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CSG > SEC Filings for CSG > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for CHAMBERS STREET PROPERTIES

Form 10-Q for CHAMBERS STREET PROPERTIES


7-Aug-2014

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 of beneficial interest $0.01 par value (the "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 Operating Partnership, LP ("CSP OP") to qualify as a partnership for U.S. federal income tax purposes;

our ability to qualify as a self-administered real estate investment trust ("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 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 New York Stock Exchange (the "NYSE") under the symbol "CSG" 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, which was completed on June 26, 2013.
As of June 30, 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 rentable square feet. Our consolidated properties were approximately 93.9% leased (based upon rentable square feet) as of June 30, 2014. As of June 30, 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 12.8 million rentable square feet. Our unconsolidated properties were approximately 99.5% leased (based upon rentable square feet) as of June 30, 2014. As of June 30, 2014, 20 of our unconsolidated properties were net leased to single tenants, which encompassed approximately 11.5 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 CB Richard Ellis Strategic Partners Asia II-A, L.P. ("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 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. 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. During the six months ended June 30, 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 six months ended June 30, 2014, consistent with our investment strategy to focus on single-tenant industrial and office properties, we sold one multi-tenant office property held in the Duke JV for approximately $13.1 million, of which our pro rata share was approximately $10.5 million. In addition, subsequent to June 30, 2014, we sold our last retail property located in the United Kingdom for approximately $63.0 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 six months ended June 30, 2014, we completed the following activities 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, developers, contractors and material providers all require office and/or


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warehouse space for their businesses. However, growth in demand for space was by no means exclusive to these industries, and activity remains relatively stable 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 and investor demand, 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 for commercial real estate investment continued to improve during 2013 and into 2014, resulting in increasing competition to acquire properties. Even with this increased competition, we remain well positioned to acquire properties that fit our investment parameters, due to our strong liquidity position, modest near-term capital needs and excellent portfolio. We intend to continue to focus our strategy on enhancing the value of our existing properties, sustaining our tenant relationships, and growing our portfolio by continuing to selectively acquire high-quality and well-leased properties.


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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 June 30, 2014 is presented in the table below:
                                                           Prior Lease (1)                           New Lease (1)
                                                                                                                         Tenant
                                                                                                                        Improve-
                                                      Annualized Base Rent(2)           Annualized Base Rent(2)           ments
                                                                                                                        & Leasing
                                                                                                                         Commis-
                                   Square Feet         Cash            GAAP(3)           Cash            GAAP(3)        sions(4)
Industrial Properties
Consolidated
Renewals                               91,684     $     284,446     $   319,601     $     224,482     $   351,577     $    27,673
New Tenants - Previously Leased
Space(5)                              417,185         1,240,251       1,232,996         1,641,600       1,648,371         917,256
Total Consolidated                    508,869         1,524,697       1,552,597         1,866,082       1,999,948         944,929
Consolidated & Unconsolidated
Renewals                               91,684           284,446         319,601           224,482         351,577          27,673
New Tenants - Previously Leased
Space(5)                              417,185         1,240,251       1,232,996         1,641,600       1,648,371         917,256
Total Industrial Properties           508,869         1,524,697       1,552,597         1,866,082       1,999,948         944,929
Office Properties
Consolidated
Renewals                              113,825         1,678,930       1,738,551         1,628,945       2,000,501       1,088,512
New Tenants - Not Previously
Leased Space(6)(7)                     52,158                 -               -           886,620         965,867       2,973,026
Total Consolidated                    165,983         1,678,930       1,738,551         2,515,565       2,966,368       4,061,538
Unconsolidated
New Tenants - Not Previously
Leased Space(6)                         2,799                 -               -            26,758          25,751          36,143
Consolidated & Unconsolidated
Renewals                              113,825         1,678,930       1,738,551         1,628,945       2,000,501       1,088,512
New Tenants - Not Previously
Leased Space(6)                        54,957                 -               -           913,378         991,618       3,009,169
Total Office Properties               168,782         1,678,930       1,738,551         2,542,323       2,992,119       4,097,681
Total Properties
Consolidated
Renewals                              205,509         1,963,376       2,058,152         1,853,427       2,352,078       1,116,185
New Tenants - Previously Leased
Space(5)                              417,185         1,240,251       1,232,996         1,641,600       1,648,371         917,256
New Tenants - Not Previously
Leased Space(6)(7)                     52,158                 -               -           886,620         965,867       2,973,026
Total Consolidated                    674,852         3,203,627       3,291,148         4,381,647       4,966,316       5,006,467
Unconsolidated
New Tenants - Not Previously
Leased Space(6)                         2,799                 -               -            26,758          25,751          36,143
Consolidated & Unconsolidated
Renewals                              205,509         1,963,376       2,058,152         1,853,427       2,352,078       1,116,185
New Tenants - Previously Leased
Space(5)                              417,185         1,240,251       1,232,996         1,641,600       1,648,371         917,256
New Tenants - Not Previously
Leased Space(6)                        54,957                 -               -           913,378         991,618       3,009,169
Total Properties                      677,651     $   3,203,627     $ 3,291,148     $   4,408,405     $ 4,992,067     $ 5,042,610


__________


(1) Prior lease amounts represent rents in place at the time of expiration or termination. New lease amounts represent rents in place at the time of lease commencement.

(2) Cash Annualized Base Rent for each lease equals (i) 12 times the monthly cash base rent due as of June 30, 2014, or (ii) for any lease still in an initial free or reduced rent period as of June 30, 2014, 12 times the monthly cash base rent due upon expiration of the initial free or reduced rent period. U.S. Generally Accepted Accounting Principles ("GAAP") Annualized Base Rent includes the effect of straight-line rent. Cash and GAAP annualized base rent amounts for unconsolidated properties are included at pro rata share.

(3) GAAP amounts for prior leases include above/below market rents if applicable.

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

(5) Represents leases signed to new tenants for space that was previously leased since the later of (i) twelve months ago or (ii) the date we acquired the property.

(6) Represents leases signed to new tenants for space that was not previously leased since the later of (i) twelve months ago or (ii) the date we acquired the property.


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(7) Includes 47,250 square feet leased on future expansion of 22535 Colonial Parkway property, expected to be delivered in 2015 with a new 10 year term upon completion of the expansion. Total property (new and existing) will be 137,000 square feet.

The following table sets forth percentage leased and average annual net effective rent information regarding our total portfolio of consolidated properties and unconsolidated properties as of June 30, 2014 and 2013. Percentage leased information is presented at 100% and average annual net effective rent information is presented at our pro-rata share for our unconsolidated properties (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
Consolidated
Properties:
Office            7,559         7,334          32.7 %          32.7 %    96.7 %    96.9 %   $   148,538     $ 145,463     $    19.65     $ 19.83
Industrial       15,380        14,871          66.6 %          66.4 %    92.5 %    94.8 %        56,647        57,759     $     3.68     $  3.88
Retail              144           200           0.7 %           0.9 %   100.0 %   100.0 %         3,980         4,727     $    27.64     $ 23.64
Total            23,083        22,405         100.0 %         100.0 %    93.9 %    95.5 %   $   209,165     $ 207,949

Unconsolidated
Properties:
Office            1,202         1,559           9.4 %          13.3 %    94.3 %    93.2 %   $    20,172     $  25,012     $    16.78     $ 16.04
Industrial       11,627         9,893          90.6 %          84.2 %   100.0 %   100.0 %        55,336        43,274     $     4.76     $  4.37
Retail                -           296             - %           2.5 %      -%      97.9 %             -        20,959     $        -     $ 70.81
Total            12,829        11,748         100.0 %         100.0 %    99.5 %    99.0 %   $    75,508     $  89,245

Consolidated
and
Unconsolidated
Properties:
Office            8,761         8,893          24.4 %          26.0 %    96.4 %    96.2 %   $   168,710     $ 170,475     $    19.26     $ 19.17
Industrial       27,007        24,764          75.2 %          72.5 %    95.7 %    96.9 %       111,983       101,033     $     4.15     $  4.08
Retail              144           496           0.4 %           1.5 %   100.0 %    98.8 %         3,980        25,686     $    27.64     $ 51.79
Total            35,912        34,153         100.0 %         100.0 %    95.9 %    96.7 %   $   284,673     $ 297,194


__________


(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 6.75 years
as of June 30, 2014. In addition, approximately 95.9% of our base rent is
scheduled to expire after 2015. The following table sets forth a schedule of
expiring leases for our consolidated and unconsolidated properties as of
June 30, 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           813            $    3,361                8     $       113            23              821     $    3,474            1.2 %
2015                     544                 3,014              771           5,331            31            1,315          8,345            2.9 %
2016                   1,741                31,701              235           2,112            26            1,976         33,813           11.6 %
2017                     672                10,610            1,018           6,994            27            1,690         17,604            6.0 %
2018                   1,568                18,693            1,997          10,433            36            3,565         29,126           10.0 %
2019                   3,416                25,327            2,874          12,014            27            6,290         37,341           12.8 %
2020                   1,868                18,558               22             236            15            1,890         18,794            6.4 %
2021                   4,358                38,094            2,167           9,482            20            6,525         47,576           16.3 %
2022                     693                 8,755            1,360           6,992             7            2,053         15,747            5.4 %
2023                   2,830                27,991            1,188           5,801            16            4,018         33,792           11.5 %
Thereafter             3,173                41,311            1,119           5,720            22            4,292         47,031           16.1 %
Total                 21,676            $  227,415           12,759     $    65,228           250           34,435     $  292,643          100.0 %
Weighted Average
Remaining Term
(Years) (2):
Triple Net
Single-Tenant
Properties(3)                                 7.10                             6.61                                          6.99
Multi-Tenant
Properties                                    7.14                             4.83                                          6.56
Other
Single-Tenant
Properties                                    4.86                             5.50                                          4.92
. . .
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