e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 0-50363
GLADSTONE COMMERCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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MARYLAND
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02-0681276 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
1521 WESTBRANCH DRIVE, SUITE 200
MCLEAN, VIRGINIA 22102
(Address of principal executive office)
(703) 287-5800
(Registrants 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 such filing requirements for the past 90 days. Yes þ No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated 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):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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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 þ .
The number of shares of the registrants Common Stock, $0.001 par value, outstanding as of October
31, 2008 was 8,565,264.
GLADSTONE COMMERCIAL CORPORATION
TABLE OF CONTENTS
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PAGE |
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PART I FINANCIAL INFORMATION |
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Item 1. Financial Statements (Unaudited) |
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Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 |
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3 |
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Consolidated Statements of Operations for the three and nine months ended
September 30, 2008 and 2007 |
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4 |
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Consolidated Statements of Cash Flows for the nine months ended
September 30, 2008 and 2007 |
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5 |
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Notes to Consolidated Financial Statements |
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6 |
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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations |
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22 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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33 |
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Item 4. Controls and Procedures |
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34 |
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PART II OTHER INFORMATION |
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Item 1. Legal Proceeding |
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35 |
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Item 1A. Risk Factors |
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35 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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36 |
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Item 3. Defaults Upon Senior Securities |
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36 |
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Item 4. Submission of Matters to a Vote of Security Holders |
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36 |
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Item 5. Other Information |
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36 |
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Item 6. Exhibits |
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36 |
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SIGNATURES |
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38 |
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2
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30, 2008 |
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December 31, 2007 |
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ASSETS |
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Real estate, net |
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$ |
367,715,344 |
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$ |
324,761,772 |
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Lease intangibles, net |
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32,467,191 |
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28,989,556 |
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Mortgage notes receivable |
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10,000,000 |
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10,000,000 |
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Cash and cash equivalents |
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3,064,675 |
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1,356,408 |
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Restricted cash |
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2,637,531 |
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1,914,067 |
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Funds held in escrow |
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1,988,558 |
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1,401,695 |
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Deferred rent receivable |
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6,667,829 |
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5,094,799 |
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Deferred financing costs, net |
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4,752,282 |
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4,405,129 |
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Prepaid expenses and other assets |
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989,645 |
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979,263 |
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TOTAL ASSETS |
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$ |
430,283,055 |
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$ |
378,902,689 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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LIABILITIES |
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Mortgage notes payable |
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$ |
255,425,225 |
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$ |
202,120,471 |
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Short-term loan and borrowings under line of credit |
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30,200,000 |
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24,400,000 |
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Deferred rent liability |
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3,343,863 |
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3,933,035 |
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Asset retirement obligation liability |
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2,155,341 |
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1,811,752 |
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Accounts payable and accrued expenses |
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514,222 |
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778,949 |
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Due to adviser (Refer to Note 2) |
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1,231,722 |
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784,301 |
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Obligation under capital lease |
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232,301 |
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Rent received in advance, security deposits and funds held in escrow |
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3,600,768 |
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2,706,113 |
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Total Liabilities |
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296,703,442 |
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236,534,621 |
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STOCKHOLDERS EQUITY |
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Redeemable preferred stock, $0.001 par value; $25 liquidation preference;
2,300,000 shares authorized and 2,150,000 shares issued and outstanding |
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2,150 |
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2,150 |
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Common stock, $0.001 par value, 47,700,000 shares authorized and
8,565,264 shares issued and outstanding |
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8,565 |
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8,565 |
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Additional paid in capital |
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170,640,979 |
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170,640,979 |
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Notes receivable employees |
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(2,629,846 |
) |
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(2,769,923 |
) |
Distributions in excess of accumulated earnings |
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(34,442,235 |
) |
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(25,513,703 |
) |
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Total Stockholders Equity |
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133,579,613 |
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142,368,068 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
430,283,055 |
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$ |
378,902,689 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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For the three months ended September 30, |
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For the nine months ended September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Operating revenues |
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Rental income |
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$ |
10,157,553 |
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$ |
8,024,305 |
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$ |
29,269,036 |
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$ |
22,834,663 |
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Interest income from mortgage notes receivable |
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216,446 |
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255,555 |
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673,548 |
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758,333 |
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Tenant recovery revenue |
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83,144 |
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80,648 |
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253,495 |
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230,851 |
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Total operating revenues |
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10,457,143 |
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8,360,508 |
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30,196,079 |
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23,823,847 |
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Operating expenses |
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Depreciation and amortization |
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3,262,903 |
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2,668,383 |
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9,435,690 |
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7,722,349 |
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Property operating expenses |
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225,020 |
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204,972 |
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670,442 |
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597,273 |
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Base management fee (Refer to Note 2) |
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404,108 |
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459,202 |
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1,255,833 |
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1,412,337 |
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Incentive fee (Refer to Note 2) |
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793,787 |
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677,104 |
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2,300,286 |
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1,896,677 |
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Administration fee (Refer to Note 2) |
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238,241 |
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175,852 |
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724,978 |
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592,996 |
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Professional fees |
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117,857 |
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118,371 |
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362,584 |
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442,479 |
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Insurance |
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43,354 |
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53,943 |
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126,947 |
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171,275 |
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Directors fees |
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54,702 |
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66,250 |
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161,202 |
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174,750 |
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Stockholder related expenses |
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42,232 |
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40,991 |
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271,430 |
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215,969 |
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Asset retirement obligation expense |
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35,157 |
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29,440 |
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98,394 |
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86,542 |
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General and administrative |
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105,999 |
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17,452 |
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139,151 |
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79,119 |
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Total operating expenses before credit from Adviser |
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5,323,360 |
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4,511,960 |
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15,546,937 |
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13,391,766 |
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Credit to incentive fee (Refer to Note 2) |
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(205,876 |
) |
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(526,991 |
) |
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(941,928 |
) |
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(1,746,564 |
) |
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Total operating expenses |
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5,117,484 |
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3,984,969 |
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14,605,009 |
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11,645,202 |
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Other income (expense) |
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Interest income from temporary investments |
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4,559 |
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33,105 |
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20,796 |
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325,390 |
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Interest income employee loans |
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49,624 |
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52,728 |
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152,620 |
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169,608 |
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Other income |
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7,500 |
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9,896 |
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56,493 |
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28,127 |
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Interest expense |
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(4,258,461 |
) |
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(2,920,270 |
) |
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(12,008,316 |
) |
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(8,137,343 |
) |
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Total other expense |
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(4,196,778 |
) |
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(2,824,541 |
) |
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(11,778,407 |
) |
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(7,614,218 |
) |
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Income from continuing operations |
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1,142,881 |
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1,550,998 |
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3,812,663 |
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4,564,427 |
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Discontinued operations |
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(Loss) income from discontinued operations |
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(1,322 |
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5,975 |
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(34,956 |
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471 |
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Net realized income from foreign currency transactions |
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33,487 |
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33,550 |
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Taxes refunded on sale of real estate |
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78,667 |
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Total discontinued operations |
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(1,322 |
) |
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39,462 |
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(34,956 |
) |
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112,688 |
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Net income |
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1,141,559 |
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1,590,460 |
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3,777,707 |
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4,677,115 |
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Dividends attributable to preferred stock |
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(1,023,437 |
) |
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(1,023,438 |
) |
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(3,070,312 |
) |
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(3,070,312 |
) |
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Net income available to common stockholders |
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$ |
118,122 |
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$ |
567,022 |
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$ |
707,395 |
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$ |
1,606,803 |
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Earnings per weighted average common share basic & diluted |
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Income from continuing operations (net of dividends attributable to preferred stock) |
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$ |
0.01 |
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$ |
0.07 |
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$ |
0.08 |
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$ |
0.18 |
|
Discontinued operations |
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0.00 |
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|
0.00 |
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|
0.00 |
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|
0.01 |
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Net income available to common stockholders |
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$ |
0.01 |
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$ |
0.07 |
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$ |
0.08 |
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$ |
0.19 |
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Weighted average shares outstanding- basic & diluted |
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8,565,264 |
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8,565,264 |
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8,565,264 |
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|
8,565,264 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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For the nine months ended September 30, |
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2008 |
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|
2007 |
|
Cash flows from operating activities: |
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|
Net income |
|
$ |
3,777,707 |
|
|
$ |
4,677,115 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
|
|
9,435,690 |
|
|
|
7,722,349 |
|
Amortization of deferred financing costs |
|
|
806,075 |
|
|
|
509,990 |
|
Amortization of deferred rent asset and liability, net |
|
|
(399,049 |
) |
|
|
(399,051 |
) |
Accretion of obligation under capital lease |
|
|
7,234 |
|
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|
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|
Asset retirement obligation expense |
|
|
98,394 |
|
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|
86,542 |
|
Decrease (increase) in prepaid expenses |
|
|
(110,382 |
) |
|
|
28,815 |
|
Increase in deferred rent receivable |
|
|
(1,763,153 |
) |
|
|
(1,247,345 |
) |
Increase in accounts payable, accrued expenses, and amount due adviser |
|
|
182,694 |
|
|
|
516,996 |
|
Increase in rent received in advance |
|
|
171,191 |
|
|
|
137,534 |
|
|
|
|
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|
|
|
Net cash provided by operating activities |
|
|
12,206,401 |
|
|
|
12,032,945 |
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Cash flows from investing activities: |
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|
Real estate investments |
|
|
(48,935,032 |
) |
|
|
(85,742,539 |
) |
Receipts from lenders for reserves held in escrow |
|
|
630,033 |
|
|
|
1,007,684 |
|
Payments to lenders for reserves held in escrow |
|
|
(1,216,896 |
) |
|
|
(1,010,385 |
) |
Increase in restricted cash |
|
|
(723,464 |
) |
|
|
(275,696 |
) |
Deposits on future acquisitions |
|
|
(1,650,000 |
) |
|
|
(1,310,000 |
) |
Deposits applied against real estate investments |
|
|
1,750,000 |
|
|
|
1,610,000 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(50,145,359 |
) |
|
|
(85,720,936 |
) |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings under mortgage notes payable |
|
|
48,015,000 |
|
|
|
32,521,691 |
|
Principal repayments on mortgage notes payable |
|
|
(1,171,849 |
) |
|
|
(599,328 |
) |
Principal repayments on employee notes receivable from sale of common stock |
|
|
140,077 |
|
|
|
400,598 |
|
Borrowings from line of credit |
|
|
62,600,000 |
|
|
|
24,200,000 |
|
Repayments on line of credit |
|
|
(56,800,000 |
) |
|
|
(4,200,000 |
) |
Receipts from tenants from reserves |
|
|
1,746,804 |
|
|
|
1,446,577 |
|
Payments to tenants from reserves |
|
|
(1,555,146 |
) |
|
|
(1,311,406 |
) |
Increase in security deposits |
|
|
531,806 |
|
|
|
140,525 |
|
Payments for deferred financing costs |
|
|
(1,153,228 |
) |
|
|
(770,761 |
) |
Dividends paid for common and preferred |
|
|
(12,706,239 |
) |
|
|
(12,320,797 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
39,647,225 |
|
|
|
39,507,099 |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
1,708,267 |
|
|
|
(34,180,892 |
) |
|
Cash and cash equivalents, beginning of period |
|
|
1,356,408 |
|
|
|
36,005,686 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
3,064,675 |
|
|
$ |
1,824,794 |
|
|
|
|
|
|
|
|
|
NON-CASH OPERATING, INVESTING AND FINANCING INFORMATION |
|
|
|
|
|
|
|
|
|
Additions to real estate included in accounts payable, accrued expenses, and amount due adviser |
|
$ |
|
|
|
$ |
409,000 |
|
|
|
|
|
|
|
|
|
Increase in asset retirement obligation |
|
$ |
245,195 |
|
|
$ |
150,523 |
|
|
|
|
|
|
|
|
|
Fixed rate debt assumed in connection with acquisitions |
|
$ |
6,461,603 |
|
|
$ |
4,506,689 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Gladstone Commercial Corporation (the Company) is a Maryland corporation that operates in a
manner so as to qualify as a real estate investment trust (REIT) for federal income tax purposes
and was incorporated on February 14, 2003 under the General Corporation Law of Maryland, primarily
for the purpose of engaging in the business of investing in real estate properties net leased to
creditworthy entities and making mortgage loans to creditworthy entities. Subject to certain
restrictions and limitations, the business of the Company is managed by Gladstone Management
Corporation, a Delaware corporation (the Adviser).
Subsidiaries
The Company conducts substantially all of its operations through a subsidiary, Gladstone Commercial
Limited Partnership, a Delaware limited partnership, (the Operating Partnership). As the Company
currently owns all of the general and limited partnership interests of the Operating Partnership
through GCLP Business Trust I and II as disclosed below, the financial position and results of
operations of the Operating Partnership are consolidated with those of the Company.
Gladstone Commercial Partners, LLC, a Delaware limited liability company (Commercial Partners)
and a subsidiary of the Company, was organized to engage in any lawful act or activity for which a
limited liability company may be organized in Delaware. Commercial Partners has the power to make
and perform all contracts and to engage in all activities to carry out the purposes of the Company,
and all other powers available to it as a limited liability company. As the Company currently owns
all of the membership interests of Commercial Partners, the financial position and results of
operations of Commercial Partners are consolidated with those of the Company.
Gladstone Lending, LLC, a Delaware limited liability company (Gladstone Lending), and a
subsidiary of the Company, was created to conduct all operations related to real estate mortgage
loans of the Company. As the Operating Partnership currently owns all of the membership interests
of Gladstone Lending, the financial position and results of operations of Gladstone Lending are
consolidated with those of the Company.
Gladstone Commercial Advisers, Inc., a Delaware corporation (Commercial Advisers) and a
subsidiary of the Company, is a taxable REIT subsidiary (TRS), which was created to collect all
non-qualifying income related to the Companys real estate portfolio. It is currently anticipated
that this income will predominately consist of fees received by the Company related to the leasing
of real estate. There have been no such fees earned to date. Since the Company owns 100% of the
voting securities of Commercial Advisers, the financial position and results of operations of
Commercial Advisers are consolidated with those of the Company.
GCLP Business Trust I and GCLP Business Trust II, subsidiaries of the Company, each are business
trusts formed under the laws of the Commonwealth of Massachusetts on December 28, 2005. The Company
transferred its 99% limited partnership interest in the Operating Partnership to GCLP Business
Trust I in exchange for 100 trust shares. Commercial Partners transferred its 1% general
partnership interest in the Operating Partnership to GCLP Business Trust II in exchange for 100
trust shares.
6
Interim financial information
Interim financial statements of the Company are prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial information and
pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain disclosures accompanying annual financial statements prepared in accordance
with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal
recurring accruals, necessary for the fair statement of financial statements for the interim period
have been included.
Investments in real estate
The Company records investments in real estate at cost and capitalizes improvements and
replacements when they extend the useful life or improve the efficiency of the asset. The Company
expenses costs of repairs and maintenance as incurred. The Company computes depreciation using the
straight-line method over the estimated useful life of 39 years for buildings and improvements,
five to seven years for equipment and fixtures and the shorter of the useful life or the remaining
lease term for tenant improvements and leasehold interests.
The Company accounts for its acquisitions of real estate in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations, which requires the purchase price
of real estate to be allocated to the acquired tangible assets and liabilities, consisting of land,
building, tenant improvements, long-term debt and identified intangible assets and liabilities,
consisting of the value of above-market and below-market leases, the value of in-place leases, the
value of unamortized lease origination costs, the value of tenant relationships and the value of
capital lease obligations, based in each case on their fair values.
Managements estimates of value are made using methods similar to those used by independent
appraisers (e.g., discounted cash flow analysis). Factors considered by management in its analysis
include an estimate of carrying costs during hypothetical expected lease-up periods considering
current market conditions, and costs to execute similar leases. The Company also considers
information obtained about each property as a result of its pre-acquisition due diligence,
marketing and leasing activities in estimating the fair value of the tangible and intangible assets
and liabilities acquired. In estimating carrying costs, management also includes real estate taxes,
insurance and other operating expenses and estimates of lost rentals at market rates during the
expected lease-up periods, which primarily range from nine to eighteen months, depending on
specific local market conditions. Management also estimates costs to execute similar leases,
including leasing commissions, legal and other related expenses to the extent that such costs are
not already incurred in connection with a new lease origination as part of the transaction.
The Company allocates purchase price to the fair value of the tangible assets of an acquired
property by valuing the property as if it were vacant. The as-if-vacant value is allocated to
land, building, and tenant improvements based on managements determination of the relative fair
values of these assets. Real estate depreciation expense on these tangible assets was
approximately $2.3 million and $6.7 million for the three and nine months ended September 30, 2008,
respectively, and approximately $1.8 million and $5.2 million for the three and nine months ended
September 30, 2007, respectively.
Above-market and below-market in-place lease values for owned properties are recorded based on the
present value (using an interest rate which reflects the risks associated with the leases acquired)
of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases
and (ii) managements estimate of fair market lease rates for the corresponding in-place leases,
measured over a period equal to the remaining non-cancelable term of the lease. The capitalized
above-market lease values, included in the accompanying balance sheet as part of deferred rent
receivable, are amortized as a reduction of rental income over the remaining non-cancelable terms
of the respective leases. Total amortization related to above-market lease values was $63,374 and
$190,123 for the three and nine months ended September 30, 2008 and 2007, respectively. The
capitalized below-market lease values, included in the accompanying balance sheet as deferred rent
liability, are amortized as an increase to rental income over the remaining non-cancelable terms of
the respective leases. Total amortization related to below-market
lease values was $196,391 and $589,173 for the three and nine months ended September 30, 2008 and
2007, respectively.
7
The total amount of the remaining intangible assets acquired, which consist of in-place lease
values, unamortized lease origination costs, and customer relationship intangible values, are
allocated based on managements evaluation of the specific characteristics of each tenants lease
and the Companys overall relationship with that respective tenant. Characteristics to be
considered by management in allocating these values include the nature and extent of our existing
business relationships with the tenant, growth prospects for developing new business with the
tenant, the tenants credit quality and expectations of lease renewals (including those existing
under the terms of the lease agreement), among other factors.
The value of in-place leases and unamortized lease origination costs are amortized to expense over
the remaining term of the respective leases, which generally range from 10 to 15 years. The value
of customer relationship intangibles, which is the benefit to the Company resulting from the
likelihood of an existing tenant renewing its lease, are amortized to expense over the remaining
term and any anticipated renewal periods in the respective leases, but in no event does the
amortization period for intangible assets exceed the remaining depreciable life of the building.
Should a tenant terminate its lease, the unamortized portion of the above-market and below-market
lease values, in-place lease values, unamortized lease origination costs and customer relationship
intangibles will be charged to expense. Total amortization expense related to these intangible
assets was approximately $0.9 million and $2.8 million for the three and nine months ended
September 30, 2008, respectively, and approximately $0.8 million and $2.5 million for the three and
nine months ended September 30, 2007, respectively.
Impairment
Investments in Real Estate
The Company accounts for the impairment of real estate in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which requires that the Company periodically
review the carrying value of each property to determine if circumstances that indicate impairment
in the carrying value of the investment exist or that depreciation periods should be modified. If
circumstances support the possibility of impairment, the Company prepares a projection of the
undiscounted future cash flows, without interest charges, of the specific property and determines
if the investment in such property is recoverable. If impairment is indicated, the carrying value
of the property would be written down to its estimated fair value based on the Companys best
estimate of the propertys discounted future cash flows. There have been no impairments recognized
on real estate assets in the Companys history.
Provision for Loan Losses
The Companys accounting policies require that it reflect in its financial statements an allowance
for estimated credit losses with respect to mortgage loans it has made based upon its evaluation of
known and inherent risks associated with its private lending assets. Management reflects
provisions for loan losses based upon its assessment of general market conditions, its internal
risk management policies and credit risk rating system, industry loss experience, its assessment of
the likelihood of delinquencies or defaults, and the value of the collateral underlying its
investments. Actual losses, if any, could ultimately differ from these estimates. There have been
no provisions for loan losses in the Companys history.
Cash and cash equivalents
The Company considers all short-term, highly liquid investments that are both readily convertible
to cash and have a maturity of three months or less at the time of purchase to be cash equivalents;
except that any such investments purchased with funds held in escrow or similar accounts are
classified as restricted cash. Items classified as cash equivalents include money-market deposit
accounts. All of the Companys cash and cash equivalents at September 30, 2008 were held in the
custody of one financial institution, and the Companys balance at times may exceed federally
insurable limits. The Company mitigates this risk by depositing funds with major financial
institutions.
8
Restricted cash
Restricted cash consists of security deposits and funds held in escrow for certain tenants. The
funds held in escrow are for capital improvements, taxes, insurance and other replacement reserves
for certain of our tenants. These funds will be released to the tenants upon completion of agreed
upon tasks as specified in the lease agreements, mainly consisting of maintenance and repairs on
the buildings, and when evidence of insurance and tax payments has been submitted to the Company.
Funds held in escrow
Funds held in escrow consist of funds held by certain of the Companys lenders for properties held
as collateral by these lenders. These funds consist of replacement reserves for capital
improvements, repairs and maintenance, insurance and taxes. These funds will be released to the
Company upon completion of agreed upon tasks as specified in the mortgage agreements, mainly
consisting of maintenance and repairs on the buildings, and when evidence of insurance and tax
payments has been submitted to the lenders.
Deferred financing costs
Deferred financing costs consist of costs incurred to obtain financing, including legal fees,
origination fees, and administrative fees. The costs are deferred and amortized using the
straight-line method, which approximates the effective interest method over the term of the
financing secured. The Company made payments of $1,096,766 and $1,153,228 for deferred financing
costs during the three and nine months ended September 30, 2008, respectively, and $82,736 and
$770,761 for the three and nine months ended September 30, 2007, respectively. Total amortization
expense related to deferred financing costs was $300,318 and $806,075 for the three and nine months
ended September 30, 2008, respectively, and $176,817 and $509,990 for the three and nine months
ended September 30, 2007, respectively. Accumulated amortization was $2,990,567 and $2,184,492 as
of September 30, 2008 and December 31, 2007, respectively.
Prepaid expenses and other assets
Prepaid expenses and other assets consist of accounts receivable, interest receivable, prepaid
assets and deposits on real estate.
Obligation under capital lease
In conjunction with the Companys acquisition of a building in Fridley, Minnesota on February 26,
2008, it was assigned a ground lease on the parking lot of the building at the time of closing,
which had a purchase obligation to acquire the land under the ground lease at the end of the term,
April 1, 2014. In accordance with SFAS No. 13 Accounting for Leases, the Company accounted for
the ground lease as a capital lease and recorded the corresponding obligation under the capital
lease.
Revenue recognition
Rental revenue includes rents that each tenant pays in accordance with the terms of its respective
lease reported evenly over the non-cancelable term of the lease. Certain of the Companys leases
currently contain rental increases at specified intervals. We recognize such revenues on a
straight-line basis by averaging the non-cancelable rental revenues over the lease terms. Deferred
rent receivable in the accompanying balance sheet includes the cumulative difference between rental
revenue as recorded on a straight line basis and rents received from the tenants in accordance with
the lease terms, along with the capitalized above-market lease values of certain acquired
properties. Accordingly, the Company determines, in its judgment, to what extent the deferred rent
receivable applicable to each specific tenant is collectible. The Company reviews deferred rent
receivable, as it relates to straight line rents, on a quarterly basis and takes into consideration
the tenants payment history, the financial condition of the tenant, business conditions in the
industry in which the tenant operates and economic conditions in the area in
which the property is located. In the event that the collectibility of deferred rent with respect
to any given tenant is in doubt, the Company records an increase in the allowance for uncollectible
accounts or records a direct write-off of the specific rent receivable, which would have an adverse
effect on the net income for the year in which the reserve is increased or the direct write-off is
recorded and would decrease total assets and stockholders equity. No such reserves have been
recorded as of September 30, 2008.
9
Management considers its loans and other lending investments to be held-for-investment. The
Company reflects held-for-investment investments at amortized cost, less allowance for loan losses,
acquisition premiums or discounts, and deferred loan fees. On occasion, the Company may acquire
loans at small premiums or discounts based on the credit characteristics of such loans. These
premiums or discounts are recognized as yield adjustments over the lives of the related loans.
Loan origination fees, as well as direct loan origination costs, are also deferred and recognized
over the lives of the related loans as yield adjustments. If loans with premiums, discounts, or
loan origination fees are prepaid, the Company immediately recognizes the unamortized portion as a
decrease or increase in the prepayment gain or loss. Interest income is recognized using the
effective interest method applied on a loan-by-loan basis. Prepayment penalties or yield
maintenance payments from borrowers are recognized as additional income when received.
Certain of the Companys mortgage loans and leases have embedded derivatives in the form of
interest rate floors and ceilings. These embedded derivatives do not require separate accounting
under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
Income taxes
The Company has operated and intends to continue to operate in a manner that will allow it to
qualify as a REIT under the Internal Revenue Code of 1986, as amended, and accordingly will not be
subject to federal income taxes on amounts distributed to stockholders (except income from
foreclosure property), provided it distributes at least 90% of its REIT taxable income to its
stockholders and meets certain other conditions. To the extent that the Company satisfies the
distribution requirement but distributes less than 100% of its taxable income, the Company will be
subject to federal corporate income tax on its undistributed income.
Commercial Advisers is a wholly-owned TRS that is subject to federal and state income taxes. Though
Commercial Advisers has had no activity to date, the Company would account for any future income
taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. Under SFAS
No. 109, the Company accounts for income taxes using the asset and liability method under which
deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
Segment information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, provides
standards for public companies relating to the reporting of financial and descriptive information
about their operating segments in financial statements. Operating segments are defined as
components of an enterprise for which separate financial information is available and is evaluated
regularly by the chief operating decision maker or decision making group in determining how to
allocate resources and in assessing performance. Company management is the chief decision making
group. As discussed in Note 9, the Companys operations are derived from two operating segments,
one segment purchases real estate (land, buildings and other improvements), which is simultaneously
leased to existing users, and the other segment originates mortgage loans and collects principal
and interest payments.
Foreign currency transactions
The Company purchased two properties in Canada in October 2004. These properties were classified
as held for sale as of June 30, 2006, and were sold in July 2006. All gains and losses from
foreign currency transactions are reflected in discontinued operations in the Companys
consolidated financial statements. The Company had a bank account in Canada, which was closed in
December 2007. The cash account was
re-valued at each balance sheet date to reflect the then current exchange rate. The gains or
losses from the valuation of the cash were recorded on the income statement as a realized gain or
loss. Realized foreign currency gains of $33,487 and $33,550 were recorded for the three and nine
months ended September 30, 2007, respectively. There were no realized foreign currency gains or
losses recorded for the three and nine months ended September 30, 2008 since the account was closed
in December 2007.
10
Asset retirement obligations
In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 requires an entity to
recognize a liability for a conditional asset retirement obligation when incurred if the liability
can be reasonably estimated. FIN 47 clarifies that the term Conditional Asset Retirement
Obligation refers to a legal obligation (pursuant to existing laws or by contract) to perform an
asset retirement activity in which the timing and/or method of settlement are conditional on a
future event that may or may not be within the control of the entity. FIN 47 also clarifies when
an entity would have sufficient information to reasonably estimate the fair value of an asset
retirement obligation. The Company has accrued a liability and corresponding increase to the cost
of the related properties for disposal related to all properties constructed prior to 1985 that
have, or may have, asbestos present in the building. The Company accrued a liability during the
nine months ended September 30, 2008 of $245,195 related to properties acquired during the period.
The Company also recorded expense of $35,157 and $98,394 for the three and nine months ended
September 30, 2008, respectively, and $29,440 and $86,542 for the three and nine months ended
September 30, 2007, respectively, related to the cumulative accretion of the obligation.
Real estate held for sale and discontinued operations
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that the
results of operations of any properties which have been sold, or are held for sale, be presented as
discontinued operations in the Companys consolidated financial statements in both current and
prior periods presented. Income items related to held for sale properties are listed separately on
the Companys consolidated income statement. Real estate assets held for sale are measured at the
lower of the carrying amount or the fair value, less the cost to sell, and are listed separately on
the Companys consolidated balance sheet. Once properties are listed as held for sale, no further
depreciation is recorded.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in GAAP and expands
disclosures about fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
The Company has only partially adopted the provisions of SFAS 157 because of the issuance of FSP
SFAS 157-2 (the FSP), which allows companies to delay the effective date of SFAS 157 for
non-financial assets and liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis. The partial adoption had no impact on the
Companys results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 allows entities to measure at fair value many
financial instruments and certain other assets and liabilities that are not otherwise required to
be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15,
2007. The Company adopted SFAS 159 effective for the fiscal year beginning January 1, 2008, and the
adoption had no impact on the Companys results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, SFAS No.
141(R), which replaces SFAS No. 141, Business Combinations (SFAS 141R). SFAS 141R
significantly changes the accounting for acquisitions involving business combinations, as it
requires that the assets and liabilities of all business combinations be recorded at fair value,
with limited exceptions. SFAS 141R also requires that all expenses related to the acquisition be
expensed as incurred, rather than
capitalized into the cost of the acquisition as had been the previous accounting under SFAS No.
141. SFAS 141R is effective on a prospective basis for all business combinations for which the
acquisition date is on or after the beginning of the first annual period subsequent to December 15,
2008. If SFAS 141R had been in effect as of January 1, 2008, the Company would have expensed
approximately $0.73 million of transaction costs related to the six acquisitions completed during
the nine months ended September 30, 2008, or approximately 1.4% of the total purchase price of the
acquired properties, which would have resulted in a decrease in funds from operations (FFO) of
approximately 7.2%. The impact on the Companys results of operations could differ significantly
when the pronouncement is adopted on January 1, 2009.
11
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements (SFAS 160). SFAS 160 requires all entities to report noncontrolling (minority)
interests in subsidiaries in the same way as equity in the consolidated financial statements. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company does not believe
the adoption of this pronouncement will have a material impact on its results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161), which is intended to help investors better understand how derivative
instruments and hedging activities affect an entitys financial position, financial performance and
cash flows through enhanced disclosure requirements. The enhanced disclosures primarily surround
disclosing the objectives and strategies for using derivative instruments by their underlying risk
as well as a tabular format of the fair values of the derivative instruments and their gains and
losses. SFAS 161 is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets (FSP SFAS 142-3), which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142 Goodwill and Other Intangible Assets (SFAS 142).
FSP SFAS 142-3 is intended to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141R. FSP SFAS No. 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, as well as interim periods within those fiscal
years, and must be applied prospectively to intangible assets acquired after the effective date.
The Company is currently evaluating the impact the adoption of the pronouncement will have on its
results of operations.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could materially
differ from those estimates.
Reclassifications
Certain amounts from prior years financial statements have been reclassified to conform to the
current presentation. These reclassifications had no effect on previously reported net income or
stockholders equity.
12
2. Management Advisory Fee
The Company has been externally managed pursuant to a contractual investment advisory arrangement
with its Adviser, under which its Adviser has directly employed all of the Companys personnel and
paid its payroll, benefits, and general expenses directly. The Companys initial investment
advisory agreement with its Adviser was in place from August 12, 2003 through December 31, 2006
(the Initial Advisory Agreement). On January 1, 2007, the Company entered into an amended and
restated investment advisory agreement with its Adviser (the Amended Advisory Agreement) and an
administration agreement (the Administration Agreement) with a wholly-owned subsidiary of the
Adviser, Gladstone Administration, LLC (the Administrator). The management services and fees in
effect under the Amended Advisory and Administration Agreements are described below.
Amended Advisory Agreement
The Amended Advisory Agreement provides for an annual base management fee equal to 2% of the
Companys total stockholders equity, less the recorded value of any preferred stock, and an
incentive fee based on FFO. For the three and nine months ended September 30, 2008, the Company
recorded a base management fee of $404,108 and $1,255,833, respectively, and for the three and nine
months ended September 30, 2007, the Company recorded a base management fee of $459,202 and
$1,412,337, respectively. For purposes of calculating the incentive fee, FFO includes any realized
capital gains and capital losses, less any dividends paid on preferred stock, but FFO does not
include any unrealized capital gains or losses. The incentive fee rewards the Adviser if the
Companys quarterly FFO, before giving effect to any incentive fee (pre-incentive fee FFO),
exceeds 1.75%, or 7% annualized, (the hurdle rate) of total stockholders equity, less the
recorded value of any preferred stock. The Adviser receives 100% of the amount of the
pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% of the Companys
pre-incentive fee FFO. The Adviser also receives an incentive fee of 20% of the amount of the
Companys pre-incentive fee FFO that exceeds 2.1875%.
For the three and nine months ended September 30, 2008, the Company recorded an incentive fee of
$793,787 and $2,300,286, respectively, offset by a credit related to an unconditional and
irrevocable voluntary waiver issued by the Adviser of $205,876 and $941,928, respectively, for a
net incentive fee for the three and nine months ended September 30, 2008 of $587,911 and
$1,358,358, respectively. For the three and nine months ended September 30, 2007, the Company
recorded an incentive fee of $677,104 and $1,896,677, respectively, offset by a credit related to
an unconditional and irrevocable voluntary waiver issued by the Adviser of $526,991 and $1,746,564,
respectively, for a net incentive fee for the three and nine months ended September 30, 2007 of
$150,113. The board of directors of the Company accepted the Advisers offer to unconditionally,
irrevocably and voluntarily waive a portion of the incentive fee for the three and nine months
ended September 30, 2008 and 2007, in order to maintain the current level of distributions to the
Companys stockholders.
Administration Agreement
Under the Administration Agreement, the Company pays separately for its allocable portion of the
Administrators overhead expenses in performing its obligations including, but not limited to, rent
for employees of the Administrator, and its allocable portion of the salaries and benefits expenses
of its chief financial officer, chief compliance officer, controller, treasurer and their
respective staffs. The Companys allocable portion of expenses is derived by multiplying the
Administrators total allocable expenses by the percentage of the Companys average total assets
(the total assets at the beginning and end of each quarter) in comparison to the average total
assets of all companies managed by the Adviser under similar agreements. For the three and nine
months ended September 30, 2008, the Company recorded an administration fee of $238,241 and
$724,978, respectively, and for the three and nine months ended September 30, 2007, the Company
recorded an administration fee of $175,852 and $592,996, respectively.
13
3. Earnings per Common Share
The following tables set forth the computation of basic and diluted earnings per share for the
three and nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, |
|
|
For the nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income available to common stockholders |
|
$ |
118,122 |
|
|
$ |
567,022 |
|
|
$ |
707,395 |
|
|
$ |
1,606,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic & diluted weighted average shares |
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted earnings per common share |
|
$ |
0.01 |
|
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Real Estate and Intangible Assets
Real Estate
The following table sets forth the components of the Companys investments in real estate,
including capitalized leases, as of September 30, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Real estate: |
|
|
|
|
|
|
|
|
Land |
|
$ |
55,226,042 |
(1) |
|
$ |
48,867,482 |
|
Building |
|
|
325,090,570 |
|
|
|
283,829,987 |
|
Tenant improvements |
|
|
9,820,706 |
|
|
|
7,802,937 |
|
Accumulated depreciation |
|
|
(22,421,974 |
) |
|
|
(15,738,634 |
) |
|
|
|
|
|
|
|
Real estate, net |
|
$ |
367,715,344 |
|
|
$ |
324,761,772 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes land held under a capital lease carried at approximately $1.1 million. |
|
During the nine months ended September 30, 2008, the Company acquired six properties, which are
summarized below: |
|
(1) |
|
On January 29, 2008, the Company acquired a 42,900 square foot industrial building in
Reading, Pennsylvania for approximately $7.2 million, including transaction costs. At
closing, the Company extended a 20 year triple net lease with the sole tenant, and the tenant
has four options to extend the lease for additional periods of five years each. The lease
provides for prescribed rent escalations over the life of the lease, with annualized straight
line rents of approximately $0.72 million. |
|
(2) |
|
On February 26, 2008, the Company acquired a 74,160 square foot office building in Fridley,
Minnesota for approximately $10.6 million, including transaction costs. At closing, the
Company was assigned the previously existing triple net lease with the sole tenant, which had
a remaining term of approximately five years. The tenant has two options to extend the lease
for additional periods of five years each. The lease provides for prescribed rent escalations
over the life of the lease, with
annualized straight line rents of approximately $0.95 million. The Company was also assigned a
ground lease on the parking lot at the time of closing, which has a remaining term of
approximately six years. At the end of the term, the Company is required to purchase the land.
The rent due under the ground lease had been prepaid by the previous owner through the end of
the term. |
|
(3) |
|
On March 31, 2008, the Company acquired a 273,300 square foot industrial building in Concord
Township, Ohio for approximately $15.3 million, including transaction costs. At closing, the
Company extended a 20 year triple net lease with the sole tenant, and the tenant has three
options to extend the lease for additional periods of five years each. The lease provides for
prescribed rent escalations over the life of the lease, with annualized straight line rents of
approximately $1.72 million. |
14
|
|
|
(4) |
|
On April 30, 2008, the Company acquired a 74,950 square foot industrial building in
Pineville, North Carolina for approximately $3.9 million, including transaction costs. At
closing, the Company extended a 20 year triple net lease with the sole tenant, and the tenant
has three options to extend the lease for additional periods of five years each. The lease
provides for prescribed rent escalations over the life of the lease, with annualized straight
line rents of approximately $0.43 million. |
|
(5) |
|
On August 29, 2008, the Company acquired a 223,458 square foot industrial building in
Marietta, Ohio for approximately $8.1 million, including transaction costs. At closing, the
Company extended a 20 year triple net lease with the sole tenant, and the tenant has two
options to extend the lease for additional periods of ten years each. The lease provides for
prescribed rent escalations over the life of the lease, with annualized straight line rents of
approximately $0.90 million. |
|
(6) |
|
On August 29, 2008, the Company acquired a 67,200 square foot office building in Chalfont,
Pennsylvania for approximately $8.4 million, including transaction costs, which was funded by
a combination of cash on hand, and the assumption of approximately $6.5 million of financing
on the property. At closing, the Company was assigned the previously existing triple net
lease with the sole tenant, which had a remaining term of approximately 7 years. The tenant
has two options to extend the lease for additional periods of five years each. The lease
provides for prescribed rent escalations over the life of the lease, with annualized straight
line rents of approximately $0.76 million. |
In accordance with SFAS No. 141, Business Combinations, the Company allocated the purchase price
of the properties acquired during the nine months ended September 30, 2008 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant |
|
|
|
|
|
|
|
|
|
|
Customer |
|
|
|
|
|
|
Total Purchase |
|
|
|
Land |
|
|
Building |
|
|
Improvements |
|
|
In-place Leases |
|
|
Leasing Costs |
|
|
Relationships |
|
|
Obligations |
|
|
Price |
|
Reading, Pennsylvania |
|
$ |
490,646 |
|
|
$ |
6,188,168 |
|
|
$ |
14,208 |
|
|
$ |
362,479 |
|
|
$ |
1,786 |
|
|
$ |
141,232 |
|
|
$ |
|
|
|
$ |
7,198,519 |
|
Fridley, Minnesota |
|
|
1,354,233 |
|
|
|
7,454,098 |
|
|
|
619,428 |
|
|
|
452,414 |
|
|
|
171,005 |
|
|
|
807,950 |
|
|
|
(225,067 |
) |
|
|
10,634,061 |
|
Concord Township, Ohio |
|
|
1,796,467 |
|
|
|
10,254,003 |
|
|
|
900,120 |
|
|
|
1,702,792 |
|
|
|
5,102 |
|
|
|
917,661 |
|
|
|
(245,198 |
) |
|
|
15,330,947 |
|
Pineville, North Carolina |
|
|
669,025 |
|
|
|
2,930,295 |
|
|
|
98,025 |
|
|
|
151,426 |
|
|
|
2,218 |
|
|
|
93,080 |
|
|
|
|
|
|
|
3,944,069 |
|
Marietta, Ohio |
|
|
829,014 |
|
|
|
6,537,796 |
|
|
|
69,469 |
|
|
|
479,124 |
|
|
|
3,268 |
|
|
|
179,014 |
|
|
|
|
|
|
|
8,097,685 |
|
Chalfont, Pennsylvania |
|
|
1,249,415 |
|
|
|
6,105,819 |
|
|
|
316,519 |
|
|
|
172,278 |
|
|
|
189,326 |
|
|
|
397,841 |
|
|
|
|
|
|
|
8,431,198 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,388,800 |
|
|
$ |
39,470,179 |
|
|
$ |
2,017,769 |
|
|
$ |
3,320,513 |
|
|
$ |
372,705 |
|
|
$ |
2,536,778 |
|
|
$ |
(470,265 |
) |
|
$ |
53,636,479 |
|
|
|
|
|
|
|
|
|
|
Intangible Assets
The weighted average amortization period for the intangible assets acquired during the nine months
ended September 30, 2008, were as follows:
|
|
|
|
|
Intangible assets |
|
Years |
In-place leases
|
|
|
16.8 |
|
Leasing costs
|
|
|
18.2 |
|
Customer relationships
|
|
|
22.7 |
|
All intangible assets
|
|
|
16.7 |
|
There were no allocations to above or below market lease intangibles for the six acquisitions
during the nine months ended September 30, 2008.
15
Future operating lease payments from tenants under non-cancelable leases, excluding tenant
reimbursement of expenses, in effect at September 30, 2008, were as follows:
|
|
|
|
|
|
|
Tenant |
|
|
Lease Payments |
Three months ending December 31, 2008
|
|
$ |
9,922,367 |
|
Year ending December 31, 2009
|
|
|
38,749,365 |
|
2010
|
|
|
38,743,925 |
|
2011
|
|
|
38,352,963 |
|
2012
|
|
|
38,056,061 |
|
2013
|
|
|
32,691,790 |
|
Thereafter
|
|
|
184,282,955 |
|
In accordance with the lease terms, substantially all tenant expenses are required to be paid by
the tenant; however, the Company would be required to pay property taxes on the respective
properties, and ground lease payments on the property located in Tulsa, Oklahoma, in the event the
tenant fails to pay them. The total annualized property taxes for all properties held by the
Company at September 30, 2008 was approximately $5.5 million, and the total annual ground lease
payments on the Tulsa, Oklahoma property was approximately $134,000.
The following table summarizes the net value of other intangible assets and the accumulated
amortization for each intangible asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Lease Intangibles |
|
|
Amortization |
|
|
Lease Intangibles |
|
|
Amortization |
|
In-place leases |
|
$ |
15,981,245 |
|
|
$ |
(4,661,864 |
) |
|
$ |
12,660,732 |
|
|
$ |
(3,414,868 |
) |
Leasing costs |
|
|
9,662,731 |
|
|
|
(2,769,660 |
) |
|
|
9,290,026 |
|
|
|
(2,114,233 |
) |
Customer relationships |
|
|
17,136,501 |
|
|
|
(2,881,762 |
) |
|
|
14,599,726 |
|
|
|
(2,031,827 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42,780,477 |
|
|
$ |
(10,313,286 |
) |
|
$ |
36,550,484 |
|
|
$ |
(7,560,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated aggregate amortization expense for the remainder of the current and each of the five
succeeding fiscal years is as follows:
|
|
|
|
|
|
|
Estimated Aggregate |
|
|
Amortization Expense |
Three months ending December 31, 2008
|
|
$ |
688,090 |
|
Year ending December 31, 2009
|
|
|
2,687,299 |
|
2010
|
|
|
2,623,713 |
|
2011
|
|
|
2,480,618 |
|
2012
|
|
|
2,190,906 |
|
2013
|
|
|
1,312,252 |
|
Thereafter
|
|
|
6,319,267 |
|
5. Discontinued Operations
On July 21, 2006, the Company sold its two Canadian properties for approximately $6.9 million, for
a gain on the sale of approximately $1.4 million. The Company incurred approximately $315,000 in
taxes related to the gain on the sale in 2006. The 2006 tax returns were subsequently filed in
March of 2007, and the amount owed was approximately $236,000. The Company received a refund in
2007 in the amount of approximately $79,000, which is reflected in the accompanying statement of
operations in discontinued operations under taxes refunded on sale of real estate. The operating
expenses recorded during the three and nine months ended September 30, 2008 are legal fees related
to the Canadian entities which have been dissolved.
16
The Company classified its two Canadian properties as discontinued operations, in accordance with
the provisions of SFAS 144. The table below summarizes the components of income (loss) from
discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, |
|
|
For the nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Operating (expense) income |
|
$ |
(1,322 |
) |
|
$ |
5,975 |
|
|
$ |
(34,956 |
) |
|
$ |
471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized income from foreign currency
transactions |
|
|
|
|
|
|
33,487 |
|
|
|
|
|
|
|
33,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes refunded on sale of real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
$ |
(1,322 |
) |
|
$ |
39,462 |
|
|
$ |
(34,956 |
) |
|
$ |
112,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Mortgage Note Receivable
On April 15, 2005, the Company originated a mortgage loan in the amount of $10.0 million,
collateralized by an office building in McLean, Virginia, where the Companys Adviser and
Administrator are subtenants in the building. This 12 year mortgage loan accrues interest at the
greater of 7.5% per year or the one month London Interbank Offered Rate (LIBOR) rate plus 6.0%
per year, with a ceiling of 10.0%. The mortgage loan is interest only for the first nine years of
the term, with payments of principal commencing after the initial period. The balance of the
principal and all interest remaining is due at the end of the 12 year term. At September 30, 2008,
the interest rate was 8.5%.
7. Mortgage Notes Payable, Line of Credit and Short-Term Loan
The Companys mortgage notes payable, line of credit and short-term loan as of September 30, 2008
and December 31, 2007 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of Issuance/ |
|
|
Principal Maturity |
|
|
Stated Interest Rate at |
|
|
Principal Balance Outstanding |
|
|
|
Assumption |
|
|
Date |
|
|
September 30, 2008 (1) |
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
Fixed-Rate Mortgage Notes Payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/16/2005 |
|
|
|
4/1/2030 |
|
|
|
6.33 |
% |
|
$ |
2,958,913 |
|
|
$ |
3,003,582 |
|
|
|
|
8/25/2005 |
|
|
|
9/1/2015 |
|
|
|
5.33 |
% |
|
|
21,448,474 |
|
|
|
21,664,476 |
|
|
|
|
9/12/2005 |
|
|
|
9/1/2015 |
|
|
|
5.21 |
% |
|
|
12,588,000 |
|
|
|
12,588,000 |
|
|
|
|
12/21/2005 |
|
|
|
12/8/2015 |
|
|
|
5.71 |
% |
|
|
19,280,744 |
|
|
|
19,456,000 |
|
|
|
|
2/21/2006 |
|
|
|
12/1/2013 |
|
|
|
5.91 |
% |
|
|
9,369,889 |
|
|
|
9,480,063 |
|
|
|
|
2/21/2006 |
|
|
|
6/30/2014 |
|
|
|
5.20 |
% |
|
|
19,529,866 |
|
|
|
19,782,270 |
|
|
|
|
3/29/2006 |
|
|
|
4/1/2016 |
|
|
|
5.92 |
% |
|
|
17,000,000 |
|
|
|
17,000,000 |
|
|
|
|
4/27/2006 |
|
|
|
5/5/2016 |
|
|
|
6.58 |
% |
|
|
14,324,718 |
|
|
|
14,514,214 |
|
|
|
|
11/22/2006 |
|
|
|
12/1/2016 |
|
|
|
5.76 |
% |
|
|
14,309,000 |
|
|
|
14,309,000 |
|
|
|
|
12/22/2006 |
|
|
|
1/1/2017 |
|
|
|
5.79 |
% |
|
|
21,846,000 |
|
|
|
21,846,000 |
|
|
|
|
2/8/2007 |
|
|
|
3/1/2017 |
|
|
|
6.00 |
% |
|
|
13,775,000 |
|
|
|
13,775,000 |
|
|
|
|
6/5/2007 |
|
|
|
6/8/2017 |
|
|
|
6.11 |
% |
|
|
14,240,000 |
|
|
|
14,240,000 |
|
|
|
|
9/6/2007 |
|
|
|
12/11/2015 |
|
|
|
5.81 |
% |
|
|
4,442,289 |
|
|
|
4,487,205 |
|
|
|
|
10/15/2007 |
|
|
|
11/8/2017 |
|
|
|
6.63 |
% |
|
|
15,855,560 |
|
|
|
15,974,661 |
|
|
|
|
8/29/2008 |
|
|
|
6/1/2016 |
|
|
|
6.80 |
% |
|
|
6,441,772 |
|
|
|
|
|
|
|
|
9/15/2008 |
|
|
|
10/1/2010 |
|
|
|
6.85 |
% |
|
|
48,015,000 |
|
|
|
|
|
|
Total Fixed-Rate Mortgage Notes Payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255,425,225 |
|
|
|
202,120,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-Rate Line of Credit: |
|
|
12/29/2006 |
|
|
|
12/29/2009 |
(2) |
|
LIBOR + 1.9 |
% |
|
|
10,200,000 |
|
|
|
4,400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-Rate Short-Term Loan: |
|
|
12/21/2007 |
|
|
|
12/21/2008 |
(3) |
|
LIBOR + 2.75 |
% |
|
|
20,000,000 |
|
|
|
20,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage Notes Payable, Line of Credit and Short-Term Loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
285,625,225 |
|
|
$ |
226,520,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The weighted average interest rate on all debt outstanding at September 30, 2008 was approximately 5.92%. |
|
(2) |
|
The line of credit may be extended for a one-year period at the Companys option, subject to certain conditions. |
|
(3) |
|
The short-term loan may be extended for a six-month period at the Companys option, subject to certain conditions. |
17
Mortgage Notes Payable
As of September 30, 2008 the Company had 16 fixed-rate mortgage notes payable, collateralized by a
total of 55 properties. The obligor under each of these notes is a wholly-owned separate borrowing
entity, which owns the real estate collateral. The Company is not a co-borrower but has limited
recourse liabilities that could result from: a borrower voluntarily filing for bankruptcy, improper
conveyance of a property, fraud or material misrepresentation, misapplication or misappropriation
of rents, security deposits, insurance proceeds or condemnation proceeds, and physical waste or
damage to the property resulting from a borrowers gross negligence or willful misconduct. The
Company also indemnifies lenders against claims resulting from the presence of hazardous substances
or activity involving hazardous substances in violation of environmental laws on a property. The
weighted-average interest rate on the mortgage notes payable as of September 30, 2008 was
approximately 6.0%.
The fair market value of all fixed-rate mortgage notes payable outstanding as of September 30, 2008
was approximately $231.4 million, as compared to the carrying value stated above of approximately
$255.4 million. The fair market value is calculated based on a discounted cash flow analysis,
using interest rates based on managements estimate of interest rates on long-term debt with
comparable terms.
On August 29, 2008, the Company assumed approximately $6.4 million of indebtedness pursuant to a
long-term note payable from GE Commercial Mortgage Financial Corporation (GE), in connection with
the Companys acquisition, on the same date, of a property located in Chalfont, Pennsylvania. The
note accrues interest at a rate of 6.8% per year, and the Company may not repay this note prior to
maturity, or the Company may be subject to a substantial prepayment penalty. The note matures on
June 1, 2016.
On September 15, 2008, through wholly-owned subsidiaries, the Company borrowed approximately $48.0
million pursuant to a long-term note payable from GE, which is collateralized by security interests
in 15 properties. The note accrues interest at a rate of 6.85% per year and the Company may not
repay this note prior to maturity, or the Company would be subject to a substantial prepayment
penalty. The note has a maturity date of October 1, 2010, with three annual extension options
through October 1, 2013. The Company used the proceeds from the note to pay down the outstanding
balance on the line of credit.
Scheduled principal payments of mortgage notes payable are as follows:
|
|
|
|
|
|
|
Scheduled principal |
|
|
|
payments |
|
Three months ending December 31, 2008 |
|
$ |
467,668 |
|
Year ending December 31, 2009 |
|
|
2,380,065 |
|
2010 |
|
|
50,539,216 |
|
2011 |
|
|
2,820,750 |
|
2012 |
|
|
3,107,172 |
|
2013 |
|
|
11,837,278 |
|
Thereafter |
|
|
184,273,076 |
|
|
|
|
|
|
|
$ |
255,425,225 |
|
|
|
|
|
18
Line of Credit
On December 29, 2006, the Company entered into a $75 million senior revolving credit agreement with
a syndicate of banks led by KeyBank National Association (KeyBank), which matures on December 29,
2009 with an option to extend for an additional year. The Company subsequently increased the
availability under the line of credit to $95 million in November 2007. The interest rate charged
on the advances under the facility is based on the LIBOR, the prime rate or the federal funds rate,
depending on market conditions, and adjusts periodically. The unused portion of the line of credit
is subject to a fee of 0.15% per year. The Companys ability to access this funding source is
subject to the Company continuing to meet customary lending requirements such as compliance with
financial and operating covenants and meeting certain lending limits. One such covenant requires
the Company to limit its distributions to stockholders to 95% of its FFO, beginning with the
quarter ended December 31, 2007. In addition, the maximum amount the Company may draw under this
agreement is based on a percentage of the value of properties pledged as collateral to the banks,
which must meet agreed upon eligibility standards. As the Company arranges for long-term mortgages
for these pledged properties, the banks will release the properties from the line of credit and
reduce the availability under the line of credit by the advanced amount of the removed property.
Conversely, as the Company purchases new properties meeting the eligibility standards, the Company
may pledge these new properties to obtain additional advances under this agreement. The
availability under the line of credit may also be reduced by letters of credit used in the ordinary
course of business. The Company may use the advances under the line of credit for both general
corporate purposes and the acquisition of new investments. As of September 30, 2008, there was
approximately $10.2 million outstanding under the line of credit at an interest rate of
approximately 5.7%, and approximately $5.1 million outstanding under letters of credit at a
weighted average interest rate of approximately 2.0%. At September 30, 2008, the remaining
borrowing capacity available under the line of credit was $79.7 million, and the Company was in
compliance with all covenants under the line of credit.
Short-Term Loan
On December 21, 2007, the Company entered into a $20 million unsecured term loan with KeyBank,
which matures on December 21, 2008 with an option to extend for an additional six months. The
Company can exercise the option to extend the term as long as it is in compliance with all
covenants under the loan at the time it exercises its option. The interest rate charged on the
loan is based on the LIBOR, the prime rate or the federal funds rate, depending on market
conditions, and adjusts periodically. The Companys ability to maintain this funding source is
subject to it continuing to meet customary lending requirements such as compliance with financial
and operating covenants and meeting certain lending limits. One such covenant requires the Company
to limit distributions to its stockholders to 95% of its FFO beginning with the quarter ended
December 31, 2007. As of September 30, 2008, the interest rate on the short-term loan was
approximately 5.2%, and the Company was in compliance with all covenants under the short-term loan.
8. Stockholders Equity
The following table summarizes the changes in stockholders equity for the nine months ended
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes |
|
|
Distributions in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in |
|
|
Receivable |
|
|
Excess of |
|
|
Total |
|
|
|
Common |
|
|
Preferred |
|
|
Excess of |
|
|
From Sale of |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Stock |
|
|
Stock |
|
|
Par Value |
|
|
Common Stock |
|
|
Earnings |
|
|
Equity |
|
Balance at December 31, 2007 |
|
$ |
8,565 |
|
|
$ |
2,150 |
|
|
$ |
170,640,979 |
|
|
$ |
(2,769,923 |
) |
|
$ |
(25,513,703 |
) |
|
$ |
142,368,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of Principal on
Notes Receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,077 |
|
|
|
|
|
|
|
140,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions Declared to
Common and Preferred
Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,706,239 |
) |
|
|
(12,706,239 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,777,707 |
|
|
|
3,777,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
8,565 |
|
|
$ |
2,150 |
|
|
$ |
170,640,979 |
|
|
$ |
(2,629,846 |
) |
|
$ |
(34,442,235 |
) |
|
$ |
133,579,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share for the three and nine months ended September 30, 2008 were $0.375
and $1.125 per share, respectively, and for the three and nine months ended September 30, 2007 were
$0.36 and $1.08, respectively. Dividends paid per share of Series A Preferred Stock for both the
three and nine months ended September 30, 2008 and 2007 were approximately $0.48 and $1.45 per
share, respectively. Dividends paid per share of Series B Preferred Stock for both the three and
nine months ended September 30, 2008 and 2007 were approximately $0.47 and $1.41 per share,
respectively.
19
The following table is a summary of all outstanding notes issued to employees of the Adviser for
the exercise of stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Strike Price of |
|
|
Amount of |
|
|
Balance of |
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Options |
|
|
Promissory Note |
|
|
Employee Loans |
|
|
|
|
|
|
Interest Rate |
|
Date Issued |
|
Exercised |
|
|
Exercised |
|
|
Issued to Employees |
|
|
at 9/30/08 |
|
|
Term of Note |
|
|
on Note |
|
Sep-04 |
|
|
25,000 |
|
|
$ |
15.00 |
|
|
$ |
375,000 |
|
|
$ |
366,348 |
|
|
9 years |
|
|
5.00 |
% |
Apr-06 |
|
|
12,422 |
|
|
|
16.10 |
|
|
|
199,994 |
|
|
|
199,994 |
|
|
9 years |
|
|
7.77 |
% |
May-06 |
|
|
50,000 |
|
|
|
16.85 |
|
|
|
842,500 |
|
|
|
842,500 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
15,000 |
|
|
|
16.10 |
|
|
|
241,500 |
|
|
|
241,500 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,500 |
|
|
|
16.01 |
|
|
|
40,000 |
|
|
|
38,544 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,000 |
|
|
|
16.10 |
|
|
|
32,200 |
|
|
|
32,200 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,000 |
|
|
|
16.10 |
|
|
|
32,200 |
|
|
|
32,200 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,000 |
|
|
|
16.68 |
|
|
|
33,360 |
|
|
|
33,360 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,000 |
|
|
|
15.00 |
|
|
|
30,000 |
|
|
|
30,000 |
|
|
10 years |
|
|
7.87 |
% |
Oct-06 |
|
|
12,000 |
|
|
|
16.10 |
|
|
|
193,200 |
|
|
|
193,200 |
|
|
9 years |
|
|
8.17 |
% |
Nov-06 |
|
|
25,000 |
|
|
|
15.00 |
|
|
|
375,000 |
|
|
|
245,000 |
|
|
9 years |
|
|
8.15 |
% |
Dec-06 |
|
|
25,000 |
|
|
|
15.00 |
|
|
|
375,000 |
|
|
|
375,000 |
|
|
10 years |
|
|
8.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,922 |
|
|
|
|
|
|
$ |
2,769,954 |
|
|
$ |
2,629,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the note agreements with each employee, they are required to remit interest
payments to the Company on their outstanding loan balance quarterly in arrears. In accordance with
Emerging Issues Task Force No. 85-1, Classifying Notes Received for Sale of Stock, receivables
from employees for the issuance of capital stock to employees prior to the receipt of cash payment
should be reflected in the balance sheet as a reduction to stockholders equity. Therefore, these
notes were recorded as loans to employees and are included in the equity section of the
accompanying consolidated balance sheets.
9. Segment Information
As of September 30, 2008, the Companys operations were derived from two operating segments. One
segment purchases real estate (land, buildings and other improvements), which is simultaneously
leased to existing users and the other segment extends mortgage loans and collects principal and
interest payments. The following table summarizes the Companys consolidated operating results and
total assets by segment as of and for the three and nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended September 30, 2008 |
|
|
As of and for the nine months ended September 30, 2008 |
|
|
|
Real Estate |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
|
Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
Operating revenues |
|
$ |
10,240,697 |
|
|
$ |
216,446 |
|
|
$ |
|
|
|
$ |
10,457,143 |
|
|
$ |
29,522,531 |
|
|
$ |
673,548 |
|
|
$ |
|
|
|
$ |
30,196,079 |
|
Operating expenses |
|
|
(3,523,080 |
) |
|
|
|
|
|
|
(1,594,404 |
) |
|
|
(5,117,484 |
) |
|
|
(10,204,526 |
) |
|
|
|
|
|
|
(4,400,483 |
) |
|
|
(14,605,009 |
) |
Other expense |
|
|
(3,183,823 |
) |
|
|
|
|
|
|
(1,012,955 |
) |
|
|
(4,196,778 |
) |
|
|
(9,128,081 |
) |
|
|
|
|
|
|
(2,650,326 |
) |
|
|
(11,778,407 |
) |
Discontinued operations |
|
|
(1,322 |
) |
|
|
|
|
|
|
|
|
|
|
(1,322 |
) |
|
|
(34,956 |
) |
|
|
|
|
|
|
|
|
|
|
(34,956 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,532,472 |
|
|
$ |
216,446 |
|
|
$ |
(2,607,359 |
) |
|
$ |
1,141,559 |
|
|
$ |
10,154,968 |
|
|
$ |
673,548 |
|
|
$ |
(7,050,809 |
) |
|
$ |
3,777,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
409,461,178 |
|
|
$ |
10,070,714 |
|
|
$ |
10,751,163 |
|
|
$ |
430,283,055 |
|
|
$ |
409,461,178 |
|
|
$ |
10,070,714 |
|
|
$ |
10,751,163 |
|
|
$ |
430,283,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended September 30, 2007 |
|
|
As of and for the nine months ended September 30, 2007 |
|
|
|
Real Estate |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
|
Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
Operating revenues |
|
$ |
8,104,953 |
|
|
$ |
255,555 |
|
|
$ |
|
|
|
$ |
8,360,508 |
|
|
$ |
23,065,514 |
|
|
$ |
758,333 |
|
|
$ |
|
|
|
$ |
23,823,847 |
|
Operating expenses |
|
|
(2,902,795 |
) |
|
|
|
|
|
|
(1,082,174 |
) |
|
|
(3,984,969 |
) |
|
|
(8,406,164 |
) |
|
|
|
|
|
|
(3,239,038 |
) |
|
|
(11,645,202 |
) |
Other expense |
|
|
(2,693,509 |
) |
|
|
|
|
|
|
(131,032 |
) |
|
|
(2,824,541 |
) |
|
|
(7,502,386 |
) |
|
|
|
|
|
|
(111,832 |
) |
|
|
(7,614,218 |
) |
Discontinued operations |
|
|
39,462 |
|
|
|
|
|
|
|
|
|
|
|
39,462 |
|
|
|
112,688 |
|
|
|
|
|
|
|
|
|
|
|
112,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,548,111 |
|
|
$ |
255,555 |
|
|
$ |
(1,213,206 |
) |
|
$ |
1,590,460 |
|
|
$ |
7,269,652 |
|
|
$ |
758,333 |
|
|
$ |
(3,350,870 |
) |
|
$ |
4,677,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
343,702,960 |
|
|
$ |
10,083,333 |
|
|
$ |
7,559,584 |
|
|
$ |
361,345,877 |
|
|
$ |
343,702,960 |
|
|
$ |
10,083,333 |
|
|
$ |
7,559,584 |
|
|
$ |
361,345,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
The amounts included under the other column in the tables above include other income, which
consists of interest income and any other miscellaneous income earned, operating expenses that were
not specifically derived from either operating segment, and other expense that is not specifically
related to either operating segment.
10. Pro Forma Financial Information
The Company acquired six properties during the nine months ended September 30, 2008. The following
table reflects pro-forma condensed consolidated income statements as if the six properties were
acquired as of the beginning of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, |
|
|
For the nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
$ |
10,719,521 |
|
|
$ |
9,730,400 |
|
|
$ |
32,138,406 |
|
|
$ |
27,933,522 |
|
Total operating expenses |
|
|
(5,313,745 |
) |
|
|
(4,720,207 |
) |
|
|
(15,810,891 |
) |
|
|
(13,998,829 |
) |
Other expense |
|
|
(4,320,745 |
) |
|
|
(3,427,951 |
) |
|
|
(11,984,983 |
) |
|
|
(8,217,628 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,085,031 |
|
|
|
1,582,242 |
|
|
|
4,342,532 |
|
|
|
5,717,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends attributable to preferred stock |
|
|
(1,023,437 |
) |
|
|
(1,023,438 |
) |
|
|
(3,070,312 |
) |
|
|
(3,070,312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations available to common stockholders |
|
$ |
61,594 |
|
|
$ |
558,804 |
|
|
$ |
1,272,220 |
|
|
$ |
2,646,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share and Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted net income from continuing operations |
|
$ |
0.01 |
|
|
$ |
0.07 |
|
|
$ |
0.15 |
|
|
$ |
0.31 |
|
Weighted average shares outstanding-basic & diluted |
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
8,565,264 |
|
These pro-forma condensed consolidated income statements are not necessarily indicative of what
actual results would have been had the Company acquired the specified properties as of the
beginning of the periods presented.
11. Commitments and Contingencies
The Company is required to pay ground lease payments on its Tulsa, Oklahoma property. The lease
expires in June 2021. Future operating lease payments under the non-cancelable lease, in effect at
September 30, 2008 were as follows:
|
|
|
|
|
|
|
Lease Payments |
Three months ending December 31, 2008
|
|
$ |
33,600 |
|
Year ending December 31, 2009
|
|
|
134,400 |
|
2010
|
|
|
134,400 |
|
2011
|
|
|
134,400 |
|
2012
|
|
|
134,400 |
|
2013
|
|
|
134,400 |
|
Thereafter
|
|
|
1,008,000 |
|
12. Subsequent Events
On October 7, 2008, the Companys Board of Directors declared cash dividends of $0.125 per common
share, $0.1614583 per share of the Series A Preferred Stock, and $0.15625 per share of the Series B
Preferred Stock for each of the months of October, November and December 2008. Monthly dividends
will be payable on October 31, 2008, November 28, 2008 and December 31, 2008, to those stockholders
of record as of the close of business for the dates of October 23, 2008, November 19, 2008 and
December 22, 2008, respectively.
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
All statements contained herein, other than historical facts, may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements may relate to,
among other things, future events or our future performance or financial condition. In some cases,
you can identify forward-looking statements by terminology such as may, might, believe,
will, provided, anticipate, future, could, growth, plan, intend, expect,
should, would, if, seek, possible, potential, likely or the negative of such terms or
comparable terminology. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements. We caution readers not to
place undue reliance on any such forward-looking statements, which are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake
no obligation to publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, after the date of this Form 10-Q.
OVERVIEW
General
We were incorporated under the General Corporation Laws of the State of Maryland on February 14,
2003, primarily for the purpose of investing in and owning net leased industrial and commercial
real property and selectively making long-term industrial and commercial mortgage loans. Most of
the portfolio of real estate we currently own is leased to a wide cross section of tenants ranging
from small businesses to large public companies, many of which are corporations that do not have
publicly rated debt. We have in the past entered into, and intend in the future to enter into,
purchase agreements for real estate having triple net leases with terms of approximately 10 to 15
years and built in rental increases. Under a triple net lease, the tenant is required to pay all
operating, maintenance and insurance costs and real estate taxes with respect to the leased
property. We are actively communicating with buyout funds, real estate brokers and other third
parties to locate properties for potential acquisition or to provide mortgage financing in an
effort to build our portfolio.
Business Environment
Conditions within the U.S. credit markets in general and the U.S. real estate credit markets in
particular continue to experience historical levels of dislocation and stress that began in the
summer of 2007. These conditions continue to impact us in a variety of ways, including making it
difficult for us to price and finance new investment opportunities on attractive terms. We do not
know when market conditions will stabilize, if adverse conditions will intensify or the full extent
to which the disruptions will affect us. If market instability persists or intensifies, we may
experience challenges in raising additional capital. Continued weak economic conditions could
adversely impact the financial condition of one or more of our tenants and therefore, could make a
tenant bankruptcy and payment default on the related lease more likely. Currently,
all of our properties are fully leased and all but one of our tenants and our borrower are current
and paying in accordance with their leases and loan, respectively.
22
At September 30, 2008, we owned 65 properties totaling approximately 6.3 million square feet, and
had one mortgage loan outstanding. The total gross investment in these acquisitions, including the
mortgage loan investment, was approximately $442.9 million at September 30, 2008. Prior to
September 30, 2008, we reported the aggregate number of properties we own based on the appraisals
obtained in connection with the acquisition of our properties, which occasionally grouped two or
more buildings together. At September 30, 2008 we are reporting, and in future periods we will
report, our aggregate number of properties based on the number of individual buildings. Below is a
summary of the properties we owned as of the respective periods, using the new methodology:
|
|
|
|
|
As of: |
|
Total properties owned |
December 31, 2006
|
|
|
42 |
|
March 31, 2007
|
|
|
46 |
|
June 30, 2007
|
|
|
47 |
|
September 30, 2007
|
|
|
51 |
|
December 31, 2007
|
|
|
59 |
|
March 31, 2008
|
|
|
62 |
|
June 30, 2008
|
|
|
63 |
|
September 30, 2008
|
|
|
65 |
|
Recent Events
Investment Activities: During the nine months ended September 30, 2008, we acquired six properties
totaling approximately 756,000 square feet for approximately $53.6 million, and made capital
improvements to our properties located in Newburyport, Massachusetts and Arlington, Texas for
approximately $1.8 million, resulting in a total investment of approximately $55.4 million. Of the
total investment, $48.9 million was funded under our line of credit and the remaining $6.5 million
was funded under a long-term note payable with GE Commercial Mortgage Financial Corporation or GE,
assumed in connection with an acquisition.
Financing Activities: During the nine months ended September 30, 2008, we had net borrowings under
our line of credit of approximately $5.8 million with approximately $10.2 million outstanding at
September 30, 2008. The proceeds from the line of credit were used to fund the six acquisitions
during the nine-month period and to fund capital improvements to our properties located in
Newburyport, Massachusetts and Arlington, Texas. In September 2008, we borrowed approximately
$48.0 million pursuant to a long-term note payable with GE, collateralized by security interests in
15 of our properties. The proceeds from the long-term note payable were used to pay down the line
of credit.
Our Investment Adviser and Administrator
Gladstone Management Corporation, or our Adviser, is led by a management team which has extensive
experience in our lines of business. Our Adviser also has a wholly-owned subsidiary, Gladstone
Administration, LLC, or the Administrator, which employs our chief financial officer, chief
compliance officer, controller, treasurer and their respective staffs. All of our executive
officers are officers or directors, or both, of our Adviser and our Administrator.
Our Adviser and Administrator also provide investment advisory and administrative services to our
affiliates, Gladstone Capital Corporation and Gladstone Investment Corporation, both publicly
traded business development companies, as well as Gladstone Land Corporation, a private
agricultural real estate company. All of our directors and executive officers serve as either
directors or executive officers, or both, of Gladstone Capital Corporation and Gladstone Investment
Corporation. In the future, our Adviser may provide investment advisory and administrative services
to other funds, both public and private, of which it is the sponsor.
Our Adviser was organized as a corporation under the laws of the State of Delaware on July 2, 2002,
and is a registered investment adviser under the Investment Advisers Act of 1940, as amended. Our
Adviser is headquartered in McLean, Virginia, a suburb of Washington D.C., and also has offices in
New York, New Jersey, Pennsylvania, Illinois, Texas, Georgia and Washington.
23
Investment Advisory and Administration Agreements
We have been externally managed pursuant to a contractual investment advisory arrangement with our
Adviser, under which our Adviser has directly employed all of our personnel and paid its payroll,
benefits, and general expenses directly. Our initial investment advisory agreement with our
Adviser, which we refer to as the Initial Advisory Agreement, was in place from August 12, 2003
through December 31, 2006. On
January 1, 2007, we entered into an amended and restated investment advisory agreement with our
Adviser, which we refer to as the Amended Advisory Agreement, and an administration agreement,
which we refer to as the Administration Agreement, with our Administrator.
Under the terms of the Initial Advisory Agreement and the Amended Advisory Agreement, we were and
remain responsible for all expenses incurred for our direct benefit. Examples of these expenses
include legal, accounting, interest on short-term debt and mortgages, tax preparation, directors
and officers insurance, stock transfer services, stockholder related fees, consulting and related
fees. During the three and nine months ended September 30, 2008, the total amount of these expenses
that we incurred was approximately $4.8 million and $13.8 million, respectively. During the three
and nine months ended September 30, 2007, the total amount of these expenses that we incurred was
approximately $3.4 million and $9.8 million, respectively. All of these charges are incurred
directly by us rather than by our Adviser for our benefit. Accordingly, we did not make any
reimbursements to our Adviser for these amounts.
In addition, we are also responsible for all fees charged by third parties that are directly
related to our business, which may include real estate brokerage fees, mortgage placement fees,
lease-up fees and transaction structuring fees (although we may be able to pass some or all of such
fees on to our tenants and borrowers). During the three and nine months ended September 30, 2008
and 2007, none of these expenses were incurred by us directly. The actual amount of such fees that
we incur in the future will depend largely upon the aggregate costs of the properties we acquire,
the aggregate amount of mortgage loans we make, and the extent to which we are able to shift the
burden of such fees to our tenants and borrowers. Accordingly, the amount of these fees that we
will pay in the future is not determinable at this time.
Management Services and Fees under the Amended Advisory Agreement
The Amended Advisory Agreement provides for an annual base management fee equal to 2.0% of our
total stockholders equity, less the recorded value of any preferred stock, and an incentive fee
based on funds from operations, or FFO. For purposes of calculating the incentive fee, FFO
includes any realized capital gains and capital losses, less any dividends paid on preferred stock,
but FFO does not include any unrealized capital gains or losses. The incentive fee will reward our
Adviser if our quarterly FFO, before giving effect to any incentive fee (pre-incentive fee FFO),
exceeds 1.75%, or 7% annualized, (the hurdle rate) of total stockholders equity, less the
recorded value of any preferred stock. Our Adviser will receive 100% of the amount of the
pre-incentive fee FFO that exceeds the hurdle rate, but is less than 2.1875% of our pre-incentive
fee FFO. Our Adviser will also receive an incentive fee of 20% of the amount of our pre-incentive
fee FFO that exceeds 2.1875%. The incentive fee may be reduced because of our line of credit
covenant which limits distributions to our stockholders to 95% of FFO.
For the three and nine months ended September 30, 2008, the base management fee was $404,108 and
$1,255,833, respectively. For the three and nine months ended September 30, 2007, the base
management fee was $459,202 and $1,412,337, respectively. For the three and nine months ended
September 30, 2008, we recorded an incentive fee of $793,787 and $2,300,286, respectively, offset
by a credit from an unconditional and irrevocable voluntary waiver issued by the Adviser of
$205,876 and $941,928, respectively, for a net incentive fee for the three and nine months ended
September 30, 2008 of $587,911 and $1,358,358, respectively. For the three and nine months ended
September 30, 2007, we recorded an incentive fee of $677,104 and $1,896,677, respectively, offset
by a credit from an unconditional and irrevocable voluntary waiver issued by the Adviser of
$526,991 and $1,746,564, respectively, for a net incentive fee for both the three and nine months
ended September 30, 2007 of $150,113. Our Board of Directors accepted our Advisers offer to waive
a portion of the incentive fee for the three and nine months ended September 30, 2008 and 2007, in
order to maintain the current level of distributions to our stockholders. Our Adviser has
indicated that it intends to continue to waive all or a portion of the incentive fee in order to
support the current level of distributions to our stockholders, however, our Adviser is not
required to issue any waiver, in whole or in part.
24
Administration Agreement
Under the Administration Agreement, we pay separately for our allocable portion of our
Administrators overhead expenses in performing its obligations including, but not limited to, rent
for employees of our Administrator, and our allocable portion of the salaries and benefits expenses
of our chief financial officer, chief compliance officer, controller, treasurer and their
respective staffs. For the three and nine months ended September 30, 2008, we incurred $238,241
and $724,978, respectively, for the administration fee. For the three and nine months ended
September 30, 2007, we incurred $175,852 and $592,996, respectively, for the administration fee.
Critical Accounting Policies
The preparation of our financial statements in accordance with generally accepted accounting
principles in the United States of America, or GAAP, requires management to make judgments that are
subjective in nature in order to make certain estimates and assumptions. Management relies on its
experience, collects historical data and current market data, and analyzes this information in
order to arrive at what it believes to be reasonable estimates. Under different conditions or
assumptions, materially different amounts could be reported related to the accounting policies
described below. In addition, application of these accounting policies involves the exercise of
judgments on the use of assumptions as to future uncertainties and, as a result, actual results
could materially differ from these estimates. A summary of all of our significant accounting
policies is provided in Note 1 to our consolidated financial statements included elsewhere in this
report. Below is a summary of accounting polices involving estimates and assumptions that require
complex, subjective or significant judgments in their application and that materially affect our
results of operations.
Allocation of Purchase Price
When we acquire real estate, we allocate the purchase price to the acquired tangible assets and
liabilities, consisting of land, building, tenant improvements, long-term debt and identified
intangible assets and liabilities, consisting of the value of above-market and below-market leases,
the value of in-place leases, the value of unamortized lease origination costs, the value of tenant
relationships and the value of capital lease obligations, based in each case on their fair values.
Managements estimates of value are made using methods similar to those used by independent
appraisers (e.g., discounted cash flow analysis). Factors considered by management in its analysis
include an estimate of carrying costs during hypothetical expected lease-up periods considering
current market conditions, and costs to execute similar leases. We also consider information
obtained about each property as a result of our pre-acquisition due diligence, marketing and
leasing activities in estimating the fair value of the tangible and intangible assets and
liabilities acquired. In estimating carrying costs, management also includes real estate taxes,
insurance and other operating expenses and estimates of lost rentals at market rates during the
expected lease-up periods, which primarily range from 9 to 18 months, depending on specific local
market conditions. Management also estimates costs to execute similar leases, including leasing
commissions, legal and other related expenses to the extent that such costs are not already
incurred in connection with a new lease origination as part of the transaction. Management also
considers the nature and extent of our existing business relationships with the tenant, growth
prospects for developing new business with the tenant, the tenants credit quality and expectations
of lease renewals (including those existing under the terms of the lease agreement), among other
factors. A change in any of the assumptions above, which are very subjective, could have a
material impact on our results of operations.
25
The allocation of the purchase price directly affects the following in our consolidated financial
statements:
|
|
|
The amount of acquisition costs allocated to the various tangible and intangible assets
on our balance sheet; |
|
|
|
|
The amounts allocated to the value of above-market and below-market lease values are
amortized to rental income over the remaining non-cancelable terms of the respective
leases. The amounts
allocated to all other tangible and intangible assets are amortized to depreciation or
amortization expense. Thus changes in the purchase price allocation among our assets could
have a material impact on our FFO, which is used by investors of REITs to evaluate our
operating performance; and |
|
|
|
|
The period of time that tangible and intangible assets are depreciated over varies
greatly, and thus changes in the amounts allocated to these assets will have a direct
impact on our results of operations. Intangible assets are generally amortized over the
respective life of the leases, which normally range from 10 to 15 years, we depreciate our
buildings over 39 years, and land is not depreciated. These differences in timing could
have a material impact on our result of operations. |
Asset Impairment Evaluation
We periodically review the carrying value of each property to determine if circumstances that
indicate impairment in the carrying value of the investment exist or that depreciation periods
should be modified. If circumstances support the possibility of impairment, we prepare a projection
of the undiscounted future cash flows, without interest charges, of the specific property and
determine if the investment in such property is recoverable. If impairment is indicated, the
carrying value of the property would be written down to its estimated fair value based on our best
estimate of the propertys discounted future cash flows. Any material changes to the estimates and
assumptions used in this analysis could have a significant impact on our results of operations, as
the changes would impact our determination if impairment is deemed to have occurred and the amount
of impairment loss we would recognize.
Provision for Loan Losses
Our accounting policies require that we reflect in our financial statements an allowance for
estimated credit losses with respect to mortgage loans we have made based upon our evaluation of
known and inherent risks associated with our private lending assets. Management reflects
provisions for loan losses based upon our assessment of general market conditions, our internal
risk management policies and credit risk rating system, industry loss experience, our assessment of
the likelihood of delinquencies or defaults, and the value of the collateral underlying our
investments. Any material changes to the estimates and assumptions used in this analysis could
have a significant impact on our results of operations.
Recently Issued Accounting Pronouncements
Refer to Note 1 in the accompanying consolidated financial statements for a summary of all recently
issued accounting pronouncements.
Results of Operations
Our weighted-average yield on the portfolio as of September 30, 2008 was approximately 9.53%. Our
weighted-average yields on the six properties acquired during the nine months ended September 30,
2008 were as follows:
|
|
|
|
|
Date Acquired |
|
Property Location |
|
Weighted-Average Yield |
1/29/08
|
|
Reading, Pennsylvania
|
|
9.95% |
2/26/08
|
|
Fridley, Minnesota
|
|
8.93% |
3/31/08
|
|
Concord Township, Ohio
|
|
11.27% |
4/30/08
|
|
Pineville, North Carolina
|
|
11.06% |
8/29/08
|
|
Marietta, Ohio
|
|
11.07% |
8/29/08
|
|
Chalfont, Pennsylvania
|
|
9.01% |
The weighted-average yield on our portfolio is calculated by taking the annualized straight-line
rent, reflected as rental income on our consolidated statements of operations, or mortgage interest
payments, reflected as interest income from mortgage notes receivable on our consolidated
statements of operations, of each acquisition or mortgage loan as a percentage of the acquisition
or loan price, as applicable. The
weighted-average yield does not take into account the interest expense incurred on the financings
placed on our properties.
26
A comparison of our operating results for the three and nine months ended September 30, 2008 and
2007 is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, |
|
|
For the nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
10,157,553 |
|
|
$ |
8,024,305 |
|
|
$ |
2,133,248 |
|
|
|
27 |
% |
|
$ |
29,269,036 |
|
|
$ |
22,834,663 |
|
|
$ |
6,434,373 |
|
|
|
28 |
% |
Interest income from mortgage notes receivable |
|
|
216,446 |
|
|
|
255,555 |
|
|
|
(39,109 |
) |
|
|
-15 |
% |
|
|
673,548 |
|
|
|
758,333 |
|
|
|
(84,785 |
) |
|
|
-11 |
% |
Tenant recovery revenue |
|
|
83,144 |
|
|
|
80,648 |
|
|
|
2,496 |
|
|
|
3 |
% |
|
|
253,495 |
|
|
|
230,851 |
|
|
|
22,644 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
10,457,143 |
|
|
|
8,360,508 |
|
|
|
2,096,635 |
|
|
|
25 |
% |
|
|
30,196,079 |
|
|
|
23,823,847 |
|
|
|
6,372,232 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,262,903 |
|
|
|
2,668,383 |
|
|
|
594,520 |
|
|
|
22 |
% |
|
|
9,435,690 |
|
|
|
7,722,349 |
|
|
|
1,713,341 |
|
|
|
22 |
% |
Property operating expenses |
|
|
225,020 |
|
|
|
204,972 |
|
|
|
20,048 |
|
|
|
10 |
% |
|
|
670,442 |
|
|
|
597,273 |
|
|
|
73,169 |
|
|
|
12 |
% |
Base management fee |
|
|
404,108 |
|
|
|
459,202 |
|
|
|
(55,094 |
) |
|
|
-12 |
% |
|
|
1,255,833 |
|
|
|
1,412,337 |
|
|
|
(156,504 |
) |
|
|
-11 |
% |
Incentive fee |
|
|
793,787 |
|
|
|
677,104 |
|
|
|
116,683 |
|
|
|
17 |
% |
|
|
2,300,286 |
|
|
|
1,896,677 |
|
|
|
403,609 |
|
|
|
21 |
% |
Administration fee |
|
|
238,241 |
|
|
|
175,852 |
|
|
|
62,389 |
|
|
|
35 |
% |
|
|
724,978 |
|
|
|
592,996 |
|
|
|
131,982 |
|
|
|
22 |
% |
Professional fees |
|
|
117,857 |
|
|
|
118,371 |
|
|
|
(514 |
) |
|
|
0 |
% |
|
|
362,584 |
|
|
|
442,479 |
|
|
|
(79,895 |
) |
|
|
-18 |
% |
Insurance |
|
|
43,354 |
|
|
|
53,943 |
|
|
|
(10,589 |
) |
|
|
-20 |
% |
|
|
126,947 |
|
|
|
171,275 |
|
|
|
(44,328 |
) |
|
|
-26 |
% |
Directors fees |
|
|
54,702 |
|
|
|
66,250 |
|
|
|
(11,548 |
) |
|
|
-17 |
% |
|
|
161,202 |
|
|
|
174,750 |
|
|
|
(13,548 |
) |
|
|
-8 |
% |
Stockholder related expense |
|
|
42,232 |
|
|
|
40,991 |
|
|
|
1,241 |
|
|
|
3 |
% |
|
|
271,430 |
|
|
|
215,969 |
|
|
|
55,461 |
|
|
|
26 |
% |
Asset retirement obligation expense |
|
|
35,157 |
|
|
|
29,440 |
|
|
|
5,717 |
|
|
|
19 |
% |
|
|
98,394 |
|
|
|
86,542 |
|
|
|
11,852 |
|
|
|
14 |
% |
General and administrative |
|
|
105,999 |
|
|
|
17,452 |
|
|
|
88,547 |
|
|
|
507 |
% |
|
|
139,151 |
|
|
|
79,119 |
|
|
|
60,032 |
|
|
|
76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses before credit from Adviser |
|
|
5,323,360 |
|
|
|
4,511,960 |
|
|
|
811,400 |
|
|
|
18 |
% |
|
|
15,546,937 |
|
|
|
13,391,766 |
|
|
|
2,155,171 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit to incentive fee |
|
|
(205,876 |
) |
|
|
(526,991 |
) |
|
|
321,115 |
|
|
|
-61 |
% |
|
|
(941,928 |
) |
|
|
(1,746,564 |
) |
|
|
804,636 |
|
|
|
-46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
5,117,484 |
|
|
|
3,984,969 |
|
|
|
1,132,515 |
|
|
|
28 |
% |
|
|
14,605,009 |
|
|
|
11,645,202 |
|
|
|
2,959,807 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from temporary investments |
|
|
4,559 |
|
|
|
33,105 |
|
|
|
(28,546 |
) |
|
|
-86 |
% |
|
|
20,796 |
|
|
|
325,390 |
|
|
|
(304,594 |
) |
|
|
-94 |
% |
Interest income employee loans |
|
|
49,624 |
|
|
|
52,728 |
|
|
|
(3,104 |
) |
|
|
-6 |
% |
|
|
152,620 |
|
|
|
169,608 |
|
|
|
(16,988 |
) |
|
|
-10 |
% |
Other income |
|
|
7,500 |
|
|
|
9,896 |
|
|
|
(2,396 |
) |
|
|
-24 |
% |
|
|
56,493 |
|
|
|
28,127 |
|
|
|
28,366 |
|
|
|
101 |
% |
Interest expense |
|
|
(4,258,461 |
) |
|
|
(2,920,270 |
) |
|
|
(1,338,191 |
) |
|
|
46 |
% |
|
|
(12,008,316 |
) |
|
|
(8,137,343 |
) |
|
|
(3,870,973 |
) |
|
|
48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(4,196,778 |
) |
|
|
(2,824,541 |
) |
|
|
(1,372,237 |
) |
|
|
49 |
% |
|
|
(11,778,407 |
) |
|
|
(7,614,218 |
) |
|
|
(4,164,189 |
) |
|
|
55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1,142,881 |
|
|
|
1,550,998 |
|
|
|
(408,117 |
) |
|
|
-26 |
% |
|
|
3,812,663 |
|
|
|
4,564,427 |
|
|
|
(751,764 |
) |
|
|
-16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
(1,322 |
) |
|
|
5,975 |
|
|
|
(7,297 |
) |
|
|
-122 |
% |
|
|
(34,956 |
) |
|
|
471 |
|
|
|
(35,427 |
) |
|
|
-7522 |
% |
Net realized income from foreign currency transactions |
|
|
|
|
|
|
33,487 |
|
|
|
(33,487 |
) |
|
|
-100 |
% |
|
|
|
|
|
|
33,550 |
|
|
|
(33,550 |
) |
|
|
-100 |
% |
Taxes refunded on sale of real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
78,667 |
|
|
|
(78,667 |
) |
|
|
-100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
(1,322 |
) |
|
|
39,462 |
|
|
|
(40,784 |
) |
|
|
-103 |
% |
|
|
(34,956 |
) |
|
|
112,688 |
|
|
|
(147,644 |
) |
|
|
-131 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,141,559 |
|
|
|
1,590,460 |
|
|
|
(448,901 |
) |
|
|
-28 |
% |
|
|
3,777,707 |
|
|
|
4,677,115 |
|
|
|
(899,408 |
) |
|
|
-19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends attributable to preferred stock |
|
|
(1,023,437 |
) |
|
|
(1,023,438 |
) |
|
|
1 |
|
|
|
0 |
% |
|
|
(3,070,312 |
) |
|
|
(3,070,312 |
) |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
118,122 |
|
|
$ |
567,022 |
|
|
$ |
(448,900 |
) |
|
|
-79 |
% |
|
$ |
707,395 |
|
|
$ |
1,606,803 |
|
|
$ |
(899,408 |
) |
|
|
-56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenues
Rental income increased for the three and nine months ended September 30, 2008, as compared to the
three and nine months ended September 30, 2007, primarily as a result of the 14 properties acquired
between September 30, 2007 and September 30, 2008, coupled with properties acquired during the nine
months ended September 30, 2007 that were held for the full nine-month period in 2008.
Interest income from mortgage notes receivable decreased for the three and nine months ended
September 30, 2008, as compared to the three and nine months ended September 30, 2007, primarily
because interest income on our mortgage loan is based on the London Interbank Offered Rate, or
LIBOR, which has significantly decreased over the past year.
Tenant recovery revenue remained relatively flat for the three months ended September 30, 2008 as
compared to the three months ended September 30, 2007. Tenant recovery revenue increased for the
nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007,
primarily as a result of the reimbursement of the ground lease payments on our Tulsa, Oklahoma
property acquired in March 2007, which was held for the entire nine-month period in 2008.
Operating Expenses
Depreciation and amortization expenses increased during the three and nine months ended September
30, 2008, as compared to the three and nine months ended September 30, 2007, as a result of the 14
properties acquired between September 30, 2007 and September 30, 2008, and properties acquired
during the nine months ended September 30, 2007 that were held for the full nine-month period in
2008.
27
Property operating expenses consist of franchise taxes, management fees, insurance, ground lease
payments on our Tulsa, Oklahoma property acquired in March 2007 and overhead expenses paid on
behalf of certain of our properties. Property operating expenses increased during the three and
nine months ended September 30, 2008, as compared to the three and nine months ended September 30,
2007, primarily as a result of repairs on several of our properties. In addition, property
operating expenses for the entire nine months ended September 30, 2008 included ground lease
payments on our Tulsa, Oklahoma property acquired in March 2007.
The base management fee decreased for the three and nine months ended September 30, 2008, as
compared to the three and nine months ended September 30, 2007, as a result of a decrease in total
common stockholders equity, the main component of the calculation. The calculation of the base
management fee is described in detail above under Investment Advisory and Administration
Agreements.
The incentive fee increased for the three and nine months ended September 30, 2008, as compared to
the three and nine months ended September 30, 2007, due to the decrease in total common
stockholders equity, coupled with the increase in FFO. The calculation of the incentive fee is
described in detail above under Investment Advisory and Administration Agreements.
The administration fee increased for the three and nine months ended September 30, 2008 and 2007,
primarily as a result of the increased number of employees of our Administrator, coupled with an
increase in overhead expenses allocated by our Administrator. The calculation of the
administrative fee is described in detail above under Investment Advisory and Administration
Agreements.
Professional fees, consisting primarily of legal and accounting fees, remained relatively flat
during the three months ended September 30, 2008, as compared to the three months ended September
30, 2007.
Professional fees decreased during the nine months ended September 30, 2008, as compared to the
nine months ended September 30, 2007, primarily as a result of a reduction in legal fees paid
during the nine months ended September 30, 2008 combined with fees incurred during the three and
nine months ended September 30, 2007 for state tax research and costs related to the implementation
of FIN 48, which were not incurred during the nine months ended September 30, 2008.
Insurance expense consists of the premiums paid for directors and officers insurance, which is
renewed annually each September. Insurance expense decreased for the three and nine months ended
September 30, 2008, as compared to the three and nine months ended September 30, 2007, because of a
decrease in the premiums for the period from September 2007 through September 2008.
Directors fees decreased during the three and nine months ended September 30, 2008, as compared to
the three and nine months ended September 30, 2007, primarily as a result of fewer meetings
occurring in the three and nine months ended September 30, 2008.
Stockholder related expense increased for the three and nine months ended September 30, 2008, as
compared to the three and nine months ended September 30, 2007, primarily as a result of the
increase in our costs associated with printing and filing the annual report, coupled with costs
associated with the solicitation of the stockholder vote for the 2008 annual meeting.
Asset retirement obligation expense increased for the three and nine months ended September 30,
2008, as compared to the three and nine months ended September 30, 2007, primarily as a result of a
property acquired between September 30, 2007 and September 30, 2008, which was required to
recognize an asset retirement liability, coupled with a property acquired where a liability was
recorded during the nine months ended September 30, 2007 that was held for the full period in 2008.
General and administrative expenses increased for the three and nine months ended September 30,
2008, as compared to the three and nine months ended September 30, 2007, primarily as a result of
capitalized fees for financings that did not materialize, and as such, were written off.
28
Other Income and Expense
Interest income from temporary investments decreased during the three and nine months ended
September 30, 2008, as compared to the three and nine months ended September 30, 2007. The decrease
was primarily a result of the decrease in our average cash balances during the nine months ended
September 30, 2008.
During the three and nine months ended September 30, 2008, interest income on employee loans
decreased, as compared to the three and nine months ended September 30, 2007. This decrease was a
result of employees who paid off their loans during 2008, coupled with other partial principal
repayments over the periods.
Other income was relatively flat during the three months ended September 30, 2008, as compared to
the three months ended September 30, 2007. Other income increased for the nine months ended
September 30, 2008 as compared to the nine months ended September 30, 2007, primarily because of a
real estate tax reimbursement we received from our property located in Sterling Heights, Michigan.
Interest expense increased for the three and nine months ended September 30, 2008, as compared to
the three and nine months ended September 30, 2007. This was primarily a result of the long term
financings we closed on 14 of our properties subsequent to September 30, 2007, coupled with an
increased amount outstanding on our line of credit during the three and nine months ended September
30, 2008. In September 2008, we paid down the outstanding balance on the line of credit using
proceeds from the $48.0 million long-term note payable from GE.
Discontinued Operations
The loss from discontinued operations is the expense related to our two Canadian properties, which
were sold in July 2006. The expense relates to legal fees associated with the dissolution of the
entities which sold the properties. The 2006 tax returns were filed in March 2007, and we were due
a refund of approximately $79,000, which is reflected on the statements of operations under taxes
refunded on sale of real estate for the nine months ended September 30, 2007.
Net Income Available to Common Stockholders
Net income available to common stockholders decreased for the three and nine months ended September
30, 2008, as compared to the three and nine months ended September 30, 2007. This decrease was
primarily a result of increased interest expense from the increased number of properties which have
long-term financing, partially offset by the increase in the size of our portfolio of investments
in the past year and the corresponding increase in our revenues and the other events described
above.
Liquidity and Capital Resources
Cash and Cash Equivalents
At September 30, 2008, we had approximately $3.1 million in cash and cash equivalents. We have
access to our existing line of credit with an available borrowing capacity of $79.7 million, have
obtained mortgages on 55 of our properties and have a $20.0 million short-term loan. We expect
that the funds from our line of credit, additional mortgages and securities offerings will provide
us with sufficient capital to make additional investments and to fund our continuing operations for
the foreseeable future. As previously discussed in Managements Discussion and Analysis Business
Environment, continued weak economic conditions could adversely affect our ability to obtain
additional mortgages collateralized by some or all of our real property in the future, as well as
our ability to borrow funds and issue additional equity securities in order to obtain additional
capital in the future. We cannot determine the terms of future borrowings or equity issuances or
whether we will be able to borrow funds or issue equity on terms favorable to us, or if at all.
29
Operating Activities
Net cash provided by operating activities during the nine months ended September 30, 2008 was
approximately $12.2 million, compared to net cash provided by operating activities of approximately
$12.0 million for the nine months ended September 30, 2007. A majority of cash from operating
activities is generated from the rental payments we receive from our tenants and the interest
payments we receive from our borrower. We utilize this cash to fund our property-level operating
expenses and use the excess cash primarily for debt and interest payments on our mortgage notes
payable, interest payments on our line of credit and short-term loan, dividend payments, management
fees to our Adviser, and other entity level expenses.
Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2008 was
approximately $50.1 million, which primarily consisted of the purchase of six properties, as
described in the Recent Events section above, as compared to net cash used in investing
activities during the nine months ended September 30, 2007 of approximately $85.7 million, which
primarily consisted of the purchase of eight properties and one leasehold interest. During the
nine months ended September 30, 2008, we purchased five of the six properties using borrowings
under our line of credit and assumed the mortgage on the sixth property located in Chalfont,
Pennsylvania. During the nine months ended September 30, 2007, we purchased all of the properties
using borrowings under our line of credit.
Net real estate consisted of the following tenant industry classifications as of September 30, 2008
and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
Industry Classification |
|
Net Real Estate |
|
|
Net Real Estate |
|
|
Net Real Estate |
|
|
Net Real Estate |
|
Automobile |
|
$ |
10,906,445 |
|
|
|
3.0 |
% |
|
$ |
11,072,192 |
|
|
|
3.4 |
% |
Beverage, Food & Tobacco |
|
|
18,792,486 |
|
|
|
5.1 |
% |
|
|
10,655,401 |
|
|
|
3.3 |
% |
Buildings and Real Estate |
|
|
20,116,878 |
|
|
|
5.5 |
% |
|
|
20,504,268 |
|
|
|
6.3 |
% |
Chemicals, Plastics & Rubber |
|
|
26,175,476 |
|
|
|
7.1 |
% |
|
|
15,371,141 |
|
|
|
4.7 |
% |
Containers, Packaging & Glass |
|
|
16,002,508 |
|
|
|
4.4 |
% |
|
|
16,320,658 |
|
|
|
5.0 |
% |
Diversified/Conglomerate Manufacturing |
|
|
32,437,883 |
|
|
|
8.8 |
% |
|
|
25,328,441 |
|
|
|
7.8 |
% |
Diversified/Conglomerate Services |
|
|
2,569,588 |
|
|
|
0.7 |
% |
|
|
2,615,717 |
|
|
|
0.8 |
% |
Electronics |
|
|
54,585,128 |
|
|
|
14.8 |
% |
|
|
55,721,882 |
|
|
|
17.2 |
% |
Healthcare, Education & Childcare |
|
|
55,307,539 |
|
|
|
15.0 |
% |
|
|
43,322,758 |
|
|
|
13.3 |
% |
Home & Office Furnishings |
|
|
5,180,076 |
|
|
|
1.4 |
% |
|
|
5,276,588 |
|
|
|
1.6 |
% |
Insurance |
|
|
5,696,887 |
|
|
|
1.5 |
% |
|
|
5,809,099 |
|
|
|
1.8 |
% |
Machinery |
|
|
21,686,150 |
|
|
|
5.9 |
% |
|
|
12,682,144 |
|
|
|
3.9 |
% |
Oil & Gas |
|
|
10,878,990 |
|
|
|
3.0 |
% |
|
|
11,099,726 |
|
|
|
3.4 |
% |
Personal & Non-Durable Consumer Products |
|
|
13,024,942 |
|
|
|
3.5 |
% |
|
|
13,207,489 |
|
|
|
4.1 |
% |
Personal, Food & Miscellaneous Services |
|
|
4,408,674 |
|
|
|
1.2 |
% |
|
|
4,502,040 |
|
|
|
1.4 |
% |
Printing & Publishing |
|
|
22,167,679 |
|
|
|
6.0 |
% |
|
|
22,594,423 |
|
|
|
7.0 |
% |
Telecommunications |
|
|
47,778,015 |
|
|
|
13.0 |
% |
|
|
48,677,805 |
|
|
|
15.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
367,715,344 |
|
|
|
100.0 |
% |
|
$ |
324,761,772 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry groupings are based on managements knowledge of the tenants operations in the leased
space.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2008 was
approximately $39.6 million, which primarily consisted of the proceeds from the long-term financing
of 15 of our properties and borrowings under our line of credit, partially offset by repayments on
our line of credit, principal repayments on mortgage notes payable, payments for deferred financing
costs, and dividend payments. Net cash provided by financing activities for the nine months ended
September 30, 2007 was approximately $39.5 million, which primarily consisted of the proceeds
received from the long-term financing of seven of our properties, partially offset by repayments
on our line of credit, payments for deferred financing costs, principal repayments on mortgage
notes payable and dividend payments.
30
Future Capital Needs
As of September 30, 2008, we had investments in 65 real properties for a net value, including
intangible assets, of approximately $400.2 million and one mortgage loan receivable for $10.0
million. During the remainder of 2008 and beyond, we intend to complete additional acquisitions of
real estate and to originate additional mortgage notes, although there is no guarantee we will be
able to do so on favorable terms, if at all. We intend to fund our contractual obligations and
acquire additional properties by borrowing all or a portion of the purchase price and
collateralizing the mortgages with some or all of our real property, by borrowing against our
existing line of credit with an available borrowing capacity of $79.7 million, or by issuing
additional equity securities under an effective registration statement on Form S-3 (File No.
333-147856) we have on file with the Securities and Exchange Commission (the Registration
Statement). The Registration Statement permits us to issue, through one or more transactions, up
to an aggregate of $300.0 million in securities consisting of common or preferred stock, of which
all $300 million was
available as of September 30, 2008. We may also use these funds for general corporate needs. If
we are unable to make any required debt payments on any borrowings, our lenders could foreclose on
the properties collateralizing their loans, which could cause us to lose part or all of our
investments in such properties. In addition, we need sufficient capital to fund our dividends, and
we may require credits to our management fees, issued from our Adviser, in order to meet these
obligations, although our Adviser is under no obligation to provide such credits, in whole or in
part.
Mortgage Notes Payable
On September 15, 2008, through wholly-owned subsidiaries, we borrowed approximately $48.0 million
pursuant to a long-term note payable from GE, which is collateralized by security interests in 15
properties. The note accrues interest at a rate of 6.85% per year and we may not repay this note
prior to maturity, or we would be subject to a substantial prepayment penalty. The note has a
maturity date of October 1, 2010, with three annual extension options through October 1, 2013. We
used the proceeds from the note to pay down the outstanding balance on the line of credit. As of
September 30, 2008, we had 16 fixed-rate mortgage notes payable in the aggregate principal amount
of approximately $255.4 million, collateralized by a total of 55 properties with terms ranging from
2 years to 25 years. The weighted-average interest rate on the mortgage notes payable as of
September 30, 2008 was approximately 6.0%.
Line of Credit
On December 29, 2006, we entered into a $75 million senior revolving credit agreement with a
syndicate of banks led by KeyBank National Association, which matures on December 29, 2009 with an
option to extend for an additional year. We subsequently increased the availability under our line
of credit to $95 million in November 2007. The interest rate charged on the advances under the
facility is based on LIBOR, the prime rate or the federal funds rate, depending on market
conditions, and adjusts periodically. The unused portion of the line of credit is subject to a fee
of 0.15% per year. Our ability to access this funding source is subject to us continuing to meet
customary lending requirements such as compliance with financial and operating covenants and
meeting certain lending limits. One such covenant requires us to limit distributions to our
stockholders to 95% of our funds from operations, or FFO, beginning with the quarter ended December
31, 2007. In addition, the maximum amount we may draw under this agreement is based on a percentage
of the value of properties pledged as collateral to the banks, which must meet agreed upon
eligibility standards. As we arrange for long-term mortgages for these pledged properties, the
banks will release the properties from the line of credit and reduce the availability under the
line of credit by the advanced amount of the removed property. Conversely, as we purchase new
properties meeting the eligibility standards, we may pledge these new properties to obtain
additional advances under this agreement. The availability under the line of credit will also be
reduced by letters of credit used in the ordinary course of business. We may use the advances
under the line of credit for both general corporate purposes and the acquisition of new
investments. As of September 30, 2008, there was approximately $10.2 million outstanding under the
line of credit at an interest rate of approximately 5.7%, and approximately $5.1 million
outstanding under letters of credit at a weighted average interest rate of approximately 2.0%. At
September 30, 2008, the remaining borrowing capacity available under the line of credit was $79.7
million, and we were in compliance with all covenants under the line of credit.
31
Short-Term Loan
On December 21, 2007, we entered into a $20 million unsecured term loan with KeyBank National
Association, which matures on December 21, 2008, with an option to extend for an additional nine
months. We can exercise the option to extend the term as long as we are in compliance with all
covenants under the loan at the time we exercise the option. The interest rate charged on the loan
is based on LIBOR, the prime rate or the federal funds rate, depending on market conditions, and
adjusts periodically. Our ability to maintain this funding source is subject to us continuing to
meet customary lending requirements such as compliance with financial and operating covenants and
meeting certain lending limits. One such covenant requires us to limit distributions to our
stockholders to 95% of our FFO beginning with the quarter ended
December 31, 2007. As of September 30, 2008, the interest rate on the short-term loan was
approximately 5.2%, and we were in compliance with all covenants under the short-term loan.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K as of September 30, 2008.
Contractual Obligations
The following table reflects our significant contractual obligations as of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
Contractual Obligations |
|
Total |
|
|
Less than 1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More than 5 Years |
|
Debt Obligations (1) |
|
$ |
285,625,225 |
|
|
$ |
22,257,476 |
|
|
$ |
63,294,033 |
|
|
$ |
6,196,582 |
|
|
$ |
193,877,134 |
|
Interest on Debt Obligations (2) |
|
|
96,063,397 |
|
|
|
12,242,982 |
|
|
|
30,176,906 |
|
|
|
23,017,473 |
|
|
|
30,626,036 |
|
Capital Lease Obligations (3) |
|
|
232,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232,301 |
|
Operating Lease Obligations (4) |
|
|
1,713,600 |
|
|
|
134,400 |
|
|
|
268,800 |
|
|
|
268,800 |
|
|
|
1,041,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
383,634,523 |
|
|
$ |
34,634,858 |
|
|
$ |
93,739,739 |
|
|
$ |
29,482,855 |
|
|
$ |
225,777,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Debt obligations represent borrowings under our line of credit, term loan and mortgage notes
payable that were outstanding as of September 30, 2008. The line of credit matures in December
2009, with an option to extend for an additional year, and the term loan matures in December 2008
with an option to extend for an additional six months. |
|
(2) |
|
Interest on debt obligations does not include interest on our borrowings under our line
of credit or term loan. The balance and interest rate on our line of credit and term loan are
variable and, thus, the amount of interest has not been calculated for purposes of this table. |
|
(3) |
|
Capital lease obligations represent the obligation to purchase the land held under the
ground lease on our property located in Fridley, Minnesota. |
|
(4) |
|
Operating lease obligations represent the ground lease payments due on our Tulsa,
Oklahoma property. The lease expires in June 2021. |
Funds from Operations
NAREIT developed FFO, as a relative non-GAAP supplemental measure of operating performance of an
equity REIT, in order to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. FFO, as defined by NAREIT, is net income (computed
in accordance with GAAP), excluding gains or losses from sales of property, plus depreciation and
amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint
ventures.
FFO does not represent cash flows from operating activities in accordance with GAAP, which, unlike
FFO, generally reflects all cash effects of transactions and other events in the determination of
net income, and should not be considered an alternative to net income as an indication of our
performance or to cash flows from operations as a measure of liquidity or ability to make
distributions. Comparison of FFO, using the NAREIT definition, to similarly titled measures for
other REITs may not necessarily be meaningful due to possible differences in the application of the
NAREIT definition used by such REITs.
FFO available to common stockholders is FFO adjusted to subtract preferred share dividends. We
believe that net income available to common stockholders is the most directly comparable GAAP
measure to FFO available to common stockholders.
32
Basic funds from operations per share, or Basic FFO per share, and diluted funds from operations
per share, or Diluted FFO per share, is FFO available to common stockholders divided by weighted
average common shares outstanding and FFO available to common stockholders divided by weighted
average common
shares outstanding on a diluted basis, respectively, during a period. We believe that FFO
available to common stockholders, Basic FFO per share and Diluted FFO per share are useful to
investors because they provide investors with a further context for evaluating our FFO results in
the same manner that investors use net income and earnings per share, or EPS, in evaluating net
income available to common stockholders. In addition, since most REITs provide FFO available to
common stockholders, Basic FFO and Diluted FFO per share information to the investment community,
we believe these are useful supplemental measures for comparing us to other REITs. We believe
that net income is the most directly comparable GAAP measure to FFO, Basic EPS is the most directly
comparable GAAP measure to Basic FFO per share, and that diluted EPS is the most directly
comparable GAAP measure to Diluted FFO per share.
The following table provides a reconciliation of our FFO for the three and nine months ended
September 30, 2008 and 2007, to the most directly comparable GAAP measure, net income, and a
computation of basic and diluted FFO per weighted average common share, basic and diluted net
income per weighted average common share and the percentage of FFO paid per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, |
|
|
For the nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
1,141,559 |
|
|
$ |
1,590,460 |
|
|
$ |
3,777,707 |
|
|
$ |
4,677,115 |
|
Less: Dividends attributable to preferred stock |
|
|
(1,023,437 |
) |
|
|
(1,023,438 |
) |
|
|
(3,070,312 |
) |
|
|
(3,070,312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
|
118,122 |
|
|
|
567,022 |
|
|
|
707,395 |
|
|
|
1,606,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Real estate depreciation and amortization |
|
|
3,262,903 |
|
|
|
2,668,383 |
|
|
|
9,435,690 |
|
|
|
7,722,349 |
|
Less: Gain on sale of real estate, net of taxes paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO available to common stockholders |
|
$ |
3,381,025 |
|
|
$ |
3,235,405 |
|
|
$ |
10,143,085 |
|
|
$ |
9,250,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic & diluted |
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
8,565,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted net income per weighted average
common share |
|
$ |
0.01 |
|
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted FFO per weighted average common share |
|
$ |
0.395 |
|
|
$ |
0.378 |
|
|
$ |
1.184 |
|
|
$ |
1.080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.375 |
|
|
$ |
0.360 |
|
|
$ |
1.125 |
|
|
$ |
1.080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of FFO paid per common share |
|
|
95 |
% |
|
|
95 |
% |
|
|
95 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk includes risks that arise from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices and other market changes that affect market sensitive
instruments. The primary risk that we believe we will be exposed to is interest rate risk. We
currently own one variable rate loan receivable, certain of our leases contain escalations based on
market interest rates, and the interest rate on our existing line of credit and short-term loan is
variable. We seek to mitigate this risk by structuring such provisions of our loans and leases to
contain a minimum interest rate or escalation rate, as applicable. We are also exposed to the
effects of interest rate changes as a result of the holding of our cash and cash equivalents in
short-term, interest-bearing investments.
To illustrate the potential impact of changes in interest rates on our net income for the three and
nine month periods ended September 30, 2008 and 2007, we have performed the following analysis,
which assumes that our balance sheet remains constant and no further actions beyond a minimum
interest rate or escalation rate are taken to alter our existing interest rate sensitivity.
The following table summarizes the impact of a 1% increase and 1% decrease in the one month LIBOR
for the three and nine month periods ended September 30, 2008 and 2007.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
1% increase in the one month LIBOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Rental & Interest Income |
|
$ |
27,308 |
|
|
$ |
9,125 |
|
|
$ |
82,106 |
|
|
$ |
27,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Interest Expense |
|
|
77,178 |
|
|
|
51,111 |
|
|
|
229,856 |
|
|
|
151,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease |
|
$ |
(49,869 |
) |
|
$ |
(41,986 |
) |
|
$ |
(147,750 |
) |
|
$ |
(124,292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income available to common stockholders |
|
$ |
118,112 |
|
|
$ |
567,022 |
|
|
$ |
707,395 |
|
|
$ |
1,606,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease as percentage of
Net Income available to common stockholders |
|
|
-42.2 |
% |
|
|
-7.4 |
% |
|
|
-20.9 |
% |
|
|
-7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1% decrease in the one month LIBOR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Rental & Interest Income |
|
$ |
(24,779 |
) |
|
$ |
(9,125 |
) |
|
$ |
(75,939 |
) |
|
$ |
(27,375 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Interest Expense |
|
$ |
(77,178 |
) |
|
$ |
(51,111 |
) |
|
$ |
(229,856 |
) |
|
$ |
(152,222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase |
|
$ |
52,399 |
|
|
$ |
41,986 |
|
|
$ |
153,916 |
|
|
$ |
124,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income available to common stockholders |
|
$ |
118,112 |
|
|
$ |
567,022 |
|
|
$ |
707,395 |
|
|
$ |
1,606,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase as percentage of
Net Income available to common stockholders |
|
|
44.4 |
% |
|
|
7.4 |
% |
|
|
21.8 |
% |
|
|
7.8 |
% |
As of September 30, 2008, the fair value of our fixed rate debt outstanding was approximately
$231.4 million. Interest rate fluctuations may affect the fair value of our fixed rate debt
instruments. If interest rates on our fixed rate debt instruments, using rates at September 30,
2008, had been one percentage point higher or lower, the fair value of those debt instruments on
that date would have decreased or increased by approximately $11.0 million and $11.7 million,
respectively.
In the future, we may be exposed to additional effects of interest rate changes primarily as a
result of our line of credit, term loan or long-term debt used to maintain liquidity and fund
expansion of our real estate investment portfolio and operations. Our interest rate risk
management objectives are to limit the impact of interest rate changes on earnings and cash flows
and to lower overall borrowing costs. To achieve this objective, we will borrow primarily at fixed
rates or variable rates with the lowest margins available and, in some cases, with the ability to
convert variable rates to fixed rates. We may also enter into derivative financial instruments
such as interest rate swaps and caps in order to mitigate the interest rate risk on a related
financial instrument. We will not enter into derivative or interest rate transactions for
speculative purposes.
In addition to changes in interest rates, the value of our real estate is subject to fluctuations
based on changes in local and regional economic conditions and changes in the creditworthiness of
lessees, all of which may affect our ability to refinance debt if necessary.
Item 4. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures
As of September 30, 2008, our management, including our chief executive officer and chief financial
officer, evaluated the effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, management, including the chief executive officer and chief
financial officer, concluded that our disclosure controls and procedures were effective as of
September 30, 2008 in providing a reasonable level of assurance that information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in applicable SEC rules and
forms, including providing a reasonable level of assurance that information required to be
disclosed by us in such reports is accumulated and communicated to our management, including our
chief executive officer and our chief financial officer, as appropriate to allow timely decisions
regarding required disclosure. However, in evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed and operated
can provide only reasonable assurance of necessarily achieving the desired control objectives, and
management was required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
34
b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the
three months ended September 30, 2008 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Neither we nor any of our subsidiaries are currently subject to any material legal proceedings,
nor, to our knowledge, is any material legal proceeding threatened against us or our subsidiaries.
Item 1A. Risk Factors
Our business is subject to certain risks and events that, if they occur, could adversely affect our
financial condition and results of operations and the trading price of our common stock. For a
discussion of these risks, please refer to the Risk Factors section of our Annual Report on Form
10-K for the fiscal year ended December 31, 2007, filed by us with the Securities and Exchange
Commission on February 27, 2008, and our Quarterly Report on Form 10-Q for the quarter ended June
30, 2008, filed by us with the Securities and Exchange Commission on August 5, 2008. In connection
with our preparation of this quarterly report, we have reviewed and considered these risk factors
and have determined that the following risk factors should be read in connection with the existing
risk factors disclosed in the Form 10-K for the year ended December 31, 2007 and Form 10-Q for the
quarter ended June 30, 2008.
The current state of the economy and the capital markets increases the possibility of adverse
effects on our financial position and results of operations.
The United States has entered into an economic downturn. Continued weak economic conditions could
adversely impact the financial condition of one or more of our tenants and, therefore, could make a
tenant bankruptcy and payment default on the related lease more likely. Impaired financial
positions and operating results could, in turn, harm our results of operations and affect our
ability to access capital under
our line of credit. The maximum amount we may draw under our line of credit is based on a
percentage of the value of properties pledged as collateral to the banks, which must meet agreed
upon eligibility standards. As we arrange for long-term mortgages for these pledged properties,
the banks will release the properties from the line of credit and reduce the availability under the
line of credit by the advanced amount of the removed property. The economic decline generally, and
the disruptions in the capital markets in particular, have decreased liquidity and increased our
cost of debt and equity capital which could also impact our ability to raise capital and reduce our
volume of new investments. The longer these conditions persist, the greater the probability that
these factors could have an adverse effect on our operations and financial results.
Our ownership of properties through ground leases exposes us to risks which are different than
those resulting from our ownership of fee title to other properties.
We have acquired an interest in certain of our properties by acquiring a leasehold interest in
the land underlying the property, and we may acquire additional properties in the future that are
subject to similar ground leases. In this situation, we have no economic interest in the land
underlying the property and do not control this land. Because we do not control the underlying
land, this type of ownership interest poses potential risks for our business because (i) if the
ground lease terminates for any reason, we will lose our interest in the property, including any
investment that we made in the property, (ii) if our tenant defaults under the previously existing
lease, we will continue to be obligated to meet the terms and conditions of the ground lease
without the annual amount of ground lease payments reimbursable to us by the tenant, and (iii) if
the third party owning the land under the ground lease disrupts our use either permanently or for a
significant period of time, then the value of our assets could be impaired and our results of
operations could be adversely affected.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were voted on during the three months ended September 30, 2008.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibit Index
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Exhibit |
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Description of Document |
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3.1
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Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 to the Registration Statement on
Form S
-11 (File No. 333-106024), filed September 11, 2003. |
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3.2
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Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024), filed
September 11, 2003. |
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3.2.1
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First Amendment to Bylaws, incorporated by reference to Exhibit
99.1 of the Current Report on Form 8-K (File No. 000-50363),
filed July 10, 2007. |
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4.1
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Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.75% Series A Cumulative Redeemable Preferred
Stock, incorporated by reference to Exhibit 3.3 of Form 8-A (File
No. 000-50363), filed January 19, 2006. |
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4.2
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Articles Supplementary Establishing and Fixing the Rights and
Preferences of the 7.5% Series B Cumulative Redeemable Preferred
Stock, incorporated by reference to Exhibit 3.4 of Form 8-A (File
No. 000-50363), filed October 19, 2006. |
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4.3
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Form of Certificate for 7.75% Series A Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation, incorporated
by reference to Exhibit 4.1 of Form 8-A (File No. 000-50363),
filed January 19, 2006. |
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4.4
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Form of Certificate for 7.5% Series B Cumulative Redeemable
Preferred Stock of Gladstone Commercial Corporation, incorporated
by reference to Exhibit 4.2 of Form 8-A (File No. 000-50363),
filed October 19, 2006. |
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10.1
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Amended and Restated Investment Advisory between the Gladstone
Commercial Corporation and Gladstone Management Corporation,
dated January 1, 2007, incorporated by reference to Exhibit 99.1
of the Current Report on Form 8-K (File No.
000-50363), filed
January 3, 2007 (renewed on July 9, 2008). |
36
|
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Exhibit |
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Description of Document |
10.2
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Administration Agreement between Gladstone Commercial Corporation
and Gladstone Administration, LLC, dated January 1, 2007
incorporated by reference to Exhibit 99.2 of the Current Report
on Form 8-K (File No. 000-50363), filed January 3, 2007 (renewed
on July 9, 2008). |
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11
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Computation of Per Share Earnings from Operations (included in
the notes to the unaudited financial statements contained in this
report). |
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31.1
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Certification of Chief Executive Officer pursuant to section 302
of The Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of Chief Financial Officer pursuant to section 302
of The Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of Chief Executive Officer pursuant to section 906
of The Sarbanes-Oxley Act of 2002. |
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32.2
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Certification of Chief Financial Officer pursuant to section 906
of The Sarbanes-Oxley Act of 2002. |
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Previously filed and incorporated by reference. |
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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Gladstone Commercial Corporation
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Date: November 5, 2008 |
By: |
/s/ Harry Brill
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Harry Brill |
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Chief Financial Officer |
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38