xQUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Maryland | 76-0594970 |
(State or other jurisdiction of | (IRS Employer |
incorporation or organization) | Identification No.) |
Yes x | No o |
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer ý |
Yes o | No x |
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32 | ||
March 31, 2006 | December 31, 2005 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Real estate | |||||||
Land | $ | 32,770,566 | $ | 32,770,566 | |||
Buildings and improvements | 141,344,762 | 141,018,810 | |||||
174,115,328 | 173,789,376 | ||||||
Less accumulated depreciation | (21,182,002 | ) | (19,824,386 | ) | |||
Real estate, net | 152,933,326 | 153,964,990 | |||||
Cash and cash equivalents | 1,715,364 | 848,998 | |||||
Escrows and acquisition deposits | 4,525,647 | 5,307,663 | |||||
Note receivable | 622,135 | 628,936 | |||||
Receivables | |||||||
Accounts receivable, net of allowance for doubtful accounts of $463,585 and $472,875 as of March 31, 2006 and December 31, 2005, respectively | 1,259,745 | 1,248,985 | |||||
Accrued rent receivable | 2,691,821 | 2,593,060 | |||||
Due from affiliates | 3,240,968 | 3,180,663 | |||||
Receivables, net | 7,192,534 | 7,022,708 | |||||
Deferred costs, net | 3,189,336 | 3,004,218 | |||||
Prepaid expenses and other assets | 1,194,604 | 684,536 | |||||
Total assets | $ | 171,372,946 | $ | 171,462,049 |
Hartman Commercial Properties REIT and Subsidiary | ||||||
CONSOLIDATED BALANCE SHEETS |
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Real estate | |||||||
Land | $ | 32,770,566 | $ | 32,770,566 | |||
Buildings and improvements | 141,803,741 | 141,018,810 | |||||
174,574,307 | 173,789,376 | ||||||
Less accumulated depreciation | (22,363,082 | ) | (19,824,386 | ) | |||
Real estate, net | 152,211,225 | 153,964,990 | |||||
Cash and cash equivalents | 2,657,866 | 848,998 | |||||
Escrows and acquisition deposits | 4,414,617 | 5,307,663 | |||||
Note receivable | 621,290 | 628,936 | |||||
Receivables | |||||||
Accounts receivable, net of allowance for doubtful | |||||||
accounts of $590,525 and $472,875 as of June 30, 2006 | |||||||
and December 31, 2005, respectively | 949,011 | 1,248,985 | |||||
Accrued rent receivable | 2,773,999 | 2,593,060 | |||||
Due from affiliates | 2,891,102 | 3,180,663 | |||||
Receivables, net | 6,614,112 | 7,022,708 | |||||
Deferred costs, net | 3,332,060 | 3,004,218 | |||||
Prepaid expenses and other assets | 1,195,931 | 684,536 | |||||
Total assets | $ | 171,047,101 | $ | 171,462,049 |
Hartman Commercial Properties REIT and Subsidiary | ||||||
CONSOLIDATED BALANCE SHEETS (cont.) |
June 30, | December 31, | ||||||
2006 | 2005 | ||||||
(Unaudited) | |||||||
Liabilities and Shareholders' Equity | |||||||
Liabilities | |||||||
Notes payable | $ | 70,858,404 | $ | 73,025,535 | |||
Accounts payable and accrued expenses | 2,241,951 | 4,063,126 | |||||
Due to affiliates | 175,245 | 350,865 | |||||
Tenants' security deposits | 1,531,448 | 1,440,864 | |||||
Prepaid rent | 580,355 | 470,248 | |||||
Offering proceeds escrowed | 582,616 | 1,559,439 | |||||
Dividends payable | 1,443,346 | 1,525,460 | |||||
Other liabilities | 871,250 | 1,026,914 | |||||
Total liabilities | 78,284,615 | 83,462,451 | |||||
Minority interests of unit holders in Operating Partnership; | |||||||
5,808,337 units at June 30, 2006 | |||||||
and December 31, 2005 | 33,417,786 | 34,272,074 | |||||
Commitments and contingencies | |||||||
Shareholders' equity | |||||||
Preferred shares, $0.001 par value per share; 50,000,000 | |||||||
shares authorized; none issued and outstanding | |||||||
at June 30, 2006 and December 31, 2005 | - | - | |||||
Common shares, $0.001 par value per share; 400,000,000 | |||||||
shares authorized; 9,709,871 and 8,913,654 issued and | |||||||
oustanding at June 30, 2006 and December 31, 2005 | 9,710 | 8,914 | |||||
Additional paid-in-capital | 69,629,173 | 62,560,077 | |||||
Accumulated deficit | (10,294,183 | ) | (8,841,467 | ) | |||
Total shareholders' equity | 59,344,700 | 53,727,524 | |||||
Total liabilities and shareholders' equity | $ | 171,047,101 | $ | 171,462,049 |
March 31, 2006 | December 31, 2005 | ||||||
(Unaudited) | |||||||
Liabilities and Shareholders’ Equity | |||||||
Liabilities | |||||||
Notes payable | $ | 73,316,704 | $ | 73,025,535 | |||
Accounts payable and accrued expenses | 1,425,780 | 4,063,126 | |||||
Due to affiliates | 308,669 | 350,865 | |||||
Tenants’ security deposits | 1,467,069 | 1,440,864 | |||||
Prepaid rent | 428,160 | 470,248 | |||||
Offering proceeds escrowed | 1,303,480 | 1,559,439 | |||||
Dividends payable | 1,631,724 | 1,525,460 | |||||
Other liabilities | 1,026,914 | 1,026,914 | |||||
Total liabilities | 80,908,500 | 83,462,451 | |||||
Minority interests of unit holders in Operating Partnership; 5,808,337 units at March 31, 2006 and December 31, 2005 | 33,744,495 | 34,272,074 | |||||
Commitments and contingencies | - | - | |||||
Shareholders’ equity | |||||||
Preferred shares, $0.001 par value per share; 50,000,000 shares authorized; none issued and outstanding at March 31, 2006 and December 31, 2005 | - | - | |||||
Common shares, $0.001 par value per share; 400,000,000 shares authorized; 9,346,440 and 8,913,654 issued and outstanding at March 31, 2006 and December 31, 2005, respectively | 9,346 | 8,914 | |||||
Additional paid-in capital | 66,420,123 | 62,560,077 | |||||
Accumulated deficit | (9,709,518 | ) | (8,841,467 | ) | |||
Total shareholders’ equity | 56,719,951 | 53,727,524 | |||||
Total liabilities and shareholders’ equity | $ | 171,372,946 | $ | 171,462,049 |
Hartman Commercial Properties REIT and Subsidiary | ||||||||
CONSOLIDATED STATEMENTS OF INCOME | ||||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
Revenues | |||||||||||||
Rental income | $ | 6,156,653 | $ | 5,041,536 | $ | 12,133,379 | $ | 9,818,729 | |||||
Tenants' reimbursements | 1,219,958 | 1,187,863 | 2,600,287 | 2,547,801 | |||||||||
Interest and other income | 400,239 | 41,009 | 553,555 | 216,519 | |||||||||
Total revenues | 7,776,850 | 6,270,408 | 15,287,221 | 12,583,049 | |||||||||
Expenses | |||||||||||||
Operation and maintenance | 1,057,584 | 791,033 | 2,075,039 | 1,547,498 | |||||||||
Interest expense | 1,402,913 | 911,737 | 2,710,482 | 1,681,797 | |||||||||
Real estate taxes | 968,991 | 835,991 | 1,834,446 | 1,565,023 | |||||||||
Insurance | 147,655 | 116,698 | 281,413 | 221,457 | |||||||||
Electricity, water and gas utilities | 600,635 | 253,585 | 1,112,738 | 473,195 | |||||||||
Property management and asset | |||||||||||||
management fees to an affiliate | 391,371 | 370,159 | 803,620 | 729,162 | |||||||||
General and administrative | 288,330 | 303,402 | 737,856 | 620,841 | |||||||||
Depreciation | 1,181,080 | 1,048,260 | 2,538,696 | 2,077,138 | |||||||||
Amortization | 207,928 | 398,100 | 409,147 | 735,828 | |||||||||
Bad debt expense (recoveries) | 127,440 | (98,425 | ) | 118,150 | 69,560 | ||||||||
Total expenses | 6,373,927 | 4,930,540 | 12,621,587 | 9,721,499 | |||||||||
Income before minority interests | 1,402,923 | 1,339,868 | 2,665,634 | 2,861,550 | |||||||||
Minority interests in Operating Partnership | (544,541 | ) | (593,383 | ) | (1,043,876 | ) | (1,290,620 | ) | |||||
Net income | 858,382 | 746,485 | 1,621,758 | 1,570,930 | |||||||||
Net income per common share | $ | 0.089 | $ | 0.097 | $ | 0.172 | $ | 0.211 | |||||
Weighted-average shares outstanding | 9,603,104 | 7,675,191 | 9,407,407 | 7,461,176 |
Three Months Ended March 31, | |||||||
2006 | 2005 | ||||||
Revenues | |||||||
Rental income | $ | 5,976,726 | $ | 4,777,193 | |||
Tenants’ reimbursements | 1,380,329 | 1,359,938 | |||||
Interest and other income | 153,316 | 175,509 | |||||
Total revenues | 7,510,371 | 6,312,640 | |||||
Expenses | |||||||
Operation and maintenance | 1,017,455 | 756,465 | |||||
Interest expense | 1,307,569 | 770,060 | |||||
Real estate taxes | 865,455 | 729,032 | |||||
Insurance | 133,758 | 104,759 | |||||
Electricity, water and gas utilities | 512,103 | 219,610 | |||||
Property management and asset management fees to an affiliate | 412,249 | 359,003 | |||||
General and administrative | 449,526 | 317,439 | |||||
Depreciation | 1,357,616 | 1,028,878 | |||||
Amortization | 201,220 | 337,728 | |||||
Bad debt expense (recoveries) | (9,290 | ) | 167,985 | ||||
Total expenses | 6,247,661 | 4,790,959 | |||||
Income before minority interests | 1,262,710 | 1,521,681 | |||||
Minority interests in Operating Partnership | (499,335 | ) | (697,237 | ) | |||
Net income | $ | 763,375 | $ | 824,444 | |||
Net income per common share | $ | 0.083 | $ | 0.114 | |||
Weighted-average shares outstanding | 9,211,711 | 7,247,162 | |||||
Hartman Commercial Properties REIT and Subsidiary | |||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY |
Additional | ||||||||||||||||
Common Stock | Paid-in | Accumulated | ||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||
Balance, December 31, 2004 | 7,010,146 | $ | 7,010 | $ | 45,527,152 | $ | (5,705,170 | ) | $ | 39,828,992 | ||||||
Issuance of common stock for | ||||||||||||||||
cash, net of offering costs | 1,865,557 | 1,866 | 16,672,428 | - | 16,674,294 | |||||||||||
Issuance of shares under dividend | ||||||||||||||||
reinvestment plan at $9.50 per share | 37,951 | 38 | 360,497 | - | 360,535 | |||||||||||
Net income | - | - | - | 2,448,182 | 2,448,182 | |||||||||||
Dividends | - | - | - | (5,584,479 | ) | (5,584,479 | ) | |||||||||
Balance, December 31, 2005 | 8,913,654 | 8,914 | 62,560,077 | (8,841,467 | ) | 53,727,524 | ||||||||||
Issuance of common stock for | ||||||||||||||||
cash, net of offering costs | 749,727 | 750 | 6,627,487 | - | 6,628,237 | |||||||||||
Issuance of shares under dividend | ||||||||||||||||
reinvestment plan at $9.50 per share | 46,490 | 46 | 441,609 | - | 441,655 | |||||||||||
Net income | - | - | - | 1,621,758 | 1,621,758 | |||||||||||
Dividends | - | - | - | (3,074,474 | ) | (3,074,474 | ) | |||||||||
Balance, June 30, 2006 (unaudited) | 9,709,871 | $ | 9,710 | $ | 69,629,173 | $ | (10,294,183 | ) | $ | 59,344,700 |
Common Stock | Additional | Accumulated | ||||||||||||||
Shares | Amount | Paid-in Capital | Deficit | Total | ||||||||||||
Balance, December 31, 2004 | 7,010,146 | $ | 7,010 | $ | 45,527,152 | $ | (5,705,170 | ) | $ | 39,828,992 | ||||||
Issuance of common stock for cash, net of offering costs | 1,865,557 | 1,866 | 16,672,428 | - | 16,674,294 | |||||||||||
Issuance of shares under dividend reinvestment plan at $9.50 per share | 37,951 | 38 | 360,497 | - | 360,535 | |||||||||||
Net income | - | - | - | 2,448,182 | 2,448,182 | |||||||||||
Dividends | - | - | - | (5,584,479 | ) | (5,584,479 | ) | |||||||||
Balance, December 31, 2005 | 8,913,654 | 8,914 | 62,560,077 | (8,841,467 | ) | 53,727,524 | ||||||||||
Issuance of common stock for cash, net of offering costs | 412,133 | 412 | 3,663,862 | - | 3,664,274 | |||||||||||
Issuance of shares under dividend reinvestment plan at $9.50 per share | 20,653 | 20 | 196,184 | - | 196,204 | |||||||||||
Net income | - | - | - | 763,375 | 763,375 | |||||||||||
Dividends | - | - | - | (1,631,426 | ) | (1,631,426 | ) | |||||||||
Balance, March 31, 2006 | 9,346,440 | $ | 9,346 | $ | 66,420,123 | $ | (9,709,518 | ) | $ | 56,719,951 | ||||||
Three Months Ended March 31, | |||||||
2006 | 2005 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 763,375 | $ | 824,444 | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||
Depreciation | 1,357,616 | 1,028,878 | |||||
Amortization | 201,220 | 337,728 | |||||
Minority interests in Operating Partnership | 499,335 | 697,237 | |||||
Equity in income of real estate partnership | — | (12,038 | ) | ||||
Bad debt expense (recoveries) | (9,290 | ) | 167,985 | ||||
Changes in operating assets and liabilities: | |||||||
Escrows and acquisition deposits | 782,016 | 2,658,203 | |||||
Receivables | (100,231 | ) | (272,506 | ) | |||
Due to/from affiliates | (102,501 | ) | (277,974 | ) | |||
Deferred costs | (386,338 | ) | (266,588 | ) | |||
Prepaid expenses and other assets | (510,068 | ) | (187,488 | ) | |||
Accounts payable and accrued expenses | (2,637,346 | ) | (1,985,568 | ) | |||
Tenants’ security deposits | 26,205 | 34,972 | |||||
Prepaid rent | (42,088 | ) | 47,839 | ||||
Net cash provided by (used in) operating activities | (158,095 | ) | 2,795,124 | ||||
Cash flows used in investing activities: | |||||||
Additions to real estate | (325,952 | ) | (5,797,994 | ) | |||
Distributions received from real estate partnership | — | 9,743 | |||||
Repayment of note receivable | 6,801 | 3,005 | |||||
Net cash used in investing activities | (319,151 | ) | (5,785,246 | ) | |||
Cash flows from financing activities: | |||||||
Dividends paid | (1,525,162 | ) | (1,230,281 | ) | |||
Distributions paid to OP unit holders | (1,026,914 | ) | (1,019,363 | ) | |||
Proceeds from issuance of common shares | 3,860,478 | 3,804,786 | |||||
Proceeds from stock offering escrowed | (255,959 | ) | (334,006 | ) | |||
Proceeds from notes payable | 530,406 | 4,200,000 | |||||
Repayments of notes payable | (239,237 | ) | (1,665,237 | ) | |||
Net cash provided by financing activities | 1,343,612 | 3,755,899 | |||||
Net increase in cash and cash equivalents | 866,366 | 765,777 | |||||
Cash and cash equivalents at beginning of period | 848,998 | 631,978 | |||||
Cash and cash equivalents at end of period | $ | 1,715,364 | $ | 1,397,755 | |||
Hartman Commercial Properties REIT and Subsidiary | |||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS |
Six Months Ended June 30, | |||||||
2006 | 2005 | ||||||
(Unaudited) | |||||||
Cash flows from operating activities: | |||||||
Net income | $ | 1,621,758 | $ | 1,570,930 | |||
Adjustments to reconcile net income to | |||||||
net cash provided by (used in) | |||||||
operating activities: | |||||||
Depreciation | 2,538,696 | 2,077,138 | |||||
Amortization | 409,147 | 735,828 | |||||
Minority interests in Operating Partnership | 1,043,876 | 1,290,620 | |||||
Equity in income of real estate partnership | - | (6,685 | ) | ||||
Bad debt expense (recoveries) | 117,650 | 69,560 | |||||
Fair value of derivative instrument | (195,755 | ) | - | ||||
Changes in operating assets and liabilities: | |||||||
Escrows and acquisition deposits | 893,046 | 867,389 | |||||
Receivables | 1,385 | (148,379 | ) | ||||
Due from affiliates | 113,941 | (370,398 | ) | ||||
Deferred costs | (617,447 | ) | (1,024,800 | ) | |||
Prepaid expenses and other assets | (315,640 | ) | (124,408 | ) | |||
Accounts payable and accrued expenses | (1,821,175 | ) | (976,569 | ) | |||
Tenants' security deposits | 90,584 | 134,266 | |||||
Prepaid rent | 110,107 | 239,616 | |||||
Net cash provided by operating activities | 3,990,173 | 4,334,108 | |||||
Cash flows from investing activities: | |||||||
Additions to real estate | (784,931 | ) | (5,982,095 | ) | |||
Distributions received from real estate partnership | - | 9,743 | |||||
Repayment of note receivable | 7,646 | 12,977 | |||||
Net cash used in investing activities | (777,285 | ) | (5,959,375 | ) | |||
Cash flows from financing activities: | |||||||
Dividends paid | (3,156,588 | ) | (2,512,081 | ) | |||
Distributions paid to OP unit holders | (2,053,828 | ) | (2,046,277 | ) | |||
Proceeds from issuance of common shares | 7,069,892 | 6,851,127 | |||||
Proceeds from stock offering escrowed | (976,823 | ) | (201,456 | ) | |||
Proceeds from notes payable | 35,280,406 | 23,175,094 | |||||
Repayments of notes payable | (37,447,537 | ) | (22,932,894 | ) | |||
Payments of loan origination costs | (119,542 | ) | (320,050 | ) | |||
Net cash provided by (used in) financing activities | (1,404,020 | ) | 2,013,463 | ||||
Net increase in cash and cash equivalents | 1,808,868 | 388,196 | |||||
Cash and cash equivalents at beginning of period | 848,998 | 631,978 | |||||
Cash and cash equivalents at end of period | $ | 2,657,866 | $ | 1,020,174 |
Note 1 - | Summary of Significant Accounting Policies |
Basis of consolidation |
Note 1 - | Summary of Significant Accounting Policies |
Basis of accounting |
The financial records of the Company are maintained on the accrual basis of accounting whereby revenues are recognized when earned, and expenses are recorded when incurred. |
Cash and cash equivalents |
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents at |
Due from affiliates |
Due from affiliates |
Escrows and acquisition deposits |
Escrow deposits include escrows established pursuant to certain mortgage financing arrangements for real estate taxes, insurance, maintenance and capital expenditures and escrow of proceeds of the Public Offering described in Note |
Real estate |
Real estate properties are recorded at cost, net of accumulated depreciation. Improvements, major renovations and certain costs directly related to the acquisition, improvement and leasing of real estate are capitalized. Expenditures for repairs and maintenance are charged to operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for the buildings and improvements. Tenant improvements are depreciated using the straight-line method over the life of the lease. |
Note 1 - | Summary of Significant Accounting Policies (continued) |
Offering costs |
Offering costs include selling commissions, issuance costs, investor relations fees and unit purchase discounts. These costs were incurred in the raising of capital through the sale of common shares and are treated as a reduction of shareholders’ equity. |
Revenue recognition |
All leases on properties held by the Company are classified as operating leases, and the related rental income is recognized on a straight-line basis over the terms of the related leases. Differences between rental income earned and amounts due per the respective lease agreements are capitalized or charged, as applicable, to accrued rent receivable. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. The Company provides an allowance for doubtful accounts against the portion of tenant accounts receivable which is estimated to be uncollectible. |
Federal income taxes |
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Company include the estimated useful lives for depreciable and amortizable assets and costs, and the estimated allowance for doubtful accounts receivable. Actual results could differ from those estimates. |
Derivative Instruments |
The Company has initiated a program designed to manage exposure to interest rate fluctuations by entering into financial derivative instruments. The primary objective of this program is to comply with debt covenants on a credit facility. The Company entered into an interest rate swap agreement with respect to amounts borrowed under certain of our credit facilities, which effectively exchanges existing obligations to pay interest based on floating rates for obligations to pay interest based on fixed LIBOR rates. |
Changes in the market value of the derivative instruments and in the market value of the hedged items are recorded in earnings each reporting period. For items that are appropriately classified as cash flow hedges in accordance with Statement of Financial Accounting Standards No. 133, |
Note 1 - | Summary of Significant Accounting Policies (continued) |
Fair value of financial instruments |
The Company’s financial instruments consist primarily of cash, cash equivalents, accounts receivable and accounts and notes payable. The carrying value of cash, cash equivalents, accounts receivable and accounts payable are representative of their respective fair values due to the short-term nature of these instruments. Investment securities are carried at fair market value or at amounts that approximate fair market value. The fair value of the Company’s debt obligations is representative of its carrying value based upon current rates offered for similar types of borrowing arrangements. The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the financial institution would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Recent
In February 2006, the In March 2006, FASB issued SFAS No. 156,
Hartman Commercial Properties REIT and Subsidiary Notes to Consolidated Financial Statements (Unaudited)
Notes Payable
facility. The Company On June 2, 2005, the Company finalized a new revolving credit facility with a consortium of banks. The facility became retroactively effective as of March 11, 2005, the date certain documents for the facility were placed into escrow, pending the completion of the transaction. The credit facility is secured by a pledge of the partnership interests in Hartman REIT Operating Partnership III LP (“HROP III”), a new wholly owned subsidiary of the Operating Partnership that was formed to hold title to the properties comprising the borrowing base pool for the facility. 10 Hartman Commercial Properties REIT and Subsidiary Notes to Consolidated Financial Statements (Unaudited) June 30, 2006
The On May 31, 2006, pursuant to the Revolving Credit Agreement, dated as of March 11, 2005, the Company requested to increase the limit of the credit facility by $25,000,000, so that the total credit facility will be $75,000,000. On June 26, 2006, the Company conveyed ownership of 18 properties from Hartman REIT Operating Partnership II LP (“HROP II”) to HROP III in order to expand the borrowing base pool for the credit facility. At June 30, 2006, 36 properties were owned by HROP III. On June 30, 2006, the Company drew down $34,750,000 on the line of credit to extinguish the three year floating rate mortgage loan described below and pay related legal and banking fees. As of Outstanding amounts under the credit facility accrue interest computed (at the Company’s option) at either the LIBOR or the Alternative Base Rate on the basis of a 360 day year, plus the applicable margin as determined from the following table:
The Alternative Base Rate is a floating rate equal to the higher of the bank’s base rate or the Federal Funds Rate plus .5%. LIBOR Rate loans will be available in one, two, three or six month periods, with a maximum of six contracts at any time. The effective interest rate as of Interest only is payable monthly under the loan with the total amount of principal due at maturity on March 11, 2008. The loan may be prepaid at any time in part or in whole, provided that the credit facility is not in default. If LIBOR pricing is elected, there is a prepayment penalty based on a “make-whole” calculation for all costs associated with prepaying a LIBOR borrowing. As of December 31, 2005, the Company was in violation of a loan covenant which provides that the ratio of declared dividends to funds from operations (as defined in the loan agreement) shall not be greater than 95%. As this violation constitutes an event of default, the lenders had the right to accelerate payment of this credit facility. However, on May 8, 2006 the Company received a waiver from the required majority of the consortium banks in the credit facility and also entered into a modification of the loan agreement whereby the covenant was amended though December 31, 2006. As amended, the ratio of declared dividends to funds from operations (as defined in the loan agreement) shall not exceed 107% for the three months ended March 31, 2006 and June 30, 2006, 104% for the three months ended September 30, 2006 and 100% for the three months ended December 31, 2006. The Company is now in compliance with the covenant, as 11 Hartman Commercial Properties REIT and Subsidiary Notes to Consolidated Financial Statements (Unaudited) June 30, 2006
In December 2002, the Company refinanced substantially all of its mortgage debt with a $34,440,000 three-year floating rate mortgage loan collateralized by 18 of the Company’s properties and having a maturity date of January 1, 2006, extendable for an additional two years. Effective as of February 28, 2006 we extended the loan to January 1, 2008. During the initial term, the loan bore interest at 2.5% over a 30-day LIBOR (6.79% at December 31, 2005) computed on the basis of a 360-day year. During the extension term the interest rate will be 3.0% over 30-day LIBOR. Interest only payments are due monthly, and the loan may be repaid in full or in $100,000 increments, with a final balloon payment due upon maturity. The security documents related to the mortgage loan contain a covenant that requires HROP II, a wholly owned subsidiary formed for the purpose of this credit facility, to maintain adequate capital in light of its contemplated operations. This covenant and the other restrictions provided for in the credit facility do not affect HROP II’s ability to make distributions to the Company. On June 30, 2006, the Company paid off the balance of this loan. In connection with the purchase of the Windsor Park property in December 2003, the Company assumed a note payable in the amount of $6,550,000, secured by the property. The balance at June 30, 2006 was $5,357,364. The note is payable in equal monthly installments of principal and interest of $80,445, with interest at the rate of 8.34% per annum. The balance of the note is payable in full on December 1, 2006. The Company financed its comprehensive insurance premium with a note in the amount of $757,175 payable in 10 equal monthly installments of $75,718, which includes interest at 5.49%. The note is secured by unearned insurance premiums and will be paid in full in December 2006. As of
The Company made cash payments for interest on debt of 12 Hartman Commercial Properties REIT and Subsidiary Notes to Consolidated Financial Statements (Unaudited) June 30, 2006
In January 1999, the Company entered into a property management agreement with the Management Company. Effective September 1, 2004, this agreement was amended and restated. Prior to September 1, 2004, in consideration for supervising the management and performing various day-to-day affairs, the Company paid the Management Company a management fee of 5% and a partnership management fee of 1% based on Effective Gross Revenues from the properties, as defined. After September 1, 2004, the Company pays the Management Company property management fees in an amount not to exceed the fees customarily charged in arm’s length transactions by others rendering similar services in the same geographic area, as determined by a survey of brokers and agents in such area. The Company expects these fees to be between approximately 2% and 4% of Gross Revenues, as such term is defined in the amended and restated property management agreement, for the management of office buildings and approximately 5% of Gross Revenues for the management of retail and office/industrial properties. Effective September 1, 2004, the Company entered into an advisory agreement with the Management Company which provides that the Company pay the Management Company a fee of one-fourth of .25% of Gross Asset Value, as such term is defined in the advisory agreement, per quarter for asset management services. The Company incurred total management, partnership and asset management fees of The aggregate fees and reimbursements payable to the Management Company under the new agreements effective September 1, 2004 were not intended to be significantly different from those that would have been payable under the previous agreement. Upon actual calculation, the asset management fee under the new agreement was significantly higher. The Management Company waived the excess of the fee for the period September 1, 2004 through March 31, 2006 in perpetuity. The asset management fee, as calculated under the new agreement, was charged by the Management Company in the second quarter and has been reflected in the consolidated financial statements as of June 30, 2006. 13 Hartman Commercial Properties REIT and Subsidiary Notes to Consolidated Financial Statements (Unaudited) June 30, 2006
During July 2004, the Company amended certain terms of its Declaration of Trust. Under the amended terms, the Management Company may be required to reimburse the Company for operating expenses exceeding certain limitations determined at the end of each fiscal quarter. Reimbursements, if any, from the Management Company are recorded on a quarterly basis as a reduction in property management fees. Under the provisions of the property management agreement, costs incurred by the Management Company for the management and maintenance of the properties are reimbursable to the Management Company. At In consideration of leasing the properties, the Company also pays the Management Company leasing commissions for leases originated by the Management Company and for expansions and renewals of existing leases. The Company incurred total leasing commissions to the Management Company of In connection with the Public Offering described in Note Also in connection with the Public Offering described in Note The Management Company paid 14 Hartman Commercial Properties REIT and Subsidiary Notes to Consolidated Financial Statements (Unaudited) June 30, 2006
HCP’s day-to-day operations are strategically directed by the Board of The Company was a party to various other transactions with related parties which are reflected in due to/from affiliates in the accompanying consolidated balance
On September 15, 2004, HCP’s Registration Statement on Form S-11, with respect to a public offering (the “Public Offering”) of up to 10,000,000 common shares of beneficial interest to be offered at a price of $10 per share was declared effective under the Securities Act of 1933. The Registration Statement also covers up to 1,000,000 shares available pursuant to HCP’s dividend reinvestment plan to be offered at a price of $9.50 per share. The shares are offered to investors on a best efforts basis. Post-Effective Amendments No. 1, 2 and 3 to the Registration Statement were declared effective by the SEC on June 27, 2005, March 9, 2006 and May 3, 2006, respectively. As of At Operating Partnership units
Hartman Commercial Properties REIT and Subsidiary Notes to Consolidated Financial Statements (Unaudited)
The following tables summarize the cash dividends/distributions payable to holders of common shares and holders of OP Units declared with respect to the
Hartman Commercial Properties REIT and Subsidiary Notes to Consolidated Financial Statements (Unaudited)
The Company is a participant in various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a material effect on the financial position, results of operations, or cash flows of the Company.
Management does not differentiate by property types and because no individual property is so significant as to be a separate segment, the Company does not present segment information.
On June 5, 2006, Terry L. Henderson tendered his resignation as the Chief Financial Officer and a member of the Board of HCP, to be effective July 4, 2006. Mr. Henderson resigned from his positions with the Company in order to pursue other professional opportunities. On June 21, 2006, Hartman Management, L.P. the affiliated property manager for the Company, announced the hiring of Dave Holeman, age 42, as Chief Financial Officer of Hartman Management, L.P. Prior to joining Hartman Management, L.P., Mr. Holeman was employed by Gexa Energy for 2 years as Vice President and C.F.O. Prior to Gexa, Mr. Holeman worked for Houston Cellular Telephone Company for 7 years serving in the roles of C.F.O. and Controller. Prior to Houston Cellular, Mr. Holeman was employed by H.M.S.S., a company providing alternative site health care services, in various capacities, including Controller and Assistant Controller. Mr. Holeman began his career as an auditor for Deloitte and Touche. Mr. Holeman is a Certified Public Accountant and has a BBA degree in accounting from Abilene Christian University. On July 5, 2006, the Board of HCP approved the appointment of James C. Mastandrea to serve as a member of its Board of Trustees. Mr. Mastandrea will serve as a trustee with a term expiring at the Company’s 2007 Annual Meeting of Shareholders, and he has been appointed to serve on the Board’s Audit Committee, Nominating and Governance Committee, Compensation Committee, and Conflicts Committee. Mr. Mastandrea is an independent director, as that term is defined under the Nasdaq listing standards. There are no arrangements or understandings between Mr. Mastandrea and any other person pursuant to which Mr. Mastandrea was selected as a trustee. Since the beginning of the Company’s last fiscal year, Mr. Mastandrea has had no direct or indirect interest in any transaction to which the Company was a party. Mr. Mastandrea currently serves as Chairman of the Board of Trustees and Chief Executive Officer of Paragon Real Estate Equity and Investment Trust. Mr. Mastandrea has previously served as Chairman and Chief Executive Officer of MDC Realty Corporation of Chicago, Illinois, and as Chairman of the Board of Trustees and Chief Executive Officer of First Union Real Estate Investments (NYSE), a publicly-traded real estate investment trust headquartered in Cleveland, Ohio.
You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and the notes thereto included in this report. For more detailed information regarding the basis of presentation for the following information, you should read the notes to the consolidated financial statements included in this report. Forward-Looking Statements This report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements included in this quarterly report that are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto), including, without limitation, the information set forth in this “Management's Discussion and Analysis of Financial Condition and Results of Operation,” are forward-looking statements. These statements can be identified by the use of forward-looking terminology, including “forecast,” “may,” “believe,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other “forward-looking” information. We and our representatives may from time to time make other oral or written statements that are also forward-looking statements. These forward-looking statements are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties. While we believe that the assumptions concerning future events are reasonable, we caution that there are inherent difficulties in anticipating or predicting certain important factors. Such factors are discussed in our other filings, including but not limited to, our Annual Report on Form 10-K, filed with the Securities and Exchange Commission. We disclaim any intention or obligation to revise any forward-looking statements, including financial estimates, whether as a result of new information, future events or otherwise. Overview We own 37 commercial properties, consisting of 19 retail centers, 12 office/warehouse properties and six office buildings. All of our properties are located in the Houston, Dallas and San Antonio, Texas metropolitan areas. As of We have no employees and we do not manage our properties. Our properties and day-to-day operations are managed by Hartman Management, L.P. (the “Management Company”) under a management agreement. Under the management agreement in effect after September 1, 2004, we pay the Management Company the following amounts:
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Gross revenues are defined as all amounts actually collected as rents or other charges for the use and occupancy of our properties, but excludes interest and other investment income and proceeds received for a sale, exchange, condemnation, eminent domain taking, casualty or other disposition of assets. Under an advisory agreement effective September 1, 2004, we also pay the Management Company for asset management services a quarterly fee in an amount equal to one-fourth of 0.25% of the gross asset value calculated on the last day of each preceding quarter. Gross asset value is defined as the amount equal to the aggregate book value of our assets (other than investments in bank accounts, money market funds or other current assets), before depreciation, bad debts or other similar non-cash reserves and without reduction for any debt relating to such assets, at the date of measurement, except that during such periods in which we are obtaining regular independent valuations of the current value of our net assets for purposes of enabling fiduciaries of employee benefit plans to comply with applicable Department of Labor reporting requirements, gross asset value is the greater of (i) the amount determined pursuant to the foregoing or (ii) our assets’ aggregate valuation established by the most recent such valuation report without reduction for depreciation, bad debts or other similar non-cash reserves and without reduction for any debt relating to such assets. The aggregate fees and reimbursements payable to the Management Company under the new agreements effective September 1, 2004 were not intended to be significantly different from those that would have been payable under the previous Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements. We prepared these financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements required us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We based our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Our results may differ from these estimates. Currently, we believe that our accounting policies do not require us to make estimates using assumptions about matters that are highly uncertain. You should read Note 1, Summary of Significant Accounting Policies, to our financial statements in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We have described below the critical accounting policies that we believe could impact our consolidated financial statements most significantly. Basis of Consolidation. We are the sole general partner of Hartman REIT Operating Partnership, L.P. (the “Operating Partnership”) and possess full legal control and authority over its operations. As of Real Estate. We record real estate properties at cost, net of accumulated depreciation. We capitalize improvements, major renovations and certain costs directly related to the acquisition, improvement and leasing of real estate. We charge expenditures for repairs and maintenance to operations as they are incurred. We calculate depreciation using the straight-line method over the estimated useful lives of 5 to 39 years of our buildings and improvements. We depreciate tenant improvements using the straight-line method over the life of the lease. We review our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through our operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property. If impairment is indicated, we record a loss for the amount by which the carrying value of the property exceeds its fair value. We have determined that there has been no impairment in the carrying value of our real estate assets as of Purchase Price Allocation. We estimate the fair value of acquired tangible assets by valuing the acquired property as if it were vacant. The “as-if-vacant” value (limited to the purchase price) is allocated to land, building, and tenant improvements based on management’s determination of the relative fair values of these assets. We record above-market and below-market in-place lease values for purchased properties based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. We amortize the capitalized above-market lease values as a reduction of rental income over the remaining non-cancelable terms of the respective leases. We amortize the capitalized below-market lease values as an increase to rental income over the initial term and any fixed-rate renewal periods in the respective leases. Because most of our leases are relatively short term, have inflation or other scheduled rent escalations, and cover periods during which there have been few, and generally insignificant, pricing changes in the specific properties’ markets, the properties we have acquired have not been subject to leases with terms materially different than then-existing market-level terms. 20 We measure the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Our management’s estimates of value are made using methods similar to those used by independent appraisers, primarily discounted cash flow analysis. Factors considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management will also include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which we expect to primarily range from four to 18 months, depending on specific local market conditions. Our management also estimates costs to execute similar leases including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction. The total amount of other intangible assets acquired is further allocated to in-place lease values and customer relationship intangible values based on our management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics considered by our management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. We amortize the value of in-place leases, if any, to expense over the remaining initial terms of the respective leases, which, for leases with allocated intangible value, we expect to range generally from five to 10 years. The value of customer relationship intangibles is amortized to expense over the remaining initial terms and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles are charged to expense. Revenue Recognition. All leases on properties we hold are classified as operating leases, and we recognize the related rental income on a straight-line basis over the terms of the related leases. We capitalize or charge to accrued rent receivable, as applicable, differences between rental income earned and amounts due per the respective lease agreements. Percentage rents are recognized as rental income when the thresholds upon which they are based have been met. Recoveries from tenants for taxes, insurance, and other operating expenses are recognized as revenues in the period the corresponding costs are incurred. We provide an allowance for doubtful accounts against the portion of tenant accounts receivable which we estimate to be uncollectible. Liquidity and Capital Resources General. We generally lease our properties on a triple-net basis or on bases which provide for tenants to pay for increases in operating expenses over a base year or set amount, which means that tenants are required to pay for all repairs and maintenance, property taxes, insurance and utilities, or increases thereof, applicable to their space. During the This shortage resulted from decreased revenues and lower occupancy rates beginning in the third quarter of 2005, as well as increased interest expenses associated with rising interest rates and increased borrowings. Management has recently implemented new initiatives aimed at increasing occupancy and cash flows. In addition, on April 25, 2006, our Board voted to decrease the dividend on our common shares for the second quarter of 2006 by approximately 15% to alleviate cash flow shortages. Therefore, we anticipate that cash flows from operating activities and our borrowing capacity will allow us to make all distributions required for us to continue to qualify to be taxed as a REIT. 21 Public Offering. As reflected in Note Cash and Cash Equivalents. We had cash and cash equivalents of Our Debt for Borrowed Money. On June 2, 2005, the The On May 31, 2006, pursuant to section 2.8 of the Revolving Credit Agreement, dated as of March 11, 2005, the Company requested to increase the limit of the credit facility by $25,000,000, so that the total credit facility will be $75,000,000. On June 26, 2006, the Company conveyed ownership of 18 properties from Hartman REIT Operating Partnership II LP (“HROP II”) to HROP III in order to expand the borrowing base pool for the credit facility. At June 30, 2006, 36 properties are owned by HROP III. On June 30, 2006, the Company drew down $34,750,000 on the line of credit to extinguish the three year floating rate mortgage loan described below and pay related legal and banking fees. As of 22 Outstanding amounts under the facility will accrue interest, at the Company’s option, at either the LIBOR Rate or the Alternative Base Rate, plus the applicable margin as determined from the following grid:
The Alternative Base Rate equals a floating rate equal to the higher of KeyBank’s Base Rate or Federal Funds Rate plus 0.5%. Interest is due monthly in arrears, computed on the actual number of days elapsed over a 360-day year. LIBOR Rate loans will be available in one, two, three or six month periods, with a maximum of six contracts at any time. In the event of default, interest will be calculated as above plus 2%. The effective interest rate as of Interest only is payable monthly under the loan with the total amount of principal due at maturity on March 11, 2008. The loan may be prepaid at any time in part or in whole, provided that the facility is not in default. If LIBOR Rate pricing is elected, there is a prepayment penalty based on a “make-whole” calculation for all costs associated with prepaying a LIBOR borrowing. The revolving line of credit is supported by a pool of eligible properties referred to as the borrowing base pool. The borrowing base pool must meet the following criteria:
Properties can be added to and removed from the borrowing base pool at any time provided no defaults would occur as a result of the removal. If a property does not meet the criteria of an eligible property and the Company wants to include it in the borrowing base pool, a majority vote of the bank consortium is required for inclusion in the borrowing base pool. Covenants, tested quarterly, relative to the borrowing base pool are as follows:
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Covenants, tested quarterly, relative to the Company are as follows:
The Company must hedge all variable rate debt above $40 million until the point in which the ratio of variable rate debt to fixed rate debt is 50% of total debt and maintain such hedges during any period in which variable rate debt exceeds 50% of total debt. On March 27, 2006 the Company executed an interest rate swap dated as of March 16, 2006 for the purpose of hedging variable interest rate exposure, in compliance with the requirements of the loan agreement. The lender waived default for the fact that the hedge was not executed within six months of closing, as required by the loan agreement. As of December 31, 2005, we were in violation of the covenant which provides that the ratio of declared dividends to funds from operations (as defined in the loan agreement) shall not be greater than 95%. As this violation constitutes an event of default, our lenders had the right to accelerate payment of the credit facility. However, on May 8, 2006 the Company received a waiver from the required majority of the consortium banks in the credit facility and also entered into a modification of the loan agreement whereby the covenant was amended though December 31, 2006. As amended, the ratio of declared dividends to funds from operations (as defined in the loan agreement) shall not exceed 107% for the three month periods ending March 31, 2006 and June 30, 2006, 104% for the three months ended September 30, 2006, and 100% for the three months ended December 31, 2006. The Company is now in compliance with the covenant, as 24 In December 2002, we refinanced most of our debt with a credit facility from GMAC Commercial Mortgage Corporation. The loan is secured by, among other things, 18 of our properties, which are held by HROP II, a wholly-owned subsidiary formed for the purpose of this credit facility, and the improvements, personal property and fixtures on the properties, all reserves, escrows and deposit accounts held by HROP II, all intangible assets specific to or used in connection with the properties, and an assignment of rents related to such properties. We believe the fair market value of these properties was approximately $62,000,000 at the time the loan was put in place. We may prepay the loan without penalty. This loan was paid in full on June 30, 2006. In connection with the purchase of the Windsor Park property in December 2003, we assumed a note payable in the amount of $6,550,000 secured by the property. The balance at June 30, 2006 was $5,357,364. The note is payable in equal monthly installments of principal and interest of $80,445, with interest at the rate of 8.34% per annum. The balance of the note is payable in full on December 1, 2006. Capital Expenditures. We currently do not expect to make significant capital expenditures or any significant improvements to any of our currently owned properties during the next 12 months. However, we may have unexpected capital expenditures or improvements on our existing assets. Additionally, we intend to continue our ongoing acquisition strategy of acquiring properties (generally in the $1,000,000 to $10,000,000 value range) in the Houston, Dallas and San Antonio, Texas metropolitan areas, where we believe opportunities exist for acceptable investment returns, and we may incur significant capital expenditures or make significant improvements in connection with any properties we may acquire. Total Contractual Cash Obligations. A summary of our contractual cash obligations, as of 30, 2006 is as follows:
We have no commercial commitments such as lines of credit or guarantees that might result from a contingent event that would require our performance pursuant to a funding commitment. Property Acquisitions. During 2005, we acquired from unrelated parties three multi-tenant office buildings comprising approximately 486,024 square feet of gross leasable area (GLA). The properties were acquired for cash in the amount of approximately $30,430,000. No properties have been acquired during the six months ended June 30, 2006. 25 Common Share Dividends. We declared the following dividends to our shareholders with respect to the first quarter of 2005 through the
OP Unit Distributions. The Operating Partnership declared the following distributions to holders of its OP Units, including the Company, with respect to the first quarter of 2005 through the
Results of Operations General. The following
Revenues. Interest and other income was $400,239 and $553,555 for the three and six months ended June 30, 2006, as compared to Expenses. Our total expenses, including interest expense and depreciation and amortization expense, were 27 We expect that the dollar amount of operating expenses will increase as we acquire additional properties and expand our operations. The increase in our operating expenses during the The amount we pay the Management Company under our property management agreement is based in part on our property revenues. As a result of our increased revenues in the Our interest expense increased by Net Income. Income provided by operating activities before minority interests was Taxes We elected to be taxed as a REIT under the Internal Revenue Code beginning with our taxable year ended December 31, 1999. As a REIT, we generally are not subject to federal income tax on income that we distribute to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates. We believe that we are organized and operate in such a manner as to qualify to be taxed as a REIT, and we intend to operate so as to remain qualified as a REIT for federal income tax purposes. Inflation We anticipate that our leases will continue to be triple-net leases or otherwise provide that tenants pay for increases in operating expenses and will contain provisions that we believe will mitigate the effect of inflation. In addition, many of our leases are for terms of less than five years, which allows us to adjust rental rates to reflect inflation and other changing market conditions when the leases expire. Consequently, increases due to inflation, as well as ad valorem tax rate increases, generally do not have a significant adverse effect upon our operating results. Environmental Matters Our properties are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which our operations are conducted. From our inception, we have incurred no significant environmental costs, accrued liabilities or expenditures to mitigate or eliminate future environmental contamination. Off-Balance Sheet Arrangements We have no significant off-balance sheet arrangements as of
Market risk is the risk of loss arising from adverse changes in market rates and prices. The principal market risk to which we are exposed is the risk related to interest rate fluctuations. Based upon the nature of our operations, we are not subject to foreign exchange or commodity risk. We will be exposed to changes in interest rates as a result of our credit facilities which have floating interest rates. As of
As of the As reported in our annual report on Form 10-K for the year ended December 31, 2005, our independent registered public accounting firm, in the course of the audit of our 2005 financial statements, brought to management’s attention two material weaknesses in our internal controls: (1) Inadequate controls and procedures in place to effectively identify and monitor amendments to lease agreements and (2) Inadequate controls and procedures in place to effectively identify and monitor tenant defaults where a lease commission has been recorded. As a result of these deficiencies, our accounting personnel may not be made aware of changes to lease agreements and tenant defaults that require recognition in our financial accounting records. Accordingly, errors in our accounting for revenue and amortization expense may occur and may not be detected. A material weakness (within the meaning of the Public Company Accounting Oversight Board Based upon that evaluation and the material weaknesses described above, the Company’s Chief Executive Officer and the Chief Financial Officer of the Management Company, acting in the capacity as the Company’s Principal Accounting Officer, concluded that the Company’s disclosure controls and procedures are not effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Company’s Exchange Act filings. Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal controls over financial reporting that occurred during the three months ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION
From time to time, we are subject to certain legal proceedings claims and disputes that arise in the ordinary course of our business. Although we cannot predict the outcomes of these legal proceedings, we do not believe these actions, in the aggregate, will have a material adverse impact on our financial position, results of operations or liquidity.
The Company’s Registration Statement on Form S-11 (SEC File No. 333-111674) was declared effective by the SEC on September 15, 2004 with respect to the ongoing Public Offering described in Note The 10,000,000 shares offered to the public in the Public Offering are being offered to investors on a best efforts basis by the dealer manager D.H. Hill Securities, LLP, which means that the broker-dealers participating in the offering are only required to use their best efforts to sell the shares and have no firm commitment or obligation to purchase any of the shares. As of
Although the immediate use of 30 During 2006, we have continued to partially fund our distributions to shareholders out of our lines of credit, as distributions have continued to exceed cash flow from operations. To the extent a portion of the net offering proceeds have been utilized to repay amounts borrowed under our lines of credit, such net offering proceeds may be regarded as being distributions to shareholders, all or a portion of which may be characterized as a return of capital.
None.
None. 31
32
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*Filed herewith Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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