Cogdell Spencer Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-32649
COGDELL SPENCER INC.
(Exact name of registrant as specified in its charter)
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Maryland
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20-3126457 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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4401 Barclay Downs Drive, Suite 300 |
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Charlotte, North Carolina
(Address of principal executive offices)
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28209
(Zip code) |
(704) 940-2900
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filed, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
o Accelerated filer 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). o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock as
of the latest practicable date: 11,948,245 shares of common stock, par value $.01 per share,
outstanding as of November 6, 2007.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COGDELL SPENCER INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
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As of |
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As of |
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September 30, 2007 |
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December 31, 2006 |
|
Assets |
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|
|
|
|
|
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|
Real estate properties: |
|
|
|
|
|
|
|
|
Land |
|
$ |
28,139 |
|
|
$ |
22,768 |
|
Buildings and improvements |
|
|
430,188 |
|
|
|
339,214 |
|
Less: Accumulated depreciation |
|
|
(39,065 |
) |
|
|
(23,664 |
) |
|
|
|
|
|
|
|
Total operating real estate properties, net |
|
|
419,262 |
|
|
|
338,318 |
|
Construction in progress |
|
|
10,110 |
|
|
|
12,854 |
|
|
|
|
|
|
|
|
Total real estate properties, net |
|
|
429,372 |
|
|
|
351,172 |
|
Cash and cash equivalents |
|
|
3,184 |
|
|
|
1,029 |
|
Restricted cash |
|
|
1,311 |
|
|
|
982 |
|
Investment in capital lease |
|
|
5,964 |
|
|
|
6,193 |
|
Acquired above market leases, net of accumulated
amortization of $457 in 2007 and $290 in 2006 |
|
|
1,003 |
|
|
|
966 |
|
Acquired in place lease value and deferred leasing
costs, net of accumulated amortization of $16,185
in 2007 and $11,184 in 2006 |
|
|
18,076 |
|
|
|
18,205 |
|
Acquired ground leases, net of accumulated
amortization of $192 in 2007 and $146 in 2006 |
|
|
3,046 |
|
|
|
3,092 |
|
Deferred financing costs, net of accumulated
amortization of $573 in 2007 and $342 in 2006 |
|
|
1,315 |
|
|
|
1,018 |
|
Goodwill |
|
|
5,335 |
|
|
|
5,326 |
|
Other assets |
|
|
7,046 |
|
|
|
5,075 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
475,652 |
|
|
$ |
393,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Liabilities and stockholders equity |
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Notes payable under line of credit |
|
$ |
46,100 |
|
|
$ |
77,487 |
|
Mortgage loans |
|
|
233,629 |
|
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|
184,544 |
|
Accounts payable and other liabilities |
|
|
16,345 |
|
|
|
9,851 |
|
Accrued dividends and distributions |
|
|
5,779 |
|
|
|
4,404 |
|
Acquired below market leases, net of accumulated
amortization of $2,080 in 2007 and $1,384 in 2006 |
|
|
3,489 |
|
|
|
3,096 |
|
|
|
|
|
|
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Total liabilities |
|
|
305,342 |
|
|
|
279,382 |
|
Commitments and contingencies |
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|
|
|
|
|
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|
Minority interests in real estate partnerships |
|
|
1,859 |
|
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|
157 |
|
Minority interests in operating partnership |
|
|
47,192 |
|
|
|
53,844 |
|
Stockholders equity: |
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|
Preferred stock, $0.01 par value; 50,000 shares
authorized, none issued or outstanding |
|
|
|
|
|
|
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|
Common Stock; $0.01 par value; 200,000 shares
authorized, 11,948 and 8,000 shares issued and
outstanding in 2007 and 2006, respectively |
|
|
119 |
|
|
|
80 |
|
Additional paid-in capital |
|
|
166,865 |
|
|
|
87,224 |
|
Accumulated other comprehensive income (loss) |
|
|
(479 |
) |
|
|
73 |
|
Accumulated deficit |
|
|
(45,246 |
) |
|
|
(27,702 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
121,259 |
|
|
|
59,675 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
475,652 |
|
|
$ |
393,058 |
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|
|
|
|
|
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|
See notes to condensed consolidated financial statements.
1
COGDELL SPENCER INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
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|
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2007 |
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|
2006 |
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|
2007 |
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|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Rental |
|
$ |
16,389 |
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|
$ |
13,394 |
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|
$ |
45,314 |
|
|
$ |
38,492 |
|
Management fee revenue |
|
|
526 |
|
|
|
188 |
|
|
|
1,621 |
|
|
|
748 |
|
Expense reimbursements |
|
|
315 |
|
|
|
89 |
|
|
|
989 |
|
|
|
398 |
|
Development fee revenue |
|
|
25 |
|
|
|
19 |
|
|
|
276 |
|
|
|
108 |
|
Interest and other income |
|
|
226 |
|
|
|
202 |
|
|
|
827 |
|
|
|
736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
17,481 |
|
|
|
13,892 |
|
|
|
49,027 |
|
|
|
40,482 |
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Property operating and management |
|
|
6,797 |
|
|
|
5,050 |
|
|
|
18,766 |
|
|
|
14,139 |
|
General and administrative |
|
|
1,513 |
|
|
|
1,387 |
|
|
|
5,447 |
|
|
|
4,822 |
|
Depreciation |
|
|
5,581 |
|
|
|
5,120 |
|
|
|
15,455 |
|
|
|
14,288 |
|
Amortization |
|
|
1,692 |
|
|
|
2,617 |
|
|
|
5,209 |
|
|
|
7,375 |
|
Interest |
|
|
4,101 |
|
|
|
4,195 |
|
|
|
11,324 |
|
|
|
9,979 |
|
Prepayment penalty on early extinguishment of debt |
|
|
|
|
|
|
37 |
|
|
|
|
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|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
19,684 |
|
|
|
18,406 |
|
|
|
56,201 |
|
|
|
50,640 |
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Loss from continuing operations before equity in earnings (loss)
of unconsolidated real estate partnerships, gain from sale of
real estate partnership interests, minority interest in real
estate partnerships, minority interests in operating partnership,
and discontinued operations |
|
|
(2,203 |
) |
|
|
(4,514 |
) |
|
|
(7,174 |
) |
|
|
(10,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings (loss) of unconsolidated real estate
partnerships |
|
|
2 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
7 |
|
Gain from sale of real estate partnership interests |
|
|
|
|
|
|
484 |
|
|
|
|
|
|
|
484 |
|
Minority interests in real estate partnerships |
|
|
(16 |
) |
|
|
(24 |
) |
|
|
(55 |
) |
|
|
(77 |
) |
Minority interests in operating partnership |
|
|
615 |
|
|
|
1,430 |
|
|
|
2,226 |
|
|
|
3,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(1,602 |
) |
|
|
(2,622 |
) |
|
|
(5,005 |
) |
|
|
(6,306 |
) |
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
(9 |
) |
Gain from sale of real estate property |
|
|
|
|
|
|
435 |
|
|
|
|
|
|
|
435 |
|
Minority interests in operating partnership |
|
|
|
|
|
|
(154 |
) |
|
|
|
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations |
|
|
|
|
|
|
283 |
|
|
|
|
|
|
|
276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,602 |
) |
|
$ |
(2,339 |
) |
|
$ |
(5,005 |
) |
|
$ |
(6,030 |
) |
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Per share data basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.13 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.79 |
) |
Income from discontinued operations |
|
|
|
|
|
|
0.04 |
|
|
|
|
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.13 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic and diluted |
|
|
11,934 |
|
|
|
7,976 |
|
|
|
10,755 |
|
|
|
7,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
2
COGDELL SPENCER INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Accumulated |
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
|
|
|
Common |
|
|
Common |
|
|
Paid-in |
|
|
Comprehensive |
|
|
Accumulated |
|
|
|
|
|
|
Shares |
|
|
Stock |
|
|
Capital |
|
|
Income
(loss) |
|
|
Deficit |
|
|
Total |
|
Balance at December 31, 2006 |
|
|
8,000 |
|
|
$ |
80 |
|
|
$ |
87,224 |
|
|
$ |
73 |
|
|
$ |
(27,702 |
) |
|
$ |
59,675 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,005 |
) |
|
|
(5,005 |
) |
Unrealized loss on interest rate
swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(552 |
) |
|
|
|
|
|
|
(552 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,557 |
) |
Issuance of common stock, net of costs |
|
|
3,950 |
|
|
|
39 |
|
|
|
78,404 |
|
|
|
|
|
|
|
|
|
|
|
78,443 |
|
Conversion of operating partnership
units to common stock |
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Amortization of restricted stock grants |
|
|
|
|
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
74 |
|
Forfeiture of restricted stock grants |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,539 |
) |
|
|
(12,539 |
) |
Adjustment to record change of interest
in the operating partnership due to
the
issuance of operating partnership
units in excess of book value |
|
|
|
|
|
|
|
|
|
|
1,157 |
|
|
|
|
|
|
|
|
|
|
|
1,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007 |
|
|
11,948 |
|
|
$ |
119 |
|
|
$ |
166,865 |
|
|
$ |
(479 |
) |
|
$ |
(45,246 |
) |
|
$ |
121,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
COGDELL SPENCER INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2007 |
|
|
September 30, 2006 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,005 |
) |
|
$ |
(6,030 |
) |
Adjustments to reconcile net loss to cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Minority interests |
|
|
(2,171 |
) |
|
|
(3,211 |
) |
Gain from sale of real estate partnership interests |
|
|
|
|
|
|
(484 |
) |
Gain from
sale of real estate property discontinued operations |
|
|
|
|
|
|
(435 |
) |
Depreciation and amortization (including amounts in
discontinued operations) |
|
|
20,664 |
|
|
|
21,686 |
|
Amortization of acquired above market leases and
acquired below market leases, net (including amounts in
discontinued operations) |
|
|
(529 |
) |
|
|
(696 |
) |
Straight line rental revenue |
|
|
(237 |
) |
|
|
(139 |
) |
Amortization of deferred finance costs and debt premium |
|
|
186 |
|
|
|
58 |
|
Equity-based compensation |
|
|
158 |
|
|
|
79 |
|
Equity in loss (earnings) of unconsolidated
real estate partnerships |
|
|
2 |
|
|
|
(7 |
) |
Prepayment penalty for early extinguishment of debt |
|
|
|
|
|
|
37 |
|
Change in fair value of interest rate swap agreements |
|
|
|
|
|
|
(59 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Other assets |
|
|
(852 |
) |
|
|
(210 |
) |
Accounts payable and other liabilities |
|
|
5,330 |
|
|
|
2,154 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
17,546 |
|
|
|
12,743 |
|
Investing activities: |
|
|
|
|
|
|
|
|
Investment in real estate properties |
|
|
(91,868 |
) |
|
|
(97,194 |
) |
Purchase of minority interests in operating partnership |
|
|
(3,807 |
) |
|
|
|
|
Proceeds from sale of real estate property |
|
|
|
|
|
|
1,914 |
|
Proceeds from sale of real estate partnership interests |
|
|
|
|
|
|
546 |
|
Proceeds from capital lease |
|
|
229 |
|
|
|
229 |
|
Purchase of corporate equipment |
|
|
(502 |
) |
|
|
|
|
Distributions received from unconsolidated real estate
partnership |
|
|
4 |
|
|
|
2 |
|
Increase in restricted cash |
|
|
(329 |
) |
|
|
(277 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(96,273 |
) |
|
|
(94,780 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from mortgage notes payable |
|
|
65,941 |
|
|
|
13,270 |
|
Repayments of mortgage notes payable |
|
|
(16,714 |
) |
|
|
(7,799 |
) |
Proceeds from line of credit |
|
|
49,300 |
|
|
|
82,750 |
|
Repayments to line of credit |
|
|
(80,687 |
) |
|
|
(4,500 |
) |
Prepayment penalty for early extinguishment of debt |
|
|
|
|
|
|
(37 |
) |
Net proceeds from sale of common stock |
|
|
78,443 |
|
|
|
|
|
Dividends and distributions |
|
|
(15,919 |
) |
|
|
(8,653 |
) |
Equity contribution by partner in a consolidated real estate
partnership |
|
|
1,304 |
|
|
|
|
|
Distributions to minority interests in real estate partnership |
|
|
(117 |
) |
|
|
(134 |
) |
Payment of deferred financing costs |
|
|
(669 |
) |
|
|
(261 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
80,882 |
|
|
|
74,636 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
2,155 |
|
|
|
(7,401 |
) |
Balance at beginning of period |
|
|
1,029 |
|
|
|
9,571 |
|
Cumulative effect adjustment associated with the
implementation of EITF 04-5 |
|
|
|
|
|
|
213 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
3,184 |
|
|
$ |
2,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized interest |
|
$ |
11,792 |
|
|
$ |
9,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
307 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information noncash
investing and financing activities: |
|
|
|
|
|
|
|
|
Issuance of operating partnership units as consideration for
investment in real estate property |
|
|
3,583 |
|
|
|
6,018 |
|
Investment in real estate costs contributed by partner in a
consolidated real estate partnership |
|
|
460 |
|
|
|
|
|
Debt assumed with purchase of property |
|
|
|
|
|
|
5,178 |
|
Accrued dividends and distributions |
|
|
5,779 |
|
|
|
4,326 |
|
See notes to condensed consolidated financial statements.
4
COGDELL SPENCER INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Business Description
Cogdell Spencer Inc. (the Company), incorporated in Maryland in 2005, is a fully-integrated,
self-administered and self-managed real estate investment trust (REIT) that invests in specialty
office buildings for the medical profession, including medical offices, ambulatory surgery and
diagnostic centers, in the United States of America. As of September 30, 2007, the Companys
portfolio consisted of 55 wholly-owned properties, five joint venture
properties, and 57 other managed
medical office buildings.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company reviews its interests in entities to determine if the entitys assets, liabilities,
noncontrolling interests and results of activities should be consolidated by an entity that is
included in the consolidated financial statements in accordance with Financial Accounting Standards
Board Interpretation (FASB) No. 46 (revised December 2003), Consolidation of Variable Interest
Entities (FIN 46R), Emerging Issues Task Force
(EITF) 04-5 Determining Whether a General Partner, or the General Partners as
a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights and Accounting Research Bulletin No. 51, Consolidated Financial Statements.
The accompanying condensed consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States (GAAP) and represent the assets and
liabilities and operating results of the Company. The consolidated financial statements include the
Companys accounts, its wholly-owned subsidiaries, as well as Cogdell Spencer LP (the Operating
Partnership) and its subsidiaries. The consolidated financial statements also include any
partnerships for which the Company or its subsidiaries is the general partner or the managing
member and the rights of the limited partners do not overcome the presumption of control by the
general partner or managing member. All significant intercompany balances and transactions have
been eliminated in consolidation.
Interim Financial Information
The financial information for the three and nine months ended September 30, 2007 and 2006 is
unaudited, but includes all adjustments, consisting of normal recurring adjustments that, in the
opinion of management, are necessary for a fair presentation of the Companys financial position,
results of operations, and cash flows for such periods. Operating results for the three and nine
months ended September 30, 2007 and 2006 are not necessarily indicative of results that may be
expected for any other interim period or for the full fiscal years of 2007 or 2006 or any other
future period. These condensed consolidated financial statements do not include all disclosures
required by GAAP for annual consolidated financial statements. The
Companys most recent audited consolidated
financial statements are contained in the Companys Annual Report on Form 10-K for the year ended
December 31, 2006.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect amounts reported in the financial statements and accompanying
notes. Significant estimates and assumptions are used by management in determining the useful lives
of real estate properties and the initial valuations and underlying allocations of purchase price
in connection with real estate property acquisitions. Actual results may differ from those
estimates.
Reclassifications
Certain 2006 amounts have been reclassified to conform to the 2007 presentation. The
reclassifications did not affect previously reported stockholders equity or net loss. These
reclassifications include the reclassification of the operating results of one property to
discontinued operations. For additional information, see Note 4 to the Companys audited financial
statements filed in its Annual Report on Form 10-K for the year ended December 31, 2006.
5
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS No. 109 (FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
SFAS No. 109. FIN 48 prescribes a comprehensive model for how companies should recognize, measure,
present, and disclose in their financial statements uncertain tax positions taken or expected to be
taken in an income tax return. For those benefits recognized, a tax position must be
more-likely-than-not to be sustained based solely upon the technical merits of the position. Such
tax positions shall initially and subsequently be measured as the largest amount of tax benefit
that, on a cumulative basis, is greater than 50% likely of being realized upon ultimate settlement
with the tax authority assuming that the taxing authority has full knowledge of the position and
all relevant facts. The Company implemented FIN 48 effective January 1, 2007. The adoption of
FIN 48 did not result in an adjustment to the Companys financial statements.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (SFAS 157). SFAS 157
defines fair value for assets and liabilities, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. SFAS 157 will be effective January 1, 2008. SFAS 157
is not expected to have a material impact on the Companys results of operations or financial
position.
In September 2006, the FASB issued SFAS No. 158 Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R)
(SFAS 158). SFAS 158 requires recognition of the funded status of such plans as an asset or
liability, with changes in the funded status recognized through comprehensive income in the year in
which they occur. These provisions of SFAS 158 became effective December 31, 2006. Additionally, SFAS
158 requires measurement of a plans assets and its obligations at the end of the employers fiscal
year, effective December 31, 2008. SFAS 158 has not had, and is not expected to have, a material
impact on the Companys results of operations or financial position.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115 (SFAS 159). SFAS No. 159
permits entities to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings. SFAS 159 does not
affect any existing accounting literature that requires certain assets and liabilities to be
carried at fair value. SFAS 159 will be effective for fiscal years beginning after November 15, 2007.
The Company is currently evaluating the impact of the adoption of this new standard on its
financial statements.
3. Property Acquisitions
In
June, 2007, the Company acquired Central New York Medical
Center in Syracuse, New York. The fully leased, six-story, 111,634 square foot facility is located
on the campus of the Crouse Hospital and includes a 469-space parking garage. The property was
acquired for $36.2 million, inclusive of transaction costs. The consideration consisted of cash
and the issuance of 181,133 Operating Partnership units. The following table is an allocation of
the purchase price (in thousands):
|
|
|
|
|
Land |
|
$ |
2,112 |
|
Building and improvements |
|
|
32,674 |
|
Acquired in place lease value and deferred leasing costs |
|
|
2,429 |
|
Acquired above market leases |
|
|
28 |
|
Acquired below market leases |
|
|
(1,043 |
) |
|
|
|
|
Total purchase price allocated |
|
$ |
36,200 |
|
|
|
|
|
On
August 30, 2007, the Company acquired Summit Professional Plaza I and II in Brunswick,
Georgia, for approximately $24.3 million in cash, inclusive of transaction costs. The two-building
complex totals 97,272 net rentable square feet. Southeast Georgia Health System, a 356-bed
not-for-profit healthcare system, is the anchor tenant and
currently leases approximately 38% of the complex. Southeast Georgia Health System is A rated by
Standard & Poors Ratings Services. The following table is an allocation of the purchase price (in
thousands):
6
|
|
|
|
|
Land |
|
$ |
3,167 |
|
Building and improvements |
|
|
18,628 |
|
Acquired in place lease value and deferred leasing costs |
|
|
2,374 |
|
Acquired above market leases |
|
|
174 |
|
Acquired below market leases |
|
|
(36 |
) |
|
|
|
|
Total purchase price allocated |
|
$ |
24,307 |
|
|
|
|
|
The following summary of selected unaudited pro forma results of operations presents information as
if the purchase of Central New York Medical Center, Summit Professional Plaza I, and Summit
Professional Plaza II properties had occurred at the beginning of the periods indicated. The pro
forma information is provided for informational purposes only and is not indicative of results that
would have occurred had the property been purchased at the beginning of the periods indicated or
results which may occur in the future (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, 2007 |
|
September 30, 2006 |
Total revenues |
|
$ |
53,896 |
|
|
$ |
45,268 |
|
Net loss |
|
|
(3,213 |
) |
|
|
(4,252 |
) |
Per share information: |
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
(0.30 |
) |
|
$ |
(0.53 |
) |
4. Investments in Real Estate Partnerships
As of September 30, 2007, the Company had an ownership interest in six limited liability companies
or limited partnerships.
The following is a description of the unconsolidated entities:
|
|
|
McLeod Medical Partners, LLC, a South Carolina limited liability company, founded in
1982, 1.1% owned by the Company, and owns three medical office buildings; |
|
|
|
|
Shannon Health/MOB Limited Partnership No. 1, a Delaware limited partnership, founded in
2001, 2.0% owned by the Company, and owns ten medical office buildings; and |
|
|
|
|
BSB Health/MOB Limited Partnership No. 2, a Delaware limited partnership, founded in
2002, 2.0% owned by the Company, and owns nine medical office buildings. |
The following is a description of the consolidated entities:
|
|
|
Rocky Mount MOB, LLC, a North Carolina limited liability company, founded in 2002, 34.5%
owned by the Company, and owns one medical office building; |
|
|
|
|
Cogdell Health Campus MOB, LP, a Pennsylvania limited partnership, founded in
2006, 89.4% owned by the Company, and owns one medical office building; and |
|
|
|
|
Mebane Medical Investors, LLC, a North Carolina limited liability company, founded in
2006, 49.0% owned by the Company, and currently has one medical office building under
construction. |
The Company is the general partner or managing member of these real estate partnerships and manages
the properties owned by these entities. The Company may receive development fees, property
management fees, leasing fees, and expense reimbursements from these
real estate partnerships.
The consolidated entities are included in the Companys consolidated financial statements because
the limited partners or non-managing members do not have sufficient participation rights in the partnerships to overcome
the presumption of control by the Company as the managing member or
general partner. The limited partners or non-managing members have
certain protective rights such as the ability to prevent the sale of building, the dissolution of
the partnership or limited liability company, or the incurrence of additional indebtedness.
The Companys unconsolidated entities are accounted for under the equity method of accounting based
on the Companys ability to exercise significant influence. The following is a summary of
financial information for the limited liability companies and limited partnerships for the periods
indicated. The summary of financial information set forth below reflects the unaudited financial
position and operations of the unconsolidated real estate partnerships in their entirety, not just
the Companys interest in the entities (in thousands):
7
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
|
|
September 30, 2007 |
|
December 31, 2006 |
Financial position: |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
58,071 |
|
|
$ |
58,267 |
|
Total liabilities |
|
|
51,415 |
|
|
|
51,441 |
|
Members equity |
|
|
6,657 |
|
|
|
6,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Results of operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,052 |
|
|
$ |
2,837 |
|
|
$ |
9,119 |
|
|
$ |
9,042 |
|
Operating and general and
administrative expenses |
|
|
1,320 |
|
|
|
1,360 |
|
|
|
3,853 |
|
|
|
3,770 |
|
Net income |
|
|
285 |
|
|
|
30 |
|
|
|
914 |
|
|
|
934 |
|
The
2.0% ownership in each of the Shannon Health/MOB Limited Partnership No. 1 and BSB Health/MOB Limited
Partnership No. 2 were assumed as part of the Consera Healthcare
Real Estate LLC (Consera)
acquisition in September 2006. The partnership agreements and tenant leases of the limited
partners are designed to give preferential treatment to the limited partners as to operating cash
flows from these partnerships. The Company, as the general partner, does not generally participate
in the operating cash flows from these entities other than to receive property management fees.
The limited partners can remove the Company as the property manager and as the general partner.
5. Mortgages, Notes Payable and Guarantees
In
March 2007, Cogdell Health Campus MOB, LP, a consolidated real
estate partnership, obtained construction financing related to the Lancaster General Health
Campus MOB project. The credit facility provides financing up to $11.0 million and will convert to
permanent financing at the date of occupancy. The interest rate during the construction period is
LIBOR plus 1.05% (6.17% as of September 30, 2007). The mortgage note payable will mature five or
seven years, at the Companys option, from the date of occupancy and provides for principal
payments based on a 25-year amortization. As of September 30, 2007, there was $8.2 million drawn
on the facility.
In
May 2007, Mebane Medical Investors, LLC, a consolidated real
estate partnership, obtained construction financing related to the Mebane Medical Office
Building project. The credit facility provides financing up to $13.0 million with an interest rate equal
to LIBOR plus 1.3% (6.42% as of September 30, 2007). The
mortgage note payable will mature in May 2010
and provides for interest-only payments through May 2009 and
principal payments based on a 30-year
amortization from June 2009 through the maturity date in
May 2010. This facility has two one-year
extension options. As of September 30, 2007, there was $3.8 million drawn on the facility.
In May 2007, the Company refinanced the Parkridge MOB mortgage note payable. The $13.5
million note payable requires interest-only payments through June 2012 and principal and interest
payment of $84,359 per month from July 2012 through the maturity
date in June 2017. This note
payable has a fixed interest rate of 5.68%.
In June 2007, in connection with the acquisition of the Central New York Medical Center, the
Company obtained a $24.5 million, ten-year, interest-only mortgage note payable. The note payable
has a fixed interest rate of 6.22%.
In
August 2007, in connection with the acquisition of Summit
Professional Plaza I and II in Brunswick, Georgia, the
Company obtained a $15.9 million, ten-year, interest-only mortgage note payable. The note payable
has a fixed interest rate of 6.18%.
At
September 30, 2007, the Company received a waiver related to a
violation of the consolidated secured indebtedness to consolidated
total asset value ratio financial covenant contained in the
Companys $130.0 million unsecured revolving credit
facility (the Credit Facility).
6. Derivative Financial Instruments
Interest rate swap agreements are utilized to reduce exposure to variable interest rates associated
with certain mortgage notes payable. These agreements involve an exchange of fixed and floating
interest payments without the exchange of the underlying principal amount (the notional amount).
The interest rate swap agreements are reported at fair value in the consolidated balance sheet
within Other assets or Accounts payable and other liabilities and changes in the fair value
8
are
reported in accumulated other comprehensive income (loss) exclusive of ineffectiveness amounts, which are
reported in interest expense.
In
August 2007, the Company entered into two interest rate swap
agreements associated with a $3.0
and $27.0 million tranche under the Credit Facility. These instruments are designated
and qualify as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS No. 133), as amended and interpreted, and are due to expire in October
2008.
In
September 2007, the Company entered into two interest rate swap
agreements associated with
mortgage loans collateralized by properties owned by St. Francis Medical Plaza, LLC and St. Francis
Community MOB, LLC. These instruments are designated and qualify as cash flow hedges under SFAS
No. 133, and are based on notional amounts of $7.7 million and $7.1 million, respectively. Both
are due to expire in June 2008.
The following table summarizes the terms of the agreements and their fair values at September 30,
2007 and December 31, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount as of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
September 30, |
|
|
|
|
|
|
|
|
Effective |
|
|
Expiration |
|
|
2007 |
|
|
2006 |
|
Entity |
|
2007 |
|
|
Receive Rate |
|
Pay Rate |
|
|
Date |
|
|
Date |
|
|
Asset |
|
|
Liability |
|
|
Asset |
|
|
Liability |
|
Beaufort Medical Plaza |
|
$ |
4,955 |
|
|
1 Month LIBOR |
|
|
5.01 |
% |
|
|
10/25/2006 |
|
|
|
7/25/2008 |
|
|
$ |
|
|
|
$ |
12 |
|
|
$ |
6 |
|
|
$ |
|
|
Gaston MOB |
|
|
15,972 |
|
|
1 Month LIBOR |
|
|
5.18 |
% |
|
|
11/3/2006 |
|
|
|
11/22/2007 |
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
Medical Investors I, LLC |
|
|
8,676 |
|
|
1 Month LIBOR |
|
|
5.15 |
% |
|
|
10/10/2006 |
|
|
|
12/10/2007 |
|
|
|
3 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
River Hills Medical Associates |
|
|
2,998 |
|
|
1 Month LIBOR |
|
|
4.97 |
% |
|
|
10/16/2006 |
|
|
|
12/15/2008 |
|
|
|
|
|
|
|
12 |
|
|
|
4 |
|
|
|
|
|
Roper MOB |
|
|
9,617 |
|
|
1 Month LIBOR |
|
|
6.45 |
% |
|
|
10/10/2006 |
|
|
|
7/10/2009 |
|
|
|
|
|
|
|
65 |
|
|
|
12 |
|
|
|
|
|
Methodist Professional Center I |
|
|
30,000 |
|
|
1 Month LIBOR |
|
|
4.95 |
% |
|
|
11/6/2006 |
|
|
|
10/31/2009 |
|
|
|
|
|
|
|
248 |
|
|
|
34 |
|
|
|
|
|
Cogdell Spencer LP |
|
|
3,000 |
|
|
1 Month LIBOR |
|
|
5.06 |
% |
|
|
8/14/2007 |
|
|
|
10/31/2008 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
Cogdell Spencer LP |
|
|
27,000 |
|
|
1 Month LIBOR |
|
|
5.06 |
% |
|
|
8/20/2007 |
|
|
|
10/31/2008 |
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
St. Francis Medical Plaza, LLC |
|
|
7,673 |
|
|
1 Month LIBOR |
|
|
5.11 |
% |
|
|
9/18/2007 |
|
|
|
6/15/2008 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
St. Francis Community MOB, LLC |
|
|
7,144 |
|
|
1 Month LIBOR |
|
|
5.11 |
% |
|
|
9/18/2007 |
|
|
|
6/15/2008 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11 |
|
|
$ |
492 |
|
|
$ |
70 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Minority Interests
Minority interests in the Operating Partnership at September 30, 2007 and December 31, 2006 were
$47.2 million and $53.8 million, respectively.
As of September 30, 2007, there were 16,533,313 Operating Partnership units outstanding, of which
11,948,245, or 72.3%, were owned by the Company and 4,585,068, or 27.7%, were owned by other
partners (including certain of our tenants, directors, and senior management).
8. Dividends and Distributions
On September 14, 2007, the Company declared a dividend to common stockholders of record and the
Operating Partnership declared a distribution to holders of Operating
Partnership units of record, in each case as of October
5, 2007, totaling $5.8 million, or $0.35 per share or Operating Partnership unit, covering the
period from July 1, 2007 through September 30, 2007. The dividend and distribution were paid on
October 19, 2007. The dividend and distribution were equivalent to an annual rate of $1.40 per
share or Operating Partnership unit.
9. Loss per Share
The following is a summary of the elements used in calculating basic and diluted loss per share (in
thousands, except per share amount):
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Loss from continuing operations |
|
$ |
(1,601 |
) |
|
$ |
(2,622 |
) |
|
$ |
(5,005 |
) |
|
$ |
(6,306 |
) |
Income from discontinued operations |
|
|
|
|
|
|
283 |
|
|
|
|
|
|
|
276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,601 |
) |
|
$ |
(2,339 |
) |
|
$ |
(5,005 |
) |
|
$ |
(6,030 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(0.13 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.79 |
) |
Income from discontinued operations |
|
|
|
|
|
|
0.04 |
|
|
|
|
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.13 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.47 |
) |
|
$ |
(0.76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic and diluted |
|
|
11,934 |
|
|
|
7,976 |
|
|
|
10,755 |
|
|
|
7,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following potentially dilutive securities were outstanding, but were not included in the
computation of diluted earnings per share because the effects of their inclusion would be
anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Operating Partnership units |
|
|
4,596 |
|
|
|
4,371 |
|
|
|
4,562 |
|
|
|
4,367 |
|
Unvested restricted stock |
|
|
15 |
|
|
|
20 |
|
|
|
18 |
|
|
|
23 |
|
10. Related Party Transactions
The
Fork Farm, a working farm owned by the Companys Chairman, James
W. Cogdell, periodically hosts events on behalf
of the Company. Charges for such events are reflected in general and administrative expenses in
the consolidated statements of operations. For the period January 1, 2007 through September 30,
2007, approximately $14,900 was paid to The Fork Farm.
11. Segment Reporting
The Company defines business segments by their distinct customer base and service provided based on
the financial information used by our chief operating decision maker to make resource allocation
decisions and assess performance. There are two identified reportable segments: (1) property
operations and (2) real estate services. Management evaluates each segments performance based on
net operating income, which is defined as income before corporate general and administrative
expenses, depreciation, amortization, interest expense, loss on early extinguishment of debt, gain
on sale of real estate partnership interests, equity in earnings (loss) of unconsolidated real
estate partnerships, and minority interests. Intersegment revenues and expenses are reflected at
the contractually stipulated amounts and eliminated in consolidation or combination. The following
table represents the segment information for the three months ended September 30, 2007 and 2006 (in
thousands):
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2007 |
|
|
September 30, 2006 |
|
|
September 30, 2007 |
|
|
September 30, 2006 |
|
Property operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues |
|
$ |
16,389 |
|
|
$ |
13,394 |
|
|
$ |
45,314 |
|
|
$ |
38,492 |
|
Interest and other income |
|
|
147 |
|
|
|
158 |
|
|
|
447 |
|
|
|
491 |
|
Intersegment revenues |
|
|
93 |
|
|
|
83 |
|
|
|
270 |
|
|
|
250 |
|
Property operating expenses |
|
|
(5,190 |
) |
|
|
(4,071 |
) |
|
|
(13,714 |
) |
|
|
(11,026 |
) |
Intersegment expenses |
|
|
(1,041 |
) |
|
|
(881 |
) |
|
|
(3,079 |
) |
|
|
(2,563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
10,398 |
|
|
$ |
8,683 |
|
|
$ |
29,238 |
|
|
$ |
25,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets, end of period |
|
$ |
468,035 |
|
|
$ |
384,080 |
|
|
$ |
468,035 |
|
|
$ |
384,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee revenue |
|
$ |
551 |
|
|
$ |
207 |
|
|
$ |
1,897 |
|
|
$ |
856 |
|
Expense reimbursements |
|
|
315 |
|
|
|
89 |
|
|
|
989 |
|
|
|
398 |
|
Interest and other income |
|
|
79 |
|
|
|
44 |
|
|
|
380 |
|
|
|
245 |
|
Intersegment revenues |
|
|
1,041 |
|
|
|
881 |
|
|
|
3,079 |
|
|
|
2,563 |
|
Real estate
services operating expenses |
|
|
(1,717 |
) |
|
|
(987 |
) |
|
|
(5,422 |
) |
|
|
(3,365 |
) |
Intersegment expenses |
|
|
(93 |
) |
|
|
(83 |
) |
|
|
(270 |
) |
|
|
(250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
176 |
|
|
$ |
151 |
|
|
$ |
653 |
|
|
$ |
447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets, end of period |
|
$ |
7,617 |
|
|
$ |
8,821 |
|
|
$ |
7,617 |
|
|
$ |
8,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues |
|
$ |
18,615 |
|
|
$ |
14,856 |
|
|
$ |
52,376 |
|
|
$ |
43,295 |
|
Elimination of intersegment revenues |
|
|
(1,134 |
) |
|
|
(964 |
) |
|
|
(3,349 |
) |
|
|
(2,813 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
17,481 |
|
|
$ |
13,892 |
|
|
$ |
49,027 |
|
|
$ |
40,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net operating income |
|
$ |
10,574 |
|
|
$ |
8,842 |
|
|
$ |
29,891 |
|
|
$ |
26,343 |
|
Corporate general and administrative expenses |
|
|
(1,403 |
) |
|
|
(1,379 |
) |
|
|
(5,077 |
) |
|
|
(4,570 |
) |
Depreciation and amortization expense |
|
|
(7,273 |
) |
|
|
(7,737 |
) |
|
|
(20,664 |
) |
|
|
(21,663 |
) |
Interest expense |
|
|
(4,101 |
) |
|
|
(4,195 |
) |
|
|
(11,324 |
) |
|
|
(9,979 |
) |
Prepayment penalty on early extinguishment of debt |
|
|
|
|
|
|
(37 |
) |
|
|
|
|
|
|
(37 |
) |
Equity in earnings (loss) of unconsolidated
real estate partnerships |
|
|
2 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
7 |
|
Gain from sale of real estate partnership interests |
|
|
|
|
|
|
484 |
|
|
|
|
|
|
|
484 |
|
Minority interests |
|
|
599 |
|
|
|
1,406 |
|
|
|
2,171 |
|
|
|
3,361 |
|
Total discontinued operations |
|
|
|
|
|
|
283 |
|
|
|
|
|
|
|
276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,602 |
) |
|
$ |
(2,339 |
) |
|
$ |
(5,005 |
) |
|
$ |
(6,030 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets, end of period |
|
$ |
475,652 |
|
|
$ |
392,901 |
|
|
$ |
475,652 |
|
|
$ |
392,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When used in this discussion and elsewhere in this Quarterly Report on Form 10-Q, the words
believes, anticipates, projects, should, estimates, expects, and similar expressions
are intended to identify forward-looking statements with the meaning of that term in Section 27A of
the Securities Act of 1933, as amended (the Securities Act), and in Section 21F of the Securities
and Exchange Act of 1934, as amended. Actual results may differ materially due to uncertainties
including:
|
|
|
the Companys business strategy; |
|
|
|
|
the Companys ability to obtain future financing arrangements; |
|
|
|
|
estimates relating to the Companys future distributions; |
|
|
|
|
the Companys understanding of the Companys competition; |
|
|
|
|
the Companys ability to renew the Companys ground leases; |
|
|
|
|
changes in the reimbursement available to the Companys tenants by government or private
payors; |
|
|
|
|
the Companys tenants ability to make rent payments; |
|
|
|
|
defaults by tenants; |
|
|
|
|
market trends; and |
|
|
|
|
projected capital expenditures. |
Forward-looking statements are based on estimates as of the date of this report. Cogdell Spencer
Inc. (the Company) disclaims any obligation to publicly release the results of any revisions to
these forward-looking statements reflecting new estimates, events or circumstances after the date
of this report.
Overview
The Company is a fully-integrated, self-administered and self-managed REIT that invests in
specialty office buildings for the medical profession, including medical offices, ambulatory
surgery and diagnostic centers, in the United States of America. The Company has been built around
understanding and addressing the specialized real estate needs of the healthcare industry. The
Companys management team has developed long-term and extensive relationships through developing
and maintaining modern, customized medical office buildings and healthcare related facilities. The
Company has been able to maintain occupancy above market levels and secure strategic hospital
campus locations. The Company operates its business through Cogdell Spencer LP (the Operating
Partnership), its operating partnership subsidiary, and its subsidiaries.
The Company derives a significant portion of its revenues from rents received from tenants under
existing leases in medical office buildings and other healthcare related facilities. The Company
derives a lesser portion of its revenues from fees that are paid for managing and developing
medical office buildings and other healthcare related facilities for third parties. The Companys
management believes a strong internal property management capability is a vital component of the
Companys business, both for the properties the Company owns and for those that the Company
manages.
As of September 30, 2007, the Company owned and/or managed 117 medical office buildings and
healthcare related facilities, serving 30 hospital systems in 12 states. The Companys aggregate
portfolio was comprised of:
|
|
55 wholly owned properties; |
|
|
|
five joint venture properties; and |
12
|
|
57 other properties owned by
third parties which the Company manages. |
At September 30, 2007, the Companys aggregate portfolio contained approximately 5.7 million net
rentable square feet, consisting of approximately 2.9 million net rentable square feet from
wholly-owned properties, approximately 0.3 million net rentable square feet from joint venture
properties, and approximately 2.5 million net rental square feet from properties owned by third
parties and managed by the Company. Approximately 81% of the net rentable square feet of the
wholly-owned properties are situated on hospital campuses. As such, the Company believes that its
assets occupy a premier franchise location in relation to local hospitals, providing the Companys
properties with a distinct competitive advantage over alternative medical office space in an area.
As of September 30, 2007, the Companys in-service, wholly-owned properties were approximately
94.2% occupied, with a weighted average remaining lease term of approximately 4.4 years.
Factors Which May Influence Future Results of Operations
Generally, the Companys revenues and expenses have remained consistent except for growth due to
property and company acquisitions and timing of development fee earnings.
Related to the Companys interest rate swap agreements that do not qualify for hedge accounting,
changes in fair values, which vary from period to period based on changes in market interest rates,
are recorded in interest expense. Generally, increases (decreases) in market interest rates will
increase (decrease) the fair value of the derivative, which will decrease (increase) current period
interest expense for the change in fair value. During the fourth quarter of 2006, the Company
terminated several derivative transactions and entered into new agreements with the appropriate
hedge documentation in place, which reduced the variances previously experienced in interest
expense. The Company will continue to have interest expense variability for variable rate
mortgages that do not have interest rate swap agreements.
Critical Accounting Policies
The Companys discussion and analysis of financial condition and results of operations are based
upon the Companys consolidated financial statements and the Companys Predecessors combined
financial statements, which have been prepared on the accrual basis of accounting in conformity
with GAAP. All significant intercompany balances and transactions have been eliminated in
consolidation and combination.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses in the reporting period.
The Companys actual results may differ from these estimates. Management has provided a summary of
the Companys significant accounting policies in Note 2 to the Companys consolidated financial
statements included in its Annual Report on Form 10-K for the year ended December 31, 2006.
Critical accounting policies are those judged to involve accounting estimates or assumptions that
may be material due to the levels of subjectivity and judgment necessary to account for uncertain
matters or susceptibility of such matters to change. Other companies in similar businesses may
utilize different estimation policies and methodologies, which may impact the comparability of the
Companys results of operations and financial condition to those companies.
Investments in Real Estate
Acquisition of real estate. The price that the Company pays to acquire a property is impacted by
many factors, including the condition of the buildings and improvements, the occupancy of the
building, the existence of above and below market tenant leases, the creditworthiness of the
tenants, favorable or unfavorable financing, above or below market ground leases and numerous other
factors. Accordingly, the Company is required to make subjective assessments to allocate the
purchase price paid to acquire investments in real estate among the assets acquired and liabilities
assumed based on the Companys estimate of the fair values of such assets and liabilities. This
includes determining the value of the buildings and improvements, land, any ground leases, tenant
improvements, in-place tenant leases, tenant relationships, the value (or negative value) of above
(or below) market leases and any debt assumed from the seller or loans made by the seller to the
Company. Each of these estimates requires significant judgment and some of the estimates involve
complex calculations. The Companys calculation methodology is summarized in Note 2 to the
Companys audited consolidated financial statements included in its Annual Report on Form 10-K for
the year ended December 31, 2006. These allocation assessments have a direct impact on the
Companys results of operations because if the Company were to allocate more value to land there
would be no depreciation with respect to such amount or if the Company were to allocate more value
to the buildings as opposed to allocating to the value of tenant leases, this amount would be
recognized as an expense over a
13
much longer period of time, since the amounts allocated to buildings are depreciated over the
estimated lives of the buildings whereas amounts allocated to tenant leases are amortized over the
terms of the leases. Additionally, the amortization of value (or negative value) assigned to above
(or below) market rate leases is recorded as an adjustment to rental revenue as compared to
amortization of the value of in-place leases and tenant relationships, which is included in
depreciation and amortization in the Companys consolidated and combined statements of operations.
Useful lives of assets. The Company is required to make subjective assessments as to the useful
lives of the Companys properties for purposes of determining the amount of depreciation to record
on an annual basis with respect to the Companys investments in real estate. These assessments have
a direct impact on the Companys net income (loss) because if the Company were to shorten the
expected useful lives of the Companys investments in real estate the Company would depreciate such
investments over fewer years, resulting in more depreciation expense on an annual basis.
Asset impairment valuation. The Company reviews the carrying value of its properties when
circumstances, such as adverse market conditions, indicate a potential impairment may exist. The
Company bases its review on an estimate of the future cash flows (excluding interest charges)
expected to result from the real estate investments use and eventual disposition. The Company
considers factors such as future operating income, trends and prospects, as well as the effects of
leasing demand, competition and other factors. If the Companys evaluation indicates that it may be
unable to recover the carrying value of a real estate investment, an impairment loss is recorded to
the extent that the carrying value exceeds the estimated fair value of the property. These losses
have a direct impact on the Companys net income because recording an impairment loss results in an
immediate negative adjustment to operating results. The evaluation of anticipated cash flows is
highly subjective and is based in part on assumptions regarding future occupancy, rental rates and
capital requirements that could differ materially from actual results in future periods. Since cash
flows on properties considered to be long-lived assets to be held and used are considered on an
undiscounted basis to determine whether an asset has been impaired, the Companys strategy of
holding properties over the long-term directly decreases the likelihood of recording an impairment
loss. If the Companys strategy changes or market conditions otherwise dictate an earlier sale
date, an impairment loss may be recognized and such loss could be material. If the Company
determines that impairment has occurred, the affected assets must be reduced to their fair value.
No such impairment losses have been recognized to date. The Company estimates the fair value of
rental properties utilizing a discounted cash flow analysis that includes projections of future
revenues, expenses and capital improvement costs, similar to the income approach that is commonly
utilized by appraisers. The Company reviews the value of Goodwill using an income approach on an
annual basis and when circumstances indicate a potential impairment may exist.
Revenue Recognition
Rental income related to non-cancelable operating leases is recognized using the straight line
method over the terms of the tenant leases. Deferred rents included in the Companys consolidated
balance sheets represent the aggregate excess of rental revenue recognized on a straight line basis
over the rental revenue that would be recognized under the cash flow received, based on the terms
of the leases. The Companys leases generally contain provisions under which the tenants reimburse
the Company for all property operating expenses and real estate taxes incurred by the Company. Such
reimbursements are recognized in the period that the expenses are incurred. Lease termination fees
are recognized when the related leases are canceled and the Company has no continuing obligation to
provide services to such former tenants. As discussed above, the Company recognizes amortization of
the value of acquired above or below market tenant leases as a reduction of rental income in the
case of above market leases or an increase to rental revenue in the case of below market leases.
The Company receives fees for property management and development and consulting services from time
to time from third parties which is reflected as fee revenue. Management fees are generally based
on a percentage of revenues for the month as defined in the related property management agreements.
Development and consulting fees are recorded on a percentage of completion method using
managements best estimate of time and costs to complete projects. The Company has a long history
of developing reasonable and dependable estimates related to development or consulting contracts
with clear requirements and rights of the parties to the contracts. Although not frequent,
occasionally revisions to estimates of costs are necessary and are reflected as a change in
estimate when known. Due to the amount of control retained by the Company, most joint venture
developments will be consolidated, therefore those development fees will be eliminated in
consolidation. Other income shown in the statement of operations, generally includes interest
income, primarily from the amortization of unearned income on a sales-type capital lease recognized
in accordance with Statement of Financial Accounting Standards
No. 13 (SFAS 13), and other income incidental
to the Companys operations and is recognized when earned.
The Company must make subjective estimates as to when the Companys revenue is earned and the
collectibility of the Companys accounts receivable related to minimum rent, deferred rent, expense
reimbursements, lease termination fees and
14
other income. The Company specifically analyzes accounts receivable and historical bad debts,
tenant concentrations, tenant creditworthiness, and current economic trends when evaluating the
adequacy of the allowance for bad debts. These estimates have a direct impact on the Companys net
income because a higher bad debt allowance would result in lower net income, and recognizing rental
revenue as earned in one period versus another would result in higher or lower net income for a
particular period.
REIT Qualification Requirements
The Company is subject to a number of operational and organizational requirements to qualify and
then maintain qualification as a REIT. If the Company does not qualify as a REIT, its income would
become subject to U.S. federal, state and local income taxes at regular corporate rates that would
be substantial and the Company cannot re-elect to qualify as a REIT for five years. The resulting
adverse effects on the Companys results of operations, liquidity and amounts distributable to
stockholders would be material.
Changes in Financial Condition
On
March 23, 2007, the Company issued 3,949,700 shares of common
stock at a price of $21.00 per share
resulting in net proceeds to the Company of $78.4 million. The net proceeds were used to reduce
outstanding principal on the Companys Credit Facility and for
working capital. For more information on the Credit Facility, see
Liquidity and Capital Resources.
Results of Operations
The Companys loss from operations is generated primarily from operations of its properties and
development and property management fee revenue. The changes in operating results from period to
period reflect changes in existing property performance and changes in the number of properties due
to development, acquisition, or disposition of properties.
Property Summary
The following is an activity summary of the Companys property portfolio (excluding unconsolidated
real estate partnerships) for the three and nine months ended September 30, 2007 and 2006 and the
year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, 2007 |
|
September 30, 2006 |
|
September 30, 2007 |
|
September 30, 2006 |
Properties at beginning of the period |
|
|
52 |
|
|
|
49 |
|
|
|
50 |
|
|
|
44 |
|
Consolidation of Rocky Mount MOB LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Acquisitions |
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
6 |
|
In-service development |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Dispositions |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties at end of the period |
|
|
54 |
|
|
|
50 |
|
|
|
54 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease-up development property |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, 2006 |
Properties at January 1 |
|
|
44 |
|
Consolidation of Rocky Mount MOB LLC |
|
|
1 |
|
Acquisitions |
|
|
6 |
|
Dispositions |
|
|
(1 |
) |
|
|
|
|
|
Properties at December 31 |
|
|
50 |
|
|
|
|
|
|
The above tables exclude East Jefferson Medical Specialty Building, which is accounted for as a
sales-type capital lease, and include the consolidated real estate
partnerships of Rocky Mount MOB LLC
and Cogdell Health Campus MOB, LP, 34.5% and 89.4%, respectively, owned by the Company.
A property is considered in-service upon the earlier of (1) lease-up and substantial completion
of tenant improvements, or (2) one year after cessation of major construction. For portfolio and
operational data, a single in-service date is used. For GAAP reporting, a property is placed into
service in stages as construction is completed and the property and tenant space
15
is available for
its intended use.
Comparison of the three months ended September 30, 2007 and September 30, 2006
Revenue. Total revenue increased $3.6 million, or 25.8%, for the three months ended September 30,
2007 compared to the three months ended September 30, 2006. This increase was primarily due to an
increase in revenue of $3.0 million related to rental revenue from properties acquired from July 1,
2006 to September 30, 2007, developments that began operations in 2007, and management fee and
expense reimbursement revenue from Consera Healthcare Real Estate, LLC (Consera), which was acquired
in September 2006. There was a $0.6 million increase in same-property revenue.
Property operating and management expenses. Property operating and management expenses increased
$1.7 million, or 34.6%, for the three months ended September 30, 2007 compared to the three months
ended September 30, 2006. This increase was primarily due to $1.2 million of operating expenses
related to properties acquired from July 1, 2006 to September 30, 2007, developments that began
operations in 2007, and personnel and management costs at Consera. There was a $0.5 million
increase in same-property property operating and management expenses.
General and administrative expenses. General and administrative expenses increased $0.1 million,
or 9.1%, for the three months ended September 30, 2007 compared to the same period in 2006
primarily due to increased personnel costs.
Interest expense. Interest expense, excluding changes in fair values of the interest rate swap
agreements, for the three months ended September 30, 2007 was $4.1 million compared to $3.8 million
for the three months ended September 30, 2006, an increase of
$0.3 million, or 12.1%. This increase
was primarily due to an increase in borrowings. At September 30, 2007, the Company had $279.7
million of debt outstanding compared to $253.3 million at September 30, 2006, an increase of $26.4
million, or 10.4%.
Changes in interest rate swap fair values were recorded as a decrease or increase to interest
expense until the swaps were terminated in November 2006. For the three months ended September 30,
2006, the interest rate swap agreements fair values decreased by approximately $0.4 million, which
resulted in an increase of interest expense for the same amount.
Comparison of the nine months ended September 30, 2007 and September 30, 2006
Revenue. Total revenue increased $8.5 million, or 21.1%, for the nine months ended September 30,
2007 compared to the nine months ended September 30, 2006. This increase was primarily due to an
increase in revenue of $7.4 million related to rental revenue from properties acquired during 2006
and 2007, developments that began operations in 2007, and management fee and expense reimbursement
revenue from Consera. There was a $1.1 million increase in same-property revenue.
Property operating and management expenses. Property operating and management expenses increased
$4.6 million, or 32.7%, for the nine months ended September 30, 2007 compared to the nine months
ended September 30, 2006. This increase was primarily due to $3.3 million of operating expenses
related to properties acquired during 2006 and 2007, developments that began operations in 2007,
and personnel and management costs at Consera. There was a $1.3 million increase in same-property
property operating and management expenses.
General and administrative expenses. General and administrative expenses increased $0.6 million,
or 13.0%, for the nine months ended September 30, 2007 compared to the same period in 2006
primarily due to tax professional services, income tax accruals related to development and
management fees earned by the Companys taxable REIT subsidiaries, and expensing of previously
capitalized costs associated with a development project that was discontinued. The reimbursement
of these expensed costs is included in development fee revenue.
Interest expense. Interest expense, excluding changes in fair values of the interest rate swap
agreements, for the nine months ended September 30, 2007 was $11.3 million compared to
$10.0 million for the nine months ended September 30, 2006, an increase of $1.3 million, or 13.0%.
This increase was primarily due to the timing of property and business acquisitions and the
repayment of debt using proceeds from the March 2007 common stock equity issuance.
Changes in interest rate swap fair values were recorded as a decrease or increase to interest
expense until the swaps were terminated in November 2006. For the nine months ended September 30,
2006, the interest rate swap agreements fair values increased by approximately $0.1 million, which
resulted in a reduction of interest expense of the same amount.
16
Cash Flows
Comparison of the nine months ended September 30, 2007 and September 30, 2006
Cash provided by operating activities was $17.6 million and $12.7 million during the nine months
ended September 30, 2007 and 2006, respectively. The increase of $4.9 million was primarily due to
(1) a $2.4 million increase in earnings before non-cash depreciation and amortizations and changes
in fair value of interest rate swap agreements and (2) a $2.5 million net increase due to changes
in operating assets and liabilities primarily resulting from increased accrued expenses and prepaid
rent as of September 30, 2007 as compared to the prior period.
Cash used in investing activities was $96.3 million and $94.8 million during the nine months ended
September 30, 2007 and 2006, respectively. The increase of $1.5 million is primarily due to the
acquisition of three properties and increased development activity during the nine months ended
September 30, 2007 compared to the acquisition of six properties, offset by a property disposition
and sale of real estate partnership interests during the same period in 2006.
Cash provided by financing activities was $80.9 million and $74.6 million for the nine months ended
September 30, 2007 and 2006, respectively. The increase of $6.3 million was primarily due to the
timing of quarterly distributions. During 2007, there were three distributions paid to
stockholders and holders of Operating Partnership units compared to two distribution payments in 2006. For the period
November 2005 (the commencement of operations) through December 2005, the distribution was paid in
December 2005, whereas for the period October 2006 through December 2006, the distribution was paid
in January 2007. Net cash provided by financing activities in 2006 was mainly due to proceeds from
the Credit Facility. In March 2007, proceeds from the issuance of common stock were used
to repay borrowing from the Credit Facility. Net cash provided by financing activities in 2007
was mainly due to borrowing from the Credit Facility and from mortgage note payables.
Construction in Progress
During the three months ended September 30, 2007, the Company completed a 64,276 square foot
ambulatory surgery center and medical office building (ASC/MOB) in Lancaster, Pennsylvania. This
facility, located on the Lancaster General Health Campus includes The Physicians Surgery Center,
which occupies the first floor; The Westphal Group, a local orthopedic practice; and various
outpatient services associated with Lancaster General Hospital.
Construction
in progress at September 30, 2007, consisted of the Mebane Medical Office Building. The
following is a summary of the construction in progress balance (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Completion |
|
Net Rentable |
|
|
Investment |
|
|
Total |
|
Property |
|
Location |
|
Date |
|
Square Feet |
|
|
to Date |
|
|
Investment |
|
Mebane Medical Office Building |
|
Mebane, NC |
|
2Q 2008 |
|
|
60,000 |
|
|
$ |
8,813 |
|
|
$ |
16,200 |
|
Land and pre-construction developments |
|
|
|
|
|
|
|
|
|
|
1,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000 |
|
|
$ |
10,110 |
|
|
$ |
16,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mebane Medical Investors, LLC, which will own Mebane Medical Office Building, is a real estate
partnership between the Company and Alamance Regional Medical Center, Inc. The Company currently has
a 49% ownership in the real estate partnership and consolidates the partnership in accordance with
EITF 04-5.
In
May 2007, Mebane Medical Investors, LLC, a consolidated real
estate partnership, obtained construction financing related to the Mebane
Medical Office Building project. The facility provides financing up to $13.0 million with an
interest rate equal to LIBOR plus 1.3% (6.42% as of September 30, 2007). The mortgage note payable
will mature in three years and provides for interest-only payments through May 2009 and principal
payments based on a 30 year amortization from June 2009 through the maturity
17
date in
May 2010. This
facility has two one-year extension options. As of September 30, 2007, there was $3.8 million
drawn on the facility.
Liquidity and Capital Resources
As of September 30, 2007, the Company had $3.2 million available in cash and cash equivalents. The
Company will be required to distribute at least 90% of the Companys net taxable income, excluding
net capital gains, to the Companys stockholders on an annual basis due to qualification
requirements as a REIT. Therefore, as a general matter, it is unlikely that the Company will have
any substantial cash balances that could be used to meet the Companys liquidity needs. Instead,
these needs must be met from cash generated from operations and external sources of capital.
The Company has a $130.0 million unsecured revolving Credit Facility with a
syndicate of financial institutions (including Bank of America, N.A., Citicorp North America, Inc.
and Branch Banking & Trust Company) (collectively, the Lenders). The Credit Facility is
available to fund working capital and for other general corporate purposes; to finance acquisition
and development activity; and to refinance existing and future indebtedness. The Credit Facility
permits the Company to borrow up to $130.0 million of revolving loans, with sub-limits of $25.0
million for swingline loans and $25.0 million for letters of credit.
The Credit Facility shall terminate and all amounts outstanding thereunder shall be due and payable
in full, three years from November 1, 2005, subject to a one-year extension at the Companys
option. The Credit Facility also allows for up to $120.0 million of increased availability (to a
total aggregate available amount of $250.0 million), at the Companys option but subject to each
Lenders option to increase its commitment. The interest rate on loans under the Credit Facility
equals, at the Companys election, either (1) LIBOR plus a margin of between 100 to 130 basis
points based on the Companys leverage ratio or (2) the higher of the federal funds rate plus 50
basis points or Bank of America, N.A.s prime rate.
The Credit Facility contains customary terms and conditions for credit facilities of this type,
including: (1) limitations on the Companys ability to (A) incur additional indebtedness, (B) make
distributions to the Companys stockholders, subject to complying with REIT requirements, and
(C) make certain investments; (2) maintenance of a pool of unencumbered assets subject to certain
minimum valuations thereof; and (3) requirements for us to maintain certain financial coverage
ratios. These customary financial coverage ratios and other conditions include a maximum leverage
ratio (65%, with flexibility for one two quarter increase to not more than 75%), minimum fixed
charge coverage ratio (150%), maximum combined secured indebtedness (40%), maximum recourse
indebtedness (15%), maximum unsecured indebtedness (60%, with flexibility for one two quarter
increase to not more than 75%), minimum unencumbered interest coverage ratio (175%, with the
flexibility for one two quarter decrease to 150%) and minimum combined tangible net worth ($30
million plus 85% of net proceeds of equity issuances by the Company and its subsidiaries after
November 1, 2005).
As of September 30, 2007, there was $82.0 million available under the Credit Facility. There was
$46.1 million outstanding at September 30, 2007 and $1.9 million of availability is restricted
related to outstanding letters of credit.
The Company believes that it will have sufficient capital resources as a result of operations and
the borrowings in place to fund ongoing operations.
On September 14, 2007, the Company declared a dividend to common stockholders of record and the
Operating Partnership declared a distribution to holders of Operating
Partnership units of record, in each case as of October
5, 2007, totaling $5.8 million, or $0.35 per share or Operating Partnership unit, covering the
period from July 1, 2007 through September 30, 2007. The dividend and distribution were paid on
October 19, 2007. The dividend and distribution were equivalent to an annual rate of $1.40 per
share and Operating Partnership unit.
Long-Term Liquidity Needs
The Companys principal long-term liquidity needs consist primarily of new property development,
property acquisitions, principal payments under various mortgages and other credit facilities and
non-recurring capital expenditures. The Company does not expect that its net cash provided by
operations will be sufficient to meet all of these long-term liquidity needs. Instead, the Company
expects to finance new property developments through modest cash equity capital contributed by the
Company together with construction loan proceeds, as well as through cash equity investments by its
tenants. The Company expects to fund property acquisitions through a combination of borrowings
under its Credit Facility and traditional secured mortgage financing. In addition, the Company
expects to use Operating Partnership units issued by the
18
Operating Partnership to acquire
properties from existing owners seeking a tax deferred transaction. The Company expects to meet
other long-term liquidity requirements through net cash provided by operations and through
additional equity and debt financings, including loans from banks, institutional investors or other
lenders, bridge loans, letters of credit, and other lending arrangements, most of which will be
secured by mortgages. The Company may also issue unsecured debt in the future. However, in view of
the Companys strategy to grow its portfolio over time, the Company does not, in general, expect to
meet its long-term liquidity needs through sales of its properties. In the event that,
notwithstanding this intent, the Company was in the future to consider sales of its properties from
time to time, the proceeds that would be available to the Company from such sales, may be reduced
by amounts that the Company may owe under the tax protection agreements or those properties would
need to be sold in a tax deferred transaction which would require reinvestment of the proceeds in
another property. In addition, the Companys ability to sell certain of its assets could be
adversely affected by the general illiquidity of real estate assets and certain additional factors
particular to the Companys portfolio such as the specialized nature of its target property type,
property use restrictions and the need to obtain consents or waivers of rights of first refusal or
rights of first offers from ground lessors in the case of sales of its properties that are subject
to ground leases.
The Company intends to repay indebtedness incurred under its Credit Facility from time to time, for
acquisitions or otherwise, out of cash flow and from the proceeds of additional debt or equity
issuances. In the future, the Company may seek to increase the amount of the Credit Facility,
negotiate additional credit facilities or issue corporate debt instruments. Any indebtedness
incurred or issued by the Company may be secured or unsecured, short-, medium- or long-term, fixed
or variable interest rate and may be subject to other terms and conditions the Company deems
acceptable. The Company intends to refinance at maturity the mortgage notes payable that have
balloon payments at maturity.
Contractual Obligations
The following table summarizes the Companys contractual obligations as of September 30, 2007,
including the maturities and scheduled principal repayments and the commitments due in connection
with the Companys ground leases and operating leases for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of 2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
Thereafter |
|
|
Total |
|
Obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt principal
payments and maturities (1) |
|
$ |
25,273 |
|
|
$ |
90,244 |
|
|
$ |
46,701 |
|
|
$ |
6,209 |
|
|
$ |
3,674 |
|
|
$ |
107,267 |
|
|
$ |
279,368 |
|
Standby letters of credit (2) |
|
|
|
|
|
|
1,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,908 |
|
Interest payments (3) |
|
|
4,158 |
|
|
|
13,488 |
|
|
|
9,018 |
|
|
|
6,692 |
|
|
|
6,431 |
|
|
|
26,964 |
|
|
|
66,751 |
|
Ground leases (4) |
|
|
111 |
|
|
|
228 |
|
|
|
228 |
|
|
|
228 |
|
|
|
228 |
|
|
|
9,224 |
|
|
|
10,247 |
|
Operating leases (5) |
|
|
85 |
|
|
|
409 |
|
|
|
412 |
|
|
|
356 |
|
|
|
360 |
|
|
|
31 |
|
|
|
1,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,627 |
|
|
$ |
106,277 |
|
|
$ |
56,359 |
|
|
$ |
13,485 |
|
|
$ |
10,693 |
|
|
$ |
143,486 |
|
|
$ |
359,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes notes payable under the Companys Credit Facility |
|
(2) |
|
As collateral for performance on a mortgage note payable, the Company is
contingently liable under a standby letter of credit, which also reduces the availability
under the Credit Facility |
|
(3) |
|
Assumes one-month LIBOR 5.12% and Prime Rate of 7.75% |
|
(4) |
|
Substantially all of the ground leases effectively limit our control over various
aspects of the operation of the applicable property, restrict our ability to transfer the
property and allow the lessor the right of first refusal to purchase the building and
improvements. All of the ground leases provide for the property to revert to the lessor for no
consideration upon the expiration or earlier termination of the ground lease. |
|
(5) |
|
Payments under operating lease agreements relate to various of our properties
equipment and office space leases. The future minimum lease commitments under these leases are
as indicated. |
Off-Balance Sheet Arrangements
The Company guarantees debt in connection with certain of its development activities, including
joint ventures. The Company has guaranteed, in the event of a default, the mortgage note payable
for one unconsolidated real estate joint venture. An initial liability of $0.1 million has been
recorded for the guarantee using expected present value measurement techniques. The guarantee,
which has a principal balance of $8.9 million at September 30, 2007, will be released upon the full
repayment of the mortgage note payable, which matures in December 2007. The mortgage is
collateralized by property and the collateral will revert to the guarantor in the event the
guarantee is performed.
19
Management believes the probability the Company will have to perform on the guarantee in the future
is minimal and therefore the Company does not expect the Companys guarantee to have a material
impact on the Companys financial statements.
Real Estate Taxes
The Companys leases generally require the tenants to be responsible for all real estate taxes.
Inflation
Inflation
in the United States of America has been relatively low in recent years and did not have a material
impact on the results of operations for the periods shown in the consolidated and combined
financial statements. Although the impact of inflation has been relatively insignificant in recent
years, it remains a factor in the United States of America economy and may increase the cost of acquiring or
replacing properties.
Seasonality
The Company does not consider its business to be subject to material seasonality fluctuations.
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS No. 109 (FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
SFAS No. 109. FIN 48 prescribes a comprehensive model for how companies should recognize, measure,
present, and disclose in their financial statements uncertain tax positions taken or expected to be
taken in an income tax return. For those benefits recognized, a tax position must be
more-likely-than-not to be sustained based solely upon the technical merits of the position. Such
tax positions shall initially and subsequently be measured as the largest amount of tax benefit
that, on a cumulative basis, is greater than 50% likely of being realized upon ultimate settlement
with the tax authority assuming that the taxing authority has full knowledge of the position and
all relevant facts. The Company implemented FIN 48 effective January 1, 2007. The adoption of
FIN 48 did not result in an adjustment to the Companys financial statements.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (SFAS 157). SFAS 157
defines fair value for assets and liabilities, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. SFAS 157 will be effective January 1, 2008.
SFAS 157 is not expected to have a material impact on the Companys results of operations or financial
position.
In September 2006, the FASB issued SFAS No. 158 Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R)
(SFAS 158). SFAS 158 requires recognition of the funded status of such plans as an asset or
liability, with changes in the funded status recognized through comprehensive income in the year in
which they occur. These provisions of SFAS 158 became effective December 31, 2006. Additionally, SFAS
158 requires measurement of a plans assets and its obligations at the end of the employers fiscal
year, effective December 31, 2008. SFAS 158 has not had, and is not expected to have, a material
impact on the Companys results of operations or financial position.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115 (SFAS 159). SFAS No. 159
permits entities to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings. SFAS 159 does not
affect any existing accounting literature that requires certain assets and liabilities to be
carried at fair value. SFAS 159 will be effective for fiscal years beginning after November 15, 2007.
The Company is currently evaluating the impact of the adoption of this new standard on its
financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
20
The Companys future income, cash flows and fair values relevant to financial instruments are
dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse
changes in market prices and interest rates. The Company uses some derivative financial instruments
to manage, or hedge, interest rate risks related to the Companys borrowings. The Company does not
use derivatives for trading or speculative purposes and only enters into contracts with major
financial institutions based on their credit rating and other factors.
As of September 30, 2007, the Company had $279.4 million of consolidated debt outstanding
(excluding any discounts or premiums related to assumed debt). Of the Companys total
consolidated debt, $36.9 million, or 13.2%, was variable rate debt that is not subject to variable
to fixed rate interest rate swap agreements. Of the Companys total indebtedness, $242.5 million,
or 86.8%, was subject to fixed interest rates, including variable rate debt that is subject to
variable to fixed rate swap agreements. The weighted average interest
rate for fixed rate debt was 6.3% at September 30, 2007.
If LIBOR were to increase by 100 basis points, the increase in interest expense on the Companys
variable rate debt would decrease future annual earnings and cash flows by approximately $0.4
million. Interest rate risk amounts were determined by considering the impact of hypothetical
interest rates on the Companys financial instruments. These analyses do not consider the effect of
any change in overall economic activity that could occur in that environment. Further, in the event
of a change of that magnitude, the Company may take actions to further mitigate the Companys
exposure to the change.
However, due to the uncertainty of the specific actions that would be taken and their possible
effects, these analyses assume no changes in the Companys financial structure.
ITEM 4. CONTROLS AND PROCEDURES
The Companys Chief Executive Officer and Chief Financial Officer, based on the evaluation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities and Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule
15d-15, have concluded that as of the end of the period covered by this report, the Companys
disclosure controls and procedures were effective to give reasonable assurances to the timely
collection, evaluation and disclosure of information relating to the Company that would potentially
be subject to disclosure under the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.
During the three and nine month periods ended September 30, 2007, there was no change in the
Companys internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial reporting.
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can
provide only reasonable, not absolute assurance that it will detect or uncover failures within the
Company to disclose material information otherwise required to be set forth in our periodic
reports.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not involved in any material litigation nor, to the Companys knowledge, is any
material litigation pending or threatened against us, other than routine litigation arising out of
the ordinary course of business or which is expected to be covered by insurance and not expected to
harm the Companys business, financial condition or results of operations.
ITEM 1A. RISK FACTORS
See the Companys Annual Report on Form 10-K for the year ended December 31, 2006, for risk
factors. There have been no material changes to the Companys risk factors during the three and
nine months ended September 30, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
21
Issuer Purchases of Equity Securities
Below is a summary of equity repurchases by month for the nine months ended September 30, 2007:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities |
|
|
Approximate Dollar |
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|
|
|
|
|
|
Average |
|
|
Purchased as Part |
|
|
Value of Equity |
|
|
|
Total Number of |
|
|
Price Paid |
|
|
of Publicly |
|
|
Securities that May |
|
|
|
Equity Securities |
|
|
Per Equity |
|
|
Announced Plans |
|
|
Yet Be Purchased |
|
For the Month Ended |
|
Purchased |
|
|
Security |
|
|
or Programs |
|
|
Under the Plan |
|
July 1 -
July 31, 2007 |
|
|
|
|
|
$ |
|
|
|
|
N/A |
|
|
|
N/A |
|
August 1 - August 31, 2007 |
|
|
2,948 |
|
|
$ |
19.91 |
|
|
|
N/A |
|
|
|
N/A |
|
September 1 - September 30, 2007 |
|
|
9,779 |
|
|
$ |
17.72 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
12,727 |
|
|
$ |
18.23 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These
figures only relate to repurchases of Operating Partnership units by
the Operating Partnership. The Company did not
repurchase shares of Common Stock during the nine months ended September 30, 2007.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
22
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
3.1 |
|
Articles of Amendment and Restatement of Cogdell Spencer Inc., incorporated by reference to
Exhibit 3.1 of the Companys Registration Statement on Form S-11 (File No. 333-127396). |
|
3.2 |
|
Bylaws of Cogdell Spencer Inc., incorporated by reference to Exhibit 3.2 of the Companys
Registration Statement on Form S-11 (File No. 333-127396). |
|
3.3 |
|
Amended and Restated Agreement of Limited Partnership of Cogdell Spencer LP, incorporated by
reference to Exhibit 3.3 of the Companys Registration Statement on Form S-11 (File No.
333-127396). |
|
3.4 |
|
Declaration of Trust of CS Business Trust I., incorporated by reference to Exhibit 3.4 of the
Companys Registration Statement on Form S-11 (File No. 333-127396). |
|
3.5 |
|
Declaration of Trust of CS Business Trust II, incorporated by reference to Exhibit 3.5 of the
Companys Registration Statement on Form S-11 (File No. 333-127396). |
|
4.1 |
|
Form of stock certificate, incorporated by reference to Exhibit 4.0 of the Companys
Registration Statement on Form S-11 (File No. 333-127396). |
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002. |
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002. |
|
32.1 |
|
Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adapted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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COGDELL SPENCER INC.
Registrant
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Date: November 9, 2007 |
/s/ Frank C. Spencer
|
|
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Frank C. Spencer |
|
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President and Chief Executive Officer |
|
|
|
|
|
Date: November 9, 2007 |
/s/ Charles M. Handy
|
|
|
Charles M. Handy |
|
|
Senior Vice President and Chief Financial Officer |
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24