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TPGI > SEC Filings for TPGI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for THOMAS PROPERTIES GROUP INC

Form 10-Q for THOMAS PROPERTIES GROUP INC


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled "Forward-Looking Statements." Certain risk factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this report entitled "Risk Factors." When you read the financial statements and the information included in this report, you should be aware that our operations are significantly affected by both macro and micro economic forces. Our operations are directly affected by actual and perceived trends in various national and regional economic conditions that affect national and regional markets for commercial real estate services, including interest rates, the availability of credit to finance commercial real estate transactions, and the impact of tax laws affecting real estate. Periods of economic slowdown or recession, rising interest rates, tightening of the credit markets, declining demand for or increased supply of real estate, or the public perception that any of these events may occur can adversely affect our business. These conditions could result in a general decline in rents, which in turn would reduce revenue from property management fees and brokerage commissions derived from leases. In addition, these conditions could lead to a decline in property values as well as a decline in funds invested in commercial real estate and related assets, which in turn may reduce revenues from investment advisory, property management, leasing and development fees. Forward-Looking Statements
Forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated and you should not rely on them as predictions of future events. Although information is based on our current estimates, forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise. You are cautioned not to place undue reliance on this information as we cannot guarantee that any future expectations and events described will happen as described or that they will happen at all. You can identify forward-looking statements by the use of forward-looking terminology such as "believes", "expects", "may", "should", "seeks", "approximately", "intends", "plans", "pro forma", "estimates" or "anticipates" or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Overview and Background
We are a full-service real estate operating company that owns, acquires, develops and manages primarily office, as well as mixed-use and residential properties on a nationwide basis. Our company's primary areas of focus are the acquisition and ownership of interests in premier properties, property development and redevelopment, and investment and property management activities. We conduct our business through our Operating Partnership, of which we own 78.7% as of September 30, 2012 and have control over the major decisions of the Operating Partnership.

Recent Developments
In September 2012, entities owned by TPG, CalSTRS and Madison, acquired all of the equity interests in an eight building, three million square foot portfolio of office properties in Austin, Texas, formerly owned by TPG-Austin Portfolio Syndication Partners JV LP, a venture among Lehman Brothers Holdings, Inc (50%), an offshore sovereign wealth fund (25%) and TPG/CalSTRS, LLC (25%). The purchase price for the portfolio was $859.0 million. As part of the transaction, TPG/CalSTRS Austin, LLC assumed five existing first mortgage loans totaling $626.0 million. The transaction reduced the existing leverage on the portfolio by repaying approximately $200 million owed to Lehman Commercial Paper, Inc. and the three existing partners as a result of loans made by the partners. TPG retains all operating responsibilities for the properties and the existing Austin leasing and management team remains in place.

Factors That May Influence Future Results of Operations The following is a summary of the more significant factors we believe may affect our results of operations. For a more detailed discussion regarding the factors that you should consider before making a decision to acquire shares of our common stock, see the information under the caption "Risk Factors" elsewhere in this report.
Rental income. The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space, to lease currently available space as well as space in newly developed or redeveloped properties and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in the submarkets where our properties are located.


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Los Angeles, Philadelphia, Austin, and Houston-Submarket Information. A significant portion of our income is derived from properties located in Los Angeles, Philadelphia, Austin and Houston. The market conditions in these submarkets have a significant impact on our results of operations. Development. We continually evaluate the size, timing and scope of our development initiatives to determine if we are able to lease committed development properties at expected rental rates or within projected time frames or complete projects on schedule or within budgeted amounts. The inability to achieve these outcomes could adversely affect our financial condition, results of operations and cash flows. We currently have sole ownership interest in three development projects, Campus El Segundo, Four Points Centre and 2100 JFK Boulevard, as of September 30, 2012, in which we had incurred, on a consolidated basis, approximately $80.4 million of costs related to land acquisition, predevelopment and infrastructure that are reflected in "Land Improvements - Development Properties" on our consolidated balance sheet. We are targeting one or more parcels at each of these three projects for potential sale. To the extent that we do not proceed with projects as planned or do not achieve sufficient proceeds from any contemplated disposition, development costs would need to be evaluated for impairment.

Results of Operations
The results of operations reflect the consolidation of the affiliates that own One Commerce Square, Two Commerce Square, Murano, 2100 JFK Boulevard, Four Points Centre, Campus El Segundo and our investment advisory, property management, leasing and real estate development operations. The following properties are accounted for using the equity method of accounting (the date of acquisition is listed for each with the exception of 2121 Market Street whose date represents the year it was co-developed with our partner):

•2121 Market Street (as of 2001)
•City National Plaza (as of January 2003)
•Reflections I (as of October 2004)
•Reflections II (as of October 2004)
•San Felipe Plaza (as of August 2005)
•CityWestPlace (as of June 2006)
•Fair Oaks Plaza (as of January 2007)

The following properties were disposed by TPG/CalSTRS during the fourth quarter of 2011 or, in the case of Brookhollow Central, the first quarter of 2012, and were accounted for using the equity method of accounting for the periods presented:
•Four Falls Corporate Center (as of March 2005, disposed of October 2011)
•Oak Hill Plaza (as of March 2005, disposed of October 2011)
•Walnut Hill Plaza (as of March 2005, disposed of October 2011)
•2500 CityWest (as of August 2005, disposed of November 2011)
•2500 CityWest land (as of December 2005, disposed of November 2011)
•Brookhollow Central I, II and III (as of August 2005, disposed of January 2012)
•Centerpointe I & II (as of January 2007, disposed of December 2011)

TPG Austin Partner, LLC, a limited liability company formed in September 2012 by TPG and Madison, owns a 50% interest in TPG/CalSTRS Austin, LLC which owns the following properties that were acquired from TPG-Austin Porfolio Syndication Partner JV LP ("Austin Joint Venture Predecessor"), a venture among Lehman Brothers Holdings Inc. (50%), an offshore sovereign wealth fund (25%) and TPG/CalSTRS, LLC (25%). TPG Austin Partner, LLC accounts for the following properties using the equity method of accounting:

•San Jacinto Center (acquired September 2012)
•Frost Bank Tower (acquired September 2012)
•One Congress Plaza (acquired September 2012)
•One American Center (acquired September 2012)
•300 West 6th Street (acquired September 2012)
•Park Centre (acquired September 2012)
•Great Hills Plaza (acquired September 2012)
•Westech 360 I-IV (acquired September 2012)


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This information should be read in conjunction with the accompanying consolidated financial statements and notes included elsewhere in this report. Comparison of the three months ended September 30, 2012 to the three months ended September 30, 2011.
Overview

The main drivers of our consolidated results of operations are (1) two high-rise office towers, commonly referred to as
Commerce Square, located in Philadelphia, Pennsylvania, (2) Murano, a high-rise condominium project, also located in
Philadelphia, and (3) our investment advisory, management, leasing and development services business. The following table reflects the change in leasing status of our three consolidated office properties from September 30, 2012 to September 30, 2011.

                                                                  Percent Leased
                                                               As of September 30,
                                               Rentable
                               Location       Square Feet       2012           2011
Consolidated Operating
Properties:
One Commerce Square        Philadelphia, PA     942,866          96.6 %         88.4 %
Two Commerce Square        Philadelphia, PA     953,276          78.7 %         85.7 %
Four Points Centre         Austin, TX           193,862          57.8 %         28.3 %
                                              2,090,004

We have sold 245 units at Murano as of September 30, 2012. Revenue from unit settlements decreased from six units settled in the three months ended September 30, 2011 as compared to five units in the three months ended September 30, 2012. Fee revenue from our investment advisory, management, leasing and development services business decreased $5.3 million or 53.5% for the three months ended September 30, 2012 compared to the same period for 2011. This decrease was primarily due to an incentive fee of $4.4 million paid to us in 2011 by CalSTRS related to the disposition of a separate account asset. There was no corresponding fee in 2012. The decrease was also attributable to lower fee revenue from unconsolidated properties which were sold in 2011 and the first quarter of 2012.
Revenues
Total revenues decreased by approximately $6.1 million, or 21.6%, to $22.1 million for the three months ended September 30, 2012 from $28.2 million for the same period for 2011. The decrease in total revenues was primarily due to a decrease of $5.3 million in investment advisory, management, leasing and development services fees earned in the three months ended September 30, 2012. This decrease was primarily due to (1) an incentive fee of $4.4 million paid to us in 2011 by CalSTRS related to the disposition of a separate account asset (there was no corresponding fee in 2012), (2) our development management role in the NBC Universal entitlement project reached completion during 2012 resulting in lower fee revenue compared to 2011, and (3) a decrease in fees from unconsolidated properties which were sold in 2011 and the first quarter of 2012. In addition, total revenues decreased by $0.8 million due to a decrease in settlements of condominium sales compared to the prior period. Expenses
Total expenses decreased by approximately $0.6 million, or 2.3%, during the three months ended September 30, 2012 in comparison to the same period in 2011. An increase of $0.7 million in depreciation and amortization expense was offset by decreases of $0.7 million in investment advisory expenses, $0.2 million in cost of condominium sales, $0.1 million in reimbursable property personnel costs, $0.2 million in real estate tax expense and $0.1 million in interest expense.


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Equity in net income (loss) of unconsolidated real estate entities Set forth below is a summary of the combined financial information for the unconsolidated real estate entities, our share of net income (loss) and our equity in net income (loss), after intercompany eliminations, for three months ended September 30, 2012 and 2011 (in thousands):

                                                               Three months ended
                                                                 September 30,
                                                              2012            2011
Revenue                                                   $    68,342     $   66,780
Expenses:
Operating and other expenses                                   36,814         34,089
Interest expense                                               25,678         24,402
Depreciation and amortization                                  21,435         26,494
Total expenses                                                 83,927         84,985
Income (loss) from continuing operations                      (15,585 )      (18,205 )
Gain (loss) on sale of real estate                            (60,076 )            -
Income (loss) from discontinued operations                      1,800          9,398
Net income (loss)                                         $   (73,861 )   $   (8,807 )
Thomas Properties' share of net income (loss)             $    (3,251 )   $     (946 )
Intercompany eliminations                                       1,454            593
Equity in net income (loss) of unconsolidated real estate
entities                                                  $    (1,797 )   $     (353 )

Aggregate revenues for the unconsolidated real estate entities for the three months ended September 30, 2012 increased approximately $1.5 million, or 2.2%, to $68.3 million compared to $66.8 million for the three months ended September 30, 2011. The increase is primarily due to higher tenant reimbursement revenue within TPG/CalSTRS resulting from increased occupancy at City West Place and San Felipe Plaza and an increase in the real estate tax expense at these two properties. Operating and other expenses for unconsolidated real estate entities increased by $2.7 million, or 7.9%, to $36.8 million for the three months ended September 30, 2012 compared to $34.1 million for three months ended September 30, 2011. The increase was due primarily to increases in property tax expense for City West Place, San Felipe Plaza and City National Plaza resulting from higher assessed values in 2012, as well as increases in operating expenses at City National Plaza, primarily for contract cleaning, earthquake insurance and parking operations. Interest expense increased by approximately $1.3 million, or 5.3%, to $25.7 million for the three months ended September 30, 2012 as compared to $24.4 million for the three months ended September 30, 2011. The increase was due primarily to higher interest rates and greater outstanding loan balances on the Austin Portfolio Bank Term Loan and the Austin Senior Secured Priority Facility, both of which were paid off at par in September 2012. Income associated with discontinued operations decreased by approximately $7.6 million, or 80.9%, primarily as a result of a gain earned in the three months ended September 30, 2011 associated with the extinguishment of debt on Centerpointe. Benefit (provision) for income taxes
For the three months ended September 30, 2012, there was a benefit for income taxes of $0.4 million, a decrease from a benefit of $1.2 million for the same period in 2011. This change is primarily due to a difference in the amount of accrued interest that was reversed on certain unrecognized tax benefits due to the expiration of statute of limitation periods.
Comparison of the nine months ended September 30, 2012 to the nine months ended September 30, 2011.
Revenues
Total revenues decreased by approximately $9.1 million, or 12.4%, to $64.3 million for the nine months ended September 30, 2012 from $73.4 million for the same period for 2011. The decrease in total revenues was primarily due to $1.4 million decrease in tenant reimbursement revenue during the nine months ended September 30, 2012, due to a decrease in anticipated operating expenses during the period, a $1.8 million decrease in condominium sales due to the settlement of nine units during the nine months ended September 30, 2012 compared to twelve units during the comparable period in 2011, and a decrease of $6.8 million in investment advisory, management, leasing and development services. This decrease was primarily due to (1) an incentive fee of $4.4 million paid to us in 2011 by CalSTRS related to the disposition of a separate account asset (there was no corresponding fee in 2012), (2) our development management role in the NBC Universal entitlement project reached


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completion during 2012 resulting in lower fee revenue compared to 2011, and (3) a decrease in fees from unconsolidated properties which were sold in 2011 and the first quarter of 2012. These decreases were offset by a $1.1 million increase in rental revenue at Commerce Square due to new leases. Expenses
Total expenses remained consistent during the nine months ended September 30, 2012 in comparison to the same period in 2011. Increases of $1.6 million in depreciation and amortization expense and $1.2 million in general and administrative expenses were primarily offset by decreases of $1.3 million in investment advisory expenses, $0.7 million in cost of condominium sales, and $0.9 million in lower interest expense.
Equity in net income (loss) of unconsolidated real estate entities Set forth below is a summary of the combined financial information for the unconsolidated real estate entities, our share of net income (loss) and our equity in net income (loss), after intercompany eliminations, for nine months ended September 30, 2012 and 2011 (in thousands):

                                                               Nine months ended
                                                                 September 30,
                                                              2012           2011
Revenue                                                   $  200,135     $  194,026
Expenses:
Operating and other expenses                                 108,026         97,736
Interest expense                                              77,420         72,402
Depreciation and amortization                                 64,986         70,391
Total expenses                                               250,432        240,529
Income (loss) from continuing operations                     (50,297 )      (46,503 )
Gain (loss) on sale of real estate                           (60,076 )            -
Income (loss) from discontinued operations                    (5,050 )        2,082
Net income (loss)                                         $ (115,423 )   $  (44,421 )
Thomas Properties' share of net income (loss)                 (5,853 )       (3,844 )
Intercompany eliminations                                      3,240          1,906
Equity in net income (loss) of unconsolidated real estate
entities                                                  $   (2,613 )   $   (1,938 )

Aggregate revenues for the unconsolidated real estate entities for the nine months ended September 30, 2012 increased approximately $6.1 million, or 3.1%, to $200.1 million compared to $194.0 million for the nine months ended September 30, 2011. The increase is primarily due to higher tenant reimbursement revenue from all properties due to the increase in real estate tax expense, as well as higher revenues within TPG/CalSTRS resulting from increased occupancy and rental rates at City West Place and City National Plaza. Operating and other expenses for unconsolidated real estate entities increased by $10.3 million, or 10.5%, to $108.0 million for the nine months ended September 30, 2012 compared to $97.7 million for nine months ended September 30, 2011. The increase was due primarily to increases in the property tax expense for all properties resulting from higher assessed values in 2012, as well as increases at City West Place, primarily for cafeteria expenses and windstorm insurance, and City National Plaza, primarily for contract cleaning, earthquake insurance, and parking operations. Interest expense increased by approximately $5.0 million, or 6.9%, to $77.4 million for the nine months ended September 30, 2012 as compared to $72.4 million for the nine months ended September 30, 2011. The increase was due primarily to higher interest rates and greater outstanding loan balances on the Austin Portfolio Bank Term Loan and the Austin Senior Secured Priority Facility, both of which were paid off at par in September 2012. Loss associated with discontinued operations increased by approximately $7.2 million, or 342.9%, to a loss of $5.1 million for the nine months ended September 30, 2012 compared to a gain of $2.1 million for the nine months ended September 30, 2011, primarily due to a gain on the extinguishment of debt at Centerpointe during the nine months ended September 30, 2011.
Benefit (provision) for income taxes
For the nine months ended September 30, 2012, there was a benefit for income taxes of $0.4 million, a decrease from a benefit of $1.0 million for the same period in 2011. This change is primarily due to a difference in the amount of accrued interest that was reversed on certain unrecognized tax benefits due to the expiration of statute of limitation periods.


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Liquidity and Capital Resources
Analysis of liquidity and capital resources As of September 30, 2012, we have unrestricted cash and cash equivalents of $58.4 million. We believe that we will have sufficient capital to satisfy our liquidity needs over the next 12 months through cash flows from operations and proceeds from condominium and property sales. We expect to meet our long-term liquidity requirements, including debt service, property acquisitions and additional future development and redevelopment activity, through cash flow from operations, additional secured and unsecured long-term borrowings, proceeds from dispositions of non-strategic assets, and the potential issuance of additional debt, or common or preferred equity securities, including convertible securities.
We have $3.9 million of scheduled principal payments in 2012 assuming the $2.5 million principal payment on the Campus El Segundo mortgage loan, which was to have been made on October 31, 2012, is deferred to April 30, 2013, as has been agreed to by lender and borrower. While documentation of such modification is pending, the lender has agreed to extend the maturity date to November 30, 2012. We believe that we have sufficient capital to satisfy these obligations when due.
In November 2012, our board of directors declared a quarterly cash dividend to common stockholders of $0.02 per common share payable in November 2012. Additionally, we paid dividends of $0.015 per common share in the preceding three quarters of 2012. The availability of funds to pay dividends is impacted by property-level restrictions on cash flows. With respect to our investments in properties, we do not solely control decision making with respect to these properties, and may not be able to obtain monies from these properties even if funds are available for distribution to us. In addition, we may enter future financing arrangements that contain restrictions on our use of cash generated from our properties. The payment of cash dividends in the future, if any, will be at the discretion of our board of directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition, and any other factors deemed relevant by our board of directors.
As of September 30, 2012, we have unfunded capital commitments to TPG/CalSTRS of $10.9 million. We are obligated to fund tenant improvements and other capital improvements for properties that were acquired prior to June 1, 2007. We estimate we will fund approximately $6.5 million between 2012 and 2014 to satisfy our share of contractual obligations existing at September 30, 2012 for capital improvements, tenant improvements and leasing commissions.
During July 2012, Research Park Plaza I & II and Stonebridge Plaza II were sold by the Austin Joint Venture Predecessor, an unconsolidated real estate entity. Mortgage loans on these properties, were paid in full from the proceeds of the sales. Additionally, a subsidiary of TPG/CalSTRS made a payment of $19.3 million, of which our share was $1.5 million, in July 2012 on a note payable to a former partner in the City National Plaza partnership.
In September 2012, entities owned by TPG, CalSTRS and Madison, acquired all of the equity interests in an eight building, three million square foot portfolio of office properties in Austin, Texas, formerly owned by Austin Joint Venture Predecessor, a venture among Lehman Brothers Holdings, Inc (50%), an offshore sovereign wealth fund (25%) and TPG/CalSTRS, LLC (25%). The purchase price for the portfolio was $859.0 million. As part of the transaction, TPG/CalSTRS Austin, LLC assumed five existing first mortgage loans totaling $626.0 million. The transaction reduced the existing leverage on the portfolio by repaying approximately $200 million owed to Lehman Commercial Paper, Inc. and the three existing partners as a result of loans made by the partners. TPG contributed approximately $75.5 million of the required equity. Together with Madison, we have unfunded capital commitments of approximately $15.0 million. Of that amount, TPG's unfunded capital commitment is approximately $10.0 million or 66.67% as of September 30, 2012.

Development
We own interests in three development projects, Campus El Segundo, Four Points Centre and 2100 JFK Boulevard. TPG/CalSTRS owns one development site, CityWestPlace, which is comprised of 24 acres. If we decide to develop any of these land holdings, we anticipate seeking to mitigate our development risk by obtaining significant pre-leasing and guaranteed maximum cost construction contracts. The amount and timing of costs associated with our development projects is inherently uncertain due to market and economic conditions. We presently intend to fund development expenditures, if any, primarily through construction and permanent financing.
Leasing, Tenant Improvement and Capital Needs In addition to our development projects, our One Commerce Square and Two Commerce Square properties require capital expenditures as well as leasing commissions and tenant improvement costs. The level of these expenditures varies from year to year based on several factors, including lease expirations. There . . .

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