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CSG > SEC Filings for CSG > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for CHAMBERS STREET PROPERTIES

Form 10-Q for CHAMBERS STREET PROPERTIES


14-Aug-2013

Quarterly Report


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

Explanatory Note

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements, the notes thereto, and the other financial data included elsewhere in this Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This document contains various "forward-looking statements." You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "would," "could," "should," "seeks," "approximately," "intends," "plans," "projects," "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. Statements regarding the following subjects may be impacted by a number of risks and uncertainties:

our business strategy;

our ability to obtain future financing arrangements;

estimates relating to our future distributions;

our understanding of our competition;

market trends;

projected capital expenditures;

the impact of technology on our products, operations and business; and

the use of the proceeds of any offerings of securities.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common shares, along with the following factors that could cause actual results to vary from our forward-looking statements:

general volatility of the securities markets in which we participate;

national, regional and local economic climates;

changes in supply and demand for industrial and office properties;

adverse changes in the real estate markets, including increasing vacancy, decreasing rental revenue and increasing insurance costs;

availability and credit worthiness of prospective tenants;

our ability to maintain rental rates and maximize occupancy;

our ability to identify and secure acquisitions;

our failure to successfully manage growth or operate acquired properties;

our pace of acquisitions and/or dispositions of properties;

risks related to development projects (including construction delay, cost overruns or our inability to obtain necessary permits);

payment of distributions from sources other than cash flows and operating activities;

receiving corporate debt ratings and changes in the general interest rate environment;

availability of capital (debt and equity);

our ability to refinance existing indebtedness or incur additional indebtedness;

failure to comply with our debt covenants;

unanticipated increases in financing and other costs, including a rise in interest rates;


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the actual outcome of the resolution of any conflict;

material adverse actions or omissions by any of our joint venture partners;

our ability to operate as a self-managed company;

availability of and ability to retain our executive officers and other qualified personnel;

future terrorist attacks in the United States or abroad;

the ability of CSP OP to qualify as a partnership for U.S. federal income tax purposes;

our ability to qualify as a REIT for U.S. federal income tax purposes;

foreign currency fluctuations;

changes to accounting principles and policies and guidelines applicable to REITs;

legislative or regulatory changes adversely affecting REITs and the real estate business;

environmental, regulatory and/or safety requirements; and

other factors discussed under Item 1A Risk Factors of this Annual Report on Form 10-K for the year ended December 31, 2012 and those factors that may be contained in any filing we make with the SEC, including Part II, Item 1A of Form 10-Qs.

Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise. For a further discussion of these and other factors that could impact our future results, performance or transactions, see Item 1A. "Risk Factors."

Overview

Chambers Street Properties is a self-administered and internally managed Maryland REIT led by an experienced management team that is focused on acquiring, owning and managing high-quality industrial (primarily warehouse/distribution) and office properties, which are net leased to tenants with strong credit profiles. Our management team manages our day-to-day operations and oversees and supervises our employees and outside service providers. Acquisitions and asset management services are performed principally by us, with certain services provided by third parties. All of our real estate investments are held directly by, or indirectly through wholly owned subsidiaries of CSP Operating Partnership, LP ("CSP OP"), of which we are the majority owner and the sole general partner. We have elected to be taxed as a REIT for U.S. federal income tax purposes. On May 21, 2013, we listed our common shares on the New York Stock Exchange (the "NYSE") under the ticker symbol "CSG."

We were formed on March 30, 2004 and commenced operations in July 2004, following an initial $55,000,000 private placement of our common shares of beneficial interest. Jack A. Cuneo, our Founder and President and Chief Executive Officer, developed the initial business plan and obtained sponsorship from CBRE Global Investors, LLC to establish our company. Since that time, we have raised equity capital to finance our real estate investment activities through two public offerings of our common shares of beneficial interest. Our public offerings raised an aggregate of $2,388,227,000 in gross offering proceeds, excluding proceeds associated with common shares issued under our former amended and restated dividend reinvestment plan.

We invest in real estate properties, focusing primarily on industrial (primarily warehouse/distribution) and office properties, as well as other real estate-related assets. We primarily target single-tenant industrial and office assets, in well-located and growing markets that are critical to the tenant's business. A majority of these properties are subject to triple net or similar leases, where the tenant bears all or substantially all of the costs, including cost increases, for real estate taxes, utilities, insurance and ordinary repairs. We may also utilize our expertise and resources to capitalize on unique opportunities that may exist elsewhere in the marketplace. We intend to invest primarily in properties located in geographically-diverse metropolitan areas in the United States. Our international investments focus on properties typically located in significant business districts and suburban markets. Some of our domestic and international investments may be in partnership with other entities that have significant local-market expertise.

Our primary objective is to maximize shareholder value through stable cash flow and long-term asset appreciation. In pursuing this objective, we target growth through acquisitions and selective built-to-suit development in markets that complement our existing portfolio, actively manage our balance sheet to maintain flexibility with conservative leverage, and seek internal growth through proactive asset management, leasing and property management oversight. Operating results at our individual properties are impacted by the supply and demand trends of national and regional economies, the financial health of current and prospective tenants and their customers, capital and credit market trends, construction costs, and interest rate movements. Individual operating property performance is monitored and calculated using certain non-GAAP financial measures such as an analysis of net operating income. An


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analysis of net operating income as compared to local regional and national statistics may provide insight into short or longer term trends exclusive of capital markets or capital structuring issues. For investments outside of the United States, in addition to monitoring local property market fundamentals and capital and credit market trends, we evaluate currency hedging strategies, taxes, the stability of the local government and economy and the experience of our management team in the region.

As of June 30, 2013, we owned, on a consolidated basis, 99 industrial (primarily warehouse/distribution), office and retail properties located in 19 U.S. states (Arizona, California, Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, Maryland, Massachusetts, Minnesota, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Utah and Virginia) and in the United Kingdom, encompassing approximately 22,405,000 rentable square feet. Our consolidated properties were approximately 93.68% leased (based upon square feet) as of June 30, 2013. As of June 30, 2013, 72 of our consolidated properties were triple net leased to single tenants-these triple net single-tenant properties encompassed approximately 17,694,000 rentable square feet. As of June 30, 2013, certain of our consolidated properties were subject to mortgage debt, a description of which is set forth in "Financial Condition, Liquidity and Capital Resources-Financing."

In addition, we had ownership interests in five unconsolidated entities that, as of June 30, 2013, owned interests in 33 properties. Excluding those properties owned through our investment in CBRE Strategic Partners Asia, we owned, on an unconsolidated basis, 30 industrial (primarily warehouse/distribution), office and retail properties located in nine U.S. states (Arizona, Florida, Illinois, Indiana, Missouri, North Carolina, Ohio, Tennessee and Texas) and in the United Kingdom and Europe encompassing approximately 11,748,000 rentable square feet. Our unconsolidated properties were approximately 99.05% leased (based upon square feet) as of June 30, 2013. As of June 30, 2013, 18 of our unconsolidated properties were triple net leased to single tenants-these triple net single-tenant properties encompassed approximately 10,170,000 rentable square feet. As of June 30, 2013, certain of our unconsolidated properties were subject to mortgage debt, a description of which is set forth in "-Financial Condition, Liquidity and Capital Resources-Financing."

As of June 30, 2013, our portfolio was 95.53% leased, and the total effective annual rents for our industrial (primarily warehouse/distribution) properties, office properties and retail properties were approximately $90,075,000, $162,462,000 and $8,235,000, respectively (net of any rent concessions). The average effective annual rent per square foot for our industrial (primarily warehouse/distribution) properties, office properties and retail properties was approximately $3.98, $18.92 and $17.33, respectively (net of any rent concessions). The average effective annual rent per square foot for our triple net lease industrial and office properties was approximately $4.07 and $18.30 as of June 30, 2013, respectively (net of any rent concessions).

As of June 30, 2012, our portfolio was 98.45% leased, and the total effective annual rents for our industrial (primarily warehouse/distribution) properties, office properties and retail properties were approximately $73,178,000, $149,323,000, and $8,397,000 as of June 30, 2012, respectively (net of any rent concessions). The average effective annual rent per square foot for our industrial properties, office properties and retail properties was approximately $3.90, $19.23 and $17.67 as of June 30, 2012, respectively (net of any rent concessions). The average effective annual rent per square foot for our triple net lease industrial and office properties was approximately $3.98 and $17.71 as of June 30, 2012, respectively (net of any rent concessions).

Transition to Self-Management

We were originally formed as CB Richard Ellis Realty Trust and prior to July 1, 2012, all of the business activities of the Company were externally managed by CBRE Advisors LLC (the "former investment advisor") pursuant to various advisory agreements.

In 2010, our Board of Trustees established a Special Committee of the Board (the "Special Committee") consisting of the Board's independent trustees to explore and review our strategic alternatives and liquidity events in accordance with our investment objectives. The Special Committee engaged Robert A. Stanger & Co., Inc. as its financial advisor, to assist with its exploration and review of our strategic alternatives and liquidity events in accordance with our investment objectives (as discussed above). During 2011, with the assistance of its financial advisor and in consultation with the former investment advisor and our Board of Trustees, the Special Committee discussed and considered various strategic alternatives, including potentially continuing as a going concern under our then current business plan, a potential liquidation of our assets either through a sale or merger of our company (including through either a bulk sale of our portfolio or through a sale of our individual properties) as well as a potential listing of our shares on a national securities exchange. In December 2011, after consideration of the recent general economic and capital market conditions, market conditions for listed REITs, credit market conditions, our operational performance, the status of our portfolio, our then current offering and our current and anticipated deployment of available capital to investments, the Special Committee and our Board of Trustees determined it was in the best interests of our shareholders for our shares to remain unlisted and to continue operations rather than commencing a liquidation of our assets. The Special Committee and our Board of Trustees believed at that time that remaining unlisted and continuing our operations would provide us with the ability to purchase additional properties in order to continue to expand and diversify our portfolio and thus potentially better position us for a liquidity event. In April 2013, our Board of Trustees determined that it was in our and our shareholders' best interest to pursue a listing on the NYSE, which occurred on May 21, 2013.


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In March 2012, the Special Committee determined that our company and its shareholders would benefit from an internal management structure in that such a structure could provide cost savings, improved cash distribution coverage, flexibility to pursue a variety of strategic initiatives, the ability to take advantage of opportunities created by changing market conditions and an opportunity to enhance the trading values of our common shares, to the extent that we pursued and completed a listing of our common shares on a national securities exchange, the NASDAQ Global Select Market or the NASDAQ Global Market. Our Board of Trustees, based on the recommendation of the Special Committee, authorized the Special Committee to commence a process to achieve internal management.

On April 27, 2012, we entered into a transition to self-management agreement (the "Transition to Self-Management Agreement") with CSP OP, CBRE Global Investors, and the former investment advisor, which sets forth certain tasks to be performed by each of the parties to the agreement in order to facilitate our self-management, including but not limited to our hiring of the 19 identified employees of the former investment advisor and/or its affiliates who were dedicated to our operations. The tasks set forth in the Transition to Self-Management Agreement have been fulfilled.

On June 30, 2012, the fourth amended and restated advisory agreement terminated according to its terms and, effective July 1, 2012, we entered into a transitional services agreement (the "Transitional Services Agreement") with CSP OP and the former investment advisor pursuant to which the former investment advisor would provide certain operational and consulting related services to us at the direction of our officers and other personnel for a term which ended on April 30, 2013. For a description of the services provided by, and fees paid to, the former investment advisor (and its affiliates), see Note 11 to the Condensed Consolidated Financial Statements "Investment Management and Other Fees to Related Parties."

Business and Growth Strategies

We seek to invest in industrial and office properties that are net leased to investment grade or credit worthy tenants on long-term leases at attractive prices through new acquisitions or build-to-suit projects. We believe the credit quality of many of our tenants, the lengths of our leases, the relatively modest capital expense requirements of our industrial properties and our single-tenant focus help us to create shareholder value. We also believe that our senior management team's extensive experience will allow us to identify and consummate the acquisition and development of high-quality net leased properties. Our strategy is intended to generate attractive risk-adjusted returns for our shareholders over time and across a variety of market conditions and economic cycles. We intend to execute our strategy and expand our portfolio through the following:

Acquire Existing, High-Quality Net Leased Industrial and Office Properties.
We believe high-quality industrial and office properties, which are net leased to single tenants with strong credit profiles, represent attractive investments. We target acquisitions in markets with above-average projected rental growth, strong tenant demand and significant barriers to new construction. Our relationships with our tenants and our network of industry contacts help us source acquisitions.

Selectively Pursue Built-to-Suit Opportunities. We intend to pursue select built-to-suit opportunities that have attractive development yields and tenants with strong credit profiles under long-term triple net leases.

Maximize Cash Flow Through Internal Growth. We seek investments that provide the potential for attractive returns to our shareholders with fixed rent escalations over long term leases that provide stable cash flow. We have typically structured our property acquisitions to achieve a positive spread between our cost of capital and the yields achieved on our investments. Our existing leases have embedded rental rate growth as the majority of our existing leases provide for periodic increases in rent.

Pursue a Disciplined Capital Recycling Program. We intend to pursue a disciplined capital allocation strategy designed to maximize the value of our investments by selectively disposing of properties that are no longer consistent with our investment strategy or whose returns appear to have been maximized. To the extent that we dispose of properties, we intend to redeploy the capital into investment opportunities that we believe are more attractive.

Actively Manage a Strong and Flexible Capital Structure. We expect to maintain a prudent capital structure with access to multiple sources of equity and debt financing. We intend to continue to stagger our debt maturities and transition to become a primarily unsecured borrower. We anticipate that we will have a mix of fixed and floating-rate debt and intend to maintain modest total leverage. As a means to reduce our exposure to foreign currency fluctuations, we endeavor to retain debt in the local currency of our international properties.

Market Trends

In early 2010, the commercial real estate market experienced gradual indications of market stabilization and improved access to debt financing on attractive terms began to reappear. During 2010 and into 2011, we also noted the initial signs of added competition for commercial real estate investments, particularly for high-quality stabilized properties leased to credit worthy tenants on a long-term basis, and we additionally experienced a willingness of our tenants to commit to extended lease maturities, and in some instances expand existing facilities.


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As economic activity progressed in 2011 and during 2012, a slower pace of recovery in the general economy continued with a gradual improvement in certain key metrics such as exports and corporate profits. In the current environment, capital availability continues to remain concentrated on the highest quality, well-leased and strategically positioned properties that provide lower risk and stable investment return potential, and for well sponsored real estate investment programs with experienced management teams.

Throughout 2012 and into 2013, demand for quality industrial space accelerated across much of the country, but particularly in major distribution hubs. The office market is in the midst of a slow recovery following the recession, with the rate of recovery varying significantly by metropolitan area and submarket. Net lease properties performed better than other real estate segments during the recent recession, reflecting the stability provided by assets with long-term in-place leases. Construction and development of new properties has shown signs of improvement, primarily with regard to new, single-tenant, built-to-suit opportunities leased on a long-term basis. The continuation of low interest rates combined with the availability of attractively priced properties should allow us to deploy our capital on an attractive basis.

Our Properties

The following table provides information relating to our properties, excluding those owned through our investment in CBRE Strategic Partners Asia, as of June 30, 2013. These properties consisted of 69 warehouse/distribution properties, encompassing 24,764,000 rentable square feet, 57 office properties, encompassing 8,893,000 rentable square feet and three retail properties, encompassing 496,000 rentable square feet.

                                                                                                                                                                Approximate
                                                                                                                                                                   Total
                                                                                                    Our              Net Rentable                               Acquisition
                                         Date            Year                                    Effective           Square Feet           Percentage             Cost(1)
Property and Market                    Acquired         Built            Property Type           Ownership          (in thousands)           Leased           (in thousands)
Domestic Consolidated Properties:
REMEC Corporate Campus 1(2)
San Diego, CA                           9/15/2004         1983               Office                  100.00 %                    34             100.00 %      $         6,833
REMEC Corporate Campus 2(2)
San Diego, CA                           9/15/2004         1983               Office                  100.00 %                    30             100.00 %                6,125
REMEC Corporate Campus 3(2)
San Diego, CA                           9/15/2004         1983               Office                  100.00 %                    37             100.00 %                7,523
REMEC Corporate Campus 4(2)
San Diego, CA                           9/15/2004         1983               Office                  100.00 %                    31             100.00 %                6,186
300 Constitution Drive(2)
Boston, MA                              11/3/2004         1998       Warehouse/Distribution          100.00 %                   330               0.00 %               19,805
Deerfield Commons(3)
Atlanta, GA                             6/21/2005         2000               Office                  100.00 %                   122             100.00 %               21,834
505 Century Parkway(2)
Dallas, TX                               1/9/2006         1997       Warehouse/Distribution          100.00 %                   100              66.86 %                6,095
631 International Parkway(2)
Dallas, TX                               1/9/2006         1998       Warehouse/Distribution          100.00 %                    73             100.00 %                5,407
660 North Dorothy(2)
Dallas, TX                               1/9/2006         1997       Warehouse/Distribution          100.00 %                   120             100.00 %                6,836
Bolingbrook Point III
Chicago, IL                             8/29/2007         2006       Warehouse/Distribution          100.00 %                   185             100.00 %               18,170
Community Cash Complex 1(2)
Spartanburg, SC                         8/30/2007         1960       Warehouse/Distribution          100.00 %                   206               3.50 %                2,690
Community Cash Complex 2(2)
Spartanburg, SC                         8/30/2007         1978       Warehouse/Distribution          100.00 %                   144              76.58 %                2,225
Community Cash Complex 3(2)
Spartanburg, SC                         8/30/2007         1981       Warehouse/Distribution          100.00 %                   116               0.00 %                1,701
Community Cash Complex 4(2)
Spartanburg, SC                         8/30/2007         1984       Warehouse/Distribution          100.00 %                    33             100.00 %                  547
Community Cash Complex 5(2)
Spartanburg, SC                         8/30/2007         1984       Warehouse/Distribution          100.00 %                    53             100.00 %                  824
Fairforest Building 1(2)
Spartanburg, SC                         8/30/2007         2000       Warehouse/Distribution          100.00 %                    51             100.00 %                2,974
Fairforest Building 2(2)
Spartanburg, SC                         8/30/2007         1999       Warehouse/Distribution          100.00 %                   104             100.00 %                5,379
Fairforest Building 3(2)
Spartanburg, SC                         8/30/2007         2000       Warehouse/Distribution          100.00 %                   100             100.00 %                5,760
Fairforest Building 4(2)
Spartanburg, SC                         8/30/2007         2001       Warehouse/Distribution          100.00 %                   191             100.00 %                5,640
Fairforest Building 5
Spartanburg, SC                         8/30/2007         2006       Warehouse/Distribution          100.00 %                   316             100.00 %               16,968
Fairforest Building 6
Spartanburg, SC                         8/30/2007         2005       Warehouse/Distribution          100.00 %                   101             100.00 %                7,469

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