þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
MARYLAND (State or other jurisdiction of incorporation or organization) | 02-0681276 (I.R.S. Employer Identification No.) |
MCLEAN, VIRGINIA 22102
(Address of principal executive office)
(703) 287-5800
(Registrant’s telephone number, including area code)
Large Accelerated Filero. | Accelerated Filerþ | Non-Accelerated Filero. |
TABLE OF CONTENTS
PAGE | ||||
PART I FINANCIAL INFORMATION | ||||
Item 1. Consolidated Financial Statements (Unaudited) | 3 | |||
Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005 | ||||
Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 | ||||
Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 | ||||
Notes to Financial Statements | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 40 | |||
Item 4. Controls and Procedures | 41 | |||
PART II OTHER INFORMATION | ||||
Item 1. Legal Proceedings | 42 | |||
Item 1A. Risk Factors | 42 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 42 | |||
Item 3. Defaults Upon Senior Securities | 42 | |||
Item 4. Submission of Matters to a Vote of Security Holders | 42 | |||
Item 5. Other Information | 42 | |||
Item 6. Exhibits | 42 | |||
SIGNATURES | 44 |
March 31, 2006 | December 31, 2005 | |||||||
ASSETS | ||||||||
Real estate, net of accumulated depreciation of $4,562,992 and $3,408,878, respectively | $ | 204,739,533 | $ | 161,634,761 | ||||
Lease intangibles, net of accumulated amortization of $1,902,039 and $1,221,413, respectively | 22,593,292 | 13,947,484 | ||||||
Mortgage notes receivable | 21,000,455 | 21,025,815 | ||||||
Cash and cash equivalents | 1,280,038 | 1,740,159 | ||||||
Restricted cash | 1,935,741 | 1,974,436 | ||||||
Funds held in escrow | 1,730,346 | 1,041,292 | ||||||
Interest receivable – mortgage note | 70,586 | 70,749 | ||||||
Interest receivable – employees | 5,548 | — | ||||||
Deferred rent receivable | 2,751,382 | 2,590,617 | ||||||
Deferred financing costs, net of accumulated amortization of $381,970 and $260,099, respectively | 2,762,706 | 1,811,017 | ||||||
Prepaid expenses | 471,160 | 385,043 | ||||||
Deposits on real estate | 200,000 | 600,000 | ||||||
Accounts receivable | 266,312 | 225,581 | ||||||
TOTAL ASSETS | $ | 259,807,099 | $ | 207,046,954 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Mortgage notes payable | $ | 108,558,267 | $ | 61,558,961 | ||||
Borrowings under line of credit | 22,260,000 | 43,560,000 | ||||||
Deferred rent liability | 3,698,616 | — | ||||||
Asset retirement obligation liability | 1,428,964 | — | ||||||
Accounts payable and accrued expenses | 743,560 | 493,002 | ||||||
Due to adviser | 196,148 | 164,155 | ||||||
Rent received in advance, security deposits and funds held in escrow | 2,488,362 | 2,322,300 | ||||||
Total Liabilities | 139,373,917 | 108,098,418 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Redeemable preferred stock, $0.001 par value; $25 liquidation preference; 1,150,000 shares authorized and 1,000,000 shares issued and outstanding at March 31, 2006 | 1,000 | — | ||||||
Common stock, $0.001 par value, 18,850,000 shares authorized and 7,672,000 shares issued and outstanding at both December 31, 2005 and March 31, 2006 | 7,672 | 7,672 | ||||||
Additional paid in capital | 129,245,756 | 105,502,544 | ||||||
Notes receivable — employees | (432,282 | ) | (432,282 | ) | ||||
Distributions in excess of accumulated earnings | (8,388,964 | ) | (6,129,398 | ) | ||||
Total Stockholders’ Equity | 120,433,182 | 98,948,536 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 259,807,099 | $ | 207,046,954 | ||||
3
For the three | For the three | |||||||
months ended | months ended | |||||||
March 31, 2006 | March 31, 2005 | |||||||
Operating revenues | ||||||||
Rental income | $ | 5,021,485 | $ | 1,847,007 | ||||
Interest income from mortgage notes receivable | 552,913 | 295,583 | ||||||
Tenant recovery revenue | 5,623 | 2,043 | ||||||
Total operating revenues | 5,580,021 | 2,144,633 | ||||||
Operating expenses | ||||||||
Depreciation and amortization | 1,834,740 | 537,755 | ||||||
Management advisory fee | 652,742 | 471,861 | ||||||
Professional fees | 202,936 | 331,244 | ||||||
Taxes and licenses | 54,259 | 128,273 | ||||||
Insurance | 82,999 | 70,383 | ||||||
General and administrative | 145,958 | 132,828 | ||||||
Asset retirement obligation expense | 55,143 | — | ||||||
Stock option compensation expense | 46,216 | — | ||||||
Total operating expenses | 3,074,993 | 1,672,344 | ||||||
Other income (expense) | ||||||||
Interest income from temporary investments | 7,373 | 94,521 | ||||||
Interest income — employee loans | 5,548 | 4,685 | ||||||
Interest expense | (1,682,948 | ) | (36,219 | ) | ||||
Income before realized and unrealized losses | 835,001 | 535,276 | ||||||
Realized and unrealized loss from foreign currency | ||||||||
Net realized loss from foreign currency transactions | (816 | ) | (347 | ) | ||||
Net unrealized gain from foreign currency transactions | 12,615 | 255 | ||||||
Total net realized and unrealized gain (loss) from foreign currency | 11,799 | (92 | ) | |||||
Net income | 846,800 | 535,184 | ||||||
Dividends attributable to preferred stock | (344,444 | ) | — | |||||
Net income available to common stockholders | $ | 502,356 | $ | 535,184 | ||||
Earnings per weighted average common share | ||||||||
Basic | $ | 0.07 | $ | 0.07 | ||||
Diluted | $ | 0.06 | $ | 0.07 | ||||
Weighted average shares outstanding | ||||||||
Basic | 7,672,000 | 7,667,000 | ||||||
Diluted | 7,821,658 | 7,733,335 | ||||||
4
For the three | For the three | |||||||
months ended | months ended | |||||||
March 31, 2006 | March 31, 2005 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 846,800 | $ | 535,184 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,834,740 | 537,755 | ||||||
Amortization of deferred financing costs | 121,871 | 16,246 | ||||||
Amortization of deferred rent asset | 63,374 | 6,136 | ||||||
Amortization of deferred rent liability | (80,290 | ) | — | |||||
Asset retirement obligation expense | 55,143 | — | ||||||
Stock compensation | 46,216 | — | ||||||
Unrealized gain from foreign currency transactions | (12,615 | ) | (255 | ) | ||||
Changes in assets and liabilities: | ||||||||
Decrease (increase) in mortgage interest receivable | 163 | (6,314 | ) | |||||
(Increase) decrease in employee interest receivable | (5,548 | ) | 107 | |||||
Increase in prepaid expenses | (86,117 | ) | (32,341 | ) | ||||
(Increase) decrease in other assets | (40,730 | ) | 48,170 | |||||
Increase in deferred rent receivable | (224,386 | ) | (97,244 | ) | ||||
Increase in accounts payable and accrued expenses | 250,558 | 249,075 | ||||||
Increase in due to Adviser | 31,993 | 13,367 | ||||||
Increase in rent received in advance and security deposits | 204,757 | 75,098 | ||||||
Payments to lenders for operating reserves held in escrow | (872,926 | ) | — | |||||
Increase in operating reserves from tenants | 451,969 | — | ||||||
Net cash provided by operating activities | 2,584,972 | 1,344,984 | ||||||
Cash flows from investing activities: | ||||||||
Real estate investments | (18,302,939 | ) | (12,485,610 | ) | ||||
Decrease in restricted cash | 38,695 | — | ||||||
Receipts from tenants for capital reserves | 301,808 | — | ||||||
Payments to tenants from capital reserves | (230,141 | ) | — | |||||
Payments to lenders for capital reserves held in escrow | (414,360 | ) | — | |||||
Receipts from lenders for capital reserves held in escrow | 35,901 | — | ||||||
Deposits on future acquisitions | (350,000 | ) | (550,000 | ) | ||||
Deposits applied against real estate investments | 750,000 | 350,000 | ||||||
Principal repayments on mortgage loans | 25,360 | 25,786 | ||||||
Net cash used in investing activities | (18,145,676 | ) | (12,659,824 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from share issuance | 25,000,000 | — | ||||||
Offering costs | (1,302,006 | ) | — | |||||
Borrowings under mortgage note payable | 17,000,000 | 3,150,000 | ||||||
Principal repayments on mortgage note payable | (117,486 | ) | — | |||||
Borrowings from line of credit | 35,200,000 | — | ||||||
Repayments on line of credit | (56,500,000 | ) | — | |||||
Principal repayments on employee loans | — | 208 | ||||||
Payments for deferred financing costs | (1,073,561 | ) | (629,380 | ) | ||||
Dividends paid for common and preferred | (3,106,364 | ) | (2,300,100 | ) | ||||
Net cash provided by financing activities | 15,100,583 | 220,728 | ||||||
Net decrease in cash and cash equivalents | (460,121 | ) | (11,094,112 | ) | ||||
Cash and cash equivalents, beginning of period | 1,740,159 | 29,153,987 | ||||||
Cash and cash equivalents, end of period | $ | 1,280,038 | $ | 18,059,875 | ||||
Cash paid during period for interest | $ | 1,545,821 | $ | 8,862 | ||||
NON-CASH INVESTING ACTIVITIES | ||||||||
Increase in asset retirement obligation | $ | 1,373,820 | $ | — | ||||
NON-CASH FINANCING ACTIVITIES | ||||||||
Fixed rate debt assumed in connection with acquisitions | $ | 30,129,654 | $ | — | ||||
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
7
March 31, 2006 | December 31, 2005 | |||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||
Lease Intangibles | Amortization Period | Lease Intangibles | Amortization Period | |||||||||||||
In-place leases | $ | 10,178,997 | 11.46 | $ | 5,625,736 | 11.82 | ||||||||||
Leasing costs | 5,302,506 | 10.95 | 5,047,033 | 11.33 | ||||||||||||
Customer relationships | 9,013,828 | 14.79 | 4,496,128 | 15.43 | ||||||||||||
Accumulated amortization | (1,902,039 | ) | (1,221,413 | ) | ||||||||||||
$ | 22,593,292 | 12.35 | $ | 13,947,484 | 12.69 | |||||||||||
Estimated Amortization | ||||
Year | Expense | |||
2006 | $ | 2,331,159 | ||
2007 | 2,772,488 | |||
2008 | 2,772,488 | |||
2009 | 2,594,848 | |||
2010 | 2,499,080 |
8
9
10
11
12
For the three | For the three | |||||||
months ended | months ended | |||||||
March 31, 2006 | March 31, 2005 | |||||||
Allocated payroll and benefits | $ | 467,719 | $ | 347,314 | ||||
Allocated overhead expenses | $ | 185,023 | $ | 124,547 | ||||
Total management advisory fee | $ | 652,742 | $ | 471,861 | ||||
13
3. Stock Options
Effective January 1, 2006, the Company adopted the provisions of FASB Statement No. 123(R), “Share-Based Payment,” for its stock-based compensation plans. The Company previously accounted for these plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and disclosure requirements established by SFAS 123, “Accounting for Stock-Based Compensation.” In this regard, these options have been granted to individuals who are the Company’s officers, and who would qualify as leased employees under FASB Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25.”
Under APB 25, no expense was recorded in the income statement for the Company’s stock options. The pro forma effects on income for stock options were instead disclosed in a footnote to the financial statements. Under SFAS 123(R), all share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense in the income statement over an employee’s requisite service period.
The Company adopted SFAS 123(R) using the modified prospective method. Under this transition method, compensation cost recognized during the three months ended March 31, 2006 includes the cost for all stock-based payments granted prior to, but not yet vested, as of January 1, 2006. This cost was based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123. For the three months ended March 31, 2006 the Company recorded stock option compensation expense of $46,216, using an estimated weighted average fair value of $1.26 using the Black-Scholes option-pricing model, based on options issued from date of inception forward, and the following weighted-average assumptions: divided yield of 5.07%, risk-free interest rate of 2.61%, expected volatility factor of 18.15%, and expected lives of 3 years.
The following table illustrates the effect on net income and earnings per share as if the company had applied the fair-value recognition provisions of SFAS 123 to stock options, stock appreciation rights, performance units and restricted stock units for periods prior to adoption of SFAS 123(R).
For the three months | ||||
ended March 31, 2005 | ||||
Net income, as reported | $ | 535,184 | ||
Less: Stock-based compensation expense determined using the fair value based method | (95,792 | ) | ||
Net income, pro-forma | $ | 439,392 | ||
Basic, as reported | $ | 0.07 | ||
Basic, pro-forma | $ | 0.06 | ||
Diluted, as reported | $ | 0.07 | ||
Diluted, pro-forma | $ | 0.06 | ||
The stock-based compensation expense under the fair value method, as reported in the above table, was computed using an estimated weighted average fair value of $1.29 using the Black-Scholes option-pricing model, based on options issued from date of inception forward, and the following weighted-average assumptions: dividend yield of 4.99%, risk-free interest rate of 2.54%, expected volatility factor of 18.40%, and expected lives of 3 years.
As of March 31, 2006, there was approximately $61,000 of total unrecognized compensation cost related to non-vested stock-based compensation awards granted. That cost is expected to be recognized over the next 1.3 years.
14
At March 31, 2006, 916,000 options were outstanding with exercise prices ranging from $15 to $16.85 with terms of ten years.
A summary of the status of the Company’s 2003 Equity Incentive Plan for the three months ended March 31, 2006 is as follows:
Weighted Average | ||||||||
Shares | Exercise Price | |||||||
Options outstanding at December 31, 2005, of which 744,250 shares are exercisable | 916,000 | $ | 15.39 | |||||
Granted | — | $ | — | |||||
Exercised | — | $ | — | |||||
Forfeited | — | $ | — | |||||
Options outstanding at March 31, 2006, of which 744,250 shares are exercisable | 916,000 | $ | 15.39 | |||||
The following table is a summary of all notes issued to employees for the exercise of stock options:
Number of | Strike Price of | Amount of | ||||||||||||||||||
Options | Options | Promissory | Interest Rate | |||||||||||||||||
Date Issued | Exercised | Exercised | Note | Term of Note | on Note | |||||||||||||||
Sep-04 | 25,000 | $ | 15.00 | $ | 375,000 | 9 years | 5.0 | % | ||||||||||||
May-05 | 5,000 | $ | 15.00 | $ | 75,000 | 9 years | 6.0 | % |
These notes were recorded as loans to employees in the equity section of the accompanying consolidated balance sheets. As of March 31, 2006, approximately $432,000 of indebtedness was owed by current employees to the Company, and no current or former directors or executive officers had any loans outstanding.
For the three | For the three | |||||||
months ended | months ended | |||||||
March 31, 2006 | March 31, 2005 | |||||||
Net income available to common stockholders | $ | 502,356 | $ | 535,184 | ||||
Denominator for basic weighted average shares | 7,672,000 | 7,667,000 | ||||||
Dilutive effect of stock options | 149,658 | 66,335 | ||||||
Denominator for diluted weighted average shares | 7,821,658 | 7,733,335 | ||||||
Basic earnings per common share | $ | 0.07 | $ | 0.07 | ||||
Diluted earnings per common share | $ | 0.06 | $ | 0.07 | ||||
15
Square Footage | ||||||||||||
Date Acquired | Location | (unaudited) | Property Description | Net Real Estate | ||||||||
Dec-03 | Raleigh, North Carolina | 58,926 | Office | $ | 4,968,511 | |||||||
Jan-04 | Canton, Ohio | 54,018 | Office and Warehouse | 3,078,010 | ||||||||
Apr-04 | Akron, Ohio | 83,891 | Office and Laboratory | 8,414,213 | ||||||||
Jun-04 | Charlotte, North Carolina | 64,500 | Office | 8,837,611 | ||||||||
Jul-04 | Canton, North Carolina | 228,000 | Commercial and Manufacturing | 4,976,182 | ||||||||
Aug-04 | Snyder Township, Pennsylvania | 290,000 | Commercial and Warehouse | 6,389,350 | ||||||||
Aug-04 | Lexington, North Carolina | 154,000 | Commercial and Warehouse | 2,873,216 | ||||||||
Sep-04 | Austin, Texas | 51,993 | Flexible Office | 7,075,067 | ||||||||
Oct-04 | Norfolk, Virginia | 25,797 | Commercial and Manufacturing | 919,418 | ||||||||
Oct-04 | Mt. Pocono, Pennsylvania | 223,275 | Commercial and Manufacturing | 5,965,661 | ||||||||
Oct-04 | Granby, Quebec | 99,981 | Commercial and Manufacturing | 3,017,470 | ||||||||
Oct-04 | Montreal, Quebec | 42,490 | Commercial and Manufacturing | 1,810,905 | ||||||||
Feb-05 | San Antonio, Texas | 60,245 | Flexible Office | 8,083,146 | ||||||||
Feb-05 | Columbus, Ohio | 39,000 | Industrial | 2,723,352 | ||||||||
Apr-05 | Big Flats, New York | 120,000 | Industrial | 6,601,497 | ||||||||
May-05 | Wichita, Kansas | 69,287 | Office | 11,036,428 | ||||||||
May-05 | Arlington, Texas | 64,000 | Warehouse and Bakery | 4,024,885 | ||||||||
Jun-05 | Dayton, Ohio | 59,894 | Office | 2,409,159 | ||||||||
Jul-05 | Eatontown, New Jersey | 30,268 | Office | 4,789,574 | ||||||||
Jul-05 | Franklin Township, New Jersey | 183,000 | Office and Warehouse | 7,626,240 | ||||||||
Jul-05 | Duncan, South Carolina | 278,020 | Office and Manufacturing | 15,254,836 | ||||||||
Aug-05 | Hazelwood, Missouri | 51,155 | Office and Warehouse | 3,060,466 | ||||||||
Sep-05 | Angola, Indiana | 52,080 | Industrial | 1,166,732 | ||||||||
Sep-05 | Angola, Indiana | 50,000 | Industrial | 1,166,732 | ||||||||
Sep-05 | Rock Falls, Illinois | 52,000 | Industrial | 1,166,732 | ||||||||
Oct-05 | Newburyport, Massachusetts | 70,598 | Industrial | 7,092,037 | ||||||||
Oct-05 | Clintonville, Wisconsin | 291,142 | Industrial | 4,719,867 | ||||||||
Dec-05 | Maple Heights, Ohio | 347,218 | Industrial | 11,862,804 | ||||||||
Dec-05 | Richmond, Virginia | 42,213 | Office | 6,064,897 | ||||||||
Dec-05 | Toledo, Ohio | 23,368 | Office | 3,092,996 | ||||||||
Feb-06 | South Hadley, Massachusetts | 150,000 | Industrial | 3,236,717 | ||||||||
Feb-06 | Champaign, Illinois | 108,262 | Office | 14,205,278 | ||||||||
Feb-06 | Roseville, Minnesota | 359,540 | Office | 27,029,544 | ||||||||
3,878,161 | $ | 204,739,533 | ||||||||||
March 31, 2006 | December 31, 2005 | |||||||
Real estate: | ||||||||
Land | $ | 26,411,783 | $ | 20,329,568 | ||||
Building | 178,132,801 | 141,660,553 | ||||||
Tenant improvements | 4,757,941 | 3,053,518 | ||||||
Accumulated depreciation | (4,562,992 | ) | (3,408,878 | ) | ||||
Real estate, net | $ | 204,739,533 | $ | 161,634,761 | ||||
16
Tenant | Lease | Total Purchase | ||||||||||||||||||
Land | Building | Improvements | Intangibles | Price | ||||||||||||||||
South Hadley, Massachusetts | $ | 470,636 | $ | 2,775,163 | $ | — | $ | 418,699 | $ | 3,664,498 | ||||||||||
Champaign, Illinois | 3,587,711 | 10,428,904 | 221,778 | 861,237 | 15,099,630 | |||||||||||||||
Roseville, Minnesota | 2,480,548 | 23,498,730 | 1,133,284 | 3,112,447 | 30,225,009 | |||||||||||||||
$ | 6,538,895 | $ | 36,702,797 | $ | 1,355,062 | $ | 4,392,383 | $ | 48,989,137 | |||||||||||
Year | Rental Payments | |||
2006 | $ | 16,114,536 | ||
2007 | 21,776,570 | |||
2008 | 22,140,535 | |||
2009 | 21,413,955 | |||
2010 | 20,547,390 | |||
Thereafter | 85,001,572 |
17
Location | Real Estate Taxes | |||
Raleigh, North Carolina | $ | 45,743 | ||
Canton, Ohio | 6,374 | |||
Akron, Ohio | 133,630 | |||
Charlotte, North Carolina | 65,724 | |||
Canton, North Carolina | 47,877 | |||
Snyder Township, Pennsylvania | 99,222 | |||
Lexington, North Carolina | 21,102 | |||
Austin, Texas | 167,499 | |||
Norfolk, Virginia | 11,570 | |||
Mt. Pocono, Pennsylvania | 115,232 | |||
Granby, Quebec | 37,885 | |||
Montreal, Quebec | 81,502 | |||
San Antonio, Texas | 159,444 | |||
Columbus, Ohio | 37,610 | |||
Big Flats, New York | 24,594 | |||
Wichita, Kansas | 5,222 | |||
Arlington, Texas | 66,312 | |||
Dayton, Ohio | 56,108 | |||
Eatontown, New Jersey | 53,240 | |||
Franklin Township, New Jersey | 140,280 | |||
Duncan, South Carolina | 319,757 | |||
Hazelwood, Missouri | 75,876 | |||
Angola, Indiana | 12,934 | |||
Angola, Indiana | 12,934 | |||
Rock Falls, Illinois | 17,723 | |||
Newburyport, Massachusetts | 27,663 | |||
Clintonville, Wisconsin | 130,757 | |||
Maple Heights, Ohio | 336,163 | |||
Richmond, Virginia | 39,024 | |||
Toledo, Ohio | 48,824 | |||
South Hadley, Massachusetts | 30,911 | |||
Champaign, Illinois | 242,264 | |||
Roseville, Minnesota | 721,384 | |||
$ | 3,392,384 | |||
18
Balance Outstanding | |||||||||||||||||
Date of Issuance | Principal Maturity | ||||||||||||||||
of Note | Date | Interest Rate | March 31, 2006 | December 31, 2005 | |||||||||||||
3/16/2005 | 4/1/2030 | 6.3300 | % | $ | 3,099,488 | $ | 3,113,102 | ||||||||||
7/19/2005 | 8/1/2015 | 5.2200 | % | 4,608,079 | 4,644,859 | ||||||||||||
8/25/2005 | 9/1/2015 | 5.3310 | % | 21,757,000 | 21,757,000 | ||||||||||||
9/12/2005 | 9/1/2015 | 5.2100 | % | 12,588,000 | 12,588,000 | ||||||||||||
12/21/2005 | 12/8/2015 | 5.7107 | % | 19,456,000 | 19,456,000 | ||||||||||||
2/21/2006 | 12/1/2013 | 5.9100 | % | 9,717,698 | — | ||||||||||||
2/21/2006 | 6/1/2014 | 5.2000 | % | 20,332,002 | — | ||||||||||||
3/29/2006 | 4/1/2016 | 5.9200 | % | 17,000,000 | — | ||||||||||||
$ | 108,558,267 | $ | 61,558,961 | ||||||||||||||
19
Notes | Distributions in | |||||||||||||||||||||||
Capital in | Receivable | Excess of | Total | |||||||||||||||||||||
Common | Preferred | Excess of | From Sale of | Accumulated | Stockholders' | |||||||||||||||||||
Stock | Stock | Par Value | Common Stock | Earnings | Equity | |||||||||||||||||||
Balance at December 31, 2005 | $ | 7,672 | $ | — | $ | 105,502,544 | $ | (432,282 | ) | $ | (6,129,398 | ) | $ | 98,948,536 | ||||||||||
Issuance of Common Stock Under Stock Option Plan | — | — | — | — | — | — | ||||||||||||||||||
Issuance of Preferred Stock | — | 1,000 | 24,999,000 | — | — | 25,000,000 | ||||||||||||||||||
Public Offering Costs | — | — | (1,302,006 | ) | — | — | (1,302,006 | ) | ||||||||||||||||
Stock Options | — | — | 46,216 | — | — | 46,216 | ||||||||||||||||||
Distributions Declared to Common and Preferred Stockholders | — | — | — | — | (3,106,364 | ) | (3,106,364 | ) | ||||||||||||||||
Net income | — | — | — | — | 846,800 | 846,800 | ||||||||||||||||||
Balance at March 31, 2006 | $ | 7,672 | $ | 1,000 | $ | 129,245,754 | $ | (432,282 | ) | $ | (8,388,962 | ) | $ | 120,433,182 | ||||||||||
20
As of and for the three months ended March 31, 2006 | ||||||||||||||||
Real Estate | ||||||||||||||||
Real Estate Leasing | Lending | Other | Total | |||||||||||||
Operating revenues | $ | 5,027,108 | $ | 552,913 | $ | — | $ | 5,580,021 | ||||||||
Operating expenses | (1,944,142 | ) | — | (1,084,635 | ) | (3,028,777 | ) | |||||||||
Other income (loss) | — | — | (1,716,243 | ) | (1,716,243 | ) | ||||||||||
Net realized and unrealized loss from foreign currency | 11,799 | — | — | 11,799 | ||||||||||||
Net income (loss) | $ | 3,094,765 | $ | 552,913 | $ | (2,800,878 | ) | $ | 846,800 | |||||||
Total Assets | $ | 232,323,606 | $ | 21,071,041 | $ | 6,412,452 | $ | 259,807,099 | ||||||||
As of and for the three months ended March 31, 2005 | ||||||||||||||||
Real Estate | ||||||||||||||||
Real Estate Leasing | Lending | Other | Total | |||||||||||||
Operating revenues | $ | 1,849,050 | $ | 295,583 | $ | — | $ | 2,144,633 | ||||||||
Operating expenses | (666,028 | ) | — | (1,006,316 | ) | (1,672,344 | ) | |||||||||
Other income (loss) | — | — | 62,987 | 62,987 | ||||||||||||
Net realized and unrealized loss from foreign currency | (92 | ) | — | — | (92 | ) | ||||||||||
Net income (loss) | $ | 1,182,930 | $ | 295,583 | $ | (943,329 | ) | $ | 535,184 | |||||||
Total Assets | $ | 76,146,541 | $ | 11,153,040 | $ | 19,691,498 | $ | 106,991,079 | ||||||||
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For the three | For the three | |||||||
months ended | months ended | |||||||
March 31, 2006 | March 31, 2005 | |||||||
Operating Data: | ||||||||
Total operating revenue | $ | 6,238,795 | $ | 3,294,351 | ||||
Total operating expenses | (3,578,845 | ) | (2,549,430 | ) | ||||
Other income (expense) | (1,670,027 | ) | 62,987 | |||||
Income before realized and unrealized losses | 989,923 | 807,908 | ||||||
Realized and unrealized loss from foreign currency | 11,799 | (92 | ) | |||||
Net income (loss) | 1,001,722 | 807,816 | ||||||
Share and Per Share Data: | ||||||||
Basic net income (loss) | $ | 0.13 | $ | 0.11 | ||||
Diluted net income (loss) | $ | 0.13 | $ | 0.10 | ||||
Weighted average shares outstanding-basic | 7,672,000 | 7,667,000 | ||||||
Weighted average shares outstanding-diluted | 7,821,658 | 7,733,335 |
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• | our business strategy; | ||
• | pending transactions; | ||
• | our projected operating results; | ||
• | our ability to obtain future financing arrangements; | ||
• | estimates relating to our future distributions; | ||
• | our understanding of our competition; | ||
• | market trends; | ||
• | estimates of our future operating expenses, including payments to our Adviser under the terms of our advisory agreement; | ||
• | projected capital expenditures; and | ||
• | use of the proceeds of our credit facilities, mortgage notes payable, offerings of equity securities and other future capital resources, if any. |
• | the loss of any of our key employees, such as Mr. David Gladstone, our chairman and chief executive officer, Mr. Terry Lee Brubaker, our president and chief operating officer, or Mr. George Stelljes III, our executive vice president and chief investment officer; | ||
• | general volatility of the capital markets and the market price of our securities; | ||
• | risks associated with negotiation and consummation of pending and future transactions; | ||
• | changes in our business strategy; | ||
• | availability, terms and deployment of capital, including the ability to maintain and borrow under our existing credit facility, arrange for long-term mortgages on our properties; secure one or more additional long-term credit facilities, and to raise equity capital; | ||
• | availability of qualified personnel; | ||
• | changes in our industry, interest rates, exchange rates or the general economy; and | ||
• | the degree and nature of our competition. |
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First | Second | |||||
Our | Ratings | Ratings | ||||
System | Agency | Agency | Description (a) | |||
>10 | Baa2 | BBB | Probability of default during the next ten years is 4% and the expected loss is 1% or less | |||
10 | Baa3 | BBB- | Probability of default during the next ten years is 5% and the expected loss is 1% to 2% | |||
9 | Ba1 | BB+ | Probability of default during the next ten years is 10% and the expected loss is 2% to 3% | |||
8 | Ba2 | BB | Probability of default during the next ten years is 16% and the expected loss is 3% to 4% | |||
7 | Ba3 | BB- | Probability of default during the next ten years is 17.8% and the expected loss is 4% to 5% | |||
6 | B1 | B+ | Probability of default during the next ten years is 22% and the expected loss is 5% to 6.5% |
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First | Second | |||||
Our | Ratings | Ratings | ||||
System | Agency | Agency | Description (a) | |||
5 | B2 | B | Probability of default during the next ten years is 25% and the expected loss is 6.5% to 8% | |||
4 | B3 | B- | Probability of default during the next ten years is 27% and the expected loss is 8% to 10% | |||
3 | Caa1 | CCC+ | Probability of default during the next ten years is 30% and the expected loss is 10% to 13.3% | |||
2 | Caa2 | CCC | Probability of default during the next ten years is 35% and the expected loss is 13.3% to 16.7% | |||
1 | Caa3 | CC | Probability of default during the next ten years is 65% and the expected loss is 16.7% to 20% | |||
0 | N/a | D | Probability of default during the next ten years is 85%, or there is a payment default, and the expected loss is greater than 20% |
(a) | The default rates set forth above assume a ten year lease or mortgage loan. If the particular investment has a term other than ten years, the probability of default is adjusted to reflect the reduced risk associated with a shorter term or the increased risk associated with a longer term. |
Rating | 3/31/2006 | 12/31/2005 | ||||||
Average | 8.6 | 8.6 | ||||||
Weighted Average | 8.6 | 8.7 | ||||||
Highest | 10.0 | 10.0 | ||||||
Lowest | 6.0 | 6.0 |
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March 31, 2006 | March 31, 2005 | $ Change | % Change | |||||||||||||
Operating revenues | ||||||||||||||||
Rental income | $ | 5,021,485 | $ | 1,847,007 | $ | 3,174,478 | 172 | % | ||||||||
Interest income from mortgage note receivable | 552,913 | 295,583 | 257,330 | 87 | % | |||||||||||
Tenant recovery revenue | 5,623 | 2,043 | 3,580 | 175 | % | |||||||||||
Total operating revenues | 5,580,021 | 2,144,633 | 3,435,388 | 160 | % | |||||||||||
Operating expenses | ||||||||||||||||
Depreciation and amortization | 1,834,740 | 537,755 | 1,296,985 | 241 | % | |||||||||||
Management advisory fee | 652,742 | 471,861 | 180,881 | 38 | % | |||||||||||
Professional fees | 202,936 | 331,244 | (128,308 | ) | -39 | % | ||||||||||
Taxes and licenses | 54,259 | 128,273 | (74,014 | ) | -58 | % | ||||||||||
Insurance | 82,999 | 70,383 | 12,616 | 18 | % | |||||||||||
General and administrative | 145,958 | 132,828 | 13,130 | 10 | % | |||||||||||
Asset retirement obligation expense | 55,143 | — | 55,143 | 100 | % | |||||||||||
Stock option compensation expense | 46,216 | — | 46,216 | 100 | % | |||||||||||
Total operating expenses | 3,074,993 | 1,672,344 | 1,402,649 | 84 | % | |||||||||||
Other income (expense) | ||||||||||||||||
Interest income from temporary investments | 7,373 | 94,521 | (87,148 | ) | -92 | % | ||||||||||
Interest income — employee loans | 5,548 | 4,685 | 863 | 18 | % | |||||||||||
Interest expense | (1,682,948 | ) | (36,219 | ) | (1,646,729 | ) | 4547 | % | ||||||||
Income before realized and unrealized losses | 835,001 | 535,276 | 299,725 | 56 | % | |||||||||||
Realized and unrealized loss from foreign currency | 11,799 | (92 | ) | 11,891 | 100 | % | ||||||||||
Net income | 846,800 | 535,184 | 311,616 | 58 | % | |||||||||||
Dividends attributable to preferred stock | (344,444 | ) | — | (344,444 | ) | 100 | % | |||||||||
Net income available to common stockholders | $ | 502,356 | $ | 535,184 | $ | (32,828 | ) | -6 | % | |||||||
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Payments Due by Period | ||||||||||||||||||||
More than 5 | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 1-3 Years | 3-5 Years | Years | |||||||||||||||
Long-Term Debt Obligations(1) | $ | 130,818,267 | $ | 594,904 | $ | 24,356,093 | $ | 2,955,656 | $ | 102,911,614 | ||||||||||
Interest on Long-Term Debt Obligations(2) | 54,617,590 | 6,065,279 | 12,031,184 | 11,697,862 | 24,823,265 | |||||||||||||||
Capital Lease Obligations | — | — | — | — | — | |||||||||||||||
Operating Lease Obligations(3) | — | — | — | — | — | |||||||||||||||
Purchase Obligations(4) | 14,000,000 | 14,000,000 | — | — | — | |||||||||||||||
Other Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP | — | — | — | — | — | |||||||||||||||
Total | $ | 199,435,857 | $ | 20,660,183 | $ | 36,387,277 | $ | 14,653,518 | $ | 127,734,879 | ||||||||||
(1) | Long-term debt obligations represent both borrowings under our BB&T line of credit and mortgage notes payble that were outstanding as of March 31, 2006. The line of credit matures in February 2008. | |
(2) | Interest on long-term debt obligations does not include interest on our borrowings under our line of credit. The balance and interest rate is variable and, thus, the amount of interest can not be calculated for purposes of this table. | |
(3) | This does not include the portion of the operating lease on office space that is allocated to us by our Adviser in connection with our advisory agreement. | |
(4) | The purchase obligations reflected in the above table represents commitments outstanding at March 31, 2006 to purchase real estate. |
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For the three | For the three | |||||||
months ended | months ended | |||||||
March 31, 2006 | March 31, 2005 | |||||||
Net income | $ | 846,800 | $ | 535,184 | ||||
Add: Real estate depreciation and amortization | 1,834,740 | 537,755 | ||||||
FFO | 2,681,540 | 1,072,939 | ||||||
Less: Dividends attributable to preferred stock | (344,444 | ) | — | |||||
FFO available to common stockholders | 2,337,096 | 1,072,939 | ||||||
Weighted average shares outstanding — basic | 7,672,000 | 7,667,000 | ||||||
Weighted average shares outstanding — diluted | 7,821,658 | 7,733,335 | ||||||
Basic net income per weighted average common share | $ | 0.07 | $ | 0.07 | ||||
Diluted net income per weighted average common share | $ | 0.06 | $ | 0.07 | ||||
Basic FFO per weighted average common share | $ | 0.30 | $ | 0.14 | ||||
Diluted FFO per weighted average common share | $ | 0.30 | $ | 0.14 | ||||
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41
Exhibit | Description of Document | |
3 .1† | Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S - -11 (File No. 333-106024), filed June 11, 2003. | |
3 .2† | Bylaws, incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-11 (File No. 333-106024), filed June 11, 2003. | |
3.3† | Articles Supplementary Establishing and Fixing the Rights and Preferences of the 7.75% Series A Cumulative Redeemable Preferred Stock, incorporated by reference to Exhibit 3.3 of Form 8-A (File No. 000-50363), filed January 19, 2006. | |
4.1† | Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred Stock of Gladstone Commercial Corporation, incorporated by reference to Exhibit 4.1 of Form 8-A (File No. 000-50363), filed on January 19, 2006. | |
10.19† | First Amended and Restated Agreement of Limited Partnership of Gladstone Commercial Limited Partnership, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 000-50363), filed on February 1, 2006. | |
10.20† | Loan agreement between Stonewater Dox Funding LLC and Wells Fargo Bank, National Association, dated as of November 21, 2003, incorporated by reference to Exhibit 10.20 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. |
42
Exhibit | Description of Document | |
10.21† | Assumption agreement between Stonewater Dox Funding LLC, ACI06 Champaign IL LLC, Gladstone Commercial Corporation and LaSalle Bank National Association, dated as of February 21, 2006, incorporated by reference to Exhibit 10.21 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.22† | Promissory note between Stonewater Dox Funding LLC and Wells Fargo Bank, National Association, dated as of November 21, 2003, incorporated by reference to Exhibit 10.22 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.23† | Purchase agreement between Stonewater UIS Funding LLC and Gladstone Commercial Limited Partnership, dated as of November 23, 2005, as the same has been modified by that certain Amendment to Purchase Agreement dated December 22, 2005, that certain Amendment to Purchase Agreement dated December 30, 2005, that certain Amendment to Purchase Agreement dated January 6, 2006, that certain Amendment to Purchase Agreement dated January 13, 2006, that certain Amendment to Purchase Agreement dated January 17, 2006 and that certain Amendment to Purchase Agreement dated January 20, 2006., incorporated by reference to Exhibit 10.23 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.24† | Loan agreement between Stonewater Dox Funding LLC and Greenwich Capital Financial Products, Inc, dated as of May 12, 2004, incorporated by reference to Exhibit 10.24 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.25† | Loan assumption agreement between Stonewater UIS Funding LLC, and UC06 Roseville MN LLC, Gladstone Commercial Corporation and LaSalle Bank National Association, dated as of February 21, 2006, incorporated by reference to Exhibit 10.25 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.26† | Promissory note between Stonewater UIS Funding LLC and Greenwich Capital Financial Products, Inc, dated as of May 12, 2004, incorporated by reference to Exhibit 10.26 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.27† | Purchase agreement between Stonewater UIS Funding LLC and Gladstone Commercial Limited Partnership, dated as of November 23, 2005, as the same has been modified by that certain Amendment to Purchase Agreement dated December 22, 2005, that certain Amendment to Purchase Agreement dated December 30, 2005, that certain Amendment to Purchase Agreement dated January 6, 2006, that certain Amendment to Purchase Agreement dated January 13, 2006, that certain Amendment to Purchase Agreement dated January 17, 2006 and that certain Amendment to Purchase Agreement dated January 20, 2006, incorporated by reference to Exhibit 10.27 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.28† | Third Amendment to Credit Agreement and Loan Documents by and among Gladstone Commercial Corporation, Gladstone Commercial Limited Partnership, Branch Banking and Trust Company, and certain other parties, dated as of March 17, 2006. | |
10.29 | Loan agreement between IXIS Real Estate Capital Inc. and 2525 N Woodlawn Vstrm Wichita KS, LLC, CI05 Clintonville WI LLC and MSI05-3 LLC, dated as of April 27, 2006. | |
10.30 | Promissory note between IXIS Real Estate Capital Inc. and 2525 N Woodlawn Vstrm Wichita KS, LLC, CI05 Clintonville WI LLC and MSI05-3 LLC, dated as of April 27, 2006. | |
11 | Computation of Per Share Earnings from Operations (included in the notes to the audited financial statements contained in this report) |
43
Exhibit | Description of Document | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
31 .2 | Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
32 .1 | Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | |
32 .2 | Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. |
† | Previously filed and incorporated by reference. |
Gladstone Commercial Corporation | ||||
Date: May 2, 2006 | By: | /s/ Harry Brill | ||
Harry Brill | ||||
Chief Financial Officer |
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Exhibit | Description of Document | |
3 .1† | Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S - -11 (File No. 333-106024), filed June 11, 2003. | |
3 .2† | Bylaws, incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-11 (File No. 333-106024), filed June 11, 2003. | |
3.3† | Articles Supplementary Establishing and Fixing the Rights and Preferences of the 7.75% Series A Cumulative Redeemable Preferred Stock, incorporated by reference to Exhibit 3.3 of Form 8-A (File No. 000-50363), filed January 19, 2006. | |
4.1† | Form of Certificate for 7.75% Series A Cumulative Redeemable Preferred Stock of Gladstone Commercial Corporation, incorporated by reference to Exhibit 4.1 of Form 8-A (File No. 000-50363), filed on January 19, 2006. | |
10.19† | First Amended and Restated Agreement of Limited Partnership of Gladstone Commercial Limited Partnership, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 000-50363), filed on February 1, 2006. | |
10.20† | Loan agreement between Stonewater Dox Funding LLC and Wells Fargo Bank, National Association, dated as of November 21, 2003, incorporated by reference to Exhibit 10.20 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.21† | Assumption agreement between Stonewater Dox Funding LLC, ACI06 Champaign IL LLC, Gladstone Commercial Corporation and LaSalle Bank National Association, dated as of February 21, 2006, incorporated by reference to Exhibit 10.21 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.22† | Promissory note between Stonewater Dox Funding LLC and Wells Fargo Bank, National Association, dated as of November 21, 2003, incorporated by reference to Exhibit 10.22 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.23† | Purchase agreement between Stonewater UIS Funding LLC and Gladstone Commercial Limited Partnership, dated as of November 23, 2005, as the same has been modified by that certain Amendment to Purchase Agreement dated December 22, 2005, that certain Amendment to Purchase Agreement dated December 30, 2005, that certain Amendment to Purchase Agreement dated January 6, 2006, that certain Amendment to Purchase Agreement dated January 13, 2006, that certain Amendment to Purchase Agreement dated January 17, 2006 and that certain Amendment to Purchase Agreement dated January 20, 2006., incorporated by reference to Exhibit 10.23 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.24† | Loan agreement between Stonewater Dox Funding LLC and Greenwich Capital Financial Products, Inc, dated as of May 12, 2004, incorporated by reference to Exhibit 10.24 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.25† | Loan assumption agreement between Stonewater UIS Funding LLC, and UC06 Roseville MN LLC, Gladstone Commercial Corporation and LaSalle Bank National Association, dated as of February 21, 2006, incorporated by reference to Exhibit 10.25 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.26† | Promissory note between Stonewater UIS Funding LLC and Greenwich Capital Financial Products, Inc, dated as of May 12, 2004, incorporated by reference to Exhibit 10.26 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. |
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Exhibit | Description of Document | |
10.27† | Purchase agreement between Stonewater UIS Funding LLC and Gladstone Commercial Limited Partnership, dated as of November 23, 2005, as the same has been modified by that certain Amendment to Purchase Agreement dated December 22, 2005, that certain Amendment to Purchase Agreement dated December 30, 2005, that certain Amendment to Purchase Agreement dated January 6, 2006, that certain Amendment to Purchase Agreement dated January 13, 2006, that certain Amendment to Purchase Agreement dated January 17, 2006 and that certain Amendment to Purchase Agreement dated January 20, 2006, incorporated by reference to Exhibit 10.27 of the Current Report on Form 8-K (File No. 000-50363), filed on February 24, 2006. | |
10.28† | Third Amendment to Credit Agreement and Loan Documents by and among Gladstone Commercial Corporation, Gladstone Commercial Limited Partnership, Branch Banking and Trust Company, and certain other parties, dated as of March 17, 2006. | |
10.29 | Loan agreement between IXIS Real Estate Capital Inc. and 2525 N Woodlawn Vstrm Wichita KS, LLC, CI05 Clintonville WI LLC and MSI05-3 LLC, dated as of April 27, 2006. | |
10.30 | Promissory note between IXIS Real Estate Capital Inc. and 2525 N Woodlawn Vstrm Wichita KS, LLC, CI05 Clintonville WI LLC and MSI05-3 LLC, dated as of April 27, 2006. | |
11 | Computation of Per Share Earnings (included in the notes to the audited financial statements contained in this report) | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
31 .2 | Certification of Chief Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | |
32 .1 | Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | |
32 .2 | Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. |
† | Previously filed and incorporated by reference. |
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