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| SIR > SEC Filings for SIR > Form 10-Q on 7-Aug-2012 | All Recent SEC Filings |
7-Aug-2012
Quarterly Report
The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and with the Combined Financial Statements of Selected Properties of CommonWealth REIT as of December 31, 2011 and 2010 and for the three years in the period ended December 31, 2011 and notes thereto contained in our Prospectus.
OVERVIEW
As of June 30, 2012, we owned 253 properties, located in 16 states, that contain approximately 22.0 million rentable square feet and were approximately 95.6% leased (based upon rentable square feet). For the three months ended June 30, 2012, approximately 66.4% of our total revenue was from 228 properties with 17.8 million rentable square feet we own on Oahu, Hawaii. The remainder of our total revenue for the three months ended June 30, 2012 was from 25 properties located throughout the mainland United States.
Property Operations
As of June 30, 2012, 95.6% of our rentable square feet was leased, compared to
95.5% of our rentable square feet as of June 30, 2011. Occupancy data for 2012
and 2011 is as follows (square feet and dollars in thousands):
All Properties Comparable Properties (1)
As of June 30, As of June 30,
2012 2011 2012 2011
Total properties 253 251 250 250
Total rentable square feet 21,950 21,442 21,306 21,344
Percent leased (2) 95.6% 95.5% 95.4% 95.5%
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(2) Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases and (ii) space which is leased but is not occupied or is being offered for sublease by tenants.
The average annualized effective rental rate per square foot, as defined below, for our properties for the periods ended June 30, 2012 and 2011 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2012 2011 2012 2011
Average annualized effective rental
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During the three months ended June 30, 2012, we entered lease renewals for approximately 38,000 square feet and new leases for approximately 147,000 square feet, which had combined weighted average rental rates that were 52.0% higher than prior rents for the same space. The weighted average lease term for new leases and lease renewals entered into during the second quarter of 2012 was 10.3 years. Commitments for tenant improvement, leasing commission costs and concessions for leases entered during the quarter ended June 30, 2012 totaled $3.29 per square foot on average, or approximately $0.32 per square foot per year of the lease term. All new and renewal leasing activity during the quarter ended June 30, 2012 occurred at our properties located in Hawaii.
We executed rent resets at properties located in Hawaii for approximately 30,000 square feet of land during the quarter ended June 30, 2012, which had combined weighted average reset rates that were 34.2% higher than prior rates.
The U.S. economy has recently experienced a recession, and the recovery to date has been slow, unsteady and incomplete. We believe that the high current unemployment rate and weak national office and industrial leasing market conditions may lead to a continued decrease in national office and industrial occupancy and effective rental rates through the end of 2012. However, because our weighted average remaining lease term (based on annualized rental revenue, as defined below) was approximately 11.8 years as of June 30, 2012, we do not expect our occupancy rate to materially change through the end of 2012. In addition, despite the recent
recession and incomplete recovery of the U.S. economy, revenues from our properties located in Hawaii, which represented approximately 66.4% of our total rental revenue for the three months ended June 30, 2012, have generally increased under CWH's prior ownership as leases for those properties have reset or renewed. Nevertheless, because of the current U.S. and global economic uncertainty, there are too many variables for us to reasonably project what the financial impact of changing market conditions will be on our occupancy or financial results.
As shown in the table below, approximately 4.0% of our rented square feet and approximately 2.7% of total annualized rental revenue are included in leases scheduled to expire by December 31, 2012. Lease renewals and rental rates for which available space may be relet in the future will depend on prevailing market conditions at the times these renewals, new leases and rent reset rates are negotiated. However, all of our leases scheduled to expire through December 31, 2014 relate to properties located in Oahu, Hawaii, and, as stated above, revenues from our properties in Hawaii have generally increased during our and CWH's prior ownership as the leases for those properties have been reset or renewed. As of June 30, 2012, lease expirations by year are as follows (square feet and dollars in thousands):
Cumulative
Cumulative Percent of Percent of
Percent of Percent of Total Total
Number of Total Total Annualized Annualized Annualized
Tenants with Rented Rented Rented Rental Rental Rental
Expiring Square Feet Square Feet Square Feet Revenue Revenue Revenue
Year Leases Expiring(1) Expiring(1) Expiring(1) Expiring(2) Expiring(2) Expiring(2)
2012 22 843 4.0% 4.0% 3,248 2.7% 2.7%
2013 12 373 1.8% 5.8% 1,811 1.5% 4.2%
2014 9 117 0.6% 6.4% 476 0.4% 4.6%
2015 18 575 2.7% 9.1% 5,593 4.7% 9.3%
2016 20 1,285 6.1% 15.2% 8,771 7.4% 16.7%
2017 9 411 2.0% 17.2% 5,743 4.8% 21.5%
2018 7 1,292 6.2% 23.4% 12,818 10.8% 32.3%
2019 10 1,654 7.9% 31.3% 4,234 3.6% 35.9%
2020 5 318 1.5% 32.8% 4,349 3.7% 39.6%
2021 5 566 2.7% 35.5% 2,074 1.7% 41.3%
Thereafter 134 13,542 64.5% 100.0% 69,853 58.7% 100.0%
251 20,976 100.0% 118,970 100.0%
Weighted average
remaining lease
term (in years) 12.6 11.8
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(2) Annualized rental revenue is the annualized contractual rents from our tenants pursuant to existing leases as of June 30, 2012, plus straight line rent adjustments and estimated recurring expense reimbursements.
A majority of our Hawaii properties are lands leased for rents that are periodically reset based on fair market values, generally every five to ten years. The following chart shows the annualized rental revenue as of June 30, 2012 scheduled to reset at our Hawaii lands.
Scheduled Rent Resets At Hawaii Lands
(dollars in thousands)
Annualized
Rental Revenue(1)
as of June 30,
2012
Scheduled
to Reset
2012 $ 2,849
2013 9,638
2014 7,496
2015 and thereafter 17,485
Total $ 37,468
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We intend to continue to seek to negotiate with our tenants as rents under their leases are scheduled to reset in order to achieve new rents based on the then current fair market values. Despite CWH's and our prior experience with rent resets in Hawaii, our ability to increase rents when rent resets occur depends upon market conditions which are beyond our control. Accordingly, we can provide no assurance that the historical increases in rents which we and CWH have achieved in the past pursuant to contractual rent resets will be repeated in the future, and it is possible that rents could reset to a lower level if fair market values decrease.
We intend to seek to renew or extend the terms of leases relating to our mainland properties when they expire. Because these properties are each leased to a single tenant, because of the capital many of these tenants have invested into the improvements and because our properties may be of strategic importance to the each tenant's business, we believe that there is a greater likelihood that these tenants will renew or extend their leases when they expire as compared to tenants in a property with multiple tenants. However, we also believe that if a building previously occupied by a single tenant becomes vacant, it may take longer and cost more to locate a new tenant than when space becomes vacant in a multi-tenant property. Whenever we extend, renew or enter into new leases for our properties, we intend to seek rents which are equal to or higher than our historical rents for the same properties; however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions which are beyond our control.
Our manager, RMR, employs a tenant review process for us. RMR assesses tenants on an individual basis and does not employ a uniform set of credit criteria. In general, depending on facts and circumstances, RMR evaluates the creditworthiness of a tenant based on information concerning the tenant that is provided by the tenant and, in some cases, information that is publicly available or obtained from third party sources. RMR also often uses a third party service to monitor the credit ratings of debt securities of our existing tenants whose debt securities are rated by a nationally recognized statistical rating organization.
Our principal source of funds for our operations to pay our debt service and our distributions to shareholders is rents from tenants at our properties. Rents are generally received from our tenants monthly in advance. As of June 30, 2012, tenants representing 1% or more of our total annualized rental revenues were as follows (square feet in thousands):
Tenants Representing 1% or More of Our Total Annualized Rental Revenues:
% of
% of Total Annualized Rental
Tenant Property Type Sq. Ft. (1) Sq. Ft. (1) Revenue (2) Expiration
1 Novell, Inc. Mainland 406 1.9% 6.7% 11/30/2024
Properties
2 The Southern Company Mainland 448 2.1% 4.1% 12/31/2018
Properties
3 Tesoro Hawaii Hawaii 3,148 15.0% 3.6% 4/30/2019;
Corporation Properties 12/31/2019;
3/31/2024
4 Bookspan Mainland 502 2.4% 3.1% 9/23/2028
Properties
5 Shurtape Mainland 645 3.1% 2.9% 5/28/2024
Technologies, LLC Properties
6 Stratus Mainland 287 1.4% 2.8% 5/31/2016
Technologies, Inc. Properties
7 Micron Mainland 96 0.5% 2.7% 4/30/2020
Technology, Inc Properties
8 Servco Pacific, Inc. Hawaii 537 2.6% 2.6% 1/31/2029;
Properties 2/29/2032
9 Safeway Stores, Inc. Hawaii 146 0.7% 2.0% 10/31/2018
Properties
10 Sprint Nextel Mainland 140 0.7% 1.9% 7/31/2018
Corporation Properties
11 BCI Coca-Cola Hawaii 351 1.7% 1.9% 12/31/2022;
Bottling Company Properties 7/31/2039
12 Allied Building Hawaii 310 1.5% 1.9% 12/31/2028
Products Corporation Properties
13 Manheim Services Hawaii 338 1.6% 1.8% 5/31/2016
Corporation Properties
14 Mattson Mainland 101 0.5% 1.7% 5/31/2017
Technology, Inc. Properties
15 AES Hawaii, Inc. Hawaii 1,242 5.9% 1.7% 3/31/2040
Properties
16 Cisco Systems, Inc. Mainland 149 0.7% 1.7% 12/31/2015
Properties
17 Kaiser Foundation Hawaii 217 1.0% 1.5% 4/30/2026;
Health Plan Properties 6/30/2046
18 Waikiki Pearl Hawaii 278 1.3% 1.3% 12/31/2029
Company, Inc. Properties
19 Element K Mainland 95 0.5% 1.3% 12/31/2017
Properties
20 Pahounui Partners, Hawaii 191 0.9% 1.2% 6/30/2027
LLC Properties
21 US Airways Mainland 101 0.5% 1.2% 8/31/2015
Group, Inc. Properties
22 Trex Company, Inc. Mainland 308 1.5% 1.2% 12/31/2021
Properties
23 TPI Composites, Inc. Mainland 317 1.5% 1.2% 7/31/2018
Properties
24 Ameron International Hawaii 146 0.7% 1.1% 12/31/2027
Corp. Properties
25 Fileminders Hawaii 85 0.4% 1.0% 5/31/2022
Properties
Total 10,584 50.6% 54.1%
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(2) Annualized rental revenue is the annualized contractual rents from our tenants pursuant to existing leases as of June 30, 2012, plus straight line rent adjustments and estimated recurring expense reimbursements.
Investment Activities
On February 16, 2012, CWH contributed the Properties to us. In return, we issued
to CWH: (i) 22,000,000 common shares (including 1,000 common shares initially
issued to CWH on December 21, 2011 in connection with our formation) and
(ii) the CWH Note.
Since February 16, 2012, we have acquired five properties with a combined 958,132 square feet for an aggregate purchase price of $151.0 million, excluding closing costs. As of August 6, 2012, we have entered into existing agreements to acquire four properties with a combined 1,576,856 rentable square feet for an aggregate purchase price of $109.7 million, including the assumption of $26.0 million of mortgage debt and excluding closing costs. For more information regarding properties that we have acquired and properties that we have agreed to acquire pursuant to existing agreements we have entered, see Note 4 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Our strategy related to property acquisitions and dispositions is materially unchanged from that disclosed in our Prospectus. We anticipate seeking to negotiate with tenants at our Hawaii properties as rents under their leases are scheduled to reset. We may explore redevelopment opportunities at some of our Hawaii properties as leases expire. We will also seek to expand our portfolio by acquiring additional single tenant properties. We expect that most of our acquisition efforts will focus on office and industrial properties; however, we may consider acquiring other types of properties, including properties which are net leased to single tenants for retail uses and properties specifically suited to particular tenants' requirements.
Financing Activities
On February 16, 2012, CWH contributed the Properties to us. In return, we issued
to CWH: (i) 22,000,000 common shares (including 1,000 common shares initially
issued to CWH on December 21, 2011 in connection with our formation) and
(ii) the CWH Note.
On March 12, 2012, we issued 9,200,000 common shares in connection with our IPO, including 1,200,000 shares issued when the underwriters exercised in full their over allotment option, at a price of $21.50 per share, raising net proceeds of approximately $180.8 million. We used the net proceeds from our IPO and drawings under our revolving credit facility to repay the CWH Note.
Simultaneous with the closing of our IPO, we entered into a $500.0 million revolving credit facility that is available for general business purposes, including acquisitions. The revolving credit facility is scheduled to mature on March 11, 2016, and subject to the payment of an extension fee and meeting certain other conditions, we have an option to extend the stated maturity date by one year.
Interest under the revolving credit facility is calculated at floating rates based upon LIBOR plus premiums that vary depending upon our debt leverage or credit ratings. The weighted average annual interest rate for the revolving credit facility was 1.54% for the three months ended June 30, 2012 and 1.55% for the period of March 12, 2012 to June 30, 2012. As of June 30, 2012, we had $321.0 million of borrowings and $179.0 million available for additional borrowings under the revolving credit facility.
On July 12, 2012, we amended the revolving credit facility. As a result of this amendment, the pledge agreement that we and certain of our subsidiaries had entered into was terminated, and the equity of our subsidiaries that had been pledged pursuant to that pledge agreement as collateral for our and our subsidiary guarantors' obligations under the revolving credit facility was released.
Simultaneous with amending the revolving credit agreement, we entered into a five year $350.0 million unsecured term loan with a group of institutional lenders. The term loan matures on July 11, 2017 and is prepayable without penalty at any time. In addition, the term loan includes a feature under which maximum borrowings may be increased to up to $700.0 million in certain circumstances. Interest is calculated at floating rates based upon LIBOR plus premiums that vary depending upon our debt leverage or credit ratings. We used the net proceeds of our term loan to repay amounts outstanding under our revolving credit facility and deposited excess proceeds into interest bearing cash accounts to fund general business activities, including acquisitions.
Our revolving credit facility agreement and our term loan agreement include various financial and other covenants that generally restrict our ability to incur debts in excess of calculated amounts, restrict our ability to make distributions under certain circumstances and require us to maintain certain financial ratios. We believe we were in compliance with the terms of our revolving credit facility covenants at June 30, 2012.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2012, Compared to Three Months Ended June 30, 2011
(dollars in thousands, except per share data)
Comparable Properties Results (1) Acquired Properties Results (2) Consolidated Results
Three Months Ended June 30, Three Months Ended June 30, Three Months Ended June 30,
$ % $ % $ %
2012 2011 Change Change 2012 2011 Change Change 2012 2011 Change Change
Revenues
Rental income $ 23,026 $ 23,112 $ (86 ) (0.4)% $ 728 $ - $ 728 - $ 23,754 $ 23,112 $ 642 2.8%
Tenant reimbursements and
other income 4,136 4,117 19 0.5% 30 - 30 - 4,166 4,117 49 1.2%
Total revenues $ 27,162 $ 27,229 $ (67 ) (0.2)% $ 758 $ - $ 758 - $ 27,920 $ 27,229 $ 691 2.5%
Operating expenses:
Real estate taxes 3,658 3,548 110 3.1% 19 - 19 - 3,677 3,548 129 3.6%
Other operating expenses 1,997 1,766 231 13.1% 26 - 26 - 2,023 1,766 257 14.6%
Total operating expenses 5,655 5,314 341 6.4% 45 - 45 - 5,700 5,314 386 7.3%
Net operating income (3) $ 21,507 $ 21,915 $ (408 ) (1.9)% $ 713 $ - $ 713 - 22,220 21,915 305 1.4%
Other expenses
Depreciation and
amortization 3,021 2,765 256 9.3%
Acquisition related costs 675 - 675 -
General and administrative 1,634 1,427 207 14.5%
Total other expenses 5,330 4,192 1,138 27.1%
Operating income 16,890 17,723 (833 ) (4.7)%
Interest expense (1,632 ) - (1,632 ) -
Equity in earnings of an
investee 74 - 74 -
Net income $ 15,332 $ 17,723 $ (2,391 ) (13.5)%
Weighted average common
shares outstanding 31,200 -
Net income per common
share $ 0.49 -
Calculation of Funds From
Operations and Normalized
Funds From Operations (4)
Net income $ 15,332 $ 17,723
Depreciation and
amortization 3,021 2,765
Funds from operations 18,353 20,488
Acquisition related costs 675 -
Normalized funds from
operations $ 19,028 $ 20,488
Funds from operations per
common share $ 0.59
Normalized funds from
. . .
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