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, 2006 |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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
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(I.R.S. Employer Identification No.) |
organization) |
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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,
or a non-accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Large Accelerated Filer
o. Accelerated Filer þ Non-Accelerated Filer 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
27, 2006 was 7,911,340.
GLADSTONE COMMERCIAL CORPORATION
TABLE OF CONTENTS
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PAGE |
PART I |
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FINANCIAL INFORMATION |
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Item 1. |
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Consolidated Financial Statements (Unaudited) |
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Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005 |
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3 |
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Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005 |
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4 |
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Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 |
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6 |
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Notes to Consolidated Financial Statements |
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Item 2. |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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27 |
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Item 3. |
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Quantitative and Qualitative Disclosure About Market Risk |
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46 |
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Item 4. |
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Controls and Procedures |
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47 |
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PART II |
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OTHER INFORMATION |
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Item 1. |
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Legal Proceedings |
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48 |
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Item 1A. |
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Risk Factors |
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48 |
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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49 |
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Item 3. |
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Defaults Upon Senior Securities |
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49 |
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
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49 |
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Item 5. |
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Other Information |
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49 |
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Item 6. |
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Exhibits |
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50 |
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SIGNATURES |
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51 |
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GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30, 2006 |
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December 31, 2005 |
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ASSETS |
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Real estate, net of accumulated depreciation of
$7,106,263 and $3,408,878, respectively |
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$ |
236,573,888 |
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$ |
161,634,761 |
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Lease intangibles, net of accumulated amortization of
$3,393,819 and $1,221,413, respectively |
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24,198,562 |
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13,947,484 |
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Mortgage notes receivable |
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10,000,000 |
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21,025,815 |
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Cash and cash equivalents |
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614,784 |
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1,740,159 |
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Restricted cash |
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1,644,889 |
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1,974,436 |
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Funds held in escrow |
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1,514,701 |
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1,041,292 |
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Interest receivable mortgage note |
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70,749 |
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Interest receivable employees |
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41,346 |
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Deferred rent receivable |
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3,342,398 |
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2,590,617 |
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Deferred financing costs, net of accumulated
amortization of
$725,040 and $260,099, respectively |
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2,911,643 |
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1,811,017 |
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Prepaid expenses |
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435,196 |
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385,043 |
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Deposits on real estate |
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600,000 |
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Accounts receivable |
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225,073 |
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225,581 |
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TOTAL ASSETS |
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$ |
281,502,480 |
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$ |
207,046,954 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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LIABILITIES |
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Mortgage notes payable |
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$ |
118,516,249 |
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$ |
61,558,961 |
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Borrowings under line of credit |
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35,660,000 |
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43,560,000 |
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Deferred rent liability |
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4,914,989 |
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Asset retirement obligation liability |
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1,604,416 |
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Accounts payable and accrued expenses |
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695,330 |
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493,002 |
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Due to adviser |
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210,277 |
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164,155 |
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Rent received in advance, security deposits and
funds held in escrow |
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2,045,850 |
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2,322,300 |
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Total Liabilities |
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163,647,111 |
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108,098,418 |
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STOCKHOLDERS EQUITY |
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Redeemable preferred stock, $0.001 par value; $25
liquidation preference;
1,150,000 shares authorized and 1,000,000 shares
issued and outstanding at September 30, 2006 |
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1,000 |
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Common stock, $0.001 par value, 18,850,000 shares
authorized and
7,850,901 and 7,672,000 shares issued and
outstanding, respectively |
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7,851 |
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7,672 |
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Additional paid in capital |
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132,448,681 |
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105,502,544 |
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Notes receivable employees |
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(2,259,036 |
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(432,282 |
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Distributions in excess of accumulated earnings |
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(12,343,127 |
) |
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(6,129,398 |
) |
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Total Stockholders Equity |
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117,855,369 |
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98,948,536 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
281,502,480 |
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$ |
207,046,954 |
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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 |
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September 30, 2006 |
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September 30, 2005 |
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Operating revenues |
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Rental income |
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$ |
6,214,295 |
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$ |
3,307,759 |
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Interest income from mortgage notes receivable |
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478,329 |
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553,968 |
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Tenant recovery revenue |
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43,352 |
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28,208 |
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Total operating revenues |
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6,735,976 |
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3,889,935 |
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Operating expenses |
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Depreciation and amortization |
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2,162,640 |
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1,107,672 |
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Management advisory fee |
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656,916 |
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609,171 |
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Professional fees |
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167,353 |
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87,896 |
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Taxes and licenses |
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24,812 |
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36,952 |
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Insurance |
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113,453 |
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70,244 |
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General and administrative |
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115,349 |
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61,074 |
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Shareholder related expenses |
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34,414 |
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45,868 |
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Asset retirement obligation expense |
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30,619 |
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Stock option compensation expense |
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314,593 |
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Total operating expenses |
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3,620,149 |
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2,018,877 |
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Other income (expense) |
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Interest income from temporary investments |
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2,006 |
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10,093 |
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Interest
incomeemployee loans |
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41,346 |
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5,562 |
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Interest expense |
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(2,494,221 |
) |
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(865,237 |
) |
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Total other expense |
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(2,450,869 |
) |
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(849,582 |
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Income from continuing operations |
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664,958 |
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1,021,476 |
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Discontinued operations |
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Income from discontinued operations |
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6,915 |
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70,504 |
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Net realized loss from foreign currency transactions |
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(1,044 |
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(340 |
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Net unrealized loss from foreign currency transactions |
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(224,229 |
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Gain on sale of real estate |
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1,422,026 |
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Taxes on sale of real estate |
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(315,436 |
) |
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Total discontinued operations |
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1,112,461 |
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(154,065 |
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Net income |
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1,777,419 |
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867,411 |
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Dividends attributable to preferred stock |
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(484,375 |
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Net income available to common stockholders |
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$ |
1,293,044 |
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$ |
867,411 |
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Earnings per weighted average common share basic |
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Income from continuing operations (net of dividends
attributable to preferred stock) |
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$ |
0.02 |
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$ |
0.13 |
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Discontinued operations |
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0.14 |
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(0.02 |
) |
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Net income available to common stockholders |
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$ |
0.16 |
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$ |
0.11 |
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Earnings per weighted average common share diluted |
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Income from continuing operations (net of dividends
attributable to preferred stock) |
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$ |
0.02 |
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$ |
0.13 |
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Discontinued operations |
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|
0.14 |
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(0.02 |
) |
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Net income available to common stockholders |
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$ |
0.16 |
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$ |
0.11 |
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Weighted average shares outstanding |
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Basic |
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7,820,376 |
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7,672,000 |
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Diluted |
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7,981,071 |
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7,725,667 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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For the nine months ended |
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September 30, 2006 |
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September 30, 2005 |
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Operating revenues |
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Rental income |
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$ |
17,109,203 |
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$ |
7,103,591 |
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Interest income from mortgage notes
receivable |
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1,589,675 |
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1,351,197 |
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Tenant recovery revenue |
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92,772 |
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|
69,808 |
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Total operating revenues |
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18,791,650 |
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|
8,524,596 |
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Operating expenses |
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Depreciation and amortization |
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6,026,150 |
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2,277,432 |
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Management advisory fee |
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2,029,050 |
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1,564,826 |
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Professional fees |
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598,771 |
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|
428,781 |
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Taxes and licenses |
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|
114,774 |
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|
188,347 |
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Insurance |
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299,296 |
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|
207,648 |
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General and administrative |
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319,784 |
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|
166,410 |
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Shareholder related expenses |
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|
282,478 |
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|
170,285 |
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Asset retirement obligation expense |
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|
102,263 |
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Stock option compensation expense |
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394,411 |
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Total operating expenses |
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10,166,977 |
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|
5,003,729 |
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Other income (expense) |
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Interest income from temporary
investments |
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13,437 |
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|
117,806 |
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Interest income employee loans |
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|
75,483 |
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|
15,483 |
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Other income |
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|
10,400 |
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Interest expense |
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(6,268,757 |
) |
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|
(1,156,259 |
) |
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Total other expense |
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(6,169,437 |
) |
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(1,022,970 |
) |
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Income from continuing operations |
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2,455,236 |
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|
2,497,897 |
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Discontinued operations |
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Income from discontinued operations |
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|
116,169 |
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|
281,602 |
|
Net realized loss from foreign
currency transactions |
|
|
(201,017 |
) |
|
|
(3,277 |
) |
Net unrealized loss from foreign
currency transactions |
|
|
|
|
|
|
(224,094 |
) |
Gain on sale of real estate |
|
|
1,422,026 |
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|
|
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|
Taxes on sale of real estate |
|
|
(315,436 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
1,021,742 |
|
|
|
54,231 |
|
|
|
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Net income |
|
|
3,476,978 |
|
|
|
2,552,128 |
|
|
|
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|
Dividends attributable to preferred stock |
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|
(1,313,194 |
) |
|
|
|
|
|
|
|
|
|
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|
Net income available to common stockholders |
|
$ |
2,163,784 |
|
|
$ |
2,552,128 |
|
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|
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|
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|
|
|
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|
Earnings per weighted average common share
- basic |
|
|
|
|
|
|
|
|
Income from continuing operations
(net of dividends attributable to preferred
stock) |
|
$ |
0.15 |
|
|
$ |
0.32 |
|
Discontinued operations |
|
|
0.13 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders |
|
$ |
0.28 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
Earnings per weighted average
common share diluted |
|
|
|
|
|
|
|
|
Income from continuing operations
(net of dividends attributable to preferred
stock) |
|
$ |
0.14 |
|
|
$ |
0.32 |
|
Discontinued operations |
|
|
0.13 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders |
|
$ |
0.27 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
7,752,170 |
|
|
|
7,669,619 |
|
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|
|
|
|
|
|
Diluted |
|
|
7,896,860 |
|
|
|
7,718,441 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
GLADSTONE COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the nine |
|
|
For the nine |
|
|
|
months ended |
|
|
months ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,476,978 |
|
|
$ |
2,552,128 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization, including discontinued
operations |
|
|
6,078,450 |
|
|
|
2,374,912 |
|
Amortization of deferred financing costs, including
discontinued operations |
|
|
464,941 |
|
|
|
158,457 |
|
Amortization of deferred rent asset |
|
|
190,123 |
|
|
|
114,700 |
|
Amortization of deferred rent liability |
|
|
(499,870 |
) |
|
|
|
|
Asset retirement obligation expense, including discontinued
operations |
|
|
112,195 |
|
|
|
|
|
Stock compensation |
|
|
394,411 |
|
|
|
|
|
Increase in mortgage notes payable due to change in value of
foreign currency |
|
|
202,065 |
|
|
|
226,238 |
|
Value of building acquired in excess of mortgage note
satisfied, applied to interest income |
|
|
(335,701 |
) |
|
|
|
|
Gain on sale of real estate |
|
|
(1,422,026 |
) |
|
|
|
|
Decrease (increase) in mortgage interest receivable |
|
|
70,749 |
|
|
|
(2,716 |
) |
(Increase) decrease in employee interest receivable |
|
|
(41,346 |
) |
|
|
111 |
|
Increase in prepaid expenses and other assets |
|
|
(49,645 |
) |
|
|
(76,943 |
) |
Increase in deferred rent receivable |
|
|
(941,903 |
) |
|
|
(369,624 |
) |
Increase in accounts payable, accrued expenses, and amount
due adviser |
|
|
248,449 |
|
|
|
302,532 |
|
Increase (decrease) in rent received in advance and security
deposits |
|
|
472,167 |
|
|
|
(259,509 |
) |
Net payments to lenders for operating reserves held in escrow |
|
|
(2,001,065 |
) |
|
|
(81,640 |
) |
Increase in operating reserves from tenants |
|
|
1,189,942 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
7,608,914 |
|
|
|
4,938,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Real estate investments |
|
|
(48,311,928 |
) |
|
|
(80,763,736 |
) |
Proceeds from sales of real estate |
|
|
2,106,112 |
|
|
|
|
|
Issuance of mortgage note receivable |
|
|
|
|
|
|
(10,000,000 |
) |
Principal repayments on mortgage notes receivable |
|
|
44,742 |
|
|
|
60,443 |
|
Increase in restricted cash |
|
|
329,547 |
|
|
|
|
|
Net receipts from tenants for capital reserves |
|
|
125,574 |
|
|
|
|
|
Net payments to lenders for capital reserves held in escrow |
|
|
(536,476 |
) |
|
|
(1,006,602 |
) |
Deposits on future acquisitions |
|
|
(600,000 |
) |
|
|
(1,600,000 |
) |
Deposits applied against real estate investments |
|
|
1,200,000 |
|
|
|
1,400,000 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(45,642,429 |
) |
|
|
(91,909,895 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from share issuance |
|
|
26,034,648 |
|
|
|
|
|
Offering costs |
|
|
(1,308,496 |
) |
|
|
|
|
Borrowings under mortgage notes payable |
|
|
31,900,000 |
|
|
|
41,964,045 |
|
Principal repayments on mortgage notes payable |
|
|
(427,506 |
) |
|
|
(32,036 |
) |
Borrowings from line of credit |
|
|
70,400,400 |
|
|
|
69,410,000 |
|
Repayments on line of credit |
|
|
(78,300,400 |
) |
|
|
(45,600,000 |
) |
Principal repayments on employee loans |
|
|
|
|
|
|
17,094 |
|
Payments for deferred financing costs |
|
|
(1,699,798 |
) |
|
|
(1,595,299 |
) |
Dividends paid for common and preferred |
|
|
(9,690,708 |
) |
|
|
(5,982,260 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
36,908,140 |
|
|
|
58,181,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(1,125,375 |
) |
|
|
(28,789,705 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
1,740,159 |
|
|
|
29,153,987 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
614,784 |
|
|
$ |
364,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Increase in asset retirement obligation |
|
$ |
1,604,416 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Fixed rate debt assumed in connection with acquisitions |
|
$ |
30,129,654 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Assumption of mortgage notes payable by buyer |
|
$ |
4,846,925 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Notes receivable issued in exchange for common stock associated
with the exercise of employee stock options |
|
$ |
1,826,754 |
|
|
$ |
75,000 |
|
|
|
|
|
|
|
|
|
Acquisition of building in satisfaction of mortgage note
receivable |
|
$ |
11,316,774 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
GLADSTONE COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Gladstone Commercial Corporation (the Company) is a Maryland corporation that qualifies 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 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.
On December 28, 2005, GCLP Business Trust I and GCLP Business Trust II, each a business trust
formed under the laws of the Commonwealth of Massachusetts, were established by the Company. On
December 31, 2005, the Company transferred its 99% limited partnership interest in the Operating
Partnership to GCLP Business Trust I in exchange for 100 trust shares. Also on December 31, 2005,
Gladstone Commercial Partners, LLC transferred its 1% general partnership interest in the Operating
Partnership to GCLP Business Trust II in exchange for 100 trust shares.
7
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 and the value of tenant relationships, 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 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.
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, including
discontinued operations, was $1,383,279 and $3,862,257 for the three and nine months ended
September 30, 2006, respectively, and $770,467 and $1,742,094 for the three and nine months ended
September 30, 2005, 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. The value of these above-market leases as of September 30, 2006 was
$1,626,650. Total amortization related to above-market lease values was $63,375 and $190,123 for
the three and nine months ended September 30, 2006, respectively, and $21,315 and $114,700 for the
three and nine months ended September 30, 2005, 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 initial term and
any fixed-rate renewal periods in the respective leases. The value of these below-market leases as
of September 30, 2006 was $4,914,989 and total amortization related to below-market lease values
was $196,391 and $499,870 for the three and nine months ended September 30, 2006, respectively.
There were no below-market lease values for the three and nine months ended September 30, 2005.
8
The Company has determined that certain of its properties, which were originally not treated as
business combinations under SFAS No. 141 because there was not an existing lease in place at the
time of acquisition, should have been treated as business combinations when determining the
purchase price of the real estate. These properties had leases that were put in place on the date
of acquisition and thus were implicitly included in the purchase price and should have been
considered as leases in place for purposes of determining if the acquisitions were business
combinations. As a result, the Company reallocated approximately $1.2 million of land, building
and tenant improvements to intangible assets and recognized additional amortization of $140,606,
offset by increased rental revenue related to below market rents of approximately $28,000, for a
net decrease in income of approximately $112,000 in the quarter ended March 31, 2006. Of the
additional $112,000 recognized in the quarter ended March 31, 2006, approximately $90,000 relates
to periods prior to 2006, and management has deemed the amount immaterial to those periods.
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 range from 5 to 20 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
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 in-place lease value and customer relationship
intangibles will be charged to expense. Total amortization expense related to these intangible
assets, including discontinued operations, was $779,361 and $2,216,193 for the three and nine
months ended September 30, 2006, respectively, and $369,714 and $632,818 for the three and nine
months ended September 30, 2005, respectively.
The following table summarizes the net value of other intangible assets and the accumulated
amortization for each intangible asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Lease Intangibles |
|
|
Amortization |
|
|
Lease Intangibles |
|
|
Amortization |
|
In-place leases |
|
$ |
10,738,319 |
|
|
$ |
(1,551,955 |
) |
|
$ |
5,625,736 |
|
|
$ |
(558,997 |
) |
Leasing costs |
|
|
5,891,099 |
|
|
|
(1,064,706 |
) |
|
|
5,047,033 |
|
|
|
(505,078 |
) |
Customer relationships |
|
|
10,962,963 |
|
|
|
(777,158 |
) |
|
|
4,496,128 |
|
|
|
(157,338 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,592,381 |
|
|
$ |
(3,393,819 |
) |
|
$ |
15,168,897 |
|
|
$ |
(1,221,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The estimated aggregate amortization expense for the current and each of the four succeeding fiscal
years is as follows:
|
|
|
|
|
|
|
Estimated Amortization |
Year |
|
Expense |
2006 |
|
$ |
809,317 |
|
2007 |
|
|
3,237,268 |
|
2008 |
|
|
3,237,268 |
|
2009 |
|
|
3,122,392 |
|
2010 |
|
|
3,084,100 |
|
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 the Companys real estate assets at September 30, 2006.
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.
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 commercial paper and
money-market funds. All of the Companys cash and cash equivalents at September 30, 2006 were held
in the custody of two financial institutions, and the Companys balance at times may exceed
federally insurable limits. The Company mitigates this risk by depositing funds with major
financial institutions.
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.
10
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 long-term 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. Total amortization expense related to deferred financing costs, including
discontinued operations, was $175,641 and $464,941 for the three and nine months ended September
30, 2006, respectively, and $83,621 and $158,457 for the three and nine months ended September 30,
2005, respectively.
Revenue recognition
Rental revenues include rents that each tenant pays in accordance with the terms of its respective
lease reported on a straight-line basis over the non-cancelable term of the lease. Certain of the
Companys leases currently contain rental increases at specified intervals, and straight-line basis
accounting requires the Company to record an asset, and include in revenues, deferred rent
receivable that will be received if the tenant makes all rent payments required through the
expiration of the initial term of the lease. 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, 2006.
Rental payments for two of the Companys leases, where the rental payments under the leases were
based on annual increases in the CPI index, with a provision that required minimum annual rental
increases and maximum annual rental increases, were not originally straight lined at the time the
leases were put into place. Upon further review of SFAS No. 13, Accounting for Leases, it was
determined that since the rents will increase by a minimum amount per year, that the rental income
should be straight lined over the life of the leases assuming the minimum increase pursuant to
SFAS 13. The Company made a cumulative adjusting entry in June of 2006 of approximately $179,000,
approximately $123,000 of which related to 2005, which management has deemed immaterial to the year
ended December 31, 2005.
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, deferred loan fees and undisbursed loan funds. 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 or exit 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, loan origination or exit 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.
11
Stock based compensation
In December of 2004, the Financial Accounting Standards Board (FASB) approved the revision of
SFAS No. 123, Accounting for Stock-Based Compensation, and issued the revised SFAS No. 123(R),
Share-Based Payment. In April of 2005, the effective date of adoption was changed from interim
periods ending after June 15, 2005 to annual periods beginning after June 15, 2005. SFAS No.
123(R) effectively replaces SFAS No. 123, and supersedes APB Opinion No. 25. The new standard was
effective for awards that are granted, modified, or settled in cash for annual periods beginning
after June 15, 2005. The Company adopted SFAS No. 123(R) on January 1, 2006 using the modified
prospective approach. Under the modified prospective approach, stock-based compensation expense was
recorded for the unvested portion of previously issued awards that remained outstanding at January
1, 2006 using the same estimate of the grant date fair value and the same attribution method used
to determine the pro forma disclosure under SFAS No. 123. SFAS No. 123(R) also requires that all
share-based payments to employees after January 1, 2006, including employee stock options, be
recognized in the financial statements as stock-based compensation expense based on the fair value
on the date of grant.
In October of 2005, the FASB released FASB Staff Position No. FAS 123(R)-2 (FSP FAS No.
123(R)-2), Practical Accommodation to the Application of Grant Date as Defined in FASB Statement
No. 123(R). FSP FAS No. 123(R)-2 provides guidance on the application of grant date as defined in
SFAS No. 123(R). The FASB addresses the notion of mutual understanding, specifically that a
mutual understanding shall be presumed to exist at the date the award is approved in accordance
with the relevant corporate governance requirements if the award is a unilateral grant and
therefore the recipient does not have the ability to negotiate the terms and conditions of the
award with the employer and the key terms and conditions of the award are expected to be
communicated to an individual recipient within a relatively short time period for the date of
approval. The Company applied FSP FAS No. 123(R)-2 in conjunction with the adoption of SFAS No.
123(R) on January 1, 2006.
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 real estate investment trust
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.
Because the Company is not able to deduct any of its unrealized losses on the translation of assets
and liabilities in a foreign currency for tax purposes, the Company must distribute these amounts
to its stockholders or the Company would be subject to federal and state corporate income tax on
the amounts of these losses.
Commercial Advisers is a wholly-owned TRS that is subject to federal and state income taxes. The
Company accounts for such 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.
In July of 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109. This Interpretation provides guidance for the
financial statement recognition and measurement of a tax position taken or expected to be taken on
a tax return, and provides guidance on recognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition of tax positions. This Interpretation is
effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating
the impact of the Interpretation.
12
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 10, 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 of 2004. These properties were
classified as held for sale as of June 30, 2006, and were sold in July of 2006. All gains and
losses from foreign currency transactions are reflected in discontinued operations in the Companys
Consolidated Financial Statements. Rental payments from these properties were received in Canadian
dollars. In accordance with SFAS No. 52 Foreign Currency Translation, the rental revenue
received was recorded using the exchange rate as of the transaction date, which is the first day of
each month. If the rental payment was received on a date other than the transaction date, then a
realized foreign currency gain or loss would be recorded on the financial statements. Straight
line rent and any deferred rent asset or liability recorded in connection with monthly rental
payments were also recorded using the exchange rate as of the transaction date. The Company was
also required to remit quarterly tax payments to Canada from amounts withheld from the tenants in
the Canadian properties. Since these payments were received from the tenants on dates different
then the remittance date to Canada, the tax payments also resulted in realized foreign currency
gains and losses on the income statement. In addition to rental payments that are denominated in
Canadian dollars, the Company also has a bank account in Canada and the long-term financings on the
two Canadian properties were also issued in Canadian dollars. All cash, deferred rent assets and
mortgage notes payable related to the Canadian properties are re-valued at each balance sheet date
to reflect the current exchange rate. The gains or losses from the valuation of the cash are
recorded on the income statement as a realized gain or loss, and the valuation of the deferred rent
assets and mortgage notes payable is recorded on the income statement as unrealized gains or losses
on the translation of assets and liabilities, these unrealized losses became realized when the
Canadian properties were sold in July 2006. A realized gain of $1,422,026 related to the sale of
the Canadian properties was recognized for the three and nine months ended September 30, 2006.
Realized foreign currency losses of $1,044 and $201,017 were recorded for the three and nine months
ended September 30, 2006, respectively, from the valuation of cash, tax payments made to the
Canadian government, and the previously unrealized foreign currency losses associated with the
valuation of the deferred rent assets and mortgage notes payable that became a realized foreign
currency loss as of the date of sale. Realized foreign currency losses of $340 and $3,277 were
recorded for the three and nine months ended September 30, 2005, respectively. There were no
unrealized foreign currency losses recorded for the three and nine months ended September 30, 2006.
Unrealized foreign currency losses of $224,229 and $224,094 were recorded for the three and nine
months ended September 30, 2005, respectively.
13
Asset retirement obligations
In March of 2005, the 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 of
$1,604,416, approximately $728,000 of which related to properties acquired prior to 2006, for
disposal related to all properties constructed prior to 1985 that have, or may have, asbestos
present in the building. During the three and nine months ended September 30, 2006, the Company
recorded $30,619 and $112,192, respectively, of expense, including discontinued operations, related
to the cumulative accretion of the obligation from the Companys acquisition of the related
properties through September 30, 2006. The Company adopted FIN 47 as of December 31, 2005, but did
not record the liability and the related cumulative effect as of December 31, 2005 because the
Company deemed the impact of its initial estimates immaterial and worked to further refine these
estimates.
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 for the current period. Once properties are listed as
held for sale, no further depreciation is recorded.
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 differ from
those estimates.
Reclassifications
Certain amounts from prior years financial statements have been reclassified to conform to the
current year presentation. These reclassifications had no effect on previously reported net income
or stockholders equity.
2. Management Advisory Fee
The Company has no employees, and all of the Companys operations are managed by the Companys
Adviser pursuant to an advisory agreement. Pursuant to the advisory agreement, the Adviser is
responsible for managing the Company on a day-to-day basis and for identifying, evaluating,
negotiating and consummating investment transactions consistent with the Companys criteria. In
exchange for such services, the Company pays the Adviser a management advisory fee, which consists
of the reimbursement of certain expenses of the Adviser. The Company reimburses the Adviser for
its pro-rata share of the payroll and related benefit expenses on an employee-by-employee basis,
based on the percentage of each employees time devoted to Company matters. The Company also
reimburses the Adviser for general overhead expenses multiplied by the ratio of hours worked by the
Advisers employees on Company matters to the total hours worked by the Advisers employees.
14
The Company compensates its Adviser through reimbursement of its portion of the Advisers payroll,
benefits and general overhead expenses. This reimbursement is generally subject to a combined
annual management fee limitation of 2.0% of the Companys average invested assets for the year,
with certain exceptions. Reimbursement for overhead expenses is only required up to the point that
reimbursed overhead expenses and payroll and benefits expenses, on a combined basis, equal 2.0% of
the Companys average invested assets for the year, and general overhead expenses are required to
be reimbursed only if the amount of payroll and benefits reimbursed to the Adviser is less than
2.0% of its average invested assets for the year. However, payroll and benefits expenses are
required to be reimbursed by the Company to the extent that they exceed the overall 2.0% annual
management fee limitation. To the extent that overhead expenses payable or reimbursable by the
Company exceed this limit and the Companys independent directors determine that the excess
expenses were justified based on unusual and nonrecurring factors which they deem sufficient, the
Company may reimburse the Adviser in future years for the full amount of the excess expenses, or
any portion thereof, but only to the extent that the reimbursement would not cause the Companys
overhead expense reimbursements to exceed the 2.0% limitation in any year. To date, the advisory
fee has not exceeded the annual cap.
For the three and nine months ended September 30, 2006, the Company incurred approximately $657,000
and $2,029,000, respectively, in management advisory fees. For the three and nine months ended
September 30, 2005, the Company incurred approximately $609,000 and $1,565,000, respectively, in
management advisory fees. Approximately $210,000 and $164,000 was unpaid at September 30, 2006
and December 31, 2005, respectively.
The following table shows the breakdown of the management advisory fee for three and nine months
ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three |
|
|
For the three |
|
|
For the nine |
|
|
For the nine |
|
|
|
months ended |
|
|
months ended |
|
|
months ended |
|
|
months ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
Allocated payroll and benefits |
|
$ |
513,220 |
|
|
$ |
446,625 |
|
|
$ |
1,542,254 |
|
|
$ |
1,128,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated overhead expenses |
|
|
143,696 |
|
|
|
162,546 |
|
|
|
486,796 |
|
|
|
436,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management advisory fee |
|
$ |
656,916 |
|
|
$ |
609,171 |
|
|
$ |
2,029,050 |
|
|
$ |
1,564,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 24, 2006, the Companys stockholders approved a proposal to enter into an amended and
restated investment advisory agreement (the Amended Advisory Agreement) with its Adviser and an
administration agreement (the Administration Agreement) between the Company and Gladstone
Administration, LLC (the Administrator), a wholly owned subsidiary of the Adviser.
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 funds from operations, (FFO). The incentive fee would reward the Adviser
if the Companys quarterly FFO, before giving effect to any incentive fee, exceeds 1.75%, or 7%
annualized, (the hurdle rate) of total stockholders equity, less the recorded value of any
preferred stock. The 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 the Companys pre-incentive fee FFO. The
Adviser will also receive an incentive fee of 20% of the
amount of the Companys pre-incentive fee FFO that exceeds 2.1875%. Under the Administration
Agreement, the Company will pay separately for its allocable portion of the Administrators
overhead expenses in performing its obligations, including rent, and the Companys allocable
portion of the salaries and benefits expenses of its chief financial officer, chief compliance
officer, controller, treasurer and their respective staffs.
The Amended Advisory Agreement and Administration Agreement will not become effective as long as
the 2003 Equity Incentive Plan (the 2003 Plan) is in effect or as long as there are any
outstanding stock options. In connection with the approval of the Amended Advisory and
Administration Agreements, and pursuant to the approval of the Companys Board of Directors on July
11, 2006, on July 12, 2006, the
15
Company accelerated in full the vesting of all outstanding options
under the 2003 Plan, resulting in the acceleration of 35,000 unvested options. Also on July 12,
2006, the Company filed a Schedule TO and related documentation with the Securities and Exchange
Commission, which described an offer to all executive officers and directors and the employees of
the Adviser who held stock options to accelerate the expiration date of all of their outstanding
options under the 2003 Plan to December 31, 2006 (as amended, the Offer). The Offer was
conditional upon its acceptance by all option holders on or before its expiration on August 31,
2006, and all option holders accepted the Offer prior to that date. As of September 30, 2006, all
outstanding options under the 2003 Plan were amended to expire on December 31, 2006. The Company
intends to terminate the 2003 Plan on December 31, 2006. Following the expiration of any
unexercised options and the termination of the 2003 Plan, the Company intends to implement the
Amended Advisory Agreement and Administration Agreement on January 1, 2007. The current investment
advisory agreement with the Adviser will continue in effect until these new agreements become
effective.
3. Stock Options
Effective January 1, 2006, the Company adopted the provisions of FASB Statement No. 123(R),
Share-Based Payment, for its stock-based compensation plans. The Company previously accounted for
these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations and disclosure requirements established by
SFAS No. 123, Accounting for Stock-Based Compensation. In this regard, these options have been
granted to individuals who are the Companys officers, and who would qualify as leased employees
under FASB Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25.
Under APB 25, no expense was recorded in the income statement for the Companys stock options. The
pro forma effects on income for stock options were instead disclosed in a footnote to the financial
statements. Under SFAS No. 123(R), all share-based compensation cost is measured at the grant date,
based on the fair value of the award, and is recognized as an expense in the income statement over
an employees requisite service period.
The Company adopted SFAS No. 123(R) using the modified prospective method. Under this transition
method, compensation cost recognized during the three and nine months ended September 30, 2006
includes the cost for all stock-based payments granted prior to, but not yet vested, as of January
1, 2006. This cost was based on the grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123. The Company was required to record a one-time, non-cash expense as a
result of the amendment of the options during the quarter ended September 30, 2006 of $314,593.
For the nine months ended September 30, 2006 the Company recorded total stock option compensation
expense of $394,411.
The following table illustrates the effect on net income and earnings per share as if the Company
had applied the fair-value recognition provisions of SFAS No. 123 to stock options, stock
appreciation rights, performance units and restricted stock units for periods prior to adoption of
SFAS No. 123(R).
16
|
|
|
|
|
|
|
|
|
|
|
For the three |
|
|
For the nine |
|
|
|
months ended |
|
|
months ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net income, as reported |
|
$ |
867,411 |
|
|
$ |
2,552,128 |
|
|
|
|
|
|
|
|
|
|
Less: Stock-based compensation expense
determined using the fair value
based method |
|
|
(47,941 |
) |
|
|
(140,373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, pro-forma |
|
$ |
819,470 |
|
|
$ |
2,411,755 |
|
|
|
|
|
|
|
|
|
|
Basic, as reported |
|
$ |
0.11 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
Basic, pro-forma |
|
$ |
0.11 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted, as reported |
|
$ |
0.11 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
Diluted, pro-forma |
|
$ |
0.11 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
The stock-based compensation expense under the fair value method, as reported in the above table,
was computed using an estimated weighted average fair value of $1.26 using the Black-Scholes
option-pricing model, based on options issued from date of inception forward, and the following
weighted-average assumptions: dividend yield of 5.06%, risk-free interest rate of 2.60%, expected
volatility factor of 18.11%, and expected lives of 3 years.
As of September 30, 2006, there was no additional unrecognized compensation cost related to
non-vested stock-based compensation awards granted, as a result of the acceleration of all options
on July 11, 2006.
At September 30, 2006, 737,099 options were outstanding with exercise prices ranging from $15 to
$16.53. All options were fully vested as of September 30, 2006. The aggregate intrinsic value of
these fully vested options, which was calculated by taking the difference between the closing stock
price at September 29, 2006 and the exercise price of the option and multiplying that value by the
number of options with exercise prices below the September 29, 2006 stock price, was approximately
$3.5 million at September 30, 2006.
The Company has a total of 960,000 options authorized for issuance under the 2003 Plan. A summary
of the status of the Companys 2003 Plan for the nine months ended September 30, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Shares |
|
|
Exercise Price |
|
Options outstanding at December 31, 2005, of which 744,250
shares were exercisable |
|
|
916,000 |
|
|
$ |
15.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
$ |
|
|
Exercised |
|
|
(178,901 |
) |
|
$ |
15.87 |
|
Forfeited |
|
|
|
|
|
$ |
|
|
Options outstanding and exercisable at September 30, 2006 |
|
|
737,099 |
|
|
$ |
15.29 |
|
|
|
|
|
|
|
|
|
17
The following table is a summary of all notes issued to employees of the Adviser for the exercise
of stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Strike Price of |
|
|
Amount of |
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Options |
|
|
Promissory |
|
|
|
|
|
|
Interest Rate |
|
Date Issued |
|
Exercised |
|
|
Exercised |
|
|
Note |
|
|
Term of Note |
|
|
on Note |
|
Sep-04 |
|
|
25,000 |
|
|
$ |
15.00 |
|
|
$ |
375,000 |
|
|
9 years |
|
|
5.00 |
% |
May-05 |
|
|
5,000 |
|
|
$ |
15.00 |
|
|
$ |
75,000 |
|
|
9 years |
|
|
6.00 |
% |
Apr-06 |
|
|
25,000 |
|
|
$ |
15.00 |
|
|
$ |
375,000 |
|
|
5 years |
|
|
7.77 |
% |
Apr-06 |
|
|
12,422 |
|
|
$ |
16.10 |
|
|
$ |
199,994 |
|
|
9 years |
|
|
7.77 |
% |
May-06 |
|
|
50,000 |
|
|
$ |
16.85 |
|
|
$ |
842,500 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
15,000 |
|
|
$ |
16.10 |
|
|
$ |
241,500 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,500 |
|
|
$ |
16.01 |
|
|
$ |
40,000 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,000 |
|
|
$ |
16.10 |
|
|
$ |
32,200 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,000 |
|
|
$ |
16.10 |
|
|
$ |
32,200 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,000 |
|
|
$ |
16.68 |
|
|
$ |
33,360 |
|
|
10 years |
|
|
7.87 |
% |
May-06 |
|
|
2,000 |
|
|
$ |
15.00 |
|
|
$ |
30,000 |
|
|
10 years |
|
|
7.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,922 |
|
|
|
|
|
|
$ |
2,276,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These notes were recorded as loans to employees and are
included in the equity section of the accompanying consolidated balance sheets. As of
September 30, 2006, approximately $2,259,000 of indebtedness was owed by current employees to the
Company, and no current or former directors or executive officers had any loans outstanding.
On May 24, 2006, the Companys stockholders approved the Amended Advisory Agreement with its
Adviser and the Administrative Agreement with its Administrator. In connection with the approval of
the Amended Advisory Agreement, the Company ceased further option grants and will terminate the
2003 Plan on December 31, 2006.
On August 31, 2006, all the holders of currently outstanding stock options accepted the Companys
offer to amend their stock options and accelerate the expiration date of the outstanding options to
December 31, 2006. Therefore, all currently outstanding stock options must be exercised before
December 31, 2006 or become forfeited on December 31, 2006. Upon termination of the 2003 Plan, the
Company will implement the Amended Advisory Agreement between the Company and the Adviser effective
on January 1, 2007, the first day of the Companys 2007 fiscal year.
4. 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, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three |
|
|
For the three |
|
|
For the nine |
|
|
For the nine |
|
|
|
months ended |
|
|
months ended |
|
|
months ended |
|
|
months ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
Net income available to common stockholders |
|
$ |
1,293,044 |
|
|
$ |
867,411 |
|
|
$ |
2,163,784 |
|
|
$ |
2,552,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic weighted average shares |
|
|
7,820,376 |
|
|
|
7,672,000 |
|
|
|
7,752,170 |
|
|
|
7,669,619 |
|
Dilutive effect of stock options |
|
|
160,695 |
|
|
|
53,667 |
|
|
|
144,690 |
|
|
|
48,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted weighted average shares |
|
|
7,981,071 |
|
|
|
7,725,667 |
|
|
|
7,896,860 |
|
|
|
7,718,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.16 |
|
|
$ |
0.11 |
|
|
$ |
0.28 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.16 |
|
|
$ |
0.11 |
|
|
$ |
0.27 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
5. Real Estate
A summary of the 38 properties held by the Company as of September 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Acquired |
|
Location |
|
Square Footage |
|
|
Property Description |
|
Net Real Estate |
|
Dec-03 |
|
Raleigh, North Carolina |
|
|
58,926 |
|
|
Office |
|
$ |
4,864,590 |
|
Jan-04 |
|
Canton, Ohio |
|
|
54,018 |
|
|
Office and Warehouse |
|
|
3,033,997 |
|
Apr-04 |
|
Akron, Ohio |
|
|
83,891 |
|
|
Office and Laboratory |
|
|
8,326,162 |
|
Jun-04 |
|
Charlotte, North Carolina |
|
|
64,500 |
|
|
Office |
|
|
8,727,250 |
|
Jul-04 |
|
Canton, North Carolina |
|
|
228,000 |
|
|
Commercial and Manufacturing |
|
|
4,911,438 |
|
|
Aug-04 |
|
Snyder Township, Pennsylvania |
|
|
290,000 |
|
|
Commercial and Warehouse |
|
|
6,314,217 |
|
Aug-04 |
|
Lexington, North Carolina |
|
|
154,000 |
|
|
Commercial and Warehouse |
|
|
2,846,120 |
|
Sep-04 |
|
Austin, Texas |
|
|
51,993 |
|
|
Flexible Office |
|
|
7,015,299 |
|
Oct-04 |
|
Norfolk, Virginia |
|
|
25,797 |
|
|
Commercial and Manufacturing |
|
|
909,711 |
|
Oct-04 |
|
Mt. Pocono, Pennsylvania |
|
|
223,275 |
|
|
Commercial and Manufacturing |
|
|
5,889,715 |
|
Feb-05 |
|
San Antonio, Texas |
|
|
60,245 |
|
|
Flexible Office |
|
|
7,956,087 |
|
Feb-05 |
|
Columbus, Ohio |
|
|
39,000 |
|
|
Industrial |
|
|
2,692,599 |
|
Apr-05 |
|
Big Flats, New York |
|
|
120,000 |
|
|
Industrial |
|
|
6,518,254 |
|
May-05 |
|
Wichita, Kansas |
|
|
69,287 |
|
|
Office |
|
|
10,906,369 |
|
May-05 |
|
Arlington, Texas |
|
|
64,000 |
|
|
Warehouse and Bakery |
|
|
3,976,955 |
|
Jun-05 |
|
Dayton, Ohio |
|
|
59,894 |
|
|
Office |
|
|
2,406,170 |
|
Jul-05 |
|
Eatontown, New Jersey |
|
|
30,268 |
|
|
Office |
|
|
4,742,162 |
|
Jul-05 |
|
Franklin Township, New Jersey |
|
|
183,000 |
|
|
Office and Warehouse |
|
|
7,640,481 |
|
Jul-05 |
|
Duncan, South Carolina |
|
|
278,020 |
|
|
Office and Manufacturing |
|
|
15,068,285 |
|
Aug-05 |
|
Hazelwood, Missouri |
|
|
51,155 |
|
|
Office and Warehouse |
|
|
3,029,121 |
|
Sep-05 |
|
Angola, Indiana |
|
|
52,080 |
|
|
Industrial |
|
|
1,153,041 |
|
Sep-05 |
|
Angola, Indiana |
|
|
50,000 |
|
|
Industrial |
|
|
1,153,041 |
|
Sep-05 |
|
Rock Falls, Illinois |
|
|
52,000 |
|
|
Industrial |
|
|
1,153,042 |
|
Oct-05 |
|
Newburyport, Massachusetts |
|
|
70,598 |
|
|
Industrial |
|
|
7,008,103 |
|
Oct-05 |
|
Clintonville, Wisconsin |
|
|
291,142 |
|
|
Industrial |
|
|
4,657,650 |
|
Dec-05 |
|
Maple Heights, Ohio |
|
|
347,218 |
|
|
Industrial |
|
|
11,467,618 |
|
Dec-05 |
|
Richmond, Virginia |
|
|
42,213 |
|
|
Office |
|
|
5,996,116 |
|
Dec-05 |
|
Toledo, Ohio |
|
|
23,368 |
|
|
Office |
|
|
3,048,960 |
|
Feb-06 |
|
South Hadley, Massachusetts |
|
|
150,000 |
|
|
Industrial |
|
|
3,191,562 |
|
Feb-06 |
|
Champaign, Illinois |
|
|
108,262 |
|
|
Office |
|
|
14,269,900 |
|
Feb-06 |
|
Roseville, Minnesota |
|
|
359,540 |
|
|
Office |
|
|
27,396,979 |
|
May-06 |
|
Burnsville, Minnesota |
|
|
114,100 |
|
|
Office |
|
|
12,140,106 |
|
Jun-06 |
|
Menomonee Falls, Wisconsin |
|
|
125,692 |
|
|
Industrial |
|
|
7,490,306 |
|
Jul-06 |
|
Baytown, Texas |
|
|
12,000 |
|
|
Office |
|
|
2,643,057 |
|
Sep-06 |
|
Sterling Heights, Michigan |
|
|
532,869 |
|
|
Industrial |
|
|
11,311,244 |
|
Sep-06 |
|
Birmingham, Alabama |
|
|
63,514 |
|
|
Industrial |
|
|
1,572,727 |
|
Sep-06 |
|
Montgomery, Alabama |
|
|
29,472 |
|
|
Industrial |
|
|
1,572,727 |
|
Sep-06 |
|
Columbia, Missouri |
|
|
16,275 |
|
|
Industrial |
|
|
1,572,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate, net |
|
|
4,629,612 |
|
|
|
|
$ |
236,573,888 |
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the components of the Companys investments in real estate:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
Real estate: |
|
|
|
|
|
|
|
|
Land |
|
$ |
33,764,113 |
|
|
$ |
20,329,568 |
|
Building |
|
|
204,082,090 |
|
|
|
141,660,553 |
|
Tenant improvements |
|
|
5,833,948 |
|
|
|
3,053,518 |
|
Accumulated depreciation |
|
|
(7,106,263 |
) |
|
|
(3,408,878 |
) |
|
|
|
|
|
|
|
Real estate, net |
|
$ |
236,573,888 |
|
|
$ |
161,634,761 |
|
|
|
|
|
|
|
|
On February 15, 2006, the Company acquired a 150,000 square foot industrial facility in South
Hadley, Massachusetts for $3.6 million, including transaction costs, and the purchase was funded
using borrowings from the Companys line of credit. Upon acquisition of the property, the Company
was assigned the previously existing triple net lease with the sole tenant, which had a remaining
term of approximately four years at the time of assignment, and the tenant has one option to extend
the lease for additional period of five years. The lease provides for annual rents of
approximately $353,000 in 2007, with prescribed escalations thereafter.
19
On February 21, 2006, the Company acquired four office buildings located in the same business park
in Champaign, Illinois, from a single seller totaling 108,262 square feet. The Company acquired
the four properties for approximately $15.1 million, including transaction costs, which was funded
by a combination of borrowings from the existing line of credit, and the assumption of
approximately $10.0 million of financing on the property. At closing, the Company was assigned the
previously existing triple net leases with the sole tenant, which had remaining terms ranging from
five to nine years at the time of assignment, and the tenant has options to extend each lease for
additional periods of three years each. The leases provide for annual rents of approximately $1.3
million in 2007.
On February 21, 2006, the Company acquired a 359,540 square foot office building in Roseville,
Minnesota for approximately $30.0 million, including transaction costs, which was funded by a
combination of borrowings from the existing line of credit, and the assumption of approximately
$20.0 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 seven
years at the time of assignment, and the tenant has one option to extend the lease for an
additional period of five years. The lease provides for annual rents of approximately $2.4 million
in 2007, with prescribed escalations thereafter.
On May 10, 2006, the Company acquired a 114,100 square foot office building in Burnsville,
Minnesota for approximately $14.1 million, including transaction costs, which was funded using
borrowings from the Companys line of credit. At closing, the Company was assigned the previously
existing triple net lease with the sole tenant, which had a remaining term of approximately four
years, and concurrently with the closing the tenant exercised its first renewal option for an
additional five years to the original lease term. The tenant also has two remaining options to
extend the lease for an additional period of five years each. The lease provides for annual rents
of approximately $1.2 million in 2007, with prescribed escalations thereafter.
On June 30, 2006, the Company acquired a 125,692 square foot office building in Menomonee Falls,
Wisconsin for approximately $8.0 million, including transaction costs, which was funded using
borrowings from the Companys line of credit. At closing, the Company extended a ten year triple
net lease with the sole tenant, and the tenant has three options to extend the lease for additional
periods of ten years each.
The lease provides for annual rents of approximately $0.7 million in 2007, with prescribed
escalations thereafter.
On July 13, 2006, the Company acquired a 12,000 square foot office building in Baytown, Texas for
approximately $2.8 million, including transaction costs, which was funded using borrowings from the
Companys line of credit. At closing, the Company was assigned the previously existing triple net
lease with the sole tenant, which had a remaining term of approximately seven years. The tenant
has two options to extend the lease for additional periods of five years each. The lease provides
for annual rents of approximately $0.2 million in 2007, with prescribed escalations thereafter.
On September 22, 2006, the Company conducted a foreclosure sale and was the successful bidder at
such sale on a 532,869 square foot office and industrial building in Sterling Heights, Michigan.
When the Company was determined to be the highest bidder, the mortgage loan was deemed to be
satisfied to the extent of such bid. The Company obtained an independent appraisal on the security
which indicated a fair value in excess of the outstanding principal balance and accrued,
non-default interest due under the mortgage loan at the time of default. As a result of the
fair value indicated in the appraisal, the Company determined that the loan was not impaired
and a writedown was not necessary. The Company accounted for the asset received as if the
assets had been acquired for cash and recorded the real estate asset at approximately
$11.3 million, which equaled the outstanding principal balance and
accrued, non-default interest due under the mortgage loan to the Company at that time. Under
Michigan law, the borrower had six months from the date of foreclosure to redeem ownership of the
property in exchange for payment of the bid amount plus certain other expenditures. As part of the
resolution of the Companys claims against the borrower and tenant, the borrower formally waived
its right of redemption and permitted the Company to take immediate control of the property so
that it could be re-rented.
20
On September 29, 2006, the Company acquired three separate properties from a single seller: a
63,514 square foot industrial building in Birmingham, Alabama; a 29,472 square foot industrial
building located in Montgomery, Alabama; and a 16,275 square foot industrial building located in
Columbia, Missouri. These three properties were acquired for an aggregate cost to the Company of
approximately $4.9 million, including transaction costs, and the purchase was funded using
borrowings from the Companys line of credit. Upon acquisition of the properties, the Company
extended a ten year triple net lease with the tenant of each building, with four options to extend
the lease for additional periods of five years each. The lease provides for annual rents of
approximately $0.4 million in 2006, with prescribed escalations thereafter.
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, 2006 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant |
|
|
|
|
|
|
|
|
|
|
Customer |
|
|
Below Market |
|
|
Total Purchase |
|
|
|
Land |
|
|
Building |
|
|
Improvements |
|
|
In-place leases |
|
|
Leasing Costs |
|
|
relationships |
|
|
Rents |
|
|
Price |
|
South Hadley,
Massachusetts |
|
$ |
470,636 |
|
|
$ |
2,543,800 |
|
|
$ |
|
|
|
$ |
225,959 |
|
|
$ |
46,710 |
|
|
$ |
183,052 |
|
|
$ |
|
|
|
$ |
3,470,157 |
|
Champaign, Illinois |
|
|
3,645,770 |
|
|
|
10,589,003 |
|
|
|
225,367 |
|
|
|
838,387 |
|
|
|
165,893 |
|
|
|
869,041 |
|
|
|
(1,223,286 |
) |
|
|
15,110,175 |
|
Roseville, Minnesota |
|
|
2,587,757 |
|
|
|
23,623,407 |
|
|
|
1,182,263 |
|
|
|
2,448,286 |
|
|
|
491,342 |
|
|
|
2,881,122 |
|
|
|
(3,473,624 |
) |
|
|
29,740,553 |
|
Burnsville, Minnesota |
|
|
3,510,711 |
|
|
|
7,827,812 |
|
|
|
863,658 |
|
|
|
463,237 |
|
|
|
316,043 |
|
|
|
1,126,538 |
|
|
|
|
|
|
|
14,107,999 |
|
Menomonee Falls, Wisconsin |
|
|
624,700 |
|
|
|
6,870,586 |
|
|
|
40,030 |
|
|
|
138,320 |
|
|
|
1,154 |
|
|
|
379,284 |
|
|
|
|
|
|
|
8,054,074 |
|
Baytown, Texas |
|
|
221,314 |
|
|
|
2,356,986 |
|
|
|
80,483 |
|
|
|
|
|
|
|
54,277 |
|
|
|
100,949 |
|
|
|
|
|
|
|
2,814,009 |
|
Sterling Heights, Michigan |
|
|
2,734,887 |
|
|
|
8,581,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,316,774 |
|
Birmingham, Alabama; |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Montgomery Alabama; |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Columbia, Missouri |
|
|
1,005,450 |
|
|
|
3,633,074 |
|
|
|
39,268 |
|
|
|
74,985 |
|
|
|
2,900 |
|
|
|
209,165 |
|
|
|
|
|
|
|
4,964,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,801,225 |
|
|
$ |
66,026,555 |
|
|
$ |
2,431,069 |
|
|
$ |
4,189,174 |
|
|
$ |
1,078,319 |
|
|
$ |
5,749,151 |
|
|
$ |
(4,696,910 |
) |
|
$ |
89,578,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average amortization period, for properties acquired during the nine months ended
September 30, 2006, for in-place leases is approximately 8.3 years, for leasing costs is
approximately 8.1 years, for customer relationships is approximately 13.8 years, for below market
rents is 6.2 years and for all intangible assets is approximately 9.9 years.
Future operating lease payments under non-cancelable leases, excluding customer reimbursement of
expenses in effect at September 30, 2006, are as follows:
|
|
|
|
|
Year |
|
Lease Payments |
|
2006 |
|
$ |
5,912,698 |
|
2007 |
|
|
23,725,435 |
|
2008 |
|
|
24,122,926 |
|
2009 |
|
|
23,429,511 |
|
2010 |
|
|
22,706,503 |
|
Thereafter |
|
|
91,805,314 |
|
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 property
in the event the tenant fails to pay them. The total property taxes, on an annual basis, for all
properties outstanding as of September 30, 2006 is approximately $3.9 million.
6. Discontinued Operations
On July 21, 2006, the Company sold its two properties located in Canada for approximately $6.9
million dollars, for a gain on the sale of approximately $1.4 million. The Company paid
approximately $315,000 in taxes related to the gain on the sale, although the actual
amount of taxes due will not be finalized until 2006 tax returns are filed. The Company has been
advised that the actual amount of taxes should be approximately $235,000, or $80,000 less than what
was paid at closing, subject to final adjustments and federal (Canadian) tax return review. The
mortgages associated with the Canadian properties were assumed by the buyer at closing.
21
The Company has classified its two Canadian properties as discontinued operations, in accordance
with the provisions of SFAS No. 144, which 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. The
table below summarizes the components of income from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three |
|
|
For the three |
|
|
For the nine |
|
|
For the nine |
|
|
|
months ended |
|
|
months ended |
|
|
months ended |
|
|
months ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
Operating revenue |
|
$ |
31,106 |
|
|
$ |
146,017 |
|
|
$ |
342,629 |
|
|
$ |
432,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense |
|
|
6,815 |
|
|
|
12,016 |
|
|
|
22,708 |
|
|
|
20,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes & Licenses |
|
|
319,753 |
|
|
|
448 |
|
|
|
323,172 |
|
|
|
2,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
13,059 |
|
|
|
30,539 |
|
|
|
143,716 |
|
|
|
30,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense |
|
|
|
|
|
|
32,510 |
|
|
|
52,300 |
|
|
|
97,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate |
|
|
1,422,026 |
|
|
|
|
|
|
|
1,422,026 |
|
|
|
|
|
Realized and unrealized
gains (losses) on foregin
currency transactions |
|
|
(1,044 |
) |
|
|
(224,569 |
) |
|
|
(201,017 |
) |
|
|
(227,371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
discontinued operations |
|
$ |
1,112,461 |
|
|
$ |
(154,065 |
) |
|
$ |
1,021,742 |
|
|
$ |
54,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. 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 is one of the
subtenants in the building. The loan was funded using a portion of the net proceeds from the
Companys initial public offering. This 12 year mortgage loan accrues interest at the greater of
7.5% per year or the one month 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.
In August 2006, the Company ceased accruing revenues on its mortgage loan secured by an industrial
property in Sterling Heights, Michigan, placed the borrower in default and began pursuing available
remedies under its mortgage, including instituting foreclosure proceedings on the property. The Company obtained
an independent appraisal on the security which indicated a fair value in excess of the outstanding principal
balance and accrued, non-default interest due under the mortgage loan at the time of default. As a result
of the fair value indicated in the appraisal, the Company determined that the loan was not impaired and a
writedown was not necessary. At the
foreclosure sale on September 22, 2006, the Company was the successful bidder. When the Company
was determined to be the highest bidder, the mortgage loan was deemed to be satisfied to the extent
of the Companys bid. The Company accounted for the asset received as if the assets had been
acquired for cash and recorded the real estate asset at approximately $11.3 million,
which equaled the outstanding principal balance and accrued,
non-default interest due under the mortgage loan to the Company at that time. Under Michigan law,
the borrower had six months from the date of foreclosure to redeem ownership of the property in
exchange for payment of the bid amount plus certain other expenditures. As part of the resolution
of the Companys claims against the borrower and tenant, the borrower formally waived its right of
redemption and permitted the Company to take immediate control of the property so that it could be
re-rented.
22
8. Mortgage Notes Payable
As of September 30, 2006 the Company had 8 fixed-rate mortgage notes payable collateralized by a
total of 17 properties. The weighted-average interest rate on the mortgage notes payable as of
September 30, 2006 was approximately 5.67%. A summary of the mortgage notes payable as
of September 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Outstanding |
|
Date of Issuance |
|
Principal Maturity |
|
|
|
|
|
|
|
|
|
|
of Note |
|
Date |
|
|
Interest Rate |
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
3/16/2005 |
|
|
4/1/2030 |
|
|
|
6.3300 |
% |
|
$ |
3,073,256 |
|
|
$ |
3,113,102 |
|
7/19/2005 |
|
|
8/1/2015 |
|
|
|
5.2200 |
% |
|
|
|
|
|
|
4,644,859 |
|
8/25/2005 |
|
|
9/1/2015 |
|
|
|
5.3310 |
% |
|
|
21,757,000 |
|
|
|
21,757,000 |
|
9/12/2005 |
|
|
9/1/2015 |
|
|
|
5.2100 |
% |
|
|
12,588,000 |
|
|
|
12,588,000 |
|
12/21/2005 |
|
|
12/8/2015 |
|
|
|
5.7107 |
% |
|
|
19,456,000 |
|
|
|
19,456,000 |
|
2/21/2006 |
|
|
12/1/2013 |
|
|
|
5.9100 |
% |
|
|
9,652,561 |
|
|
|
|
|
2/21/2006 |
|
|
6/30/2014 |
|
|
|
5.2000 |
% |
|
|
20,180,508 |
|
|
|
|
|
3/29/2006 |
|
|
4/1/2016 |
|
|
|
5.9200 |
% |
|
|
17,000,000 |
|
|
|
|
|
4/27/2006 |
|
|
5/5/2016 |
|
|
|
6.5800 |
% |
|
|
14,808,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
118,516,249 |
|
|
$ |
61,558,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair market value of all fixed-rate debt outstanding as of September 30, 2006 is approximately
$118,000,000, as compared to the carrying value stated above of approximately $119,000,000.
On February 21, 2006, the Company assumed approximately $10.0 million of indebtedness pursuant to a
long-term note payable from Wells Fargo Bank, National Association, in connection with the
Companys acquisition, on the same date, of a property located in Champaign, Illinois. The note
accrues interest at a rate of 5.91% per year, and the Company may not repay this note prior to the
last 3 months of the term, or the Company would be subject to a prepayment penalty. The note
matures on December 1, 2013.
On February 21, 2006, the Company assumed approximately $20.0 million of indebtedness pursuant to a
long-term note payable from Greenwich Capital Financial Products, Inc, in connection with the
Companys
acquisition, on the same date, of a property located in Roseville, Minnesota. The note accrues
interest at a rate of 5.20% per year, and the Company may not repay this note prior to the last 3
months of the term, or the Company would be subject to a prepayment penalty. The note matures on
June 30, 2014.
On March 29, 2006, the Company, through wholly-owned subsidiaries, borrowed $17.0 million pursuant
to a long-term note payable from CIBC Inc. which is collateralized by security interests in its
Big Flats, New York property, its Eatontown, New Jersey property, and its Franklin Township, New
Jersey property in the amounts of approximately $5.6 million, $4.6 million and $6.8 million,
respectively. The note accrues interest at a rate of 5.92% per year, and the Company may not repay
this note until after January 1, 2016, or the Company would be subject to a substantial prepayment
penalty. The note has an anticipated maturity date of April 1, 2016, with a clause in which the
lender has the option of extending the maturity date to April 1, 2036. The Company used the
proceeds from the note to pay down its line of credit.
On April 27, 2006, the Company, through wholly-owned subsidiaries, borrowed $14.9 million pursuant
to a long-term note payable from IXIS Real Estate Capital Inc. which is collateralized by security
interests in its Wichita, Kansas property, its Clintonville Wisconsin property, its Rock Falls,
Illinois property and its Angola, Indiana properties in the amounts of approximately $9.0 million,
$3.6 million, $0.7 million and $1.6 million, respectively. The note accrues interest at a rate of
6.58% per year, and the Company may not repay this note until after February 5, 2016, or the
Company would be subject to a substantial prepayment penalty. The note has a maturity date of May
5, 2016, and the Company used the proceeds from the note to pay down its line of credit.
23
9. Stockholders Equity
The following table summarizes the changes in stockholders equity for the nine months ended
September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2005 |
|
$ |
7,672 |
|
|
$ |
|
|
|
$ |
105,502,544 |
|
|
$ |
(432,282 |
) |
|
$ |
(6,129,398 |
) |
|
$ |
98,948,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under Stock Option Plan |
|
|
179 |
|
|
|
|
|
|
|
2,861,222 |
|
|
|
(1,826,754 |
) |
|
|
|
|
|
|
1,034,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Preferred Stock |
|
|
|
|
|
|
1,000 |
|
|
|
24,999,000 |
|
|
|
|
|
|
|
|
|
|
|
25,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Offering Costs |
|
|
|
|
|
|
|
|
|
|
(1,308,496 |
) |
|
|
|
|
|
|
|
|
|
|
(1,308,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
|
|
|
|
|
|
|
|
394,411 |
|
|
|
|
|
|
|
|
|
|
|
394,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions Declared to Common and
Preferred Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,690,707 |
) |
|
|
(9,690,708 |
) |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,476,978 |
|
|
|
3,476,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
7,851 |
|
|
$ |
1,000 |
|
|
$ |
132,448,681 |
|
|
$ |
(2,259,036 |
) |
|
$ |
(12,343,127 |
) |
|
$ |
117,855,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 18, 2006, the Company completed the public offering of 1,000,000 shares of 7.75%
Series A Cumulative Redeemable Preferred Stock (the Series A Preferred Stock), par value $0.001
per share, at a price of $25.00 per share, under the Companys shelf registration statement on Form
S-3, and pursuant to the terms set forth in a prospectus dated October 24, 2005, as supplemented by
a final prospectus supplement dated January 18, 2006. The Series A Preferred Stock may be redeemed
at a liquidation preference in the amount of $25.00 per share plus any unpaid dividends at the
election of the Company on or after January 30, 2011. These securities have no stated maturity,
sinking fund or mandatory redemption and are not convertible into any other securities of the
Company. The closing of the offering occurred on January 26, 2006, and the Series A Preferred Stock
is traded on the NASDAQ Global Market under the trading symbol GOODP. Net proceeds of the
offering, after underwriting discounts and offering expenses, were approximately $23.7 million, and
the net proceeds were used to repay outstanding indebtedness under the Companys line of credit.
Dividends paid per common share for the three and nine months ended September 30, 2006 were $0.36
and $1.08 per share, respectively. Dividends paid per common share for the three and nine months
ended September 30, 2005 were $0.24 and $0.66 per share, respectively. Dividends paid per share of
Series A Preferred Stock for the three and nine months ended September 30, 2006 were approximately
$0.48 and $1.31 per share, respectively.
10. Segment Information
As of September 30, 2006, 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 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, 2006 and 2005:
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended September 30, 2006 |
|
|
As of and for the nine months ended September 30, 2006 |
|
|
|
|
|
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
Real Estate Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
|
Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
Operating revenues |
|
$ |
6,257,647 |
|
|
$ |
478,329 |
|
|
$ |
|
|
|
$ |
6,735,976 |
|
|
$ |
17,201,975 |
|
|
$ |
1,589,675 |
|
|
$ |
|
|
|
$ |
18,791,650 |
|
Operating expenses |
|
|
(2,218,071 |
) |
|
|
|
|
|
|
(1,402,078 |
) |
|
|
(3,620,149 |
) |
|
|
(6,243,187 |
) |
|
|
|
|
|
|
(3,923,790 |
) |
|
|
(10,166,977 |
) |
Other income (loss) |
|
|
|
|
|
|
|
|
|
|
(2,450,869 |
) |
|
|
(2,450,869 |
) |
|
|
|
|
|
|
|
|
|
|
(6,169,437 |
) |
|
|
(6,169,437 |
) |
Discontinued operations |
|
|
1,112,461 |
|
|
|
|
|
|
|
|
|
|
|
1,112,461 |
|
|
|
1,021,742 |
|
|
|
|
|
|
|
|
|
|
|
1,021,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
5,152,037 |
|
|
$ |
478,329 |
|
|
$ |
(3,852,947 |
) |
|
$ |
1,777,419 |
|
|
$ |
11,980,530 |
|
|
$ |
1,589,675 |
|
|
$ |
(10,093,227 |
) |
|
$ |
3,476,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
265,894,348 |
|
|
$ |
10,000,000 |
|
|
$ |
5,608,132 |
|
|
$ |
281,502,480 |
|
|
$ |
265,894,348 |
|
|
$ |
10,000,000 |
|
|
$ |
5,608,132 |
|
|
$ |
281,502,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended September 30, 2005 |
|
|
As of and for the nine months ended September 30, 2005 |
|
|
|
|
|
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
|
Real Estate |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
Real Estate Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
|
Leasing |
|
|
Lending |
|
|
Other |
|
|
Total |
|
Operating revenues |
|
$ |
3,335,967 |
|
|
$ |
553,968 |
|
|
$ |
|
|
|
$ |
3,889,935 |
|
|
$ |
7,173,399 |
|
|
$ |
1,351,197 |
|
|
$ |
|
|
|
$ |
8,524,596 |
|
Operating expenses |
|
|
(1,144,624 |
) |
|
|
|
|
|
|
(874,253 |
) |
|
|
(2,018,877 |
) |
|
|
(2,465,779 |
) |
|
|
|
|
|
|
(2,537,950 |
) |
|
|
(5,003,729 |
) |
Other income (loss) |
|
|
|
|
|
|
|
|
|
|
(849,582 |
) |
|
|
(849,582 |
) |
|
|
|
|
|
|
|
|
|
|
(1,022,970 |
) |
|
|
(1,022,970 |
) |
Discontinued operations |
|
|
(154,065 |
) |
|
|
|
|
|
|
|
|
|
|
(154,065 |
) |
|
|
54,231 |
|
|
|
|
|
|
|
|
|
|
|
54,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,037,278 |
|
|
$ |
553,968 |
|
|
$ |
(1,723,835 |
) |
|
$ |
867,411 |
|
|
$ |
4,761,851 |
|
|
$ |
1,351,197 |
|
|
$ |
(3,560,920 |
) |
|
$ |
2,552,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
143,839,316 |
|
|
$ |
21,114,785 |
|
|
$ |
3,892,030 |
|
|
$ |
168,846,131 |
|
|
$ |
143,839,316 |
|
|
$ |
21,114,785 |
|
|
$ |
3,892,030 |
|
|
$ |
168,846,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Line of Credit
On February 28, 2005, the Company entered into a line of credit agreement with a syndicate of banks
led by Branch Banking & Trust Company. This line of credit initially provided the Company with up
to $50 million of financing. The Company amended the line of credit on June 29, 2006 to increase
the maximum availability under the line from $50 million to $75 million. The line of credit
matures on February 28,
2008. The interest rate charged on the advances under the facility is based on the London
Interbank Offered Rate (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 0.25% 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 of these financial covenants limits
the amount the Company can pay out, on a quarterly basis, to no more than 95% of its funds from
operations as dividends to its stockholders. For the quarter ended September 30, 2006, the
Companys dividend payout exceeded this threshold, although the Company received a waiver for this
requirement with respect to the quarter ended September 30, 2006, and was required to pay a waiver
fee of $75,000. If the Company is not in compliance with this covenant as of December
31, 2006, the Company will likely seek another waiver of such compliance or seek to refinance the
credit facility. In such case, if the Companys lenders are unwilling to grant us a waiver on
terms the Company believes are reasonable or at all, and if the Company is unable to secure an
alternative credit facility, the Company may be in default on its credit facility as of December
31, 2006. The maximum amount the Company may draw under this agreement is based on the
percentage of the value of its properties meeting agreed-upon eligibility standards that the
Company has pledged as collateral to the banks. As the Company arranges for long-term mortgages
for these 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 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, 2006 and December 31, 2005, there was $35.7 million and $43.6
million outstanding under the line of credit at an interest rate of 7.58% and 6.31% per year,
respectively.
12. Pro Forma Financial Information
The Company acquired ten properties during the nine months ended September 30, 2006, one of which
was the Sterling Heights, Michigan property. The Sterling Heights, Michigan property was not
included in the pro forma calculation, as the Company was not collecting revenues from that
property as of September 30, 2006. The following table reflects pro-forma consolidated income
statements as if the nine properties were acquired as of the beginning of the periods presented:
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three |
|
|
For the three |
|
|
For the nine |
|
|
For the nine |
|
|
|
months ended |
|
|
months ended |
|
|
months ended |
|
|
months ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
$ |
6,861,173 |
|
|
$ |
5,823,778 |
|
|
$ |
20,600,619 |
|
|
$ |
14,095,386 |
|
Total operating expenses |
|
|
(3,669,060 |
) |
|
|
(3,280,062 |
) |
|
|
(11,031,591 |
) |
|
|
(8,564,678 |
) |
Other expense |
|
|
(2,450,869 |
) |
|
|
(849,582 |
) |
|
|
(6,169,437 |
) |
|
|
(1,022,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
741,244 |
|
|
|
1,694,134 |
|
|
|
3,399,591 |
|
|
|
4,507,738 |
|
Discontinued Operations |
|
|
1,112,461 |
|
|
|
(154,065 |
) |
|
|
1,021,740 |
|
|
|
54,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,853,705 |
|
|
$ |
1,540,069 |
|
|
$ |
4,421,331 |
|
|
$ |
4,561,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share and Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income |
|
$ |
0.24 |
|
|
$ |
0.20 |
|
|
$ |
0.57 |
|
|
$ |
0.59 |
|
Diluted net income |
|
$ |
0.23 |
|
|
$ |
0.20 |
|
|
$ |
0.56 |
|
|
$ |
0.59 |
|
Weighted average shares
outstanding-basic |
|
|
7,820,376 |
|
|
|
7,672,000 |
|
|
|
7,752,170 |
|
|
|
7,669,619 |
|
Weighted average shares
outstanding-diluted |
|
|
7,981,071 |
|
|
|
7,725,667 |
|
|
|
7,896,860 |
|
|
|
7,718,441 |
|
These pro-forma consolidated income statements are not necessarily indicative of what actual
results would have been had the Company acquired the nine properties as of the beginning of the
periods presented.
13. Subsequent Events
On October 10, 2006, the Board of Directors declared cash dividends of $0.12 per common share for
each of the months of October, November and December of 2006. Monthly dividends will be payable on
October 31, 2006, November 30, 2006 and December 29, 2006, to those shareholders of record for
those dates on October 23, 2006, November 21, 2006 and December 20, 2006, respectively.
On October 10, 2006, the Board of Directors declared cash dividends of $0.1614583 per preferred
share for each of the months of October, November and December of 2006. Monthly dividends will be
payable on October 31, 2006, November 30, 2006 and December 29, 2006, to those shareholders of
record for those dates on October 23, 2006, November 21, 2006 and December 20, 2006, respectively.
On October 16, 2006, an employee of the Company exercised 12,000 options at $16.10 per share for a
like number of shares of common stock in consideration for a promissory note in the principal
amount of $193,200. This note has full recourse back to the employee, has a term of nine years
and bears interest at 8.17% per year.
On October 18, 2006, the Company completed the public offering of 1,150,000 shares of 7.5% Series B
Cumulative Redeemable Preferred Stock (the Series B Preferred Stock), par value $0.001 per share,
at a price of $25.00 per share, under the Companys shelf registration statement on Form S-3, and
pursuant to the terms set forth in a prospectus dated October 24, 2005, as supplemented by a final
prospectus supplement dated October 18, 2006. The shares sold in the offering included the full
exercise of a 150,000 share over-allotment option by the underwriters. The Series B Preferred
Stock may be redeemed at a liquidation preference in the amount of $25.00 per share plus any unpaid
dividends at the election of the Company on or after October 31, 2011. These securities have no
stated maturity, sinking fund or mandatory redemption and are not convertible into any other
securities of the Company. The closing of the offering occurred on October 25, 2006, and the Series
B Preferred Stock is traded on the NASDAQ Global Market under the trading symbol GOODO. Net
proceeds of the offering, after underwriting discounts and offering expenses, were approximately
$27.4 million and the net proceeds were used to repay outstanding indebtedness under the Companys
line of credit.
On October 20, 2006, the borrower with respect to the Sterling Heights, Michigan property waived
its right of redemption to reacquire the property, confirming the Companys ownership of the
property. The Company simultaneously executed a lease with a new tenant for the Sterling Heights,
Michigan property. The Company executed a ten year, triple net lease with the new tenant, with
one option to extend the lease for an additional period of five years. The lease also has a
provision whereby the tenant may purchase the property from the Company within the first lease year
for $11.3 million, or in the second lease year for $11.6 million. The lease provides for annual
rents of approximately $1.1 million in 2007, with prescribed escalations thereafter. The Company
also pursued its claims against the borrower for the deficiency relating to default interest,
expenses and prepayment fees of approximately $650,000. The Company
pursued such deficiency claims against the borrower and its affiliated tenant who had filed bankruptcy
and collected approximately $655,000 from the tenant and borrower.
26
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis of our financial condition and results of operations should be read in
conjunction with our financial statements and the notes thereto contained elsewhere in this Form
10-Q.
Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q constitute forward-looking
statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements made with respect to possible or
assumed future results of our business, financial condition, liquidity, results of operations,
plans and objectives. Such forward-looking statements can generally be identified by the use of the
words may, will, intend, believe, expect, anticipate, estimate or similar
expressions. You should not place undue reliance on these forward-looking statements. Statements
regarding the following subjects are forward-looking by their nature:
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our business strategy; |
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|
pending transactions; |
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|
our projected operating results; |
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our ability to obtain future financing arrangements; |
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estimates relating to our future distributions; |
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|
our understanding of our competition; |
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market trends; |
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|
estimates of our future operating expenses, including payments to our adviser under the
terms of our advisory agreement; |
|
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|
projected capital expenditures; and |
|
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|
|
use of the proceeds of our credit facilities, mortgage notes payable, offerings of equity
securities and other future capital resources, if any. |
These statements involve known and unknown risks, uncertainties and other factors that may cause
results, levels of activity, growth, performance, tax consequences or achievements to be materially
different from any future results, levels of activity, growth, performance, tax consequences or
achievements expressed or implied by such forward-looking statements.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future
performance, taking into account all information currently available to us. Although we believe
that these beliefs, assumptions and expectations are reasonable, we cannot guarantee future
results, levels of activity, performance, growth or achievements. These beliefs, assumptions and
expectations can change as a result of many possible events or factors, not all of which are known
to us. If a change occurs, our business, financial condition, liquidity and results of operations
may vary materially from those expressed in or implied by our forward-looking statements. You
should carefully consider these risks before you make an investment decision with respect to our
common and preferred stock, along with the following factors that could cause actual results to
vary from our forward-looking statements:
|
|
|
the loss of any of our key employees, such as Mr. David Gladstone, our chairman and chief
executive officer, Mr. Terry Lee Brubaker, our president and chief operating officer, or Mr.
George Stelljes III, our executive vice president and chief investment officer; |
|
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|
general volatility of the capital markets and the market price of our securities; |
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|
risks associated with negotiation and consummation of pending and future transactions; |
|
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|
changes in our business strategy; |
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|
availability, terms and deployment of capital, including the ability to maintain and
borrow under our existing credit facility, arrange for long-term mortgages on our properties;
secure one or more additional long-term credit facilities, and to raise equity capital; |
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|
availability of qualified personnel; |
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|
changes in our industry, interest rates, exchange rates or the general economy; and |
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|
the degree and nature of our competition. |
We are under no duty to update any of the forward-looking statements after the date of this report
to conform such statements to actual results.
27
Overview
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 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, with rental increases
built into the leases. 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. At
September 30, 2006, we owned 38 properties, and had one mortgage loan outstanding. 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.
We conduct substantially all of our activities, including ownership of all of our properties,
through Gladstone Commercial Limited Partnership, a Delaware limited partnership formed on May 28,
2003, which we refer to as our Operating Partnership. We control our Operating Partnership
through our ownership of GCLP Business Trust II, a Massachusetts business trust, which is the
general partner of our Operating Partnership, and through our ownership of GCLP Business Trust I, a
Massachusetts business trust, which holds all of the limited partnership units of our Operating
Partnership. We expect that our Operating Partnership may issue limited partnership units from
time to time in exchange for industrial and commercial real property. By structuring our
acquisitions in this manner, the sellers of the real estate will generally be able to defer the
recognition of gains associated with the dispositions of their properties until they redeem the
limited partnership units. Limited partners who hold limited partnership units in our Operating
Partnership will be entitled to redeem their units for cash or, at our election, shares of our
common stock on a one-for-one basis at any time. Whenever we issue stock for cash, we are
obligated to contribute the net proceeds we receive from the sale of the stock to our Operating
Partnership, and our Operating Partnership is, in turn, obligated to issue an equivalent number of
limited partnership units to us. Our Operating Partnership will distribute the income it generates
from its operations to its partners, including GCLP Business Trust I and GCLP Business Trust II,
both of which are beneficially owned by us, on a pro rata basis. We will, in turn, distribute the
amounts we receive from our Operating Partnership to fund distributions to our stockholders in the
form of monthly cash dividends. We have historically operated, and intend to continue to operate,
so as to qualify as a real estate investment trust (REIT) for federal income tax purposes,
thereby generally avoiding federal income taxes on the distributions we make to our stockholders.
Gladstone Management Corporation, a registered investment adviser and an affiliate of ours, serves
as our external adviser (our Adviser). Our Adviser is responsible for managing our business on a
day-to-day basis and for identifying and making acquisitions and dispositions in accordance with
our investment criteria.
Recent Events
Investments
On February 15, 2006, we acquired a 150,000 square foot industrial facility in South Hadley,
Massachusetts for approximately $3.6 million, including transaction costs, which was funded using
borrowings from our line of credit. At closing, we were assigned the previously existing triple
net lease with the sole tenant, which had a remaining term of approximately four years at the time
of assignment, and the tenant has one option to extend the lease for additional period of five
years. The lease provides for annual rents of approximately $353,000 in 2007, with prescribed
escalations thereafter.
On February 21, 2006, we acquired four office buildings located in the same business park in
Champaign, Illinois, from a single seller totaling 108,262 square feet. We acquired the four
properties for approximately $15.1 million, including transaction costs, which was funded by a
combination of
borrowings from our line of credit, and the assumption of approximately $10.0
million of financing on the property. At closing, we were assigned the previously existing triple net leases with the sole
tenant, which had remaining terms ranging from five to nine years at the time of assignment, and
the tenant has options to extend each lease for additional periods of three years each. The leases
provide for annual rents of approximately $1.3 million in 2007.
28
On February 21, 2006, we acquired a 359,540 square foot office building in Roseville, Minnesota for
approximately $30.0 million, including transaction costs, which was funded by a combination of
borrowings from our line of credit, and the assumption of approximately $20.0 million of financing
on the property. At closing, we were assigned the previously existing triple net lease with the
sole tenant, which had a remaining term of approximately seven years at the time of assignment, and
the tenant has one option to extend the lease for an additional period of five years. The lease
provides for annual rents of approximately $2.4 million in 2007, with prescribed escalations
thereafter.
On May 10, 2006, we acquired an 114,100 square foot office building in Burnsville, Minnesota for
approximately $14.1 million, including transaction costs, which was funded using borrowings from
our line of credit. At closing, we were assigned the previously existing triple net lease with the
sole tenant, which had a remaining term of approximately four years, and concurrently with the
closing the tenant exercised its first renewal option for an additional five years to the original
lease term. The tenant also has two remaining options to extend the lease for an additional period
of five years each. The lease provides for annual rents of approximately $1.2 million in 2007,
with prescribed escalations thereafter.
On June 30, 2006, we acquired a 125,692 square foot office building in Menomonee Falls, Wisconsin
for approximately $8.0 million, including transaction costs, which was funded using borrowings from
our line of credit. At closing, we extended a ten year triple net lease with the sole tenant, and
the tenant has three options to extend the lease for additional periods of ten years each. The
lease provides for annual rents of approximately $0.7 million in 2007, with prescribed escalations
thereafter.
On July 13, 2006, we acquired a 12,000 square foot office building in Baytown, Texas for
approximately $2.8 million, including transaction costs, which was funded using borrowings from our
line of credit. At closing, we were assigned the previously existing triple net lease with the
sole tenant, which had a remaining term of approximately seven years. The tenant has two options
to extend the lease for additional periods of five years each. The lease provides for annual rents
of approximately $0.2 million in 2007, with prescribed escalations thereafter.
On September 29, 2006, we acquired three separate properties from a single seller: a 63,514 square
foot industrial building in Birmingham, Alabama; a 29,472 square foot industrial building located
in Montgomery, Alabama; and a 16,275 square foot industrial building located in Columbia, Missouri.
These three properties were acquired for an aggregate cost of approximately $4.9 million, including
transaction costs, and the purchase was funded using borrowings from our line of credit. Upon
acquisition of the properties, we extended a ten year triple net lease with the tenant of each
building, with four options to extend the lease for additional periods of five years each. The
lease provides for annual rents of approximately $0.4 million in 2006, with prescribed escalations
thereafter.
Mortgage Loans
On February 21, 2006, we assumed approximately $10.0 million of indebtedness pursuant to a
long-term note payable from Wells Fargo Bank, National Association, in connection with our
acquisition, on the same date, of a property located in Champaign, Illinois. The note accrues
interest at a rate of 5.91% per year, and we may not repay this note prior to the last 3 months of
the term, or we would be subject to a substantial prepayment penalty. The note matures on December
1, 2013.
On February 21, 2006, we assumed approximately $20.0 million of indebtedness pursuant to a
long-term note payable from Greenwich Capital Financial Products, Inc, in connection with our
acquisition, on the same date, of a property located in Roseville, Minnesota. The note accrues
interest at a rate of 5.20% per
year, and we may not repay this note prior to the last 3 months of the term, or we would be subject
to a substantial prepayment penalty. The note matures on June 30, 2014.
29
On March 29, 2006, through wholly-owned subsidiaries, we borrowed $17.0 million pursuant to a
long-term note payable from CIBC Inc. which is collateralized by security interests in our Big
Flats, New York property, our Eatontown, New Jersey property, and our Franklin Township, New Jersey
property in the amounts of approximately $5.6 million, $4.6 million and $6.8 million, respectively.
The note accrues interest at a rate of 5.92% per year, and we may not repay this note until after
January 1, 2016, or we would be subject to a substantial prepayment penalty. The note has an
anticipated maturity date of April 1, 2016, with a clause in which the lender has the option of
extending the maturity date to April 1, 2036. We used the proceeds from the note to pay down our
line of credit.
On April 27, 2006, through wholly-owned subsidiaries, we borrowed $14.9 million pursuant to a
long-term note payable from IXIS Real Estate Capital Inc. which is collateralized by security
interests in our Wichita, Kansas property, our Clintonville Wisconsin property, our Rock Falls,
Illinois property and our Angola, Indiana properties in the amounts of approximately $9.0 million,
$3.6 million, $0.7 million and $1.6 million, respectively. The note accrues interest at a rate of
6.58% per year, and we may not repay this note until after February 5, 2016, or we would be subject
to a substantial prepayment penalty. The note has a maturity date of May 5, 2016, and we used the
proceeds from the note to pay down our line of credit.
Preferred Stock Financings
On January 18, 2006, we completed a public offering of 1,000,000 shares of 7.75% Series A
Cumulative Redeemable Preferred Stock (the Series A Preferred Stock), par value $0.001 per share,
at a price of $25.00 per share, under our shelf registration statement on Form S-3, and pursuant to
the terms set forth in a prospectus dated October 24, 2005, as supplemented by a final prospectus
supplement dated January 18, 2006. Net proceeds of the offering, after underwriting discounts and
offering expenses, were approximately $23.7 million and were used to repay outstanding indebtedness
under our line of credit. The Series A Preferred Stock may be redeemed at a liquidation
preference in the amount of $25.00 per share plus any unpaid dividends at our election on or after
January 30, 2011. These securities have no stated maturity, sinking fund or mandatory redemption
and are not convertible into any other securities. The closing of the offering took place on
January 26, 2006, and the Series A Preferred Stock is traded on the NASDAQ Global Market under the
trading symbol GOODP.
On October 18, 2006, we completed a public offering of 1,150,000 shares of 7.5% Series B Cumulative
Redeemable Preferred Stock (the Series B Preferred Stock), par value $0.001 per share, at a price
of $25.00 per share, under our shelf registration statement on Form S-3, and pursuant to the terms
set forth in a prospectus dated October 24, 2005, as supplemented by a final prospectus supplement
dated October 18, 2006. The shares sold in the offering included the full exercise of a 150,000
share over-allotment option by the underwriters. The Series B Preferred Stock may be redeemed at
a liquidation preference in the amount of $25.00 per share plus any unpaid dividends at our
election on or after October 31, 2011. These securities have no stated maturity, sinking fund or
mandatory redemption and are not convertible into any other securities. The closing of the offering
occurred on October 25, 2006, and the Series B Preferred Stock is traded on the NASDAQ Global
Market under the trading symbol GOODO. Net proceeds of the offering, after underwriting
discounts and offering expenses, were approximately $27.4 million and the net proceeds were used to
repay outstanding indebtedness under our line of credit.
Properties Sold
On July 21, 2006, we sold our two properties located in Canada for approximately $6.9 million
dollars, for a gain on the sale of approximately $1.4 million. We paid approximately $315,000 in
taxes related to the gain on the sale although the actual amount of taxes due will not be
finalized until 2006 tax returns are filed. We have been advised that the actual amount of taxes
should be approximately $235,000, or $80,000 less than what was paid at closing, subject to final
adjustments and federal (Canadian) tax return review. The mortgages associated with the Canadian
properties were assumed by the buyer at closing.
30
Acquisition of Building in Satisfaction of Mortgage Loan
In August 2006, we ceased accruing revenues on our mortgage loan secured by an industrial property
in Sterling Heights, Michigan, placed the borrower in default and began pursuing available remedies
under its mortgage, including instituting foreclosure proceedings on the property. We obtained an independent
appraisal on the security which indicated a fair value in excess of the outstanding principal balance and
accrued, non-default interest due under the mortgage loan at the time of default. As a result of the fair value
indicated in the appraisal, we determined that the loan was not impaired and a writedown was not necessary. At the
foreclosure sale on September 22, 2006, we were the successful bidder.
We accounted for the asset received as if the assets had been acquired for cash and recorded the real estate asset at
approximately $11.3 million on that date, which equaled the outstanding principal
balance and accrued, non-default interest due under the mortgage loan to us. Under Michigan law,
the borrower has six months from the date of foreclosure to redeem ownership of the property in
exchange for payment of the bid amount plus certain other expenditures. As part of the resolution
of our claims against the borrower and tenant, the borrower formally waived its right of redemption
and permitted us to take immediate control of the property so that it could be re-rented.
On October 20, 2006, the borrower with respect to the Sterling Heights, Michigan property waived
its right of redemption to reacquire the property, confirming our ownership of the property. We
simultaneously executed a lease with a new tenant for the Sterling Heights, Michigan property. We
executed a ten year, triple net lease with the new tenant, with one option to extend the lease for
an additional period of five years. The lease also has a provision whereby the tenant may purchase
the property from us within the first lease year for $11.3 million, or in the second lease year for
$11.6 million. The lease provides for annual rents of approximately $1.1 million in 2007, with
prescribed escalations thereafter. The Company also pursued its claims against the borrower for
the deficiency relating to default interest, expenses and prepayment fees of approximately
$650,000. The Company pursued such deficiency claims against the borrower and its affiliated tenant
who had filed bankruptcy and collected approximately $655,000 from the tenant and borrower.
Expenses
All of our personnel are directly employed by our Adviser. Pursuant to the terms of our advisory
agreement, we are responsible for a portion of our Advisers total payroll and benefits expenses
(based on the percentage of time our Advisers employees devote to our matters on an
employee-by-employee basis) and a portion of our Advisers total overhead expense (based on the
percentage of time worked by all of our Advisers employees on our matters).
We compensate our Adviser through reimbursement of our portion of our Advisers payroll, benefits
and general overhead expenses. This reimbursement is generally subject to a combined annual
management fee limitation of 2.0% of our average invested assets for the year, with certain
exceptions. Reimbursement for overhead expenses is only required up to the point that reimbursed
overhead expenses and payroll and benefits expenses, on a combined basis, equal 2.0% of our average
invested assets for the year, and general overhead expenses are required to be reimbursed only if
the amount of payroll and benefits reimbursed to our Adviser is less than 2.0% of our average
invested assets for the year. However, payroll and benefits expenses are required to be reimbursed
by us to the extent that they exceed the overall 2.0% annual management fee limitation. To the
extent that overhead expenses payable or reimbursable by us exceed this limit and our independent
directors determine that the excess expenses were justified based on unusual and nonrecurring
factors which they deem sufficient, we may reimburse our Adviser in future years for the full
amount of the excess expenses, or any portion thereof, but only to the extent that the
reimbursement would not cause our overhead expense reimbursements to exceed the 2.0% limitation in
any year. To date, the advisory fee has not exceeded the annual cap.
During the three and nine months ended September 30, 2006, payroll and benefits expenses, which are
part of the management fee paid to our Adviser, were approximately $513,000 and $1,542,000
respectively, and during the three and nine months ended September 30, 2005, payroll and benefits
expenses were approximately $445,000 and $1,129,000, respectively. The actual amount of payroll and
benefits expenses
31
which we will be required to reimburse our Adviser in the future is not
determinable, but we currently estimate that during the year ending
December 31, 2006 this amount will be approximately $2.2
million. This estimate is based on our current expectations regarding our Advisers payroll and
benefits expenses and the proportion of our Advisers time we believe is likely to be spent on
matters relating to our business. To the extent that our Advisers payroll and benefits expenses
are greater than we currently expect or our Adviser allocates a greater percentage of its time to
our business, our actual reimbursement to our Adviser for our share of its payroll and benefits
expenses could be materially greater than we currently estimate.
During the three and nine months ended September 30, 2006, the amount of overhead expenses that we
reimbursed our Adviser was approximately $144,000 and $487,000, respectively, and during the three
and nine months ended September 30, 2005, the amount of overhead expenses we reimbursed our Adviser
was approximately $163,000 and $436,000, respectively. The actual amount of overhead expenses for
which we will be required to reimburse our Adviser in the future is not determinable at this time,
but we currently estimate that, during the year ending December 31, 2006, this amount will be
approximately $650,000.
Under the terms of the advisory agreement, we are responsible for all expenses incurred for our
direct benefit. Examples of these expenses include, legal, accounting, interest, tax preparation,
directors and officers insurance, stock transfer services, shareholder related fees, consulting and
related fees. During the three and nine months ended September 30, 2006, the total amount of these
expenses that we incurred was approximately $462,000 and $1,627,000, respectively. During the
three and nine months ended September 30, 2005, the total amount of these expenses that we incurred
was approximately $1,210,000 and $2,371,000, respectively.
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). 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.
On May 24, 2006, our stockholders approved a proposal to enter into an amended and restated
investment advisory agreement (the Amended Advisory Agreement) with our Adviser and an
administration agreement (the Administration Agreement) between us and Gladstone Administration,
LLC (the Administrator), a wholly owned subsidiary of our Adviser.
The Amended Advisory Agreement provides for an annual base management fee equal to 2% of our total
stockholders equity (less the recorded value of any preferred stock) and an incentive fee based on
funds from operations, (FFO), which would reward the Adviser if our quarterly FFO (before giving
effect to any incentive fee) exceeds 1.75% (7% annualized) (the hurdle rate) of total
stockholders equity less the recorded value of any preferred stock. The 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. The Adviser will also receive an incentive fee of 20% of the amount
of our pre-incentive fee FFO that exceeds 2.1875%. Under the Administration Agreement, we will pay
separately for its allocable portion of the Administrators overhead expenses in performing its
obligations, including, but not limited to, rent, and our allocable portion of the salaries and
benefits expenses of our chief financial officer, chief compliance officer, controller and their
respective staffs.
The Amended Advisory Agreement and Administration Agreement will not become effective as long as
the 2003 Equity Incentive Plan (the 2003 Plan) is in effect or as long as there are any
outstanding stock options. In connection with the approval of the Amended Advisory and
Administration Agreements, and pursuant to the approval of our Board of Directors on July 11, 2006,
on July 12, 2006, we accelerated in full the vesting of all outstanding options under the 2003
Plan, resulting in the vesting of 35,000 unvested options. Also on July 12, 2006, we filed a
Schedule TO and related documentation with the Securities and Exchange Commission, which described
our offer to our executive officers and directors and the employees of our Adviser who held stock
options to accelerate the expiration date of all of their outstanding options
32
under the 2003 Plan to December 31, 2006 (as amended, the Offer). The Offer was conditional upon its
acceptance by all option holders on or before its expiration on August 31, 2006, and all option
holders accepted the Offer prior to that date. As of September 30, 2006, there were 737,099
outstanding options under the 2003 Plan, and all of the outstanding options were amended to expire
on December 31, 2006, and we intend to terminate the 2003 Plan on December 31, 2006. Following the
expiration of any unexercised options and the termination of the 2003 Plan, we intend to implement
Amended Advisory Agreement and Administration Agreement on January 1, 2007. The current investment
advisory agreement with Gladstone Management will continue in effect until these new agreements
become effective.
Critical Accounting Policies
Management believes our most critical accounting policies are revenue recognition (including
straight-line rent), investment accounting, purchase price allocation, accounting for our
investments in real estate, provision for loan losses, the accounting for our derivative and
hedging activities, if any, income taxes and stock based compensation. Each of these items involves
estimates that require management to make judgments that are subjective in nature. Management
relies on its experience, collects historical data and current market data, and analyzes these
assumptions 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.
Revenue Recognition
Rental income includes rents that each tenant pays in accordance with the terms of its respective
lease reported on a straight-line basis over the initial term of the lease. Because a majority of
our leases contain rental increases at specified intervals, straight-line basis accounting requires
us to record as an asset, and include in revenues, deferred rent receivable that we will only
receive if the tenant makes all rent payments required through the expiration of the initial term
of the lease. Deferred rent receivable in the accompanying balance sheets 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, our management must determine, in its judgment, to what
extent the deferred rent receivable applicable to each specific tenant is collectible. We review
deferred rent receivable, as is it relates to straight line rents, on a quarterly basis and take
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, we would record an increase in our allowance for uncollectible
accounts or record a direct write-off of the specific rent receivable, which would have an adverse
effect on our net income for the year in which the reserve is increased or the direct write-off is
recorded and would decrease our total assets and stockholders equity.
Management considers its loans and other lending investments to be held-for-investment. We reflect
held-for-investment investments at amortized cost less allowance for loan losses, acquisition
premiums or discounts, deferred loan fees and undisbursed loan funds. On occasion, we 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 or exit 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, loan origination or exit fees are prepaid, we immediately recognize 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, if any, are recognized as additional income when received.
33
Purchase Price Allocation
We account for 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, consisting of land, building and tenant improvements,
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
and the value of tenant relationships, 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 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 total amount of other intangible assets acquired are allocated to in-place lease values and
customer relationship intangible values based on managements evaluation of the specific
characteristics of each tenants lease and our 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.
We amortize the value of in-place leases to expense over the initial term of the respective leases,
which generally range from five to twenty years. The value of customer relationship intangibles
are amortized to expense over the initial term and any renewal periods in the respective leases,
but in no event will 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 in-place
lease value and customer relationship intangibles would be charged to expense.
We record above-market and below-market in-place lease values for owned properties 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. We amortize the
capitalized above-market lease values, included in the accompanying balance sheet as part of
deferred rent receivable, as a reduction of rental income over the remaining non-cancelable terms
of the respective leases. We amortize the capitalized below-market lease values, included in the
accompanying balance sheet as part of the deferred rent liability, as an increase to rental income
over the initial term and any fixed-rate renewal periods in the respective leases.
We have determined that certain of our properties, which were originally not treated as business
combinations under SFAS No. 141 because there was not an existing lease in place at the time of
acquisition, should have been treated as business combinations when determining the purchase price
of the real estate. These properties had leases that were put in place on the date of acquisition
and thus were implicit in the purchase price and should have been considered as leases in place for
purposes of determining if the acquisitions were business combinations. As a result, we
reallocated approximately $1.2 million of land, building and tenant improvements to intangible
assets and recognized additional amortization of $140,606, offset by increased rental revenue
related to below market rents of approximately $28,000, for a net decrease in income of
approximately $112,000 for the quarter ended March 31, 2006. Of the additional $112,000 recognized
in the quarter ended March 31, 2006, approximately $90,000 related to periods prior to 2006, and
management has deemed the amount immaterial to those periods.
34
Risk Rating
In evaluating each transaction that it considers for investment, our Adviser seeks to assess the
risk associated with the potential tenant or borrower. For companies that have debt that has been
rated by a national credit rating agency, our Adviser uses the rating as determined by such ratings
agency. For tenants or borrowers that do not have publicly traded debt, our Adviser calculates and
assigns to our tenants and borrowers a risk rating under our ten-point risk rating scale. Our
Adviser seeks to have the risk rating system mirror the risk rating systems of major risk rating
organizations such as those provided by nationally recognized statistical rating organizations
(NRSRO). While we seek to mirror the NRSRO systems, we cannot provide any assurance that our risk
rating system provides the same risk rating as a NRSRO. The following chart is an estimate of the
relationship of our risk rating system to the designations used by two NRSROs as they risk rate
debt securities of major companies. Because we have established our system to rate debt securities
of companies that are unrated by any NRSRO, there can be no assurance that the correlation to the
NRSRO set out below is accurate. We believe our risk rating would be significantly higher than a
typical NRSRO risk rating because the risk rating of the typical NRSRO is designed for larger
businesses. However, our risk rating has been designed to risk rate the securities of smaller
businesses that are not rated by a typical NRSRO. Therefore, when we use our risk rating on larger
business securities, the risk rating is higher than a typical NRSRO rating. The primary difference
between our risk rating and the rating of a typical NRSRO is that our risk rating uses more
quantitative determinants and includes qualitative determinants that are not used in the NRSRO
rating. It is our understanding that most debt securities of middle market companies do not exceed
the grade of BBB on a NRSRO scale, so there would be no debt securities in the middle market that
would meet the definition of AAA, AA or A, therefore, our scale begins with the designation BBB.
The table below gives an indication of the probability of default and the magnitude of the loss if
there is a default:
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
|
Our |
|
Ratings |
|
Ratings |
|
|
System |
|
Agency |
|
Agency |
|
Description (a) |
>10
|
|
Baa2
|
|
BBB
|
|
Probability of default during the
next ten years is 4% and the
expected loss is 1% or less |
|
|
|
|
|
|
|
10
|
|
Baa3
|
|
BBB-
|
|
Probability of default during the
next ten years is 5% and the
expected loss is 1% to 2% |
|
|
|
|
|
|
|
9
|
|
Ba1
|
|
BB+
|
|
Probability of default during the
next ten years is 10% and the
expected loss is 2% to 3% |
|
|
|
|
|
|
|
8
|
|
Ba2
|
|
BB
|
|
Probability of default during the
next ten years is 16% and the
expected loss is 3% to 4% |
|
|
|
|
|
|
|
7
|
|
Ba3
|
|
BB-
|
|
Probability of default during the
next ten years is 17.8% and the
expected loss is 4% to 5% |
|
|
|
|
|
|
|
6
|
|
B1
|
|
B+
|
|
Probability of default during the
next ten years is 22% and the
expected loss is 5% to 6.5% |
|
|
|
|
|
|
|
5
|
|
B2
|
|
B
|
|
Probability of default during the
next ten years is 25% and the
expected loss is 6.5% to 8% |
|
|
|
|
|
|
|
4
|
|
B3
|
|
B-
|
|
Probability of default during the
next ten years is 27% and the
expected loss is 8% to 10% |
|
|
|
|
|
|
|
3
|
|
Caa1
|
|
CCC+
|
|
Probability of default during the
next ten years is 30% and the
expected loss is 10% to 13.3% |
35
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
|
Our |
|
Ratings |
|
Ratings |
|
|
System |
|
Agency |
|
Agency |
|
Description (a) |
2
|
|
Caa2
|
|
CCC
|
|
Probability of default during the
next ten years is 35% and the
expected loss is 13.3% to 16.7% |
|
|
|
|
|
|
|
1
|
|
Caa3
|
|
CC
|
|
Probability of default during the
next ten years is 65% and the
expected loss is 16.7% to 20% |
|
|
|
|
|
|
|
0
|
|
N/a
|
|
D
|
|
Probability of default during the
next ten years is 85%, or there is a
payment default, and the expected
loss is greater than 20% |
|
|
|
(a) |
|
The default rates set forth above assume a ten year lease or mortgage loan. If the particular
investment has a term other than ten years, the probability of default is adjusted to reflect the
reduced risk associated with a shorter term or the increased risk associated with a longer term. |
We generally anticipate entering into transactions with tenants or borrowers that have a risk
rating of at least 4, based on the above scale, which would equate to tenants or borrowers whose
debt rating would be at least B3 or B-. Once we have entered into a transaction, we periodically
re-evaluate the risk rating, or debt rating as applicable, of the investment for purposes of
determining whether we should increase our reserves for loan losses or allowance for uncollectible
rent. Our Board of Directors may alter our risk rating system from time to time.
The following table reflects the average risk rating of our tenants and borrowers as of September
30, 2006 and December 31, 2005. The borrower in our Sterling Heights, Michigan property defaulted
on their mortgage loan prior to September 30, 2006, therefore the risk rating for that borrower is
not reflected in the table below as of September 30, 2006:
|
|
|
|
|
|
|
|
|
Rating |
|
9/30/2006 |
|
12/31/2005 |
Average
|
|
|
8.5 |
|
|
|
8.6 |
|
Weighted Average
|
|
|
8.5 |
|
|
|
8.7 |
|
Highest
|
|
|
10.0 |
|
|
|
10.0 |
|
Lowest
|
|
|
6.0 |
|
|
|
6.0 |
|
Investments in Real Estate
We record investments in real estate at cost, and we capitalize improvements and replacements when
they extend the useful life or improve the efficiency of the asset. We expense costs of repairs
and maintenance as incurred. We compute 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.
We are required to make subjective assessments as to the useful lives of our properties for
purposes of determining the amount of depreciation to record on an annual basis with respect to our
investments in real estate. These assessments have a direct impact on our net income because, if
we were to shorten the expected useful lives of our investments in real estate, we would depreciate
these investments over fewer years, resulting in more depreciation expense and lower net income on
an annual basis.
We have adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
which establishes a single accounting model for the impairment or disposal of long-lived assets
including discontinued operations. SFAS No. 144 requires that the operations related to properties
that have been sold or that we intend to sell be presented as discontinued operations in the
statement of operations for all periods presented, and properties we intend to sell be designated
as held for sale on our balance sheet.
When circumstances such as adverse market conditions indicate a possible impairment of the value of
a property, we review the recoverability of the propertys carrying value. The review of
recoverability is based on our estimate of the future undiscounted cash flows, excluding interest
charges, expected to result from the propertys use and eventual disposition. Our forecast of
these cash flows considers factors such as expected future operating income, market and other
applicable trends and residual value, as well as the effects of leasing demand and competition. If
impairment exists due to the inability to recover the carrying value of a property, an impairment
loss is recorded to the extent that the carrying value exceeds the estimated fair value of the
property. We are required to make subjective assessments as to whether there are impairments in
the values of our investments in real estate.
36
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 on a portfolio basis 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. Actual losses, if any, could ultimately differ materially
from these estimates.
Income Taxes
Our financial results generally do not reflect provisions for current or deferred income taxes.
Management believes that we have operated, and we intend to continue to operate, in a manner that
will allow us to qualify as a REIT for federal income tax purposes, and, as a result, we do not
expect to pay substantial corporate-level income taxes. Many of the requirements for REIT
qualification, however, are highly technical and complex. If we were to fail to meet these
requirements, we would be subject to federal income tax, which could have a material adverse impact
on our results of operations and amounts available for distributions to our stockholders.
Stock Based Compensation
We adopted the fair value method to account for the issuance of stock options under our 2003 Equity
Incentive Plan in accordance with SFAS No. 123(R), Share-Base Payment, in January of 2006. In
this regard, a substantial portion of these options were granted to individuals who are our
officers and who qualify as leased employees under FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25. We
adopted SFAS No. 123(R) using the modified prospective approach, where stock-based compensation
expense was recorded for the unvested portion of previously issued awards that remained outstanding
at January 1, 2006 using the same estimate of the grant date fair value and the same attribution
method used to determine the pro forma disclosure under SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) also requires that all share-based payments to employees after
January 1, 2006, including employee stock options, be recognized in the financial statements as
stock-based compensation expense based on the fair value on the date of grant.
In October of 2005, the Financial Accounting Standards Board (FASB) released FASB Staff Position
No. FAS 123(R)-2 (FSP FAS 123(R)-2), Practical Accommodation to the Application of Grant Date as
Defined in FASB Statement No. 123(R). FSP FAS 123(R)-2 provides guidance on the application of
grant date as defined in SFAS No. 123(R). The FASB addresses the notion of mutual understanding,
specifically that a mutual understanding shall be presumed to exist at the date the award is
approved in accordance with the relevant corporate governance requirements if the award is a
unilateral grant and therefore the recipient does not have the ability to negotiate the terms and
conditions of the award with the employer, and the key terms and conditions of the award are
expected to be communicated to an individual recipient within a relatively short time period for
the date of approval. We applied FSP FAS 123(R)-2 in conjunction with the adoption of SFAS No.
123(R) on January 1, 2006.
Results of Operations
Our weighted-average yield on the portfolio as of September 30, 2006 was approximately 9.4%. The
weighted-average yield was 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.
37
A comparison of our operating results for the three and nine months ended September 30, 2006 and
2005 is below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
$ Change |
|
|
% Change |
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
$ Change |
|
|
% Change |
|
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
6,214,295 |
|
|
$ |
3,307,759 |
|
|
$ |
2,906,536 |
|
|
|
88 |
% |
|
$ |
17,109,203 |
|
|
$ |
7,103,591 |
|
|
$ |
10,005,612 |
|
|
|
141 |
% |
Interest income from mortgage notes receivable |
|
|
478,329 |
|
|
|
553,968 |
|
|
|
(75,639 |
) |
|
|
-14 |
% |
|
|
1,589,675 |
|
|
|
1,351,197 |
|
|
|
238,478 |
|
|
|
18 |
% |
Tenant recovery revenue |
|
|
43,352 |
|
|
|
28,208 |
|
|
|
15,144 |
|
|
|
54 |
% |
|
|
92,772 |
|
|
|
69,808 |
|
|
|
22,964 |
|
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
6,735,976 |
|
|
|
3,889,935 |
|
|
|
2,846,041 |
|
|
|
73 |
% |
|
|
18,791,650 |
|
|
|
8,524,596 |
|
|
|
10,267,054 |
|
|
|
120 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,162,640 |
|
|
|
1,107,672 |
|
|
|
1,054,968 |
|
|
|
95 |
% |
|
|
6,026,150 |
|
|
|
2,277,432 |
|
|
|
3,748,718 |
|
|
|
165 |
% |
Management advisory fee |
|
|
656,916 |
|
|
|
609,171 |
|
|
|
47,745 |
|
|
|
8 |
% |
|
|
2,029,050 |
|
|
|
1,564,826 |
|
|
|
464,224 |
|
|
|
30 |
% |
Professional fees |
|
|
167,353 |
|
|
|
87,896 |
|
|
|
79,457 |
|
|
|
90 |
% |
|
|
598,771 |
|
|
|
428,781 |
|
|
|
169,990 |
|
|
|
40 |
% |
Taxes and licenses |
|
|
24,812 |
|
|
|
36,952 |
|
|
|
(12,140 |
) |
|
|
-33 |
% |
|
|
114,774 |
|
|
|
188,347 |
|
|
|
(73,573 |
) |
|
|
-39 |
% |
Insurance |
|
|
113,453 |
|
|
|
70,244 |
|
|
|
43,209 |
|
|
|
62 |
% |
|
|
299,296 |
|
|
|
207,648 |
|
|
|
91,648 |
|
|
|
44 |
% |
General and administrative |
|
|
115,349 |
|
|
|
61,074 |
|
|
|
54,275 |
|
|
|
89 |
% |
|
|
319,784 |
|
|
|
166,410 |
|
|
|
153,374 |
|
|
|
92 |
% |
Shareholder related expense |
|
|
34,414 |
|
|
|
45,868 |
|
|
|
(11,454 |
) |
|
|
-25 |
% |
|
|
282,478 |
|
|
|
170,285 |
|
|
|
112,193 |
|
|
|
66 |
% |
Asset retirement obligation expense |
|
|
30,619 |
|
|
|
|
|
|
|
30,619 |
|
|
|
100 |
% |
|
|
102,263 |
|
|
|
|
|
|
|
102,263 |
|
|
|
100 |
% |
Stock option compensation expense |
|
|
314,593 |
|
|
|
|
|
|
|
314,593 |
|
|
|
100 |
% |
|
|
394,411 |
|
|
|
|
|
|
|
394,411 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,620,149 |
|
|
|
2,018,877 |
|
|
|
1,601,272 |
|
|
|
79 |
% |
|
|
10,166,977 |
|
|
|
5,003,729 |
|
|
|
5,163,248 |
|
|
|
103 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from temporary investments |
|
|
2,006 |
|
|
|
10,093 |
|
|
|
(8,087 |
) |
|
|
-80 |
% |
|
|
13,437 |
|
|
|
117,806 |
|
|
|
(104,369 |
) |
|
|
-89 |
% |
Interest income employee loans |
|
|
41,346 |
|
|
|
5,562 |
|
|
|
35,784 |
|
|
|
643 |
% |
|
|
75,483 |
|
|
|
15,483 |
|
|
|
60,000 |
|
|
|
388 |
% |
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
% |
|
|
10,400 |
|
|
|
|
|
|
|
10,400 |
|
|
|
100 |
% |
Interest expense |
|
|
(2,494,221 |
) |
|
|
(865,237 |
) |
|
|
(1,628,984 |
) |
|
|
188 |
% |
|
|
(6,268,757 |
) |
|
|
(1,156,259 |
) |
|
|
(5,112,498 |
) |
|
|
442 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
|
(2,450,869 |
) |
|
|
(849,582 |
) |
|
|
(1,601,287 |
) |
|
|
188 |
% |
|
|
(6,169,437 |
) |
|
|
(1,022,970 |
) |
|
|
(5,146,467 |
) |
|
|
503 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
664,958 |
|
|
|
1,021,476 |
|
|
|
(356,518 |
) |
|
|
-35 |
% |
|
|
2,455,236 |
|
|
|
2,497,897 |
|
|
|
(42,661 |
) |
|
|
-2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
6,915 |
|
|
|
70,504 |
|
|
|
(63,589 |
) |
|
|
-90 |
% |
|
|
116,169 |
|
|
|
281,602 |
|
|
|
(165,433 |
) |
|
|
-59 |
% |
Net realized gain (loss) from foreign currency transactions |
|
|
(1,044 |
) |
|
|
(340 |
) |
|
|
(704 |
) |
|
|
-207 |
% |
|
|
(201,017 |
) |
|
|
(3,277 |
) |
|
|
(197,740 |
) |
|
|
-6034 |
% |
Net unrealized (loss) gain from foreign currency
transactions |
|
|
|
|
|
|
(224,229 |
) |
|
|
224,229 |
|
|
|
100 |
% |
|
|
|
|
|
|
(224,094 |
) |
|
|
224,094 |
|
|
|
100 |
% |
Gain on sale of real estate |
|
|
1,422,026 |
|
|
|
|
|
|
|
1,422,026 |
|
|
|
100 |
% |
|
|
1,422,026 |
|
|
|
|
|
|
|
1,422,026 |
|
|
|
100 |
% |
Taxes on sale of real estate |
|
|
(315,436 |
) |
|
|
|
|
|
|
(315,436 |
) |
|
|
100 |
% |
|
|
(315,436 |
) |
|
|
|
|
|
|
(315,436 |
) |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
1,112,461 |
|
|
|
(154,065 |
) |
|
|
1,266,526 |
|
|
|
822 |
% |
|
|
1,021,742 |
|
|
|
54,231 |
|
|
|
967,511 |
|
|
|
1784 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,777,419 |
|
|
|
867,411 |
|
|
|
910,008 |
|
|
|
105 |
% |
|
|
3,476,978 |
|
|
|
2,552,128 |
|
|
|
924,850 |
|
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends attributable to preferred stock |
|
|
(484,375 |
) |
|
|
|
|
|
|
(484,375 |
) |
|
|
100 |
% |
|
|
(1,313,194 |
) |
|
|
|
|
|
|
(1,313,194 |
) |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
1,293,044 |
|
|
$ |
867,411 |
|
|
$ |
425,633 |
|
|
|
49 |
% |
|
$ |
2,163,784 |
|
|
$ |
2,552,128 |
|
|
$ |
(388,344 |
) |
|
|
-15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Rental income increased for the three and nine months ended September 30, 2006, as compared to the
same periods in 2005, primarily due to the acquisition of 14 properties subsequent to September 30,
2005, and properties acquired during the first nine months of 2005 that were held for the full
period in 2006. There was also an adjusting entry made in June of 2006 to record the
straight-lining of rents for 2 properties that were acquired in 2005 of approximately $179,000 and
management has deemed the amount immaterial to those periods.
Interest income from mortgage loans decreased for the three months ended September 30, 2006 as
compared to the three months ended September 20, 2005, due to the defaulted mortgage loan on the
Sterling Heights, Michigan property and the resulting non-accrual of interest income in August 2006
for that mortgage loan. Interest income increased for the nine months ended September 30, 2006, as
compared to the nine months ended September 30, 2005, as a result of a mortgage loan issued in
April of 2005 where interest was only earned for part of 2005, partially offset by the defaulted
mortgage discussed above.
Tenant recovery revenue increased for the three and nine months ended September 30, 2006, as
compared to the three and nine months ended September 30, 2005, as a result of an increase in the
number of tenants which reimburse us for insurance expense, partially offset by an over-accrual of
franchise taxes in 2005.
Expenses
Depreciation and amortization expenses increased in the three and nine months ended September 30,
2006 as compared to the same periods in 2005, as a result of the 14 property acquisitions completed
between September 30, 2005 and September 30, 2006, coupled with properties acquired during the
three and nine months ended September 30, 2005 that were held for the full period in 2006, and the
approximately $140,000 adjustment to depreciation discussed above under Purchase Price
Allocation.
38
The management advisory fee for the three and nine months ended September 30, 2006 increased, as
compared to the three and nine months ended September 30, 2005, primarily as a result of the
increased number of our Advisers employees who spent time on our matters, coupled with an increase
in overhead expenses incurred by our Adviser for our benefit. The management advisory fee consists
of the reimbursement of expenses, including direct allocation of employee salaries and benefits, as
well as general overhead expense, to our Adviser in accordance with the terms of the advisory
agreement.
Professional fees, consisting primarily of legal and accounting fees, increased during the three
and nine months ended September 30, 2006, as compared to the three and nine months ended September
30, 2005, primarily as a result of an increase to the overall accounting fees due to the increased
fees for the audit of the financial statements, the accounting fees associated with the formation
of GCLP Business Trust I and GCLP Business Trust II, and an increased number of tax returns filed
as a result of the increased portfolio of investments. Legal fees also increased year over year as
a result of increased fees related to the filing of our proxy statement, and the fees surrounding
the filing of the Registration Statement on Form S-8 and the Schedule TO filed in connection with
the offer to amend the terms of options outstanding under the 2003 plan.
Taxes and licenses decreased for the three and nine months ended September 30, 2006 as compared to
the three and nine months ended September 30, 2005, primarily because of a payment of approximately
$100,000 of franchise taxes paid for doing business in certain states in the first quarter of 2005,
which related to taxes incurred in 2004, coupled with reduced taxes in the states of Texas and
Pennsylvania as a result of a restructuring of our entities that hold these properties, partially
offset by the increase in franchise taxes due to the increase in our portfolio of investments.
Insurance expense increased for the three and nine months ended September 30, 2006, as compared to
the three and nine months ended September 30, 2005. The increase is primarily a result of an
increase in premiums for directors and officers insurance from the prior year, coupled with an
increased number of properties that required insurance.
General and administrative expenses increased for the three and nine months ended September 30,
2006 as compared to the three months ended September 30, 2005, as a result of approximately $40,000
and $128,000 in operating expenses that we were required to pay on behalf of a tenant under the
terms of its lease for the three and nine months ended September 30, 2006, respectively, coupled
with an increase in directors fees and fees paid to management companies for certain of our
properties.
Shareholder related expense increased for the nine months ended September 30, 2006 as compared to
the nine months ended September 30, 2005, as a result of costs associated with the annual report,
the proxy statement, and the increased costs associated with the solicitation of the shareholder
vote for the annual meeting. Shareholder related expenses decreased for the three months ended
September 30, 2006 as compared to the three months ended September 30, 2005, as a result of a
decrease in the amount of fees paid for investor conferences, coupled with a decreased number of
SEC reports filed.
Asset retirement obligation expense is the result of the adoption of FASB 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. We have accrued a liability for disposal related to all properties
constructed prior to 1985 that have, or may have, asbestos present in the building. There was no
asset retirement obligation expense recorded for the three and nine months ended September 30,
2005.
39
Stock option compensation expense is the result of the adoption of SFAS No. 123(R). SFAS No.
123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation and supersedes Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25).
Under the modified prospective approach, stock-based compensation expense was recorded for the
unvested portion of previously issued awards that remain outstanding at January 1, 2006 using the
same estimate of the grant date fair value and the same attribution method used to determine the
pro forma disclosure under SFAS No. 123. We were required to record a one-time, non-cash expense as
a result of the amendment and acceleration of the options during the quarter ended September 30,
2006 of $314,593. There was no stock option compensation expense recorded for the three and nine
months ended September 30, 2005.
Interest expense increased for the three and nine months ended September 30, 2006, as compared to
the same periods in 2005. This increase is primarily a result of an increase in interest expense
and amortization of deferred financing fees related to the long-term financings on 11 properties
that closed subsequent to September 30, 2005, coupled with an increased amount outstanding on our
line of credit during 2006.
Other income
Interest income on cash and cash equivalents decreased during the three and nine months ended
September 30, 2006, as compared to the three and nine months ended September 30, 2005. The decrease
is primarily a result of the increase in our portfolio of investments in real estate and mortgage loans, resulting
in lower average cash balances invested.
During the three and nine months ended September 30, 2006, interest income on employee loans
increased, as compared to the three and nine months ended September 30, 2005. This increase is a
result of 9 employee loans that were originated during the second quarter of 2006, coupled with an
employee loan that was originated during the second quarter of 2005, where interest was earned for
the full period in 2006.
Gain on sale of real estate
On July 21, 2006, we sold our two properties located in Canada for approximately $6.9 million
dollars, for a gain on the sale of approximately $1.4 million. We paid approximately $315,000 in
taxes related to the gain on the sale although; the actual amount of taxes due will not
be finalized until 2006 tax returns are filed. We have been advised that the actual amount of
taxes should be approximately $235,000, or $80,000 less than what was paid at closing, subject to
final adjustments and federal (Canadian) tax return review. The mortgages associated with the
Canadian properties were assumed by the buyer at closing.
Foreign currency gains and losses
Net realized foreign currency gains and losses represents the gains and losses in connection with
the translation of monthly rental payments, the valuation of cash and the payment of quarterly
taxes denominated in Canadian dollars, and the previously unrealized foreign currency losses
associated with the valuation of the deferred rent assets and mortgage notes payable that became a
realized foreign currency loss as of the date of sale. The net unrealized gains and losses from
foreign currency transactions represents the valuation of the deferred rent asset and the mortgage
notes payable related to the two Canadian properties in 2005, prior to the date of sale. Increases
and decreases related to foreign currency gains and losses are a result of the fluctuation of the
exchange rate between the U.S. dollar and the Canadian dollar, which arise from our two Canadian
properties, which were sold in July of 2006.
Net income available to common stockholders
Net income available to common stockholders decreased for the nine months ended September 30, 2006,
as compared to the nine months ended September 30, 2005. This decrease is primarily a result of the
increased interest expense from the increased number of properties which have long-term financing,
increased depreciation from the one time depreciation adjustment discussed above, stock option
expense, asset retirement obligation expense and the preferred dividends paid, partially offset by
the gain on sale of the two Canadian properties, the increase in our portfolio of investments in
the past year and the corresponding increase in our revenues and the other events described above.
Net income available to common stockholders increased for the three months ended September 30, 2006
as compared to three months ended September 30, 2005, due to the gain on sale of the two Canadian
properties, which offset the additional expenses discussed above.
40
Liquidity and Capital Resources
Cash and Cash Equivalents
At September 30, 2006, we had approximately $0.6 million in cash and cash equivalents. We have now
fully invested the proceeds from our initial public offering of our common stock, and have access
to our existing line of credit and have obtained mortgages on 17 of our properties. We expect to
obtain additional mortgages secured by some or all of our real property in the future. We
anticipate continuing to borrow funds and issuing additional equity securities in order to obtain
additional capital. To this end, and as described in greater detail below, we have completed two
public offerings of preferred stock during 2006, the first of which was the public offering of
1,000,000 shares of 7.75% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per
share, at a price of $25.00 per share, under our shelf registration statement on Form S-3, and
pursuant to the terms set forth in a prospectus dated October 24, 2005, as supplemented by a final
prospectus supplement dated January 18, 2006. The second was the public
offering of 1,150,000 shares of 7.5% Series B Cumulative Redeemable Preferred Stock, par value
$0.001 per share, at a price of $25.00 per share, under our shelf registration statement on Form
S-3, and pursuant to the terms set forth in a prospectus dated October 24, 2005, as supplemented by
a final prospectus supplement dated October 18, 2006. 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.
Operating Activities
Net cash provided by operating activities during the nine months ended September 30, 2006,
consisting primarily of the items described in Results of Operations, was approximately $7.6
million, compared to net cash provided by operating activities of $4.9 million for the nine months
ended September 30, 2005.
Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2006 was $40.8
million, which primarily consisted of the purchase of nine properties, as described in the
Investments section above, partially offset by the proceeds from the sale of the two Canadian
properties, as compared to net cash used in investing activities during the nine months ended
September 30, 2005 of $91.9 million, which primarily consisted of the purchases of 13 properties
and the extension of 1 mortgage loan.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2006 was
approximately $32.1 million, which primarily consisted of the proceeds received from the long-term
financing of eight of our properties, the proceeds from borrowings under our line of credit, and
the proceeds from the offering of our preferred stock, partially offset by repayments on the line
of credit, the repayment of our two mortgage loans on the Canadian properties, payments for
deferred financing costs and dividend payments. Net cash provided by financing activities for the
nine months ended September 30, 2005 was approximately $58.2 million, which consisted of the
proceeds received from the long-term financing of eight of our properties, the proceeds from
borrowing under our line of credit, and principal repayments on employee loans, partially offset by
principal repayments on the mortgage notes payable, dividend payments to our stockholders, and
financing costs paid in connection with our line of credit and mortgage notes payable.
41
Future Capital Needs
As of September 30, 2006, we had investments in 38 real properties for approximately $267.4 million
and one mortgage loan for $10.0 million. During the remainder of 2006 and beyond, we expect to
complete additional acquisitions of real estate and to extend additional mortgage notes. We intend
to acquire additional properties by borrowing all or a portion of the purchase price and
collateralizing the loan with mortgages secured by some or all of our real property, by borrowing
against our existing line of credit, or by issuing additional equity securities. We may also use
these funds for general corporate needs. If we are unable to make any required debt payments on
any borrowings we make in the future, 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.
Registration Statements
On January 18, 2006 we completed the public offering of 1,000,000 shares of 7.75% Series A
Cumulative Redeemable Preferred Stock, par value $0.001 per share, at a price of $25.00 per share,
under our shelf registration statement on Form S-3, and pursuant to the terms set forth in a
prospectus dated October 24, 2005, as supplemented by a final prospectus supplement dated January
18, 2006. The preferred stock may be redeemed at a liquidation preference in the amount of $25.00
per share plus any unpaid dividends at our election on or after January 30, 2011. These securities
have no stated maturity, sinking fund or mandatory redemption and are not convertible into any
other securities of the Company. The closing of the offering
took place on January 26, 2006, and the stock is traded on the NASDAQ Global Market under the
trading symbol GOODP. Net proceeds of the offering, after underwriting discounts and offering
expenses, were approximately $23.7 million, and the net proceeds were used to repay outstanding
indebtedness under our line of credit.
On October 18, 2006, we completed a public offering of 1,150,000 shares of 7.5% Series B Cumulative
Redeemable Preferred Stock (the Series B Preferred Stock), par value $0.001 per share, at a price
of $25.00 per share, under our shelf registration statement on Form S-3, and pursuant to the terms
set forth in a prospectus dated October 24, 2005, as supplemented by a final prospectus supplement
dated October 18, 2006. The preferred stock may be redeemed at a liquidation preference in the
amount of $25.00 per share plus any unpaid dividends at our election on or after October 31, 2011.
These securities have no stated maturity, sinking fund or mandatory redemption and are not
convertible into any other securities. The closing of the offering occurred on October 25, 2006,
and the Series B Preferred Stock is traded on the NASDAQ Global Market under the trading symbol
GOODO. Net proceeds of the offering, after underwriting discounts and offering expenses, were
approximately $27.4 million and the net proceeds were used to repay outstanding indebtedness under
our line of credit. There are 21,250,000 shares still available for issuance under our shelf
registration statement.
Line of Credit
On February 28, 2005, we entered into a line of credit agreement with a syndicate of banks led by
Branch Banking & Trust Company. This line of credit initially provided us with up to $50 million of
financing. We have since amended the line of credit to increase the maximum availability under the
line from $50 million to $75 million. The line of credit matures on February 28, 2008. The
interest rate charged on the advances under the facility is based on the London Interbank Offered
Rate (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
0.25% 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 of these financial covenants limits the amount we can pay out,
on a quarterly basis, to no more than 95% of our funds from operations as dividends to our
stockholders. For the quarter ended September 30, 2006, our dividend payout exceeded this
threshold, although we received a waiver for this requirement with respect to the quarter ended
September 30, 2006, and were required to pay a waiver fee of $75,000. The maximum amount we may
draw under this agreement is based on the percentage of the value of its properties meeting
agreed-upon eligibility standards that we have pledged as collateral to the banks. As we
arrange for long-term mortgages for these 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. 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, 2006, there was $35.7 million outstanding under the line of
credit at an interest rate of 7.58% per year. As noted above we used the net proceeds of our
recently completed Series B Preferred Stock financing to repay approximately $27.4 million under
the line of credit in October 2006.
42
We anticipate that we will likely exceed this dividend payout threshold covenant for our line of
credit for the quarter ending December 31, 2006. If we are not in compliance with this covenant as
of December 31, 2006, we will likely seek another waiver of such compliance from our lenders or
seek to refinance the credit facility. In such case, if our lenders are unwilling to grant us a
waiver on terms we believe are reasonable or at all, and if we are unable to secure an alternative
credit facility, we may be in default on our credit facility as of December 31, 2006, which would
likely have a material adverse impact on our liquidity and financial condition.
Mortgage Notes Payable
On February 21, 2006, we assumed approximately $10.0 million of indebtedness pursuant to a
long-term note payable from Wells Fargo Bank, National Association, in connection with our
acquisition, on the same date, of a property located in Champaign, Illinois. The note accrues
interest at a rate of 5.91% per year, and we may not repay this note prior to the last 3 months of
the term, or we would be subject to a substantial prepayment penalty. The note matures on December
1, 2013.
On February 21, 2006, we assumed approximately $20.0 million of indebtedness pursuant to a
long-term note payable from Greenwich Capital Financial Products, Inc, in connection with our
acquisition, on the same date, of a property located in Roseville, Minnesota. The note accrues
interest at a rate of 5.20% per year, and we may not repay this note prior to the last 3 months of
the term, or we would be subject to a substantial prepayment penalty. The note matures on June 30,
2014.
On March 29, 2006, through wholly-owned subsidiaries, we borrowed $17.0 million pursuant to a
long-term note payable from CIBC Inc. which is collateralized by security interests in our Big
Flats, New York property, our Eatontown, New Jersey property, and our Franklin Township, New Jersey
property in the amounts of approximately $5.6 million, $4.6 million and $6.8 million, respectively.
The note accrues interest at a rate of 5.92% per year, and we may not repay this note until after
January 1, 2016, or we would be subject to a prepayment penalty. The note has an anticipated
maturity date of April 1, 2016, with a clause in which the lender has the option of extending the
maturity date to April 1, 2036. We used the proceeds from the note to pay down our line of credit.
On April 27, 2006, through wholly-owned subsidiaries, we borrowed $14.9 million pursuant to a
long-term note payable from IXIS Real Estate Capital Inc. which is collateralized by security
interests in our Wichita, Kansas property, our Clintonville, Wisconsin property, our Rock Falls,
Illinois property and our Angola, Indiana properties in the amounts of approximately $9.0 million,
$3.6 million, $0.7 million and $1.6 million, respectively. The note accrues interest at a rate of
6.58% per year, and we may not repay this note until after February 5, 2016, or we would be subject
to a substantial prepayment penalty. The note has a maturity date of May 5, 2016, and we used the
proceeds from the note to pay down our line of credit.
43
Contractual Obligations
The following table reflects our significant contractual obligations as of September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
Contractual Obligations |
|
Total |
|
|
Less than 1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More than 5 Years |
|
Long-Term Debt Obligations(1) |
|
$ |
154,176,249 |
|
|
$ |
771,666 |
|
|
$ |
38,483,015 |
|
|
$ |
3,499,207 |
|
|
$ |
111,422,361 |
|
Interest on Long-Term Debt Obligations(2) |
|
|
58,135,532 |
|
|
|
6,795,235 |
|
|
|
13,411,886 |
|
|
|
13,029,094 |
|
|
|
24,899,317 |
|
Capital Lease Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-Term Liabilities Reflected on the
Registrants Balance Sheet under GAAP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
212,311,781 |
|
|
$ |
7,566,901 |
|
|
$ |
51,894,901 |
|
|
$ |
16,528,301 |
|
|
$ |
136,321,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt obligations represent both borrowings under our BB&T line of credit
and mortgage notes payble that were outstanding as of September 30, 2006. The line of credit
matures in February of 2008. |
|
(2) |
|
Interest on long-term debt obligations does not include interest on our borrowings
under our line of credit. The balance and interest rate on our line of credit is variable and, thus, the amount of
interest can not be calculated for purposes of this table. |
|
(3) |
|
This does not include the portion of the operating lease on office space that is allocated
to us by our Adviser in connection with our advisory agreement. |
Funds from Operations
The National Association of Real Estate Investment Trusts (NAREIT) developed funds from
operations (FFO) as a relative non-GAAP (Generally Accepted Accounting Principles in the United
States) 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.
Basic funds from operations per share (Basic FFO per share) and diluted funds from operations per
share (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 (EPS) in evaluating net
income available to common shareholders. In addition, since most REITs provide FFO, Basic FFO and
Diluted FFO per share information to the investment community, we believe FFO available to common
stockholders, Basic FFO per share and Diluted FFO per share 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.
44
The following table provides a reconciliation of our FFO for the three and nine months ended
September 30, 2006 and 2005, to the most directly comparable GAAP measure, net income, and a
computation of basic and diluted FFO per weighed average common share and basic and diluted net
income per weighted average common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three |
|
|
For the three |
|
|
For the nine |
|
|
For the nine |
|
|
|
months ended |
|
|
months ended |
|
|
months ended |
|
|
months ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
Net income |
|
$ |
1,777,419 |
|
|
$ |
867,411 |
|
|
$ |
3,476,978 |
|
|
$ |
2,552,128 |
|
Less: Dividends attributable to preferred stock |
|
|
(484,375 |
) |
|
|
|
|
|
|
(1,313,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
1,293,044 |
|
|
$ |
867,411 |
|
|
$ |
2,163,784 |
|
|
$ |
2,552,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Real estate depreciation and amortization,
including discontinued operations |
|
|
2,162,640 |
|
|
|
1,140,181 |
|
|
|
6,078,450 |
|
|
|
2,374,912 |
|
Less: Gain on sale of real estate, net of taxes paid |
|
|
(1,106,590 |
) |
|
|
|
|
|
|
(1,106,590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO available to common stockholders |
|
|
2,349,094 |
|
|
|
2,007,592 |
|
|
|
7,135,644 |
|
|
|
4,927,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
7,820,376 |
|
|
|
7,672,000 |
|
|
|
7,752,170 |
|
|
|
7,669,619 |
|
Weighted average shares outstanding diluted |
|
|
7,981,071 |
|
|
|
7,725,667 |
|
|
|
7,896,860 |
|
|
|
7,718,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per weighted average common share |
|
$ |
0.16 |
|
|
$ |
0.11 |
|
|
$ |
0.28 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per weighted average common share |
|
$ |
0.16 |
|
|
$ |
0.11 |
|
|
$ |
0.27 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic FFO per weighted average common share |
|
$ |
0.30 |
|
|
$ |
0.26 |
|
|
$ |
0.92 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted FFO per weighted average common share |
|
$ |
0.29 |
|
|
$ |
0.26 |
|
|
$ |
0.90 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
Item 3. Quantitative and Qualitative Disclosure 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 have two variable rate loans, certain of our leases contain escalations based on market
interest rates, and the interest rate on our existing line of credit is variable. We seek to
mitigate this risk by structuring such provisions 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, 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.
Under this analysis, a hypothetical increase in the one month LIBOR rate by 1% would increase our
interest and rental revenue by $36,500 and increase our interest expense on the line of credit by
$361,553 for a net decrease in our net income of $325,053, or 10.1%, over the next twelve months,
compared to net income for the latest twelve months ended September 30, 2006. A hypothetical
decrease in the one month LIBOR by 1% would decrease our interest and rental revenue by $36,500 and
decrease our interest expense on the line of credit by $361,553 for a net increase in our net
income of $325,053, or 10.1%, over the next twelve months, compared to net income for the latest
twelve months ended September 30, 2006. Although management believes that this analysis is
indicative of our existing interest rate sensitivity, it does not adjust for potential changes in
credit quality, size and composition of our loan and lease portfolio on the balance sheet and other
business developments that could affect net income. Accordingly, no assurances can be given that
actual results would not differ materially from the results under this hypothetical analysis.
As of September 30, 2006, our fixed rate debt outstanding was approximately $118.5 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, 2006, had been one
percentage point higher or lower, the fair value of those debt instruments on that date would have
decreased or increased, respectively, by approximately $8.0 million.
In the future, we may be exposed to additional effects of interest rate changes primarily as a
result of our line of credit 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.
46
Item 4. Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures
As of September 30, 2006, 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, 2006 in providing a reasonable level of assurance that information we are required to
disclose in reports that we file or submit under the Securities and 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.
b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the
quarter ended September 30, 2006 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
47
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 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, 2005, filed by us with the Securities and Exchange Commission
(the SEC) on February 28, 2006 and our Quarterly Report on Form 10-Q for the quarter ended June
30, 2006, filed by us with the SEC on August 8, 2006. In connection with our preparation of this
quarterly report, management has reviewed and considered these risk factors and has determined that
the following risk factors should be read in connection with the existing risk factors disclosed in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and our Quarterly Report
on form 10-Q for the quarter ended June 30, 2006.
At the beginning of the 2007 fiscal year, our amended and restated advisory agreement with
Gladstone Management Corporation and our administration agreement with Gladstone Administration LLC
will become effective and this could adversely impact our results of operations.
On May 24, 2006, our stockholders approved a proposal to enter into the Amended Advisory Agreement
with our Adviser and the Administration Agreement with the Administrator. We expect to implement
these new agreements effective January 1, 2007. Under the Amended Advisory Agreement, we will pay
our Adviser a base management fee of 2.0% of our total stockholders equity (less the recorded
value of any preferred stock, and adjusted to exclude the effect of any unrealized gains, losses or
other items that do not affect realized net income). The Amended Advisory Agreement also includes
incentive fees which will reward our Adviser if our quarterly pre-incentive fee funds from
operations (FFO) exceeds 1.75% of our total stockholders equity. FFO is calculated after taking
into account all operating expenses for the quarter, including the base management fee (less any
rebate of fees received by the Adviser), expenses payable under the Administration Agreement and
any interest expense (but excluding the incentive fee) and any other operating expenses.
Pre-incentive fee FFO includes, in the case of investments with a deferred interest feature (such
as original issue discount, debt instruments with payment in kind interest and zero coupon
securities), accrued income and rents that we have not yet received in cash. Pre-incentive FFO will
also include any realized capital gains and realized capital losses, less any dividend paid on any
issued and outstanding preferred stock, but will not include any unrealized gains or losses. Under
the Amended Advisory Agreement, we will pay our Adviser 100% of our pre-incentive fee FFO with
respect to that portion of such FFO, if any, that exceeds the hurdle rate but is less than 2.1875%
in any calendar quarter (8.75% annualized), and 20% of the amount of our pre-incentive fee FFO, if
any, that exceeds 2.1875% in any calendar quarter (8.75% annualized).
Under the Administration Agreement, we will pay separately for administrative services, which
payments will be equal to our allocable portion of the Administrators overhead expenses in
performing its obligations under the Administration Agreement, including rent for the space
occupied by the Administrator, and our allocable portion of the salaries and benefits expenses of
our chief financial officer, treasurer, chief compliance officer and controller and their
respective staffs. As a result of the implementation of the Amended Advisory Agreement and the
Administration Agreement, our operating expenses may be materially higher than those payable under
our current investment advisory agreement with our Adviser, which could have a material adverse
effect on our results of operations, our ability to make dividend payments on the Series B
Preferred Stock and the trading price of the Series B Preferred Stock.
48
We are currently not in compliance with a covenant of our credit facility and, if we dont
receive a waiver or refinance the credit facility before December 31, 2006, we may be in default on
our credit facility, which would likely have a material adverse impact on our liquidity and
financial condition.
Under our existing credit facility, beginning with the quarter ended September 30, 2006, we are
required to pay out, on a quarterly basis, no more than 95% of our funds from operations as
dividends to our stockholders. For the quarter ended September 30, 2006, our dividend payout
exceeded this threshold, although our lenders waived compliance with this requirement with respect
to the quarter ended September 30, 2006. We anticipate that we will likely again exceed this
threshold for the quarter ending December 31, 2006. If we are not in compliance with this covenant
as of December 31, 2006, we will likely seek another waiver of such compliance from our lenders or
seek to refinance the credit facility. In such case, if our lenders are unwilling to grant us a
waiver on terms we believe are reasonable or at all, and if we are unable to secure an alternative
credit facility, we may be in default on our credit facility as of December 31, 2006, which would
likely have a material adverse impact on our liquidity and financial condition.
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, 2006.
Item 5. Other Information
Not applicable.
49
Item 6. Exhibits
Exhibit Index
|
|
|
Exhibit |
|
Description of Document |
3 .1
|
|
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. |
|
|
|
3 .2
|
|
Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024), filed
September 11, 2003. |
|
|
|
3.3
|
|
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. |
|
|
|
3.4
|
|
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. |
|
|
|
4.1
|
|
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 on January 19, 2006. |
|
|
|
4.2
|
|
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 on October 19, 2006. |
|
|
|
10.31
|
|
First Amendment to Amended and Restated Credit Agreement by and
among Gladstone Commercial Corporation, Gladstone Commercial
Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of September 29, 2006,
incorporated by reference to Exhibit 10.31 of the Current Report
on Form 8-K (File No. 000-50363), filed on September 30, 2006. |
|
|
|
10.32*
|
|
Joint Directors Nonqualified Excess Plan of Gladstone Commercial
Corporation, Gladstone Capital Corporation and Gladstone
Investment Corporations, dated as of July 11, 2006, incorporated
by reference to Exhibit 10.1 of the Current Report on Form 8-K
(File No. 000-50363), filed on July 12, 2006. |
|
|
|
11
|
|
Computation of Per Share Earnings from Operations (included in
the notes to the unaudited financial statements contained in
this report) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302
of The Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302
of The Sarbanes-Oxley Act of 2002. |
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906
of The Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906
of The Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
Previously filed and incorporated by reference. |
|
* |
|
Denotes management contract, compensation plan, contract or other arrangement. |
50
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
|
|
Date: October 31, 2006 |
By: |
/s/ Harry Brill
|
|
|
|
Harry Brill |
|
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Chief Financial Officer |
|
|
51
Exhibit Index
|
|
|
Exhibit |
|
Description of Document |
3 .1
|
|
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. |
|
|
|
3 .2
|
|
Bylaws, incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-11 (File No. 333-106024), filed
September 11, 2003. |
|
|
|
3.3
|
|
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. |
|
|
|
3.4
|
|
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. |
|
|
|
4.1
|
|
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 on January 19, 2006. |
|
|
|
4.2
|
|
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 on October 19, 2006. |
|
|
|
10.31
|
|
First Amendment to Amended and Restated Credit Agreement by and
among Gladstone Commercial Corporation, Gladstone Commercial
Limited Partnership, Branch Banking and Trust Company, and
certain other parties, dated as of September 29, 2006,
incorporated by reference to Exhibit 10.31 of the Current Report
on Form 8-K (File No. 000-50363), filed on September 30, 2006. |
|
|
|
10.32*
|
|
Joint Directors Nonqualified Excess Plan of Gladstone Commercial
Corporation, Gladstone Capital Corporation and Gladstone
Investment Corporations, dated as of July 11, 2006, incorporated
by reference to Exhibit 10.1 of the Current Report on Form 8-K
(File No. 000-50363), filed on July 12, 2006. |
|
|
|
11
|
|
Computation of Per Share Earnings (included in the notes to the
unaudited financial statements contained in this report) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302
of The Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302
of The Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906
of The Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906
of The Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
Previously filed and incorporated by reference. |
|
* |
|
Denotes management contract, compensation plan, contract or other arrangement. |
52