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CSG > SEC Filings for CSG > Form 10-Q on 6-May-2014All Recent SEC Filings




Quarterly Report

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, increasing competition and decreasing rental revenue;

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 and maintaining 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, 2013 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.

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" of our Annual Report on Form 10-K for the year ended December 31, 2013, and Item 1A,"Risk Factors" in this quarterly report on Form 10-Q. Overview
We are a self-administered REIT focused on acquiring, owning and managing net leased industrial and office properties leased to creditworthy tenants. Our experienced management team manages our day-to-day operations, 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 100% owner and sole general partner. We have elected to be taxed as a REIT for U.S. federal income tax purposes.
We were formed in Maryland 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 of approximately $2.5 billion in gross proceeds through two public offerings of our common shares to finance our real estate investment activities. On May 21, 2013, we listed our common shares on the NYSE under the symbol "CSG" and concurrently commenced the Tender Offer from our shareholders, which was completed on June 26, 2013.
As of March 31, 2014, we owned, on a consolidated basis, 100 industrial (primarily warehouse/distribution), office and retail properties located in 19 U.S. states (Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Maryland, Massachusetts, Minnesota, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Texas and Virginia) and in the United Kingdom, encompassing approximately 23.1 million net rentable square feet. Our consolidated properties were approximately 94.2% leased (based upon rentable square feet) as of March 31, 2014. As of March 31, 2014, 75 of our consolidated properties were net leased to single tenants, which encompassed approximately 18.7 million rentable square feet.
In addition, we owned, on an unconsolidated basis, 29 industrial (primarily warehouse/distribution) and office properties located in eight U.S. states
(Arizona, Florida, Illinois, Indiana, North Carolina, Ohio, Tennessee and Texas)
and in three European countries (France, Germany and the United Kingdom) encompassing approximately 12.7 million rentable square feet. Our unconsolidated properties were approximately 99.5% leased (based upon rentable square feet) as of March 31, 2014. As of March 31, 2014, 20 of our unconsolidated properties were net leased to single tenants, which encompassed approximately 11.3 million rentable square feet.

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Unless the context otherwise requires or indicates, references to the "Company," "we," "our" and "us" refer to the activities of and the assets and liabilities of the business and operations of Chambers Street Properties and its subsidiaries. References to unconsolidated properties include properties owned through unconsolidated joint ventures and do not include properties owned by CBRE Strategic Partners Asia.
Business Strategy
We focus on investing in industrial and office properties that are primarily 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 enhance 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 to grow our portfolio with properties targeted to provide steady income, sustaining tenant relationships and enhancing the value of our existing properties. 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. We monitor the credit of our tenants to stay abreast of any material changes in credit quality. We monitor tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies) that are rated by nationally recognized rating agencies, (2) reviewing financial statements that are publicly available or that are required to be delivered to us under the applicable lease, (3) monitoring news reports regarding our tenants and their underlying businesses and (4) monitoring the timeliness of rent collections. During the three months ended March 31, 2014, we continued to expand our portfolio with the purchase of one wholly-owned property for $30.2 million that is fully leased to a creditworthy tenant.
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.
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. 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. During the three months ended March 31, 2014, consistent with our investment strategy to focus on industrial and office properties, we sold one office property held in the Duke JV for approximately $13.1 million, of which our pro rata share was approximately $10.5 million.
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 three months ended March 31, 2014, we completed the following transactions in order to maintain a prudent capital structure:
On January 2, 2014, we paid off the notes payable secured by Avion III and IV in the amount of $20.0 million.

On January 7, 2014, we received a BBB- corporate rating from Standard and Poor's Rating Services ("S&P"). S&P also gave us a stable outlook, reflecting our high-quality real estate portfolio and selective acquisition strategy, which S&P believes will support solid revenue and earnings growth in the near future.

Factors that May Influence the Results of Operations Economic conditions, leasing activity and real estate capital availability all improved throughout 2013 and this trend has continued into 2014. Whereas industrial and office leasing activity in the immediately preceding years was substantially weighted toward large corporate tenants, starting in 2013 activity trended towards normalization in the market for smaller tenants. Much of this activity has been driven by increasing activity in the single-family home market - brokers, title companies, law firms, developers, contractors and related service providers all require

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office and/or industrial space as their businesses expand. However, growth in demand for space was by no means exclusive to these industries, and activity remains robust for the large, corporate user as well.
In concert with this leasing activity, market rent trends remain positive in most major markets. Driven by market rent growth, construction and development activity has continued to increase, including both single-tenant build-to-suit and speculative projects. Beginning in 2013 we observed speculative construction activity expanding to a wider selection of markets, although development still remains below long-term averages.
Debt and equity capital availability continues to remain constant in 2014. Equity availability has resulted in increasing competition for high quality, well-leased and strategically positioned properties. Even with increased competition we remain well-positioned to compete for such properties going forward, due to our strong liquidity position, modest near-term capital needs and excellent portfolio. We will continue to focus our strategy by growing our portfolio with properties targeted to provide steady income, sustaining tenant relationships and enhancing the value of our existing properties. Leasing Activity

Our ability to maintain high occupancy rates is a principal driver of maintaining and increasing rental revenue. Our leasing activity for the three months ended March 31, 2014 is presented in the table below:

                                           Three Months Ended
                                             March 31, 2014
                                                         TI/LC per
                                                        Square Feet
                                       TI/LC per        per Year of     Net Rentable
                    # of Leases     Square Feet(1)       Lease Term      Square Feet
New Leasing
Consolidated                  4    $           4.84    $        0.37         225,296
Unconsolidated                5                8.15             0.58          75,194
Total New Leasing             9                5.67             0.21         300,490
Consolidated                  5               23.41             1.38         135,757
Unconsolidated                1                0.38             0.19         391,494
Total Renewals                6                6.31             0.33         527,251
Total                        15    $           6.08    $        0.13         827,741


(1) Includes tenant improvement costs and lease commissions incurred to execute the lease and not necessarily paid in the current quarter.

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The following table sets forth percentage leased and average annual net effective rent information regarding our total portfolio of consolidated properties and unconsolidated properties at our pro-rata share as of March 31, 2014 and 2013, respectively (in thousands, except percentage and per square foot data):

                                                                                                                             Average Annual Net
                                                                                                Average Annual Net         Effective Rent/Square
                  Total Square Feet         % of Total Square Feet          % Leased            Effective Rent (1)                  Feet
                   2014          2013         2014           2013        2014      2013         2014           2013           2014         2013
Office            7,559         7,333          32.7 %          32.9 %    97.2 %    96.9 %   $   148,848     $ 145,486     $    19.69     $ 19.84
Industrial       15,380        14,781          66.6 %          66.2 %    92.7 %    95.4 %        58,560        58,882     $     3.81     $  3.98
Retail              144           200           0.7 %           0.9 %   100.0 %   100.0 %         4,225         5,253     $    29.34     $ 26.27
Total            23,083        22,314         100.0 %         100.0 %    94.2 %    95.9 %   $   211,633     $ 209,621

Office            1,201         1,559           9.5 %          13.3 %    95.0 %    93.2 %   $    17,968     $  24,719     $    14.96     $ 15.86
Industrial       11,501         9,893          90.5 %          84.2 %   100.0 %   100.0 %        54,698        44,138     $     4.76     $  4.46
Retail                -           296             - %           2.5 %       - %    97.9 %             -        10,820     $        -     $ 36.55
Total            12,702        11,748         100.0 %         100.0 %    99.5 %    99.0 %   $    72,666     $  79,677

Office            8,760         8,892          24.5 %          26.1 %    96.9 %    96.2 %   $   166,816     $ 170,205     $    19.04     $ 19.14
Industrial       26,881        24,674          75.1 %          72.4 %    95.8 %    97.2 %       113,258       103,020     $     4.21     $  4.18
Retail              144           496           0.4 %           1.5 %   100.0 %    98.8 %         4,225        16,073     $    29.34     $ 32.41
Total            35,785        34,062         100.0 %         100.0 %    96.1 %    97.0 %   $   284,299     $ 289,298


(1) Average Annual Net Effective Rent is calculated as the total average annual cash base rental payments, adjusted for free rent periods. There is no effect given to other landlord concessions and excludes payments received from tenants for reimbursement of real estate taxes and operating expenses.

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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 6.92 years
as of March 31, 2014. In addition, approximately 95.6% of leases expire after
2015. The following table sets forth a schedule of expiring leases for our
consolidated and unconsolidated properties as of March 31, 2014 (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 2014           916            $    4,083               20     $       239            28              936     $    4,322            1.5 %
2015                     570                 3,208              771           5,340            33            1,341          8,548            2.9 %
2016                   1,744                31,716              235           2,410            28            1,979         34,126           11.6 %
2017                     626                10,397            1,015           6,896            24            1,641         17,293            5.9 %
2018                   1,568                18,693            1,997          10,433            36            3,565         29,126           10.0 %
2019                   3,493                26,483            2,874          11,987            27            6,367         38,470           13.2 %
2020                   1,860                18,439               23             236            14            1,883         18,675            6.4 %
2021                   4,358                38,028            2,167           9,440            20            6,525         47,468           16.3 %
2022                     693                 8,733            1,360           6,867             7            2,053         15,600            5.3 %
2023                   2,830                27,946            1,188           5,802            16            4,018         33,748           11.6 %
Thereafter             3,083                39,340              992           5,276            21            4,075         44,616           15.3 %
Total                 21,741            $  227,066           12,642     $    64,926           254           34,383     $  291,992          100.0 %
Weighted Average
Remaining Term
(Years) (2):
Triple Net
Properties(3)                                 7.27                             6.82                                          7.17
Properties                                    7.30                             5.00                                          6.71
Properties                                    5.11                             5.75                                          5.17
Total Weighted
Average Remaining
Term (Years)(2)                               7.08                             6.37                                          6.92


(1) Expiring Net Rentable Square Feet for Unconsolidated Properties is at 100%. Expiring Base Rent for Unconsolidated Properties is at our pro rata share of effective ownership.

(2) Weighted Average Remaining Term is the average remaining term weighted by Expiring Base Rent.

(3) Triple Net Single-Tenant Properties include certain properties that have minimal secondary tenant(s).

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Property Portfolio Size
Our portfolio size at the end of each quarter since commencement of our initial
public offering (October 24, 2006) through March 31, 2014 is as follows (Net
Rentable Square Feet and Approximate Total Acquisition Cost in thousands):
                                                                                                                                               Consolidated &
                                   Consolidated Properties                           Unconsolidated Properties(1)                               Properties(1)
                                                           Approximate                                        Approximate                                        Approximate
Cumulative                                                    Total                                              Total                                              Total
Property                                 Net Rentable      Acquisition                     Net Rentable       Acquisition                      Net Rentable      Acquisition
Portfolio as of:        Properties       Square Feet          Cost          Properties     Square Feet           Cost           Properties     Square Feet          Cost
12/31/2006                    9                  878     $      86,644           -                   -     $             -              9              878     $      86,644
3/31/2007                     9                  878            86,644           -                   -                   -              9              878            86,644
6/30/2007                    10                  928           110,491           -                   -                   -             10              928           110,491
9/30/2007                    42                5,439           348,456           -                   -                   -             42            5,439           348,456
12/31/2007                   44                5,576           353,594           -                   -                   -             44            5,576           353,594
3/31/2008                    47                6,257           426,856           -                   -                   -             47            6,257           426,856
6/30/2008                    47                6,257           426,856           1                 605              35,636             48            6,862           462,492
9/30/2008                    49                6,483           486,777           6               3,307             193,773             55            9,790           680,550
12/31/2008                   52                6,771           582,682           8               5,649             273,205             60           12,420           855,887
3/31/2009                    52                6,771           582,717           8               5,649             273,130             60           12,420           855,847
6/30/2009                    53                7,106           598,103          11               5,976             305,308             64           13,082           903,411
9/30/2009                    57                7,805           719,822          11               5,976             305,202             68           13,781         1,025,024
12/31/2009                   60                8,630           791,314          13               6,904             356,158             73           15,534         1,147,472
3/31/2010                    58                8,407           748,835          18               7,392             418,818             76           15,799         1,167,653
6/30/2010                    62                9,086           916,210          22               8,633             471,615             84           17,719         1,387,825
9/30/2010                    63                9,295           983,810          22               8,633             471,615             85           17,928         1,455,425
12/31/2010                   73               12,800         1,308,560          30               9,901             629,268            103           22,701         1,937,828
3/31/2011                    73               12,800         1,308,560          43              11,950             903,508            116           24,750         2,212,068
. . .
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