect, directed toward satisfying a lender’s concerns about the venture’s ability to perform under its existing credit facilities. IA Sub claims, as a result of the foregoing, that it was not required to fund the capital call. In response to this action, Concord has answered and filed counterclaims against IA Sub. It claims that IA Sub is required to fund the additional capital and it also claims damages against IA Sub for not contributing the additional capital. A negative outcome in the litigation could i mpact the priority of future capital calls or a future liquidation, including a loss of our preferred position. A negative outcome on the counterclaim could also subject IA Sub to damages. We believe, however that there are good and valid defenses to any claim for damages against IA Sub. IA Sub intends to vigorously pursue its case and defend its position with regard to the counterclaim. Upon motion of Concord, the court set a trial date for the week of February 22, 2010. The parties are now undertaking discovery on an expedited basis. The outcome of this lawsuit cannot be predicted with any certainty and we are currently unable to estimate an amount or range of potential loss that could result if an unfavorable outcome occurs.
On July 21 2009, Inland American (LIP) Sub, L.L.C., (“IA LIP Sub”) filed an action against Robert Lauth, Michael Curless, Gregory Gurnick, Lawrence Palmer, (collectively “the Defendants”) and Thomas Peck (the “Peck Defendant”) for civil fraud, deception, racketeering, conspiracy and other violations of law (the “Lawsuit”) in order to recover damages with regard to certain losses of IA LIP Sub which occurred as a result with IA LIP Sub’s investment LIP Holdings, L.L.C.(“Holdings”) On September 10, 2009, the Defendants filed answers and counterclaims against IA LIP Sub claiming breach of contract, promissory estoppel, constructive fraud, and breach of duty of good faith and fair dealing, claiming that IA LIP Sub promised to contribute additional funds to Holdings. IA LIP Sub denies all aspects of this counterclaim, and believes that it was filed, without basis in fact, in an attempt to gain leverage over IA LIP Sub in conn ection with the Lawsuit. On September 16, 2009, the Peck Defendant filed answers and counterclaims against IA LIP Sub claiming, inter alia, that the Lawsuit was filed against Peck for the purpose of inducing Peck to cooperate with IA LIP Sub in its prosecution of its claims against the Defendants. IA LIP Sub denies all aspects of this counterclaim. The parties are now undertaking discovery. The outcome of this lawsuit cannot be predicted with any certainty and we are currently unable to estimate an amount or range of potential loss that could result if an unfavorable outcome occurs.
While we do not believe that an adverse outcome in the above lawsuits would have a material adverse effect on the our financial condition, there can be no assurance that an adverse outcome would not have a material effect on the results of operations for any particular period.
Item 1A. Risk Factors
An estimated value of our shares of common stock may not exceed the price at which we are offering shares under the distribution reinvestment plan.
Under rules published by the Financial Industry Regulatory Authority (“FINRA”), registered broker-dealers must disclose in a customer’s account statement an estimated value for a REIT’s securities if the annual report of that REIT discloses a per share
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estimated value. The FINRA rules prohibit broker-dealers from using a per share estimated value developed from data that is more than eighteen months old. We are currently evaluating the method that we will use to assist broker-dealers with this requirement. Because of the uncertainties in the marketplace generally and the factors described herein and in our other reports filed under the Exchange Act, which could continue to impact our results of operations and financial condition, the future per share estimated value of our shares may be less than the price at which we last offered shares in a primary offering or the price of our shares currently offered through our distribution reinvestment plan.
Increasing vacancy rates for certain classes of real estate assets resulting from the recent economic downturn and disruption in the financial markets could adversely affect the value of our assets.
Recent disruptions in the financial markets and deteriorating economic conditions have resulted in a trend toward increasing vacancy rates for certain classes of commercial property, including office, retail and industrial properties, due to increased tenant delinquencies and defaults under leases, generally lower demand for rentable space, as well as potential oversupply of rentable space. Business failures and downsizings have led to reduced demand for office and industrial space and reduced consumer demand for retail products and services, which has led to reduced demand for retail space. Reduced demand for commercial properties such as retail, office and industrial space could require us to increase concessions, tenant improvement expenditures or reduce rental rates to maintain occupancies beyond those anticipated at the time we acquired the properties. The continuation of disruptions in the financial markets and deteriorating economic conditions could impact certain of our properti es, and these properties could experience higher levels of vacancies than anticipated at the time of our acquisition. The value of our real estate assets could decrease below the amounts we paid for them. Revenues from properties could decrease due to lower occupancy rates, reduced rental rates and potential increases in uncollectible rent. Additionally, we will incur expenses, such as for maintenance costs, insurances costs and property taxes, even though a property is vacant. The longer the period of significant vacancies for a property, the greater the potential negative impact on our revenues and results of operations.
Although our sponsor or its affiliates have previously foregone or deferred advisor fees in an effort to increase cash available for distribution by the other REITs sponsored by our sponsor, our business manager is under no obligation, and may not agree, to continue to forgo or defer its business management fee.
From time to time, our sponsor or its affiliates have agreed to either forgo or defer a portion of the business management fee due them from us and the other REITs sponsored by our sponsor to ensure that each REIT generated sufficient cash from operating, investing and financing activities to pay distributions while continuing to raise capital and acquire properties. For the nine months ended September 30, 2009, we incurred a business management fee of $27 million, or approximately .35% of our average invested assets on an annual basis, as well as an investment advisory fee of approximately $961 thousand, together which are less than the full 1% fee that the business manager could be paid. In each case, our sponsor or its affiliates, including our business manager, determined the amounts that would be forgone or deferred in their sole discretion. There is no assurance that our business manager will continue to forgo or defer all or a portion of its business management fee, which m ay affect our ability to pay distributions or have less cash available to acquire real estate assets.
Actions of our joint venture partners could negatively impact our performance.
As of September 30, 2009, we had entered into joint venture agreements with 16 entities to fund the development or acquisition of office, industrial/distribution, retail, lodging, healthcare and mixed use properties. The current balance of our investment in these joint ventures, which we do not consolidate for financial reporting purposes, is $490 million. Our organizational documents do not limit the amount of available funds that we may invest in these joint ventures, and we intend to continue to develop and acquire properties through joint ventures with other persons or entities. In many cases, our existing venture partners share, and future partners may share, certain approval rights over major decisions and these investments may involve risks not otherwise present with other methods of investment in real estate, including, but not limited to:
the current economic conditions make it more likely that our co-member, co-venturer or partner in an investment might become bankrupt, which would mean that we and any other remaining general partners, members or co-venturers would generally remain liable for the partnership’s, limited liability company’s or joint venture’s liabilities;
that our co-member, co-venturer or partner may at any time have economic or business interests or goals which are or which become inconsistent with our business interests or goals;
that our co-member, co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our current policy with respect to maintaining our qualification as a REIT;
that, if our partners fail to fund their share of any required capital contributions, we may be required to contribute that capital;
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that joint venture, limited liability company and partnership agreements often restrict the transfer of a co-venturer’s, member’s or partner’s interest or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms;
that our relationships with our partners, co-members or co-venturers are contractual in nature and may be terminated or dissolved under the terms of the agreements and, in each event, we may not continue to own or operate the interests or assets underlying the relationship or may need to purchase these interests or assets at an above-market price to continue ownership;
that disputes between us and our partners, co-members or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business; and
that we may in certain circumstances be liable for the actions of our partners, co-members or co-venturers.
One tenant generated a significant portion of our revenue, and rental payment defaults by this significant tenant could adversely affect our results of operations.
As of September 30, 2009, approximately 10% of our rental revenue was generated by over 400 retail banking properties leased to SunTrust Banks, Inc., which are located throughout the country. Also, as of September 30, 2009, approximately 8% of our rental revenue was generated by properties leased to AT&T, Inc., the SBC Center in Hoffman Estates, Illinois, One AT&T Center in St. Louis, Missouri and AT&T Center in Cleveland, Ohio. One tenant, AT&T, Inc., leases 100% of the total gross leasable area of two of these three properties. 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, we 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.
Geographic concentration of our portfolio may make us particularly susceptible to adverse economic developments in the real estate markets of those areas.
In the event that we have a concentration of properties in a particular geographic area, our operating results are likely to be impacted by economic changes affecting the real estate markets in that area. A stockholder’s investment will be subject to greater risk to the extent that we lack a geographically diversified portfolio of properties. For example, as of September 30, 2009, approximately 4%, 5%, 5%, 8% and 10% of our base rental income of our consolidated portfolio, excluding our lodging facilities, was generated by properties located in the Dallas, Washington, D.C., Minneapolis, Chicago and Houston metropolitan areas, respectively.
Additionally, at September 30, 2009, thirty-nine of our lodging facilities, or approximately 39% of our lodging portfolio, were located in the eight eastern seaboard states ranging from Connecticut to Florida, including thirteen hotels located in North Carolina. Thus, adverse events in these areas, such as recessions, hurricanes or other natural disasters, could cause a loss of revenues from these hotels. Further, several of the hotels are located near the Atlantic Ocean and are exposed to more severe weather than hotels located inland. Elements such as salt water and humidity can increase or accelerate wear on the hotels’ weatherproofing and mechanical, electrical and other systems, and cause mold issues. As a result, we may incur additional operating costs and expenditures for capital improvements at these hotels. This geographic concentration also exposes us to risks of oversupply and competition in these markets. Significant increases in the supply of certain proper ty types, including hotels, without corresponding increases in demand could have a material adverse effect on our financial condition, results of operations and our ability to pay distributions.
Conditions of franchise agreements could adversely affect us.
As of September 30, 2009, all of our wholly owned or partially owned lodging properties were operated under franchises with nationally recognized franchisors including Marriott International, Inc., Hilton Hotels Corporation, Intercontinental Hotels Group PLC and Choice Hotels International. These agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor’s system. These standards are subject to change over time, in some cases at the discretion of the franchisor, and may restrict our ability to make improvements or modifications to a hotel without the consent of the franchisor. Conversely, these standards may require us to make certain improvements or modifications to a hotel, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment. Compliance with these standards could require us to incur significant expenses or capital expenditures.
These agreements also permit the franchisor to terminate the agreement in certain cases such as a failure to pay royalties and fees or perform our other covenants under the franchise agreement, bankruptcy, abandonment of the franchise, commission of a felony, assignment of the franchise without the consent of the franchisor or failure to comply with applicable law or maintain applicable standards in the operation and condition of the relevant hotel. If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we may be liable to the franchisor for a termination payment. These payments vary. Also, these franchise agreements do not renew automatically. We received notice from a franchisor that the franchise license agreement for one hotel, consisting of 129 rooms, which expires in November 2010, will not be renewed.
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Our investments in equity securities have materially impacted, and may in the future materially, impact our results.
We have invested, and may continue to invest, in real estate related securities of both publicly traded and private real estate companies. Real estate related equity securities are always unsecured and subordinated to other obligations of the issuer. Investments in real estate related equity securities are subject to risks of: (1) limited liquidity in the secondary trading market in the case of unlisted or thinly traded securities; (2) substantial market price volatility resulting from changes in prevailing interest rates in the case of traded equity securities; (3) subordination to the liabilities of the entity; (4) the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to redeem the securities; and (5) the possibility that earnings of the issuer may be insufficient to meet its debt service and distribution obligations. In addition, investments in real estate related securities will involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer. Issuers of real estate related securities generally invest in real estate or real estate related assets and are subject to the inherent risks associated with real estate related investments discussed in this prospectus, including:
fluctuations in value due to changes in interest rates;
increases in levels of prepayments;
fluctuations in the market value of mortgage-backed securities;
increases in borrower defaults;
decreases in the value of property underlying mortgage-backed securities; and
conflicts between the debt structure used to acquire a mortgage and the debt structure of the mortgages.
These risks may adversely affect the value of outstanding real estate related equity securities and the ability of the issuers thereof to repay principal and interest or make distribution payments. As of September 30, 2009, we had invested a total of $314 million in real estate related equity securities. Many of the entities that we have invested in have reduced the dividends paid on their stocks. In addition, the stock prices for these entities have declined precipitously. There is no assurance that the stock market in general, and the market for REIT stocks, in particular, will improve in the near future, however, we believe the declines in the three months ended September 30, 2009 to be temporary.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Effective March 30, 2009, our board of directors voted to suspend our share repurchase program until further notice.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
Not Applicable.
Item 6. Exhibits
The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.
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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.
/s/ Brenda G. Gujral
/s/ Lori J. Foust
By:
Brenda G. Gujral
Lori J. Foust
President and Director
Treasurer and principal financial officer
Date:
November 12, 2009
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Exhibit Index
EXHIBIT NO.
DESCRIPTION
3.1
Fifth Articles of Amendment and Restatement of Inland American Real Estate Trust, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K, as filed by the Registrant with the Securities and Exchange Commission on June 19, 2007)
3.2
Amended and Restated Bylaws of Inland American Real Estate Trust, Inc., effective as of April 1, 2008 (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K, as filed by the Registrant with the Securities and Exchange Commission on April 1, 2008), as amended by the Amendment to the Amended and Restated Bylaws of Inland American Real Estate Trust, Inc., effective as of January 20, 2009 (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K, as filed by the Registrant with the Securities and Exchange Commission on January 23, 2009)
4.1
Distribution Reinvestment Plan (incorporated by reference to Exhibit 4.1 to the Registrant’s Form S-3 Registration Statement, as filed by the Registrant with the Securities and Exchange Commission on March 31, 2009 (file number 333-158338)
4.2
Share Repurchase Program (incorporated by reference to Exhibit 4.2 to the Registrant’s Form S-11 Registration Statement, as filed by the Registrant with the Securities and Exchange Commission on December 20, 2006 (file number 333-139504))
4.3
Independent Director Stock Option Plan (incorporated by reference to Exhibit 4.3 to the Registrant’s Form S-11 Registration Statement, as filed by the Registrant with the Securities and Exchange Commission on February 11, 2005 (file number 333-122743))
31.1
Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2
Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1
Certification by Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2
Certification by Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
___________________________
* Filed as part of this Quarterly Report on Form 10-Q.
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