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| SIR > SEC Filings for SIR > Form 10-Q on 2-Nov-2012 | All Recent SEC Filings |
2-Nov-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 September 30, 2012, we owned 260 properties, located in 17 states, that contain approximately 23.9 million rentable square feet and were approximately 94.9% leased (based upon rentable square feet). For the three months ended September 30, 2012, approximately 58.3% of our total revenue was from 228 properties with 17.7 million rentable square feet we own on the island of Oahu, Hawaii. The remainder of our total revenue for the three months ended September 30, 2012 was from 32 properties located throughout the mainland United States.
Property Operations
As of September 30, 2012, 94.9% of our rentable square feet was leased, compared
to 95.2% of our rentable square feet as of September 30, 2011. Occupancy data
for 2012 and 2011 is as follows (square feet and dollars in thousands):
All Properties Comparable Properties (1)
As of September 30, As of September 30,
2012 2011 2012 2011
Total properties 260 251 250 250
Total rentable square feet 23,907 21,424 21,274 21,326
Percent leased (2) 94.9% 95.2% 94.3% 95.2%
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(2) Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any.
The average annualized effective rental rate per square foot, as defined below, for our properties for the periods ended September 30, 2012 and 2011 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Average annualized effective rental
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During the three months ended September 30, 2012, we executed a rent reset at a property located in Hawaii for approximately 105,000 square feet of land, which had a reset rate that was approximately 42.9% higher than the prior rate. In addition, we entered lease renewals and new leases for approximately 134,000 square feet during the quarter ended September 30, 2012. The weighted average lease term for lease renewals and new leases entered into during the third quarter of 2012 was 5.6 years. Commitments for tenant improvement, leasing commission costs and concessions for leases entered during the quarter ended September 30, 2012 totaled approximately $252,000, or approximately $0.34 per square foot per year of the weighted average lease term. All renewal and new leasing activity during the quarter ended September 30, 2012 occurred at our properties located in Hawaii.
We currently believe that U.S. leasing market conditions are slowly improving, but remain weak in many U.S. markets. However, because our weighted average remaining lease term (based on annualized rental revenue, as defined below) was approximately 12.1 years as of September 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 58.3% of our total rental revenue for the three months ended September 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, rents or financial results.
As shown in the table below, approximately 2.5% of our rented square feet and approximately 1.2% 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 September 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 16 565 2.5% 2.5% $ 1,702 1.2% 1.2%
2013 12 267 1.2% 3.7% 1,589 1.2% 2.4%
2014 11 153 0.7% 4.4% 795 0.6% 3.0%
2015 20 549 2.4% 6.8% 5,491 4.0% 7.0%
2016 20 1,285 5.7% 12.5% 8,846 6.5% 13.5%
2017 9 411 1.8% 14.3% 5,730 4.2% 17.7%
2018 9 1,510 6.7% 21.0% 14,241 10.4% 28.1%
2019 12 1,765 7.8% 28.8% 6,807 5.0% 33.1%
2020 5 318 1.4% 30.2% 4,348 3.2% 36.3%
2021 5 566 2.5% 32.7% 2,072 1.5% 37.8%
Thereafter 136 15,295 67.3% 100.0% 84,743 62.2% 100.0%
255 22,684 100.0% $ 136,364 100.0%
Weighted average
remaining lease term (in
years) 12.9 12.1
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(2) Annualized rental revenue is the annualized contractual rents from our tenants pursuant to existing leases as of September 30, 2012, including straight line rent adjustments and estimated recurring expense reimbursements, but excluding lease value amortization.
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 September 30, 2012 scheduled to reset at our Hawaii lands.
Scheduled Rent Resets At Hawaii Lands
(dollars in thousands)
Annualized
Rental Revenue(1)
as of September 30,
2012
Scheduled
to Reset
2012 $ 2,839
2013 9,150
2014 7,494
2015 and thereafter 17,572
Total $ 37,055
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We intend to continue 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. If we are unable to reach agreement with a tenant on a rent reset, our Hawaii land leases typically provide that rent is reset based on an appraisal process, and many of the previous rent resets at our Hawaii lands which have resulted in an increase in rent have been determined by an appraisal process during our and CWH's prior ownership. 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 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 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 September 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
Mainland
1 Cinram Group, Inc. Properties 1,371 6.0% 6.8% 8/30/2032
Mainland
2 Novell, Inc. Properties 406 1.8% 5.8% 11/30/2024
Mainland
3 The Southern Company Properties 448 2.0% 3.5% 12/31/2018
4/30/2019;
Tesoro Hawaii Hawaii 12/31/2019;
4 Corporation Properties 3,148 13.9% 3.1% 3/31/2024
Mainland
5 Bookspan Properties 502 2.2% 2.7% 9/23/2028
Shurtape Technologies, Mainland
6 LLC Properties 645 2.8% 2.6% 5/28/2024
Stratus Mainland
7 Technologies, Inc. Properties 287 1.3% 2.5% 5/31/2016
Mainland
8 Micron Technology, Inc Properties 96 0.4% 2.4% 4/30/2020
Hawaii 1/31/2029;
9 Servco Pacific, Inc. Properties 537 2.4% 2.2% 2/29/2032
Colgate - Palmolive Mainland
10 Company Properties 142 0.6% 2.2% 1/31/2024
Arrowhead General Mainland
11 Insurance Agency, Inc Properties 95 0.4% 1.8% 7/26/2019
Valassis Mainland
12 Communications, Inc. Properties 268 1.2% 1.8% 9/30/2023
Sprint Nextel Mainland
13 Corporation Properties 140 0.6% 1.7% 7/31/2018
Allied Building Products Hawaii
14 Corporation Properties 310 1.4% 1.7% 12/31/2028
BCI Coca-Cola Bottling Hawaii 12/31/2022;
15 Company Properties 351 1.5% 1.7% 7/31/2039
Hawaii
16 Safeway Stores, Inc. Properties 146 0.6% 1.6% 10/31/2018
Manheim Services Hawaii
17 Corporation Properties 338 1.5% 1.6% 5/31/2016
Mainland
18 Mattson Technology, Inc. Properties 101 0.4% 1.5% 5/31/2017
Mainland
19 Cisco Systems, Inc. Properties 149 0.7% 1.5% 12/31/2015
Hawaii
20 AES Hawaii, Inc. Properties 1,242 5.5% 1.5% 3/31/2040
Kaiser Foundation Health Hawaii 4/30/2026;
21 Plan Properties 217 1.0% 1.3% 6/30/2046
Waikiki Pearl Hawaii
22 Company, Inc. Properties 278 1.2% 1.2% 12/31/2029
Mainland
23 Element K Properties 95 0.4% 1.1% 12/31/2017
Hawaii
24 Pahounui Partners, LLC Properties 191 0.8% 1.1% 6/30/2027
Mainland
25 US Airways Group, Inc. Properties 101 0.4% 1.1% 8/31/2015
Mainland
26 Trex Company, Inc. Properties 308 1.4% 1.0% 12/31/2021
Mainland
27 TPI Composites, Inc. Properties 317 1.4% 1.0% 7/31/2018
Total 12,229 53.9% 58.0%
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(2) Annualized rental revenue is the annualized contractual rents from our tenants pursuant to existing leases as of September 30, 2012, including straight line rent adjustments and estimated recurring expense reimbursements, but excluding lease value amortization.
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 nine properties with a combined 2,534,979 square feet for an aggregate purchase price of $260.7 million, excluding closing costs. As of November 1, 2012, we have agreed to acquire five properties with a combined 506,592 rentable square feet for an aggregate purchase price of $132.4 million, excluding closing costs. Our agreements to acquire additional properties are subject to conditions typical of commercial real estate transactions, including completion of our diligence. Accordingly there can be no assurance that we will acquire all or any of these properties. For more information regarding properties that we have acquired, 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 also intend to 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 in full 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 our payment of an extension fee and meeting certain other conditions, we have an option to extend the stated maturity date by one year. Borrowings under the revolving credit facility bear interest at LIBOR plus a spread. We also pay a per annum facility fee on the total amount of lending commitments under our revolving credit facility. Both the interest rate spread and the facility fee are subject to adjustment based upon changes to our debt leverage or credit ratings. As of September 30, 2012, our revolving credit facility spread was 130 basis points and our facility fee was 30 basis points. As of September 30, 2012, the interest rate payable on borrowings under the revolving credit facility was 1.52%, and we had $92.0 million of borrowings and $408.0 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 previously 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. The amount outstanding under the term loan bears interest at LIBOR plus a spread that is subject to adjustment based upon changes to our debt leverage or credit ratings. As of September 30, 2012, the term loan spread was 155 basis points and the interest rate payable on the amount outstanding under the term loan was 1.78%. 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.
There have been recent governmental inquires regarding the setting of LIBOR, which may result to changes to the process that could have the effect of increasing LIBOR. Increases in LIBOR would increase the amount of interest we pay under our revolving credit facility and term loan.
Our revolving credit facility and our term loan 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 and term loan covenants at September 30, 2012.
In September 2012, we assumed a mortgage totaling $18.5 million, which was recorded at a fair value of approximately $20.0 million, in connection with our acquisition in Carlsbad, CA. This mortgage bears interest at a rate of 5.950%, requires monthly principal and interest payments and matures in 2017.
Also in September 2012, we assumed a mortgage totaling $7.5 million, which was recorded at a fair value of approximately $7.9 million, in connection with our acquisition in Chelmsford, MA. This mortgage bears interest at a rate of 5.689%, requires monthly interest only payments and matures in 2016 with the ability to prepay at our option beginning in 2014.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2012, Compared to Three Months Ended
September 30, 2011 (dollars in thousands, except per share data)
Comparable Properties Results (1) Acquired Properties Results (2) Consolidated Results
Three Months Ended September 30, Three Months Ended September 30, Three Months Ended September 30,
$ % $ % $ %
2012 2011 Change Change 2012 2011 Change Change 2012 2011 Change Change
Revenues
Rental income $ 22,450 $ 22,338 $ 112 0.5% $ 3,994 $ - $ 3,994 - $ 26,444 $ 22,338 $ 4,106 18.4%
Tenant reimbursements
and other income 4,058 4,583 (525 ) (11.5)% 376 - 376 - 4,434 4,583 (149 ) (3.3)%
Total revenues $ 26,508 $ 26,921 $ (413 ) (1.5)% $ 4,370 $ - $ 4,370 - $ 30,878 $ 26,921 $ 3,957 14.7%
Operating expenses
Real estate taxes 3,732 3,912 (180 ) (4.6)% 163 - 163 - 3,895 3,912 (17 ) (0.4)%
Other operating expenses 1,568 2,223 (655 ) (29.5)% 247 - 247 - 1,815 2,223 (408 ) (18.4)%
Total operating expenses 5,300 6,135 (835 ) (13.6)% 410 - 410 - 5,710 6,135 (425 ) (6.9)%
Net operating income (3) $ 21,208 $ 20,786 $ 422 2.0% $ 3,960 $ - $ 3,960 - 25,168 20,786 4,382 21.1%
Other expenses
Depreciation and
amortization 3,888 2,884 1,004 34.8%
Acquisition related
costs 583 - 583 -
General and
administrative 2,626 1,405 1,221 86.9%
Total other expenses 7,097 4,289 2,808 65.5%
Operating income 18,071 16,497 1,574 9.5%
Interest expense (2,467 ) - (2,467 ) -
Equity in earnings of an
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