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CSG > SEC Filings for CSG > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for CHAMBERS STREET PROPERTIES

Form 10-Q for CHAMBERS STREET PROPERTIES


8-Nov-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 unaudited condensed 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;


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

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 our 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 Securities and Exchange Commission (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
We are a self-administered and internally managed Maryland REIT focused on acquiring, owning and operating net-leased industrial and office properties, leased to creditworthy tenants. Our experienced management team manages our day-to-day operations and oversees and supervises acquisitions and asset management services, which are performed principally by our employees, 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, or 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, or the NYSE, under the ticker symbol "CSG." We were formed on March 30, 2004 and commenced operations in July 2004 following an initial private placement of our common shares. Jack A. Cuneo, our founder, President and Chief Executive Officer, developed the initial business plan 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.
Prior to July 1, 2012, all of our business activities were managed by CBRE Advisors LLC (the "former investment advisor") pursuant to advisory agreements. On July 1, 2012, we became a self-managed company and changed our name from CB Richard Ellis Realty Trust to Chambers Street Properties in accordance with a plan determined by our Board of Trustees. In addition, as of April 30, 2013, the transitional services agreement with CSP OP ("Transitional Services Agreement") and the former investment advisor that we had entered into as part of our transition to a self-managed company ended and we are now responsible for the management of our day-to-day operations, including the supervision of our employees and third-party service providers. Acquisitions and asset management activities are performed by our employees, with certain services provided by third parties at market rates.
As of September 30, 2013, we owned, on a consolidated basis, 101 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 22.8 million rentable square feet. Our consolidated properties were approximately 94.4% leased (based upon rentable square feet) as of September 30, 2013. As of September 30, 2013, 74 of our consolidated properties were net leased to single tenants, which encompassed approximately 18.1 million rentable square feet.


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In addition, we had ownership interests in five unconsolidated entities that, as of September 30, 2013, owned interests in 33 properties. Excluding those properties owned through our investment in CB Richard Ellis Strategic Partners Asia II-A, L.P. ("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 other parts of Europe encompassing approximately 11.7 million rentable square feet. Our unconsolidated properties were approximately 99.1% leased (based upon rentable square feet) as of September 30, 2013. As of September 30, 2013, 18 of our unconsolidated properties were net leased to single tenants, which encompassed approximately 10.2 million rentable square feet. Business Strategy
We seek to invest in industrial and office properties that are net leased to investment grade or creditworthy tenants on long-term leases through acquisitions of existing properties or build-to-suit projects. We believe the credit quality of many of our tenants, the length 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 continue to execute our strategy and expand our portfolio through the following:
Acquisitions. We believe high-quality industrial and office properties, which are net leased to 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. During the nine months ended September 30, 2013, we continued to expand our portfolio with the purchase of two wholly-owned properties for $60.3 million that are fully leased to creditworthy tenants and the purchase of our partner's 20% outside interest in 17 industrial and office properties that were previously held in an unconsolidated joint venture. We generally finance our acquisitions through the assumption of secured debt or with borrowings under our unsecured revolving credit facility.
Build-to-Suit Opportunities. We also intend to pursue build-to-suit opportunities that have attractive development yields and tenants with strong credit profiles, under long-term triple net leases. During the nine months ended September 30, 2013, we completed construction of our build-to-suit venture at 1400 Atwater Drive located in Malvern, Pensylvania. The project is a 300,000 square foot build-to-suit office development that was pre-leased to Endo Health Solutions under a 12-year lease. Upon substantial completion of construction in January 2013, we acquired our partner's 5% interest in the project for approximately $3.4 million.
Maximize Cash Flow Through Internal Growth. We seek investments with fixed rent escalations over long term leases that provide stable, increasing 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 typically have embedded rental rate growth as the majority of them provide for periodic increases in rent.
Capital Recycling Program. We intend to pursue a disciplined capital allocation strategy 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, or to reduce debt. 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 continue to stagger our debt maturities and utilize a balance of secured and unsecured borrowings. We continue to 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.
During the nine months ended September 30, 2013, we completed the following transactions in order to maintain our prudent capital structure. Capital Market Transactions
On May 21, 2013, we listed our common shares on the New York Stock Exchange (the "NYSE") under the symbol "CSG" (the "Listing") and concurrently commenced a modified "Dutch Auction" tender offer to purchase up to $125.0 million in value of the common shares (the "Tender Offer") from our shareholders. As a result of the Tender Offer, on June 26, 2013, we accepted for purchase 12,376,235 common shares at a purchase price of $10.10 per share, for an aggregate cost of approximately $125.0 million, excluding fees and expenses relating to the Tender Offer.


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Financing Transactions
On March 6, 2013, we entered into an unsecured term loan in the amount of $50.0 million (the "TD Term Loan") with TD Bank, N.A ("TD Bank"). Upon closing the TD Term Loan, we simultaneously entered into an interest rate swap agreement with TD Bank to effectively fix the interest rate on the TD Term Loan at 3.425% per annum for its seven-year term, based upon the TD Term Loan's then current stated applicable margin. This applicable margin, and therefore the effective interest rate on the TD Term Loan, may vary during its term by an increase of up to 0.75% based upon the then current leverage ratio. In the event that the Company obtains a credit rating, the applicable margin on the TD Term Loan can vary from a 0.60% reduction to a 0.20% increase based upon our then current credit rating. The TD Term Loan contains customary representations and warranties and covenants. We used the proceeds of the TD Term Loan to repay a portion of our borrowings under our unsecured revolving credit facility.

On March 7, 2013, we entered into an unsecured term loan in the amount of $200.0 million (the "WF Term Loan #1") with Wells Fargo Bank, National Association ("Wells Fargo Bank") and certain other lenders. Upon closing the WF Term Loan #1, we simultaneously entered into an interest rate swap agreement with Wells Fargo Bank to effectively fix the interest rate on the WF Term Loan #1 at 2.4885% per annum for its five-year term, based upon the WF Term Loan #1's then current stated applicable margin. This applicable margin, and therefore the effective interest rate on the WF Term Loan #1, may vary during its term by an increase of up to 0.60% based upon the then current leverage ratio. In the event that the Company obtains a credit rating, the applicable margin on the WF Term Loan #1 can vary from a 0.40% reduction to a 0.50% increase based upon our then current credit rating. The WF Term Loan #1 contains customary representations and warranties and covenants. We used the proceeds to repay a portion of our borrowings under our unsecured revolving credit facility.

On September 12, 2013, we entered into an unsecured term loan in the amount of $120.0 million (the "Capital One Term Loan") with Capital One, National Association ("Capital One") and certain other lenders. Upon closing the Capital One Term Loan, we simultaneously entered into an interest rate swap agreement with Capital One to effectively fix the interest rate on the Capital One Term Loan at 4.42125% per annum for its entire term until the Capital One Term Loan's scheduled maturity on January 31, 2021, based upon the Capital One Term Loan's current stated applicable margin. This applicable margin, and therefore the effective interest rate on the Capital One Term Loan, may vary during its term from a 0.20% reduction to a 0.35% increase based upon the then current leverage ratio. In the event the Company obtains a credit rating, the applicable margin on the Capital One Term Loan can vary from a 0.55% reduction to a 0.25% increase based upon our then current credit rating. We used the majority of the proceeds to repay a portion of our borrowings under our unsecured revolving credit facility.

On September 26, 2013, in connection with the second amendment to the Credit Agreement with Wells Fargo Bank (the "Second Amendment") (see additional information in Note 6 under "Unsecured Revolving Credit Facility"), our WF Term Loan #1 was replaced with a new unsecured term loan (the "WF Term Loan #2") with the same amount of $200.0 million and the same maturity date of March 7, 2018 as for the WF Term Loan #1. The existing swap agreement entered into on March 7, 2013 upon closing of the WF Term Loan #1 remained in place and is now applicable to the WF Term Loan #2 in order to effectively fix its interest rate at 2.6385% per annum for its term, based upon the WF Term Loan #2's current stated applicable margin. In addition, on September 26, 2013, and also in connection with the Second Amendment (see additional information in Note 6 under "Unsecured Revolving Credit Facility"), we entered into a new $200.0 million unsecured term loan (the "WF Term Loan #3"). Upon closing the WF Term Loan #3, we simultaneously entered into an interest rate swap agreement to effectively fix the interest rate on the WF Term Loan #3 at 3.274% per annum for its entire term until the WF Term Loan #3's scheduled maturity on January 15, 2019, based upon the WF Term Loan #3's current stated applicable margin. The applicable margin on both the WF Term Loan #2 and the WF Term Loan #3, and therefore the effective interest rate on both of these loans, may vary during their terms from a 0.20% reduction to a 0.35% increase based upon the then current leverage ratio. In the event the Company obtains a credit rating, the applicable margin on the WF Term Loan #2 and the WF Term Loan #3 can vary from a 0.70% reduction to a 0.30% increase based upon our then current credit rating. We used the majority of the WF Term Loan #3 proceeds to repay a portion of our borrowings under our unsecured revolving credit facility.

On September 26, 2013, we entered into a Second Amendment to our Credit Agreement. The Second Amendment modified our unsecured revolving credit facility to increase its capacity from $700.0 million to $850.0 million. The unsecured revolving credit facility's term was extended to January 15, 2018, which may be extended for one year at our option upon the payment of customary extension fees, provided that we are not then in default. The unsecured revolving credit facility has no minimum outstanding balance requirements. The applicable margin on the unsecured revolving credit facility can vary from (i) 1.50% to 2.05% based upon the Company's then current leverage ratio. In the event the Company obtains a credit rating, the applicable margin on the unsecured revolving credit facility can vary from 0.90% to 1.70% based upon the then current credit rating of the Company or CSP OP.


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Factors that May Influence the Results of Operations Market Trends
During 2011, we noted initial signs of added competition for commercial real estate investments, particularly for high-quality stabilized properties leased to creditworthy 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.
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. Recently, interest rates have increased as a result of the current economic recovery. Well-located, high quality commercial real estate remains in high demand and the acquisition environment remains quite competitive as we are seeing many active buyers in the market, including REITs, private equity and institutional capital. Nonetheless, however, we expect to continue to deploy capital on an accretive basis. Leasing Activity
Our ability to maintain high occupancy rates is a principal driver of maintaining and increasing rental revenue. The following table sets forth percentage leased and average net-effective rent information regarding our total portfolio of consolidated properties and unconsolidated properties at 100% as of September 30, 2013 and 2012, respectively (in thousands, except percentage and per square foot data):

                                                                                                             Average Annual Net          Average Annual Net
                             Total Square Feet         % of Total Square Feet           % Leased             Effective Rent (1)           Effective Rent/SF
Property Type                2013          2012          2013           2012         2013       2012         2013           2012          2013         2012
Office                      9,118          8,480          26.4 %          27.5 %     96.5 %     97.5 %   $   166,323     $ 149,859     $   18.88     $ 19.30
Warehouse/Distribution     24,925         21,852          72.2 %          70.9 %     95.8 %     99.1 %        92,350        79,648          4.07        4.02
Retail                        496            496           1.4 %           1.6 %     98.8 %     99.2 %         8,580         8,597         18.03       18.09
Total                      34,539         30,828         100.0 %         100.0 %     96.0 %     98.7 %   $   267,253     $ 238,104

Our single- and multi-tenant property distribution of September 30, 2013 and 2012, respectively (in thousands, except percentage and per square foot data):

                                                                                                  Average Annual Net         Average Annual Net
                    Total Square Feet         % of Total Square Feet          % Leased            Effective Rent (1)         Effective Rent/SF
Property Type        2013          2012         2013           2012        2013      2012         2013          2012          2013         2012
Triple Net
Single-Tenant
Properties(2)      28,249        24,420          81.8 %          79.2 %    97.0 %    99.9 %   $  184,473     $ 158,420     $    6.88     $ 6.94
Multi-Tenant
Properties          4,948         4,946          14.3 %          16.0 %    91.5 %    92.2 %       58,288        53,616         12.57      13.05
Other
Single-Tenant
Properties (2)      1,342         1,462           3.9 %           4.8 %    91.3 %   100.0 %       24,492        26,068         19.23      19.78
Total              34,539        30,828         100.0 %         100.0 %    96.0 %    98.7 %   $  267,253     $ 238,104


__________


(1) Average annual net effective rents include amounts from unconsolidated properties at our pro-rata share.


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(2) Single-Tenant Properties include certain properties that have di minimis secondary tenant(s).

Tenant Lease Expirations
Our ability to maintain occupancy rates, and net effective rents, primarily
depends upon our continuing ability to re-lease expiring space. We have limited
near term lease expirations with an average remaining lease term of 7.00 years
as of September 30, 2013. In addition, approximately 92% of leases expire after
2015. The following table sets forth a schedule of expiring leases for our
consolidated and unconsolidated properties as of September 30, 2013 (Expiring
Net Rentable Square Feet and Expiring Base Rent in thousands):
                                                                                                              Consolidated &
                                                               Unconsolidated                                 Unconsolidated
                       Consolidated Properties                 Properties(1)                                  Properties(1)
                       Expiring                           Expiring                       Number Of       Expiring                      Percentage
                     Net Rentable         Expiring      Net Rentable      Expiring       Expiring      Net Rentable      Expiring     of Expiring
                      Square Feet        Base Rent      Square Feet       Base Rent       Leases       Square Feet      Base Rent      Base Rent
Remaining 2013           369            $    4,561               13     $       162             7              382     $    4,723            1.6 %
2014                     754                 5,730              485           2,657            43            1,239          8,387            2.9 %
2015                     645                 6,569              397           4,084            38            1,042         10,653            3.7 %
2016                   1,827                31,110              233           1,937            34            2,060         33,047           11.3 %
2017                     626                 8,442            1,149           8,289            35            1,775         16,731            5.7 %
2018                   1,674                16,452            2,128          12,403            42            3,802         28,855            9.9 %
2019                   4,086                29,267            2,537          10,569            28            6,623         39,836           13.7 %
2020                   2,027                19,361               39             530            15            2,066         19,891            6.8 %
2021                   4,329                37,849            2,339          13,276            17            6,668         51,125           17.5 %
2022                     711                 9,018            1,040           4,895             7            1,751         13,913            4.8 %
Thereafter             4,469                57,322            1,279           6,942            25            5,748         64,264           22.1 %
Total                 21,517            $  225,681           11,639     $    65,744           291           33,156     $  291,425          100.0 %
Weighted Average
Remaining Term
(Years) (2):
Triple Net
Single-Tenant
Properties(3)                                 7.54                             6.71                                          7.37
Multi-Tenant
Properties                                    6.60                             5.26                                          6.20
Other
. . .
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