- Securities Registration: Real Estate Company (S-11/A)
As filed
with the Securities and Exchange Commission on June 28,
2010
Registration
No. 333-165174
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 6
to
Form S-11
FOR REGISTRATION UNDER THE
SECURITIES ACT OF 1933 OF SECURITIES
OF CERTAIN REAL ESTATE COMPANIES
WELSH PROPERTY TRUST,
INC.
(Exact name of registrant as
specified in its governing instruments)
4350 Baker Road, Suite 400
Minnetonka, Minnesota 55343
(952) 897-7700
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Scott T. Frederiksen
Chief Executive Officer
Welsh Property Trust, Inc.
4350 Baker Road, Suite 400
Minnetonka, Minnesota 55343
(952) 897-7700
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Steven J. Ryan, Esq.
Alec C. Sherod, Esq.
Jen Randolph Reise, Esq.
Briggs and Morgan, P.A.
2200 IDS Center
Minneapolis, Minnesota 55402
(612) 977-8400
(phone)
(612) 977-8650
(fax)
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Jay L. Bernstein, Esq.
Andrew S. Epstein, Esq.
Clifford Chance US LLP
31 West
52
nd
Street
New York, New York 10019
(212) 878-8000 (phone)
(212) 878-8375 (fax)
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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the
effective date of this Registration Statement
If any of the Securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box:
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering.
o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large
accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
þ
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Smaller reporting
company
o
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(Do not check if a smaller
reporting company)
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and we are not soliciting offers
to buy these securities in any jurisdiction where the offer or
sale is not permitted.
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SUBJECT TO COMPLETION, DATED
JUNE 28, 2010
PRELIMINARY PROSPECTUS
35,789,474 Shares
Welsh Property Trust,
Inc.
Common Stock
This is the initial public offering of our common stock. No
public market currently exists for our common stock. Our company
owns, acquires and manages commercial real estate and provides
management, leasing, construction, architecture, mortgage
banking, facility management, development and investment
services for our owned portfolio and to third parties. All of
the shares of common stock being offered pursuant to this
prospectus are being sold by us. We intend to elect and qualify
to be taxed as a real estate investment trust, or REIT, for
federal income tax purposes commencing with our taxable year
ending December 31, 2010. We are offering
35,789,474 shares of our common stock as described in this
prospectus. We expect the initial public offering price of our
common stock to be between $8.50 and $10.50 per share.
Our common stock has been approved to be listed on the New York
Stock Exchange, or the NYSE, subject to official notice of
issuance, under the symbol WLS.
Shares of our common stock are subject to restrictions on
ownership and transfer that are intended, among other purposes,
to assist us in qualifying and maintaining our qualification as
a REIT. Our charter, subject to certain exceptions, limits
ownership to no more than 9.8% in value or number of shares,
whichever is more restrictive, of our outstanding capital stock
or our outstanding common stock.
Investing in our common stock involves a high degree of risk.
Before buying any shares, you should carefully read the
discussion of material risks of investing in our common stock in
Risk Factors beginning on page 22 of this
prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Per share
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Total
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Public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds, before expenses, to us
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$
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$
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The underwriters may also purchase up to an additional
5,368,421 shares of our common stock at the public offering
price, less the underwriting discounts and commissions payable
by us, to cover over-allotments, if any, within 30 days
from the date of this prospectus. If the underwriters exercise
this option in full, the total underwriting discounts and
commissions will be $ and our
total proceeds, before expenses, will be
$ .
The underwriters are offering the common stock as set forth
under Underwriting. Delivery of the shares will be
made on or
about ,
2010.
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UBS
Investment Bank
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J.P.
Morgan
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Deutsche
Bank Securities
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RBC Capital Markets
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The date of this prospectus
is ,
2010.
WELSH PROPERTY TRUST, INC. NYSE: WLS www. shpt.com.
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You should rely only on the information contained in this
prospectus and any free writing prospectus provided or approved
by us. We have not, and the underwriters have not, authorized
anyone to provide you with additional information or information
different from that contained in this prospectus. We are
offering to sell, and seeking offers to buy, shares of our
common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of shares
of our common stock.
TABLE OF
CONTENTS
Through and
including ,
2010 (the
25
th
day
after the date of this prospectus) federal securities law may
require all dealers that effect transactions in these
securities, whether or not participating in this offering, to
deliver a prospectus. This requirement is in addition to the
dealers obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
We use market data and industry forecasts and projections
throughout this prospectus, including data from publicly
available information and industry publications. These sources
generally state that the information they provide has been
obtained from sources believed to be reliable, but that the
accuracy and completeness of the information are not guaranteed.
The forecasts and projections are based on industry surveys and
the preparers experience in the industry and there can be
no assurance that any of the projections will be achieved. We
believe that the surveys and market research others have
performed are reliable, but we have not independently verified
this information.
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You should read the following summary together with the more
detailed information regarding our company, including under the
caption Risk Factors and the historical and pro
forma financial statements, including the related notes,
appearing elsewhere in this prospectus. Unless the context
otherwise requires or indicates, references in this prospectus
to we, our, us, our
company, and the company refer to Welsh
Property Trust, Inc., a Maryland corporation, together with our
consolidated subsidiaries, including Welsh Property Trust, L.P.,
a Delaware limited partnership, which we refer to in this
prospectus as our operating partnership, Welsh
Property TRS, Inc., our taxable REIT subsidiary, which will
provide real estate-related services such as construction,
property management, brokerage and architecture to third-party
owners, which we refer to in this prospectus as our
taxable REIT subsidiary, and Welsh Property Trust,
LLC, a Delaware limited liability company and the sole general
partner of our operating partnership, together with the services
business and property subsidiaries that currently own our
properties, which we refer to as our existing
entities, or, in reference to our historical business,
the Welsh organization. For accounting purposes, the
existing entities have been classified as either Welsh
Predecessor Companies or Welsh Contribution
Companies. The Welsh Predecessor Companies are a
collection of real estate entities that directly or indirectly
own industrial and office properties and are controlled by
Dennis J. Doyle, co-founder of the Welsh organization and
Chairman of our company. The Welsh Contribution Companies are a
collection of real estate entities that directly or indirectly
own industrial and office properties as well as the services
business and are under the common management of Mr. Doyle,
Scott T. Frederiksen and Jean V. Kane, who we refer to,
collectively, as our principals. In addition, unless
the context otherwise requires or indicates, the information set
forth in this prospectus assumes that (1) the formation
transactions described elsewhere in this prospectus have been
completed, (2) the underwriters over-allotment option
is not exercised, and (3) the common stock to be sold in
the offering is sold at $9.50 per share, which is the midpoint
of the initial public offering price range shown on the cover
page of this prospectus.
As used in this prospectus, fully diluted basis
assumes the exchange of all outstanding common units of limited
partnership interest in our operating partnership, which we
refer to as OP units, for shares of our common stock
on a
one-for-one
basis, which is not the same as the meaning of fully
diluted under generally accepted accounting principles, or
GAAP. In addition, pro forma, pro forma
consolidated, or on a pro forma basis means
that the information presented gives effect to this offering,
the formation transactions, the acquisition of our acquisition
portfolio, the financing transactions and the issuance of stock
awards to our directors (each as described herein), in each case
as if such transactions had occurred on January 1, 2009,
with respect to statement of operations data, and on
March 31, 2010 with respect to balance sheet data, all as
set forth in our unaudited pro forma condensed consolidated
financial statements, which we call our pro forma
financials or our pro forma financial
information.
OUR
COMPANY
We are a vertically integrated, self-administered and
self-managed real estate investment trust, or REIT, formed to
continue and expand the
32-year-old
business of the Welsh organization. We acquire, own, operate,
and manage industrial and office properties primarily across the
central United States and provide real estate services to
commercial property owners in central U.S. markets. Upon
completion of this offering and the formation transactions
described herein, we will own and manage our existing portfolio
of 65 income-producing properties, consisting of 57 industrial
and eight office properties comprising in the aggregate
approximately 9.6 million leasable square feet. Our
existing portfolio is situated in several central
U.S. markets located across 12 states. Our existing
portfolio also includes five parcels of vacant, developable land
totaling approximately 44 acres in four markets. We will
also own a 5% economic interest in a portfolio consisting of 10
industrial and three office properties and a 21.7% economic
interest in
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one five-building office complex; these properties together
total approximately 3.2 million leasable square feet. We
expect to maintain contractual management and leasing
responsibilities for these properties, which we refer to as our
joint venture portfolio. As of April 1, 2010, our existing
portfolio was 86.1% occupied by leasable square footage and our
joint venture portfolio was 95.0% occupied by leasable square
footage. Our existing portfolio, our joint venture portfolio and
our acquisition portfolio, discussed below, are referred to
together as our real estate portfolio.
Concurrently with the closing of this offering, we plan to
expand our real property holdings through the acquisition of 22
additional industrial properties in 11 states containing an
aggregate of 8.8 million leasable square feet, for
consideration of $320.1 million. We plan to use net
proceeds from this offering, issuance of OP units, assumption of
existing debt and new debt financing to acquire these
properties, which we refer to together as our acquisition
portfolio. These properties, which are included in our pro forma
financial information, complement our existing portfolio by
adding additional holdings in some of our existing markets as
well as allowing us to expand into contiguous markets. We refer
to our existing portfolio and our acquisition portfolio together
as our combined portfolio. In addition to these properties, we
are currently reviewing 14 additional industrial properties with
an aggregate purchase price of $282.8 million, which we
refer to as our acquisition pipeline. There can be no assurance
that we will acquire any of the properties in our acquisition
portfolio or pipeline.
On a pro forma basis, our combined portfolio was 92.6% occupied
by leasable square footage. We believe we benefit from a diverse
tenant base representing a multitude of industries, from
third-party logistics firms to food producers in the industrial
sector, and from Fortune 500 companies to small
professional services companies in the office sector.
Our vertically integrated real estate services business provides
a complete spectrum of real estate services to complement and
support our properties. Our services business enables us to gain
valuable insights into the markets in which we operate,
specifically by providing us with an operational perspective of
market trends. For example, our brokers supply us with timely
first-hand knowledge about rental rates, rent concessions, and
capitalization rates in our markets. We believe our heightened
market awareness developed through our services business
provides us with a competitive advantage that manifests itself
in operational efficiencies, effective management strategies and
the ability to source acquisitions
off-market.
As of April 1, 2010, we had approximately 27.1 million
leasable square feet under management, including
12.4 million leasable square feet under management for
third parties, and nearly 80 licensed real estate salespersons
in our brokerage division. Historically, our services business
has been a key driver of revenue at our properties by enabling
us to identify profit and growth opportunities, provide services
to our tenants, proactively manage potential liabilities and
overhead expenses and develop relationships to source off-market
acquisitions.
Our three principals each have over 22 years of commercial
real estate experience, almost exclusively with our company. Our
Chairman, Dennis J. Doyle, co-founded the Welsh organization in
1977, while Scott T. Frederiksen, our Chief Executive Officer,
and Jean V. Kane, our President and Chief Operating Officer,
have been with the Welsh organization since 1987. This team has
experience in many diverse aspects of the real estate industry,
has operated in a variety of business and economic cycles, and
has worked together for over 22 years to build the Welsh
organization into the multi-faceted, full-service real estate
company that it is today. Upon completion of this offering and
the formation transactions, our principals will collectively
beneficially own approximately 5.2% of our outstanding common
stock on a fully diluted basis, substantially all of which is
held in the form of OP units.
We intend to elect and qualify to be taxed as a REIT for federal
income tax purposes commencing with our taxable year ending
December 31, 2010. Upon completion of this offering and the
formation transactions, substantially all of our business will
be conducted through our operating partnership, Welsh Property
Trust, L.P. We believe that conducting our business through our
operating partnership will offer us the opportunity to acquire
additional properties from sellers in
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tax-deferred transactions through the use of OP units as
acquisition currency. We are vertically integrated
in that, through our services business, we are able to provide a
full spectrum of real estate services, including asset and
property management, construction, financing and leasing, to
support our existing portfolio. We are
self-administered and self-managed in
that we will be managed by our executive officers as opposed to
an external manager and our own staff will handle the asset
management functions for our properties.
MARKET
OPPORTUNITY
We believe the recent distress in the real estate sector may
present compelling near-term acquisition opportunities in both
industrial and office properties, though our primary focus is
industrial properties. In the short term, we will target owners
that may be faced with liquidity issues who may be motivated to
sell their properties because of the current distress in the
overall economy. With the combination of our existing
infrastructure, our ability to source off-market acquisition
opportunities and operate assets efficiently and our access to
capital through the public markets, we believe that we are
well-positioned to take advantage of these opportunities.
We intend to continue to focus primarily on acquisition
opportunities in our current markets in the central United
States, although we will also monitor other potential markets
for attractive investment opportunities that may warrant
additional consideration. When expanding into new markets, we
will focus on strategically located, resilient
sub-markets
that we believe will outperform the greater market. We consider
resilient sub-markets to be those that have a strong employment
base, convenient freeway access, close proximity to airports and
railroad intermodal terminals, high population density and other
economic benefits for current and potential tenants.
OUR COMPETITIVE
STRENGTHS
We believe that a number of competitive strengths distinguish us
from our competitors, have contributed in large part to our past
achievements, and will be integral to our future success.
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Experienced and Committed Management Team.
Our
three principals each have more than 22 years of commercial
real estate experience, almost exclusively with our company, and
have extensive knowledge of our real estate portfolio. This team
has experience in many diverse aspects of the real estate
industry, has operated in a variety of business and economic
cycles, and has worked together to build the Welsh organization
into the multi-faceted, full-service real estate company that it
is today. Each of our principals is contributing all of his or
her interests in the property subsidiaries that own the assets
in our real estate portfolio and all of his or her ownership
interests in the services business. Mr. Doyle,
Mr. Frederiksen and Ms. Kane are part of a senior
management team of 11 individuals, supported by over 310
commercial real estate professionals.
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Established Portfolio of Assets.
With a focus
on markets throughout the central United States, we have
accumulated a portfolio of real estate assets that is
characterized by its diverse tenant base and consistent cash
flow. Our existing portfolio consists of 57 industrial and eight
office properties with an aggregate of approximately
9.6 million leasable square feet, and our top 10 tenants
represented approximately 25.8% of our annualized gross rent as
of April 1, 2010. Our existing portfolio was 86.1% occupied
by leasable square footage as of April 1, 2010, and we
believe there is opportunity for additional value creation by
increasing occupancy levels and continuing to drive operational
efficiencies within the portfolio. The pro forma occupancy for
our combined portfolio, which includes our acquisition
portfolio, was 92.6% based on leasable square footage. We will
also own a 5% economic interest in a portfolio consisting of 10
industrial and three office properties and a 21.7% economic
interest in one five-building office complex; these properties
together total approximately 3.2 million leasable square
feet, and we expect to maintain contractual management and
leasing responsibilities for our joint venture portfolio.
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Vertically Integrated Real Estate Services
Business.
Through our real estate services
business, which provides a full spectrum of real estate
services, we are able to identify leading indicators of market
trends and seek to maximize profit opportunities and expense
management in the markets in which we operate. With service
operations in virtually every aspect of real estate services
needed by owners, operators and tenants, and experience with a
variety of real estate property types, we are able to garner
first-hand knowledge of trends in occupancy, operational costs,
tenant delinquencies and potential development and construction
activity. With this knowledge, we can be proactive in the
management of our real estate portfolio, the sourcing of
off-market acquisition opportunities, the integration of
acquisitions into our portfolio and the growth of our services
business.
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Market-Centered and Relationship-Focused
Approach.
We believe that our local market
presence, combined with our network of industry relationships,
will allow us to successfully execute our business objectives
and create value for our stockholders. We have in-house property
management staff in our five regional offices: Minneapolis/St.
Paul, Minnesota; Chicago, Illinois; St. Louis, Missouri;
Detroit, Michigan; and Cincinnati, Ohio. We also have leasing,
marketing and transactional professionals in Minneapolis/St.
Paul, Detroit and Cincinnati. Our local market presence
complements our existing portfolio, as approximately 63.3% of
our leasable square footage is located in the five contiguous
central states where we have regional offices. We believe our
market presence enables us to better understand the particular
characteristics and trends of each market, respond quickly and
directly to tenant needs and demands and reduce third-party
leasing commissions and other expenses. This market-centered,
relationship-focused approach to our growth allows us to
efficiently and cost-effectively identify both internal and
external growth opportunities.
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Proactive Portfolio Management.
With 21 office
locations providing property management services, we have
developed a comprehensive approach to property management to
enhance the operating performance of our properties, which we
believe leads to high levels of tenant retention and therefore
increased value for our stockholders. Our proactive management
leverages our local market knowledge and enables us to closely
monitor our properties and to be prepared for potential tenant
and property issues as well as changes in local, regional or
national market conditions. In addition, we believe that our
internalized management and services business provides us the
ability to more effectively motivate and hold accountable
third-party service providers in markets where we do not have a
local presence.
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Established Acquisition Track Record and Acquisition
Pipeline.
From January 1, 2000 through
December 31, 2009, we completed over $650 million in
industrial and office real estate acquisitions in 41 separate
transactions involving 90 buildings totaling approximately
12.5 million leasable square feet. Our acquisition strategy
is driven by our network of industry relationships and leverages
the market knowledge of our services business. With a
32-year
track record, seven service businesses, over 320 employees
(including nearly 80 licensed real estate salespersons in our
brokerage division), 21 office locations and a portfolio of
approximately 27.1 million leasable square feet under
management including 12.4 million square feet under
management for third parties, we have access to information
relating to assets prior to their being widely marketed.
Approximately 72% of our acquisitions from 2005 to 2009, based
on purchase price, were sourced in off-market transactions where
there was no formal sales process. Eighteen of the 22 properties
in our acquisition portfolio were sourced off-market and 10 of
the 14 buildings in our acquisition pipeline were sourced
off-market.
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BUSINESS AND
GROWTH STRATEGIES
We have implemented the following strategies to achieve our
primary business objectives which are to maximize cash flow and
to achieve sustainable long-term growth in earnings and funds
from operations, or FFO, thereby maximizing total returns to our
stockholders.
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Maximizing Cash Flow from Our Real Estate
Portfolio.
We intend to maximize the cash flow
from our real estate portfolio by:
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increasing occupancy levels;
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realizing contractual increases in rent under our existing
leases;
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increasing rental rates for tenants with below market leases
upon renewal;
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managing operating expenses; and
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identifying profit opportunities for our services business.
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As of April 1, 2010, our combined portfolio was 92.6%
occupied by leasable square footage, leaving approximately
1.7 million leasable square feet available for additional
revenue creation.
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Capitalizing on Acquisition
Opportunities.
Concurrently with the completion
of this offering and the formation transactions, and as a key
component of our business plan going forward, we intend to
expand our real estate portfolio through the disciplined
acquisition of high-quality industrial and select office
properties. We intend to acquire assets with a focus on
attractive current cash flow and the potential for long-term
capital appreciation. In the short term, we will target owners
that may be faced with liquidity issues who may be motivated to
sell their properties because of the current distress in the
overall economy. We will evaluate each acquisition opportunity
to ensure it has the characteristics we believe are necessary to
be successful, including desirable location, creditworthy tenant
base, limited need for capital improvements, rent growth
potential in existing leases and opportunities to leverage our
services business. As of June 25, 2010, we had under
contract $320.1 million of properties in our acquisition
portfolio and we are currently reviewing an additional
$282.8 million of properties in our acquisition pipeline.
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Pursuing Relationship-Focused Growth.
We are
focused on building tenant and other relationships within the
markets in which we own and operate our properties in order to
understand and identify commercial real estate needs in each
market. We believe this strategy is a catalyst for our growth
and enhances our existing relationships because we are able to
strategically offer our services business to our tenants by
providing them with comprehensive real estate services that
extend beyond the typical landlord/tenant relationship and focus
on the long-term growth of our tenants business to make
them an integral part of our success. We understand that in
order to maximize the value of our investments, our tenants must
prosper as well. For example, in 2008 we accommodated the growth
of an existing industrial tenant into an additional market where
we already had a presence by acquiring a building for the tenant
to lease, and simultaneously identified an additional tenant to
lease the remaining space in the building.
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Leveraging Expansion of our Services
Business.
We provide services to other real
estate owners as well as our real estate portfolio, generating
revenue from third parties that supplements the rental income
produced by our real estate portfolio. This income is
low-volatility because we provide a diversity of services that
property owners need in each economic cycle. For example, in
2009, we saw reductions in revenue in brokerage, construction,
architectural and financing services; however, this was
partially offset by increased revenue in investment services,
property management and facility services, and was further
mitigated by our variable cost structure including the use of
independent contractors and
sub-contractors
in brokerage and construction. We believe that, as real estate
transaction volume increases during the economic recovery, we
will be well-positioned to take advantage of opportunities to
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increase our service revenue with additional third-party
business, and we will have the ability to spread the costs of
the services necessary to maintain our portfolio over the
third-party managed properties.
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OUR
PORTFOLIO
Existing
portfolio
Our existing portfolio consists of 57 industrial properties and
eight office properties situated in several central
U.S. markets across 12 states. As of April 1,
2010, our existing portfolio was 86.1% occupied by leasable
square footage, with 16.6%, based on leasable square footage,
represented by leases expiring in 2010 or 2011 (not including
leases which are month-to-month). Our approximately 450 tenants
include national, regional, and local companies that represent a
multitude of industries, from third-party logistics firms to
food producers in the industrial sector and Fortune 500
companies to small professional services companies in the office
sector.
Acquisition
portfolio and acquisition pipeline
Concurrently with the closing of this offering, we plan to
expand our real property holdings through the acquisition of 22
additional industrial properties in 11 states containing an
aggregate of 8.8 million leasable square feet, for
consideration of $320.1 million. We plan to use net
proceeds from this offering, issuance of OP units, the
assumption of existing debt and new debt financing to acquire
our acquisition portfolio. Our acquisition portfolio complements
our existing portfolio by adding additional holdings in some of
our existing markets and contiguous markets. In addition to our
acquisition portfolio, we are currently reviewing
$282.8 million of additional industrial properties in our
acquisition pipeline. Consistent with our acquisition strategy,
18 of the 22 properties in our acquisition portfolio were
sourced off-market and 10 of the 14 properties in our
acquisition pipeline were sourced off-market. There can be no
assurance that we will acquire any of the properties in our
acquisition portfolio or pipeline.
Combined
portfolio
We believe our acquisition portfolio will complement our
existing portfolio and enhance our central U.S. presence. We
refer to our acquisition portfolio and existing portfolio as our
combined portfolio, which had an occupancy as of April 1,
2010 of 92.6% and represents 18.4 million leasable square
feet in 17 states.
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The following table summarizes our combined portfolio as of
April 1, 2010:
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Total
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Total
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
leasable
|
|
|
industrial
|
|
|
office
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
leasable
|
|
|
square
|
|
|
square
|
|
|
square
|
|
|
Occupancy
|
|
|
Annualized
|
|
|
annualized
|
|
|
|
Number of
|
|
|
square
|
|
|
footage(1)
|
|
|
footage
|
|
|
footage
|
|
|
rate(2)
|
|
|
base
|
|
|
base rent(4)
|
|
State
|
|
properties
|
|
|
footage
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
rent(3)
|
|
|
(%)
|
|
|
|
|
North Carolina
|
|
|
4
|
|
|
|
2,533,911
|
|
|
|
13.8
|
|
|
|
14.7
|
|
|
|
0.0
|
|
|
|
96.2
|
|
|
$
|
7,541,140
|
|
|
|
10.1
|
|
Ohio
|
|
|
11
|
|
|
|
2,261,804
|
|
|
|
12.3
|
|
|
|
12.9
|
|
|
|
4.2
|
|
|
|
96.5
|
|
|
|
9,759,435
|
|
|
|
13.0
|
|
Minnesota
(5)
|
|
|
20
|
|
|
|
2,081,837
|
|
|
|
11.3
|
|
|
|
6.1
|
|
|
|
83.1
|
|
|
|
83.2
|
|
|
|
14,728,299
|
|
|
|
19.7
|
|
Wisconsin
|
|
|
8
|
|
|
|
1,856,495
|
|
|
|
10.1
|
|
|
|
10.8
|
|
|
|
0.0
|
|
|
|
99.6
|
|
|
|
6,203,955
|
|
|
|
8.3
|
|
Michigan
|
|
|
6
|
|
|
|
1,630,560
|
|
|
|
8.8
|
|
|
|
9.5
|
|
|
|
0.0
|
|
|
|
96.8
|
|
|
|
7,964,675
|
|
|
|
10.6
|
|
Tennessee
|
|
|
2
|
|
|
|
1,234,806
|
|
|
|
6.7
|
|
|
|
7.2
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
3,081,526
|
|
|
|
4.1
|
|
Indiana
|
|
|
3
|
|
|
|
1,196,954
|
|
|
|
6.5
|
|
|
|
7.0
|
|
|
|
0.0
|
|
|
|
71.2
|
|
|
|
2,727,254
|
|
|
|
3.6
|
|
Missouri
(6)
|
|
|
7
|
|
|
|
1,123,336
|
|
|
|
6.1
|
|
|
|
6.5
|
|
|
|
0.0
|
|
|
|
83.1
|
|
|
|
4,589,813
|
|
|
|
6.1
|
|
Iowa
|
|
|
8
|
|
|
|
782,179
|
|
|
|
4.2
|
|
|
|
4.6
|
|
|
|
0.0
|
|
|
|
89.1
|
|
|
|
2,488,490
|
|
|
|
3.3
|
|
Pennsylvania
|
|
|
3
|
|
|
|
773,649
|
|
|
|
4.2
|
|
|
|
4.5
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
2,900,492
|
|
|
|
3.9
|
|
Illinois
|
|
|
4
|
|
|
|
589,685
|
|
|
|
3.2
|
|
|
|
3.4
|
|
|
|
0.0
|
|
|
|
55.3
|
|
|
|
1,921,509
|
|
|
|
2.6
|
|
Florida
|
|
|
3
|
|
|
|
518,909
|
|
|
|
2.8
|
|
|
|
3.0
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
2,153,029
|
|
|
|
2.9
|
|
South Carolina
|
|
|
3
|
|
|
|
458,206
|
|
|
|
2.5
|
|
|
|
1.7
|
|
|
|
12.8
|
|
|
|
100.0
|
|
|
|
2,841,917
|
|
|
|
3.8
|
|
Maryland
|
|
|
1
|
|
|
|
393,440
|
|
|
|
2.1
|
|
|
|
2.3
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
983,600
|
|
|
|
1.3
|
|
California
|
|
|
1
|
|
|
|
351,723
|
|
|
|
1.9
|
|
|
|
2.0
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
2,004,821
|
|
|
|
2.7
|
|
Colorado
|
|
|
2
|
|
|
|
329,800
|
|
|
|
1.8
|
|
|
|
1.9
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
1,454,607
|
|
|
|
1.9
|
|
Kansas
|
|
|
1
|
|
|
|
311,100
|
|
|
|
1.7
|
|
|
|
1.8
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
1,555,500
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Combined
Portfolio
(5)(6)
|
|
|
87
|
|
|
|
18,428,394
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
92.6
|
|
|
$
|
74,900,061
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Certain percentages and totals
may not sum due to rounding
|
|
|
|
(1)
|
|
Calculated as total leasable
square footage by state divided by the portfolio total of
18,428,394 leasable square footage
|
|
|
|
(2)
|
|
Occupancy as of April 1,
2010
|
|
(3)
|
|
Based on monthly billed base
rent, excluding storage and parking revenue as of April 1,
2010, and calculated as billed base rent multiplied by
12
|
|
|
|
(4)
|
|
Calculated as annualized base
rent by state divided by total annualized base rent as of April
1, 2010 of $74,900,061
|
|
|
|
(5)
|
|
Occupancy exclusive of 900
2nd Avenue South, which has not reached stabilized
occupancy of 90.0% since acquisition by us with the intent to
renovate and reposition
|
|
(6)
|
|
Occupancy exclusive of the
following assets which have not reached stabilized occupancy of
90.0% since development by us: 10360 Lake Bluff Boulevard,
629-651 Lambert
Pointe Drive,
519-529 McDonnell
Boulevard
|
Joint venture
portfolio
We will own a 5% economic interest in a portfolio consisting of
10 industrial and three office properties and a 21.7% economic
interest in one five-building office complex; these properties
together total approximately 3.2 million leasable square
feet. We expect to maintain contractual management and leasing
responsibilities for these properties. As of April 1, 2010,
our joint venture portfolio was 95.0% occupied by leasable
square footage.
OUR SERVICES
BUSINESS
Our vertically integrated real estate services business provides
a complete spectrum of real estate services necessary to support
our properties. We believe that we have a competitive advantage
over many other property owners through our in-house access to
the expertise provided by our services business. Providing these
services enables us to gain valuable insights into our target
markets and operate our properties more efficiently,
specifically by allowing us to control all aspects of our
acquisitions, asset and property management, architecture,
construction, financing and leasing.
7
Our services business has seven divisions, as depicted below,
which together provide a complete spectrum of real estate
services for owners and tenants:
INVESTMENT
STRATEGY
The Welsh organizations investment strategy has
historically focused on acquiring and operating industrial and
office properties that generated attractive cash yields or
presented significant value-add opportunities for its investors.
Going forward, we intend to pursue acquisition opportunities
with attractive cash yields as well as the potential for
long-term capital appreciation. We seek to implement our focused
strategy in order to strategically expand our portfolio,
reinvest capital from strategic dispositions, and create value
with opportunistic development and redevelopment within the
portfolio. We plan to continue to follow a conservative
underwriting approach, relying on market data and
well-researched assumptions to analyze the desirability of
acquisition opportunities rather than assuming aggressive rent
growth and capitalization rate compression.
We intend to continue to focus primarily on acquisition
opportunities in our current markets in the central U.S.,
although we will also monitor other potential markets for
attractive investment opportunities that may warrant additional
consideration. We plan to primarily target stabilized industrial
acquisition opportunities. We consider stabilized properties to
be those with occupancy at or above 90%. We believe that
industrial properties typically generate more attractive current
yields, due in large part to lower ownership and re-tenanting
costs than other property types. In addition, we will look for
opportunities to add value to these acquisitions through
implementation of operational efficiencies, proactive
management, lease up of vacant space and select investments in
capital improvements that will generate higher rental revenue.
We may also strategically acquire select office properties in
markets where we have a significant presence and can closely
oversee the leasing and management process.
The Welsh organization historically focused, and we will
continue to focus, on acquiring assets off-market. We believe
that when assets are widely marketed and command a high number
of bids, the resulting price often generates yields below our
target levels. Our acquisition strategy is driven by our network
of industry relationships. With a
32-year
track record, seven service businesses, over 320 employees
(including nearly 80 licensed real estate salespersons in our
brokerage division), 21 locations and a portfolio of
approximately 27.1 million leasable square feet under
management including 12.4 million square feet under
management for third parties, we access off-market opportunities
by leveraging those relationships. In addition, we have access
to attractive off-market distressed opportunities through our
special asset services division, which provides solutions and
strategies for owners, primarily banks and loan servicers, who
are seeking
8
assistance with distressed assets. We believe that our real
estate services business, including comprehensive asset and
property management services, allows for successful transition
of acquired properties into our portfolio, increased operational
efficiencies and a competitive edge as an owner/operator,
further creating value for our stockholders.
We will seek to selectively identify asset sale opportunities in
order to achieve our total return objectives and dispose of
assets that are identified as no longer being core to our
business strategy. We will seek to maximize returns to our
stockholders by redeploying proceeds from asset sales into new
acquisitions and development opportunities. For example, in
2009, we strategically sold two buildings of a six-building
portfolio to a tenant near the end of its lease term that
desired to consolidate operations and expand its use at the
location where it was our tenant. This sale allowed us to
generate a positive return and avoid having a large vacancy
resulting from a transitioning tenant.
FINANCING
STRATEGY
We intend to finance future acquisitions with the most
advantageous source of capital available to us at the time of
the transaction, which may include a combination of public and
private offerings of our equity and debt securities, secured and
unsecured corporate-level debt, property-level debt and mortgage
financing and other public, private or bank debt. In addition,
we may acquire properties in exchange for the issuance of common
stock or OP units.
We have received commitments for a syndicated credit facility in
an initial amount of $75.0 million, which could be used to
finance new acquisitions and for other working capital purposes.
If completed, we may elect to increase the amount of the
facility up to $150 million, subject to the approval of the
administrative agent and the identification of a lender or
lenders willing to make available the additional amounts. The
proposed terms of the credit facility include: (i) security
of a first-lien mortgage or deed of trust on certain of our
properties that are otherwise unencumbered; (ii) a two year
term with one 12-month extension option; and
(iii) interest-only payments at rates between
250 basis points and 325 basis points in excess of
LIBOR for eurodollar advances, and between 150 basis points
and 225 basis points in excess of the lenders
alternate base rate, as defined therein, for all other advances,
in each case based on our overall company leverage. The specific
terms of the credit facility will be negotiated by us and the
lenders and there can be no assurance that we will be able to
enter into this credit facility on the terms described above or
at all. The credit facility will be contingent upon completion
of this offering.
Initially, we will utilize the net proceeds of this offering, in
addition to the funds available under such credit facility, to
fund acquisitions. We also may obtain secured debt to acquire
real estate assets, and we expect that our financing sources
will include banks and life insurance companies with which we
have existing relationships through our third-party mortgage
origination business. Although we intend to maintain a
conservative capital structure, with limited reliance on debt
financing, our charter does not contain a specific limitation on
the amount of debt we may incur and our board of directors may
implement or change target debt levels at any time without the
approval of our stockholders.
Our goal is to receive an investment grade rating from a
national statistical rating organization such as Moodys
Investors Service Inc. or Standard & Poors
Corporation, which we believe will lower our cost of borrowing.
In order to achieve this rating, we will be required to
establish and grow over time our unencumbered pool of assets and
manage our balance sheet to enhance our financial measurements
such as our debt to EBITDA (earnings before interest, tax,
depreciation and amortization) ratio, fixed charge coverage
ratio, and other financial metrics that are analyzed by rating
organizations in their process of determining investment grade
ratings. Fifty-six of the 65 properties in our existing
portfolio and six of the 22 properties in our acquisition
portfolio will be encumbered by mortgages upon completion of
this offering. Lack of sufficient growth in our unencumbered
pool of assets following the completion of this offering may be
an impediment to
9
receiving an investment grade rating. We will seek to maintain a
conservative capital structure, which we believe includes
lowering our overall company leverage, transitioning over time
from secured borrowings to unsecured borrowings, and maintaining
sufficient excess cash and borrowing capacity to fund operations
and make additional acquisitions.
SUMMARY RISK
FACTORS
An investment in our common stock involves various risks, and
prospective investors should carefully consider the matters
discussed in the section Risk Factors beginning on
page 21 prior to deciding whether to invest in our common
stock. These risks include, but are not limited to, the
following:
|
|
Ø
|
our properties are concentrated in the industrial real estate
sector, and our business could be adversely affected by an
economic downturn in that sector;
|
|
Ø
|
we are dependent on our tenants for a significant portion of our
revenue, and our business would be adversely affected if a
significant number of our tenants were unable to meet their
lease obligations;
|
|
Ø
|
the Welsh Predecessor Companies have a history of losses, and
our company has no assurance of future profitability;
|
|
Ø
|
the geographic concentration of our properties in states located
in the central United States could leave us vulnerable to an
economic downturn, other changes in market conditions or natural
disasters in those areas, resulting in a decrease in our revenue
or otherwise negatively impacting our results of operations;
|
|
Ø
|
our operating performance is subject to risks associated with
the real estate industry;
|
|
Ø
|
our failure to qualify or remain qualified as a REIT would
result in higher taxes and reduced cash available for
distribution to our stockholders;
|
|
Ø
|
we have never operated as a REIT or as a public company and we
cannot assure you that we will successfully and profitably
operate our business in compliance with the regulatory
requirements applicable to REITs and to public companies;
|
|
Ø
|
we will rely on external sources of capital to fund future
capital needs, and if we encounter difficulty in obtaining such
capital, we may not be able to make future acquisitions
necessary to grow our business or meet maturing obligations;
|
|
Ø
|
we cannot assure you of our ability to make distributions in the
future. We may be required to fund our distributions from other
sources, including using borrowed funds to make distributions,
which would increase our interest costs and reduce our earnings
and cash available for distribution;
|
|
|
Ø
|
our ability to pay our estimated initial annual distribution,
which represents approximately 106.5% of our estimated cash
available for distribution for the 12 months ended
March 31, 2011, calculated as provided under
Distribution Policy, depends upon our actual
operating results, and we may have to borrow funds under our
syndicated credit facility to pay this distribution, which could
slow our growth;
|
|
|
Ø
|
we have not obtained recent independent appraisals of our
properties or our services business in connection with the
formation transactions. As a result, the consideration we will
pay for the assets we intend to acquire in the formation
transactions, certain of which we intend to purchase from our
principals, may exceed their aggregate fair market value;
|
|
|
Ø
|
the loss of any of our principals or certain other key members
of our senior management team could significantly harm our
business; and
|
|
Ø
|
there has been no public market for our common stock prior to
this offering and an active trading market may not develop or be
sustained following this offering. In addition, the price of our
common stock may be volatile or may decline regardless of our
operating performance.
|
10
FORMATION
TRANSACTIONS
Prior to the completion of this offering, we operated our
business through the existing entities. Our real estate
portfolio is owned through (i) three investment funds,
which are owned by our principals and their affiliates with a
number of third-party investors, including third-party investors
that own
tenant-in-common
interests in properties owned with Welsh US Real Estate Fund,
LLC, (ii) 21 property subsidiaries that are owned by our
principals and their affiliates with other third parties and
11 property subsidiaries that are owned solely by
third-party investors, (iii) nine additional property
subsidiaries that are owned solely by our principals and their
affiliates and certain of their family members, and (iv) an
economic interest held by our principals in our joint venture
portfolio. In addition, our services business is owned
exclusively by our principals and their affiliates. Concurrently
with the completion of this offering, we will engage in a series
of transactions, which we refer to as the formation
transactions, that will consolidate our real estate portfolio
and our services business, including the properties in our
acquisition portfolio, within our company and our operating
partnership.
Part of the formation transactions includes a contribution
transaction whereby the three investment funds, the third-party
investors owning
tenant-in-common
interests with the Welsh US Real Estate Fund, LLC and the owners
of the ownership interests in the property subsidiaries
described above, including our principals, their affiliates,
certain of their family members and third-party investors,
through a series of contributions, will exchange their ownership
interests in the existing entities owning our real estate
portfolio, and our principals will exchange their ownership
interests in our services business and their economic interest
in our joint venture portfolio, for OP units and, in some
instances, cash. We refer to the owners of the interests to be
contributed in the contribution transaction for OP units as our
continuing investors. The agreements relating to the
contribution transaction are subject to customary closing
conditions, including the completion of this offering. In
addition, the contribution of Welsh Securities, LLC, the
broker-dealer arm of our services business, is subject to the
approval of the Financial Industry Regulatory Authority, or
FINRA.
The significant elements of the formation transactions
undertaken in connection with the offering include:
|
|
Ø
|
formation of our company, our operating partnership, the general
partner of our operating partnership and our taxable REIT
subsidiary;
|
|
Ø
|
the contribution transaction;
|
|
Ø
|
the acquisition from unaffiliated third parties of properties
from our acquisition portfolio; and
|
|
Ø
|
the assumption by us of indebtedness related to our existing
portfolio, the release of certain guarantees made by our
principals in respect of such indebtedness and our entry into a
new credit facility, which we refer to as the financing
transactions.
|
11
OUR
STRUCTURE
As a result of the formation transactions and upon the
completion of this offering, we will be a holding company and
our primary assets will be membership interests in a Delaware
limited liability company that will own a general partnership
interest in, and serve as the general partner of, our operating
partnership, as well as OP units in our operating partnership.
The following diagram depicts our ownership structure
immediately following completion of this offering and the
formation transactions:
|
|
|
*
|
|
Diagram excludes shares of
common stock contingently issuable upon vesting of performance
based restricted stock units to be granted to certain of our
executive officers (see ManagementCompensation
Discussion and AnalysisOverview of executive compensation
programRestricted Stock Units under the LTIP) and OP
units that our principals have the possibility of receiving as
consideration for our services business (see Structure and
Formation of our CompanyFormation
TransactionsContribution and exchange of interests in the
existing entities)
|
12
Our principals may be deemed to be our promoters
based on their ownership and various relationships with us and
the existing entities.
MATERIAL BENEFITS
TO RELATED PARTIES
Upon the completion of this offering and the formation
transactions, our executive officers and members of our board of
directors will receive material financial and other benefits, as
described below. For a more detailed discussion of these
benefits see Management and Certain
Relationships and Related Party Transactions.
Formation
transactions
In connection with the formation transactions, the following
executive officers and directors of our company will exchange
all of their ownership interests in our services business and
property subsidiaries as well as their economic interests in our
joint venture portfolio for OP units, as described below:
|
|
|
Name
|
|
Benefits
received
|
|
|
|
|
|
Dennis J. Doyle
|
|
Approximately 1.1 million OP units (with a combined
aggregate value of approximately $10.9 million, based on
the mid-point of the initial public offering price shown on the
cover page of this prospectus) in exchange for interests in the
existing entities having an aggregate net tangible book value
attributable to such interests as of March 31, 2010 of
approximately $2.5 million
|
|
|
|
Scott T. Frederiksen
|
|
Approximately 575,000 OP units (with a combined aggregate value
of approximately $5.5 million, based on the mid-point of the
initial public offering price shown on the cover page of this
prospectus) in exchange for interests in the existing entities
having an aggregate net tangible book value attributable to such
interests as of March 31, 2010 of approximately $3.4 million
|
|
|
|
Jean V. Kane
|
|
Approximately 534,000 OP units (with a combined aggregate value
of approximately $5.1 million, based on the mid-point of
the initial public offering price shown on the cover page of
this prospectus) in exchange for interests in the existing
entities having an aggregate net tangible book value
attributable to such interests as of March 31, 2010 of
approximately $3.4 million
|
|
|
|
Dennis G. Heieie
|
|
Approximately 5,700 OP units (with a combined aggregate
value of approximately $54,000, based on the mid-point of the
initial public offering price shown on the cover page of this
prospectus) in exchange for interests in the existing entities
having an aggregate net tangible book value attributable to such
interests as of March 31, 2010 of less than $0.1 million
|
13
|
|
|
Name
|
|
Benefits
received
|
|
|
|
|
|
Patrick H. OSullivan
|
|
Indirect beneficial ownership of the 322,692 OP units
received by CrossHarbor Capital Partners, LLC (with a combined
aggregate value of approximately $3.1 million, based on the
mid-point of the initial public offering price shown on the
cover page of this prospectus) in exchange for an interest in an
existing entity having an aggregate net tangible book value
attributable to such interest as of March 31, 2010 of
approximately $0.1 million
|
The foregoing amounts exclude an additional 1,578,947 OP
units that our principals have the possibility of receiving as
consideration for our services business (see Structure and
Formation of our CompanyFormation
TransactionsContribution and exchange of interests in the
existing entities).
Our other independent directors and Tracey L. Lange, our Senior
Vice President, will not receive any OP units, as these
individuals do not currently hold any interests in the
properties and assets to be contributed in the formation
transactions.
Employment
arrangements
Upon the completion of this offering and the formation
transactions, Mr. Frederiksen, our Chief Executive Officer,
and Ms. Kane, our President and Chief Operating Officer,
will each enter into an employment agreement with our company
providing for salary, cash bonus, performance based equity
compensation and other benefits, including severance benefits
upon a termination of employment under certain circumstances.
Registration
rights agreement
We have entered into a registration rights agreement with the
persons receiving OP units in the formation transactions,
including our principals and certain of our executive officers.
Under the registration rights agreement, subject to certain
limitations, commencing not earlier than 12 months and not
later than 13 months after the completion of this offering,
we will file one or more registration statements covering the
resale of the shares of our common stock issued or issuable, at
our option, in exchange for OP units issued in the formation
transactions. We may, at our option, satisfy our obligation to
prepare and file a resale registration statement with respect to
shares of our common stock issuable upon exchange of OP units
received in the formation transactions by filing a registration
statement providing for the issuance by us to the holders of
such OP units of shares of our common stock registered under the
Securities Act of 1933, as amended, or the Securities Act, in
lieu of our operating partnerships obligation to pay cash
for such OP units. We have agreed to pay all of the expenses
relating to a registration of such securities.
RESTRICTIONS ON
OWNERSHIP OF OUR STOCK
In order to assist us in complying with the limitations on the
concentration of ownership of REIT stock imposed by the Internal
Revenue Code of 1986, as amended, or the Code, among other
purposes, our charter generally prohibits any person from
actually or constructively owning more than 9.8% in value or
number of shares, whichever is more restrictive, of our
outstanding shares of capital stock or common stock, subject to
certain exceptions. Subject to certain limitations, our charter
permits exceptions to be made with the approval of our board of
directors.
14
CONFLICTS OF
INTEREST
Our principals and certain of our executive officers have
interests in certain of the entities that we will acquire in the
formation transactions upon completion of this offering and will
enter into contribution and other agreements in connection with
such acquisitions. In addition, we expect that certain of our
principals will enter into employment agreements with us
pursuant to which they will agree, among other things, not to
engage in certain business activities in competition with us and
pursuant to which they will agree to devote substantially
full-time attention to our affairs. See
ManagementCompensation Discussion and
AnalysisOverview of Executive Compensation
ProgramEmployment Agreements and Change in Control
Arrangements. We may choose not to enforce, or to enforce
less vigorously, our rights under these agreements due to our
ongoing relationship with our principals and our executive
officers. See Risk FactorsWe may pursue less
vigorous enforcement of the terms of the formation transactions
and other agreements because of conflicts of interest with
certain of our directors and officers.
We did not conduct arms-length negotiations with our
principals with respect to all of the terms of the formation
transactions. In the course of structuring the formation
transactions, our principals had the ability to influence the
type and level of benefits that they and our other officers will
receive from us. In addition, we have not obtained any recent
third-party appraisals of the properties and other assets to be
acquired by us in connection with the formation transactions. As
a result, the consideration to be paid by us to the continuing
investors, including our principals and certain of our executive
officers, for the acquisition of the assets in the formation
transactions may exceed the fair market value of those assets.
TAX
STATUS
We intend to elect and qualify to be taxed as a REIT under
Sections 856 through 860 of the Code, commencing with our
taxable year ending December 31, 2010. We believe that our
organization and proposed method of operation will enable us to
meet the requirements for qualification and taxation as a REIT
for federal income tax purposes. To maintain our REIT
qualification, we must meet a number of organizational and
operational requirements, including a requirement that we
annually distribute at least 90% of our taxable income,
excluding net capital gain, to our stockholders. As a REIT, we
generally will not be subject to federal income tax on net
taxable income we currently distribute to our stockholders. If
we fail to qualify as a REIT in any taxable year, we will be
subject to federal income tax at regular corporate rates. Even
if we qualify for taxation as a REIT, we may be subject to some
federal, state and local taxes on our income or property. See
Federal Income Tax Considerations.
DISTRIBUTION
POLICY
We intend to pay regular quarterly dividends to holders of our
common stock and make regular quarterly distributions to holders
of OP units in our operating partnership. We intend to pay a pro
rata dividend with respect to the period commencing on the
completion of this offering and ending September 30, 2010,
based on a dividend of $0.166 per share for a full quarter.
On an annualized basis, this would be $0.665 per share, or an
annual dividend rate of approximately 7.0% based on the
mid-point of the initial public offering price range shown on
the cover page of this prospectus. Although we have not
previously paid distributions, we intend to maintain our initial
dividend rate for the
12-month
period following completion of this offering unless our actual
results of operations, economic conditions or other factors
differ materially from the assumptions used in our estimate. Our
initial annual dividend represents approximately 106.5% of our
estimated cash available for distribution for the 12 months
ending March 31, 2011 as calculated under
Distribution Policy. Accordingly, we currently
expect that we will be unable to pay our estimated initial
annual distribution to stockholders and OP unitholders out
of estimated cash available for distribution for the
12 months ending March 31, 2011 as calculated under
Distribution Policy. Unless our operating cash flow
increases, we will be required either to fund
15
future distributions from borrowings under our syndicated credit
facility or to reduce such distributions. Distributions made by
us will be authorized by our board of directors in its sole
discretion out of funds legally available therefor and will be
dependent upon a number of factors, including restrictions under
applicable law, the capital requirements of our company and
meeting the distribution requirements necessary to maintain our
qualification as a REIT. Actual distributions may be
significantly different from the expected distributions. We do
not intend to reduce the expected dividend per share if the
underwriters over-allotment option is exercised.
CORPORATE
INFORMATION
We were incorporated as a Maryland corporation on
December 18, 2009 and intend to elect and qualify to be
taxed as a REIT for federal income tax purposes commencing with
our taxable year ending December 31, 2010. Our corporate
offices are located at 4350 Baker Road, Suite 400,
Minnetonka, Minnesota 55343. Our telephone number is
(952) 897-7700.
Our internet website is www.welshpt.com. The information
contained on, or accessible through, this website, or any other
website of the Welsh organization, is not incorporated by
reference into this prospectus and should not be considered a
part of this prospectus.
16
The offering
|
|
|
Common stock offered by us
|
|
35,789,474 shares
|
|
|
|
Common stock to be outstanding after the offering
|
|
35,807,001 shares
(1)
|
|
|
|
Common stock and OP units (redeemable or, at our option,
exchangeable into common stock 12 months after the offering
on a
one-for-one
basis) to be outstanding after the offering
|
|
43,389,461 shares and OP
units
(2)
|
|
|
|
Common stock and OP units outstanding after this offering,
assuming full exercise of the underwriters over-allotment
option
|
|
48,757,882 shares and OP units
|
|
|
|
Use of proceeds
|
|
We estimate that we will receive net proceeds from the offering
of approximately $315.2 million, or approximately
$362.6 million if the underwriters over-allotment
option is exercised in full, after deducting the underwriting
discounts and commissions, and estimated expenses of the
offering. We intend to use the net proceeds of the offering to
purchase our acquisition portfolio, to pay down debt and to pay
related fees and expenses.
|
|
|
|
Proposed NYSE Symbol
|
|
WLS
|
|
|
|
(1)
|
|
Includes (i) 35,789,474 shares of common stock we
are offering in this offering; (ii) 300 shares of
common stock issued in connection with our initial
capitalization and (iii) 17,227 shares of common stock
to be issued upon completion of this offering as equity-based
compensation to our non-employee directors. Excludes:
(i) up to 5,368,421 shares issuable upon exercise of
the underwriters over-allotment option in full;
(ii) up to 616,690 shares of common stock contingently
issuable upon the vesting of performance based restricted stock
units to be granted to Mr. Frederiksen and Ms. Kane
under our
Long-Term
Equity Incentive Plan, or LTIP (see
ManagementCompensation Discussion and
AnalysisOverview of executive compensation
programRestricted Stock Units under the LTIP);
(iii) additional shares available for future issuance under
our LTIP; (iv) up to 7,582,460 shares issuable upon
exchange of OP units; and (v) an additional
1,578,947 OP units that our principals have the possibility of
receiving as consideration for our services business (see
Structure and Formation of our CompanyFormation
TransactionsContribution and exchange of interests in the
existing entities)
|
|
|
|
(2)
|
|
Includes all of the shares identified in the first sentence
of footnote (1) above, and 7,582,460 OP units to be issued
upon completion of this offering and the formation transactions
to our principals, continuing investors and certain sellers of
the acquisition portfolio
|
17
The following table sets forth summary financial and operating
data on a pro forma basis for Welsh Property Trust, Inc.
and on a historical basis for Welsh Predecessor Companies. We
have not presented historical financial information for Welsh
Property Trust, Inc. because we have not had any corporate
activity since our formation other than the issuance of shares
of common stock in connection with the initial capitalization of
our company and because we believe that a presentation of the
results of Welsh Property Trust, Inc. would not be meaningful.
You should read the following summary of historical and pro
forma financial data in conjunction with Selected
Financial Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
our unaudited pro forma condensed consolidated financial
statements and related notes, and the combined financial
statements and related notes of the Welsh Predecessor Companies
included elsewhere in this prospectus. The Welsh Predecessor
Companies being contributed to our operating partnership are a
collection of real estate entities, which includes the
accounting acquirer, that directly or indirectly own industrial
and office properties and are controlled by Dennis J. Doyle.
The unaudited pro forma condensed consolidated balance sheet
data is presented as if this offering and the formation
transactions all had occurred on March 31, 2010, and the
unaudited pro forma condensed consolidated statement of
operations and other data for the three months ended
March 31, 2010 and the year ended December 31, 2009,
is presented as if this offering and the formation transactions
all had occurred on January 1, 2009. Our unaudited pro
forma condensed consolidated financial statements include the
effects of the contribution of the entities included in the
Welsh Contribution Companies, a collection of real estate
entities that directly or indirectly own industrial and office
properties as well as the services business and are under the
common management of our principals. The contribution of the
Welsh Contribution Companies has been accounted for using the
acquisition method of accounting. Additionally, our unaudited
pro forma condensed consolidated financial statements include
the purchase of our acquisition portfolio. All material
intercompany balances have been eliminated in the unaudited pro
forma condensed consolidated financial statements. The pro forma
financial information is not necessarily indicative of what our
actual financial position or results of operations would have
been as of and for the period indicated, nor does it purport to
represent our future financial position or results of operations.
18
|
|
|
|
|
|
|
|
|
|
|
Pro forma Welsh
Property Trust, Inc.
|
|
|
|
Three months
ended
|
|
|
Year ended
|
|
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(in thousands,
except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
25,600
|
|
|
$
|
100,191
|
|
Construction and service fee revenue
|
|
|
8,906
|
|
|
|
54,672
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
34,506
|
|
|
|
154,863
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
4,261
|
|
|
|
19,946
|
|
Real estate taxes
|
|
|
4,640
|
|
|
|
15,540
|
|
Cost of construction and service fee revenue
|
|
|
7,412
|
|
|
|
45,204
|
|
Depreciation and amortization
|
|
|
7,937
|
|
|
|
32,949
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
24,250
|
|
|
|
113,639
|
|
|
|
|
|
|
|
|
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
Equity in net (income) loss from equity method investments
|
|
|
(99
|
)
|
|
|
332
|
|
Impairment charges
|
|
|
|
|
|
|
6,432
|
|
Acquisition costs
|
|
|
285
|
|
|
|
|
|
General and administrative expenses
|
|
|
2,812
|
|
|
|
10,868
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
2,998
|
|
|
|
17,632
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
7,258
|
|
|
|
23,592
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(5,931
|
)
|
|
|
(24,252
|
)
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
1,327
|
|
|
|
(660
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
Gain on disposition of real estate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
1,327
|
|
|
$
|
(660
|
)
|
|
|
|
|
|
|
|
|
|
Basic pro forma net income (loss) per common share
|
|
$
|
0.03
|
|
|
$
|
(0.02
|
)
|
Diluted pro forma net income (loss) per common share
|
|
|
0.03
|
|
|
|
(0.02
|
)
|
Pro forma weighted average number of shares outstanding
|
|
|
35,807
|
|
|
|
35,807
|
|
Pro forma weighted average number of common shares and potential
dilutive securities
|
|
|
43,389
|
|
|
|
43,389
|
|
Other Data:
|
|
|
|
|
|
|
|
|
Funds from Operations
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
1,327
|
|
|
$
|
(660
|
)
|
Depreciation and amortization
|
|
|
7,937
|
|
|
|
32,949
|
|
Depreciation and amortization equity method
investments
|
|
|
192
|
|
|
|
823
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations (FFO)
|
|
$
|
9,456
|
|
|
$
|
33,112
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical Welsh
Predecessor Companies
|
|
|
|
Three months
ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year ended
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
7,938
|
|
|
$
|
7,310
|
|
|
$
|
29,247
|
|
|
$
|
31,549
|
|
|
$
|
19,684
|
|
Construction and service fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900
|
|
|
|
1,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
7,938
|
|
|
|
7,310
|
|
|
|
29,247
|
|
|
|
32,449
|
|
|
|
21,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
1,768
|
|
|
|
2,523
|
|
|
|
8,509
|
|
|
|
8,334
|
|
|
|
3,688
|
|
Real estate taxes
|
|
|
1,754
|
|
|
|
1,454
|
|
|
|
5,212
|
|
|
|
5,637
|
|
|
|
3,280
|
|
Cost of construction and service fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
768
|
|
|
|
1,249
|
|
Depreciation and amortization
|
|
|
2,618
|
|
|
|
2,546
|
|
|
|
10,391
|
|
|
|
11,861
|
|
|
|
6,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
6,140
|
|
|
|
6,523
|
|
|
|
24,112
|
|
|
|
26,600
|
|
|
|
14,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net (income) loss from equity method investments
|
|
|
1,323
|
|
|
|
255
|
|
|
|
1,252
|
|
|
|
1,132
|
|
|
|
2,130
|
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
6,432
|
|
|
|
7,577
|
|
|
|
|
|
Acquisition costs
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
209
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
1,608
|
|
|
|
255
|
|
|
|
7,706
|
|
|
|
8,918
|
|
|
|
2,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
190
|
|
|
|
532
|
|
|
|
(2,571
|
)
|
|
|
(3,069
|
)
|
|
|
4,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income, net
|
|
|
41
|
|
|
|
(58
|
)
|
|
|
42
|
|
|
|
1
|
|
|
|
17
|
|
Interest expense, net
|
|
|
(3,173
|
)
|
|
|
(2,752
|
)
|
|
|
(12,558
|
)
|
|
|
(12,625
|
)
|
|
|
(8,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(2,942
|
)
|
|
|
(2,278
|
)
|
|
|
(15,087
|
)
|
|
|
(15,693
|
)
|
|
|
(3,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
99
|
|
|
|
324
|
|
|
|
224
|
|
|
|
53
|
|
Gain on disposition of real estate investments
|
|
|
|
|
|
|
|
|
|
|
1,595
|
|
|
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations
|
|
|
|
|
|
|
99
|
|
|
|
1,919
|
|
|
|
1,285
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(2,942
|
)
|
|
$
|
(2,179
|
)
|
|
$
|
(13,168
|
)
|
|
$
|
(14,408
|
)
|
|
$
|
(3,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Welsh Property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust,
Inc.
|
|
|
Historical Welsh
Predecessor Companies
|
|
|
|
As of
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
As of
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(dollars in
thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net real estate investments
|
|
$
|
670,212
|
|
|
$
|
234,793
|
|
|
$
|
229,085
|
|
|
$
|
208,234
|
|
|
$
|
179,669
|
|
Other assets, net
|
|
|
164,149
|
|
|
|
29,514
|
|
|
|
27,072
|
|
|
|
27,828
|
|
|
|
23,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
834,361
|
|
|
$
|
264,307
|
|
|
$
|
256,157
|
|
|
$
|
236,062
|
|
|
$
|
203,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages and notes payable
|
|
$
|
416,767
|
|
|
$
|
229,496
|
|
|
$
|
223,503
|
|
|
$
|
201,541
|
|
|
$
|
158,889
|
|
Other liabilities
|
|
|
25,445
|
|
|
|
15,638
|
|
|
|
15,842
|
|
|
|
14,096
|
|
|
|
11,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
442,212
|
|
|
|
245,134
|
|
|
|
239,345
|
|
|
|
215,637
|
|
|
|
170,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owners equity
|
|
|
|
|
|
|
19,173
|
|
|
|
16,812
|
|
|
|
20,425
|
|
|
|
33,000
|
|
Stockholders equity
|
|
|
312,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
79,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
834,361
|
|
|
$
|
264,307
|
|
|
$
|
256,157
|
|
|
$
|
236,062
|
|
|
$
|
203,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Investment in our common stock involves risks. You should
carefully consider the following risk factors in addition to
other information contained in this prospectus before purchasing
the common stock we are offering. The occurrence of any of the
following risks might cause you to lose all or part of your
investment. Some statements in this prospectus, including
statements in the following risk factors, constitute
forward-looking statements. Please refer to the section entitled
Special Note Regarding Forward-Looking
Statements.
RISKS RELATED TO
OUR PROPERTIES AND OPERATIONS
Our properties
are concentrated in the industrial real estate sector, and our
business could be adversely affected by an economic downturn in
that sector.
Of the 65 properties in our existing portfolio, 57 are
industrial properties, including warehouse, distribution, flex,
assembly, light manufacturing, showroom and research and
development facilities. The 56 industrial properties that we
owned as of December 31, 2009 represented, in the
aggregate, approximately 70.4% of our total rental and related
revenue for the year ended December 31, 2009, on a combined
historical basis, and the 57 industrial properties that we owned
as of March 31, 2010 represented, in the aggregate,
approximately 71.4% of our total rental and related revenue for
the three months ended March 31, 2010. This concentration
may expose us to the risk of economic downturns in the
industrial real estate sector to a greater extent than if our
properties were more diversified across other sectors of the
real estate industry.
We are dependent
on our tenants for a significant portion of our revenue, and our
business would be adversely affected if a significant number of
our tenants were unable to meet their lease
obligations.
We would be adversely affected if a significant number of our
tenants were unable to meet their lease obligations. On a
combined historical basis, for the three months ended
March 31, 2010, our top five tenants based on rental and
related revenue represented approximately $2.2 million, or
13.7%, of the total rental and related revenue generated by our
existing portfolio. These tenants were Oracle USA, Inc., an
integrated technology company, in Minneapolis, Minnesota;
Archway Marketing Services, Inc., a marketing fulfillment
services company, in Romulus, Michigan; Mastronardi
ProduceUSA, Inc., a producer and distributor of gourmet
greenhouse vegetables throughout North America, in Romulus,
Michigan; Medline Industries, Inc., a manufacturer of medical
supplies, in Romulus, Michigan; and Metal Processing Corp., a
company that provides processing, distribution and storage of
metal products, in Gary, Indiana. In addition, certain of our
properties are occupied by a single tenant and, as a result, the
success of these properties will depend on the financial
stability of a single tenant. Our tenants may experience a
downturn in their businesses, which may weaken their financial
condition and result in their failure to make timely rental
payments or their default under their leases.
Tenant defaults,
bankruptcies or insolvencies and their impact on tenant
performance and our rights under our leases may adversely affect
the rental revenue produced by our properties.
The bankruptcy or insolvency of our tenants may adversely affect
the income produced by our properties. If a tenant defaults on
its lease obligations, we may experience delays in enforcing our
rights as landlord and may incur substantial costs, including
litigation and related expenses, in protecting our investment
and re-leasing our property. If a tenant files for bankruptcy,
we generally cannot evict the tenant solely because of such
bankruptcy. A court may authorize a bankrupt tenant to reject
and terminate its lease with us. In such a case, our claim
against the tenant for unpaid future rent would be subject to a
statutory cap that might be substantially less than the
remaining rent actually owed under
22
Risk
factors
the lease, and it is unlikely that a bankrupt tenant would pay
in full amounts it owes us under the lease. This shortfall could
adversely affect our cash flow and results of operations.
If a tenant experiences a downturn in its business or other
types of financial distress, it may be unable to make timely
rental payments. Under some circumstances, we may agree to
partially or wholly terminate the lease in advance of the
termination date in consideration for a lease termination fee
that is less than the agreed rental amount. Additionally,
without regard to the manner in which a lease termination
occurs, we are likely to incur additional costs in the form of
tenant improvements and leasing commissions in our efforts to
lease the space to a new tenant, as well as possibly lower
rental rates reflective of declines in market rents. We cannot
assure you that we will have adequate sources of funding
available to us for such purposes.
The Welsh
Predecessor Companies have a history of losses, and our company
has no assurance of future profitability.
The Welsh Predecessor Companies, as defined herein, have a
history of GAAP losses of $13.2 million, $14.4 million and $3.7
million for the years ended December 31, 2009, 2008 and 2007,
respectively, and a GAAP net loss of $2.9 million for the three
months ended March 31, 2010. Given this history of operating
losses, we cannot assure you that our company will ever become
profitable or, if it does, that it will continue to be
profitable in future periods. We have formed our company from
the combination of the Welsh Predecessor Companies, the Welsh
Contribution Companies and our acquisition portfolio based on
certain assumptions, which may prove incorrect. Our future
success will depend upon many factors, including factors which
may be beyond our control or which cannot be predicted at this
time.
The geographic
concentration of our properties in states located in the central
United States could leave us vulnerable to an economic downturn,
other changes in market conditions or natural disasters in those
areas, resulting in a decrease in our revenue or otherwise
negatively impacting our results of operations.
The properties in our existing portfolio located in Minnesota,
Michigan, Indiana, Missouri and Iowa provided approximately
32.0%, 17.7%, 6.0%, 10.2%, and 5.5%, respectively, of our
annualized base rent as of April 1, 2010. As a result of
the geographic concentration of properties in these states, we
are particularly exposed to downturns in these local economies,
other changes in local real estate market conditions and natural
disasters that occur in those areas (such as floods, tornadoes
and other events). In the event of adverse economic changes in
these states, our business, financial condition, results of
operations, and cash flow, the per share trading price of our
common stock and our ability to satisfy our debt service
obligations and to make distributions to our stockholders may be
materially and adversely affected.
We have not
obtained recent independent appraisals of our properties or our
services business in connection with the formation transactions.
As a result, the consideration we will pay for the assets we
intend to acquire in the formation transactions, certain of
which we intend to purchase from our principals, may exceed
their aggregate fair market value.
We have not obtained any recent third-party appraisals of the
properties and other assets to be acquired by us from our
principals and from unaffiliated third parties in the formation
transactions that will take place concurrently with this
offering, nor have we obtained any independent third-party
valuations or fairness opinions in connection with the formation
transactions. We will acquire the real estate-related assets
from the unaffiliated third parties and our principals and
certain of their affiliates and family members for a fixed
number of OP units, the value of which will increase or decrease
based on the price of our common stock in this offering. The
initial public offering price of our common stock will be
determined in consultation with the underwriters based on the
history and prospects for the industry in which we compete, our
financial information, our management and our business potential
and
23
Risk
factors
earning prospects, the prevailing securities markets at the time
of this offering, and the recent market prices of, and the
demand for, publicly-traded shares of generally comparable
companies. The initial public offering price does not
necessarily bear any relationship to the book value or the fair
market value of the assets we intend to acquire in the formation
transactions. As a result, the price to be paid by us to the
unaffiliated third parties and our principals and certain of
their affiliates and family members for the acquisition of the
real estate-related assets in the formation transactions may
exceed the book value and fair market value of those assets.
Furthermore, we will acquire the services business assets from
our principals for consideration consisting of a number of
OP units based on a fixed valuation, plus the possible
additional OP units based on the achievement of certain
performance thresholds, which consideration may exceed the book
value and fair market value of such assets.
The acquisition
of the properties in our acquisition portfolio and the
contribution of certain of the existing entities is subject to
certain closing and other conditions. The failure to satisfy or
waive these conditions may result in us not acquiring these
properties or entities.
As of the date of this prospectus, we have entered into
agreements to purchase the 22 properties in our acquisition
portfolio. Our ability to close these acquisitions depends on
many factors, including the completion of our due diligence on
certain properties and the satisfaction of relevant deadlines
and other customary closing conditions. In particular, each
purchase agreement for the properties in our acquisition
portfolio provides that the acquisition must be completed by a
specified termination date, with certain purchase and sale
agreements providing for a short cure period. The termination
dates for most of the properties in our acquisition portfolio
occur after the anticipated date of the completion of this
offering, or we have agreed in principle with the sellers of the
other properties to extend the termination dates and are in the
process of finalizing the related extension documentation.
The agreements relating to the contribution transaction are
subject to customary closing conditions, including the receipt
of all necessary lender and other third-party consents and
approvals. As of the date of this prospectus, we have obtained
or have been informed by lenders or servicers that we can expect
to obtain consents, or no consents are required, for properties
in our existing portfolio covering approximately
$383.6 million of outstanding indebtedness as of
March 31, 2010. We remain in the lender review process with
regard to only approximately $22.1 million of outstanding
indebtedness, comprised of approximately $10.3 million of
indebtedness on 600638 Lambert Pointe Drive,
$9.2 million of indebtedness on 601627 Lambert
Pointe Drive, and $2.6 million of indebtedness on 9835-9925
13
th
Avenue. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsLiquidity and
Capital ResourcesIndebtedness. Furthermore, as of
the date of this prospectus, we are still in the lender review
process with regard to one property in our acquisition
portfolio, the Minneapolis property, where we are assuming
approximately $2.6 million of existing debt in connection
with the acquisition. If we are unable to obtain the necessary
lender consent on or before the closing of this offering, we may
be required to prepay this indebtedness and refinance the
property, including through the use of our syndicated credit
facility. The refinancing of the indebtedness with respect to
which we are still in the lender review process could result in
prepayment penalties of approximately $100,000 plus
defeasance-related costs. We could be adversely affected if we
are unable to acquire properties in our acquisition portfolio on
a timely basis or if we do not obtain lender consents.
Furthermore, we have not entered into any binding agreements
with respect to any of the 14 properties we are currently
reviewing in our acquisition pipeline, and there can be no
assurance that our efforts with respect to these properties will
lead to acquisitions. For additional information regarding our
existing portfolio, our acquisition portfolio and our
acquisition pipeline, see Business and PropertiesOur
Portfolio.
24
Risk
factors
We face intense
competition, which may decrease or prevent increases in the
occupancy and rental rates of our properties.
We compete with a number of developers, owners and operators of
industrial and office real estate, many of which own properties
similar to ours in the same markets in which our properties are
located. If our competitors offer space at rental rates below
current market rates, or below the rental rates we currently
charge our tenants, we may lose existing or potential tenants
and we may be pressured to reduce our rental rates below those
we currently charge or to offer substantial rent abatements,
tenant improvements, early termination rights or
tenant-favorable renewal options in order to retain tenants when
our tenants leases expire. In that case, our business,
financial condition, results of operations and cash flow, the
per share trading price of our common stock and our ability to
satisfy our debt service obligations and to make distributions
to our stockholders may be materially and adversely affected.
If we are unable
to renew leases or lease vacant space or are unable to lease our
properties at or above existing rental rates, our rental revenue
may be adversely affected.
Our existing portfolio was 86.1% occupied by leasable square
footage as of April 1, 2010 with approximately
1.6 million vacant leasable square feet. It includes
month-to-month
leases covering an aggregate of approximately 202,000 leasable
square feet. Our existing portfolio has 80 leases that are
scheduled to expire from May 1, 2010 through the end of
2010, accounting for approximately 0.7 million leasable
square feet. We cannot assure you that leases will be renewed or
that our properties will be re-leased at rental rates equal to
or above our existing rental rates or that substantial rent
abatements, tenant improvements, early termination rights or
tenant-favorable renewal options will not be offered to attract
new tenants or retain existing tenants. Some of our existing
leases currently provide tenants with options to renew the terms
of their leases at rates that are below the current market rate
or to terminate their leases prior to the expiration date
thereof. In addition, certain of the properties we acquire may
have some level of vacancy at the time of completion of this
offering and the formation transactions and certain of our
properties may be specifically suited to the particular needs of
a tenant. Accordingly, portions of our industrial and office
properties may remain vacant for extended periods of time, which
may cause us to suffer reduced revenue resulting in less cash
available to be distributed to our stockholders. Moreover, the
resale value of a property could be diminished because the
market value of a particular property depend principally upon
the value of the leases of such property.
If we default on
the ground lease for land on which some of the properties in our
existing portfolio and acquisition portfolio are located, our
business could be materially and adversely affected.
Each of our existing portfolio and our acquisition portfolio
include an interest in a ground lease. If we acquire and default
under the terms of these leases, we may be liable for damages
and could lose our leasehold interest in the applicable property
and interest in the building on the property. If any of these
events were to occur, our business, financial condition, results
of operations and cash flow, the per share trading price of our
common stock and our ability to satisfy our debt service
obligations and to make distributions to our stockholders would
be materially and adversely affected.
Our operating
performance is subject to risks associated with the real estate
industry.
Real estate investments are subject to various risks and
fluctuations and cycles in value and demand, many of which are
beyond our control. Certain events may decrease cash available
for distributions, as well as the value of our properties. These
events include, but are not limited to:
|
|
Ø
|
adverse changes in international, national or local economic and
demographic conditions such as the current global economic
downturn;
|
25
Risk
factors
|
|
Ø
|
vacancies or our inability to rent space on favorable terms,
including possible market pressures to offer tenants rent
abatements, tenant improvements, early termination rights or
tenant-favorable renewal options;
|
|
Ø
|
adverse changes in financial conditions of buyers, sellers and
tenants of properties;
|
|
Ø
|
inability to collect rent from tenants;
|
|
Ø
|
competition from other real estate investors with significant
capital, including other real estate operating companies, REITs
and institutional investment funds;
|
|
Ø
|
reductions in the level of demand for commercial space, and
changes in the relative popularity of properties;
|
|
Ø
|
increases in the supply of industrial or office space;
|
|
Ø
|
fluctuations in interest rates, which could adversely affect our
ability, or the ability of buyers and tenants of properties, to
obtain financing on favorable terms or at all;
|
|
Ø
|
increases in expenses, including, but not limited to, insurance
costs, labor costs, energy prices, real estate assessments and
other taxes and costs of compliance with laws, regulations and
governmental policies, and restrictions on our ability to pass
expenses on to our tenants; and
|
|
Ø
|
changes in, and changes in enforcement of, laws, regulations and
governmental policies, including, without limitation, health,
safety, environmental, zoning and tax laws, governmental fiscal
policies and the Americans with Disabilities Act of 1990, or the
ADA.
|
In addition, periods of economic slowdown or recession, such as
the current global economic downturn, rising interest rates or
declining demand for real estate, or the public perception that
any of these events may occur, could result in a general decline
in rents or an increased incidence of defaults under existing
leases. If we cannot operate our properties to meet our
financial expectations, our business, financial condition,
results of operations and cash flow, the per share trading price
of our common stock and our ability to satisfy our debt service
obligations and to make distributions to our stockholders could
be materially and adversely affected. We cannot assure you that
we will achieve our return objectives.
Our services
business provides a significant amount of services to third
parties, and, as a result, we depend on the financial condition
of these third parties and their ability to perform under our
agreements with them.
For the three months ended March 31, 2010 and the year
ended December 31, 2009, our construction and service fee
revenue was $8.9 million and $54.7 million,
respectively, on a historical combined basis. These third
parties may experience a downturn in their businesses, which may
weaken their financial condition and result in their failure to
make timely payments under our agreements with them. In
addition, our third-party business may be adversely affected by
the financial condition or performance of the subcontractors and
other agents we hire to support our services business. In
addition, following this offering, certain of our third-party
clients that are publicly-traded REITs may decide to terminate
their relationship with our services business due to competitive
concerns or perceived conflicts of interest with our company.
We will rely on
external sources of capital to fund future capital needs, and if
we encounter difficulty in obtaining such capital, we may not be
able to make future acquisitions necessary to grow our business
or meet maturing obligations.
In order to qualify as a REIT under the Code, we will be
required, among other things, to distribute each year to our
stockholders at least 90% of our taxable income, excluding net
capital gain. Because of this distribution requirement, we may
not be able to fund, from cash retained from operations, all of
our future capital needs, including capital needed to make
investments and to satisfy or refinance maturing obligations.
26
Risk
factors
We expect to rely on external sources of capital, including debt
and equity financing to fund future capital needs. However, the
recent U.S. and global economic slowdown has resulted in a
capital environment characterized by limited availability,
increasing costs and significant volatility. If we are unable to
obtain needed capital on satisfactory terms or at all, we may
not be able to make the investments needed to expand our
business, or to meet our obligations and commitments as they
mature. Our access to capital will depend upon a number of
factors over which we have little or no control, including
general market conditions, the markets perception of our
current and potential future earnings and cash distributions and
the market price of the shares of our common stock. We may not
be in a position to take advantage of attractive investment
opportunities for growth if we are unable to access the capital
markets on a timely basis on favorable terms.
Our ability to
sell equity to expand our business will depend, in part, on the
market price of our common stock, and our failure to meet market
expectations with respect to our business could negatively
affect the market price of our common stock and limit our
ability to sell equity.
The availability of equity capital to us will depend, in part,
on the market price of our common stock which, in turn, will
depend upon various market conditions and other factors that may
change from time to time, including:
|
|
Ø
|
the extent of investor interest;
|
|
Ø
|
our ability to satisfy the distribution requirements applicable
to REITs;
|
|
Ø
|
the general reputation of REITs and the attractiveness of their
equity securities in comparison to other equity securities,
including securities issued by other real estate-based companies;
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our financial performance and that of our tenants;
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analyst reports about us and the REIT industry;
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general stock and bond market conditions, including changes in
interest rates on fixed income securities, which may lead
prospective purchasers of our common stock to demand a higher
annual yield from future distributions;
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a failure to maintain or increase our dividend, which is
dependent, to a large part, on FFO which, in turn, depends upon
increased revenue from additional acquisitions and rental
increases; and
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other factors such as governmental regulatory action and changes
in REIT tax laws.
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Our failure to meet the markets expectation with regard to
future earnings and cash distributions would likely adversely
affect the market price of our common stock and, as a result,
the availability of equity capital to us.
We will have
substantial amounts of indebtedness outstanding following this
offering, which may affect our ability to make distributions,
may expose us to interest rate fluctuation risk and may expose
us to the risk of default under our debt obligations.
As of March 31, 2010, on a pro forma basis, our aggregate
indebtedness would have been approximately $416.8 million.
We may incur significant additional debt for various purposes
including, without limitation, the funding of future acquisition
and development activities and operational needs. In this
regard, we have received commitments for a syndicated credit
facility in an initial amount of $75.0 million, which could
be used to finance new acquisitions and for other working
capital purposes.
Payments of principal and interest on borrowings may leave us
with insufficient cash resources to operate our properties or to
make the distributions currently contemplated or necessary to
maintain our
27
Risk
factors
REIT qualification. Our substantial outstanding indebtedness,
and the limitations imposed on us by our debt agreements, could
have other significant adverse consequences, including the
following:
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our cash flow may be insufficient to meet our required principal
and interest payments;
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we may be unable to borrow additional funds as needed or on
satisfactory terms, which could, among other things, adversely
affect our ability to capitalize upon emerging acquisition
opportunities or meet operational needs;
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we may be unable to refinance our indebtedness at maturity or
the refinancing terms may be less favorable than the terms of
our original indebtedness;
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we may be forced to dispose of one or more of our properties,
possibly on disadvantageous terms;
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we may violate restrictive covenants in our loan documents,
which would entitle the lenders to accelerate our debt
obligations;
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certain of the property subsidiaries loan documents may
include restrictions on such subsidiarys ability to make
distributions to us;
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we may be unable to hedge floating rate debt, counterparties may
fail to honor their obligations under our hedge agreements,
these agreements may not effectively hedge interest rate
fluctuation risk, and, upon the expiration of any hedge
agreements, we would be exposed to then-existing market rates of
interest and future interest rate volatility;
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we may default on our obligations and the lenders or mortgagees
may foreclose on our properties that secure their loans and
receive an assignment of rents and leases; and
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our default under any of our indebtedness with cross-default
provisions could result in a default on other indebtedness.
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If any one of these events were to occur, our business,
financial condition, results of operations and cash flow, the
per share trading price of our common stock and our ability to
satisfy our debt service obligations and to make distributions
to our stockholders could be materially and adversely affected.
In addition, any foreclosure on our properties could create
taxable income without accompanying cash proceeds, which could
adversely affect our ability to meet the REIT distribution
requirements imposed by the Code.
Our existing loan
agreements contain, and future financing arrangements will
likely contain, restrictive covenants relating to our
operations, which could limit our ability to make distributions
to our stockholders.
We are subject to certain restrictions pursuant to the
restrictive covenants of our outstanding indebtedness, which may
affect our distribution and operating policies and our ability
to incur additional debt. Loan documents evidencing our existing
indebtedness contain, and loan documents entered into in the
future will likely contain, certain operating covenants that
limit our ability to further mortgage the property or
discontinue insurance coverage. In addition, these agreements
contain, and future agreements likely will contain, financial
covenants, including certain coverage ratios and limitations on
our ability to incur secured and unsecured debt, make
distributions, sell all or substantially all of our assets, and
engage in mergers and consolidations and certain acquisitions.
Covenants under our existing indebtedness do, and under any
future indebtedness likely will, restrict our ability to pursue
certain business initiatives or certain acquisition
transactions. In addition, failure to meet any of these
covenants, including the financial coverage ratios, could cause
an event of default under or accelerate some or all of our
indebtedness, which would have a material adverse effect on us.
28
Risk
factors
The current
limitations on the availability of credit may limit our ability
to refinance our debt obligations in the short-term and may
limit our access to liquidity.
Approximately 3.0% of our debt outstanding as of March 31,
2010 is scheduled to mature during 2010. Given the current
economic conditions including, but not limited to, the current
limitations on the availability of credit and related adverse
conditions in the global financial markets, we may be unable to
refinance these obligations on favorable terms, or at all. If we
are unable to refinance these obligations prior to the maturity
date, then we may be forced to seek liquidity through a variety
of options, including, but not limited to, the sale of
properties at below market prices. If we default on one or more
of these obligations, it may result in additional defaults under
our other obligations. Furthermore, we could also potentially
lose access to the liquidity we expect to have under our new
syndicated credit facility if one or more participating lenders
default on their commitments.
Increases in
interest rates would increase the amount of our variable-rate
debt payments and could limit our ability to pay dividends to
our stockholders.
On a combined historical basis, as of March 31, 2010,
approximately $110.8 million of our approximately
$405.7 million of indebtedness was subject to floating
interest rates. Increases in interest rates also would increase
our interest costs associated with any draws that we would make
on our new syndicated credit facility, which would reduce our
cash flows and our ability to pay dividends to our stockholders.
In addition, if we are required to repay existing debt during
periods of higher interest rates, we may need to sell one or
more of our investments in order to repay the debt, which might
reduce the realization of the return on such investments.
Changes in
interest rates could have adverse affects on our cash flows
compared to those of our competitors.
We have entered into an interest rate swap to effectively fix
our exposure to variable interest rates that covers the notional
amount of $3.5 million of debt at a fixed rate of 5.5%, a
loan secured by our Mosinee, Wisconsin property. If interest
rates move below our fixed rate, we will incur more interest
expense than other similar market participants, which may have
an adverse affect on our cash flows as compared to other market
participants.
Additionally, there is counterparty risk associated with our
interest rate swap. If market conditions lead to insolvency or
make a merger necessary for our counterparty, it is possible
that the terms of our interest rate swap will not be honored in
their current form with a new counterparty. The potential
termination or renegotiation of the terms of the interest rate
swap agreement as a result of changing counterparties through
insolvency or merger could adversely affect our results of
operations and cash flows.
Adverse global
market and economic conditions may continue to adversely affect
us and could cause us to recognize impairment charges or
otherwise harm our performance.
Recent market and economic conditions have been challenging,
with tighter credit conditions in 2008 and 2009. Continued
concerns about the availability and cost of credit, the
U.S. mortgage market, inflation, unemployment levels,
geopolitical issues and declining equity and real estate markets
have contributed to increased market volatility and diminished
expectations for the U.S. economy. The commercial real
estate sector in particular has been negatively affected by
these market and economic conditions. These conditions may
result in our tenants delaying lease commencements, requesting
rent reductions, declining to extend or renew leases upon
expiration or renewing at lower rates. These conditions also
have forced tenants, in some cases, to declare bankruptcy or
vacate leased premises. We may be unable to re-lease vacated
space at attractive rents or at all. We are unable to predict
whether, or to what extent or for how long, these adverse market
and economic conditions will persist. The
29
Risk
factors
continuation or intensification of these conditions may impede
our ability to generate sufficient operating cash flow to pay
expenses, maintain properties, make distributions and repay debt.
If we were to
incur uninsured or uninsurable losses, or losses in excess of
our insurance coverage, we would be required to pay for such
losses, which could adversely affect our financial condition
and our cash flow.
We carry comprehensive liability, fire, extended coverage,
business interruption and rental loss insurance covering all of
the properties in our portfolio under a blanket insurance policy
with policy specifications, limits and deductibles customarily
carried for similar properties. In addition, we carry liability
and workers compensation insurance applicable to our
services business, as well as professional liability and
directors and officers insurance. We do not carry
insurance for certain losses, including, but not limited to,
losses caused by riots or war. Certain types of losses may be
either uninsurable or not economically insurable, such as losses
due to earthquakes, riots or acts of war. Should an uninsured
loss occur, we could lose both our investment in and anticipated
profits and cash flow from a property. If any such loss is
insured, we may be required to pay a significant deductible on
any claim for recovery of such a loss prior to our insurer being
obligated to reimburse us for the loss, or the amount of the
loss may exceed our coverage for the loss. In addition, future
lenders may require such insurance, and our failure to obtain
such insurance could constitute a default under our loan
agreements. In addition, we may reduce or discontinue terrorism,
earthquake, flood or other insurance on some or all of our
properties in the future if the cost of premiums for any of
these policies exceeds, in our judgment, the value of the
coverage discounted for the risk of loss. Finally, our title
insurance policies may not insure for the current aggregate
market value of our portfolio, and we do not intend to increase
our title insurance coverage as the market value of our
portfolio increases. As a result, our business, financial
condition, results of operations, cash flow, per share trading
price of our common stock and ability to satisfy our debt
service obligations and to make distributions to our
stockholders may be materially and adversely affected.
If any of our
insurance carriers become insolvent, we could be adversely
affected.
We carry several different lines of insurance, placed with
several large insurance carriers. If any one of these large
insurance carriers were to become insolvent, we would be forced
to replace the existing insurance coverage with another suitable
carrier, and any outstanding claims would be at risk for
collection. In such an event, we cannot be certain that we would
be able to replace the coverage at similar or otherwise
favorable terms. Replacing insurance coverage at unfavorable
rates and the potential of uncollectible claims due to carrier
insolvency could adversely affect our results of operations and
cash flows.
Terrorism and
other factors that may negatively impact demand for our
properties could harm our operating results.
The strength and profitability of our business depends on demand
for and the value of our properties. Future terrorist attacks in
the United States, such as the attacks that occurred in New York
and Washington, D.C. on September 11, 2001, and other
acts of terrorism or war may cause further economic instability
in the United States, which could negatively impact the demand
for our properties. As a result, such terrorist attacks could
have an adverse impact on our business even if they are not
directed at our properties. In addition, the terrorist attacks
of September 11, 2001 have substantially affected the
availability and price of insurance coverage for certain types
of damages or occurrences, and our insurance policies for
terrorism include large deductibles and co-payments. The lack of
sufficient insurance for these types of acts could expose us to
significant losses and could have a negative impact on our
operations.
30
Risk
factors
Some of our
leases provide tenants with the right to terminate their lease
early, which could have an adverse effect on our cash flow and
results of operations.
Some of our leases permit our tenants to terminate their leases
as to all or a portion of the leased premises prior to their
stated lease expiration dates under certain circumstances, such
as providing notice and, in some cases, paying a termination
fee. In many cases, such early terminations can be effectuated
by our tenants with little or no termination fee being paid to
us. As of April 1, 2010, approximately 15.5%, based on
leasable square footage, of our leases over 25,000 leasable
square feet included rights for tenants to terminate. If our
tenants exercise early termination rights, our cash flow and
earnings will be materially and adversely affected, and we can
provide no assurance that we will be able to generate an
equivalent amount of net rental income by leasing the vacated
space to new third-party tenants.
We may not be
able to control our operating costs or our expenses may remain
constant or increase, even if our revenue does not increase,
causing our results of operations to be adversely
affected.
Factors that may adversely affect our ability to control
operating costs include the need to pay for insurance and other
operating costs, including real estate taxes, which could
increase over time, the need periodically to repair, renovate
and re-lease space, the cost of compliance with governmental
regulation, including zoning and tax laws, the potential for
liability under applicable laws, interest rate levels and the
availability of financing. If our operating costs increase as a
result of any of the foregoing factors, our results of
operations may be materially and adversely affected.
The expense of owning and operating a property is not
necessarily reduced when circumstances such as market factors
and competition cause a reduction in income from the property.
As a result, if revenue declines, we may not be able to reduce
our expenses accordingly. Costs associated with real estate
investments, such as real estate taxes, insurance, loan payments
and maintenance, generally will not be reduced even if a
property is not fully occupied or other circumstances cause our
revenues to decrease. If a property is mortgaged and we are
unable to meet the mortgage payments, the lender could foreclose
on the mortgage and take possession of the property, resulting
in a further reduction in net income.
We may be
required to make significant capital expenditures to improve our
properties in order to retain and attract tenants, causing a
decline in operating revenue and reducing cash available for
debt service and distributions to stockholders.
If adverse economic conditions continue in the real estate
market and demand for office space remains low, we expect that,
upon expiration of leases at our properties, we will be required
to make rent or other concessions to tenants, accommodate
requests for renovations,
build-to-suit
remodeling and other improvements or provide additional services
to our tenants. As a result, we may have to make significant
capital or other expenditures in order to retain tenants whose
leases expire and to attract new tenants in sufficient numbers.
Additionally, we may need to raise capital to make such
expenditures. If we are unable to do so or capital is otherwise
unavailable, we may be unable to make the required expenditures.
This could result in non-renewals by tenants upon expiration of
their leases, which would result in declines in revenue from
operations and reduce cash available for debt service and
distributions to stockholders.
If we are unable
to sell, dispose of or refinance one or more of our properties
in the future, we may be unable to realize our investment
objectives and our business may be adversely affected.
The real estate investments made, and to be made, by us are
relatively difficult to sell quickly. Proceeds, if any, will be
realized from an investment generally upon disposition or
refinancing of the underlying
31
Risk
factors
property. We may be unable to realize our investment objectives
by sale, other disposition or refinance at attractive prices
within any given period of time or may otherwise be unable to
complete any exit strategy. In particular, these risks could
arise from weakness in or even the lack of an established market
for a property, changes in the financial condition or prospects
of prospective purchasers, changes in national or international
economic conditions, and changes in laws, regulations or fiscal
policies of jurisdictions in which the property is located.
If we sell
properties and provide financing to purchasers, defaults by the
purchasers would adversely affect our cash flows.
If we decide to sell any of our properties, we presently intend
to use our best efforts to sell them for cash. However, in some
instances we may sell our properties by providing financing to
purchasers. If we provide financing to purchasers, we will bear
the risk that the purchaser may default, which could negatively
impact our cash distributions to stockholders and result in
litigation and related expenses. Even in the absence of a
purchaser default, the distribution of the proceeds of sales to
our stockholders, or their reinvestment in other assets, will be
delayed until the promissory notes or other property we may
accept upon a sale are actually paid, sold or refinanced.
Our assets may be
subject to impairment charges, which would have an adverse
effect on our results of operations and FFO.
We periodically evaluate our real estate investments and other
assets for impairment indicators. The judgment regarding the
existence of impairment indicators is based on factors such as
market conditions, tenant performance and legal structure. For
example, the early termination of a lease by a tenant may lead
to an impairment charge. If we determine that an impairment has
occurred, we would be required to make an adjustment to the net
carrying value of the asset, which could have a material adverse
effect on our results of operations and FFO in the period in
which the impairment charge is recorded.
Because we own
real property, we are subject to extensive environmental
regulation, which creates uncertainty regarding future
environmental expenditures and liabilities.
Environmental laws regulate, and impose liability for, releases
of hazardous or toxic substances into the environment. Under
various provisions of these laws, an owner or operator of real
estate is or may be liable for costs related to soil or
groundwater contamination on, in, or migrating to or from its
property. In addition, persons who arrange for the disposal or
treatment of hazardous or toxic substances may be liable for the
costs of cleaning up contamination at the disposal site. Such
laws often impose liability regardless of whether the person
knew of, or was responsible for, the presence of the hazardous
or toxic substances that caused the contamination. The presence
of, or contamination resulting from, any of these substances, or
the failure to properly remediate them, may adversely affect our
ability to sell or rent our property or to borrow using such
property as collateral. In addition, persons exposed to
hazardous or toxic substances may sue for personal injury
damages. For example, certain laws impose liability for release
of or exposure to asbestos-containing materials and
contamination from past operations or from off-site sources. As
a result, in connection with our current or former ownership,
operation, management and development of real properties, we may
be potentially liable for investigation and cleanup costs,
penalties, and damages under environmental laws.
All of the properties in our existing portfolio and joint
venture portfolio have been subjected to preliminary
environmental assessments within the last ten years, known as
Phase I assessments, by independent environmental consultants
that are designed to identify certain liabilities. In addition,
each of the properties in our acquisition portfolio has been
subjected to, or will be subjected to, a Phase I assessment. The
Phase I assessments covering two properties in our joint
venture portfolio, three properties in our existing portfolio
and one property in our acquisition portfolio did reveal the
existence
32
Risk
factors
of conditions, such as the use and storage of petroleum-based
oils and lubricants and demolition and construction materials,
groundwater contamination and the existence of impacted soils
(on one property in our existing portfolio, one property in our
joint venture portfolio and one property in our acquisition
portfolio) or conditions that could impact the soil or
groundwater under certain circumstances in the future (on the
three other properties), that have the potential to give rise to
environmental liabilities. Phase I assessments are,
however, limited in scope, and may not include or identify all
potential environmental liabilities or risks associated with the
property. Unless required by applicable laws or regulations, we
may not further investigate, remedy or ameliorate the
liabilities disclosed in the Phase I assessments.
We cannot assure you that the Phase I assessments or other
environmental studies identified all potential environmental
liabilities, or that we will not incur material environmental
liabilities in the future. If we do incur material environmental
liabilities in the future, we may face significant remediation
costs, and we may find it difficult to sell, or we may be unable
to sell, any affected properties.
Compliance with
the laws, regulations and covenants that are applicable to our
properties, including permit, license and zoning requirements,
may adversely affect our ability to make future acquisitions or
renovations, result in significant costs or delays and adversely
affect our growth strategy.
Our properties are subject to various covenants and local laws
and regulatory requirements, including permitting and licensing
requirements. Local regulations, including municipal or local
ordinances, zoning restrictions and restrictive covenants
imposed by community developers may restrict our use of our
properties and may require us to obtain approval from local
officials or community standards organizations at any time with
respect to our properties, including prior to acquiring a
property or when undertaking renovations of any of our existing
properties. Among other things, these restrictions may relate to
fire and safety, seismic, asbestos-cleanup or hazardous material
abatement requirements. We cannot assure you that existing
regulatory policies will not adversely affect us or the timing
or cost of any future acquisitions or renovations, or that
additional regulations will not be adopted that would increase
such delays or result in additional costs. Our growth strategy
may be materially and adversely affected by our ability to
obtain permits, licenses and zoning approvals. Our failure to
obtain such permits, licenses and zoning approvals could have a
material adverse effect on our business, financial condition and
results of operations.
In addition, federal and state laws and regulations, including
laws such as the ADA impose further restrictions on our
operations. Under the ADA, all public accommodations must meet
federal requirements related to access and use by disabled
persons. Some of our properties may currently be in
non-compliance with the ADA. If one or more of the properties in
our portfolio is not in compliance with the ADA or any other
regulatory requirements, we may be required to incur additional
costs to bring the property into compliance and we might incur
damages or governmental fines. In addition, existing
requirements may change and future requirements may require us
to make significant unanticipated expenditures that would
adversely impact our business, financial condition, results of
operations and cash flow, the per share trading price of our
common stock and our ability to satisfy our debt service
obligations and to make distributions to our stockholders.
We have
identified a material weakness, and may identify additional
material weaknesses or significant deficiencies, in our internal
controls over financial reporting. Our failure to remedy this
matter could result in a material misstatement of our financial
statements.
In connection with the preparation of our financial statements
included elsewhere in this prospectus, our independent
registered public accounting firm identified and communicated to
us deficiencies in our internal control which it considers to be
a material weakness. A deficiency in internal control exists
when the design or operation of a control does not allow
management or employees, in the normal
33
Risk
factors
course of performing their assigned functions, to prevent, or
detect and correct, misstatements on a timely basis. A material
weakness is a deficiency, or a combination of deficiencies, in
internal control, such that there is a reasonable possibility
that a material misstatement of the entitys financial
statements will not be prevented, or detected and corrected, on
a timely basis. The material weakness identified by our
independent registered public accounting firm related to our
lack of a sufficient number of adequately trained finance and
accounting personnel with appropriate expertise with
U.S. GAAP.
As a result of
becoming a public company, we must implement additional
financial and accounting systems, procedures and controls which
are applicable to such companies, which will increase our costs
and require substantial management time and attention.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company,
including costs associated with public company reporting
requirements and corporate governance requirements, including
requirements under the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act. As an example, for our 2011 calendar year,
our management will be required to report on, and our
independent registered public accounting firm to attest to, our
internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. In the past, we have
reported our results to the investors in the investment funds on
a
fund-by-fund
basis, and we have not separately reported audited results for
the services companies and real property assets on a combined
basis. If we fail to implement proper overall business controls,
including as required to integrate the existing entities and
support our growth, our results of operations could be harmed or
we could fail to meet our reporting obligations. In addition, if
we fail to remediate the weakness identified above or if we
identify significant deficiencies or additional material
weaknesses in our internal control over financial reporting that
we cannot remediate in a timely manner, or if we are unable to
receive an unqualified report from our independent registered
public accounting firm with respect to our internal control over
financial reporting, we could become subject to delisting from
the NYSE, an investigation by the Securities and Exchange
Commission, or the SEC, and civil or criminal sanctions.
Additionally, ineffective internal control over financial
reporting would place us at increased risk of fraud or misuse of
corporate assets and could cause our stockholders, lenders and
others to lose confidence in the reliability of our financial
statements and the trading price of our common stock and our
ability to obtain any necessary equity or debt financing could
suffer.
Furthermore, the design and effectiveness of our disclosure
controls and procedures and internal control over financial
reporting may not prevent all errors, misstatements, or
misrepresentations. Although management will attempt to
remediate the material weakness described above and will
continue to review the effectiveness of our disclosure controls
and procedures and internal control over financial reporting,
there can be no guarantee that our internal control over
financial reporting will be remediated or will in the future be
effective in accomplishing all control objectives all of the
time. Deficiencies, including any material weaknesses, in our
internal control over financial reporting which may occur in the
future could result in misstatements of our results of
operations, restatements of our financial statements, a decline
in the trading price of our common stock, or otherwise
materially adversely affect our business, reputation, results of
operations, financial condition, or liquidity.
34
Risk
factors
We may be unable
to complete acquisitions that would grow our business, including
those in our acquisition portfolio, and even if consummated, we
may fail to successfully integrate and operate acquired
properties.
Our growth strategy includes acquiring the properties in our
acquisition portfolio and the disciplined acquisition of
properties as opportunities arise. Our ability to acquire
properties on satisfactory terms and successfully integrate and
operate them is subject to the following significant risks:
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we may be unable to acquire desired properties because of
competition from other real estate investors with more capital,
including other real estate operating companies, REITs and
investment funds;
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we may acquire properties that are not accretive to our results
upon acquisition, and we may not successfully manage and lease
those properties to meet our expectations;
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competition from other potential acquirers may significantly
increase the purchase price of a desired property;
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we may be unable to generate sufficient cash from operations, or
obtain the necessary debt or equity financing to consummate an
acquisition or, if obtainable, financing may not be on
satisfactory terms;
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we may need to spend more than budgeted amounts to make
necessary improvements or renovations to acquired properties;
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agreements for the acquisition of properties are typically
subject to customary conditions to closing, including
satisfactory completion of due diligence investigations, and we
may spend significant time and money on potential acquisitions
that we do not consummate;
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the process of acquiring or pursuing the acquisition of a new
property may divert the attention of our senior management team
from our existing business operations;
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we may be unable to quickly and efficiently integrate new
acquisitions, particularly acquisitions of portfolios of
properties, into our existing operations;
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market conditions may result in higher than expected vacancy
rates and lower than expected rental rates; and
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we may acquire properties without any recourse, or with only
limited recourse, for liabilities, whether known or unknown,
such as
clean-up
of
environmental contamination, claims by tenants, vendors or other
persons against the former owners of the properties and claims
for indemnification by general partners, directors, officers and
others indemnified by the former owners of the properties.
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If we cannot complete property acquisitions on favorable terms,
or operate acquired properties to meet our goals or
expectations, our business, financial condition, results of
operations and cash flow, the per share trading price of our
common stock and our ability to satisfy our debt service
obligations and to make distributions to our stockholders could
be materially and adversely affected.
If we are unable
to source off-market deal flow in the future, we may be unable
to successfully implement our growth strategy of acquiring
properties at attractive prices.
A key component of our growth strategy is to acquire additional
industrial and office real estate assets before they are widely
marketed by real estate brokers, or off-market.
Properties that are acquired off-market are typically more
attractive to us as a purchaser because of the absence of a
formal marketing process, which could lead to higher prices. If
we cannot obtain off-market deal flow in the future, our ability
to locate and acquire additional properties at attractive prices
could be materially and adversely affected.
35
Risk
factors
We may be unable
to successfully expand our operations into new markets, which
could adversely affect our return on our real estate investments
in these markets.
If the opportunity arises, we may explore acquisitions of
properties in new markets. Each of the risks applicable to our
ability to acquire and successfully integrate and operate
properties in our current markets is also applicable to our
ability to acquire and successfully integrate and operate
properties in new markets. In addition to these risks, we may
not possess the same level of familiarity with the dynamics and
market conditions of any new markets that we may enter, which
could adversely affect our ability to expand into or operate in
those markets. We may be unable to achieve a desired return on
our investments in new markets. If we are unsuccessful in
expanding into new markets, it could adversely affect our
business, financial condition, results of operations and cash
flow, the per share trading price of our common stock and
ability to satisfy our debt service obligations and to make
distributions to our stockholders.
Certain of our
properties are subject to non-disposition agreements which
restrict our ability to dispose of such properties and these
restrictions could impair our liquidity and operating
flexibility if sales of such properties were necessary to
generate capital or otherwise.
We have entered into four non-disposition agreements with
contributors of properties in the formation transactions that
affect three properties. These agreements restrict the sale of
the subject property without the contributors consent
until March 1, 2013 for two of the three properties and
until July 11, 2013 for the other property. The three
properties subject to these agreements comprise approximately
252,000 square feet of industrial space in three states.
Additionally, one of Welshs three investment funds, Welsh
US Real Estate Fund, LLC, has made certain co-investments in its
properties in the form of
tenant-in-common
interests that have been previously contributed to Welsh US Real
Estate Fund, LLC on a tax-deferred basis pursuant to a
conversion agreement dated May 15, 2007. Under this
conversion agreement, which affects five properties in one state
comprising approximately 1.4 million leasable square feet,
Welsh US Real Estate Fund, LLC is restricted from selling these
properties without the consent of the contributors for a period
of four years from the date of the conversion agreement and must
use its best efforts to qualify any sale of the properties for
up to seven years from the date of the conversion agreement as a
tax-deferred exchange. These restrictions could impede our
ability to raise cash quickly through a sale of one or more of
these properties or to dispose of a poorly performing property
until the expiration of the terms of this agreement.
Welsh US Real Estate Fund, LLC has also entered into conversion
agreements with the tenant-in-common interest owners of three
additional properties constituting 1.3 million leasable
square feet. These conversion agreements contain similar
restrictions on the sale of such properties. Although we intend
to terminate these conversion agreements in connection with the
formation transactions, if we are unable to do so, the
restrictions described above would also apply to these
additional properties. See Structure and Formation of Our
CompanyCertain Agreements Not to Sell Property.
We are exposed to
risks associated with property development.
We may engage in development and redevelopment activities with
respect to certain of our properties. If we do so, we will be
subject to certain risks, including, without limitation:
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the availability and pricing of financing on satisfactory terms
or at all;
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the availability and timely receipt of zoning and other
regulatory approvals;
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the cost and timely completion of construction (including
unanticipated risks beyond our control, such as weather or labor
conditions, material shortages and construction
overruns); and
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the ability to achieve an acceptable level of occupancy upon
completion.
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36
Risk
factors
These risks could result in substantial unanticipated delays or
expenses and, under certain circumstances, could prevent
completion of development activities once undertaken, any of
which could have an adverse effect on our business, financial
condition, results of operations and cash flow, the per share
trading price of our common stock and ability to satisfy our
debt service obligations and to make distributions to our
stockholders.
We are assuming
liabilities in connection with the formation transactions,
including unknown liabilities, which, if significant, could
adversely affect our business.
As part of the formation transactions, we will assume existing
liabilities of our services business and the property
subsidiaries, including, but not limited to, liabilities in
connection with our properties, some of which may be unknown or
unquantifiable at the time this offering is consummated. Unknown
liabilities might include liabilities for cleanup or remediation
of undisclosed environmental conditions, claims of tenants,
vendors or other persons dealing with the entities prior to this
offering, tax liabilities, employment-related issues, and
accrued but unpaid liabilities whether incurred in the ordinary
course of business or otherwise. If the magnitude of such
unknown liabilities is high, either singly or in the aggregate,
they could adversely affect our business, financial condition,
results of operations and cash flow, the per share trading price
of our common stock and our ability to satisfy our debt service
obligations and to make distributions to our stockholders.
We cannot assure
you of our ability to make distributions in the future. We may
use borrowed funds or funds from other sources to make
distributions, which may adversely impact our
operations.
We intend to make distributions to our common stockholders and
holders of OP units. We intend to maintain our initial dividend
rate for the
12-month
period following completion of this offering unless our actual
results of operations, economic conditions or other factors
differ materially from the assumptions used in our estimate.
Distributions declared by us will be authorized by our board of
directors in its sole discretion out of funds legally available
therefor and will depend upon a number of factors, including
restrictions under applicable law and the capital requirements
of our company.
All distributions will be made at the discretion of our board of
directors and will depend on our earnings, our financial
condition, maintenance of our REIT qualification and other
factors as our board of directors may deem relevant from time to
time. We may be required to fund distributions from working
capital, borrowings under our new syndicated credit facility,
proceeds of this offering or a sale of assets to the extent
distributions exceed earnings or cash flows from operations.
Funding distributions from working capital would restrict our
operations. If we borrow from our syndicated credit facility in
order to pay distributions, we would be more limited in our
ability to execute our strategy of using that facility to fund
acquisitions. Finally, selling assets may require us to dispose
of assets at a time or in a manner that is not consistent with
our disposition strategy. If we borrow to fund distributions,
our leverage ratios and future interest costs would increase,
thereby reducing our earnings and cash available for
distribution from what they otherwise would have been. We may
not be able to make distributions in the future. In addition,
some of our distributions may be considered a return of capital
for income tax purposes. If we decide to make distributions in
excess of our current and accumulated earnings and profits, such
distributions would generally be considered a return of capital
for federal income tax purposes to the extent of the
holders adjusted tax basis in their shares. A return of
capital is not taxable, but it has the effect of reducing the
holders adjusted tax basis in its investment. If
distributions exceed the adjusted tax basis of a holders
shares, they will be treated as gain from the sale or exchange
of such stock. See Federal Income Tax
ConsiderationsTaxation of Stockholders.
37
Risk
factors
Our ability to
pay our estimated initial annual distribution, which represents
approximately 106.5% of our estimated cash available for
distribution for the 12 months ended March 31, 2011,
depends upon our actual operating results, and we may have to
borrow funds under our syndicated credit facility to pay this
distribution, which could slow our growth.
We expect to pay an initial annual dividend of $0.665 per share,
or $28.9 million in the aggregate, which represents
approximately 106.5% (or a deficiency of $1.8 million) of
our estimated cash available for distribution of
$27.1 million for the 12 months ending March 31,
2011 calculated as described in Distribution Policy.
Accordingly, we currently expect that we will be unable to pay
our estimated initial annual distribution to stockholders and OP
unitholders out of estimated cash available for distribution for
the 12 months ending March 31, 2011 as calculated in
Distribution Policy. Unless our operating cash flow
increases, we will be required either to fund future
distributions from borrowings under our syndicated credit
facility or to reduce such distributions. Use of our syndicated
credit facility to pay distributions will reduce the amount of
our borrowing capacity available for other purposes. If we need
to borrow funds on a regular basis to meet our distribution
requirements or if we reduce the amount of our distribution, our
stock price may be adversely affected.
Our property
taxes could increase due to property tax rate changes or
reassessment, which could adversely impact our cash
flows.
Even if we qualify as a REIT for federal income tax purposes, we
will be required to pay state and local taxes on our properties.
The real property taxes on our properties may increase as
property tax rates change or as our properties are assessed or
reassessed by taxing authorities. In particular, our portfolio
of properties may be reassessed as a result of this offering and
the formation transactions. Therefore, the amount of property
taxes we pay in the future may differ substantially from what we
have paid in the past. If the property taxes we pay increase,
our ability to pay expected distributions to our stockholders
could be materially and adversely affected.
RISKS RELATED TO
OUR ORGANIZATION AND STRUCTURE
Our principals
exercised significant influence with respect to the terms of the
formation transactions, including transactions in which they
determined the compensation they would receive.
We did not conduct arms-length negotiations with our
principals with respect to the contributions that are part of
the formation transactions. In the course of structuring the
formation transactions, our principals had the ability to
influence the type and level of benefits that they and our other
officers will receive from us. In addition, our principals had
substantial pre-existing ownership interests in our services
companies, the investment funds and the property subsidiaries,
as well as their economic interest in our joint venture
portfolio, and will receive substantial economic benefits as a
result of the formation transactions. With respect to the real
estate-related assets we will acquire, the formation transaction
documents provide that the principals and the other continuing
investors will receive a fixed number of OP units, the value of
which will increase or decrease based on the price of our common
stock in this offering. With respect to the services business
assets we will acquire, the formation transaction documents
provide that the principals will receive a number of OP units
based on a fixed valuation of such assets where the number of OP
units is determined by dividing such valuation by the initial
public offering price in this offering. In addition, our
principals have assumed executive management and director
positions with us, for which they will receive certain other
benefits such as employment agreements, equity-based awards and
other compensation. See Certain Relationships and Related
Party TransactionsFormation Transactions.
38
Risk
factors
We may pursue
less vigorous enforcement of the terms of the formation
transactions and other agreements because of conflicts of
interest with certain of our directors and officers.
Our principals and certain of our executive officers and
employees have interests in certain of the entities that we will
acquire in the formation transactions and will enter into
contribution and other agreements in connection with such
acquisitions. Certain of our principals will enter into
employment agreements with us pursuant to which they will agree,
among other things, not to engage in certain business activities
in competition with us and pursuant to which they will devote
substantially full-time attention to our affairs. See
ManagementCompensation Discussion and
AnalysisOverview of Executive Compensation
ProgramEmployment Agreements and Change in Control
Arrangements. We may choose not to enforce, or to enforce
less vigorously, our rights under these agreements because of
our desire to maintain our ongoing relationship with our
principals, given their significant knowledge of our business,
relationships with our customers and significant equity
ownership in us.
Tax consequences
to holders of OP units upon a sale or refinancing of our
properties may cause the interests of our principals, as holders
of OP units, to differ from the interests of our other
stockholders.
As a result of the unrealized built-in gain that may be
attributable to one or more of the properties contributed to our
operating partnership by companies owned in whole or in part by
our principals, some of our principals may experience more
onerous tax consequences than holders of our common stock upon
the sale or refinancing of such properties including
disproportionately greater allocations of items of taxable
income and gain upon the occurrence of such an event. A
principal that receives such disproportionately greater
allocation of taxable income and gain will not receive a
correspondingly greater distribution of cash proceeds with which
to pay the income taxes on such income. Accordingly, they may
have different objectives regarding the appropriate pricing,
timing and other material terms of any sale or refinancing of
such properties and could exercise their influence over our
affairs by attempting to delay, defer or prevent a transaction
that might otherwise be in the best interests of our other
stockholders.
Our principals
have outside business interests and investments, which could
potentially take their time and attention away from
us.
Our principals have outside business interests, including
ownership and management responsibilities related to certain
properties and entities that are not being contributed in the
formation transactions. These outside business interests are
generally either non-controlling minority interests in real
estate or interests in real estate product types other than
industrial and office real estate. Our principals outside
business interests may present a conflict in that they could
interfere with the ability of one or more of the principals to
devote time and attention to our business and affairs and, as a
result, our business could be harmed. Furthermore, in some
cases, one or more of the principals or their affiliates may
have certain management and fiduciary obligations that may
conflict with such persons responsibilities as an
executive officer or director, which may also adversely affect
our business.
Our principals
will have significant influence over our affairs and could
exercise such influence in a manner that is not in the best
interests of our other stockholders.
Upon completion of this offering and the formation transactions,
our principals will own approximately 5.2% of our outstanding
common stock on a fully diluted basis, substantially all of
which is held in the form of OP units. If our principals
exercise their redemption rights with respect to their OP units
and we issue common stock in exchange therefor, our principals,
to the extent they vote their shares in a similar manner, will
have influence over our affairs and could exercise such
influence in a manner that is not in the best interests of our
other stockholders, including by attempting to delay, defer or
prevent a change of control transaction that might otherwise be
in the best interests of our stockholders. In
39
Risk
factors
addition, our three principals serve on our board of directors,
and our board of directors consists of nine persons.
We are a holding
company with no direct operations. As a result, we will rely on
funds received from our operating partnership to pay liabilities
and dividends, our stockholders claims will be
structurally subordinated to all liabilities of our operating
partnership and our stockholders will not have any voting rights
with respect to our operating partnership activities, including
the issuance of additional OP units.
We are a holding company and will conduct all of our operations
through our operating partnership. We do not have, apart from
our ownership of our operating partnership, any independent
operations. As a result, we will rely on distributions from our
operating partnership to pay any dividends we might declare on
shares of our common stock. We will also rely on distributions
from our operating partnership to meet any of our obligations,
including tax liability on taxable income allocated to us from
our operating partnership (which might make distributions to the
company not equal to the tax on such allocated taxable income).
In addition, because we are a holding company,
stockholders claims will be structurally subordinated to
all existing and future liabilities and obligations (whether or
not for borrowed money) of our operating partnership and its
subsidiaries. Therefore, in the event of our bankruptcy,
liquidation or reorganization, claims of our stockholders will
be satisfied only after all of our and our operating
partnerships and its subsidiaries liabilities and
obligations have been paid in full.
After giving effect to this offering, we will own approximately
82.5% of the interests in our operating partnership. However,
our operating partnership may issue additional OP units in the
future. Such issuances could reduce our ownership percentage in
our operating partnership. Because our common stockholders will
not directly own any OP units, they will not have any voting
rights with respect to any such issuances or other partnership
level activities of our operating partnership.
Our charter, the
partnership agreement of our operating partnership and Maryland
law contain provisions that may delay or prevent a change of
control transaction.
Our charter contains a 9.8% ownership
limit.
Our charter, subject to certain
exceptions, and commencing upon the completion of this offering,
limits any person to actual or constructive ownership of no more
than 9.8% in value or number of shares, whichever is more
restrictive, of the outstanding shares of our capital stock and
no more than 9.8% of the value or number of shares, whichever is
more restrictive, of the outstanding shares of our common stock.
Our board of directors, in its sole discretion and upon receipt
of certain representations and undertakings, may exempt a person
(prospectively or retroactively) from the ownership limits.
However, our board of directors may not, among other
limitations, grant an exemption from the ownership limits to any
person whose ownership, direct or indirect, of more than 9.8% of
the value or number of the outstanding shares of our capital
stock or the outstanding shares of our common stock would cause
us to fail to qualify as a REIT. The ownership limits and the
other restrictions on ownership and transfer of our stock
contained in our charter may delay or prevent a transaction or a
change of control that might involve a premium price for our
common stock or otherwise be in the best interest of our
stockholders. See Description of StockRestrictions
on Ownership and Transfer.
Our board of directors may create and issue a class or series
of common or preferred stock without stockholder
approval.
Our board of directors is empowered
under our charter to amend our charter to increase or decrease
the aggregate number of shares of our stock or the number of
shares of stock of any class or series that we have authority to
issue, to designate and issue from time to time one or more
classes or series of stock and to classify or reclassify any
unissued shares of our common stock or preferred stock without
stockholder approval. Our board of directors may determine the
relative preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of
redemption of any class or series of stock issued.
40
Risk
factors
As a result, we may issue series or classes of stock with voting
rights, rights to distributions or other rights, senior to the
rights of holders of our common stock. The issuance of any such
stock could also have the effect of delaying or preventing a
change of control transaction that might otherwise be in the
best interests of our stockholders.
Certain provisions in the partnership agreement of our
operating partnership may delay or prevent unsolicited
acquisitions of us.
Provisions in the partnership
agreement of our operating partnership may delay or make more
difficult unsolicited acquisitions of us or changes in our
control. These provisions could discourage third parties from
making proposals involving an unsolicited acquisition of us or
change of our control, although some stockholders might consider
such proposals, if made, desirable. These provisions include,
among others:
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redemption rights of qualifying parties;
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transfer restrictions on the OP units;
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the ability of the general partner in some cases to amend the
partnership agreement without the consent of the limited
partners;
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the right of the limited partners to consent to transfers of the
general partnership interest of the general partner and mergers
or consolidations of our company under specified limited
circumstances; and
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restrictions relating to our qualification as a REIT under the
Code.
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Our charter and bylaws and the partnership agreement of our
operating partnership also contain other provisions that may
delay, defer or prevent a transaction or a change of control
that might involve a premium price for our common stock or
otherwise be in the best interest of our stockholders. See
Material Provisions of Maryland Law and of Our Charter and
BylawsRemoval of Directors, Advance
Notice of Director Nominations and New Business and
Description of the Partnership Agreement of Welsh Property
Trust, L.P.
Certain rights
which are reserved to our stockholders may allow third parties
to enter into business combinations with us that are not in the
best interest of the stockholders, without negotiating with our
board of directors.
Certain provisions of the Maryland General Corporate Law, or the
MGCL, may have the effect of requiring a third party seeking to
acquire us to negotiate with our board of directors, including:
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business combination provisions that, subject to
limitations, prohibit certain business combinations between us
and an interested stockholder (defined generally as
any person who beneficially owns 10% or more of the voting power
of our outstanding voting stock or an affiliate or associate of
our company who, at any time within the two-year period prior to
the date in question, was the beneficial owner of 10% or more of
the voting power of our then outstanding stock) or an affiliate
of an interested stockholder for five years after the most
recent date on which the stockholder becomes an interested
stockholder, and thereafter may impose supermajority voting
requirements on these combinations; and
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control share provisions that provide that
control shares of our company (defined as shares
which, when aggregated with other shares controlled by the
stockholder (except solely by virtue of a revocable proxy),
entitle the stockholder to exercise one of three increasing
ranges of voting power in electing directors) acquired in a
control share acquisition (defined as the direct or
indirect acquisition of ownership or control of issued and
outstanding control shares) have no voting rights
except to the extent approved by our stockholders by the
affirmative vote of at least two-thirds of all the votes
entitled to be cast on the matter, excluding all interested
shares.
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As permitted by the MGCL, we have elected, by resolution of our
board of directors and pursuant to a provision in our bylaws, to
opt out of the business combination provisions and control share
provisions, respectively, of the MGCL, and our board of
directors may not adopt a resolution or amend our bylaws
41
Risk
factors
to opt in to these provisions without the affirmative vote of a
majority of the votes cast by our common stockholders.
In addition, we have not adopted a stockholder rights plan (also
known as a poison pill), and we do not intend to adopt a
stockholder rights plan unless our stockholders approve in
advance the adoption of such plan.
If a third party makes an acquisition proposal that our board of
directors believes is not in the best interests of our
stockholders or does not represent the highest value reasonable
available to our stockholders under the circumstances, it is not
likely that we would be able to obtain stockholder approval to
opt in to the business combination or control share provisions
of the MGCL, or adopt a stockholder rights plan, in a timely
fashion. As a result, third parties may be able to enter into
business combinations with us that may not be in the best
interest of our stockholders. See Material Provisions of
Maryland Law and of Our Charter and BylawsBusiness
Combinations, Control Share
Acquisitions, and Policies with Respect to Certain
ActivitiesStockholder Rights Plans.
Under their
employment agreements, certain of our executive officers will
have the right to receive severance benefits in certain
circumstances, which may adversely affect us.
In connection with this offering and the formation transactions,
we will enter into written employment agreements with
Mr. Frederiksen, our Chief Executive Officer, and
Ms. Kane, our President and Chief Operating Officer. These
employment agreements provide for severance benefits to the
executive upon the termination of his or her employment upon
certain circumstances, generally either when terminated by us
without cause or by the executive officer for
good reason, or when terminated without cause or
with good reason following a change of control (each
of these terms as defined in the employment agreements). The
severance benefits under the agreements generally include a
payment equal to two times the executives base salary and
two times their bonus in previous years, as well as full vesting
of their outstanding equity-based awards. If we were required to
pay these severance benefits, the benefits would be paid as a
lump sum, and our cash flow could be negatively affected.
Furthermore, the financial obligations triggered by these
provisions may delay, defer or prevent a business combination or
acquisition of us by another company that might involve a
premium price for our common stock or otherwise be in the best
interests of our stockholders. See
ManagementCompensation Discussion and
AnalysisOverview of Executive Compensation
ProgramEmployment Agreements and Change in Control
Arrangements for a full description of such agreements.
Our fiduciary
duties as sole member of the general partner of our operating
partnership could create conflicts of interest.
Upon the completion of this offering and the formation
transactions, we, as the sole member of the general partner of
our operating partnership, will have fiduciary duties to our
operating partnership and the limited partners in the operating
partnership, the discharge of which may conflict with the
interests of our stockholders. The limited partners of our
operating partnership have agreed that, in the event of a
conflict between the duties owed by our directors to our company
and the duties that we owe, in our capacity as the sole member
of the general partner of our operating partnership, to such
limited partners, our directors are under no obligation to give
priority to the interests of such limited partners. In addition,
those persons holding OP units will have the right to vote on
certain amendments to the limited partnership agreement (which
require approval by a majority in interest of the limited
partners, including us) and individually to approve certain
amendments that would adversely affect their rights, as well as
the right to vote on mergers and consolidations of the general
partner or us in certain limited circumstances. These voting
rights may be exercised in a manner that conflicts with the
interests of our stockholders. For example, we cannot adversely
affect the limited partners rights to receive
distributions, as set forth in the limited partnership
agreement, without their consent, even though modifying such
rights might be in the best interest of our stockholders
generally.
42
Risk
factors
The loss of any
of our principals or certain other key members of our senior
management team could significantly harm our business.
Our ability to maintain our competitive position depends to a
large degree on the efforts and skills of our principals,
Mr. Doyle, our Chairman; Mr. Frederiksen, our Chief
Executive Officer; and Ms. Kane, our President and Chief
Operating Officer. If we lose the services of any of these
individuals, our business may be materially and adversely
affected. In addition, many of the members of our senior
management team have strong industry reputations, which aid us
in identifying acquisition and borrowing opportunities, having
such opportunities brought to us, and negotiating with tenants
and sellers of properties. The loss of the services of these
personnel could materially and adversely affect our operations
because of diminished relationships with lenders, existing and
prospective tenants, property sellers and industry personnel. In
addition, many of the services business personnel have strong
industry reputations and client relationships, which aid us in
operating our services business. If we lose the services of
certain key personnel of the services business, our business may
be materially and adversely affected.
We have never
operated as a REIT or as a public company and we cannot assure
you that we will successfully and profitably operate our
business in compliance with the regulatory requirements
applicable to REITs and to public companies.
We have not previously operated as a publicly-traded REIT. In
addition, certain members of our board of directors and all of
our executive officers have no experience in operating a
publicly-traded REIT. We cannot assure you that we will be able
to successfully operate our company as a REIT or a
publicly-traded company, including satisfying the requirements
to timely meet disclosure requirements and complying with the
Sarbanes-Oxley Act, including implementing effective internal
controls. Failure to maintain our qualification as a REIT or
comply with other regulatory requirements would have an adverse
effect on our business, financial condition, results of
operations, cash flow, per share trading price of our common
stock and ability to satisfy our debt service obligations and to
make distributions to our stockholders. Additionally, we may
need to replace or supplement our existing management
and/or
staff
in order to maintain operations as a publicly-traded company,
which may increase our costs of operations or delay
implementation of our business strategies.
Our board of
directors may change significant corporate policies without
stockholder approval.
Our investment, financing, borrowing and dividend policies and
our policies with respect to other activities, including growth,
debt, capitalization and operations, will be determined by our
board of directors. These policies may be amended or revised at
any time and from time to time at the discretion of the board of
directors without a vote of our stockholders. See Policies
with Respect to Certain Activities. In addition, the board
of directors may change our policies with respect to conflicts
of interest provided that such changes are consistent with
applicable legal requirements. A change in these policies could
have an adverse effect on our business, financial condition,
results of operations and cash flow, the per share trading price
of our common stock and our ability to satisfy our debt service
obligations and to make distributions to our stockholders.
Compensation
awards to our management, as determined by the compensation
committee of our board of directors, may not be tied to or
correspond with our financial results or share price. As such,
management compensation may increase during a period where our
financial performance or the price of our common stock
declines.
The compensation committee of our board of directors will be
responsible for overseeing our compensation and employee benefit
plans and practices, including our incentive compensation and
equity-based compensation plans. Our compensation committee will
have significant discretion in structuring compensation packages
and may make compensation decisions based on any number of
43
Risk
factors
factors. As a result, compensation awards may not be tied to or
correspond with financial results at our company or the share
price of our common stock.
Our current and
future joint venture investments could be adversely affected by
a lack of sole decision-making authority and our reliance on the
financial condition of our joint venture partners.
The Welsh organization has historically entered into joint
ventures with certain institutional investors and unaffiliated
third parties. In the future we may enter into strategic joint
ventures with unaffiliated investors to acquire, develop,
improve, or dispose of properties, thereby reducing the amount
of capital required by us to make investments and diversifying
our capital sources for growth. We will own a 5% economic
interest in a portfolio consisting of 10 industrial and
three office properties and a 21.7% economic interest in one
five-building office complex; these properties together total
approximately 3.2 million leasable square feet. Such joint
venture investments involve risks not otherwise present in a
wholly owned property, development, or redevelopment project,
including the following:
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in these investments, we do not have exclusive control over the
development, financing, leasing, management, and other aspects
of the project, which may prevent us from taking actions that
are opposed by our joint venture partners;
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joint venture agreements often restrict the transfer of a
co-venturers interest or may otherwise restrict our
ability to sell the interest when we desire or on advantageous
terms, for instance by the presence of a right of first offer,
which is present in one of our joint ventures;
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we would not be in a position to exercise sole decision-making
authority regarding the property or joint venture, which could
create the potential risk of creating impasses on decisions,
such as acquisitions or sales;
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co-venturers may, at any time, have economic or business
interests or goals that are, or that may become, inconsistent
with our business interests or goals;
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co-venturers may be in a position to take action contrary to our
instructions, requests, policies or objectives, including our
current policy with respect to maintaining our qualification as
a REIT;
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the possibility that a co-venturer in an investment might become
bankrupt, which would mean that we and any other remaining
co-venturers would generally remain liable for the joint
ventures liabilities;
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our relationships with our co-venturers are contractual in
nature and may be terminated or dissolved under the terms of the
applicable joint venture agreements and, in such event, we may
not continue to own or operate the interests or assets
underlying such relationship or may need to purchase such
interests or assets at a premium to the market price to continue
ownership;
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Ø
|
disputes between us and our co-venturers may result in
litigation or arbitration which would increase our expenses and
prevent our officers and directors from focusing their time and
efforts on our business and could result in subjecting the
properties owned by the applicable joint venture to additional
risk; or
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Ø
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we may, in certain circumstances, be liable for the actions of
our co-venturers, and the activities of a joint venture could
adversely affect our ability to qualify as a REIT, even though
we do not control the joint venture.
|
Any of these risks above might subject a property to liabilities
in excess of those contemplated and thus reduce the returns to
our investors.
RISKS RELATED TO
THIS OFFERING
The historical
performance of Welsh Predecessor Companies and Welsh
Contribution Companies may not be indicative of our future
results or an investment in our common stock.
We have presented in this prospectus under
Managements Discussion and Analysis of Financial
Condition and Results of Operations certain information
relating to the combined historical performance of Welsh
Predecessor Companies and Welsh Contribution Companies. When
considering this information you should bear in mind that the
combined historical results of Welsh Predecessor Companies and
Welsh Contribution Companies may not be indicative of the future
results that you
44
Risk
factors
should expect from us or any investment in our common stock. In
particular, our results could vary significantly from these
combined historical results due to the fact that:
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Ø
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we are acquiring the ownership interests in the property
subsidiaries and the economic interests in our joint venture
portfolio in the formation transactions from unaffiliated third
parties and our principals and certain of their family members
and affiliates for consideration that may be in excess of their
book value and their fair market value;
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Ø
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we are also acquiring the ownership interests in the services
business in the formation transactions from the principals for
consideration that may be in excess of their book value and fair
market value;
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Ø
|
we will not benefit from any value that was created in the
properties that are being acquired in connection with the
formation transactions prior to our acquisition;
|
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Ø
|
we will be operating all of the acquired properties and other
assets under one ongoing company, as opposed to individual
investment partnerships with defined terms;
|
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Ø
|
we will be operating as a public company, and, as such, our cost
structure will vary from the historical cost structure of Welsh
Predecessor Companies and Welsh Contribution Companies;
|
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Ø
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we may not incur indebtedness at the same level relative to the
value of our properties as was incurred by Welsh Predecessor
Companies and Welsh Contribution Companies;
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Ø
|
our approaches to disposition and refinancing of properties and
the use of proceeds of such transactions are likely to differ
from those of Welsh Predecessor Companies and Welsh Contribution
Companies;
|
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Ø
|
our distribution policy will differ from that of Welsh
Predecessor Companies and Welsh Contribution Companies;
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Ø
|
the value realized by our stockholders will depend not only on
the cash generated by our properties and our services business
but also by the market price for our common stock, which may be
influenced by a number of other factors;
|
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Ø
|
the size and type of investments that we make as a public
company, and the relative riskiness of those investments, may
differ materially from those of Welsh Predecessor Companies and
Welsh Contribution Companies, which could significantly impact
the rates of return expected from an investment in our common
stock;
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Ø
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we may enter into joint ventures that could manage and lease
properties differently than Welsh Predecessor Companies and
Welsh Contribution Companies have historically; and
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Ø
|
as described elsewhere in this prospectus, our future results
are subject to many uncertainties and other factors that could
cause our returns to be materially lower than the returns
previously achieved by Welsh Predecessor Companies and Welsh
Contribution Companies.
|
Differences
between the net tangible book value of the Welsh Predecessor
Companies and the price paid for our common stock in the
offering will result in an immediate and material dilution of
the net tangible book value of our common stock.
On a pro forma basis at March 31, 2010, before giving
effect to the formation transactions and this offering, our net
tangible book value was $2.9 million, or $1.39 per share of
common stock, assuming the exchange of OP units for shares of
our common stock on a
one-for-one
basis. After giving effect to the formation transactions, but
before giving effect to this offering, our pro forma net
tangible book value at March 31, 2010 was a deficit of
($2.5) million or ($0.33) per share of common stock.
As a result, the pro forma net tangible book value per share of
our common stock after the completion of this offering and the
formation transactions will be less than the initial public
offering price. The purchasers of common stock offered hereby
will experience immediate and substantial dilution of $3.05 per
share in the pro forma net tangible book value per share of our
common stock.
45
Risk
factors
The number of
shares of our common stock available for future sale, including
by our affiliates and other continuing investors, could
adversely affect the market price of our common stock, and
future sales by us of shares of our common stock or issuances by
our operating partnership of OP units may be dilutive to
existing stockholders.
Sales of substantial amounts of shares of our common stock in
the public market, or upon exchange of OP units or exercise of
any equity awards, or the perception that such sales might occur
could adversely affect the market price of the shares of our
common stock. The exercise of the underwriters
over-allotment option, the exchange of OP units for common
stock, the vesting of any equity-based awards granted to certain
directors, executive officers and other employees under our
LTIP, the issuance of our common stock or OP units in connection
with property, portfolio or business acquisitions and other
issuances of our common stock or OP units could have an adverse
effect on the market price of the shares of our common stock.
Also, contributing investors, including those who will be issued
OP units as consideration for the sale of certain properties in
our acquisition portfolio, will hold 7,582,460 OP units on a pro
forma basis, assuming a per share price based on the midpoint of
the initial public offering price range set forth on the cover
page of this prospectus (although the final aggregate number of
OP units issued will vary based on the actual price of our
common stock at our initial public offering), and are parties to
a registration rights agreement that provides for registration
rights. The exercise of these registration rights, which would
require us to prepare, file and have declared effective a resale
registration statement permitting the public resale of any
shares issued upon redemption of such OP units, could depress
the price of our common stock. The existence of these OP units,
as well as additional OP units that may be issued in the future,
equity awards, and shares of our common stock reserved for
issuance as restricted shares or upon exchange of any such OP
units and any related resales may adversely affect the market
price of our common stock and the terms upon which we may be
able to obtain additional capital through the sale of equity
securities. In addition, future sales by us of shares of our
common stock may be dilutive to existing stockholders.
Additionally, each of our executive officers and directors, and
each of the continuing investors, has entered into
lock-up
agreements with the underwriters of this offering. Under these
agreements, subject to certain exceptions, each of these persons
may not, without the prior written approval of UBS Securities
LLC (or, in the case of our executive officers and directors,
both UBS Securities LLC and J.P. Morgan Securities Inc.),
offer, sell, offer to sell, contract or agree to sell,
hypothecate, hedge, pledge, grant any option to purchase or
otherwise dispose of or agree to dispose of, directly or
indirectly, any of our common stock or any securities
convertible into or exercisable or exchangeable for our common
stock, including, without limitation, OP units, warrants or
other rights to purchase our common stock for the period ending
12 months after the date of this prospectus (subject to
extension under certain circumstances). At any time and without
public notice, UBS Securities LLC (or, in the case of our
executive officers and directors, both UBS Securities LLC and
J.P. Morgan Securities Inc.) may in its (or their) sole
discretion release some or all of the securities from these
lock-up
agreements. Upon the expiration or, if applicable, release of
the foregoing resale restrictions, 17,527 shares of common
stock will become eligible for sale in the public markets (not
including any shares issuable upon exchange of the OP units
described above), which could impact the market price of our
common stock.
Increases in
market interest rates may result in a decrease in the value of
our common stock.
One of the factors that will influence the price of our common
stock will be the dividend yield on our common stock (as a
percentage of the price of our common stock) relative to market
interest rates. An increase in market interest rates may lead
prospective purchasers of our common stock to expect a higher
dividend yield and, if we are unable to pay such yield, the
market price of our common stock could decrease.
46
Risk
factors
The market price
of our common stock could be adversely affected by our level of
cash distributions.
The markets perception of our growth potential and our
current and potential future cash distributions, whether from
operations, sales or refinancings, as well as the real estate
market value of the underlying assets, may cause our common
stock to trade at prices that differ from our net asset value
per share. If we retain operating cash flow for investment
purposes, working capital reserves or other purposes, these
retained funds, while increasing the value of our underlying
assets, may not correspondingly increase the market price of our
common stock. Our failure to meet the markets expectations
with regard to future earnings and distributions likely would
adversely affect the market price of our common stock.
There has been no
public market for our common stock prior to this offering and an
active trading market may not develop or be sustained following
this offering. In addition, the price of our common stock may be
volatile or may decline regardless of our operating
performance.
Prior to this offering, there has been no public market for our
common stock. Our common stock has been approved to be listed on
the NYSE, subject to official notice of issuance, but we cannot
assure you that an active trading market will develop or be
sustained or that shares of our common stock will be resold at
or above the initial public offering price. The initial public
offering price of our common stock will be determined by
agreement among us and the underwriters, but we cannot assure
you that our common stock will not trade below the initial
public offering price following the completion of this offering
and the formation transactions. See Underwriting.
The market value of our common stock could be materially and
adversely affected by general market conditions, including the
extent to which a secondary market develops for our common stock
following the completion of this offering and the formation
transactions, the extent of institutional investor interest in
us, the general reputation of REITs and the attractiveness of
their equity securities in comparison to other equity securities
(including securities issued by other real estate-based
companies), our financial performance and general stock and bond
market conditions. Some other factors that could negatively
affect our share price or result in fluctuations in the price of
our common stock include:
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Ø
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actual or anticipated variations in our quarterly operating
results;
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Ø
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changes in our FFO or earnings estimates or publication of
research reports about us or the real estate industry;
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Ø
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increases in market interest rates, which may lead purchasers of
our shares to demand a higher yield;
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Ø
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adverse market reaction to any increased indebtedness we incur
in the future;
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Ø
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additions or departures of key personnel;
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Ø
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speculation in the press or investment community;
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Ø
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changes in accounting principles; and
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Ø
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passage of legislation or other regulatory developments that
adversely affect us or our industry.
|
If securities
analysts do not publish research or reports about our business
or if they downgrade our common stock or our sector, the price
of our common stock could decline.
The trading market for our common stock will rely in part on the
research and reports that industry or financial analysts publish
about us or our business. We do not control these analysts.
Furthermore, if one or more of the analysts who do cover us
downgrades our stock or our industry, or the stock of any of our
competitors, the price of our common stock could decline. If one
or more of these analysts ceases coverage of our company, we
could lose attention in the market, which in turn could cause
the price of our common stock to decline.
47
Risk
factors
FEDERAL INCOME
TAX RISKS
Our failure to
qualify or remain qualified as a REIT would result in higher
taxes and reduced cash available for distribution to our
stockholders.
We intend to elect and qualify to be taxed as a REIT for federal
income tax purposes, commencing with our taxable year ending
December 31, 2010. However, qualification as a REIT
involves the application of highly technical and complex
provisions of the Code, for which only a limited number of
judicial and administrative interpretations exist. Even an
inadvertent or technical mistake could jeopardize our REIT
qualification. Our qualification as a REIT will depend on our
satisfaction of certain asset, income, organizational,
distribution, stockholder ownership and other requirements on a
continuing basis.
Moreover, new tax legislation, administrative guidance or court
decisions, in each instance potentially applicable with
retroactive effect, could make it more difficult or impossible
for us to qualify as a REIT. If we were to fail to qualify as a
REIT in any taxable year, we would be subject to federal income
tax, including any applicable alternative minimum tax, on our
taxable income at regular corporate rates, and distributions to
stockholders would not be deductible by us in computing our
taxable income. Any such corporate tax liability could be
substantial and would reduce the amount of cash available for
distribution to our stockholders, which in turn could have an
adverse impact on the value of our shares of common stock. If,
for any reason, we failed to qualify as a REIT and we were not
entitled to relief under certain Code provisions, we would be
unable to elect to be taxed as a REIT for the four taxable years
following the year during which we ceased to so qualify, which
would adversely impact the market price of our common stock.
REIT distribution
requirements could require us to borrow funds during unfavorable
market conditions or subject us to tax, which would reduce the
cash available for distribution to our stockholders.
To qualify as a REIT, we must distribute to our stockholders
each calendar year at least 90% of our REIT taxable income
(including certain items of non-cash income), determined before
the deduction for dividends paid and excluding any net capital
gain. If we satisfy the 90% distribution requirement, but
distribute less than 100% of our taxable income, we will be
subject to federal corporate income tax on our undistributed
income. In addition, we will incur a 4% nondeductible excise tax
on the amount, if any, by which our distributions in any
calendar year are less than the sum of:
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Ø
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85% of our REIT ordinary income for that year;
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Ø
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95% of our REIT capital gain net income for that year; and
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Ø
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any undistributed taxable income from prior years.
|
In order to qualify as a REIT and avoid the payment of income
and excise taxes, we may need to borrow funds on a short-term
basis, or possibly on a long-term basis, to meet the REIT
distribution requirements even if the then-prevailing market
conditions are not favorable for these borrowings. These
borrowing needs could result from, among other things, a
difference in timing between the actual receipt of cash and
recognition of income for federal income tax purposes, the
effect of non-deductible capital expenditures, the creation of
reserves or required debt amortization payments.
We may choose to
pay dividends in our own stock, in which case our stockholders
may be required to pay income taxes in excess of the cash
dividends received.
We may distribute taxable dividends that are payable in cash and
shares of our common stock at the election of each stockholder.
Under IRS Revenue Procedure
2010-12,
up
to 90% of any such taxable dividend for 2010 and 2011 could be
payable in our stock. Taxable stockholders receiving such
dividends will be required to include the full amount of the
dividends as ordinary income to the extent of our current and
accumulated earnings and profits for federal income tax
purposes. As a result, a U.S. stockholder may be required
to pay income taxes with respect to such dividends in excess of
the cash dividends received.
48
Risk
factors
If a U.S. stockholder sells the stock it receives as a
dividend in order to pay this tax, the sales proceeds may be
less than the amount included in income with respect to the
dividend, depending on the market price of our stock at the time
of the sale. Furthermore, with respect to
non-U.S. stockholders,
we may be required to withhold U.S. tax with respect to
such dividends, including in respect of all or a portion of such
dividend that is payable in stock. In addition, if a significant
number of our stockholders determine to sell shares of our
common stock in order to pay taxes owed on dividends, it may put
downward pressure on the trading price of our common stock.
If our operating
partnership failed to qualify as a partnership for federal
income tax purposes, we would cease to qualify as a REIT and
suffer other adverse consequences.
We believe that our operating partnership will qualify to be
treated as a partnership for federal income tax purposes. As a
partnership, our operating partnership will not be subject to
federal income tax on its income. Instead, each of its partners,
including us, will be required to pay tax on its allocable share
of the operating partnerships income. We cannot assure
you, however, that the Internal Revenue Service, or the IRS,
will not challenge our operating partnerships status as a
partnership for federal income tax purposes, or that a court
would not sustain such a challenge. If the IRS were successful
in treating our operating partnership as a corporation for
federal income tax purposes, we would fail to meet the gross
income tests and certain of the asset tests applicable to REITs
and, accordingly, cease to qualify as a REIT. Also, the failure
of our operating partnership to qualify as a partnership would
cause it to become subject to federal and state corporate income
tax, which would reduce significantly the amount of cash
available for debt service and for distribution to its partners,
including us.
Dividends payable
by REITs do not qualify for the reduced tax rates available for
some other corporate dividends, which could cause investors to
view an investment in our common stock as relatively less
attractive and, as a result, adversely affect the price of our
common stock.
The maximum tax rate applicable to income from qualified
dividends payable to U.S. stockholders that are
individuals, trusts and estates has been reduced by legislation
to 15% (through the end of 2010). Dividends payable by REITs,
however, generally are not eligible for the reduced rates.
Although this legislation does not adversely affect the taxation
of REITs or dividends payable by REITs, the more favorable rates
applicable to regular corporate qualified dividends could cause
investors who are individuals, trusts and estates to perceive
investments in REITs to be relatively less attractive than
investments in non-REIT corporations that pay dividends, which
could adversely affect the value of the shares of REITs,
including the market price of our common stock.
Complying with
REIT requirements may limit our ability to hedge effectively and
may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge
our liabilities. Any income from a hedging transaction we enter
into to manage risk of interest rate changes, price changes or
currency fluctuations with respect to borrowings made or to be
made to acquire or carry real estate assets does not constitute
gross income for purposes of the 75% or 95% gross
income tests, if properly identified as specified in the Code
and accompanying regulations. If we enter into other types of
hedging transactions, the income from those transactions is
likely to be treated as non-qualifying income for purposes of
both of the gross income tests. As a result of these rules, we
may need to limit our use of advantageous hedging techniques or
implement those hedges through a taxable REIT subsidiary. This
could increase the cost of our hedging activities because our
taxable REIT subsidiary would be subject to tax on gains or
could expose us to greater risks associated with changes in
interest rates than we would otherwise want to bear. In
addition, losses in a taxable REIT subsidiary would generally
not provide any tax benefit, except for being carried forward
against future taxable income in the taxable REIT subsidiary.
49
Risk
factors
Our ownership of
a taxable REIT subsidiary will be limited and our transactions
with a taxable REIT subsidiary will cause us to be subject to a
100% penalty tax on certain income or deductions if those
transactions are not conducted on arms length
terms.
A REIT may own up to 100% of the equity interest of an entity
that is a corporation for U.S. federal income tax purposes
if the entity is a taxable REIT subsidiary or a qualified REIT
subsidiary. A taxable REIT subsidiary may hold assets and earn
income that would not be qualifying assets or income if held or
earned directly by a REIT. Both the subsidiary and the REIT must
jointly elect to treat the subsidiary as a taxable REIT
subsidiary. A corporation of which a taxable REIT subsidiary
directly or indirectly owns more than 35% of the voting power or
value of the stock will automatically be treated as a taxable
REIT subsidiary. Overall, no more than 25% of the value of a
REITs assets may consist of stock or securities of one or
more taxable REIT subsidiaries. In addition, the taxable REIT
subsidiary rules in certain instances limit the deductibility of
interest paid or accrued by a taxable REIT subsidiary to its
affiliated REIT to assure that the taxable REIT subsidiary is
subject to an appropriate level of corporate taxation. The rules
also impose a 100% penalty tax on certain transactions between a
taxable REIT subsidiary and an affiliated REIT that are not
conducted on an arms length basis.
We will own an interest in a taxable REIT subsidiary that will
own the equity interests of our services business and we may
form one or more taxable REIT subsidiaries in the future. Our
taxable REIT subsidiary will pay U.S. federal, state and
local income tax on their taxable income, and their after-tax
net income will be available for distribution to us but is not
required to be distributed. We anticipate that securities of our
taxable REIT subsidiary will not make up more than 25% of the
value of our total assets. Furthermore, we will monitor the
value of our investments in our taxable REIT subsidiary for the
purpose of ensuring compliance with taxable REIT subsidiary
ownership limitations. The 25% taxable REIT subsidiary
limitation could limit the future growth of our services
business. We will scrutinize all of our transactions with our
taxable REIT subsidiaries to ensure that they are entered into
on arms length terms to avoid incurring the 100% penalty
tax described above. There can be no assurance, however, that we
will be able to comply with the 25% limitation discussed above
or to avoid application of the 100% penalty tax discussed above.
Complying with
REIT requirements may cause us to forego otherwise attractive
opportunities or liquidate otherwise attractive
investments.
To qualify as a REIT for federal income tax purposes, we must
continually satisfy tests concerning, among other things, the
sources of our income, the nature and diversification of our
assets, the amounts we distribute to our stockholders and the
ownership of our stock. In order to meet these tests, we may be
required to forego investments we might otherwise make or
liquidate attractive investments from our portfolio. Thus,
compliance with the REIT requirements may hinder our operating
performance.
In particular, we must ensure that at the end of each calendar
quarter, at least 75% of the value of our assets consists of
cash, cash items, government securities and qualified real
estate assets. The remainder of our investment in securities
(other than government securities and qualified real estate
assets) generally may not include more than 10% of the
outstanding voting securities of any one issuer or more than 10%
of the total value of the outstanding securities of any one
issuer. In addition, in general, no more than 5% of the value of
our assets (other than government securities and qualified real
estate assets) may consist of the securities of any one issuer,
and no more than 25% of the value of our total assets can be
represented by securities of one or more taxable REIT
subsidiaries. If we fail to comply with these requirements at
the end of any calendar quarter, we must remedy the failure
within 30 days after the end of the calendar quarter or
qualify for certain statutory relief provisions to avoid losing
our REIT qualification and experiencing adverse tax
consequences. As a result, we may be required to liquidate
otherwise attractive investments. These actions could have the
effect of reducing our income and amounts available for
distribution to our stockholders.
50
This prospectus contains 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, intends, plans,
projects, estimates,
anticipates predicts, or
potential 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 which may cause
our actual results, performance or achievements to be materially
different from any future results, performances or achievements
expressed or implied by the forward-looking statements:
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our use of the proceeds of this offering;
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the competitive environment in which we operate;
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our ability to maintain or increase our rental rates and
occupancy rates;
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the performance and economic condition of our tenants;
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our ability to oversee our portfolio;
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our ability to lease or sell any of our properties;
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our ability to successfully engage in strategic acquisitions and
investments;
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our ability to successfully expand into new markets;
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our ability to successfully engage in property development;
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Ø
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the effect of general market, economic and political conditions,
including the recent economic slowdown and dislocation in the
global credit markets;
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the availability and cost of capital;
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changes in interest rates;
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the amount and yield of any additional investments;
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our ability to generate sufficient cash flows to satisfy our
debt service obligations and to make distributions;
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our ability to maintain adequate insurance coverage;
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the terms of government regulations that affect us and
interpretations of those regulations, including changes in tax
laws and regulations affecting REITs, changes in real estate and
zoning laws and increases in real property tax rates;
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our ability to maintain our qualification as a REIT; and
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other subjects referenced in this prospectus, including those
set forth under the caption Risk Factors.
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The forward-looking statements contained in this prospectus
reflect 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 stock.
For more information regarding risks that may cause our actual
results to differ materially from any forward-looking
statements, see Risk Factors. We disclaim any
obligation to publicly update or revise any forward-looking
statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes.
51
We estimate that the net proceeds to us from the sale by us of
35,789,474 shares of common stock will be approximately
$315.2 million, or $362.6 million if the underwriters
exercise their over-allotment option in full, assuming an
initial public offering price of $9.50 per share, the
midpoint of the initial public offering range set forth on the
cover of this prospectus, and after deducting underwriting
discounts and commissions and estimated offering expenses of
approximately $24.8 million payable by us. We will
contribute the net proceeds of this offering to our operating
partnership in exchange for OP units.
The following table sets forth the estimated sources and the
estimated uses of funds that we expect in connection with the
offering. Some of the uses indicated in the following table
could be funded from other sources, such as borrowings under our
syndicated credit facility or additional cash on hand.
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Sources
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Uses
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(dollars in
thousands)
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(dollars in
thousands)
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Gross offering proceeds
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$
|
340,000
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|
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Purchase of combined
portfolio
(1)
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|
$
|
258,491
|
|
|
|
|
|
|
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Repay existing indebtedness/funding of lender reserves
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|
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48,689
|
|
|
|
|
|
|
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Fees and expenses, less
reimbursements
(2)
|
|
|
307
|
|
|
|
|
|
|
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Underwriting discounts and commissions
|
|
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24,500
|
|
|
|
|
|
|
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Working Capital
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8,013
|
|
|
|
|
|
|
|
|
|
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Total Sources
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$
|
340,000
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|
Total Uses
|
|
$
|
340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
See Business and PropertiesOur
PortfolioAcquisition Portfolio. This amount includes
the gross purchase price for those properties being purchased
with net proceeds from this offering, as well as estimated
acquisition costs, including the cash acquisition costs related
to the acquisition of certain assets through the use of
consideration other than net proceeds. In addition to the use of
net proceeds from this offering, we will acquire certain
properties in our acquisition portfolio by using proceeds of new
debt financing, the assumption of existing debt or the issuance
of OP units. This amount also includes approximately
$1.9 million of proceeds being used to acquire interests in
our existing portfolio from certain third parties
|
|
|
|
(2)
|
|
Includes repayment of
start-up
costs previously paid by WelshCo, LLC. The underwriters have
agreed to reimburse us for certain of our expenses in connection
with this offering, some of which may be used to pay deferred
distributions to the principals as the pre-formation
transactions owners of WelshCo, LLC. See
Underwriting
|
Pending the use of the net proceeds, we intend to invest the net
proceeds in interest-bearing, short-term investment-grade
securities, money-market accounts or other investments which are
consistent with our intention to elect and qualify to be taxed
as a REIT.
If the underwriters exercise their over-allotment option in
full, we expect to use the additional net proceeds to us, which
will be approximately $47.4 million in the aggregate, for
general working capital purposes, including potential future
acquisitions and debt repayment. We do not intend to use any of
the net proceeds from the offering to fund distributions to our
stockholders, but to the extent we use the net proceeds to fund
distributions, these payments will be treated as a return of
capital to our stockholders for federal income tax purposes.
52
Use of
proceeds
The following table sets forth the current indebtedness on our
existing portfolio that we expect to repay in whole or in part
with the net proceeds of this offering:
|
|
|
|
|
|
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|
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Fixed
|
|
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|
|
|
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|
|
|
|
Use of
|
|
|
interest rate/
|
|
|
|
|
|
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|
Property
|
|
Proceeds
|
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LIBOR
spread
|
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Maturity
|
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|
|
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|
|
|
|
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1700-1910
Elmhurst Road
|
|
$
|
3,966,680
|
|
|
|
8.69
|
%
|
|
|
6/1/2010
|
(1)
|
|
|
|
|
|
1801-1827
OBrien Road
|
|
|
1,500,000
|
|
|
|
L + 450
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|
|
|
8/17/2010
|
|
|
|
|
|
|
5 Circle Freeway
|
|
|
3,541,920
|
|
|
|
8.48
|
%
|
|
|
9/1/2010
|
|
|
|
|
|
|
5600-5672
Lincoln Drive
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|
|
2,184,383
|
|
|
|
7.45
|
%
|
|
|
1/1/2011
|
|
|
|
|
|
|
Kiesland
(2)
|
|
|
8,595,771
|
|
|
|
L + 400
|
(3)
|
|
|
2/1/2011
|
|
|
|
|
|
|
201 Mississippi
|
|
|
2,500,000
|
|
|
|
L + 200
|
(4)
|
|
|
7/25/2011
|
|
|
|
|
|
|
900 2nd Avenue South
|
|
|
5,500,000
|
|
|
|
L + 225
|
(5)
|
|
|
7/31/2011
|
|
|
|
|
|
|
115 West Lake Drive & Ridgeview Parkway
|
|
|
7,141,767
|
|
|
|
5.90
|
%
|
|
|
11/10/2011
|
|
|
|
|
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|
601-627
Lambert Pointe Drive
|
|
|
933,653
|
(6)
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6.60
|
%
|
|
|
8/1/2012
|
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|
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2921-2961
East Kemper Road
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|
900,000
|
(7)
|
|
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L + 325
|
|
|
|
7/1/2013
|
|
|
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600-638
Lambert Pointe Drive
|
|
|
163,000
|
(6)
|
|
|
5.41
|
%
|
|
|
5/1/2015
|
|
|
|
|
|
|
Urbandale
Loan
(8)
|
|
|
1,012,440
|
(6)
|
|
|
5.22
|
%
|
|
|
8/1/2015
|
|
|
|
|
|
|
6999 Oxford Street
|
|
|
400,000
|
(6)
|
|
|
5.20
|
%
|
|
|
10/5/2015
|
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|
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|
9835-9859;
9905-9925
13th Avenue
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|
231,199
|
(6)
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|
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5.52
|
%
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|
|
11/6/2015
|
|
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|
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|
Westpark Plaza and Valley Oak
B.C.
(9)
|
|
|
1,900,000
|
|
|
|
6.10
|
%
|
|
|
1/15/2016
|
|
|
|
|
|
|
Prudential Loan
I
(10)
|
|
|
500,000
|
(6)
|
|
|
6.08
|
%
|
|
|
6/5/2016
|
|
|
|
|
|
|
Romulus Senior
Loan
(11)
|
|
|
500,000
|
(6)
|
|
|
5.69
|
%
|
|
|
6/5/2017
|
|
|
|
|
|
|
Romulus Mezzanine
Loan
(12)
|
|
|
1,509,000
|
|
|
|
L + 375
|
(13)
|
|
|
6/5/2017
|
|
|
|
|
|
|
Notes payable
|
|
|
3,419,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of debt
repayment
(13)
|
|
|
2,289,499
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,689,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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(1)
|
|
Currently in default due to past-due maturity; will be repaid
in full with proceeds from this offering, together with interest
charged on the outstanding amount at 7% per annum during the
period of default. Although the lenders default notice
indicates its intention to commence foreclosure proceedings,
applicable state law affords the borrower the right to pay the
loan off in full prior to completion of any such foreclosure
proceedings
|
|
|
|
(2)
|
|
Collateralized by 11590 Century Boulevard,
5836-5885
Highland Ridge Drive, 11500 Century Boulevard and 106 Circle
Freeway Drive properties
|
|
|
|
(3)
|
|
LIBOR + 400 basis points with a 5.50% interest rate
floor until 6/30/2010 and a 6.00% interest rate floor
thereafter; interest rate capped at 6.24% pursuant to Rate Cap
Agreement
|
|
|
|
(4)
|
|
Contingent upon completion of this offering is an interest
rate change to LIBOR + 350 basis points
|
|
|
|
(5)
|
|
Contingent upon completion of this offering is an interest
rate change to LIBOR + 400 basis points
|
|
|
|
(6)
|
|
Amount to be placed in reserve with lender and is not
applicable to principal balance
|
|
|
|
(7)
|
|
Amount includes $500,000 repayment of principal and $400,000
lender account balance requirement
|
|
|
|
(8)
|
|
Collateralized by 10052 Justin Drive, 3000 Justin Drive, 2721
99th Street, 2851 99th Street, 2901 99th Street and 2851 104th
Street properties
|
|
|
|
(9)
|
|
Collateralized by
7115-7137
Shady Oak Road and
13810-13800
24th Avenue North properties
|
|
|
|
(10)
|
|
Collateralized by 1920 Beltway Drive, 2201 Lunt Road, 2036
Stout Field W Drive and 7750 Zionsville Road properties
|
53
Use of
proceeds
|
|
|
(11)
|
|
Collateralized by 6505 Cogswell Road, 7525 Cogswell Road,
38100 Ecorse Road, 41133 Van Born Road and 41199 Van Born Road
properties, which we refer to collectively as our Romulus
portfolio
|
|
|
|
(12)
|
|
LIBOR + 375 basis points with an 8.00% interest rate
floor until 6/5/2010, at which time it converts to a 10.00%
interest rate
|
|
|
|
(13)
|
|
Includes estimated prepayment penalties, transaction and
documentation costs associated with the loan payments, escrow
and reserve funding
|
54
We intend to pay regular quarterly dividends to holders of our
common stock and make regular quarterly distributions to holders
of OP units in our operating partnership. We intend to pay a pro
rata dividend with respect to the period commencing on the
completion of this offering and ending on September 30,
2010, based on a dividend of $0.166 per share for a full
quarter. On an annualized basis, this would be $0.665 per share,
or an annual dividend rate of approximately 7.0%, based on the
mid-point of the initial public offering price range set forth
on the cover page of this prospectus. We have estimated our cash
available for distribution to holders of our common stock and OP
units for the 12 months ending March 31, 2011 based on
adjustments to our pro forma net loss available to common
stockholders before allocation to non-controlling interest for
the 12-month period ended March 31, 2010, as described
below. In estimating our cash available for distribution to
holders of our common stock and OP units, we have made certain
assumptions as reflected in the table and footnotes below.
Although we have not previously paid distributions, we intend to
maintain our initial dividend rate for the
12-month
period following completion of this offering unless our actual
results of operations, economic conditions or other factors
differ materially from the assumptions used in our estimate.
Distributions made by us will be authorized by our board of
directors in its sole discretion out of funds legally available
therefor and will be dependent upon a number of factors,
including restrictions under applicable law, the capital
requirements of our company and meeting the distribution
requirements necessary to maintain our qualification as a REIT.
Actual distributions may be significantly different from the
expected distributions. We do not intend to reduce the expected
dividend per share if the underwriters over-allotment
option is exercised.
It is possible that our distributions may exceed our current and
accumulated earnings and profits as determined for federal
income tax purposes. Therefore, a portion of our distributions
may represent a return of capital for federal income tax
purposes. See Federal Income Tax
ConsiderationsTaxation of Stockholders for more
information.
Federal income tax law generally requires that a REIT distribute
annually at least 90% of its taxable income, excluding net
capital gains, and that it pay tax at regular corporate rates to
the extent that it annually distributes less than 100% of its
net taxable income, including net capital gains. For more
information, see Federal Income Tax
ConsiderationsAnnual Distribution Requirements.
Although we anticipate that our estimated cash available for
distribution will exceed the annual distribution requirements
applicable to REITs, under some circumstances we may be required
to borrow funds, liquidate otherwise attractive investments or
make taxable distributions of our stock in order to meet these
distribution requirements.
We cannot assure you that our estimated distributions will be
made or sustained. See Special Note Regarding
Forward-Looking Statements. Any distributions we pay in
the future will depend upon our actual results of operations,
economic conditions and other factors that could differ
materially from our current expectations. Our actual results of
operations will be affected by a number of factors, including
the revenue we receive from our properties and the distribution
we receive from our services business, our operating expenses,
interest expense, our occupancy levels, the ability of our
tenants to meet their obligations and unanticipated
expenditures. For more information regarding risk factors that
could materially adversely affect our actual results of
operations, see Risk Factors. We may be required to
fund distributions from working capital, borrowings under our
new syndicated credit facility, proceeds of this offering or a
sale of assets to the extent distributions exceed earnings or
cash flows from operations.
55
Distribution
policy
The following table describes our pro forma net loss before
noncontrolling interests for the 12-month period ended
March 31, 2010, and the adjustments we have made thereto in
order to estimate our initial cash available for distribution to
the holders of our common stock and OP units for the 12-month
period ended March 31, 2011. The table reflects our
consolidated information, including the OP units in our
operating partnership. Each OP unit in our operating partnership
may be exchanged for cash or, at our option, one share of our
common stock, beginning 12 months after completion of this
offering.
|
|
|
|
|
|
|
|
|
(dollars in
thousands,
|
|
|
|
except per share
data)
|
|
|
Pro forma net loss before noncontrolling interests for the 12
months ended December 31, 2009
|
|
$
|
(660
|
)
|
Less: Pro forma net income before noncontrolling interests for
the three months ended March 31, 2009
|
|
|
(1,326
|
)
|
Add: Pro forma net income before noncontrolling interests for
the three months ended March 31, 2010
|
|
|
1,327
|
|
|
|
|
|
|
Pro forma net loss before noncontrolling interests for the 12
months ended March 31, 2010
|
|
|
(659
|
)
|
Add: Pro forma real estate depreciation and amortization
|
|
|
32,966
|
|
Add: Pro forma depreciation and amortization from equity method
investments
|
|
|
837
|
|
Add: Amortization of deferred financing costs and debt premiums
and discounts
|
|
|
1,940
|
|
Add: Impairment charges
|
|
|
6,432
|
|
Less: Net effects of straight-line rents and amortization of
acquired above/below market lease intangibles
|
|
|
(3,198
|
)
|
|
|
|
|
|
Pro forma cash flows provided by operations for the 12 months
ended March 31, 2010
|
|
|
38,318
|
|
Add: Net increases in rental and related
revenue
(1)
|
|
|
6,143
|
|
Less: Net decreases in contractual rental and related revenue
due to lease
expirations
(2)
|
|
|
(5,483
|
)
|
|
|
|
|
|
Estimated cash flows provided by operations for the 12 months
ended March 31, 2011
|
|
|
38,978
|
|
Less: Provision for tenant improvements and leasing
commissions
(3)
|
|
|
(545
|
)
|
Less: Estimated annual provision for recurring capital
expenditures
(4)
|
|
|
(1,474
|
)
|
|
|
|
|
|
Estimated cash flows used in investing activities for the 12
months ended March 31, 2011
|
|
|
(2,019
|
)
|
Estimated cash flows used in financing activities for the 12
months ended March 31,
2011
(5)
|
|
|
(51,744
|
)
|
|
|
|
|
|
Estimated proceeds from credit facility to be used in financing
activities
(6)
|
|
|
41,884
|
|
|
|
|
|
|
Estimated cash available for distribution for the 12 months
ended March 31, 2011
|
|
$
|
27,099
|
|
|
|
|
|
|
Estimated annual distribution to non controlling interests for
the 12 months ended March 31, 2011
|
|
|
5,042
|
|
Estimated annual distribution to common stockholders for the
12 months ended March 31, 2011
|
|
|
23,812
|
|
|
|
|
|
|
Estimated annual distribution for the 12 months ended
March 31, 2011
|
|
$
|
28,854
|
|
|
|
|
|
|
Estimated distribution per OP unit for the 12 months ended
March 31,
2011
(7)
|
|
$
|
0.665
|
|
Estimated distribution per share for the 12 months ended
March 31,
2011
(7)
|
|
$
|
0.665
|
|
Payout ratio based on estimated cash available for distribution
to our holders of common stock/OP
units
(8)
|
|
|
106.5
|
%
|
|
|
|
(1)
|
|
Net increases in rental and related revenue consists of
contractual increases in rental and related revenue from our
real estate portfolio related to increases in rental revenue
from leases entered into as of May 10, 2010; $3,694 is from
our existing portfolio and $2,449 is from our acquisition
portfolio
|
56
Distribution
policy
|
|
|
(2)
|
|
Net decreases in contractual rental and related revenue are
due to lease expirations from our combined portfolio; $(5,054)
is from our existing portfolio and $(429) is from our
acquisition portfolio
|
|
|
|
(3)
|
|
Provision for tenant improvements and leasing commissions
includes any current contractual tenant improvement or leasing
commission costs to be incurred in the 12 months ended
March 31, 2011 related to any new leases or renewals
entered into as of May 10, 2010; $(545) is from our
existing portfolio. During the 12 months ended March 31,
2011, we expect to have additional tenant improvement and
leasing commission expenditures related to new and renewal
leasing that occur after May 10, 2010. Any increases in
such expenditures would be directly related to such new and
renewal leasing in that such expenditures would be incurred when
a new lease is signed or an expiring lease is renewed, and are
not included herein because we have no contractual obligations
at this time for such future leasing
|
|
|
|
(4)
|
|
Estimated annual provision for recurring capital expenditures
is based on $0.08 per leasable square foot of such expenditures
for our combined portfolio; $767 is from our existing portfolio
and $707 is from our acquisition portfolio. This estimate is
based on the historical weighted average of our existing
portfolio, on a per square foot basis, of annual recurring
capital expenditures from 2007 through 2009 and the annualized
three months ended March 31, 2010
|
|
|
|
(5)
|
|
Estimated cash flows used in financing activities for the
12 months ended March 31, 2011 includes all scheduled
debt repayments, including both amortization and other principal
repayments and $17.1 million of principal payments related
to debt scheduled to mature on two loans prior to March 31,
2011, $22.1 million that may be applied to repay
outstanding indebtedness on certain properties in our existing
portfolio and $2.6 million that may be applied to repay
outstanding indebtedness on certain properties in our
acquisition portfolio being assumed in connection with the
acquisition of such properties if we are unable to obtain
pending lender consents as described under Business and
PropertiesOur PortfolioLender Consents, but
excludes $19.8 million of scheduled maturities that we
intend to repay with net proceeds of this offering
|
|
|
|
(6)
|
|
If we are unable to refinance any of the $17.1 million
of principal payments related to debt scheduled to mature on two
loans prior to March 31, 2011 with new mortgage financing,
we may pay such amounts in full using our syndicated credit
facility. If we are unable to obtain pending lender consents on
$22.1 million of outstanding indebtedness on certain
properties in our existing portfolio and $2.6 million of
outstanding indebtedness on certain properties in our
acquisition portfolio being assumed in connection with the
acquisition of such properties, we may be required to pay such
amounts in full using our syndicated credit facility. In
addition, although not reflected in the line item in the table,
based on the calculations shown in the table above, we are
estimating a deficiency of approximately $1.8 million in
our estimated cash available for distribution for the
12 months ending March 31, 2011, and unless our
operating cash flow increases during such period, we may fund
such deficiency from borrowings under our syndicated credit
facility. With respect to the credit facility, we have entered
into a commitment letter with J.P. Morgan Securities Inc.
and JPMorgan Chase Bank, National Association to structure,
arrange and syndicate a senior revolving credit facility for us
in the amount of up to $75 million. If completed, we may
elect to increase the amount of the facility up to
$150 million, subject to the approval of the administrative
agent and the identification of a lender or lenders willing to
make available the additional amounts. The proceeds of the
facility will be available to finance our acquisition of
industrial and office properties, and to finance working capital
needs and for other general corporate purposes, including
repayment of maturing debt
|
|
|
|
(7)
|
|
Estimated distribution per share for the 12 months ended
March 31, 2011 is based on 35,807,001 shares
outstanding following the completion of this offering and
estimated distribution per OP unit for the 12 months ended
March 31, 2011 is based on 7,582,460 OP units
outstanding following the completion of this offering. The table
excludes shares issuable upon exercise of the underwriters
over-allotment option, shares of common stock contingently
issuable upon the vesting
|
57
Distribution
policy
|
|
|
|
|
of performance based restricted stock units to be granted to
Mr. Frederiksen and Ms. Kane under our LTIP (see
ManagementCompensation Discussion and
AnalysisOverview of executive compensation
programRestricted Stock Units under the LTIP),
additional shares available for future issuance under our LTIP
and OP units that our principals have the possibility of
receiving as consideration for our services business (see
Structure and Formation of our CompanyFormation
TransactionsContribution and exchange of interests in the
existing entities)
|
|
|
|
(8)
|
|
Payout ratio based on estimated cash available for
distribution to our holders of common stock/OP units is
calculated as the estimated annual distribution for the 12
months ended March 31, 2011 divided by the estimated cash
available for distribution for the 12 months ended
March 31, 2011
|
As reflected in the payout ratio shown in the table above, our
estimated initial annual dividend of $0.665 per share represents
approximately 106.5% of our estimated cash available for
distribution for the 12 months ending March 31, 2011.
Accordingly, we currently expect that we will be unable to pay
our estimated initial annual distribution to stockholders and OP
unitholders out of estimated cash available for distribution for
the 12 months ending March 31, 2011. However, the
above table does not include any increases or decreases in
revenues or costs associated with: (1) any rental and
related revenue increases or decreases from changes in occupancy
in our real estate portfolio from leases that may be executed
subsequent to May 10, 2010; (2) rental and related
revenue from renewals of expiring leases in our real estate
portfolio that may be executed subsequent to May 10, 2010
(of our existing portfolio leases expiring in 2009, we renewed
64.7% of the tenants); (3) increases or decreases in
construction and service fee revenue; (4) rental and
related revenue from additional acquisitions completed
subsequent to the completion of this offering from our current
acquisition pipeline and other acquisition opportunities; and
(5) any offsetting costs associated with any increases in
revenue, such as tenant improvements and leasing commissions. As
a result, our actual payout ratio could be higher or lower than
the payout ratio shown in the table above. In any case, unless
our operating cash flow increases, we will be required either to
fund future distributions from borrowings under our syndicated
credit facility or to reduce such distributions.
58
The following table presents capitalization information as of
March 31, 2010 on (1) a historical basis for the Welsh
Predecessor Companies, and (2) a pro forma as adjusted
basis for our company taking into account both the formation
transactions and the offering. The pro forma adjustments give
effect to the formation transactions and the offering as if they
had occurred on March 31, 2010 and the application of the
net proceeds as described in Use of Proceeds.
You should read this table in conjunction with Use of
Proceeds, Selected Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the more detailed
information contained in the Welsh Predecessor Companies
combined financial statements and notes thereto included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2010
|
|
|
|
Historical
|
|
|
Pro Forma
|
|
|
|
Welsh
|
|
|
Welsh
|
|
|
|
Predecessor
|
|
|
Property
|
|
|
|
Companies
|
|
|
Trust,
Inc.
|
|
|
|
|
|
(unaudited)
|
|
|
|
(dollars in
thousands)
|
|
|
Mortgages and notes payable
|
|
$
|
229,496
|
|
|
$
|
416,767
|
|
Stockholders/owners equity (deficit):
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value per share, 1.0 million shares
authorized, 300 shares issued and outstanding, actual,
490.0 million shares authorized, 35,807,001 shares
issued and outstanding on a pro forma
basis
(1)
|
|
|
|
|
|
|
358
|
|
Additional paid in capital
|
|
|
|
|
|
|
316,177
|
|
Owners equity
|
|
|
19,173
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
(4,076
|
)
|
Noncontrolling interest in our operating
partnership
(2)
|
|
|
|
|
|
|
79,690
|
|
|
|
|
|
|
|
|
|
|
Total stockholders/owners equity
|
|
|
19,173
|
|
|
|
392,149
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
248,669
|
|
|
$
|
808,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes: (i) up to 5,368,421 shares issuable upon
exercise of the underwriters over-allotment option in
full; (ii) up to 616,690 shares of common stock
contingently issuable upon the vesting of performance based
restricted stock units to be granted to Mr. Frederiksen and
Ms. Kane under our LTIP (see
ManagementCompensation Discussion and
AnalysisOverview of executive compensation
programRestricted Stock Units under the LTIP);
(iii) additional shares available for future issuance under
our LTIP and (iv) up to 7,582,460 shares issuable upon
exchange of OP units
|
|
|
|
(2)
|
|
Excludes an additional 1,578,947 OP units that our principals
have the possibility of receiving as consideration for our
services business (see Structure and Formation of our
CompanyFormation TransactionsContribution and
exchange of interests in the existing entities)
|
59
Purchasers of our common stock offered by this prospectus will
experience dilution to the extent of the difference between the
initial public offering price per share and the net tangible
book value per share. Net tangible book value is calculated by
subtracting the intangible assets and liabilities such as in
place leases and above market lease intangibles, deferred
financing and leasing costs, and below market lease liabilities
from book value. On a pro forma basis at March 31, 2010,
before giving effect to the formation transactions and this
offering, our net tangible book value was $2.9 million or
$1.39 per share of common stock, assuming the exchange of
OP units for shares of our common stock on a one-for-one basis.
After giving effect to the formation transactions, but before
giving effect to this offering, our pro forma net tangible book
value at March 31, 2010 was a deficit of
($2.5) million or ($0.33) per share of common stock. After
giving effect to the formation transactions and the sale of
shares of common stock in the offering, the receipt by us of the
net proceeds from the offering, the deduction of underwriting
discounts and commissions, estimated offering expenses payable
by us and the purchase of the properties in our acquisition
portfolio, our pro forma net tangible book value at
March 31, 2010 would have been $279.8 million or
$6.45 per share of common stock. This would represent an
increase in pro forma net tangible book value attributable to
the sale of shares of common stock to new investors of
$282.3 million or $7.89 per share and an immediate
dilution in pro forma net tangible book value of $3.05 per
share from the initial public offering price of $9.50 per
share. The following table illustrates this per share dilution:
|
|
|
|
|
|
Initial public offering price per share
|
|
$
|
9.50
|
|
Pro forma net tangible book value per share as of March 31,
2010, before the formation transactions and the
offering
(1)
|
|
|
1.39
|
|
Increase in pro forma net tangible book value per share
attributable to the formation transactions but before the
offering
(2)
|
|
|
(1.72
|
)
|
Increase in pro forma net tangible book value per share
attributable to the
offering
(3)
|
|
|
6.78
|
|
|
|
|
|
|
Net increase in pro forma net tangible book value per share
attributable to the formation transactions and the offering
|
|
|
5.06
|
|
|
|
|
|
|
Pro forma net tangible book value per share after the offering
and the formation
transactions
(4)
|
|
|
6.45
|
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share to
new
investors
(
5
)
|
|
$
|
3.05
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Pro forma net tangible book value per share of our common
stock before the formation transactions and the offering is
determined by dividing the net tangible book value of the Welsh
Predecessor Companies of approximately $2.9 million by
approximately 2.1 million OP units to be issued to the
Welsh Predecessor Companies continuing investors
|
|
|
|
(2)
|
|
The increase in pro forma net tangible book value per share
attributable to the formation transactions but before the
offering is determined by subtracting (a) the pro forma net
tangible book value per share of our common stock before the
formation transactions and the offering (see note
(1) above) from (b) (i) the pro forma net tangible
book value per share after the formation transactions but before
the offering of approximately ($2.5 million) divided by
(ii) approximately 7.6 million OP units to be issued
to the Welsh Predecessor Companies continuing investors as
well as the other continuing investors participating in the
formation transactions and third-party sellers receiving OP
units in connection with the acquisition portfolio
|
|
|
|
(3)
|
|
The increase in pro forma net tangible book value per share
attributable to the offering is determined by subtracting
(a) the sum of (i) the pro forma net tangible book
value per share of our common stock before the formation
transactions and the offering (see note (1) above) and
(ii) the pro forma net tangible book value per share
attributable to the formation transactions but before the
offering (see note (2) above) from (b) (i) the pro
forma net tangible book value per share after
|
60
Dilution
|
|
|
|
|
the formation transactions and the offering of approximately
$279.8 million (assuming the acquisition of all of the
properties in our acquisition portfolio) divided by
(ii) approximately 43.4 million shares of common stock
and OP units to be issued to the Welsh Predecessor
Companies continuing investors as well as the other
continuing investors participating in the formation transactions
and third-party sellers receiving OP units in connection with
the acquisition portfolio, and the new investors in this
offering
|
|
|
|
(4)
|
|
Determined by dividing pro forma net tangible book value of
approximately $279.8 million by approximately
43.4 million shares of common stock and OP units
|
|
|
|
(5)
|
|
Determined by subtracting pro forma net tangible book value
per share of common stock after the offering and the formation
transactions from the initial public offering price paid by new
investors for a share of common stock
|
The table below summarizes, as of March 31, 2010, on a pro
forma basis after giving effect to the formation transactions
and the offering discussed above, the differences between the
number of shares of common stock and OP units received from us
and our operating partnership, the total consideration paid and
the average price per share paid by continuing investors of the
existing entities and paid in cash by the new investors
purchasing shares in the offering (based on the net tangible
book value attributable to the ownership interests contributed
by such continuing investors in the formation transaction).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash/net
tangible
|
|
|
Average
|
|
|
|
|
|
|
book value of
|
|
|
price per
|
|
|
|
Shares/units
issued*
|
|
|
contribution
|
|
|
share/unit
|
|
|
|
|
OP units and common shares issued in connection with the
formation
transaction
(1)
|
|
|
7,599,987
|
|
|
|
18
|
%
|
|
$
|
(2,520,000
|
)
|
|
|
0
|
%
|
|
$
|
(.33
|
)
|
New investors purchasing shares in this offering
|
|
|
35,789,474
|
|
|
|
82
|
%
|
|
|
340,000,000
|
|
|
|
100
|
%
|
|
|
9.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
43,389,461
|
|
|
|
100
|
%
|
|
$
|
337,480,000
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Based upon an initial public offering price of $9.50 per
share, which is the mid-point of the initial public offering
price range indicated on the cover page of this prospectus.
Estimated underwriting discounts and commissions and estimated
offering expenses have not been deducted.
|
|
|
|
(1)
|
|
Includes 17,227 shares of common stock to be issued upon
completion of this offering as equity-based compensation to our
non-employee directors and 300 shares issued in connection with
our initial capitalization
|
This table excludes shares of common stock that may be issued by
us upon exercise of the underwriters over-allotment
option, shares of common stock contingently issuable upon the
vesting of performance based restricted stock units to be
granted to Mr. Frederiksen and Ms. Kane under our LTIP
(see ManagementCompensation Discussion and
AnalysisOverview of executive compensation
programRestricted Stock Units under the LTIP); and
additional shares of common stock available for future issuance
under the LTIP and OP units that our principals have the
possibility of receiving as consideration for our services
business (see Structure and Formation of our
CompanyFormation TransactionsContribution and
exchange of interests in the existing entities). Further
dilution to our new investors will result if these excluded
shares of common stock are issued by us in the future.
61
The following table sets forth selected financial and operating
data on a pro forma basis for Welsh Property Trust, Inc. and on
a historical basis for our Welsh Predecessor Companies. We have
not presented historical financial information for Welsh
Property Trust, Inc. because we have not had any corporate
activity since our formation other than the issuance of shares
of common stock in connection with the initial capitalization of
our company and because we believe that a presentation of the
results of Welsh Property Trust, Inc. would not be meaningful.
You should read the following selected financial and operating
data in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations,
our unaudited pro forma condensed consolidated financial
statements and related notes, and the combined financial
statements and related notes of the Welsh Predecessor Companies
included elsewhere in this prospectus. The unaudited selected
historical combined balance sheet information at March 31,
2010 and statements of operations for the three months ended
March 31, 2010 and 2009 have been derived from the combined
financial statements of the Welsh Predecessor Companies included
elsewhere in this prospectus. The selected historical combined
balance sheet information at December 31, 2009 and 2008,
and the historical combined statements of operations for the
years ended December 31, 2009, 2008, and 2007, have been
derived from the combined financial statements of the Welsh
Predecessor Companies audited by KPMG LLP, independent
registered public accountants, whose report thereon is included
elsewhere in this prospectus. The selected historical combined
balance sheet information at December 31, 2007, 2006 and
2005, and the historical combined statements of operations for
the years ended December 31, 2006 and 2005 have been
derived from the unaudited combined financial statements of the
Welsh Predecessor Companies, which are not included in this
prospectus. The Welsh Predecessor Companies being contributed to
our operating partnership are a collection of real estate
entities, which includes the accounting acquirer, that directly
or indirectly own industrial and office properties and are
controlled by Dennis J. Doyle.
The unaudited pro forma condensed consolidated balance sheet
data is presented as if this offering and the formation
transactions had occurred on March 31, 2010, and the
unaudited pro forma condensed consolidated statement of
operations and other data for the three months ended
March 31, 2010 and the year ended December 31, 2009,
is presented as if this offering and the formation transactions
had occurred on January 1, 2009. Our unaudited pro forma
condensed consolidated financial statements include the effects
of the contribution of the entities included in the Welsh
Contribution Companies, a collection of real estate entities
that directly or indirectly own industrial and office properties
as well as the services business and are under the common
management of our principals. The contribution of the Welsh
Contribution Companies has been accounted for using the
acquisition method of accounting. Additionally, our unaudited
pro forma condensed consolidated financial statements include
the purchase of our acquisition portfolio. All material
intercompany balances have been eliminated in the unaudited pro
forma condensed consolidated financial statements. The pro forma
financial information is not necessarily indicative of what our
actual financial condition would have been as of March 31,
2010 or what our actual results of operations would have been
assuming this offering and the formation transactions had been
completed as of January 1, 2009, nor does it purport to
represent our future financial position or results of operations.
62
Selected
financial data
|
|
|
|
|
|
|
|
|
|
|
Pro forma Welsh
Property Trust, Inc.
|
|
|
|
Three months
ended
|
|
|
Year ended
|
|
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(in thousands,
except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
25,600
|
|
|
$
|
100,191
|
|
Construction and service fee revenue
|
|
|
8,906
|
|
|
|
54,672
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
34,506
|
|
|
|
154,863
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
4,261
|
|
|
|
19,946
|
|
Real estate taxes
|
|
|
4,640
|
|
|
|
15,540
|
|
Cost of construction and service fee revenue
|
|
|
7,412
|
|
|
|
45,204
|
|
Depreciation and amortization
|
|
|
7,937
|
|
|
|
32,949
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
24,250
|
|
|
|
113,639
|
|
|
|
|
|
|
|
|
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
Equity in net (income) loss from equity method investments
|
|
|
(99
|
)
|
|
|
332
|
|
Impairment charges
|
|
|
|
|
|
|
6,432
|
|
Acquisition costs
|
|
|
285
|
|
|
|
|
|
General and administrative expenses
|
|
|
2,812
|
|
|
|
10,868
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
2,998
|
|
|
|
17,632
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
7,258
|
|
|
|
23,592
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(5,931
|
)
|
|
|
(24,252
|
)
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
1,327
|
|
|
|
(660
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
Gain on disposition of real estate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
1,327
|
|
|
$
|
(660
|
)
|
|
|
|
|
|
|
|
|
|
Basic pro forma net income (loss) per common share
|
|
$
|
0.03
|
|
|
$
|
(0.02
|
)
|
Diluted pro forma net income (loss) per common share
|
|
|
0.03
|
|
|
|
(0.02
|
)
|
Pro forma weighted average number of shares outstanding
|
|
|
35,807
|
|
|
|
35,807
|
|
Pro forma weighted average number of common shares and potential
dilutive securities
|
|
|
43,389
|
|
|
|
43,389
|
|
Other Data:
|
|
|
|
|
|
|
|
|
Funds from Operations
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,327
|
|
|
$
|
(660
|
)
|
Depreciation and amortization
|
|
|
7,937
|
|
|
|
32,949
|
|
Depreciation and amortization equity method
investments
|
|
|
192
|
|
|
|
823
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations (FFO)
|
|
$
|
9,456
|
|
|
$
|
33,112
|
|
|
|
|
|
|
|
|
|
|
63
Selected
financial data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical Welsh
Predecessor Companies
|
|
|
|
Three months
ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year ended
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(dollars in
thousands)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
7,938
|
|
|
$
|
7,310
|
|
|
$
|
29,247
|
|
|
$
|
31,549
|
|
|
$
|
19,684
|
|
|
$
|
11,758
|
|
|
$
|
4,694
|
|
Construction and service fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900
|
|
|
|
1,618
|
|
|
|
1,988
|
|
|
|
1,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
7,938
|
|
|
|
7,310
|
|
|
|
29,247
|
|
|
|
32,449
|
|
|
|
21,302
|
|
|
|
13,746
|
|
|
|
6,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
1,768
|
|
|
|
2,523
|
|
|
|
8,509
|
|
|
|
8,334
|
|
|
|
3,688
|
|
|
|
2,035
|
|
|
|
1,059
|
|
Real estate taxes
|
|
|
1,754
|
|
|
|
1,454
|
|
|
|
5,212
|
|
|
|
5,637
|
|
|
|
3,280
|
|
|
|
2,165
|
|
|
|
1,053
|
|
Cost of construction and service fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
768
|
|
|
|
1,249
|
|
|
|
1,541
|
|
|
|
948
|
|
Depreciation and amortization
|
|
|
2,618
|
|
|
|
2,546
|
|
|
|
10,391
|
|
|
|
11,861
|
|
|
|
6,462
|
|
|
|
4,153
|
|
|
|
1,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
6,140
|
|
|
|
6,523
|
|
|
|
24,112
|
|
|
|
26,600
|
|
|
|
14,679
|
|
|
|
9,894
|
|
|
|
4,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net loss (income) from equity method investments
|
|
|
1,323
|
|
|
|
255
|
|
|
|
1,252
|
|
|
|
1,132
|
|
|
|
2,130
|
|
|
|
1,659
|
|
|
|
(1,792
|
)
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
6,432
|
|
|
|
7,577
|
|
|
|
|
|
|
|
109
|
|
|
|
6
|
|
Acquisition costs
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
209
|
|
|
|
195
|
|
|
|
195
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
1,608
|
|
|
|
255
|
|
|
|
7,706
|
|
|
|
8,918
|
|
|
|
2,325
|
|
|
|
1,963
|
|
|
|
(1,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
190
|
|
|
|
532
|
|
|
|
(2,571
|
)
|
|
|
(3,069
|
)
|
|
|
4,298
|
|
|
|
1,889
|
|
|
|
3,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income, net
|
|
|
41
|
|
|
|
(58
|
)
|
|
|
42
|
|
|
|
1
|
|
|
|
17
|
|
|
|
21
|
|
|
|
8
|
|
Interest expense, net
|
|
|
(3,173
|
)
|
|
|
(2,752
|
)
|
|
|
(12,558
|
)
|
|
|
(12,625
|
)
|
|
|
(8,057
|
)
|
|
|
(4,521
|
)
|
|
|
(788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(2,942
|
)
|
|
|
(2,278
|
)
|
|
|
(15,087
|
)
|
|
|
(15,693
|
)
|
|
|
(3,742
|
)
|
|
|
(2,611
|
)
|
|
|
2,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
99
|
|
|
|
324
|
|
|
|
224
|
|
|
|
53
|
|
|
|
245
|
|
|
|
187
|
|
Gain on disposition of real estate investments
|
|
|
|
|
|
|
|
|
|
|
1,595
|
|
|
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations
|
|
|
|
|
|
|
99
|
|
|
|
1,919
|
|
|
|
1,285
|
|
|
|
53
|
|
|
|
245
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(2,942
|
)
|
|
$
|
(2,179
|
)
|
|
$
|
(13,168
|
)
|
|
$
|
(14,408
|
)
|
|
$
|
(3,689
|
)
|
|
$
|
(2,366
|
)
|
|
$
|
2,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
Selected
financial data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Welsh Property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust,
Inc.
|
|
|
Historical Welsh
Predecessor Companies
|
|
|
|
As of
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
As of
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(dollars in
thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net real estate investments
|
|
$
|
670,212
|
|
|
$
|
234,793
|
|
|
$
|
229,085
|
|
|
$
|
208,234
|
|
|
$
|
179,669
|
|
|
$
|
137,047
|
|
|
$
|
67,834
|
|
Other assets, net
|
|
|
164,149
|
|
|
|
29,514
|
|
|
|
27,072
|
|
|
|
27,828
|
|
|
|
23,419
|
|
|
|
20,638
|
|
|
|
5,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
834,361
|
|
|
$
|
264,307
|
|
|
$
|
256,157
|
|
|
$
|
236,062
|
|
|
$
|
203,088
|
|
|
$
|
157,685
|
|
|
$
|
73,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages and notes payable
|
|
$
|
416,767
|
|
|
$
|
229,496
|
|
|
$
|
223,503
|
|
|
$
|
201,541
|
|
|
$
|
158,889
|
|
|
$
|
116,745
|
|
|
$
|
49,223
|
|
Other liabilities
|
|
|
25,445
|
|
|
|
15,638
|
|
|
|
15,842
|
|
|
|
14,096
|
|
|
|
11,199
|
|
|
|
9,019
|
|
|
|
3,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
442,212
|
|
|
|
245,134
|
|
|
|
239,345
|
|
|
|
215,637
|
|
|
|
170,088
|
|
|
|
125,764
|
|
|
|
52,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owners equity
|
|
|
|
|
|
|
19,173
|
|
|
|
16,812
|
|
|
|
20,425
|
|
|
|
33,000
|
|
|
|
31,921
|
|
|
|
20,899
|
|
Stockholders equity
|
|
|
312,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
79,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
834,361
|
|
|
$
|
264,307
|
|
|
$
|
256,157
|
|
|
$
|
236,062
|
|
|
$
|
203,088
|
|
|
$
|
157,685
|
|
|
$
|
73,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in forward-looking
statements for many reasons, including the risks described in
Risk Factors and elsewhere in this prospectus. You
should read the following discussion with Special Note
Regarding Forward-Looking Statements and the combined
financial statements and related notes included elsewhere in
this prospectus.
The following discussion and analysis is based on, and should be
read in conjunction with the unaudited financial statements and
notes thereto for the three months ended March 31, 2010
and the audited financial statements and notes thereto for the
years ended December 31, 2009, 2008 and 2007 of the Welsh
Predecessor Companies and the Welsh Contribution Companies. We
have not had any corporate activity since our formation, other
than the issuance of 300 shares of our common stock to our
principals in connection with our initial capitalization and
activities in preparation for this offering and the formation
transactions. Accordingly, we believe that a discussion of our
results of operations would not be meaningful, and this
discussion and analysis therefore only discusses the combined
results of the Welsh Predecessor Companies and the Welsh
Contribution Companies. For more information regarding these
companies, see Selected Financial Data. All
significant intercompany balances and transactions have been
eliminated in the financial statements discussed below.
OVERVIEW
We are a vertically integrated, self-administered and
self-managed REIT formed to continue and expand the
32-year-old
business of the Welsh organization. We acquire, own, operate,
and manage industrial and office properties primarily across the
central United States and provide real estate services to
commercial property owners in central U.S. markets. Upon
completion of this offering and the formation transactions
described herein, we will own and manage our existing portfolio
of 65 income-producing properties, consisting of 57 industrial
and eight office properties comprising in the aggregate
approximately 9.6 million leasable square feet. Our
existing portfolio also includes five parcels of vacant,
developable land totaling approximately 44 acres in four
markets. All of our land holdings are adjacent to real estate
assets in our existing portfolio and we believe they will
provide attractive development opportunities when market
conditions improve. We will also own a 5% economic interest in a
portfolio consisting of 10 industrial and three office
properties and a 21.7% economic interest in one five-building
office complex; these properties together total approximately
3.2 million leasable square feet. We expect to maintain
contractual management and leasing responsibilities for this
joint venture portfolio. In addition, concurrently with the
closing of this offering, we plan to expand our real property
holdings through the acquisition of 22 additional industrial
properties in 11 states containing an aggregate of
8.8 million leasable square feet, for consideration of
$320.1 million.
Our primary business objectives are to maximize cash flow and to
achieve sustainable long-term growth in earnings and FFO,
thereby maximizing total return to our stockholders. The
strategies we intend to execute to achieve these objectives
include:
|
|
Ø
|
maximize cash flow from existing properties;
|
|
Ø
|
capitalize on acquisition opportunities;
|
|
Ø
|
pursue relationship-focused growth; and
|
|
Ø
|
leverage expansion of our full-service platform.
|
Our revenue consists primarily of the rents we bill to our
tenants as stipulated in our leases, including reimbursements
for real estate taxes, property insurance, utilities and
maintenance. We also receive
66
Managements
discussion and analysis of financial condition and results of
operations
revenue from services that we provide to third parties such as
property management, brokerage, construction, architecture,
mortgage origination and facilities maintenance.
We have historically financed our investments through private
placements of equity securities, joint ventures, equity
investment by our principals, or a combination of these methods.
The majority of our existing portfolio properties are also
secured by first mortgage loans, and in three instances, second
mortgage loans or mezzanine financing. Our pro forma aggregate
indebtedness as of March 31, 2010 was $416.8 million.
For more information about our business, see Business and
Properties.
FACTORS WHICH MAY
INFLUENCE OUR BUSINESS AND THE BUSINESS OF OUR TENANTS
The primary source of our operating revenue is rents received
from tenants under leases at our properties, including
reimbursements from tenants for certain operating costs. In
addition, our revenue includes construction and service fee
revenue for services provided under contractual arrangements
with a variety of third-party owners. We seek earnings growth
primarily through increasing rents and occupancy at existing
properties, acquiring additional properties in markets
complementing our existing portfolio locations, repositioning
our portfolio through strategic disposition of certain non-core
assets, and increasing our revenue and profit margins from our
services business.
Factors affecting
our tenants profitability
Our revenue is derived primarily from rents we receive from
leases with our tenants. Certain economic factors present both
opportunities and risks to our tenants and, therefore, may
influence their ability to meet their obligations to us. These
factors directly affect our tenants operations and, given
our reliance on their performance under our leases, present
risks to us that may affect our results of operations or ability
to meet our financial obligations. Our top five tenants, on a
combined historical basis, based on total rental and related
revenue for the three months ended March 31, 2010, were:
Oracle USA, Inc., an integrated technology company, in
Minneapolis, Minnesota; Archway Marketing Services, Inc., a
marketing fulfillment services company, in Romulus, Michigan;
Mastronardi Produce-USA, Inc., a producer and distributor of
gourmet greenhouse vegetables throughout North America, in
Romulus, Michigan; Medline Industries, Inc., a manufacturer of
medical supplies, in Romulus, Michigan; and Metal Processing,
Corp., a company that provides processing, distribution and
storage of metal products, in Gary, Indiana. In the aggregate,
these tenants represented 13.7% of our total revenue for the
three months ended March 31, 2010, and they are diverse by
both geography and industry, which mitigates our risk of tenant
failure.
Factors affecting
our third-party revenue
We also derive revenue from fees paid for services provided by
our services business. Our services business is diverse and has
maintained overall profitability over the past five fiscal
years. This construction and service fee revenue is comprised of
construction, property management, brokerage, mortgage
origination, architecture, and facilities services.
We have management and real estate brokerage relationships with
Highstreet Equities, ING, TA & Associates and others
where we provide services to their owned commercial real estate
in the Minneapolis/St. Paul metropolitan area. Although these
revenue sources are derived from contracts that are typically
short-term in nature, we have had an ongoing relationship with
each of the clients identified above for over three years.
Although the majority of recurring revenue from third-party
clients comes from property management fees, we also earn
ancillary revenue from these clients, including brokerage
commissions, construction, architecture, mortgage origination
and facilities maintenance. Following the completion of this
offering and the formation transactions, we will not recognize
revenue for services provided by our services business to either
us or our affiliates.
67
Managements
discussion and analysis of financial condition and results of
operations
TRENDS WHICH MAY
INFLUENCE RESULTS OF OPERATIONS
According to the Real Estate Roundtable, a total of $3.5
trillion of commercial real estate debt was outstanding as of
September 2009, excluding government-sponsored and agency loans.
Of this debt, nearly $850 billion is maturing from 2010
through 2012. We believe that these near-term maturities,
coupled with the increased equity requirements demanded by
potential replacement lenders, may force many real estate owners
to dispose of assets as an alternative to refinancing. We
believe this will provide attractive opportunities for us to
acquire stable assets to complement our real estate portfolio
and leverage our existing infrastructure. We believe that our
relatively low amount of near-term debt maturities will further
enhance our ability to take advantage of attractive acquisition
opportunities.
Our contractual increases over our pro forma rental and related
revenue for the 12 months ended March 31, 2010 from our
real estate portfolio related to increases in rental revenue
from leases that have been duly executed as of May 10, 2010
total $7.5 million for the 12 months ended March 31,
2011. As the U.S. economy stabilizes and moves toward
recovery from the recent recession, we believe there may be
opportunity for an increase in occupancy as our tenants increase
manufacturing and distribution activities. In addition to
potential increases in revenue due to increased occupancy in our
real estate portfolio, there may be an opportunity to increase
rental rates from renewing expiring leases. As of April 1,
2010, 16.6% of our existing portfolio, based on leasable square
footage, was represented by leases expiring in 2010 or 2011 (not
including leases which are month-to-month). In our combined
portfolio, as of April 1, 2010, 10.4%, based on leasable
square footage, was represented by leases expiring in 2010 and
2011 (not including leases which are
month-to-month).
We believe that there is a broader potential tenant base for
smaller premises and the majority of our expiring leases are
under 50,000 square feet. Three of the leases in our existing
portfolio scheduled to expire in 2010 are for premises over
50,000 leasable square feet and two of the leases in our
existing portfolio scheduled to expire in 2011 are for premises
over 50,000 square feet. With the addition of our
acquisition portfolio, our combined portfolio includes three
leases of greater than 50,000 square feet that are
scheduled to expire in 2010 and four leases of greater than
50,000 square feet that are scheduled to expire in 2011.
In addition, we believe that as the economy stabilizes,
transaction volume for our services business should increase,
leading to increases in construction and service fee revenue. In
the three months ended March 31, 2010, we saw a 6.5%
increase in brokerage and other service revenue and an 8.5%
increase in the number of brokerage transactions compared to the
three months ended March 31, 2009. As of March 31,
2010, in our construction business, we had in place
eight contracts for construction projects totaling an
aggregate of $18.8 million in revenue. While
$3.1 million of the revenue from these contracts was
recognized in the three months ended March 31, 2010, all of
these construction projects have commenced or are scheduled to
commence by July 1, 2010, and we believe all will be
complete, and therefore all revenue recognized, by the end of
2010. In addition to these contracts, we are currently engaged
in negotiations for an additional $29.1 million of
construction projects that should be completed by July 15,
2011 and may lead to additional revenue recognized in 2010. For
$15.0 million of these projects, we have been awarded the
job as general contractor, but have not entered into definitive
agreements. The remaining $14.1 million of construction
projects are subject to a bidding process in which we are
participating with other parties. There can be no assurance,
however, that we will receive such revenues or successfully
finalize the negotiations relating to these opportunities. These
contracts and negotiations do not include any of our numerous
ongoing tenant improvement jobs of less than $0.5 million
each. We believe these contracts and negotiations represent a
significant improvement in our construction business pipeline
over 2009. In contrast, as of March 31, 2009, we had only
five construction projects under contract totaling an aggregate
of $15.5 million and were in negotiations for only
$9.0 million of potential projects.
68
Managements
discussion and analysis of financial condition and results of
operations
ACCESS TO
CAPITAL
In order to continue to raise capital necessary to expand our
portfolio, we will rely on access to the capital markets on an
ongoing basis for the funds to make investments as opportunities
arise. Our indebtedness outstanding upon completion of this
offering and the formation transactions will be comprised almost
entirely of mortgages secured by our existing portfolio. On a
pro forma basis, as of March 31, 2010, our aggregate
indebtedness was approximately $416.8 million. While 100%
of our existing portfolio is currently encumbered by mortgage
liens, our combined portfolio will have significantly lower
overall leverage, as 16 of the 22 properties in our acquisition
portfolio and nine of the 65 properties in our existing
portfolio will be unencumbered by mortgages upon completion of
this offering. In connection with the purchase of our
acquisition portfolio concurrent with this offering, as well as
any acquisitions we consummate following the completion of this
offering, we intend to acquire properties primarily on an
unleveraged basis until the costs and availability of long-term
debt financing are consistent with our overall business
objectives. We have received commitments for a syndicated credit
facility in an initial amount of $75.0 million, which could
be used to finance new acquisitions and for other working
capital purposes. If completed we may elect to increase the
amount of the facility up to $150 million, subject to the
approval of the administrative agent and the identification of a
lender or lenders willing to make available the additional
amounts. The proposed terms of the credit facility include:
(i) security of a first-lien mortgage or deed of trust on
certain of our properties that are otherwise unencumbered:
(ii) a two year term with one 12-month extension option and
(iii) interest-only payments at rates between 250 basis
points and 325 basis points in excess of LIBOR for eurodollar
advances, and between 150 basis points and 225 basis points in
excess of the lenders alternate base rate, as defined
therein, for all other advances, in each case based on our
overall company leverage. The specific terms of the credit
facility will be negotiated by us and the lenders and there can
be no assurance that we will be able to enter into this credit
facility on the terms described above or at all. The credit
facility will be contingent upon completion of this offering.
OUR REVENUE,
EXPENSES AND CASH FLOW
Revenue
Our revenue consists primarily of the rents we bill to our
tenants as stipulated in leases, including reimbursements for
real estate taxes, property insurance, utilities and
maintenance. We also recognize revenue from services provided to
third parties such as property management, brokerage,
construction, architecture, loan origination fees and facilities
maintenance. Although not a significant part of our revenue, we
also earn interest on overnight cash deposits and interest from
one outstanding loan secured by real estate. Factors that affect
our revenue include our occupancy and rental rates. For example,
our existing portfolio was 86.1% occupied based on leasable
square footage at April 1, 2010. If we are able to increase
our occupancy rates, we will be able to realize increased
revenue from our existing portfolio.
Rental and Related Revenue.
Rental and related
revenue represents rent under existing leases that is billed to
our tenants. In addition, rental and related revenue includes
lease termination fees, non-cash charges and adjustments related
to straight-lining of rents and amortization of acquired above
and below market lease intangibles.
Construction and Service Fee Revenue.
We
recognize revenue from contractual and project-based services
provided to third parties related to construction, brokerage,
property management, leasing services, asset management,
architecture, loan facilitation and facilities services.
Historically, construction and brokerage revenue have
constituted the majority of our construction and service fee
revenue. Although the profitability of our services business
varies depending upon transaction volume, the low fixed costs
associated with our brokerage division has historically made it
the most profitable division of our services business.
69
Managements
discussion and analysis of financial condition and results of
operations
Expenses
We recognize a variety of cash and non-cash charges in our
financial statements. Our cash expenses consist primarily of the
interest expense on the borrowings we incur in order to make our
investments, property operating costs, rental expenses, real
estate taxes, the costs associated with our services business,
and general and administrative expenses. Interest expense
charges are associated with certain asset-specific loans.
Cost of Rental Operations.
These expenses
include payment of operational needs of our assets such as
maintenance, repairs, utilities, landscaping, insurance, snow
removal and janitorial services.
Real Estate Taxes.
The majority of our leases
require the tenant to make payments to us to cover our current
real estate tax expense. We collect money for these taxes from
our tenants and pay the obligations as they come due. We account
for the billing of these amounts as revenue (tenant recoveries)
and the payment of the actual taxes as an expense. To the extent
we have vacancies at our properties, we pay the real estate
taxes associated with those vacancies on a pro-rata basis. On an
annual basis, we analyze the real estate tax liabilities for
each asset and determine if a protest or appeal of the tax
assessed should be undertaken. As of April 1, 2010, we had
on-going tax appeals related to 2009 real estate taxes
aggregating approximately $4.9 million, or 44.3% of our
total 2009 real estate taxes. In general, tax appeals are
undertaken annually where appropriate and, in many instances,
cover multiple tax years. Our pending tax appeals may result in
a reduction and refund of real estate taxes previously paid;
however, we are not expecting reductions or refunds, if any,
related to these tax appeals until after the third quarter of
2010.
Cost of Construction and Service Fee
Revenue.
Expenses related to our services
business typically consist of cost of materials, salaries,
commissions and related costs.
Depreciation and Amortization.
We incur
depreciation expense on all of our long-lived assets. This
non-cash expense, under GAAP, is intended to reflect the
economic useful lives of our assets. As for amortization, we
incur non-cash charges that reflect costs incurred to acquire
in-place lease intangible assets and costs incurred related to
leasing commissions. We generally amortize these costs over the
term of the related lease.
Other operating
activities
Equity in Net (Income) Loss from Equity Method
Investments.
We record earnings or losses on
investments in partnerships, tenancies in common and limited
liability companies where we have a noncontrolling interest. Our
only equity method investments following this offering will be
in connection with our joint venture portfolio.
Impairment Charges.
Impairment charges consist
of non-cash reductions to the carrying value of long-lived
assets and are incurred when changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
General and Administrative Expenses.
Our
general and administrative expenses consist primarily of payroll
and payroll related expense for executive management and
corporate support functions such as human resources, information
technology, corporate accounting and legal. Additionally, we
incur outside accounting, legal and other professional fees.
Other income
(expenses)
Interest Expense.
We recognize the interest we
incur on our existing borrowings as interest expense, as well as
the amortization of financing costs.
70
Managements
discussion and analysis of financial condition and results of
operations
Income from Discontinued Operations.
Income or
loss from discontinued operations consists of recognized income
or loss from any material operations related to properties sold
during the period or held for sale at the end of the period.
Cash
flow
Cash Provided by Operating Activities.
Cash
provided by operating activities is derived largely from net
income by adjusting our revenue (i) for those amounts not
collected in cash during the period in which the revenue is
recognized, (ii) for cash collected that was billed in
prior periods or will be billed in future periods and
(iii) by adding back expenses charged during the period
that are not paid in cash during the same period. We expect to
make our distributions based largely on cash provided by
operations.
Cash Used in Investing Activities.
Cash used
in investing activities consists of cash that is used during a
period for new acquisitions, development costs and capital
expenditures.
Cash Provided by Financing Activities.
Cash
provided by financing activities consists of cash we receive
from issuances of debt and equity capital and the repayment of
debt principal. This cash provides the primary basis for the
investments in new properties and capital expenditures. We
expect that we will seek to raise additional debt or equity
financing for the majority of our investment activity.
RESULTS OF
OPERATIONS
COMPARISON OF THE
THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 2009
The following tables summarize the combined historical results
of operations of the Welsh Predecessor Companies and the Welsh
Contribution Companies for the three months ended March 31,
2010 and the three months ended March 31, 2009. This
presentation reconciles and eliminates intercompany transactions
that are primarily service and management fees incurred between
the Welsh Predecessor Companies and the Welsh Contribution
Companies. Due to the combination of the Welsh Predecessor
Companies and the Welsh Contribution Companies, the equity in
the net loss of certain equity method investments is also
eliminated.
71
Managements
discussion and analysis of financial condition and results of
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31, 2010
|
|
|
|
Welsh
|
|
|
Welsh
|
|
|
Elimination
|
|
|
|
|
|
|
Predecessor
|
|
|
Contribution
|
|
|
Combining
|
|
|
Historical
|
|
|
|
Companies
|
|
|
Companies
|
|
|
Entries
|
|
|
Combined
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
7,938
|
|
|
$
|
8,325
|
|
|
$
|
(172
|
)
|
|
$
|
16,091
|
|
Construction and service fee revenue
|
|
|
|
|
|
|
9,777
|
|
|
|
(871
|
)
|
|
|
8,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
7,938
|
|
|
|
18,102
|
|
|
|
(1,043
|
)
|
|
|
24,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
1,768
|
|
|
|
1,911
|
|
|
|
(167
|
)
|
|
|
3,512
|
|
Real estate taxes
|
|
|
1,754
|
|
|
|
1,697
|
|
|
|
|
|
|
|
3,451
|
|
Cost of construction and service fee revenue
|
|
|
|
|
|
|
7,926
|
|
|
|
(514
|
)
|
|
|
7,412
|
|
Depreciation and amortization
|
|
|
2,618
|
|
|
|
2,617
|
|
|
|
(56
|
)
|
|
|
5,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
6,140
|
|
|
|
14,151
|
|
|
|
(737
|
)
|
|
|
19,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net (income) loss from equity method investments
|
|
|
1,323
|
|
|
|
|
|
|
|
(1,422
|
)
|
|
|
(99
|
)
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
285
|
|
General and administrative expense
|
|
|
|
|
|
|
5,330
|
|
|
|
(257
|
)
|
|
|
5,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
1,608
|
|
|
|
5,330
|
|
|
|
(1,679
|
)
|
|
|
5,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
190
|
|
|
|
(1,379
|
)
|
|
|
1,373
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
41
|
|
|
|
20
|
|
|
|
|
|
|
|
61
|
|
Interest expense
|
|
|
(3,173
|
)
|
|
|
(1,959
|
)
|
|
|
12
|
|
|
|
(5,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(2,942
|
)
|
|
|
(3,318
|
)
|
|
|
1,385
|
|
|
|
(4,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposition of real estate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(2,942
|
)
|
|
$
|
(3,318
|
)
|
|
$
|
1,385
|
|
|
$
|
(4,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
Managements
discussion and analysis of financial condition and results of
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31, 2009
|
|
|
|
Welsh
|
|
|
Welsh
|
|
|
Elimination
|
|
|
|
|
|
|
Predecessor
|
|
|
Contribution
|
|
|
Combining
|
|
|
Historical
|
|
|
|
Companies
|
|
|
Companies
|
|
|
Entries
|
|
|
Combined
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
7,310
|
|
|
$
|
8,974
|
|
|
$
|
(155
|
)
|
|
$
|
16,129
|
|
Construction and service fee revenue
|
|
|
|
|
|
|
14,589
|
|
|
|
(687
|
)
|
|
|
13,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
7,310
|
|
|
|
23,563
|
|
|
|
(842
|
)
|
|
|
30,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
2,523
|
|
|
|
2,107
|
|
|
|
(179
|
)
|
|
|
4,451
|
|
Real estate taxes
|
|
|
1,454
|
|
|
|
1,703
|
|
|
|
|
|
|
|
3,157
|
|
Cost of construction and service fee revenue
|
|
|
|
|
|
|
12,514
|
|
|
|
(312
|
)
|
|
|
12,202
|
|
Depreciation and amortization
|
|
|
2,546
|
|
|
|
2,586
|
|
|
|
(33
|
)
|
|
|
5,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
6,523
|
|
|
|
18,910
|
|
|
|
(524
|
)
|
|
|
24,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net (income) loss from equity method investments
|
|
|
255
|
|
|
|
|
|
|
|
(230
|
)
|
|
|
25
|
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
|
|
|
|
2,296
|
|
|
|
(234
|
)
|
|
|
2,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
255
|
|
|
|
2,296
|
|
|
|
(464
|
)
|
|
|
2,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
532
|
|
|
|
2,357
|
|
|
|
146
|
|
|
|
3,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
(58
|
)
|
|
|
7
|
|
|
|
|
|
|
|
(51
|
)
|
Interest expense
|
|
|
(2,752
|
)
|
|
|
(2,021
|
)
|
|
|
4
|
|
|
|
(4,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(2,278
|
)
|
|
|
343
|
|
|
|
150
|
|
|
|
(1,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
99
|
|
Gain on disposition of real estate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(2,179
|
)
|
|
$
|
343
|
|
|
$
|
150
|
|
|
$
|
(1,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
Total revenue decreased $5.0 million, or 16.7%, to
$25.0 million for the three months ended March 31,
2010 from $30.0 million for the three months ended
March 31, 2009. A detailed analysis of the decrease in
revenue follows. References to same-store properties are to
properties that we owned during both the current and prior
quarter reporting periods for which the operations have been
stabilized and included for the entire period presented.
Rental and
related revenue
Rental and related revenue was $16.1 million for the three
months ended March 31, 2010 and was also $16.1 million
for the three months ended March 31, 2009. The three months
ended March 31, 2010 included additional revenue realized
from two buildings acquired in 2009 subsequent to the end of the
first quarter and one building acquired in 2010 prior to
March 31, totaling $0.6 million. On a same-
73
Managements
discussion and analysis of financial condition and results of
operations
store basis, rental and related revenue decreased 3.7%, to
$15.5 million for the three months ended March 31,
2010 from $16.1 million for the three months ended
March 31, 2009. This decrease in same-store revenue was due
primarily to a decrease in same-store occupancy from 83.3% at
March 31, 2009 to 82.5% at March 31, 2010.
On a combined historical basis, for the three months ended
March 31, 2010 our industrial properties generated
$11.5 million of rental and related revenue, or 71.4% of
our total rental and related revenue for such period, compared
to $11.7 million or 72.7% for the three months ended
March 31, 2009. On a combined historical basis, for the
three months ended March 31, 2010 our office properties
generated $4.6 million of rental and related revenue, or
28.6% of our total rental and related revenue for such period,
compared to $4.4 million or 27.3% for the three months
ended March 31, 2009.
Construction and
service fee revenue
Total construction and service fee revenue decreased
$5.0 million, or 36.0%, to $8.9 million for the three
months ended March 31, 2010 from $13.9 million for the
three months ended March 31, 2009. This decrease was
attributable to a decrease in construction revenue to
$4.0 million for the three months ended March 31, 2010
compared to construction revenue of $9.3 million for the
three months ended March 31, 2009. This decrease was
attributed primarily to one construction project that generated
$5.5 million of revenues during the three months ended
March 31, 2009 and was completed during 2009. Brokerage and
other service revenue increased to $4.9 million for the
three months ended March 31, 2010 from $4.6 million
for the three months ended March 31, 2009. This increase
was primarily attributable to an increase in brokerage activity
and increased property management fees.
We believe that our construction and services fee revenue for
2010 will trend higher during the remainder of this year. As of
March 31, 2010, in our construction business, we had in
place eight contracts for construction projects totaling an
aggregate of $18.8 million in revenue. While
$3.1 million of the revenue from these contracts was
recognized in the three months ended March 31, 2010, all of
these construction projects have commenced or are scheduled to
commence by July 1, 2010, and we believe all will be
complete, and therefore all revenue recognized, by the end of
2010. In addition to these contracts, we are currently engaged
in negotiations for an additional $29.1 million of
construction projects that should be completed by July 15,
2011 and may lead to additional revenue recognized in 2010. For
$15.0 million of these projects, we have been awarded the
job as general contractor, but have not entered into definitive
agreements. The remaining $14.1 million of construction
projects are subject to a bidding process in which we are
participating with other parties. There can be no assurance,
however, that we will receive such revenues or successfully
finalize the negotiations relating to these opportunities. These
contracts and negotiations are do not include any of our
numerous ongoing tenant improvement jobs of less than
$0.5 million each. We believe these contracts and
negotiations represent a significant improvement in our
construction business pipeline over 2009. In contrast, as of
March 31, 2009, we had only five construction projects
under contract totaling an aggregate of $15.5 million and
were in negotiations for only $9.0 million of potential
projects.
EXPENSES
Cost of rental
operations
Total cost of rental operations decreased 22.2% to
$3.5 million for the three months ended March 31, 2010
from $4.5 million for the three months ended March 31,
2009. This decrease was due in part to a decrease in bad debt
expense (amounts deemed uncollectable from tenants, generally
because they have vacated or terminated their occupied space
prior to expiration of their leases) for the three months ended
March 31, 2010 of $0.9 million, partially offset by
additional expense related to two buildings acquired in 2009
subsequent to the end of the first quarter and one building
acquired in 2010 prior to March 31, totaling
$0.3 million.
74
Managements
discussion and analysis of financial condition and results of
operations
On a combined historical basis, for the three months ended
March 31, 2010 the cost of rental operations for our
industrial properties was $2.4 million, or 68.6% of our
total cost of rental operations, compared to $2.7 million,
or 60.0% of our rental operations for the three months ended
March 31, 2009. On a combined historical basis, the cost of
rental operations for our office properties was
$1.1 million, or 31.4% of our total cost of rental
operations for the three months ended March 31, 2010,
compared to $1.4 million, or 31.1% of our total cost of
rental operations for the three months ended March 31, 2009.
Real estate
taxes
Our real estate taxes increased 9.4% to $3.5 million for
the three months ended March 31, 2010 from
$3.2 million for the three months ended March 31,
2009. This increase was almost entirely attributable to the
taxes related to two buildings acquired in 2009 subsequent to
the end of the first quarter and one building acquired in 2010
prior to March 31, totaling $0.2 million. On a
same-store basis, real estate taxes were relatively flat when
comparing the three months ended March 31, 2010 to the
three months ended March 31, 2009.
Cost of
construction and service fee revenue
Total cost of construction and service fee revenue decreased
39.3% to $7.4 million for the three months ended
March 31, 2010 from $12.2 million for the three months
ended March 31, 2009. This decrease in costs more than
offset the 36.0% decrease in revenue for construction and
service fee revenue for the same period, resulting in a higher
gross margin in the three months ended March 31, 2010
(16.8%) when compared to the three months ended March 31,
2009 (12.2%).
Within this decrease, construction expense decreased to
$3.9 million for the three months ended March 31, 2010
compared to $8.8 million for the three months ended
March 31, 2009, or 55.7%. This decrease correlated to the
decrease in construction revenue. Expenses related to brokerage
and other service revenue increased to $3.5 million for the
three months ended March 31, 2010 from $3.4 million
for the three months ended March 31, 2009, or 2.9%. This
increase in the cost of brokerage and other service revenue was
attributable to an increase in brokerage activity when comparing
the three months ended March 31, 2010 with the three months
ended March 31, 2009.
Depreciation and
amortization
Our depreciation and amortization expense increased 2.0% to
$5.2 million for the three months ended March 31, 2010
from $5.1 million for the three months ended March 31,
2009. This increase was attributable to additional depreciation
expense related to two buildings acquired in 2009 subsequent to
the end of the first quarter and one building acquired in 2010
prior to March 31.
Other operating
activities
Impairment Charges.
We realized no impairment
charges in either the three months ended March 31, 2010 or
the three months ended March 31, 2009.
General and Administrative Expense.
Our
general and administrative expenses increased 142.9% to
$5.1 million for the three months ended March 31, 2010
from $2.1 million for the three months ended March 31,
2009. This increase was attributable to an expense of
$3.0 million related to legal, accounting and other
pre-offering expenses recorded in the three months ended
March 31, 2010.
Other
expenses
Interest Expense.
Our interest expense
increased 6.3% to $5.1 million for the three months ended
March 31, 2010 from $4.8 million for the three months
ended March 31, 2009. This increase in interest
75
Managements
discussion and analysis of financial condition and results of
operations
expense was due in part to interest expense related to
additional debt on two buildings acquired in 2009 subsequent to
the end of the first quarter and one building acquired in 2010
prior to March 31, totaling $0.1 million. In addition,
on a same-store basis, two properties had higher interest
expense recorded in the three months ended March 31, 2010,
including
4350-4400
Baker Road, or Baker Road Corporate Center, of $0.1 million
due to the conversion of construction financing to permanent
financing and
629-651
Lambert Pointe Drive of $0.2 million attributable to a
refinancing subsequent to March 31, 2009; these increases
were partially offset by decreases in interest expense on other
properties.
COMPARISON OF THE
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
The following table summarizes the combined historical results
of operations of the Welsh Predecessor Companies and the Welsh
Contribution Companies for the years ended December 31,
2009, 2008 and 2007. This presentation reconciles and eliminates
intercompany transactions that are primarily service and
management fees incurred between the Welsh Predecessor Companies
and the Welsh Contribution Companies. Due to the combination of
the Welsh Predecessor Companies and the Welsh Contribution
Companies, the equity in the net loss of certain equity method
investments is also eliminated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2009
|
|
|
|
Welsh
|
|
|
Welsh
|
|
|
Elimination/
|
|
|
|
|
|
|
Predecessor
|
|
|
Contribution
|
|
|
Combining
|
|
|
Historical
|
|
|
|
Companies
|
|
|
Companies
|
|
|
Entries
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
29,247
|
|
|
$
|
33,283
|
|
|
$
|
(624
|
)
|
|
$
|
61,906
|
|
Construction and service fee revenue
|
|
|
|
|
|
|
57,755
|
|
|
|
(3,083
|
)
|
|
|
54,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
29,247
|
|
|
|
91,038
|
|
|
|
(3,707
|
)
|
|
|
116,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
8,509
|
|
|
|
8,480
|
|
|
|
(332
|
)
|
|
|
16,657
|
|
Real estate taxes
|
|
|
5,212
|
|
|
|
5,956
|
|
|
|
|
|
|
|
11,168
|
|
Cost of construction and service fee revenue
|
|
|
|
|
|
|
47,449
|
|
|
|
(2,245
|
)
|
|
|
45,204
|
|
Depreciation and amortization
|
|
|
10,391
|
|
|
|
9,869
|
|
|
|
(137
|
)
|
|
|
20,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
24,112
|
|
|
|
71,754
|
|
|
|
(2,714
|
)
|
|
|
93,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net (income) loss from equity method investments
|
|
|
1,252
|
|
|
|
|
|
|
|
(919
|
)
|
|
|
333
|
|
Impairment charges
|
|
|
6,432
|
|
|
|
|
|
|
|
|
|
|
|
6,432
|
|
General and administrative expense
|
|
|
22
|
|
|
|
10,950
|
|
|
|
(936
|
)
|
|
|
10,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
7,706
|
|
|
|
10,950
|
|
|
|
(1,855
|
)
|
|
|
16,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(2,571
|
)
|
|
|
8,334
|
|
|
|
862
|
|
|
|
6,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
42
|
|
|
|
96
|
|
|
|
|
|
|
|
138
|
|
Interest expense
|
|
|
(12,558
|
)
|
|
|
(8,269
|
)
|
|
|
14
|
|
|
|
(20,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(15,087
|
)
|
|
|
161
|
|
|
|
876
|
|
|
|
(14,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
324
|
|
Gain on disposition of real estate investments
|
|
|
1,595
|
|
|
|
|
|
|
|
|
|
|
|
1,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(13,168
|
)
|
|
$
|
161
|
|
|
$
|
876
|
|
|
$
|
(12,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
Managements
discussion and analysis of financial condition and results of
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2008
|
|
|
|
Welsh
|
|
|
Welsh
|
|
|
Elimination/
|
|
|
|
|
|
|
Predecessor
|
|
|
Contribution
|
|
|
Combining
|
|
|
Historical
|
|
|
|
Companies
|
|
|
Companies
|
|
|
Entries
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
31,549
|
|
|
$
|
30,954
|
|
|
$
|
|
|
|
$
|
62,503
|
|
Construction and service fee revenue
|
|
|
900
|
|
|
|
66,815
|
|
|
|
(1,787
|
)
|
|
|
65,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
32,449
|
|
|
|
97,769
|
|
|
|
(1,787
|
)
|
|
|
128,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
8,334
|
|
|
|
8,319
|
|
|
|
(187
|
)
|
|
|
16,466
|
|
Real estate taxes
|
|
|
5,637
|
|
|
|
5,346
|
|
|
|
|
|
|
|
10,983
|
|
Cost of construction and service fee revenue
|
|
|
768
|
|
|
|
54,880
|
|
|
|
(1,067
|
)
|
|
|
54,581
|
|
Depreciation and amortization
|
|
|
11,861
|
|
|
|
9,675
|
|
|
|
(57
|
)
|
|
|
21,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
26,600
|
|
|
|
78,220
|
|
|
|
(1,311
|
)
|
|
|
103,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net (income) loss from equity method investments
|
|
|
1,132
|
|
|
|
|
|
|
|
(1,165
|
)
|
|
|
(33
|
)
|
Impairment charges
|
|
|
7,577
|
|
|
|
|
|
|
|
|
|
|
|
7,577
|
|
General and administrative expense
|
|
|
209
|
|
|
|
9,187
|
|
|
|
|
|
|
|
9,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
8,918
|
|
|
|
9,187
|
|
|
|
(1,165
|
)
|
|
|
16,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(3,069
|
)
|
|
|
10,362
|
|
|
|
689
|
|
|
|
7,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
1
|
|
|
|
188
|
|
|
|
|
|
|
|
189
|
|
Interest expense
|
|
|
(12,625
|
)
|
|
|
(10,660
|
)
|
|
|
(60
|
)
|
|
|
(23,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations
|
|
|
(15,693
|
)
|
|
|
(110
|
)
|
|
|
629
|
|
|
|
(15,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
224
|
|
Gain on disposition of real estate investments
|
|
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations
|
|
|
1,285
|
|
|
|
|
|
|
|
|
|
|
|
1,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(14,408
|
)
|
|
$
|
(110
|
)
|
|
$
|
629
|
|
|
$
|
(13,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
Managements
discussion and analysis of financial condition and results of
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2007
|
|
|
|
Welsh
|
|
|
Welsh
|
|
|
Elimination/
|
|
|
|
|
|
|
Predecessor
|
|
|
Contribution
|
|
|
Combining
|
|
|
Historical
|
|
|
|
Companies
|
|
|
Companies
|
|
|
Entries
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
19,684
|
|
|
$
|
32,534
|
|
|
$
|
(112
|
)
|
|
$
|
52,106
|
|
Construction and service fee revenue
|
|
|
1,618
|
|
|
|
61,826
|
|
|
|
(1,223
|
)
|
|
|
62,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
21,302
|
|
|
|
94,360
|
|
|
|
(1,335
|
)
|
|
|
114,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
3,688
|
|
|
|
8,126
|
|
|
|
(164
|
)
|
|
|
11,650
|
|
Real estate taxes
|
|
|
3,280
|
|
|
|
5,462
|
|
|
|
|
|
|
|
8,742
|
|
Cost of construction and service fee revenue
|
|
|
1,249
|
|
|
|
50,965
|
|
|
|
(1,192
|
)
|
|
|
51,022
|
|
Depreciation and amortization
|
|
|
6,462
|
|
|
|
10,885
|
|
|
|
(23
|
)
|
|
|
17,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
14,679
|
|
|
|
75,438
|
|
|
|
(1,379
|
)
|
|
|
88,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net (income) loss from equity method investments
|
|
|
2,130
|
|
|
|
|
|
|
|
(1,715
|
)
|
|
|
415
|
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expense
|
|
|
195
|
|
|
|
8,122
|
|
|
|
|
|
|
|
8,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
2,325
|
|
|
|
8,122
|
|
|
|
(1,715
|
)
|
|
|
8,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
4,298
|
|
|
|
10,800
|
|
|
|
1,759
|
|
|
|
16,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
17
|
|
|
|
(332
|
)
|
|
|
|
|
|
|
(315
|
)
|
Interest expense
|
|
|
(8,057
|
)
|
|
|
(13,717
|
)
|
|
|
(50
|
)
|
|
|
(21,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations
|
|
|
(3,742
|
)
|
|
|
(3,249
|
)
|
|
|
1,709
|
|
|
|
(5,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(3,689
|
)
|
|
$
|
(3,249
|
)
|
|
$
|
1,709
|
|
|
$
|
(5,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The discussion that follows provides a comparison of the
historical combined results of operations for the periods noted
below.
YEAR ENDED
DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31,
2008
REVENUE
Total revenue decreased 9.2% to $116.6 million for the year
ended December 31, 2009 from $128.4 million for the
year ended December 31, 2008. A detailed analysis of the
decrease in revenue follows. References to same-store properties
are to properties that we owned during both the current and
prior year reporting periods for which the operations have been
stabilized and included for the entire period presented.
Rental and
related revenue
Rental and related revenue decreased 1.0% to $61.9 million
for the year ended December 31, 2009 from
$62.5 million for the year ended December 31, 2008. Of
this decrease, $0.5 million was
78
Managements
discussion and analysis of financial condition and results of
operations
attributable to the loss of rental revenue from an investment
property sold in 2008. Additionally, we had five properties
that, on an aggregated same-store basis had reductions in rental
and related revenue of $3.0 million due to lower occupancy.
These losses of rental and related revenue were partially offset
by $0.4 million attributable to rental and related revenue
generated by two buildings acquired in 2009 and
$1.2 million attributable to the full-year recognition of
revenue generated from five buildings acquired in 2008.
Additionally, we realized increases in revenue of
$0.8 million from increases in occupancy at 4350-4400 Baker
Road.
On a combined historical basis, for the year ended
December 31, 2009, our industrial properties generated
$43.6 million of rental and related revenue, or 70.4% of
our total rental and related revenue. Our office properties
generated $18.3 million of rental and related revenue, or
29.6% of our total rental and related revenue.
Construction and
service fee revenue
Total construction and service fee revenue decreased 17.0% to
$54.7 million for the year ended December 31, 2009
from $65.9 million for the year ended December 31,
2008. This decrease was primarily attributable to decreased
revenue in construction of $30.3 million for the year ended
December 31, 2009 compared to $36.9 million for the
year ended December 31, 2008. This variance is due to less
construction activity from tenant improvements during 2009.
Brokerage and other service revenue also decreased to
$24.4 million for the year ended December 31, 2009
from $29.0 million for the year ended December 31,
2008. This decrease is primarily attributable to a decline in
leasing activity, which was partially offset by increased
property management fees.
EXPENSES
Cost of rental
operations
Total cost of rental operations increased 1.2% to
$16.7 million for the year ended December 31, 2009
from $16.5 million for the year ended December 31,
2008. This increase was associated with the two buildings
acquired in 2009 and the full-year recognition of the five
buildings acquired in 2008. For the year ended December 31,
2009, the cost of rental operations for our office properties
was $6.4 million, or 38.3% of our total cost of rental
operations, and the cost of rental operations for our industrial
properties was $10.3 million, or 61.7% of our total cost of
rental operations.
Real estate
taxes
Our real estate taxes increased 1.8% to $11.2 million for
the year ended December 31, 2009 from $11.0 million
for the year ended December 31, 2008. While there were
increases in real estate taxes associated with the two buildings
acquired in 2009 and the full-year recognition of the five
buildings acquired in 2008, these increases were largely offset
by lower real estate taxes on a same-store basis.
Cost of
construction and service fee revenue
Total cost of construction and service fee revenue decreased
17.2% to $45.2 million in the year ended December 31,
2009 from $54.6 million for the year ended
December 31, 2008. This decrease in cost correlated to the
decrease in revenue for construction and service fee revenue.
Within this decrease, construction expense decreased to
$29.0 million for the year ended December 31, 2009
compared to $32.6 million for the year ended
December 31, 2008, or 11.0%. This decrease correlates to
the decrease in construction revenue. Expenses related to
brokerage and other service revenue also decreased to
$16.3 million for the year ended December 31, 2009
from $22.0 million for the year ended December 31,
2008, or 25.9%. This decrease in the cost of other service
revenue is
79
Managements
discussion and analysis of financial condition and results of
operations
attributable to a decline in leasing activity, which was
partially offset by the cost of increased property management
activity.
Depreciation and
amortization
Our depreciation and amortization expense decreased 6.5% to
$20.1 million for the year ended December 31, 2009
from $21.5 million for the year ended December 31,
2008. This decrease was attributable to a $1.6 million
decrease in depreciation and amortization related to our Romulus
portfolio from the year ended December 31, 2008 to the year
ended December 31, 2009 as a result of the accelerated
amortization of intangible assets during 2008 primarily
resulting from a tenant lease termination and a
$0.4 million decrease in depreciation and amortization
related to the 2008 impairment of the properties located at 1751
Nicholas Boulevard in Elk Grove Village, Illinois, and
519-529
McDonnell Boulevard in St. Louis, Missouri, respectively.
These decreases were partially offset by depreciation and
amortization related to the acquisition of two buildings in 2009
and the full-year recognition of depreciation and amortization
expense on the five buildings acquired in 2008.
Other operating
activities
Impairment Charges.
Our impairment charges
decreased 15.8% to $6.4 million for the year ended
December 31, 2009 from $7.6 million for the year ended
December 31, 2008. The 2009 impairment charges were related
to the impairment of five properties within our existing
portfolio, most notably properties in Urbandale, Iowa, which had
an impairment charge of $3.9 million, and certain
properties in Cincinnati, Ohio, which had an impairment charge
of $1.8 million. The changes in circumstances indicating
that the carrying amount of these assets may not have been
recoverable primarily were related to decreases in occupancy and
reductions in rental rates.
General and Administrative Expense.
Our
general and administrative expenses increased 6.4% to
$10.0 million for the year ended December 31, 2009
from $9.4 million for the year ended December 31,
2008. This increase was attributable to an expense of
$2.0 million related to legal, accounting and other
pre-offering professional fees, partially offset by staff and
other overhead reductions. Our general and administrative
expense was 8.6% of total revenue in 2009, compared to 7.3% of
total revenue in 2008.
Other
expenses
Interest Expense.
Our interest expense
decreased 10.7% to $20.8 million for the year ended
December 31, 2009 from $23.3 million for the year
ended December 31, 2008. This decrease in interest expense
was primarily due to a decrease in interest expense on our
properties on a same-store basis as a result of decreased
interest rates under our LIBOR-based floating rate loans during
the year ended December 31, 2009. This decrease was
partially offset by $0.3 million of interest expense
attributable to debt obtained for purchase of two buildings
purchased in 2009 and the full-year recognition of interest
expense related to the five buildings acquired in 2008.
YEAR ENDED
DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31,
2007
REVENUE
Total revenue increased 12.3% to $128.4 million for the
year ended December 31, 2008 from $114.3 million for
the year ended December 31, 2007. A detailed analysis of
the increase in revenue follows. References to same-store
properties are to properties that we owned during both the
current and prior year reporting periods for which the
operations have been stabilized and included for the entire
period presented.
80
Managements
discussion and analysis of financial condition and results of
operations
Rental and
related revenue
Rental and related revenue increased 20.0% to $62.5 million
for the year ended December 31, 2008 from
$52.1 million for the year ended December 31, 2007. Of
this increase, $1.7 million was attributable to rental and
related revenue generated by the five buildings we acquired in
2008 and $4.5 million was attributable to increases from
the full-year recognition of revenue generated from the 10
buildings we acquired in 2007, including an increase of
$2.6 million of revenue from our Romulus portfolio
purchased in May 2007. In addition, we realized increases in
revenue from increases in occupancy on a same-store basis,
including an increase of $1.3 million of revenue at
4350-4400 Baker Road and an increase of $1.4 million of
revenue at 900
2
nd
Avenue South.
For the year ended December 31, 2008, our industrial
properties generated $46.3 million of rental and related
revenue, or 74.1% of our total rental and related revenue. Our
office properties generated $16.2 million of rental and
related revenue, or 25.9% of our total rental and related
revenue.
Construction and
service fee revenue
Total construction and service fee revenue increased 6.0% to
$65.9 million for the year ended December 31, 2008
from $62.2 million for the year ended December 31,
2007. This increase was primarily attributable to increased
construction revenue of $36.9 million for the year ended
December 31, 2008 compared to $26.9 million for the
year ended December 31, 2007, or 37.2%, from our
construction activities related to senior housing projects in
Minneapolis and Albert Lea, Minnesota. This increase in
construction revenue was partially offset by decreased brokerage
and other service revenue, which decreased 17.8% to
$29.0 million for the year ended December 31, 2008
from $35.3 million for the year ended December 31,
2007. This decrease was attributable to decreased brokerage
activity.
EXPENSES
Cost of rental
operations
Cost of rental operations increased 41.0% to $16.5 million
for the year ended December 31, 2008 from
$11.7 million for the year ended December 31, 2007.
This increase in expenses was primarily attributable to the
expenses relating to the five buildings we acquired in 2008, and
the full-year recognition of expenses incurred relating to the
2007 acquisitions. The five buildings we acquired in 2008
accounted for $0.4 million of the increase, and the 10
buildings we acquired in 2007 accounted for $2.2 million of
the increase. Additionally, we realized increases in rental
expense, including increases of $0.7 million at 900
2
nd
Avenue South in Minneapolis and $0.5 million at 4350-4400
Baker Road in Minneapolis, Minnesota, both related to increased
occupancy. For the year ended December 31, 2008, the cost
of rental operations for our office properties was
$6.6 million, or 40.0% of our total cost of rental
operations, and the cost of rental operations for our industrial
properties was $9.9 million, or 60.0% of our total cost of
rental operations.
Real estate
taxes
Our real estate taxes increased 26.4% to $11.0 million for
the year ended December 31, 2008 from $8.7 million for
the year ended December 31, 2007. This increase was
attributable primarily to the real estate tax expense of the
five buildings we acquired in 2008, and the full-year
recognition of real estate tax expense from the 10 buildings we
acquired in 2007. The five buildings we acquired in 2008
accounted for $0.3 million of the increase, and the 10
buildings we acquired in 2007 accounted for $1.2 million of
the increase.
81
Managements
discussion and analysis of financial condition and results of
operations
Cost of
construction and service fee revenue
Total costs of construction and service fee revenue increased
7.1% to $54.6 million for the year ended December 31,
2008 from $51.0 million for the year ended
December 31, 2007. Within that increase, construction
expense increased to $32.6 million for the year ended
December 31, 2008 from $24.5 million for the year
ended December 31, 2007, or 33.1%. This increase in cost
correlated to the increase in revenue for construction. The
expenses related to our service fee revenue decreased 17% to
$22.0 million for the year ended December 31, 2008
from $26.5 million for the year ended December 31,
2007. This decrease in expenses correlated to the decrease in
overall brokerage and other service revenue.
Depreciation and
amortization
Our depreciation and amortization expense increased 24.3% to
$21.5 million for the year ended December 31, 2008
from $17.3 million for the year ended December 31,
2007. This increase was primarily attributable to the
depreciation and amortization related to the five buildings
acquired in 2008, and the full-year recognition of depreciation
and amortization related to the 10 buildings acquired in 2007.
The five buildings acquired in 2008 accounted for
$0.5 million of the increase, and the 10 buildings acquired
in 2007 accounted for $3.0 million of the increase.
Other operating
activities
Impairment Charges.
Our impairment charges
were $7.6 million for the year ended December 31, 2008
compared to no impairment charges for the year ended
December 31, 2007. The 2008 impairment charges were
attributable to the impairment of the properties located at 1751
Nicholas Boulevard in Elk Grove Village, Illinois, and
519-529
McDonnell Boulevard in St. Louis, Missouri. The changes in
circumstances indicating that the carrying amount of these
properties may not have been recoverable were related to loss of
occupancy or continued vacancy.
General and Administrative Expense.
Our
general and administrative expenses increased 13.3% to
$9.4 million for the year ended December 31, 2008 from
$8.3 million for the year ended December 31, 2007. Our
general and administrative expense remained steady at 7.3% of
total revenue in both 2008 and 2007.
Other
expenses
Interest Expense.
Our interest expense
increased 6.9% to $23.3 million for the year ended
December 31, 2008 from $21.8 million for the year
ended December 31, 2007. Included in the net increase of
interest expense was $0.6 million attributable to the five
buildings purchased in 2008 and $1.8 million attributable
to full-year recognition of the 10 buildings acquired in 2007.
These increases were partially offset by decreases in interest
expense on our properties on a same-store basis as a result of
decreased interest rates under our LIBOR-based floating rate
loans.
FUNDS FROM
OPERATIONS
We have included herein a discussion of FFO, which, as defined
by the National Association of Real Estate Investment Trusts, or
NAREIT, represents net income (computed in accordance with
GAAP), excluding gains and losses from sales of property, plus
real estate depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments
for unconsolidated partnerships and joint ventures. While FFO is
a non-GAAP financial measure, we consider it to be a key measure
of our operating performance which should be considered along
with, but not as an alternative to, net income and cash flow. We
believe that FFO is a beneficial indicator of the performance of
an equity REIT. Specifically, FFO calculations may be helpful to
investors as a starting point in measuring our operating
performance, because they exclude factors that do not relate to,
or are not indicative of,
82
Managements
discussion and analysis of financial condition and results of
operations
our operating performance, such as depreciation and amortization
of real estate assets and gains or losses from sales of
operating real estate assets. As such factors can vary among
owners of identical assets in similar conditions based on
historical cost accounting and useful-life estimates, FFO may
provide a valuable comparison of our operating performance when
comparing between reporting periods and other REITs.
Management believes that accounting for real estate assets in
accordance with GAAP implicitly assumes that the value of real
estate assets diminishes predictably over time. Since real
estate values have historically risen or fallen with market
conditions, many industry investors and analysts have considered
the presentation of operating results for real estate companies
that use historical cost accounting to be insufficient by
themselves. Because FFO excludes depreciation and amortization
unique to real estate, as well as gains and losses from property
dispositions, it provides our management with a performance
measure that, when compared
year-over-year
or with other REITs, reflects the impact to operations from
trends in occupancy rates, rental rates, operating costs,
development activities and interest costs, thereby providing
perspective not immediately apparent from net income. In
addition, we believe that FFO is frequently used by securities
analysts, investors and other interested parties in the
evaluation of REITs.
We offer FFO to assist the users of information regarding our
financial performance, but FFO is a non-GAAP financial measure
and should not be considered a measure of liquidity, an
alternative to net income or an indicator of any other
performance measure determined in accordance with GAAP, nor is
it indicative of funds available to fund our cash needs,
including our ability to pay dividends or make distributions. In
addition, our calculation of FFO is not necessarily comparable
to FFO as calculated by other REITs that do not use the same
definition or implementation guidelines or interpret the
standards differently from us. Investors in our securities
should not rely on these measures as a substitute for any GAAP
financial measure, including net income.
The information in the table below is derived from a combination
of the historical combined financial statements and related
notes of the Welsh Predecessor Companies and Welsh Contribution
Companies, and the unaudited pro forma condensed consolidated
financial statements and reconciles net loss to FFO.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Welsh
|
|
|
|
|
|
|
|
|
Welsh
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
|
|
|
|
|
|
|
Property
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust,
Inc.
|
|
|
|
|
|
|
|
|
Trust,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
Historical
combined
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
Three months
ended
|
|
|
December
|
|
|
Historical
combined
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
31,
|
|
|
Year ended
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(unaudited,
dollars in thousands)
|
|
|
Net income (loss)
|
|
$
|
1,327
|
|
|
$
|
(4,876
|
)
|
|
$
|
(1,686
|
)
|
|
$
|
(660
|
)
|
|
$
|
(12,131
|
)
|
|
$
|
(13,889
|
)
|
|
$
|
(5,229
|
)
|
Depreciation and amortizationexisting entities
|
|
|
7,937
|
|
|
|
5,179
|
|
|
|
5,099
|
|
|
|
32,949
|
|
|
|
20,123
|
|
|
|
21,479
|
|
|
|
17,324
|
|
Depreciation and amortizationequity method investments
|
|
|
192
|
|
|
|
192
|
|
|
|
178
|
|
|
|
823
|
|
|
|
823
|
|
|
|
807
|
|
|
|
899
|
|
Gain on disposition of real estate investmentsexisting
entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,595
|
)
|
|
|
(1,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
$
|
9,456
|
|
|
$
|
495
|
|
|
$
|
3,591
|
|
|
$
|
33,112
|
|
|
$
|
7,220
|
|
|
$
|
7,336
|
|
|
$
|
12,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the definition provided by NAREIT, non-cash
charges not classified as extraordinary items such as impairment
charges are reflected in the calculation of FFO through
inclusion in GAAP net loss. As such, the impairment charges
recognized of approximately $6.4 million for the year ended
83
Managements
discussion and analysis of financial condition and results of
operations
December 31, 2009 and $7.6 million for the year ended
December 31, 2008 are included in the net loss. As
presented below, FFO is modified to exclude the impact of
impairment charges and any extraordinary, non-recurring cash
expenditures. We refer to FFO modified in this manner as Funds
from OperationsModified, or FFOM. We believe FFOM is an
important supplemental,
non-GAAP
financial measure because it communicates operating results
without the impact of impairment charges or extraordinary,
non-recurring cash expenditures.
The information in the table below reconciles FFO to FFOM and is
derived from a combination of the historical combined financial
statements and related notes of the Welsh Predecessor Companies
and Welsh Contribution Companies, and the unaudited pro forma
condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Welsh Property
|
|
|
|
|
|
|
|
|
Welsh Property
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust,
Inc.
|
|
|
|
|
|
|
|
|
Trust,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
Historical
combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
Three months
ended
|
|
|
Year ended
|
|
|
Historical
combined
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
Year ended
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(unaudited,
dollars in thousands)
|
|
|
FFO
|
|
$
|
9,456
|
|
|
$
|
495
|
|
|
$
|
3,591
|
|
|
$
|
33,112
|
|
|
$
|
7,220
|
|
|
$
|
7,336
|
|
|
$
|
12,994
|
|
Acquisition costs
|
|
|
285
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,432
|
|
|
|
6,432
|
|
|
|
7,577
|
|
|
|
|
|
Non-recurring cash expenditures
|
|
|
|
|
|
|
2,966
|
(1)
|
|
|
|
|
|
|
|
|
|
|
1,987
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFOM
|
|
$
|
9,741
|
|
|
$
|
3,746
|
|
|
$
|
3,591
|
|
|
$
|
39,544
|
|
|
$
|
15,639
|
|
|
$
|
14,913
|
|
|
$
|
12,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This non-recurring cash expenditure relates to the legal,
accounting and other professional pre-filing fees associated
with this offering
|
Set forth below is additional information related to certain
significant cash and noncash items included in or excluded from
net income, which may be helpful in further assessing our
operating results.
|
|
Ø
|
In accordance with GAAP, we recognized straight-line rental
revenue of approximately $0.5 million and $0.1 million
for the three months ended March 31, 2010 and 2009 and
$0.8 million, $1.3 million and $1.5 million for
the years ended December 31, 2009, 2008, and 2007,
respectively.
|
|
Ø
|
Amortization of deferred financing costs of approximately
$0.1 million and $0.2 million for the three months
ended March 31, 2010 and 2009 and $0.6 million,
$0.9 million and $0.9 million for the years ended
December 31, 2009, 2008, and 2007, respectively, was
recognized as interest expense.
|
|
Ø
|
Amortization of above-market and below-market leases was
recorded as net decreases to revenue in the accompanying
consolidated statements of operations of approximately
$0.1 million and $0.1 million for the three months
ended March 31, 2010 and 2009 and $0.2 million,
$0.4 million and $0.3 million for the years ended
December 31, 2009, 2008, and 2007, respectively.
|
|
Ø
|
Capital expenditures of a recurring nature related to tenant
improvements and leasing commissions that do not incrementally
enhance the underlying assets income generating capacity
were $1.0 million and $1.2 million for the three
months ended March 31, 2010 and 2009 and $4.8 million,
$4.5 million and $4.7 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
|
Presented below is our FFO adjusted both (i) to exclude the
impact of impairment charges and/or any extraordinary,
non-recurring cash expenditures, (ii) to exclude
significant non-cash items that were included in net income, and
(iii) to include significant cash items that were excluded from
net income, which we refer to as Adjusted Funds from Operations,
or AFFO. We believe AFFO is an important
84
Managements
discussion and analysis of financial condition and results of
operations
supplemental
non-GAAP
measure because it approximates our ability to fund dividends
from operations in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Welsh
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
|
|
|
|
|
|
|
Welsh
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust,
Inc.
|
|
|
|
|
|
|
|
|
Property
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
|
|
|
Historical
combined
|
|
|
Trust,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
Three months
ended
|
|
|
Year ended
|
|
|
Historical
combined
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
Year ended
December 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(unaudited,
dollars in thousands)
|
|
|
FFO
|
|
$
|
9,456
|
|
|
$
|
495
|
|
|
$
|
3,591
|
|
|
$
|
33,112
|
|
|
$
|
7,220
|
|
|
$
|
7,336
|
|
|
$
|
12,994
|
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,432
|
|
|
|
6,432
|
|
|
|
7,577
|
|
|
|
|
|
Straight line rental revenue adjustment
|
|
|
(1,629
|
)
|
|
|
(466
|
)
|
|
|
(129
|
)
|
|
|
(5,440
|
)
|
|
|
(804
|
)
|
|
|
(1,286
|
)
|
|
|
(1,464
|
)
|
Deferred financing cost amortization
|
|
|
437
|
|
|
|
131
|
|
|
|
163
|
|
|
|
2,333
|
|
|
|
640
|
|
|
|
875
|
|
|
|
888
|
|
Above/below market lease amortization
|
|
|
667
|
|
|
|
91
|
|
|
|
77
|
|
|
|
2,589
|
|
|
|
179
|
|
|
|
364
|
|
|
|
309
|
|
Non-recurring cash expenditures
|
|
|
|
|
|
|
2,966
|
(1)
|
|
|
|
|
|
|
|
|
|
|
1,987
|
(1)
|
|
|
|
|
|
|
|
|
Acquisition costs
|
|
|
285
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring capital expenditures
|
|
|
(959
|
)
|
|
|
(959
|
)
|
|
|
(1,165
|
)
|
|
|
(4,835
|
)
|
|
|
(4,835
|
)
|
|
|
(4,497
|
)
|
|
|
(4,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFFO
|
|
$
|
8,257
|
|
|
$
|
2,543
|
|
|
$
|
2,537
|
|
|
$
|
34,191
|
|
|
$
|
10,819
|
|
|
$
|
10,369
|
|
|
$
|
7,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This non-recurring cash expenditure relates to the legal,
accounting and other professional fees associated with this
offering
|
LIQUIDITY AND
CAPITAL RESOURCES
We expect to meet our short-term liquidity requirements, such as
near-term debt maturities and operating expenses, generally
through net cash provided by operations, existing cash balances
and, if necessary, short-term borrowings. We believe that the
net cash provided by operations will be adequate to fund our
operating requirements, debt service and the payment of
dividends required for us to qualify as a REIT for one year
after the completion of this offering. We are currently
negotiating extensions or refinancings of the approximately
$12.1 million of our outstanding mortgage indebtedness that
matures in 2010, and as reflected in our pro forma financial
information, we anticipate using net proceeds from this offering
to pay $9.0 million of such mortgage indebtedness.
We expect to meet our long-term liquidity requirements, such as
scheduled debt maturities and property acquisitions, through
long-term secured and unsecured borrowings, public and private
offerings of equity and debt securities or, in connection with
acquisitions of additional properties, the issuance of OP units
of the operating partnership. However, the recent U.S. and
global economic slowdown has resulted in a capital environment
characterized by limited availability, increasing costs and
significant volatility. The continued persistence of these
conditions could limit our ability to raise debt and equity
capital on favorable terms or at all which, in turn, could
adversely impact our ability to finance future investments and
react to changing economic and business conditions. Certain of
our properties are subject to non-disposition agreements, which
restrict our ability to dispose of such properties and these
85
Managements
discussion and analysis of financial condition and results of
operations
restrictions could impair our liquidity and operating
flexibility if sales of such properties were necessary to
generate capital or otherwise. See Structure and Formation
of Our CompanyCertain Agreements Not to Sell
Property for further discussion of these agreements.
We have a $5.0 million revolving line of credit which
expires in October 2010 and requires us to pay interest at a
rate of one-month LIBOR plus 3.0%, subject to a minimum interest
rate of 5.0%. At December 31, 2009, we had
$2.0 million in standby letters of credit outstanding,
which expire in September 2010. We pay a commitment fee of 1.5%
on amounts outstanding under our standby letters of credit. Our
available line of credit is reduced by any amounts outstanding
under our standby letters of credit.
We have received commitments for a syndicated credit facility in
an initial amount of $75.0 million, which could be used to
finance new acquisitions and for other working capital purposes.
If completed, we may elect to increase the amount of the
facility up to $150 million, subject to the approval of the
administrative agent and the identification of a lender or
lenders willing to make available the additional amounts. The
proposed terms of the credit facility include: (i) security
of a first-lien mortgage or deed of trust on certain of our
properties that are otherwise unencumbered; (ii) a two year
term with one 12-month extension option; and
(iii) interest-only payments at rates between 250 basis
points and 325 basis points in excess of LIBOR for eurodollar
advances, and between 150 basis points and 225 basis points in
excess of the lenders alternate base rate, as defined
therein, for all other advances, in each case based on our
overall company leverage. The specific terms of the credit
facility will be negotiated by us and the lenders and there can
be no assurance that we will be able to enter into this credit
facility on the terms described above or at all. The credit
facility will be contingent upon completion of this offering.
We remain in the lender review process with respect to
approximately $22.1 million of outstanding indebtedness on
certain properties in our existing portfolio, and
$2.6 million of outstanding indebtedness on certain
properties in our acquisition portfolio being assumed in
connection with the acquisition of such properties (see
Business and PropertiesOur PortfolioLender
Consents). We also intend to refinance $17.1 million
of debt scheduled to mature on two loans with new mortgage
financing prior to March 31, 2011. If we are unable to
obtain such lender consents or such new mortgage financing, we
may be required to pay such amounts in full using our syndicated
credit facility. In addition, based on the calculations
described under Distribution Policy, we are
estimating a deficiency of approximately $1.8 million in
our estimated cash available for distribution for the
12 months ending March 31, 2011, and unless our
operating cash flow increases during such period, we may fund
such deficiency from borrowings under our syndicated credit
facility. The use of our syndicated credit facility for the
above purposes will reduce the amounts available under the
facility for other purposes.
As a REIT, we will be required to distribute at least 90% of our
taxable income, excluding net capital gains, to our stockholders
on an annual basis. Therefore, as a general matter, it is
unlikely that, after the net proceeds of this offering are
expended, we will have substantial cash balances that could be
used to meet liquidity needs. Instead, these needs will likely
need to be met from cash generated from operations, proceeds
from sales of properties and external sources of capital.
As described below in Business and Properties
Financing Strategy, our organizational documents do not
limit the amount of indebtedness that we may incur, and we
currently do not have a target leverage ratio. Our long term
goal is to become an investment grade rated company, and we
intend to manage our balance sheet accordingly.
We intend to use the net proceeds of this offering to invest in
additional properties and we also intend to invest in properties
on a going-forward basis as suitable opportunities arise and
adequate sources of financing are available. As of June 25,
2010, we had under contract $320.1 million of properties in
our acquisition portfolio and we are currently reviewing an
additional $282.8 million of properties in our
86
Managements
discussion and analysis of financial condition and results of
operations
acquisition pipeline. These potential acquisitions are in
various stages of evaluation, and there can be no assurance as
to whether or when any portion of these acquisitions will be
completed. See Business and PropertiesOur
PortfolioAcquisition Portfolio and
Acquisition Pipeline for further discussion.
Our ability to complete acquisitions is subject to a number of
risks and variables, including our ability to negotiate mutually
agreeable terms with the counterparties and our satisfaction
with the results of due diligence inquiries related to the
acquisition target. See Risk Factors for further
discussion of these risks and uncertainties. We expect that
future acquisitions of properties will depend on and will be
financed by, in whole or in part, our existing cash, the
proceeds from additional issuances of common stock, issuances of
OP units or other securities, the assumption of existing
indebtedness or borrowings under our new syndicated credit
facility.
Indebtedness
The majority of the properties in our existing portfolio are
encumbered by first mortgage liens, and in three instances are
encumbered by second mortgages or mezzanine financing. These
mortgages were provided by securitized lenders, insurance
companies, and banks prior to the date hereof and in most
instances will remain in place after the completion of this
offering and the formation transactions. As of April 1,
2010, within our existing portfolio of 65 properties, we have 43
mortgage loans, some of which encumber more than one property
and are cross-collateralized.
Our indebtedness outstanding upon the completion of this
offering and the formation transactions will be comprised almost
entirely of mortgage indebtedness secured by properties in our
existing portfolio. As of March 31, 2010, our outstanding
indebtedness was $405.7 million on a historical combined
basis. In addition, our pro rata share of unconsolidated joint
venture debt was $15.2 million.
87
Managements
discussion and analysis of financial condition and results of
operations
The following table sets forth the current terms of our
indebtedness on our existing portfolio with balances outstanding
on a combined historical basis as of March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Fixed interest
rate
|
|
|
Amortization
|
|
|
|
|
Property
|
|
March 31,
2010
|
|
|
/ LIBOR
spread
|
|
|
period
(Yrs)*
|
|
|
Maturity
|
|
|
|
|
1700-1910
Elmhurst Road
|
|
$
|
3,966,680
|
|
|
|
8.69
|
%
|
|
|
26
|
|
|
|
6/1/2010
|
(1)
|
1801-1827
OBrien Road
|
|
|
4,631,653
|
|
|
|
L + 450
|
|
|
|
Interest Only
|
|
|
|
8/17/2010
|
(2)
|
5 Circle Freeway
|
|
|
3,541,920
|
|
|
|
8.48
|
%
|
|
|
20
|
|
|
|
9/1/2010
|
|
5600-5672
Lincoln Drive
|
|
|
2,184,383
|
|
|
|
7.45
|
%
|
|
|
25
|
|
|
|
1/1/2011
|
(2)
|
Kiesland
(3)
|
|
|
8,595,771
|
|
|
|
L + 400
|
(4)
|
|
|
Interest Only
|
|
|
|
2/1/2011
|
|
5001 West 80th Street
|
|
|
14,000,000
|
|
|
|
5.78
|
%
|
|
|
Interest Only
|
|
|
|
2/1/2011
|
|
900 2nd Avenue South Mezzanine Loan
|
|
|
6,922,864
|
|
|
|
15.00
|
%
|
|
|
Accrues Interest
|
|
|
|
6/30/2011
|
|
201 Mississippi
|
|
|
14,858,377
|
|
|
|
L + 200
|
(5)
|
|
$
|
19,700 per month
|
|
|
|
7/25/2011
|
|
900 2nd Avenue South
|
|
|
45,750,000
|
|
|
|
L + 225
|
(6)
|
|
|
Interest Only
|
(7)
|
|
|
7/31/2011
|
|
10360 Lake Bluff Boulevard
|
|
|
9,180,987
|
|
|
|
6.75
|
%
|
|
|
Interest Only
|
(8)
|
|
|
8/1/2011
|
|
115 West Lake Drive & Ridgeview Parkway
|
|
|
7,141,767
|
|
|
|
5.90
|
%
|
|
|
23
|
|
|
|
11/10/2011
|
|
629-651
Lambert Pointe Drive
|
|
|
11,208,835
|
|
|
|
7.00
|
%
(9)
|
|
|
Interest Only
|
(10)
|
|
|
2/1/2012
|
|
519-529
McDonnell Boulevard
|
|
|
5,059,852
|
|
|
|
7.00
|
%
(9)
|
|
|
Interest Only
|
(11)
|
|
|
2/1/2012
|
|
25295 Guenther Road
|
|
|
6,242,762
|
|
|
|
6.13
|
%
(12)
|
|
|
15
|
|
|
|
3/30/2012
|
(13)
|
450 South Lombard Road
|
|
|
4,741,835
|
|
|
|
6.00
|
%
|
|
|
25
|
|
|
|
6/1/2012
|
|
601-627
Lambert Pointe Drive
|
|
|
9,191,031
|
|
|
|
6.60
|
%
|
|
|
30
|
|
|
|
8/1/2012
|
|
Baker Road Corporate
Center
(14)
|
|
|
27,274,696
|
|
|
|
L + 335
|
(15)
|
|
|
Interest Only
|
(16)
|
|
|
4/30/2013
|
(17)
|
2921-2961
East Kemper Road
|
|
|
4,000,000
|
|
|
|
L + 325
|
|
|
|
Interest Only
|
(18)
|
|
|
7/1/2013
|
|
1962 Queenland Drive
|
|
|
3,494,027
|
|
|
|
5.50
|
%
(19)
|
|
|
25
|
|
|
|
4/30/2014
|
|
707 West County Road E (Second Mortgage)
|
|
|
570,801
|
|
|
|
6.75
|
%
|
|
|
25
|
|
|
|
5/1/2014
|
|
325 Larsen Drive
|
|
|
2,095,019
|
|
|
|
6.00
|
%
|
|
|
5
|
|
|
|
9/14/2014
|
|
7401 Cahill Road
|
|
|
1,191,526
|
|
|
|
6.50
|
%
|
|
|
25
|
|
|
|
11/10/2014
|
|
7247-7275
Flying Cloud Drive
|
|
|
2,689,097
|
(20)
|
|
|
5.80
|
%
|
|
|
20
|
|
|
|
1/4/2015
|
|
224 North Hoover Road
|
|
|
4,180,225
|
|
|
|
L + 450
|
(21)
|
|
$
|
5,250 per month
|
|
|
|
3/15/2015
|
|
600-638
Lambert Pointe Drive
|
|
|
10,329,577
|
|
|
|
5.41
|
%
|
|
|
30
|
|
|
|
5/1/2015
|
|
Urbandale
Loan
(22)
|
|
|
13,000,000
|
|
|
|
5.22
|
%
|
|
|
Interest Only
|
(23)
|
|
|
8/1/2015
|
|
6999 Oxford Street
|
|
|
4,042,433
|
|
|
|
5.20
|
%
|
|
|
30
|
|
|
|
10/5/2015
|
|
9835-9859;
9905-9925
13th Avenue
|
|
|
2,631,002
|
|
|
|
5.52
|
%
|
|
|
30
|
|
|
|
11/6/2015
|
|
1760-1850
North Corrington Avenue
|
|
|
9,015,455
|
|
|
|
5.35
|
%
|
|
|
30
|
|
|
|
12/1/2015
|
|
Westpark Plaza and Valley Oak
B.C.
(24)
|
|
|
8,357,303
|
|
|
|
6.10
|
%
|
|
|
25
|
|
|
|
1/15/2016
|
|
Plymouth Professional Center I &
II
(25)
|
|
|
2,721,802
|
|
|
|
6.04
|
%
|
|
|
30
|
|
|
|
5/1/2016
|
|
Prudential Loan
I
(26)
|
|
|
13,187,202
|
|
|
|
6.08
|
%
|
|
|
30
|
|
|
|
6/5/2016
|
|
Prudential Loan
II
(27)
|
|
|
23,187,722
|
|
|
|
5.77
|
%
|
|
|
Interest Only
|
(28)
|
|
|
12/5/2016
|
|
9701-9901
Valley View Road
|
|
|
5,280,000
|
|
|
|
5.81
|
%
|
|
|
Interest Only
|
(29)
|
|
|
12/5/2016
|
|
Romulus Senior
Loan
(30)
|
|
|
64,560,000
|
|
|
|
5.69
|
%
|
|
|
Interest Only
|
(31)
|
|
|
6/5/2017
|
|
Romulus Mezzanine
Loan
(30)
|
|
|
1,509,000
|
|
|
|
L + 375
|
(32)
|
|
|
See Footnote
|
(33)
|
|
|
6/5/2017
|
|
5200-5390
Ashland Way
|
|
|
4,898,189
|
|
|
|
6.13
|
%
(34)
|
|
|
30
|
|
|
|
6/1/2018
|
|
500 Sumner Way
|
|
|
6,875,000
|
|
|
|
6.00
|
%
(35)
|
|
|
15
|
|
|
|
12/31/2018
|
|
Welsh Partners
Loan
(36)
|
|
|
5,729,204
|
|
|
|
4.99
|
%
|
|
|
25
|
|
|
|
3/1/2019
|
|
707 West County Road E (First Mortgage)
|
|
|
3,745,365
|
|
|
|
6.75
|
%
(37)
|
|
|
25
|
|
|
|
5/31/2019
|
|
2205 SE Creekview Drive
|
|
|
2,172,263
|
|
|
|
5.48
|
%
(38)
|
|
|
21.25
|
|
|
|
9/1/2026
|
|
1520 Albany Place SE
|
|
|
11,072,892
|
|
|
|
6.63
|
%
|
|
|
18.75
|
|
|
|
12/10/2026
|
|
2900 Lone Oak Parkway
|
|
|
7,106,250
|
|
|
|
4.84
|
%
(39)
|
|
|
25
|
|
|
|
3/3/2035
|
|
Notes Payable and Premiums, Net
|
|
|
3,553,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
405,688,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
This column indicates the number
of years utilized to calculate the repayment of principal over
the term of the loan or indicates Interest Only if
no principal payments are currently required
|
88
Managements
discussion and analysis of financial condition and results of
operations
|
|
|
(1)
|
|
Currently in default due to
past-due maturity; will be repaid in full with proceeds from
this offering, together with interest charged on the outstanding
amount at 7% per annum during the period of default. Although
the lenders default notice indicates its intention to
commence foreclosure proceedings, applicable state law affords
the borrower the right to pay the loan off in full prior to
completion of any such foreclosure proceedings
|
|
|
|
(2)
|
|
Currently negotiating
refinancing and/or extension
|
|
|
|
(3)
|
|
Collateralized by 11590 Century
Boulevard,
5836-5885
Highland Ridge Drive, 11500 Century Boulevard and 106 Circle
Freeway Drive properties
|
|
|
|
(4)
|
|
LIBOR + 400 basis points
with a 5.50% interest rate floor until 6/30/2010 and a 6.00%
interest rate floor thereafter; interest rate capped at 6.24%
pursuant to Rate Cap Agreement
|
|
|
|
(5)
|
|
Contingent upon completion of
this offering is an interest rate change to LIBOR + 350 basis
points
|
|
|
|
(6)
|
|
Contingent upon completion of
this offering is an interest rate change to LIBOR + 400 basis
points
|
|
|
|
(7)
|
|
Principal payments begin
8/1/2010 in the amount of $41,300 per month
|
|
|
|
(8)
|
|
Current principal paydown
schedule in place with next principal payment of $250,000 on
8/1/2010
|
|
|
|
(9)
|
|
7.25% interest rate effective
9/30/2010, 7.50% interest rate effective 12/1/2010 and 0.125%
increase quarterly thereafter with an 8.00% interest rate
cap
|
|
|
|
(10)
|
|
Principal payments begin
7/1/2010 in the amount of $38,500 per month; current principal
paydown schedule in place with next principal payment of
$330,000 on 7/1/2010
|
|
|
|
(11)
|
|
Principal payments begin
7/1/2010 in the amount of $21,000 per month; current principal
paydown schedule in place with next principal payment of
$420,000 on 7/1/2010
|
|
|
|
(12)
|
|
Contingent upon completion of
this offering is an interest rate change to 6.50%, effective
3/31/2011
|
|
|
|
(13)
|
|
Stated maturity date is
contingent upon completion of this offering; current maturity is
3/30/2011
|
|
|
|
(14)
|
|
Collateralized by 4350 Baker
Road and 4400 Baker Road properties, which we refer to
collectively as Baker Road Corporate Center
|
|
|
|
(15)
|
|
LIBOR + 335 basis points
with a 4.50% interest rate floor until 11/29/2010 and a 5.00%
interest rate floor thereafter
|
|
|
|
(16)
|
|
Current principal paydown
schedule in place with recent principal payments of $400,000
made on 3/31/2010 and $100,000 on 4/30/2010, with next principal
payment of $250,000 on 6/30/2010; contingent upon completion of
this offering, and in lieu of any additional principal payments,
is a principal payment of $500,000
|
|
|
|
(17)
|
|
Lender has agreed to an
extension from 11/29/2012 to 4/30/2013 with anticipated closing
prior to 6/30/2010
|
|
|
|
(18)
|
|
Converts to
25-year
amortization on 8/1/2010
|
|
|
|
(19)
|
|
Interest rate capped at 5.50%
pursuant to swap agreement
|
|
|
|
(20)
|
|
Additional $800,000 available in
the form of a second mortgage note that can be funded for
building improvements
|
|
|
|
(21)
|
|
LIBOR + 450 basis points
with 5.50% interest rate floor
|
|
|
|
(22)
|
|
Collateralized by 10052 Justin
Drive, 3000 Justin Drive, 2721 99th Street, 2851 99th Street,
2901 99th Street and 2851 104th Street properties
|
|
|
|
(23)
|
|
Converts to
30-year
amortization on 9/1/2010
|
|
|
|
(24)
|
|
Collateralized by
7115-7137
Shady Oak Road and
13810-13800
24th Avenue North properties
|
|
|
|
(25)
|
|
Collateralized by 9750 Rockford
Road and 9800 Rockford Road properties, which we refer to
collectively as Plymouth Professional Center I &
II
|
|
|
|
(26)
|
|
Collateralized by 1920 Beltway
Drive, 2201 Lunt Road, 2036 Stout Field W Drive and 7750
Zionsville Road properties
|
|
|
|
(27)
|
|
Collateralized by 5301 West
5th Hernasco, 5540 Broadway North Shore,
25 Enterprise Drive, 3440 Symmes Road and 8085 Rivers Avenue
properties
|
|
|
|
(28)
|
|
Converts to
30-year
amortization on 1/5/2010
|
|
|
|
(29)
|
|
Converts to
30-year
amortization on 1/5/2013
|
|
|
|
(30)
|
|
Collateralized by 6505 Cogswell
Road, 7525 Cogswell Road, 38100 Ecorse Road, 41133 Van Born Road
and 41199 Van Born Road properties
|
|
|
|
(31)
|
|
Converts to
30-year
amortization on 7/5/2012
|
|
|
|
(32)
|
|
LIBOR + 375 basis points
with an 8.00% interest rate floor until 6/5/2010, at which time
it converts to a 10.00% interest rate
|
89
Managements
discussion and analysis of financial condition and results of
operations
|
|
|
(33)
|
|
Current principal payment
schedule in place with recent principal payment of $250,000 made
on 3/15/2010; in the event the loan is not paid in full by June
2010, it converts to a fully amortizing loan at an interest rate
of 10.00% per annum which runs co-terminous with the Senior Loan
on this portfolio
|
|
|
|
(34)
|
|
Effective 6/1/2013 the interest
rate adjusts to
5-year
treasury + 275 basis points, with a 6.00% interest rate
floor
|
|
|
|
(35)
|
|
Effective 3/1/2015 the interest
rate adjusts to LIBOR swap + 300 basis points, with a 6.00%
interest rate floor
|
|
|
|
(36)
|
|
Collateralized by
6820-6848
Washington Avenue South,
6102-6190
Olson Memorial Highway and
7202-7264
Washington Avenue South properties
|
|
|
|
(37)
|
|
Effective 5/1/2014 the interest
rate adjusts to
5-year
treasury + 275 basis points, with a 6.00% interest rate
floor
|
|
|
|
(38)
|
|
Effective 6/1/2015 the interest
rate adjusts to greater of (i) 7.48% or
(ii) 10-year
treasury + 302 basis points
|
|
|
|
(39)
|
|
Effective 4/1/2013, the interest
rate adjusts to prime + 50 basis points, adjusted
quarterly
|
Upon completion of the offering and the formation transactions,
we expect to repay certain of our existing indebtedness as
described under Use of Proceeds and to incur
additional indebtedness in connection with the closing of
certain properties included in the acquisition portfolio as
described under Business and PropertiesOur
PortfolioAcquisition Portfolio.
90
Managements
discussion and analysis of financial condition and results of
operations
The following table sets forth our indebtedness on a pro forma
basis upon completion of this offering and the formation
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
Fixed interest
rate/
|
|
|
Amortization
|
|
|
|
|
Property
|
|
balance
|
|
|
LIBOR
spread
|
|
|
period
(Yrs)*
|
|
|
Maturity
|
|
|
1801-1827
OBrien Road
|
|
$
|
3,131,653
|
|
|
|
L + 450
|
|
|
|
Interest Only
|
|
|
|
8/17/2010
|
(1)
|
5001 West 80th Street
|
|
|
14,000,000
|
|
|
|
5.78
|
%
|
|
|
Interest Only
|
|
|
|
2/1/2011
|
|
201 Mississippi
|
|
|
12,358,377
|
|
|
|
L + 200
|
(2)
|
|
$
|
19,700 per month
|
|
|
|
7/25/2011
|
|
900 2nd Avenue South
|
|
|
40,250,000
|
|
|
|
L + 225
|
(3)
|
|
|
Interest Only
|
(4)
|
|
|
7/31/2011
|
|
10360 Lake Bluff Boulevard
|
|
|
9,180,987
|
|
|
|
6.75
|
%
|
|
|
Interest Only
|
(5)
|
|
|
8/1/2011
|
|
629-651
Lambert Pointe Drive
|
|
|
11,208,835
|
|
|
|
7.00
|
%
(6)
|
|
|
Interest Only
|
(7)
|
|
|
2/1/2012
|
|
519-529
McDonnell Boulevard
|
|
|
5,059,852
|
|
|
|
7.00
|
%
(6)
|
|
|
Interest Only
|
(8)
|
|
|
2/1/2012
|
|
25295 Guenther Road
|
|
|
6,242,762
|
|
|
|
6.13
|
%
(9)
|
|
|
15
|
|
|
|
3/30/2012
|
(10)
|
450 South Lombard Road
|
|
|
4,741,835
|
|
|
|
6.00
|
%
|
|
|
25
|
|
|
|
6/1/2012
|
|
601-627
Lambert Pointe Drive
|
|
|
9,191,031
|
|
|
|
6.60
|
%
|
|
|
30
|
|
|
|
8/1/2012
|
|
3254 Fraser
Street
(11)
|
|
|
3,412,500
|
|
|
|
5.66
|
%
|
|
|
25
|
|
|
|
3/1/2013
|
|
Baker Road Corporate
Center
(12)
|
|
|
27,274,696
|
|
|
|
L + 335
|
(13)
|
|
|
Interest Only
|
(14)
|
|
|
4/30/2013
|
(15)
|
2921-2961
East Kemper Road
|
|
|
3,500,000
|
|
|
|
L + 325
|
|
|
|
Interest Only
|
(16)
|
|
|
7/1/2013
|
|
1962 Queenland Drive
|
|
|
3,494,027
|
|
|
|
5.50
|
%
(17)
|
|
|
25
|
|
|
|
4/30/2014
|
|
707 West County Road E (Second Mortgage)
|
|
|
570,801
|
|
|
|
6.75
|
%
|
|
|
25
|
|
|
|
5/1/2014
|
|
325 Larsen Drive
|
|
|
2,095,019
|
|
|
|
6.00
|
%
|
|
|
5
|
|
|
|
9/14/2014
|
|
7401 Cahill Road
|
|
|
1,191,526
|
|
|
|
6.50
|
%
|
|
|
25
|
|
|
|
11/10/2014
|
|
7247-7275
Flying Cloud Drive
|
|
|
2,689,097
|
(18)
|
|
|
5.80
|
%
|
|
|
20
|
|
|
|
1/4/2015
|
|
224 North Hoover Road
|
|
|
4,180,225
|
|
|
|
L + 450
|
(19)
|
|
$
|
5,250 per month
|
|
|
|
3/15/2015
|
|
600-638
Lambert Pointe Drive
|
|
|
10,329,577
|
|
|
|
5.41
|
%
|
|
|
30
|
|
|
|
5/1/2015
|
|
Urbandale
Loan
(20)
|
|
|
13,000,000
|
|
|
|
5.22
|
%
|
|
|
Interest Only
|
(21)
|
|
|
8/1/2015
|
|
6999 Oxford Street
|
|
|
4,042,433
|
|
|
|
5.20
|
%
|
|
|
30
|
|
|
|
10/5/2015
|
|
9835-9859;
9905-9925
13th Avenue
|
|
|
2,631,002
|
|
|
|
5.52
|
%
|
|
|
30
|
|
|
|
11/6/2015
|
|
1760-1850
North Corrington Avenue
|
|
|
9,015,455
|
|
|
|
5.35
|
%
|
|
|
30
|
|
|
|
12/1/2015
|
|
Westpark Plaza and Valley Oak
B.C.
(22)
|
|
|
6,857,303
|
|
|
|
6.10
|
%
|
|
|
25
|
|
|
|
1/15/2016
|
|
Plymouth Professional Center I &
II
(23)
|
|
|
2,721,802
|
|
|
|
6.04
|
%
|
|
|
30
|
|
|
|
5/1/2016
|
|
Prudential Loan
I
(24)
|
|
|
13,187,202
|
|
|
|
6.08
|
%
|
|
|
30
|
|
|
|
6/5/2016
|
|
Prudential Loan
II
(25)
|
|
|
23,187,722
|
|
|
|
5.77
|
%
|
|
|
Interest Only
|
(26)
|
|
|
12/5/2016
|
|
9701-9901
Valley View Road
|
|
|
5,280,000
|
|
|
|
5.81
|
%
|
|
|
Interest Only
|
(27)
|
|
|
12/5/2016
|
|
Romulus Senior
Loan
(28)
|
|
|
64,560,000
|
|
|
|
5.69
|
%
|
|
|
Interest Only
|
(29)
|
|
|
6/5/2017
|
|
7401 Bush Lake
Road
(30)
|
|
|
2,791,676
|
|
|
|
6.05
|
%
|
|
|
30
|
|
|
|
7/8/2017
|
|
5200-5390
Ashland Way
|
|
|
4,898,189
|
|
|
|
6.13
|
%
(31)
|
|
|
30
|
|
|
|
6/1/2018
|
|
500 Sumner Way
|
|
|
6,875,000
|
|
|
|
6.00
|
%
(32)
|
|
|
15
|
|
|
|
12/31/2018
|
|
Welsh Partners
Loan
(33)
|
|
|
5,729,204
|
|
|
|
4.99
|
%
|
|
|
25
|
|
|
|
3/1/2019
|
|
707 West County Road E (First Mortgage)
|
|
|
3,745,365
|
|
|
|
6.75
|
%
(34)
|
|
|
25
|
|
|
|
5/31/2019
|
|
JP Morgan Chase N.A.
Loan
(35)
|
|
|
57,780,000
|
|
|
|
S + 260
|
(36)
|
|
|
20
|
|
|
|
5/30/2020
|
|
2205 SE Creekview Drive
|
|
|
2,172,263
|
|
|
|
5.48
|
%
(37)
|
|
|
21.25
|
|
|
|
9/1/2026
|
|
1520 Albany Place SE
|
|
|
11,072,892
|
|
|
|
6.63
|
%
|
|
|
18.75
|
|
|
|
12/10/2026
|
|
2900 Lone Oak Parkway
|
|
|
7,106,250
|
|
|
|
4.84
|
%
(38)
|
|
|
25
|
|
|
|
3/3/2035
|
|
Notes Payable and Premiums, Net
|
|
|
(3,989,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
416,767,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
Managements
discussion and analysis of financial condition and results of
operations
|
|
|
*
|
|
This column indicates the number
of years utilized to calculate the repayment of principal over
the term of the loan or indicates Interest Only if
no principal payments are currently required
|
|
(1)
|
|
Currently negotiating
refinancing and/or extension
|
|
(2)
|
|
Contingent upon completion of
this offering is an interest rate change to LIBOR + 350 basis
points
|
|
(3)
|
|
Contingent upon completion of
this offering is an interest rate change to LIBOR + 400 basis
points
|
|
(4)
|
|
Principal payments begin
8/1/2010 in the amount of $41,300 per month
|
|
(5)
|
|
Current principal paydown
schedule in place with next principal payment of $250,000 on
8/1/2010
|
|
(6)
|
|
7.25% interest rate effective
9/30/2010, 7.50% interest rate effective 12/1/2010 and 0.125%
increase quarterly thereafter with an 8.00% interest rate
cap
|
|
(7)
|
|
Principal payments begin
7/1/2010 in the amount of $38,500 per month; current principal
paydown schedule in place with next principal payment of
$330,000 on 7/1/2010
|
|
(8)
|
|
Principal payments begin
7/1/2010 in the amount of $21,000 per month; current principal
paydown schedule in place with next principal payment of
$420,000 on 7/1/2010
|
|
(9)
|
|
Contingent upon completion of
this offering is an interest rate change to 6.50%, effective
3/31/2011
|
|
(10)
|
|
Stated maturity date is
contingent upon completion of this offering; current maturity is
3/30/2011
|
|
(11)
|
|
Anticipated terms of financing
to be assumed in connection with the purchase of this property
in our acquisition portfolio at the completion of this offering;
actual terms may change based on finalized assumption
terms
|
|
(12)
|
|
Collateralized by 4350 Baker
Road and 4400 Baker Road properties, which we refer to
collectively as Baker Road Corporate Center
|
|
(13)
|
|
LIBOR + 335 basis points
with a 4.50% interest rate floor until 11/29/2010 and a 5.00%
interest rate floor thereafter
|
|
(14)
|
|
Current principal paydown
schedule in place with recent principal payments of $400,000
made on 3/31/2010 and $100,000 on 4/30/2010, with next principal
payment of $250,000 on 6/30/2010; contingent upon completion of
this offering, and in lieu of any additional principal payments,
is a principal payment of $500,000
|
|
|
|
(15)
|
|
Lender has agreed to an
extension from 11/29/2012 to 4/30/2013 with anticipated closing
prior to 6/30/2010
|
|
|
|
(16)
|
|
Converts to
25-year
amortization on 8/1/2010
|
|
(17)
|
|
Interest rate capped at 5.50%
pursuant to swap agreement
|
|
(18)
|
|
Additional $800,000 available in
the form of a second mortgage note that can be funded for
building improvements
|
|
(19)
|
|
LIBOR + 450 basis points
with 5.50% interest rate floor
|
|
|
|
(20)
|
|
Collateralized by 10052 Justin
Drive, 3000 Justin Drive, 2721 99th Street, 2851 99th Street,
2901 99th Street and 2851 104th Street properties
|
|
|
|
(21)
|
|
Converts to
30-year
amortization on 9/1/2010
|
|
|
|
(22)
|
|
Collateralized by
7115-7137
Shady Oak Road and
13810-13800
24th Avenue North properties
|
|
|
|
(23)
|
|
Collateralized by 9750 Rockford
Road and 9800 Rockford Road properties, which we refer to
collectively as Plymouth Professional Center I &
II
|
|
|
|
(24)
|
|
Collateralized by 1920 Beltway
Drive, 2201 Lunt Road, 2036 Stout Field W Drive and
7750 Zionsville Road properties
|
|
|
|
(25)
|
|
Collateralized by 5301 West
5th Hernasco, 5540 Broadway North Shore,
25 Enterprise Drive, 3440 Symmes Road and 8085 Rivers Avenue
properties
|
|
|
|
(26)
|
|
Converts to
30-year
amortization on 1/5/2010
|
|
|
|
(27)
|
|
Converts to
30-year
amortization on 1/5/2013
|
|
|
|
(28)
|
|
Collateralized by 6505 Cogswell
Road, 7525 Cogswell Road, 38100 Ecorse Road,
41133 Van Born Road and 41199 Van Born Road
properties
|
|
|
|
(29)
|
|
Converts to
30-year
amortization on 7/5/2012
|
92
Managements
discussion and analysis of financial condition and results of
operations
|
|
|
(30)
|
|
Anticipated terms of financing
to be assumed in connection with the purchase of this property
in our acquisition portfolio at the completion of this offering;
actual terms may change based on finalized assumption
terms
|
|
|
|
(31)
|
|
Effective 6/1/2013 the interest
rate adjusts to
5-year
treasury + 275 basis points, with a 6.00% interest rate
floor
|
|
|
|
(32)
|
|
Effective 3/1/2015 the interest
rate adjusts to LIBOR swap + 300 basis points, with a 6.00%
interest rate floor
|
|
|
|
(33)
|
|
Collateralized by
6820-6848
Washington Avenue South,
6102-6190
Olson Memorial Highway and
7202-7264
Washington Avenue South properties
|
|
|
|
(34)
|
|
Effective 5/1/2014 the interest
rate adjusts to
5-year
treasury + 275 basis points, with a 6.00% interest rate
floor
|
|
|
|
(35)
|
|
Anticipated terms of new debt
financing to be entered into in connection with the purchase of
11600 East 56th Avenue, 5200 and 5300 Region Court, 5321
Dennis McCarthy Drive, and #1 Payless Way in our acquisition
portfolio at the completion of this offering; actual terms may
change based on finalized documentation terms
|
|
|
|
(36)
|
|
10-year
swap yield + 260 basis points, with a 6.25% interest rate
floor
|
|
|
|
(37)
|
|
Effective 6/1/2015 the interest
rate adjusts to greater of (i) 7.48% or
(ii) 10-year
treasury + 302 basis points
|
|
|
|
(38)
|
|
Effective 4/1/2013 the interest
rate adjusts to prime + 50 basis points, adjusted
quarterly
|
Contractual
obligations
The following table shows the amounts due in connection with the
contractual obligations described below as of December 31,
2009 on a historical combined basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by
period
|
|
Obligation
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Long-term debt principal obligations
|
|
$
|
397,927
|
|
|
$
|
30,923
|
|
|
$
|
122,794
|
|
|
$
|
55,954
|
|
|
$
|
7,939
|
|
|
$
|
9,004
|
|
|
$
|
171,313
|
|
Long-term debt interest obligations
|
|
|
95,296
|
|
|
|
19,232
|
|
|
|
16,562
|
|
|
|
13,109
|
|
|
|
11,012
|
|
|
|
10,455
|
|
|
|
24,926
|
|
Capital lease obligations
|
|
|
661
|
|
|
|
259
|
|
|
|
207
|
|
|
|
167
|
|
|
|
28
|
|
|
|
0
|
|
|
|
|
|
Operating lease obligations
|
|
|
168
|
|
|
|
75
|
|
|
|
63
|
|
|
|
27
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
494,052
|
|
|
$
|
50,489
|
|
|
$
|
139,626
|
|
|
$
|
69,257
|
|
|
$
|
18,981
|
|
|
$
|
19,460
|
|
|
$
|
196,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFF BALANCE SHEET
ARRANGEMENTS
We have no off balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on
our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
INTERNAL
CONTROLS
In connection with the preparation of our financial statements
included elsewhere in this prospectus, our independent
registered public accounting firm identified and communicated to
us deficiencies in our internal controls which it considers to
be a material weakness. Our management believes that the
underlying cause of the deficiencies in our internal controls
relates to our transition from a private company with less
developed controls to a public company that must meet the
applicable reporting and control standards. Since the
identification of these deficiencies, we have identified a
number of actions to address the material weakness noted by our
independent registered public accounting firm, including hiring
new accounting and other personnel with SEC reporting
experience, appointing an audit committee which we believe has
strong public company audit experience, adopting a formal
charter for
93
Managements
discussion and analysis of financial condition and results of
operations
our audit committee and engaging consultants as needed until we
complete the hiring of our accounting staff. On May 13,
2010 we hired a corporate controller/director of financial
reporting. Also, through the use of our outside consultants, we
have provided on-site training to our accounting staff on GAAP
accounting in order to strengthen our procedures for financial
reporting capabilities and internal controls.
Presently, we are not an accelerated filer, as such term is
defined by
Rule 12b-2
of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and therefore our management team is not currently
required to perform an annual assessment of the effectiveness of
our internal control over financial reporting and our
independent registered public accounting firm is not required to
express an opinion on managements assessment and on the
effectiveness of our internal control over financial reporting.
These requirements will first apply to our annual report on
Form 10-K
for our fiscal year ending December 31, 2011.
CASH
FLOWS
The following table summarizes the combined historical cash
flows of the Welsh Predecessor Companies and the Welsh
Contribution Companies for the three months ended March 31,
2010 and 2009 and the years ended December 31, 2009, 2008
and 2007. This presentation reconciles and eliminates
intercompany transactions that are primarily service and
management fees incurred between the Welsh Predecessor Companies
and the Welsh Contribution Companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Welsh
|
|
|
Welsh
|
|
|
Elimination/
|
|
|
|
|
|
|
Predecessor
|
|
|
Contribution
|
|
|
Combining
|
|
|
Historical
|
|
|
|
Companies
|
|
|
Companies
|
|
|
Entries
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
(dollars in
thousands)
|
|
|
Three Months Ended March 31, 2010 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
648
|
|
|
$
|
912
|
|
|
$
|
(46
|
)
|
|
$
|
1,514
|
|
Net cash provided by (used in) investing activities
|
|
|
(13,002
|
)
|
|
|
(678
|
)
|
|
|
94
|
|
|
|
(13,586
|
)
|
Net cash provided by (used in) financing activities
|
|
|
11,245
|
|
|
|
700
|
|
|
|
(47
|
)
|
|
|
11,898
|
|
Three Months Ended March 31, 2009 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
1,108
|
|
|
$
|
2,272
|
|
|
$
|
(719
|
)
|
|
$
|
2,661
|
|
Net cash provided by (used in) investing activities
|
|
|
(85
|
)
|
|
|
(1,419
|
)
|
|
|
63
|
|
|
|
(1,441
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(692
|
)
|
|
|
(866
|
)
|
|
|
656
|
|
|
|
(902
|
)
|
Year Ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
5,000
|
|
|
$
|
10,559
|
|
|
$
|
(3,080
|
)
|
|
$
|
12,479
|
|
Net cash provided by (used in) investing activities
|
|
|
(4,248
|
)
|
|
|
(4,964
|
)
|
|
|
(3,766
|
)
|
|
|
(12,978
|
)
|
Net cash provided by (used in) financing activities
|
|
|
436
|
|
|
|
(7,774
|
)
|
|
|
6,846
|
|
|
|
(492
|
)
|
Year Ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
7,785
|
|
|
$
|
9,662
|
|
|
$
|
(4,917
|
)
|
|
$
|
12,530
|
|
Net cash provided by (used in) investing activities
|
|
|
558
|
|
|
|
(34,647
|
)
|
|
|
3,698
|
|
|
|
(30,391
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(8,605
|
)
|
|
|
28,877
|
|
|
|
1,220
|
|
|
|
21,492
|
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
9,361
|
|
|
$
|
6,804
|
|
|
$
|
(998
|
)
|
|
$
|
15,167
|
|
Net cash provided by (used in) investing activities
|
|
|
(47,804
|
)
|
|
|
(106,653
|
)
|
|
|
7,061
|
|
|
|
(147,396
|
)
|
Net cash provided by (used in) financing activities
|
|
|
39,417
|
|
|
|
99,269
|
|
|
|
(6,063
|
)
|
|
|
132,623
|
|
THREE MONTHS
ENDED MARCH 31, 2010 COMPARED TO THREE MONTHS ENDED MARCH 31,
2009
Cash provided by
operating activities
Cash provided by operating activities decreased
$1.2 million, or 44.4%, to $1.5 million for the three
months ended March 31, 2010 compared to $2.7 million
for the three months ended March 31, 2009.
94
Managements
discussion and analysis of financial condition and results of
operations
This decrease was primarily attributable to the net changes in
current assets and liabilities, with accounts receivable
contributing the most to the decrease.
Cash used in
investing activities
Cash used in investing activities was $13.6 million for the
three months ended March 31, 2010, compared to
$1.4 million for the three months ended March 31,
2009. The increase was attributable to acquisitions activity in
the three months ended March 31, 2010 compared to no
acquisitions activity in the three months ended March 31,
2009.
Cash provided by
(used in) financing activities
Cash provided by financing activities was $11.9 million for
the three months ended March 31, 2010 compared to cash used
in financing activities of $0.9 million for the three
months ended March 31, 2009. The increase in the three
months ended March 31, 2010 compared to the three months
ended March 31, 2009 was primarily attributable to
financing activity and capital contributions related to the 2010
acquisition.
YEAR ENDED
DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31,
2008
Cash provided by
operating activities
Cash provided by operating activities was $12.5 million for
both the years ended December 31, 2009 and 2008.
Cash provided by
(used in) investing activities
Cash used in investing activities was $13.0 million for the
year ended December 31, 2009, compared to
$30.4 million for the year ended December 31, 2008, a
decrease of 57.2%. The decrease was attributable to a
combination of decreased acquisition activity, decreases in
recurring tenant improvements, and reduced development
activities.
Cash provided by
(used in) financing activities
Cash used in financing activities was $0.5 million for the
year ended December 31, 2009 compared to cash provided by
financing activities of $21.5 million for the year ended
December 31, 2008, a decrease of 102.3%. The decrease in
2009 was primarily attributable to a decrease in financing
activity and increases in the repayment of principal on
long-term debt, including payments made in connection with the
sale of two assets.
YEAR ENDED
DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31,
2007
Cash provided by
operating activities
Cash provided by operating activities was $12.5 million for
the year ended December 31, 2008, compared to
$15.2 million for the year ended December 31, 2007, a
decrease of 17.8%. The decrease in 2008 cash provided by
operating activities was primarily attributable to the net
changes in current assets and liabilities, with accounts
receivable and prepaid expenses contributing the most to the
decrease.
Cash used in
investing activities
Cash used in investing activities was $30.4 million for the
year ended December 31, 2008, compared to
$147.4 million for the year ended December 31, 2007, a
decrease of 79.4%. The decrease in 2008 was due to a decrease in
acquisition and development activity in 2008 compared to 2007.
95
Managements
discussion and analysis of financial condition and results of
operations
Cash provided by
financing activities
Cash provided by financing activities was $21.5 million for
the year ended December 31, 2008 compared to cash provided
by financing activities of $132.6 million for the year
ended December 31, 2007, a decrease of 83.8%. The decrease
in 2008 was attributable to a combination of decreased financing
activity due to decreased acquisitions and increases in the
repayment of principal on long-term debt, including payments
made in connection with the sale of assets.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The presentation of our combined financial statements in
conformity with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Our
estimates, judgments and assumptions are inherently subjective,
based on the existing business and market conditions, and are
therefore continually evaluated based upon available information
and experience. See Note 3 to the Welsh Predecessor
Companies combined financial statements included elsewhere in
this prospectus for further discussion of our significant
accounting policies. The following accounting policies are
considered critical in the preparation of the financial
statements due to the degree of judgment involved in estimating
reported amounts and the sensitivity to changes in industry and
economic conditions:
Revenue
recognition
Rental revenue includes rents that each tenant pays in
accordance with the terms of its respective lease reported on a
straight-line basis over the non-cancellable term of the lease.
Certain properties have leases that provide for tenant occupancy
during periods where no rent is due or where minimum rent
payments change during the term of the lease. Deferred rent in
our balance sheets includes the cumulative difference between
rental revenue as recorded on a straight-line basis and rents
received from the tenants in accordance with the lease terms.
Tenant reimbursements for real estate taxes, common area
maintenance, and other recoverable costs are recognized in the
period that the expenses are incurred.
We generally recognize revenue associated with brokerage
commissions when commissions are earned or received. Property
management and maintenance services, and architectural design
service revenue is recognized when the service has been provided
and are billed on a monthly basis. We recognize revenue from
long-term construction contracts on the
percentage-of-completion
method, measured by the percentage of costs incurred to date to
the estimated total cost for each contract. We use this method
because management considers total cost to be the best available
measure of progress on construction contracts.
Real estate
investments
Investment property is stated at cost. Investment property
includes cost of acquisitions, development and construction and
tenant allowances and improvements. Depreciation and
amortization are provided over estimated useful lives ranging
from five to 40 years by use of the straight-line method.
Maintenance and repairs are expensed as incurred; major
improvements and betterments are capitalized.
Impairment of
long-lived assets
Long-lived assets, such as investment property, and purchased
intangible assets subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset be tested for possible
impairment, we first compare undiscounted cash flows expected to
be generated by an asset to the carrying value of the asset. If
the carrying value of the long-lived asset is not recoverable on
an undiscounted cash flow basis, an impairment is recognized to
the extent that the carrying value exceeds
96
Managements
discussion and analysis of financial condition and results of
operations
its fair value. Fair value is determined through various
valuation techniques including discounted cash flow models,
quoted market values and third-party independent appraisals, as
considered necessary.
Acquisition of
real estate property and related assets
We allocate the purchase price of acquired properties to
tangible and identified intangible assets based on their
estimated respective fair values. The fair values of tangible
assets are determined on an as-if-vacant basis
considering a variety of factors, including the physical
condition and quality of the properties, estimated rental and
absorption rates, estimated future cash flows, and valuation
assumptions consistent with current market conditions. The
as-if-vacant fair value is allocated to land,
building, and improvements based on relevant information
obtained in connection with the acquisition of the properties.
The fair value of intangible assets acquired is allocated to the
above or below market component of the in-place leases, the
value of in-place leases, and the value of customer
relationships, if any. The above and below market portion of the
leases is determined by comparing the projected cash flows of
the leases in place to projected cash flows of comparable
market-rate leases (referred to as acquired above and below
market leases). In-place lease intangibles are estimated using
the following components, as applicable: the estimated cost to
replace the leases, including foregone rents during the period
of finding a new tenant, foregone recovery of tenant
pass-through costs, leasing commissions, tenant improvements,
and other direct costs associated with obtaining a new tenant
(referred to as acquired in-place leases).
Acquired in-place lease costs are amortized as amortization
expense on a straight-line basis over the remaining life of the
underlying leases. Acquired above and assumed below market
leases are amortized on a straight-line basis as an adjustment
to rental revenue over the remaining term of the underlying
leases, including, for below-market leases, fixed option renewal
periods, if any.
Should a tenant terminate its lease, the unamortized portions of
the acquired in-place lease costs associated with that tenant
are written off to amortization expense or rental revenue, as
indicated above.
Valuation of
receivables
We are subject to losses that may be incurred from the inability
of our tenants to make required payments. We have established
the following procedures and policies to evaluate the
collectability of such receivables and to record, when
necessary, an allowance against amounts not deemed reasonable of
collection. We evaluate all receivables outstanding over
90 days, including deferred rent receivables, to determine
if the amount should be reserved for and we evaluate specific
receivables based on any tenants we have identified as a
potential credit risk based on our knowledge of their financial
situation and other market factors.
Inflation
Inflation in the United States has been relatively low in recent
years and did not have a material impact on our operations for
the periods shown in the historical combined financial
statements. Although the impact of inflation has been relatively
insignificant in recent years, it remains a factor in the
U.S. economy and may increase the cost of acquiring or
replacing properties.
The majority of our leases provide for separate real estate tax
and operating expense reimbursements. In addition, most of the
leases provide for fixed rent increases. We believe that
inflationary increases may be at least partially offset by
contractual rent increases and the pass-through nature of the
expenses described above.
97
Managements
discussion and analysis of financial condition and results of
operations
SEASONALITY
We do not consider our business to be subject to material
seasonal fluctuations. However, during the winter months, we
have historically recognized lower construction and service fee
revenue, due primarily to decreased construction and brokerage
activity, and increased cost of rental operations, due to
increased snow removal costs, primarily impacting the first
quarter.
QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our future income, cash flows and fair values relevant to
financial instruments are dependent upon prevailing market
interest rates. Market risk refers to the risk of loss from
adverse changes in market prices and interest rates. We use some
derivative financial instruments to manage, or hedge, interest
rate risks related to our borrowings. We do not use derivatives
for trading or speculative purposes and only enter into
contracts with major financial institutions based on their
credit rating and other factors.
As of March 31, 2010, on a pro forma basis, our aggregate
indebtedness would have been approximately $416.8 million.
As of March 31, 2010, on a historical combined basis,
approximately $110.8 million, or 27.3%, of our total
consolidated debt was variable rate debt. We have one
free-standing interest rate cap agreement in place that covers
an aggregate notional amount of $8.5 million of our
variable interest rate debt. In addition, we have one interest
rate swap that covers the notional amount of $3.5 million
of variable interest debt at a fixed rate of 5.50%. Excluding
the debt in place at the 1962 Queenland Drive property,
which has been swapped to a fixed rate, if LIBOR were to
increase by 100 basis points, our annual interest expense
would increase by approximately $0.7 million and we would
realize a corresponding decrease in net cash flow.
The information below represents our debt maturities for average
fixed and floating interest rate loans on an annualized basis
through 2014 and aggregate thereafter for both our existing
portfolio and joint venture portfolio:
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2010
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2011
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2012
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2013
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2014
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|
Thereafter
|
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Total
|
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Consolidated Debt
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Average Fixed Interest Rate (%)
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8.59
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7.74
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7.13
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5.90
|
|
5.74
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6.30
|
Average Floating Interest Rate (%)
|
|
LIBOR + 4.50
|
|
LIBOR +
2.41
(1)
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LIBOR +
3.34
(2)
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Index +
2.56
(3)
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Index + 2.73
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Joint Venture
Debt
(4)
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Average Fixed Interest Rate (%)
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6.18
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6.18
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Average Floating Interest Rate
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(1)
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2.1% of the outstanding balance
on our existing portfolio is subject to a 6.0% interest rate
floor
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(2)
|
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6.7% of the outstanding balance
on our existing portfolio is subject to a 5.0% interest rate
floor
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(3)
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1.0% of the outstanding balance
on our existing portfolio is subject to a 5.5% interest rate
floor; an additional 2.1% of the outstanding balance on our
existing portfolio is subject to a rate adjustment which is
equal to the
5-year
treasury plus 275 basis points with a 6.0% interest rate floor;
an additional 0.4% of the outstanding balance on our existing
portfolio is subject to a 10.0% interest rate floor; an
additional 1.7% of the outstanding balance on our existing
portfolio is subject to a rate adjustment which is the LIBOR
swap plus 300 basis points, with a 6.0% interest rate floor; an
additional 1.8% of the outstanding balance on our existing
portfolio is subject to a rate adjustment which is equal to
prime + 50 basis points, adjusted quarterly
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(4)
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Our ownership percentage
consists of 21.7% in a five-building office complex and 5.0% in
a 10 industrial, three office property portfolio
|
98
We believe the recent distress in the real estate sector may
present compelling near-term acquisition opportunities in both
industrial and office properties, though our primary focus is
industrial properties. In the short term, we will target owners
that may be faced with liquidity issues who may be motivated to
sell their properties because of the current distress in the
overall economy. With the combination of our existing
infrastructure, our ability to source off-market acquisition
opportunities and operate assets efficiently, and our access to
capital through the public markets, we believe that we are well
positioned to take advantage of these opportunities.
INDUSTRIALMARKET
OVERVIEW
As of April 1, 2010, approximately 87.1% of our existing
portfolio, by leasable square footage, consisted of industrial
facilities, including warehouse, flex, assembly, light
manufacturing, distribution, showroom and research and
development facilities. Our industrial facilities are
characterized by their proximity to major transportation
arteries and by their functionality, and are leased to local,
regional and national industrial tenants, predominantly on a
triple-net-lease
basis. We expect the majority of our future acquisitions will be
industrial properties. While the industrial real estate market
has been negatively impacted by the recent economic downturn,
over the long run we believe that the industrial real estate
sector is characterized by strong fundamentals that have the
potential to provide attractive returns to our stockholders.
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Ø
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Low Vacancy Volatility.
Vacancy rates for the
industrial sector have not only been historically lower than
other real estate sectors, but have also displayed less
volatility through economic cycles. With shorter development
times than the majority of other real estate subsectors, we
believe that the industrial real estate sector responds more
quickly to economic changes and is less susceptible to large,
sustained increases in supply.
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Ø
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Modest Re-Tenanting and Maintenance
Costs.
Industrial building designs are
substantively universal with low levels of office space,
allowing ready use by a wide variety of potential tenants. As a
result, the cost of re-tenanting facilities is relatively modest
as compared to other commercial property types, resulting in
lower expenditures for tenant improvements. In addition,
industrial properties have relatively lower maintenance
requirements as compared to other real estate asset classes. The
majority of maintenance expenditures at industrial properties
are related to the upkeep of parking lots and roofs.
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Ø
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Triple-Net
Leases.
Leases for industrial real estate assets
are typically structured on a
triple-net
basis, limiting owners exposure to variable operating
costs, as the tenant generally pays all taxes, insurance and
maintenance expenses.
|
INDUSTRIALFOCUSED
CENTRAL UNITED STATES STRATEGY
Our industrial properties are primarily located in the central
United States. In our existing portfolio, approximately
8.9 million leasable square feet, or 93.3% of the total
portfolio square footage, is within nine contiguous central
U.S. states: Minnesota, Wisconsin, Iowa, Missouri,
Michigan, Ohio, Indiana, Illinois and Kansas. Although
globalization has impacted demand for manufacturing space in the
United States as companies move their operations overseas,
logistics and distribution companies continue to demand
warehouse and distribution space. The central United States
serves as a distribution hub for global trade, acting as both a
transfer and a destination point for the cross-continental
transportation of goods in the expanding logistics industry,
which services the supply chain process. We have assets in both
types of inland distribution markets that serve tenants at
various stages in the supply chain: inland intermodal and inland
consumer. Inland intermodal distribution locations sort and
redistribute parts and
99
Industry
background and market opportunity
finished goods along supply chain channels. Inland consumer
distribution locations service retailers and suppliers to
end-consumer destinations.
We intend to continue to focus primarily on acquisition
opportunities in our current markets in the central United
States, although we will also monitor other potential markets
for attractive investment opportunities that may warrant
additional consideration. When expanding into new markets, we
will focus on strategically located, resilient
sub-markets
that we believe will outperform the greater market. We consider
resilient sub-markets to be those that have a strong employment
base, convenient freeway access, close proximity to airports and
railroad intermodal terminals, high population density and other
economic benefits for current and potential tenants.
INDUSTRIALIMPROVING
INDUSTRY FUNDAMENTALS
Although operating fundamentals remain weak across
U.S. real estate markets, we believe that as the national
economy improves, industrial operating fundamentals will also
improve. According to CBRE Econometric Advisors, the national
industrial vacancy rate is projected to peak at 14.8% in 2010,
its highest level since at least 1990, with steady improvement
thereafter through 2015, when vacancy rates are projected to
decline to 9.9%. Over the past 10 years, the national
industrial vacancy rate ranged from a low of 6.8% in 2000 to a
high of 13.9% in 2009. As a result of reduced industrial
development activity, there is a limited amount of new supply
estimated to become available over the next several years in the
United States. CBRE Econometric Advisors estimates
37.4 million square feet of new industrial supply in 2010,
which is roughly half of the amount of new supply completed in
2009 and approximately one-fifth of the amount of new supply
completed in 2008. In 2011 and 2012, new industrial supply
projections are approximately 24.3% and 31.4% of 2008 levels,
respectively. In addition, CBRE Econometric Advisors estimates
that the net change in occupied industrial space, commonly
referred to as net absorption, in the United States will turn
positive in 2011 and remain positive through the forecast period
of 2015.
Source: CBRE Econometric AdvisorsIndustrial Outlook XL,
Spring 2010
100
Industry
background and market opportunity
We believe that, as vacancy rates improve along with the general
economy, and with limited supply becoming available, pricing
power will shift from tenants to owners and rents will increase.
We believe that, as outlined in the CBRE Econometric Advisors
Spring 2010 U.S. Industrial Report, the historically low
rent and limited new supply levels coupled with increased global
trade will set the stage for an industrial market recovery, and
that, in the near term, the resurgence of manufacturing and
growth in inventories of industrial tenants will increase demand
for industrial space, which in turn will improve rental rates.
CBRE Econometric Advisors estimates that U.S. industrial rent
growth, which hit a 20-year low in 2009, declining 10.4%
year-over-year,
will steadily improve over the next several years, turning
positive in 2012. With 64.7% of our leases in our existing
portfolio by leasable square feet expiring in 2012 and beyond,
we believe we will be well positioned to benefit from this
future rent growth.
Source: CBRE Econometric AdvisorsIndustrial Outlook XL,
Spring 2010
INDUSTRIALATTRACTIVE
ACQUISITION OPPORTUNITIES
We believe that the recent declines in the values of industrial
real estate present compelling near-term acquisition
opportunities. The economic crisis has had a profound impact on
the global demand drivers for industrial space. Industrial
production, imports, exports and retail sales have all
experienced declines over the past year resulting in a decreased
demand for industrial space. Accordingly, we have observed
declining market rents and increasing rent concessions,
impacting property owners cash flows and their ability to
cover debt service payments. According to the Real Estate
Roundtable, there is a total of $3.5 trillion of commercial real
estate debt outstanding, excluding government-sponsored and
agency loans. Of this debt, nearly $850 billion is maturing
from 2010 through 2012. While asset sales by
financially-distressed owners have been limited so far in the
U.S. industrial sector, we believe that these near-term
maturities, coupled with the increased equity requirements
demanded by potential replacement lenders, may force many real
estate owners to dispose of assets as an alternative to
refinancing. We believe this will provide attractive
opportunities for us to acquire stable assets to complement our
real estate portfolio and leverage our existing infrastructure.
When evaluating acquisition opportunities, we will look
primarily at both asset location and functionality. For asset
location, we will specifically target industrial assets with
close proximity to catalysts of industrial activity such as
major interstate highway systems, airports, railroad intermodal
terminals, major
101
Industry
background and market opportunity
manufacturing facilities and major business parks. In evaluating
the functionality of an industrial property we look at several
key characteristics including the minimum ceiling height of
usable space or clear height, number of truck-high loading docks
or dock doors and grade-level drive-in doors, building depths,
size of loading and truck maneuvering areas, ability to divide
the building for multiple users, trailer storage areas and
parking. In addition, we will target industrial assets with an
acquisition cost lower than replacement cost.
Given the forecasted improvement in the industrial real estate
market in 2011, we believe that industrial market prices are
reaching a bottom. With limited new supply generally becoming
available in our top markets in the short-term, increased
investment in infrastructure and gradual improvement in import
and export data, we believe the longer-term prospects for trade
remain solid as the United States will continue to play a vital
role in the globalization of trade. These trends bode well for
industrial fundamentals, which in turn benefits our business
strategy.
OUR TOP EXISTING
INDUSTRIAL MARKETS
Based on total leasable square footage owned, the top five
industrial markets for our existing portfolio are Detroit,
Chicago, Minneapolis, St. Louis and Cincinnati. The
following charts summarize, for each of our top five markets,
historical and projected data from CBRE Econometric Advisors
regarding occupancy, rental growth, new completions and net
absorption.
Top Five Existing
Industrial Markets
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Inventory
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2005 - 2009
Occupancy
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Rent
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Total
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(per
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Population
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(million
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square
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Market
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(million)
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square
feet)
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Warehouse
(1)
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Manufacturing
(1)
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Occupancy
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Volatility
(2)
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High
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Low
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foot)
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Detroit
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4.6
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505.3
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39.1%
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46.6%
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79.7%
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560bps
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85.3%
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79.7%
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$
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3.78
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Chicago
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9.0
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1,091.8
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51.9%
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35.9%
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85.1%
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440bps
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89.5%
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85.1%
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4.90
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Minneapolis
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3.3
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322.2
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69.3%
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19.5%
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88.6%
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370bps
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92.3%
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88.6%
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4.95
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St. Louis
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2.9
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273.7
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67.9%
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24.6%
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84.9%
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670bps
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91.6%
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84.9%
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3.59
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Cincinnati
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2.2
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291.4
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66.8%
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29.1%
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87.9%
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470bps
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92.6%
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87.9%
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3.00
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Source: CBRE Econometric Advisors
(1) Percentage calculated based on total square
feet
(2) Calculated as the difference between maximum
and minimum annual occupancy levels from 2005 to 2009
Detroit,
Michigan
Detroits economy is heavily dependent on the automobile
industry and thus has been one of the hardest hit by the recent
economic downturn, and has experienced depressed industrial
demand. According to CBRE Econometric Advisors, as of
December 31, 2009, the industrial market in Detroit
consisted of 505.3 million square feet of inventory and
average occupancy rate was 79.7%. While CBRE Econometric
Advisors estimates occupancy levels will stay relatively low,
minimal new supply is projected over the next few years leading
to positive net absorption starting in 2011. While net
absorption is projected to turn slightly negative at the end of
the forecast period in 2014 and 2015, we believe we are
relatively well positioned with long term leases in place and no
intention of expanding our real estate holdings in this market.
Additionally, the properties we own in the Detroit market are in
the submarket of Romulus and adjacent sub-markets, which have
been relatively resilient
sub-markets
in the region, as evidenced by lower-than-market vacancy rates.
As of January 1, 2010, our Romulus portfolio was 95.8%
occupied based on leasable square footage, compared to the
average occupancy rate of 79.7% in Detroit, as of
December 31, 2009, as referenced above. In addition to
achieving
above-market
occupancy levels
102
Industry
background and market opportunity
compared to the Detroit market as a whole, we have also been
able to exceed greater-Detroit market base rental rates in our
leases within this portfolio. Our most recently executed lease,
commencing on January 1, 2010, is a 10-year lease of over
280,000 square feet with a base rental rate of $4.75 per square
foot, compared to a market average in Detroit of $3.78 per
square foot as of December 31, 2009, as reported by CBRE
Econometric Advisors.
Source: CBRE Econometric Advisors, Spring 2010
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Industry
background and market opportunity
Chicago,
Illinois
As the third largest city in the United States and the largest
city in the Midwest, Chicago is a center of manufacturing and
one of the largest warehousing and distribution markets in the
nation. With a wide variety of transportation optionsroad,
rail, air and seaChicago plays a major role in the
transportation network of the United States. According to CBRE
Econometric Advisors, as of December 31, 2009, the
industrial market consisted of over 1.0 billion square feet
of inventory and the average occupancy rate was 85.1%. Occupancy
rates are expected to bottom at 83.6% in 2010 and experience
continued improvement in the following years. While CBRE
Econometric Advisors projects new supply to increase 2012
through 2015, we believe we are well positioned in this market
with properties located in close proximity to the airport.
Source: CBRE Econometric Advisors, Spring 2010
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Industry
background and market opportunity
Minneapolis,
Minnesota
With a population of approximately 3.3 million people,
Minneapolis has one of the most diverse economies in the
upper-Midwest, driven by commerce, finance, healthcare and
high-tech industries. According to CBRE Econometric Advisors, as
of December 31, 2009, Minneapolis industrial market
consisted of 322.2 million square feet of inventory that
with an average occupancy rate of 88.6%. The majority of the
industrial space in Minneapolis consists of warehouse product,
comprising 69.3% of total industrial product by square foot.
Over the past several years, high construction costs have
discouraged industrial developers from overbuilding in this
market. CBRE Econometric Advisors projects minimal new supply to
become available over the next four years and net absorption to
turn positive in 2012.
Source: CBRE Econometric Advisors, Spring 2010
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Industry
background and market opportunity
St. Louis,
Missouri
St. Louis, home to 2.9 million residents, is serviced by
several key interstate highways including I-70, a key east-west
interstate highway running from Utah to Maryland, and I-55, a
north-south highway running from Louisiana to Chicago. As a key
distribution center in the central United States, a majority of
the industrial space in St. Louis is warehouse product.
According to CBRE Econometric Advisors, as of December 31,
2009, the industrial market of St. Louis consisted of
273.7 million square feet of inventory that was 84.9%
occupied. Occupancy rates are expected to improve in 2011 after
bottoming at 83.6% in 2010. While the St. Louis industrial
market experienced significant negative net absorption in 2009,
CBRE Econometric Advisors projects net absorption to turn
positive in 2011.
Source: CBRE Econometric Advisors, Spring 2010
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Industry
background and market opportunity
Cincinnati,
Ohio
With a population of 2.2 million located at the nexus of
I-71, I-75 and I-74, Cincinnati is a major transportation
corridor and a thoroughfare of goods in the central United
States. According to CBRE Econometric Advisors, as of
December 31, 2009, Cincinnatis industrial market
consisted of 291.4 million square feet with an average
occupancy rate of 87.9%. With limited new supply expected to
become available in the next several years, CBRE Econometric
Advisors predicts occupancy rates will bottom in 2010 at 87.0%
and improve steadily through 2014.
Source: CBRE Econometric Advisors, Spring 2010
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Industry
background and market opportunity
TOP ACQUISITION
MARKETS
Concurrently with the closing of this offering, we plan to
expand our real property holdings through the acquisition of 22
additional industrial properties in 11 states containing an
aggregate of 8.8 million leasable square feet. We have
leveraged our significant market presence in the central
U.S. and extensive industry relationships to place these
properties under contract in both existing markets and new
markets, consistent with our historical acquisition strategy.
In the selection of the properties in our acquisition portfolio,
we have focused on strategically-located, regional distribution
markets in primarily contiguous states with convenient
intermodal access including interstate highway systems, rail
connections and ports. Based on total leasable square footage,
the top four states in our acquisition portfolio are North
Carolina, Ohio, Wisconsin and Tennessee.
North
Carolina
Our acquisition portfolio includes 2.3 million square feet
of industrial properties located in and around the Charlotte and
Winston-Salem markets in North Carolina.
Charlotte, North Carolina.
With an extensive
interstate highway system, convenient rail access, and an inland
port facility, we believe Charlotte is one of the major
distribution centers in the Southeast and a key industrial
market. Two major rail systems, Norfolk Southern and CSX
Transportation, link Charlotte with the eastern half of the
United States. Interstate highways 77 and 85, key north/south
and east/west routes, further connect Charlotte as more than 200
trucking companies move products and materials through the area.
The Charlotte Intermodal Terminal, which is operated by the
North Carolina Ports Authority and has the ability to transport
both semi-trailers and shipping containers on rail, links
Charlotte with the Port of Wilmington, and has a fully
operational inland container staging and storage facility.
Winston-Salem, North Carolina.
Traditionally
associated with the textile, furniture and tobacco industries,
manufacturing plays a large role in Winston-Salems
economy. In addition, several retailers have recently relocated
to the market, which we believe illustrates the areas
logistical strength. Interstate highway 40 and several state
highways connect Winston-Salem to the rest of North Carolina and
the broader Southeast market.
Ohio
In our existing portfolio, we currently have approximately
700,000 square feet of industrial and office properties in
Ohio, located in the Cincinnati and Columbus markets. Our
acquisition portfolio includes an additional 1.6 million
square feet of industrial properties located in the Columbus and
Dayton markets.
Columbus, Ohio.
Strategically located between
the Northeast and Midwest regions, and accessible by truck,
rail, air or port, we believe Columbus is a key distribution and
warehouse center. Three major railroads operate routes through
Columbus, all providing ability to transport semi-trailers and
shipping containers on rail and two have
export / import containerization facilities. Two
interstate highways,
I-71
and
I-70, intersect Columbus and several other major highways
provide convenient access into and out of the city. The new
Norfolk Southern intermodal terminal is in its first stage of
operation and is preparing to expand as the necessary rail line
improvements are completed throughout the state. An important
link in the import/export shipping network is the Rickenbacker
Air / Industrial Park, which has been designated a
foreign trade zone.
Dayton, Ohio.
With a transportation system
affording direct access to major markets, we believe Dayton has
become an important warehouse and distribution center. Three
Class I rail systems furnish
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Industry
background and market opportunity
rail cargo transportation to Dayton and CSX and Conrail both
operate switching yards in the city. The junction of I-70 and
I-75, major east/west routes, is located just north of Dayton
and is an important hub for the trucking industry with multiple
trucking companies maintaining terminals in the metropolitan
area.
Wisconsin
Our existing portfolio includes nearly 600,000 square feet
of industrial properties in Wisconsin, primarily located in the
Milwaukee market, and our acquisition portfolio includes an
additional 1.3 million square feet primarily located in
Appleton and Milwaukee.
Appleton, Wisconsin.
Located in the Fox River
Valley, approximately 100 miles north of Milwaukee,
Appletons economy has long been driven by the paper
industry. Appleton also has a thriving metals-machinery industry
and we believe it is becoming an increasingly important center
for regional trade. Canadian National provides rail freight and
multiple trucking and warehouse firms service the Fox River
Valley. In addition, Appleton has access to the Great Lakes
shipping corridor through the Port of Green Bay, which is
30 miles north and the Port of Milwaukee, which is
100 miles south. Main thoroughfares include
U.S. Highways 10, 41 and 45.
Milwaukee, Wisconsin.
Located on Lake
Michigan, Milwaukee serves as the commercial and industrial hub
for the Great Lakes region and is one of the top manufacturing
centers in the United States. The Port of Milwaukee is a major
commercial shipping hub with access to the eastern seaboard
through the St. Lawrence Seaway and to the Gulf of Mexico
through the Mississippi River. Two major rail lines service the
Milwaukee industrial market and hundreds of motor freight
carriers are engaged in shipping goods from Milwaukee.
Tennessee
Our acquisition portfolio includes 1.2 million square feet
of industrial properties located in and around the Memphis and
Nashville markets in Tennessee.
Memphis, Tennessee.
With excellent access to
rail, river and freight transport, we believe Memphis is one of
the top distribution centers in the country. We believe the
Memphis industrial market benefits from a strategic location and
an extensive transportation infrastructure which includes the
Port of Memphis, one of the largest inland ports on the
Mississippi, the BNSF Intermodal Facility and the proposed
Norfolk Southern intermodal facility and access to multiple
highways systems. Memphis is served by five Class I rail
systems and hundreds of common carriers, including all major
truck lines. With eight federal highways, three interstate
highways and seven state highways, Memphis trucking
industry is highly connected with the rest of the nation.
Nashville, Tennessee.
Nashville has a diverse
economy with businesses from a wide range of industries
headquartered in the city, including health care, publishing and
music. With a central location in the Southeast, Nashville is
also a busy transportation center, which we believe makes
Nashville an attractive industrial market. The most common modes
of transportation are trucking, rail freight and river barge.
Multiple motor freight lines serve the area and the CSX
intermodal provides Nashville with a modern loading and
unloading system with the ability to transport both
semi-trailers and shipping containers on rail. In addition, the
Cumberland River, an artery of the Ohio River with dozens of
commercial barge operators, links the city to points on the
Mississippi River and the Gulf of Mexico coast. Adding to the
traditional forms of transportation, the Nashville Air Cargo
Link is designated as a foreign trade zone and is an all-cargo
complex serving the Nashville International Airport.
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Industry
background and market opportunity
OFFICEMARKET
OVERVIEW
As of April 1, 2010, approximately 12.9% of our existing
portfolio, by leasable square footage, was office properties,
consisting of office buildings principally located in
metropolitan central business districts and suburban mixed-use
developments. In the future, while our primary focus will be the
acquisition of industrial assets, we also expect to selectively
acquire office assets that present compelling opportunities for
long-term capital appreciation through our hands-on management
and leasing in markets where we have a significant operational
presence.
OFFICEIMPROVING
INDUSTRY FUNDAMENTALS
Although the U.S. office market has been negatively
impacted by decreased demand and declining rental rates, office
demand and asset prices are expected to recover as the economy
and employment levels improve. There are signs that the sharp
corrections in payroll employment have brought the office sector
close to the trough of the cycle. According to CBRE Econometric
Advisors, the office vacancy rate is projected to peak at 17.4%
in 2010, the highest vacancy rate since 1992. After 2010, CBRE
Econometric Advisors projects that the vacancy rate will improve
steadily to 12.0% in 2015.
In addition, as a result of the dislocation in the financial
markets, commercial real estate developers have had limited
access to debt financing for projects over the past two years.
The lack of development means that markets will not face
over-supply once the economys recovery reaches the labor
market and increases the demand for office space.
Source: CBRE Econometric AdvisorsOffice Outlook XL
Spring 2010
OFFICEATTRACTIVE
ACQUISITION OPPORTUNITIES
We believe that the current declines in office real estate
values may present compelling near-term acquisition
opportunities. Although the U.S. economy appears to be
recovering as the pace of job losses diminishes and confidence
returns to the financial markets, economic contraction has left
a weakened job market and negatively impacted office market
demand. According to CBRE Econometric Advisors,
year-over-year
office rents declined 12.2% in 2009, the worst decline since
before 1990, and office vacancy rates reached 16.3% in 2009, the
highest vacancy rate seen since 2003. CBRE Econometric Advisors
expects office vacancy rates to peak at 17.4% in 2010.
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Industry
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The current environment of declining rents and rising vacancy
rates has made it difficult for property owners to cover
operating costs and debt obligations, especially those who
purchased highly leveraged assets. Higher vacancy rates and
lower market rental rates are creating increased pressure on
investors as they struggle to make debt service payments on
highly-leveraged properties, creating opportunities for
investors with access to capital to invest in assets at
attractive prices.
When evaluating office acquisition opportunities, we look at
both location and functionality, specifically targeting assets
in established
sub-markets
with proximity to executive and workforce housing, retail
centers, restaurants and other amenities that will assist in
attracting and retaining tenants. We will consider expansion
primarily in our current markets and other central United States
markets that have positive economic indicators. In addition, we
will monitor other potential markets for attractive investment
opportunities that may warrant additional consideration. To
evaluate functionality of an office asset, we examine a number
of factors, including ceiling heights, floor plate sizes and
layouts, amenities and parking.
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OUR
COMPANY
We are a vertically integrated, self-administered and
self-managed REIT formed to continue and expand the
32-year-old
business of the Welsh organization. We acquire, own, operate,
and manage industrial and office properties primarily across the
central United States and provide real estate services to
commercial property owners in central U.S. markets. Upon
completion of this offering and the formation transactions
described herein, we will own and manage our existing portfolio
of 65 income-producing properties, consisting of 57 industrial
and eight office properties comprising in the aggregate
approximately 9.6 million leasable square feet. Our
existing portfolio is situated in several central
U.S. markets located across 12 states. Our existing
portfolio also includes five parcels of vacant, developable land
totaling approximately 44 acres in four markets. All of our
land holdings are adjacent to real estate assets in our existing
portfolio and we believe they will provide attractive
development opportunities when market conditions improve. We
will also own a 5% economic interest in a portfolio consisting
of 10 industrial and three office properties and a 21.7%
economic interest in one five-building office complex; these
properties together total approximately 3.2 million
leasable square feet. We expect to maintain contractual
management and leasing responsibilities for this joint venture
portfolio. As of April 1, 2010, our existing portfolio was
86.1% occupied by leasable square footage and our joint venture
portfolio was 95.0% occupied by leasable square footage.
Concurrently with the closing of this offering, we plan to
expand our real property holdings through the acquisition of
22 additional industrial properties in 11 states containing
an aggregate of 8.8 million leasable square feet, for
consideration of $320.1 million. We plan to use net
proceeds from this offering, issuance of OP units, assumption of
existing debt and new debt financing to acquire our acquisition
portfolio. Our acquisition portfolio, which is included in our
pro forma financial information, complements our existing
portfolio by adding additional holdings in some of our existing
markets as well as allowing us to expand into contiguous
markets. In addition to our acquisition portfolio, we are
currently reviewing 14 additional industrial properties
with an aggregate purchase price of $282.8 million in our
acquisition pipeline. There can be no assurance that we will
acquire any of the properties in our acquisition portfolio or
pipeline.
On a pro forma basis, our combined portfolio was 92.6% occupied
by leasable square footage. We believe we benefit from a diverse
tenant base representing a multitude of industries, from
third-party logistics firms to food producers in the industrial
sector, and from Fortune 500 companies to small
professional services companies in the office sector.
Our vertically integrated real estate services business provides
a complete spectrum of real estate services to complement and
support our properties. Our services business enables us to gain
valuable insights into the markets in which we operate,
specifically by providing us with an operational perspective of
market trends. For example, our brokers supply us with timely
first-hand knowledge about rental rates, rent concessions, and
capitalization rates in our markets. We believe our heightened
market awareness developed through our services business
provides us with a competitive advantage that manifests itself
in operational efficiencies, effective management strategies and
the ability to source off-market acquisitions. As of
April 1, 2010, we had approximately 27.1 million
leasable square feet under management, including
12.4 million leasable square feet under management for
third parties, and nearly 80 licensed real estate salespersons
in our brokerage division. Historically, our services business
has been a key driver of revenue at our properties and provided
us with the ability to address opportunities or issues within
our real estate portfolio. Specifically, this business helps us
by identifying tenants for vacancies within properties,
supporting tenant retention through on-going tenant
relationships, negotiating of master contracts over the
portfolio of properties to achieve savings in key
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Business and
properties
maintenance areas, analyzing property taxes and potential
appeals annually, and providing knowledge of up-to-date market
developments that allows us the ability to negotiate favorably
with tenants in all market cycles.
We believe the Welshs organizations history and
experience as an owner, operator and manager of real estate
assets through various business and economic cycles will
strengthen our managements ability to capture market
opportunities and execute a focused strategy to achieve our
fundamental business objective of maximizing total returns to
our stockholders. Originally founded in 1977 by George Welsh as
Welsh Construction Corp., the Welsh organization started as a
small development and construction firm focused on
build-to-suit
opportunities. Our Chairman, Dennis J. Doyle, co-founded the
Welsh organization in 1977, while Scott T. Frederiksen, our
Chief Executive Officer, and Jean V. Kane, our President and
Chief Operating Officer, have been with the Welsh organization
since 1987. Under the guiding principles established by
Mr. Welsh, this leadership team has worked together for
over 22 years to build the Welsh organization into the
multi-faceted, full-service real estate company that it is
today. Mr. Frederiksen has been an integral part of the
growth of the portfolio, overseeing underwriting, acquisitions,
asset management, investor relations, legal, development and
financing of the property portfolio. Prior to that,
Mr. Frederiksen was an industrial broker with Welsh
Companies. Ms. Kane has overseen the growth of the
operational and services divisions of the Welsh organization for
the past nine years. We believe their strategic knowledge of our
business, combined with the leadership and vision of
Mr. Doyle, will provide us with a disciplined approach to
execution of our business plan that we expect will provide value
to our stockholders.
Mr. Doyle, Mr. Frederiksen and Ms. Kane are part
of a senior management team of 11 individuals, supported by over
310 commercial real estate professionals. The members of our
senior management team have an average tenure with the Welsh
organization of over 12 years. With a corporate culture
focused on doing our best for our clients, investors, employees
and community, the Welsh organization was recognized as
the #1 Best Place to Work in the Twin Cities by
the Minneapolis/St. Paul Business Journal in the medium-sized
company category in 2009. Upon completion of this offering and
the formation transactions, our executive officers and directors
will collectively beneficially own approximately 6.0% of our
outstanding common stock, on a fully-diluted basis, which will
strongly align their interests with the interests of our
stockholders.
Our principals have strategically combined the effectiveness of
locally-based property management and leasing in our regional
offices or, in some instances, through local third-party
providers, with the cost efficiencies of centralized acquisition
and disposition, capital markets, financing, asset management
and fiscal and accounting control systems. As our market
presence, square footage and tenant relationships develop in
certain markets, we expect to selectively expand our services
businesses into markets where we identify the potential for
additional revenue or cost reductions. This market-centered
approach allows us to leverage the market information gained as
an owner and service provider into growth opportunities for both
our portfolio and our services business. We tailor our
operations to meet the market-specific needs of our properties
and tenants. We expect to continue to grow our services business
strategically in this manner to provide us with deeper market
penetration and to continue to capture value for our
stockholders.
We have an established track record of acquiring industrial and
office properties on an individual asset basis and as portfolio
acquisitions in off-market transactions. From January 1,
2000 through December 31, 2009, we completed over
$650 million in industrial and office real estate
acquisitions in 41 separate transactions consisting of 90
properties with approximately 12.5 million leasable square
feet. Approximately 72% of our acquisitions from 2005 to 2009,
based on purchase price, were sourced in off-market transactions
where there was no formal sales process. We expect to continue
our acquisition strategy of investing in industrial and select
office properties that have attractive cash yields and potential
for long-term capital appreciation. The properties we will
target for future acquisition
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Business and
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opportunities will continue to be characterized by access to
major transportation arteries, proximity to densely populated
markets and quality design that allows for the most flexible use
of the asset. We will seek to complement our real estate
portfolio with acquisitions in our current markets as well as
focused growth into additional U.S. markets where we
believe we can achieve favorable returns and leverage our
integrated services business, management experience and capital
resources.
We intend to elect and qualify to be taxed as a REIT for federal
income tax purposes commencing with our taxable year ending
December 31, 2010. Upon the completion of this offering and
the formation transactions, substantially all of our business
will be conducted through our operating partnership, Welsh
Property Trust, L.P. We believe that conducting our business
through our operating partnership will offer us the opportunity
to acquire additional properties from sellers in tax-deferred
transactions through the use of OP units as acquisition currency.
OUR COMPETITIVE
STRENGTHS
We believe that a number of competitive strengths distinguish us
from our competitors, have contributed in large part to our past
achievements, and will be integral to our future success.
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Experienced and Committed Management Team.
Our
three principals each have more than 22 years of commercial
real estate experience, almost exclusively with our company, and
have extensive knowledge of our real estate portfolio. This team
has experience in many diverse aspects of the real estate
industry, has operated in a variety of business and economic
cycles, and has worked together to build the Welsh organization
into the multi-faceted, full-service real estate company that it
is today. Each of our principals is contributing all of his or
her interests in the property subsidiaries that own the assets
in our real estate portfolio and all of his or her ownership
interests in the services business. Mr. Doyle,
Mr. Frederiksen and Ms. Kane are part of a senior
management team of 11 individuals, supported by over 310
commercial real estate professionals. Upon completion of this
offering and the formation transactions, our officers and
directors will collectively beneficially own approximately 6.0%
of our outstanding common stock on a fully-diluted basis, which
strongly aligns their interests with those of our stockholders.
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Established Portfolio of Assets.
With a focus
on markets throughout the central United States, we have
accumulated a portfolio of real estate assets that is
characterized by its diverse tenant base and consistent cash
flow. Our existing portfolio consists of 57 industrial and eight
office properties with an aggregate of approximately
9.6 million leasable square feet, and our top 10 tenants
represented approximately 25.8% of our annualized gross rent as
of April 1, 2010. Our existing portfolio was 86.1% occupied
by leasable square footage as of April 1, 2010, and we
believe there is opportunity for additional value creation by
increasing occupancy levels and continuing to drive operational
efficiencies within the portfolio. The pro forma occupancy for
our combined portfolio, which includes our acquisition
portfolio, was 92.6% based on leasable square footage. We will
also own a 5% economic interest in a portfolio consisting of 10
industrial and three office properties and a 21.7% economic
interest in one five-building office complex; these properties
together total approximately 3.2 million leasable square
feet, and we expect to maintain contractual management and
leasing responsibilities for this joint venture portfolio. Our
joint venture portfolio, which was 95.0% occupied by leasable
square footage as of April 1, 2010, also provides us with
the opportunity for us to earn disposition fees and
distributions based on financial performance when the portfolio
is eventually sold. Our existing portfolio also includes five
parcels of vacant, developable land totaling approximately
44 acres in four markets. All of the parcels are located
adjacent to real estate assets in our existing portfolio, and we
believe they will provide attractive development opportunities
when their respective markets demand additional commercial real
estate properties.
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Vertically Integrated Real Estate Services
Business.
Through our real estate services
business, which provides a full spectrum of real estate
services, we are able to identify leading indicators of market
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trends and seek to maximize profit opportunities and expense
management in the markets in which we operate. As of
April 1, 2010, we had approximately 27.1 million
leasable square feet under management, including
12.4 million leasable square feet under management for
third parties. With service operations in virtually every aspect
of real estate services needed by owners, operators and tenants,
and experience with a variety of real estate property types, we
are able to garner first-hand knowledge of trends in occupancy,
operational costs, tenant delinquencies and potential
development and construction activity. With this knowledge, we
can be proactive in the management of our existing portfolio,
the sourcing of off-market acquisition opportunities, the
integration of acquisitions into our portfolio and the growth of
our services business. We also leverage our services business to
provide third-party services to other owners of real estate,
which provides an additional revenue source. We have been able
to maintain profitability in our services business through
several economic cycles by providing diverse services that
property owners need in each stage of a cycle. For example, in
the year ended December 31, 2009 we saw reductions in
revenue in brokerage, construction, architectural and financing
services; however, this was partially offset by increased
revenue in investment services, property management and facility
services, and was additionally mitigated by our low fixed-cost
structure of using independent contractors and
sub-contractors
in brokerage and construction. Our vertically integrated real
estate services business also allows us to identify and
capitalize on opportunities for cross-selling between our
divisions, which we believe provides a competitive advantage in
being an all-inclusive service provider for third parties
seeking professional real estate services.
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Market-Centered and Relationship-Focused
Approach.
We believe that our local market
presence, combined with our network of industry relationships,
will allow us to successfully execute our business objectives
and create value for our stockholders. We have in-house property
management staff in our five regional offices: Minneapolis/St.
Paul, Minnesota; Chicago, Illinois; St. Louis, Missouri;
Detroit, Michigan; and Cincinnati, Ohio. We also have leasing,
marketing and transactional professionals in Minneapolis/St.
Paul, Detroit and Cincinnati. Our local market presence
complements our existing portfolio, as approximately 63.3% of
our leasable square footage is located in the five contiguous
central states where we have regional offices. We believe our
market presence enables us to better understand the particular
characteristics and trends of each market, respond quickly and
directly to tenant needs and demands and reduce third-party
leasing commissions and other expenses. Additionally, our
industry relationships as a third-party service provider to many
owners augments our ability to source off-market acquisitions
outside of competitive market processes, capitalize on
development opportunities, capture repeat business and
transaction activity, attract and retain tenants and identify
profit opportunities for our services business. From 2005
through 2009, approximately 53.7% of our acquisitions, based on
total purchase price, have been purchased from sellers with whom
we had repeat business and transaction activities. This
market-centered, relationship-focused approach to our growth
allows us to efficiently and cost effectively identify both
internal and external growth opportunities.
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Proactive Portfolio Management.
With 21 office
locations providing property management services, we have
developed a comprehensive approach to property management to
enhance the operating performance of our properties, which we
believe leads to high levels of tenant retention and therefore
increased value for our stockholders. Our proactive management
leverages our local market knowledge and enables us to closely
monitor our properties and to be prepared for potential tenant
and property issues as well as changes in local, regional or
national market conditions. We have regular and ongoing contact
with our tenants, brokers and outside service providers, visit
our properties on a regular basis and closely monitor the
financial and overall performance of each property and its
tenants. In addition, we believe that our internalized
management and services business provides us the ability to more
effectively motivate and hold accountable third-party service
providers in markets where we do not have a local presence. In
addition, our focus on portfolio management enables us to
identify strategic opportunities to negotiate portfolio-wide on
common
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capital expenses, which enhance a facilitys physical
plant, market position, occupancy and growth prospects.
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Established Acquisition Track Record and Acquisition
Pipeline.
From January 1, 2000 through
December 31, 2009, we completed over $650 million in
industrial and office real estate acquisitions in 41 separate
transactions involving 90 buildings totaling approximately
12.5 million leasable square feet. Our acquisition strategy
is driven by our network of industry relationships and leverages
the market knowledge of our services business. With a
32-year
track record, seven service businesses, over 320 employees
(including nearly 80 licensed real estate salespersons in our
brokerage division), 21 office locations and a portfolio of
approximately 27.1 million leasable square feet under
management including 12.4 million square feet under
management for third parties, we have access to information
relating to assets prior to their being widely marketed.
Approximately 72% of our acquisitions from 2005 to 2009, based
on purchase price, were sourced in off-market transactions where
there was no formal sales process. Eighteen of the 22 properties
in our acquisition portfolio were sourced off-market and 10 of
the 14 properties in our acquisition pipeline were sourced
off-market.
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BUSINESS AND
GROWTH STRATEGIES
We have implemented the following strategies to achieve our
primary business objectives which are to maximize cash flow and
to achieve sustainable long-term growth in earnings and FFO,
thereby maximizing total returns to our stockholders.
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Maximizing Cash Flow from Our Real Estate
Portfolio.
We intend to maximize the cash flow
from our real estate portfolio by:
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increasing occupancy levels as the economy recovers and positive
job growth leads to overall increased demand in the real estate
sector;
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realizing contractual increases in rent under our existing
leases;
|
|
|
-
|
increasing rental rates for tenants with below market leases as
leases expire and are renegotiated at market rates;
|
|
|
-
|
managing operating expenses through negotiating volume discounts
with respect to our entire real estate portfolio and aggressive
cost management; and
|
|
|
-
|
identifying profit opportunities through interaction with
tenants who may become clients of our services business.
|
|
|
|
|
|
As of April 1, 2010, our combined portfolio was 92.6%
occupied by leasable square footage on a pro forma basis,
leaving approximately 1.7 million leasable square feet
available for additional revenue creation. In addition, we
believe that as the economy improves, job growth will be
created, resulting in increased occupancy and therefore demand
at our properties. In addition, we believe this increased
occupancy may be accompanied by higher rents due to limited
current construction of new properties.
|
|
|
Ø
|
Capitalizing on Acquisition
Opportunities.
Concurrently with the completion
of this offering and the formation transactions, and as a key
component of our business plan going forward, we intend to
expand our portfolio through the disciplined acquisition of
high-quality industrial and select office properties. We intend
to acquire assets with a focus on attractive current cash flow
and the potential for long-term capital appreciation. We will
evaluate each acquisition opportunity to ensure it has the
characteristics we believe are necessary to be successful,
including desirable location, creditworthy tenant base, limited
need for capital improvements, rent growth potential in existing
leases and
|
116
Business and
properties
opportunities to leverage our services business. We will
continue to focus on off-market acquisition opportunities
through our local market knowledge and relationships. In the
short term, we will target owners that may be faced with
liquidity issues who may be motivated to sell their properties
because of the current distress in the overall economy. As of
June 25, 2010, we had under contract $320.1 million of
properties in our acquisition portfolio and we are currently
reviewing an additional $282.8 million of properties in our
acquisition pipeline. See Our
PortfolioAcquisition Portfolio.
|
|
Ø
|
Pursuing Relationship-Focused Growth.
We are
focused on building tenant and other relationships within the
markets in which we own and operate our properties in order to
understand and identify commercial real estate needs in each
market. We believe this strategy is a catalyst for our growth
and enhances our existing relationships because we are able to
strategically offer our services business to our tenants by
providing them with comprehensive real estate services that
extend beyond the typical landlord/tenant relationship and focus
on the long-term growth of our tenants business to make
them an integral part of our success. We understand that in
order to maximize the value of our investments, our tenants must
prosper as well. For example, in 2008 we accommodated the growth
of an existing industrial tenant into an additional market where
we already had a presence by acquiring a building for the tenant
to lease, and simultaneously identified an additional tenant to
lease the remaining space in the building.
|
|
Ø
|
Leveraging Expansion of our Services
Business.
We provide services to other real
estate owners as well as our real estate portfolio, generating
revenue from third parties that supplements the rental income
produced by our real estate portfolio. This income is
low-volatility because we provide a diversity of services that
property owners need in each economic cycle. For example, in
2009, we saw reductions in revenue in brokerage, construction,
architectural and financing services; however, this was
partially offset by increased revenue in investment services,
property management and facility services, and was further
mitigated by our variable cost structure including the use of
independent contractors and
sub-contractors
in brokerage and construction. We believe that, as real estate
transaction volume increases during the economic recovery, we
will be well-positioned to take advantage of opportunities to
increase our service revenue with additional third-party
business, and we will have the ability to spread the costs of
the services necessary to maintain our portfolio over the
third-party managed properties. We will expect to strategically
expand our presence into markets where we have real estate
assets by considering a number of factors, including owned
square footage, number of tenants, types of tenants, and whether
we can recover the overhead expense of
on-the-ground
personnel from our tenants under existing leases.
|
OUR
PORTFOLIO
Existing
portfolio
Our existing portfolio consists of 57 industrial properties and
eight office properties situated in several central
U.S. markets across 12 states. Our existing portfolio
is approximately 9.6 million leasable square feet, of which
approximately 8.3 million leasable square feet comprises
the industrial properties and almost 1.3 million leasable
square feet comprises the office properties. As of April 1,
2010, our existing portfolio was 86.1% occupied, based on
leasable square footage.
Industrial properties.
Our existing portfolio
includes 57 industrial properties, comprised of a variety of
warehouse, distribution, flex, assembly, light manufacturing,
showroom and research and development facilities principally
located in suburban mixed-use developments or business parks.
The industrial properties have an average age of approximately
19 years, generally have convenient access to major
transportation systems and include both single tenant and
multi-tenant facilities. Approximately 86.4% of the
approximately 8.3 million leasable square feet in the
industrial properties was occupied as of
117
Business and
properties
April 1, 2010. Major tenants as of April 1, 2010,
based on leased square feet, include Staples
Contract & Commercial, Inc., Metal Processing
Corporation, A123 Systems, Inc., Oakley Industries
Sub-Assembly
Division, Inc., Archway Marketing Services, Inc. and KGP
Logistics, Inc.
The following table summarizes the industrial properties in our
existing portfolio as of April 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
Year
|
|
|
leasable
|
|
|
Occupancy
|
|
|
|
|
|
rent per
|
|
|
|
Property
|
|
|
|
built/
|
|
|
square
|
|
|
rate
(2)
|
|
|
Annualized
|
|
|
square
|
|
Address
|
|
type
(1)
|
|
MSA
|
|
renovated
|
|
|
footage
|
|
|
(%)
|
|
|
base
rent
(3)
|
|
|
foot
(4)
|
|
|
|
|
Florida
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5301 West 5thHernasco
|
|
Distribution
|
|
Jacksonville
|
|
|
1973
|
|
|
|
121,345
|
|
|
|
100.0
|
|
|
$
|
352,851
|
|
|
$
|
2.91
|
|
5540 BroadwayNorth Shore
|
|
Distribution
|
|
Jacksonville
|
|
|
1974
|
|
|
|
106,000
|
|
|
|
100.0
|
|
|
|
366,301
|
|
|
|
3.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FloridaTotal/Weighted Average
|
|
|
1973
|
|
|
|
227,345
|
|
|
|
100.0
|
|
|
|
719,153
|
|
|
|
3.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Illinois
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2201 Lunt Road
|
|
Distribution
|
|
Chicago-Naperville-Joliet
|
|
|
1955
|
|
|
|
213,390
|
|
|
|
28.4
|
|
|
|
214,152
|
|
|
|
3.54
|
|
450 South Lombard Road
|
|
Distribution
|
|
Chicago-Naperville-Joliet
|
|
|
1979
|
|
|
|
155,943
|
|
|
|
56.9
|
|
|
|
322,353
|
|
|
|
3.63
|
|
1700-1910 Elmhurst Road
|
|
Warehouse
|
|
Chicago-Naperville-Joliet
|
|
|
1980
|
|
|
|
140,837
|
|
|
|
68.9
|
|
|
|
762,503
|
|
|
|
7.86
|
|
115 West Lake Drive
|
|
Distribution
|
|
Chicago-Naperville-Joliet
|
|
|
1999
|
|
|
|
79,515
|
|
|
|
100.0
|
|
|
|
622,501
|
|
|
|
7.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IllinoisTotal/Weighted Average
|
|
|
1973
|
|
|
|
589,685
|
|
|
|
55.3
|
|
|
|
1,921,509
|
|
|
|
5.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indiana
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2036 Stout Field W Drive
|
|
Distribution
|
|
Indianapolis-Carmel
|
|
|
1998
|
|
|
|
75,880
|
|
|
|
100.0
|
|
|
|
212,464
|
|
|
|
2.80
|
|
7750 Zionsville Road
|
|
Warehouse
|
|
Indianapolis-Carmel
|
|
|
1988
|
|
|
|
80,442
|
|
|
|
88.3
|
|
|
|
438,096
|
|
|
|
6.17
|
|
201
Mississippi
(5)
|
|
Distribution
|
|
Chicago-Naperville-Joliet
|
|
|
1985
|
|
|
|
1,040,632
|
|
|
|
67.7
|
|
|
|
2,076,694
|
|
|
|
2.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IndianaTotal/Weighted Average
|
|
|
1986
|
|
|
|
1,196,954
|
|
|
|
71.2
|
|
|
|
2,727,254
|
|
|
|
3.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iowa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10052 Justin Drive
|
|
Warehouse
|
|
Des Moines-West Des Moines
|
|
|
1992
|
|
|
|
39,069
|
|
|
|
55.3
|
|
|
|
125,394
|
|
|
|
5.80
|
|
3000 Justin Drive
|
|
Warehouse
|
|
Des Moines-West Des Moines
|
|
|
1990
|
|
|
|
37,344
|
|
|
|
47.1
|
|
|
|
75,689
|
|
|
|
4.30
|
|
2721 99th Street
|
|
Warehouse
|
|
Des Moines-West Des Moines
|
|
|
1996
|
|
|
|
59,307
|
|
|
|
56.2
|
|
|
|
208,872
|
|
|
|
6.27
|
|
2851 99th Street
|
|
Warehouse
|
|
Des Moines-West Des Moines
|
|
|
1996
|
|
|
|
60,730
|
|
|
|
71.9
|
|
|
|
294,826
|
|
|
|
6.75
|
|
2901 99th Street
|
|
Flex
|
|
Des Moines-West Des Moines
|
|
|
1997
|
|
|
|
18,750
|
|
|
|
86.9
|
|
|
|
130,609
|
(6)
|
|
|
8.02
|
|
2851 104th Street
|
|
Flex
|
|
Des Moines-West Des Moines
|
|
|
1998
|
|
|
|
35,058
|
|
|
|
91.7
|
|
|
|
223,929
|
|
|
|
6.97
|
|
1520 Albany Place SE
|
|
Warehouse
|
|
Orange City
|
|
|
1990
|
|
|
|
487,121
|
|
|
|
100.0
|
|
|
|
1,155,892
|
|
|
|
2.37
|
|
2205 SE Creekview
Drive
(7)
|
|
Distribution
|
|
Des Moines-West Des Moines
|
|
|
2002
|
|
|
|
44,800
|
|
|
|
100.0
|
|
|
|
273,280
|
|
|
|
6.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IowaTotal/Weighted Average
|
|
|
1992
|
|
|
|
782,179
|
|
|
|
89.1
|
|
|
|
2,488,490
|
|
|
|
3.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kansas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 Sumner
Way
(17)
|
|
Distribution
|
|
Kansas City
|
|
|
1998
|
|
|
|
311,100
|
|
|
|
100.0
|
|
|
|
1,555,500
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KansasTotal/Weighted Average
|
|
|
1998
|
|
|
|
311,100
|
|
|
|
100.0
|
|
|
|
1,555,500
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michigan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6505 Cogswell
Road
(8)
|
|
Distribution
|
|
Detroit-Warren-Livonia
|
|
|
2005
|
|
|
|
424,320
|
|
|
|
100.0
|
|
|
|
1,926,662
|
|
|
|
4.54
|
|
7525 Cogswell
Road
(8)
|
|
Warehouse
|
|
Detroit-Warren-Livonia
|
|
|
2001
|
|
|
|
285,200
|
|
|
|
100.0
|
|
|
|
1,939,360
|
|
|
|
6.80
|
|
38100 Ecorse
Road
(8)(9)
|
|
Distribution
|
|
Detroit-Warren-Livonia
|
|
|
1999
|
|
|
|
287,300
|
|
|
|
100.0
|
|
|
|
1,364,675
|
(10)
|
|
|
4.75
|
|
41133 Van Born
Road
(8)
|
|
Distribution
|
|
Detroit-Warren-Livonia
|
|
|
2002
|
|
|
|
199,920
|
|
|
|
100.0
|
|
|
|
962,176
|
|
|
|
4.81
|
|
41199 Van Born
Road
(8)
|
|
Distribution
|
|
Detroit-Warren-Livonia
|
|
|
2002
|
|
|
|
199,920
|
|
|
|
73.8
|
|
|
|
651,152
|
|
|
|
4.42
|
|
25295 Guenther Road
|
|
Distribution
|
|
Detroit-Warren-Livonia
|
|
|
2008
|
|
|
|
233,900
|
|
|
|
100.0
|
|
|
|
1,120,650
|
|
|
|
4.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MichiganTotal/Weighted Average
|
|
|
2003
|
|
|
|
1,630,560
|
|
|
|
96.8
|
|
|
|
7,964,675
|
|
|
|
5.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
Business and
properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
Year
|
|
|
leasable
|
|
|
Occupancy
|
|
|
|
|
|
rent per
|
|
|
|
Property
|
|
|
|
built/
|
|
|
square
|
|
|
rate
(2)
|
|
|
Annualized
|
|
|
square
|
|
Address
|
|
type
(1)
|
|
MSA
|
|
renovated
|
|
|
footage
|
|
|
(%)
|
|
|
base
rent
(3)
|
|
|
foot
(4)
|
|
|
|
|
Minnesota
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7401 Cahill Road
|
|
Warehouse
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1979
|
|
|
|
45,672
|
|
|
|
100.0
|
|
|
$
|
276,238
|
|
|
$
|
6.05
|
|
5600-5672 Lincoln Drive
|
|
Warehouse
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1974
|
|
|
|
78,000
|
|
|
|
91.3
|
|
|
|
461,932
|
|
|
|
6.48
|
|
6999 Oxford Street
|
|
Warehouse
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1969
|
|
|
|
110,333
|
|
|
|
74.2
|
|
|
|
371,516
|
|
|
|
4.54
|
|
7247-7275 Flying Cloud Drive
|
|
Flex
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1984
|
|
|
|
76,297
|
|
|
|
36.7
|
|
|
|
426,822
|
|
|
|
15.26
|
|
2900 Lone Oak
Parkway
(7)
|
|
Flex
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1987
|
|
|
|
91,605
|
|
|
|
95.1
|
|
|
|
895,056
|
|
|
|
10.28
|
|
707 West County Road East
|
|
Warehouse
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
2008
|
|
|
|
71,338
|
|
|
|
100.0
|
|
|
|
501,246
|
|
|
|
7.03
|
|
9835-9859; 9905-9925 13th Ave
|
|
Warehouse
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1968
|
|
|
|
66,735
|
|
|
|
69.8
|
|
|
|
262,747
|
|
|
|
5.64
|
|
7115-7137
Shady Oak Road
|
|
Warehouse
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1984
|
|
|
|
78,171
|
|
|
|
79.8
|
|
|
|
407,648
|
|
|
|
6.53
|
|
13810-13800 24th Avenue North
|
|
Warehouse
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1975
|
|
|
|
95,844
|
|
|
|
83.7
|
|
|
|
549,748
|
|
|
|
6.86
|
|
9701-9901 Valley View Road
|
|
Warehouse
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1979
|
|
|
|
90,300
|
|
|
|
94.9
|
|
|
|
566,425
|
|
|
|
6.61
|
|
6820-6848 Washington Avenue S
|
|
Warehouse
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1979
|
|
|
|
40,000
|
|
|
|
100.0
|
|
|
|
229,669
|
|
|
|
5.74
|
|
6102-6190 Olson Memorial Hwy
|
|
Warehouse
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1978
|
|
|
|
90,000
|
|
|
|
86.9
|
|
|
|
482,835
|
(11)
|
|
|
6.17
|
|
7202-7264 Washington Avenue S
|
|
Warehouse
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1976
|
|
|
|
61,000
|
|
|
|
92.1
|
|
|
|
363,477
|
|
|
|
6.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MinnesotaTotal/Weighted Average
|
|
|
1980
|
|
|
|
995,295
|
|
|
|
83.8
|
|
|
|
5,795,359
|
|
|
|
7.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Missouri
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1920 Beltway
Drive
(12)
|
|
Distribution
|
|
St. Louis
|
|
|
2006
|
|
|
|
70,000
|
|
|
|
100.0
|
|
|
|
304,500
|
|
|
|
4.35
|
|
1760-1850 N. Corrington Ave
|
|
Distribution
|
|
Kansas City
|
|
|
2000
|
|
|
|
173,090
|
|
|
|
84.7
|
|
|
|
846,485
|
|
|
|
5.78
|
|
10360 Lake Bluff Boulevard
|
|
Distribution
|
|
St. Louis
|
|
|
2007
|
|
|
|
142,800
|
|
|
|
82.6
|
|
|
|
795,825
|
|
|
|
6.75
|
|
601-627 Lambert Pointe Drive
|
|
Warehouse
|
|
St. Louis
|
|
|
2000
|
|
|
|
201,523
|
|
|
|
71.4
|
|
|
|
824,464
|
|
|
|
5.73
|
|
600-638 Lambert Pointe Drive
|
|
Warehouse
|
|
St. Louis
|
|
|
2002
|
|
|
|
209,333
|
|
|
|
87.4
|
|
|
|
914,341
|
|
|
|
5.00
|
|
629-651 Lambert Pointe Drive
|
|
Warehouse
|
|
St. Louis
|
|
|
2006
|
|
|
|
210,950
|
|
|
|
68.8
|
|
|
|
874,198
|
|
|
|
6.02
|
|
519-529 McDonnell Boulevard
|
|
Distribution
|
|
St. Louis
|
|
|
2007
|
|
|
|
115,640
|
|
|
|
5.5
|
|
|
|
30,000
|
|
|
|
4.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MissouriTotal/Weighted
Average
(13)
|
|
|
2003
|
|
|
|
1,123,336
|
|
|
|
83.1
|
|
|
|
4,589,813
|
|
|
|
5.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Carolina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224 North Hoover Road
|
|
Distribution
|
|
Durham-Chapel Hill
|
|
|
1975
|
|
|
|
252,465
|
|
|
|
100.0
|
|
|
|
646,310
|
|
|
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North CarolinaTotal/Weighted Average
|
|
|
1975
|
|
|
|
252,465
|
|
|
|
100.0
|
|
|
|
646,310
|
|
|
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 Enterprise
Drive
(14)
|
|
Distribution
|
|
Cincinnati-Middletown
|
|
|
2003
|
|
|
|
45,000
|
|
|
|
100.0
|
|
|
|
253,500
|
|
|
|
5.63
|
|
3440 Symmes Road
|
|
Distribution
|
|
Cincinnati-Middletown
|
|
|
2000
|
|
|
|
54,000
|
|
|
|
100.0
|
|
|
|
268,365
|
|
|
|
4.97
|
|
5836-5885 Highland Ridge Dr.
|
|
Warehouse
|
|
Cincinnati-Middletown
|
|
|
1986
|
|
|
|
86,292
|
|
|
|
82.6
|
|
|
|
340,563
|
|
|
|
4.78
|
|
11500 Century Boulevard
|
|
Flex
|
|
Cincinnati-Middletown
|
|
|
1987
|
|
|
|
31,101
|
|
|
|
100.0
|
|
|
|
204,902
|
(15)
|
|
|
6.59
|
|
106 Circle Freeway Drive
|
|
Warehouse
|
|
Cincinnati-Middletown
|
|
|
1975
|
|
|
|
43,796
|
|
|
|
100.0
|
|
|
|
307,878
|
|
|
|
7.03
|
|
5 Circle Freeway
|
|
Flex
|
|
Cincinnati-Middletown
|
|
|
1986
|
|
|
|
128,266
|
|
|
|
91.4
|
|
|
|
710,237
|
|
|
|
6.06
|
|
2921-2961 East Kemper
Road
(16)
|
|
Warehouse
|
|
Cincinnati-Middletown
|
|
|
1986
|
|
|
|
116,156
|
|
|
|
97.5
|
|
|
|
704,795
|
|
|
|
6.22
|
|
1801-1827 OBrien Road
|
|
Warehouse
|
|
Columbus
|
|
|
1985
|
|
|
|
143,858
|
|
|
|
85.9
|
|
|
|
768,307
|
|
|
|
6.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OhioTotal/Weighted Average
|
|
|
1987
|
|
|
|
648,469
|
|
|
|
92.4
|
|
|
|
3,558,546
|
|
|
|
5.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wisconsin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1962 Queenland
Drive
(5)
|
|
Distribution
|
|
Wausau
|
|
|
1997
|
|
|
|
106,000
|
|
|
|
100.0
|
|
|
|
623,821
|
|
|
|
5.89
|
|
5200-5390 Ashland
Way
(5)
|
|
Distribution
|
|
Milwaukee-Waukesha-West Allis
|
|
|
1999
|
|
|
|
155,320
|
|
|
|
95.6
|
|
|
|
706,544
|
|
|
|
4.76
|
|
325 Larsen Drive
|
|
Distribution
|
|
Fond du Lac
|
|
|
1996
|
|
|
|
234,000
|
|
|
|
100.0
|
|
|
|
751,140
|
|
|
|
3.21
|
|
Ridgeview Parkway
|
|
Distribution
|
|
Milwaukee-Waukesha-West Allis
|
|
|
1998
|
|
|
|
94,403
|
|
|
|
100.0
|
|
|
|
586,951
|
|
|
|
6.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WisconsinTotal/Weighted Average
|
|
|
1997
|
|
|
|
589,723
|
|
|
|
98.8
|
|
|
|
2,668,456
|
|
|
|
4.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing PortfolioIndustrialTotal/Weighted
Average
(13)
|
|
|
1991
|
|
|
|
8,347,111
|
|
|
|
86.4
|
|
|
$
|
34,635,065
|
|
|
$
|
4.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Certain percentages and totals
may not sum due to rounding
|
|
(1)
|
|
Property types defined as
follows: distribution consists of 0% to 15% office space;
warehouse consists of 15% to 55% office space; and flex consists
of greater than 55% office space
|
|
(2)
|
|
Occupancy as of April 1,
2010
|
|
(3)
|
|
Based on monthly billed base
rent, excluding storage and parking revenue, as of April 1,
2010 and calculated as billed base rent, multiplied by
12
|
|
(4)
|
|
Calculated as annualized billed
base rent divided by total leased square footage as of
April 1, 2010
|
119
Business and
properties
|
|
|
(5)
|
|
Subject to a conversion
agreement with the
tenant-in-common
interest owner. We intend to terminate this agreement upon
completion of the formation transactions
|
|
(6)
|
|
Annualized base rent not
reflective of base rent abatement of $2,067 for one
tenant
|
|
(7)
|
|
Each property is subject to a
non-disposition agreement and cannot be sold without consent of
the contributor prior to March 1, 2013
|
|
(8)
|
|
These properties collectively
constitute our Romulus portfolio; each property is subject to a
conversion agreement restricting Welsh US Real Estate Fund, LLC
from selling the property without the consent of the contributor
prior to May 15, 2011
|
|
(9)
|
|
Current sole tenant, A123
Systems, Inc., has an option to purchase/build on adjacent
vacant parcel
|
|
(10)
|
|
Annualized base rent figure not
reflective of 50% monthly rent abatement during first
12 months of lease, commencing January 1,
2010
|
|
(11)
|
|
Annualized base rent not
reflective of base rent abatement in the aggregate of $1,420 for
two tenants
|
|
(12)
|
|
Current sole tenant, Access
Courier, has a right of first refusal on a sale of the
property
|
|
(13)
|
|
Occupancy exclusive of the
following assets which have not reached stabilized occupancy of
90.0% since development by us: 10360 Lake Bluff Boulevard,
629-651 Lambert Pointe Drive, 519-529 McDonnell Boulevard;
existing industrial portfolio occupancy is 84.7%
|
|
(14)
|
|
Current tenant, Tosca, Ltd., has
a right of first refusal on a sale of the property
|
|
(15)
|
|
Annualized base rent figure
reflective of $115,060 in annualized base rent to commence
May 1, 2010
|
|
(16)
|
|
This property is subject to a
non-disposition agreement; property cannot be sold without
consent of the contributor prior to July 1, 2013
|
|
(17)
|
|
Property is under a ground
lease
|
Office properties.
Our existing portfolio also
includes eight office properties consisting of multi-story and
single-story office buildings principally located in
metropolitan central business districts and suburban mixed-use
developments. All of the office properties are well-maintained
buildings, with a weighted average age of approximately
19 years. Substantially all of the office properties are
located within larger metropolitan areas offering excellent
access to business amenities. Approximately 82.5% of the almost
1.3 million leasable square footage in the office
properties was occupied as of April 1, 2010. Major tenants
as of April 1, 2010, based on leased square footage,
include Oracle USA, Inc., Minute Clinic (CVS), and a healthcare
services company.
The following table summarizes the office properties in our
existing portfolio as of April 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
leasable
|
|
|
Occupancy
|
|
|
Annualized
|
|
|
rent per
|
|
|
|
Property
|
|
|
|
Year built/
|
|
|
square
|
|
|
rate
(1)
|
|
|
base
|
|
|
square
|
|
Address
|
|
type
|
|
MSA
|
|
renovated
|
|
|
footage
|
|
|
(%)
|
|
|
rent
(2)
|
|
|
foot
(3)
|
|
|
|
|
Minnesota
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4350 Baker
Road
(4)
|
|
Office
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
2008
|
|
|
|
94,459
|
|
|
|
97.2
|
|
|
$
|
1,703,472
|
|
|
$
|
18.55
|
|
4400 Baker
Road
(4)(5)
|
|
Office
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
2008
|
|
|
|
72,318
|
|
|
|
100.0
|
|
|
|
3,120
|
(6)
|
|
|
0.04
|
|
900 2nd Avenue South
|
|
Office
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1986
|
|
|
|
633,846
|
|
|
|
70.9
|
|
|
|
5,317,545
|
|
|
|
11.83
|
|
9750 Rockford
Road
(7)
|
|
Office
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1987
|
|
|
|
15,144
|
|
|
|
100.0
|
|
|
|
254,855
|
|
|
|
16.83
|
|
9800 Rockford
Road
(7)
|
|
Office
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1993
|
|
|
|
7,700
|
|
|
|
100.0
|
|
|
|
108,971
|
|
|
|
14.15
|
|
5001 West 80th Street
|
|
Office
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
1999
|
|
|
|
207,456
|
|
|
|
64.8
|
|
|
|
1,226,741
|
(8)
|
|
|
9.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MinnesotaTotal/Weighted
Average
(9)
|
|
|
1992
|
|
|
|
1,030,923
|
|
|
|
81.0
|
|
|
|
8,614,705
|
|
|
|
11.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11590 Century Boulevard
|
|
Office
|
|
Cincinnati-Middletown
|
|
|
1987
|
|
|
|
51,674
|
|
|
|
41.3
|
|
|
|
214,269
|
|
|
|
10.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OhioTotal/Weighted Average
|
|
|
1987
|
|
|
|
51,674
|
|
|
|
41.3
|
|
|
|
214,269
|
|
|
|
10.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Carolina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8085 Rivers Avenue
|
|
Office
|
|
Charleston-North
|
|
|
1988
|
|
|
|
158,583
|
|
|
|
100.0
|
|
|
|
1,637,798
|
|
|
|
10.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South CarolinaTotal/Weighted Average
|
|
|
1988
|
|
|
|
158,583
|
|
|
|
100.0
|
|
|
|
1,637,798
|
|
|
|
10.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing PortfolioOfficeTotal/Weighted
Average
(9)
|
|
|
1991
|
|
|
|
1,241,180
|
|
|
|
82.5
|
|
|
$
|
10,466,771
|
|
|
$
|
11.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
Business and
properties
|
|
|
*
|
|
Certain percentages and totals
may not sum due to rounding
|
|
(1)
|
|
Occupancy as of April 1,
2010
|
|
(2)
|
|
Based on monthly billed base
rent, excluding storage and parking revenue, as of April 1,
2010 and calculated as billed base rent, multiplied by
12
|
|
(3)
|
|
Calculated as annualized billed
base rent divided by total leased square footage as of
April 1, 2010
|
|
(4)
|
|
4350 Baker Road and 4400 Baker
Road are collectively referred to as Baker Road Corporate
Center
|
|
(5)
|
|
Current tenant, PeopleNet, has
an option to purchase the building and a right of first
opportunity to purchase the building
|
|
(6)
|
|
Effective January 1, 2011,
PeopleNet pays $605,437 in annualized base rent; effective
August 1, 2010, Health Dimensions Consulting Inc. pays
$96,000 in annualized base rent, which is not reflective of a
$19,811 rent credit to be received August 1,
2010
|
|
(7)
|
|
9750 Rockford Road and 9800
Rockford Road are collectively referred to as Plymouth
Professional Center I & II
|
|
(8)
|
|
Annualized base rent not
reflective of base rent abatement of $591 for one
tenant
|
|
(9)
|
|
Occupancy exclusive of 900 2nd
Avenue South, which has not reached stabilized occupancy of
90.0% since acquisition by us with the intent to renovate and
reposition; existing office portfolio occupancy is
76.6%
|
Portfolio diversification.
Our existing
portfolio is diverse by geography, tenant base and product type.
With the majority of our properties located in nine contiguous
states, we own properties in many large central
U.S. markets including Minneapolis, Detroit, St. Louis
and Indianapolis. The diversification of our existing portfolio
is enhanced by owning both industrial and office properties, and
within the industrial sector both warehouse and distribution
assets.
Tenant diversification.
As of April 1,
2010, our existing portfolio had approximately 450 tenants.
We believe we have a diverse tenant base, with our largest
tenant accounting for approximately 500,000 square feet, or
5.1% of the total leasable square footage, and our top
10 tenants representing approximately 25.8% of our
annualized gross rent as of April 1, 2010. Our average
tenant size within our existing portfolio is approximately
16,300 square feet. Our tenants include national, regional,
and local companies that represent a multitude of industries,
from third-party logistics firms to food producers in the
industrial sector and Fortune 500 companies to small
professional services companies in the office sector.
121
Business and
properties
The following table summarizes the top 10 tenants in our
existing portfolio based on annualized gross rent as of
April 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
square
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
Leasable
|
|
|
footage
|
|
|
|
|
|
|
|
|
Property
|
|
Annualized
|
|
|
gross
rent
(3)
|
|
|
square footage
|
|
|
occupied
(5)
|
|
|
Lease
|
|
Tenant
|
|
MSA
|
|
type
(1)
|
|
gross
rent
(2)
|
|
|
(%)
|
|
|
occupied
(4)
|
|
|
(%)
|
|
|
expiration
|
|
|
|
|
Oracle USA, Inc.
|
|
Minneapolis-
St. Paul-
Bloomington
|
|
Office
|
|
$
|
2,205,060
|
|
|
|
3.6
|
|
|
|
117,402
|
|
|
|
1.2
|
|
|
|
12/13
|
|
Archway Marketing Services, Inc.
|
|
Detroit-Warren-
Livonia
|
|
Warehouse
|
|
|
2,024,796
|
|
|
|
3.3
|
|
|
|
285,200
|
|
|
|
3.0
|
|
|
|
2/16
|
|
Oakley Industries Sub-Assembly Division, Inc.
|
|
St. Louis/Detroit-
Warren-Livonia
|
|
Distribution
|
|
|
1,971,852
|
|
|
|
3.2
|
|
|
|
255,550
|
(6)
|
|
|
2.7
|
|
|
|
10/14
|
|
A123 Systems, Inc.
|
|
Detroit-Warren-
Livonia
|
|
Distribution
|
|
|
1,876,571
|
(7)
|
|
|
3.0
|
|
|
|
287,300
|
|
|
|
3.0
|
|
|
|
12/19
|
|
KGP Logistics, Inc.
|
|
Kansas City
|
|
Distribution
|
|
|
1,555,500
|
|
|
|
2.5
|
|
|
|
311,100
|
|
|
|
3.2
|
|
|
|
12/18
|
|
Medline Industries, Inc.
|
|
Detroit-Warren-
Livonia
|
|
Distribution
|
|
|
1,376,832
|
|
|
|
2.2
|
|
|
|
224,640
|
|
|
|
2.3
|
|
|
|
12/12
|
|
Mastronardi Produce-USA, Inc.
|
|
Detroit-Warren-
Livonia
|
|
Distribution
|
|
|
1,373,952
|
|
|
|
2.2
|
|
|
|
199,680
|
|
|
|
2.1
|
|
|
|
7/10
|
|
Metal Processing Corporation
|
|
Chicago-
Naperville-Joliet
|
|
Distribution
|
|
|
1,317,984
|
|
|
|
2.1
|
|
|
|
293,926
|
|
|
|
3.1
|
|
|
|
10/14
|
|
Staples Contract & Commercial, Inc.
|
|
Orange
City/Des
Moines-West
Des Moines
|
|
Warehouse
|
|
|
1,214,268
|
(8)
|
|
|
2.0
|
|
|
|
492,945
|
(9)
|
|
|
5.1
|
|
|
|
12/26
|
|
MinuteClinic/CVS
|
|
Minneapolis-
St. Paul-
Bloomington
|
|
Office
|
|
|
1,099,296
|
|
|
|
1.8
|
|
|
|
52,650
|
|
|
|
0.5
|
|
|
|
6/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top 10
Tenants
(10)
|
|
|
|
|
|
|
16,016,111
|
|
|
|
25.8
|
|
|
|
2,520,393
|
|
|
|
26.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Tenants
|
|
|
|
|
|
|
46,045,801
|
|
|
|
74.2
|
|
|
|
7,067,898
|
|
|
|
73.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Existing Portfolio
|
|
|
|
|
|
$
|
62,061,912
|
|
|
|
100.0
|
|
|
|
9,588,291
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Certain percentages and totals
may not sum due to rounding
|
|
(1)
|
|
Property types defined as
follows: distribution consists of 0% to 15% office space;
warehouse consists of 15% to 55% office space; office consists
of 100% office space
|
|
(2)
|
|
Calculated as April 1, 2010
billable base rent plus forecasted billable common area
maintenance, real estate taxes, parking and storage, multiplied
by 12
|
|
(3)
|
|
Calculated as annualized gross
rent divided by total gross rent figure of $62,061,912
|
|
(4)
|
|
Leases signed as of
April 1, 2010
|
|
(5)
|
|
Based on leasable square footage
occupied divided by total leasable square footage of
9,588,291
|
|
(6)
|
|
Includes 117,900 leasable square
footage in St. Louis and 137,650 leasable square footage in
Detroit-Warren-Livonia
|
|
(7)
|
|
Annualized gross rent figure not
reflective of 50% monthly rent abatement during first
12 months of lease, commencing January 1,
2010
|
|
(8)
|
|
Annualized gross rent not
reflective of real estate taxes, which tenant pays
directly
|
|
(9)
|
|
Includes 5,824 square feet
of leasable flex space with a lease expiration of April 30,
2010
|
|
(10)
|
|
Welsh Companies would be fifth
on this list, if included
|
122
Business and
properties
Geographic diversification.
We own properties
in 12 states, nine of which are in the contiguous central
U.S. states of Minnesota, Michigan, Indiana, Missouri,
Iowa, Ohio, Wisconsin, Illinois and Kansas. In our existing
portfolio, as of April 1, 2010, approximately
8.9 million square feet, or 93.3% of our total leasable
square footage, is within these nine states. We believe our
central U.S. market presence provides cash flow stability
as these markets tend to be less volatile than some coastal
markets that experience greater fluctuation in occupancy.
The following table presents a summary of our existing portfolio
by state as of April 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
leasable
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
square
|
|
|
|
|
|
|
|
|
|
|
|
annualized
|
|
|
|
Number of
|
|
|
Total leasable
|
|
|
footage
(1)
|
|
|
Industrial
|
|
|
Office
|
|
|
Annualized
|
|
|
base
rent
(3)
|
|
State
|
|
properties
|
|
|
square
footage
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
base
rent
(2)
|
|
|
(%)
|
|
|
|
|
Minnesota
|
|
|
19
|
|
|
|
2,026,218
|
|
|
|
21.1
|
|
|
|
49.1
|
|
|
|
50.9
|
|
|
$
|
14,410,063
|
|
|
|
32.0
|
|
Michigan
|
|
|
6
|
|
|
|
1,630,560
|
|
|
|
17.0
|
|
|
|
100.0
|
|
|
|
0.0
|
|
|
|
7,964,675
|
|
|
|
17.7
|
|
Indiana
|
|
|
3
|
|
|
|
1,196,954
|
|
|
|
12.5
|
|
|
|
100.0
|
|
|
|
0.0
|
|
|
|
2,727,254
|
|
|
|
6.0
|
|
Missouri
|
|
|
7
|
|
|
|
1,123,336
|
|
|
|
11.7
|
|
|
|
100.0
|
|
|
|
0.0
|
|
|
|
4,589,813
|
|
|
|
10.2
|
|
Iowa
|
|
|
8
|
|
|
|
782,179
|
|
|
|
8.2
|
|
|
|
100.0
|
|
|
|
0.0
|
|
|
|
2,488,490
|
|
|
|
5.5
|
|
Ohio
|
|
|
9
|
|
|
|
700,143
|
|
|
|
7.3
|
|
|
|
92.6
|
|
|
|
7.4
|
|
|
|
3,772,815
|
|
|
|
8.4
|
|
Wisconsin
|
|
|
4
|
|
|
|
589,723
|
|
|
|
6.2
|
|
|
|
100.0
|
|
|
|
0.0
|
|
|
|
2,668,456
|
|
|
|
5.9
|
|
Illinois
|
|
|
4
|
|
|
|
589,685
|
|
|
|
6.2
|
|
|
|
100.0
|
|
|
|
0.0
|
|
|
|
1,921,509
|
|
|
|
4.3
|
|
Kansas
|
|
|
1
|
|
|
|
311,100
|
|
|
|
3.2
|
|
|
|
100.0
|
|
|
|
0.0
|
|
|
|
1,555,500
|
|
|
|
3.4
|
|
North Carolina
|
|
|
1
|
|
|
|
252,465
|
|
|
|
2.6
|
|
|
|
100.0
|
|
|
|
0.0
|
|
|
|
646,310
|
|
|
|
1.4
|
|
Florida
|
|
|
2
|
|
|
|
227,345
|
|
|
|
2.4
|
|
|
|
100.0
|
|
|
|
0.0
|
|
|
|
719,153
|
|
|
|
1.6
|
|
South Carolina
|
|
|
1
|
|
|
|
158,583
|
|
|
|
1.7
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
1,637,798
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Existing Portfolio
|
|
|
65
|
|
|
|
9,588,291
|
|
|
|
100.0
|
|
|
|
87.1
|
|
|
|
12.9
|
|
|
$
|
45,101,836
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Certain percentages and totals may not sum due to rounding
|
|
(1)
|
|
Calculated as total leasable square footage by state divided
by the portfolio total of 9,588,291 leasable square footage
|
|
(2)
|
|
Based on monthly billed base rent, excluding storage and
parking revenue, as of April 1, 2010 and calculated as
billed base rent multiplied by 12
|
|
(3)
|
|
Calculated as annualized base rent by state divided by total
annualized April 2010 base rent figure of $45,101,836
|
Lease expirations.
We believe our existing
portfolio is currently well positioned with respect to lease
rollover. As of April 1, 2010, 16.6% of our existing
portfolio, based on leasable square footage, is represented by
leases expiring in 2010 or 2011 (not including leases which are
month-to-month). We believe that there is a broader potential
tenant base for smaller premises. Because of this, we believe it
is advantageous that we have relatively few leases of greater
than 50,000 square feet expiring in the next two years. In 2010,
the leases scheduled to expire represent 728,847 leasable
square feet, or 7.6% of the leasable square footage in our
existing portfolio. Three of the leases scheduled to expire in
2010 are for premises over 50,000 leasable square feet. In
2011, the leases scheduled to expire represent
864,449 square feet, or 9.0% of the leasable square footage
in our existing portfolio. Two of the leases scheduled to expire
in 2011 are for premises over 50,000 square feet.
We believe we have implemented an aggressive and comprehensive
strategy to facilitate tenant retention and lease-up of space
within our properties. Beginning 12 months prior to the
lease expiration, we meet with tenants and identify the
tenants intentions with respect to the space, as well as
the condition of the tenants business and space needs.
After this meeting, we undertake negotiations to extend the
123
Business and
properties
current lease; however, if the tenant does not engage in
discussions we begin pursuing marketing and showing of the space
as soon as possible.
We believe that the leasing market has been steadily improving
since
mid-2009
and
anticipate the trend to continue through 2010 and beyond. From
January 1, 2009 through April 30, 2010, we have
entered into new leases for approximately 995,000 square feet
for our existing portfolio. Highlights of this leasing activity
include a 10-year industrial lease for 287,000 square feet
and a ten-year office lease for 53,584 square feet. Both of
these leases filled space vacated by prior tenants due to
bankruptcies in 2008. We believe we have maintained a successful
leasing strategy by offering competitive market lease rates
coupled with below-market tenant pass-through expenses through
our aggressive cost management and aggregated national buying
power. Of our existing portfolio leases expiring in the 12
months ended December 31, 2009, we renewed 64.7% of the
tenants.
The following table summarizes lease expirations with respect to
leases in place in our existing portfolio as of April 1,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
base rent
|
|
|
|
Number
|
|
|
|
|
|
Leasable
|
|
|
|
|
|
Annualized
|
|
|
per leased
|
|
|
|
of leases
|
|
|
Leasable
|
|
|
square
footage
(2)
|
|
|
Annualized
|
|
|
base
rent
(4)
|
|
|
square
|
|
|
|
expiring
|
|
|
square
footage
(1)
|
|
|
(%)
|
|
|
base
rent
(3)
|
|
|
(%)
|
|
|
foot
|
|
|
|
|
Common
Area
(5)
|
|
|
|
|
|
|
24,101
|
|
|
|
0.3
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Available
|
|
|
|
|
|
|
1,564,699
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTM Tenants
|
|
|
57
|
|
|
|
201,871
|
|
|
|
2.1
|
|
|
|
711,807
|
|
|
|
1.6
|
|
|
|
3.53
|
|
2010
|
|
|
89
|
|
|
|
728,847
|
|
|
|
7.6
|
|
|
|
4,641,601
|
|
|
|
10.3
|
|
|
|
6.37
|
|
2011
|
|
|
100
|
|
|
|
864,449
|
|
|
|
9.0
|
|
|
|
5,991,392
|
|
|
|
13.3
|
|
|
|
6.93
|
|
2012
|
|
|
88
|
|
|
|
1,068,648
|
|
|
|
11.1
|
|
|
|
5,843,435
|
|
|
|
13.0
|
|
|
|
5.47
|
|
2013
|
|
|
71
|
|
|
|
1,000,961
|
|
|
|
10.4
|
|
|
|
6,216,711
|
|
|
|
13.8
|
|
|
|
6.21
|
|
2014
|
|
|
36
|
|
|
|
1,319,448
|
|
|
|
13.8
|
|
|
|
6,258,689
|
|
|
|
13.9
|
|
|
|
4.74
|
|
2015
|
|
|
20
|
|
|
|
325,064
|
|
|
|
3.4
|
|
|
|
2,583,283
|
|
|
|
5.7
|
|
|
|
7.95
|
|
2016
|
|
|
19
|
|
|
|
887,232
|
|
|
|
9.3
|
|
|
|
4,922,447
|
|
|
|
10.9
|
|
|
|
5.55
|
|
2017
|
|
|
9
|
|
|
|
142,764
|
|
|
|
1.5
|
|
|
|
1,006,565
|
|
|
|
2.2
|
|
|
|
7.05
|
|
2018
|
|
|
5
|
|
|
|
380,667
|
|
|
|
4.0
|
|
|
|
2,215,250
|
|
|
|
4.9
|
|
|
|
5.82
|
|
2019
|
|
|
3
|
|
|
|
313,319
|
|
|
|
3.3
|
|
|
|
1,468,547
|
|
|
|
3.3
|
|
|
|
4.69
|
|
Thereafter
|
|
|
9
|
|
|
|
766,221
|
|
|
|
8.0
|
|
|
|
3,242,110
|
|
|
|
7.2
|
|
|
|
4.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Existing Portfolio
|
|
|
506
|
|
|
|
9,588,291
|
|
|
|
100.0
|
|
|
$
|
45,101,836
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Certain percentages and totals may not sum due to rounding
|
|
(1)
|
|
Leasable square footage represents the contracted square
footage upon expiration
|
|
(2)
|
|
Calculated as leasable square footage expiring divided by the
portfolio total of 9,588,291 leasable square feet
|
|
(3)
|
|
Based on monthly billed base rent, excluding storage and
parking revenue, as of April 1, 2010 and calculated as
billed base rent, multiplied by 12
|
|
(4)
|
|
Calculated as annualized base rent divided by total
annualized April 2010 base rent figure of $45,101,836
|
|
(5)
|
|
Common areas, conference rooms, lounges, etc. noted on
company rent rolls
|
124
Business and
properties
Historical Capital Expenditures, Tenant Improvements and
Leasing Commissions.
The table below sets forth
certain historical information regarding capital expenditures,
tenant improvements, and leasing commissions for our real
property holdings during each period. For purposes of the
information presented below, we used the following guidelines:
|
|
Ø
|
New leases
represents contracts where a previously
unknown, unrelated tenant leased premises from us or any portion
of a lease with an existing tenant that was an expansion of the
leased premises.
|
|
Ø
|
Renewal leases
represents contracts entered into with
existing tenants who, upon expiration of its lease, enter into a
new lease for the same space.
Month-to-month
leases are not included in renewal calculations.
|
|
Ø
|
Tenant improvements, leasing commissions and capital
expenditures
are those building improvements and leasing
costs required to maintain then-current revenues. Excluded from
these categories are those costs that relate to first generation
leasing (newly developed or acquired properties that have not
been occupied during our ownership), building and building
improvement costs for any of our properties developed by us
related to initial stabilization, acquisition capital
expenditures planned for at the time of acquisition, and
renovations that enhance the value of the property.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q12010
|
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
Q12010
|
|
|
PSF
|
|
|
2009
|
|
|
PSF
|
|
|
2008
|
|
|
PSF
|
|
|
2007
|
|
|
PSF
|
|
|
|
|
Tenant
improvements
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
|
|
$
|
360,727
|
|
|
$
|
0.93
|
|
|
$
|
1,283,768
|
|
|
$
|
2.24
|
|
|
$
|
542,309
|
|
|
$
|
0.91
|
|
|
$
|
1,336,949
|
|
|
$
|
5.74
|
|
Renewal
|
|
|
101,201
|
|
|
|
1.71
|
|
|
|
173,628
|
|
|
|
0.34
|
|
|
|
543,192
|
|
|
|
2.92
|
|
|
|
480,104
|
|
|
|
2.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total industrial
|
|
|
461,928
|
|
|
|
1.03
|
|
|
|
1,457,396
|
|
|
|
1.35
|
|
|
|
1,085,502
|
|
|
|
1.39
|
|
|
|
1,817,055
|
|
|
|
3.97
|
|
Office
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
|
|
|
195,989
|
|
|
|
7.88
|
|
|
|
528,947
|
|
|
|
27.32
|
|
|
|
881,615
|
|
|
|
21.24
|
|
|
|
509,777
|
|
|
|
14.81
|
|
Renewal
|
|
|
0
|
|
|
|
0.00
|
|
|
|
65,686
|
|
|
|
3.01
|
|
|
|
418,064
|
|
|
|
9.65
|
|
|
|
19,979
|
|
|
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total office
|
|
|
195,989
|
|
|
|
7.88
|
|
|
|
594,634
|
|
|
|
14.43
|
|
|
|
1,299,679
|
|
|
|
15.32
|
|
|
|
529,755
|
|
|
|
10.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tenant improvements
|
|
$
|
657,917
|
|
|
$
|
1.39
|
|
|
$
|
2,052,030
|
|
|
$
|
1.83
|
|
|
$
|
2,385,181
|
|
|
$
|
2.75
|
|
|
$
|
2,346,810
|
|
|
$
|
4.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing
commissions
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
|
|
$
|
31,698
|
|
|
$
|
0.52
|
|
|
$
|
1,206,210
|
|
|
$
|
2.11
|
|
|
$
|
624,920
|
|
|
$
|
0.98
|
|
|
$
|
480,835
|
|
|
$
|
1.49
|
|
Renewal
|
|
|
18,148
|
|
|
|
0.16
|
|
|
|
378,317
|
|
|
|
0.58
|
|
|
|
286,559
|
|
|
|
0.53
|
|
|
|
169,779
|
|
|
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total industrial
|
|
|
49,846
|
|
|
|
0.28
|
|
|
|
1,584,527
|
|
|
|
1.30
|
|
|
|
911,479
|
|
|
|
0.77
|
|
|
|
650,614
|
|
|
|
1.07
|
|
Office
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
|
|
|
139,803
|
|
|
|
5.62
|
|
|
|
508,509
|
|
|
|
9.57
|
|
|
|
345,008
|
|
|
|
6.83
|
|
|
|
204,866
|
|
|
|
4.76
|
|
Renewal
|
|
|
0
|
|
|
|
0.00
|
|
|
|
101,528
|
|
|
|
2.58
|
|
|
|
284,887
|
|
|
|
3.71
|
|
|
|
30,591
|
|
|
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total office
|
|
|
139,803
|
|
|
|
5.62
|
|
|
|
610,036
|
|
|
|
6.59
|
|
|
|
629,895
|
|
|
|
4.95
|
|
|
|
235,457
|
|
|
|
3.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total leasing commissions
|
|
$
|
189,649
|
|
|
$
|
0.94
|
|
|
$
|
2,194,563
|
|
|
$
|
1.67
|
|
|
$
|
1,541,374
|
|
|
$
|
1.18
|
|
|
$
|
886,071
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
17,002
|
|
|
$
|
0.01
|
|
|
$
|
588,536
|
|
|
$
|
0.08
|
|
|
$
|
447,107
|
|
|
$
|
0.06
|
|
|
$
|
982,272
|
|
|
$
|
0.15
|
|
Office
|
|
|
94,522
|
|
|
|
0.28
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
123,217
|
|
|
|
0.09
|
|
|
|
529,280
|
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
111,524
|
|
|
$
|
0.05
|
|
|
$
|
588,536
|
|
|
$
|
0.06
|
|
|
$
|
570,324
|
|
|
$
|
0.06
|
|
|
$
|
1,511,552
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total existing portfolio
|
|
$
|
959,090
|
|
|
|
|
|
|
$
|
4,835,129
|
|
|
|
|
|
|
$
|
4,496,879
|
|
|
|
|
|
|
$
|
4,744,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Per square foot (PSF) amounts calculated by
dividing the aggregate tenant improvement
and/or
leasing commission cost by the aggregate square footage of the
leases in which we incurred such costs, excluding new/renewed
leases in which there were no tenant improvements and/or leasing
commissions
|
125
Business and
properties
|
|
|
(2)
|
|
PSF amounts calculated by dividing the aggregate annualized
capital expenditure costs by the annual average square footage
of our real property holdings during each period
|
Land holdings.
We also own five parcels of
vacant, developable land totaling approximately 44 acres in
the aggregate, in Minnesota, Ohio, Missouri and Michigan. Our
development team has prepared preliminary analyses for the
future development of more than 500,000 leasable square
feet of industrial and office space on such land. These analyses
represent managements estimates based on a review of
current applicable zoning for industrial and office use of the
land and acreage of the land. These analyses remain subject to
any change in conditions which may impact the development of
this land.
Most of the land includes site improvements such as public
sewer, water and utilities. All of the parcels are located
adjacent to real estate assets in our existing portfolio and are
suitable for assisting tenants in expansions. As a real estate
firm with construction and development capabilities, we believe
our holdings of commercially zoned land will provide attractive
opportunities for future development activities, particularly as
the availability of undeveloped land that can be zoned for
industrial or office development within our core markets
diminishes.
We have a track record of development expertise. Within our
existing portfolio, we developed eight of our industrial
properties and four of our office properties. Most recently, in
2008, we developed an approximately 167,000 square foot
project in Minnetonka, Minnesota which included our
95,000 square foot, LEED Gold corporate headquarters and
the renovation of a 72,000 square foot adjacent building.
The overall development was fully stabilized and 98.4% occupied
as of April 1, 2010. We believe this development was
possible, even during the current recessionary economic cycle,
because of our vertically integrated services business, which
supported every aspect of the development, as well as our
industry relationships and reputation as a landlord, which
allowed us to secure large tenants prior to breaking ground.
Acquisition
portfolio
Concurrently with the closing of this offering, we plan to
expand our real property holdings through the acquisition of 22
additional industrial properties in 11 states containing an
aggregate of 8.8 million leasable square feet, for
consideration of $320.1 million (which includes 394,403 OP
units, which have an aggregate value of $3.7 million based
on the mid-point of our initial public offering price shown on
the cover of the prospectus). We plan to use net proceeds from
this offering, issuance of OP units, assumption of existing debt
and new debt financing to acquire our acquisition portfolio. Our
acquisition portfolio complements our existing portfolio by
adding additional holdings in some of our existing markets and
contiguous markets. Consistent with our acquisition strategy, 18
of the 22 properties in our acquisition portfolio were
sourced off-market. There can be no assurance that we will
acquire any of the properties in our acquisition portfolio, and
acquisition of these properties is contingent upon completion of
this offering.
The following paragraphs describe the properties in our
acquisition portfolio, which are included in our pro forma
financial information.
|
|
Ø
|
Columbus portfolio.
We have entered into a
purchase agreement for the Columbus portfolio, an approximately
759,950 leasable square foot, single-tenant, three-building
portfolio, for $22.3 million. This portfolio is 100%
occupied until 2018 on a
triple-net
basis to a privately-held third-party logistics provider. The
tenant has been in business for over 35 years, has
nationwide presence and is headquartered at this portfolio. The
portfolio is well-located in the southeast submarket of
Columbus, Ohio near Rickenbacker Global Logistics Park and
Rickenbacker Airport which includes a Norfolk Southern Railroad
Intermodal Terminal. The three buildings are functional
properties which offer 24 feet of vertical usable space,
which we refer to as clear height, as well as adequate elevated
truck high loading areas for shipping and delivery, which we
refer to as loading
|
126
Business and
properties
|
|
|
docks, and have an average age of 15 years. We expect to
acquire the Columbus portfolio using the net proceeds of this
offering.
|
|
|
Ø
|
Memphis portfolio.
We have entered into a
purchase agreement for the Memphis portfolio, an approximately
816,400 leasable square foot, multi-tenant, two-building
industrial portfolio located in Memphis, Tennessee for
$20.7 million. The portfolio is 100% occupied by five
tenants with an average remaining lease term of approximately
six years. The portfolio is located in the Southpoint
Distribution Park, in close proximity to the Memphis
International Airport and the new BNSF Rail Terminal. The
buildings were both constructed in 1998 and feature 32 foot
clear height, concrete construction and numerous loading docks.
They have been institutionally owned and well-maintained since
their construction. We expect to acquire the Memphis portfolio
using the net proceeds of this offering.
|
|
|
Ø
|
Nashville property.
We have entered into a
purchase agreement for a property located in Madison, Tennessee,
an approximately 418,406 square foot, single tenant, light
manufacturing and distribution building, for $11.2 million.
The property is 100% occupied and leased to a Fortune
100 company for a remaining term of 4.5 years. The
building is located in the Northeast/I-65 sub-market of
Nashville. The building features
24-foot
clear height, concrete construction, and numerous loading
docks. The building is currently divided into four equal spaces
each separated by two fire doors, which will facilitate
re-tenanting in the future. We expect to acquire the Nashville
property using the net proceeds of this offering.
|
|
|
Ø
|
Denver/Lakeland portfolio.
We have entered
into a purchase agreement for the Denver/Lakeland portfolio,
consisting of a total of three buildings in two states
encompassing approximately 502,164 leasable square feet, for
approximately $21.8 million. The Denver, Colorado property
is currently leased to a single tenant for five years, is
located near I-70 just east of Denver, Colorado, totals
210,600 leasable square feet, and was built in 1994.
Commencing on January 1, 2011, the lease will be guaranteed
by a Fortune 500 company and occupied by one of its
wholly-owned subsidiaries. The building features
40-foot
clear height in a majority of the property, Union Pacific rail
access, 24 dock doors, and three drive-ins on seven acres of
land. The Lakeland, Florida property totals 291,564 leasable
square feet in two buildings, was built in 1988 and 1990 and
offers numerous loading docks. The larger of the two buildings
is leased through December 2013 to a single tenant who has
occupied the entire building since it was developed, and is
currently utilizing the rail servicing the building. The smaller
building is leased through August 2015 to a group who has
invested its own capital into the building and has been located
in this building since 2001. We expect to acquire this portfolio
at the completion of this offering with a combination of new
debt financing at current-market terms, net proceeds of this
offering and issuance of OP units.
|
|
|
Ø
|
Aurora property.
We have entered into a
purchase agreement for a property located in Aurora, Colorado, a
suburb of Denver, an approximately 119,200 square foot
warehouse property built in 1986 and 100% leased to two tenants,
for a purchase price of $5.3 million. The building is
concrete construction, offers adequate elevated loading for
shipping and delivery and drive-in loading and early
suppression/fast response sprinkler systems, which we refer to
as ESFR, and is well located near the interstate highway system.
The larger of the two tenants, who is leasing its premises
through May 2012, also occupies another plant three blocks from
this facility which acts as its fulfillment site. The smaller
tenants lease runs until 2018. We expect to acquire this
property at the completion of this offering with a combination
of assumption of existing debt financing and net proceeds of
this offering. The terms of the existing financing to be assumed
by us in connection with this acquisition include a term through
March 1, 2013, a
30-year
amortization period, a current principal balance of
approximately $4.4 million and a fixed 5.7% interest rate.
The lender of the existing financing for this property is
Principal Life Insurance Company. Our operating partnership will
be providing a carve out guaranty, whereby it guarantees certain
obligations carved out of the non-recourse
|
127
Business and
properties
|
|
|
provisions of the loan documents, such as environmental
indemnification obligations, misrepresentation, fraud, and
bankruptcy.
|
|
|
Ø
|
Minneapolis property.
We have entered into a
purchase agreement for a property located in Edina, Minnesota,
an approximately 55,619 square foot flex building, for
$3.3 million. Well located near the interstate highway
system, the property is a functional multi-tenant building
currently 87% occupied in a submarket of
Minneapolis/St.
Paul. We expect to acquire the Minneapolis property at the
completion of this offering through a combination of assumption
of existing debt financing and issuance of OP units. The terms
of the existing financing to be assumed by us in connection with
the contribution of this property include a term through
July 8, 2017, a
30-year
amortization period, a current principal balance of
approximately $2.6 million and a fixed 6.05% interest rate.
The lender of the existing financing for this property is Wells
Fargo Bank, N.A.
|
|
|
Ø
|
Brookville property.
We have entered into a
purchase agreement for a property located in Brookville, Ohio,
near Dayton, an approximately 801,711 square foot warehouse
distribution facility, for approximately $44.4 million. The
facility is leased through early 2024 to a wholly-owned
subsidiary of a publicly-traded corporation which operates as
one of the largest specialty family footwear retailers in North
and South America. This facility is the tenants largest
distribution center in the United States. The building,
constructed in 2008, features 32-foot clear height, concrete
construction, numerous loading docks, 52-foot by 52-foot column
spacing and an ESFR wet sprinkler system. The tenant has
invested over $35 million in material handling equipment in
the facility. We expect to acquire the Brookville property at
the completion of this offering with a combination of new debt
financing at current-market terms and issuance of OP units.
|
|
|
Ø
|
Tejon property.
We have entered into a
purchase agreement for a property located in Tejon, California,
near Bakersfield, an approximately 351,723 square foot,
single tenant, fulfillment and distribution center, for
$24.0 million. The property is leased until 2028 to a
subsidiary of a publicly traded marketer and supplier of brand
name, private label and licensed footwear to department stores
and mass merchandisers. The facility serves as the tenants
only fulfillment center west of the Rocky Mountains. The
building, constructed in 2008, features 32-foot clear height,
concrete construction, numerous loading docks, 50-foot by
50-foot column spacing and an ESFR sprinkler system, and has the
potential to accommodate tenant growth through an expansion of
the building footprint. The tenant has invested in excess of
$25 million in material handling equipment in the facility
to increase the efficiency of its operation. The property is
located in the Tejon Industrial Complex, which is strategically
located approximately one and a half hours north of Los Angeles
(two hours from the ports of Los Angeles and Long Beach) and
four hours south of San Francisco and the Port of Oakland.
We expect to acquire the Tejon property at the completion of
this offering with a combination of new debt financing at
current-market terms and net proceeds of this offering.
|
|
Ø
|
Eastern National Industrial portfolio and Mattawoman
property.
We have entered into six purchase
agreements for seven industrial properties for
$69.2 million. The properties, including the Mattawoman
property, are located in various east coast markets, including
Brandywine, Maryland, Charlotte, North Carolina, Charleston,
South Carolina and Allentown, Pennsylvania. The buildings total
approximately 1,731,712 square feet and are 100% leased and
occupied by seven tenants, with an average remaining lease term
of approximately four years. The buildings range in size
from 96,400 square feet to 539,600 square feet and
were constructed between 1988 and 2000. The acquisition of the
Eastern National Industrial portfolio includes vacant,
developable land adjacent to one of the buildings in North
Carolina which could potentially accommodate a 120,000 leasable
square foot industrial building. We expect to acquire the
Eastern National Industrial portfolio and Mattawoman property
using net proceeds of this offering.
|
|
|
Ø
|
Milwaukee property.
We have entered into a
purchase agreement for a property located in Cudahy, Wisconsin,
a suburb of Milwaukee, totaling 150,465 square feet, for
$8.0 million. The building is 100% leased to a single
tenant through 2016. The tenant has been located in the building
since
|
128
Business and
properties
|
|
|
2001, and finalized a renewal and expansion into the remainder
of the facility in 2009. The property is located near the
airport in the Cudahy submarket. The building was built in 1999
and has 28-foot clear height, features both dock high and grade
level loading and can be divided again in the future as there
are currently two office pods in the project. We expect to
acquire the Milwaukee property using net proceeds of this
offering.
|
|
|
Ø
|
Winston-Salem property.
We have entered into a
purchase agreement for all of the partnership interests in a
partnership (as well as the membership interests of the
partnerships general partner) that owns 100% of a property
located in Winston-Salem, North Carolina, an approximately
930,451 square foot, single-tenant, distribution building,
for $29.9 million. The property is 100% occupied and leased
to a 2009 Fortune 1000 company for a remaining term of over
11 years. The tenants headquarters are located in
Winston-Salem, approximately five miles from this building. The
building was constructed in 1989 and offers 30-foot clear
height, 54-foot by 54-foot column spacing and sits on
approximately 49 acres. The building is located in the
Forsyth County submarket within the Greensboro/Winston-Salem
market. We expect to acquire the Winston-Salem property using
net proceeds of this offering.
|
|
|
Ø
|
Wisconsin portfolio.
We have entered into a
purchase agreement for the Wisconsin portfolio, an approximately
1,116,307 square foot, two-tenant, three-building
industrial portfolio located in the Appleton and Plover areas of
Wisconsin, for $25.3 million. The portfolio is 100%
occupied, with 14 years remaining on the leases in one of
the buildings with a 2009 Fortune 500 printing company tenant
that occupies two of the buildings. This tenants lease of
its second building has three years remaining on its term. The
third building, located in the Appleton area, is a six year
sale/leaseback with a national third-party logistics provider
headquartered in Appleton that has a 40 year operating
history. We expect to acquire the Wisconsin portfolio using net
proceeds of this offering.
|
|
|
Ø
|
Charlotte portfolio.
We have entered into a
purchase agreement for the Charlotte portfolio, an approximately
1,085,995 square foot, seven-tenant, five-building
industrial portfolio located in Charlotte, North Carolina, for
$35.0 million. The portfolio is 91% occupied with no
existing tenant lease expirations until 2014 and an average of
5.4 years remaining on the terms of the leases. The
buildings range in size from 21,592 square feet to
782,946 square feet. We expect to acquire the Charlotte
portfolio using net proceeds of this offering.
|
The Columbus portfolio, Denver/Lakeland portfolio, Wisconsin
portfolio, Winston-Salem property, Milwaukee property, Eastern
National Industrial portfolio and Mattawoman property,
Minneapolis property, Aurora property and Memphis portfolio were
not listed on the market for sale and were sourced by us
directly through our relationships with owners and brokers. The
weighted average age of the properties in our acquisition
portfolio, is 17 years. The acquisition portfolio, as of
April 1, 2010, was 98.8% occupied. Based on leasable square
footage, the weighted average lease term remaining for the
properties in our acquisition portfolio is 7.6 years. All
of the properties in our acquisition portfolio are industrial
properties.
The purchase agreements for the properties in our acquisition
portfolio provide for customary due diligence review periods and
contain various customary conditions to closing. At any time
prior to the expiration of the applicable due diligence period,
we may terminate the related agreement. We have completed our
due diligence investigation of substantially all of the
properties in our acquisition portfolio and anticipate that we
will have completed our due diligence investigation of the
remaining properties prior to completion of this offering. In
addition, the purchase agreements for the properties in our
acquisition portfolio provide that the acquisition must be
completed by a specified termination date, with certain purchase
agreements providing for a short cure period. The termination
dates for most of the properties in our acquisition portfolio
occur after the anticipated date of the completion of this
offering, or we have agreed in principle with the sellers of the
other properties to extend the termination dates and are in the
process of finalizing the related extension documentation.
129
Business and
properties
The charts following table summarizes the properties in our
acquisition portfolio as of April 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
leasable
|
|
|
Occupancy
|
|
|
|
|
|
rent per
|
|
|
|
Property
|
|
|
|
Year built/
|
|
|
square
|
|
|
rate
(2)
|
|
|
Annualized
|
|
|
square
|
|
Address
|
|
type
(1)
|
|
MSA
|
|
renovated
|
|
|
footage
|
|
|
(%)
|
|
|
base
rent
(2),(3)
|
|
|
foot
(4)
|
|
|
|
|
California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5321 Dennis McCarthy Drive
|
|
Distribution
|
|
Bakersfield
|
|
|
2008
|
|
|
|
351,723
|
|
|
|
100.0
|
|
|
$
|
2,004,821
|
|
|
$
|
5.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CaliforniaTotal/Weighted Average
|
|
|
|
|
2008
|
|
|
|
351,723
|
|
|
|
100.0
|
|
|
|
2,004,821
|
|
|
|
5.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colorado
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11600 East 56th Avenue
|
|
Distribution
|
|
Denver-Aurora-Broomfield
|
|
|
1994
|
|
|
|
210,600
|
|
|
|
100.0
|
|
|
|
977,967
|
|
|
|
4.64
|
|
3254 Fraser Street
|
|
Warehouse
|
|
Denver-Aurora-Broomfield
|
|
|
1986
|
|
|
|
119,200
|
|
|
|
100.0
|
|
|
|
476,640
|
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ColoradoTotal/Weighted Average
|
|
|
|
|
1991
|
|
|
|
329,800
|
|
|
|
100.0
|
|
|
|
1,454,607
|
|
|
|
4.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5200/5225 Region Court/5300 Region Court
|
|
Warehouse
|
|
Lakeland-Winter Haven
|
|
|
1988-1990
|
|
|
|
291,564
|
|
|
|
100.0
|
|
|
|
1,433,876
|
|
|
|
4.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FloridaTotal/Weighted Average
|
|
|
|
|
1989
|
|
|
|
291,564
|
|
|
|
100.0
|
|
|
|
1,433,876
|
|
|
|
4.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maryland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14301 Mattawoman Drive
|
|
Distribution
|
|
Washington-Arlington-Alexandria
|
|
|
1998
|
|
|
|
393,440
|
|
|
|
100.0
|
|
|
|
983,600
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MarylandTotal/Weighted Average
|
|
|
|
|
1998
|
|
|
|
393,440
|
|
|
|
100.0
|
|
|
|
983,600
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minnesota
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7401 Bush Lake Road
|
|
Flex
|
|
Minneapolis-St.Paul-Bloomington
|
|
|
1973
|
|
|
|
55,619
|
|
|
|
86.8
|
|
|
|
318,236
|
|
|
|
6.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MinnesotaTotal/Weighted Average
|
|
|
|
|
1973
|
|
|
|
55,619
|
|
|
|
86.8
|
|
|
|
318,236
|
|
|
|
6.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North Carolina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521 Northridge Park Drive
|
|
Distribution
|
|
Winston-Salem
|
|
|
1989
|
|
|
|
930,451
|
|
|
|
100.0
|
|
|
|
2,651,785
|
|
|
|
2.85
|
|
2401 Nevada Boulevard/
11906-12520
General Drive
|
|
Distribution
|
|
Charlotte-Gastonia-Concord
|
|
|
1973-1999
|
|
|
|
1,085,995
|
|
|
|
91.1
|
|
|
|
3,491,509
|
|
|
|
3.53
|
|
2727 Salisbury Highway
|
|
Distribution
|
|
Statesville-Mooresville
|
|
|
1992
|
|
|
|
265,000
|
|
|
|
100.0
|
|
|
|
751,536
|
|
|
|
2.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North CarolinaTotal/Weighted Average
|
|
|
|
|
1987
|
|
|
|
2,281,446
|
|
|
|
95.8
|
|
|
|
6,894,830
|
|
|
|
3.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1580-1600
Williams Road
|
|
Distribution
|
|
Columbus
|
|
|
1991-1999
|
|
|
|
759,950
|
|
|
|
100.0
|
|
|
|
2,212,974
|
|
|
|
2.91
|
|
#1 Payless Way
|
|
Distribution
|
|
Dayton
|
|
|
2008
|
|
|
|
801,711
|
|
|
|
100.0
|
|
|
|
3,773,645
|
|
|
|
4.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OhioTotal/Weighted Average
|
|
|
|
|
2002
|
|
|
|
1,561,661
|
|
|
|
100.0
|
|
|
|
5,986,619
|
|
|
|
3.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300 Salem Church Road
|
|
Distribution
|
|
Harrisburg-Carlisle
|
|
|
1990
|
|
|
|
120,000
|
|
|
|
100.0
|
|
|
|
466,800
|
|
|
|
3.89
|
|
330-350
Salem Church Road
|
|
Distribution
|
|
Harrisburg-Carlisle
|
|
|
1990
|
|
|
|
539,600
|
|
|
|
100.0
|
|
|
|
2,034,520
|
|
|
|
3.77
|
|
7130 Ambassador Drive
|
|
Distribution
|
|
Allentown-Bethlehem-Easton
|
|
|
1992
|
|
|
|
114,049
|
|
|
|
100.0
|
|
|
|
399,172
|
(5)
|
|
|
3.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PennsylvaniaTotal/Weighted Average
|
|
|
|
|
1990
|
|
|
|
773,649
|
|
|
|
100.0
|
|
|
|
2,900,492
|
|
|
|
3.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Carolina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260 Parkway East
|
|
Warehouse
|
|
Duncan
|
|
|
1988
|
|
|
|
96,400
|
|
|
|
100.0
|
|
|
|
431,872
|
|
|
|
4.48
|
|
|
|
|
|
Charleston-North
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2440 Clements Ferry Road
|
|
Distribution
|
|
Charleston-Summerville
|
|
|
2000
|
|
|
|
203,223
|
|
|
|
100.0
|
|
|
|
772,247
|
|
|
|
3.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South CarolinaTotal/Weighted Average
|
|
|
|
|
1996
|
|
|
|
299,623
|
|
|
|
100.0
|
|
|
|
1,204,119
|
|
|
|
4.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tennessee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4995 Citation Drive/
4460 East Holmes Road
|
|
Distribution
|
|
Memphis
|
|
|
1998
|
|
|
|
816,400
|
|
|
|
100.0
|
|
|
|
1,951,830
|
|
|
|
2.39
|
|
|
|
|
|
Nashville-Davidson-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
538 Myatt Drive
|
|
Distribution
|
|
Murfreesboro-Franklin
|
|
|
1984
|
|
|
|
418,406
|
|
|
|
100.0
|
|
|
|
1,129,696
|
|
|
|
2.70
|
|
|
|
|
|
Nashville-Davidson-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TennesseeTotal/Weighted Average
|
|
|
|
|
1993
|
|
|
|
1,234,806
|
|
|
|
100.0
|
|
|
|
3,081,526
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wisconsin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N9234 Lake Park Road
|
|
Distribution
|
|
Appleton-Oshkosh-Neenah
|
|
|
2003-2009
|
|
|
|
416,500
|
|
|
|
100.0
|
|
|
|
1,649,340
|
|
|
|
3.96
|
|
1500 Disk Drive
|
|
Distribution
|
|
Stevens Point
|
|
|
1978-1984, 1995
|
|
|
|
253,424
|
|
|
|
100.0
|
|
|
|
608,218
|
|
|
|
2.40
|
|
655 Brighton Beach Road
|
|
Distribution
|
|
Appleton-Oshkosh-Neenah
|
|
|
1971-1979, 1997
|
|
|
|
446,383
|
|
|
|
100.0
|
|
|
|
598,153
|
(6)
|
|
|
1.34
|
|
130
Business and
properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
leasable
|
|
|
Occupancy
|
|
|
|
|
|
rent per
|
|
|
|
Property
|
|
|
|
Year built/
|
|
|
square
|
|
|
rate
(2)
|
|
|
Annualized
|
|
|
square
|
|
Address
|
|
type
1
|
|
MSA
|
|
renovated
|
|
|
footage
|
|
|
(%)
|
|
|
base
rent
(2),(3)
|
|
|
foot
(4)
|
|
|
|
|
5150 International Drive
|
|
Distribution
|
|
Milwaukee-Waukesha-West Allis
|
|
|
1999
|
|
|
|
150,465
|
|
|
|
100.0
|
|
|
$
|
679,788
|
|
|
$
|
4.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WisconsinTotal/Weighted Average
|
|
|
|
|
1990
|
|
|
|
1,266,772
|
|
|
|
100.0
|
|
|
|
3,535,499
|
|
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition PortfolioTotal/Weighted Average
|
|
|
|
|
1993
|
|
|
|
8,840,103
|
|
|
|
98.8
|
|
|
$
|
29,798,225
|
|
|
$
|
3.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Certain percentages and totals
may not sum due to rounding
|
|
|
|
**
|
|
The Columbus portfolio is
comprised of
1580-1600
Williams Road; the Memphis portfolio is comprised of 4995
Citation Drive/4460 East Holmes Road; the Nashville property is
538 Myatt Drive; the Denver/Lakeland portfolio is comprised of
11600 East 56th Avenue and 5200/5225 Region Court/ 5300
Region Court; the Aurora property is 3254 Fraser Street; the
Minneapolis property is 7401 Bush Lake Road; the Brookville
property is #1 Payless Way; the Tejon property is 5321
Dennis McCarthy Drive; the Eastern National Industrial portfolio
is comprised of 2727 Salisbury Highway, 300 Salem Church Road,
330-350
Salem Church Road, 7130 Ambassador Drive, 260 Parkway East and
2440 Clements Ferry Road; the Mattawoman property is 14301
Mattawoman Drive; the Milwaukee property is 5150 International
Drive; the Winston Salem property is 521 Northridge Park Drive;
the Wisconsin portfolio is comprised of N9234 Lake Park Road,
1500 Disk Drive and 655 Brighton Beach Road; and the Charlotte
portfolio is comprised of
11906-12520
General Drive and 2401 Nevada Boulevard.
|
|
|
|
(1)
|
|
Property types defined as
follows: distribution consists of 0% to 15% office space;
warehouse consists of 15% to 55% office space; and flex consists
of greater than 55% office space
|
|
(2)
|
|
Based on information provided to
us by the sellers
|
|
(3)
|
|
Based on monthly billed base
rent, excluding storage and parking revenue, as of April 1,
2010 and calculated as billed base rent multiplied by
12
|
|
(4)
|
|
Calculated as annualized billed
base rent divided by total leased square footage as of
April 1, 2010
|
|
(5)
|
|
Annualized base rent to commence
May 1, 2010
|
|
(6)
|
|
Seller will sign a 6-year lease
for 446,383 square feet upon completion of this offering, with
an initial monthly rental payment of $49,846
|
The following table presents a summary of our acquisition
portfolio by state as of April 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total leasable
|
|
|
|
|
|
Total
annualized
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Total leasable
|
|
square
footage
(1)
|
|
|
Annualized
|
|
|
base
rent
(3)
|
|
|
|
|
|
|
|
State
|
|
properties
|
|
|
|
square
footage
|
|
(%)
|
|
|
base
rent
(1)(2)
|
|
|
(%)
|
|
|
|
|
|
|
|
|
|
|
North Carolina
|
|
|
3
|
|
|
|
2,281,446
|
|
|
25.8
|
|
|
$
|
6,894,830
|
|
|
|
23.1
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
|
2
|
|
|
|
1,561,661
|
|
|
17.7
|
|
|
|
5,986,619
|
|
|
|
20.1
|
|
|
|
|
|
|
|
|
|
Wisconsin
|
|
|
4
|
|
|
|
1,266,772
|
|
|
14.3
|
|
|
|
3,535,499
|
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
Tennessee
|
|
|
2
|
|
|
|
1,234,806
|
|
|
14.0
|
|
|
|
3,081,526
|
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
Pennsylvania
|
|
|
3
|
|
|
|
773,649
|
|
|
8.8
|
|
|
|
2,900,492
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
Maryland
|
|
|
1
|
|
|
|
393,440
|
|
|
4.5
|
|
|
|
983,600
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
California
|
|
|
1
|
|
|
|
351,723
|
|
|
4.0
|
|
|
|
2,004,821
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
Colorado
|
|
|
2
|
|
|
|
329,800
|
|
|
3.7
|
|
|
|
1,454,607
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
South Carolina
|
|
|
2
|
|
|
|
299,623
|
|
|
3.4
|
|
|
|
1,204,119
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
1
|
|
|
|
291,564
|
|
|
3.3
|
|
|
|
1,433,876
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
Minnesota
|
|
|
1
|
|
|
|
55,619
|
|
|
0.6
|
|
|
|
318,236
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Acquisition Portfolio
|
|
|
22
|
|
|
|
8,840,103
|
|
|
100.0
|
|
|
$
|
29,798,225
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Certain percentages and totals
may not sum due to rounding
|
(1)
|
|
Based on information provided to
us by the sellers
|
|
(2)
|
|
Based on monthly billed base
rent, excluding storage and parking revenue, as of April 1,
2010 and calculated as billed based rent multiplied by
12
|
131
Business and
properties
|
|
|
(3)
|
|
Calculated as annualized billed
base rent by state divided by total annualized April 2010
base rent figure of $29,798,225
|
The following table summarizes lease expirations with respect to
leases in place in our acquisition portfolio as of April 1,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Leasable
square
|
|
|
|
|
|
Annualized
|
|
|
Annualized
base
|
|
|
|
of leases
|
|
|
Leasable
|
|
|
footage
(2)
|
|
|
Annualized
|
|
|
base
rent
(4)
|
|
|
rent per
leased
|
|
|
|
expiring
|
|
|
square
footage
(1)
|
|
|
(%)
|
|
|
base
rent
(1),(3)
|
|
|
(%)
|
|
|
square
foot
|
|
|
|
|
Common Area
|
|
|
|
|
|
|
216
|
|
|
|
0.0
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Available
|
|
|
|
|
|
|
106,053
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTM Tenants
|
|
|
3
|
|
|
|
3,146
|
|
|
|
0.0
|
|
|
|
28,478
|
|
|
|
0.1
|
|
|
|
9.05
|
|
2010
|
|
|
5
|
|
|
|
23,480
|
|
|
|
0.3
|
|
|
|
168,714
|
|
|
|
0.6
|
|
|
|
7.19
|
|
2011
|
|
|
3
|
|
|
|
300,467
|
|
|
|
3.4
|
|
|
|
1,133,258
|
|
|
|
3.8
|
|
|
|
3.77
|
|
2012
|
|
|
6
|
|
|
|
724,397
|
|
|
|
8.2
|
|
|
|
2,564,997
|
|
|
|
8.6
|
|
|
|
3.54
|
|
2013
|
|
|
4
|
|
|
|
593,406
|
|
|
|
6.7
|
|
|
|
2,127,042
|
|
|
|
7.1
|
|
|
|
3.58
|
|
2014
|
|
|
8
|
|
|
|
1,373,696
|
|
|
|
15.5
|
|
|
|
4,022,371
|
|
|
|
13.5
|
|
|
|
2.93
|
|
2015
|
|
|
4
|
|
|
|
547,321
|
|
|
|
6.2
|
|
|
|
1,915,998
|
|
|
|
6.4
|
|
|
|
3.50
|
|
2016
|
|
|
3
|
|
|
|
806,164
|
|
|
|
9.1
|
|
|
|
2,533,837
|
(5)
|
|
|
8.5
|
|
|
|
3.14
|
|
2017
|
|
|
3
|
|
|
|
620,083
|
|
|
|
7.0
|
|
|
|
1,511,527
|
|
|
|
5.1
|
|
|
|
2.44
|
|
2018
|
|
|
2
|
|
|
|
810,950
|
|
|
|
9.2
|
|
|
|
2,413,404
|
|
|
|
8.1
|
|
|
|
2.98
|
|
2019
|
|
|
4
|
|
|
|
430,339
|
|
|
|
4.9
|
|
|
|
1,299,008
|
|
|
|
4.4
|
|
|
|
3.02
|
|
Thereafter
|
|
|
4
|
|
|
|
2,500,385
|
|
|
|
28.3
|
|
|
|
10,079,591
|
|
|
|
33.8
|
|
|
|
4.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Acquisition Portfolio
|
|
|
49
|
|
|
|
8,840,103
|
|
|
|
100.0
|
|
|
$
|
29,798,225
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Certain percentages and totals
may not sum due to rounding
|
|
(1)
|
|
Based on information provided to
us by the sellers
|
|
|
|
(2)
|
|
Calculated as leasable square
footage expiring divided by the portfolio total of 8,840,103
leasable square footage
|
|
|
|
(3)
|
|
Based on monthly billed base
rent, excluding storage and parking revenue, as of April 1,
2010 and calculated as billed based rent multiplied by
12
|
|
|
|
(4)
|
|
Calculated as annualized base
rent divided by total annualized base rent figure of
$29,798,225
|
|
|
|
(5)
|
|
Includes $598,153 of rent under
lease commencing upon completion of this offering
|
132
Business and
properties
The following table summarizes information on the top ten
tenants in our acquisition portfolio based on annualized base
rent as of April 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
square
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
Leasable
|
|
|
footage
|
|
|
|
|
|
|
|
|
Property
|
|
Annualized
|
|
|
base
rent
(4)
|
|
|
square footage
|
|
|
occupied
(6)
|
|
|
Lease
|
|
Tenant
|
|
MSA
|
|
type
(1)
|
|
base
rent
(2),(3)
|
|
|
(%)
|
|
|
occupied
(5)
|
|
|
(%)
|
|
|
expiration
|
|
|
|
|
Payless
|
|
Dayton
|
|
Distribution
|
|
$
|
3,773,645
|
|
|
|
12.7
|
|
|
|
801,711
|
|
|
|
9.1
|
|
|
|
2/24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hanesbrands, Inc.
|
|
Winston-Salem
|
|
Distribution
|
|
|
2,651,785
|
|
|
|
8.9
|
|
|
|
930,451
|
|
|
|
10.5
|
|
|
|
12/21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exel Inc.
|
|
Harrisburg-Carlisle
|
|
Distribution
|
|
|
2,501,320
|
|
|
|
8.4
|
|
|
|
659,600
|
(7)
|
|
|
7.5
|
|
|
|
7/13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RR Donnelley
|
|
Appleton-Oshkosh-Neenah/Stevens Point
|
|
Distribution
|
|
|
2,257,558
|
|
|
|
7.6
|
|
|
|
669,924
|
(8)
|
|
|
7.6
|
|
|
|
5/24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ODW Logistics, Inc.
|
|
Columbus
|
|
Distribution
|
|
|
2,212,974
|
|
|
|
7.4
|
|
|
|
759,950
|
|
|
|
8.6
|
|
|
|
3/18
|
|
Brown Shoe
|
|
Bakersfield
|
|
Distribution
|
|
|
2,004,821
|
|
|
|
6.7
|
|
|
|
351,723
|
|
|
|
4.0
|
|
|
|
11/27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americold
|
|
Charlotte-Gastonia-Concord
|
|
Distribution
|
|
|
1,255,896
|
|
|
|
4.2
|
|
|
|
209,316
|
|
|
|
2.4
|
|
|
|
10/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DuPont
|
|
Nashville-Davidson
Murfreesboro-Franklin
|
|
Distribution
|
|
|
1,129,696
|
|
|
|
3.8
|
|
|
|
418,406
|
|
|
|
4.7
|
|
|
|
12/14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Container Company
|
|
Lakeland-Winter Haven
|
|
Warehouse
|
|
|
1,035,821
|
|
|
|
3.5
|
|
|
|
217,850
|
|
|
|
2.5
|
|
|
|
11/13
|
|
Gregg Appliances, Inc.
|
|
Washington-Arlington-Alexandria
|
|
Distribution
|
|
|
983,600
|
|
|
|
3.3
|
|
|
|
393,440
|
|
|
|
4.5
|
|
|
|
5/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top 10 Tenants
|
|
|
|
|
|
|
19,807,117
|
|
|
|
66.5
|
|
|
|
5,412,371
|
|
|
|
61.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Tenants
|
|
|
|
|
|
|
9,991,109
|
|
|
|
33.5
|
|
|
|
3,427,732
|
|
|
|
38.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Acquisition Portfolio
|
|
|
|
|
|
$
|
29,798,225
|
|
|
|
100.0
|
|
|
|
8,840,103
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Certain percentages and totals
may not sum due to rounding
|
|
(1)
|
|
Property types defined as
follows: distribution consists of 0% to 15% office space;
warehouse consists of 15% to 55% office space
|
|
(2)
|
|
Based on information provided to
us by the sellers
|
|
(3)
|
|
Based on monthly billed base
rent, excluding storage and parking revenue, as of April 1, 2010
and calculated as billed based rent multiplied by 12
|
|
|
|
(4)
|
|
Calculated as annualized base
rent divided by total base rent figure of $29,798,225
|
|
|
|
(5)
|
|
Based on leases signed as of
April 1, 2010
|
|
|
|
(6)
|
|
Based on leasable square footage
occupied divided by total leasable square footage of
8,804,103
|
|
|
|
(7)
|
|
Includes 200,000 leasable square
footage with a lease expiration of September 30, 2011 and
339,600 leasable square footage with a lease expiration of
February 28, 2012
|
|
(8)
|
|
Includes 253,424 leasable square
footage in Stevens Point with a lease expiration of
December 31, 2013. Lease expiring May 31, 2024 has a
termination option in favor of the tenant allowing termination
on May 31, 2019 with payment of $1,320,000 termination
fee
|
Combined
portfolio
We believe our acquisition portfolio will complement our
existing portfolio and enhance our central U.S. presence. We
refer to our acquisition portfolio and existing portfolio as our
combined portfolio, which had an occupancy as of April 1,
2010 of 92.6% and represents 18.4 million leasable square
feet in 17 states.
133
Business and
properties
The following table summarizes our combined portfolio as of
April 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
leasable
|
|
|
industrial
|
|
|
office
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
leasable
|
|
|
square
|
|
|
square
|
|
|
square
|
|
|
Occupancy
|
|
|
Annualized
|
|
|
annualized
|
|
|
|
Number of
|
|
|
square
|
|
|
footage(1)
|
|
|
footage
|
|
|
footage
|
|
|
rate(2)
|
|
|
base
|
|
|
base rent(4)
|
|
State
|
|
properties
|
|
|
footage
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
rent(3)
|
|
|
(%)
|
|
|
|
|
North Carolina
|
|
|
4
|
|
|
|
2,533,911
|
|
|
|
13.8
|
|
|
|
14.7
|
|
|
|
0.0
|
|
|
|
96.2
|
|
|
$
|
7,541,140
|
|
|
|
10.1
|
|
Ohio
|
|
|
11
|
|
|
|
2,261,804
|
|
|
|
12.3
|
|
|
|
12.9
|
|
|
|
4.2
|
|
|
|
96.5
|
|
|
|
9,759,435
|
|
|
|
13.0
|
|
Minnesota
(5)
|
|
|
20
|
|
|
|
2,081,837
|
|
|
|
11.3
|
|
|
|
6.1
|
|
|
|
83.1
|
|
|
|
83.2
|
|
|
|
14,728,299
|
|
|
|
19.7
|
|
Wisconsin
|
|
|
8
|
|
|
|
1,856,495
|
|
|
|
10.1
|
|
|
|
10.8
|
|
|
|
0.0
|
|
|
|
99.6
|
|
|
|
6,203,955
|
|
|
|
8.3
|
|
Michigan
|
|
|
6
|
|
|
|
1,630,560
|
|
|
|
8.8
|
|
|
|
9.5
|
|
|
|
0.0
|
|
|
|
96.8
|
|
|
|
7,964,675
|
|
|
|
10.6
|
|
Tennessee
|
|
|
2
|
|
|
|
1,234,806
|
|
|
|
6.7
|
|
|
|
7.2
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
3,081,526
|
|
|
|
4.1
|
|
Indiana
|
|
|
3
|
|
|
|
1,196,954
|
|
|
|
6.5
|
|
|
|
7.0
|
|
|
|
0.0
|
|
|
|
71.2
|
|
|
|
2,727,254
|
|
|
|
3.6
|
|
Missouri
(6)
|
|
|
7
|
|
|
|
1,123,336
|
|
|
|
6.1
|
|
|
|
6.5
|
|
|
|
0.0
|
|
|
|
83.1
|
|
|
|
4,589,813
|
|
|
|
6.1
|
|
Iowa
|
|
|
8
|
|
|
|
782,179
|
|
|
|
4.2
|
|
|
|
4.6
|
|
|
|
0.0
|
|
|
|
89.1
|
|
|
|
2,488,490
|
|
|
|
3.3
|
|
Pennsylvania
|
|
|
3
|
|
|
|
773,649
|
|
|
|
4.2
|
|
|
|
4.5
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
2,900,492
|
|
|
|
3.9
|
|
Illinois
|
|
|
4
|
|
|
|
589,685
|
|
|
|
3.2
|
|
|
|
3.4
|
|
|
|
0.0
|
|
|
|
55.3
|
|
|
|
1,921,509
|
|
|
|
2.6
|
|
Florida
|
|
|
3
|
|
|
|
518,909
|
|
|
|
2.8
|
|
|
|
3.0
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
2,153,029
|
|
|
|
2.9
|
|
South Carolina
|
|
|
3
|
|
|
|
458,206
|
|
|
|
2.5
|
|
|
|
1.7
|
|
|
|
12.8
|
|
|
|
100.0
|
|
|
|
2,841,917
|
|
|
|
3.8
|
|
Maryland
|
|
|
1
|
|
|
|
393,440
|
|
|
|
2.1
|
|
|
|
2.3
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
983,600
|
|
|
|
1.3
|
|
California
|
|
|
1
|
|
|
|
351,723
|
|
|
|
1.9
|
|
|
|
2.0
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
2,004,821
|
|
|
|
2.7
|
|
Colorado
|
|
|
2
|
|
|
|
329,800
|
|
|
|
1.8
|
|
|
|
1.9
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
1,454,607
|
|
|
|
1.9
|
|
Kansas
|
|
|
1
|
|
|
|
311,100
|
|
|
|
1.7
|
|
|
|
1.8
|
|
|
|
0.0
|
|
|
|
100.0
|
|
|
|
1,555,500
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Combined
Portfolio
(5)(6)
|
|
|
87
|
|
|
|
18,428,394
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
92.6
|
|
|
$
|
74,900,061
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Certain percentages and totals
may not sum due to rounding
|
|
|
|
(1)
|
|
Calculated as total leasable
square footage by state divided by the portfolio total of
18,428,394 leasable square footage
|
|
|
|
(2)
|
|
Occupancy as of April 1,
2010
|
|
(3)
|
|
Based on monthly billed base
rent, excluding storage and parking revenue as of April 1,
2010, and calculated as billed base rent multiplied by
12
|
|
|
|
(4)
|
|
Calculated as annualized base
rent by state divided by total annualized base rent as of April
1, 2010 of $74,900,061
|
|
|
|
(5)
|
|
Occupancy exclusive of 900
2nd Avenue South, which has not reached stabilized
occupancy of 90.0% since acquisition by us with the intent to
renovate and reposition
|
|
(6)
|
|
Occupancy exclusive of the
following assets which have not reached stabilized occupancy of
90.0% since development by us: 10360 Lake Bluff Boulevard,
629-651 Lambert
Pointe Drive,
519-529 McDonnell
Boulevard
|
Lease expirations.
We believe our combined
portfolio is currently well positioned with respect to lease
rollover. As of April 1, 2010, 10.4% of our combined
portfolio, based on leasable square footage, is represented by
leases expiring in 2010 or 2011 (not including leases which are
month-to-month). We believe that there is a broader potential
tenant base for smaller premises. Because of this, we believe it
is advantageous that we have relatively few leases of greater
than 50,000 square feet expiring in the next two years. In
2010, the leases scheduled to expire represent approximately
0.8 million leasable square feet, or 4.1% of the leasable
square footage in our combined portfolio. Three of the leases
scheduled to expire in 2010 are for premises over 50,000
leasable square feet. In 2011, the leases scheduled to expire
represent approximately 1.2 million square feet, or 6.3% of
the leasable square footage in our combined portfolio. Four of
the leases scheduled to expire in 2011 are for premises over
50,000 square feet.
134
Business and
properties
The following table summarizes lease expirations with respect to
leases in place in our combined portfolio as of April 1,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasable
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Number
|
|
|
Leasable
|
|
|
square
|
|
|
|
|
|
Annualized
|
|
|
base rent
|
|
|
|
of leases
|
|
|
square
|
|
|
footage
(2)
|
|
|
Annualized
|
|
|
base
rent
(4)
|
|
|
per leased
|
|
|
|
expiring
|
|
|
footage
(1)
|
|
|
(%)
|
|
|
base
rent
(1),(3)
|
|
|
(%)
|
|
|
square
foot
|
|
|
|
|
Common Area
|
|
|
|
|
|
|
24,317
|
|
|
|
0.1
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Available
|
|
|
|
|
|
|
1,670,752
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MTM Tenants
|
|
|
60
|
|
|
|
205,017
|
|
|
|
1.1
|
|
|
|
740,285
|
|
|
|
1.0
|
|
|
|
3.61
|
|
2010
|
|
|
94
|
|
|
|
752,327
|
|
|
|
4.1
|
|
|
|
4,810,315
|
|
|
|
6.4
|
|
|
|
6.39
|
|
2011
|
|
|
103
|
|
|
|
1,164,916
|
|
|
|
6.3
|
|
|
|
7,124,650
|
|
|
|
9.5
|
|
|
|
6.12
|
|
2012
|
|
|
94
|
|
|
|
1,793,045
|
|
|
|
9.7
|
|
|
|
8,408,432
|
|
|
|
11.2
|
|
|
|
4.69
|
|
2013
|
|
|
75
|
|
|
|
1,594,367
|
|
|
|
8.7
|
|
|
|
8,343,752
|
|
|
|
11.1
|
|
|
|
5.23
|
|
2014
|
|
|
44
|
|
|
|
2,693,144
|
|
|
|
14.6
|
|
|
|
10,281,060
|
|
|
|
13.7
|
|
|
|
3.82
|
|
2015
|
|
|
24
|
|
|
|
872,385
|
|
|
|
4.7
|
|
|
|
4,499,281
|
|
|
|
6.0
|
|
|
|
5.16
|
|
2016
|
|
|
22
|
|
|
|
1,693,396
|
|
|
|
9.2
|
|
|
|
7,456,284
|
(5)
|
|
|
10.0
|
|
|
|
4.40
|
|
2017
|
|
|
12
|
|
|
|
762,847
|
|
|
|
4.1
|
|
|
|
2,518,092
|
|
|
|
3.4
|
|
|
|
3.30
|
|
2018
|
|
|
7
|
|
|
|
1,191,617
|
|
|
|
6.5
|
|
|
|
4,628,654
|
|
|
|
6.2
|
|
|
|
3.88
|
|
2019
|
|
|
7
|
|
|
|
743,658
|
|
|
|
4.0
|
|
|
|
2,767,554
|
|
|
|
3.7
|
|
|
|
3.72
|
|
Thereafter
|
|
|
13
|
|
|
|
3,266,606
|
|
|
|
17.7
|
|
|
|
13,321,701
|
|
|
|
17.8
|
|
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Combined Portfolio
|
|
|
555
|
|
|
|
18,428,394
|
|
|
|
100.0
|
|
|
$
|
74,900,061
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Certain percentages and totals may not sum due to rounding
|
|
(1)
|
|
Leasable square footage represents the contracted square
footage upon expiration
|
|
|
|
(2)
|
|
Calculated as leasable square footage expiring divided by the
portfolio total of 18,428,394 leasable square footage
|
|
|
|
(3)
|
|
Based on monthly billed base rent, excluding storage and
parking revenue, as of April 1, 2010 and calculated as
billed base rent, multiplied by 12
|
|
|
|
(4)
|
|
Calculated as annualized base rate divided by total
annualized base rent figure of $74,900,061
|
|
|
|
(5)
|
|
Includes $598,153 of rent under lease commencing upon
completion of this offering
|
Acquisition
pipeline
In addition to those properties identified in our acquisition
portfolio above, we intend to acquire additional properties with
the net proceeds of this offering, in exchange for OP units,
with new debt financing or through the assumption of existing
indebtedness. We are currently reviewing an additional 14
industrial properties with an aggregate purchase price of
approximately $282.8 million, representing 6.3 million
leasable square feet, which we refer to as our acquisition
pipeline. We consider the properties in our acquisition pipeline
to be high-quality industrial properties in markets
complementary to our existing portfolio, including Minneapolis,
Denver, and Kansas City. We sourced 10 of the 14 properties
directly through our relationships with owners and brokers, and
such properties were not listed on the market for sale.
For purposes of identifying properties in our acquisition
pipeline, we have targeted owners that may be faced with
liquidity issues, including near-term maturities, who may be
motivated to sell their properties because of the current
distress in the overall economy. We believe this will be a
successful strategy for our future acquisitions because many of
the properties in our acquisition pipeline are being sold due to
owner liquidity issues.
There can be no assurance that we will acquire any of the
properties in our acquisition pipeline. We expect we would
finance any future acquisitions from our acquisition pipeline
with available cash or with proceeds from our syndicated credit
facility or other debt financing.
135
Business and
properties
Joint venture
portfolio
We will own a 5% economic interest in a portfolio consisting of
10 industrial and three office properties and a 21.7%
economic interest in one five-building office complex; these
properties together total approximately 3.2 million
leasable square feet. As a minority owner in these properties,
we will not have exclusive control over the financing, leasing
and management. However, we may receive economic benefits such
as preferred distributions, disposition fees and a share of the
profits upon sale of the applicable property, and we also expect
to maintain contractual management and leasing responsibilities
for the properties in our joint venture portfolio. As of
April 1, 2010, our joint venture portfolio was 95.0%
occupied by leasable square footage. The portfolio includes
approximately 2.5 million square feet of industrial space,
which was 95.7% occupied based on total industrial leasable
square footage as of April 1, 2010, and approximately
690,000 square feet of office space which was 92.5%
occupied based on total office leasable square footage as of
April 1, 2010.
The following table provides a summary of the properties in our
joint venture portfolio as of April 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
leasable
|
|
|
Occupancy
|
|
|
Welsh
|
|
|
|
Property
|
|
|
|
square
|
|
|
rate
(2)
|
|
|
ownership
|
|
Address
|
|
type
(1)
|
|
MSA
|
|
footage
|
|
|
(%)
|
|
|
(%)
|
|
|
|
|
National Joint Venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6250 Ridgeview Road
|
|
Distribution
|
|
St. Cloud
|
|
|
1,201,286
|
|
|
|
100.0
|
|
|
|
5.0
|
|
1608 Frank Akers Road
|
|
Distribution
|
|
Anniston
|
|
|
203,496
|
|
|
|
100.0
|
|
|
|
5.0
|
|
5460 Executive Parkway
|
|
Warehouse
|
|
Grand Rapids-Wyoming
|
|
|
176,606
|
|
|
|
100.0
|
|
|
|
5.0
|
|
400 Hunt Valley Road
|
|
Warehouse
|
|
Pittsburgh
|
|
|
159,785
|
|
|
|
100.0
|
|
|
|
5.0
|
|
1745 East 165th Street
|
|
Distribution
|
|
Chicago-Naperville-Joliet
|
|
|
141,086
|
|
|
|
100.0
|
|
|
|
5.0
|
|
3545 Nicholson Road
|
|
Distribution
|
|
Milwaukee-Waukesha-West Allis
|
|
|
136,000
|
|
|
|
100.0
|
|
|
|
5.0
|
|
1100 East LeClaire Road
|
|
Distribution
|
|
Davenport-Moline-Rock Island
|
|
|
131,550
|
|
|
|
100.0
|
|
|
|
5.0
|
|
7550 49th Avenue North
|
|
Warehouse
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
115,286
|
|
|
|
100.0
|
|
|
|
5.0
|
|
787 Renaissance Parkway
|
|
Distribution
|
|
Cleveland-Elyria-Mentor
|
|
|
110,669
|
|
|
|
100.0
|
|
|
|
5.0
|
|
9925 Brookford Street
|
|
Distribution
|
|
Charlotte-Gastonia-Concord
|
|
|
106,644
|
|
|
|
0.0
|
|
|
|
5.0
|
|
2855 South James Drive
|
|
Office
|
|
Milwaukee-Waukesha-West Allis
|
|
|
86,204
|
|
|
|
100.0
|
|
|
|
5.0
|
|
5000 South Towne Drive
|
|
Office
|
|
Milwaukee-Waukesha-West Allis
|
|
|
74,000
|
|
|
|
100.0
|
|
|
|
5.0
|
|
7660 Centurian Parkway
|
|
Office
|
|
Jacksonville
|
|
|
72,486
|
|
|
|
100.0
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NationalTotal/Weighted Average
|
|
|
|
|
2,715,098
|
|
|
|
96.1
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minnesota Joint Venture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66006868 France Avenue South
|
|
Office
|
|
Minneapolis-St. Paul-Bloomington
|
|
|
456,945
|
|
|
|
88.6
|
|
|
|
21.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MinnesotaTotal/Weighted Average
|
|
|
|
|
456,945
|
|
|
|
88.6
|
|
|
|
21.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint Venture PortfolioTotal/Weighted Average
|
|
|
3,172,043
|
|
|
|
95.0
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Certain percentages and totals
may not sum due to rounding
|
|
(1)
|
|
Property types defined as
follows: distribution consists of 0% to 15% office space;
warehouse consists of 15% to 55% office space; and office
consists of 100% office space
|
|
(2)
|
|
Occupancy as of April 1,
2010
|
Lender
consents
In connection with the formation transactions, we will assume or
otherwise become liable for certain property-related
indebtedness and related obligations with respect to our
existing portfolio and our acquisition portfolio. Where required
by the applicable documents, instruments and agreements
evidencing or securing existing indebtedness, we have obtained
or are in the process of obtaining such modifications, approvals
and consents as we have deemed necessary or appropriate in
connection with the formation transactions. As of the date of
this prospectus, we have obtained or have been informed by
lenders or servicers that we can expect to obtain consents, or
no consents are required, for properties in our existing
portfolio covering approximately $383.6 million of
outstanding indebtedness as of March 31, 2010. We remain in
the lender review process with regard to only approximately
$22.1 million of outstanding indebtedness, comprised of
approximately $10.3 million of indebtedness
136
Business and
properties
on
600-638
Lambert Pointe Drive, $9.2 million of indebtedness on
601-627
Lambert Pointe Drive, and $2.6 million of indebtedness on
9835-9925
13
th
Avenue. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsLiquidity and
Capital ResourcesIndebtedness. We have received all
required lender consents with regard to indebtedness relating to
our joint venture portfolio. Finally, as of the date of this
prospectus, we are still in the lender review process with
regard to one property in our acquisition portfolio, the
Minneapolis property, where we are assuming approximately
$2.6 million of existing debt in connection with the
acquisition. We expect to receive the required modifications,
approvals and consents related to this remaining property prior
to the closing of this offering, but there can be no assurance
that we will be able to do so.
OUR SERVICES
BUSINESS
Our vertically integrated real estate services business provides
a complete spectrum of real estate services necessary to support
our properties. We believe that we have a competitive advantage
over many other property owners through our in-house access to
the expertise provided by our services business. Providing these
services enables us to gain valuable insights into our target
markets and operate our properties more efficiently,
specifically by allowing us to control all aspects of our
acquisitions, asset and property management, architecture,
construction, financing and leasing. As of April 1, 2010,
including our real estate portfolio, we have approximately
27.1 million leasable square feet under management and
nearly 80 licensed real estate salespersons in our brokerage
division. Historically, the Welsh organizations services
business has been a key driver of net revenue at our properties
and provided us with the ability to address opportunities or
issues within our real estate portfolio. Specifically, this
business helps us by identifying tenants for vacancies within
properties, supporting tenant retention through on-going tenant
relationships, negotiating master contracts over the portfolio
of properties to achieve savings in key maintenance areas,
analyzing property taxes and potential appeals annually, and
providing knowledge of
up-to-date
market developments that allows us the ability to negotiate
favorably with tenants in all market cycles.
In addition, our services business has been a source of
recurring third-party revenue. We have been able to maintain
profitability in our services business through several economic
cycles by ensuring that we have the services that owners need in
each stage of a cycle: professional management in a recessionary
economy where hands-on management is key to retaining value;
development and construction when job growth is strong and there
is demand for new space; brokerage services that are able to
provide assistance in all market conditions to create value for
owners or tenants; and facility management, which is less
dependent on market conditions overall. For example, in the year
ended December 31, 2009, we saw reductions in revenue in
brokerage, construction, architectural and financing services;
however, this was partially offset by increased revenue in
investment services, property management and facility services,
and further mitigated by our low fixed-cost structure of using
independent contractors and
sub-contractors
in brokerage and construction. The third-party management and/or
brokerage relationships of our services business extend to
public, private, and individual owners, including companies such
as Highstreet Equities, ING, and TA & Associates.
Although these revenue sources are derived from contracts that
are typically short-term in nature, we have had an ongoing
relationship with each of the clients identified above for over
three years. Although the majority of recurring revenue from
third-party clients comes from property management fees, we also
earn transaction-based revenue from these clients, including
brokerage commissions and construction, architecture, mortgage
origination and facilities maintenance fees.
137
Business and
properties
Our services business has seven divisions, as depicted below,
which together provide a complete spectrum of real estate
services for owners and tenants:
Welsh
Companies
Welsh Companies is made up of four subdivisions: brokerage,
asset services/asset management, development and special asset
services.
Brokerage.
Welsh Companies has a real estate
brokerage division with nearly 80 licensed real estate
salespersons in our brokerage division specializing in office,
industrial, retail and investment sales. Welsh Companies
brokerage team has four offices in Minnesota as well as offices
in Detroit, Michigan and Cincinnati, Ohio. In 2009, the
brokerage division completed approximately 860 transactions.
Welsh Companies is the only Minnesota affiliate of NAI Global,
the premier network of independent commercial real estate firms
and one of the largest commercial real estate service providers
worldwide. NAI Global manages a network of 5,000 professionals
and 325 offices in 55 countries throughout the world. We believe
this relationship provides us with increased exposure and
nationwide resources, and increases the network of professionals
in other markets that assist in providing value for our owned
portfolio. We believe the extensive market knowledge of our
brokerage professionals and their in-depth knowledge of our
assets allow us to enhance value in marketing and leasing
transactions.
Asset Services Asset Management, Property Management and
Accounting.
Welsh Companies is an Accredited
Management Organization (AMO) that manages a portfolio of
approximately 27.1 million leasable square feet of
commercial real estate in the central United States, including
12.4 million square feet under management for third
parties, and serves the needs of more than 2,000 tenants. Having
managed properties for institutions as well as individual
owners, Welsh Companies property management staff and
in-house accounting personnel are capable of complying with each
property owners cash management, reporting and accounting
requirements. We believe that our ability to maintain close
business relationships with our tenants through internalized
asset management, and to the extent available, property
management, allows for us to quickly and comprehensively address
tenant concerns and retain tenants at our properties.
Additionally, we believe our centralized accounting for all
properties in our portfolio provides effective financial
management and enables us to identify efficiencies and
consolidate contracts affecting multiple properties by
monitoring not only individual property expenses but categories
and vendors on a portfolio-wide basis.
138
Business and
properties
Development.
Welsh Companies and its
affiliates has developed more than 1.2 million square feet
of industrial and office property since 2001. Of our existing
portfolio, we developed four of our office properties and eight
of our industrial properties. Most recently, it developed an
approximately 167,000 square foot project in Minnetonka,
Minnesota which included our 95,000 square foot, LEED Gold
corporate headquarters and the renovation of a
72,000 square foot adjacent building. This development was
completed in 2008. The overall development was fully stabilized
and 98.4% occupied as of April 1, 2010. This development
capability facilitates tenant-driven and owner-initiated
building expansions, reconfigurations and redevelopments of
existing properties. In addition, when market conditions allow,
this expertise will also allow us to maximize the value of the
vacant land parcels that are part of our existing portfolio by
developing new assets on these parcels.
Special Asset Services.
Welsh Companies has a
specialized, cross-divisional team focused on providing
management strategies regarding distressed assets throughout the
central United States. Consisting of individuals with finance,
property management, asset management, brokerage, legal and
development experience, we believe this team provides integrated
solutions and strategies for owners seeking assistance with
troubled assets. These integrated solutions include providing an
initial opinion of value and relevant market information to
management, accounting expertise, and assistance with the
ultimate disposition of assets. This service supplements our
primary revenue generators, and we believe may lead to
acquisition opportunities of currently distressed assets. Of the
properties we currently manage, over 2.0 million square
feet is directly related to our special asset services division.
WelshInvest
WelshInvest is our acquisitions division, which acquired the
majority of our real estate portfolio and selected the
properties in our acquisition portfolio. WelshInvests
staff includes acquisition and analytical professionals who work
to strategically identify, underwrite and negotiate
acquisitions, as well as legal and investor relations
professionals. WelshInvest is also focused on the integration of
acquired assets into our portfolio and our platform to maximize
operational efficiencies. Our acquisition professionals are
backed by a team of analysts who provide underwriting, property
analysis and research capabilities. We believe this team is
integral to the execution of our acquisition growth strategy.
Welsh
Capital
Welsh Capital brokers commercial mortgages, facilitates
mezzanine financing, provides loan servicing, and assists in
loan restructuring and note sales. Welsh Capital maintains
relationships with a variety of financial investors and
commercial lenders, including life insurance and finance
companies, pension funds, commercial banks and investment
conduits. We believe our long-standing relationships in this
industry allow us to receive attractive financing terms on
projects with less time-consuming negotiations. Welsh Capital
has obtained loans for clients with principal amounts of
approximately $1.3 billion since beginning business in
1999. We believe Welsh Capitals contact with financing
markets will assist us in managing our debt structure, as well
as continue to provide a source of third-party revenue.
Welsh
Construction
Welsh Construction provides experience in planning new
construction projects as well as tenant improvements and
expansions, including local, regional and national site
selection, construction management, tenant improvements, and, in
connection with Genesis Architecture, LLC, another arm of our
services business, design-build. Welsh Construction has a
consolidated and efficient process for space planning, bids,
approvals and execution that we believe provides a competitive
advantage to our portfolio of properties due to timing and
efficiency.
Welsh Construction is a member of the U.S. Green Building
Council, and developed, designed and built one of the first
buildings in Minnesota to receive LEED Gold certification by the
U.S. Green Building Council. LEED (Leadership in Energy and
Environmental Design) is an internationally recognized
sustainable building certification system that provides
third-party verification that a building was
139
Business and
properties
designed and built using strategies aimed at improving
performance across specific metrics including energy savings,
water efficiency, carbon dioxide emissions reduction, improved
indoor environmental quality, and stewardship of resources and
sensitivity to their environmental impacts.
Genesis
Architecture
Genesis Architecture has a staff of two licensed architects and
eight other professionals, including space planners and interior
designers. Genesis Architecture provides resources including
architectural design, site analysis/master planning, interior
design and programming. We believe that our integrated
architectural services provide a competitive advantage to our
brokers and asset managers in the space planning process for new
and renewing tenants by allowing us to quickly and
cost-effectively configure spaces and complete scale drawings of
space plans.
Welsh Facilities
Services (FaciliTech)
FaciliTech provides commercial, industrial and retail
maintenance and small project services. The services provided by
licensed and experienced professionals include plumbing,
electrical and HVAC subcontract services on new buildings,
tenant improvements, building additions and remodeling in
negotiated, design-build and traditional delivery methods.
FaciliTech creates value by providing in-house services to our
portfolio at cost and also generating additional revenue through
third-party contracts.
Welsh
Securities
Welsh Securities is a FINRA-registered brokerage firm founded in
2008 and licensed in 2009 to assist us in accessing private
capital. Mr. Frederiksen, our Chief Executive Officer, and
Anne Olson, our Director of Investment Operations, each hold
Series 7, Series 63 and Series 24 Principal
licenses for Welsh Securities; Dennis Heieie, our Chief
Financial Officer and Treasurer, holds the Series 27
Financial Operations Principal license; and one additional
employee also holds Series 7 and Series 63 licenses.
This division may provide additional access to capital for
growth in certain circumstances through its access to direct
investors and a network of licensed brokerage firms. The
contribution of Welsh Securities, LLC is subject to FINRA
approval.
INVESTMENT
STRATEGY AND PROCESS
Investment
strategy
The Welsh organizations investment strategy has
historically focused on acquiring and operating industrial and
office properties that generated attractive cash yields or
presented significant value-add opportunities for its investors.
Going forward, we intend to pursue acquisition opportunities
with attractive cash yields as well as the potential for
long-term capital appreciation. We seek to implement our focused
strategy in order to strategically expand our portfolio,
reinvest capital from strategic dispositions, and create value
with opportunistic development and redevelopment within the
portfolio. We plan to continue to follow a conservative
underwriting approach, relying on market data and
well-researched assumptions to analyze the desirability of
acquisition opportunities rather than assuming aggressive rent
growth and capitalization rate compression.
We intend to continue to focus primarily on acquisition
opportunities in our current markets in the central United
States, although we will also monitor other potential markets
for attractive investment opportunities that may warrant
additional consideration. We plan to primarily target stabilized
industrial acquisition opportunities. We consider stabilized
properties to be those with occupancy at or above 90%. We
believe that industrial properties typically generate more
attractive current yields, due in large part to lower ownership
and re-tenanting costs than other property types. In addition,
we will look for opportunities to add value to these
acquisitions through implementation of operational efficiencies,
proactive management, lease up of vacant space and select
investments in capital improvements that will generate higher
rental revenue. We may also strategically acquire select office
properties in markets where we have a significant presence and
can closely oversee the leasing and management process.
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Business and
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The Welsh organization historically focused, and we will
continue to focus, on acquiring assets off-market. We believe
that when assets are widely marketed and command a high number
of bids, the resulting price often generates yields below our
target levels. Our acquisition strategy is driven by our network
of industry relationships. With a
32-year
track record, seven service businesses, over 320 employees
(including nearly 80 licensed real estate salespersons in our
brokerage division), 21 locations and a portfolio of
approximately 27.1 million leasable square feet under
management including 12.4 million square feet under
management for third parties, we access off-market opportunities
by leveraging those relationships. In addition, we have access
to attractive off-market distressed opportunities through our
special asset services division, which provides solutions and
strategies for owners, primarily banks and loan servicers, who
are seeking assistance with distressed assets. We believe that
our real estate services business, including comprehensive asset
and property management services, allows for successful
transition of acquired properties into our portfolio, increased
operational efficiencies and a competitive edge as an
owner/operator, further creating value for our stockholders.
We will seek to selectively identify asset sale opportunities in
order to achieve our total return objectives and dispose of
assets that are identified as no longer being core to our
business strategy. We will seek to maximize returns to our
stockholders by redeploying proceeds from asset sales into new
acquisitions and development opportunities. For example, in
2009, we strategically sold two buildings of a six-building
portfolio to a tenant near the end of its lease term that
desired to consolidate operations and expand its use at the
location where it was our tenant. This sale allowed us to
generate a positive return and avoid having a large vacancy
resulting from a transitioning tenant.
Investment
process
We take a diligent approach to identifying and analyzing
acquisition opportunities. Our investment team consists of
acquisitions professionals who work together with our asset
management professionals and investment committee to source,
structure, negotiate and close new acquisitions.
Acquisition Sourcing.
We primarily source
acquisition opportunities off-market through an extensive
network of both internal and external relationships. Internally,
we source acquisitions through our brokerage teams, property
management, mortgage brokerage and asset management teams and
our special asset services division. Externally, our
acquisitions professionals are focused in specific target
markets where much of their time is spent on developing and
maintaining relationships with local brokers, owners and
lenders, and any additional relationships that will give them
the inside track on prospective new deals before they become
actively marketed.
Conservative Underwriting and Analysis.
We
take a conservative approach to underwriting. With extensive
experience as an owner and third-party service provider of
commercial real estate assets, we have a unique perspective on
the life cycle of an asset and the true costs associated with
ownership. In addition, our acquisitions professionals work
closely with our asset managers and regularly track leasing and
sales information within their respective markets to more
accurately reflect current market conditions in the underwriting
process. Rather than using standard assumptions when evaluating
an asset, we underwrite to in-place occupancy and incorporate
conservative rental rate assumptions with a view on the macro
economic factors. We are also very conservative in our
assumptions for tenant improvement and leasing commission costs,
using costs based on current market conditions.
Investment Committee Approval.
All of our
acquisitions are subject to the approval of our investment
committee, which includes members of our executive management
team. Our investment committee is an integral part of the
acquisition process, giving approvals at two separate points.
First, prior to the execution of a contract, a preliminary
acquisition memorandum is prepared by acquisitions and
underwriting staff outlining the proposed transaction. This
memorandum includes detailed information on the property,
tenants and location with pictures, aerials, site plans, market
information and a detailed financial analysis. If approval is
gained, the second step is to complete the due diligence and
update the memorandum with the findings of the due diligence
investigation and further financial
141
Business and
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analysis, which is presented to our committee prior to
committing non-refundable earnest money to the opportunity. At
the time the memorandum is updated and prior to the commitment
of non-refundable earnest money, at least one member of our
executive management team (and often more than one) will
physically tour the asset. Approval by our investment committee
of the transaction after their review of the updated memorandum
and information obtained through the property tour allows the
acquisitions staff to commit non-refundable earnest money and
proceed to closing on the acquisition.
Due Diligence and Closing.
Upon execution of a
contract for the acquisition of property, we enter into a period
of due diligence which typically ranges from 30 to 45 days.
During this time, we thoroughly evaluate the asset and its
historical financial performance. A team approach to due
diligence is employed and the acquisitions professionals and the
asset management professionals who will be assigned to the asset
all contribute in the process. During the process, the due
diligence team tours the asset and surrounding market, reviews
historical operating statements, conducts tenant interviews,
completes an audit of the financials compared to our
ARGUS
©
model, reviews service contracts, and interviews potential
leasing and management teams. A third party is contracted to
complete environment site assessments and property condition
assessments, and full legal due diligence on the condition of
title to the property is undertaken. Following the completion of
due diligence, comprehensive findings are prepared for inclusion
in the updated acquisition memorandum to be reviewed by our
investment committee along with any recommendations for
contingencies to proceed with the acquisition. In addition, the
acquisitions professionals and asset management professionals
create a business plan for the asset, which addresses major
lease renewals, needed capital projects, strategy for
positioning the asset and asset operations. Upon closing of the
acquisition, a final transition meeting takes place between the
acquisitions team and the asset management team to further
discuss the plan and conduct a transfer of documentation to
ensure smooth transition of the asset into our portfolio of
properties.
Property
management
With 21 office locations providing property management services,
we have developed a comprehensive approach to property
management to enhance the operating performance of our
properties. Our proactive management leverages our local market
knowledge and enables us to closely monitor our properties and
to be prepared for potential tenant and property issues as well
as changes in local, regional or national market conditions.
Once acquired, each property in our portfolio is actively
managed to add value through aggressive leasing strategies,
strong tenant relations and proactive expense management. We
have the internal capability to provide leasing services,
architecture and space planning, construction, accounting, and
facilities management in addition to traditional asset and
property management. We have regular and ongoing contact with
our tenants, brokers and outside service providers, visit our
properties on a regular basis and closely monitor the financial
and overall performance of each property and its tenants. Our
policy is to leverage our internal resources to proactively
manage our properties. In addition, we believe that our
internalized management and services business provides us the
ability to more effectively motivate and hold accountable
third-party service providers in markets where we do not have a
local presence.
Property
disposition
We will dispose of certain properties in the future to exit
specific markets, when we have determined that the net proceeds
of a sale transaction could be accretively
re-invested
in properties that strategically enhance our investment
strategy, or in situations where we have determined that we have
maximized a propertys value. In determining which
properties to dispose of we will frequently review our portfolio
to determine which properties are potential candidates for
disposition. If we determine a property is a candidate for
disposition, we will assemble a team of personnel best suited to
assist in consummating a transaction with a potential purchaser.
Potential candidates for dispositions will be properties that
are either in markets we wish to exit, properties that may
provide attractive opportunities to invest net sale proceeds, or
properties that we
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Business and
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believe have reached their maximum value. We expect that, in
most cases, properties that will be considered for disposition
will have an occupancy level of at least 90% in the event the
likely buyer is an investor or less than 50% in the event the
likely buyer is an owner-occupant or user. Other factors we will
consider are the number of leases that expire in the near term,
the current and projected net operating income of the property,
existing loans and their associated pre-payment costs, as well
as any pending capital improvement projects. All of these
factors will impact our valuation of the property. In addition,
we will also look at potential groupings of properties that
could be sold on a portfolio basis if we believe such a sale
could increase the overall valuation of the individual
properties.
Once an initial determination is made to explore the potential
disposition of a property, we will engage in a full valuation of
the property. We will create our own financial analysis for the
property using
Argus
®
software, as well as secure valuation opinions from respected
real estate brokerage firms. Once the valuations are submitted,
we will create a sensitivity matrix to evaluate our overall
returns on a prospective sale for a range of potential sale
prices and associated closing costs. If we believe a sale is in
our best interest, an initial disposition memorandum will be
prepared and submitted to our investment committee for approval.
The disposition memorandum will include information about the
property, the anticipated sale price, and projected returns to
us. Upon approval by the investment committee, we will proceed
to market the property for sale.
The first step in the marketing process will be to determine
whether to use a brokerage firm to market the property if the
property is not located in a market where we provide brokerage
services. In markets where we have a brokerage staff, we will
leverage our internal knowledge of the market and marketing
process to our advantage in the transaction. If we determine
that the use of a third-party brokerage firm may increase the
net sales proceeds in a transaction, we will select a group of
firms to interview for the assignment. Once the interviews are
complete, we will determine which firm is most capable of
handling the transaction and engage them to represent us in the
sale. After preparation of marketing materials detailing the
property, market information and a marketing strategy, the
brokerage firm will then begin its process of marketing the
property to potential purchasers. If we believe that the use of
a third-party brokerage firm will not add value to a potential
disposition, we will contact investors or users directly to
assess their interest in acquiring the property, and directly
provide them all the information necessary to undertake their
analysis. Once bids on the properties are secured, we will work
to negotiate with the purchaser specific business terms and
conditions that are acceptable to us, and memorialize the offer
in a letter of intent with the purchaser. If we decide to sell
any of our properties, we presently intend to sell them for
cash. However, if requested by a purchaser on terms satisfactory
to us, we may provide financing to purchasers.
Upon execution of a letter of intent for the sale of a property,
our dispositions staff will present the offer deemed most
attractive to our investment committee for approval. Assuming
that an offer is approved by the investment committee, we will
turn our focus to the execution of the transaction.
Legal counsel will handle drafting and negotiation of the
contract with the purchaser or purchasers counsel, and we
will provide all required documentation related to the property
for the purchasers due diligence review. If a seller
discovers information that leads it to request a price reduction
or modification of the initial agreement, approval of our
investment committee will be required for any material changes.
The closing of the transaction will be led by legal counsel in
cooperation with the personnel who worked on various aspects of
the transaction.
FINANCING
STRATEGY
We intend to finance future acquisitions with the most
advantageous source of capital available to us at the time of
the transaction, which may include a combination of public and
private offerings of our equity and debt securities, secured and
unsecured corporate-level debt, property-level debt and mortgage
financing and other public, private or bank debt. In addition,
we may acquire properties in exchange for the issuance of common
stock or OP units. There can be no assurance that we will
acquire any of the properties in our
143
Business and
properties
acquisition portfolio or pipeline. We expect we would finance
any future acquisitions from our acquisition pipeline with
available cash, proceeds from our syndicated credit facility or
other debt financing.
We have received commitments for a syndicated credit facility in
an initial amount of $75.0 million, which could be used to
finance new acquisitions and for other working capital purposes.
If completed, we may elect to increase the amount of the
facility up to $150 million, subject to the approval of the
administrative agent and the identification of a lender or
lenders willing to make available the additional amounts. The
proposed terms of the credit facility include: (i) security
of a first-lien mortgage or deed of trust on certain of our
properties that are otherwise unencumbered; (ii) a two year
term with one 12-month extension option; and
(iii) interest-only payments at rates between
250 basis points and 325 basis points in excess of
LIBOR for eurodollar advances, and between 150 basis points
and 225 basis points in excess of the lenders
alternate base rate, as defined therein, for all other advances,
in each case based on our overall company leverage. The specific
terms of the credit facility will be negotiated by us and the
lenders and there can be no assurance that we will be able to
enter into this credit facility on the terms described above or
at all. The credit facility will be contingent upon completion
of this offering.
Initially, we will utilize the net proceeds of this offering, in
addition to the funds available under the new syndicated credit
facility, to fund acquisitions. We also may obtain secured debt
to acquire real estate assets, and we expect that our financing
sources will include banks and life insurance companies with
which we have existing relationships through our third-party
mortgage origination business. Although we intend to maintain a
conservative capital structure, with limited reliance on debt
financing, our charter does not contain a specific limitation on
the amount of debt we may incur and our board of directors may
implement or change target debt levels at any time without the
approval of our stockholders.
Our goal is to receive an investment grade rating from a
national statistical rating organization such as Moodys
Investors Service, Inc. or Standard & Poors
Corporation, which we believe will lower our cost of borrowing.
In order to achieve this rating, we will establish and grow over
time our unencumbered pool of assets, and manage our balance
sheet to enhance our financial measurements such as our debt to
EBITDA (earnings before interest, tax, depreciation and
amortization) ratio, fixed charge coverage ratio, and other
financial metrics that are analyzed by rating organizations in
their process of determining investment ratings. Fifty-six of
the 65 properties in our existing portfolio and six of the
22 properties in our acquisition portfolio will be
encumbered by mortgages upon completion of this offering. Lack
of sufficient growth in our unencumbered pool of assets
following the completion of this offering may be an impediment
to receiving an investment grade rating. We will seek to
maintain a conservative capital structure, which we believe
includes lowering overall company leverage, transitioning over
time from secured borrowings to unsecured borrowings, and
maintaining sufficient excess cash and borrowing capacity to
fund operations and make additional acquisitions.
REGULATION
General
Our properties are subject to various covenants, laws,
ordinances and regulations, including regulations relating to
common areas and fire and safety requirements. We believe that
each of the existing properties has the necessary permits and
approvals to operate its business.
Americans with
Disabilities Act
Our properties must comply with Title III of the ADA to the
extent that such properties are public
accommodations as defined under the ADA. Under the ADA,
all public accommodations must meet federal requirements related
to access and use by disabled persons. The ADA may require
removal of structural barriers to access by persons with
disabilities in certain public areas of our properties where
such removal is readily achievable. Although we believe that the
properties in our portfolio in the aggregate substantially
comply with present requirements of the ADA, and we have not
received any notice for correction from any regulatory agency,
we have not conducted a comprehensive audit or
144
Business and
properties
investigation of all of our properties to determine whether we
are in compliance and therefore we may own properties that are
not in compliance with the ADA.
ADA compliance is dependent upon the tenants specific use
of the property, and as the use of a property changes or
improvements to existing spaces are made, we will take steps to
ensure compliance. Noncompliance with the ADA could result in
additional costs to attain compliance, and we believe that a
reasonable estimate of costs to cure any noncompliance would be
between $0 and $100,000 per building, depending on the use of
the property as a public accommodation. The obligation to make
readily achievable accommodations is an ongoing one, and we will
continue to assess our properties and to make alterations to
achieve compliance as necessary.
Environmental
matters
Environmental laws regulate, and impose liability for, releases
of hazardous or toxic substances into the environment. Under
several of these laws, an owner or operator of real estate is or
may be liable for costs related to soil or groundwater
contamination on, in, or migrating to or from its property. In
addition, persons who arrange for the disposal or treatment of
hazardous or toxic substances may be liable for the costs of
cleaning up contamination at the disposal site. Such laws often
impose liability regardless of whether the person knew of, or
was responsible for, the presence of the hazardous or toxic
substances that caused the contamination. The presence of, or
contamination resulting from, any of these substances, or the
failure to properly remediate them, may adversely affect our
ability to sell or rent our property or to borrow using such
property as collateral. In addition, persons exposed to
hazardous or toxic substances may sue for personal injury
damages. For example, some laws impose liability for release or
exposure to asbestos-containing materials, a substance known to
be present in a number of our buildings. In other cases, some of
our properties have been (or may have been) affected by
contamination from past operations or from off-site sources. As
a result, in connection with our current or former ownership,
operation, management and development of real properties, we may
be potentially liable for investigation and cleanup costs,
penalties, and damages under environmental laws.
All of the properties in our existing portfolio and joint
venture portfolio have been subjected to Phase I assessments
within the last ten years by independent environmental
consultants that are designed to identify certain liabilities.
In addition, each of the properties in our acquisition portfolio
has been subjected to, or will be subjected to, a Phase I
assessment. The Phase I assessments covering two properties in
our joint venture portfolio, three properties in our existing
portfolio and one property in our acquisition portfolio did
reveal the existence of conditions, such as the use and storage
of petroleum-based oils and lubricants and demolition and
construction materials, groundwater contamination and the
existence of impacted soils (on one property in our existing
portfolio, one property in our joint venture portfolio and one
property in our acquisition portfolio) or conditions that could
impact the soil or groundwater under certain circumstances in
the future (on the three other properties), that have the
potential to give rise to environmental liabilities. Phase I
assessments are intended to discover and evaluate information
regarding the environmental condition of the surveyed property
and surrounding properties. Phase I assessments generally
include an historical review, a public records review, an
investigation of the surveyed site and surrounding properties,
and preparation and issuance of a written report, but do not
include soil sampling or subsurface investigations and typically
do not include an asbestos survey.
While some of these assessments have led to further
investigation and sampling, none of our environmental
assessments of our properties has revealed any environmental
liability that we believe would have a material adverse effect
on our financial condition or results of operations taken as a
whole. Nonetheless, it is possible that our assessments do not
reveal all environmental liabilities or that there are material
environmental liabilities of which we are unaware. Material
environmental conditions, liabilities or compliance concerns may
arise after the environmental assessment has been completed.
Moreover, there can be no assurance that (i) future laws,
ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental
condition of our properties will not be affected by tenants, by
the condition of land or operations in the vicinity of our
properties (such as releases from
145
Business and
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underground storage tanks), or by third parties unrelated to us.
If the costs of defending against environmental claims, of
compliance with the various environmental laws and regulations,
now existing or hereafter adopted, or of remediating any
contaminated property exceed our budgets for such items, our
ability to make expected distributions to stockholders could be
materially and adversely affected.
Broker-dealer
regulation
Our wholly-owned subsidiary, Welsh Securities, is a
FINRA-registered brokerage firm, and so it is governed by the
rules of FINRA. Mr. Frederiksen, our Chief Executive
Officer, and Anne Olson, our Director of Investment Operations,
each hold Series 7, Series 63 and Series 24
Principal licenses for Welsh Securities; Dennis Heieie, our
Chief Financial Officer and Treasurer, holds the Series 27
Financial Operations Principal license; and one additional
employee also holds Series 7 and Series 63 licenses.
INSURANCE
We carry comprehensive liability, fire, extended coverage,
business interruption and rental loss insurance covering all of
the properties in our portfolio under a blanket insurance
policy. In addition, it is our practice to carry environmental
coverage on properties we believe are at higher risk of
environmental issues due to use or location. We currently carry
environmental coverage on one property, 201 Mississippi Avenue
in Gary, Indiana, relating to its use as a processing facility
for raw metal products. We believe the policy specifications and
insured limits are appropriate and adequate given the relative
risk of loss, the cost of the coverage and industry practice;
however, our insurance coverage may not be sufficient to fully
cover our losses. We do not carry insurance for certain losses,
including, but not limited to, losses caused by riots or war.
Some of our policies, like those covering losses due to
terrorism, earthquakes and floods, are insured subject to
limitations involving substantial self insurance portions and
significant deductibles and co-payments for such events. We may
reduce or discontinue terrorism, earthquake, flood or other
insurance on some or all of our properties in the future if the
cost of premiums for any of these policies exceeds, in our
judgment, the value of the coverage discounted for the risk of
loss. In addition, our title insurance policies may not insure
for the current aggregate market value of our portfolio, and we
do not intend to increase our title insurance coverage as the
market value of our portfolio increases.
COMPETITION
We compete in the ownership, operation, management and
acquisition of industrial and office properties with pension
funds and their advisors, bank and insurance company investment
accounts, other REITS, real estate limited partnerships,
individuals, and other entities engaged in real estate
investment activities, some of whom own or may in the future own
properties similar to ours in the same geographic regions in
which our properties are located and some of whom have greater
financial resources and lower costs of capital available to them
than we have. There is competition for tenants across our
portfolio, and consequently, we may find it necessary to offer
competitive incentives such as free rent, absorb charges for
tenant improvements, or provide other inducements that will
lower our operational proceeds in the short term.
EMPLOYEES
As of April 1, 2010, the Welsh organization consisted of
325 employees. We believe that our relationships with our
employees are satisfactory. As of the date of this filing, we
are not party to any union contracts with our employees, and no
union negotiations are pending. With a corporate culture focused
on providing service to our tenants and other clients,
community-focused volunteerism, and sustainable real estate
investments, the Welsh organization was recognized as
the #1 Best Place to Work in the Twin Cities by
the Minneapolis/St. Paul Business Journal in the medium-sized
company category in 2009.
PRINCIPAL
EXECUTIVE OFFICES
We own our headquarters space at 4350 Baker Road,
Suite 400, Minnetonka, Minnesota 55343. Our phone number is
952-897-7700.
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Business and
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LEGAL
PROCEEDINGS
From time to time, we are party to various lawsuits, claims and
other legal proceedings that arise in the ordinary course of our
business. We are not currently a party, as plaintiff or
defendant, to any legal proceedings which, individually or in
the aggregate, would be expected to have a material effect on
our business, financial condition, results of operations or cash
flow, the per share trading price of our common stock or our
ability to satisfy our debt service obligations and to make
distributions to our stockholders, if determined adversely to us.
From time to time, we initiate lawsuits and other legal
proceedings in the ordinary course of our business to evict
tenants that are in default and obtain judgments against them
for the balance of rent and other expenses due for the remaining
term of the lease to which such tenant is a party. The
collectability of these judgments, however, is often limited by
the distressed financial condition of the defaulting tenant.
On November 23, 2009, Welsh Baker Road, LLC, a property
subsidiary that is wholly owned by our principals and is to be
acquired by us in the formation transactions, filed a proof of
claim with the United States Bankruptcy Court, District of
Minnesota, for amounts owed to it by a tenant at the 4400 Baker
Road property, Petters Group Worldwide, LLC, which is currently
in bankruptcy. The claim amount is approximately
$2.8 million. Because of the uncertainty regarding the
amount that will be available to creditors, it is impossible at
this juncture to predict how much Welsh Baker Road, LLC will
realize in connection with this claim.
In connection with the bankruptcy of Plastech Engineered
Products, Inc., its subsidiaries and affiliates, filed in the
United States Bankruptcy Court for the Eastern District of
Michigan on February 1, 2008, Welsh Romulus, LLC, a
property subsidiary that is to be acquired by us from one of our
investment funds in the formation transactions, has filed
several claims totaling approximately $2.7 million. Because
of the uncertainty regarding the amount that will be available
for distributions to creditors and the complaint referenced
below, it is impossible at this juncture to predict how much
Welsh Romulus, LLC will realize in connection with these claims.
In addition, on October 7, 2009, a complaint was filed
against Welsh Romulus, LLC by Carroll Services, LLC, the
liquidating trustee for Plastech Engineered Products, Inc. in
the United States Bankruptcy Court for the Eastern District of
Michigan demanding (i) the return of approximately $408,000
in rent payments received by Welsh Romulus, LLC in the
90-day
period prior to Plastech Engineered Products bankruptcy
filing, and (ii) the disallowance of the claims filed by
Welsh Romulus, LLC in the Plastech bankruptcy case. As of
May 14, 2010, Welsh Romulus, LLC and Carroll Services, LLC
had reached an agreement in principle to settle solely the
complaint filed by Carroll Services, LLC against Welsh Romulus,
LLC in consideration of a $108,000 reduction in the pending
claims of Welsh Romulus, LLC against Plastech Engineered
Products, Inc., its subsidiaries and affiliates. The agreement
in principle to settle this complaint is subject to entry into a
definitive settlement agreement, required lender consent and
bankruptcy court approval, and there can be no assurance that
Welsh Romulus, LLC will be able to enter into such a settlement
agreement on the terms described above or at all or obtain such
lender consent or court approval.
OTHER
MATTERS
Mr. Doyle, our Chairman, has participated as an investor in
two multi-family housing projects that are the subject of
foreclosure
and/or
receivership actions brought by the Federal National Mortgage
Association (Fannie Mae) with respect to alleged defaults
relating to the projects mortgages and other indebtedness.
We and the existing entities have no connection to these
projects, which were joint ventures involving unrelated entities
under the control of Mr. Doyle and various third parties.
147
DIRECTORS AND
EXECUTIVE OFFICERS
Our board of directors is responsible for directing the
management of our business and affairs. Our stockholders will
elect our entire board of directors annually. Our board consists
of nine directors, six of whom our board has determined are
independent under NYSE listing standards. There are no familial
relationships between any of our directors and executive
officers. See Certain Relationships and Related Party
Transactions for further information regarding
transactions involving certain of our control persons.
Certain information regarding our directors and executive
officers is set forth in the following table, as of
April 15, 2010:
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Director
Since
|
|
|
Dennis J. Doyle
|
|
|
57
|
|
|
Chairman of the Board
|
|
December 18, 2009
|
Scott T. Frederiksen
|
|
|
44
|
|
|
Chief Executive Officer and Director
|
|
December 18, 2009
|
Jean V. Kane
|
|
|
49
|
|
|
President, Chief Operating Officer and Director
|
|
December 18, 2009
|
Dennis G. Heieie
|
|
|
50
|
|
|
Chief Financial Officer and Treasurer
|
|
|
Tracey L. Lange
|
|
|
44
|
|
|
Senior Vice President
|
|
|
Milo D. Arkema
|
|
|
59
|
|
|
Director
|
|
April 15, 2010
|
James L. Chosy
|
|
|
46
|
|
|
Director
|
|
April 15, 2010
|
Peter D. Linneman
|
|
|
58
|
|
|
Director
|
|
April 15, 2010
|
Patrick H. OSullivan
|
|
|
42
|
|
|
Director
|
|
April 15, 2010
|
Paul L. Snyder
|
|
|
62
|
|
|
Director
|
|
April 15, 2010
|
Lawrence W. Stranghoener
|
|
|
55
|
|
|
Director
|
|
April 15, 2010
|
BIOGRAPHIES OF
DIRECTORS AND EXECUTIVE OFFICERS
Dennis J. Doyle,
Chairman of the Board
Mr. Doyle is the co-founder of the Welsh organization.
Since 1977, he has held many positions within Welshs
services business ranging from manual laborer to licensed broker
to positions in executive management. He has served as Chief
Executive Officer of Welsh Companies since 1987. He will cease
serving as Chief Executive Officer of Welsh Companies and assume
the role of Chairman of the Board of our company upon the
completion of this offering and the formation transactions and
continue to serve as a source of leadership and strategic vision
for our company. We believe he is uniquely qualified to serve as
our Chairman because of his long history with the Welsh
organization and its business. Mr. Doyle has been a
director of our company since its formation on December 18,
2009. He continues to hold a real estate brokers license
in the State of Minnesota. Mr. Doyle is the founder and
chief executive officer of Hope For The City, a privately
funded,
not-for-profit
organization established to fight poverty, hunger, and disease
by utilizing corporate surplus. Mr. Doyle is a member of
the board of directors of Egan Company, Gresser Companies, Inc.,
Tradition Capital Bank and American Church Mortgage Company and
a former director of the Rottlund Company, Inc.
Scott T.
Frederiksen, Chief Executive Officer and Director
Mr. Frederiksen is a principal partner of the Welsh
organization and has more than 23 years of experience with
Welshs services business, starting as an industrial broker
in 1987. He was named Senior Vice President in 1996 and has
served as President of WelshInvest, the Welsh
organizations historical investment division, from January
2008 until the completion of this offering and the
148
Management
formation transactions. As President of WelshInvest,
Mr. Frederiksen leads a team of dedicated professionals in
the areas of financial analysis, acquisitions, due diligence,
legal, investor relations, financing, asset management, and
dispositions. We believe that Mr. Frederiksens
brokerage and investment experience, along with his historical
leadership of the Welsh organization, will make him an asset to
our board. He has been a director of our company since its
formation on December 18, 2009. Mr. Frederiksen holds
the Certified Commercial Investment Member, or CCIM, and Society
of Industrial and Office Properties, or SIOR, designations as
well as a real estate brokers license in the State of
Minnesota. Mr. Frederiksen also holds his Series 24, 7
and 63 securities licenses and is a principal license holder for
Welsh Securities, LLC.
Jean V. Kane,
President, Chief Operating Officer and Director
Ms. Kane has over 24 years of industry experience,
including 23 years of experience with the Welsh
organization. She has overseen the operations of our services
business as President and Chief Operating Officer of Welsh
Companies, including Welshs property management,
brokerage, construction, architecture, development and
facilities services, since 2001. She joined the Welsh
organization as a Property Manager in 1987, taking on
responsibility as asset manager for the Welsh
organizations portfolio in 1988; she was promoted to
Assistant Vice President in 1993, to Senior Vice President,
Central Services in 1997, and to Executive Vice President and
Chief Operating Officer in 2000. We believe that Ms. Kane
is qualified to serve as one of our directors because of her
deep understanding of our services business and our industry,
and experience in operating the Welsh organization.
Ms. Kane has been a director of our company since its
formation on December 18, 2009. Ms. Kane holds CCIM
and Real Property Administrator, or RPA, designations as well as
a real estate brokers license in the State of Minnesota.
Ms. Kane has served on the U.S. BankTwin Cities
Advisory Board since December 2005. She is also a member of the
executive board of directors of National NAIOP (the National
Association of Industrial and Office Properties), and the
Minneapolis Downtown Improvement District.
Dennis G. Heieie,
Chief Financial Officer and Treasurer
Mr. Heieie joined the Welsh organization in 1998 as its
Chief Financial Officer and Senior Vice President.
Mr. Heieie will become the Companys Chief Financial
Officer and Treasurer upon the completion of this offering and
the formation transactions. Mr. Heieie has 27 years of
financial and industry experience. Prior to joining the Welsh
organization, from 1991 to 1998, Mr. Heieie was Portfolio
Controller for General Growth Properties, a publicly-traded REIT
which owns and manages shopping malls, where he was responsible
for accounting and financial reporting to third-party clients.
Prior to General Growth, Mr. Heieie spent five years
working for Target Corporation in various financial capacities,
and his professional career began at Coopers & Lybrand
as a certified public accountant. Mr. Heieie is a member of
the Minnesota Society of Certified Public Accountants, holds his
Series 27 securities license and is the Financial
Operations Principal of Welsh Securities, LLC.
Tracey L. Lange,
Senior Vice President
Ms. Lange is the Senior Vice President of WelshInvest,
where she oversees financial analysis, due diligence, investor
relations, asset management and dispositions. Since joining the
Welsh organization in 1999 as a Property Manager, Ms. Lange
has been promoted several times and became Senior Vice President
in 2009. Before joining the Welsh organization, Ms. Lange
was an Asset Manager for Equity Holdings, where she was
responsible for asset and property management of private real
estate investments. In total, she has 22 years of industry
experience. She holds a real estate license in the State of
Minnesota and is a Certified Commercial Investment Member (CCIM).
149
Management
Milo D. Arkema,
Director
Mr. Arkema has been a director and employee of Baker Tilly
Virchow Krause & Co. LLP, an accounting and advisory firm
since 2007. Until 2007, he was a partner at Virchow Krause
& Co. LLP, now renamed Baker Tilly Virchow Krause LLP, and
served for five years as a member of its executive committee.
Mr. Arkemas previous accounting firm, which he joined
in 1975, merged with Baker Tilly Virchow Krause LLP in 2000. His
principal focus has been advising and consulting with
entrepreneurs, shareholders, family businesses and boards
regarding strategy, capital formation, management issues,
executive compensation and general business issues. Currently,
he also leads and manages financial due diligence engagements
for private equity firms and strategic buyers. He has served on
the investment committees of Welsh Real Estate Fund IV, LLC
and Welsh Midwest Fund, LLC since 2008, and he is the chairman
of the board of directors of CaringBridge, a non-profit that
provides free websites to connect family and friends during a
serious health event. Mr. Arkemas experience in
public accounting and executive compensation analysis led to our
conclusion that he should be selected as a member of our board.
James L. Chosy,
Director
Mr. Chosy is General Counsel and Secretary of Piper Jaffray
Companies, a publicly-traded international middle-market
investment bank and institutional securities firm, a position he
has held since 2001. From 1995 to 2001, he served as Vice
President and Associate General Counsel and from 2000 to 2001 he
served as Secretary at U.S. Bancorp, a financial services
holding company. Mr. Chosy has served as a member of the
Board of Governors of the Childrens Theatre Company since
2004 and as a member of the Board of Visitors of the University
of Minnesota Law School since 2006. He is admitted to practice
law in Minnesota and also holds Series 7 and Series 24
securities licenses. Mr. Chosys public company legal,
compliance and management experience led to our conclusion that
he should be selected as a member of our board.
Peter L.
Linneman, Ph.D., Director
Dr. Linneman is the Albert Sussman Professor of Real
Estate, Finance and Public Policy at the Wharton School of
Business of the University of Pennsylvania. A member of
Whartons faculty since 1979, Dr. Linneman served as
the founding chairman of Whartons real estate department,
the director of Whartons Zell-Lurie Real Estate Center of
11 years and the founding co-editor of The Wharton Real Estate
Review. Dr. Linneman is currently the principal of Linneman
Associates, a consulting firm. He serves on the board of
directors of Equity One, Inc., a shopping center REIT, and JER
Investors Trust Inc., a specialty real estate finance company,
where he also serves on the audit committee. He has also served
as a director of Bedford Property Investors, Inc. and other
public real estate companies, and is a past and current director
of numerous private real estate companies. Dr. Linneman
holds a Ph.D. in economics from the University of Chicago.
Dr. Linnemans scholarship and position as a respected
authority in real estate finance led to our conclusion that he
should be selected as a member of our board.
Patrick H.
OSullivan, Director
Mr. OSullivan is Chief Financial Officer, Managing
Director and a member of the investment committee of CrossHarbor
Capital Partners, LLC, a real estate firm specializing in
investments in real estate equity, debt securities and
distressed real estate loans. From 2002 until the fall of 2006,
he served as chief accounting officer for Heritage Property
Investment Trust, a publicly-traded REIT.
Mr. OSullivan is a certified public accountant in
Massachusetts. Mr. OSullivans experience and
insight into both public company financial reporting and real
estate investing led to our conclusion that he should be
selected as a member of our board.
150
Management
Paul L. Snyder,
Director
Mr. Snyder retired from KPMG LLP, an international public
accounting firm, in March 2009 after a
39-year
career with KPMG that included serving as managing partner of
the Minneapolis office, the Chicago office and the Midwest area,
and serving on the Board of Directors of KPMG LLP United States
and KPMG LLP Americas. We engaged KPMG as our outside auditor in
September 2009, subsequent to Mr. Snyders retirement.
Mr. Snyder currently serves on the board of directors of
Securian Financial Group, Inc., the holding company parent for a
group of insurance and financial advisory companies, and
Christopher & Banks Corporation, a retailer of womens
apparel, as well as the YMCA Minneapolis and the St. Paul
Foundation and as a Life Trustee of the Chicago Historical
Society. Mr. Snyders public accounting and financial audit
experience led to our conclusion that he should be selected as a
member of our board.
Lawrence W.
Stranghoener, Director
Mr. Stranghoener has served as Executive Vice President and
Chief Financial Officer of The Mosaic Company, a publicly-traded
crop nutrition company, since September 2004. Previously, he had
been Executive Vice President and Chief Financial Officer at
Thrivent Financial for Lutherans, a financial services company,
and its predecessor organization from 2001 to 2004 and had spent
17 years at Honeywell, Inc., a technology and manufacturing
company, including three years as its Chief Financial Officer.
Mr. Stranghoener currently serves as a board member and a
member of the audit committee of Kennametal Inc., a metalworking
and tool production company, and is on the Board of Regents of
St. Olaf College. Mr. Stranghoeners experience
with public company financial accounting and reporting led to
our conclusion that he should be selected as a member of our
board.
OUR BOARD OF
DIRECTORS
Director
qualifications and skills
Our directors were chosen based on their experience,
qualifications and skills. We first identified nominees for the
board through professional contacts and other resources. We then
assessed each nominees integrity and accountability,
judgment, maturity, willingness to commit the time and energy
needed to satisfy the requirements of board and committee
membership, balance with other commitments, financial literacy,
and independence from us. We relied on information provided by
the nominees in their biographies and responses to
questionnaires, as well as independent third party sources.
Board leadership
structure, corporate and risk oversight
We place a high premium on good corporate governance of us
because we believe strong corporate governance is key to strong
leadership of us and that enhances the value of us for our
stockholders. We have a non-staggered, majority-independent
board of directors who will be elected annually. We currently do
not have a stockholder rights plan. In addition, we have opted
out of certain state anti-takeover provisions.
Our board of directors has the primary responsibility for
overseeing risk management of our company, and our management
intends to provide it with a regular report highlighting risk
assessments and recommendations. Our audit committee will focus
on oversight of financial risks relating to us; our compensation
committee will focus primarily on risks relating to remuneration
of our officers and employees; and our nominating and corporate
governance committee will focus on reputational and corporate
governance risks relating to our company. In addition, the audit
committee and board intend to regularly hold discussions with
our executive and other officers regarding the risks that may
affect our company. With respect to specific areas affecting our
company such as executive compensation
151
Management
policies and practices or corporate governance, our board
committees within those areas will also consider the risks to us
and advise or take actions accordingly to address significant
risks.
Committees of the
board of directors
Our board of directors has established three standing
committees: an audit committee, a compensation committee and a
nominating and corporate governance committee. Each of these
committees, the principal functions of which are briefly
described below, will consist solely of independent directors
under the NYSEs definition of independence and its
transition rules for newly listed public companies. Our board of
directors may from time to time establish other committees to
facilitate the management of our company.
Audit Committee.
The audit committee will help
ensure the integrity of our financial statements, the
qualifications and independence of our independent auditors and
the performance of our internal audit function and independent
auditors. The audit committee will select, assist and meet with
the independent auditors, oversee each annual audit and
quarterly review, establish and maintain our internal audit
controls and prepare the audit committee report required by the
federal securities laws to be included in our annual proxy
statement. Each member of our audit committee will be
independent pursuant to the listing standards of the NYSE. In
addition, each member of our audit committee will be
financially literate as required by the NYSE, and at
least one member of our audit committee will qualify as an
audit committee financial expert as required by the
SEC. Mr. Snyder is the chair of our audit committee and our
audit committee financial expert, as that term is defined by the
SEC, and Mr. OSullivan and Mr. Stranghoener also
serve as members of this committee.
Compensation Committee.
The compensation
committee will review and approve the compensation and benefits
of our executive officers, administer and make recommendations
to our board of directors regarding our compensation and
long-term incentive plans and produce an annual report on
executive compensation for inclusion in our proxy statement.
Each member of our compensation committee will be independent
pursuant to the listing standards of the NYSE. In addition, each
member of our compensation committee will be a non-employee
director as set forth in
Rule 16b-3
of the Exchange Act. Mr. Arkema is the chair of our
compensation committee and Mr. Snyder and Mr. Chosy
also serve as members of this committee.
Nominating and Corporate Governance
Committee.
The nominating and corporate
governance committee will develop and recommend to our board of
directors a set of corporate governance principles, a code of
business conduct and ethics and policies with respect to
conflicts of interest, monitor our compliance with corporate
governance requirements of state and federal law and the rules
and regulations of the NYSE, develop and recommend to our board
of directors criteria for prospective members of our board of
directors, conduct candidate searches and interviews, oversee
and evaluate our board of directors and management, evaluate
from time to time the appropriate size and composition of our
board of directors, recommend, as appropriate, increases,
decreases and changes in the composition of our board of
directors and formally propose the slate of nominees for
election as directors at each annual meeting of our
stockholders. Our stockholders will elect our entire board of
directors annually. Each member of our nominating and corporate
governance committee will be independent pursuant to the listing
standards of the NYSE. Mr. Chosy is the chair of our
nominating and corporate governance committee and
Dr. Linneman and Mr. Arkema will also serve as members
of this committee.
Compensation of
directors
Each of our non-employee directors will receive an annual cash
retainer of $25,000 and an annual stock award under our LTIP for
service on our board of directors. The chairpersons of our audit
committee and compensation committee will receive an additional
annual cash retainer of $7,500, and the chairperson of the
nominating and corporate governance committee will receive an
additional annual
152
Management
cash retainer of $5,000. In addition, each non-employee director
will receive a meeting fee of $1,000 for each board or committee
meeting attended, and will be reimbursed for reasonable
out-of-pocket
expenses incurred in connection with attendance at meetings of
the board or committees. Directors who are our employees will
not receive compensation for their services as directors.
The initial stock awards for service on the board will be for
2,461 shares each and will be issued concurrent with the
completion of this offering. Subsequent stock awards will be
issued on the date of the directors reelection to the
board, with the number of shares determined by dividing $40,000
by the closing price per share of our stock on the date of the
award. The initial and subsequent stock awards will vest in full
upon grant. Our directors will be required to hold until their
retirement from the board a minimum of 75% of the shares awarded.
Mr. Doyle, who will be a non-employee director upon
completion of this offering and the formation transactions, will
receive the compensation described above. As chairman of our
board, Mr. Doyle will also receive an additional annual
cash retainer of $100,000.
CODE OF BUSINESS
CONDUCT AND ETHICS
Upon completion of this offering and the formation transactions,
our board of directors will establish a code of business conduct
and ethics that applies to our officers, directors and
employees. Among other matters, our code of business conduct and
ethics will be designed to deter wrongdoing and to promote:
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honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
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full, fair, accurate, timely and understandable disclosure in
our SEC reports and other public communications;
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compliance with applicable governmental laws, rules and
regulations;
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prompt internal reporting of violations of the code to
appropriate persons identified in the code; and
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accountability for adherence to the code.
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Any waiver of the code of business conduct and ethics for our
executive officers or directors must be approved by a majority
of our independent directors, and any such waiver shall be
promptly disclosed as required by law or NYSE regulations.
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the compensation committee will be a current or
former officer or employee of our company or any of our
subsidiaries. None of our executive officers serves as a member
of the board of directors or compensation committee of any
company that will have one or more of its executive officers
serving as a member of our board of directors or compensation
committee.
COMPENSATION
DISCUSSION AND ANALYSIS
The following compensation discussion and analysis discusses and
analyzes the executive compensation program for the named
executive officers identified below under Executive
CompensationSummary Compensation Table, which
program will be effective upon completion of this offering and
the formation transactions. This discussion and analysis should
be read together with the tables and related footnote
disclosures detailed below. The following discussion and
analysis contain forward-looking statements that are based on
our current plans, considerations, expectations and
determinations regarding our future executive compensation
program. Our actual executive compensation program may differ
from the anticipated program described below.
153
Management
Evolution of our
executive compensation program
Historically, the Welsh organizations approach to
executive compensation has been tied to the operation of the
business as a closely held private company. Mr. Doyle,
Mr. Frederiksen and Ms. Kane were solely responsible
for setting and adjusting the overall design of our executive
compensation program. They would annually review each
executives compensation as part of his or her annual
performance review and budgeting process. When making decisions
about executive compensation, they used information provided by
recruiting firms, our historical pay practices, and wage
increase information from various publicly available sources.
They also considered the seniority, skill, and responsibilities
of the particular executive; internal equity among pay levels of
our executive officers; and the individual performance of each
executive officer. In anticipation of our transition from
private to public ownership, we have made or will make certain
adjustments to our executive compensation program. These
adjustments are described below.
Engagement of Compensation Consultant and Identification of
Peer Group.
Prior to 2009, we did not engage an
outside compensation consultant, nor did we utilize a formal pay
philosophy or benchmarking approach. In 2009, the Welsh
organization engaged Baker Tilly Virchow Krause & Co., LLP,
or Baker Tilly Virchow Krause, an independent compensation
consultant, to assist and advise us on matters related to
executive compensation. Baker Tilly Virchow Krause reviewed our
compensation framework and approach, and provided benchmarks
against a peer group of companies to enable us to ensure that
our philosophy and strategy for executive compensation is
appropriate and desirable as we transition from a closely-held
private company to a publicly-traded REIT.
Baker Tilly Virchow Krause considered the following factors in
selecting our peer group from currently publicly-traded REITs:
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REIT Structure:
fully integrated, self-managed
REITs;
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Sector focus:
primarily either diversified
REITs or REITs in the industrial or office sectors;
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Recent earnings performance:
primarily REITs
that achieved positive net operating income in 2008; and
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Size:
primarily REITs approximately similar in
size to our company based on estimated market capitalization,
revenue
and/or
enterprise value.
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For purposes of the compensation analysis, the application of
these factors yielded the following peer group of companies:
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AMB Property Corporation
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Brandywine Realty Trust
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Cousins Properties Incorporated
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DCT Industrial Trust, Inc.
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Duke Realty Corporation
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EastGroup Properties, Inc.
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Equity One, Inc.
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First Industrial Realty Trust, Inc.
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Highwoods Properties, Inc.
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Inland Real Estate Corporation
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Investors Real Estate Trust
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Kilroy Realty Corporation
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Liberty Property Trust
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Mack-Cali Realty Corporation
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Parkway Properties, Inc.
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ProLogis
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PS Business Parks, Inc.
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We believe this peer group constitutes a critical component of
the market where we compete for executive talent. Baker Tilly
Virchow Krause reviewed the proxy statements for our peer group
to assist in benchmarking executive compensation at our company.
In addition, because we also compete for talent with other
industries, Baker Tilly Virchow Krause relied on general pay
data obtained through published survey sources in assessing our
executive compensation levels. Baker Tilly Virchow Krause
154
Management
used this data to recommend an executive compensation program
designed to help us transition from a closely-held private
company to a publicly-traded REIT.
Transition of Management Roles.
In
anticipation of our transition from private to public ownership,
we will transition management roles prior to and following the
completion of this offering and the formation transactions, as
described in the following chart:
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Position with the
Welsh organization
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Position with
Welsh Property Trust, Inc.
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Name
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prior to this
offering
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following this
offering
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Dennis J. Doyle
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Chief Executive Officer of Welsh Companies
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Chairman of the Board
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Scott T. Frederiksen
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President, WelshInvest and Senior Vice President of Welsh
Companies
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Chief Executive Officer and Director
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Jean V. Kane
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President and Chief Operating Officer of Welsh Companies
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President, Chief Operating
Officer and Director
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Dennis G. Heieie
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Senior Vice President and Chief Financial Officer of Welsh
Companies
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Chief Financial Officer and
Treasurer
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Tracey L. Lange
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Senior Vice President of WelshInvest
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Senior Vice President
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This transition continues the strong legacy of leadership within
our company; reflects the assumption by Mr. Doyle of the
position of Chairman of the Board, and by Mr. Frederiksen
of the position of Chief Executive Officer; and is responsive to
executive roles and responsibilities required for public
companies.
Formalization of Other Compensation
Practices.
In anticipation of our transition from
private to public ownership, we are formalizing our approach to
our executive compensation program. For example, we will to
enter into employment agreements with Mr. Frederiksen, our
Chief Executive Officer, and Ms. Kane, our President and
Chief Operating Officer. See Overview of Executive
Compensation ProgramEmployment Agreements and Change in
Control Arrangements below, for more information. We have
benchmarked our compensation to set total targeted compensation
for our named executive officers just under the median total
compensation provided by our peer group. In addition, in our
approach to incentive compensation, we are tying incentive
compensation to the achievement of post-offering goals in order
to motivate our named executive officers to achieve those goals.
Overview of
executive compensation program
Following the completion of this offering and the formation
transactions, we will continue to recruit, retain and motivate
key executives to lead us in achieving our business goals. Our
executive compensation program will support these objectives by
providing our named executive officers with a base salary and
the opportunity to earn annual incentive compensation. In
addition, Mr. Frederiksen, our Chief Executive Officer, and
Ms. Kane, our President and Chief Operating Officer, each
will be granted an award of restricted stock units under our
LTIP, which awards will vest based on achievement of specified
performance goals. Our named executive officers also receive
certain benefits and perquisites.
We intend for the compensation provided to our named executive
officers to be competitive with our peers in order to recruit
and retain top talent. We will tie annual incentive compensation
to the achievement of certain performance goals in order to
retain and motivate our named executive officers. The vesting of
the awards of restricted stock units provided our Chief
Executive Officer and President and Chief Operating Officer will
be linked to increasing stockholder value in order to align
management goals with stockholder goals. We believe that this
approach will further our efforts to recruit, retain and
motivate key executives, and in turn achieve our business
objectives.
155
Management
Each component of our executive compensation program is
described below.
Base Salaries.
Our named executive officers
will receive a base salary as compensation for services rendered
throughout the year. For 2010, we expect base salaries for our
named executive officers to remain at the same amount as they
were prior to completion of this offering and the formation
transactions, which is significantly less than the median for
our companys peer group. Our compensation committee will
thereafter determine adjustments, if any, to base salaries for
our named executive officers to appropriately align their
compensation, with the peer group to reflect our performance
following the completion of this offering, to reflect
significant changes in job responsibilities or market
conditions, or otherwise as the committee sees appropriate. Such
adjustments made to align compensation with the peer group may
result in aggregate increases to base salary for the named
executive officers which are in a range estimated to be between
$400,000 and $600,000 annually. We expect to make those
adjustments to impact the named executive officers
salaries for fiscal years 2011 and 2012.
Annual Incentive Compensation.
Our named
executive officers will have the opportunity to earn annual
incentive compensation under an annual incentive compensation
plan. Based on this plan, bonuses would be earned if we achieve
certain performance goals, and, if earned, will be paid in cash
as a percentage of base salary. Although fiscal year 2010 will
be a partial year, we intend to pay full year bonuses to all
participants in the 2010 Annual Incentive Compensation Plan, or
our annual incentive plan, including our named executive
officers, based on the achievement of certain fiscal year 2010
performance goals.
To determine the 2010 targeted incentive compensation awards,
the compensation committee reviewed the peer group benchmarking
information provided by Baker Tilly Virchow Krause, our business
and growth strategies, our pro forma financial statements, and
certain financial models. In consideration of our growth plan
and the fact that the key steps to execute the growth plan will
be accomplished before this offering, the committee set the 2010
annual incentive compensation target at 110% of the targeted
2012 base salary for our Chief Executive Officer and 116% of the
targeted 2012 base salary for our Chief Operating Officer, or
slightly below the peer group median. The awards are based on
the targeted 2012 base salaries because the actual 2010 base
salaries will continue to be at a level well below peer group
median levels as they were established prior to this offering.
The following table summarizes the targeted annual incentive
award amounts and the related percentages of our 2010 base
salaries and our targeted 2012 base salaries:
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As % of base
salary
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Target Payout
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Actual
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Targeted
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Amount
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2010
Base
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2012
Base
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Scott T. Frederiksen, CEO
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$
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523,000
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174%
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110%
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Jean V. Kane, President/COO
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523,000
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174%
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116%
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Dennis G. Heieie, CFO
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100,000
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50%
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Tracey L. Lange, Sr VP
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100,000
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50%
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Targeted annual incentive compensation goals will be based on
the achievement of corporate performance goals. These corporate
performance goals are:
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Adjusted Funds from Operations (per Share) (AFFO Goal /
Incentive)
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Net Income (NI Goal / Incentive)
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The compensation committee selected the AFFO Goal to measure
cash flow performance, and the NI Goal to provide a measure of
GAAP earnings performance.
156
Management
For 2010, the allocation of performance goals for each executive
is summarized in the following table:
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Goal
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CEO
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COO
|
|
|
CFO
|
|
|
Sr VP
|
|
|
|
|
Adjusted Funds from Operations per Share
|
|
$
|
0.74
|
*
|
|
|
60%
|
|
|
|
60%
|
|
|
|
60%
|
|
|
|
60%
|
|
Net Income
|
|
$
|
6.1 million
|
|
|
|
40%
|
|
|
|
40%
|
|
|
|
40%
|
|
|
|
40%
|
|
|
|
|
*
|
|
Estimated. Actual AFFO Goal will be recalculated
post-offering based on the actual number of total outstanding
shares upon completion of this offering.
|
To set the above-referenced goals, the compensation committee
reviewed our pro forma financial statements and certain
financial models, including the primary assumptions underlying
these financial models. As noted elsewhere in this prospectus, a
critical factor for our companys financial performance for
the period from the date of this offering through
December 31, 2010 is our acquisition of new portfolio
properties using the net proceeds of this offering, debt
financing and the issuance of OP units. The compensation
committee selected the AFFO Goal of $0.74 and the NI Goal of
$6.1 million as target performance goals for 2010 because
achieving such metrics, which are based directly on the
successful completion of the acquisition of new portfolio
properties and the expected income and cash flow of such
properties, would represent strong financial performance by our
company. The compensation committee further believes that the
use of these two goals represents an appropriate balance of risk
and reward for management.
Annual incentive compensation payouts will be determined based
on the achievement of threshold, target and maximum performance
goals, as summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement
Points (% of Goal)
|
|
|
|
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
|
|
Adjusted Funds from Operations per Share
|
|
|
80%
|
|
|
|
100%
|
|
|
|
120%
|
|
Net Income
|
|
|
50%
|
|
|
|
100%
|
|
|
|
120%
|
|
For each corporate performance goal, the plan includes a target
payout, a threshold payout, and a maximum payout, as summarized
in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
|
|
Adjusted Funds from Operations per Share
|
|
|
80%
|
|
|
|
100%
|
|
|
|
110%
|
|
Net Income
|
|
|
50%
|
|
|
|
100%
|
|
|
|
120%
|
|
The threshold and maximum payouts were established as a
percentage of the target payout.
Payouts for each performance goal will be calculated as set
forth below.
|
|
Ø
|
If actual performance for the performance goal is less than the
threshold performance goal, no payouts would be made in
connection with that performance goal.
|
|
Ø
|
If actual performance is equal to the threshold performance
goal, the payout would be equal to the threshold payout.
|
|
Ø
|
If actual performance is in excess of the threshold performance
goal but less than the target performance goal, the payout would
be equal to the threshold payout plus the excess over the
threshold payout computed as the product of:
|
|
|
|
|
-
|
a percentage calculated as the amount of the actual performance
in excess of the threshold performance goal divided by the
difference between the threshold performance goal and the target
performance goal, multiplied by
|
|
|
-
|
the difference between the threshold payout and the target
payout.
|
157
Management
|
|
Ø
|
If actual performance is equal to the target performance goal,
the payout would be equal to the target payout.
|
|
Ø
|
If actual performance is in excess of the target performance
goal but less than the maximum performance goal, the payout
would be equal to the target payout plus the excess over the
target payout computed as the product of:
|
|
|
|
|
-
|
a percentage calculated as the amount of the actual performance
in excess of the target performance goal divided by the
difference between the target performance goal and the maximum
performance goal, multiplied by
|
|
|
-
|
the difference between the target payout and the maximum payout.
|
|
|
Ø
|
If actual performance is equal to or greater than the maximum
performance goal, the payout would be equal to the maximum
payout.
|
In the event of the termination of employment due to the
executives death or disability, the payout under this plan
for that executive would be the executives target total
bonus amount prorated for the portion of the performance year
that the executive was employed, such prorated amount to be
calculated by dividing the target total bonus by 12 and
multiplying by the number of months during the performance year
that the executive was employed through the last day of the
month on or succeeding the executives termination of
employment.
Payouts, if any, will be made on or before March 15 of the
year following the relevant performance period. Targeted annual
incentive compensation for 2011 and 2012 will be determined by
the compensation committee.
Restricted Stock Units under the
LTIP.
Pursuant to the terms of their employment
agreements, we will grant Mr. Frederiksen, our Chief Executive
Officer, and Ms. Kane, our President and Chief Operating
Officer, awards of restricted stock units under our LTIP. We
refer to the awards described below as the 2010 awards. The LTIP
was adopted, and approved by our pre-offering stockholders, to
provide long-term incentives to persons with significant
responsibility for the success and growth of our company, to
help align the interests of such persons with those of our
stockholders, to assist us in recruiting, retaining and
motivating a diverse group of employees and directors on a
competitive basis, and to link
pay-for-performance
for such employees and directors. The LTIP is also designed to
provide such persons with additional incentives and reward
opportunities designed to enhance the profitable growth of our
company.
We benchmarked the 2010 awards to our peer group based on annual
GAAP cost as a percentage of base salaries. Because our 2010
base salaries will continue at the levels established prior to
this offering which are below the median base compensation
provided by our peer group, the 2010 awards were based on our
targeted 2012 base salaries rather than our 2010 base salaries.
To determine the 2010 targeted restricted stock units the
compensation committee reviewed the peer group benchmarking
information provided by Baker Tilly Virchow Krause, our pro
forma financial statements, certain financial models, and
historical REIT return indices. In consideration of our growth
plan and the peer group information, the committee set the 2010
restricted stock unit values at 175% of the targeted 2012 base
salary for our Chief Executive Officer and 185% of the targeted
2012 base salary for our Chief Operating Officer, or slightly
below the peer group median. The awards were based on the
targeted 2012 base salaries because the actual 2010 base
salaries will continue to be at a level well below peer group
median levels as they were established prior to this offering.
We are entitled to settle the 2010 awards in cash, shares of
common stock on a one-for-one basis with the units, or a
combination of cash and shares. The specific number of shares
issuable under the 2010 awards will be determined by dividing
the award value associated with actual performance for the
measurement period described below by the initial public
offering price. The award values measured as
158
Management
of the date of this offering for each of Mr. Frederiksen
and Ms. Kane are as follows: $1,246,500 (threshold),
$2,493,000 (target) and $2,929,280 (maximum). If we elect to
settle the 2010 awards in cash, we will pay the product of the
share amount calculated above multiplied by the average of the
high and low sale prices of our common stock on
December 31, 2012. As permitted under the LTIP, dividend
equivalents will be paid on the number of shares issuable as of
December 31, 2012 for the period from the date of the
closing of this offering through December 31, 2012. The
2010 awards will vest on December 31, 2012, and be settled
on or about February 15, 2013, if we achieve certain
performance goals, as summarized below, for the measurement
period starting from the date of the closing of this offering
and ending on December 31, 2012. These performance goals
are:
|
|
Ø
|
total stockholder return (TSR) goal; and
|
|
Ø
|
comparative stockholder return (CSR) goal.
|
Performance for the TSR goal will be calculated as follows:
|
|
Ø
|
the appreciation of our share price calculated as the difference
between (a) the average of the closing prices of our stock
for each day of the last quarter of 2012 and (b) the
initial public offering price per share; plus
|
|
Ø
|
the dividend per share paid to the stockholders for 2010, 2011,
and 2012; divided by
|
|
Ø
|
the initial public offering price per share.
|
Performance for the CSR goal will be calculated by dividing our
actual stockholder return as computed for the performance of the
TSR goal with the average of:
|
|
Ø
|
the Dow Jones REIT Composite Index average return from the day
preceding the date of this offering through December 31,
2012; and
|
|
Ø
|
the FTSE NAREIT All REIT Index average return from the day
preceding the date of this offering through December 31,
2012.
|
The performance goals and the allocation of LTIP compensation by
goal for each executive are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation by
Goal
|
|
|
|
|
|
|
|
|
|
|
Performance
|
|
|
|
|
|
|
|
|
|
Goal
|
|
|
CEO
|
|
|
COO
|
|
|
|
|
Total Stockholder Return
|
|
|
30%
|
|
|
|
50%
|
|
|
|
50%
|
|
Comparative Stockholder Return
|
|
|
100%
|
|
|
|
50%
|
|
|
|
50%
|
|
The compensation committee set the LTIP performance goals based
on its review of our pro forma financial statements and
historical REIT return indices. The compensation committee
believes the selected performance goals, which reference
stockholder returns, provide a balance of challenge and
motivation for management. The TSR goal requires achievement of
our projected dividend rate as well as appreciation of our stock
price following this offering. The TSR goal is balanced by the
CSR goal that requires management to achieve target performance
comparatively equal to the average return of the REITs in the
two indices selected.
For each performance goal, there is a threshold performance, a
target performance and a maximum performance established as a
percentage of the related performance goal as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement
Points (% of Goal)
|
|
|
|
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
|
|
Total Stockholder Return
|
|
|
60%
|
|
|
|
100%
|
|
|
|
110%
|
|
Comparative Stockholder Return
|
|
|
80%
|
|
|
|
100%
|
|
|
|
125%
|
|
159
Management
For each performance goal, the plan includes threshold units,
target units and maximum units. The threshold and maximum units
are established as a percentage of the target units as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
|
|
Total Stockholder Return
|
|
|
60%
|
|
|
|
100%
|
|
|
|
110%
|
|
Comparative Stockholder Return
|
|
|
50%
|
|
|
|
100%
|
|
|
|
125%
|
|
The number of units vesting for each performance goal will be
calculated as follows.
|
|
Ø
|
If actual performance for the performance goal is less than the
threshold performance goal, no units would vest in connection
with that performance goal.
|
|
Ø
|
If actual performance is equal to the threshold performance
goal, the number of units vesting would be equal to the
threshold units.
|
|
Ø
|
If actual performance is in excess of the threshold performance
goal but less than the target performance goal, the number of
units vesting would be equal to the threshold units plus the
excess over the threshold units computed as the product of:
|
|
|
|
|
-
|
a percentage calculated as the amount of the actual performance
in excess of the threshold performance goal divided by the
difference between the threshold performance goal and the target
performance goal, multiplied by
|
|
|
-
|
the difference between the threshold units and the target units.
|
|
|
Ø
|
If actual performance is equal to the target performance goal,
the number of units vesting would be equal to the target units.
|
|
Ø
|
If actual performance is in excess of the target performance
goal but less than the maximum performance goal, the number of
units vesting would be equal to the target units plus the excess
over the target units computed as the product of:
|
|
|
|
|
-
|
a percentage calculated as the amount of the actual performance
in excess of the target performance goal divided by the
difference between the target performance goal and the maximum
performance goal, multiplied by
|
|
|
-
|
the difference between the target units and the maximum units.
|
|
|
Ø
|
If actual performance is equal to or greater than the maximum
performance goal, the number of units vesting would be equal to
the maximum units.
|
If any of the calculation results include a fraction of a unit,
the unit amount will be rounded up.
Benefits and Perquisites.
Our named executive
officers may participate in the standard company benefits we
offer to all full-time employees. These benefits include medical
and dental insurance, life insurance, long-term disability
insurance, short-term income replacement and 401(k) retirement
plans.
Our named executive officers may participate in our 401(k)
retirement plan, which permits employees to contribute between
1% and 100% of their compensation (base salary plus annual cash
incentive), within the limits of the law and in accordance with
our 401(k) testing. We provide a matching contribution of $0.50
for each dollar contributed, up to a maximum of 6% of
compensation. A discretionary profit sharing allocation is also
permitted under the plan.
Employment Agreements and Change in Control
Arrangements.
Upon completion of this offering
and the formation transactions, we intend to enter into written
employment agreements with Mr. Frederiksen and
Ms. Kane, who will serve, respectively, as our Chief
Executive Officer and our President and Chief Operating Officer.
Each employment agreement will be for a term commencing upon
completion of this offering and ending on December 31,
2012, with employment continuing on an
at-will
basis thereafter and terminable by either party upon
60 days written notice. The employment
160
Management
agreements will provide for an initial annual base salary of
$300,000 to Mr. Frederiksen and $300,000 to Ms. Kane, which may
be increased but not decreased at the discretion of our
compensation committee. The employment agreements also provide
for the above-described cash incentive payments under our annual
incentive plan, based on achievement of specified performance
objectives, and the above-described award of restricted stock
units under our LTIP, with vesting based on the achievement of
specified performance goals, along with participation in our
other employee benefit plans and programs that are generally
available to our employees.
If during the term of the employment agreements
Mr. Frederiksen or Ms. Kane should die or become
unable to perform his or her essential job functions despite
reasonable accommodation for a period of six months or longer,
whether consecutive or not, during a
12-month
period, then such executive officers employment shall
terminate and he or she will be paid base salary and any
incentive compensation earned through the date of termination,
including prorated incentive compensation for any partial year
of employment, and receive immediate vesting of any unvested
LTIP awards.
Under their employment agreements, upon the termination of
employment either by us for cause or by Mr. Frederiksen or
Ms. Kane without good reason during the term of the
employment agreement, such executive officer will be entitled to
receive only his or her annual base salary and other benefits
accrued and earned through the date of termination of
employment. Cause under the employment agreements
generally means conviction of or plea to a felony or a gross
misdemeanor, or any willful or reckless public conduct by the
executive that has a material detrimental effect on us; fraud or
embezzlement against us; or willful, reckless or grossly
negligent and material failure to perform his or her duties,
follow the lawful directions of the board or misconduct in
violation of company policy or applicable law. The employment
agreements generally define good reason to mean any
of the following, without the executives consent: a
material diminution in the executives total compensation,
salary, authority or duties; a change in reporting authority
such that Mr. Frederiksen no longer reports to the board or
a material diminution in the authority of the person to whom
Ms. Kane reports; a move of principal place of employment
of more than 50 miles; or a failure of us to use our best
efforts to cause the executive to be re-nominated to the board
during the initial term of the agreement. A change in
control, generally, would include the acquisition,
including through merger, of more than 50% of our stock, or the
sale, transfer or disposition of all or substantially all of our
assets. Each of the above terms is only a summary and is
qualified by the employment agreements, which have been filed as
exhibits to the registration statement of which this prospectus
is a part.
Upon the termination of employment either (i) by us without
cause, (ii) by the executive officer for good reason,
(iii) if the executives employment terminates at the
end of the initial term (i.e., at December 31, 2012)
without renewal by our company, or (iv) any of the previous
events occur within 24 months following a change of
control, the executive officer will be entitled under his or her
employment agreement to the following severance payments and
benefits:
|
|
Ø
|
two years of the executives base salary, calculated at the
highest rate in effect during the six-month period before
termination;
|
|
Ø
|
a cash incentive bonus payment equal to two times the average of
the two previous annual cash incentive bonuses received by the
executive pursuant to our annual incentive plan, or, if the
executive has not yet received two annual cash incentive bonuses
by the time of termination, two times the cash incentive bonus
the executive would have received if he or she had remained
employed and satisfied all target performance objectives;
|
|
Ø
|
full vesting of the LTIP awards held by the executive officer,
subject to the requirements of Section 162(m) of the Code, upon
termination by us for cause or by the executive officer for good
reason;
|
|
Ø
|
for 18 months after termination of employment, continuing
coverage under the group health plans made available by our
company to active employees; and
|
|
Ø
|
outplacement assistance.
|
161
Management
Upon a change of control, all outstanding unvested LTIP awards
granted to the executive fully vest and become immediately
exercisable, regardless of whether the executive is entitled to
the severance benefits set forth above.
In the event that any amount payable to an executive officer is
determined to be an excess parachute payment under
Section 280G of the Code, the payment may be reduced so
that the executive will receive the best after-tax result.
Each employment agreement also contains non-competition and
non-recruitment provisions that continue for a one-year period
after termination of employment, as well as confidentiality
provisions. The executives may not engage in outside businesses
which would conflict or interfere with their rendition of
services either directly or indirectly to our company. However,
at the same time, they may continue to participate in charitable
and other activities and they may hold, develop, increase, or
sell their outside real estate investments, with any increases
in their ownership of industrial or office facilities subject to
prior written approval from our board of directors. In addition,
severance payments are conditioned on the execution of a release.
Treatment of Brokerage Commissions
Agreement.
Welsh Companies, LLC historically paid
commissions to Mogul Financial Group, Ltd., or Mogul, an entity
wholly owned by Mr. Frederiksen, in connection with real
estate brokerage activities facilitated by Mogul. We and Mogul
acknowledge that we will continue to benefit from the
relationships established by Mogul, and that such relationships
will continue to generate revenue for us over the next several
years. In recognition of this continued revenue stream, and the
value of the relationships established by Mogul, we and Mogul
will enter into an agreement to provide for the continued
payment of commissions. Under this agreement, Mogul will receive
2.0% of the gross brokerage revenue of Welsh Companies, LLC in
the first year after the consummation of this offering, 1.5% of
such revenues in the second year, and 1.25% of such revenues in
the third year, subject to an aggregate maximum payment of
$900,000 under the agreement. The agreement will terminate upon
the earliest of expiration of the three years, payment of the
maximum amount or if Mr. Frederiksen is terminated for
cause under his employment agreement with our company.
Tax and Accounting Treatment of Compensation
Decisions.
We have been and will continue to be
mindful of the potential tax and accounting treatment of each
component of our executive compensation program. For example,
Section 162(m) of the Code generally limits the
deductibility of compensation in excess of $1 million for a
companys chief executive officer or any of its four other
highest paid executive officers. Certain performance based
compensation is not subject to this limitation. We intend to
structure our LTIP to qualify as performance based compensation
not subject to the limitations contained in Section 162(m).
We may in the future determine that our compensation objectives
are not furthered when compensation must be paid in a specific
manner to be tax deductible.
Stock Ownership Guidelines.
Upon completion of
this offering and the formation transactions, we plan to adopt
stock ownership guidelines applicable to Mr. Frederiksen
and Ms. Kane. We anticipate that these guidelines will
require each executive to hold four times his or her base
compensation (base salary plus annual cash incentive bonus) in
the form of stock. The executives will have four years to
achieve this minimum. In addition, they will be required to hold
a minimum of 75% of any equity awarded pursuant to the LTIP
while they remain in our employ.
162
Management
EXECUTIVE
COMPENSATION
The following table sets forth the compensation paid to our
named executive officers, each of whom was serving as an
executive officer of Welsh Companies, LLC or an affiliated
entity on December 31, 2009.
Summary
compensation table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other
|
|
|
|
|
Name and
principal position
|
|
Year
|
|
|
Salary
(1)
|
|
|
Bonus
|
|
|
compensation
(2)
|
|
|
Total
|
|
|
|
|
Dennis J. Doyle
|
|
|
2009
|
|
|
$
|
300,000
|
|
|
$
|
|
|
|
$
|
67,477
|
|
|
$
|
367,477
|
|
Chairman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott T. Frederiksen
|
|
|
2009
|
|
|
|
300,000
|
|
|
|
|
|
|
|
384,415
|
|
|
|
684,415
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jean V. Kane
|
|
|
2009
|
|
|
|
300,000
|
|
|
|
|
|
|
|
14,550
|
|
|
|
314,550
|
|
President and Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dennis G. Heieie
|
|
|
2009
|
|
|
|
170,000
|
|
|
|
35,000
|
|
|
|
5,950
|
|
|
|
210,950
|
|
Chief Financial Officer and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tracey L. Lange
|
|
|
2009
|
|
|
|
192,115
|
|
|
|
25,500
|
|
|
|
|
|
|
|
217,615
|
|
Senior Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Effective January 1, 2010, the annual base salaries of
our named executive officers were as follows:
Mr. Frederiksen$300,000; Ms. Kane$300,000;
Mr. Heieie$200,000; and
Ms. Lange$200,000
|
|
(2)
|
|
All other compensation for fiscal year 2009 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to 401(k)
|
|
|
Automobile
|
|
|
Charitable
|
|
|
Brokerage
|
|
|
|
|
Name
|
|
Plan
(a)
|
|
|
allowance
(b)
|
|
|
contributions
(c)
|
|
|
commissions
(d)
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|
|
Total
|
|
|
|
|
Dennis J. Doyle
|
|
$
|
7,350
|
|
|
$
|
11,858
|
|
|
$
|
48,269
|
|
|
$
|
|
|
|
$
|
67,477
|
|
Scott T. Frederiksen
|
|
|
7,350
|
|
|
|
7,200
|
|
|
|
|
|
|
|
369,865
|
|
|
|
384,415
|
|
Jean V. Kane
|
|
|
7,350
|
|
|
|
7,200
|
|
|
|
|
|
|
|
|
|
|
|
14,550
|
|
Dennis G. Heieie
|
|
|
5,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,950
|
|
Tracey L. Lange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Company Contribution to 401(k) Plan. As for all
salaried employees, under our 401(k) plan we match 50% of the
first 6% of the employees contributions, up to a maximum
compensation limit of $245,000
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|
(b)
|
|
Automobile Allowance. These amounts represent
allowances paid directly to our named executive officers to
facilitate their purchase or lease of automobiles
|
|
(c)
|
|
Charitable Contributions. This amount represents
the approximate dollar value for 2009 of charitable
contributions attributable to Mr. Doyle, both direct
contributions and for rent and related costs for office space
provided below-market in one of our properties, to Hope for the
City, a Minnesota non-profit corporation, of which
Mr. Doyle is chief executive officer
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|
(d)
|
|
Brokerage Commissions. These amounts represent
historical commissions paid for 2009 by Welsh Companies, LLC to
Mogul Financial Group, Ltd., an entity wholly owned by
Mr. Frederiksen, for brokerage services related to
Mr. Frederiksens prior brokerage relationships which
were referred to or assumed by other brokers in the
organization
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163
Management
Potential
payments upon termination or change of control
The employment agreements we will enter into with
Mr. Frederiksen and Ms. Kane provide for severance
payments and the provision of other benefits upon termination of
their employment or upon a change in control. See
Compensation Discussion and AnalysisOverview of
Executive Compensation ProgramEmployment Agreements and
Change in Control Arrangements. In addition, our 401(k)
retirement plan provides for retirement benefits upon
termination of employment.
Long-Term Equity
Incentive Plan
We have adopted, and our pre-offering stockholders have
approved, the LTIP. The purpose of the LTIP will be to provide
long-term incentives to those persons with significant
responsibility for the success and growth of our company, to
help align the interests of such persons with those of our
stockholders, to assist us in recruiting, retaining and
motivating key employees and directors on a competitive basis,
and to link pay-for-performance for such employees and
directors. The LTIP also will be designed to provide such
persons with additional incentives and reward opportunities
designed to enhance the profitable growth of our company.
Plan administration.
Our compensation
committee, which we refer to below as the committee, administers
all aspects of the LTIP. Each member of the committee will be
independent as defined in the NYSE listing standards, a
non-employee director as defined in
Rule 16b-3
of the Exchange Act, and an outside director as required by
162(m) of the Code and the regulations thereunder. The committee
has the authority to, among other things:
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Ø
|
construe and interpret the LTIP;
|
|
Ø
|
make rules and regulations relating to the administration of the
LTIP;
|
|
Ø
|
select participants and make awards;
|
|
Ø
|
establish the terms and conditions of awards; and
|
|
Ø
|
determine whether the conditions of an award have been met.
|
Awards.
The LTIP provides for the grant of
non-qualified stock options, incentive stock options that
qualify under Section 422 of the Code, stock appreciation
rights, restricted stock awards, restricted stock units,
performance shares, performance units and stock awards, each as
defined in the LTIP.
Eligibility.
Any officer, employee, consultant
or advisor; or a person expected to become an employee or a
director of our company or any of its subsidiaries or affiliated
businesses, is eligible for awards provided for under the LTIP.
Incentive stock options may be granted only to employees and
stock awards may not be granted to employees. The selection of
participants and the nature and size of grants and awards are
within the discretion of the committee.
Authorized shares.
The LTIP authorizes the
issuance of 2,000,000 shares of common stock. The total
number of shares of common stock issuable under the LTIP equals
the number of shares authorized for issuance but unissued
thereunder and repurchased shares. No more than
200,000 shares will be available for the grant of incentive
stock options.
If any award is forfeited or the award otherwise terminates
without the issuance of shares of common stock under a
derivative security, if applicable, the shares associated with
the award will again be available for future grants. However,
shares withheld by or delivered to our company to satisfy the
exercise or conversion price of an award or in payment of taxes
will not again be available for future grants, and, upon the
exercise of a stock-settled stock appreciation right, the number
of shares subject to the stock appreciation right will not again
be available for future grants regardless of the actual number
of shares used to settle such stock appreciation right. In
addition, awards that are settled in cash rather than shares of
stock and awards that may be granted in connection with the
assumption or
164
Management
substitution of outstanding grants from an acquired or merged
company will not reduce the number of shares available for
issuance under the LTIP.
If necessary for an award to satisfy the performance based
exception under Section 162(m) of the Code, the maximum
number of shares of common stock with respect to which awards
may be granted during any calendar year to any person shall be
400,000 shares, and the maximum dollar amount that may be
paid under such performance based exception to any one person
during any period of three calendar years shall be
$3.5 million.
Adjustments.
In the event of a corporate
transaction that affects our common stock, the committee or our
board of directors will make adjustments to the number of
authorized shares and the individual limitations set forth above
and to the outstanding awards as it deems appropriate and
equitable.
Options.
A stock option permits the
participant to purchase shares of common stock at a specified
price. Options may be granted alone or together with stock
appreciation rights. A stock option may be granted in the form
of a non-qualified stock option or an incentive stock option.
The price at which a share may be purchased under an option (the
exercise price) shall be equal to, or, at the committees
discretion, higher than, the fair market value (the average of
the high and low market prices) of a share of our common stock
on the date the option is granted. Except in the case of an
adjustment related to a corporate transaction, the exercise
price of a stock option may not be decreased after the date of
grant and no outstanding option may be surrendered as
consideration for the grant of a new option with a lower
exercise price without stockholder approval. No dividends or
dividend equivalents will be paid on stock options.
The committee may establish the term of each option, but no
option will be exercisable after 10 years from the grant
date.
The amount of incentive stock options that becomes exercisable
for the first time in a particular year by an individual
participant cannot exceed a face value of $100,000 or such other
amount as may subsequently be specified by the Code, determined
using the fair market value of the shares on the date of grant.
Stock Appreciation Rights (SARs).
A stock
appreciation right entitles the participant to receive a payment
in shares of our common stock
and/or
cash
equal to the excess of the fair market value of our common stock
on the date the SAR is exercised over the SAR exercise price.
SARs may be granted either alone or in tandem with stock
options. The exercise price of an SAR shall be equal to or, in
the discretion of the committee, greater than the fair market
value of our common stock on the date of grant. The committee
may establish the term of each SAR, but no SAR will be
exercisable after 10 years from the grant date. No
dividends or dividend equivalents will be paid on SARs.
Restricted Stock Awards (RSAs) and Restricted Stock Units
(RSUs).
A restricted stock award represents
shares of common stock that are issued to a participant subject
to vesting requirements. A restricted stock unit is the right
granted to a participant to receive a share of our common stock
and/or
a
cash payment based on the value of a share of our common stock
subject to vesting requirements. The restrictions on such awards
are determined by the committee, and may include time-based or
performance based restrictions. Any time-based restriction
generally must be for a minimum of one year. The committee may
also condition the vesting of any RSA or RSU grant on the
achievement of one or more performance goals. RSUs may be
settled in cash, shares of common stock or a combination
thereof, as determined by the committee. Holders of RSUs will
have no ownership interest in the shares of common stock to
which such RSUs relate unless and until payment with respect to
such RSUs is actually made in shares of common stock.
Participants who hold RSAs will have voting rights and the right
to receive dividends or other distributions during the
restriction period. Except as otherwise determined by the
committee, participants who hold RSUs will be credited with
dividend equivalents in respect of such RSUs during the
restriction period.
165
Management
Performance awards and performance
goals.
Performance awards are awards conditioned
on the achievement of performance goals (which are based on one
or more performance measures) during a performance period. The
committee determines the performance goal and the length of the
performance period. The performance measures to be used for
purposes of performance awards may be described in terms of
objectives that are related to the individual participant
(including salary range, tenure in the current position and
performance during the prior year) or objectives that are
company-wide or related to a subsidiary, division, department,
region, function, policy initiative or business unit of our
company, and may consist of one or more or any combination of
the following criteria: stockholder return, stockholder return
ranked against one or more REIT indices, stock price, the
attainment by a share of common stock of a specified fair market
value for a specified period of time, capitalization, earnings
per share, growth in stock price, growth in market value, return
to stockholders (including or excluding dividends), return on
equity, earnings, economic value added, revenues, net income,
operating income, return on assets, return on capital, adjusted
return on invested capital, return on sales, market share, cash
flow measures or cost reduction goals, sales volume, net
earnings, gross margin, or achieving goals, objectives, and
policy initiatives. The performance goals based on these
performance measures may be expressed in absolute terms,
relative to prior performance or relative to the performance of
other entities. Notwithstanding the attainment of any
performance goal, the committee has the discretion to reduce,
but not to increase, any award payment. Performance awards may
be in the form of options, performance shares, performance
units, restricted shares, restricted stock units or SARs.
Stock awards.
Stock awards consist of vested
shares of common stock that are not subject to a risk of
forfeiture. Stock awards may only be granted to non-employee
directors and other eligible participants who are consultants or
advisors (i.e., non-employees).
Non-employee director awards.
Under the LTIP,
our non-employee directors may receive stock awards as
compensation for their service on the board or its committees,
as determined by the committee from time to time. Employee
directors are not eligible to receive these awards.
Change in control.
In the event of a change in
control of our company, participants in the LTIP are entitled to
the following:
|
|
Ø
|
each stock option and SAR will be exercisable in full;
|
|
Ø
|
the restriction period applicable to any restricted stock units
and restricted stock awards, including vesting requirements,
will lapse and any other restrictions, terms or conditions will
lapse and be deemed to be satisfied and payable in accordance
with their terms; and
|
|
Ø
|
the performance measures applicable to any performance shares or
performance units will be deemed to immediately vest and become
payable as if 100% of the performance goals had been achieved.
|
In the event of a change in control in which the holders of our
common stock receive publicly-traded shares of common stock of
another entity, there will be substituted for each share of our
common stock issuable under the LTIP, whether or not then
subject to an outstanding award, the number and class of shares
into which each outstanding share of our common stock is
converted pursuant to such change in control. In the event of
such substitution, the purchase price per share in the case of
any option or restricted stock award will be appropriately
adjusted by the committee.
The term change in control is defined in the LTIP.
Effective date, term, amendment and
termination.
The LTIP will become effective as of
the date of stockholder approval and will remain in effect until
the tenth anniversary of such date. Our board of directors or
the committee may terminate or amend the LTIP at any time, but
no such amendment or termination may adversely affect awards
granted prior to such termination or amendment except to the
extent necessary or appropriate to comply with applicable law or
stock exchange rules and regulations. Unless our stockholders
shall have first approved the amendment, no amendment may
(i) increase the number of shares issuable under the plan
or the maximum individual award limitations, (ii) add to
the
166
Management
types of awards that can be made, (iii) change the
performance measures pursuant to which performance awards are
earned, (iv) modify the requirements as to eligibility for
participation, (v) decrease the exercise price of any
option or SAR to less than the fair market value on the grant
date, (vi) amend the LTIP in a manner that requires
stockholder approval pursuant to the LTIP, applicable law or the
rules of the principal securities exchange on which shares of
our common stock are traded, (vii) effect any change
inconsistent with Section 422 of the Code, or (viii) extend
the maximum period during which awards can be made under the
plan.
Limitations on transfer.
Awards granted under
the LTIP are nontransferable other than upon the
participants death, by will or the laws of descent and
distribution, unless otherwise determined by the committee. The
committee has the discretion only to permit the transfer of an
award to a participants immediate family member without
the payment of any consideration.
167
FORMATION
TRANSACTIONS
Some of our directors and officers have material financial
interests in the formation transactions. Prior to the completion
of the formation transactions, Mr. Doyle,
Mr. Frederiksen and Ms. Kane have ownership interests
in the services business, ownership interests in the property
subsidiaries that owned the properties in our existing
portfolio, either directly or indirectly through the investment
funds, and economic interests in our joint venture portfolio.
They were also employees of the Welsh organization.
Mr. Heieie was an employee of the Welsh organization and
had an ownership interest in property subsidiaries that owned
two of our existing portfolio properties.
As part of the formation transactions, we have entered into
contribution agreements with our principals, as well as the
continuing investors, pursuant to which we will acquire the
ownership interests in the services business and the property
subsidiaries owning the properties in our existing portfolio,
either directly or indirectly through their interests in the
three investment funds, as well as our principals economic
interests in our joint venture portfolio. Pursuant to the
contribution agreements, we will issue OP units in exchange for
these interests. The aggregate number and value of the OP units
to be issued to our principals and our executive officers in
connection with such contributions are as follows:
|
|
Ø
|
Mr. Doyle, our Chairman, will receive 1,148,550 OP
units, representing approximately 2.6% of our common stock
outstanding on a fully-diluted basis and having an aggregate
value of $10.9 million (based on the mid-point of the
initial public offering price shown on the cover of this
prospectus) in exchange for the interests to be contributed by
him in the formation transactions;
|
|
|
Ø
|
Mr. Frederiksen, our Chief Executive Officer and one of our
directors, will receive 575,295 OP units, representing
approximately 1.3% of our common stock outstanding on a
fully-diluted basis and having an aggregate value of
$5.5 million (based on the mid-point of the initial public
offering price shown on the cover of this prospectus) in
exchange for the interests to be contributed by him in the
formation transactions;
|
|
|
Ø
|
Ms. Kane, our President, Chief Operating Officer and one of
our directors, will receive 533,546 OP units, representing
approximately 1.2% of our common stock outstanding on a
fully-diluted basis and having an aggregate value of
$5.1 million (based on the mid-point of the initial public
offering price shown on the cover of this prospectus) in
exchange for the interests to be contributed by her in the
formation transactions; and
|
|
|
Ø
|
Mr. Heieie, our Chief Financial Officer and Treasurer, will
receive 5,696 OP units, representing less than 1% of our
common stock outstanding on a fully-diluted basis and having an
aggregate value of $54,112 (based on the mid-point of the
initial public offering price shown on the cover of this
prospectus), all of which relates to his interests in real
property, in exchange for the interests to be contributed by him
in the formation transactions.
|
Furthermore, Mr. OSullivan, one of our directors, may
be deemed to be the beneficial owner of 322,692 OP units to
be received by CrossHarbor Capital Partners, LLC, as described
below under Certain Relationships and Related
Transactions with the Welsh Organization Prior to the Formation
TransactionsSpecific related party transactions.
The foregoing amounts exclude an additional 1,578,947 OP
units that our principals have the possibility of receiving as
consideration for our services business (see Structure and
Formation of our Company Formation
Transactions Contribution and exchange of interests
in the existing entities).
168
Certain
relationships and related party transactions
In addition to the OP units to be received in connection with
the formation transactions, Mr. Doyle, Mr. Frederiksen
and Ms. Kane will also benefit from the following:
|
|
Ø
|
in the case of Mr. Frederiksen and Ms. Kane,
employment agreements which will provide for salary, bonus and
other benefits, including severance benefits in the event of a
termination of employment in certain circumstances (see
ManagementCompensation Discussion and
AnalysisOverview of Executive Compensation
ProgramEmployment Agreements and Change in Control
Arrangements);
|
|
Ø
|
in the case of Mr. Frederiksen, an agreement to terminate
his existing arrangement for brokerage commissions (see
ManagementCompensation Discussion and
AnalysisTreatment of Brokerage Commissions
Agreement);
|
|
Ø
|
indemnification by us for certain liabilities and expenses
incurred as a result of actions brought, or threatened to be
brought, against them as an officer
and/or
director of our company;
|
|
Ø
|
redemption rights under the OP agreement (see Description
of the Partnership Agreement of Welsh Property Trust, L.P.);
|
|
|
Ø
|
registration rights afforded by a registration rights agreement
(see Shares Eligible for Future SaleRegistration
Rights);
|
|
|
Ø
|
release of certain personal guarantees related to real estate
loans secured by our existing portfolio properties and our joint
venture properties (see Structure and Formation of Our
CompanyThe Financing Transactions); and
|
|
|
Ø
|
following repayment by us to WelshCo, LLC of certain start-up
costs previously paid by WelshCo, LLC, reimbursement of
approximately $1.5 million through deferred distributions
from WelshCo, LLC
|
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
Our charter authorizes us to obligate ourselves and our bylaws
obligate us, to indemnify each of our officers and directors who
are made or threatened to be made a party to any proceeding by
reason of his or her service in that capacity, and to pay or
reimburse his or her reasonable expenses in advance of the final
disposition of such a proceeding, to the maximum extent
permitted by Maryland law. We also have the right, with the
approval of our board of directors, to provide such
indemnification and advancement of expenses to individuals who
served our company or any of our subsidiaries, Welsh Predecessor
Companies or Welsh Contribution Companies as an officer or
director, as well as the right to provide indemnification and
advancement of expenses to any employee or agent of such
entities. In addition, the partnership agreement includes
provisions providing for indemnification or reimbursement of
reasonable expenses of the general partner, the company, acting
in its capacity as the special limited partner, and their
directors, officers and employees in connection with such
proceedings. We also intend to enter into agreements with our
directors and executive officers providing for indemnification
and advancement or reimbursement of the reasonable expenses of
such directors and officers, to the maximum extent permitted by
Maryland law, in connection with any proceeding to which they
are or are threatened to be made a party, or in which they are
or become involved, as a witness or otherwise, by reason of
their service as directors or officers and in certain other
capacities. In addition, pursuant to a separate indemnification
agreement, our operating partnership has agreed to indemnify our
principals and certain other parties participating in the
contribution transaction to the extent each has guaranteed
certain obligations or agreed to provide indemnification for
certain liabilities arising out of or related to the real
property or the use, maintenance and operation of the real
property and other assets owned by the entities being
contributed to the operating partnership in the contribution
transaction.
169
Certain
relationships and related party transactions
ON-GOING BUSINESS
RELATIONSHIPS
We expect to continue with several service agreements between us
and entities owned in part or controlled by our principals
related to real estate assets that were not contributed as part
of the formation transactions. These agreements cover
industrial, retail and multi-family assets, and relate to
property management, asset management and brokerage services. In
all instances, the fees charged by us and paid by the
principals affiliated entities will be at market terms for
the type of asset, location of asset, and services provided.
These agreements are generally short-term in nature and several
provide broad cancellation rights to both parties.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS WITH THE WELSH
ORGANIZATION PRIOR TO THE FORMATION TRANSACTIONS
The Welsh
organization
Prior to the completion of the formation transactions, the
day-to-day
operations for our existing portfolio and joint venture
portfolio were managed by the Welsh organization, which included
diverse entities that have separate ownership from the ownership
of the property subsidiaries that owned our existing portfolio
and joint venture portfolio, pursuant to the terms and
conditions of written agreements between the relevant services
companies, on the one hand, and the property subsidiaries, on
the other hand. For the year ended December 31, 2009, total
intercompany revenue was $7.0 million, representing
primarily revenue from rental, construction, and brokerage
services provided. For further information on intercompany
payments, see Note 14 to the combined financial statements
of Welsh Predecessor Companies. All intercompany revenue has
been eliminated in the financial statements included in this
prospectus. In connection with the formation transactions, the
services companies and the property subsidiaries became
wholly-owned subsidiaries of our operating partnership and, as a
result, there will be no intercompany payments made after the
completion of this offering and the formation transactions.
Prior to the completion of the formation transactions, the
services companies were considered related parties as they were
indirectly majority owned
and/or
controlled by our principals. Collectively, these individuals
had primary responsibility for the management decisions of the
Welsh organization and certain of its affiliates.
Our principals may be deemed to be our promoters
based on their ownership and various relationships with us and
the existing entities.
Specific related
party transactions
In August 2009, Welsh Franklin, LLC, a property subsidiary to be
acquired by us in the formation transactions, purchased two
industrial buildings located in Franklin, Wisconsin from Welsh
Franklin Development Company II, LLC, an entity 70% owned by
Mr. Doyle, our Chairman. Total consideration paid by the
Welsh organization was $7.2 million, including the
assumption of approximately $5.9 million in existing debt.
Mr. Doyles distribution from the cash proceeds
following the sale was approximately $1.0 million.
As of December 31, 2009, Mr. Doyle, our Chairman;
Mr. Frederiksen, our Chief Executive Officer and one of our
directors; and Ms. Kane, our President, Chief Operating
Officer and one of our directors, owned 4.7%, 0.9% and 0.6%
interests, respectively, in Tradition Capital Bank, and
Mr. Doyle is a member of its board of directors. Tradition
Capital Bank redeemed the interests of Mr. Frederiksen and
Ms. Kane on January 11, 2010, and each of them now
have no interest in Tradition Capital Bank. The Welsh
organization has previously had, and we expect to continue to
have, lending relationships with this bank, which as of
March 31, 2010 held mortgages on two of our existing
properties with an outstanding aggregate principal balance of
$8.9 million, as well as depository relationships whereby
our
170
Certain
relationships and related party transactions
company may have operating or savings accounts for certain of
its property-owning or operating entities.
Mr. Arkema, one of our directors, is employed by Baker
Tilly Virchow Krause, which has provided services to our
company. During 2009, Mr. Arkema led a compensation
consulting and compensation benchmarking project for our company
for which we have been invoiced approximately $55,000 from Baker
Tilly Virchow Krause for its services during 2009. In each of
the last three fiscal years, Baker Tilly Virchow Krause, or its
predecessor, has provided tax preparation services for certain
of our wholly-owned limited liability companies, and we have
paid approximately $5,600 annually for these services. In
addition, we also retained Baker Tilly Virchow Krause in 2010 to
assist our internal accounting team in preparing our 2009
financial statements and work papers for audit, for which we
have been invoiced from Baker Tilly Virchow Krause in the amount
of approximately $1.1 million. Mr. Arkema did not
participate in such accounting assistance or in the tax
preparation services. Mr. Arkema may be deemed to have an
indirect interest in the payments we made to Baker Tilly Virchow
Krause, even though he was not compensated directly by us and
was not compensated beyond his normal salary from Baker Tilly
Virchow Krause.
Mr. OSullivan, one of our directors, is also an
officer of CrossHarbor Capital Partners, LLC, and so may be
deemed to be the beneficial owner of 39.3% of the issued and
outstanding membership interests of Intercen Partners LLC, one
of the existing entities. Intercen Partners, LLC will be
contributed to our operating partnership in exchange for OP
units upon consummation of the formation transactions and this
offering.
On December 18, 2009, in connection with the formation and
initial capitalization of our company, we issued 100 shares
of common stock to each of Mr. Doyle, Mr. Frederiksen
and Ms. Kane for an aggregate purchase price of $300. The
shares were issued in reliance on the exemption set forth in
Section 4(2) of the Securities Act.
We also provide certain charitable contributions and rent and
related expenses to Hope for the City, a charity controlled by
Mr. Doyle, and have historically paid brokerage commissions
to an entity controlled by Mr. Frederiksen, as discussed
under Compensation Discussion and AnalysisOverview
of Executive Compensation ProgramTreatment of Brokerage
Commissions Agreement and ManagementSummary
Compensation Table.
REVIEW AND
APPROVAL OF FUTURE TRANSACTIONS WITH RELATED PERSONS
Upon completion of this offering and the formation transactions,
we will adopt a written policy for the review and approval of
related person transactions requiring disclosure under
Rule 404(a) of
Regulation S-K.
We expect this policy to provide that the nominating and
corporate governance committee will be responsible for reviewing
and approving or disapproving all interested transactions,
meaning any transaction, arrangement or relationship in which
(a) the amount involved may be expected to exceed $120,000
in any fiscal year, (b) our company will be a participant,
and (c) a related person has a direct or indirect material
interest. A related person will be defined as an executive
officer, director or nominee for election as director, or a
greater than 5% beneficial owner of our common stock, or an
immediate family member of the foregoing. The policy may deem
certain interested transactions to be pre-approved.
171
Any change in our investment objectives or the policies
discussed below requires the approval of our board of directors,
but does not require stockholder approval.
INVESTMENT
POLICIES
Investments in
real estate or interests in real estate
We will conduct all of our investment activities through our
operating partnership and its subsidiaries. Our primary business
objectives are to maximize current cash flow and generate
sustainable long-term growth in earnings and FFO, thereby
maximizing total returns to our stockholders. In order to
achieve these objectives, we will seek to maximize cash flow
from our portfolio, capitalize on acquisition opportunities,
reinvest capital efficiently, and leverage our full-service
platform to achieve growth in our services business. We may seek
to expand or upgrade our portfolio of properties if appropriate
to protect or increase our potential for long-term capital
appreciation. Our business will be focused primarily on
industrial and office real estate properties and providing real
estate-related services such as property management, leasing,
construction, architecture, mortgage origination, development
and investment services to third-party owners of real estate. We
have not established a specific policy regarding the relative
priority of our investment objectives. For a discussion of our
properties, services business and our business and other
strategic objectives, see Business and Properties.
Historically, we have conducted our business through
(1) our services business and (2) investments in real
property through our property subsidiaries, both directly and
indirectly through our investment funds, and our joint venture
portfolio. Such real estate investments have included both
wholly-owned and percentage ownership in the various entities
and underlying properties. See Structure and Formation of
Our Company.
We expect to pursue our investment objectives through the
ownership by our operating partnership of real estate assets and
our services business, but we may also make investments in other
entities, including joint ventures. We currently intend to focus
on assets and providing services in those areas in which we
operate and to strategically select new markets when
opportunities are available that meet our investment criteria or
areas that have potential to provide a strong base of business
opportunities. Our ownership of properties currently includes
partial interests in real estate assets, including through joint
ventures or
tenant-in-common
ownership with parties unaffiliated with us. We anticipate that
future investment will be focused primarily in the central
United States, but will not be limited to any geographic area.
We intend to engage in investment activities in a manner that is
consistent with requirements applicable to REITs for federal
income tax purposes.
We may enter into joint ventures from time to time, if we
determine that doing so would be the most cost-effective and
efficient means of raising capital. Equity investments may be
subject to existing mortgage financing and other indebtedness or
such financing or indebtedness may be incurred in connection
with acquiring investments. Any such financing or indebtedness
will have priority over our equity interest in such property.
Investments are also subject to our policy not to be treated as
an investment company under the Investment Company Act of 1940,
as amended, or the 1940 Act.
We do not have a specific policy to acquire assets primarily for
capital gain or primarily for income. From time to time, we may
make investments that support our objectives but do not provide
current cash flow. We believe investments that do not generate
current cash flow may be, in certain instances, consistent with
our objective to achieve sustainable long-term growth in
earnings and FFO.
We do not have any specific policy as to the amount or
percentage of our assets which will be invested in any specific
asset, other than the requirements under REIT qualification
rules. We currently anticipate that our real estate investments
will continue to be diversified in multiple assets representing
172
Policies with
respect to certain activities
both industrial and office properties, services businesses, and
in multiple geographic markets. As of April 1, 2010, our
portfolio of investments included 57 industrial and eight office
properties located in 12 states.
Investments in
real estate mortgages
While we will emphasize equity real estate investments in
industrial and office real estate properties, we may, at the
discretion of our board of directors, invest in mortgages and
other real estate interests consistent with the rules applicable
to REITs. The mortgages in which we may invest may be either
first-lien mortgages or subordinate mortgages on office
buildings, industrial buildings or unimproved land. Investments
in real estate mortgages are subject to the risk that one or
more borrowers may default and that the collateral securing
mortgages may not be sufficient to enable us to recover our full
investment.
Investments in
securities or interests in entities primarily engaged in real
estate activities and investments in other securities
Subject to the gross income and asset requirements required for
REIT qualification, we may invest in securities of entities
engaged in real estate activities or securities of other
issuers, including for the purpose of exercising control over
such entities. We do not currently have any policy limiting the
types of entities in which we may invest or the proportion of
assets to be so invested, whether through acquisition of an
entitys common stock, limited liability or partnership
interests, interests in another REIT or entry into a joint
venture. However, other than in the formation transactions, we
do not presently intend to invest in these types of securities.
OTHER
POLICIES
Purchase and sale
of investments
We expect to acquire industrial and office real estate assets
primarily for generation of current income and long-term capital
appreciation. In addition, we may seek to make acquisitions of
operating and services businesses that will complement our
current services business and our portfolio of properties.
Although we do not currently intend to sell any assets, we may
deliberately and strategically dispose of assets in the future
and redeploy funds into new acquisitions and development
opportunities that align with our strategic objectives. If
market conditions are favorable, we may also engage in
development opportunities by developing the land within our
portfolio or acquiring land for development that we believe
would be accretive to our portfolio of assets.
Financing
policies
We expect to employ leverage in our capital structure in amounts
determined from time to time by our board of directors. Although
our board of directors has not adopted a policy which limits the
total amount of indebtedness that we may incur, it will consider
a number of factors in evaluating our level of indebtedness, as
well as the amount of such indebtedness that will either be
fixed or variable rate. There are no restrictions in our charter
or bylaws that limit the amount or percentage of indebtedness
that we may incur nor restrict the form in which our
indebtedness will be incurred (including recourse or
non-recourse debt or cross collateralized debt). Our levels of
indebtedness may vary from time to time in light of then-current
economic conditions, relative costs of debt and equity capital,
market values of our properties, general market conditions for
debt and equity securities, fluctuations in the market price of
our common stock, growth and acquisition opportunities and other
relevant factors. In addition, we have received commitments for
a syndicated credit facility in an initial amount of
$75.0 million, which could be used to finance new
acquisitions and for other working capital purposes.
173
Policies with
respect to certain activities
This credit facility may be used, without stockholder approval,
for operational and growth opportunities and, if used, would
increase our indebtedness.
Lending
policies
We do not have a policy limiting our ability to make loans to
other persons, although we may be so limited by applicable law,
such as the Sarbanes-Oxley Act. Subject to REIT qualification
rules, we may make loans to unaffiliated third parties. For
example, we may consider offering purchase money financing in
connection with the disposition of assets in instances where the
provision of that financing would increase the value to be
received by us for the asset sold. We have not engaged in any
significant lending activities in the past, although we
currently have one loan outstanding to an unrelated third party
in connection with a prior disposition that will mature on
December 31, 2010. We do not expect to engage in any
significant lending in the future. We may choose to guarantee
debt of certain joint ventures with third parties. Consideration
for those guarantees may include, but is not limited to, fees,
long-term management contracts, options to acquire additional
ownership interests and promoted equity positions. Our board of
directors may, in the future, adopt a formal lending policy
without notice to or consent of our stockholders.
Issuance of
additional securities
If our board of directors determines that obtaining additional
capital would be advantageous to us, we may, without stockholder
approval, issue debt or equity securities, including causing our
operating partnership to issue additional OP units, retain
earnings (subject to the REIT distribution requirements for
federal income tax purposes) or pursue a combination of these
methods. As long as our operating partnership is in existence,
the proceeds of all equity capital raised by us will be
contributed to our operating partnership in exchange for
additional OP units, which will dilute the ownership interests
of the limited partners therein.
We may offer shares of our common stock, OP units, or other debt
or equity securities in exchange for cash, real estate assets or
other investment targets, and to repurchase or otherwise
re-acquire shares of our common stock, OP units or other debt or
equity securities. We may issue preferred stock from time to
time, in one or more classes or series, as authorized by our
board of directors without the need for stockholder approval. We
have not adopted a specific policy governing the issuance of
senior securities at this time. Through Welsh Securities, we may
engage in the distribution and sale of securities of other
issuers in private placements exempt from registration
requirements under the Securities Act.
Repurchase of our
securities
We may repurchase shares of our common stock or OP units from
time to time. In addition, certain holders of OP units have the
right, beginning 12 months after completion of this
offering, to require us to redeem their OP units in exchange for
cash or, at our option, shares of common stock. See
Shares Eligible for Future
SaleRedemption/Exchange Rights.
Reporting
policies
We intend to make available to our stockholders audited annual
financial statements and annual reports. Upon the completion of
this offering, we will become subject to the information
reporting requirements of the Exchange Act, pursuant to which we
will file periodic reports, proxy statements and other
information, including audited financial statements, with the
SEC.
Stockholder
rights plans
We have not adopted a stockholder rights plan, and we do not
intend to adopt a stockholder rights plan unless our
stockholders approve in advance the adoption of such plan.
174
Policies with
respect to certain activities
Policies with
respect to certain transactions
Upon completion of this offering and the formation transactions,
we will adopt a written policy for the review and approval of
related person transactions requiring disclosure under
Rule 404(a) of
Regulation S-K,
which will include our directors, officers, major stockholders
and affiliates, including certain of their family members. For a
discussion of our Related Person Transaction Policy, see
Certain Relationships and Related Party
TransactionsReview and Approval of Future Transactions
with Related Persons.
Under our bylaws, our directors and officers may have business
interests and engage in business activities similar to, in
addition to or in competition with those of or relating to our
company. See Risk FactorsRisks Related to Our
Organization and StructureOur principals have outside
business interests and investments, which could potentially take
their time and attention away from us.
175
OVERVIEW
Prior to the completion of this offering, we operated our
business through the existing entities. Our real estate
portfolio is owned through (i) three investment funds,
which are owned by our principals and their affiliates with a
number of third-party investors, including third-party investors
that own
tenant-in-common
interests in properties owned with Welsh US Real Estate Fund,
LLC, (ii) 21 property subsidiaries that are owned by our
principals and their affiliates with other third parties and
11 property subsidiaries that are owned solely by
third-party investors, (iii) nine additional property
subsidiaries that are owned solely by our principals and their
affiliates and certain of their family members, and (iv) an
economic interest held by our principals in our joint venture
portfolio. In addition, our services business is owned
exclusively by our principals and their affiliates. Concurrently
with the completion of this offering, we will engage in a series
of transactions, which we refer to as the formation
transactions, that will consolidate our real estate portfolio
and our services business, including the properties in our
acquisition portfolio, within our company and our operating
partnership.
Part of the formation transactions includes a contribution
transaction whereby the three investment funds, the third-party
investors owning
tenant-in-common
interests with the Welsh US Real Estate Fund, LLC and the owners
of the ownership interests in the property subsidiaries
described above, including our principals, their affiliates,
certain of their family members and third-party investors,
through a series of contributions, will exchange their ownership
interests in the existing entities owning our real estate
portfolio, and our principals will exchange their ownership
interests in our services business and their economic interest
in our joint venture portfolio, for OP units and, in some
instances, cash. The agreements relating to the contribution
transaction are subject to customary closing conditions,
including the completion of this offering.
The significant elements of the formation transactions
undertaken in connection with the offering include:
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formation of our company, our operating partnership, the general
partner of our operating partnership and our taxable REIT
subsidiary;
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the contribution transaction;
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the acquisition from unaffiliated third parties of properties
from our acquisition portfolio; and
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the financing transactions described in more detail below.
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FORMATION OF OUR
COMPANY, OUR OPERATING PARTNERSHIP AND OUR TAXABLE REIT
SUBSIDIARY
Our company, Welsh Property Trust, Inc., was incorporated on
December 18, 2009 under the laws of the State of Maryland.
We intend to elect and qualify to be taxed as a REIT for federal
income tax purposes commencing with our taxable year ending
December 31, 2010. Our operating partnership, Welsh
Property Trust, L.P., was organized as a limited partnership
under the laws of the State of Delaware on December 18,
2009. Our wholly-owned subsidiary, Welsh Property Trust, LLC, is
and will continue to act as our operating partnerships
sole general partner and will hold general partner interests in
our operating partnership. Welsh Property Trust, Inc. will also
hold OP units in our operating partnership. The combined number
of GP units held by Welsh Property Trust, LLC and OP units held
by Welsh Property Trust, Inc. will equal the number of shares of
our common stock outstanding upon completion of this offering.
As part of the formation transactions, we will establish a
taxable REIT subsidiary that will be owned by our operating
partnership. We expect that our taxable REIT subsidiary will
earn income and engage in
176
Structure and
formation of our company
activities that might otherwise jeopardize our qualification as
a REIT or that would cause us to be subject to a 100% tax on
prohibited transactions. A taxable REIT subsidiary is taxed as a
regular corporation and its net income therefore will be subject
to federal, state and local level corporate tax. We may form
additional taxable REIT subsidiaries in the future. Any income
earned by our taxable REIT subsidiaries will not be included for
purposes of the 90% distribution requirement discussed under
Federal Income Tax ConsiderationsAnnual Distribution
Requirements, unless such income is actually distributed
to us. For a further discussion of taxable REIT subsidiaries,
see Federal Income Tax ConsiderationsTaxation of Our
Company.
FORMATION
TRANSACTIONS
Contribution and
exchange of interests in the existing entities
Pursuant to separate contribution agreements, the investment
funds and other owners of the property subsidiaries and the
economic interest in our joint venture portfolio (including our
principals and third-party investors) and the holders of
ownership interests in our services business (consisting
exclusively of our principals) will contribute and exchange
their interests as follows:
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the investment funds will contribute their ownership interests
in 24 property subsidiaries owning 34 properties, one mortgage
interest and one parcel of vacant land, to our operating
partnership in exchange for 2.1 million OP units, which
have an aggregate value (based on the mid-point of the initial
public offering price shown on the cover page of this
prospectus) of $20.3 million (which include
$5.8 million of OP units that will be issued in respect of
the Kansas City property acquired by one of the investment funds
on March 5, 2010 (see Note 2(G) to our unaudited pro
forma condensed consolidated financial statements));
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with respect to the properties owned by Welsh US Real Estate
Fund LLC as a tenant-in-common with third parties, six of
these third-party investors will contribute their
tenant-in-common
interests to three of the 24 property subsidiaries described
above immediately prior to the closing of the contribution
transaction, in exchange for an equity interest in the
applicable property subsidiary and, at closing, will contribute
their interest in such property subsidiary to our operating
partnership in exchange for 377,902 OP units, which have an
aggregate value (based on the mid-point of the initial public
offering price shown on the cover page of this prospectus) of
$3.6 million; three of these third-party investors will
contribute their ownership interests in three property
subsidiaries owning
tenant-in-common
interests in two of the 34 properties described above to our
operating partnership in exchange for 258,848 OP units,
which have an aggregate value (based on the mid-point of the
initial public offering price shown on the cover page of this
prospectus) of $2.5 million; and one of these third-party
investors will sell its
tenant-in-common
interest in one of the 34 properties described above to our
operating partnership or one of its subsidiaries in exchange for
$1.85 million in cash;
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the holders (including our principals and third party investors)
of the ownership interests in 30 property subsidiaries
owning 24 properties in which third-party investors have an
interest (either through a property subsidiary that is jointly
owned with our principals or through the sole ownership of a
property subsidiary that owns a
tenant-in-common
interest in the property) will contribute their ownership
interests in these property subsidiaries to our operating
partnership in exchange for 2.9 million OP units, which
have an aggregate value (based on the mid-point of the initial
public offering price shown on the cover page of this
prospectus) of $27.1 million; and one of the third-party
investors in one of the property subsidiaries will sell its
membership interest in such property subsidiary to our operating
partnership in exchange for approximately $32,000 in cash;
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our principals and certain of their family members will
contribute their ownership interests in eight property
subsidiaries that own the entire interest in eight properties to
our operating partnership in
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177
Structure and
formation of our company
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exchange for 386,000 OP units, which have an aggregate
value (based on the mid-point of the initial public offering
price shown on the cover page of this prospectus) of
$3.7 million;
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our principals will contribute their economic interests in joint
ventures that own the 14 properties that comprise our joint
venture portfolio and that we expect to continue to manage
following the completion of this offering and the formation
transactions to our operating partnership in exchange for
125,000 OP units, which have an aggregate value (based on
the mid-point of the initial public offering price shown on the
cover page of this prospectus) of $1.2 million; however,
the owners of the remaining interest in the joint ventures will
not contribute their interests pursuant to the formation
transactions; and
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our principals will contribute their ownership interests in our
services business to our operating partnership in exchange for
(i) OP units having an aggregate value (based on the
initial public offering price of the common stock in this
offering) of $10.0 million upon the consummation of this
offering, and (ii) the possibility of receiving an
additional number of OP units equal to $15.0 million
divided by the initial public offering price of the common stock
in this offering, subject to the achievement of a certain
performance threshold. Under the contribution agreement relating
to our services business, our principals will collectively
receive the additional $15.0 million in OP units only if
our common stock outperforms the FTSE NAREIT All REIT Index by
at least 3% in the aggregate for the three-year period that
begins on the first trading day of our common stock on the NYSE
and ends on the third anniversary of such date. Based on this
performance criteria, our principals would be eligible to
receive this additional consideration even if the performance of
both the FTSE NAREIT All REIT Index and our common stock were
negative. The FTSE NAREIT All REIT Index is a free float
adjusted market capitalization-weighted index that includes all
tax-qualified REITs listed on the NYSE, NYSE Amex and NASDAQ
Stock Market. This index was chosen in the course of
negotiations between us and the underwriters because it allows
the performance of our common stock over the period to be
measured against the universe of U.S. publicly traded REITs
included in the index. The contribution agreement also requires
that our independent directors review and approve the
calculation of this performance threshold. In addition, the
additional $15.0 million in OP units will be adjusted to reflect
any dividends, stock splits, or reverse stock splits of our
common stock and distributions of rights to acquire our common
stock.
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Valuation of the
investment funds, other entities and services business
Valuation of the Investment Funds.
We
determined the aggregate values of the investment funds in the
contribution transaction by considering a number of factors,
including recent comparable market transactions, prior and
projected financial performance, current appraisals to the
extent available, current occupancy and lease expirations,
replacement value, outstanding debt, pending capital
expenditures and current market capitalization rates. Each
investment fund has an investment committee that is responsible
for making decisions regarding the funds investments. In
connection with the contribution transaction, the investment
committee of each of the investment funds appointed a special
committee, comprised solely of the non-Welsh-employed members of
the investment committee, to consider and negotiate the proposed
transaction on behalf of the investment fund. We proposed values
for each of the investment funds, and each of the special
committees considered our proposal and negotiated with us to
establish the value for the investment funds. Each special
committee determined that the final value for the investment
fund was fair and reasonable to the owners of the investment
fund and that it was in the best interest of the investment fund
to participate in the contribution transaction. In making their
determinations, the special committees considered a number of
factors, including property condition, current occupancy and
lease expirations, current debt terms, market information, prior
performance and projected future performance, and potential
third-party sale scenarios.
Valuation of the Other Entities.
We determined
the value of the properties held by the property subsidiaries
that are owned by our principals or their affiliates with other
third parties, the property
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Structure and
formation of our company
subsidiaries that are owned solely by third-party investors, the
principals property subsidiaries and the principals
economic interests in our joint venture portfolio in the
contribution transaction by considering a number of factors,
including recent comparable market transactions, prior and
projected financial performance, current appraisals to the
extent available, current occupancy and lease expirations,
replacement value, outstanding debt, pending capital
expenditures and current market capitalization rates. The
required consents from the owners of interests in these
properties to the contribution transaction have been received.
After determining the values of the investment funds and the
other property subsidiaries and joint venture portfolio
interests as described above, we determined to allocate a fixed
number of 6,135,426 OP units to be issued to the continuing
investors, including the principals and their affiliates and
family members, in the contribution transaction in consideration
for the interests in the existing entities owning our existing
portfolio and the principals interests in the joint
venture portfolio. We calculated the number of OP units to
be received by each investor based upon the investors pro
rata share of the total value of the investment funds, property
subsidiaries and joint venture portfolio interests (determined
based upon the value of the interests being contributed by the
investor). In addition, we negotiated with two investors to
purchase their interests for cash, as described above.
Valuation of the Services Business.
The number
of OP units that our principals will receive in exchange for
their contribution of their ownership interests in the services
business will be determined as set forth above. No independent
or other valuation was undertaken in respect of this business
for purposes of this offering.
Consideration
paid in formation transactions
Consideration Paid for the Real Estate
Portfolio.
In the formation transactions, in
consideration for the acquisition of (i) the 24 property
subsidiaries owned by the three investment funds, including the
interests in such property subsidiaries held by third-party
investors, (ii) the three property subsidiaries owning
tenant-in-common
interests with Welsh US Real Estate Fund, LLC, (iii) the 30
property subsidiaries owning properties in which third parties
have an interest, (iv) the eight property subsidiaries
owned solely by our principals and certain of their affiliates
and family members, and (v) the economic interest that our
principals hold in our joint venture portfolio, we expect to
issue 6.1 million OP units, which have an aggregate
value of $58.3 million (based on the mid-point of the
initial public offering price shown on the cover page of this
prospectus), and pay $1.9 million in cash.
Consideration Paid to Principals in Respect of the Services
Business.
In the formation transactions, in
consideration for the acquisition of our services business, we
expect (based on the mid-point of the initial public offering
price range shown on the cover page of this prospectus) to issue
an aggregate of 1,052,632 OP units to our principals,
representing an aggregate value of $10.0 million. In
addition, our principals will have the possibility of receiving
an additional $15.0 million, or 1,578,947 OP units
(based on the mid-point of the initial public offering price
shown on the cover page of this prospectus), as described above,
which are not included in the totals set forth below as they are
contingent on the achievement of certain performance measures.
The aggregate number and value of OP units to be received by our
principals and executive officers, including their affiliates,
in exchange for their interests in the investment funds and
property subsidiaries, their economic interests in our joint
venture portfolio, and their ownership interests in our services
business, are as follows:
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Mr. Doyle, our Chairman, will receive 1,148,550 OP
units, representing approximately 2.6% of our common stock
outstanding on a fully-diluted basis and having an aggregate
value of $10.9 million (based on the mid-point of the
initial public offering price range shown on the cover page of
this prospectus) in exchange for the interests to be contributed
by him in the formation transactions.
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Structure and
formation of our company
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Mr. Frederiksen, our Chief Executive Officer and one of our
directors, will receive 575,295 OP units, representing
approximately 1.3% of our common stock outstanding on a
fully-diluted basis and having an aggregate value of
$5.5 million (based on the mid-point of the initial public
offering price range shown on the cover page of this prospectus)
in exchange for the interests to be contributed by him in the
formation transactions.
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Ms. Kane, our President, Chief Operating Officer and one of
our directors, will receive 533,546 OP units, representing
approximately 1.2% of our common stock outstanding on a
fully-diluted basis and having an aggregate value of
$5.1 million (based on the mid-point of the initial public
offering price range shown on the cover page of this prospectus)
in exchange for the interests to be contributed by her in the
formation transactions.
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Mr. Heieie, our Chief Financial Officer and Treasurer, will
receive 5,696 OP units, representing approximately less
than 1% of our common stock outstanding on a fully-diluted basis
and having an aggregate value of $54,112 (based on the mid-point
of the initial public offering price range shown on the cover
page of this prospectus), all of which relates to his interests
in real property, in exchange for the interests to be
contributed by him in the formation transactions.
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Ms. Lange, our Senior Vice President, will not receive any
OP units, as she does not currently hold any interests in the
properties and assets to be contributed in the formation
transactions.
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CERTAIN
AGREEMENTS NOT TO SELL PROPERTY
We have entered into four non-disposition agreements with
contributors of properties in the formation transactions that
affect three properties. These agreements restrict the sale of
the subject property without the contributors consent
until March 1, 2013 for two of the three properties and
until July 11, 2013 for the other property. The three
properties subject to these agreements comprise approximately
252,000 square feet of industrial space in three states.
Additionally, one of Welshs three investment funds, Welsh
US Real Estate Fund, LLC, has made certain co-investments in its
properties in the form of
tenant-in-common
interests that have been previously contributed to Welsh US Real
Estate Fund, LLC on a tax-deferred basis pursuant to a
conversion agreement dated May 15, 2007. Under this
conversion agreement, which affects five properties in one state
comprising approximately 1.4 million leasable square feet,
Welsh US Real Estate Fund, LLC is restricted from selling these
properties without the consent of the contributors for a period
of four years from the date of the conversion agreement and must
use its best efforts to qualify any sale of the properties for
up to seven years from the date of the conversion agreement as a
tax-deferred exchange. These restrictions could impede our
ability to raise cash quickly through a sale of one or more of
these properties or to dispose of a poorly performing property
until the expiration of the terms of this agreement.
Welsh US Real Estate Fund, LLC has also entered into conversion
agreements with the tenant in common interest owners of three
additional properties constituting 1.3 million leasable
square feet. These conversion agreements contain similar
restrictions on the sale of such properties. Although we intend
to terminate these conversion agreements in connection with the
formation transactions, if we are unable to do so, the
restrictions described above would also apply to these
additional properties.
The affected properties are identified by footnote in the table
under Business and PropertiesOur
PortfolioExisting PortfolioIndustrial
Properties.
FUND INDEMNIFICATION
AGREEMENTS
Pursuant to indemnification agreements, each dated as of
November 13, 2009, each of the three investment funds has
agreed to indemnify each member of such investment funds
investment committee and special committee for any liabilities
and expenses incurred in respect of their service as a member of
the investment committee or special committee. The contribution
agreement executed by each investment fund provides that these
indemnification obligations will be assumed by the partnership
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Structure and
formation of our company
following the completion of the formation transactions. In
addition, the partnership will be named as an additional insured
on the liability insurance policy taken out for the benefit of
the members of the investment committees and special committees.
ACQUISITION
PORTFOLIO
For a discussion of the properties in our acquisition portfolio
that we will acquire in connection with the formation
transactions, see Business and PropertiesOur
PortfolioAcquisition Portfolio.
THE FINANCING
TRANSACTIONS
Treatment of
existing financing
In connection with the formation transactions, we will assume or
otherwise become liable for certain existing property-related
indebtedness and related obligations. These related obligations
may include obligations in respect of interest rate swaps and
caps, forward rate transactions and similar interest rate
management transactions. The indebtedness and related
obligations we will assume or otherwise become liable for will
include indebtedness and related obligations of existing
entities owning our existing portfolio, as well as indebtedness
and related obligations incurred or assumed in connection with
the acquisition of properties from our acquisition portfolio.
Where required by the applicable documents, instruments and
agreements evidencing or securing existing indebtedness, we have
obtained or are in the process of obtaining such modifications,
approvals and consents as we have deemed necessary or
appropriate in connection with the formation transactions. For
additional information, see Business and
PropertiesOur PortfolioLender Consents.
Release of
certain guarantees and indemnities
The principals and Doyle Security Fund, a Minnesota limited
liability company owned entirely by our Chairman,
Mr. Doyle, have guaranteed certain portions of the
indebtedness we will assume or otherwise become liable for in
connection with the formation transactions. To the extent we
deemed appropriate, we have requested that the lenders with
respect to such indebtedness release the principals and Doyle
Security Fund from liability under their respective guarantees
upon completion of the formation transactions. In certain cases,
we have agreed to provide a guaranty of our operating
partnership in consideration of such release. We have agreed to
indemnify the principals and Doyle Security Fund from any
liability (contingent or otherwise) for indebtedness and related
obligations we will assume or otherwise become liable for in
connection with the formation transactions. See Certain
Relationships and Related Party
TransactionsIndemnification of Officers and
Directors.
New credit
facility
We have received commitments for a syndicated credit facility in
an initial amount of $75.0 million, which could be used to
finance new acquisitions and for other working capital purposes.
If completed, we may elect to increase the amount of the
facility up to $150 million, subject to the approval of the
administrative agent and the identification of a lender or
lenders willing to make available the additional amounts. The
proposed terms of the credit facility include: (i) security
of a first-lien mortgage or deed of trust on certain of our
properties that are otherwise unencumbered; (ii) a two-year
term with one 12-month extension option; and
(iii) interest-only payments at rates between
250 basis points and 325 basis points in excess of
LIBOR for eurodollar advances, and between 150 basis points
and 225 basis points in excess of the lenders
alternate base rate as defined therein, for all other advances,
in each case based on our overall company leverage. The specific
terms of the credit facility will be negotiated by us and the
lenders and there can be no assurance that we will be able to
enter into this credit facility on the terms described above or
at all. The credit facility will be contingent upon completion
of this offering.
181
Structure and
formation of our company
We remain in the lender review process with respect to
approximately $22.1 million of outstanding indebtedness on
certain properties in our existing portfolio, and
$2.6 million of outstanding indebtedness on certain
properties in our acquisition portfolio being assumed in
connection with the acquisition of such properties (see
Business and PropertiesOur PortfolioLender
Consents). We also intend to refinance $17.1 million
of debt scheduled to mature on two loans with new mortgage
financing prior to March 31, 2011. If we are unable to
obtain such lender consents or such new mortgage financing, we
may be required to pay such amounts in full using the syndicated
credit facility. In addition, based on the calculations under
Distribution Policy, we are estimating a deficiency
of approximately $1.8 million in our estimated cash
available for distribution for the 12 months ending
March 31, 2011, and unless our operating cash flow
increases during such period, we may fund such deficiency from
borrowings under the syndicated credit facility. The use of our
syndicated credit facility for the above purposes will reduce
the amounts available under the facility for other purposes.
CONSEQUENCES OF
THIS OFFERING, THE FORMATION TRANSACTIONS AND THE FINANCING
TRANSACTIONS
The completion of this offering, the formation transactions and
the financing transactions will have the following consequences:
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our operating partnership will directly or indirectly own our
real estate portfolio and the services business;
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purchasers of our common stock in this offering will own
approximately 99.9% of our outstanding common stock, or 82.5% on
a fully diluted basis;
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our company will own 82.5% of our operating partnerships
outstanding OP units and the continuing investors, including our
principals and our executive officers, and third parties
receiving OP units in connection with the acquisition portfolio
will own 17.5%; and
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we expect to have total consolidated indebtedness, pursuant to
our pro forma financial statements, of approximately
$416.8 million.
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DETERMINATION OF
OFFERING PRICE
Prior to this offering, there has been no public market for our
common stock. The initial public offering price of our common
stock will be negotiated between the representatives of the
underwriters and us. In determining the initial public offering
price of our common stock, the representatives of the
underwriters will consider the history and prospects for the
industry in which we compete, our financial information, the
ability of our management and our business potential and earning
prospects, the prevailing securities markets at the time of this
offering, and the recent market prices of, and the demand for,
publicly-traded shares of generally comparable companies. The
initial public offering price of our common stock does not
necessarily bear any relationship to the book value of our
assets or the assets to be acquired in the formation
transactions, our financial condition or any other established
criteria of value and may not be indicative of the market price
for our common stock after this offering. We have not obtained
any recent third-party appraisals of the properties and other
assets to be acquired by us in connection with this offering or
the formation transactions, nor have we obtained any independent
third-party valuations or fairness opinions in connection with
the formation transactions. The consideration to be paid by us
for our properties and other assets in the formation
transactions may exceed the fair market value of these
properties and assets. See Risk FactorsRisks Related
to Our Properties and OperationsWe have not obtained
recent independent appraisals of our properties or our services
business in connection with the formation transactions. As a
result, the consideration we will pay for the assets we intend
to acquire in the formation transactions, certain of which we
intend to purchase from our principals, may exceed their
aggregate fair market value.
182
The following table presents information regarding the
beneficial ownership of our common stock, following the
completion of this offering and the formation transactions, with
respect to:
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each person who beneficially owns more than 5% of our
outstanding common stock;
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each of our named executive officers; and
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all directors, director nominees and executive officers as a
group.
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Unless otherwise indicated, all shares are owned directly and
the indicated person has sole voting and investment power.
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Shares and
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OP units
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Percentage
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beneficially
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beneficially
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Name of
beneficial
owner
(1)
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owned
(2)
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owned
(3)
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Dennis J.
Doyle
(4)
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1,151,111
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3.1%
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Scott T.
Frederiksen
(5)
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575,395
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1.6%
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Jean V.
Kane
(6)
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533,646
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1.5%
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Dennis G.
Heieie
(7)
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5,696
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*
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Tracey L. Lange
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Milo D.
Arkema
(8)
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2,461
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*
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James L.
Chosy
(8)
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2,461
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*
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Peter D.
Linneman
(8)
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2,461
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*
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Patrick H.
OSullivan
(9)
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325,153
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*
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Paul L.
Snyder
(8)
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2,461
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*
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Lawrence W.
Stranghoener
(8)
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2,461
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*
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All directors and executive officers as a
group
(10)
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2,603,306
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6.8%
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*
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Denotes less than 1%
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(1)
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The address for each of the persons named above is 4350 Baker
Road, Suite 400, Minnetonka, Minnesota 55343
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(2)
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For purposes of this table, a person is deemed to be the
beneficial owner of any shares of common stock if that person
has or shares voting power or investment power with respect to
those shares, or has the right to acquire beneficial ownership
at any time within 60 days of the date of the table. As
used herein, voting power is the power to vote or
direct the voting of shares and investment power is
the power to dispose or direct the disposition of shares. In
addition, for purposes of this table, shares of common stock
which may be issued upon exchange of any OP units (see
Description of the Partnership Agreement of Welsh Property
Trust, L.P.Redemption Rights of Qualifying
Parties) are considered, except as provided in the notes
below, to be beneficially owned by the holder of such OP
units
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(3)
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Assumes a total of 35,807,001 shares of our common stock
are outstanding upon completion of this offering and the
formation transactions. For purposes of calculating the
percentage beneficially owned, OP units shown as beneficially
owned by a person or group are considered to represent
outstanding shares of common stock for that person or group, but
not for other persons shown in the table
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(4)
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Represents 100 shares of common stock issued at our
initial capitalization, 2,461 shares of common stock issued
upon completion of this offering and the formation transactions
as equity-based compensation for non-employee directors (see
ManagementOur Board of DirectorsCompensation
of directors) and 1,148,550 additional shares of common
stock that may be issuable upon exchange for an aggregate of
1,148,550 OP units. Such OP units consist of 313,914 OP units
owned directly by Mr. Doyle and 834,636 OP units that are
deemed to be owned by
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183
Principal
stockholders
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Mr. Doyle through the entities described below or
through his familial relationship with the following person:
(1) 69,091 OP units owned by Margaret Doyle, who is
Mr. Doyles wife, of which 6,454 OP units are owned
directly by Ms. Doyle and 62,637 OP units are owned
indirectly by Ms. Doyle, (2) 48,359 OP units owned by
Doyle Family Limited Partnership, (3) 414 OP units owned by
Devin Nathan, Inc., (4) 41,619 OP units owned by RB
Broadway Development Company, LLC, (5) 10,839 OP units
owned by Oakcreek Industrial Partners, LLC, (6) 7,421 OP
units owned by Welsh Equities, LLC, (7) 4,117 OP units
owned by Welsh Midwest Real Estate Fund, LLC, (8) 48 OP
units owned by Welsh US Real Estate Fund, LLC, (9) 18,754
OP units owned by 918 II Plymouth Partners, (10) 9,345 OP
units owned by 918 Plymouth Partners, (11) 17,803 OP units
owned by S.M.D. Lincoln Investments, LLC, (12) 26,705 OP
units owned by Hickory Hills Apartments Limited Partnership
(13) 448 OP units owned by WelshCo Holdings, LLC,
(14) 38,852 OP units owned by Welsh Partners 85, A Limited
Partnership, (15) 31,658 OP units owned by Lake Michigan
Industrial Properties, LLC, (16) 9,413 OP units owned by
Welsh Holdings CNL Fund I, Inc., (17) 2 OP units owned
by Mendelssohn Industrial Properties, LLC, (18) 300 OP
units owned by Welsh Tri-Center, LLC, (19) 2,835 OP units
owned by Shakopee Ventures, LLC, (20) 5 OP units owned by
Doyle Security Fund, LLC, (21) 17,553 OP units owned by
Development WelshCo, LLC, (22) 419,074 OP units owned by
Welsh Holdings, LLC, and (23) 59,980 OP units owned by
Doyle Westbelt, LLC. In all cases in which this note discloses
beneficial ownership by Mr. Doyle of the OP units owned by
an entity, such OP units represent Mr. Doyles direct
or indirect percentage pecuniary interest in the entity
estimated as of March 31, 2010. Mr. Doyle disclaims
beneficial ownership of the remainder of the OP units owned by
such entity (in particular, Mr. Doyle disclaims beneficial
ownership of the remainder of the OP units owned by 918 II
Plymouth Partners, 918 Plymouth Partners, Hickory Hills
Apartments Limited Partnership, Lake Michigan Industrial
Properties, LLC, Mendelssohn Industrial Properties, LLC,
Oakcreek Industrial Partners, LLC, RB Broadway Development
Company, LLC, Shakopee Ventures, LLC, Welsh Equities, LLC, Welsh
Holdings CNL Fund I, Inc., Welsh Midwest Real Estate Fund,
LLC, Welsh Partners 85, A Limited Partnership, Welsh Tri-Center,
LLC, Welsh US Real Estate Fund, LLC, and WelshCo Holdings, LLC).
Excludes 526,315 OP units that may be issued upon the third
anniversary of the commencement of trading of our common stock
on the NYSE, subject to a certain performance measure being met,
in exchange for the contribution of the services business (see
Structure and formation of our companyFormation
TransactionsContribution and exchange of interests in the
existing entities. The OP units held by Ms. Doyle and by
each of the foregoing entities may not sum to the totals
provided above due to rounding
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(5)
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Represents 100 shares of common stock issued at our
initial capitalization and 575,295 additional shares of common
stock that may be issuable upon exchange of an aggregate of
575,295 OP units. Such OP units consist of 71,799 OP units owned
directly by Mr. Frederiksen and 503,496 OP units that are
deemed to be owned by Mr. Frederiksen through the following
entities: (1) 20,809 OP units owned by RB Broadway
Development Company, LLC, (2) 6,287 OP units owned by
Oakcreek Industrial Partners, LLC, (3) 7,165 OP units owned
by Welsh Equities, LLC, (4) 1,472 OP units owned by Welsh
Midwest Real Estate Fund, LLC, (5) 13,886 OP units owned by
Welsh Real Estate Fund IV, LLC, (6) 4,821 OP units
owned by Welsh US Real Estate Fund, LLC, (7) 448 OP units
owned by WelshCo Holdings, LLC, (8) 74,711 OP units owned
by Welsh Partners 85, A Limited Partnership, (9) 927 OP
units owned by Lake Michigan Industrial Properties, LLC,
(10) 3,198 OP units owned by Welsh Holdings CNL
Fund I, Inc., (11) 17 OP units owned by Mendelssohn
Industrial Properties, LLC, (12) 77 OP units owned by Welsh
Tri-Center, LLC, (13) 10,769 OP units owned by Shakopee
Ventures, LLC, (14) 1,363 OP units owned by IC Holdings,
LLC, (15) 6,669 OP units owned by Welsh Warren, LLC, and
(16) 350,877 OP units owned by Welsh Enterprises, LLC. In
all cases in which this note discloses beneficial ownership by
Mr. Frederiksen of the OP units owned by an entity, such OP
units represent Mr. Frederiksens direct or indirect
percentage pecuniary interest in the entity estimated as of
March 31, 2010. Mr. Frederiksen disclaims beneficial
ownership of the remainder of the OP units owned by such entity
(in particular, Mr. Frederiksen disclaims beneficial
ownership of the remainder of the OP units owned by IC Holdings,
LLC, Lake Michigan Industrial Properties, LLC, Mendelssohn
Industrial Properties, LLC, Oakcreek Industrial Partners, LLC,
RB Broadway Development Company, LLC, Shakopee Ventures,
LLC, Welsh Equities, LLC, Welsh Holdings CNL Fund I, Inc.,
Welsh Midwest Real
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184
Principal
stockholders
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Estate Fund, LLC, Welsh Partners 85, A Limited Partnership,
Welsh Real Estate Fund IV, LLC, Welsh Tri-Center, LLC,
Welsh US Real Estate Fund, LLC, Welsh Warren, LLC, and WelshCo
Holdings, LLC). Excludes up to 308,345 shares of common
stock contingently issuable upon vesting of performance based
restricted stock units to be granted to Mr. Frederiksen
upon completion of this offering and the formation transactions
under our LTIP (see ManagementCompensation
Discussion and AnalysisOverview of executive compensation
programRestricted Stock Units under the LTIP and
526,315 OP units that may be issued upon the third anniversary
of the commencement of trading of our common stock on the NYSE,
subject to a certain performance measure being met, in exchange
for the contribution of the services business (see
Structure and Formation of our CompanyFormation
TransactionsContribution and exchange of interests in the
existing entities). The OP units held by each of the
foregoing entities may not sum to the totals provided above due
to rounding
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(6)
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Represents 100 shares of common stock issued at our
initial capitalization and 533,546 shares of common stock
that may be issuable upon exchange of an aggregate of 533,546 OP
units. Such OP units consist of 3,954 OP units owned directly by
Ms. Kane and 529,592 OP units that are deemed to be owned
by Ms. Kane through the following entities: (1) 20,809
OP units owned by RB Broadway Development Company, LLC,
(2) 2,974 OP units owned by Oakcreek Industrial Partners,
LLC, (3) 3,327 OP units owned by Welsh Equities, LLC,
(4) 739 OP units owned by Welsh Midwest Real Estate Fund,
LLC, (5) 13,886 OP units owned by Welsh Real Estate
Fund IV, LLC, (6) 4,821 OP units owned by Welsh US
Real Estate Fund, LLC, (7) 448 OP units owned by WelshCo
Holdings, LLC, (8) 12,098 OP units owned by Lake Michigan
Industrial Properties, LLC, (9) 3,198 OP units owned by
Welsh Holdings CNL Fund I, Inc., (10) 17 OP units
owned by Mendelssohn Industrial Properties, LLC, (11) 36 OP
units owned by Welsh Tri-Center, LLC, (12) 1,419 OP units
owned by Shakopee Ventures, LLC, (13) 4,733 OP units owned
by Turtle Creek Partners, LLC, (14) 657 OP units owned by
Turtle Creek Partners II, LLC, (15) 13,138 OP units owned
by Turtle Creek Partners IV, LLC, (16) 3,334 OP units owned
by Welsh Warren, LLC, (17) 391,883 OP units owned by Welsh
Ventures, LLC, and (18) 52,075 OP units owned by The 2009
Kane Family Irrevocable Trust u/a/d 12/10/09. In all cases in
which this note discloses beneficial ownership by Ms. Kane
of the OP units owned by an entity, such OP units represent
Ms. Kanes direct or indirect percentage pecuniary
interest in the entity estimated as of March 31, 2010.
Ms. Kane disclaims beneficial ownership of the remainder of
the OP units owned by such entity (in particular, Ms. Kane
disclaims beneficial ownership of the remainder of the OP units
owned by Lake Michigan Industrial Properties, LLC, Mendelssohn
Industrial Properties, LLC, Oakcreek Industrial Partners, LLC,
RB Broadway Development Company, LLC, Shakopee Ventures, LLC,
Turtle Creek Partners II, LLC, Turtle Creek Partners IV,
LLC, Turtle Creek Partners, LLC, Welsh Equities, LLC, Welsh
Holdings CNL Fund I, Inc., Welsh Midwest Real Estate Fund,
LLC, Welsh Real Estate Fund IV, LLC, Welsh Tri-Center, LLC,
Welsh US Real Estate Fund, LLC, Welsh Warren, LLC, and WelshCo
Holdings, LLC). Excludes up to 308,345 shares of common
stock contingently issuable upon vesting of performance based
restricted stock units to be granted to Ms. Kane upon
completion of this offering and the formation transactions under
our LTIP (see ManagementCompensation Discussion and
AnalysisOverview of executive compensation
programRestricted Stock Units under the LTIP and
526,315 OP units that may be issued upon the third anniversary
of the commencement of trading of our common stock on the NYSE,
subject to a certain performance measure being met, in exchange
for the contribution of the services business (see
Structure and Formation of our CompanyFormation
TransactionsContribution and exchange of interests in the
existing entities). The OP units held by each of the
foregoing entities may not sum to the totals provided above due
to rounding
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(7)
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Represents 5,696 shares of common stock that may be
issuable upon the exchange of 5,696 OP units. Such OP units
consist of 2,367 OP units owned directly by Mr. Heieie and
3,329 OP units owned by Welsh Warren, LLC that are deemed to be
owned by Mr. Heieie through such entity. In the case of the
beneficial ownership by Mr. Heieie of the OP units owned by
Welsh Warren, LLC, such OP units represent
Mr. Heieies direct or indirect percentage pecuniary
interest in Welsh Warren, LLC estimated as of March 31,
2010. Mr. Heieie disclaims beneficial ownership of the
remainder of the OP units owned by Welsh Warren, LLC
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185
Principal
stockholders
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(8)
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Represents 2,461 shares of common stock issued upon
completion of this offering and the formation transactions as
equity-based compensation for non-employee directors
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(9)
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Represents 2,461 shares of common stock issued upon
completion of this offering and the formation transactions as
equity-based compensation for non-employee directors and
322,692 shares of common stock that may be issuable upon
the exchange of 322,692 OP units. Such OP units are owned by
MassMutual/Boston Capital Mezzanine Partners II, L.P.
Mr. OSullivan is an officer of CrossHarbor Capital
Partners, LLC, a manager of this entity, and may be deemed to be
the beneficial owner of such OP units
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(10)
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Represents 300 shares of common stock issued at our
initial capitalization, 17,227 shares of common stock
issued upon the completion of this offering and the formation
transactions as equity-based compensation for non-employee
directors and 2,585,779 shares issuable upon the exchange
of 2,585,779 OP units
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186
This information in this section describes our capital structure
and the terms of our governing documents as we expect that they
will be at the time of the completion of this offering and the
formation transactions.
Our authorized stock consists of 500 million shares,
consisting of 490 million shares of common stock, par value
$0.01 per share, and 10 million shares of preferred stock,
par value $0.01 per share. Our charter authorizes our board of
directors, with the approval of a majority of the entire board
and without any action on the part of our stockholders, to amend
our charter to increase or decrease the aggregate number of
shares of stock that we are authorized to issue or the number of
authorized shares of any class or series. As of March 31,
2010, we had 300 outstanding shares of common stock held by
three record holders, and no outstanding shares of preferred
stock.
COMMON
STOCK
Subject to the preferential rights, if any, of holders of any
other class or series of our stock and to the provisions of our
charter relating to the restrictions on ownership and transfer
of our stock, the holders of our common stock:
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have the right to receive ratably any distributions from funds
legally available therefor, when, as and if authorized by our
board of directors and declared by us; and
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Ø
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are entitled to share ratably in all of our assets available for
distribution to holders of our common stock upon liquidation,
dissolution or winding up of our affairs.
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All shares of our common stock now outstanding are fully paid
and nonassessable and the shares of common stock to be issued in
this offering will be fully paid and nonassessable. There are no
redemption, sinking fund, conversion, preemptive or appraisal
rights with respect to the shares of our common stock.
Subject to the provisions of our charter relating to the
restrictions on ownership and transfer of our stock and except
as may otherwise be provided in the terms of any class or series
of common stock, holders of our common stock are entitled to one
vote per share on all matters on which holders of our common
stock are entitled to vote at all meetings of our stockholders.
The holders of our common stock do not have cumulative voting
rights. Subject to the rights of any future class or series of
common or preferred stock, the holders of a majority of the
shares voting in the election of our directors can elect all of
the directors to be elected, if they so choose. In such event,
the holders of the remaining shares will not be able to elect
any of our directors.
POWER TO
RECLASSIFY AND ISSUE STOCK
Our board of directors may classify any unissued shares of
preferred stock, and reclassify any unissued shares of common
stock or any previously classified but unissued shares of
preferred stock into other classes or series of stock, including
one or more classes or series of stock that have priority over
our common stock with respect to voting rights or distributions
or upon liquidation, and authorize us to issue the
newly-classified shares. Prior to the issuance of shares of each
class or series, our board of directors is required by the MGCL
and our charter to set, subject to the provisions of our charter
regarding the restrictions on ownership and transfer of our
stock, the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of
redemption for each such class or series. These actions can be
taken without stockholder approval, unless stockholder approval
is required by applicable law, the terms of any other class or
series of our stock or the rules of any stock exchange or
automated quotation system on which
187
Description of
stock
our securities may be listed or traded. As of the date hereof,
no shares of preferred stock are outstanding and we have no
present plans to issue any preferred stock.
POWER TO INCREASE
AUTHORIZED STOCK AND ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK
AND PREFERRED STOCK
We believe that the power of our board of directors to increase
the aggregate number of authorized shares of stock or the number
of shares of stock of any class or series that we have the
authority to issue, to issue additional authorized but unissued
shares of our common stock or preferred stock and to classify or
reclassify unissued shares of our common stock or preferred
stock and thereafter to cause us to issue such classified or
reclassified shares of stock will provide us with flexibility in
structuring possible future financings and acquisitions and in
meeting other needs which might arise. Shares of additional
classes or series of stock, as well as additional shares of
common stock, will be available for issuance without further
action by our stockholders, unless stockholder consent is
required by applicable law or the rules of any stock exchange or
automated quotation system on which our securities are then
listed or traded. Although our board of directors does not
intend to do so, it could authorize us to issue a class or
series of common stock or preferred stock that could, depending
upon the terms of the particular class or series, delay, defer
or prevent a transaction or a change of control of our company
that might involve a premium price for our stockholders or
otherwise be in their best interest.
RESTRICTIONS ON
OWNERSHIP AND TRANSFER
In order for us to qualify as a REIT under the Code, shares of
our stock must be owned by 100 or more persons during at least
335 days of a taxable year of 12 months (other than
the first year for which an election to be a REIT has been made)
or during a proportionate part of a shorter taxable year. Also,
not more than 50% of the value of the outstanding shares of
stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities)
during the last half of a taxable year (other than the first
year for which an election to be a REIT has been made).
Our charter contains restrictions on the ownership and transfer
of shares of our common stock and other outstanding shares of
stock. The relevant sections of our charter provide that,
subject to the exceptions described below, upon the completion
of this offering, no person or entity may own, or be deemed to
own, by virtue of the applicable constructive ownership
provisions of the Code, more than 9.8% by number or value,
whichever is more restrictive, of the outstanding shares of our
common stock, which we refer to as the common share ownership
limit, or 9.8% by number or value, whichever is more
restrictive, of the outstanding shares of our stock, which we
refer to as the aggregate share ownership limit. We refer to the
common share ownership limit and the aggregate share ownership
limit collectively as the ownership limits.
The constructive ownership rules under the Code are complex and
may cause shares of stock owned actually or constructively by a
group of related individuals
and/or
entities to be owned constructively by one individual or entity.
As a result, the acquisition of less than 9.8% by number or
value, whichever is more restrictive, of the outstanding shares
of our common stock or 9.8% by number or value, whichever is
more restrictive, of the outstanding shares of our stock (or the
acquisition of an interest in an entity that owns, actually or
constructively, shares of our stock by an individual or entity),
could, nevertheless, cause that individual or entity, or another
individual or entity, to violate the ownership limits.
Our board of directors may, upon receipt of certain
representations, undertakings and agreements and in its sole
discretion, exempt (prospectively or retroactively) any person
from the ownership limits or establish a different limit, or
excepted holder limit, for a particular person if the
persons ownership in excess of the ownership limits will
not then or in the future result in our being closely
held under
188
Description of
stock
Section 856(h) of the Code (without regard to whether the
persons interest is held during the last half of a taxable
year) or otherwise cause us to fail to qualify as a REIT. In
order to be considered by our board of directors for exemption,
a person also must not own, actually or constructively, an
interest in one of our tenants (or a tenant of any entity which
we own or control) that would cause us to own, actually or
constructively, more than a 9.9% interest in the tenant unless
the revenue derived by us from such tenant is sufficiently small
that, in the opinion of our board of directors, rent from such
tenant would not adversely affect our ability to qualify as a
REIT. The person seeking an exemption must represent and
covenant to the satisfaction of our board of directors that it
will not violate these two restrictions. The person also must
agree that any violation or attempted violation of these
restrictions will result in the automatic transfer to a trust of
the shares of stock causing the violation. As a condition of
granting an exemption or creating an excepted holder limit, our
board of directors may, but is not be required to, obtain an
opinion of counsel or IRS ruling satisfactory to our board of
directors with respect to our qualification as a REIT and may
impose such other conditions or restrictions as it deems
appropriate.
In connection with granting an exemption from the ownership
limits, establishing an excepted holder limit or at any other
time, our board of directors may increase or decrease the
ownership limits. Any decrease in the ownership limits will not
be effective for any person whose percentage ownership of shares
of our stock is in excess of such decreased limits until such
persons percentage ownership of shares of our stock equals
or falls below such decreased limits (other than a decrease as a
result of a retroactive change in existing law, which will be
effective immediately), but any further acquisition of shares of
our stock in excess of such percentage ownership will be in
violation of the applicable limits. Our board of directors may
not increase or decrease the ownership limits if, after giving
effect to such increase or decrease, five or fewer persons could
beneficially own or constructively own in the aggregate more
than 49.9% in value of the shares of our stock then outstanding.
Prior to any modification of the ownership limits, our board of
directors may require such opinions of counsel, affidavits,
undertakings or agreements as it may deem necessary or advisable
in order to determine or ensure our qualification as a REIT.
Our charter further prohibits:
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any person from beneficially or constructively owning, applying
certain attribution rules of the Code, shares of our stock after
the completion of this offering that would result in our being
closely held under Section 856(h) of the Code
(without regard to whether the stockholders interest is
held during the last half of a taxable year) or otherwise cause
us to fail to qualify as a REIT; and
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any person from transferring shares of our stock after the
completion of this offering if such transfer would result in
shares of our stock being beneficially owned by fewer than
100 persons (determined without reference to any rules of
attribution).
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Any person who acquires or attempts or intends to acquire
beneficial or constructive ownership of shares of our stock that
will or may violate the ownership limits or any of the other
foregoing restrictions on ownership and transfer of our stock
will be required to immediately give written notice to us or, in
the case of a proposed or attempted transaction, give at least
15 days prior written notice to us, and provide us
with such other information as we may request in order to
determine the effect of such transfer on our qualification as a
REIT. The ownership limits and the other restrictions on
ownership and transfer of our stock will not apply if our board
of directors determines that it is no longer in our best
interests to attempt to qualify, or to continue to qualify, as a
REIT or that compliance with the restrictions on ownership and
transfer of our stock is no longer required in order for us to
qualify as a REIT.
If any transfer of shares of our stock after the completion of
this offering would result in shares of our stock being
beneficially owned by fewer than 100 persons, such transfer
will be void from the time of such purported transfer and the
intended transferee will acquire no rights in such shares. In
addition, if
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any purported transfer of shares of our stock or any other event
would otherwise result, after the completion of this offering,
in:
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any person violating the ownership limits or such other limit
established by our board of directors; or
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our company being closely held under
Section 856(h) of the Code (without regard to whether the
stockholders interest is held during the last half of a
taxable year) or otherwise failing to qualify as a REIT,
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then that number of shares (rounded up to the nearest whole
share) that would cause us to violate such restrictions will
automatically be transferred to, and held by, a charitable trust
for the exclusive benefit of one or more charitable
organizations selected by us, and the intended transferee will
acquire no rights in such shares. The transfer will be deemed to
be effective as of the close of business on the business day
prior to the date of the violative transfer or other event that
results in the transfer to the charitable trust. A person who,
but for the transfer of the shares to the charitable trust,
would have beneficially or constructively owned the shares so
transferred is referred to as a prohibited owner,
which, if appropriate in the context, also means any person who
would have been the record owner of the shares that the
prohibited owner would have so owned. If the transfer to the
charitable trust as described above would not be effective, for
any reason, to prevent violation of the applicable restriction
on ownership and transfer contained in our charter, then our
charter provides that the transfer of the shares will be void
from the time of such purported transfer.
Shares of stock transferred to a charitable trust are deemed
offered for sale to us, or our designee, at a price per share
equal to the lesser of (1) the price paid per share in the
transaction that resulted in such transfer to the charitable
trust (or, if the event that resulted in the transfer to the
charitable trust did not involve a purchase of such shares of
stock at market price, defined generally as the last reported
sales price reported on the NYSE (or other applicable exchange),
the market price per share of such stock on the day of the event
which resulted in the transfer of such shares of stock to the
charitable trust) and (2) the market price on the date we,
or our designee, accept such offer. We may reduce the amount
payable to the charitable trust by the amount of distributions
which have been paid to the prohibited owner and are owed by the
prohibited owner to the charitable trust as described below. We
may pay the amount of such reduction to the charitable trust for
the benefit of the charitable beneficiary. We have the right to
accept such offer until the trustee of the charitable trust has
sold the shares held in the charitable trust as discussed below.
Upon a sale to us, the interest of the charitable beneficiary in
the shares sold terminates, and the charitable trustee must
distribute the net proceeds of the sale to the prohibited owner.
If we do not buy the shares, the charitable trustee must, within
20 days of receiving notice from us of the transfer of the
shares to the charitable trust, sell the shares to a person or
entity designated by the charitable trustee who could own the
shares without violating the ownership limits or the other
restrictions on ownership and transfer of our stock described
above. After that, the charitable trustee must distribute to the
prohibited owner an amount equal to the lesser of (1) the
price paid by the prohibited owner for the shares in the
transaction that resulted in the transfer to the charitable
trust (or, if the event that resulted in the transfer to the
charitable trust did not involve a purchase of such shares at
market price, the market price per share of such stock on the
day of the event that resulted in the transfer to the charitable
trust) and (2) the sales proceeds (net of commissions and
other expenses of sale) received by the charitable trust for the
shares. The charitable trustee may reduce the amount payable to
the prohibited owner by the amount of distributions which have
been paid to the prohibited owner and are owed by the prohibited
owner to the charitable trust. Any net sales proceeds in excess
of the amount payable to the prohibited owner will be
immediately paid to the charitable beneficiary, together with
any distributions thereon. In addition, if, prior to discovery
by us that shares of stock have been transferred to a charitable
trust, such shares of stock are sold by a prohibited owner, then
such shares will be deemed to have been sold on behalf of the
charitable trust and to the extent that the prohibited owner
received an amount for or in respect of such shares that exceeds
the amount that such
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Description of
stock
prohibited owner was entitled to receive, such excess amount
will be paid to the charitable trust upon demand by the
charitable trustee. The prohibited owner will have no rights in
the shares held by the charitable trust.
The charitable trustee will be designated by us and will be
unaffiliated with us and with any prohibited owner. Prior to the
sale of any shares by the charitable trust, the charitable
trustee will receive, in trust for the charitable beneficiary,
all distributions made by us with respect to such shares and may
also exercise all voting rights with respect to such shares. Any
dividend or other distribution paid prior to our discovery that
shares of stock have been transferred to the charitable trust
will be paid by the recipient to the charitable trust upon
demand by the charitable trustee. These rights will be exercised
for the exclusive benefit of the charitable beneficiary.
Subject to Maryland law, effective as of the date that the
shares have been transferred to the charitable trust, the
charitable trustee will have the authority, at the charitable
trustees sole discretion:
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to rescind as void any vote cast by a prohibited owner prior to
our discovery that the shares have been transferred to the
charitable trust; and
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to recast the vote in accordance with the desires of the
charitable trustee acting for the benefit of the charitable
beneficiary.
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However, if we have already taken irreversible action, then the
charitable trustee may not rescind and recast the vote.
If our board of directors determines in good faith that a
proposed transfer would violate the restrictions on ownership
and transfer of our stock set forth in our charter, our board of
directors may take such action as it deems advisable to refuse
to give effect to or to prevent such transfer, including, but
not limited to, causing us to redeem shares of stock, refusing
to give effect to the transfer on our books or instituting
proceedings to enjoin the transfer.
Every owner of 5% or more (or such lower percentage as required
by the Code or the regulations promulgated thereunder) of the
outstanding shares of all classes or series of our stock,
including common stock, will be required to give written notice
to us within 30 days after the end of each taxable year
stating the name and address of such owner, the number of shares
of each class and series of our stock that the person
beneficially owns and a description of the manner in which such
shares are held. Each such owner will be required to provide to
us such additional information as we may request in order to
determine the effect, if any, of such beneficial ownership on
our qualification as a REIT and to ensure compliance with the
ownership limits. In addition, each stockholder will, upon
demand, be required to provide to us such information as we may
request, in good faith, in order to determine our qualification
as a REIT and to comply with the requirements of any taxing
authority or governmental authority or to determine such
compliance.
Any certificates representing shares of our stock, or any
written statements of information delivered in lieu of
certificates, will bear a legend referring to the restrictions
described above.
These restrictions on ownership and transfer of our stock could
delay, defer or prevent a transaction or a change in control
that might involve a premium price for our common stock or
otherwise be in the best interest of our stockholders.
TRANSFER AGENT
AND REGISTRAR
The transfer agent and registrar with respect to our common
stock is Wells Fargo Bank, N.A.
LISTING
Our common stock has been approved to be listed on the NYSE,
subject to official notice of issuance, under the symbol
WLS.
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OUR BOARD OF
DIRECTORS
Our charter and bylaws provide that the number of directors we
have may be established only by our board of directors pursuant
to our bylaws, but may not be fewer than the minimum number
permitted under Maryland law nor more than 15. Upon the
completion of this offering and the formation transactions, we
expect to have nine directors. Our charter provides that,
at such time as we are eligible to make the election provided
for in Title 3, Subtitle 8 of the MGCL, which we expect
will occur upon the completion of this offering, except as may
be provided in setting the terms of any class or series of
preferred stock, any vacancy, including a vacancy created by an
increase in the number of directors, on our board of directors
may be filled only by a majority of the remaining directors,
even if the remaining directors do not constitute a quorum. Any
individual elected to fill such vacancy will serve for the
remainder of the full term of the directorship in which the
vacancy occurred and until his or her successor is duly elected
and qualifies.
Each of our directors is elected by our stockholders to serve
until the next annual meeting and until his or her successor is
duly elected and qualifies under Maryland law. Holders of shares
of our common stock will have no right to cumulative voting in
the election of directors. Directors are elected by a plurality
of the votes cast.
Our bylaws require that each director be an individual at least
21 years of age who is not under legal disability and that
at least a majority of our directors will be individuals whom
our board of directors has determined are
independent under the standards established by our
board of directors and in accordance with the then applicable
NYSE listing standards.
REMOVAL OF
DIRECTORS
Our charter provides that a director may be removed from office
at any time, but only by the affirmative vote of stockholders
entitled to cast at least two-thirds of all of the votes
entitled to be cast generally in the election of directors. Our
charter and bylaws provide that, except as provided by the board
of directors in setting the terms of any class or series of
preferred stock, our board of directors has the exclusive power
to fill vacant directorships. These provisions may preclude
stockholders from removing incumbent directors and filling the
vacancies created by such removal with their own nominees.
BUSINESS
COMBINATIONS
Under the MGCL, certain business combinations,
including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification
of equity securities, between a Maryland corporation and an
interested stockholder or, generally, any person who
beneficially owns 10% or more of the voting power of the
corporations outstanding voting stock or an affiliate or
associate of the corporation who, at any time within the
two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then
outstanding stock the corporation, or an affiliate of such an
interested stockholder, are prohibited for five years after the
most recent date on which the interested stockholder becomes an
interested stockholder. Thereafter, any such business
combination must be recommended by the board of directors of
such corporation and approved by the affirmative vote of at
least (1) 80% of the votes entitled to be cast by holders
of outstanding voting stock of the corporation and
(2) two-thirds of the votes entitled to be cast by holders
of voting stock of the corporation other than shares held by the
interested stockholder with whom (or with whose affiliate) the
business combination is to be effected or held by an affiliate
or associate of the
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bylaws
interested stockholder, unless, among other conditions, the
corporations stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the
interested stockholder for its shares. Under the MGCL, a person
is not an interested stockholder if the board of
directors approved in advance the transaction by which the
person otherwise would have become an interested stockholder. A
corporations board of directors may provide that its
approval is subject to compliance with any terms and conditions
determined by it.
These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by a board of
directors prior to the time that the interested stockholder
becomes an interested stockholder. Pursuant to the statute, our
board of directors has by resolution exempted business
combinations between us and any other person from these
provisions of the MGCL. As a result, any person may be able to
enter into business combinations with us that may not be in the
best interests of our stockholders without compliance by us with
the supermajority vote requirements and other provisions of the
statute. Our bylaws provide that this resolution may be altered
or repealed in whole or in part only with the affirmative vote
of a majority of the votes cast by our common stockholders.
CONTROL SHARE
ACQUISITIONS
The MGCL provides that control shares of a Maryland
corporation acquired in a control share acquisition
have no voting rights except to the extent approved by the
affirmative vote of two-thirds of the votes entitled to be cast
on the matter, excluding shares of stock in respect of which any
of the following persons is entitled to exercise or direct the
exercise of the voting power of such shares in the election of
directors: (1) the person that has made or proposed to make
the control share acquisition, (2) an officer of the
corporation or (3) an employee of the corporation who is
also a director of the corporation. Control shares
are shares of voting stock which, if aggregated with all other
such shares owned by the acquirer, or in respect of which the
acquirer is able to exercise or direct the exercise of voting
power (except solely by virtue of a revocable proxy), would
entitle the acquirer to exercise voting power in electing
directors within one of the following ranges of voting power:
(A) one-tenth or more but less than one-third,
(B) one-third or more but less than a majority or
(C) a majority or more of all voting power. Control shares
do not include shares that the acquirer is then entitled to vote
as a result of having previously obtained stockholder approval.
A control share acquisition means the acquisition of
issued and outstanding control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including
an undertaking to pay expenses and making an acquiring
person statement as described in MGCL), may compel the
board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any
stockholders meeting.
If voting rights are not approved at the meeting or if the
acquirer does not deliver an acquiring person
statement as required by the statute, then, subject to
certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined,
without regard to the absence of voting rights for the control
shares, as of the date of the last control share acquisition by
the acquirer or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a
stockholders meeting and the acquirer becomes entitled to
vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights, unless the
corporations charter or bylaws provides otherwise. The
fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per
share paid by the acquirer in the control share acquisition.
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The control share acquisition statute does not apply to
(1) shares acquired in a merger, consolidation or share
exchange if the corporation is a party to the transaction or
(2) acquisitions approved or exempted by the charter or
bylaws of the corporation.
Our bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of
shares of our stock, and this provision of our bylaws may not be
amended (and we may not opt in to the control share acquisition
statute) without the affirmative vote of a majority of the votes
cast by our common stockholders.
SUBTITLE
8
Subtitle 8 of Title 3 of the MGCL permits a Maryland
corporation with a class of equity securities registered under
the Exchange Act and at least three independent directors to
elect to be subject, by provision in its charter or bylaws or a
resolution of its board of directors and notwithstanding any
contrary provision in the charter or bylaws, to any or all of
five provisions:
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a classified board;
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a two-thirds vote requirement for removing a director;
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a requirement that the number of directors be fixed only by vote
of the directors;
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a requirement that a vacancy on the board be filled only by the
remaining directors and for the remainder of the full term of
the class of directors in which the vacancy occurred; and
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a majority requirement for the calling of a special meeting of
stockholders.
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Through provisions in our charter and bylaws unrelated to
Subtitle 8, we already (1) require the affirmative vote of
stockholders entitled to cast at least two-thirds of the votes
entitled to be cast generally in the election of directors for
the removal of any director from the board, (2) vest in the
board the exclusive power to fix the number of directors and
(3) require, unless called by our chairman, chief executive
officer or president or a majority of our directors, the request
of stockholders entitled to cast a majority of the votes
entitled to be cast at such meeting on such matter to call a
special meeting of stockholders to act on any matter that may
properly be considered at a meeting of stockholders. Our charter
provides that, at such time as we become eligible to make the
election provided for under Subtitle 8, except as may be
provided in setting the terms of any class or series of
preferred stock, vacancies on our board of directors may be
filled only by the affirmative vote of a majority of the
remaining directors then in office for the full term of the
directorship in which the vacancy occurred.
MEETINGS OF
STOCKHOLDERS
Pursuant to our bylaws, an annual meeting of our stockholders
for the purpose of the election of directors and the transaction
of any business will be held annually on a date and at the time
and place set by our board of directors. Each of our directors
is elected by our stockholders to serve until the next annual
meeting and until his or her successor is duly elected and
qualifies under Maryland law. In addition, our chairman, chief
executive officer or president or a majority of our directors
may call a special meeting of our stockholders. Subject to the
provisions of our bylaws, a special meeting of our stockholders
to act on any matter that may properly be considered by our
stockholders will also be called by our secretary upon the
written request of stockholders entitled to cast a majority of
all the votes entitled to be cast at the meeting on such matter,
accompanied by the information required by our bylaws. Our
secretary will inform the requesting stockholders of the
reasonably estimated cost of preparing and mailing the notice of
meeting (including our proxy materials), and the requesting
stockholder must pay such estimated cost before our secretary
may prepare and mail the notice of the special meeting.
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AMENDMENT TO OUR
CHARTER AND BYLAWS
Except for certain amendments related to the removal of
directors and certain amendments to our charter (which must be
declared advisable by our board of directors and approved by the
affirmative vote of stockholders entitled to cast at least
two-thirds of all the votes entitled to be cast on the matter),
our charter generally may be amended only if the amendment is
declared advisable by our board of directors and approved by the
affirmative vote of stockholders entitled to cast a majority of
all of the votes entitled to be cast on the matter.
Our board of directors has the exclusive power to adopt, alter
or repeal any provision of our bylaws and to make new bylaws,
except for amendments to the following provisions of our bylaws,
each of which may be amended only with the affirmative vote of a
majority of the votes cast on such an amendment by our common
stockholders:
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provisions opting out of the control share acquisition statute;
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provisions prohibiting our board of directors, without the
approval of a majority of the votes cast by our common
stockholders, from revoking altering or amending any resolution,
or adopting any resolution inconsistent with any
previously-adopted resolution of our board of directors, that
exempts any business combination between us and any other person
or entity from the business combination provisions of the
MGCL; and
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provisions governing amendments of our bylaws.
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EXTRAORDINARY
TRANSACTIONS
Under Maryland law, a Maryland corporation generally cannot
consolidate, merge, sell all or substantially all of its assets
or engage in a share exchange unless the action is advised by
its board of directors and approved by the affirmative vote of
stockholders entitled to cast at least two-thirds of the votes
entitled to be cast on the matter unless a different proportion,
which may not be less than a majority of all the votes entitled
to be cast on the matter, is specified in the corporations
charter. As permitted by Maryland law, our charter provides that
any of these actions may be approved by the affirmative vote of
stockholders entitled to cast a majority of all the votes
entitled to be cast on the matter. Also, many of our operating
assets are held by our subsidiaries, and these subsidiaries may
be able to merge or sell all or substantially all of their
assets without the approval of our stockholders.
APPRAISAL
RIGHTS
Our charter provides that our stockholders will not be entitled
to exercise appraisal rights unless a majority of our entire
board of directors determines that appraisal rights apply, with
respect to all or any classes or series of stock, to one or more
transactions occurring after the date of such determination in
connection with which holders of such shares would otherwise be
entitled to exercise appraisal rights.
DISSOLUTION
Our dissolution must be declared advisable by a majority of our
entire board of directors and approved by the affirmative vote
of stockholders entitled to cast a majority of all of the votes
entitled to be cast on the matter.
ADVANCE NOTICE OF
DIRECTOR NOMINATIONS AND NEW BUSINESS
Our bylaws provide that, with respect to an annual meeting of
stockholders, nominations of individuals for election to our
board of directors and the proposal of business to be considered
by stockholders may be made only (1) pursuant to our notice
of the meeting, (2) by or at the direction of our board of
directors or (3) by a stockholder who is a stockholder of
record both at the time of giving the notice
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bylaws
required by our bylaws and at the time of the meeting, who is
entitled to vote at the meeting in the election of each
individual so nominated or on such other business and who has
complied with the advance notice provisions of, and provided the
information required by, our bylaws.
With respect to special meetings of stockholders, only the
business specified in our notice of meeting may be brought
before the meeting. Nominations of individuals for election to
our board of directors at a special meeting of our stockholders
may be made only (1) by or at the direction of our board of
directors or (2) provided that the meeting has been called
in accordance with our bylaws for the purpose of electing
directors, by a stockholder who is a stockholder of record both
at the time of giving the notice required by our bylaws and at
the time of the meeting, who is entitled to vote at the meeting
in the election of each individual so nominated and who has
complied with the advance notice provisions of, and provided the
information required by, our bylaws.
ANTI-TAKEOVER
EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER
AND BYLAWS
Our charter and bylaws and Maryland law contain provisions that
may delay, defer or prevent a change in control or other
transaction that might involve a premium price for shares of our
common stock or otherwise be in the best interests of our
stockholders, including restrictions on ownership and transfer
of our stock and advance notice requirements for director
nominations and stockholder proposals.
INDEMNIFICATION
AND LIMITATION OF DIRECTORS AND OFFICERS
LIABILITY
Maryland law permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money
damages except for liability resulting from (1) actual
receipt of an improper benefit or profit in money, property or
services or (2) active and deliberate dishonesty that is
established by a final judgment and is material to the cause of
action. Our charter contains such a provision that limits such
liability to the maximum extent permitted by Maryland law.
The MGCL requires a Maryland corporation (unless its charter
provides otherwise, which our charter does not) to indemnify a
director or officer who has been successful in the defense of
any proceeding to which he or she is made or threatened to be
made a party by reason of his or her service in that capacity.
The MGCL permits a corporation to indemnify its present and
former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they
may be made or threatened to be made a party by reason of their
service in those or other capacities unless it is established
that: (1) the act or omission of the director or officer
was material to the matter giving rise to the proceeding and
(A) was committed in bad faith or (B) was the result
of active and deliberate dishonesty; (2) the director or
officer actually received an improper personal benefit in money,
property or services; or (3) in the case of any criminal
proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful.
However, under the MGCL, a Maryland corporation may not
indemnify a director or officer in a suit by or in the right of
the corporation in which the director or officer was adjudged
liable to the corporation or for a judgment of liability on the
basis that a personal benefit was improperly received. A court
may order indemnification if it determines that the director or
officer is fairly and reasonably entitled to indemnification,
even though the director or officer did not meet the prescribed
standard of conduct, was adjudged liable to the corporation or
was adjudged liable on the basis that personal benefit was
improperly received. However, indemnification for an adverse
judgment in a suit by us or in our right, or for a judgment of
liability on the basis that personal benefit was improperly
received, is limited to expenses.
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In addition, the MGCL permits a corporation to advance
reasonable expenses to a director or officer upon the
corporations receipt of: (1) a written affirmation by
the director or officer of his or her good faith belief that he
or she has met the standard of conduct necessary for
indemnification by the corporation; and (2) a written
undertaking by the director or officer or on the directors
or officers behalf to repay the amount paid or reimbursed
by the corporation if it is ultimately determined that the
director or officer did not meet the standard of conduct.
Our charter authorizes us to obligate ourselves and our bylaws
obligate us, to the maximum extent permitted by Maryland law in
effect from time to time, to indemnify and, without requiring a
preliminary determination of the ultimate entitlement to
indemnification, pay or reimburse reasonable expenses in advance
of final disposition of a proceeding to (1) any present or
former director or officer who is made or threatened to be made
a party to the proceeding by reason of his or her service in
that capacity; or (2) any individual who, while a director
or officer of our company and at our request, serves or has
served as a director, officer, partner, manager, member or
trustee of another corporation, REIT, partnership, limited
liability company, joint venture, trust, employee benefit plan
or other enterprise and who is made or threatened to be made a
party to the proceeding by reason of his or her service in that
capacity.
Our charter and bylaws also permit us to indemnify and advance
expenses to any person who served a predecessor of ours in any
of the capacities described above and to any employee or agent
of our company or a predecessor of our company.
Following completion of this offering, we intend to enter into
indemnification agreements with each of our directors and
executive officers that would provide for indemnification and
advance of expenses to the maximum extent permitted by Maryland
law.
Insofar as the foregoing provisions permit indemnification of
directors, officers or persons controlling us for liability
arising under the Securities Act, we have been informed that, in
the opinion of the SEC, this indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
REIT
QUALIFICATION
Our charter provides that our board of directors may revoke or
otherwise terminate our REIT election, without approval of our
stockholders, if it determines that it is no longer in our best
interests to continue to qualify as a REIT.
197
A summary of the material provisions of the Amended and Restated
Agreement of Limited Partnership of Welsh Property
Trust L.P., which we refer to as the partnership agreement,
is set forth below. The following description does not purport
to be complete and is subject to and qualified in its entirety
by reference to applicable provisions of the Delaware Revised
Uniform Limited Partnership Act, or the DRULPA, and the
partnership agreement. We have filed a copy of the partnership
agreement as an exhibit to the registration statement of which
this prospectus is a part.
GENERAL
Upon completion of the offering and the formation transactions,
substantially all of our assets will be held by, and
substantially all of our operations will be conducted through,
our operating partnership, either directly or through
subsidiaries. We are the sole member of the sole general partner
of our operating partnership. The general partner is a Delaware
limited liability company and owns a general partnership
interest in our operating partnership. We are also a limited
partner of our operating partnership, and we own, either
directly or through subsidiaries including the general partner,
82.5% of the outstanding interests in our operating partnership
through our ownership of OP units.
OP units are also held by persons who contributed interests in
properties
and/or
other
assets to our operating partnership in the formation
transactions. All holders of units in our operating partnership
(including the general partner in its capacity as such and us in
our capacity as a limited partner) are entitled to share in cash
distributions from, and in the profits and losses of, our
operating partnership in proportion to their respective
percentage interests in our operating partnership. The units in
our operating partnership will not be listed on any exchange or
quoted on any national market system.
Provisions in the partnership agreement may delay or make more
difficult unsolicited acquisitions of us or changes in our
control. These provisions could discourage third parties from
making proposals involving an unsolicited acquisition of us or
change of our control, although some stockholders might consider
such proposals, if made, desirable. Such provisions also make it
more difficult for third parties to alter the management
structure of our operating partnership without the concurrence
of our board of directors. These provisions include, among
others:
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redemption rights of qualifying parties;
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transfer restrictions on the OP units;
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the ability of the general partner in some cases to amend the
partnership agreement without the consent of the limited
partners; and
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the right of the limited partners to consent to transfers of the
general partner interest of the general partner and mergers or
consolidations involving us under specified limited
circumstances.
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PURPOSES,
BUSINESS AND MANAGEMENT
The purpose of our operating partnership includes the conduct of
any business that may be conducted lawfully by a limited
partnership formed under the DRULPA, except that the partnership
agreement requires the business of our operating partnership to
be conducted in such a manner that will permit us to qualify as
a REIT under Sections 856 through 860 of the Code. Subject
to the foregoing limitation, our operating partnership may enter
into partnerships, joint ventures or similar arrangements and
may own interests in any other entity. The general partner shall
cause our operating partnership not to take, or to refrain from
taking, any action that, in its judgment, in its sole and
absolute discretion:
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could adversely affect our ability to continue to qualify as a
REIT;
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Description of
the partnership agreement of Welsh Property Trust,
L.P.
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could subject us to any additional taxes under Code
Section 857 or Code Section 4981 or any other related or
successor provision under the Code;
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could violate any law or regulation of any governmental body or
agency having jurisdiction over us, our securities or our
operating partnership; or
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could violate in any material respects any of the covenants,
conditions or restrictions now or hereafter placed upon or
adopted by us pursuant to any of our agreements or applicable
laws and regulations,
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unless, in any such case, such action or inaction described in
the bullet points above is specifically consented to by us.
In general, our board of directors will direct the management of
the affairs of our operating partnership by directing the
management of our affairs, in our capacity as the sole member of
the general partner of our operating partnership.
Except as otherwise expressly provided in the partnership
agreement or as delegated or provided to an additional general
partner by the general partner or any successor general partner
pursuant to the partnership agreement, all management powers
over the business and affairs of our operating partnership are
exclusively vested in the general partner. No limited partner or
any other person to whom one or more OP units have been
transferred may, in its capacity as a limited partner, take part
in the operations, management or control of our operating
partnerships business, transact any business in our
operating partnerships name or have the power to sign
documents for or otherwise bind our operating partnership. The
general partner may not be removed by the limited partners
without the general partners consent. In addition to the
powers granted to the general partner under applicable law or
that are granted to the general partner under any other
provision of the partnership agreement, the general partner,
subject to the other provisions of the partnership agreement,
has full power and authority to do all things deemed necessary
or desirable by the general partner to conduct the business of
our operating partnership, to exercise all powers of our
operating partnership and to effectuate the purposes of our
operating partnership. Our operating partnership may incur debt
or enter into other similar credit, guarantee, financing or
refinancing arrangements for any purpose, including, without
limitation, in connection with any acquisition of properties,
upon such terms as the general partner determines to be
appropriate. With limited exceptions, the general partner is
authorized to execute, deliver and perform agreements and
transactions on behalf of our operating partnership without any
further act, approval or vote of the limited partners.
RESTRICTIONS ON
GENERAL PARTNERS AUTHORITY
The general partner may not take any action in contravention of
the partnership agreement. The general partner may not, without
the prior consent of the limited partners (including us),
undertake, on behalf of our operating partnership, any of the
following actions or enter into any transaction that would have
the effect of such actions:
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take any action that would make it impossible to carry on the
business of our operating partnership, except as provided in the
partnership agreement;
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possess operating partnership property, or assign any rights in
partnership property, for other than a partnership purpose,
except as otherwise provided in the partnership agreement;
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admit a person as a partner of our operating partnership, except
as provided in the partnership agreement;
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perform any act that would subject a limited partner to
liability as a general partner or any other liability, except as
provided in the partnership agreement or the DRULPA;
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enter into any agreement that prohibits or restricts the general
partner or our operating partnership from performing its
redemption obligations; and
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Description of
the partnership agreement of Welsh Property Trust,
L.P.
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amend, modify or terminate the partnership agreement, except as
provided in the partnership agreement; for a description of the
provisions of the partnership agreement permitting the general
partner to amend the partnership agreement without the consent
of the limited partners. See Amendment of the
Partnership Agreement for Our Operating Partnership.
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The general partner generally may not withdraw as general
partner from our operating partnership nor transfer all of its
interest in our operating partnership without the consent of a
majority in interest of the limited partners (including us),
subject to the exceptions discussed in Restrictions
on General Partner.
In addition, the general partner may not amend the partnership
agreement or take any action on behalf of our operating
partnership, without the prior consent of each limited partner
adversely affected by such amendment or action, if such
amendment or action would:
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convert a limited partner interest into a general partner
interest;
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modify the limited liability of a limited partner;
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alter the rights of any limited partner to receive the
distributions to which such partner is entitled, or alter the
allocations specified in the partnership agreement;
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alter or modify the redemption rights or related definitions as
provided in the partnership agreement;
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alter or modify the restrictions on the right of the general
partner to transfer its interest in, or withdraw from, our
operating partnership; or
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remove, alter or amend the powers and restrictions related to
our REIT requirements or permit us to avoid paying taxes under
Code Section 857 or Code Section 4981.
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ADDITIONAL
LIMITED PARTNERS
The general partner is authorized to admit additional limited
partners and additional general partners to our operating
partnership from time to time, for such consideration and on
terms and conditions as may be established by the general
partner in its sole and absolute discretion. No person may be
admitted as an additional limited partner or an additional
general partner without the general partners consent,
which consent may be given or withheld in its sole and absolute
discretion.
No action or consent by the limited partners is required in
connection with the admission of any additional limited partner.
The general partner is expressly authorized to cause our
operating partnership to issue additional OP units:
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upon the conversion, redemption or exchange of any debt, OP
units or other securities issued by our operating partnership;
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for less than fair market value, so long as we conclude in good
faith that such issuance is in the best interests of us and our
operating partnership; and
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in connection with any merger of any other entity into our
operating partnership or a subsidiary of it if the applicable
merger agreement provides that persons are to receive OP units
in our operating partnership in exchange for their interests in
the entity merging into our operating partnership.
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Subject to Delaware law, any additional OP units may be issued
in one or more classes, or one or more series of any of such
classes, with such designations, preferences and relative,
participating, optional or other special rights, powers and
duties (including, without limitation, rights, powers and duties
that may be senior or otherwise entitled to preference over
existing OP units) as the general partner shall determine, in
its sole and absolute discretion without the approval of any
limited partner or any other person. Without limiting the
generality of the foregoing, the general partner has authority
to specify:
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the allocations of items of partnership income, gain, loss,
deduction and credit to each such class or series of OP units;
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Description of
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L.P.
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the right of each such class or series of OP units to share in
distributions;
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the rights of each such class or series of OP units upon
dissolution and liquidation of our operating partnership;
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the voting rights, if any, of each such class or series of OP
units; and
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the conversion, redemption or exchange rights applicable to each
such class or series of OP units.
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ABILITY TO ENGAGE
IN OTHER BUSINESSES; CONFLICTS OF INTEREST
Our operating partnership and general partner may not conduct
any business other than in connection with the ownership,
acquisition and disposition of partnership interests, the
management of the business of our operating partnership, our
operation as a reporting company with a class or classes of
securities registered under the Exchange Act, our operations as
a REIT, the offering, sale, syndication, private placement or
public offering of stock, bonds, securities or other interests,
financing or refinancing of any type related to our operating
partnership or its assets or activities, and such activities as
are incidental to those activities discussed above.
DISTRIBUTIONS
Subject to the terms of any partnership unit designation, the
general partner shall cause our operating partnership to
distribute quarterly, all, or such portion as the general
partner may in its sole and absolute discretion determine, of
Available Cash (as such term is defined in the partnership
agreement) generated by our operating partnership during such
quarter to the partners and limited partners:
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first, with respect to any units that are entitled to any
preference in distribution, in accordance with the rights of
such class or classes of units, and, within such class or
classes, among the limited partners pro rata in proportion to
their respective percentage interests; and
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second, with respect to any units that are not entitled to any
preference in distribution, in accordance with the rights of
such class of partnership units, as applicable, and, within such
class, among the limited partners pro rata in proportion to
their respective percentage interests.
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To the extent we own properties outside our operating
partnership, any income we receive in connection with the
activities from those properties will result in a recalculation
of distributions from our operating partnership such that we and
the limited partners would each receive the same distributions
that we and they would have received had we contributed such
properties to our operating partnership.
ALLOCATIONS OF
NET INCOME AND NET LOSS
Net income and net loss of our operating partnership are
determined and allocated with respect to each fiscal year of our
operating partnership as of the end of the year. Except as
otherwise provided in the partnership agreement, an allocation
of a share of net income or net loss is treated as an allocation
of the same share of each item of income, gain, loss or
deduction that is taken into account in computing net income or
net loss. Except as otherwise provided in the partnership
agreement, net income and net loss are allocated to the holders
of operating partnership units in accordance with their
respective percentage interests at the end of each fiscal year.
The partnership agreement contains provisions for special
allocations intended to comply with certain regulatory
requirements, including the requirements of Treasury Regulations
Sections 1.704-1(b)
and 1.704-2. Except as otherwise provided in the partnership
agreement, for U.S. federal income tax purposes under the
Code and the regulations promulgated by the U.S. Treasury
Department, or the Treasury Regulations, each operating
partnership item of income, gain, loss and deduction is
allocated among the limited partners of our operating
partnership in the same manner as its correlative item of book
income, gain, loss or deduction is allocated pursuant to the
partnership agreement. In addition, under Section 704(c) of
the Internal Revenue Code, items of income, gain, loss and
deduction with respect to appreciated or depreciated
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Description of
the partnership agreement of Welsh Property Trust,
L.P.
property which is contributed to a partnership, such as our
operating partnership, in a tax-free transaction must be
specially allocated among the partners in such a manner so as to
take into account such variation between tax basis and fair
market value. The operating partnership will allocate tax items
to the holders of operating partnership units taking into
consideration the requirements of Section 704(c). See
Federal Income Tax Considerations.
BORROWING BY OUR
OPERATING PARTNERSHIP
The general partner is authorized to cause our operating
partnership to borrow money and to issue and guarantee debt as
it deems necessary for the conduct of the activities of our
operating partnership. Such debt may be secured, among other
things, by mortgages, deeds of trust, liens or encumbrances on
properties of our operating partnership.
REIMBURSEMENT OF
US; TRANSACTIONS WITH OUR AFFILIATES AND US
Neither the general partner, our subsidiary, nor we will receive
any compensation for services as the general partner and limited
partner of our operating partnership. We, as a limited partner
in our operating partnership, have the same right to allocations
and distributions as other partners and limited partners. In
addition, our operating partnership will reimburse us for all
expenses incurred by us in connection with our operating
partnerships business, including (i) expenses
relating to the ownership of interests in and management and
operation of, or for the benefit of, our operating partnership,
(ii) compensation of officers and employees, including,
without limitation, payments under our future compensation plans
that may provide for stock, OP units or phantom stock, pursuant
to which our employees will receive payments based upon
distributions on or the value of our common stock,
(iii) director or manager fees and expenses of our company
or our affiliates, and (iv) all costs and expenses that we
incur in connection with our being a public company, including
costs of filings with the SEC, reports and other distributions
to our stockholders.
Except as expressly permitted by the partnership agreement, we
and our affiliates may not engage in any transactions with our
operating partnership except on terms that are fair and
reasonable and no less favorable to our operating partnership
than would be obtained from an unaffiliated third party.
OUR LIABILITY AND
THAT OF THE LIMITED PARTNERS
Under DRULPA, we, as sole member of the general partner, are
liable for all general obligations of our operating partnership
to the extent not paid by our operating partnership.
The limited partners are not required to make additional
contributions to our operating partnership. Assuming that a
limited partner does not take part in the control of the
business of our operating partnership, the liability of the
limited partner for obligations of our operating partnership
under the partnership agreement and DRULPA is limited, subject
to limited exceptions, generally to the loss of the limited
partners investment in our operating partnership
represented by such limited partners OP units.
Our operating partnership will operate in a manner we deem
reasonable, necessary and appropriate to preserve the limited
liability of the limited partners.
EXCULPATION AND
INDEMNIFICATION OF US
The partnership agreement generally provides that we, as sole
member of the general partner, the general partner, and any of
our respective directors or officers will incur no liability to
our operating partnership, or any limited partner, general
partner or assignee, for losses sustained or liabilities
incurred or benefits not derived as a result of errors in
judgment, mistakes of law or of any act or omission if we, the
general partner or such officer or director acted in good faith.
In addition, we, as the sole member of the general partner, and
the general partner are not responsible for any misconduct
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Description of
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L.P.
or negligence on the part of our agents, provided we appointed
such agents in good faith. We, as the sole member of the general
partner, and the general partner may consult with legal counsel,
accountants, appraisers, management consultants, investment
bankers and other consultants and advisors, and any action we
take or omit to take in reliance upon the opinion of such
persons, as to matters which we, as the sole member of the
general partner, and the general partner reasonably believe to
be within their professional or expert competence, shall be
conclusively presumed to have been done or omitted in good faith
and in accordance with such opinion.
The partnership agreement also provides for the indemnification,
to the fullest extent permitted by law, of us, as the sole
member of the general partner, of the general partner, of our
directors and officers, and of such other persons as the general
partner may from time to time designate against any and all
losses, claims, damages, liabilities, joint or several,
expenses, judgments, fines, settlements and other amounts
arising from any and all claims, demands, actions, suits or
proceedings in which such person may be involved that relate to
the operations of our operating partnership, provided that such
person will not be indemnified for (i) any act or omission
of such person that was material to the matter giving rise to
the action and either was committed in bad faith or was the
result of active and deliberate dishonesty, (ii) in the
case of any criminal proceeding, any act or omission that such
person had reason to believe was unlawful, or (iii) any
transaction for which such person received an improper personal
benefit in violation or breach of any provision of the
partnership agreement.
REDEMPTION RIGHTS
OF QUALIFYING PARTIES
After holding OP units for a period of 12 months, each
limited partner (other than us) and some assignees have the
right, subject to the terms and conditions set forth in the
partnership agreement, to require our operating partnership to
redeem all or a portion of the OP units held by such party in
exchange for a cash amount per unit equal to the per share value
of our common stock, subject to adjustment as described below.
The per share value of our common stock is defined in the
partnership agreement as the average of the closing prices for
our common stock for the 10 consecutive trading days immediately
preceding the determination date. The cash amount per unit is
adjusted pursuant to the partnership agreement to reflect any
dividends, stock splits, or reverse stock splits of our common
stock and distributions of rights to acquire our common stock.
On or before the close of business on the fifth business
day after a limited partner gives a notice of redemption to the
general partner, we may, in our sole and absolute discretion but
subject to the restrictions on the ownership and transfer of our
common stock imposed under our charter, elect to acquire some or
all of the tendered OP units from the tendering party in
exchange for common stock, based on an exchange ratio of one
share of common stock for each unit, subject to adjustment in
the event of certain activities of our company, including stock
dividends or stock splits, the issuance of certain rights,
options or warrants for the purchase of common stock or certain
distributions of assets or debt to our stockholders. Common
stock issued in exchange for OP units pursuant to the
partnership agreement may contain legends regarding restrictions
under the Securities Act and applicable state securities laws as
we in good faith determine to be necessary or advisable in order
to ensure compliance with securities laws.
RESTRICTIONS ON
TRANSFER
The partnership agreement restricts the transferability of
partnership interests, including OP units. Any transfer or
purported transfer of an OP unit not made in accordance with the
partnership agreement will not be valid. Until the expiration of
12 months from the date on which a limited partner acquired
OP units, such limited partner generally may not transfer all or
any portion of its OP units to any transferee.
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Description of
the partnership agreement of Welsh Property Trust,
L.P.
After the expiration of 12 months from the date on which a
limited partner acquired OP units, such limited partner has the
right to transfer all or any portion of its OP units to any
person that is an accredited investor, subject to
the satisfaction of conditions specified in the partnership
agreement, including our right of first refusal. For purposes of
this transfer restriction, accredited investor shall
have the meaning set forth in Rule 501 promulgated under
the Securities Act. It is a condition to any transfer that the
transferee assumes by operation of law or express agreement all
of the obligations of the transferor limited partner under the
partnership agreement with respect to such OP units, and no such
transfer will relieve the transferor limited partner of its
obligations under the partnership agreement without our
approval, in our sole and absolute discretion. This transfer
restriction does not apply to a statutory merger or
consolidation pursuant to which all obligations and liabilities
of the limited partner are assumed by a successor corporation by
operation of law.
In connection with any transfer of partnership interests or OP
units, we will have the right to receive an opinion of counsel
reasonably satisfactory to us to the effect that the proposed
transfer may be effected without registration under the
Securities Act, and will not otherwise violate any federal or
state securities laws or regulations applicable to our operating
partnership or the partnership interests or OP units transferred.
No transfer by a limited partner of its OP units, including any
redemption or any acquisition of partnership interests or OP
units by us or by our operating partnership, may be made to any
person if:
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in the opinion of legal counsel for our operating partnership,
it would (i) result in our operating partnership being
treated as an association taxable as a corporation or would
result in a termination of the partnership under Code Section
708, or (ii) adversely affect the ability of our company to
continue to qualify as a REIT or would subject our company to
any additional taxes under Sections 857 or 4981 of the
Code; or
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such transfer is effectuated through an established
securities market or a secondary market (or the
substantial equivalent thereof) within the meaning of Code
section 7704.
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In addition, we generally have a right of first refusal with
respect to any proposed transfers by other limited partners,
exercisable within 10 business days of notice of the transfer
and a description of the proposed consideration to be paid for
the OP units.
SUBSTITUTED
LIMITED PARTNERS
No limited partner will have the right to substitute a
transferee as a limited partner in its place. A transferee of
the interest of a limited partner may be admitted as a
substituted limited partner only with our consent, which consent
may be given or withheld in our sole and absolute discretion. If
we, in our sole and absolute discretion, do not consent to the
admission of any permitted transferee as a substituted limited
partner, such transferee will be considered an assignee for
purposes of the partnership agreement. An assignee will be
entitled to all the rights of an assignee of a limited
partnership interest under DRULPA, including the right to
receive distributions from our operating partnership and the
share of net income, net losses and other items of income, gain,
loss, deduction and credit of our operating partnership
attributable to the OP units assigned to such transferee and the
rights to transfer the OP units provided in the partnership
agreement, but will not be deemed to be a holder of OP units for
any other purpose under the partnership agreement, and will not
be entitled to effect a consent or vote with respect to such OP
units on any matter presented to the limited partners for
approval. The right to consent or vote, to the extent provided
in the partnership agreement or under the DRULPA, will fully
remain with the transferor limited partner.
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RESTRICTIONS ON
GENERAL PARTNER
The general partner may not transfer any of its general partner
interest (other than to us or our affiliates) or withdraw from
managing our operating partnership unless:
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it receives the prior consent of a majority in interest of the
limited partners (including us); or
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it receives the prior consent of the limited partners (including
us) to merge with another entity and immediately after a merger
of us as sole member of the general partner into another entity,
substantially all of the assets of the surviving entity, other
than the general partner interest in our operating partnership
held by the general partner, are contributed to our operating
partnership as a capital contribution in exchange for
partnership interests or OP units.
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RESTRICTIONS ON
MERGERS, SALES, TRANSFERS AND OTHER SIGNIFICANT TRANSACTIONS
INVOLVING US
We may merge, consolidate or otherwise combine our assets with
another entity, or sell all or substantially all of our assets,
or reclassify, recapitalize or change the terms of our
outstanding common equity interests if:
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in connection with such event, all limited partners, other than
ourselves as the special limited partner under the partnership
agreement, shall have a right to receive consideration that is
equivalent in value to the consideration received by holders of
our common stock; or
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substantially all of the assets of our operating partnership are
to be owned by a surviving entity in which our limited partners,
other than ourselves as the special limited partner, will hold
interests that are at least as favorable in terms as the former
units of limited partnership interest previously held by such
limited partners, subject to certain specified liquidity
protections as are set forth in our operating partnership
agreement.
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AMENDMENT OF THE
PARTNERSHIP AGREEMENT FOR OUR OPERATING PARTNERSHIP
Amendments to the partnership agreement may be proposed only by
the general partner or by limited partners holding 25% percent
or more of the partnership interests held by limited partners
(excluding us). Following such proposal, the general partner
will submit to the partners and limited partners any proposed
amendment that, pursuant to the terms of the partnership
agreement, requires the consent of the general partner and a
majority in interest of the limited partners holding OP units
entitled to vote at the meeting. The general partner will seek
the written consent of the partners and limited partners, if
applicable, on the proposed amendment or will call a meeting to
vote on the proposed amendment and to transact any other
business that it may deem appropriate.
AMENDMENT BY THE
GENERAL PARTNER WITHOUT THE CONSENT OF THE LIMITED
PARTNERS
The general partner has the power, without the consent of the
limited partners, to amend the partnership agreement as may be
required to facilitate or implement any of the following
purposes:
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to add to its obligations as general partner or surrender any
right or power granted to it or any of its affiliates for the
benefit of the limited partners;
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to reflect the admission, substitution or withdrawal of partners
or the termination of our operating partnership in accordance
with the partnership agreement;
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to reflect a change that is of an inconsequential nature or does
not adversely affect the limited partners in any material
respect, or to cure any ambiguity, correct or supplement any
provision in the partnership agreement not inconsistent with law
or with other provisions of the partnership agreement, or make
other changes with respect to matters arising under the
partnership agreement that will not be inconsistent with law or
with the provisions of the partnership agreement;
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Description of
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to satisfy any requirements, conditions or guidelines contained
in any order, directive, opinion, ruling or regulation of a
federal or state agency or contained in federal or state law;
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to reflect such changes as are reasonably necessary for us to
maintain our REIT qualification or to reflect the transfer of
all or any part of a partnership interest among us and any
qualified REIT subsidiary (within the meaning of
Code Section 856(i)(2));
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to modify the manner in which capital accounts are computed to
the extent set forth in the definition of Capital
Account in the partnership agreement or contemplated by
the Code or the Treasury Regulations;
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to effectuate or otherwise reflect the issuance of additional
partnership interests permitted under the partnership agreement
of our operating partnership and the manner in which items of
net income or net loss are allocated with respect to such
interests; and
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to reflect any other modification to the partnership agreement
as is reasonably necessary for the business or operations of us
or our operating partnership and which does not violate the
explicit prohibitions set forth in the partnership agreement.
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PROCEDURES FOR
ACTIONS AND CONSENTS OF PARTNERS
Meetings of the partners may be called only by the general
partner. Notice of any such meeting will be given to all
partners not less than seven days nor more than 60 days
prior to the date of such meeting. Partners may vote in person
or by proxy at such meeting. Each meeting of partners will be
conducted by the general partner or such other person as it may
appoint pursuant to such rules for the conduct of the meeting as
it or such other person deems appropriate in its sole and
absolute discretion. Whenever the vote or consent of partners is
permitted or required under the partnership agreement, such vote
or consent may be given at a meeting of partners or may be given
by written consent. Any action required or permitted to be taken
at a meeting of the partners may be taken without a meeting if a
written consent setting forth the action so taken is signed by
partners holding a majority of outstanding partnership interests
(or such other percentage as is expressly required by the
partnership agreement for the action in question).
TAX
MATTERS
Pursuant to the partnership agreement, the general partner is
the tax matters partner of our operating partnership.
Accordingly, we have the authority to handle tax audits and to
make tax elections under the Internal Revenue Code, in each
case, on behalf of our operating partnership.
DISSOLUTION
Our operating partnership will dissolve, and its affairs will be
wound up, upon the first to occur of any of the following:
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an event of withdrawal, as defined in DRULPA, including, without
limitation, bankruptcy, of us unless, within 90 days after
the withdrawal, a majority in interest of the remaining partners
agree in writing, in their sole and absolute discretion, to
continue the business of our operating partnership and to the
appointment, effective as of the date of withdrawal, of a
successor general partner;
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an election to dissolve our operating partnership made by the
general partner in its sole and absolute discretion, with or
without the consent of the partners;
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the entry of a decree of judicial dissolution of our operating
partnership pursuant to the provisions of DRULPA;
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the occurrence of any sale or other disposition of all or
substantially all of the assets of our operating partnership not
in the ordinary course of our operating partnerships
business or a related series of transactions that, taken
together, result in the sale or other disposition of all or
substantially all of
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206
Description of
the partnership agreement of Welsh Property Trust,
L.P.
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the assets of our operating partnership not in the ordinary
course of our operating partnerships business; or
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the redemption, or acquisition by us, of all partnership common
units or all partnership units other than partnership common
units or all partnership units held by us or the general partner.
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Upon dissolution of our operating partnership, the general
partner, or, in the event that there is no remaining general
partner or the general partner has dissolved, a liquidator will
proceed to liquidate the assets of our operating partnership and
apply the proceeds from such liquidation in the order of
priority set forth in the partnership agreement.
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GENERAL
Upon the completion of this offering and the formation
transactions, we expect to have outstanding
35,807,001 shares of our common stock. In addition,
7,582,460 shares of our common stock are authorized and
reserved for issuance upon exchange of OP units that will be
outstanding upon the completion of this offering and the
formation transactions.
Of these shares, the 35,789,474 shares sold in the offering
will be freely transferable without restriction or further
registration under the Securities Act, subject to the
restrictions on ownership and transfer of our stock set forth in
our charter, except for any shares held by our
affiliates, as that term is defined by Rule 144
under the Securities Act. The shares purchased by affiliates in
the offering and the shares of our common stock owned by our
affiliates upon redemption of OP units will be restricted
shares as defined in Rule 144.
Prior to this offering, there has been no public market for our
common stock. Trading of our common stock on the NYSE is
expected to commence immediately following the completion of
this offering and the formation transactions. No prediction can
be made as to the effect, if any, that future sales of shares,
or the availability of shares for future sale, will have on the
market price prevailing from time to time. Sales of substantial
amounts of our common stock (including shares issued upon the
exchange of OP units or the exercise of stock options), or the
perception that such sales occur, could adversely affect
prevailing market prices of our common stock. See Risk
FactorsRisks Related to this OfferingThere has been
no public market for our common stock prior to this offering and
an active trading market may not develop or be sustained
following this offering. In addition, the price of our common
stock may be volatile or may decline regardless of our operating
performance and Description of the Partnership
Agreement of Welsh Property Trust, L.P.Restrictions on
Transfer.
RULE 144
In general, Rule 144 provides that if (i) one year has
elapsed since the date of acquisition of common stock from us or
any of our affiliates and (ii) the holder is, and has not
been, an affiliate of ours at any time during the three months
preceding the proposed sale, such holder may sell such common
stock in the public market under Rule 144(b)(1) without
regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements under
such rule. In general, Rule 144 also provides that if
(i) six months have elapsed since the date of acquisition
of common stocks from us or any of our affiliates, (ii) we
have been a reporting company under the Exchange Act for at
least 90 days and (iii) the holder is not, and has not
been, an affiliate of ours at any time during the three months
preceding the proposed sale, such holder may sell such common
stock in the public market under Rule 144(b)(1) subject to
satisfaction of Rule 144s public information
requirements, but without regard to the volume limitations,
manner of sale provisions or notice requirements under such rule.
In addition, under Rule 144, if (i) one year (or,
subject to us being a reporting company under the Exchange Act
for at least the preceding 90 days, six months) has elapsed
since the date of acquisition of common stock from us or any of
our affiliates and (ii) the holder is, or has been, an
affiliate of ours at any time during the three months preceding
the proposed sale, such holder may sell such common stock in the
public market under Rule 144(b)(1) subject to satisfaction
of Rule 144s volume limitations, manner of sale
provisions, public information requirements and notice
requirements.
REDEMPTION/EXCHANGE
RIGHTS
In connection with the formation transactions, our operating
partnership will issue an aggregate of 7,582,460 OP units
to our principals, continuing investors and in connection with
the acquisition
208
Shares eligible
for future sale
portfolio. Beginning on or after the date which is
12 months after the completion of this offering, limited
partners of our operating partnership have the right to require
our operating partnership to redeem part or all of their OP
units for cash, or, at our election, shares of our common stock,
based upon the fair market value of an equivalent number of
shares of our common stock at the time of the redemption,
subject to the restrictions on ownership and transfer of our
stock set forth in our charter and described under the section
entitled Description of StockRestrictions on
Ownership and Transfer. See Description of the
Partnership Agreement of Welsh Property Trust,
L.P.Redemption Rights of Qualifying Parties.
REGISTRATION
RIGHTS
We have entered into a registration rights agreement with the
various persons receiving OP units in the formation
transactions, including our principals and certain of our
executive officers. Under the registration rights agreement,
subject to certain limitations, commencing not earlier than 12
months and not later than 13 months after the completion of
this offering, we will file one or more registration statements
covering the resale of the shares of our common stock issued or
issuable, at our option, in exchange for OP units issued in the
formation transactions. We may, at our option, satisfy our
obligation to prepare and file a resale registration statement
with respect to shares of our common stock issuable upon
exchange of OP units received in the formation transactions by
filing a registration statement providing for the issuance by us
to the holders of such OP units of shares of our common stock
registered under the Securities Act in lieu of our operating
partnerships obligation to pay cash for such OP units. We
have agreed to pay all of the expenses relating to a
registration of such securities.
Under certain circumstances, we are required to use reasonable
efforts to engage an underwriter to undertake an underwritten
offering under a resale registration statement filed by us as
described above upon the written request of holders of at least
5% in the aggregate of the securities subject to the
registration rights agreement, provided that we are not
obligated to effect more than two underwritten offerings.
LONG-TERM EQUITY
INCENTIVE PLAN
We have adopted, and our pre-offering stockholders have
approved, the LTIP. Awards under the LTIP may be granted in the
form of stock options, stock appreciation rights, restricted
shares and restricted stock units, performance shares and
performance units, and stock awards. Under the LTIP, we will
grant performance based restricted stock units to certain of our
executive officers and stock awards to our non-employee
directors upon completion of this offering. See
ManagementExecutive CompensationLong-Term
Equity Incentive Plan.
LOCK-UP
AGREEMENTS AND OTHER CONTRACTUAL RESTRICTIONS ON
RESALE
We, our operating partnership, our executive officers and
directors and our existing security holders have entered into
lock-up
agreements with the underwriters. Under these agreements,
subject to certain exceptions, we and each of these persons may
not, without the prior written approval of UBS Securities LLC
(or, in the case of our executive officers and directors, both
UBS Securities LLC and J.P. Morgan Securities
Inc.), offer, sell, offer to sell, contract or agree to sell,
hypothecate, hedge, pledge, grant any option to purchase or
otherwise dispose of or agree to dispose of, directly or
indirectly, any of our common stock or any securities
convertible into or exercisable or exchangeable for our common
stock, including, without limitation, OP units, or warrants or
other rights to purchase our common stock. These restrictions
will be in effect for a period of one year after the date of
this prospectus (subject to extension under certain
circumstances). At any time and without public notice, UBS
Securities LLC (or, in the case of our executive officers and
directors, both UBS Securities LLC and
J.P. Morgan Securities Inc.) may in its (or their) sole
discretion release some or all of the securities from these
lock-up
agreements.
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The following is a summary of the material federal income tax
consequences relating to our qualification and taxation as a
REIT and the acquisition, holding and disposition of our common
stock. This summary is based upon the Code, the regulations
promulgated by the U.S. Treasury Department, or the
Treasury Regulations, current administrative interpretations and
practices of the IRS (including administrative interpretations
and practices expressed in private letter rulings which are
binding on the IRS only with respect to the particular taxpayers
who requested and received those rulings) and judicial
decisions, all as currently in effect, and all of which are
subject to differing interpretations or to change, possibly with
retroactive effect. No assurance can be given that the IRS would
not assert, or that a court would not sustain, a position
contrary to any of the tax consequences described below. No
advance ruling has been or will be sought from the IRS regarding
any matter discussed in this prospectus. The summary is also
based upon the assumption that the operation of our company, and
of our subsidiaries and other lower-tier and affiliated
entities, will in each case be in accordance with its applicable
organizational documents or partnership agreement. This summary
is for general information only, and does not purport to discuss
all aspects of federal income taxation that may be important to
a particular stockholder in light of his, her or its investment
or tax circumstances, or to stockholders subject to special tax
rules, such as:
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expatriates;
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persons who
mark-to-market
the common stock;
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subchapter S corporations;
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U.S. stockholders (as defined below) whose functional
currency is not the U.S. dollar;
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financial institutions;
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insurance companies;
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broker dealers;
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regulated investment companies;
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trusts and estates;
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Investors who receive our common stock through the exercise of
employee stock options or otherwise as compensation;
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persons holding our common stock as part of a
straddle, hedge, conversion
transaction, synthetic security or other
integrated investment;
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persons subject to the alternative minimum tax provisions of the
Code;
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persons holding their interest through a partnership or similar
pass-through entity;
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persons holding a 10% or more (by vote or value) beneficial
interest in us;
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and, except to the extent discussed below:
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tax exempt organizations; and
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non-U.S. stockholders
(as defined under Taxation of
StockholdersTaxation of Taxable
U.S. Stockholders).
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This summary assumes that stockholders will hold our common
stock as a capital asset, which generally means as property held
for investment.
THE FEDERAL INCOME TAX TREATMENT OF HOLDERS OF OUR COMMON STOCK
DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT AND
INTERPRETATIONS OF COMPLEX PROVISIONS OF FEDERAL INCOME TAX LAW
FOR WHICH NO CLEAR
210
Federal income
tax considerations
PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE TAX
CONSEQUENCES OF HOLDING OUR COMMON STOCK TO ANY PARTICULAR
STOCKHOLDER WILL DEPEND ON THE STOCKHOLDERS PARTICULAR TAX
CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR
REGARDING THE FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND
OTHER TAX CONSEQUENCES TO YOU, IN LIGHT OF YOUR PARTICULAR
INVESTMENT OR TAX CIRCUMSTANCES, OF ACQUIRING, HOLDING AND
DISPOSING OF OUR COMMON STOCK.
TAXATION OF OUR
COMPANY
We intend to elect and qualify to be taxed as a REIT under the
Code, commencing with our taxable year ending December 31,
2010. We believe that we have been organized and will operate in
a manner that will allow us to qualify for taxation as a REIT
under the Code commencing with our taxable year ending
December 31, 2010, and we intend to continue to be
organized and operate in such a manner.
The law firm of Briggs and Morgan, P.A. has acted as our tax
counsel in connection with our election to be taxed as a REIT.
We will receive an opinion of Briggs and Morgan, P.A. prior to
effectiveness of the registration statement of which this
prospectus forms a part that we are organized in conformity with
the requirements for qualification and taxation as a REIT under
the Code commencing with our taxable year ending on
December 31, 2010, and that our proposed method of
operation will enable us to meet the requirements for
qualification and taxation as a REIT under the Code. It must be
emphasized that the opinion of Briggs and Morgan, P.A. will be
based on various assumptions relating to our organization and
operation including that all factual representations and
statements set forth in all relevant documents, records and
instruments are true and correct, all actions described in this
prospectus are completed in a timely fashion and that we will at
all times operate in accordance with the method of operation
described in our organizational documents and this prospectus,
and is conditioned upon representations and covenants made by
our management regarding our organization, assets, and the
present and future conduct of our business operations.
While we believe that we are organized and intend to operate so
that we will qualify as a REIT, given the highly complex nature
of the rules governing REITs, the ongoing importance of factual
determinations, and the possibility of future changes in our
companys circumstances, no assurance can be given by
Briggs and Morgan, P.A. or us that we will so qualify for any
particular year. The opinion of Briggs and Morgan, P.A., a copy
of which will be filed as an exhibit to the registration
statement of which this prospectus is a part, will be expressed
as of the date issued, and will not cover subsequent periods.
Opinions of counsel impose no obligation to advise us or the
holders of our stock of any subsequent change in the matters
stated, represented or assumed, or of any subsequent change in
the applicable law. You should be aware that opinions of counsel
are not binding on the IRS, and no assurance can be given that
the IRS will not challenge the conclusions set forth in such
opinions.
Qualification and taxation as a REIT depends on our ability to
meet, on a continuing basis, through actual operating results,
distribution levels, and diversity of stock ownership, various
qualification requirements imposed upon REITs by the Code. Our
ability to qualify as a REIT also requires that we satisfy
certain asset tests, some of which depend upon the fair market
values of assets directly or indirectly owned by us. Such values
may not be susceptible to a precise determination. Accordingly,
no assurance can be given that the actual results of our
operations for any taxable year will satisfy such requirements
for qualification and taxation as a REIT.
TAXATION OF REITS
IN GENERAL
As indicated above, our qualification and taxation as a REIT
depend upon our ability to meet, on a continuing basis, various
qualification requirements imposed upon REITs by the Code. The
material qualification requirements are summarized below under
Requirements for QualificationGeneral.
211
Federal income
tax considerations
While we intend to operate so that we qualify as a REIT, no
assurance can be given that the IRS will not challenge our
qualification as a REIT, or that we will be able to operate in
accordance with the REIT requirements in the future. See
Failure to Qualify.
Provided that we qualify as a REIT, we will generally be
entitled to a deduction for dividends that we pay and therefore
will not be subject to federal corporate income tax on our net
income that is currently distributed to our stockholders. This
treatment substantially eliminates the double
taxation at the corporate and stockholder levels that
results generally from investment in a corporation. Rather,
income generated by a REIT generally is taxed only at the
stockholder level upon a distribution of dividends by the REIT.
For tax years through 2010, stockholders who are individual
U.S. stockholders (as defined below) are taxed on corporate
dividends to a maximum rate of 15% (the same as long-term
capital gains), thereby substantially reducing, though not
completely eliminating, the double taxation that has
historically applied to corporate dividends. With limited
exceptions, however, dividends received by individual
U.S. stockholders from us or from other entities that are
taxed as REITs will continue to be taxed at rates applicable to
ordinary income, which will be as high as 35% through 2010.
Net operating losses, foreign tax credits and other tax
attributes of a REIT generally do not pass through to the
stockholders of the REIT, subject to special rules for certain
items such as capital gains recognized by REITs. See
Taxation of Stockholders.
If we qualify as a REIT, we will nonetheless be subject to
federal tax in the following circumstances:
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we will be taxed at regular corporate rates on any undistributed
income, including undistributed net capital gains;
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we may be subject to the alternative minimum tax on
our items of tax preference, if any;
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if we have net income from prohibited transactions,
which are, in general, sales or other dispositions of property
held primarily for sale to customers in the ordinary course of
business, other than foreclosure property (as
described below), such income will be subject to a 100% tax. See
Prohibited Transactions, and
Foreclosure Property;
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if we elect to treat property that we acquire in connection with
a foreclosure of a mortgage loan or certain leasehold
terminations as foreclosure property (as described
below), we may thereby (a) avoid the 100% tax on gain from
a resale of that property (if the sale would otherwise
constitute a prohibited transaction), and (b) treat income
and gain from such property as qualifying income for purposes of
the REIT gross income tests discussed below, but the income from
the sale or operation of the property may be subject to
corporate income tax at the highest applicable rate (currently
35%);
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if we fail to satisfy the 75% gross income test or the 95% gross
income test, as discussed below, but nonetheless maintain our
qualification as a REIT because other requirements are met, we
will be subject to a 100% tax on an amount equal to (a) the
greater of (1) the amount by which we fail the 75% gross
income test or (2) the amount by which we fail the 95%
gross income test, as the case may be, multiplied by (b) a
fraction intended to reflect our profitability;
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if we fail to satisfy any of the REIT asset tests, as described
below, by larger than a
de minimis
amount, but our
failure is due to reasonable cause and not willful negligence
and we nonetheless maintain our REIT qualification because of
specified cure provisions, we will be required to pay a tax
equal to the greater of $50,000 or the highest applicable rate
(currently 35%) of the net income generated by the nonqualifying
assets during the period in which we failed to satisfy the asset
tests;
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if we fail to satisfy any provision of the Code that would
result in our failure to qualify as a REIT (other than a gross
income or asset test requirement) and that violation is due to
reasonable cause
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212
Federal income
tax considerations
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and not willful negligence, we may retain our REIT
qualification, but we will be required to pay a penalty of
$50,000 for each such failure;
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if we fail to distribute during each calendar year at least the
sum of (a) 85% of our REIT ordinary income for such year,
(b) 95% of our REIT capital gain net income for such year
and (c) any undistributed taxable income from prior
periods, or the required distribution, we will be
subject to a 4% excise tax on the excess of the required
distribution over the sum of (i) the amounts actually
distributed (taking into account excess distributions from prior
years), plus (ii) retained amounts on which federal income
tax is paid at the corporate level;
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we may be required to pay monetary penalties to the IRS in
certain circumstances, including if we fail to meet
record-keeping requirements intended to monitor our compliance
with rules relating to the composition of our stockholders, as
described in Requirements for
QualificationGeneral;
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a 100% excise tax may be imposed on some items of income and
expense that are directly or constructively paid between us, our
tenants
and/or
our
taxable REIT subsidiary if and to the extent that the IRS
successfully adjusts the reported amounts of these items;
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if we acquire appreciated assets from a corporation that is not
a REIT (
i.e.
, a subchapter C corporation, whether taxable
or tax exempt) in a transaction in which the adjusted tax basis
of the assets in our hands is determined by reference to the
adjusted tax basis of the assets in the hands of the subchapter
C corporation, we may be subject to tax on such appreciation at
the highest federal corporate income tax rate then applicable if
we subsequently recognize gain on a disposition of any such
assets during the ten-year period following our acquisition from
the subchapter C corporation. The results described in this
paragraph assume that the subchapter C corporation will not
elect in lieu of this treatment to be subject to an immediate
tax when the asset is acquired by us;
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we may elect to retain and pay income tax on our net long-term
capital gain. In that case, a stockholder would include its
proportionate share of our undistributed long-term capital gain
(to the extent we make a timely designation of such gain to the
stockholder) in its income, would be deemed to have paid its
proportionate share of the tax that we paid on such gain, and
would be allowed a credit for its proportionate share of the tax
deemed to have been paid, and an adjustment would be made to
increase the stockholders basis in our common stock; and
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we may have subsidiaries or own interests in other lower-tier
entities that are subchapter C corporations, including our
taxable REIT subsidiary, the earnings of which could be subject
to federal corporate income tax.
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In addition, we and our subsidiaries may be subject to a variety
of taxes other than federal income tax, including payroll taxes
and state, local, and foreign income, property and other taxes
on assets, operations or net worth. We could also be subject to
tax in situations and on transactions not presently contemplated.
REQUIREMENTS FOR
QUALIFICATIONGENERAL
The Code defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or
directors;
(2) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of
beneficial interest;
(3) that would be taxable as a domestic corporation
but for the special Code provisions applicable to REITs;
(4) that is neither a financial institution nor an
insurance company subject to specific provisions of the Code;
213
Federal income
tax considerations
(5) the beneficial ownership of which is held by 100
or more persons;
(6) in which, during the last half of each taxable
year, not more than 50% in value of the outstanding stock is
owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include
specified entities);
(7) which meets other tests described below,
including with respect to the nature of its income and assets
and the amount of its distributions; and
(8) that makes an election to be a REIT for the
current taxable year or has made such an election for a previous
taxable year that has not been terminated or revoked.
The Code provides that conditions (1) through (4) must
be met during the entire taxable year, and that condition
(5) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a
shorter taxable year. Conditions (5) and (6) do not
need to be satisfied for the first taxable year for which an
election to become a REIT has been made. Our charter will
provide restrictions regarding the ownership and transfer of our
shares, which are intended, among other purposes, to assist in
satisfying the share ownership requirements described in
conditions (5) and (6) above. For purposes of
condition (6), an individual generally includes a
supplemental unemployment compensation benefit plan, a private
foundation, or a portion of a trust permanently set aside or
used exclusively for charitable purposes, but does not include a
qualified pension plan or profit sharing trust.
To monitor compliance with the share ownership requirements, we
are generally required to maintain records regarding the actual
ownership of our shares. To do so, we must demand written
statements each year from the record holders of significant
percentages of our stock in which the record holders are to
disclose the actual owners of the shares,
i.e.
, the
persons required to include in gross income the dividends paid
by us. A list of those persons failing or refusing to comply
with this demand must be maintained as part of our records.
Failure by us to comply with these record keeping requirements
could subject us to monetary penalties. If we satisfy these
requirements and have no reason to know that condition
(6) is not satisfied, we will be deemed to have satisfied
such condition. A stockholder that fails or refuses to comply
with the demand is required by Treasury Regulations to submit a
statement with its tax return disclosing the actual ownership of
the shares and other information.
In addition, a corporation generally may not elect to become a
REIT unless its taxable year is the calendar year. We have
adopted December 31 as our year-end, and thereby will satisfy
this requirement.
EFFECT OF
SUBSIDIARY ENTITIES
Ownership of
partnership interests
In the case of a REIT that holds an interest in an entity that
is treated as a partnership for federal income tax purposes,
Treasury Regulations provide that the REIT is deemed to own its
proportionate share of the partnerships assets, and to
earn its proportionate share of the partnerships gross
income based on its
pro rata
share of capital interest in
the partnership, for purposes of the asset and gross income
tests applicable to REITs as described below. However, for
purposes of the 10% value test only, the determination of a
REITs interest in partnership assets will be based on the
REITs proportionate interest in any securities issued by
the partnership, excluding, for these purposes, certain excluded
securities as described in the Code. In addition, the assets and
gross income of the partnership generally are deemed to retain
the same character in the hands of the REIT. Thus, our
proportionate share, based upon our percentage capital interest,
of the assets and items of income of partnerships in which we
own an equity interest (including our interest in our operating
partnership and our equity interests in lowertier
partnerships), is treated as assets and items of income of our
company for purposes of applying the REIT requirements described
below. Consequently, to the extent that we directly or
indirectly hold a preferred or other equity interest in a
partnership, the partnerships assets and
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Federal income
tax considerations
operations may affect our ability to qualify as a REIT, even
though we may have no control, or only limited influence, over
the partnership. A summary of certain rules governing the
federal income taxation of partnerships and their partners is
provided in Tax Aspects of Investments in
Partnerships.
Disregarded
subsidiaries
If a REIT owns a corporate subsidiary that is a qualified
REIT subsidiary, that subsidiary is disregarded for
federal income tax purposes, and all assets, liabilities and
items of income, deduction and credit of the subsidiary are
treated as assets, liabilities and items of income, deduction
and credit of the REIT itself, including for purposes of the
gross income and asset tests applicable to REITs, as summarized
below. A qualified REIT subsidiary is any
corporation, other than a taxable REIT subsidiary, that is
wholly owned by a REIT, or by other disregarded subsidiaries, or
by a combination of the two. Single-member limited liability
companies that are wholly owned by a REIT are also generally
disregarded as separate entities for federal income tax
purposes, including for purposes of the REIT gross income and
asset tests. Disregarded subsidiaries, along with partnerships
in which we hold an equity interest, are sometimes collectively
referred to herein as pass-through subsidiaries.
In the event that a disregarded subsidiary ceases to be wholly
owned by usfor example, if any equity interest in the
subsidiary is acquired by a person other than us or another
disregarded subsidiary of ours, or is classified as a taxable
REIT subsidiarythe subsidiarys separate existence
would no longer be disregarded for federal income tax purposes.
Instead, it would have multiple owners and would be treated as
either a partnership or a taxable corporation. Such an event
could, depending on the circumstances, adversely affect our
companys ability to satisfy the various asset and gross
income tests applicable to REITs, including the requirement that
REITs generally may not own, directly or indirectly, more than
10% of the value or voting power of the outstanding securities
of another entity unless it is a taxable REIT subsidiary. See
Gross Income Tests and Asset
Tests below.
Taxable
subsidiaries
A REIT, in general, may jointly elect with a subsidiary
corporation, whether or not wholly owned, to treat the
subsidiary corporation as a taxable REIT subsidiary. The
separate existence of a taxable REIT subsidiary or other taxable
corporation, unlike a disregarded subsidiary as discussed above,
is not ignored for federal income tax purposes. Accordingly,
such an entity would generally be subject to corporate income
tax on its earnings, which may reduce the cash flow generated by
our company and our companys subsidiaries in the
aggregate, and our companys ability to make distributions
to its stockholders.
A REIT is not treated as holding the assets of a taxable
subsidiary corporation or as receiving any income that the
subsidiary earns. Rather, the stock issued by the subsidiary is
an asset in the hands of the REIT, and the REIT recognizes as
income the distributions, if any, that it receives from the
subsidiary. This treatment can affect the gross income and asset
test calculations that apply to the REIT, as described below.
Because a REIT does not include the assets and income of such
subsidiary corporations in determining compliance with the REIT
requirements, such entities may be used by the REIT to undertake
indirectly activities that the REIT rules might otherwise
preclude it from doing directly or through pass-through
subsidiaries (for example, activities that give rise to certain
categories of income such as management fees or foreign currency
gains). If dividends are paid to us by one or more of our
taxable REIT subsidiaries or other taxable subsidiary
corporations, then a portion of the dividends that we distribute
to our U.S. stockholders who are taxed at individual rates
generally will be eligible for taxation through 2010 at the
preferential qualified dividend income rates rather than at
ordinary income rates. See Taxation of
StockholdersTaxation of Taxable
U.S. Stockholders, and Taxation of
StockholdersDistributions.
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Certain restrictions imposed on taxable REIT subsidiaries are
intended to ensure that such entities will be subject to
appropriate levels of federal income taxation. First, if a
taxable REIT subsidiary has a debt to equity ratio as of the
close of the taxable year exceeding 1.5 to 1, it may not deduct
interest payments made in any year to an affiliated REIT to the
extent that such payments exceed, generally, 50% of the taxable
REIT subsidiarys adjusted taxable income for that year
(although the taxable REIT subsidiary may carry forward to, and
deduct in, a succeeding year the disallowed interest amount if
the 50% test is satisfied in that year). In addition, if amounts
are paid to a REIT or deducted by a taxable REIT subsidiary due
to transactions between a REIT, its tenants
and/or
a
taxable REIT subsidiary, that exceed the amount that would be
paid to or deducted by a party in an arms length
transaction, the REIT generally will be subject to an excise tax
equal to 100% of such excess. Rents our company receives that
include amounts for services furnished by a taxable REIT
subsidiary to any of its tenants will not be subject to the
excise tax if such amounts qualify for the safe harbor
provisions contained in the Code. Safe harbor provisions are
provided where (a) amounts are excluded from the definition
of impermissible tenant service income as a result of satisfying
a 1%
de minimis
exception; (b) a taxable REIT
subsidiary renders a significant amount of similar services to
unrelated parties and the charges for such services are
substantially comparable; (c) rents paid to our company by
tenants, leasing at least 25% of the net leasable space of the
REITs property, that are not receiving services from the
taxable REIT subsidiary are substantially comparable to the
rents paid by our tenants leasing comparable space that are
receiving such services from the taxable REIT subsidiary and the
charge for the services is separately stated; or (d) the
taxable REIT subsidiarys gross income from the service is
not less than 150% of the taxable REIT subsidiarys direct
cost of furnishing the service.
Our company will form a taxable REIT subsidiary that will be
owned by our operating partnership following the contribution
transaction. Our taxable REIT subsidiary, through several
wholly-owned limited liability companies, will conduct several
third-party services businesses including a brokerage business,
property management, architecture, construction, mortgage
origination, and property maintenance.
GROSS INCOME
TESTS
In order to qualify as a REIT, we annually must satisfy two
gross income tests. First, at least 75% of our gross income for
each taxable year, excluding gross income from prohibited
transactions and certain hedging and foreign currency
transactions, must be derived from investments relating to
real property or mortgages on real property, including
rents from real property, dividends or other
distributions on, and gain from the sale or other disposition of
shares of other REITs, interest income derived from mortgage
loans secured by real property (including certain types of
mortgage-backed securities), and gains from the sale of real
estate assets, as well as income from certain kinds of temporary
investments. Second, at least 95% of our gross income in each
taxable year, excluding gross income from prohibited
transactions and certain hedging and foreign currency
transactions, must be derived from some combination of income
that qualifies under the 75% income test described above (other
than qualified temporary investment income), as well as other
dividends, interest, and gain from the sale or disposition of
stock or securities, which need not have any relation to real
property.
Rents received by us will qualify as rents from real
property in satisfying the gross income tests described
above, only if several conditions are met, including the
following. The rent must not be based in whole or in part on the
income or profits of any person. However, an amount will not be
excluded from rents from real property solely by
reason of being based on a fixed percentage or percentages of
receipts or sales or if it is based on the net income of a
tenant which derives substantially all of its income with
respect to such property from subleasing of substantially all of
such property, to the extent that the rents paid by the
sublessees would qualify as rents from real
property, if earned directly by us. If rent is partly
attributable to personal property leased in connection with a
lease of real property, the portion of the total rent that is
attributable to the personal property will not qualify as
rents from
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Federal income
tax considerations
real property unless it constitutes 15% or less of the
total rent received under the lease. Moreover, in order for
rents received to qualify as rents from real
property, services provided by us to a tenant generally
must be furnished or rendered to the tenants of such property
through an independent contractor who is adequately
compensated and from which we derive no income, through a
taxable REIT subsidiary, or be services that are usually
or customarily rendered in connection with the rental of
space for occupancy only and are not otherwise considered
rendered to the occupant of the property. If the services do not
meet one of the foregoing criteria, they will give rise to
impermissible tenant service income, which is not
qualifying income for purposes of the 75% or 95% gross income
tests. The amount of impermissible tenant service income is
deemed to be at least 150% of the direct cost of providing the
service. If the impermissible tenant service income with respect
to a property exceeds 1% of the total income from that property,
then all of the income from that property will fail to qualify
as rents from real property. If the total amount of
impermissible tenant service income from a property does not
exceed 1% of the total income from that property, the income
will not cause the rent paid by the tenants of that property to
fail to qualify as rents from real property.
Also, rental income will qualify as rents from real
property only to the extent that we do not directly or
indirectly (through application of certain constructive
ownership rules) own, (i) in the case of any lessee which
is a corporation, stock possessing 10% or more of the total
combined voting power of all classes of stock entitled to vote,
or 10% or more of the total value of shares of all classes of
stock of such lessee, or (ii) in the case of any lessee
which is not a corporation, an interest of 10% or more in the
assets or net profits of such lessee. However, rental payments
from a taxable REIT subsidiary will qualify as rents from
real property even if we own more than 10% of the total
value or combined voting power of the taxable REIT subsidiary if
at least 90% of the property is leased to unrelated tenants and
the rent paid by the taxable REIT subsidiary is substantially
comparable to the rent paid by the unrelated tenants for
comparable space. However, amounts attributable to certain
rental increases charged to a controlled taxable REIT subsidiary
can fail to qualify even if these conditions are met.
Unless we determine that the resulting nonqualifying income
under any of the following situations, taken together with all
other nonqualifying income earned by us in the taxable year,
will not jeopardize our qualification as a REIT, we do not and
do not intend to:
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charge rent for any property that is based in whole or in part
on the income or profits of any person, except by reason of
being based on a fixed percentage or percentages of receipts or
sales, as described above;
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rent any property to a related party tenant, including a taxable
REIT subsidiary (as described below), unless the rent from the
lease to the taxable REIT subsidiary would qualify for the
special exception from the related party tenant rule applicable
to certain leases with a taxable REIT subsidiary;
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derive rental income attributable to personal property other
than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the total
rent received under the lease; or
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directly perform services considered to be noncustomary or
rendered to the occupant of the property.
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We may receive distributions from taxable REIT subsidiaries or
other corporations that are not REITs or qualified REIT
subsidiaries. These distributions will be classified as dividend
income to the extent of the earnings and profits of the
distributing corporation. Such distributions will generally
constitute qualifying income for purposes of the 95% gross
income test, but not under the 75% gross income test unless
attributable to investments of certain new capital during the
one-year period beginning on the date of receipt of the new
capital. Any dividends received by us from a REIT will be
qualifying income for purposes of both the 95% and 75% gross
income tests.
Interest income, for purposes of the 75% gross income test,
constitutes qualifying mortgage interest to the extent that the
obligation is secured by a mortgage on real property. If we
receive interest income
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Federal income
tax considerations
with respect to a mortgage loan that is secured by both real
property and other property, and the highest principal amount of
the loan outstanding during a taxable year exceeds the fair
market value of the real property on the date that we acquired
or originated the mortgage loan, the interest income will be
apportioned between the real property and the other property,
and our income from the arrangement will qualify for purposes of
the 75% gross income test only to the extent that the interest
is allocable to the real property. Even if a loan is not secured
by real property or is undersecured, the income that it
generates may nonetheless qualify for purposes of the 95% gross
income test.
To the extent that the terms of a loan provide for contingent
interest that is based on the gain realized upon the sale of the
property securing the loan or based on the appreciation in the
propertys values as of a specific date (a shared
appreciation provision), income attributable to the
participation feature will be treated as gain from sale of the
underlying property, which generally will be qualifying income
for purposes of both the 75% and 95% gross income tests,
provided that the property is not inventory or dealer property.
To the extent that we derive interest income from a loan where
all or a portion of the amount of interest payable is
contingent, such income generally will qualify for purposes of
the gross income tests only if it is based upon the gross
receipts or sales, and not the net income or profits of any
person. This limitation does not apply, however, to a mortgage
loan where the borrower derives substantially all of its gross
income with respect to the property from the leasing of
substantially all of its interest in the property to tenants, to
the extent that the rental income derived by the borrower, would
qualify as rents from real property had it been
earned directly by us.
If we fail to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, we may still qualify as a REIT for
the year if we are entitled to relief under applicable
provisions of the Code. These relief provisions will generally
be available if our failure to satisfy one or both of the 75% or
95% gross income tests for any year, was due to reasonable cause
and not due to willful neglect and, following the identification
of such failure, we set forth a description of each item of our
gross income that satisfies the gross income tests in a schedule
for the taxable year filed in accordance with regulations
prescribed by the Treasury. It is not possible to state whether
we would be entitled to the benefit of these relief provisions
in all circumstances. If these relief provisions are
inapplicable to a particular set of circumstances involving us,
we will not qualify as a REIT. As discussed under
Taxation of REITs in General, even where these
relief provisions apply, a tax would be imposed upon the profit
attributable to the amount by which we fail to satisfy the
particular gross income test.
ASSET
TESTS
We, at the close of each calendar quarter, must also satisfy
four tests relating to the nature of our assets. First, at least
75% of the value of our total assets must be represented by some
combination of real estate assets, cash, cash items,
U.S. government securities, and, under some circumstances,
stock or debt instruments purchased with new capital. For this
purpose, real estate assets include interests in
real property, such as land, buildings, leasehold interests in
real property, stock of other corporations that qualify as
REITs, and certain kinds of mortgage-backed securities and
mortgage loans. Assets that do not qualify for purposes of the
75% test are subject to the additional asset tests described
below.
Second, the value of any one issuers securities owned by
us may not exceed 5% of the value of our total assets. Third, we
may not own more than 10% of any one issuers outstanding
securities, as measured by either voting power or value. Fourth,
the aggregate value of all securities of taxable REIT
subsidiaries held by us may not exceed 25% of the value of our
total assets.
The 5% and 10% asset tests do not apply to securities of taxable
REIT subsidiaries. The 10% value test does not apply to certain
straight debt (as described below) and other
excluded securities, as described in the Code, including but not
limited to a loan to an individual or an estate, an obligation
to pay rents from real property and any security issued by a
REIT. In addition, (a) a REITs interest as a
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Federal income
tax considerations
partner in a partnership is not considered a security for
purposes of applying the 10% value test; (b) any debt
instrument issued by a partnership (other than straight debt or
another excluded security) will not be considered a security
issued by the partnership if at least 75% of the
partnerships gross income is derived from sources that
would qualify for the 75% REIT gross income test; and
(c) any debt instrument issued by a partnership (other than
straight debt or another excluded security) will not be
considered a security issued by the partnership to the extent of
the REITs interest as a partner in the partnership. In
general, straight debt is a written unconditional
promise to pay on demand or at a specific date a sum certain in
money if (i) the debt is not convertible, directly or
indirectly, into stock; (ii) the interest rate and interest
payment dates are not contingent on profits, the borrowers
discretion, or similar factors other than certain contingencies
relating to the timing and amount of principal and interest
payments and (iii) in the case of an issuer which is a
corporation or a partnership, securities that otherwise would be
considered straight debt will not be so considered if we or any
of our controlled taxable REIT subsidiaries hold any securities
of the corporate or partnership issuer which (a) are not
straight debt or other excluded securities (prior to the
application of this rule) and (b) have an aggregate value
greater than 1% of the issuers outstanding securities
(including for the purposes of a partnership issuer, our
interest as a partner in the partnership).
After initially meeting the asset tests at the close of any
quarter, we will not lose our qualification as a REIT for
failure to satisfy the asset tests at the end of a later quarter
solely by reason of changes in asset values. If we fail to
satisfy the asset tests because we acquire securities during a
quarter, we can cure this failure by disposing of sufficient
non-qualifying assets within 30 days after the close of
that quarter. If we fail the 5% asset test, or the 10% vote or
value tests at the end of any quarter and such failure is not
cured within 30 days thereafter, we may dispose of
sufficient assets (generally, within six months after the last
day of the quarter in which its identification of the failure to
satisfy these asset tests occurred) to cure such a violation
that does not exceed the lesser of 1% of our assets at the end
of the relevant quarter or $10,000,000. If we fail any of the
other asset tests or our failure of the 5% and 10% asset tests
is in excess of the
de minimis
amount described in the
preceding sentence, as long as the failure was due to reasonable
cause and not willful neglect, we will be permitted to avoid
disqualification as a REIT, after the
30-day
cure
period, by taking steps including the disposition of sufficient
assets to meet the asset test (generally within six months after
the last day of the quarter in which our identification of the
failure to satisfy the REIT asset test occurred) and paying a
tax equal to the greater of $50,000 or 35% of the net income
generated by the nonqualifying assets during the period in which
we failed to satisfy the asset test.
We believe that our holdings of securities and other assets will
comply with the foregoing REIT asset requirements, and we intend
to monitor compliance on an ongoing basis. However, values of
some assets may not be susceptible to a precise determination,
and values are subject to change in the future. Furthermore, the
proper classification of an instrument as debt or equity for
federal income tax purposes may be uncertain in some
circumstances, which could affect the application of the REIT
asset tests. Accordingly, there can be no assurance that the IRS
will not contend that our interests in subsidiaries or in the
securities of other issuers cause a violation of the REIT asset
tests.
ANNUAL
DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, we are required to distribute
dividends, other than capital gain dividends, to our
stockholders in an amount at least equal to:
(a) the sum of:
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90% of our REIT taxable income (computed without
regard to our deduction for dividends paid and our net capital
gains), and
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90% of the net income, if any, (after tax) from
foreclosure property (as described below), minus
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(b) the sum of specified items of non cash income
that exceeds a percentage of our income.
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Federal income
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These distributions must be paid in the taxable year to which
they relate, or in the following taxable year if such
distributions are declared in October, November or December of
the taxable year, are payable to stockholders of record on a
specified date in any such month, and are actually paid before
the end of January of the following year. Such distributions are
treated as both paid by us and received by each stockholder on
December 31 of the year in which they are declared. In addition,
at our election, a distribution for a taxable year may be
declared before we timely file our tax return for the year and
paid with or before the first regular dividend payment after
such declaration, provided such payment is made during the
12-month
period following the close of such taxable year. These
distributions are taxable to our stockholders in the year in
which paid, even though the distributions relate to our prior
taxable year for purposes of the 90% distribution requirement.
In order for distributions to be counted towards our
distribution requirement, and to give rise to a tax deduction by
us, they must not be preferential dividends. A
dividend is not a preferential dividend if it is
pro rata
among all outstanding shares of stock within a
particular class, and is in accordance with the preferences
among different classes of stock as set forth in the
organizational documents.
To the extent that we distribute at least 90%, but less than
100%, of our REIT taxable income, as adjusted, we
will be subject to tax at ordinary corporate tax rates on the
retained portion. In addition, we may elect to retain, rather
than distribute, our net long-term capital gains and pay tax on
such gains. In this case, we could elect to have our
stockholders include their proportionate share of such
undistributed long-term capital gains in income and receive a
corresponding credit for their proportionate share of the tax
paid by us. Our stockholders would then increase the adjusted
basis of their stock in our company by the difference between
the designated amounts included in their long-term capital gains
and the tax deemed paid with respect to their proportionate
shares.
If we fail to distribute during each calendar year at least
the required distribution, which is equal to the sum
of (a) 85% of our REIT ordinary income for such year,
(b) 95% of our REIT capital gain net income for such year
and (c) any undistributed taxable income from prior
periods, then we will be subject to a 4% excise tax on the
excess of such required distribution over the sum of
(x) the amounts actually distributed (taking into account
excess distributions from prior periods) and (y) the
amounts of income retained on which we have paid corporate
income tax. We intend to make timely distributions so that we
are not subject to the 4% excise tax.
It is possible that we, from time to time, may not have
sufficient cash to meet the distribution requirements due to
timing differences between (a) the actual receipt of cash,
including receipt of distributions from our subsidiaries, and
(b) the inclusion of items in income by us for federal
income tax purposes. Potential sources of non-cash taxable
income include (i) a lease of our property subject to the
provisions of Section 467 of the Code, and (ii) loans
or mortgage-backed securities held by us as assets that are
issued at a discount and require the accrual of taxable interest
income in advance of our receipt in cash, loans on which the
borrower is permitted to defer cash payments of interest and
distressed loans on which we may be required to accrue taxable
interest income even though the borrower is unable to make
current servicing payments in cash. In the event that such
timing differences occur, in order to meet the distribution
requirements and avoid any taxes, it might be necessary to
arrange for short-term, or possibly long-term, borrowings, or to
pay dividends in the form of taxable in-kind distributions of
property.
We may be able to rectify a failure to meet the distribution
requirements for a year by paying deficiency
dividends to stockholders in a later year, which may be
included in our deduction for dividends paid for the earlier
year. In this case, we may be able to avoid losing our REIT
qualification or being taxed on amounts distributed as
deficiency dividends. However, we will be required
to pay interest based on the amount of any deduction taken for
deficiency dividends.
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Federal income
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FAILURE TO
QUALIFY
In the event we violate a provision of the Code that would
result in our failure to qualify as a REIT, specified relief
provisions will be available to us to avoid such
disqualification if (a) the violation is due to reasonable
cause and not willful neglect, (b) we pay a penalty of
$50,000 for each failure to satisfy the provision and
(c) the violation does not include a violation under the
gross income or asset tests described above (and for which other
specified relief provisions are available). This cure provision
reduces the instances that could lead to our disqualification as
a REIT for violations due to reasonable cause.
If we fail to qualify for taxation as a REIT in any taxable
year, and the relief provisions of the Code do not apply, we
will be subject to tax, including any applicable alternative
minimum tax, on our taxable income at regular federal corporate
rates. Distributions to our stockholders in any year in which we
are not a REIT will not be deductible by us, nor will they be
required to be made. In this situation, to the extent of current
and accumulated earnings and profits, and, subject to
limitations of the Code, distributions to our stockholders will
generally be taxable in the case of the our stockholders who are
individual U.S. stockholders (as defined under
Taxation of StockholdersTaxation of Taxable
U.S. Stockholders), at a maximum rate of 15% (through
2010), and distributions in the hands of our corporate
U.S. stockholders may be eligible for the dividends
received deduction. Unless we are entitled to relief under
specific statutory provisions, we will also be disqualified from
re-electing to be taxed as a REIT for the four taxable years
following a year during which qualification was lost. It is not
possible to state whether, in all circumstances, we will be
entitled to any statutory relief.
PROHIBITED
TRANSACTIONS
Net income derived from a prohibited transaction is subject to a
100% tax. The term prohibited transaction generally
includes a sale or other disposition of property (other than
foreclosure property, as described below) that is
held primarily for sale to customers in the ordinary course of a
trade or business by a REIT, by a lowertier partnership in
which the REIT holds an equity interest or by a borrower that
has issued a shared appreciation mortgage or similar debt
instrument to the REIT. We intend to hold our properties for
investment with a view to long-term appreciation, to engage in
the business of owning and operating properties and to make
sales of properties that are consistent with our investment
objectives. However, whether property is held primarily
for sale to customers in the ordinary course of a trade or
business depends on the particular facts and
circumstances. No assurance can be given that any particular
property in which we hold a direct or indirect interest will not
be treated as property held for sale to customers, or that
certain safe harbor provisions of the Code that prevent such
treatment will apply. For this purpose, the Code provides a safe
harbor pursuant to which sales of properties will not constitute
prohibited transactions, if (i) we have held the property
for at least two years for the production of rental income,
(ii) we capitalized expenditures on the property in the two
years preceding sale that are less than 30% of the net selling
price of the property, and (iii) we (a) have seven or
fewer sales of property (excluding certain property obtained
through foreclosure) for the year of sale or (b) either
(I) the aggregate tax basis of property sold during the
year of sale is 10% or less of the aggregate tax basis of all of
our assets as of the beginning of the taxable year, or
(II) the aggregate fair market value of property sold
during the year of sales is 10% or less of the aggregate fair
market value of all our assets as of the beginning of the
taxable year and (III) in the case that (a) is not
satisfied, substantially all of the marketing and development
expenditures with respect to the property sold are made through
an independent contractor from whom we derive no income. The
100% tax will not apply to gains from the sale of property that
is held through a taxable REIT subsidiary or other taxable
corporation, although such income will be subject to tax in the
hands of the corporation at regular corporate income tax rates.
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Federal income
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FORECLOSURE
PROPERTY
Foreclosure property is real property (including
interests in real property) and any personal property incident
to such real property (a) that is acquired by a REIT as a
result of the REIT having bid on the property at foreclosure, or
having otherwise reduced the property to ownership or possession
by agreement or process of law, after there was a default (or
default was imminent) on a lease of the property or an
indebtedness owed to the REIT and secured by the property,
(b) for which the related loan or lease was made, entered
into or acquired by the REIT at a time when default was not
imminent or anticipated and (c) for which such REIT makes a
proper election to treat the property as foreclosure property.
REITs generally are subject to tax at the maximum corporate rate
(currently 35%) on any net income from foreclosure property,
including any gain from the disposition of the foreclosure
property, other than income that would otherwise be qualifying
income for purposes of the 75% gross income test. Any gain from
the sale of property for which a foreclosure property election
has been made will not be subject to the 100% tax on gains from
prohibited transactions described above, even if the property
would otherwise constitute inventory or dealer property in the
hands of the selling REIT. We do not anticipate that we will
receive any income from foreclosure property that is not
qualifying income for purposes of the 75% gross income test,
but, if we do receive any such income, we intend to make an
election to treat the related property as foreclosure property.
HEDGING
TRANSACTIONS
We may enter into hedging transactions with respect to one or
more of our assets or liabilities. Hedging transactions could
take a variety of forms, including interest rate swaps or cap
agreements, options, futures contracts, forward rate agreements
or similar financial instruments. Except to the extent provided
by Treasury Regulations, any income from a hedging transaction
to manage risk of interest rate or price changes or currency
fluctuations with respect to borrowings made or to be made, or
ordinary obligations incurred or to be incurred, by us to
acquire or carry real estate assets, which is clearly identified
as such before the close of the day on which it was acquired,
originated or entered into, including gain from the sale or
disposition of such a transaction will not constitute gross
income for purposes of either the 95% or the 75% gross income
test. To the extent that we enter into other types of hedging
transactions, the income from those transactions is likely to be
treated as non-qualifying income for purposes of both of the
gross income tests. We intend to structure any hedging
transactions in a manner that does not jeopardize our
qualification as a REIT.
FOREIGN
INVESTMENTS
To the extent that we and our subsidiaries hold or acquire any
investments and, accordingly, pay taxes in foreign countries,
taxes paid by us in foreign jurisdictions may not be passed
through to, or used by, our stockholders as a foreign tax credit
or otherwise. Any foreign investments may also generate foreign
currency gains and losses. Certain foreign currency gains will
be excluded from gross income for purposes of one or both of the
gross income tests. Real estate foreign exchange
gain will be excluded from gross income for purposes of
both the 95% and 75% gross income tests. Real estate foreign
exchange gain generally includes foreign currency gain
attributable to any item of income or gain that is qualifying
income for purposes of the 75% gross income test, foreign
currency gain attributable to the acquisition or ownership of
(or becoming or being the obligor under) obligations secured by
mortgages on real property or on interests in real property and
certain foreign currency gain attributable to certain
qualified business units of a REIT. Passive
foreign exchange gain will be excluded from gross income
for purposes of the 95% gross income test. Passive foreign
exchange gain generally includes real estate foreign exchange
gain as described above, and also includes foreign currency gain
attributable to any item of income or gain that is qualifying
income for purposes of the 95% gross income test and foreign
currency gain attributable to the acquisition or ownership of
(or becoming or being the obligor under) obligations. Because
passive foreign exchange gain includes real estate foreign
exchange gain,
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real estate foreign exchange gain is excluded from gross income
for purposes of both the 75% and 95% gross income tests. These
exclusions for real estate foreign exchange gain and passive
foreign exchange gain do not apply to certain foreign currency
gain derived from dealing, or engaging in substantial and
regular trading, in securities. Such gain is treated as
nonqualifying income for purposes of both the 75% and 95% gross
income tests.
TAX ASPECTS OF
INVESTMENTS IN PARTNERSHIPS
General
We may hold investments through entities that are classified as
partnerships for federal income tax purposes, including our
interest in our operating partnership and our equity interests
in lower-tier partnerships. In general, partnerships are
pass-through entities that are not subject to
federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership, and are potentially
subject to tax on these items without regard to whether the
partners receive a distribution from the partnership. We will
include our proportionate share of these partnership items for
purposes of the various REIT income and asset tests, based on
our capital interest in such partnership, and the actual
computation of our REIT taxable income will be based on our
distributive share of such items determined under the applicable
partnership agreement or under the applicable provisions of the
Code and the Treasury Regulations thereunder. See
Effect of Subsidiary EntitiesOwnership of
Partnership Interests. Consequently, to the extent that we
hold an equity interest in a partnership, the partnerships
assets and operations may affect our ability to qualify as a
REIT, even though we may have no control, or only limited
influence, over the partnership.
Entity
classification
The investment by us in partnerships involves special tax
considerations, including the possibility of a challenge by the
IRS of the status of any of our subsidiary partnerships as a
partnership, as opposed to an association taxable as a
corporation for federal income tax purposes. If any of these
entities were treated as an association for federal income tax
purposes, it would be taxable as a corporation and therefore
could be subject to an entity level tax on its income.
Although OP units will not be traded on an established
securities market, there is a risk that the redemption rights of
the holders of OP units could cause the interests in our
operating partnership to be viewed as readily tradable on a
secondary market or the substantial equivalent thereof. Under
relevant Treasury Regulations interests in a partnership will
not be considered readily tradable on a secondary market or the
substantial equivalent thereof if the partnership qualifies for
specified safe harbors that are based on the
specific facts and circumstances related to the partnership.
Although our operating partnership may, depending on the number
of partners in the partnership and the percentage interests
transferred during a taxable year qualify for one of the
safe-harbors in the future, our operating partnership cannot
provide any assurance that it currently meets any of the safe
harbors, or that if it currently meets any of the safe harbors
that it will continue to meet such safe harbors. In the event
that a safe harbor provision of applicable Treasury Regulations
is not available, our operating partnership may be classified as
a publicly-traded partnership. Although our operating
partnership may be classified as a publicly-traded partnership,
it would not be subject to corporate level tax provided it met
the 90% qualifying income exception. We anticipate that the
operations of our operating partnership will meet the 90%
qualifying income test. If our operating partnership was treated
as a publicly-traded partnership that did not meet a designated
qualifying income exception, our operating partnership would be
treated as a corporation for federal income tax purposes. In
such a situation, the character of our assets and items of our
gross income would change and could preclude us from satisfying
the REIT asset tests (particularly the tests generally
preventing a REIT from owning more than 10% of the voting
securities, or more than 10% of the value of the securities, of
a corporation) or the gross income tests as discussed in
Gross Income Tests and Asset
Tests, and in turn could prevent us from
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Federal income
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qualifying as a REIT. See Failure to Qualify,
for a discussion of the effect of our failure to meet these
tests for a taxable year. In addition, any change in the status
of any of our subsidiary partnerships for tax purposes might be
treated as a taxable event, in which case we could have taxable
income that is subject to the REIT distribution requirements
without receiving any cash.
Allocations with
respect to partnership properties
The partnership agreement of our operating partnership generally
provides that items of operating income and loss will be
allocated to the holders of OP units in proportion to the number
of units held by each such holder. If an allocation of
partnership income or loss does not comply with the requirements
of Section 704(b) of the Code and the Treasury Regulations
thereunder, the item subject to the allocation will be
reallocated in accordance with the partners interests in
the partnership. This reallocation will be determined by taking
into account all of the facts and circumstances relating to the
economic arrangement of the partners with respect to such item.
Our operating partnerships allocations of income and loss
are intended to comply with the requirements of
Section 704(b) of the Code and the Treasury Regulations
promulgated under this section of the Code.
Under the Code and the Treasury Regulations, income, gain, loss
and deduction attributable to appreciated or depreciated
property that is contributed to a partnership in exchange for an
interest in the partnership must be allocated for tax purposes
in a manner such that the contributing partner is charged with,
or benefits from, the unrealized gain or unrealized loss
associated with the property at the time of the contribution.
The amount of the unrealized gain or unrealized loss is
generally equal to the difference between the fair market value
of the contributed property at the time of contribution, and the
adjusted tax basis of such property at the time of contribution
(a book tax difference). Such allocations are solely
for federal income tax purposes and do not affect the book
capital accounts or other economic or legal arrangements among
the partners.
To the extent that any of our subsidiary partnerships acquire
appreciated (or depreciated) properties by way of capital
contributions from its partners, allocations would need to be
made in a manner consistent with these requirements. In
connection with the contribution transaction, appreciated
property will be contributed to our operating partnership. As a
result, we could be allocated lesser amounts of depreciation and
greater amounts of taxable income in respect of our operating
partnerships properties than would be the case if all of
our operating partnerships assets had a tax basis equal to
their fair market values at the time of any contributions to the
operating partnership. This could cause us to recognize, over a
period of time, (a) lower amounts of depreciation
deductions for tax purposes than if all of the contributed
properties were to have a tax basis equal to their fair market
value at the time of their contribution to our operating
partnership and (b) taxable income in excess of economic or
book income as a result of a sale of a property, which might
adversely affect our ability to comply with the REIT
distribution requirements discussed above and result in our
stockholders recognizing additional dividend income without an
increase in distributions.
TAXATION OF
STOCKHOLDERS
Taxation of
taxable U.S. stockholders
This section summarizes the taxation of U.S. stockholders
that are not tax exempt organizations. For these purposes, a
U.S. stockholder is a beneficial owner of
common stock that for federal income tax purposes is:
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a citizen or resident of the United States
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a corporation (including an entity treated as a corporation for
federal income tax purposes) created or organized in or under
the laws of the United States or of a political subdivision
thereof (including the District of Columbia);
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an estate whose income is subject to federal income taxation
regardless of its source; or
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any trust if (a) a U.S. court is able to exercise
primary supervision over the administration of such trust and
one or more U.S. persons have the authority to control all
substantial decisions of the trust or (b) it has a valid
election in place to be treated as a U.S. person.
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If an entity or arrangement treated as a partnership for federal
income tax purposes holds our stock, the federal income tax
treatment of a partner generally will depend upon the status of
the partner and the activities of the partnership. A partner of
a partnership holding common stock should consult its own tax
advisor regarding the federal income tax consequences to the
partner of the acquisition, ownership and disposition of our
stock by the partnership.
Distributions.
Provided that we qualify as a
REIT, distributions made to our taxable U.S. stockholders
out of our current and accumulated earnings and profits, and not
designated as capital gain dividends, will generally be taken
into account by them as ordinary dividend income and will not be
eligible for the dividends received deduction for corporations.
In determining the extent to which a distribution with respect
to the common stock constitutes a dividend for federal income
tax purposes, our earnings and profits will be allocated first
to distributions with respect to our preferred stock, if any,
and then to common stock. Dividends received from REITs are
generally not eligible to be taxed at the preferential qualified
dividend income rates applicable to individual
U.S. stockholders who receive dividends from taxable
subchapter C corporations.
In addition, distributions from us that are designated as
capital gain dividends will be taxed to U.S. stockholders
as long-term capital gains, to the extent that they do not
exceed the actual net capital gain of our company for the
taxable year, without regard to the period for which the
U.S. stockholder has held its stock. To the extent that we
elect under the applicable provisions of the Code,
U.S. stockholders will be treated as having received, for
federal income tax purposes, our undistributed capital gains as
well as a corresponding credit for taxes paid by us on such
retained capital gains. U.S. stockholders will increase
their adjusted tax basis in the common stock by the difference
between their allocable share of such retained capital gain and
their share of the tax paid by us. Corporate
U.S. stockholders may be required to treat up to 20% of
some capital gain dividends as ordinary income. Long-term
capital gains are generally taxable at maximum federal rates of
15% (through 2010) in the case of U.S. stockholders
who are individuals, and 35% for corporations. Capital gains
attributable to the sale of depreciable real property held for
more than 12 months are subject to a 25% maximum federal
income tax rate for U.S. stockholders who are individuals,
to the extent of previously claimed depreciation deductions.
Distributions in excess of our current and accumulated earnings
and profits will not be taxable to a U.S. stockholder to
the extent that they do not exceed the adjusted tax basis of the
U.S. stockholders shares in respect of which the
distributions were made, but rather will reduce the adjusted tax
basis of these shares. To the extent that such distributions
exceed the adjusted tax basis of an individual
U.S. stockholders shares, they will be included in
income as long-term capital gain, or short term capital gain if
the shares have been held for one year or less. In addition, any
dividend declared by us in October, November or December of any
year and payable to a U.S. stockholder of record on a
specified date in any such month will be treated as both paid by
us and received by the U.S. stockholder on December 31 of
such year, provided that the dividend is actually paid by us
before the end of January of the following calendar year.
With respect to U.S. stockholders who are taxed at the
rates applicable to individuals, we may elect to designate a
portion of our distributions paid to such U.S. stockholders
as qualified dividend income. A portion of a
distribution that is properly designated as qualified dividend
income is taxable to non-corporate U.S. stockholders as net
capital gain, provided that the U.S. stockholder has held
the common stock with respect to which the distribution is made
for more than 60 days during the
121-day
period beginning on the date that is 60 days before the
date on which such common stock became ex-dividend
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Federal income
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with respect to the relevant distribution. The maximum amount of
our distributions eligible to be designated as qualified
dividend income for a taxable year is equal to the sum of:
(a) the qualified dividend income received by us
during such taxable year from non-REIT C corporations (including
our taxable REIT subsidiaries);
(b) the excess of any undistributed REIT
taxable income recognized during the immediately preceding year
over the federal income tax paid by us with respect to such
undistributed REIT taxable income;
(c) the excess of any income recognized during the
immediately preceding year attributable to the sale of a
built-in-gain
asset that was acquired in a carry-over basis transaction from a
non-REIT C corporation over the federal income tax paid by us
with respect to such built-in gain; and
(d) the amounts of any earnings and profits that were
distributed by us for the year and accumulated from non-REIT
years.
Generally, dividends that we receive will be treated as
qualified dividend income for purposes of (a) above if the
dividends are received from a domestic C corporation (other than
a REIT or a regulated investment company) or a qualified
foreign corporation and specified holding period
requirements and other requirements are met. A foreign C
corporation (other than a passive foreign investment
company) will be a qualified foreign
corporation if it is incorporated in a possession of the
United States, the corporation is eligible for benefits of an
income tax treaty with the United States that the Secretary of
Treasury determines is satisfactory, or the stock of the foreign
corporation on which the dividend is paid is readily tradable on
an established securities market in the United States. We
generally expect that an insignificant portion of our
distributions will consist of qualified dividend income.
To the extent that we have available net operating losses and
capital losses carried forward from prior tax years, such losses
may reduce the amount of distributions that must be made in
order to comply with the REIT distribution requirements. See
Annual Distribution Requirements. Such losses,
however, are not passed through to U.S. stockholders and do
not offset income of U.S. stockholders from other sources,
nor do they affect the character of any distributions that are
actually made by us, which are generally subject to tax in the
hands of U.S. stockholders to the extent that we have
current or accumulated earnings and profits.
Dispositions of Common Stock.
In general, a
U.S. stockholder will realize gain or loss upon the sale,
redemption or other taxable disposition of common stock in an
amount equal to the difference between the sum of the fair
market value of any property and the amount of cash received in
such disposition and the U.S. stockholders adjusted
tax basis in such common stock at the time of the disposition.
In general, a U.S. stockholders adjusted tax basis in
the common stock will equal the U.S. stockholders
acquisition cost, increased by the excess of net capital gains
deemed distributed to the U.S. stockholder (discussed
above) less tax deemed paid on it and reduced by returns of
capital. In general, capital gains recognized by individuals and
other non-corporate U.S. stockholders upon the sale or
disposition of common stock will be subject to a maximum federal
income tax rate of 15% for taxable years through 2010, if such
common stock is held for more than 12 months, and will be
taxed at ordinary income rates (of up to 35% through
2010) if such common stock is held for 12 months or
less. Gains recognized by U.S. stockholders that are
corporations are subject to federal income tax at a maximum rate
of 35%, whether or not classified as long-term capital gains.
The IRS has the authority to prescribe, but has not yet
prescribed, regulations that would apply a capital gain tax rate
of 25% (which is generally higher than the long-term capital
gain tax rates for non-corporate holders) to a portion of
capital gain realized by a non-corporate holder on the sale of
REIT stock or depositary shares that would correspond to the
REITs unrecaptured Section 1250 gain.
Holders are urged to consult with their tax advisor with respect
to their capital gain tax liability. Capital losses recognized
by a U.S. stockholder upon the disposition of the common
stock held for more than one year at the time of
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Federal income
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disposition will be considered long-term capital losses, and are
generally available only to offset capital gain income of the
U.S. stockholder but not ordinary income (except in the
case of individuals, who may offset up to $3,000 of ordinary
income each year). In addition, any loss upon a sale or exchange
of shares of the common stock by a U.S. stockholder who has
held such common stock for six months or less, after applying
holding period rules, will be treated as a long-term capital
loss to the extent of distributions received from our company
that were required to be treated by the U.S. stockholder as
long-term capital gain.
If a U.S. stockholder recognizes a loss upon a subsequent
disposition of the common stock in an amount that exceeds a
prescribed threshold, it is possible that the provisions of
Treasury Regulations involving reportable
transactions could apply, with a resulting requirement to
separately disclose the loss generating transaction to the IRS.
While these regulations are directed towards tax
shelters, they are written quite broadly, and apply to
transactions that would not typically be considered tax
shelters. Significant penalties apply for failure to comply with
these requirements. Holders should consult their tax advisor
concerning any possible disclosure obligation with respect to
the receipt or disposition of the common stock, or transactions
that might be undertaken directly or indirectly by us. Moreover,
holders should be aware that we and other participants in
transactions involving our company (including our predecessors)
might be subject to disclosure or other requirements pursuant to
these rules.
Passive activity
losses and investment interest limitations
Distributions made by us and gain arising from the sale or
exchange by a U.S. stockholder of the common stock will not
be treated as passive activity income. As a result,
U.S. stockholders will not be able to apply any
passive losses against income or gain relating to
the common stock. Distributions made by us, to the extent they
do not constitute a return of capital, generally will be treated
as investment income for purposes of computing the investment
interest limitation. A U.S. stockholder that elects to
treat capital gain dividends, capital gains from the disposition
of stock or qualified dividend income as investment income for
purposes of the investment interest limitation will be taxed at
ordinary income rates on such amounts.
New legislation
relating to surtax on certain net investment income
Newly enacted legislation would require certain U.S.
stockholders who are individuals, estates or trusts to pay a
3.8% surtax on, among other things, dividends on and capital
gains from the sale or other disposition of stock. This surtax
will apply for taxable years beginning after December 31,
2012. U.S. stockholders should consult their tax advisors
regarding the effect, if any, of this legislation on their
ownership and disposition of our common stock.
TAXATION OF TAX
EXEMPT U.S. STOCKHOLDERS
U.S. tax exempt entities, including qualified employee
pension and profit sharing trusts and individual retirement
accounts, generally are exempt from federal income taxation.
However, they are subject to taxation on their unrelated
business taxable income, which is referred to in this prospectus
as UBTI. While many investments in real estate may
generate UBTI, the IRS has ruled that dividend distributions
from a REIT to a tax exempt entity do not constitute UBTI. Based
on that ruling, and provided that (1) a tax exempt
U.S. stockholder has not held the common stock as
debt financed property within the meaning of the
Code (
i.e.
, where the acquisition or holding of the
property is financed through a borrowing by the tax exempt
stockholder), and (2) the common stock is not otherwise
used in an unrelated trade or business, distributions from us
and income from the sale of the common stock generally should
not give rise to UBTI to a tax exempt U.S. stockholder.
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Federal income
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Tax exempt U.S. stockholders that are social clubs,
voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services
plans exempt from federal income taxation under
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the
Code, respectively, are subject to different UBTI rules, which
generally will require them to characterize distributions from
us as UBTI.
In certain circumstances, a pension trust (a) that is
described in Section 401(a) of the Code, (b) is tax
exempt under Section 501(a) of the Code, and (c) that
owns more than 10% of our stock could be required to treat a
percentage of the dividends from us as UBTI if we are a
pension held REIT. We will not be a pension
held REIT unless either (a) (1) one pension trust
owns more than 25% of the value of our stock, or (2) a
group of pension trusts, each individually holding more than 10%
of the value of our companys stock, collectively owns more
than 50% of such stock and (b) we would not have qualified
as a REIT but for the fact that Section 856(h)(3) of the
Code provides that stock owned by such trusts shall be treated,
for purposes of the requirement that not more than 50% of the
value of the outstanding stock of a REIT is owned, directly or
indirectly, by five or fewer individuals (as defined
in the Code to include certain entities as held directly by its
beneficiaries in proportion to their actuarial interests).
Certain restrictions on ownership and transfer of our stock
should generally prevent a tax exempt entity from owning more
than 10% of the value of our stock, or us from becoming a
pension held REIT.
Tax exempt U.S. stockholders are urged to consult their
tax advisors regarding the federal, state, local and foreign tax
consequences of owning our common stock.
TAXATION OF
NON-U.S.
STOCKHOLDERS
The following is a summary of certain federal income tax
consequences of the acquisition, ownership and disposition of
the common stock applicable to
non-U.S. stockholders
holding common stock. For purposes of this summary, a
non-U.S. stockholder
is a beneficial owner of the common stock that is not a
U.S. stockholder and that is not a partnership. The
discussion is based on current law and is for general
information only. It addresses only selective and not all
aspects of federal income taxation.
Ordinary
dividends
The portion of dividends received by
non-U.S. stockholders
payable out of our earnings and profits that are not
attributable to gains from sales or exchanges of U.S. real
property interests and which are not effectively connected with
a U.S. trade or business of the
non-U.S. stockholder
generally will be treated as ordinary income subject to federal
withholding tax at the rate of 30%, unless reduced or eliminated
by an applicable income tax treaty. Under some treaties,
however, lower rates generally applicable to dividends do not
apply to distributions from REITs.
In general,
non-U.S. stockholders
will not be considered to be engaged in a U.S. trade or
business solely as a result of their ownership of the common
stock. In cases where the dividend income from a
non-U.S. stockholders
investment in the common stock is, or is treated as, effectively
connected with the
non-U.S. stockholders
conduct of a U.S. trade or business, the
non-U.S. stockholder
generally will be subject to federal income tax at graduated
rates, in the same manner as U.S. stockholders are taxed
with respect to such dividends, and may also be subject to the
30% branch profits tax (or lower rate provided by treaty) on the
income after the application of the income tax in the case of a
non-U.S. stockholder
that is a corporation.
Non dividend
distributions
Unless (a) the common stock constitutes a U.S. real
property interest, or USRPI, or (b) either (1) the
non-U.S. stockholders
investment in the common stock is effectively connected with a
U.S. trade or business conducted by such
non-U.S. stockholder
(in which case the
non-U.S. stockholder
will be subject
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Federal income
tax considerations
to the same treatment as U.S. stockholders with respect to
such gain and subject to the branch profits tax if the holder is
a corporation or (2) the
non-U.S. stockholder
is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and
certain other requirements are met (in which case the
non-U.S. stockholder
will be subject to a 30% tax on the individuals net
capital gain for the year), distributions by us which are not
dividends out of our earnings and profits will not be subject to
federal income tax. If it cannot be determined at the time at
which a distribution is made whether or not the distribution
will exceed current and accumulated earnings and profits, the
distribution will be subject to withholding at the rate
applicable to dividends. However, the
non-U.S. stockholder
may seek a refund from the IRS of any amounts withheld if it is
subsequently determined that the distribution was, in fact, in
excess of our current and accumulated earnings and profits. If
the common stock constitutes a USRPI, as described below,
distributions by us in excess of the sum of our earnings and
profits plus the
non-U.S. stockholders
adjusted tax basis in the common stock will be taxed under the
Foreign Investment in Real Property Tax Act of 1980, or FIRPTA,
at the rate of tax, including any applicable capital gains
rates, that would apply to a U.S. stockholder of the same
type (
e.g.
, an individual or a corporation, as the case
may be), and the collection of the tax will be enforced by a
refundable withholding at a rate of 10% of the amount by which
the distribution exceeds the
non-U.S. stockholders
share of our companys earnings and profits.
Capital gain
dividends
Under FIRPTA, a distribution made by us to a
non-U.S. stockholder,
to the extent attributable to gains from dispositions of USRPIs
held by us directly or through pass-through subsidiaries
(USRPI capital gains), will be considered
effectively connected with a U.S. trade or business of the
non-U.S. stockholder
and will be subject to federal income tax at the rates
applicable to U.S. stockholders, without regard to whether
the distribution is designated as a capital gain dividend. In
addition, we will be required to withhold tax equal to 35% of
the amount of capital gain dividends to the extent the dividends
constitute USRPI capital gains. Distributions subject to FIRPTA
may also be subject to a 30% branch profits tax (or lower rate
provided by treaty) in the hands of a
non-U.S. holder
that is a corporation. However, the 35% withholding tax will not
apply to any capital gain dividend with respect to any class of
our stock which is regularly traded on an established securities
market located in the United States if the
non-U.S. stockholder
did not own more than 5% of such class of stock at any time
during the one-year period ending on the date of distribution.
Also, the branch profits tax will not apply to such a
distribution. We believe that our common stock will meet the
regularly traded on an established securities market
exception upon completion of this offering.
A distribution is not a USRPI capital gain if we held the
underlying asset solely as a creditor, although the holding of a
shared appreciation mortgage loan would not be solely as a
creditor. Capital gain dividends received by a
non-U.S. stockholder
from a REIT that are not USRPI capital gains are generally not
subject to federal income or withholding tax, unless either
(a) the
non-U.S. stockholders
investment in the common stock is effectively connected with a
U.S. trade or business conducted by such
non-U.S. stockholder
and, if certain treaties apply, is attributable to a
U.S. permanent establishment maintained by the
non-U.S. stockholder
(in which case the
non-U.S. stockholder
will be subject to the same treatment as U.S. stockholders
with respect to such gain and subject to the branch profits tax
if the holder is a corporation) or (b) the
non-U.S. stockholder
is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and
certain other conditions are met (in which case the
non-U.S. stockholder
will be subject to a 30% tax on the individuals net
capital gain for the year).
Dispositions of
common stock
Unless the common stock constitutes a USRPI, a sale of the
common stock by a
non-U.S. stockholder
generally will not be subject to federal income taxation under
FIRPTA. The common stock will be
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Federal income
tax considerations
treated as a USRPI if 50% of our assets throughout a prescribed
testing period consist of interests in real property located
within the United States, excluding, for this purpose, interests
in real property solely in a capacity as a creditor. However, we
expect that more than 50% of our assets will consist of
interests in real property located in the United States.
Even if the foregoing 50% test is met, the common stock
nonetheless will not constitute a USRPI if we are a
domestically controlled REIT. A domestically
controlled REIT is a REIT in which, at all times during a
specified testing period, less than 50% in value of its
outstanding stock is held directly or indirectly by
non-U.S. stockholders.
We believe we will be a domestically controlled REIT and,
therefore, the sale of the common stock should not be subject to
taxation under FIRPTA. Because the common stock will be publicly
traded, however, no assurance can be given that we will be a
domestically controlled REIT.
In the event that we do not constitute a domestically controlled
REIT, a
non-U.S. stockholders
sale of the common stock nonetheless will generally not be
subject to tax under FIRPTA as a sale of a USRPI, provided that
(a) the common stock owned is of a class that is
regularly traded, as defined by applicable Treasury
Regulations, on an established securities market, and
(b) the selling
non-U.S. stockholder
owned, actually or constructively, 5% or less of our outstanding
stock of that class at all times during a specified testing
period.
If gain on the sale of the common stock were subject to taxation
under FIRPTA, the
non-U.S. stockholder
would be subject to the same treatment as a
U.S. stockholder with respect to such gain, subject to
applicable alternative minimum tax and a special alternative
minimum tax in the case of non resident alien individuals, and
the purchaser of such common stock could be required to withhold
10% of the purchase price and remit such amount to the IRS.
Gain from the sale of the common stock that would not otherwise
be subject to FIRPTA will nonetheless be taxable in the United
States to a
non-U.S. stockholder
in two cases: (a) if the
non-U.S. stockholders
investment in the common stock is effectively connected with a
U.S. trade or business conducted by such
non-U.S. stockholder,
the
non-U.S. stockholder
will be subject to the same treatment as a U.S. stockholder
with respect to such gain, and subject to the branch profits tax
if the holder is a corporation, or (b) if the
non-U.S. stockholder
is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and
certain other conditions are met, the nonresident alien
individual will be subject to a 30% tax on the individuals
capital gain.
Backup
withholding and information reporting
We will report to our U.S. stockholders and the IRS the
amount of dividends paid during each calendar year and the
amount of any tax withheld. Under the backup withholding rules,
a U.S. stockholder may be subject to backup withholding at
the current rate of 28% with respect to dividends paid unless
the holder (a) is a corporation or comes within other
exempt categories and, when required, demonstrates this fact or
(b) provides a taxpayer identification number or social
security number, certifies under penalties of perjury that such
number is correct and that such holder is not subject to backup
withholding and otherwise complies with applicable requirements
of the backup withholding rules. A U.S. stockholder that
does not provide his or her correct taxpayer identification
number or social security number may also be subject to
penalties imposed by the IRS. Backup withholding is not an
additional tax. In addition, we may be required to withhold a
portion of capital gain distributions to any
U.S. stockholder who fails to certify its non foreign
status.
We must report annually to the IRS and to each
non-U.S. stockholder
the amount of dividends paid to such holder and the tax withheld
with respect to such dividends, regardless of whether
withholding was required. Copies of the information returns
reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the
non-U.S. stockholder
resides under the
230
Federal income
tax considerations
provisions of an applicable income tax treaty. A
non-U.S. stockholder
may be subject to
back-up
withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of the common stock within the
United States is subject to both backup withholding and
information reporting unless the beneficial owner certifies
under penalties of perjury that it is a
non-U.S. stockholder
(and the payor does not have actual knowledge or reason to know
that the beneficial owner is a U.S. person) or the holder
otherwise establishes an exemption. Payment of the proceeds of a
sale of the common stock conducted through certain
U.S.-related
financial intermediaries is subject to information reporting
(but not backup withholding) unless the financial intermediary
has documentary evidence in its records that the beneficial
owner is a
non-U.S. stockholder
and specified conditions are met or an exemption is otherwise
established.
Any amounts withheld under the backup withholding rules may be
allowed as a refund or a credit against such holders
federal income tax liability provided the required information
is furnished to the IRS.
New legislation
relating to foreign accounts
Newly enacted legislation may impose withholding taxes on
certain types of payments made to foreign financial
institutions and certain other
non-U.S. entities.
Under this legislation, the failure to comply with additional
certification, information reporting and other specified
requirements could result in withholding tax being imposed on
payments of dividends and sales proceeds to
U.S. stockholders (as defined in the Registration
Statement) who own the shares through foreign accounts or
foreign intermediaries and certain
non-U.S. stockholders
(as defined in the Registration Statement). The legislation
imposes a 30% withholding tax on dividends on, and gross
proceeds from the sale or other disposition of, our common stock
paid to a foreign financial institution or to a foreign
non-financial entity, unless (i) the foreign financial
institution undertakes certain diligence and reporting
obligations or (ii) the foreign non-financial entity either
certifies it does not have any substantial United States owners
or furnishes identifying information regarding each substantial
United States owner. If the payee is a foreign financial
institution, it must enter into an agreement with the United
States Treasury requiring, among other things, that it undertake
to identify accounts held by certain United States persons or
United States-owned foreign entities, annually report certain
information about such accounts, and withhold 30% on payments to
account holders whose actions prevent it from complying with
these reporting and other requirements. The legislation would
apply to payments made after December 31, 2012.
OTHER TAX
CONSIDERATIONS
Legislative or
other actions affecting REITS
The rules dealing with federal income taxation are constantly
under review by persons involved in the legislative process and
by the IRS and the U.S. Treasury Department. No assurance
can be given as to whether, or in what form, the rules affecting
REITs or their stockholders will be enacted. Changes to the
federal tax laws and interpretations of federal tax laws could
adversely affect an investment in the common stock.
State, local and
foreign taxes
We and our subsidiaries and stockholders may be subject to
state, local or foreign taxation in various jurisdictions,
including those in which we or they transact business, own
property or reside. We own interests in properties located in a
number of jurisdictions, and may be required to file tax returns
in certain of those jurisdictions. The state, local or foreign
tax treatment of our company and our stockholders may not
conform to the federal income tax treatment discussed above. Any
foreign taxes incurred by us would not pass through to
stockholders as a credit against their federal income tax
liability. Prospective stockholders should consult their own tax
advisors regarding the application and effect of state, local
and foreign income and other tax laws on an investment in the
common stock.
231
A fiduciary of a pension, profit sharing, retirement or other
employee benefit plan, or plan, subject to the U.S. Employee
Retirement Income Security Act of 1974, as amended, or ERISA,
should consider the fiduciary standards under ERISA in the
context of the plans particular circumstances before
authorizing an investment of a portion of such plans
assets in the shares of common stock. Accordingly, such
fiduciary should consider (i) whether the investment
satisfies the diversification requirements of
Section 404(a)(1)(C) of ERISA, (ii) whether the
investment is in accordance with the documents and instruments
governing the plan as required by Section 404(a)(1)(D) of
ERISA, and (iii) whether the investment is prudent under
ERISA. In addition to the imposition of general fiduciary
standards of investment prudence and diversification, ERISA, and
the corresponding provisions of the Code, prohibit a wide range
of transactions involving the assets of the plan and persons who
have certain specified relationships to the plan (parties
in interest within the meaning of ERISA,
disqualified persons within the meaning of Code).
Thus, a plan fiduciary considering an investment in shares of
our common stock also should consider whether the acquisition or
the continued holding of the shares of common stock might
constitute or give rise to a direct or indirect prohibited
transaction that is not subject to an exemption issued by the
U.S. Department of Labor, or the DOL.
The DOL has issued final regulations, or the DOL Regulations, as
to what constitutes assets of an employee benefit plan under
ERISA. Under the DOL Regulations, if a plan acquires an equity
interest in an entity, which interest is neither a
publicly offered security nor a security issued by
an investment company registered under the 1940 Act as amended,
the plans assets would include, for purposes of the
fiduciary responsibility provision of ERISA, both the equity
interest and an undivided interest in each of the entitys
underlying assets unless certain specified exceptions apply. The
DOL Regulations define a publicly offered security as a security
that is widely held, freely
transferable, and either part of a class of securities
registered under the Exchange Act, or sold pursuant to an
effective registration statement under the Securities Act
(provided the securities are registered under the Exchange Act
within 120 days after the end of the fiscal year of the
issuer during which the public offering occurred). The shares of
common stock are being sold in an offering registered under the
Securities Act and will be registered under the Exchange Act.
The DOL Regulations provide that a security is widely
held only if it is part of a class of securities that is
owned by 100 or more investors independent of the issuer and of
one another. A security will not fail to be widely
held because the number of independent investors falls
below 100 subsequent to the initial public offering as a result
of events beyond the issuers control. We expect the common
stock to be widely held upon completion of the
initial public offering.
The DOL Regulations provide that whether a security is
freely transferable is a factual question to be
determined on the basis of all relevant facts and circumstances.
The DOL Regulations further provide that when a security is part
of an offering in which the minimum investment is $10,000 or
less, as is the case with this offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding
that such securities are freely transferable. We
believe that the restrictions imposed under our charter on the
ownership and transfer of our common stock are limited to the
restrictions on transfer generally permitted under the DOL
Regulations and are not likely to result in the failure of
common stock to be freely transferable. No assurance
can be given that the DOL will not reach a contrary conclusion.
Accordingly, we believe that our common stock will be publicly
offered securities for purposes of the DOL Regulations and that
our assets will not be deemed to be plan assets of
any plan that invests in our common stock.
Each holder of our common stock will be deemed to have
represented and agreed that its purchase and holding of such
common stock (or any interest therein) will not constitute or
result in a non-exempt prohibited transaction under ERISA or
Section 4975 of the Code.
232
We are offering the shares of our common stock described in this
prospectus through the underwriters named below. UBS Securities
LLC and J.P. Morgan Securities Inc. are the
representatives of the underwriters. We and our operating
partnership have entered into an underwriting agreement with the
representatives. Subject to the terms and conditions of the
underwriting agreement, each of the underwriters has severally
agreed to purchase the number of shares of common stock listed
next to its name in the following table:
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|
|
|
|
|
|
Number
|
|
Underwriters
|
|
of
shares
|
|
|
|
|
UBS Securities LLC
|
|
|
|
|
J.P. Morgan Securities Inc.
|
|
|
|
|
Deutsche Bank Securities Inc.
|
|
|
|
|
RBC Capital Markets Corporation
|
|
|
|
|
Robert W. Baird & Co. Incorporated
|
|
|
|
|
Stifel, Nicolaus & Company, Incorporated
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35,789,474
|
|
|
|
|
|
|
The underwriting agreement provides that the underwriters must
buy all of the shares if they buy any of them. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters over-allotment option
described below.
Our common stock is offered subject to a number of conditions,
including:
|
|
Ø
|
receipt and acceptance of the common stock by the
underwriters, and
|
|
Ø
|
the underwriters right to reject orders in whole or in
part.
|
We have been advised by the representatives that the
underwriters intend to make a market in our common stock but
that they are not obligated to do so and may discontinue making
a market at any time without notice.
In connection with this offering, certain of the underwriters or
securities dealers may distribute prospectuses electronically.
OVER-ALLOTMENT
OPTION
We have granted the underwriters an option to buy up to an
aggregate of 5,368,421 additional shares of our common stock.
The underwriters may exercise this option solely for the purpose
of covering over-allotments, if any, made in connection with
this offering. The underwriters have 30 days from the date
of this prospectus to exercise this option. If the underwriters
exercise this option, they will each purchase additional shares
approximately in proportion to the amounts specified in the
table above.
COMMISSIONS AND
DISCOUNTS
Shares sold by the underwriters to the public will initially be
offered at the offering price set forth on the cover of this
prospectus. Any shares sold by the underwriters to securities
dealers may be sold at a discount of up to
$ per share from the public
offering price. Any of these securities dealers may resell any
shares purchased from the underwriters to other brokers or
dealers at a discount of up to $
per share from the initial public offering price. Sales of
shares made outside of the United States may be made by
affiliates of the underwriters. If all the shares are not sold
at the initial public offering price, the representatives may
change the offering price and the other selling terms. Upon
execution of the underwriting agreement, the underwriters will
be obligated to purchase the shares at the prices and
233
Underwriting
upon the terms stated therein. The underwriters have informed us
that they do not expect discretionary sales to exceed 5% of the
shares of common stock to be offered.
The following table shows the per share and total underwriting
discounts and commissions we will pay to the underwriters,
assuming both no exercise and full exercise of the
underwriters option to purchase up to an additional
5,368,421 shares:
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|
|
|
|
|
|
|
|
|
No
exercise
|
|
|
Full
exercise
|
|
|
|
|
Per Share
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
|
|
|
|
|
|
|
We estimate that the total expenses of this offering payable by
us, not including the underwriting discounts and commissions,
will be approximately $10.3 million. The underwriters have
agreed to reimburse us for $10.0 million of certain of our
expenses.
DIRECTED SHARE
PROGRAM
At our request, certain of the underwriters have reserved up to
5% of the common stock being offered by this prospectus for sale
at the initial public offering price to our directors, officers,
employees and other individuals associated with us and members
of their families. The sales will be made by UBS Financial
Services Inc., a selected dealer affiliated with UBS Securities
LLC, through a directed share program. We do not know if these
persons will choose to purchase all or any portion of these
reserved shares, but any purchases they do make will reduce the
number of shares available to the general public. Participants
in the directed share program who purchase more than $100,000 of
shares shall be subject to a
180-day
lock-up with respect to any shares sold to them pursuant to that
program. This lock-up will have similar restrictions and an
identical extension provision to the
lock-up
agreements described below. Any shares sold in the directed
share program to our directors, executive officers or existing
security holders shall be subject to the
lock-up
agreements described below. See No Sales of Similar
Securities.
NO SALES OF
SIMILAR SECURITIES
We, our operating partnership, our executive officers and
directors and our existing security holders have entered into
lock-up
agreements with the underwriters. Under these agreements,
subject to certain exceptions, we and each of these persons may
not, without the prior written approval of UBS Securities LLC
(or, in the case of our executive officers and directors, both
UBS Securities LLC and J.P. Morgan Securities Inc.), offer,
sell, offer to sell, contract or agree to sell, hypothecate,
hedge, pledge, grant any option to purchase or otherwise dispose
of or agree to dispose of, directly or indirectly, any of our
common stock or any securities convertible into or exercisable
or exchangeable for our common stock, including, without
limitation, OP units, or warrants or other rights to purchase
our common stock. These restrictions will be in effect for a
period of one year after the date of the final prospectus
related to this offering. At any time and without public notice,
UBS Securities LLC (or, in the case of our executive officers
and directors, both UBS Securities LLC and J.P. Morgan
Securities Inc.) may in its (or their) sole discretion release
some or all of the securities from these
lock-up
agreements.
If:
|
|
Ø
|
during the period that begins on the date that is 15 calendar
days plus three business days before the last day of the
one-year lock up period and ends on the last day of the one-year
lock up period,
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-
|
we issue an earnings release; or
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|
|
-
|
material news or a material event relating to us occurs; or
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|
|
Ø
|
prior to the expiration of the one-year lock up period, we
announce that we will release earnings results during the
16-day
period beginning on the last day of the one-year lock up period,
|
234
Underwriting
then the one-year lock up period will be extended until the
expiration of the date that is 15 calendar days plus three
business days after the date on which the issuance of the
earnings release or the material news or material event occurs.
INDEMNIFICATION
AND CONTRIBUTION
We and our operating partnership have agreed to indemnify the
underwriters and their controlling persons against certain
liabilities, including liabilities under the Securities Act. If
we are unable to provide this indemnification, we will
contribute to payments the underwriters and their controlling
persons may be required to make in respect of those liabilities.
NEW YORK STOCK
EXCHANGE LISTING
Our common stock has been approved to be listed on the NYSE,
subject to official notice of issuance, under the trading symbol
WLS.
PRICE
STABILIZATION AND SHORT POSITIONS
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the
price of our common stock, including:
|
|
Ø
|
stabilizing transactions;
|
|
Ø
|
short sales;
|
|
Ø
|
purchases to cover positions created by short sales;
|
|
Ø
|
imposition of penalty bids; and
|
|
Ø
|
syndicate covering transactions.
|
Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or slowing a decline in the market
price of our common stock while this offering is in progress.
These transactions may also include making short sales of our
common stock, which involve the sale by the underwriters of a
greater number of shares of common stock than they are required
to purchase in this offering and purchasing shares of common
stock on the open market to cover positions created by short
sales. Short sales may be covered short sales, which
are short positions in an amount not greater than the
underwriters over-allotment option referred to above, or
may be naked short sales, which are short positions
in excess of that amount.
The underwriters may close out any covered short position either
by exercising their over-allotment option, in whole or in part,
or by purchasing shares in the open market. In making this
determination, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market compared to the price at which they may purchase shares
through the over-allotment option. The underwriters must close
out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market
that could adversely affect investors who purchased in this
offering.
The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of that underwriter in stabilizing or short covering
transactions.
As a result of these activities, the price of our common stock
may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. The underwriters
may carry out these transactions on the NYSE, in the
over-the-counter
market or otherwise.
235
Underwriting
DETERMINATION OF
OFFERING PRICE
Prior to this offering, there was no public market for our
common stock. The initial public offering price will be
determined by negotiation by us and the representatives of the
underwriters. The principal factors to be considered in
determining the initial public offering price include:
|
|
Ø
|
the information set forth in this prospectus and otherwise
available to the representatives;
|
|
Ø
|
our history and prospects and the history of, and prospects for,
the industry in which we compete;
|
|
Ø
|
our past and present financial performance and an assessment of
our management;
|
|
Ø
|
our prospects for future earnings and the present state of our
development;
|
|
Ø
|
the general condition of the securities markets at the time of
this offering;
|
|
Ø
|
the recent market prices of, and the demand for, publicly-traded
common stock of generally comparable companies; and
|
|
Ø
|
other factors deemed relevant by the underwriters and us.
|
AFFILIATIONS
Certain of the underwriters and their affiliates have in the
past provided and may from time to time provide certain
commercial banking, financial advisory, investment banking and
other services for us for which they were and will be entitled
to receive separate fees. For example, we have made arrangements
with an affiliate of J.P. Morgan Securities Inc., which is
one of the underwriters for this offering, for a syndicated
credit facility in the initial amount of $75 million, and
we expect that affiliates of certain of the other underwriters,
including UBS Securities LLC, Deutsche Bank Securities Inc. and
RBC Capital Markets Corporation, will also participate as
lenders under this credit facility and would be entitled to
receive customary fees in such capacity. In addition, an
affiliate of J.P. Morgan Securities Inc. is also the proposed
lender under a new loan that we expect to enter into in
connection with the acquisition of certain properties from our
acquisition portfolio.
The underwriters and their affiliates may from time to time in
the future engage in transactions with us and perform services
for us in the ordinary course of their business.
236
Notice to
prospective investors in the European Economic Area
In relation to each Member State of the European Economic Area,
or EEA, which has implemented the Prospectus Directive (each, a
Relevant Member State), with effect from, and
including, the date on which the Prospectus Directive is
implemented in that Relevant Member State (the Relevant
Implementation Date), an offer to the public of our
securities which are the subject of the offering contemplated by
this prospectus may not be made in that Relevant Member State,
except that, with effect from, and including, the Relevant
Implementation Date, an offer to the public in that Relevant
Member State of our securities may be made at any time under the
following exemptions under the Prospectus Directive, if they
have been implemented in that Relevant Member State:
a) to legal entities which are authorized or
regulated to operate in the financial markets, or, if not so
authorized or regulated, whose corporate purpose is solely to
invest in our securities;
b) to any legal entity which has two or more of:
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts; or
c) to fewer than 100 natural or legal persons (other
than qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the representative for
any such offer; or
d) in any other circumstances falling within
Article 3(2) of the Prospectus Directive provided that no
such offer of our securities shall result in a requirement for
the publication by us or any underwriter or agent of a
prospectus pursuant to Article 3 of the Prospectus
Directive.
As used above, the expression offered to the public
in relation to any of our securities in any Relevant Member
State means the communication in any form and by any means of
sufficient information on the terms of the offer and our
securities to be offered so as to enable an investor to decide
to purchase or subscribe for our securities, as the same may be
varied in that Member State by any measure implementing the
Prospectus Directive in that Member State and the expression
Prospectus Directive means Directive 2003/71/EC and
includes any relevant implementing measure in each Relevant
Member State.
The EEA selling restriction is in addition to any other selling
restrictions set out in this prospectus.
Notice to
prospective investors in the United Kingdom
This prospectus is only being distributed to and is only
directed at: (1) persons who are outside the United
Kingdom; (2) investment professionals falling within
Article 19(5) of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2005 (the Order); or
(3) high net worth companies, and other persons to whom it
may lawfully be communicated, falling within Article 49(2)(a) to
(d) of the Order (all such persons falling within (1)-(3)
together being referred to as relevant persons). The
shares are only available to, and any invitation, offer or
agreement to subscribe, purchase or otherwise acquire such
shares will be engaged in only with, relevant persons. Any
person who is not a relevant person should not act or rely on
this prospectus or any of its contents.
Notice to
prospective investors in Switzerland
This prospectus does not constitute an issue prospectus pursuant
to Article 652a or Article 1156 of the Swiss Code of Obligations
(CO) and the shares will not be listed on the SIX
Swiss Exchange. Therefore, the prospectus may not comply with
the disclosure standards of the CO and/or the listing rules
(including any prospectus schemes) of the SIX Swiss Exchange.
Accordingly, the shares may not be
237
Notice to
investors
offered to the public in or from Switzerland, but only to a
selected and limited circle of investors, which do not subscribe
to the shares with a view of distribution.
Notice to
prospective investors in Australia
This prospectus is not a formal disclosure document and has not
been, nor will be, lodged with the Australian Securities and
Investments Commission. It does not purport to contain all
information that an investor or their professional advisers
would expect to find in a prospectus or other disclosure
document (as defined in the Corporations Act 2001 (Australia))
for the purposes of Part 6D.2 of the Corporations Act 2001
(Australia) or in a product disclosure statement for the
purposes of Part 7.9 of the Corporations Act 2001
(Australia), in either case, in relation to the securities.
The securities are not being offered in Australia to
retail clients as defined in sections 761G and
761GA of the Corporations Act 2001 (Australia). This offering is
being made in Australia solely to wholesale clients
for the purposes of section 761G of the Corporations Act
2001 (Australia) and, as such, no prospectus, product disclosure
statement or other disclosure document in relation to the
securities has been, or will be, prepared.
This prospectus does not constitute an offer in Australia other
than to wholesale clients. By submitting an application for our
securities, you represent and warrant to us that you are a
wholesale client for the purposes of section 761G of the
Corporations Act 2001 (Australia). If any recipient of this
prospectus is not a wholesale client, no offer of, or invitation
to apply for, our securities shall be deemed to be made to such
recipient and no applications for our securities will be
accepted from such recipient. Any offer to a recipient in
Australia, and any agreement arising from acceptance of such
offer, is personal and may only be accepted by the recipient. In
addition, by applying for our securities you undertake to us
that, for a period of 12 months from the date of issue of
the securities, you will not transfer any interest in the
securities to any person in Australia other than to a wholesale
client.
Notice to
prospective investors in Hong Kong
Our securities may not be offered or sold in Hong Kong, by means
of this prospectus or any document other than (i) to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap.571, Laws of Hong Kong)
and any rules made thereunder, or (ii) in circumstances
which do not constitute an offer to the public within the
meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong),
or (iii) in other circumstances which do not result in the
document being a prospectus within the meaning of
the Companies Ordinance (Cap.32, Laws of Hong Kong). No
advertisement, invitation or document relating to our securities
may be issued or may be in the possession of any person for the
purpose of issue (in each case whether in Hong Kong or
elsewhere) which is directed at, or the contents of which are
likely to be accessed or read by, the public in Hong Kong
(except if permitted to do so under the securities laws of Hong
Kong) other than with respect to the securities which are or are
intended to be disposed of only to persons outside Hong Kong or
only to professional investors within the meaning of
the Securities and Futures Ordinance (Cap. 571, Laws of Hong
Kong) and any rules made thereunder.
Notice to
prospective investors in Japan
Our securities have not been and will not be registered under
the Financial Instruments and Exchange Law of Japan (the
Financial Instruments and Exchange Law) and our securities will
not be offered or sold, directly or indirectly, in Japan, or to,
or for the benefit of, any resident of Japan (which term as used
herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan),
or to others for re-offering or resale, directly or indirectly,
in Japan, or to a resident of Japan, except pursuant to an
exemption from the registration requirements of, and otherwise
238
Notice to
investors
in compliance with, the Financial Instruments and Exchange Law
and any other applicable laws, regulations and ministerial
guidelines of Japan.
Notice to
prospective investors in Singapore
This document has not been registered as a prospectus with the
Monetary Authority of Singapore and in Singapore, the offer and
sale of our securities is made pursuant to exemptions provided
in sections 274 and 275 of the Securities and Futures Act,
Chapter 289 of Singapore SFA). Accordingly,
this prospectus and any other document or material in connection
with the offer or sale, or invitation for subscription or
purchase, of our securities may not be circulated or
distributed, nor may our securities be offered or sold, or be
made the subject of an invitation for subscription or purchase,
whether directly or indirectly, to persons in Singapore other
than (i) to an institutional investor as defined in
Section 4A of the SFA pursuant to Section 274 of the SFA,
(ii) to a relevant person as defined in section 275(2) of
the SFA pursuant to Section 275(1) of the SFA, or any
person pursuant to Section 275(1A) of the SFA, and in
accordance with the conditions specified in Section 275, of
the SFA, or (iii) otherwise pursuant to, and in accordance
with the conditions of, any other applicable provision of the
SFA, in each case subject to compliance with the conditions (if
any) set forth in the SFA. Moreover, this document is not a
prospectus as defined in the SFA. Accordingly, statutory
liability under the SFA in relation to the content of
prospectuses would not apply. Prospective investors in Singapore
should consider carefully whether an investment in our
securities is suitable for them.
Where our securities are subscribed or purchased under
Section 275 of the SFA by a relevant person which is:
(a) by a corporation (which is not an accredited
investor (as defined in Section 4A of the SFA)) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or
(b) for a trust (where the trustee is not an
accredited investor) whose sole purpose is to hold investments
and each beneficiary of the trust is an individual who is an
accredited investor, shares of that corporation or the
beneficiaries rights and interest (howsoever described) in
that trust shall not be transferable for six months after that
corporation or that trust has acquired the shares under
Section 275 of the SFA, except:
(1) to an institutional investor (for corporations
under Section 274 of the SFA) or to a relevant person defined in
Section 275(2) of the SFA, or any person pursuant to an
offer that is made on terms that such shares of that corporation
or such rights and interest in that trust are acquired at a
consideration of not less than $200,000 (or its equivalent in a
foreign currency) for each transaction, whether such amount is
to be paid for in cash or by exchange of securities or other
assets, and further for corporations, in accordance with the
conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer;
or
(3) where the transfer is by operation of law.
In addition, investors in Singapore should note that the
securities acquired by them are subject to resale and transfer
restrictions specified under Section 276 of the SFA, and they,
therefore, should seek their own legal advice before effecting
any resale or transfer of their securities.
239
Certain matters in connection with this offering will be passed
upon for us by Briggs and Morgan, P.A., Minneapolis, Minnesota
and for the underwriters by Clifford Chance US LLP, New York,
New York. The validity of the common stock and certain matters
of Maryland and New York law will be passed upon for us by
Venable LLP, Baltimore, Maryland. Briggs and Morgan, P.A. and
Clifford Chance US LLP may rely as to certain matters of
Maryland law and New York law upon the opinion of Venable LLP.
The balance sheet of Welsh Property Trust, Inc., as of
January 31, 2010, included in this prospectus, has been
audited and reported upon by KPMG LLP, an independent registered
public accounting firm. The combined financial statements and
financial statement schedule III of the Welsh Predecessor
Companies, as of December 31, 2009 and 2008, and for each
of the years in the three-year period ended December 31,
2009, included in this prospectus, have been audited and
reported upon by KPMG LLP, an independent registered public
accounting firm. The financial information as of
December 31, 2009 and 2008, and for each of the years in
the three-year period ended December 31, 2009, in the table
of Selected Financial Data included in this
prospectus has been derived from the Welsh Predecessor Companies
financial statements audited by and reported upon by KPMG LLP.
The combined financial statements and financial statement
schedule III of the Welsh Contribution Companies, as of
December 31, 2009 and 2008, and for each of the years in
the three-year period ended December 31, 2009, included in
this prospectus, have been audited and reported upon by KPMG
LLP, an independent registered public accounting firm. The
consolidated financial statements of WelshCo, LLC and
subsidiaries, as of December 31, 2009, and for the year
ended December 31, 2009, included in this prospectus, have
been audited and reported upon by KPMG LLP, an independent
registered public accounting firm. Such financial statements,
schedules and financial data have been included in this
prospectus in reliance upon the reports of KPMG LLP, appearing
elsewhere in this prospectus, and upon the authority of said
firm as experts in accounting and auditing.
The statements of revenues and certain expenses of Columbus
portfolio, Denver/Lakeland portfolio, Kansas City property,
Memphis portfolio, Nashville property, Brookville/Tejon
portfolio and Eastern National Industrial portfolio for the year
ended December 31, 2009, included in this prospectus, have
been audited and reported upon by KPMG LLP, an independent
registered public accounting firm. Such financial statements
have been included in this prospectus in reliance upon the
reports of KPMG LLP, appearing elsewhere in this prospectus, and
upon the authority of said firm as experts in accounting and
auditing. KPMG LLPs reports refer to the fact that the
statements of revenues and certain expenses were prepared for
the purpose of complying with the rules and regulations of the
SEC and are not intended to be a complete presentation of
revenues and expenses.
The consolidated financial statements of WelshCo, LLC and
subsidiaries as of December 31, 2008 and for each of the
years in the two-year period ended December 31, 2008
included in this prospectus have been audited and reported upon
by Boulay, Heutmaker, Zibell & Co. P.L.L.P., independent
auditors. The financial statements of Intercen Partners, LLC as
of and for the year ended December 31, 2007 included in
this prospectus have been audited and reported upon by Boulay,
Heutmaker, Zibell & Co. P.L.L.P., independent auditors.
Such financial statements have been included in this prospectus
in reliance upon the reports of Boulay, Heutmaker, Zibell &
Co. P.L.L.P. appearing elsewhere in this prospectus and upon the
authority of said firm as experts in accounting and auditing.
240
We have filed with the SEC a registration statement on
Form S-11,
including exhibits and schedules filed with the registration
statement of which this prospectus is a part, under the
Securities Act with respect to the shares of our common stock to
be sold in the offering. This prospectus does not contain all of
the information set forth in the registration statement and
exhibits and schedules to the registration statement. For
further information with respect to our company and the shares
of our common stock to be sold in the offering, reference is
made to the registration statement, including the exhibits and
schedules to the registration statement. Copies of the
registration statement, including the exhibits and schedules to
the registration statement, may be examined without charge at
the public reference room of the SEC, 100 F Street,
N.E., Room 1580, Washington, DC 20549. Information about
the operation of the public reference room may be obtained by
calling the SEC at
1-800-SEC-0300.
Copies of all or a portion of the registration statement can be
obtained from the public reference room of the SEC upon payment
of prescribed fees. Our SEC filings, including our registration
statement, are also available to you on the SECs website
at www.sec.gov.
As a result of the offering, we will become subject to the
information and reporting requirements of the Exchange Act, and
will file periodic reports and proxy statements and will make
available to our stockholders annual reports containing audited
financial information for each year.
241
|
|
|
|
|
Welsh Property Trust, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
F-7
|
|
|
|
|
F-9
|
|
|
|
|
F-11
|
|
Historical Financial Statements:
|
|
|
|
|
|
|
|
F-42
|
|
|
|
|
F-43
|
|
|
|
|
F-44
|
|
|
|
|
|
|
Welsh Predecessor Companies:
|
|
|
|
|
|
|
|
F-46
|
|
|
|
|
F-47
|
|
|
|
|
F-48
|
|
|
|
|
F-49
|
|
|
|
|
F-50
|
|
|
|
|
F-52
|
|
|
|
|
F-70
|
|
|
|
|
F-73
|
|
|
|
|
|
|
Welsh Contribution Companies:
|
|
|
|
|
|
|
|
F-74
|
|
|
|
|
F-75
|
|
|
|
|
F-76
|
|
|
|
|
F-77
|
|
|
|
|
F-78
|
|
|
|
|
F-79
|
|
|
|
|
F-93
|
|
|
|
|
F-95
|
|
|
|
|
|
|
Significant Equity Method Investments of Welsh Predecessor
Companies:
|
|
|
|
|
WelshCo, LLC and Subsidiaries:
|
|
|
|
|
|
|
|
F-96
|
|
|
|
|
F-97
|
|
|
|
|
F-98
|
|
|
|
|
F-99
|
|
|
|
|
F-100
|
|
|
|
|
F-101
|
|
|
|
|
F-103
|
|
F-1
Welsh Property
Trust, Inc.
|
|
|
|
|
Intercen Partners, LLC:
|
|
|
|
|
|
|
|
F-110
|
|
|
|
|
F-111
|
|
|
|
|
F-112
|
|
|
|
|
F-113
|
|
|
|
|
F-114
|
|
|
|
|
|
|
Real Estate Operations to be Acquired:
|
|
|
|
|
Columbus Portfolio:
|
|
|
|
|
|
|
|
F-119
|
|
|
|
|
F-120
|
|
|
|
|
F-121
|
|
Denver/Lakeland Portfolio:
|
|
|
|
|
|
|
|
F-123
|
|
|
|
|
F-124
|
|
|
|
|
F-125
|
|
Kansas City Property:
|
|
|
|
|
|
|
|
F-127
|
|
|
|
|
F-128
|
|
|
|
|
F-129
|
|
Memphis Portfolio:
|
|
|
|
|
|
|
|
F-131
|
|
|
|
|
F-132
|
|
|
|
|
F-133
|
|
Nashville Property:
|
|
|
|
|
|
|
|
F-135
|
|
|
|
|
F-136
|
|
|
|
|
F-137
|
|
Brookville/Tejon Portfolio:
|
|
|
|
|
|
|
|
F-139
|
|
|
|
|
F-140
|
|
|
|
|
F-141
|
|
Eastern National Industrial Portfolio:
|
|
|
|
|
|
|
|
F-143
|
|
|
|
|
F-144
|
|
|
|
|
F-145
|
|
F-2
Welsh Property
Trust, Inc.
Unaudited pro forma
condensed consolidated financial information
The following unaudited pro forma condensed consolidated
financial information sets forth:
|
|
Ø
|
the historical financial information as of and for the three
months ended March 31, 2010 and for the year ended
December 31, 2009 as derived from the unaudited and audited
financial statements of Welsh Predecessor Companies and Welsh
Contribution Companies; and
|
|
Ø
|
pro forma adjustments assuming the formation transactions and
the initial public offering were completed as of March 31,
2010 for the purposes of the unaudited pro forma condensed
consolidated balance sheet and as of January 1, 2009 for
the purposes of the unaudited pro forma condensed consolidated
statements of operations.
|
The unaudited pro forma financial information has been adjusted
to give effect to:
|
|
Ø
|
the historical financial results of Welsh Predecessor Companies
(including the accounting acquirer) for the three months ended
March 31, 2010 and for the year ended December 31,
2009;
|
|
|
Ø
|
the contribution of Welsh Contribution Companies for units of
the limited partnership interests (OP units) in
Welsh Property Trust, L.P. (the operating
partnership) and cash;
|
|
|
Ø
|
as of March 31, 2010 and for the three months ended
March 31, 2010 and the year ended December 31, 2009,
the probable 2010 acquisition of real estate interests in the
Columbus portfolio (as defined below) for cash, the Memphis
portfolio (as defined below) for cash and the issuance of debt,
the Nashville property (as defined below) for cash, the Kansas
City property (as defined below) for OP units and the assumption
of debt, the Denver/Lakeland portfolio (as defined below) for
cash and OP units, the Brookville/Tejon portfolio (as defined
below) for cash and OP units, the Eastern National Industrial
portfolio (as defined below) for cash, the Charlotte portfolio
(as defined below) for cash, the Winston-Salem property (as
defined below) for cash, the Wisconsin portfolio (as defined
below) for cash, the Milwaukee property (as defined below) for
cash, the Aurora property (as defined below) for cash and the
assumption of debt, the Minneapolis property (as defined below)
for OP units and the assumption of debt, and the Mattawoman
property (as defined below) for cash;
|
|
|
Ø
|
the incremental general and administrative expenses expected to
be incurred to operate as a public company;
|
|
Ø
|
the annualization adjustment of properties acquired by the Welsh
Predecessor Companies during 2009 and 2010 to reflect full year
results as if these properties were acquired on January 1,
2009 for the unaudited pro forma condensed consolidated
statement of operations for the year ended December 31,
2009; and
|
|
Ø
|
the completion of the formation transactions and the initial
public offering of the Company (as defined below), repayment or
reissuance of indebtedness and other use of proceeds from the
offering.
|
The pro forma financial information includes adjustments
relating to acquisitions only when it is probable that the
Company will acquire the properties.
F-3
Welsh Property
Trust, Inc.
You should read the information below along with all other
financial information and analysis presented in this prospectus,
including the sections captioned Managements
Discussion and Analysis of Financial Condition and Results of
Operations; the Welsh Property Trust, Inc., Welsh
Predecessor Companies, and Welsh Contribution Companies combined
historical financial statements and related notes; and the
Columbus portfolio, Kansas City property, Memphis portfolio,
Nashville property, Denver/Lakeland portfolio, Brookville/Tejon
portfolio, and Eastern National Industrial portfolio statements
of revenue and certain expenses and related notes included
elsewhere in this prospectus. The unaudited pro forma condensed
consolidated financial statements are not necessarily indicative
of the actual financial position as of March 31, 2010 or
what the actual results of operations of the Company would have
been assuming the offering and formation transactions had been
completed as of January 1, 2009, nor are they indicative of
the results of operations of future periods. The unaudited pro
forma adjustments and eliminations are based on available
information and upon assumptions the Company believes are
reasonable.
F-4
Welsh Property
Trust, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
|
|
|
|
Welsh
|
|
|
|
|
|
Contribution
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
of
|
|
|
of Eastern
|
|
|
Acquisition
|
|
|
|
Property
|
|
|
Welsh
|
|
|
of Welsh
|
|
|
of
|
|
|
of
|
|
|
of
|
|
|
of Denver/
|
|
|
Brookville/
|
|
|
National
|
|
|
of
|
|
|
|
Trust,
|
|
|
Predecessor
|
|
|
Contribution
|
|
|
Columbus
|
|
|
Memphis
|
|
|
Nashville
|
|
|
Lakeland
|
|
|
Tejon
|
|
|
Industrial
|
|
|
Charlotte
|
|
As of
March 31, 2010
|
|
Inc
|
|
|
Companies
|
|
|
Companies
|
|
|
portfolio
|
|
|
portfolio
|
|
|
property
|
|
|
portfolio
|
|
|
portfolio
|
|
|
portfolio
|
|
|
portfolio
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Assets
|
|
|
|
|
|
|
(B) (G)
|
|
|
|
(C
|
)
|
|
|
(F
|
)
|
|
|
(I
|
)
|
|
|
(J
|
)
|
|
|
(K
|
)
|
|
|
(L
|
)
|
|
|
(M
|
)
|
|
|
(N
|
)
|
Net real estate investments
|
|
$
|
|
|
|
$
|
224,513
|
|
|
$
|
177,838
|
|
|
$
|
17,542
|
|
|
$
|
17,776
|
|
|
$
|
8,973
|
|
|
$
|
16,798
|
|
|
$
|
56,613
|
|
|
$
|
52,991
|
|
|
$
|
30,168
|
|
Cash, cash equivalents and restricted cash
|
|
|
1
|
|
|
|
6,213
|
|
|
|
10,335
|
|
|
|
(22,300
|
)
|
|
|
(20,729
|
)
|
|
|
(11,263
|
)
|
|
|
(21,227
|
)
|
|
|
(67,403
|
)
|
|
|
(58,734
|
)
|
|
|
(35,101
|
)
|
Accounts receivable, net
|
|
|
|
|
|
|
1,608
|
|
|
|
9,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity method investments
|
|
|
|
|
|
|
10,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
|
|
|
|
|
16,926
|
|
|
|
43,253
|
|
|
|
4,758
|
|
|
|
2,908
|
|
|
|
2,227
|
|
|
|
4,990
|
|
|
|
13,186
|
|
|
|
5,212
|
|
|
|
4,978
|
|
Other assets
|
|
|
|
|
|
|
4,767
|
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1
|
|
|
$
|
264,307
|
|
|
$
|
242,221
|
|
|
$
|
|
|
|
$
|
(45
|
)
|
|
$
|
(63
|
)
|
|
$
|
561
|
|
|
$
|
2,396
|
|
|
$
|
(531
|
)
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and notes payable
|
|
$
|
|
|
|
$
|
229,496
|
|
|
$
|
172,071
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Accounts payable and other liabilities
|
|
|
|
|
|
|
5,730
|
|
|
|
17,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market lease intangibles
|
|
|
|
|
|
|
1,621
|
|
|
|
2,010
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
1,334
|
|
|
|
28
|
|
|
|
146
|
|
Losses and distributions in excess of contributions to equity
method investments
|
|
|
|
|
|
|
8,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
|
|
|
|
245,134
|
|
|
|
191,206
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
140
|
|
|
|
1,334
|
|
|
|
28
|
|
|
|
146
|
|
Owners/Stockholders equity (deficit)
|
|
|
1
|
|
|
|
19,173
|
|
|
|
51,015
|
|
|
|
|
|
|
|
(79
|
)
|
|
|
(63
|
)
|
|
|
(1,457
|
)
|
|
|
(183
|
)
|
|
|
(559
|
)
|
|
|
(101
|
)
|
Noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,878
|
|
|
|
1,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
1
|
|
|
$
|
264,307
|
|
|
$
|
242,221
|
|
|
$
|
|
|
|
$
|
(45
|
)
|
|
$
|
(63
|
)
|
|
$
|
561
|
|
|
$
|
2,396
|
|
|
$
|
(531
|
)
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed
consolidated financial statements
F-5
Welsh Property
Trust, Inc.
Unaudited pro forma
condensed consolidated balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winston-
|
|
|
of
|
|
|
of
|
|
|
Acquisition
|
|
|
of
|
|
|
of
|
|
|
|
|
|
|
|
|
Other pro
|
|
|
|
|
|
|
Salem
|
|
|
Wisconsin
|
|
|
Milwaukee
|
|
|
of Aurora
|
|
|
Minneapolis
|
|
|
Mattawoman
|
|
|
|
|
|
|
|
|
forma
|
|
|
Pro
|
|
As of
March 31, 2010
|
|
property
|
|
|
portfolio
|
|
|
property
|
|
|
property
|
|
|
property
|
|
|
property
|
|
|
Subtotal
|
|
|
|
|
|
adjustments
|
|
|
forma
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Assets
|
|
|
(O
|
)
|
|
|
(P
|
)
|
|
|
(Q
|
)
|
|
|
(R
|
)
|
|
|
(S
|
)
|
|
|
(T
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net real estate investments
|
|
$
|
23,834
|
|
|
$
|
17,605
|
|
|
$
|
6,906
|
|
|
$
|
4,399
|
|
|
$
|
3,040
|
|
|
$
|
8,162
|
|
|
$
|
667,158
|
|
|
|
|
|
|
$
|
|
|
|
$
|
667,158
|
|
Cash, cash equivalents and restricted cash
|
|
|
(26,850
|
)
|
|
|
(25,455
|
)
|
|
|
(8,056
|
)
|
|
|
(1,853
|
)
|
|
|
(91
|
)
|
|
|
(11,047
|
)
|
|
|
(293,560
|
)
|
|
|
(A
|
)
|
|
|
315,372
|
|
|
|
34,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B
|
)
|
|
|
(973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(E
|
)
|
|
|
(41,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(E
|
)
|
|
|
(2,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(E
|
)
|
|
|
57,481
|
|
|
|
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,643
|
|
|
|
(D
|
)
|
|
|
(136
|
)
|
|
|
10,507
|
|
Equity method investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,280
|
|
|
|
(D
|
)
|
|
|
(7,226
|
)
|
|
|
3,054
|
|
Intangibles, net
|
|
|
6,066
|
|
|
|
7,819
|
|
|
|
1,119
|
|
|
|
851
|
|
|
|
241
|
|
|
|
3,161
|
|
|
|
117,695
|
|
|
|
(E
|
)
|
|
|
299
|
|
|
|
117,994
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,527
|
|
|
|
(A
|
)
|
|
|
(2,071
|
)
|
|
|
1,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A
|
)
|
|
|
(2,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
3,050
|
|
|
$
|
(31
|
)
|
|
$
|
(31
|
)
|
|
$
|
3,397
|
|
|
$
|
3,190
|
|
|
$
|
276
|
|
|
$
|
518,743
|
|
|
|
|
|
|
$
|
315,618
|
|
|
$
|
834,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and notes payable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,413
|
|
|
$
|
2,792
|
|
|
$
|
|
|
|
$
|
407,772
|
|
|
|
(D
|
)
|
|
$
|
(6,923
|
)
|
|
$
|
416,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(E
|
)
|
|
|
(41,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(E
|
)
|
|
|
57,780
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
|
3,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,118
|
|
|
|
(A
|
)
|
|
|
(3,274
|
)
|
|
|
19,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A
|
)
|
|
|
(2,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(D
|
)
|
|
|
(66
|
)
|
|
|
|
|
Below market lease intangibles
|
|
|
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
323
|
|
|
|
5,644
|
|
|
|
|
|
|
|
|
|
|
|
5,644
|
|
Losses and distributions in excess of contributions to equity
method investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,287
|
|
|
|
(D
|
)
|
|
|
(8,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,123
|
|
|
|
124
|
|
|
|
|
|
|
|
3,413
|
|
|
|
2,816
|
|
|
|
323
|
|
|
|
447,821
|
|
|
|
|
|
|
|
(5,609
|
)
|
|
|
442,212
|
|
Owners/Stockholders equity (deficit)
|
|
|
(73
|
)
|
|
|
(155
|
)
|
|
|
(31
|
)
|
|
|
(16
|
)
|
|
|
(37
|
)
|
|
|
(47
|
)
|
|
|
67,388
|
|
|
|
(A
|
)
|
|
|
316,575
|
|
|
|
312,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(E
|
)
|
|
|
(2,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(H
|
)
|
|
|
(69,215
|
)
|
|
|
|
|
Noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
411
|
|
|
|
|
|
|
|
3,534
|
|
|
|
(D
|
)
|
|
|
7,914
|
|
|
|
79,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B
|
)
|
|
|
(973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(H
|
)
|
|
|
69,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
3,050
|
|
|
$
|
(31
|
)
|
|
$
|
(31
|
)
|
|
$
|
3,397
|
|
|
$
|
3,190
|
|
|
$
|
276
|
|
|
$
|
518,743
|
|
|
|
|
|
|
$
|
315,618
|
|
|
$
|
834,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed
consolidated financial statements
F-6
Welsh Property
Trust, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
of
|
|
|
of Eastern
|
|
|
|
|
|
|
|
|
|
Welsh
|
|
|
of Welsh
|
|
|
of
|
|
|
of
|
|
|
of
|
|
|
of Denver/
|
|
|
Brookville/
|
|
|
National
|
|
|
Acquisition
|
|
|
|
|
|
|
Predecessor
|
|
|
Contribution
|
|
|
Columbus
|
|
|
Memphis
|
|
|
Nashville
|
|
|
Lakeland
|
|
|
Tejon
|
|
|
Industrial
|
|
|
of Charlotte
|
|
|
|
|
For the three
months ended March 31, 2010
|
|
Companies
|
|
|
Companies
|
|
|
portfolio
|
|
|
portfolio
|
|
|
property
|
|
|
portfolio
|
|
|
portfolio
|
|
|
portfolio
|
|
|
portfolio
|
|
|
|
|
|
|
|
|
(dollars in
thousands, except for per share data)
|
|
|
Revenue
|
|
|
(AA
|
)
|
|
|
(BB
|
)
|
|
|
(HH
|
)
|
|
|
(NN
|
)
|
|
|
(OO
|
)
|
|
|
(PP
|
)
|
|
|
(QQ
|
)
|
|
|
(RR
|
)
|
|
|
(SS
|
)
|
|
|
|
|
Rental and related revenue
|
|
$
|
7,938
|
|
|
$
|
8,325
|
|
|
$
|
688
|
|
|
$
|
786
|
|
|
$
|
322
|
|
|
$
|
685
|
|
|
$
|
1,724
|
|
|
$
|
1,421
|
|
|
$
|
1,253
|
|
|
|
|
|
Construction and service fee revenue
|
|
|
|
|
|
|
9,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
7,938
|
|
|
|
18,102
|
|
|
|
688
|
|
|
|
786
|
|
|
|
322
|
|
|
|
685
|
|
|
|
1,724
|
|
|
|
1,421
|
|
|
|
1,253
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations (including real estate taxes)
|
|
|
3,522
|
|
|
|
3,608
|
|
|
|
154
|
|
|
|
265
|
|
|
|
44
|
|
|
|
143
|
|
|
|
169
|
|
|
|
299
|
|
|
|
351
|
|
|
|
|
|
Cost of construction and service fee revenue
|
|
|
|
|
|
|
7,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,618
|
|
|
|
2,617
|
|
|
|
169
|
|
|
|
222
|
|
|
|
151
|
|
|
|
296
|
|
|
|
418
|
|
|
|
609
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
6,140
|
|
|
|
14,151
|
|
|
|
323
|
|
|
|
487
|
|
|
|
195
|
|
|
|
439
|
|
|
|
587
|
|
|
|
908
|
|
|
|
695
|
|
|
|
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net (income) loss from equity method investments
|
|
|
1,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
285
|
|
|
|
5,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
1,608
|
|
|
|
5,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
190
|
|
|
|
(1,379
|
)
|
|
|
365
|
|
|
|
299
|
|
|
|
127
|
|
|
|
246
|
|
|
|
1,137
|
|
|
|
513
|
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, net
|
|
|
(3,132
|
)
|
|
|
(1,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(2,942
|
)
|
|
|
(3,318
|
)
|
|
|
365
|
|
|
|
299
|
|
|
|
127
|
|
|
|
246
|
|
|
|
1,137
|
|
|
|
513
|
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(2,942
|
)
|
|
$
|
(3,318
|
)
|
|
$
|
365
|
|
|
$
|
299
|
|
|
$
|
127
|
|
|
$
|
246
|
|
|
$
|
1,137
|
|
|
$
|
513
|
|
|
$
|
558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to Welsh Property Trust, Inc.
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares outstanding basic
and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed
consolidated financial statements
F-7
Welsh Property
Trust, Inc.
Unaudited pro forma
condensed consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Winston-
|
|
|
of
|
|
|
of
|
|
|
Acquisition
|
|
|
of
|
|
|
of
|
|
|
|
|
|
|
|
|
Other pro
|
|
|
|
|
|
|
Salem
|
|
|
Wisconsin
|
|
|
Milwaukee
|
|
|
of Aurora
|
|
|
Minneapolis
|
|
|
Mattawoman
|
|
|
|
|
|
|
|
|
forma
|
|
|
Pro
|
|
For the three
months ended March 31, 2010
|
|
property
|
|
|
portfolio
|
|
|
property
|
|
|
property
|
|
|
property
|
|
|
property
|
|
|
Subtotal
|
|
|
|
|
|
adjustments
|
|
|
forma
|
|
|
|
|
|
(dollars in
thousands, except for per share data)
|
|
|
Revenue
|
|
|
(TT
|
)
|
|
|
(UU
|
)
|
|
|
(VV
|
)
|
|
|
(WW
|
)
|
|
|
(XX
|
)
|
|
|
(ZZ
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
805
|
|
|
$
|
747
|
|
|
$
|
247
|
|
|
$
|
171
|
|
|
$
|
106
|
|
|
$
|
324
|
|
|
$
|
25,542
|
|
|
|
(EE
|
)
|
|
$
|
(102
|
)
|
|
$
|
25,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(KK
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(II
|
)
|
|
|
332
|
|
|
|
|
|
Construction and service fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,777
|
|
|
|
(KK
|
)
|
|
|
(871
|
)
|
|
|
8,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
805
|
|
|
|
747
|
|
|
|
247
|
|
|
|
171
|
|
|
|
106
|
|
|
|
324
|
|
|
|
35,319
|
|
|
|
|
|
|
|
(813
|
)
|
|
|
34,506
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations (including real estate taxes)
|
|
|
82
|
|
|
|
105
|
|
|
|
76
|
|
|
|
51
|
|
|
|
48
|
|
|
|
79
|
|
|
|
8,996
|
|
|
|
(KK
|
)
|
|
|
(167
|
)
|
|
|
8,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(II
|
)
|
|
|
72
|
|
|
|
|
|
Cost of construction and service fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,926
|
|
|
|
(KK
|
)
|
|
|
(514
|
)
|
|
|
7,412
|
|
Depreciation and amortization
|
|
|
264
|
|
|
|
252
|
|
|
|
70
|
|
|
|
67
|
|
|
|
43
|
|
|
|
145
|
|
|
|
8,285
|
|
|
|
(KK
|
)
|
|
|
(56
|
)
|
|
|
7,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(EE
|
)
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(II
|
)
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
346
|
|
|
|
357
|
|
|
|
146
|
|
|
|
118
|
|
|
|
91
|
|
|
|
224
|
|
|
|
25,207
|
|
|
|
|
|
|
|
(957
|
)
|
|
|
24,250
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net (income) loss from equity method investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,323
|
|
|
|
(CC
|
)
|
|
|
(1,422
|
)
|
|
|
(99
|
)
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,615
|
|
|
|
(DD
|
)
|
|
|
638
|
|
|
|
3,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(JJ
|
)
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(KK
|
)
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(MM
|
)
|
|
|
(2,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,938
|
|
|
|
|
|
|
|
(3,940
|
)
|
|
|
2,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
459
|
|
|
|
390
|
|
|
|
101
|
|
|
|
53
|
|
|
|
15
|
|
|
|
100
|
|
|
|
3,174
|
|
|
|
|
|
|
|
4,084
|
|
|
|
7,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
(5,169
|
)
|
|
|
(CC
|
)
|
|
|
111
|
|
|
|
(5,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(CC
|
)
|
|
|
(885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(KK
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
459
|
|
|
|
390
|
|
|
|
101
|
|
|
|
(1
|
)
|
|
|
(29
|
)
|
|
|
100
|
|
|
|
(1,995
|
)
|
|
|
|
|
|
|
3,322
|
|
|
|
1,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
459
|
|
|
$
|
390
|
|
|
$
|
101
|
|
|
$
|
(1
|
)
|
|
$
|
(29
|
)
|
|
$
|
100
|
|
|
$
|
(1,995
|
)
|
|
|
|
|
|
$
|
3,322
|
|
|
$
|
1,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(FF
|
)
|
|
|
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to Welsh Property Trust, Inc.
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(FF
|
)
|
|
|
|
|
|
$
|
1,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic/Pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(GG
|
)
|
|
|
|
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(GG
|
)
|
|
|
|
|
|
|
|
|
Diluted pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(GG
|
)
|
|
|
|
|
|
|
0.03
|
|
Pro forma weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(GG
|
)
|
|
|
|
|
|
|
35,807
|
|
Pro forma weighted average number of common shares and potential
dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(GG
|
)
|
|
|
|
|
|
|
43,389
|
|
See accompanying notes to unaudited pro forma condensed
consolidated financial statements
F-8
Welsh Property
Trust, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
Acquisition of
|
|
|
Acquisition of
|
|
|
of Eastern
|
|
|
Acquisition
|
|
|
|
|
|
|
Welsh
|
|
|
Welsh
|
|
|
of
|
|
|
of Kansas
|
|
|
of
|
|
|
of
|
|
|
Denver/
|
|
|
Brookville/
|
|
|
National
|
|
|
of
|
|
|
|
|
|
|
Predecessor
|
|
|
Contribution
|
|
|
Columbus
|
|
|
City
|
|
|
Memphis
|
|
|
Nashville
|
|
|
Lakeland
|
|
|
Tejon
|
|
|
Industrial
|
|
|
Charlotte
|
|
|
|
|
For the year
ended December 31, 2009
|
|
Companies
|
|
|
Companies
|
|
|
portfolio
|
|
|
property
|
|
|
portfolio
|
|
|
property
|
|
|
portfolio
|
|
|
portfolio
|
|
|
portfolio
|
|
|
portfolio
|
|
|
|
|
|
|
|
|
(dollars in
thousands, except for per share data)
|
|
|
Revenue
|
|
|
(AA
|
)
|
|
|
(BB
|
)
|
|
|
(HH
|
)
|
|
|
(II
|
)
|
|
|
(NN
|
)
|
|
|
(OO
|
)
|
|
|
(PP
|
)
|
|
|
(QQ
|
)
|
|
|
(RR
|
)
|
|
|
(SS
|
)
|
|
|
|
|
Rental and related revenue
|
|
$
|
29,247
|
|
|
$
|
33,283
|
|
|
$
|
2,655
|
|
|
$
|
1,805
|
|
|
$
|
3,174
|
|
|
$
|
1,286
|
|
|
$
|
2,731
|
|
|
$
|
6,480
|
|
|
$
|
5,576
|
|
|
$
|
4,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and service fee revenue
|
|
|
|
|
|
|
57,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
29,247
|
|
|
|
91,038
|
|
|
|
2,655
|
|
|
|
1,805
|
|
|
|
3,174
|
|
|
|
1,286
|
|
|
|
2,731
|
|
|
|
6,480
|
|
|
|
5,576
|
|
|
|
4,522
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations (including real estate taxes)
|
|
|
13,721
|
|
|
|
14,436
|
|
|
|
552
|
|
|
|
344
|
|
|
|
1,051
|
|
|
|
176
|
|
|
|
571
|
|
|
|
512
|
|
|
|
1,116
|
|
|
|
1,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of construction and service fee revenue
|
|
|
|
|
|
|
47,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,391
|
|
|
|
9,869
|
|
|
|
674
|
|
|
|
562
|
|
|
|
905
|
|
|
|
606
|
|
|
|
1,185
|
|
|
|
1,667
|
|
|
|
2,659
|
|
|
|
1,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
24,112
|
|
|
|
71,754
|
|
|
|
1,226
|
|
|
|
906
|
|
|
|
1,956
|
|
|
|
782
|
|
|
|
1,756
|
|
|
|
2,179
|
|
|
|
3,775
|
|
|
|
2,745
|
|
|
|
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net loss of equity method investments
|
|
|
1,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges
|
|
|
6,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
22
|
|
|
|
10,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
7,706
|
|
|
|
10,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(2,571
|
)
|
|
|
8,334
|
|
|
|
1,429
|
|
|
|
899
|
|
|
|
1,218
|
|
|
|
504
|
|
|
|
975
|
|
|
|
4,301
|
|
|
|
1,801
|
|
|
|
1,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, net
|
|
|
(12,516
|
)
|
|
|
(8,173
|
)
|
|
|
|
|
|
|
(403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
(15,087
|
)
|
|
|
161
|
|
|
|
1,429
|
|
|
|
496
|
|
|
|
1,218
|
|
|
|
504
|
|
|
|
975
|
|
|
|
4,301
|
|
|
|
1,801
|
|
|
|
1,777
|
|
|
|
|
|
Net Income from Discontinued Operations
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(13,168
|
)
|
|
$
|
161
|
|
|
$
|
1,429
|
|
|
$
|
496
|
|
|
$
|
1,218
|
|
|
$
|
504
|
|
|
$
|
975
|
|
|
$
|
4,301
|
|
|
$
|
1,801
|
|
|
$
|
1,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to Welsh Property Trust, Inc.
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares outstanding basic
and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma condensed
consolidated financial statements
F-9
Welsh Property
Trust, Inc.
Unaudited pro forma
condensed consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winston-
|
|
|
of
|
|
|
of
|
|
|
Acquisition
|
|
|
of
|
|
|
of
|
|
|
|
|
|
|
|
|
Other pro
|
|
|
|
|
|
|
Salem
|
|
|
Wisconsin
|
|
|
Milwaukee
|
|
|
of Aurora
|
|
|
Minneapolis
|
|
|
Mattawoman
|
|
|
|
|
|
|
|
|
forma
|
|
|
Pro
|
|
For the year
ended December 31, 2009
|
|
property
|
|
|
portfolio
|
|
|
property
|
|
|
property
|
|
|
property
|
|
|
property
|
|
|
Subtotal
|
|
|
|
|
|
adjustments
|
|
|
forma
|
|
|
|
|
|
(dollars in
thousands, except for per share data)
|
|
|
Revenue
|
|
|
(TT
|
)
|
|
|
(UU
|
)
|
|
|
(VV
|
)
|
|
|
(WW
|
)
|
|
|
(XX
|
)
|
|
|
(ZZ
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
3,218
|
|
|
$
|
2,988
|
|
|
$
|
925
|
|
|
$
|
723
|
|
|
$
|
426
|
|
|
$
|
227
|
|
|
$
|
99,266
|
|
|
|
(EE
|
)
|
|
$
|
631
|
|
|
$
|
100,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(KK
|
)
|
|
|
(624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(YY
|
)
|
|
|
918
|
|
|
|
|
|
Construction and service fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,755
|
|
|
|
(KK
|
)
|
|
|
(3,083
|
)
|
|
|
54,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
3,218
|
|
|
|
2,988
|
|
|
|
925
|
|
|
|
723
|
|
|
|
426
|
|
|
|
227
|
|
|
|
157,021
|
|
|
|
|
|
|
|
(2,158
|
)
|
|
|
154,863
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations (including real estate taxes)
|
|
|
323
|
|
|
|
410
|
|
|
|
270
|
|
|
|
210
|
|
|
|
168
|
|
|
|
379
|
|
|
|
35,609
|
|
|
|
(KK
|
)
|
|
|
(332
|
)
|
|
|
35,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(YY
|
)
|
|
|
209
|
|
|
|
|
|
Cost of construction and service fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,449
|
|
|
|
(KK
|
)
|
|
|
(2,245
|
)
|
|
|
45,204
|
|
Depreciation and amortization
|
|
|
1,055
|
|
|
|
1,007
|
|
|
|
281
|
|
|
|
267
|
|
|
|
169
|
|
|
|
575
|
|
|
|
33,247
|
|
|
|
(KK
|
)
|
|
|
(137
|
)
|
|
|
32,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(EE
|
)
|
|
|
(506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(YY
|
)
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
1,378
|
|
|
|
1,417
|
|
|
|
551
|
|
|
|
477
|
|
|
|
337
|
|
|
|
954
|
|
|
|
116,305
|
|
|
|
|
|
|
|
(2,666
|
)
|
|
|
113,639
|
|
Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net loss of equity method investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,252
|
|
|
|
(CC
|
)
|
|
|
(920
|
)
|
|
|
332
|
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,432
|
|
|
|
|
|
|
|
|
|
|
|
6,432
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,972
|
|
|
|
(DD
|
)
|
|
|
2,550
|
|
|
|
10,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(JJ
|
)
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(KK
|
)
|
|
|
(935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(MM
|
)
|
|
|
(1,987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,656
|
|
|
|
|
|
|
|
(1,024
|
)
|
|
|
17,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
1,840
|
|
|
|
1,571
|
|
|
|
374
|
|
|
|
246
|
|
|
|
89
|
|
|
|
(727
|
)
|
|
|
22,060
|
|
|
|
|
|
|
|
1,532
|
|
|
|
23,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(220
|
)
|
|
|
(161
|
)
|
|
|
|
|
|
|
(21,473
|
)
|
|
|
(CC
|
)
|
|
|
931
|
|
|
|
(24,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(CC
|
)
|
|
|
(3,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(KK
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(YY
|
)
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
|
1,840
|
|
|
|
1,571
|
|
|
|
374
|
|
|
|
26
|
|
|
|
(72
|
)
|
|
|
(727
|
)
|
|
|
587
|
|
|
|
|
|
|
|
(1,247
|
)
|
|
|
(660
|
)
|
Net Income from Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,919
|
|
|
|
(LL
|
)
|
|
|
(1,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
1,840
|
|
|
$
|
1,571
|
|
|
$
|
374
|
|
|
$
|
26
|
|
|
$
|
(72
|
)
|
|
$
|
(727
|
)
|
|
$
|
2,506
|
|
|
|
|
|
|
$
|
(3,166
|
)
|
|
$
|
(660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(FF
|
)
|
|
|
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) allocated to Welsh Property Trust, Inc.
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(FF
|
)
|
|
|
|
|
|
$
|
(545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic/Pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(GG
|
)
|
|
|
|
|
|
$
|
(0.02
|
)
|
Diluted pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(GG
|
)
|
|
|
|
|
|
|
(0.02
|
)
|
Pro forma weighted average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(GG
|
)
|
|
|
|
|
|
|
35,807
|
|
Pro forma weighted average number of common shares and potential
dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(GG
|
)
|
|
|
|
|
|
|
43,389
|
|
See accompanying notes to unaudited pro forma condensed
consolidated financial statements
F-10
Welsh Property
Trust, Inc
Welsh Property Trust, Inc. (the Company) was
organized in Maryland on December 18, 2009 to continue and
expand the
32-year
old
Welsh organization, which acquires, owns, operates and manages
industrial and office properties primarily across the United
States and provides real estate services to commercial property
owners in central U.S. markets. The Company is a
combination of certain real estate entities owned by Dennis J.
Doyle and certain others who have minor ownership in Welsh
Predecessor Companies and other contributed real estate
entities. The Company has not had any corporate activity since
its formation, other than the issuance of 100 shares of its
common stock each to Dennis J. Doyle, Scott T. Frederiksen and
Jean V. Kane in connection with the initial capitalization of
the Company.
The Company has filed a Registration Statement on
Form S-11
with the Securities and Exchange Commission with respect to an
initial public offering of 35,789 shares of common stock
(not including shares included in the underwriters
over-allotment option) or $340,000 of equity at $9.50 per share.
The Company will contribute the proceeds of the offering to the
operating partnership for OP units. The Company will also own
100% of Welsh Property Trust, LLC, a Delaware limited liability
company that will be the sole general partner of the operating
partnership and as the managing general partner of the operating
partnership and so will have responsibility and discretion in
the management and control of the operating partnership. The
Company will consolidate the operating partnership in its
financial statements.
The operations of the Company will be carried on primarily
through the operating partnership. It is the intent of the
Company to elect and qualify to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of
1986, as amended, commencing with the taxable year ending
December 31, 2010. Pursuant to contribution agreements
among the owners of Welsh Predecessor Companies and Welsh
Contribution Companies and the operating partnership, the
operating partnership will receive a contribution of interests
in the real estate properties, as well as the property
management, leasing, and real estate development operations of
WelshCo, LLC and Subsidiaries (WelshCo), and the
assumption of related debt and other specified liabilities in
exchange for OP units in the operating partnership.
Additionally, the Company will form a taxable REIT subsidiary,
through which several wholly-owned limited liability companies,
will conduct several third-party service businesses including a
brokerage business, property management, architecture,
construction, mortgage origination, and property maintenance.
Because Welsh Predecessor Companies consists of the
Companys accounting acquirer and other entities under the
common control of Dennis J. Doyle, any interests contributed by
Mr. Doyle or entities controlled by Mr. Doyle in the
formation transactions will be recorded at historical cost. The
contribution or acquisition of interests other than those owned
by Welsh Predecessor Companies in the formation transactions
will be accounted for as a business combination under the
acquisition method of accounting and recognized at the estimated
fair value of acquired assets and assumed liabilities on the
date of such contribution or acquisition. The fair value of
these assets and liabilities has been allocated in accordance
with current accounting guidance. The Company determined the
fair values of acquired properties on an
as-if-vacant basis considering a variety of factors,
including the physical condition and quality of the properties,
estimated rental and absorption rates, estimated future cash
flows, and valuation assumptions consistent with current market
conditions. The as-if-vacant fair value is allocated
to land, building, and improvements based on the Companys
market knowledge and
F-11
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
published market data, including current market rental rates and
recent sales on a per square basis for comparable properties in
its markets. The fair value of in-place leases consists of the
following components as applicable (1) the estimated cost
to replace the leases, including foregone rents during the
period of finding a new tenant, foregone recovery of tenant
pass-throughs, tenant improvements, and other direct costs
associated with obtaining a new tenant (referred to as acquired
in-place leases); and (2) the above/below market portion of
the leases, determined by comparing the projected cash flows of
the leases in place to projected cash flows of comparable
market-rate leases, measured over a period equal to the
remaining non-cancelable term of the lease for above-market
leases and the remaining non-cancelable term plus the term of
any below-market fixed rate renewal options for below-market
leases. The fair value of the debt assumed was determined using
current market interest rates for comparable debt financings.
|
|
2.
|
ADJUSTMENTS TO
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
|
(A) To reflect sale of shares of common stock for
$9.50 per share in this offering
|
|
|
|
|
Proceeds from this offering
|
|
$
|
340,000
|
|
Less costs associated with this offering
|
|
|
(23,425
|
)
|
|
|
|
|
|
Increase to common stock and additional paid in capital
|
|
|
316,575
|
|
Less nonrecurring professional fees directly related to the
formation transactions
|
|
|
(3,274
|
)
|
Plus offering costs paid through March 31, 2010
|
|
|
2,071
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
315,372
|
|
|
|
|
|
|
Entry to reverse the accrual for unpaid offering costs and
offering costs included in prepaid expenses recorded through
March 31, 2010
|
|
$
|
2,977
|
|
|
|
|
|
|
(B) Reflects a historical condensed combined balance
sheet of Welsh Predecessor Companies, which include the
accounting acquirer and other entities under the common control
of Dennis J. Doyle as of March 31, 2010. Pursuant to
contribution agreements among the owners of the Welsh
Predecessor Companies and the operating partnership, which were
executed in 2009 and 2010, the operating partnership will
receive a contribution of interests in the real estate
properties and investments, in exchange for OP units in the
operating partnership. The contributions will be made upon the
consummation of this offering. Welsh Predecessor Companies
assets and liabilities will be recorded at their historical cost
basis. Pursuant to the contribution agreements, an adjustment to
the contribution value of the interests being contributed will
be made upon closing of the formation transactions to settle the
actual net cash balances of the properties with certain amounts
projected in the original contribution agreements. The expected
cash payments of $973 due for these is recorded as a reduction
to cash and reduction to equity as dividends to former owners of
the properties at the transaction date.
(C) To reflect the contribution of Welsh Contribution
Companies ownership interests for OP units in the operating
partnership and cash paid to former owners of portions of
certain properties. These entities are commonly managed by the
owners (Dennis J. Doyle, Scott T. Frederiksen and Jean V. Kane)
of WelshCo. WelshCo is responsible for the
day-to-day
operations of Welsh Securities, LLC and all of the Welsh real
estate properties. Dennis J. Doyle has an ownership interest in
each of these entities and therefore the ownership interests he
controls have been included in Welsh Predecessor Companies
financial statements as equity method investments.
The acquisition method of accounting was used to allocate the
fair value to tangible and identified intangible assets and
liabilities acquired. The amounts allocated to building are
depreciated over the estimated weighted average remaining useful
lives ranging from 31 to 39 years. The amounts allocated
F-12
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
to market lease obligations and to intangible lease assets are
amortized over the weighted average lives of the related leases
ranging from two to nine years.
The estimated fair value of the Welsh Contribution Companies is
$52.9 million, which includes the issuance of approximately
4.0 million OP units at $9.50 per unit
($38.4 million), the payment of $1.9 million in cash
to former owners to acquire their ownership interests in
portions of certain properties, the issuance of approximately
1.1 million OP units with a fixed value of
$10.0 million for the contribution of WelshCo and Welsh
Securities, LLC (the Services Business) and fair
value of approximately $2.6 million of contingent
consideration for the contribution of the Services Business.
Thus, the fair value of the Services Business is approximately
$12.6 million. The payments of $1.9 million in cash to
former owners are reflected as a use of cash in the pro forma
adjustments.
F-13
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
The pro forma adjustments to the historical basis of Welsh
Contribution Companies balance sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31, 2010
|
|
|
|
|
|
|
Acquisition
|
|
|
|
|
|
|
Welsh
|
|
|
method
|
|
|
|
|
|
|
Contribution
|
|
|
accounting
|
|
|
|
|
|
|
Companies
|
|
|
adjustments
|
|
|
Pro
forma
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net real estate investments
|
|
$
|
167,362
|
|
|
$
|
10,476
|
|
|
$
|
177,838
|
|
Cash, cash equivalents and restricted cash
|
|
|
13,862
|
|
|
|
(3,527
|
)
|
|
|
10,335
|
|
Accounts receivable, net
|
|
|
9,035
|
|
|
|
|
|
|
|
9,035
|
|
Deferred rent
|
|
|
4,106
|
|
|
|
(4,106
|
)
|
|
|
|
|
Intangibles, net
|
|
|
7,168
|
|
|
|
36,085
|
|
|
|
43,253
|
|
Deferred leasing and financing costs, net
|
|
|
3,291
|
|
|
|
(3,291
|
)
|
|
|
|
|
Other assets
|
|
|
1,760
|
|
|
|
|
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
206,584
|
|
|
$
|
35,637
|
|
|
$
|
242,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and notes payable
|
|
$
|
176,192
|
|
|
$
|
(4,121
|
)
|
|
$
|
172,071
|
|
Accounts payable and other liabilities
|
|
|
15,625
|
|
|
|
1,500
|
|
|
|
17,125
|
|
Below market lease intangibles
|
|
|
697
|
|
|
|
1,313
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
192,514
|
|
|
|
(1,308
|
)
|
|
|
191,206
|
|
Equity
|
|
|
14,070
|
|
|
|
36,945
|
|
|
|
51,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
206,584
|
|
|
$
|
35,637
|
|
|
$
|
242,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price allocated to land and building
|
|
|
|
|
|
|
|
|
|
$
|
10,476
|
|
Purchase price allocated to in-place leases and above market
lease intangible
|
|
|
|
|
|
|
|
|
|
|
22,577
|
|
Purchase price allocated to goodwill and other identifiable
intangible assets
|
|
|
|
|
|
|
|
|
|
|
13,508
|
|
Purchase price allocated to below market leases
|
|
|
|
|
|
|
|
|
|
|
(1,313
|
)
|
Record indebtedness at fair value as a result of acquisition
method accounting
|
|
|
|
|
|
|
|
|
|
|
4,121
|
|
Reversal of deferred leasing and financing costs as a result of
acquisition method accounting
|
|
|
|
|
|
|
|
|
|
|
(3,291
|
)
|
Reversal of deferred rent as a result of acquisition method
accounting
|
|
|
|
|
|
|
|
|
|
|
(4,106
|
)
|
Record dividends to owners for contribution agreement adjustments
|
|
|
|
|
|
|
|
|
|
|
(3,142
|
)
|
Original equity
|
|
|
|
|
|
|
|
|
|
|
14,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price of Welsh Contribution Companies
|
|
|
|
|
|
|
|
|
|
$
|
52,900
|
|
Payments to former owners to acquire ownership interests in
certain properties
|
|
|
|
|
|
|
|
|
|
|
(1,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
|
|
|
|
|
|
|
$
|
51,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of OP units issued
|
|
|
|
|
|
|
|
|
|
|
48,406
|
|
Fair value of contingent consideration related to service
companies
|
|
|
|
|
|
|
|
|
|
|
2,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
|
|
|
|
|
|
|
$
|
51,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(D) Reflects the elimination of certain balance sheet
intercompany transactions between WelshCo and the related
properties and the elimination of equity method investments of
Welsh Predecessor
F-14
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
Companies that are already included in Welsh Contribution
Companies and therefore consolidated for pro forma purposes.
|
|
|
|
|
|
|
Pro forma
|
|
|
|
eliminations
|
|
|
|
|
Assets:
|
|
|
|
|
Equity method investments
|
|
$
|
(7,226
|
)
|
Accounts receivable, net
|
|
|
(136
|
)
|
|
|
|
|
|
Total assets
|
|
$
|
(7,362
|
)
|
|
|
|
|
|
Liabilities and equity:
|
|
|
|
|
Mortgage and notes payable
|
|
$
|
(6,923
|
)
|
Accounts payable and other liabilities
|
|
|
(66
|
)
|
Losses and distributions in excess of contributions in equity
method investments
|
|
|
(8,287
|
)
|
|
|
|
|
|
Total liabilities
|
|
|
(15,276
|
)
|
Noncontrolling interest
|
|
|
7,914
|
|
|
|
|
|
|
Total liabilities and owners/stockholders
equity
|
|
$
|
(7,362
|
)
|
|
|
|
|
|
(E) The Company is currently negotiating with various
lenders to receive their consent to transfer the ownership of
the underlying indebtedness from the real estate entities being
acquired and contributed to the Company. Status of lender
consents is as follows:
|
|
|
|
|
Total indebtedness included in pro forma
|
|
$
|
428,967
|
|
Indebtedness that lenders have consented to or consent not
required
|
|
|
(396,734
|
)
|
Indebtedness the Company estimates attainment of consent is
probable
|
|
|
(22,152
|
)
|
|
|
|
|
|
Indebtedness that will require repayment upon occurrence of this
offering
|
|
|
10,081
|
|
Indebtedness the Company intends to repay upon occurrence of
this offering
|
|
|
31,781
|
|
|
|
|
|
|
Total indebtedness repayment upon offering
|
|
$
|
41,862
|
|
|
|
|
|
|
The above estimate of the consents the Company believes is
probable is subject to change. If consents are not received by
the Company, additional proceeds from the initial public
offering may be used to repay that specific underlying
indebtedness.
In connection with the acquisitions of the Denver/Lakeland
portfolio, as discussed in note (K), and the Brookville/Tejon
portfolio, as discussed in note (L), the Company intends to
enter into a mortgage loan agreement cross-collateralized by the
four properties in these portfolios. This loan will be for a
principal amount of $57.8 million at an interest rate of
the greater of the
10-year
swap
yield plus 260 basis points or 6.25%. For purposes of these
unaudited pro forma financial statements, the expected interest
rate of 6.25% is used to calculate the interest expense. This
loan will result in adjustments to increase cash and mortgage
notes payable by $57.8 million. Additionally, deferred
financing fees related to the loan of $299 will be shown as
reductions of cash and increases in intangibles, net. The
accompanying balance sheet reflects the net increase in cash for
this transaction of $57.5 million.
In addition, certain lenders are requiring the Company to escrow
$4.5 million as debt service reserves. This amount will be
a use of proceeds as it will be held within restricted cash. No
adjustment is reflected within the pro forma condensed
consolidated balance sheet as cash, cash equivalents and
restricted cash are reflected within the same financial
statement line item.
Additionally, the Company estimates that it will recognize
$2.3 million in expenditures associated with the retirement
of certain indebtedness and attainment of lender consents on
existing indebtedness
F-15
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
(including financing fees, related legal fees, and contingent
waiver fees). This amount will be a use of proceeds and is
included in the balance sheet as a reduction of
owners/stockholders equity.
(F) To record combined purchase of three industrial
buildings in Ohio (the Columbus portfolio). The
acquisition is contingent upon this offering. The purchase price
is $22.3 million cash and will be paid from the proceeds of
this offering.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings
are depreciated over the estimated remaining useful life of
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized over nine years.
The $22.3 million cash payment for these properties will be
allocated to these assets using the acquisition method as if the
transaction occurred on March 31, 2010 as follows:
|
|
|
|
|
|
|
Columbus
|
|
|
|
portfolio
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
17,542
|
|
Intangibles, net
|
|
|
4,758
|
|
|
|
|
|
|
Total assets purchased
|
|
|
22,300
|
|
|
|
|
|
|
Cash to acquire properties
|
|
$
|
22,300
|
|
|
|
|
|
|
(G) A single-tenant industrial building in Kansas
(the Kansas City property) was acquired by a
subsidiary of an investment fund affiliated with the Company on
March 5, 2010, and this subsidiary will be contributed to
the operating partnership in exchange for an allocation of
$5.8 million of OP units from those OP units being issued
in connection with the contribution of the interests in the real
estate properties and the assumption of approximately
$6.9 million of indebtedness.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings,
are depreciated over the estimated remaining useful life of
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized over the remaining
life of the lease.
In connection with the acquisition, the investment fund obtained
$6.9 million in new debt financing. The acquisition of the
Kansas City property by the investment fund, which was included
in the Welsh Predecessor Companies, was allocated to assets and
liabilities as follows:
|
|
|
|
|
|
|
Kansas City
|
|
|
|
property
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
8,653
|
|
Intangibles, net
|
|
|
3,959
|
|
Other assets
|
|
|
227
|
|
Accounts payable and other liabilities
|
|
|
(253
|
)
|
|
|
|
|
|
Net assets purchased
|
|
|
12,586
|
|
|
|
|
|
|
Acquisition costs
|
|
|
285
|
|
|
|
|
|
|
Property acquisition cost
|
|
$
|
12,871
|
|
|
|
|
|
|
F-16
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
(H) Reclassification of owners equity to
noncontrolling interest of $18.2 million and
$51.0 million of the Welsh Predecessor Companies and Welsh
Contribution Companies, respectively, upon the completion of
this offering. The reclassification for Welsh Predecessor
Companies of $18.2 million represents $19.2 million of
equity from the historical financial statements less
$1.0 million of contribution agreement adjustments to be
distributed to former owners as discussed in note (B).
(I) To record combined purchase of two industrial
buildings in Memphis, Tennessee (the Memphis
portfolio). The acquisition is contingent upon this
offering. The purchase price is $20.7 million cash to be
paid from the proceeds of this offering.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings
are depreciated over the estimated remaining useful life of
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized over five years.
In addition to the cash purchase price above, the Company will
pay $79 for acquisition costs that will be expensed, for total
cash expended of $20.7 million. The remaining purchase
price will be allocated to assets and liabilities using the
acquisition method as if the transaction occurred on
March 31, 2010 as follows:
|
|
|
|
|
|
|
Memphis
|
|
|
|
Portfolio
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
17,776
|
|
Intangibles, net
|
|
|
2,908
|
|
Below market lease intangibles
|
|
|
(34
|
)
|
|
|
|
|
|
Total assets purchased
|
|
$
|
20,650
|
|
|
|
|
|
|
Acquisition costs
|
|
|
79
|
|
|
|
|
|
|
Cash to acquire properties
|
|
$
|
20,729
|
|
|
|
|
|
|
Acquisition costs are expensed upon acquisition and are
reflected in the accompanying unaudited pro forma condensed
consolidated balance sheet as reductions to
owners/stockholders equity (deficit).
(J) To record purchase of one single-tenant
industrial building in Nashville, Tennessee (the Nashville
property). The acquisition is contingent upon this
offering. The purchase price is $11.2 million cash and will
be paid from the proceeds of this offering.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings
are depreciated over the estimated remaining useful life of
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized over five years.
F-17
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
In addition to the cash purchase price above, the Company will
pay $63 for acquisition costs that will be expensed, for total
cash expended of $11.3 million. The remaining purchase
price will be allocated to these assets using the acquisition
method as if the transaction occurred on March 31, 2010 as
follows:
|
|
|
|
|
|
|
Nashville
|
|
|
|
Property
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
8,973
|
|
Intangibles, net
|
|
|
2,227
|
|
|
|
|
|
|
Total assets purchased
|
|
|
11,200
|
|
|
|
|
|
|
Acquisition costs
|
|
|
63
|
|
|
|
|
|
|
Cash to acquire property
|
|
$
|
11,263
|
|
|
|
|
|
|
(K) To record combined purchase of an industrial
building in Colorado and two industrial buildings in Florida
(the Denver/Lakeland portfolio). The Company will
pay $19.8 million in cash and issue $2.0 million of OP
units for these properties for a total purchase price of
$21.8 million.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings,
are depreciated over the estimated remaining useful life of
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized over the remaining
life of the lease ranging from four to six years.
In addition to the cash purchase price above, the Company will
pay $1.5 million for acquisition costs that will be
expensed, for total cash expended of $21.2 million. The
Company intends to finance a portion of the acquisition with new
debt financing, which will impact the amount of cash required at
closing; see discussion in note (E). The remaining
$19.8 million of cash paid and $2.0 million in OP
units issued in exchange for these properties will be allocated
to assets and liabilities using the acquisition method as if the
transaction occurred on March 31, 2010 as follows:
|
|
|
|
|
|
|
Denver/Lakeland
|
|
|
|
portfolio
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
16,798
|
|
Intangibles, net
|
|
|
4,990
|
|
Accounts payable and other liabilities
|
|
|
(140
|
)
|
|
|
|
|
|
Total net assets purchased
|
|
|
21,648
|
|
|
|
|
|
|
Acquisition costs
|
|
|
1,457
|
|
|
|
|
|
|
Total net assets purchased and acquisition costs
|
|
$
|
23,105
|
|
|
|
|
|
|
Purchase price paid in cash
|
|
|
19,770
|
|
Purchase price paid in OP units
|
|
|
2,018
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
21,788
|
|
|
|
|
|
|
Acquisition costs are expensed upon acquisition and are
reflected in the accompanying unaudited pro forma condensed
consolidated balance sheet as reductions to
Owners/Stockholders equity (deficit).
(L) To record combined acquisition of the Brookville
property, a single-tenant industrial building in Ohio, and the
Tejon property, a single tenant industrial building in
California (together the Brookville/
F-18
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
Tejon portfolio). The Company will pay $67.2 million
in cash and $1.2 million of OP units for these properties
for a total purchase price of $68.4 million.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings,
are depreciated over the estimated remaining useful life of
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized over the remaining
life of the lease ranging from 13 to 18 years.
In addition to the cash purchase price above, the Company will
pay $183 for acquisition costs that will be expensed, for total
cash expended of $67.4 million. The Company intends to
finance a portion of the acquisition with new debt financing,
which will impact the amount of cash required at closing; see
discussion in note (E). The remaining $67.2 million of cash
paid and $1.2 million of OP units issued in exchange for
these properties will be allocated to assets and liabilities
using the acquisition method as if the transaction occurred on
March 31, 2010 as follows:
|
|
|
|
|
|
|
Brookville/Tejon
|
|
|
|
portfolio
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
56,613
|
|
Intangibles, net
|
|
|
13,186
|
|
Below market lease intangibles
|
|
|
(1,334
|
)
|
|
|
|
|
|
Total net assets purchased
|
|
|
68,465
|
|
|
|
|
|
|
Acquisition costs
|
|
|
183
|
|
|
|
|
|
|
Total net assets purchased and acquisition costs
|
|
$
|
68,648
|
|
|
|
|
|
|
Purchase price paid in cash
|
|
|
67,220
|
|
Purchase price paid in OP units
|
|
|
1,245
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
68,465
|
|
|
|
|
|
|
(M) To record purchase of five industrial buildings
in Southeastern United States (the Eastern National
Industrial portfolio). The acquisition is contingent upon
this offering. The purchase price is $58.2 million cash and
will be paid from the proceeds of this offering.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings
are depreciated over the estimated remaining useful life of
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized over the remaining
life ranging from one to 10 years.
F-19
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
In addition to the cash purchase price above, the Company will
pay $559 for acquisition costs that will be expensed, for total
cash expended of $58.7 million. The remaining purchase
price will be allocated to these assets using the acquisition
method as if the transaction occurred on March 31, 2010 as
follows:
|
|
|
|
|
|
|
Eastern
National
|
|
|
|
Industrial
portfolio
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
52,991
|
|
Intangibles, net
|
|
|
5,212
|
|
Below market lease intangibles
|
|
|
(28
|
)
|
|
|
|
|
|
Total assets purchased
|
|
|
58,175
|
|
|
|
|
|
|
Acquisition costs
|
|
|
559
|
|
|
|
|
|
|
Cash to acquire properties
|
|
$
|
58,734
|
|
|
|
|
|
|
(N) To record purchase of four multi-tenant
industrial buildings in Charlotte, North Carolina (the
Charlotte portfolio). The acquisition is contingent
upon this offering. The purchase price is $35.0 million
cash and will be paid from the proceeds of this offering.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings
are depreciated over the estimated remaining useful life of
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized ranging over four
to nine years.
In addition to the cash purchase price above, the Company will
pay $101 for acquisition costs that will be expensed, for total
cash expended of $35.1 million. The remaining purchase
price will be allocated to these assets using the acquisition
method as if the transaction occurred on March 31, 2010 as
follows:
|
|
|
|
|
|
|
Charlotte
|
|
|
|
portfolio
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
30,168
|
|
Intangibles, net
|
|
|
4,978
|
|
Below market lease intangibles
|
|
|
(146
|
)
|
|
|
|
|
|
Total assets purchased
|
|
|
35,000
|
|
|
|
|
|
|
Acquisition costs
|
|
|
101
|
|
|
|
|
|
|
Cash to acquire properties
|
|
$
|
35,101
|
|
|
|
|
|
|
(O) To record purchase of a single tenant industrial
building in Winston-Salem, North Carolina (the
Winston-Salem property). The acquisition is
contingent upon this offering. The purchase price for the
interest is $29.9 million cash. The Company will pay
$26.9 million from the proceeds of this offering. A second
closing for $3.1 million will occur on January 4, 2011
to complete payment of the total purchase price.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings
are depreciated over the estimated remaining useful life of
F-20
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized over twelve years.
In addition to the cash purchase price above, the Company will
pay $73 for acquisition costs that will be expensed, for total
cash expended of $30.0 million. The remaining purchase
price will be allocated to these assets using the acquisition
method as if the transaction occurred on March 31, 2010 as
follows:
|
|
|
|
|
|
|
Winston-Salem
|
|
|
|
property
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
23,834
|
|
Intangibles, net
|
|
|
6,066
|
|
|
|
|
|
|
Total assets purchased
|
|
|
29,900
|
|
|
|
|
|
|
Acquisition costs
|
|
|
73
|
|
Purchase price payable
|
|
|
(3,123
|
)
|
|
|
|
|
|
Cash to acquire property at offering
|
|
$
|
26,850
|
|
|
|
|
|
|
(P) To record purchase of three single tenant
industrial buildings in Wisconsin (the Wisconsin
portfolio). The acquisition is contingent upon this
offering. The purchase price is $25.3 million cash and will
be paid from the proceeds of this offering.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings
are depreciated over the estimated remaining useful life of
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized over four to
14 years.
In addition to the cash purchase price above, the Company will
pay $155 for acquisition costs that will be expensed, for total
cash expended of $25.5 million. The remaining purchase
price will be allocated to these assets using the acquisition
method as if the transaction occurred on March 31, 2010 as
follows:
|
|
|
|
|
|
|
Wisconsin
|
|
|
|
portfolio
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
17,605
|
|
Intangibles, net
|
|
|
7,819
|
|
Below market lease intangibles
|
|
|
(124
|
)
|
|
|
|
|
|
Total assets purchased
|
|
|
25,300
|
|
|
|
|
|
|
Acquisition costs
|
|
|
155
|
|
|
|
|
|
|
Cash to acquire properties
|
|
$
|
25,455
|
|
|
|
|
|
|
(Q) To record purchase of a single tenant industrial
building in Milwaukee, Wisconsin (the Milwaukee
property). The acquisition is contingent upon this
offering. The purchase price is $8.0 million cash and will
be paid from the proceeds of this offering.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings
are depreciated over the estimated remaining useful life of
F-21
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized over seven years.
In addition to the cash purchase price above, the Company will
pay $31 for acquisition costs that will be expensed, for total
cash expended of $8.1 million. The remaining purchase price
will be allocated to these assets using the acquisition method
as if the transaction occurred on March 31, 2010 as follows:
|
|
|
|
|
|
|
Milwaukee
|
|
|
|
property
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
6,906
|
|
Intangibles, net
|
|
|
1,119
|
|
|
|
|
|
|
Total assets purchased
|
|
|
8,025
|
|
|
|
|
|
|
Acquisition costs
|
|
|
31
|
|
|
|
|
|
|
Cash to acquire property
|
|
$
|
8,056
|
|
|
|
|
|
|
(R) To record purchase of a multi-tenant industrial
building in Denver, Colorado (the Aurora property).
The acquisition is contingent upon this offering. The purchase
price is $1.8 million cash to be paid from the proceeds of
this offering and the assumption of approximately
$3.4 million of indebtedness.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings
are depreciated over the estimated remaining useful life of
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized over the remaining
lease term ranging from two to eight years.
In addition to the cash purchase price above, the Company will
pay $16 of acquisition costs that will be expensed, for total
cash expended of $1.9 million. The remaining purchase price
will be allocated to these assets using the acquisition method
as if the transaction occurred on March 31, 2010 as follows:
|
|
|
|
|
|
|
Aurora
property
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
4,399
|
|
Intangibles, net
|
|
|
851
|
|
Indebtedness assumed
|
|
|
(3,413
|
)
|
|
|
|
|
|
Net assets purchased
|
|
|
1,837
|
|
|
|
|
|
|
Acquisition costs
|
|
|
16
|
|
|
|
|
|
|
Cash to acquire property
|
|
$
|
1,853
|
|
|
|
|
|
|
(S) To record acquisition of a multi-tenant
industrial building in Minneapolis, Minnesota (the
Minneapolis property). The Company will acquire this
property primarily through the issuance of $0.4 million of
OP units and the assumption of approximately $2.8 million
of indebtedness.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings,
are depreciated over the estimated remaining useful life of
40 years. The amounts allocated to market lease obligations
and to intangible lease assets are amortized over the remaining
lease term ranging from one to three years.
F-22
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
In addition to the OP units issued, approximately $91 will be
paid in cash for closing costs that will be expensed. The
$0.4 million in OP units will be allocated to assets and
liabilities using the acquisition method as if the transaction
occurred on March 31, 2010 as follows:
|
|
|
|
|
|
|
Minneapolis
|
|
|
|
property
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
3,040
|
|
Intangibles, net
|
|
|
241
|
|
Below market lease intangibles
|
|
|
(24
|
)
|
Indebtedness assumed
|
|
|
(2,792
|
)
|
|
|
|
|
|
Total net assets purchased
|
|
|
465
|
|
|
|
|
|
|
Acquisition costs
|
|
|
37
|
|
|
|
|
|
|
Total net assets purchased and acquisition costs
|
|
$
|
502
|
|
|
|
|
|
|
Purchase price paid in cash
|
|
|
91
|
|
Purchase price paid in OP units
|
|
|
411
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
502
|
|
|
|
|
|
|
(T) To record purchase of one single tenant
industrial building in Brandywine, Maryland (the
Mattawoman property). The acquisition is contingent
upon this offering. The purchase price is $11.0 million
cash and will be paid from the proceeds of this offering.
The acquisition method of accounting was used to allocate the
amount paid to tangible and identified intangible assets and
liabilities according to their fair values. The amounts
allocated to real estate investments, which include buildings
are depreciated over the estimated remaining useful life of
40 years. The amounts allocated to market lease obligations
and to below market lease intangibles are amortized over seven
years.
In addition to the cash purchase price above, the Company will
pay $47 for acquisition costs that will be expensed, for total
cash expended of $11.0 million. The remaining purchase
price will be allocated to these assets using the acquisition
method as if the transaction occurred on March 31, 2010 as
follows:
|
|
|
|
|
|
|
Mattawoman
|
|
|
|
property
|
|
|
|
pro
forma
|
|
|
|
|
Net real estate investments
|
|
$
|
8,162
|
|
Intangibles, net
|
|
|
3,161
|
|
Below market lease intangibles
|
|
|
(323
|
)
|
|
|
|
|
|
Total assets purchased
|
|
|
11,000
|
|
|
|
|
|
|
Acquisition costs
|
|
|
47
|
|
|
|
|
|
|
Cash to acquire properties
|
|
$
|
11,047
|
|
|
|
|
|
|
|
|
3.
|
ADJUSTMENTS TO
THE PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
|
In connection with the completion of the offering and the other
formation transactions, the Company expects to recognize
expenditures associated with the retirement of certain
indebtedness and attaining
F-23
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
of lender consents on existing indebtedness (including financing
fees, related legal fees and contingent waiver fees of
$2.1 million which have not been included in the pro forma
statement of operations as these expenditures are nonrecurring
and are a direct result of the formation transactions).
Additionally, in connection with the acquisition of the
properties in the acquisition portfolio, the Company expects to
incur acquisition costs of $3.0 million, which have not
been included in the pro forma statement of operations as these
expenditures are nonrecurring and are a direct result of the
formation transactions.
The pro forma financial information excludes (i) up to
5,368,421 shares issuable upon exercise of the
underwriters over-allotment option in full, (ii) up
to 616,690 shares of common stock contingently issuable
upon the vesting of restricted stock units to be granted to
Mr. Frederiksen and Ms. Kane under the Companys
Long-Term Equity Incentive Plan (LTIP), and
(iii) additional shares available for future issuance under
the Companys LTIP. Based upon managements review of
the restricted stock unit agreements and its evaluation of the
applicable market-based performance criteria, management
estimates that, as of the date of this offering, such awards do
not have a material impact on the pro forma financial
information.
The adjustments to the pro forma condensed consolidated
statement of operations for the three months ended
March 31, 2010 and for the year ended December 31,
2009 are as follows:
(AA) To reflect Welsh Predecessor Companies
historical combined statement of operations for the three months
ended March 31, 2010 and for the year ended
December 31, 2009. As discussed in notes (B) and (G), the
interests in the real estate properties contributed by
Mr. Doyle or entities controlled by Mr. Doyle to the
operating partnership in exchange for OP units will be recorded
at Welsh Predecessor Companies historical cost basis. As a
result, expenses such as depreciation and amortization to be
recognized by the operating partnership related to the
contributed interests are based on Welsh Predecessor
Companies historical cost basis of the related assets and
liabilities.
(BB) To reflect the results of operations from the
contribution of Welsh Contribution Companies that will occur
upon the formation transactions as discussed in note
(C) above. The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired. The amounts allocated to
buildings are depreciated over the estimated weighted average
remaining useful lives ranging from 31 to 39 years. The
amounts allocated to market lease obligations and to intangible
lease assets are amortized over the weighted average lives of
the related leases ranging from two to nine years. See note (EE)
for resulting pro forma adjustments.
(CC) To reflect change in interest expense as a
result of the financing related pro forma adjustments. As a
result of acquisition method accounting, carrying value of debt
for the Welsh Contribution Companies was adjusted to its fair
value, resulting in an $8.2 million discount. The discount
is amortized to interest expense over the life of the underlying
debt instrument. The amortization of the discount recognized in
the pro forma condensed consolidated statement of operations for
the three months ended March 31, 2010 as non-cash interest
expense is $395, which is offset by reductions to interest
expense of $506 related to repayment of indebtedness at the time
of the initial public offering resulting in a net $111 reduction
of interest expense. The annual amortization of the discount
recognized in the pro forma condensed consolidated statement of
operations for the year ended December 31, 2009 as non-cash
interest expense is $1,095, which is offset by reductions to
interest expense of $2,026 related to repayment of indebtedness
at the time of the initial public offering, resulting in a net
$931 reduction of interest expense.
Due to the contribution of Welsh Predecessor Companies and Welsh
Contribution Companies, $1,422 and $920 of equity in net loss
from equity method investments is eliminated in the pro forma
condensed
F-24
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
consolidated statement of operations for the three months ended
March 31, 2010 and the year ended December 31, 2009,
respectively.
Interest expense of $885 and $3,599 for the three months ended
March 31, 2010 and the year ended December 31, 2009,
respectively, is recognized related to the debt entered into
upon closing, as discussed in note (E).
(DD) The Company expects to incur additional general
and administrative expenses as a result of becoming a public
company, including but not limited to incremental salaries,
board of directors fees and expenses, directors and
officers insurance, Sarbanes-Oxley compliance costs, and
incremental audit and tax fees. The Company estimates that these
costs could result in incremental general and administrative
expenses of approximately $2.6 million per year or $638 per
quarter.
(EE) To record incremental adjustments to revenues
and expenses as a result of the application of acquisition
accounting for Welsh Contribution Companies as discussed in note
(C):
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
three
|
|
|
For the
|
|
|
|
months
|
|
|
year
|
|
|
|
ended
|
|
|
ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
Amortization of acquired above and below market lease
intangibles and change in straight-line rent recognition
|
|
$
|
(102
|
)
|
|
$
|
631
|
|
Depreciation and amortization
|
|
|
(392
|
)
|
|
|
(506
|
)
|
(FF) Reflects the allocation of net income (loss) to
the noncontrolling interests and stockholders equity.
(GG) Pro forma earnings (loss) per sharebasic
and diluted are calculated by dividing pro forma consolidated
net income (loss) allocable to the Companys stockholders
by the number of shares of common stock issued in this offering
and the formation transactions. Basic net income (loss) per
common share is calculated based on the weighted average common
shares outstanding, which was 35,807 shares for each
of the periods reported. Diluted net income (loss) per common
share is calculated based on net income (loss) before allocation
to noncontrolling interests by giving effect to the expected
exchange of OP units for common stock on a
one-for-one
basis, which resulted in diluted shares of 43,389 for each of
the periods reported.
(HH) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Columbus portfolio. See note (F). The amounts allocated to
building are depreciated over 40 years. The amounts
allocated to lease intangibles are amortized over nine years,
consistent with the remaining life of the
F-25
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
related leases. The pro forma adjustments to the Statement of
Revenues and Certain Expenditures for these properties are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Columbus
portfolio
|
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
three months
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
717
|
|
|
$
|
(29
|
)
|
|
$
|
688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
141
|
|
|
|
13
|
|
|
|
154
|
|
Depreciation and amortization
|
|
|
|
|
|
|
169
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
141
|
|
|
|
182
|
|
|
|
323
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
576
|
|
|
$
|
(211
|
)
|
|
$
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Rental revenue adjustments include $4 straight-line rent
adjustment offset by $(33) above market lease intangible
amortization for the three months ending March 31, 2010.
The total pro forma straight-line rent adjustment for the three
months ended March 31, 2010 is $48. Cost of rental
operations increase of $13 represents general and administrative
expenses. Depreciation and amortization increase of $169
represents adjustment to record real estate and intangible
assets depreciation and amortization in accordance with the
Companys policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Columbus
portfolio
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
2,776
|
|
|
$
|
(121
|
)
|
|
$
|
2,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
479
|
|
|
|
73
|
|
|
|
552
|
|
Depreciation and amortization
|
|
|
|
|
|
|
674
|
|
|
|
674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
479
|
|
|
|
747
|
|
|
|
1,226
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,297
|
|
|
$
|
(868
|
)
|
|
$
|
1,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Rental revenue adjustments include $11 straight-line rent
adjustment offset by $(132) above market lease intangible
amortization for the year ending December 31, 2009. The total
pro forma straight-line rent adjustment for the year is $192.
Cost of rental operations increase of $73 represents general and
administrative expenses. Depreciation and amortization increase
of $674 represents adjustment to record real estate and
intangible assets depreciation and amortization in accordance
with the Companys policies.
|
(II) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Kansas City property. As discussed in note (G), the property
was acquired by an investment fund affiliated with the operating
partnership and is reflected in the Welsh Predecessor Companies
financial statements from the date of acquisition of March 5,
2010 through March 31, 2010. For pro forma purposes, the
financial statements
F-26
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
for the three months ended March 31, 2010 are adjusted to
reflect the results of operations of this property for the full
quarter. The amounts allocated to building are depreciated over
40 years. The amounts allocated to lease intangibles are
amortized over 10 years consistent with the remaining life
of the related lease.
The pro forma adjustments to reflect the results of operations
prior to acquisition for the three months ended March 31,
2010 for this property are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kansas City
property
|
|
|
|
|
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
results for
|
|
|
|
|
|
|
Results from
|
|
|
three months
|
|
|
|
|
|
|
acquisition to
|
|
|
ended
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
Pro forma
|
|
|
|
2010
|
|
|
2010
|
|
|
Adjustment
(1)
|
|
|
|
|
Rental and related revenue
|
|
$
|
170
|
|
|
$
|
502
|
|
|
$
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
352
|
|
|
|
424
|
|
|
|
72
|
|
Depreciation and amortization
|
|
|
48
|
|
|
|
148
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
400
|
|
|
|
572
|
|
|
|
172
|
|
Interest and other expense
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(240
|
)
|
|
$
|
(80
|
)
|
|
$
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The adjustments made reflect the operations of the property
for the period prior to acquisition. These adjustments are made
to reflect the full three months of operations of the property
in the pro forma statement of operations. The total pro forma
straight-line rent adjustment for the three months ended
March 31, 2010 is $12.
|
The pro forma adjustments to the Statement of Revenues and
Certain Expenditures for this property for the year ended
December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kansas City
property
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
1,782
|
|
|
$
|
23
|
|
|
$
|
1,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
298
|
|
|
|
46
|
|
|
|
344
|
|
Depreciation and amortization
|
|
|
|
|
|
|
562
|
|
|
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
298
|
|
|
|
608
|
|
|
|
906
|
|
Interest and other expense
|
|
|
|
|
|
|
403
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,484
|
|
|
$
|
(988
|
)
|
|
$
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Rental revenue adjustments include $69 straight-line rent
adjustment offset by $(46) above market lease intangible
amortization for the year ended December 31, 2009. The
total pro forma straight-line rent adjustment for the year is
$70. Cost of rental operations includes an increase of $46 of
general and administrative expenses. This property was acquired
by an investment fund affiliated with the operating partnership
during March 2010. At that acquisition, the investment fund
originated a loan to fund a portion of the purchase price. The
$403 increase in interest expense is
|
F-27
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
|
|
|
|
|
due to the Companys assumption of this loan from the
investment fund. Depreciation and amortization increase of $562
represents adjustment to record real estate and intangible asset
depreciation and amortization in accordance with the
Companys policies.
|
(JJ) To record approximately $67 and $268 of tax
expense incurred by the Companys taxable REIT subsidiary
for the three months ended March 31, 2010 and the year
ended December 31, 2009, respectively, and will be recorded
in general and administrative expense.
(KK) To eliminate intercompany transactions that are
primarily service and management fees between Welsh Predecessor
Companies and Welsh Contribution Companies. The intercompany
amounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three
|
|
|
For the year
|
|
|
|
months ended
|
|
|
ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
(172
|
)
|
|
$
|
(624
|
)
|
Construction and service fee revenue
|
|
|
(871
|
)
|
|
|
(3,083
|
)
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
(1,043
|
)
|
|
|
(3,707
|
)
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
(167
|
)
|
|
|
(332
|
)
|
Cost of construction and service fee revenue
|
|
|
(514
|
)
|
|
|
(2,245
|
)
|
Depreciation and amortization
|
|
|
(56
|
)
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
(737
|
)
|
|
|
(2,714
|
)
|
|
|
|
|
|
|
|
|
|
General and administrative expense, and impairment charges
|
|
|
(257
|
)
|
|
|
(935
|
)
|
Interest expense
|
|
|
(12
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(37
|
)
|
|
$
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
(LL) To remove income from discontinued operations of
$1.9 million included in Welsh Predecessor Companies
statement of operations for the year ended December 31,
2009.
(MM) To remove $3.0 million and
$2.0 million for the three months ended March 31, 2010
and the year ended December 31, 2009, respectively, of
nonrecurring accounting consulting fees incurred that directly
relate to the formation transaction. These amounts were included
in general and administrative expense for Welsh Contribution
Companies.
F-28
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
(NN) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Memphis portfolio. See note (I). The amounts allocated to
building are depreciated over 40 years. The amounts
allocated to lease intangibles are amortized over one to 10
years, consistent with the remaining life of the related leases.
The pro forma adjustments to the 2010 and 2009 historical
unaudited results for these properties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memphis
portfolio
|
|
|
|
For the three
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
812
|
|
|
$
|
(26
|
)
|
|
$
|
786
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
251
|
|
|
|
14
|
|
|
|
265
|
|
Depreciation and amortization
|
|
|
|
|
|
|
222
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
251
|
|
|
|
236
|
|
|
|
487
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
561
|
|
|
$
|
(262
|
)
|
|
$
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Rental revenue adjustments include $4 straight-line rent
adjustment offset by $(30) net above market lease intangible
amortization for the three months ended March 31, 2010. The
total pro forma straight-line rent adjustment for the three
months ended March 31, 2010 is $22. Cost of rental
operations increase of $14 represents increase of general and
administrative expense. Depreciation and amortization increase
of $222 represents adjustment to record real estate and
intangible asset depreciation and amortization in accordance
with the Companys policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memphis
portfolio
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
3,277
|
|
|
$
|
(103
|
)
|
|
$
|
3,174
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
994
|
|
|
|
57
|
|
|
|
1,051
|
|
Depreciation and amortization
|
|
|
|
|
|
|
905
|
|
|
|
905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
994
|
|
|
|
962
|
|
|
|
1,956
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,283
|
|
|
$
|
(1,065
|
)
|
|
$
|
1,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Rental revenue adjustments include $16 straight-line rent
adjustment offset by $(119) net above market lease intangible
amortization for the year ending December 31, 2009. The
total pro forma straight-line rent adjustment for the year is
$50. Cost of rental operations increase of $57 represents
increase of general and administrative expense. Depreciation and
amortization increase of $905 represents adjustment to record
real estate and intangible asset depreciation and amortization
in accordance with the Companys policies.
|
(OO) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Nashville property. See note (J). The amounts allocated to
building are depreciated over 40 years. The amounts
F-29
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
allocated to lease intangibles are amortized over five years,
consistent with the remaining life of the related leases. The
pro forma adjustments to the Statement of Revenues and Certain
Expenditures for this property are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nashville
property
|
|
|
|
For the three
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
327
|
|
|
$
|
(5
|
)
|
|
$
|
322
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
37
|
|
|
|
7
|
|
|
|
44
|
|
Depreciation and amortization
|
|
|
|
|
|
|
151
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
37
|
|
|
|
158
|
|
|
|
195
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
290
|
|
|
$
|
(163
|
)
|
|
$
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment represents $(5) above market
lease intangible amortization for the three months ended March
31, 2010. The total pro forma straight-line rent adjustment for
the three months ended March 31, 2010 is $31. Cost of
rental operations increase of $7 represents increase of general
and administrative expense. Depreciation and amortization
increase of $151 represents adjustment to record real estate and
intangible asset depreciation and amortization in accordance
with the Companys policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nashville
property
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
1,308
|
|
|
$
|
(22
|
)
|
|
$
|
1,286
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
147
|
|
|
|
29
|
|
|
|
176
|
|
Depreciation and amortization
|
|
|
|
|
|
|
606
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
147
|
|
|
|
635
|
|
|
|
782
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,161
|
|
|
$
|
(657
|
)
|
|
$
|
504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment represents $(22) above market
lease intangible amortization for the year ended
December 31, 2009. The total pro forma straight-line rent
adjustment for the year is $8. Cost of rental operations
increase of $30 represents increase of general and
administrative expense. Depreciation and amortization increase
of $606 represents adjustment to record real estate and
intangible asset depreciation and amortization in accordance
with the Companys policies.
|
F-30
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
(PP) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Denver/Lakeland portfolio. See note (K). The amounts
allocated to building are depreciated over 40 years. The
amounts allocated to lease intangibles are amortized over four
to six years consistent with the remaining life of the
related lease. The pro forma adjustments to the Statement of
Revenues and Certain Expenditures for these properties are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denver/Lakeland
portfolio
|
|
|
|
For the three
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
709
|
|
|
$
|
(24
|
)
|
|
$
|
685
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
127
|
|
|
|
16
|
|
|
|
143
|
|
Depreciation and amortization
|
|
|
|
|
|
|
296
|
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
127
|
|
|
|
312
|
|
|
|
439
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
582
|
|
|
$
|
(336
|
)
|
|
$
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Rental revenue adjustments include $24 straight-line
rent adjustment offset by $(48) above market lease intangible
amortization for the three months ended March 31, 2010. The
total pro forma
straight-line
rent adjustment for the three months ended March 31, 2010
is $5. Cost of rental operations includes an increase of $16 of
general and administrative expenses. Depreciation and
amortization increase of $296 represents adjustment to record
real estate and intangible asset depreciation and amortization
in accordance with the Companys policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denver/Lakeland
portfolio
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
2,821
|
|
|
$
|
(90
|
)
|
|
$
|
2,731
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
517
|
|
|
|
54
|
|
|
|
571
|
|
Depreciation and amortization
|
|
|
|
|
|
|
1,185
|
|
|
|
1,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
517
|
|
|
|
1,239
|
|
|
|
1,756
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,304
|
|
|
$
|
(1,329
|
)
|
|
$
|
975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Rental revenue adjustments include $105 straight-line rent
adjustment offset by $(195) above market lease intangible
amortization for the year ended December 31, 2009. The
total pro forma
straight-line
rent adjustment for the year is $166. Cost of rental operations
includes an increase of $54 of general and administrative
expenses. Depreciation and amortization increase of $1,185
represents adjustment to record real estate and intangible asset
depreciation and amortization in accordance with the
Companys policies.
|
(QQ) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Brookville/Tejon
F-31
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
portfolio. See note (L). The amounts allocated to building are
depreciated over 40 years. The amounts allocated to lease
intangibles are amortized over 13 to 18 years, consistent
with the remaining life of the related leases. The pro forma
adjustments to the Statement of Revenue and Certain Expenditures
for these properties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookville/Tejon
portfolio
|
|
|
|
For the three
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
1,750
|
|
|
$
|
(26
|
)
|
|
$
|
1,724
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
132
|
|
|
|
37
|
|
|
|
169
|
|
Depreciation and amortization
|
|
|
|
|
|
|
418
|
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
132
|
|
|
|
455
|
|
|
|
587
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,618
|
|
|
$
|
(481
|
)
|
|
$
|
1,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $15 straight-line rent
adjustment offset by ($41) above market lease intangible
amortization for the three months ended March 31, 2010. The
total pro forma
straight-line
rent adjustment for the three months ended March 31, 2010
is $193. Cost of rental operations increase of $37 represents
increase of general and administrative expense. Depreciation and
amortization increase of $418 represents adjustment to record
real estate and intangible asset depreciation and amortization
in accordance with the Companys policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookville/Tejon
portfolio
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
6,630
|
|
|
$
|
(150
|
)
|
|
$
|
6,480
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
368
|
|
|
|
144
|
|
|
|
512
|
|
Depreciation and amortization
|
|
|
|
|
|
|
1,667
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
368
|
|
|
|
1,811
|
|
|
|
2,179
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,262
|
|
|
$
|
(1,961
|
)
|
|
$
|
4,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $15 straight-line rent
adjustment offset by ($165) above market lease intangible
amortization for the year ended December 31, 2009. The
total pro forma
straight-line
rent adjustment for the year is $704. Cost of rental operations
increase of $144 represents increase of general and
administrative expense. Depreciation and amortization increase
of $1,667 represents adjustment to record real estate and
intangible asset depreciation and amortization in accordance
with the Companys policies.
|
F-32
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
(RR) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Eastern National Industrial portfolio. See note (M). The
amounts allocated to building are depreciated over
40 years. The amounts allocated to lease intangibles are
amortized over one to ten years, consistent with the remaining
life of the related leases. The pro forma adjustments to the
Statement of Revenue and Certain Expenditures results for these
properties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern National
Industrial portfolio
|
|
|
|
For the three
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
1,494
|
|
|
$
|
(73
|
)
|
|
$
|
1,421
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
272
|
|
|
|
27
|
|
|
|
299
|
|
Depreciation and amortization
|
|
|
|
|
|
|
609
|
|
|
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
272
|
|
|
|
636
|
|
|
|
908
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,222
|
|
|
$
|
(709
|
)
|
|
$
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $1 straight-line rent
adjustment offset by ($74) above market lease intangible
amortization for the three months ended March 31, 2010. The
total pro forma
straight-line
rent adjustment for the three months ended March 31, 2010
is $139. Cost of rental operations increase of $27 represents
increase of general and administrative expense. Depreciation and
amortization increase of $609 represents adjustment to record
real estate and intangible asset depreciation and amortization
in accordance with the Companys policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern National
Industrial portfolio
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
5,846
|
|
|
$
|
(270
|
)
|
|
$
|
5,576
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
997
|
|
|
|
119
|
|
|
|
1,116
|
|
Depreciation and amortization
|
|
|
|
|
|
|
2,659
|
|
|
|
2,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
997
|
|
|
|
2,778
|
|
|
|
3,775
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,849
|
|
|
$
|
(3,048
|
)
|
|
$
|
1,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $19 straight-line rent
adjustment offset by ($289) above market lease intangible
amortization for the year ended December 31, 2009. The
total pro forma
straight-line
rent adjustment for the year is $419. Cost of rental operations
increase of $119 represents increase of general and
administrative expense. Depreciation and amortization increase
of $2,659 represents adjustment to record real estate and
intangible asset depreciation and amortization in accordance
with the Companys policies.
|
(SS) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Charlotte
F-33
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
portfolio. See note (N). The amounts allocated to building are
depreciated over 40 years. The amounts allocated to lease
intangibles are amortized over the remaining life of the related
leases of four to nine years. The pro forma adjustments to the
2010 and 2009 historical unaudited results for this property are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charlotte
portfolio
|
|
|
|
For the three
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
1,210
|
|
|
$
|
43
|
|
|
$
|
1,253
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
327
|
|
|
|
24
|
|
|
|
351
|
|
Depreciation and amortization
|
|
|
|
|
|
|
344
|
|
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
327
|
|
|
|
368
|
|
|
|
695
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
883
|
|
|
$
|
(325
|
)
|
|
$
|
558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $56 straight-line rent
adjustment offset by $(13) net above market lease intangible
amortization for the three months ended March 31, 2010. The
total pro forma
straight-line
rent adjustment for the three months ended March 31, 2010
is $56. Cost of rental operations increase of $24 represents
increase of general and administrative expense. Depreciation and
amortization increase of $344 represents adjustment to record
real estate and intangible asset depreciation and amortization
in accordance with the Companys policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charlotte
portfolio
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
4,046
|
|
|
$
|
476
|
|
|
$
|
4,522
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
1,293
|
|
|
|
77
|
|
|
|
1,370
|
|
Depreciation and amortization
|
|
|
|
|
|
|
1,375
|
|
|
|
1,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,293
|
|
|
|
1,452
|
|
|
|
2,745
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,753
|
|
|
$
|
(976
|
)
|
|
$
|
1,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $532 straight-line
rent adjustment offset by $(56) net above market lease
intangible amortization for the year ended December 31,
2009. The total pro forma
straight-line
rent adjustment for the year is $532. Cost of rental operations
increase of $77 represents increase of general and
administrative expense. Depreciation and amortization increase
of $1,375 represents adjustment to record real estate and
intangible asset depreciation and amortization in accordance
with the Companys policies.
|
F-34
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
(TT) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Winston-Salem property. See note (O). The amounts allocated
to building are depreciated over 40 years. The amounts
allocated to lease intangibles are amortized over twelve years,
consistent with the remaining life of the related leases. The
pro forma adjustments to the 2010 and 2009 historical unaudited
results for this property are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winston-Salem
property
|
|
|
|
For the three
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
740
|
|
|
$
|
65
|
|
|
$
|
805
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
64
|
|
|
|
18
|
|
|
|
82
|
|
Depreciation and amortization
|
|
|
|
|
|
|
264
|
|
|
|
264
|
|
Total operating expenses
|
|
|
64
|
|
|
|
282
|
|
|
|
346
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
676
|
|
|
$
|
(217
|
)
|
|
$
|
459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $65 straight-line rent
adjustment for the three months ended March 31, 2010. The
total pro forma
straight-line
rent adjustments for the three months ended March 31, 2010
is $65. Cost of rental operations increase of $18 represents
increase of general and administrative expense. Depreciation and
amortization increase of $264 represents adjustment to record
real estate and intangible asset depreciation and amortization
in accordance with the Companys policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Winston-Salem
property
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
2,906
|
|
|
$
|
312
|
|
|
$
|
3,218
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
254
|
|
|
|
69
|
|
|
|
323
|
|
Depreciation and amortization
|
|
|
|
|
|
|
1,055
|
|
|
|
1,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
254
|
|
|
|
1,124
|
|
|
|
1,378
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,652
|
|
|
$
|
(812
|
)
|
|
$
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $312 straight-line
rent adjustment for the year ended December 31, 2009. The
total pro forma
straight-line
rent adjustment for the year is $312. Cost of rental operations
increase of $69 represents increase of general and
administrative expense. Depreciation and amortization increase
of $1,055 represents adjustment to record real estate and
intangible asset depreciation and amortization in accordance
with the Companys policies.
|
(UU) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Wisconsin portfolio. See note (P). The amounts allocated to
building are depreciated over 40 years. The amounts
F-35
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
allocated to lease intangibles are amortized over four to
14 years, consistent with the remaining life of the related
leases. The pro forma adjustments to the 2010 and 2009
historical unaudited results for these properties are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wisconsin
portfolio
|
|
|
|
For the three
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
796
|
|
|
$
|
(49
|
)
|
|
$
|
747
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
86
|
|
|
|
19
|
|
|
|
105
|
|
Depreciation and amortization
|
|
|
|
|
|
|
252
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
86
|
|
|
|
271
|
|
|
|
357
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
710
|
|
|
$
|
(320
|
)
|
|
$
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $36 straight-line rent
offset by $(85) net above market lease intangible amortization
for the three months ended March 31, 2010. The total pro
forma straight-line rent adjustment for the three months ended
March 31, 2010 is $36. Cost of rental operations increase
of $19 represents increase of general and administrative
expense. Depreciation and amortization increase of $252
represents adjustment to record real estate and intangible asset
depreciation and amortization in accordance with the
Companys policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wisconsin
portfolio
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
2,783
|
|
|
$
|
205
|
|
|
$
|
2,988
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
346
|
|
|
|
64
|
|
|
|
410
|
|
Depreciation and amortization
|
|
|
|
|
|
|
1,007
|
|
|
|
1,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
346
|
|
|
|
1,071
|
|
|
|
1,417
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,437
|
|
|
$
|
(866
|
)
|
|
$
|
1,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $547 straight-line
rent offset by $(342) net above market lease intangible
amortization for the year ended December 31, 2009. The
total pro forma straight-line rent adjustment for the year is
$547. Cost of rental operations increase of $64 represents
increase of general and administrative expense. Depreciation and
amortization increase of $1,007 represents adjustment to record
real estate and intangible asset depreciation and amortization
in accordance with the Companys policies.
|
(VV) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Milwaukee property. See note (Q). The amounts allocated to
building are depreciated over 40 years. The amounts
allocated to lease intangibles are amortized over seven years,
consistent with the remaining life of the
F-36
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
related leases. The pro forma adjustments to the 2010 and 2009
historical unaudited results for this property are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Milwaukee
property
|
|
|
|
For the three
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
241
|
|
|
$
|
6
|
|
|
$
|
247
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
71
|
|
|
|
5
|
|
|
|
76
|
|
Depreciation and amortization
|
|
|
|
|
|
|
70
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
71
|
|
|
|
75
|
|
|
|
146
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
170
|
|
|
$
|
(69
|
)
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $12 straight-line rent
adjustment and offset by $(6) above market lease intangible
amortization for the three months ended March 31, 2010. The
total pro forma straight-line rent adjustment for the three
months ended March 31, 2010 is $12. Cost of rental
operations increase of $5 represents increase of general and
administrative expense. Depreciation and amortization increase
of $70 represents adjustment to record real estate and
intangible asset depreciation and amortization in accordance
with the Companys policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Milwaukee
property
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
930
|
|
|
$
|
(5
|
)
|
|
$
|
925
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
252
|
|
|
|
18
|
|
|
|
270
|
|
Depreciation and amortization
|
|
|
|
|
|
|
281
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
252
|
|
|
|
299
|
|
|
|
551
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
678
|
|
|
$
|
(304
|
)
|
|
$
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $20 straight-line rent
adjustment offset by $(25) above market lease intangible
amortization for the year ended December 31, 2009. The
total pro forma straight-line rent adjustment for the year is
$20. Cost of rental operations increase of $18 represents
increase of general and administrative expense. Depreciation and
amortization increase of $281 represents adjustment to record
real estate and intangible asset depreciation and amortization
in accordance with the Companys policies.
|
F-37
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
(WW) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Aurora property. See note (R). The amounts allocated to
building are depreciated over 40 years. The amounts
allocated to lease intangibles are amortized over two to eight
years, consistent with the remaining life of the related leases.
The pro forma adjustments to the 2010 and 2009 historical
unaudited results for this property are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aurora
property
|
|
|
|
For the three
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
169
|
|
|
$
|
2
|
|
|
$
|
171
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
48
|
|
|
|
3
|
|
|
|
51
|
|
Depreciation and amortization
|
|
|
|
|
|
|
67
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
48
|
|
|
|
70
|
|
|
|
118
|
|
Interest and other expense
|
|
|
|
|
|
|
54
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
121
|
|
|
$
|
(122
|
)
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $5 straight-line rent
adjustment and offset by $(3) above market lease intangible
amortization for the three months ended March 31,2010. The
total pro forma straight-line rent adjustment for the three
months ended March 31, 2010 is $5. Cost of rental
operations increase of $3 represents increase of general and
administrative expense. Depreciation and amortization increase
of $67 represents adjustment to record real estate and
intangible asset depreciation and amortization in accordance
with the Companys policies. Interest expense of $54
represents the interest expense related to assumed debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aurora
property
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
711
|
|
|
$
|
12
|
|
|
$
|
723
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
197
|
|
|
|
13
|
|
|
|
210
|
|
Depreciation and amortization
|
|
|
|
|
|
|
267
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
197
|
|
|
|
280
|
|
|
|
477
|
|
Interest and other expense
|
|
|
|
|
|
|
220
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
514
|
|
|
$
|
(488
|
)
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $26 straight-line rent
adjustment and offset by $(14) above market lease intangible
amortization for the year ended December 31, 2009. The
total pro forma straight-line rent adjustment for the year is
$26. Cost of rental operations increase of $13 represents
increase of general and administrative expense. Depreciation and
amortization increase of $267 represents adjustment to record
real estate and intangible asset depreciation and amortization
in accordance with the Companys policies. Interest expense
of $220 represents the interest expense related to assumed
debt.
|
F-38
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
(XX) The acquisition method of accounting was used to
allocate the fair value to tangible and identified intangible
assets and liabilities acquired in the pro forma acquisition of
the Minneapolis property. See note (S). The amounts allocated to
building are depreciated over 40 years. The amounts
allocated to lease intangibles are amortized over five years,
consistent with the remaining life of the related leases. The
pro forma adjustments to the 2010 and 2009 historical unaudited
results for this property are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minneapolis
property
|
|
|
|
For the three
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
109
|
|
|
$
|
(3
|
)
|
|
$
|
106
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
46
|
|
|
|
2
|
|
|
|
48
|
|
Depreciation and amortization
|
|
|
|
|
|
|
43
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
46
|
|
|
|
45
|
|
|
|
91
|
|
Interest and other expense
|
|
|
|
|
|
|
44
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
63
|
|
|
$
|
(92
|
)
|
|
$
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $3 straight-line rent
adjustment and offset by ($6) above market lease intangible
amortization for the three months ended March 31, 2010. The
total pro forma straight-line rent adjustment for the three
months ended March 31, 2010 is $3. Cost of rental
operations increase of $2 represents increase of general and
administrative expense. Depreciation and amortization increase
of $44 represents adjustment to record real estate and
intangible asset depreciation and amortization in accordance
with the Companys policies. Interest expense of $44
represents the interest expense related to assumed debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minneapolis
property
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
439
|
|
|
$
|
(13
|
)
|
|
$
|
426
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
160
|
|
|
|
8
|
|
|
|
168
|
|
Depreciation and amortization
|
|
|
|
|
|
|
169
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
160
|
|
|
|
177
|
|
|
|
337
|
|
Interest and other expense
|
|
|
|
|
|
|
161
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
279
|
|
|
$
|
(351
|
)
|
|
$
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $12 straight-line rent
adjustment and offset by ($25) above market lease intangible
amortization for the year ended December 31, 2009. The
total pro forma straight-line rent adjustment for the year is
$12. Cost of rental operations increase of $8 represents
increase of general and administrative expense. Depreciation and
amortization increase of $169 represents adjustment to record
real estate and intangible asset depreciation and amortization
in accordance with the Companys policies. Interest expense
of $161 represents the interest expense related to assumed
debt.
|
F-39
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
(YY) In July and November of 2009, the Welsh
Predecessor Companies acquired two properties. The results of
operations since acquisition are included in the 2009 Welsh
Predecessor Companies financial statements. The pro forma
adjustments to the 2009 historical audited results for these
properties to reflect a full year of activity are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Welsh Predecessor
Companies 2009
|
|
|
|
Acquisitions
|
|
|
|
Results from
|
|
|
Annualized
|
|
|
Annualization
|
|
|
|
acquisition to
|
|
|
results for
|
|
|
pro forma
|
|
|
|
December 31
|
|
|
Pro
forma
|
|
|
adjustment
(1)
|
|
|
|
|
Rental and related revenue
|
|
$
|
389
|
|
|
$
|
1,307
|
|
|
$
|
918
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
167
|
|
|
|
376
|
|
|
|
209
|
|
Depreciation and amortization
|
|
|
181
|
|
|
|
526
|
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
348
|
|
|
|
902
|
|
|
|
554
|
|
Interest and other expense
|
|
|
45
|
|
|
|
170
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4
|
)
|
|
$
|
235
|
|
|
$
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The adjustments made represent annualization of revenues and
expenses as if the properties were acquired on January 1,
2009.
|
(ZZ) The acquisition method of accounting was used to allocate
the fair value to tangible and identified intangible assets and
liabilities acquired in the pro forma acquisition of the
Mattawoman Property. See note (T). The amounts allocated to
building are depreciated over 40 years. The amounts
allocated to lease intangibles are amortized over seven years,
consistent with the remaining life of the related leases. The
Mattawoman Property was vacant for the majority of 2009. In
November 2009, the space was fully leased to a single tenant
with a lease term from January 2010 through May 2017 at an
average monthly rent of $103 on a straight-line basis.
The pro forma adjustments to the 2010 and 2009 historical
unaudited results for this property are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mattawoman
property
|
|
|
|
For the three
|
|
|
|
|
|
|
|
|
|
months ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
45
|
|
|
$
|
279
|
|
|
$
|
324
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
79
|
|
|
|
|
|
|
|
79
|
|
Depreciation and amortization
|
|
|
|
|
|
|
145
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
79
|
|
|
|
145
|
|
|
|
224
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(34
|
)
|
|
$
|
134
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $270 straight-line
rent adjustment and $9 below market lease intangible
amortization for the three months ended March 31, 2010. The
total pro forma straight-line rent adjustment for the three
months ended March 31, 2010 is $270. Depreciation
|
F-40
Notes and
managements assumptions to unaudited pro forma condensed
consolidated financial statements
|
|
|
|
|
and amortization increase of $145 represents adjustment to
record real estate and intangible asset depreciation and
amortization in accordance with the Companys policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mattawoman
property
|
|
|
|
Year ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
Adjustments
(1)
|
|
|
Pro
forma
|
|
|
|
|
Rental and related revenue
|
|
$
|
191
|
|
|
$
|
36
|
|
|
$
|
227
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
374
|
|
|
|
5
|
|
|
|
379
|
|
Depreciation and amortization
|
|
|
|
|
|
|
575
|
|
|
|
575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
374
|
|
|
|
580
|
|
|
|
954
|
|
Interest and other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(183
|
)
|
|
$
|
(544
|
)
|
|
$
|
(727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The rental revenue adjustment includes $36 below market lease
intangible amortization for the year ended December 31,
2009. The cost of rental operations increase of $5 represents
increase of general and administrative expense. Depreciation and
amortization increase of $575 represents adjustment to record
real estate and intangible asset depreciation and amortization
in accordance with the Companys policies.
|
F-41
Welsh Property
Trust, Inc.
Stockholders and Board of Directors
Welsh Property Trust, Inc.
We have audited the accompanying balance sheet of Welsh Property
Trust, Inc. (the Company) as of January 31,
2010. This financial statement is the responsibility of the
Companys management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of
material misstatement. An audit of a balance sheet also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in that balance sheet, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents
fairly, in all material respects, the financial position of
Welsh Property Trust, Inc. as of January 31, 2010 in
conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Minneapolis, Minnesota
March 3, 2010
F-42
Welsh Property
Trust, Inc.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
2010
|
|
|
January 31,
2010
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Assets:
|
Cash and total assets
|
|
$
|
300
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity:
|
Liabilities
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock, par value $.01 per share, 1,000,000 shares
authorized, 300 shares issued and outstanding
|
|
|
3
|
|
|
|
3
|
|
Additional paid-in capital
|
|
|
297
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
300
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
300
|
|
|
$
|
300
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to balance sheets.
F-43
Welsh Property
Trust, Inc.
|
|
1.
|
ORGANIZATION,
DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING
POLICIES
|
Welsh Property Trust, Inc. (the Company) was
incorporated in Maryland on December 18, 2009. The Company
intends to file a Registration Statement on
Form S-11
with the Securities and Exchange Commission with respect to a
proposed public offering of common stock. The Company will be
the owner of Welsh Property Trust, L.P. (the Operating
Partnership). The Company and the Operating Partnership
were formed to continue and expand the
32-year
old
Welsh organization, which acquires, owns, operates and manages
industrial and office properties primarily across the
United States and provides real estate services to
third-party commercial property owners in central
U.S. markets.
Concurrent with the consummation of the initial public offering,
the Company and the Operating Partnership, together with the
partners and members of the affiliated partnerships and limited
liability companies of Welsh Predecessor Companies and Welsh
Contribution Companies, and other parties which hold direct or
indirect ownership interests in the properties to be contributed
(collectively, the Participants), will engage in
certain formation transactions (the Formation
Transactions). The Formation Transactions are designed to
(i) continue the operations of Welsh Predecessor Companies
and Welsh Contribution Companies, (ii) enable the Company
to raise the necessary capital to acquire interests in certain
other properties, repay mortgage debt relating thereto and pay
other indebtedness, (iii) fund costs, capital expenditures
and working capital, (iv) provide a vehicle for future
acquisitions, (v) enable the Company to comply with
requirements under the federal income tax laws and regulations
relating to real estate investment trusts and (vi) preserve
tax advantages for certain investors.
The operations of the Company will be carried on primarily
through the Operating Partnership. It is the intent of the
Company to elect and qualify to be taxed as a real estate
investment trust (REIT) under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended,
commencing with the taxable year ended December 31, 2010.
Pursuant to contribution agreements among the owners of the
Welsh Predecessor Companies and Welsh Contribution Companies,
the Operating Partnership will receive a contribution of
interests in the real estate properties, as well as the property
management, leasing, and real estate development operations of
WelshCo, LLC and Subsidiaries, and the assumption of related
debt and other specified liabilities in exchange for units of
limited partnership interest in the Operating Partnership
(OP units). Welsh Property Trust, LLC is the general
partner of the Operating Partnership and is wholly-owned by the
Company. The Company will be fully integrated, self-administered
and self-managed. Additionally, the Company will form a taxable
REIT subsidiary, through which several wholly-owned limited
liability companies will conduct several services businesses
including a brokerage business, property management,
architecture, construction, mortgage origination, and property
maintenance.
F-44
Notes to
balance sheets
The Company believes that it is organized and will operate in
the manner that will allow it to be taxed as a REIT in
accordance with the Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended.
As a REIT, the Company will generally be entitled to deduction
for dividends paid and therefore will not be subject to federal
corporate income tax on its net taxable income that is being
distributed to its stockholders. REITs are subject to a number
of organizational and operational requirements. If the Company
fails to qualify as a REIT in any taxable year, the Company will
be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular
corporate tax rates.
In connection with this offering, affiliates of the Company have
or will incur legal, accounting, and related costs, which will
be reimbursed by the Company upon the consummation of this
offering. Such costs will be deducted from the proceeds of this
offering.
F-45
Welsh Predecessor
Companies
Boards of Directors and Governors
Welsh Predecessor Companies:
We have audited the accompanying combined balance sheets of
Welsh Predecessor Companies as of December 31, 2009 and
2008, and the related combined statements of operations, changes
in owners equity, and cash flows for each of the years in
the three-year period ended December 31, 2009. In
connection with our audits of the combined financial statements,
we have also audited financial statement schedule III.
These combined financial statements and financial statement
schedule III are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
combined financial statements and financial statement
schedule III based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to
above present fairly, in all material respects, the financial
position of Welsh Predecessor Companies as of December 31,
2009 and 2008, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related
financial statement schedule III, when considered in
relation to the basic combined financial statements taken as a
whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Minneapolis, Minnesota
March 3, 2010
F-46
Welsh Predecessor
Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Assets:
|
Real estate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
52,125
|
|
|
$
|
52,125
|
|
|
$
|
45,789
|
|
Buildings and tenant improvements
|
|
|
193,946
|
|
|
|
184,942
|
|
|
|
159,708
|
|
Equity method investments
|
|
|
10,280
|
|
|
|
11,903
|
|
|
|
15,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
256,351
|
|
|
|
248,970
|
|
|
|
221,402
|
|
Accumulated depreciation
|
|
|
(21,558
|
)
|
|
|
(19,885
|
)
|
|
|
(13,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net real estate investments
|
|
|
234,793
|
|
|
|
229,085
|
|
|
|
208,234
|
|
Cash and cash equivalents
|
|
|
2,364
|
|
|
|
3,473
|
|
|
|
2,285
|
|
Restricted cash
|
|
|
3,849
|
|
|
|
4,073
|
|
|
|
3,607
|
|
Accounts receivable, net of allowance of $118, $541 and $541,
respectively
|
|
|
1,608
|
|
|
|
1,341
|
|
|
|
643
|
|
Prepaid expenses
|
|
|
980
|
|
|
|
1,799
|
|
|
|
1,157
|
|
Deferred rent
|
|
|
3,787
|
|
|
|
3,254
|
|
|
|
2,532
|
|
Intangibles, net
|
|
|
13,425
|
|
|
|
10,505
|
|
|
|
15,210
|
|
Deferred financing costs, net of accumulated amortization of
$619, $642 and $724, respectively
|
|
|
606
|
|
|
|
546
|
|
|
|
1,121
|
|
Deferred leasing costs, net of accumulated amortization of
$1,163, $1,023 and $632, respectively
|
|
|
2,895
|
|
|
|
2,081
|
|
|
|
1,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
264,307
|
|
|
$
|
256,157
|
|
|
$
|
236,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Owners Equity:
|
Mortgages and notes payable, including $592, $103 and $675 to
related parties, respectively
|
|
$
|
229,496
|
|
|
$
|
223,503
|
|
|
$
|
201,541
|
|
Accounts payable, including payables to affiliates of $66, $99
and $54, respectively
|
|
|
708
|
|
|
|
771
|
|
|
|
858
|
|
Below market lease intangibles
|
|
|
1,621
|
|
|
|
1,708
|
|
|
|
2,141
|
|
Losses and distributions in excess of contributions in equity
method investments
|
|
|
8,287
|
|
|
|
8,430
|
|
|
|
6,758
|
|
Accrued interest
|
|
|
840
|
|
|
|
925
|
|
|
|
882
|
|
Accrued real estate taxes
|
|
|
1,899
|
|
|
|
1,472
|
|
|
|
1,453
|
|
Other accrued liabilities
|
|
|
397
|
|
|
|
369
|
|
|
|
111
|
|
Security deposits and prepaid rents
|
|
|
1,886
|
|
|
|
2,167
|
|
|
|
1,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
245,134
|
|
|
|
239,345
|
|
|
|
215,637
|
|
Owners equity
|
|
|
19,173
|
|
|
|
16,812
|
|
|
|
20,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Owners Equity
|
|
$
|
264,307
|
|
|
$
|
256,157
|
|
|
$
|
236,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-47
Welsh Predecessor
Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three
months
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
March 31,
|
|
|
Year ended
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and related revenue, including $171, $155, $915, $-0- and
$-0-, respectively
|
|
$
|
7,938
|
|
|
$
|
7,310
|
|
|
$
|
29,247
|
|
|
$
|
31,549
|
|
|
$
|
19,684
|
|
Service fee revenue, including $323 in 2007 from affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900
|
|
|
|
1,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
7,938
|
|
|
|
7,310
|
|
|
|
29,247
|
|
|
|
32,449
|
|
|
|
21,302
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations, including $167, $173, $1,313, $762,
and $835, respectively, to affiliates
|
|
|
1,768
|
|
|
|
2,523
|
|
|
|
8,509
|
|
|
|
8,334
|
|
|
|
3,688
|
|
Real estate taxes
|
|
|
1,754
|
|
|
|
1,454
|
|
|
|
5,212
|
|
|
|
5,637
|
|
|
|
3,280
|
|
Cost of service fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
768
|
|
|
|
1,249
|
|
Depreciation and amortization
|
|
|
2,618
|
|
|
|
2,546
|
|
|
|
10,391
|
|
|
|
11,861
|
|
|
|
6,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
6,140
|
|
|
|
6,523
|
|
|
|
24,112
|
|
|
|
26,600
|
|
|
|
14,679
|
|
Other Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net loss from equity method investments
|
|
|
1,323
|
|
|
|
255
|
|
|
|
1,252
|
|
|
|
1,132
|
|
|
|
2,130
|
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
6,432
|
|
|
|
7,577
|
|
|
|
|
|
Acquisition costs
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
209
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating activities
|
|
|
1,608
|
|
|
|
255
|
|
|
|
7,706
|
|
|
|
8,918
|
|
|
|
2,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
190
|
|
|
|
532
|
|
|
|
(2,571
|
)
|
|
|
(3,069
|
)
|
|
|
4,298
|
|
Other Income (Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income, net
|
|
|
41
|
|
|
|
(58
|
)
|
|
|
42
|
|
|
|
1
|
|
|
|
17
|
|
Interest expense
|
|
|
(3,174
|
)
|
|
|
(2,752
|
)
|
|
|
(12,558
|
)
|
|
|
(12,625
|
)
|
|
|
(8,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
(3,133
|
)
|
|
|
(2,810
|
)
|
|
|
(12,516
|
)
|
|
|
(12,624
|
)
|
|
|
(8,040
|
)
|
(Loss) income from continuing operations
|
|
|
(2,943
|
)
|
|
|
(2,278
|
)
|
|
|
(15,087
|
)
|
|
|
(15,693
|
)
|
|
|
(3,742
|
)
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
99
|
|
|
|
324
|
|
|
|
224
|
|
|
|
53
|
|
Gain on disposition of real estate investments, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$164 of expenses paid to affiliates in 2008
|
|
|
|
|
|
|
|
|
|
|
1,595
|
|
|
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from discontinued operations
|
|
|
|
|
|
|
99
|
|
|
|
1,919
|
|
|
|
1,285
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,943
|
)
|
|
$
|
(2,179
|
)
|
|
$
|
(13,168
|
)
|
|
$
|
(14,408
|
)
|
|
$
|
(3,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-48
Welsh Predecessor
Companies
For the three
months ended March 31, 2010 (unaudited) and
the years ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Combined Owners Equity, December 31, 2006
|
|
$
|
31,921
|
|
Inclusion/Exclusion of equity upon combining or uncombining of
related entities, net
|
|
|
(1,006
|
)
|
Contributions
|
|
|
12,612
|
|
Distributions
|
|
|
(6,838
|
)
|
Net loss
|
|
|
(3,689
|
)
|
|
|
|
|
|
Combined Owners Equity, December 31, 2007
|
|
|
33,000
|
|
Inclusion/Exclusion of equity upon combining or uncombining of
related entities, net
|
|
|
(575
|
)
|
Contributions
|
|
|
11,975
|
|
Distributions
|
|
|
(9,567
|
)
|
Net loss
|
|
|
(14,408
|
)
|
|
|
|
|
|
Combined Owners Equity, December 31, 2008
|
|
|
20,425
|
|
Inclusion/Exclusion of equity upon combining or uncombining of
related entities, net
|
|
|
(1,147
|
)
|
Contributions
|
|
|
17,977
|
|
Distributions
|
|
|
(7,275
|
)
|
Net loss
|
|
|
(13,168
|
)
|
|
|
|
|
|
Combined Owners Equity, December 31, 2009
|
|
|
16,812
|
|
Contributions
|
|
|
7,158
|
|
Distributions
|
|
|
(1,854
|
)
|
Net loss
|
|
|
(2,943
|
)
|
Combined Owners Equity, March 31, 2010 (unaudited)
|
|
$
|
19,173
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-49
Welsh Predecessor
Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year ended
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,943
|
)
|
|
$
|
(2,179
|
)
|
|
$
|
(13,168
|
)
|
|
$
|
(14,408
|
)
|
|
$
|
(3,689
|
)
|
Adjustments to reconcile net loss to net cash provided by
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of buildings and tenant improvements
|
|
|
1,678
|
|
|
|
1,534
|
|
|
|
6,628
|
|
|
|
7,255
|
|
|
|
3,438
|
|
Amortization of intangibles
|
|
|
800
|
|
|
|
909
|
|
|
|
3,348
|
|
|
|
4,298
|
|
|
|
3,134
|
|
Amortization and write-off of deferred financing costs
|
|
|
19
|
|
|
|
53
|
|
|
|
490
|
|
|
|
345
|
|
|
|
306
|
|
Amortization of deferred leasing commissions and other costs
|
|
|
140
|
|
|
|
103
|
|
|
|
415
|
|
|
|
461
|
|
|
|
225
|
|
Adjustment to rental income for intangible amortization, net
|
|
|
78
|
|
|
|
58
|
|
|
|
162
|
|
|
|
132
|
|
|
|
(9
|
)
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
6,432
|
|
|
|
7,577
|
|
|
|
|
|
Equity in net loss from equity method investments
|
|
|
1,323
|
|
|
|
255
|
|
|
|
1,252
|
|
|
|
1,132
|
|
|
|
2,130
|
|
Distribution from equity method investments
|
|
|
156
|
|
|
|
519
|
|
|
|
2,478
|
|
|
|
3,800
|
|
|
|
2,739
|
|
Provision for uncollectible accounts
|
|
|
33
|
|
|
|
370
|
|
|
|
|
|
|
|
294
|
|
|
|
246
|
|
Gain on disposition of real estate investments
|
|
|
|
|
|
|
|
|
|
|
(1,595
|
)
|
|
|
(1,061
|
)
|
|
|
|
|
Amortization of debt premium
|
|
|
21
|
|
|
|
26
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
(533
|
)
|
|
|
(54
|
)
|
|
|
(696
|
)
|
|
|
(667
|
)
|
|
|
(263
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
224
|
|
|
|
(202
|
)
|
|
|
(466
|
)
|
|
|
135
|
|
|
|
(352
|
)
|
Accounts receivable
|
|
|
(72
|
)
|
|
|
78
|
|
|
|
123
|
|
|
|
(158
|
)
|
|
|
(384
|
)
|
Prepaid expense
|
|
|
(47
|
)
|
|
|
158
|
|
|
|
(701
|
)
|
|
|
(44
|
)
|
|
|
(199
|
)
|
Accounts payable
|
|
|
(183
|
)
|
|
|
(53
|
)
|
|
|
(123
|
)
|
|
|
(152
|
)
|
|
|
374
|
|
Accrued interest
|
|
|
(85
|
)
|
|
|
(211
|
)
|
|
|
(31
|
)
|
|
|
(52
|
)
|
|
|
174
|
|
Accrued real estate taxes
|
|
|
293
|
|
|
|
38
|
|
|
|
(247
|
)
|
|
|
(1,163
|
)
|
|
|
915
|
|
Other accrued liabilities
|
|
|
27
|
|
|
|
(4
|
)
|
|
|
330
|
|
|
|
(14
|
)
|
|
|
71
|
|
Security deposits and prepaid rents
|
|
|
(281
|
)
|
|
|
(290
|
)
|
|
|
167
|
|
|
|
75
|
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
648
|
|
|
|
1,108
|
|
|
|
5,000
|
|
|
|
7,785
|
|
|
|
9,361
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of real estate investments and related intangible
assets
|
|
|
(12,557
|
)
|
|
|
|
|
|
|
(7,459
|
)
|
|
|
|
|
|
|
(26,572
|
)
|
Development of real estate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,022
|
)
|
Additions to real estate investments
|
|
|
(307
|
)
|
|
|
(449
|
)
|
|
|
(1,653
|
)
|
|
|
(2,729
|
)
|
|
|
(1,989
|
)
|
Proceeds from sale of real estate investments
|
|
|
|
|
|
|
|
|
|
|
5,697
|
|
|
|
6,750
|
|
|
|
|
|
Acquisition of equity method investments
|
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
(2,706
|
)
|
|
|
(7,947
|
)
|
Return on equity method investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Payments for deferred leasing and other costs
|
|
|
(138
|
)
|
|
|
(92
|
)
|
|
|
(746
|
)
|
|
|
(717
|
)
|
|
|
(274
|
)
|
Cash transferred due to equity ownership changes
|
|
|
|
|
|
|
456
|
|
|
|
14
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(13,002
|
)
|
|
|
(85
|
)
|
|
|
(4,248
|
)
|
|
|
558
|
|
|
|
(47,804
|
)
|
F-50
Welsh Predecessor
Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
|
|
|
|
March 31,
|
|
|
Year ended
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from capital contributions
|
|
$
|
7,158
|
|
|
$
|
1,271
|
|
|
$
|
14,879
|
|
|
$
|
11,975
|
|
|
$
|
4,695
|
|
Cash distributions
|
|
|
(1,854
|
)
|
|
|
(1,638
|
)
|
|
|
(7,275
|
)
|
|
|
(9,567
|
)
|
|
|
(6,838
|
)
|
Payments of long-term debt
|
|
|
(4,225
|
)
|
|
|
(718
|
)
|
|
|
(11,088
|
)
|
|
|
(18,333
|
)
|
|
|
(3,608
|
)
|
Proceeds from long-term debt
|
|
|
10,197
|
|
|
|
346
|
|
|
|
3,920
|
|
|
|
7,514
|
|
|
|
45,284
|
|
Deferred financing and loan costs
|
|
|
(31
|
)
|
|
|
47
|
|
|
|
|
|
|
|
(194
|
)
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
11,245
|
|
|
|
(692
|
)
|
|
|
436
|
|
|
|
(8,605
|
)
|
|
|
39,417
|
|
Net Change in Cash and Cash Equivalents
|
|
|
(1,109
|
)
|
|
|
331
|
|
|
|
1,188
|
|
|
|
(262
|
)
|
|
|
974
|
|
Beginning cash and cash equivalents
|
|
|
3,473
|
|
|
|
2,285
|
|
|
|
2,285
|
|
|
|
2,547
|
|
|
|
1,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
2,364
|
|
|
$
|
2,616
|
|
|
$
|
3,473
|
|
|
$
|
2,285
|
|
|
$
|
2,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-51
Welsh Predecessor
Companies
1. ORGANIZATION
AND DESCRIPTION OF BUSINESS
Welsh Predecessor Companies (collectively, the
Company, we or us), which is
not a legal entity but rather a combination of certain real
estate entities and operations as described below, was formed to
continue and expand the
32-year
old
Welsh organization, which acquires, owns, operates and manages
industrial and office properties primarily across the
United States and provides real estate services to
third-party commercial property owners in central
U.S. markets. During all periods presented in the
accompanying combined financial statements, the Company is the
collection of real estate entities controlled by Dennis J. Doyle
that directly or indirectly own real estate assets. The ultimate
owners of the Company are Dennis J. Doyle and certain others who
have minority ownership interests and voting rights.
Concurrent with the consummation of an initial public offering
(the Offering) of the common stock of Welsh Property
Trust, Inc. (the REIT), which is expected to be
completed in 2010, the REIT and a newly formed majority-owned
limited partnership, Welsh Property Trust, L.P. (the
Operating Partnership), together with the partners
and members of the affiliated partnerships and limited liability
companies of the Company and other parties which hold direct or
indirect ownership interests in the properties (collectively,
the Participants), will engage in certain formation
transactions (the Formation Transactions). The
Formation Transactions are designed to (i) continue the
operations of the Company and Welsh Contribution Companies (a
combination of real estate entities commonly managed by WelshCo,
LLC and Subsidiaries (WelshCo), an affiliate of the
Company), (ii) enable the REIT to raise the necessary
capital to acquire interests in certain other properties, repay
mortgage debt relating thereto and pay other indebtedness, (iii)
fund costs, capital expenditures and working capital,
(iv) provide a vehicle for future acquisitions,
(v) enable the REIT to comply with requirements under the
federal income tax laws and regulations relating to real estate
investment, trusts and (vi) preserve tax advantages for
certain Participants.
The operations of the REIT will be carried on primarily through
the Operating Partnership. It is the intent of the REIT to elect
and qualify to be taxed as a real estate investment trust under
Sections 856 through 860 of the Internal Revenue Code of
1986, as amended, commencing with the taxable year ending
December 31, 2010. Welsh Property Trust, LLC is the general
partner of the Operating Partnership and is wholly-owned by the
REIT. Pursuant to contribution agreements among the owners of
the Company and the Operating Partnership, the Operating
Partnership will receive a contribution of interests in the real
estate properties, as well as the property management, leasing,
and real estate development operations of WelshCo and the
assumption of related debt and other specified liabilities in
exchange for units of limited partnership interest in the
Operating Partnership. The REIT will be fully integrated,
self-administered and self-managed. Additionally, the REIT will
form a taxable subsidiary that will be owned by the Operating
Partnership. The taxable REIT subsidiary, through several
wholly-owned limited liability companies, will conduct services
businesses including a brokerage business, property management,
architecture, construction, mortgage origination, and property
maintenance.
The real estate entities included in the accompanying combined
financial statements have been combined only for the periods
that such entities were under control of Dennis J. Doyle. The
Companys combined financial statements include investments
in certain real estate and service entities over which Dennis J.
Doyle has significant influence, but not control over major
decisions including the decision to sell or refinance the
properties, are accounted for under the equity method. These
investments, which represent non-controlling 1.2% to 88.6%
ownership interests, are accounted for using the equity
F-52
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
method of accounting. The investment in certain investment real
estate entities for which the Company has unilateral control,
evidenced by the ability to make all major decisions such as the
acquisition, sale or refinancing of the property without
approval of the minority party, have been combined in these
financial statements as they are all under the common control of
Dennis J. Doyle.
The accompanying combined financial statements do not include
investments in real estate entities owned by Mr. Doyle that
will not be contributed to the Operating Partnership upon
consummation of the Offering.
2. INVESTMENT
IN REAL ESTATE PROPERTIES
As of December 31, 2009, the Company included ownership
interests in the following real estate properties:
|
|
|
|
|
Property
|
|
Type
|
|
Location
|
|
|
Combined properties:
|
|
|
|
|
Union Circle Center
|
|
Warehouse/Flex
|
|
Ohio
|
Lincoln Industrial Center
|
|
Warehouse
|
|
Minnesota
|
Kiesland
|
|
Office/Warehouse/Flex
|
|
Ohio
|
Southgate Office Plaza
|
|
Office
|
|
Minnesota
|
Green Park
|
|
Distribution
|
|
Missouri
|
Lambert III
|
|
Warehouse
|
|
Missouri
|
Lambert IV/McDonnell Pointe
|
|
Distribution
|
|
Missouri
|
450 Lombard
|
|
Distribution
|
|
Illinois
|
Baker Road
|
|
Office
|
|
Minnesota
|
325 Larsen Drive
|
|
Distribution
|
|
Wisconsin
|
7401 Cahill Road
|
|
Warehouse
|
|
Minnesota
|
Creekedge Business Center
|
|
Warehouse
|
|
Minnesota
|
Rivers Park
|
|
Office
|
|
South Carolina
|
Urbandale Portfolio
|
|
Warehouse/Flex
|
|
Iowa
|
Anderberg-Lund Building
|
|
Warehouse
|
|
Minnesota
|
Southshore Industrial Center
|
|
Warehouse
|
|
Minnesota
|
Lunt
|
|
Distribution
|
|
Illinois
|
Beltway
|
|
Distribution
|
|
Missouri
|
Stout
|
|
Warehouse
|
|
Indiana
|
Zionsville
|
|
Warehouse
|
|
Indiana
|
Jacksonville
|
|
Distribution
|
|
Florida
|
CJC
|
|
Distribution
|
|
Ohio
|
Symmes
|
|
Distribution
|
|
Ohio
|
Romulus Portfolio
|
|
Distribution/Warehouse
|
|
Michigan
|
Sara Lee Ankeny
|
|
Distribution
|
|
Iowa
|
Uncombined properties:
|
|
|
|
|
224 Hoover Road
|
|
Distribution
|
|
North Carolina
|
Eagan Waters
|
|
Flex
|
|
Minnesota
|
Westbelt Corporate Center
|
|
Warehouse
|
|
Ohio
|
Tri-Center
|
|
Warehouse
|
|
Illinois
|
201 Mississippi
|
|
Distribution
|
|
Indiana
|
Oracle/International Center
|
|
Office
|
|
Minnesota
|
Welsh Warren
|
|
Distribution
|
|
Michigan
|
WelshCo
|
|
Service
|
|
Minnesota
|
Lambert I
|
|
Warehouse
|
|
Missouri
|
F-53
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
|
|
|
|
|
Property
|
|
Type
|
|
Location
|
|
|
Enterprise Park
|
|
Warehouse
|
|
Ohio
|
Woods Equipment
|
|
Distribution
|
|
Wisconsin
|
Welsh Shoreview-PaR Systems
|
|
Warehouse
|
|
Minnesota
|
Lambert II
|
|
Warehouse
|
|
Missouri
|
Executive Park
|
|
Distribution
|
|
Missouri
|
Westpark Plaza and Valley Oak Business Center
|
|
Warehouse
|
|
Minnesota
|
Plymouth Professional Center I & II
|
|
Office
|
|
Minnesota
|
Valley View Business Center
|
|
Warehouse
|
|
Minnesota
|
Franklin II
|
|
Distribution
|
|
Wisconsin
|
Welsh Partners 85
|
|
Warehouse
|
|
Minnesota
|
American Identity/Staples
|
|
Warehouse
|
|
Iowa
|
Glendale
|
|
Distribution
|
|
Illinois
|
Pewaukee
|
|
Distribution
|
|
Wisconsin
|
CNL Joint Venture Portfolio
|
|
Distribution/ Office/Warehouse
|
|
Multiple
|
Southdale Joint Venture Portfolio
|
|
Office
|
|
Minnesota
|
The uncombined properties are owned by entities included in the
accompanying combined financial statements as equity method
investments. Additionally, Dennis Doyles ownership
interests in WelshCo, and Welsh Securities, LLC are included in
equity method investments as of December 31, 2009 and 2008.
The Companys investments in real estate properties are
subject to risks incidental to the ownership and operation of
commercial real estate. These risks include, among others, the
risks normally associated with changes in general economic
conditions, trends in the real estate industry, creditworthiness
of tenants, competition of tenants and customers, changes in tax
laws, interest rate levels, the availability and cost of
financing, and potential liability under environmental and other
laws.
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of
combination and formation
The Company represents a combination of certain entities holding
or managing interests in real estate that are commonly
controlled. Due to their common control, the financial
statements of the separate entities which own the properties are
presented on a combined basis. All significant intercompany
balances and transactions have been eliminated in the combined
financial statements.
Organization of
limited liability companies
The limited liability companies (the LLCs) included within the
combined financial statements shall continue in existence until
dissolved in accordance with the provisions of their operating
agreements and are funded through the equity contributions of
their owners. As LLCs, except as may otherwise be provided under
applicable law, no member shall be bound by, or personally
liable for, the expenses, liabilities, or obligations of the
individual companies. The members are not obligated to restore
capital deficits. Pursuant to the terms of each LLC agreement,
profits, losses, and distributions are generally allocated to
the members in accordance with their ownership percentages.
F-54
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
Accounting
estimates
The preparation of the combined financial statements requires
management to use estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenues and expenses.
Significant items subject to such estimates and assumptions
include allocation of the purchase price of acquired real estate
investments among tangible and intangible assets, determination
of the useful life of property and other long-lived assets,
valuation and impairment analysis of property and other
long-lived assets, and valuation of the allowance for doubtful
accounts. It is at least reasonably possible that these
estimates could change in the near term.
Equity method
investments
Certain investments where the Company does not have control but
has the ability to exercise significant influence are accounted
for by the equity method of accounting. Under this method, the
Companys investments in partnerships, tenants in commons
and limited liability companies are recorded at cost and the
investment accounts are adjusted for the Companys share of
the entities income or loss and for distributions and
contributions.
The Companys share of distributions and net losses exceeds
the Companys investments for certain of the equity method
investments, and accordingly, the investment balances are
presented in the accompanying combined balance sheets as
liabilities. The effects of material intercompany transactions
with these equity method investments are eliminated.
Cash and cash
equivalents
The Company considers short-term investments with original
maturities of 90 days or less to be cash equivalents. At
times throughout the year, the Companys cash balances may
exceed amounts insured by the Federal Deposit Insurance
Corporation. The Company believes it is not exposed to any
significant credit risk on cash equivalents.
Restricted
cash
Included in restricted cash are restricted escrow accounts for
insurance and real estate taxes.
Accounts
receivable and deferred rent
Accounts receivable and deferred rent are recorded at their
estimated net realizable value. The Company follows a policy of
providing an allowance for doubtful accounts. The Company does
not require collateral and accounts are considered past due if
payment is not made on a timely basis in accordance with our
credit terms. Accounts considered uncollectible are written off.
The Company incurred bad debt expense of $0.5 million,
$0.7 million and $0.3 million for 2009, 2008, and
2007, respectively.
Deferred leasing
costs
Deferred leasing costs include leasing commissions that are
amortized by the straight-line method over the term of the
lease. All direct and indirect costs, including estimated
internal costs, associated with the leasing of real estate
investments owned by the Company are capitalized and amortized
over the term of the related lease. The Company includes lease
incentive costs, which are payments made on behalf of a tenant
to sign a lease, in deferred leasing costs and amortizes them on
a straight-line basis over the respective lease terms as a
reduction of rental revenues. Unamortized costs are charged to
expense upon the early termination of the lease.
F-55
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
In leasing tenant space, the Company may provide funding to the
lessee through a tenant allowance. In accounting for a tenant
allowance, the Company determines whether the allowance
represents funding for the construction of leasehold
improvements and evaluates the ownership, for accounting
purposes, of such improvements. If the Company is considered the
owner of the leasehold improvements for accounting purposes, the
Company capitalizes the amount of the tenant allowance and
depreciates it over the shorter of the useful life of the
leasehold improvements or the related lease term. If the tenant
allowance represents a payment for a purpose other than funding
leasehold improvements, or in the event the Company is not
considered the owner of the improvements for accounting
purposes, the allowance is considered to be a lease incentive
and is recognized over the lease term as a reduction of rental
revenue on a straight-line basis.
Deferred
financing costs
Costs incurred in connection with obtaining financing are
amortized to interest expense primarily utilizing the effective
interest method.
Real estate
investments
Investment property is stated at cost. Investment property
includes cost of acquisitions, development and construction and
tenant allowances and improvements. Depreciation and
amortization are provided over estimated useful lives ranging
from five to 40 years by use of the straight line method.
Maintenance and repairs are expensed as incurred; major
improvements and betterments are capitalized.
Impairment
Long-lived assets, such as investment property, and purchased
intangible assets subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If
circumstances require that a long-lived asset be tested for
possible impairment, the Company first compares undiscounted
cash flows expected to be generated by an asset to the carrying
value of the asset. If the carrying value of the long-lived
asset is not recoverable on an undiscounted cash flow basis, an
impairment is recognized to the extent that the carrying value
exceeds its fair value. Fair value is determined through various
valuation techniques including discounted cash flow models,
quoted market values and third-party independent appraisals, as
considered necessary.
Acquisition
accounting
The Company accounts for its acquisitions of real estate
investments as a business combination under the acquisition
method of accounting. The related acquired physical assets,
in-place leases acquired and customer relationships, if any, are
recorded at their estimated fair values. The fair values of
acquired properties are determined on an
as-if-vacant basis considering a variety of factors,
including the physical condition and quality of the properties,
estimated rental and absorption rates, estimated future cash
flows, and valuation assumptions consistent with current market
conditions. The as-if-vacant fair value is allocated
to land, building, and improvements based on relevant
information obtained in connection with the acquisition of the
properties. The fair value of in-place leases consists of the
following components as applicable: (1) the estimated cost
to replace the leases, including foregone rents during the
period of finding a new tenant, foregone recovery of tenant
pass-through costs, tenant improvements, and other direct costs
associated with obtaining a new tenant (referred to as acquired
in-place leases); and (2) the above and below market
portion of the leases, determined by comparing the projected
cash flows of the leases in place to projected cash flows of
comparable market-rate leases (referred to as acquired above and
assumed below market leases).
F-56
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
Acquired in-place lease costs are amortized as amortization
expense on a straight-line basis over the remaining life of the
underlying leases. Acquired above and assumed below market
leases are amortized on a straight-line basis as an adjustment
to rental revenue over the remaining term of the underlying
leases, including, for below market leases, fixed option renewal
periods, if any.
Should a tenant terminate its lease, the unamortized portions of
the acquired in-place lease costs, acquired above and assumed
below market leases, associated with that tenant are written off
to amortization expense or rental revenue, as indicated above.
Real estate
ventures
The Company analyzes its investments in real estate joint
ventures under certain Financial Accounting Standards Board
(FASB) guidance to determine if the venture is
considered a variable interest entity and would require
consolidation. To the extent that the ventures do not qualify as
variable interest entities, the Company further assesses the
venture to determine whether a general partner, or the general
partners as a group, controls a limited partnership or similar
entity when the limited partners have certain rights in order to
determine whether consolidation is required.
The Company consolidates those ventures that are considered to
be variable interest entities where the Company is the primary
beneficiary. For non-variable interest entities, the Company
combines those ventures that Dennis J. Doyle controls through
majority ownership interests or where the Company is the
managing member and its partner does not have substantive
participating rights. Control is further demonstrated by the
ability of the general partner to manage
day-to-day
operations, refinance debt and sell the assets of the venture
without the consent of the limited partner and inability of the
limited partner to replace the general partner. The Company uses
the equity method of accounting for those ventures where the
Company does not have control over operating and financial
policies. Under the equity method of accounting, the investment
in each venture is included on the Companys balance sheet;
however, the assets and liabilities of the ventures for which
the Company uses the equity method are not included in the
balance sheet. The investment is adjusted for contributions,
distributions and the Companys proportionate share of the
net earnings or losses of each respective venture.
To the extent that the Company contributed assets to a venture,
the Companys investment in the venture is recorded at cost
basis in the assets that were contributed to the venture. To the
extent that the cost basis is different than the basis reflected
at the venture level, the basis difference is amortized over the
life of the related asset and included in the Companys
share of equity in net income of the venture. The Company
recognizes gains on the contribution or sale of real estate to
ventures, relating solely to the outside partners
interest, to the extent the economic substance of the
transaction is a sale.
On a periodic basis, the Company assesses whether there are any
indicators that the carrying value of its investments in
ventures may be impaired on an other than temporary basis. An
investment is impaired only if managements estimate of the
fair value of the investment is less than the carrying value of
the investment on an other than temporary basis. To the extent
impairment has occurred, the loss shall be measured as the
excess of the carrying value of the investment over the fair
value of the investment.
Revenue
recognition
Rental revenue.
Rental revenue includes rents
that each tenant pays in accordance with the terms of its
respective lease reported on a straight-line basis over the
non-cancellable term of the lease. Certain properties have
leases that provide for tenant occupancy during periods where no
rent is due or where minimum rent payments change during the
term of the lease. Deferred rent in the accompanying balance
sheet includes the cumulative difference between rental revenue
as recorded on a straight-line basis and rents received from the
tenants in accordance with the lease terms.
F-57
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
Tenant reimbursements for real estate taxes, common area
maintenance, and other recoverable costs are recognized in the
period that the expenses are incurred. Lease termination fees,
are recognized when the fees are determinable, tenant vacancy
has occurred, collectability is reasonably assured, and the
Company has no continuing obligation to provide services to such
former tenants.
The timing of rental revenue recognition is impacted by the
ownership of tenant improvements and allowances. When we are the
owner of the tenant improvements, revenue recognition commences
after both the improvements are completed and the tenant takes
possession or control of the space. In contrast, if we determine
that the tenant allowances we are funding are lease incentives,
then we commence revenue recognition when possession or control
of the space is turned over to the tenant.
We record lease termination fees when a tenant has executed a
definitive termination agreement with us and the payment of the
termination fee is not subject to any conditions that must be
met or waived before the fee is due to us.
Service fee revenue.
The Company recognizes
revenue associated with financing commissions when commissions
are earned. Service costs include all direct material and labor
costs and those indirect costs related to financing services and
are charged to expense as incurred.
Property
sales
Gains on sales of real estate are recognized in full when the
profit is determinable and the earnings process is complete. We
make judgments based on the specific terms of each transaction
as to the amount of the total profit from the transaction that
we recognize considering factors such as continuing ownership
interest we may have with the buyer (partial sales)
and our level of future involvement with the property or the
buyer that acquires the assets. If the sales criteria are not
met, we defer gain recognition and account for the continued
operations of the property by applying the finance, installment
or cost recovery methods, as appropriate, until the full accrual
sales criteria are met. Estimated future costs to be incurred
after completion of each sale are included in the determination
of the gain on sales.
Gains from sales of depreciated property are included in
discontinued operations and the proceeds from the sale of these
properties are classified in the investing activities section of
the combined statements of cash flows.
Income
taxes
The Company represents a combination of entities that are either
a Limited Liability Company (LLC) or a Limited
Partnership (LP). Generally, an LLC is treated
either as a partnership for federal income tax purposes or as a
division of its sole member. As a result, a LLC and LP are
generally not subject to either federal, state or local income
taxes as the respective members/partners are taxed on their
allocable share of the entitys taxable income. Therefore,
no provision or liability for federal, state, or local income
taxes has been included in these combined financial statements.
Discontinued
operations
The Company reclassifies material operations related to
properties sold or held for sale during the period to
discontinued operations for all periods presented.
Derivative
financial instruments and hedging activities
Derivative financial instruments are utilized by the Company to
reduce its exposure to market risks from changes in interest
rates. The derivative financial instruments consist of interest
rate caps and swaps. The Company does not currently hold or
issue derivative financial instruments for speculative or
F-58
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
trading purposes. Derivative financial instruments are recorded
as either an asset or a liability measured at fair value. If the
derivative does not qualify as a hedge or is not designated as a
hedge, the change in fair value of the derivative is recognized
currently in earnings. If the derivative qualifies for hedge
accounting, the change in fair value of the derivative is
recognized either currently in earnings or deferred in other
comprehensive income depending on the type of hedge and to what
extent the hedge is effective.
The Company manages a portion of its variable rate debt using an
interest rate swap. The Company entered into a fixed rate swap
to alter its exposure to the impact of changing interest rates
on its results of operations and future cash outflows for
interest. Fixed rate swaps are used to reduce the Companys
risk of the possibility of increased interest costs.
Fair value of
financial instruments
On January 1, 2008, the Company adopted guidance for
accounting for fair value measurements of financial assets and
financial liabilities and for fair value measurements of
nonfinancial items that are recognized or disclosed at fair
value in the combined financial statements on a recurring basis.
On January 1, 2009, the Company adopted guidance for fair
value measurement related to nonfinancial items that are
recognized and disclosed at fair value in the combined financial
statements on a nonrecurring basis. The guidance establishes a
fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurements)
and the lowest priority to measurements involving significant
unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy are as follows:
|
|
Ø
|
Level 1 inputs are quoted prices (unadjusted) in active markets
for identical assets or liabilities that the Company has the
ability to access at the measurement date.
|
|
Ø
|
Level 2 inputs are inputs other than quoted prices included
within Level 1 that are observable for the asset or liability,
either directly or indirectly.
|
|
Ø
|
Level 3 inputs are unobservable inputs for the asset or
liability.
|
The level in the fair value hierarchy within which a fair value
measurement in its entirety falls is based on the lowest level
input that is significant to the fair value measurement in its
entirety.
Fair value is the price that would be received for an asset or
paid to transfer a liability (an exit price) in the
Companys principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date.
The carrying value of cash and cash equivalents, restricted
cash, accounts receivable, and accounts payable, and other
working capital items approximates fair value at
December 31, 2009 and 2008 due to the short maturity nature
of these instruments. The fair value of debt is disclosed in
Note 10.
Recently adopted
pronouncements
In December 2007, the FASB issued updated guidance, which
applies to all transactions or events in which an entity obtains
control of one or more businesses. This guidance establishes the
acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed, (ii) requires
expensing of most transaction costs, and (iii) requires the
acquirer to disclose to investors and other users all of the
information needed to evaluate and understand the nature and
financial effect of the business combination. These provisions
were adopted by the Company on January 1, 2009. The primary
impact of adopting this guidance on the Companys combined
financial statements was the requirement to expense transaction
costs relating to its acquisition activities in 2009.
F-59
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
In February 2008, the FASB issued updated guidance which defers
the effective date of previous guidance issued regarding the
fair value of non-financial assets and liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a non-recurring basis, until fiscal
years beginning after November 15, 2008. These provisions
were adopted by the Company on January 1, 2009. The
adoption of this guidance did not have a material impact on the
combined financial statements.
In March 2008, the FASB issued guidance which enhances
disclosures related to derivative instruments and hedging
activities. This guidance is intended to improve financial
reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better
understand their effects on an entitys financial position,
financial performance, and cash flows. It also requires
disclosure about an entitys strategy and objectives for
using derivatives, the fair values of derivative instruments and
their related gains and losses. This guidance was adopted by the
Company on January 1, 2009 and did not have a material
impact on the combined financial statements.
In May 2009, the FASB issued updated guidance to establish
general standards of accounting for and disclosure of subsequent
events. This guidance renames the two types of subsequent events
as recognized subsequent events or non-recognized subsequent
events and modified the definition of the evaluation period for
subsequent events as events or transactions that occur after the
balance sheet date, but before the financial statements are
issued. This will require entities to disclose the date, through
which an entity has evaluated subsequent events and the basis
for that date. The Company adopted this guidance during 2009.
The adoption of this guidance did not have a material impact on
the Companys combined financial statements.
In June 2009, the FASB issued guidance, which establishes the
FASBs Accounting Standards Codification (the
Codification) as the exclusive authoritative
reference for nongovernmental U.S. GAAP for use in financial
statements, except for SEC rules and interpretative releases,
which are also authoritative for SEC registrants. As a result,
the Codification provides guidance that all standards will carry
the same level of authority. The Company adopted this guidance
during 2009. The only impact of adopting this provision was to
update and remove certain references to technical accounting
literature in the combined financial statements.
New accounting
pronouncements
In November 2008, the FASB ratified guidance related to equity
method investment accounting. This guidance applies to all
investments accounted for under the equity method and clarifies
the accounting for certain transactions and impairment
considerations involving equity method investments. This
guidance is effective beginning in the first quarter of fiscal
year 2010. The Company is currently evaluating the impact this
guidance will have on the combined financial statements.
In June 2009, the FASB issued updated guidance, which amends
guidance for determining whether an entity is a variable
interest entity (VIE) and requires the performance
of a qualitative rather than a quantitative analysis to
determine the primary beneficiary of a VIE. Under this guidance,
an entity would be required to consolidate a VIE if it has
(i) the power to direct the activities that most
significantly impact the entitys economic performance and
(ii) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE that could be significant to the
VIE. This guidance is effective for the first annual reporting
period that begins on January 1, 2010, with early adoption
prohibited. While the Company is currently evaluating the effect
of adopting this guidance, the Company believes that the
adoption will not have a material impact on the combined
financial statements.
F-60
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
Unaudited interim
information
The financial statements as of March 31, 2010 and for the
three months ended March 31, 2010 and 2009 are unaudited.
In the opinion of management, such financial statements reflect
all adjustments necessary for a fair presentation of the
respective interim periods. All such adjustments are of a normal
recurring nature.
4. DISCONTINUED
OPERATIONS
On October 13, 2009, the Company sold two buildings from
Welsh Kiesland, LLC in Ohio, to an unrelated third party for
approximately $5.7 million, resulting in a gain of
$1.6 million. The results of operations for these buildings
for 2009, 2008 and 2007 have been reported as discontinued
operations.
On September 10, 2008, the Company sold one building from
Oakcreek Industrial Partners, LLC in Minnesota to an unrelated
third party for approximately $6.8 million, resulting in
gain of $1.1 million. The results of operations for this
building for 2008 and 2007 have been reported as discontinued
operations.
Net revenue and income of all the sold buildings included in
discontinued operations for 2009, 2008 and 2007 are summarized
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Revenue
|
|
$
|
506
|
|
|
$
|
1,236
|
|
|
$
|
1,390
|
|
Expenses
|
|
|
(182
|
)
|
|
|
(1,012
|
)
|
|
|
(1,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
324
|
|
|
|
224
|
|
|
|
53
|
|
Gain on disposition of real estate investments
|
|
|
1,595
|
|
|
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from discontinued operations
|
|
$
|
1,919
|
|
|
$
|
1,285
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. CASH
FLOW INFORMATION
The cash paid by the Company for interest (including amounts
capitalized of $0, $0 and $0.5 million) for the years ended
December 31, 2009, 2008, and 2007 was $12.0 million,
$12.1 million, and $8.1 million, respectively.
The Company had the following non-cash transactions during the
year ended December 31, 2009 that represented adjustments
to proceeds from capital contributions:
|
|
Ø
|
conversion of outstanding notes payable to equity in the amount
of $0.7 million
|
|
Ø
|
contribution of undeveloped land in exchange for equity
ownership in a combined entity of $1.5 million
|
|
Ø
|
debt repayments through equity contributions of $0.7 million
|
|
Ø
|
acquisition of ownership of an equity method investment through
issuance of shares of equity of an affiliated entity for
$0.6 million
|
|
Ø
|
contribution of mortgage receivable of $0.8 million.
|
For the year ended December 31, 2007, the Company had debt
repayments of $7.9 million through noncash equity
contributions.
6. REAL
ESTATE ACQUISITIONS
In July 2009, the Company purchased the Fond du Lac III
building, an office warehouse property with approximately
234,000 of square footage, located in Fond du Lac, Wisconsin for
a total of
F-61
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
$5.1 million. The Company paid cash upon acquisition.
Subsequent to the acquisition date, the Company incurred new
debt with an original principal amount of $2.3 million.
In November 2009, the Company purchased the Cahill Road
building, an industrial property with approximately 46,000 of
square footage, located in Edina, Minnesota for a total purchase
price of $2.4 million. To finance the purchase, the Company
incurred new debt with an original principal amount of
$1.2 million.
The Company had no acquisitions during 2008.
In April 2007, the Company acquired the Erie Industrial property
with approximately 1,055,000 square footage, in Gary,
Indiana for a total purchase price of approximately
$19.4 million. To finance this purchase, the Company
incurred new debt with an original principal amount of
$15.3 million.
In December 2007, the Company acquired the Woods Equipment
property with approximately 106,000 square footage, in
Kronenwettee, Wisconsin for a total purchase price of
approximately $7.1 million. To finance this purchase, the
Company incurred new debt with an original principal amount of
$5.7 million.
7. INTANGIBLE
ASSETS AND LIABILITIES
Intangible assets and liabilities subject to amortization
consist of the following at March 31, 2010 (unaudited) (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
basis
|
|
|
amortization
|
|
|
Net
|
|
|
|
|
Acquired in-place leases
|
|
$
|
18,090
|
|
|
$
|
(7,306
|
)
|
|
$
|
10,784
|
|
Acquired above market lease
|
|
|
3,967
|
|
|
|
(1,326
|
)
|
|
|
2,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
22,057
|
|
|
$
|
(8,632
|
)
|
|
$
|
13,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed below market leases
|
|
$
|
3,295
|
|
|
$
|
(1,674
|
)
|
|
$
|
1,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets and liabilities subject to amortization
consist of the following at December 31, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
basis
|
|
|
amortization
|
|
|
Net
|
|
|
|
|
Acquired in-place leases
|
|
$
|
15,070
|
|
|
$
|
(6,700
|
)
|
|
$
|
8,370
|
|
Acquired above market lease
|
|
|
3,323
|
|
|
|
(1,188
|
)
|
|
|
2,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
18,393
|
|
|
$
|
(7,888
|
)
|
|
$
|
10,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed below market leases
|
|
$
|
3,316
|
|
|
$
|
(1,608
|
)
|
|
$
|
1,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets and liabilities subject to amortization
consist of the following at December 31, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
basis
|
|
|
amortization
|
|
|
Net
|
|
|
|
|
Acquired in-place leases
|
|
$
|
17,658
|
|
|
$
|
(6,148
|
)
|
|
$
|
11,510
|
|
Acquired above market lease
|
|
|
4,646
|
|
|
|
(946
|
)
|
|
|
3,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
22,304
|
|
|
$
|
(7,094
|
)
|
|
$
|
15,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed below market leases
|
|
$
|
3,396
|
|
|
$
|
(1,255
|
)
|
|
$
|
2,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-62
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
In connection with the real estate acquisitions for the period
ended March 31, 2010 (unaudited) and the year ended
December 31, 2009 and 2007, the following amounts were
allocated to intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
|
average
|
|
|
|
|
|
average
|
|
|
|
|
|
|
life
|
|
|
|
|
|
life
|
|
|
|
|
|
life
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2007
|
|
|
2007
|
|
|
|
|
Acquired in-place leases
|
|
$
|
3,212
|
|
|
|
9 years
|
|
|
$
|
1,454
|
|
|
|
5 years
|
|
|
$
|
3,050
|
|
|
|
10 years
|
|
Acquired above market leases
|
|
|
652
|
|
|
|
9 years
|
|
|
|
64
|
|
|
|
4 years
|
|
|
|
1,139
|
|
|
|
14 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,864
|
|
|
|
|
|
|
$
|
1,518
|
|
|
|
|
|
|
$
|
4,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed below market leases
|
|
$
|
|
|
|
|
|
|
|
$
|
16
|
|
|
|
3 years
|
|
|
$
|
188
|
|
|
|
2 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization for the years ended December 31, 2009, 2008,
and 2007 was $3.5 million, $4.4 million, and
$3.1 million, respectively.
The estimated amortization for the next five years is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
2010
|
|
$
|
3,038
|
|
|
$
|
308
|
|
2011
|
|
|
2,246
|
|
|
|
270
|
|
2012
|
|
|
1,856
|
|
|
|
252
|
|
2013
|
|
|
1,338
|
|
|
|
173
|
|
2014
|
|
|
1,027
|
|
|
|
156
|
|
8. OWNERSHIP
CHANGES IN REAL ESTATE ENTITIES
The combined financial statements of the Company include a
collection of real estate entities, that directly or indirectly
own real estate, controlled by Dennis J. Doyle (see
Note 1). Throughout the historical periods presented,
ownership changes in the entities resulted in changes to
Mr. Doyles control over certain entities. When
control was gained, entities were combined within these combined
financial statements. When ownership changes resulted in
Mr. Doyle not having control, entities were removed from
these combined financial statements and shown in Welsh
Contribution Companies combined financial statements.
Due to change in ownership and control during 2009, Woods
Equipment and Franklin II were removed from these combined
financial statements and Lambert III and Baker Road were
included in these
F-63
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
combined financial statements. These activities for the year
ended December 31, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities
|
|
|
Entities
|
|
|
Net
|
|
|
|
included
|
|
|
excluded
|
|
|
effect
|
|
|
|
|
Rental properties, net
|
|
$
|
42,220
|
|
|
$
|
(9,429
|
)
|
|
$
|
32,791
|
|
Cash
|
|
|
595
|
|
|
|
(581
|
)
|
|
|
14
|
|
Other assets, net
|
|
|
(702
|
)
|
|
|
(2,543
|
)
|
|
|
(3,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
42,113
|
|
|
$
|
(12,553
|
)
|
|
$
|
29,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages and notes payable
|
|
$
|
39,752
|
|
|
$
|
(9,402
|
)
|
|
$
|
30,350
|
|
Other liabilities
|
|
|
396
|
|
|
|
(39
|
)
|
|
|
357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
40,148
|
|
|
|
(9,441
|
)
|
|
|
30,707
|
|
Owners equity
|
|
|
1,965
|
|
|
|
(3,112
|
)
|
|
|
(1,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and owners equity
|
|
$
|
42,113
|
|
|
$
|
(12,553
|
)
|
|
$
|
29,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to change in ownership and control during 2008, American
Identity/Staples and 201 Mississippi were removed from these
combined financial statements and Southgate Office Plaza and
Romulus Portfolio were included in these combined financial
statements. These activities for the year ended
December 31, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities
|
|
|
Entities
|
|
|
Net
|
|
|
|
included
|
|
|
excluded
|
|
|
effect
|
|
|
|
|
Rental properties, net
|
|
$
|
74,192
|
|
|
$
|
(25,605
|
)
|
|
$
|
48,587
|
|
Cash
|
|
|
541
|
|
|
|
(581
|
)
|
|
|
(40
|
)
|
Other assets, net
|
|
|
9,564
|
|
|
|
(3,858
|
)
|
|
|
5,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
84,297
|
|
|
$
|
(30,044
|
)
|
|
$
|
54,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages and notes payable
|
|
$
|
78,560
|
|
|
$
|
(25,192
|
)
|
|
$
|
53,368
|
|
Other liabilities
|
|
|
2,015
|
|
|
|
(555
|
)
|
|
|
1,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
80,575
|
|
|
|
(25,747
|
)
|
|
|
54,828
|
|
Owners equity
|
|
|
3,722
|
|
|
|
(4,297
|
)
|
|
|
(575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and owners equity
|
|
$
|
84,297
|
|
|
$
|
(30,044
|
)
|
|
$
|
54,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For year ended December 31, 2007, the inclusion/exclusion
of equity upon combining or uncombining of related entities in
the statements of changes in owners equity relates to
change in ownership or control that either increased or
decreased the equity method investment.
9. EQUITY
METHOD INVESTMENTS
The Company has investments in various real estate ventures. The
equity method of accounting is applied to such investments when
the ownership structure prevents the Company from exercising a
controlling influence over operating and financial policies of
the businesses. Under this method, the Companys equity in
the net earnings or losses of the investments is reflected as
equity in net loss from equity method investments on the
combined statements of operations. A list of investment real
estate properties accounted for under the equity method is
included in Note 2.
F-64
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
The summarized financial information shown below includes all
investments carried on the equity method for the year ended
December 31, 2009, 2008 and 2007 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Revenue
|
|
$
|
112,444
|
|
|
$
|
120,585
|
|
|
$
|
114,818
|
|
Net loss
|
|
|
(3,429
|
)
|
|
|
(672
|
)
|
|
|
(7,489
|
)
|
Equity in net loss from equity method investments
|
|
|
(1,252
|
)
|
|
|
(1,132
|
)
|
|
|
(2,130
|
)
|
Total assets
|
|
|
398,335
|
|
|
|
446,289
|
|
|
|
488,490
|
|
Total liabilities
|
|
|
347,612
|
|
|
|
383,371
|
|
|
|
403,311
|
|
Equity method investments
|
|
|
11,903
|
|
|
|
15,905
|
|
|
|
28,561
|
|
Losses and distributions in excess of combinations in equity
method investments
|
|
|
(8,430
|
)
|
|
|
(6,758
|
)
|
|
|
(3,426
|
)
|
F-65
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
10. MORTGAGES
AND NOTES PAYABLE
Mortgages and notes payable consists of the following at
March 31, 2010 (unaudited) and December 31, 2009 and
2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Mortgage Notes PayableFixed Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Generally due in monthly installments of principal and interest
and mature at various dates through 2026; interest rates ranging
from 5.20% to 8.48%, with weighted average interest rate of
5.97% at March 31, 2010 (unaudited); interest rates ranging
from 5.20% to 8.48%, with weighted average interest rate of
5.98% at December 31, 2009; and interest rates ranging from
4.50% to 8.48%, with weighted average interest rate of 5.72% at
December 31, 2008
|
|
$
|
187,058
|
|
|
$
|
177,420
|
|
|
$
|
164,319
|
|
Mortgage Notes PayableVariable Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Generally due in monthly installments of principal and interest
and mature at various date through 2017; interest rates ranging
from 5.70% to 6.35%, with weighted average interest rate of
5.86% at March 31, 2010 (unaudited); interest rates ranging
from 5.70% to 6.35%, with weighted average interest rate of
5.86% at December 31, 2009 and interest rates ranging from
1.97% to 10.34%, with weighted average interest rate of 4.01% at
December 31, 2008
|
|
|
35,870
|
|
|
|
40,025
|
|
|
|
30,793
|
|
Note Payable to Financial InstitutionFixed Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest accrues at a rate of 15% at December 31, 2009 and
2008, with a maturity date of June 2011. This note is unsecured
|
|
|
6,923
|
|
|
|
6,923
|
|
|
|
6,923
|
|
Notes PayableRelated Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable due to members upon demand and non-interest bearing
|
|
|
592
|
|
|
|
103
|
|
|
|
675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230,443
|
|
|
|
224,471
|
|
|
|
202,710
|
|
Acquired discount or premium of certain debt instruments listed
above
|
|
|
(947
|
)
|
|
|
(968
|
)
|
|
|
(1,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgages and Notes Payable
|
|
$
|
229,494
|
|
|
$
|
223,503
|
|
|
$
|
201,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The mortgage notes payable are subject to various operating and
financial covenants. In addition, the Company is required to
periodically fund and maintain escrow accounts to make future
real estate tax and insurance payments, as well as to fund
certain tenant related costs and capital expenditures. These
escrow accounts are included in restricted cash. The Company is
in compliance with all financial covenants as of
December 31, 2009.
The mortgage notes payable are collateralized by their
respective real estate investments.
As of March 31, 2010 (unaudited), December 31, 2009
and 2008, $131.9 million, $132.6 million and
$100 million, respectively, of the mortgage notes payable
have been guaranteed by certain members of entities combined
into the Company.
F-66
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
Scheduled maturities of debt are as follows at December 31,
2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
2010
|
|
$
|
7,838
|
|
|
$
|
8,225
|
|
2011
|
|
|
45,494
|
|
|
|
47,688
|
|
2012
|
|
|
45,569
|
|
|
|
45,518
|
|
2013
|
|
|
3,020
|
|
|
|
2,590
|
|
2014
|
|
|
4,133
|
|
|
|
3,676
|
|
Thereafter
|
|
|
124,389
|
|
|
|
116,774
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
230,443
|
|
|
$
|
224,471
|
|
|
|
|
|
|
|
|
|
|
The fair value of the Companys fixed rate debt is
$183 million, $164 million and $151 million at
March 31, 2010 (unaudited), December 31, 2009 and
2008, respectively. The fair value of the Companys
variable debt is $36 million, $36 million and
$28 million at March 31, 2010 (unaudited),
December 31, 2009 and 2008, respectively. The Company
estimates the fair value of debt using a discounted cash flow
analysis and a yield rate that was estimated based on the
borrowing rates currently available to the Company for bank
loans with similar terms and maturities, which is a level 2
input.
11. VARIABLE
INTEREST ENTITIES
In the normal course of business the Company invests in various
entities that may be VIEs. When determining the primary
beneficiary of a VIE, the Company estimates the future cash
flows and performance of the VIE, analyzes the variability in
those cash flows and allocates the losses and returns among the
identified parties holding a variable interest. The Company
considers its explicit arrangements and implicit variable
interests. If the Companys variable interest absorbs the
majority of the variability in the expected losses or the
residual returns of the VIE, the Company is considered the
primary beneficiary of the VIE. The Company identified TriCor
Partners LLC as a VIE in which the Company is the primary
beneficiary as a result of a financial guarantee provided by the
Company on the entitys debt. Therefore, that entity is
combined. The carrying amounts and classification of assets and
liabilities included in the Companys combined balance
sheets for this entity is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Total assets
|
|
$
|
1,496
|
|
|
$
|
1,652
|
|
Total liabilities
|
|
|
2,730
|
|
|
|
2,794
|
|
F-67
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
12. TENANT
LEASES
The Company leases various office and warehouse space to tenants
over terms ranging from one to sixteen years. Some of the leases
have renewal options for additional terms. The leases provide
for base monthly rentals and reimbursements for real estate
taxes and common area maintenance.
At December 31, 2009, the Company had the following future
minimum rentals on noncancellable leases (in thousands):
|
|
|
|
|
2010
|
|
$
|
20,381
|
|
2011
|
|
|
17,636
|
|
2012
|
|
|
16,046
|
|
2013
|
|
|
13,258
|
|
2014
|
|
|
10,812
|
|
Thereafter
|
|
|
25,052
|
|
|
|
|
|
|
Total minimum base lease commitments
|
|
$
|
103,185
|
|
|
|
|
|
|
13. IMPAIRMENT
CHARGE
As a result of the downturn in the U.S. economy, the Company has
observed decreases in occupancy, deterioration of market rents,
and/or tenants financial problems in certain markets. In
addition, in certain instances, the Company has reevaluated the
holding periods of properties. Based on these observations and
evaluations, we recognized a non-cash impairment charge of
$6.4 million and $7.6 million in 2009 and 2008,
respectively, on two of our industrial buildings.
The estimated fair values of the impaired properties of
$20.3 million and $6.7 million at December 31,
2009 and 2008, respectively, were determined by management
primarily using the income approach. The fair value assumptions
employed for this impairment evaluation were generally based on
a discounted cash flow approach and review of comparable
activities in the market place, which fall within level 3
of the fair value hierarchy.
14. TRANSACTIONS
WITH RELATED PARTIES
During 2009, 2008 and 2007, the Company engaged in various
transactions with WelshCo, which is a related party, due to
common ownership. These transactions are described below (in
thousands):
Property
management expense
The Company paid property management fees to WelshCo. The total
amounts paid were $827, $590, and $486 for 2009, 2008 and 2007,
respectively.
Lease
commissions
The Company paid leasing commission to WelshCo in the amount of
$1,170, $529 and $78 for 2009, 2008 and 2007, respectively.
Leasing commissions are capitalized on the combined Balance
Sheets.
Rental
revenue
The Company received rental revenue from WelshCo in the amount
of $915 for 2009.
Service fee
revenue
The Company earned $323 of revenues related to mortgage
origination fee income from affiliated entities during 2007.
F-68
Notes to Welsh
Predecessor Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
Construction and
other property expense
The Company paid construction and other property expense to
WelshCo. The total amounts paid to WelshCo were $1,211, $452,
and $999 for 2009, 2008 and 2007, respectively. Of the total
amounts paid, $725, $280 and $650 were capitalized in net real
estate investments on the combined balance sheets.
Other capitalized
amounts
The Company paid other amounts at purchase or refinance to
WelshCo. The amounts paid were $110, $71, and $95 for 2009, 2008
and 2007, respectively. Amounts paid at purchase or refinance
were capitalized on the combined balance sheets.
Discontinued
operations
The Company paid $164 in commissions to WelshCo for property
sales during 2008.
15. COMMITMENTS
AND CONTINGENCIES
The Company is not subject to any material litigation nor to
managements knowledge is any material litigation currently
threatened against the Company other than routine litigation,
claims and administrative proceedings arising in the ordinary
course of business. Management believes that such routine
litigation, claims and administrative proceedings will not have
a material adverse impact on the Companys combined
financial position or combined results of operations.
16. UNAUDITED
INTERIM TRANSACTIONS
On March 5, 2010, the Company acquired a building in
Johnson County, Kansas for approximately $12.5 million. The
purchase price was partially funded through new debt with a
original principal of $6.9 million.
F-69
Welsh Predecessor
Companies
SCHEDULE IIIDECEMBER 31,
2009
REAL ESTATE AND ACCUMULATED DEPRECIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost capitalized
subsequent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial cost to
the Company
|
|
to
acquisition
|
|
Gross carry
amount carried at 12/31/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
&
|
|
|
|
Buildings
&
|
|
|
|
Buildings
&
|
|
|
|
Accumulated
|
|
Year of
|
|
Year
|
Development
|
|
Type
|
|
Encumbrances
|
|
Land
|
|
improvements
|
|
Land
|
|
improvements
|
|
Land
|
|
improvements
|
|
Total
|
|
depreciation
|
|
construction
|
|
acquired
|
|
|
|
(dollars in
thousands)
|
|
ADDISON, IL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450 South Lombard Road
|
|
Industrial
|
|
$4,759
|
|
$1,746
|
|
$4,379
|
|
$
|
|
$437
|
|
$1,746
|
|
$4,816
|
|
$6,562
|
|
$630
|
|
1979
|
|
2005
|
ANKENY, IA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2205 SE Creekview Drive
|
|
Industrial
|
|
2,192
|
|
274
|
|
|
|
|
|
2,201
|
|
274
|
|
2,201
|
|
2,475
|
|
404
|
|
2002
|
|
2001
|
BLOOMINGTON, MN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5001 American Boulevard West
|
|
Office
|
|
14,000
|
|
6,985
|
|
5,217
|
|
|
|
140
|
|
6,985
|
|
5,357
|
|
12,342
|
|
204
|
|
1970
|
|
2008
|
CINCINNATI, OH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11590 Century Blvd
|
|
Industrial
|
|
2,407
|
|
890
|
|
2,465
|
|
(215)
|
|
(375)
|
|
675
|
|
2,090
|
|
2,765
|
|
298
|
|
1987
|
|
2006
|
5836-5885 Highland Ridge Dr.
|
|
Industrial
|
|
3,065
|
|
812
|
|
2,504
|
|
|
|
100
|
|
812
|
|
2,604
|
|
3,416
|
|
274
|
|
1986
|
|
2006
|
11500 Century Blvd
|
|
Industrial
|
|
1,557
|
|
289
|
|
1,163
|
|
|
|
322
|
|
289
|
|
1,485
|
|
1,774
|
|
176
|
|
1987
|
|
2006
|
106 Circle Freeway Dr.
|
|
Industrial
|
|
1,423
|
|
315
|
|
1,258
|
|
|
|
12
|
|
315
|
|
1,270
|
|
1,585
|
|
126
|
|
1986
|
|
2006
|
5 Circle Freeway Dr.
|
|
Industrial
|
|
3,593
|
|
864
|
|
3,710
|
|
(172)
|
|
(33)
|
|
692
|
|
3,677
|
|
4,369
|
|
535
|
|
1986
|
|
2006
|
Century Land
|
|
Undeveloped Land
|
|
|
|
1,107
|
|
|
|
|
|
|
|
1,107
|
|
|
|
1,107
|
|
|
|
na
|
|
2006
|
EDEN PRAIRIE, MN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7249 Flying Cloud Drive
|
|
Industrial
|
|
2,700
|
|
862
|
|
2,466
|
|
56
|
|
1,468
|
|
918
|
|
3,934
|
|
4,852
|
|
1,603
|
|
1984
|
|
2003
|
EDINA, MN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5600 Lincoln Drive
|
|
Industrial
|
|
2,201
|
|
523
|
|
2,092
|
|
141
|
|
1,619
|
|
664
|
|
3,711
|
|
4,375
|
|
1,596
|
|
1974
|
|
1998
|
7401 Cahill Road
|
|
Industrial
|
|
1,198
|
|
929
|
|
1,191
|
|
|
|
|
|
929
|
|
1,191
|
|
2,120
|
|
6
|
|
|
|
|
ELK GROVE, IL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2201 Lunt Road
|
|
Industrial
|
|
6,637
|
|
2,127
|
|
6,083
|
|
(1,050)
|
|
(2,558)
|
|
1,077
|
|
3,525
|
|
4,602
|
|
589
|
|
1955
|
|
2005
|
FOND DU LAC, WI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325 Larson Drive
|
|
Industrial
|
|
2,196
|
|
299
|
|
3,578
|
|
|
|
|
|
299
|
|
3,578
|
|
3,877
|
|
45
|
|
1996
|
|
2009
|
GREEN PARK, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10360 Lake Bluff Drive
|
|
Industrial
|
|
9,450
|
|
1,756
|
|
8
|
|
441
|
|
8,580
|
|
2,197
|
|
8,588
|
|
10,785
|
|
1,211
|
|
2007
|
|
2006
|
HAMILTON, OH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 Enterprise Drive
|
|
Industrial
|
|
1,990
|
|
370
|
|
2,103
|
|
(66)
|
|
(344)
|
|
304
|
|
1,759
|
|
2,063
|
|
166
|
|
2003
|
|
2006
|
3440 Symmes Road
|
|
Industrial
|
|
2,548
|
|
440
|
|
2,431
|
|
|
|
|
|
440
|
|
2,431
|
|
2,871
|
|
192
|
|
2000
|
|
2006
|
HAZELWOOD, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
519-529
McDonnell Pointe Blvd
|
|
Industrial
|
|
5,302
|
|
961
|
|
193
|
|
(618)
|
|
1,711
|
|
343
|
|
1,904
|
|
2,247
|
|
212
|
|
2007
|
|
2006
|
629651 Lambert Point Drive
|
|
Industrial
|
|
11,319
|
|
2,323
|
|
|
|
|
|
10,101
|
|
2,323
|
|
10,101
|
|
12,424
|
|
2,062
|
|
2006
|
|
2005
|
F-70
Welsh Predecessor
Companies
SCHEDULE IIIDECEMBER 31,
2009
REAL ESTATE AND ACCUMULATED DEPRECIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost capitalized
subsequent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial cost to
the Company
|
|
to
acquisition
|
|
Gross carry
amount carried at 12/31/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
&
|
|
|
|
Buildings
&
|
|
|
|
Buildings
&
|
|
|
|
Accumulated
|
|
Year of
|
|
Year
|
Development
|
|
Type
|
|
Encumbrances
|
|
Land
|
|
improvements
|
|
Land
|
|
improvements
|
|
Land
|
|
improvements
|
|
Total
|
|
depreciation
|
|
construction
|
|
acquired
|
|
|
|
(dollars in
thousands)
|
|
INDIANAPOLIS, IN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2036 Stout Field W Drive
|
|
Industrial
|
|
$1,438
|
|
$335
|
|
$1,266
|
|
$(69)
|
|
$(163)
|
|
$266
|
|
$1,103
|
|
$1,369
|
|
$138
|
|
1998
|
|
2006
|
7750 Zionsville
|
|
Industrial
|
|
2,765
|
|
400
|
|
3,189
|
|
|
|
241
|
|
400
|
|
3,430
|
|
3,830
|
|
337
|
|
1988
|
|
2006
|
JACKSONVILLE, FL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5540 Broadway
|
|
Industrial
|
|
2,698
|
|
420
|
|
2,778
|
|
|
|
76
|
|
420
|
|
2,854
|
|
3,274
|
|
260
|
|
1974
|
|
2006
|
5301 West 5th
|
|
Industrial
|
|
3,157
|
|
266
|
|
2,855
|
|
|
|
6
|
|
266
|
|
2,861
|
|
3,127
|
|
252
|
|
1973
|
|
2006
|
MINNETONKA, MN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4400 Baker Road
|
|
Office
|
|
9,783
|
|
2,586
|
|
7,918
|
|
|
|
135
|
|
2,586
|
|
8,053
|
|
10,639
|
|
507
|
|
2006
|
|
2006
|
4350 Baker Road
|
|
Office
|
|
17,892
|
|
2,693
|
|
16,546
|
|
|
|
472
|
|
2,693
|
|
17,018
|
|
19,711
|
|
1,181
|
|
2008
|
|
2006
|
Baker Road Land
|
|
Undeveloped Land
|
|
|
|
2,298
|
|
|
|
|
|
|
|
2,298
|
|
|
|
2,298
|
|
|
|
na
|
|
2006
|
NORTH CHARLESTON, SC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8085 Rivers Avenue
|
|
Office
|
|
12,869
|
|
3,350
|
|
9,922
|
|
|
|
844
|
|
3,350
|
|
10,766
|
|
14,116
|
|
991
|
|
1988
|
|
2006
|
OVERLAND, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1920 Beltway Drive
|
|
Industrial
|
|
2,387
|
|
573
|
|
1,918
|
|
|
|
338
|
|
573
|
|
2,256
|
|
2,829
|
|
367
|
|
2006
|
|
2005
|
PLYMOUTH, MN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99059951 13th Avenue North
|
|
Industrial
|
|
2,642
|
|
477
|
|
1,233
|
|
|
|
681
|
|
477
|
|
1,914
|
|
2,391
|
|
1,134
|
|
1968
|
|
1993
|
ROMULUS, MI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6505 Cogswell Road
|
|
Industrial
|
|
17,608
|
|
2,400
|
|
16,431
|
|
|
|
15
|
|
2,400
|
|
16,446
|
|
18,846
|
|
465
|
|
2005
|
|
2007
|
7525 Cogswell Road
|
|
Industrial
|
|
16,835
|
|
2,350
|
|
15,487
|
|
|
|
204
|
|
2,350
|
|
15,691
|
|
18,041
|
|
468
|
|
2001
|
|
2007
|
38100 Ecorse Road
|
|
Industrial
|
|
13,458
|
|
2,000
|
|
12,242
|
|
|
|
164
|
|
2,000
|
|
12,406
|
|
14,406
|
|
358
|
|
1999
|
|
2007
|
41133 Van Born
|
|
Industrial
|
|
8,366
|
|
1,250
|
|
7,504
|
|
|
|
250
|
|
1,250
|
|
7,754
|
|
9,004
|
|
270
|
|
2002
|
|
2007
|
41199 Van Born
|
|
Industrial
|
|
8,292
|
|
1,250
|
|
7,506
|
|
|
|
123
|
|
1,250
|
|
7,629
|
|
8,879
|
|
223
|
|
2002
|
|
2007
|
Ecorse Road Land
|
|
Undeveloped Land
|
|
|
|
1,900
|
|
|
|
|
|
|
|
1,900
|
|
|
|
1,900
|
|
|
|
na
|
|
2007
|
Ecorse Road Land Addition
|
|
Undeveloped Land
|
|
|
|
1,521
|
|
|
|
|
|
|
|
1,521
|
|
|
|
1,521
|
|
|
|
na
|
|
2009
|
ST. LOUIS PARK, MN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6999 Oxford Street
|
|
Industrial
|
|
4,061
|
|
844
|
|
1,276
|
|
|
|
894
|
|
844
|
|
2,170
|
|
3,014
|
|
1,294
|
|
1969
|
|
1995
|
F-71
Welsh Predecessor
Companies
SCHEDULE IIIDECEMBER 31,
2009
REAL ESTATE AND ACCUMULATED DEPRECIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost capitalized
subsequent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial cost to
the Company
|
|
to
acquisition
|
|
Gross carry
amount carried at 12/31/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
&
|
|
|
|
Buildings
&
|
|
|
|
Buildings
&
|
|
|
|
Accumulated
|
|
Year of
|
|
Year
|
Development
|
|
Type
|
|
Encumbrances
|
|
Land
|
|
improvements
|
|
Land
|
|
improvements
|
|
Land
|
|
improvements
|
|
Total
|
|
depreciation
|
|
construction
|
|
acquired
|
|
|
|
(dollars in
thousands)
|
|
URBANDALE, IA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10052 Justin Drive
|
|
Industrial
|
|
$1,551
|
|
$476
|
|
$1,389
|
|
$(128)
|
|
$(317)
|
|
$348
|
|
$1,072
|
|
$1,420
|
|
$158
|
|
1992
|
|
2005
|
2721 99th Street
|
|
Industrial
|
|
3,384
|
|
1,047
|
|
3,016
|
|
(283)
|
|
(674)
|
|
764
|
|
2,342
|
|
3,106
|
|
356
|
|
1996
|
|
2005
|
2851 104th Street
|
|
Industrial
|
|
2,035
|
|
634
|
|
1,813
|
|
(171)
|
|
(410)
|
|
463
|
|
1,403
|
|
1,866
|
|
211
|
|
1998
|
|
2005
|
2851 99th Street
|
|
Industrial
|
|
3,232
|
|
993
|
|
2,801
|
|
(268)
|
|
(553)
|
|
725
|
|
2,248
|
|
2,973
|
|
346
|
|
1996
|
|
2005
|
2901 99th Street
|
|
Industrial
|
|
1,211
|
|
380
|
|
1,073
|
|
(103)
|
|
(238)
|
|
277
|
|
835
|
|
1,112
|
|
128
|
|
1997
|
|
2005
|
3000 Justin Drive
|
|
Industrial
|
|
1,587
|
|
466
|
|
1,427
|
|
(126)
|
|
(295)
|
|
340
|
|
1,132
|
|
1,472
|
|
181
|
|
1990
|
|
2005
|
OTHER
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PH Intercen
|
|
na
|
|
6,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
na
|
|
na
|
Eliminations
|
|
na
|
|
|
|
|
|
|
|
(25)
|
|
(663)
|
|
(25)
|
|
(663)
|
|
(688)
|
|
(69)
|
|
na
|
|
na
|
Romulus Mezz
|
|
na
|
|
1,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
na
|
|
na
|
Debt Premium
|
|
na
|
|
(968)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
na
|
|
na
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$223,503
|
|
$54,781
|
|
$160,431
|
|
$(2,656)
(1)
|
|
$24,511
|
|
$52,125
|
|
$184,942
|
|
$237,067
|
|
$19,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Reductions to land, buildings
and improvements are due to impairment charges recognized
subsequent to acquisition.
|
F-72
Welsh Predecessor
Companies
|
|
1.
|
RECONCILIATION OF
INVESTMENT PROPERTIES
|
The changes in investment properties of the Company for the
years ended December 31, 2009, 2008, and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Balance, beginning of year
|
|
$
|
205,497
|
|
|
$
|
161,644
|
|
|
$
|
125,386
|
|
Acquisitions
|
|
|
7,518
|
|
|
|
|
|
|
|
22,619
|
|
Transfers due to change in ownership
|
|
|
33,699
|
|
|
|
55,608
|
|
|
|
|
|
Improvements
|
|
|
1,653
|
|
|
|
2,729
|
|
|
|
14,011
|
|
Disposals
|
|
|
(4,868
|
)
|
|
|
(6,907
|
)
|
|
|
(372
|
)
|
Impairment
|
|
|
(6,432
|
)
|
|
|
(7,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
237,067
|
|
|
$
|
205,497
|
|
|
$
|
161,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unaudited aggregate cost of investment properties for
federal tax purposes as of December 31, 2009 was
$247.0 million.
|
|
2.
|
RECONCILIATION OF
ACCUMULATED DEPRECIATION
|
The changes in accumulated depreciation of the Company for the
years ended December 31, 2009, 2008, and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Balance, beginning of year
|
|
$
|
13,168
|
|
|
$
|
10,536
|
|
|
$
|
7,364
|
|
Transfers due to change in ownership
|
|
|
463
|
|
|
|
(2,822
|
)
|
|
|
|
|
Depreciation and amortization expense
|
|
|
6,628
|
|
|
|
7,255
|
|
|
|
3,438
|
|
Disposals
|
|
|
(374
|
)
|
|
|
(1,801
|
)
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
19,885
|
|
|
$
|
13,168
|
|
|
$
|
10,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of investment properties reflected in the
statements of operations is calculated over the estimated
original lives of the assets as follows:
|
|
|
Buildings
|
|
40 years
|
Building improvements
|
|
10 years
|
Tenant improvements
|
|
Term of related lease
|
F-73
Welsh
Contribution Companies
Boards of Directors and Governors
Welsh Contribution Companies:
We have audited the accompanying combined balance sheets of
Welsh Contribution Companies as of December 31, 2009 and
2008, and the related combined statements of operations, changes
in owners equity, and cash flows for each of the years in
the three-year period ended December 31, 2009. In
connection with our audits of the combined financial statements,
we have also audited financial statement Schedule III.
These combined financial statements and financial statement
Schedule III are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
combined financial statements and financial statement
Schedule III based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to
above present fairly, in all material respects, the financial
position of Welsh Contribution Companies as of December 31,
2009 and 2008, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement Schedule III, when considered
in relation to the basic combined financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.
Minneapolis, Minnesota
March 3, 2010, except as to
financial statement Schedule III
which is as of April 9, 2010
F-74
Welsh
Contribution Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
As of
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Assets:
|
Real estate investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
37,457
|
|
|
$
|
37,457
|
|
|
$
|
45,974
|
|
Buildings and tenant improvements
|
|
|
169,371
|
|
|
|
169,067
|
|
|
|
189,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,828
|
|
|
|
206,524
|
|
|
|
235,552
|
|
Accumulated depreciation
|
|
|
(39,466
|
)
|
|
|
(37,479
|
)
|
|
|
(30,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net real estate investments
|
|
|
167,362
|
|
|
|
169,045
|
|
|
|
204,979
|
|
Cash and cash equivalents
|
|
|
10,904
|
|
|
|
9,970
|
|
|
|
12,149
|
|
Restricted cash
|
|
|
2,958
|
|
|
|
3,159
|
|
|
|
2,448
|
|
Accounts receivable, net of allowance of $620, $623 and $520,
including receivables from affiliates of $136, $68 and $81,
respectively
|
|
|
9,035
|
|
|
|
8,874
|
|
|
|
11,439
|
|
Prepaid expenses and other assets
|
|
|
1,760
|
|
|
|
1,541
|
|
|
|
3,106
|
|
Deferred rent
|
|
|
4,106
|
|
|
|
4,038
|
|
|
|
3,814
|
|
Intangibles, net
|
|
|
7,168
|
|
|
|
7,478
|
|
|
|
7,193
|
|
Deferred financing costs, net of accumulated amortization of
$497, $645 and $787, respectively
|
|
|
1,195
|
|
|
|
1,134
|
|
|
|
1,427
|
|
Deferred leasing costs, net of accumulated amortization of
$2,057 $2,049 and $1,597, respectively
|
|
|
2,096
|
|
|
|
2,177
|
|
|
|
2,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
206,584
|
|
|
$
|
207,416
|
|
|
$
|
249,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Owners Equity:
|
Mortgages and notes payable, including $391, $60 and $190 to
related parties, respectively
|
|
$
|
176,192
|
|
|
$
|
174,117
|
|
|
$
|
206,861
|
|
Accounts payable
|
|
|
9,698
|
|
|
|
8,895
|
|
|
|
11,538
|
|
Below market lease intangibles
|
|
|
697
|
|
|
|
732
|
|
|
|
912
|
|
Accrued interest
|
|
|
600
|
|
|
|
641
|
|
|
|
770
|
|
Accrued real estate taxes
|
|
|
1,823
|
|
|
|
337
|
|
|
|
819
|
|
Other accrued liabilities
|
|
|
1,314
|
|
|
|
1,307
|
|
|
|
2,451
|
|
Security deposits and prepaid rents
|
|
|
2,190
|
|
|
|
2,691
|
|
|
|
2,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
192,514
|
|
|
|
188,720
|
|
|
|
226,089
|
|
Owners equity
|
|
|
14,070
|
|
|
|
18,696
|
|
|
|
23,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Owners Equity
|
|
$
|
206,584
|
|
|
$
|
207,416
|
|
|
$
|
249,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-75
Welsh
Contribution Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
|
Year ended
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
8,325
|
|
|
$
|
8,974
|
|
|
$
|
33,283
|
|
|
$
|
30,954
|
|
|
$
|
32,534
|
|
Construction and service fee revenue, including $772, $669,
$3,318, $1,642, and $1,659, respectively, from affiliates
|
|
|
9,777
|
|
|
|
14,589
|
|
|
|
57,755
|
|
|
|
66,815
|
|
|
|
61,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
18,102
|
|
|
|
23,563
|
|
|
|
91,038
|
|
|
|
97,769
|
|
|
|
94,360
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
1,911
|
|
|
|
2,107
|
|
|
|
8,480
|
|
|
|
8,319
|
|
|
|
8,126
|
|
Real estate taxes
|
|
|
1,697
|
|
|
|
1,703
|
|
|
|
5,956
|
|
|
|
5,346
|
|
|
|
5,462
|
|
Cost of construction and service fee revenue
|
|
|
7,926
|
|
|
|
12,514
|
|
|
|
47,449
|
|
|
|
54,880
|
|
|
|
50,965
|
|
Depreciation and amortization
|
|
|
2,617
|
|
|
|
2,586
|
|
|
|
9,869
|
|
|
|
9,675
|
|
|
|
10,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
14,151
|
|
|
|
18,910
|
|
|
|
71,754
|
|
|
|
78,220
|
|
|
|
75,438
|
|
Other Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses, including $915 in 2009 to
affiliates
|
|
|
5,330
|
|
|
|
2,296
|
|
|
|
10,950
|
|
|
|
9,187
|
|
|
|
8,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(1,379
|
)
|
|
|
2,357
|
|
|
|
8,334
|
|
|
|
10,362
|
|
|
|
10,800
|
|
Other Income (Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
20
|
|
|
|
7
|
|
|
|
96
|
|
|
|
188
|
|
|
|
(332
|
)
|
Interest expense
|
|
|
(1,959
|
)
|
|
|
(2,021
|
)
|
|
|
(8,269
|
)
|
|
|
(10,660
|
)
|
|
|
(13,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(3,318
|
)
|
|
$
|
343
|
|
|
$
|
161
|
|
|
$
|
(110
|
)
|
|
$
|
(3,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-76
Welsh
Contribution Companies
For the period
ended March 31, 2010 (unaudited) and for the years ended
December 31, 2009, 2008, and 2007
|
|
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Combined Owners Equity, December 31, 2006
|
|
$
|
25,532
|
|
Contributions
|
|
|
22,448
|
|
Distributions
|
|
|
(5,819
|
)
|
Net loss
|
|
|
(3,249
|
)
|
|
|
|
|
|
Combined Owners Equity, December 31, 2007
|
|
|
38,912
|
|
Inclusion/Exclusion of equity upon combining or uncombining of
related entities, net
|
|
|
(15,011
|
)
|
Contributions
|
|
|
7,921
|
|
Distributions
|
|
|
(8,302
|
)
|
Net loss
|
|
|
(110
|
)
|
|
|
|
|
|
Combined Owners Equity, December 31, 2008
|
|
|
23,410
|
|
Inclusion/Exclusion of equity upon combining or uncombining of
related entities, net
|
|
|
345
|
|
Contributions
|
|
|
1,267
|
|
Distributions
|
|
|
(6,487
|
)
|
Net income
|
|
|
161
|
|
|
|
|
|
|
Combined Owners Equity, December 31, 2009
|
|
|
18,696
|
|
Contributions
|
|
|
18
|
|
Distributions
|
|
|
(1,326
|
)
|
Net loss
|
|
|
(3,318
|
)
|
Combined Owners Equity, March 31, 2010 (unaudited)
|
|
$
|
14,070
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-77
Welsh
Contribution Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
|
Year ended
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,318
|
)
|
|
$
|
343
|
|
|
$
|
161
|
|
|
$
|
(110
|
)
|
|
$
|
(3,249
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of buildings and tenant improvements
|
|
|
2,331
|
|
|
|
1,866
|
|
|
|
7,727
|
|
|
|
7,553
|
|
|
|
7,786
|
|
Amortization of intangibles
|
|
|
265
|
|
|
|
455
|
|
|
|
1,448
|
|
|
|
1,537
|
|
|
|
2,430
|
|
Amortization and write-off of deferred financing costs
|
|
|
91
|
|
|
|
84
|
|
|
|
297
|
|
|
|
470
|
|
|
|
519
|
|
Amortization of deferred leasing commissions and other costs
|
|
|
21
|
|
|
|
265
|
|
|
|
694
|
|
|
|
585
|
|
|
|
669
|
|
Adjustment to rental income for intangible amortization, net
|
|
|
13
|
|
|
|
19
|
|
|
|
17
|
|
|
|
232
|
|
|
|
318
|
|
Provision for uncollectible accounts
|
|
|
54
|
|
|
|
54
|
|
|
|
103
|
|
|
|
223
|
|
|
|
(26
|
)
|
Loss on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
476
|
|
|
|
482
|
|
|
|
295
|
|
Deferred rent
|
|
|
(67
|
)
|
|
|
(75
|
)
|
|
|
(192
|
)
|
|
|
(619
|
)
|
|
|
(1,201
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
201
|
|
|
|
(162
|
)
|
|
|
(711
|
)
|
|
|
(616
|
)
|
|
|
(144
|
)
|
Accounts receivable
|
|
|
(215
|
)
|
|
|
3,209
|
|
|
|
2,420
|
|
|
|
(3,800
|
)
|
|
|
(421
|
)
|
Prepaid expense and other assets
|
|
|
(218
|
)
|
|
|
1,595
|
|
|
|
1,549
|
|
|
|
(1,900
|
)
|
|
|
(33
|
)
|
Accounts payable
|
|
|
803
|
|
|
|
(3,910
|
)
|
|
|
(1,949
|
)
|
|
|
4,080
|
|
|
|
(2,136
|
)
|
Accrued interest
|
|
|
(41
|
)
|
|
|
(88
|
)
|
|
|
(55
|
)
|
|
|
(172
|
)
|
|
|
483
|
|
Accrued real estate taxes
|
|
|
1,486
|
|
|
|
697
|
|
|
|
(216
|
)
|
|
|
1,167
|
|
|
|
229
|
|
Other accrued liabilities
|
|
|
8
|
|
|
|
(1,701
|
)
|
|
|
(1,224
|
)
|
|
|
(636
|
)
|
|
|
452
|
|
Security deposits and prepaid rents
|
|
|
(502
|
)
|
|
|
(379
|
)
|
|
|
14
|
|
|
|
1,186
|
|
|
|
833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
912
|
|
|
|
2,272
|
|
|
|
10,559
|
|
|
|
9,662
|
|
|
|
6,804
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of real estate investments and related intangible
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,064
|
)
|
|
|
(86,262
|
)
|
Development of real estate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,754
|
)
|
|
|
(15,519
|
)
|
Additions to real estate investments
|
|
|
(647
|
)
|
|
|
(943
|
)
|
|
|
(4,748
|
)
|
|
|
(7,103
|
)
|
|
|
(3,897
|
)
|
Payments for deferred leasing and other costs
|
|
|
(31
|
)
|
|
|
(20
|
)
|
|
|
(262
|
)
|
|
|
(766
|
)
|
|
|
(975
|
)
|
Cash transferred due to equity ownership changes
|
|
|
|
|
|
|
(456
|
)
|
|
|
46
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(678
|
)
|
|
|
(1,419
|
)
|
|
|
(4,964
|
)
|
|
|
(34,647
|
)
|
|
|
(106,653
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from capital contributions
|
|
|
18
|
|
|
|
40
|
|
|
|
1,267
|
|
|
|
7,921
|
|
|
|
22,448
|
|
Cash distributions
|
|
|
(1,326
|
)
|
|
|
(1,703
|
)
|
|
|
(6,487
|
)
|
|
|
(8,302
|
)
|
|
|
(5,819
|
)
|
Payments of long-term debt
|
|
|
(8,295
|
)
|
|
|
(6,290
|
)
|
|
|
(17,863
|
)
|
|
|
(2,301
|
)
|
|
|
(1,985
|
)
|
Proceeds from long-term debt
|
|
|
10,370
|
|
|
|
7,178
|
|
|
|
15,468
|
|
|
|
32,418
|
|
|
|
85,105
|
|
Deferred financing and loan costs
|
|
|
(67
|
)
|
|
|
(91
|
)
|
|
|
(159
|
)
|
|
|
(859
|
)
|
|
|
(480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
700
|
|
|
|
(866
|
)
|
|
|
(7,774
|
)
|
|
|
28,877
|
|
|
|
99,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents:
|
|
|
934
|
|
|
|
(13
|
)
|
|
|
(2,179
|
)
|
|
|
3,892
|
|
|
|
(580
|
)
|
Beginning cash and cash equivalents
|
|
|
9,970
|
|
|
|
12,149
|
|
|
|
12,149
|
|
|
|
8,257
|
|
|
|
8,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
10,904
|
|
|
$
|
12,136
|
|
|
$
|
9,970
|
|
|
$
|
12,149
|
|
|
$
|
8,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-78
Welsh
Contribution Companies
|
|
1.
|
ORGANIZATION AND
DESCRIPTION OF BUSINESS
|
Welsh Contribution Companies (collectively, the
Company, we or us), which is
not a legal entity but rather an aggregation for accounting
purposes of the combination of certain real estate entities and
operations as described below, was formed to continue and expand
the
32-year
old Welsh organization, which acquires, owns, operates and
manages industrial and office properties primarily across the
United States and provides real estate services to
third-party commercial property owners in central
U.S. markets. During all periods presented in the
accompanying combined financial statements, the Company is the
collection of real estate entities that directly or indirectly
own real estate assets and are under the common management by
the owners of WelshCo, LLC and Subsidiaries
(WelshCo). WelshCo, a comprehensive real estate
service company in Minneapolis, Minnesota, is responsible for
the
day-to-day
operations of the real estate entities. The ultimate owners of
the Company are the principals of WelshCo and certain others who
have various ownership interests. All entities have consented to
convert their ownership for purposes of the initial public
offering as discussed below.
Concurrent with the consummation of an initial public offering
(the Offering) of the common stock of Welsh Property
Trust, Inc. (the REIT), which is expected to be
completed in 2010, the REIT and a newly formed majority-owned
limited partnership, Welsh Property Trust, L.P. (the
Operating Partnership), together with the partners
and members of the affiliated partnerships and limited liability
companies of the Company and other parties that hold direct or
indirect ownership interests in the properties (collectively,
the Participants), will engage in certain formation
transactions (the Formation Transactions). The
Formation Transactions are designed to (i) continue the
operations of Welsh Predecessor Companies, an affiliated entity
that consists of the accounting acquirer for the REIT and other
entities being contributed in the Formation Transaction that are
under the common control of Dennis J. Doyle, and the Company,
(ii) enable the REIT to raise the necessary capital to
acquire interests in certain other properties, repay mortgage
debt relating thereto and pay other indebtedness,
(iii) fund costs, capital expenditures and working capital,
(iv) provide a vehicle for future acquisitions,
(v) enable the REIT to comply with requirements under the
federal income tax laws and regulations relating to real estate
investment trusts, and (vi) preserve tax advantages for
certain Participants.
F-79
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
|
|
2.
|
INVESTMENT IN
REAL ESTATE PROPERTIES AND ENTITIES
|
As of December 31, 2009, the Company included ownership
interests in the following real estate properties and entities:
|
|
|
|
|
|
|
Type
|
|
Location
|
|
|
WelshCo
|
|
Service
|
|
Minnesota
|
Valley View Business Center
|
|
Warehouse
|
|
Minnesota
|
Westpark Plaza and Valley Oak Business Center
|
|
Warehouse
|
|
Minnesota
|
Oracle/International Center
|
|
Office
|
|
Minnesota
|
Eagan Waters
|
|
Flex
|
|
Minnesota
|
Lambert I
|
|
Warehouse
|
|
Missouri
|
Lambert II
|
|
Warehouse
|
|
Missouri
|
Plymouth Professional Center I & II
|
|
Office
|
|
Minnesota
|
Welsh Partners 85
|
|
Warehouse
|
|
Minnesota
|
224 Hoover Road
|
|
Distribution
|
|
North Carolina
|
201 Mississippi
|
|
Distribution
|
|
Indiana
|
Enterprise Park
|
|
Distribution
|
|
Ohio
|
Woods Equipment
|
|
Distribution
|
|
Wisconsin
|
Franklin II
|
|
Distribution
|
|
Wisconsin
|
Tri-Center
|
|
Warehouse
|
|
Illinois
|
Welsh ShoreviewPaR Systems
|
|
Warehouse
|
|
Minnesota
|
Westbelt Corporate Center
|
|
Warehouse
|
|
Ohio
|
Executive Park
|
|
Distribution
|
|
Missouri
|
American Identity/Staples
|
|
Warehouse
|
|
Iowa
|
Welsh Warren
|
|
Distribution
|
|
Michigan
|
Glendale
|
|
Distribution
|
|
Illinois
|
Pewaukee
|
|
Distribution
|
|
Wisconsin
|
Welsh Securities, LLC
|
|
Service
|
|
Minnesota
|
The Companys investments in real estate properties are
subject to risks incidental to the ownership and operation of
commercial real estate. These risks include, among others, the
risks normally associated with changes in general economic
conditions, trends in the real estate industry, creditworthiness
of tenants, competition of tenants and customers, changes in tax
laws, interest rate levels, the availability and cost of
financing, and potential liability under environmental and other
laws.
|
|
3.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
Principles of
combination and formation
The Company represents a combination of certain entities holding
or managing interests in real estate that are under common
management. Due to their common management, the financial
statements of the separate entities which own the properties are
presented on a combined basis. All significant intercompany
balances and transactions have been eliminated in the combined
financial statements.
Organization of
limited liability companies
The limited liability companies (the LLCs) included
within the combined financial statements shall continue in
existence until dissolved in accordance with the provisions of
their operating agreements and are funded through the equity
contributions of their owners. As LLCs, except as may otherwise
be provided under applicable law, no member shall be bound by,
or personally liable for, the expenses, liabilities, or
obligations of the individual companies. The members are not
obligated to restore capital
F-80
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
deficits. Pursuant to the terms of each LLC agreement, profits,
losses, and distributions are generally allocated to the members
in accordance with their ownership percentages.
Accounting
estimates
The preparation of the combined financial statements requires
management to use estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenues and expenses.
Significant items subject to such estimates and assumptions
include allocation of the purchase price of acquired real estate
investments among tangible and intangible assets, determination
of the useful life of property and other long-lived assets,
valuation and impairment analysis of property and other
long-lived assets, and valuation of the allowance for doubtful
accounts. It is at least reasonably possible that these
estimates could change in the near term.
Cash and cash
equivalents
The Company considers short-term investments with original
maturities of 90 days or less to be cash equivalents. At
times throughout the year, the Companys cash balances may
exceed amounts insured by the Federal Deposit Insurance
Corporation. The Company believes it is not exposed to any
significant credit risk on cash equivalents.
Restricted
cash
Included in restricted cash are restricted escrow accounts for
insurance and real estate taxes.
Accounts
receivable and deferred rent
Accounts receivable and deferred rent are recorded at their
estimated net realizable value. The Company follows a policy of
providing an allowance for doubtful accounts. The Company does
not require collateral and accounts are considered past due if
payment is not made on a timely basis in accordance with our
credit terms. Accounts considered uncollectible are written off.
The Company recorded bad debt expense of approximately
$0.5 million, $0.7 million, and $0.1 million for
2009, 2008, and 2007, respectively.
Deferred leasing
costs
Deferred leasing costs include leasing commissions that are
amortized by the straight-line method over the term of the
lease. All direct and indirect costs, including estimated
internal costs, associated with the leasing of real estate
investments owned by the Company are capitalized and amortized
over the term of the related lease. The Company includes lease
incentive costs, which are payments made on behalf of a tenant
to sign a lease, in deferred leasing costs and amortizes them on
a straight-line basis over the respective lease terms as a
reduction of rental revenue. Unamortized costs are charged to
expense upon the early termination of the lease.
In leasing tenant space, the Company may provide funding to the
lessee through a tenant allowance. In accounting for a tenant
allowance, the Company determines whether the allowance
represents funding for the construction of leasehold
improvements and evaluates the ownership, for accounting
purposes, of such improvements. If the Company is considered the
owner of the leasehold improvements for accounting purposes, the
Company capitalizes the amount of the tenant allowance and
depreciates it over the shorter of the useful life of the
leasehold improvements or the related lease term. If the tenant
allowance represents a payment for a purpose other than funding
leasehold improvements, or in the event the Company is not
considered the owner of the improvements, for accounting
purposes, the allowance is considered to be a lease incentive
and is recognized over the lease term as a reduction of rental
revenue on a straight-line basis.
F-81
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
Deferred
financing costs
Costs incurred in connection with obtaining financing are
amortized to interest expense primarily utilizing the effective
interest method.
Real estate
investments
Investment property is stated at cost. Investment property
includes cost of acquisitions, development, and construction and
tenant allowances and improvements. Depreciation and
amortization are provided over estimated useful lives ranging
from five to 40 years by use of the straight line method.
Maintenance and repairs are expensed as incurred; major
improvements and betterments are capitalized.
Impairment
Long-lived assets, such as investment property, and purchased
intangible assets subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset be tested for possible
impairment, the Company first compares undiscounted cash flows
expected to be generated by an asset to the carrying value of
the asset. If the carrying value of the long-lived asset is not
recoverable on an undiscounted cash flow basis, an impairment is
recognized to the extent that the carrying value exceeds its
fair value. Fair value is determined through various valuation
techniques including discounted cash flow models, quoted market
values and third-party independent appraisals, as considered
necessary.
Acquisition
accounting
The Company accounts for its acquisitions of real estate
investments as a business combination under the acquisition
method of accounting. The related acquired physical assets,
in-place leases acquired and customer relationships, if any, are
recorded at their estimated fair values. The fair values of
acquired properties are determined on an
as-if-vacant basis considering a variety of factors,
including the physical condition and quality of the properties,
estimated rental and absorption rates, estimated future cash
flows, and valuation assumptions consistent with current market
conditions. The as-if-vacant fair value is allocated
to land, building, and improvements based on relevant
information obtained in connection with the acquisition of the
properties. The fair value of in-place leases consists of the
following components as applicable (1) the estimated cost to
replace the leases, including foregone rents during the period
of finding a new tenant, foregone recovery of tenant
pass-through costs, tenant improvements, and other direct costs
associated with obtaining a new tenant (referred to as acquired
in-place leases); and (2) the above and below market
portion of the leases, determined by comparing the projected
cash flows of the leases in place to projected cash flows of
comparable market-rate leases (referred to as acquired above
market leases and assumed below market leases).
Acquired in-place lease costs are amortized as amortization
expense on a straight-line basis over the remaining life of the
underlying leases. Acquired above and assumed below market
leases are amortized on a straight-line basis as an adjustment
to rental revenue over the remaining term of the underlying
leases, including for below market leases fixed option renewal
periods, if any.
Should a tenant terminate its lease, the unamortized portions of
the acquired in-place lease costs and acquired above and assumed
below market leases associated with that tenant are written off
to amortization expense or rental revenue, as indicated above.
F-82
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
Revenue
recognition
Rental and related revenue.
Rental revenue
includes rents that each tenant pays in accordance with the
terms of its respective lease reported on a straight-line basis
over the non-cancellable term of the lease. Certain properties
have leases that provide for tenant occupancy during periods
where no rent is due or where minimum rent payments change
during the term of the lease. Deferred rent in the accompanying
balance sheet includes the cumulative difference between rental
revenue as recorded on a straight-line basis and rents received
from the tenants in accordance with the lease terms.
Tenant reimbursements for real estate taxes, common area
maintenance, and other recoverable costs are recognized in the
period that the expenses are incurred. Lease termination fees,
are recognized when the fees are determinable, tenant vacancy
has occurred, collectability is reasonably assured, and the
Company has no continuing obligation to provide services to such
former tenants.
The timing of rental revenue recognition is impacted by the
ownership of tenant improvements and allowances. When we are the
owner of the tenant improvements, revenue recognition commences
after both the improvements are completed and the tenant takes
possession or control of the space. In contrast, if we determine
that the tenant allowances we are funding are lease incentives,
then we commence revenue recognition when possession or control
of the space is turned over to the tenant.
We record lease termination fees when a tenant has executed a
definitive termination agreement with us and the payment of the
termination fee is not subject to any conditions that must be
met or waived before the fee is due to us.
Construction and service fee
revenue.
Management fees are based on a
percentage of rental receipts of properties managed and are
recognized as the rental receipts are collected. Brokerage
commissions are based on a percentage of property sales and are
recorded when earned. Architectural design and maintenance fees
are based upon established hourly rates and are recognized as
the services are performed.
Income
taxes
The Company represents a combination of entities that are either
a Limited Liability Company (LLC) or a Limited
Partnership (LP). Generally, a LLC is treated either
as a partnership for federal income tax purposes or as a
division of its sole member. As a result, LLCs and LPs are
generally not subject to either federal, state or local income
taxes as the respective members/partners are taxed on their
allocable share of the entitys taxable income. Therefore,
no provision or liability for federal, state, or local income
taxes has been included in these combined financial statements.
Derivative
financial instruments and hedging activities
Derivative financial instruments are utilized by the Company to
reduce its exposure to market risks from changes in interest
rates. The derivative financial instruments consist of interest
rate caps and swaps. The Company does not currently hold or
issue derivative financial instruments for speculative or
trading purposes. Derivative financial instruments are recorded
as either an asset or a liability measured at fair value. If the
derivative does not qualify as a hedge or is not designated as a
hedge, the change in fair value of the derivative is recognized
currently in earnings. If the derivative qualifies for hedge
accounting, the change in fair value of the derivative is
recognized either currently in earnings or deferred in other
comprehensive income depending on the type of hedge and to what
extent the hedge is effective.
The Company manages a portion of its variable rate debt using an
interest rate swap. The Company entered into a fixed rate swap
to alter its exposure to the impact of changing interest rates
on its results
F-83
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
of operations and future cash outflows for interest. Fixed rate
swaps are used to reduce the Companys risk of the
possibility of increased interest costs.
Fair value of
financial instruments
On January 1, 2008, the Company adopted guidance for
accounting for fair value measurements of financial assets and
financial liabilities and for fair value measurements of
nonfinancial items that are recognized or disclosed at fair
value in the combined financial statements on a recurring basis.
On January 1, 2009, the Company adopted guidance for fair
value measurement related to nonfinancial items that are
recognized and disclosed at fair value in the combined financial
statements on a nonrecurring basis. The guidance establishes a
fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurements)
and the lowest priority to measurements involving significant
unobservable inputs (Level 3 measurements). The three
levels of the fair value hierarchy are as follows:
|
|
Ø
|
Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has
the ability to access at the measurement date.
|
|
Ø
|
Level 2 inputs are inputs other than quoted prices included
within Level 1 that are observable for the asset or
liability, either directly or indirectly.
|
|
Ø
|
Level 3 inputs are unobservable inputs for the asset or
liability.
|
The level in the fair value hierarchy within which a fair value
measurement in its entirety falls is based on the lowest level
input that is significant to the fair value measurement in its
entirety. Fair value is the price that would be received for an
asset or paid to transfer a liability (an exit price) in the
Companys principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date.
The carrying value of cash and cash equivalents, restricted
cash, accounts receivable, and accounts payable, and other
working capital items approximate fair value at
December 31, 2009 and 2008 due to the short maturity nature
of these instruments. The fair value of debt is disclosed in
Note 8.
Recently adopted
pronouncements
In December 2007, the Financial Accounting Standards Board
(FASB) issued updated guidance, which applies to all
transactions or events in which an entity obtains control of one
or more businesses. This guidance establishes the
acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed, (ii) requires
expensing of most transaction costs, and (iii) requires the
acquirer to disclose to investors and other users all of the
information needed to evaluate and understand the nature and
financial effect of the business combination. These provisions
were adopted by the Company on January 1, 2009. The primary
impact of adopting this guidance on the Companys combined
financial statements was the requirement to expense transaction
costs relating to its acquisition activities in 2009.
In February 2008, the FASB issued updated guidance which defers
the effective date of previous guidance issued regarding the
fair value of non-financial assets and liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a non-recurring basis, until fiscal
years beginning after November 15, 2008. These provisions
were adopted by the Company on January 1, 2009. The
adoption of this did not have a material impact on the combined
financial statements.
In March 2008, the FASB issued guidance which enhances
disclosures related to derivative instruments and hedging
activities. This guidance is intended to improve financial
reporting about derivative
F-84
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their
effects on an entitys financial position, financial
performance, and cash flows. It also requires disclosure about
an entitys strategy and objectives for using derivatives,
the fair values of derivative instruments and their related
gains and losses. This guidance was adopted by the Company on
January 1, 2009 and did not have a material impact on the
combined financial statements.
In May 2009, the FASB issued updated guidance to establish
general standards of accounting for and disclosure of subsequent
events. This guidance renames the two types of subsequent events
as recognized subsequent events or non-recognized subsequent
events and modified the definition of the evaluation period for
subsequent events as events or transactions that occur after the
balance sheet date, but before the financial statements are
issued. This will require entities to disclose the date, through
which an entity has evaluated subsequent events and the basis
for that date. The Company adopted this guidance during 2009.
The adoption of this guidance did not have a material impact on
the Companys combined financial statements.
In June 2009, the FASB issued guidance, which establishes the
FASBs Accounting Standards Codification (the
Codification) as the exclusive authoritative
reference for nongovernmental U.S. GAAP for use in
financial statements, except for SEC rules and interpretative
releases, which are also authoritative for SEC registrants. As a
result, the Codification provides guidance that all standards
will carry the same level of authority. The Company adopted this
guidance during 2009. The only impact of adopting this provision
was to update and remove certain references to technical
accounting literature in the Companys combined financial
statements.
New accounting
pronouncements
In November 2008, the FASB ratified guidance related to equity
method investment accounting. This guidance applies to all
investments accounted for under the equity method and clarifies
the accounting for certain transactions and impairment
considerations involving equity method investments. This
guidance is effective beginning in the first quarter of fiscal
year 2010. The Company is currently evaluating the impact this
guidance will have on its combined financial statements.
In June 2009, the FASB issued updated guidance, which amends
guidance for determining whether an entity is a variable
interest entity (VIE), and requires the performance
of a qualitative rather than a quantitative analysis to
determine the primary beneficiary of a VIE. Under this guidance,
an entity would be required to consolidate a VIE if it has
(i) the power to direct the activities that most
significantly impact the entitys economic performance and
(ii) the obligation to absorb losses of the VIE or the
right to receive benefits from the VIE that could be significant
to the VIE. This guidance is effective for the first annual
reporting period that begins on January 1, 2010, with early
adoption prohibited. While the Company is currently evaluating
the effect of adopting this guidance, the Company believes that
the adoption will not have a material impact on the combined
financial statements.
Unaudited interim
information
The financial statements as of March 31, 2010 and for the
three months ended March 31, 2010 and 2009 are unaudited.
In the opinion of management, such financial statements reflect
all adjustments necessary for a fair presentation of the
respective interim periods. All such adjustments are of a normal
recurring nature.
The cash paid by the Company for interest (including amounts
capitalized of $0, $0.3 million, and $0.6 million) for
the years ended December 31, 2009, 2008, and 2007 was
$8.1 million, $11.0 million,
F-85
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
and $13.3 million, respectively. The applicable net change
in operating accounts payable representing construction related
payables that was classified to investing activities on the
combined statements of cash flow was $0, $0, and
$1.6 million for the years ended December 31, 2009,
2008, and 2007, respectively.
|
|
5.
|
REAL ESTATE
ACQUISITIONS
|
The Company had no acquisitions during 2009.
In March 2008, the Company purchased the PaR Systems building,
an office and warehouse property, with approximately 71,000 of
square footage in Shoreview, Minnesota for a total purchase
price of approximately $4.4 million. To finance this
purchase, the Company entered into a construction loan with a
principal balance at acquisition of $3.1 million.
In March 2008, the Company purchased the Enterprise Park
buildings, three industrial properties with approximately
116,000 of square footage, located in Cincinnati, Ohio for a
total purchase price of approximately $6.1 million. This
acquisition was financed through capital contributions.
In May 2008, the Company purchased the Warren building, an
industrial property with approximately 234,000 of square
footage, located in Warren, Michigan for a total purchase price
of approximately $8.5 million. To finance this purchase,
the Company incurred new debt with an original principal amount
of $6.6 million.
In May 2007, the Company purchased the Romulus buildings, five
industrial buildings in Detroit, Michigan totaling approximately
1,383,000 of square footage for a purchase price of
approximately $80.4 million. To finance this purchase, the
Company incurred new debt with an original principal amount of
$64.6 million.
In August 2007, the Company purchased Westbelt Corporate Center,
office and warehouse properties totaling approximately 144,000
of square footage, located in Columbus, Ohio for a total
purchase price of approximately $5.8 million. To finance
this purchase, the Company incurred new debt with an original
principal amount of $4.5 million.
|
|
6.
|
INTANGIBLE ASSETS
AND LIABILITIES
|
Intangible assets and liabilities subject to amortization
consist of the following at March 31, 2010 (unaudited) (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
basis
|
|
|
amortization
|
|
|
Net
|
|
|
|
|
Acquired in-place leases
|
|
$
|
14,507
|
|
|
$
|
(8,310
|
)
|
|
$
|
6,197
|
|
Acquired above market lease
|
|
|
3,431
|
|
|
|
(2,460
|
)
|
|
|
971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
17,938
|
|
|
$
|
(10,770
|
)
|
|
$
|
7,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed below market leases
|
|
$
|
1,476
|
|
|
$
|
(779
|
)
|
|
$
|
697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-86
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
Intangible assets and liabilities subject to amortization
consist of the following at December 31, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
basis
|
|
|
amortization
|
|
|
Net
|
|
|
|
|
Acquired in-place leases
|
|
$
|
14,961
|
|
|
$
|
(8,502
|
)
|
|
$
|
6,459
|
|
Acquired above market lease
|
|
|
3,432
|
|
|
|
(2,413
|
)
|
|
|
1,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
18,393
|
|
|
$
|
(10,915
|
)
|
|
$
|
7,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed below market leases
|
|
$
|
1,486
|
|
|
$
|
(754
|
)
|
|
$
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets and liabilities subject to amortization
consist of the following at December 31, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
basis
|
|
|
amortization
|
|
|
Net
|
|
|
|
|
Acquired in-place leases
|
|
$
|
12,759
|
|
|
$
|
(7,458
|
)
|
|
$
|
5,301
|
|
Acquired above market lease
|
|
|
5,953
|
|
|
|
(4,061
|
)
|
|
|
1,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
18,712
|
|
|
$
|
(11,519
|
)
|
|
$
|
7,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed below market leases
|
|
$
|
1,679
|
|
|
$
|
(767
|
)
|
|
$
|
912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization for the years ended December 31, 2009, 2008,
and 2007 was $1.5 million, $1.8 million, and $2.7
million, respectively.
The Company had no real estate acquisitions during the year
ended December 31, 2009. In connection with the real estate
acquisitions for the years ended December 31, 2008 and
2007, the following amounts were allocated to intangible assets
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
|
average
|
|
|
|
|
average
|
|
|
|
|
|
life
|
|
|
|
|
life
|
|
|
2008
|
|
|
2008
|
|
2007
|
|
|
2007
|
|
|
Acquired in-place leases
|
|
$
|
1,242
|
|
|
9 years
|
|
$
|
5,511
|
|
|
5 years
|
Acquired above market lease
|
|
|
120
|
|
|
5 years
|
|
|
1,870
|
|
|
7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,362
|
|
|
|
|
$
|
7,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed below market leases
|
|
$
|
203
|
|
|
5 years
|
|
$
|
643
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated amortization for the next five years is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
2010
|
|
$
|
1,157
|
|
|
$
|
99
|
|
2011
|
|
|
941
|
|
|
|
73
|
|
2012
|
|
|
686
|
|
|
|
35
|
|
2013
|
|
|
514
|
|
|
|
11
|
|
2014
|
|
|
493
|
|
|
|
|
|
|
|
7.
|
OWNERSHIP CHANGES
IN REAL ESTATE ENTITIES
|
The combined financial statements of the Welsh Predecessor
Companies include a collection of real estate entities, that
directly or indirectly own real estate, controlled by Dennis J.
Doyle (see Note 1). Throughout the historical periods
presented, ownership changes in the entities resulted in changes
to
F-87
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
Mr. Doyles control over certain entities. When
control was gained, entities were combined within the Welsh
Predecessor Companies combined financial statements. When
ownership changes resulted in Mr. Doyle not having control,
entities were removed from Welsh Predecessor Companies
combined financial statements and shown in these combined
financial statements.
Due to change in ownership and control during 2009, Woods
Equipment and Franklin II were included in these combined
financial statements and Lambert III and Baker Road were
removed from these combined financial statements. These
activities for the year ended December 31, 2009 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities
|
|
|
Entities
|
|
|
Net
|
|
|
|
included
|
|
|
excluded
|
|
|
effect
|
|
|
|
|
Rental properties, net
|
|
$
|
8,948
|
|
|
$
|
(40,811
|
)
|
|
$
|
(31,863
|
)
|
Cash
|
|
|
641
|
|
|
|
(595
|
)
|
|
|
46
|
|
Other assets, net
|
|
|
2,233
|
|
|
|
(758
|
)
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,822
|
|
|
$
|
(42,164
|
)
|
|
$
|
(30,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages and notes payable
|
|
$
|
9,402
|
|
|
$
|
(39,752
|
)
|
|
$
|
(30,350
|
)
|
Other liabilities
|
|
|
59
|
|
|
|
(396
|
)
|
|
|
(337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
9,461
|
|
|
|
(40,148
|
)
|
|
|
(30,687
|
)
|
Owners equity
|
|
|
2,361
|
|
|
|
(2,016
|
)
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and owners equity
|
|
$
|
11,822
|
|
|
$
|
(42,164
|
)
|
|
$
|
(30,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to change in ownership and control during 2008, American
Identity/Staples and 201 Mississippi were included in these
combined financial statements and Southgate Office Plaza and
Romulus Portfolio were removed from these combined financial
statements. These activities for the year ended
December 31, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities
|
|
|
Entities
|
|
|
Net
|
|
|
|
included
|
|
|
excluded
|
|
|
effect
|
|
|
|
|
Rental properties, net
|
|
$
|
27,484
|
|
|
$
|
(91,659
|
)
|
|
$
|
(64,175
|
)
|
Cash
|
|
|
582
|
|
|
|
(542
|
)
|
|
|
40
|
|
Other assets, net
|
|
|
3,858
|
|
|
|
(9,564
|
)
|
|
|
(5,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
31,924
|
|
|
$
|
(101,765
|
)
|
|
$
|
(69,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages and notes payable
|
|
$
|
25,192
|
|
|
$
|
(78,561
|
)
|
|
$
|
(53,369
|
)
|
Other liabilities
|
|
|
556
|
|
|
|
(2,017
|
)
|
|
|
(1,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
25,748
|
|
|
|
(80,578
|
)
|
|
|
(54,830
|
)
|
Owners equity
|
|
|
6,176
|
|
|
|
(21,187
|
)
|
|
|
(15,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and owners, equity
|
|
$
|
31,924
|
|
|
$
|
(101,765
|
)
|
|
$
|
(69,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-88
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
|
|
8.
|
MORTGAGES AND
NOTES PAYABLE
|
Mortgages and notes payable consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
March 31,
|
|
|
As of
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Mortgage Notes PayableFixed Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Generally due in monthly installments of principal and interest
and mature at various dates through 2016; interest rates ranging
from 4.99% to 8.69%, with weighted average interest rate of
6.01%, 6.09% and 6.06% at March 31, 2010 (unaudited),
December 31, 2009 and 2008, respectively.
|
|
$
|
88,265
|
|
|
$
|
89,032
|
|
|
$
|
80,457
|
|
Mortgage Notes PayableVariable Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Generally due in monthly installments of principal and interest
and mature at various dates through 2014; interest rates ranging
from 2.75% to 4.84%, with weighted average interest rate of
3.25% at March 31, 2010 (unaudited), interest rates ranging
from 2.69% to 4.50%, with weighted average interest rate of
3.11% at December 31, 2009 and interest rates ranging from
1.44% to 5.25%, with weighted average interest rate of 3.52% at
December 31, 2008. Certain notes contain interest rate
floors of 4.00% to 4.50%.
|
|
|
84,023
|
|
|
|
84,362
|
|
|
|
80,920
|
|
Construction Note PayableFixed
Rate
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly payments of principal and interest of $26 through 2019;
with an interest rate of 6.75% as of December 31,
2008.
|
|
|
|
|
|
|
|
|
|
|
4,584
|
|
Construction Notes PayableVariable
Rate
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Generally due in monthly installments of principal and interest
and mature at various dates through 2012; with interest rates
ranging from 5.25% to 5.27%, with a weighted average interest
rate of 5.26% at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
39,753
|
|
Other Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
Various notes and obligations, secured by equipment, furniture,
and vehicles, due in monthly installments ranging from $1 to $13
through 2013 including interest rates ranging from 1.0% to
17.9%.
|
|
|
598
|
|
|
|
663
|
|
|
|
957
|
|
Notes PayableRelated Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable due to members upon demand and non-interest
bearing.
|
|
|
391
|
|
|
|
60
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgages and Notes Payable.
|
|
$
|
173,277
|
|
|
$
|
174,117
|
|
|
$
|
206,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These construction notes payable were refinanced to mortgage
rates payable.
|
The mortgage notes payable are subject to various operating and
financial covenants. In addition, the Company is required to
periodically fund and maintain escrow accounts to make future
real estate tax and insurance payments, as well as to fund
certain tenant related costs and capital expenditures. These
escrow accounts are included in restricted cash. The Company is
in compliance with all financial covenants as of
December 31, 2009.
The mortgage notes payable are collateralized by their
respective real estate investments.
F-89
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
As of March 31, 2010 (unaudited), December 31, 2009 and
2008, $121 million, $119 million and $156 million,
respectively, of the mortgages notes payable and construction
notes payable have been guaranteed by certain members of the
Company.
In addition, the Company has a revolving line of credit with a
bank which expires in October 2010. The borrowing limit on the
line of credit was $5 million at both December 31,
2009 and 2008. At December 31, 2009, interest is charged at
3% above the one-month LIBOR, with an interest rate floor of 5%,
which resulted in an interest rate of 5%. At December 31,
2008, interest was charged at 2.25% above the one month LIBOR
rate, with an interest rate floor of 4.5%, which resulted in an
interest rate of 4.5%. There were no outstanding borrowings at
December 31, 2009 and 2008. Amounts available under the
line of credit are reduced by outstanding standby letters of
credit. As of December 31, 2009 and 2008, the Company had
$2 million of standby letters of credit outstanding, which
expire in September 2010. At March 31, 2010 (unaudited), the
Company had $2.9 million outstanding on the line of credit and
$2 million of standby letters of credit outstanding. The Company
pays a commitment fee of 1.50% on the standby letters of credit.
The terms of the agreement with the bank require the Company to
maintain certain covenants. The revolving line of credit is
secured by substantially all of WelshCos assets.
Scheduled maturities of debt are as follows at March 31,
2010 (unaudited) and at December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
2010
|
|
$
|
18,030
|
|
|
$
|
22,957
|
|
2011
|
|
|
75,286
|
|
|
|
75,314
|
|
2012
|
|
|
10,887
|
|
|
|
10,602
|
|
2013
|
|
|
5,611
|
|
|
|
5,377
|
|
2014
|
|
|
5,507
|
|
|
|
5,328
|
|
Thereafter
|
|
|
60,871
|
|
|
|
54,539
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
176,192
|
|
|
$
|
174,117
|
|
|
|
|
|
|
|
|
|
|
The fair value of the Companys fixed rate debt is $85
million, $82 million and $86 million at March 31,
2010 (unaudited), December 31, 2009 and 2008, respectively.
The fair value of the Companys variable rate debt is $83
million, $79 million and $110 million at March 31,
2010 (unaudited), December 31, 2009 and 2008, respectively.
The Company estimates the fair value of debt using a discounted
cash flow analysis and a yield rate that was estimated based on
the borrowing rates currently available to the Company for bank
loans with similar terms and maturities, which is a level 2
input.
F-90
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
The Company leases various office and industrial space to
tenants over terms ranging from one to fifteen years. Some of
the leases have renewal options for additional terms. The leases
provide for base monthly rentals and reimbursements for real
estate taxes and common area maintenance.
At December 31, 2009, the Company has the following future
minimum rentals on noncancellable leases (in thousands):
|
|
|
|
|
2010
|
|
$
|
20,630
|
|
2011
|
|
|
18,011
|
|
2012
|
|
|
15,400
|
|
2013
|
|
|
11,861
|
|
2014
|
|
|
8,486
|
|
Thereafter
|
|
|
35,087
|
|
|
|
|
|
|
Total minimum base lease commitments
|
|
$
|
109,475
|
|
|
|
|
|
|
|
|
10.
|
DERIVATIVE
INSTRUMENTS
|
Effective May 1, 2009, the Company entered into an interest
rate swap agreement to limit exposure to the fluctuations in its
LIBOR-based variable interest payments on a $3.55 million
mortgage notes payable. The swap covered the notional amount of
$3.55 million at a fixed rate of 5.50% and expires on
April 1, 2014. The interest rate swap is not designated as
an effective hedge for accounting purposes. At December 31,
2009 the fair value of the interest rate swap was a liability of
$26,000. The Company determines the fair value of the interest
rate swap by using widely accepted valuation techniques
including discounted cash flow analysis on the expected cash
flows of each instrument. The analysis reflects the contractual
terms of the swap agreement, including the period to maturity
and users observable market-based inputs and uses the market
standard methodology of netting the discounted future fixed cash
receipts and the discounted expected variable cash payments,
which are level 2 inputs.
The Company had no outstanding derivatives at December 31,
2008 or for the years ended December 31, 2008 or 2007.
The following table provides details regarding the
Companys derivative instruments at December 31, 2009
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Instrument
|
|
Balance sheet
location
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
Interest rate swap
|
|
Other accrued liabilities
|
|
$
|
|
|
|
$
|
26
|
|
|
The following table provides details regarding the losses from
the Companys derivatives instrument in the statement of
operations for the year ended December 31, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Instrument
|
|
Statement of
operations location
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
Interest expense
|
|
|
|
|
|
$
|
26
|
|
F-91
Notes to Welsh
Contribution Companies combined financial statements
March 31, 2010 and 2009 (unaudited) and December 31,
2009, 2008, and 2007
|
|
11.
|
TRANSACTIONS WITH
RELATED PARTIES
|
During 2009, 2008 and 2007, the Company engaged in various
transactions with Welsh Predecessor Companies, which are related
parties, due to common ownership. These transactions are
described below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Property management revenue
|
|
$
|
827
|
|
|
$
|
590
|
|
|
$
|
486
|
|
Lease commission revenue
|
|
|
1,170
|
|
|
|
529
|
|
|
|
79
|
|
Construction revenue
|
|
|
1,211
|
|
|
|
452
|
|
|
|
999
|
|
Other income
|
|
|
110
|
|
|
|
71
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Construction and Service Fee Revenue
|
|
$
|
3,318
|
|
|
$
|
1,642
|
|
|
$
|
1,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense included in general administrative expense
|
|
$
|
915
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, the Company paid other amounts at purchase to a
related entity for acquisition services. The amount paid in 2007
was $323,000, which was capitalized in net real estate
investments in the combined balance sheets.
|
|
12.
|
COMMITMENTS AND
CONTINGENCIES
|
The Company is not subject to any material litigation nor to
managements knowledge is any material litigation currently
threatened against the Company other than routine litigation,
claims and administrative proceedings arising in the ordinary
course of business. Management believes that such routine
litigation, claims and administrative proceedings will not have
a material adverse impact on the Companys combined
financial position or combined results of operations.
One of the entities within the Company has a
401(k) profit-sharing plan, which covers substantially all
of that entitys employees who have at least six months of
service and are 21 years old. That entity makes a matching
contribution equal to 50% of the first 6% of compensation
contributed by each participant. The employer contributions were
approximately $0.4 million for each of the years ended
December 31, 2009, 2008, and 2007.
|
|
13.
|
UNAUDITED INTERIM
TRANSACTIONS
|
On June 1, 2010, a mortgage payable with a principal
balance of $4.0 million matured. The Company anticipates
using proceeds of the planned initial public offering to
extinguish the debt. During the period of default, until
repayment of the loan in full, the Company is obligated to pay
additional interest expense of 7%. The lender also has the
ability to demand payment or foreclose on the property. At this
time, the lender has not notified the Company of its intent to
initiate its remedies under the event of default.
On March 3, 2010, the Company refinanced the Eagan Waters
mortgage payable with a principal balance of $7.1 million.
The mortgage payable requires interest and principal payments on
a monthly basis at an interest rate of 4.84% until March 3,
2013, and then the interest rate adjusts to prime plus .5% with
a maturity date of March 3, 2035.
F-92
Welsh
Contribution Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial cost to
the Company
|
|
|
Cost capitalized
subsequent to acquisition
|
|
|
Gross carry
amount carried at 12/31/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
&
|
|
|
|
|
|
Buildings
&
|
|
|
|
|
|
Buildings
&
|
|
|
|
|
|
Accumulated
|
|
|
Year of
|
|
|
Year
|
|
Development
|
|
Name
|
|
Type
|
|
Encumbrances
|
|
|
Land
|
|
|
improvements
|
|
|
Land
|
|
|
improvements
|
|
|
Land
|
|
|
improvements
|
|
|
Total
|
|
|
depreciation
|
|
|
construction
|
|
|
acquired
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
DUPAGE, IL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115 West Lake Drive
|
|
Glendale
|
|
Distribution
|
|
$
|
3,516
|
|
|
$
|
1,200
|
|
|
$
|
3,764
|
|
|
$
|
|
|
|
$
|
503
|
|
|
$
|
1,200
|
|
|
$
|
4,267
|
|
|
$
|
5,467
|
|
|
$
|
(1,566
|
)
|
|
|
1999
|
|
|
|
2003
|
|
GARY, IN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201 Mississippi Ave
|
|
201 Mississippi
|
|
Distribution
|
|
|
14,917
|
|
|
|
1,943
|
|
|
|
15,802
|
|
|
|
|
|
|
|
868
|
|
|
|
1,943
|
|
|
|
16,669
|
|
|
|
18,612
|
|
|
|
(1,382
|
)
|
|
|
1940
|
|
|
|
2007
|
|
ORANGE CITY, IA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1520 Albany Place SE
|
|
Orange City
|
|
Warehouse
|
|
|
11,163
|
|
|
|
899
|
|
|
|
9,220
|
|
|
|
|
|
|
|
|
|
|
|
899
|
|
|
|
9,220
|
|
|
|
10,119
|
|
|
|
(711
|
)
|
|
|
1968
|
|
|
|
2006
|
|
WARREN, MI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25295 Guenther Road
|
|
Welsh Warren
|
|
Distribution
|
|
|
6,568
|
|
|
|
3,149
|
|
|
|
5,101
|
|
|
|
|
|
|
|
2,648
|
|
|
|
3,149
|
|
|
|
7,749
|
|
|
|
10,898
|
|
|
|
(664
|
)
|
|
|
1997
|
|
|
|
2008
|
|
PEWAUKEE, WI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ridgeview Parkway
|
|
Pewaukee
|
|
Distribution
|
|
|
3,698
|
|
|
|
650
|
|
|
|
4,795
|
|
|
|
|
|
|
|
113
|
|
|
|
650
|
|
|
|
4,908
|
|
|
|
5,558
|
|
|
|
(1,764
|
)
|
|
|
1998
|
|
|
|
2003
|
|
FRANKLIN, WI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5200-5390
Ashland Way
|
|
Franklin II
|
|
Distribution
|
|
|
4,920
|
|
|
|
523
|
|
|
|
|
|
|
|
752
|
|
|
|
4,428
|
|
|
|
1,275
|
|
|
|
4,428
|
|
|
|
5,703
|
|
|
|
(1,634
|
)
|
|
|
2000
|
|
|
|
1999
|
|
MOSINEE, WI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1962 Queenland Drive
|
|
Woods Equipment
|
|
Distribution
|
|
|
3,512
|
|
|
|
275
|
|
|
|
4,763
|
|
|
|
|
|
|
|
|
|
|
|
275
|
|
|
|
4,763
|
|
|
|
5,038
|
|
|
|
(248
|
)
|
|
|
2007
|
|
|
|
2007
|
|
DURHAM, NC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224 North Hoover Rd
|
|
224 Hoover Rd
|
|
Distribution
|
|
|
4,180
|
|
|
|
645
|
|
|
|
4,913
|
|
|
|
|
|
|
|
447
|
|
|
|
645
|
|
|
|
5,360
|
|
|
|
6,005
|
|
|
|
(437
|
)
|
|
|
1972
|
|
|
|
2006
|
|
HAZELWOOD, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601-627
Lambert Pointe Drive
|
|
Lambert I
|
|
Warehouse
|
|
|
9,234
|
|
|
|
1,882
|
|
|
|
|
|
|
|
1,140
|
|
|
|
7,402
|
|
|
|
3,022
|
|
|
|
7,402
|
|
|
|
10,424
|
|
|
|
(4,020
|
)
|
|
|
2001
|
|
|
|
2000
|
|
600-638
Lambert Pointe Drive
|
|
Lambert II
|
|
Warehouse
|
|
|
10,377
|
|
|
|
2,158
|
|
|
|
|
|
|
|
1,947
|
|
|
|
7,102
|
|
|
|
4,106
|
|
|
|
7,102
|
|
|
|
11,208
|
|
|
|
(3,846
|
)
|
|
|
2002
|
|
|
|
2002
|
|
GOLDEN VALLEY, MN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6110 Olson Memorial Hwy
|
|
Welsh Partners 85
|
|
Warehouse
|
|
|
2,759
|
|
|
|
829
|
|
|
|
2,134
|
|
|
|
|
|
|
|
1,071
|
|
|
|
829
|
|
|
|
3,205
|
|
|
|
4,034
|
|
|
|
(2,382
|
)
|
|
|
1978
|
|
|
|
1985
|
|
EDEN PRAIRIE, MN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9701-9901 Valley View Rd
|
|
Valley View Business Center
|
|
Warehouse
|
|
|
5,280
|
|
|
|
1,741
|
|
|
|
4,538
|
|
|
|
|
|
|
|
221
|
|
|
|
1,741
|
|
|
|
4,760
|
|
|
|
6,501
|
|
|
|
(467
|
)
|
|
|
1979
|
|
|
|
2006
|
|
7115-7137
Shady Oak Drive
|
|
Valley Oak Business Center
|
|
Warehouse
|
|
|
5,014
|
|
|
|
1,400
|
|
|
|
3,176
|
|
|
|
|
|
|
|
146
|
|
|
|
1,400
|
|
|
|
3,321
|
|
|
|
4,721
|
|
|
|
(361
|
)
|
|
|
1984
|
|
|
|
2005
|
|
6820 Washington Ave S
|
|
Welsh Partners 85
|
|
Warehouse
|
|
|
1,204
|
|
|
|
409
|
|
|
|
840
|
|
|
|
|
|
|
|
492
|
|
|
|
409
|
|
|
|
1,332
|
|
|
|
1,741
|
|
|
|
(984
|
)
|
|
|
1979
|
|
|
|
1985
|
|
7260 Washington Ave S
|
|
Welsh Partners 85
|
|
Warehouse
|
|
|
1,797
|
|
|
|
806
|
|
|
|
1,229
|
|
|
|
|
|
|
|
704
|
|
|
|
806
|
|
|
|
1,933
|
|
|
|
2,739
|
|
|
|
(1,373
|
)
|
|
|
1976
|
|
|
|
1985
|
|
PLYMOUTH, MN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2405 Annapolis Lane North
|
|
Westpark Plaza
|
|
Warehouse
|
|
|
3,385
|
|
|
|
1,045
|
|
|
|
5,405
|
|
|
|
|
|
|
|
230
|
|
|
|
1,045
|
|
|
|
5,635
|
|
|
|
6,681
|
|
|
|
(633
|
)
|
|
|
1975
|
|
|
|
2005
|
|
9750 Rockford Road
|
|
Plymouth Professional I
|
|
Office
|
|
|
1,854
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
1,082
|
|
|
|
203
|
|
|
|
1,082
|
|
|
|
1,285
|
|
|
|
(721
|
)
|
|
|
1987
|
|
|
|
1987
|
|
9800 Rockford Road
|
|
Plymouth Professional II
|
|
Office
|
|
|
879
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
791
|
|
|
|
191
|
|
|
|
791
|
|
|
|
982
|
|
|
|
(497
|
)
|
|
|
1993
|
|
|
|
1993
|
|
MINNEAPOLIS, MN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900 2nd Ave South
|
|
Oracle/International Center
|
|
Office
|
|
|
45,750
|
|
|
|
4,880
|
|
|
|
28,315
|
|
|
|
|
|
|
|
14,440
|
|
|
|
4,880
|
|
|
|
42,755
|
|
|
|
47,635
|
|
|
|
(9,131
|
)
|
|
|
1986
|
|
|
|
2004
|
|
EAGAN, MN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2900 Lone Oak Parkway
|
|
Eagan Waters
|
|
Flex
|
|
|
7,040
|
|
|
|
1,272
|
|
|
|
5,274
|
|
|
|
|
|
|
|
536
|
|
|
|
1,272
|
|
|
|
5,811
|
|
|
|
7,083
|
|
|
|
(572
|
)
|
|
|
1987
|
|
|
|
2006
|
|
SHARONVILLE, OH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2921-2961
East Kemper Rd
|
|
Enterprise Park
|
|
Distribution
|
|
|
871
|
|
|
|
292
|
|
|
|
915
|
|
|
|
|
|
|
|
18
|
|
|
|
292
|
|
|
|
933
|
|
|
|
1,225
|
|
|
|
(47
|
)
|
|
|
1986
|
|
|
|
2008
|
|
11473-11493 Enterprise Park Dr
|
|
Enterprise Park
|
|
Distribution
|
|
|
1,935
|
|
|
|
649
|
|
|
|
2,030
|
|
|
|
|
|
|
|
|
|
|
|
649
|
|
|
|
2,030
|
|
|
|
2,679
|
|
|
|
(93
|
)
|
|
|
1986
|
|
|
|
2008
|
|
F-93
Welsh
Contribution Companies
SCHEDULE IIIREAL
ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial cost to
the Company
|
|
|
Cost capitalized
subsequent to acquisition
|
|
|
Gross carry
amount carried at 12/31/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
&
|
|
|
|
|
|
Buildings
&
|
|
|
|
|
|
Buildings
&
|
|
|
|
|
|
Accumulated
|
|
|
Year of
|
|
|
Year
|
|
Development
|
|
Name
|
|
Type
|
|
Encumbrances
|
|
|
Land
|
|
|
improvements
|
|
|
Land
|
|
|
improvements
|
|
|
Land
|
|
|
improvements
|
|
|
Total
|
|
|
depreciation
|
|
|
construction
|
|
|
acquired
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
11480-11560
Enterprise Park Drv
|
|
Enterprise Park
|
|
Distribution
|
|
|
1,194
|
|
|
|
400
|
|
|
|
1,218
|
|
|
|
|
|
|
|
|
|
|
|
400
|
|
|
|
1,218
|
|
|
|
1,618
|
|
|
|
(56
|
)
|
|
|
1986
|
|
|
|
2008
|
|
ELK GROVE VILLAGE, IL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1700-1910
Elmhurst Road
|
|
Tri-Center
|
|
Warehouse
|
|
|
3,994
|
|
|
|
1,864
|
|
|
|
3,400
|
|
|
|
|
|
|
|
654
|
|
|
|
1,864
|
|
|
|
4,053
|
|
|
|
5,917
|
|
|
|
(621
|
)
|
|
|
1980
|
|
|
|
2005
|
|
SHOREVIEW, MN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
707 County Road E W
|
|
Welsh Shoreview - Par Systems
|
|
Warehouse
|
|
|
4,335
|
|
|
|
1,361
|
|
|
|
1,418
|
|
|
|
|
|
|
|
2,545
|
|
|
|
1,361
|
|
|
|
3,963
|
|
|
|
5,324
|
|
|
|
(304
|
)
|
|
|
1973
|
|
|
|
2008
|
|
COLUMBUS, OH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1801-1827
OBrien
|
|
Westbelt Corporate Center
|
|
Warehouse
|
|
|
4,961
|
|
|
|
1,028
|
|
|
|
3,776
|
|
|
|
|
|
|
|
551
|
|
|
|
1,028
|
|
|
|
4,327
|
|
|
|
5,355
|
|
|
|
(350
|
)
|
|
|
1985
|
|
|
|
2007
|
|
KANSAS CITY, MO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1760-1850 N. Corrington
Ave
|
|
Executive Park
|
|
Distribution
|
|
|
9,056
|
|
|
|
2,150
|
|
|
|
6,905
|
|
|
|
|
|
|
|
|
|
|
|
2,150
|
|
|
|
6,905
|
|
|
|
9,055
|
|
|
|
(921
|
)
|
|
|
2000
|
|
|
|
2004
|
|
OTHER
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WelshCo, LLC and Subsidiaries
|
|
|
|
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
(227
|
)
|
|
|
3,144
|
|
|
|
(227
|
)
|
|
|
3,144
|
|
|
|
2,917
|
|
|
|
(1,694
|
)
|
|
|
na
|
|
|
|
na
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
174,117
|
|
|
$
|
33,845
|
|
|
$
|
118,931
|
|
|
$
|
3,612
|
|
|
$
|
50,136
|
|
|
$
|
37,457
|
|
|
$
|
169,067
|
|
|
$
|
206,524
|
|
|
$
|
(37,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-94
Welsh
Contribution Companies
|
|
NOTE 1.
|
RECONCILIATION OF
REAL ESTATE INVESTMENTS
|
The changes in real estate investments of Contribution Companies
for the years ended December 2009, 2008, and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Balance, beginning of year
|
|
$
|
235,552
|
|
|
$
|
270,575
|
|
|
$
|
172,829
|
|
Acquisitions
|
|
|
|
|
|
|
17,701
|
|
|
|
79,475
|
|
Transfers due to change in ownership
|
|
|
(32,967
|
)
|
|
|
(66,717
|
)
|
|
|
|
|
Improvements
|
|
|
4,749
|
|
|
|
14,857
|
|
|
|
19,416
|
|
Disposals
|
|
|
(810
|
)
|
|
|
(864
|
)
|
|
|
(1,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
206,524
|
|
|
$
|
235,552
|
|
|
$
|
270,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unaudited aggregate cost of investment properties for
federal tax purposes as of December 31, 2009 was $221,600.
|
|
NOTE 2.
|
RECONCILIATION OF
ACCUMULATED DEPRECIATION
|
The changes in accumulated depreciation of Contribution
Companies for the years end
ed
December 31, 2009,
2008, and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Balance, beginning of year
|
|
$
|
30,573
|
|
|
$
|
26,443
|
|
|
$
|
19,789
|
|
Depreciation and amortization expense
|
|
|
8,057
|
|
|
|
7,642
|
|
|
|
7,673
|
|
Disposals
|
|
|
(643
|
)
|
|
|
(638
|
)
|
|
|
(1,019
|
)
|
Transfers due to change in ownership
|
|
|
(507
|
)
|
|
|
(2,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
37,479
|
|
|
$
|
30,573
|
|
|
$
|
26,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of real estate investments reflected in the
statements of operations is calculated over the estimated
original lives of the assets as follows:
|
|
|
Buildings
|
|
40 years
|
Building Improvements
|
|
10 years
|
Tenant improvements
|
|
Term of related lease
|
F-95
WelshCo, LLC and
Subsidiaries
Board of
Directors
WelshCo, LLC
We have audited the accompanying consolidated balance sheet of
WelshCo, LLC and Subsidiaries as of December 31, 2009, and
the related consolidated statements of operations, changes in
members equity, and cash flows for the year ended
December 31, 2009. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of WelshCo, LLC and Subsidiaries as of
December 31, 2009 and the results of their operations and
their cash flows for the year ended December 31, 2009, in
conformity with U.S. generally accepted accounting
principles.
Minneapolis, Minnesota
March 3, 2010
F-96
WelshCo, LLC and
Subsidiaries
Board of
Directors
WelshCo, LLC
We have audited the accompanying consolidated balance sheet of
WelshCo, LLC and Subsidiaries as of December 31, 2008, and
the related consolidated statements of operations, changes in
members equity, and cash flows for the years ended
December 31, 2008 and 2007. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of WelshCo, LLC and Subsidiaries as of
December 31, 2008 and the results of their operations and
their cash flows for the years ended December 31, 2008 and
2007, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Boulay, Heutmaker, Zibell & Co. P.L.L.P.
March 3, 2010
Minneapolis, Minnesota
F-97
WelshCo, LLC and
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
As of December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Assets:
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,097,781
|
|
|
$
|
4,798,765
|
|
Receivables
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts
totaling $339,000 and $445,000 at December 31, 2009 and
2008, respectively
|
|
|
4,357,751
|
|
|
|
6,046,472
|
|
Related party
|
|
|
3,594,455
|
|
|
|
3,982,879
|
|
Costs in excess of billings on uncompleted construction contracts
|
|
|
166,293
|
|
|
|
1,267,232
|
|
Other current assets
|
|
|
614,810
|
|
|
|
626,018
|
|
Notes receivable from related parties
|
|
|
152,545
|
|
|
|
465,875
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,983,635
|
|
|
|
17,187,241
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,105,902
|
|
|
|
2,656,862
|
|
Other assets
|
|
|
325,226
|
|
|
|
325,226
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
13,414,763
|
|
|
$
|
20,169,329
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
260,454
|
|
|
$
|
293,833
|
|
Accounts payable
|
|
|
7,396,071
|
|
|
|
8,797,007
|
|
Accrued liabilities
|
|
|
668,795
|
|
|
|
2,247,644
|
|
Billings in excess of costs on uncompleted construction contracts
|
|
|
25,168
|
|
|
|
494,032
|
|
Other current liabilities
|
|
|
434,613
|
|
|
|
387,555
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,785,101
|
|
|
|
12,220,071
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
|
|
403,146
|
|
|
|
653,962
|
|
Deferred rent
|
|
|
138,944
|
|
|
|
73,186
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
4,087,572
|
|
|
|
7,222,110
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Members Equity
|
|
$
|
13,414,763
|
|
|
$
|
20,169,329
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-98
WelshCo, LLC and
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction revenue
|
|
$
|
31,492,551
|
|
|
$
|
44,662,645
|
|
|
$
|
42,958,575
|
|
Brokerage and other service revenue
|
|
|
28,601,910
|
|
|
|
33,637,929
|
|
|
|
37,476,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
60,094,461
|
|
|
|
78,300,574
|
|
|
|
80,435,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction expenses
|
|
|
30,063,812
|
|
|
|
39,907,788
|
|
|
|
39,571,262
|
|
Brokerage and other service expense
|
|
|
19,462,242
|
|
|
|
24,995,986
|
|
|
|
28,092,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
49,526,054
|
|
|
|
64,903,774
|
|
|
|
67,664,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
10,568,407
|
|
|
|
13,396,800
|
|
|
|
12,770,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses
|
|
|
10,818,271
|
|
|
|
9,515,342
|
|
|
|
8,163,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
(249,864
|
)
|
|
|
3,881,458
|
|
|
|
4,607,749
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
72,345
|
|
|
|
135,121
|
|
|
|
162,915
|
|
Interest expense
|
|
|
(147,647
|
)
|
|
|
(221,100
|
)
|
|
|
(32,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(75,302
|
)
|
|
|
(85,979
|
)
|
|
|
130,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(325,166
|
)
|
|
$
|
3,795,479
|
|
|
$
|
4,738,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-99
WelshCo, LLC and
Subsidiaries
For the year
ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
5,313,574
|
|
Add: Net Income
|
|
|
4,738,057
|
|
Less: Distributions
|
|
|
(3,700,000
|
)
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
6,351,631
|
|
Add: Net Income
|
|
|
3,795,479
|
|
Less: Distributions
|
|
|
(2,925,000
|
)
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
7,222,110
|
|
Add: Contribution of Welsh Capital, LLC
|
|
|
139,628
|
|
Add: Net Loss
|
|
|
(325,166
|
)
|
Less: Distributions
|
|
|
(2,949,000
|
)
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
4,087,572
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-100
WelshCo, LLC and
Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(325,166
|
)
|
|
$
|
3,795,479
|
|
|
$
|
4,738,057
|
|
Adjustments to reconcile net income (loss) to net cash from
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
648,960
|
|
|
|
609,174
|
|
|
|
428,736
|
|
Provision for (recovery of) doubtful accounts
|
|
|
(106,000
|
)
|
|
|
165,000
|
|
|
|
|
|
(Gain) loss on disposal of property and equipment
|
|
|
(2,072
|
)
|
|
|
65,954
|
|
|
|
40,705
|
|
Deferred rent
|
|
|
65,758
|
|
|
|
73,186
|
|
|
|
|
|
Changes in assets and liabilities, net of Welsh Capital, LLC
contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
2,183,145
|
|
|
|
(3,348,975
|
)
|
|
|
799,267
|
|
Costs in excess of billings on uncompleted construction contracts
|
|
|
1,100,939
|
|
|
|
(1,083,036
|
)
|
|
|
532,527
|
|
Other current assets
|
|
|
95,545
|
|
|
|
(444,843
|
)
|
|
|
33,892
|
|
Accounts payable
|
|
|
(1,418,526
|
)
|
|
|
3,175,261
|
|
|
|
(2,670,617
|
)
|
Accrued expenses
|
|
|
(1,659,996
|
)
|
|
|
(26,241
|
)
|
|
|
235,723
|
|
Billings in excess of costs on uncompleted construction contracts
|
|
|
(468,864
|
)
|
|
|
251,489
|
|
|
|
(123,560
|
)
|
Other current liabilities
|
|
|
47,058
|
|
|
|
382,000
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
160,781
|
|
|
|
3,614,448
|
|
|
|
4,009,730
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash acquired from contribution of Welsh Capital, LLC
|
|
|
139,143
|
|
|
|
|
|
|
|
|
|
Payments for notes receivable from related parties
|
|
|
(3,520,443
|
)
|
|
|
(7,234,159
|
)
|
|
|
(1,934,321
|
)
|
Proceeds from notes receivable from related parties
|
|
|
3,833,773
|
|
|
|
8,491,923
|
|
|
|
210,682
|
|
Proceeds on sale of property and equipment
|
|
|
6,000
|
|
|
|
7,519
|
|
|
|
1,500
|
|
Capital expenditures
|
|
|
(65,129
|
)
|
|
|
(1,469,113
|
)
|
|
|
(209,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used for) investing activities
|
|
|
393,344
|
|
|
|
(203,830
|
)
|
|
|
(1,931,421
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of long-term debt
|
|
|
(306,109
|
)
|
|
|
(312,454
|
)
|
|
|
(213,101
|
)
|
Distributions paid
|
|
|
(2,949,000
|
)
|
|
|
(2,925,000
|
)
|
|
|
(3,700,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(3,255,109
|
)
|
|
|
(3,237,454
|
)
|
|
|
(3,913,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) In Cash and Equivalents
|
|
|
(2,700,984
|
)
|
|
|
173,164
|
|
|
|
(1,834,792
|
)
|
Cash and equivalentsBeginning of the year
|
|
|
4,798,765
|
|
|
|
4,625,601
|
|
|
|
6,460,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalentsEnd of the year
|
|
$
|
2,097,781
|
|
|
$
|
4,798,765
|
|
|
$
|
4,625,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-101
WelshCo, LLC and
Subsidiaries
Consolidated
statements of cash flows (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
147,647
|
|
|
$
|
221,100
|
|
|
$
|
32,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment financed by capital leases
|
|
|
|
|
|
|
331,431
|
|
|
|
462,598
|
|
Property and equipment financed by long term debt
|
|
|
21,914
|
|
|
|
101,792
|
|
|
|
122,692
|
|
Capital lease obligation exchanged
|
|
|
|
|
|
|
104,616
|
|
|
|
15,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of Welsh Capital, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
139,143
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
89
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
14,885
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
84,248
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(17,590
|
)
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
(81,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net equity contributed
|
|
$
|
139,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-102
WelshCo, LLC and
subsidiaries
|
|
1.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
Organization
WelshCo, LLC, a limited liability company, and subsidiaries have
been in the commercial real estate business since 1977, and
elected to file as an LLC in 1999. The term of the Company (as
defined below) shall continue perpetually, unless the Company is
earlier dissolved or extended in accordance with the terms of
its Member Operating Agreement.
Principles of
consolidation
The financial statements include the accounts of WelshCo, LLC
and its wholly-owned subsidiaries: Welsh Companies, LLC, Genesis
Architecture, LLC, Welsh Construction, LLC, Welsh Facilities
Services, LLC (dba FaciliTech), and Welsh Capital, LLC
(2009 contribution by common members of WelshCo, LLC)
(collectively, the Company). All significant
intercompany balances and transactions were eliminated in
consolidation.
Nature of
business
The Company provides comprehensive real estate services
primarily in the Minneapolis, Minnesota market. The business
includes the brokerage of commercial building sales and leasing,
property management and maintenance, building construction,
tenant improvements, architectural design services, and
commercial real estate debt sourcing.
Accounting
estimates
Management uses estimates and assumptions in preparing these
financial statements in accordance with accounting principles
generally accepted in the United States of America. Those
estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosures of contingent assets and
liabilities, and the reported revenues and expenses. Significant
management estimates include the allowance for doubtful
accounts; the percentage of completion of long-term construction
contracts; and the valuation of property and equipment. Actual
results could differ from those estimates. It is at least
reasonably possible that a change in estimate will occur in the
near term. Changes in the long-term construction contracts
percentage of completion can differ from actual results.
Cash and cash
equivalents
The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to
be cash equivalents.
At times throughout the year, the Companys cash balances
may exceed amounts insured by the Federal Deposit Insurance
Corporation. Cash in money market funds is not federally
insured. The Company had no balance in money market funds at
December 31, 2009 and December 31, 2008. Included in
cash are restricted escrow payments received totaling $555 at
both December 31, 2009 and 2008.
Accounts
receivable
Credit terms are extended to customers in the normal course of
business. The Company performs ongoing credit evaluations of its
customers financial condition and, generally, requires no
collateral.
F-103
Notes to
consolidated financial statements of WelshCo, LLC and
subsidiaries
December 31, 2009, 2008, and 2007
Accounts receivable are recorded at their estimated net
realizable value, net of an allowance for doubtful accounts. The
Companys estimate of the allowance for doubtful accounts
is based upon historical experience, its evaluation of the
current status of receivables, and unusual circumstances, if
any. Accounts are considered past due if payment is not made on
a timely basis in accordance with the Companys credit
terms. Accounts considered uncollectible are charged against the
allowance.
Revenue and cost
recognition
The Company recognizes revenue and costs associated with
brokerage commissions when commissions are earned, which
typically occurs when a commercial building is sold and closed,
and recognizes leasing commission revenue when evidence of the
arrangement exists and all services have been performed.
Property management and maintenance services, and architectural
design service revenues are recognized when the service has been
provided.
Debt sourcing revenue is typically recognized when the related
loan transaction closes.
The Company recognizes revenue from long-term construction
contracts on the percentage-of-completion method, measured by
the percentage of costs incurred to date to the estimated total
costs for each contract. That method is used because management
considers total cost to be the best available measure of
progress on the contracts.
Contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as
indirect labor, supplies, tools, repairs, and depreciation.
General and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and
estimated profitability may result in revisions to costs and
income, which are recognized in the period in which the
revisions are determined. Changes in estimated job profitability
resulting from job performance, job conditions, contract penalty
provisions, claims, change orders, and settlements are accounted
for as changes in estimates in the current period.
The asset, Costs in excess of billings on uncompleted
construction contracts, represents revenue recognized in
excess of amounts billed. The liability, Billings in
excess of costs on uncompleted construction contracts,
represents billings in excess of revenue recognized.
Property and
equipment
Property and equipment are stated at cost. Depreciation and
amortization are provided over estimated useful lives by use of
the straight-line method. Maintenance and repairs are expensed
as incurred; major improvements and betterments are capitalized.
The present values of capital lease obligations are classified
as long-term debt and the related assets are included in
equipment. Amortization of equipment under capital leases is
included in depreciation expense.
The major categories of property and equipment and their
depreciable lives are as follows:
|
|
|
|
|
Office equipment, furniture and fixtures
|
|
|
3-10 years
|
|
Vehicles and transportation equipment
|
|
|
5-7 years
|
|
Leasehold improvements
|
|
|
2-12 years
|
|
Long-lived
assets
The Company evaluates the carrying value of long-lived assets,
including identifiable intangibles, for impairment annually, or
when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If
impairment indicators are present and the estimated future
F-104
Notes to
consolidated financial statements of WelshCo, LLC and
subsidiaries
December 31, 2009, 2008, and 2007
undiscounted cash flows are less than the carrying value of the
assets, the carrying value is reduced to the estimated fair
value as measured by the associated discounted cash flows.
Income
taxes
The Company represents a consolidation of limited liability
companies. Generally, a limited liability company is treated as
a partnership for federal income tax purposes or as a division
of its sole member. As a result, a limited liability company is
generally not subject to either federal, state, or local income
taxes as the respective member(s) are taxed on their allocable
share of the limited liability companys taxable income.
Therefore, no provision or liability for federal, state, or
local income taxes has been included in these consolidated
financial statements.
Member rights and
obligations
Each members liability shall be limited as set forth in
the Member Operating Agreement (the Agreement). A
member will not be personally liable for any debts or losses of
the Company beyond its respective company interest except as
provided for in the Agreement. Pursuant to the terms of the
Agreement profits, losses, and distributions are generally
allocated to the members in accordance with their ownership
percentages.
Fair value of
financial instruments
Our carrying value of cash and equivalents, accounts receivable,
notes receivable, accounts payable, and other working capital
items approximate fair value at December 31, 2009 and 2008
due to the short maturity nature of these instruments.
Advertising
The Company expenses the costs of advertising as incurred.
Advertising expense was approximately $441,000, $666,000 and
$666,000 for the years ending December 31, 2009, 2008 and
2007, respectively.
Two customers (one of which was a related party) comprised
approximately 43% and 38% of the Companys outstanding
accounts receivable balance at December 31, 2009 and 2008,
respectively.
|
|
3.
|
ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
|
Accounts receivable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Trade accounts receivable
|
|
$
|
3,892,199
|
|
|
$
|
5,880,937
|
|
Retainage receivable
|
|
|
236,232
|
|
|
|
598,081
|
|
Other accounts receivable
|
|
|
568,320
|
|
|
|
12,454
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
4,696,751
|
|
|
|
6,491,472
|
|
Less allowance for doubtful accounts
|
|
|
(339,000
|
)
|
|
|
(445,000
|
)
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
4,357,751
|
|
|
$
|
6,046,472
|
|
|
|
|
|
|
|
|
|
|
F-105
Notes to
consolidated financial statements of WelshCo, LLC and
subsidiaries
December 31, 2009, 2008, and 2007
|
|
4.
|
COSTS ON
UNCOMPLETED CONTRACTS
|
The status of uncompleted contracts is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Costs incurred on uncompleted construction contracts
|
|
$
|
4,754,170
|
|
|
$
|
16,148,608
|
|
Estimated earnings on uncompleted construction contracts
|
|
|
300,031
|
|
|
|
1,544,220
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
5,054,201
|
|
|
|
17,692,828
|
|
Billings to date on uncompleted construction contracts
|
|
|
(4,913,076
|
)
|
|
|
(16,929,230
|
)
|
Unbilled balances on completed construction contracts
|
|
|
|
|
|
|
9,602
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
141,125
|
|
|
$
|
773,200
|
|
|
|
|
|
|
|
|
|
|
Uncompleted contracts are included in the accompanying balance
sheet under the following captions:
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Costs in excess of billings on uncompleted
|
|
|
|
|
|
|
|
|
construction contracts
|
|
$
|
166,293
|
|
|
$
|
1,267,232
|
|
Billings in excess of costs on uncompleted construction contracts
|
|
|
(25,168
|
)
|
|
|
(494,032
|
)
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
141,125
|
|
|
$
|
773,200
|
|
|
|
|
|
|
|
|
|
|
The estimated gross revenue on work to be performed on signed
contracts approximated $4,800,000, $19,500,000, and $8,800,000
at December 31, 2009, 2008, and 2007, respectively.
|
|
5.
|
PROPERTY AND
EQUIPMENT
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Office equipment, furniture and fixtures
|
|
$
|
3,481,168
|
|
|
$
|
3,495,812
|
|
Vehicles and transportation equipment
|
|
|
587,707
|
|
|
|
746,269
|
|
Leasehold improvements
|
|
|
182,210
|
|
|
|
184,488
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
4,251,085
|
|
|
|
4,426,569
|
|
Less accumulated depreciation
|
|
|
(2,145,183
|
)
|
|
|
(1,769,707
|
)
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,105,902
|
|
|
$
|
2,656,862
|
|
|
|
|
|
|
|
|
|
|
The Company has a revolving line of credit with its bank which
expires on October 21, 2010. The borrowing limit on the
line of credit was $5,000,000 at both December 31, 2009 and
2008. Interest was charged at 3.00% above the one-month LIBOR,
with an interest rate floor of 5.00%, which resulted in an
interest rate of 5.00% at December 31, 2009. Interest was
charged at 2.25% above the one month LIBOR rate, with an
interest rate floor of 4.50%, which resulted in an interest rate
of 4.50% at December 31, 2008. Amounts available under the
line of credit are reduced by outstanding standby letters of
credit. There were no outstanding borrowings at
December 31, 2009 and 2008. The terms of the agreement with
the bank require the Company to maintain certain covenants. The
revolving line of credit is secured by substantially all of the
Companys assets.
F-106
Notes to
consolidated financial statements of WelshCo, LLC and
subsidiaries
December 31, 2009, 2008, and 2007
The Company was contingently liable for an outstanding standby
letter of credit in the amount of $2,000,000 at both
December 31, 2009 and 2008. The letter of credit was issued
upon behalf of a related party and expires on September 11,
2010. The Company pays a commitment fee of 1.50% on the standby
letter of credit.
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Notes payable to financial institutions, due in monthly
installments ranging from $409 to $1,143 including interest from
5.70% to 7.80% through February, 2014, secured by vehicles
|
|
$
|
143,415
|
|
|
$
|
243,400
|
|
Capital lease obligations, secured by office equipment and
furniture under lease, due in monthly installments ranging from
$280 to $8,689 through December 2013 at implicit rates ranging
from 1.60% to 17.90%
|
|
|
520,185
|
|
|
|
704,395
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
663,600
|
|
|
|
947,795
|
|
Less amounts due within one year
|
|
|
(260,454
|
)
|
|
|
(293,833
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term debt
|
|
$
|
403,146
|
|
|
$
|
653,962
|
|
|
|
|
|
|
|
|
|
|
Scheduled maturities of long-term debt are as follows:
|
|
|
|
|
|
|
As of
December 31, 2009
|
|
|
|
|
2010
|
|
$
|
260,454
|
|
2011
|
|
|
207,387
|
|
2012
|
|
|
166,687
|
|
2013
|
|
|
28,232
|
|
2014
|
|
|
840
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
663,600
|
|
|
|
|
|
|
The Company leases facilities, some of which are from related
parties, under operating leases over terms of one to twelve
years. Some of the leases have renewal options for additional
terms. The Company also leases equipment under operating leases
over terms of two to five years. The Company is obligated to pay
costs of insurance, taxes, repairs and maintenance pursuant to
the terms of most of the leases. The Company also leases office
equipment and furniture under capital leases over terms of one
to five years (See Note 7).
Property and equipment include the following amounts for capital
leases:
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Assets under capital lease
|
|
$
|
1,076,385
|
|
|
$
|
1,076,385
|
|
Accumulated amortization
|
|
|
(537,726
|
)
|
|
|
(369,675
|
)
|
|
|
|
|
|
|
|
|
|
Net equipment under capital lease
|
|
$
|
538,659
|
|
|
$
|
706,710
|
|
|
|
|
|
|
|
|
|
|
F-107
Notes to
consolidated financial statements of WelshCo, LLC and
subsidiaries
December 31, 2009, 2008, and 2007
At December 31, 2009 the Company had the following minimum
commitments for payment of rentals under leases:
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
|
leases
|
|
|
leases
|
|
|
|
|
2010
|
|
$
|
1,093,993
|
|
|
$
|
236,972
|
|
2011
|
|
|
936,346
|
|
|
|
204,859
|
|
2012
|
|
|
927,570
|
|
|
|
173,421
|
|
2013
|
|
|
920,971
|
|
|
|
24,416
|
|
2014
|
|
|
936,043
|
|
|
|
|
|
Thereafter
|
|
|
5,351,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease commitments
|
|
$
|
10,166,410
|
|
|
|
639,668
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
|
|
|
|
(119,483
|
)
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments included in long term
debt (See Note 7)
|
|
|
|
|
|
$
|
520,185
|
|
|
|
|
|
|
|
|
|
|
Rent expense for operating leases was approximately $1,077,000,
$974,000, and $941,000, in 2009, 2008, and 2007, which includes
common area maintenance costs. The operating facility lease
agreements contain escalating monthly payments. In accordance
with lease accounting guidance, the Company recognizes rental
expense on a straight-line expense basis and records the
difference between the accumulated monthly lease payments and
the straight-line expense incurred as deferred rent. The Company
has recorded deferred rent obligations of $138,944 and $73,186
in 2009 and 2008 respectively. There were no deferred rent
obligations in 2007.
The Company has a 401(k) profit sharing plan, which covers
substantially all employees who have at least six months of
service and are 21 years old. The Company makes a matching
contribution equal to 50% of the first 6% of compensation
contributed by each participant. The Companys
contributions were approximately $400,000, $412,000, and
$375,000 for the years 2009, 2008 and 2007.
|
|
10.
|
TRANSACTIONS WITH
RELATED PARTIES
|
The Company has balances as of December 31, 2009 and 2008,
and transactions during the years ended December 31, 2009,
2008 and 2007, with various partnerships having common
ownership. The amounts are approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Due from related parties
|
|
$
|
3,594,455
|
|
|
$
|
3,982,879
|
|
|
|
|
|
Notes receivable due from related parties
|
|
|
152,545
|
|
|
|
465,875
|
|
|
|
|
|
Commissions, management, leasing renewal, asset management, and
other fees earned from related parties
|
|
|
7,258,399
|
|
|
|
22,595,709
|
|
|
|
25,012,847
|
|
Related party rent expense
|
|
|
1,106,919
|
|
|
|
971,810
|
|
|
|
755,476
|
|
In connection with a proposed initial public offering of an
affiliate, the Company incurred professional fees totaling
approximately $4,689,000 as of December 31, 2009. In
accordance with generally accepted accounting principles
$1,987,000 of these costs were recorded as operating expenses
during fiscal 2009. The balance remaining is reflected within
related party receivables at December 31, 2009 as it will
be refunded to the Company from the proceeds of the offering
upon its completion.
F-108
Notes to
consolidated financial statements of WelshCo, LLC and
subsidiaries
December 31, 2009, 2008, and 2007
The Company has outstanding unsecured notes receivable from
related parties of approximately $153,000 and $466,000 at
December 31, 2009 and 2008, respectively, at interest rates
varying from 6% to 8% per annum, which are due on demand.
Related party interest income was $60,468, $204,826, and $12,358
for the years ended December 31, 2009, 2008 and 2007,
respectively.
|
|
11.
|
COMMITMENTS AND
CONTINGENCIES
|
The Company is not subject to any material litigation nor to
managements knowledge is any material litigation currently
threatened against the Company other than routine litigation,
claims, and administrative proceedings arising in the ordinary
course of business. Management believes that such routine
litigation, claims and administrative proceedings will not have
a material adverse impact on the Companys consolidated
financial position or consolidated results of operations.
F-109
Intercen
Partners, LLC
Manager and Members
Intercen Partners, LLC
Minneapolis, Minnesota
We have audited the accompanying balance sheet of Intercen
Partners, LLC (a limited liability company) as of
December 31, 2007, and the related statement of operations
and changes in members equity, and cash flows for the year
then ended. These financial statements are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Intercen Partners, LLC as of December 31, 2007 and the
results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Boulay,
Heutmaker, Zibell & Co. P.L.L.P.
Minneapolis, Minnesota
February 26, 2010
F-110
Intercen
Partners, LLC
|
|
|
|
|
|
|
As of December
31, 2007
|
|
|
|
|
Assets:
|
Cash and cash equivalents
|
|
$
|
723,729
|
|
Restricted cash
|
|
|
942,313
|
|
Accounts receivable
|
|
|
145,367
|
|
Prepaid expenses
|
|
|
33,091
|
|
Investment property, net
|
|
|
38,807,577
|
|
Deferred rent
|
|
|
1,958,275
|
|
Intangibles, net
|
|
|
2,801,931
|
|
Other assets, net
|
|
|
422,483
|
|
|
|
|
|
|
Total assets
|
|
$
|
45,834,766
|
|
|
|
|
|
|
|
Liabilities and equity:
|
Liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
237,283
|
|
Accrued liabilities
|
|
|
1,036,679
|
|
Notes payable
|
|
|
40,781,733
|
|
Security deposits and prepaid rents
|
|
|
442,330
|
|
|
|
|
|
|
Total liabilities
|
|
|
42,498,025
|
|
Members equity
|
|
|
3,336,741
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
45,834,766
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-111
Intercen
Partners, LLC
|
|
|
|
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
|
|
Revenues
|
|
|
|
|
Base rent
|
|
$
|
4,894,975
|
|
Common area maintenance
|
|
|
2,853,556
|
|
Parking income
|
|
|
634,615
|
|
Other rental income
|
|
|
152,301
|
|
|
|
|
|
|
Total revenue
|
|
|
8,535,447
|
|
Operating expenses
|
|
|
|
|
Salaries and wages
|
|
|
203,438
|
|
Repairs and maintenance
|
|
|
1,633,989
|
|
Insurance
|
|
|
52,925
|
|
Real estate taxes
|
|
|
1,423,803
|
|
Property management
|
|
|
281,830
|
|
Utilities
|
|
|
1,001,050
|
|
Professional fees
|
|
|
92,232
|
|
Depreciation
|
|
|
1,898,905
|
|
Amortization
|
|
|
1,109,090
|
|
Other operating expenses
|
|
|
197,370
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,894,632
|
|
|
|
|
|
|
Operating income
|
|
|
640,815
|
|
Other income and expense
|
|
|
|
|
Interest income
|
|
|
46,898
|
|
Interest expense
|
|
|
(4,083,461
|
)
|
|
|
|
|
|
Total other expense, net
|
|
|
(4,036,563
|
)
|
|
|
|
|
|
Net loss
|
|
|
(3,395,748
|
)
|
|
|
|
|
|
Members equitybeginning of year
|
|
|
6,732,489
|
|
|
|
|
|
|
Members equityend of year
|
|
$
|
3,336,741
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-112
Intercen
Partners, LLC
|
|
|
|
|
|
|
For the year
|
|
|
|
ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
Net loss
|
|
$
|
(3,395,748
|
)
|
Adjustments to reconcile net loss to net cash used for operating
activities:
|
|
|
|
|
Depreciation
|
|
|
1,898,905
|
|
Acquired lease and other intangible amortization
|
|
|
1,737,995
|
|
Changes in assets and liabilities:
|
|
|
|
|
Contributions to operating escrow accounts
|
|
|
(1,393,716
|
)
|
Withdrawals from operating escrow accounts
|
|
|
1,473,439
|
|
Accounts receivable
|
|
|
(5,299
|
)
|
Prepaid expenses
|
|
|
3,288
|
|
Deferred rent
|
|
|
(519,136
|
)
|
Trade accounts payable
|
|
|
(257,305
|
)
|
Accrued liabilities
|
|
|
275,454
|
|
Security deposits and prepaid rents
|
|
|
226,530
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
44,407
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Acquisition of real estate investments and related intangible
assets
|
|
|
(616,875
|
)
|
Payments for real estate
|
|
|
(1,997,034
|
)
|
Contributions to investing escrow accounts
|
|
|
(20,737
|
)
|
Withdrawals from investing escrow accounts
|
|
|
105,471
|
|
Change in restricted cash to security deposits
|
|
|
(17,756
|
)
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(2,546,931
|
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from notes payable
|
|
|
2,799,527
|
|
Payments on notes payable
|
|
|
(44,832
|
)
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,754,695
|
|
|
|
|
|
|
Net increase in cash
|
|
|
252,171
|
|
Cash and cash equivalentsbeginning of year
|
|
|
471,558
|
|
|
|
|
|
|
Cash and cash equivalentsend of year
|
|
$
|
723,729
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
3,925,634
|
|
The accompanying notes are an integral part of these financial
statements.
F-113
Intercen
Partners, LLC
|
|
1.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
Nature of
business
Intercen Partners, LLC (the Company,) owns and
operates two office buildings located in Minneapolis, Minnesota.
Accounting
estimates
Management uses estimates and assumptions in preparing these
financial statements in accordance with accounting principles
generally accepted in the United States of America. Those
estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual
results could differ from those estimates. Significant items
subject to such estimates and assumptions include the useful
lives of fixed assets, the valuation of tenant origination
intangibles assets, lease intangible assets and investment
properties.
Cash
The Company maintains its accounts at two financial
institutions. At times throughout the year, the Companys
cash balances may exceed amounts insured by the Federal Deposit
Insurance Corporation.
Restricted
cash
The Company has restricted cash escrow balances at one financial
institution totaling $881,572 at December 31, 2007 in
accordance with their mortgage agreements. Disbursements from
these accounts are restricted by the terms of the mortgage
agreement. The Company also holds restricted security deposits
on behalf of certain tenants, which totaled $60,741 at
December 31, 2007.
Accounts
receivable
Accounts receivable are recorded at their estimated net
realizable value. The Company follows a policy of providing an
allowance for doubtful accounts; however, based on its
evaluation of the current status of receivables, the Company is
of the belief that such accounts will be collectible in all
material respects and thus an allowance is not necessary.
Accounts are considered past due if payment is not made on a
timely basis in accordance with the Companys credit terms.
Accounts considered uncollectible are written off. No accounts
receivable were written off during 2007.
Revenue
recognition
Rental revenues include rents that each tenant pays in
accordance with the terms of its respective lease reported on a
straight-line basis over the term of the lease. Certain of the
Companys leases currently contain rental increases at
specified intervals, and accounting principles generally
accepted in the United State of America requires the Company to
record an asset and include in revenues, deferred rent
receivable that will be received if the tenant makes all rent
payments required through the expiration of the initial term of
the lease. Deferred rent in the accompanying balance sheet
includes the cumulative difference between rental revenue as
recorded on a straight-line basis and rents received from the
tenants in accordance with the lease terms. Deferred rent was an
asset of $1,958,275 at December 31, 2007.
F-114
Notes to
financial statements of Intercen Partners, LLC December 31,
2007
Accordingly, the Company determines in its judgment, to what
extent the deferred rent receivable applicable to each specific
tenant is collectible. The Company reviews deferred rent
receivable, as it relates to straight-line rents on a regular
basis and takes into consideration the tenants payment
history, the financial condition of the tenant, business
conditions in the industry in which the tenant operates and
economic conditions in the area that the property is located. In
the event that the collectibility of deferred rent with respect
to any given tenant is in doubt, the Company records an increase
in the allowance for uncollectible accounts or records a direct
write-off of the specific rent receivable. There were no
deferred rent receivables written off during 2007.
Investment
property
Investment property is stated at cost. Depreciation and
amortization are provided over estimated useful lives by use of
the straight-line method. Maintenance and repairs are expensed
as incurred; major improvements and betterments are capitalized.
The present value of capital lease obligations are classified as
long term debt and the related assets are included in equipment.
Amortization of equipment under capital leases is included in
depreciation expense.
Long-lived
assets
Long-lived assets, such as investment property, equipment, and
purchased intangible assets subject to amortization, are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. If circumstances require a long-lived asset
be tested for possible impairment, the Company first compares
undiscounted cash flows expected to be generated by an asset to
the carrying value of the asset. If the carrying value of the
long-lived asset is not recoverable on an undiscounted cash flow
basis, an impairment is recognized to the extent that the
carrying value exceeds its fair value. Fair value is determined
through various valuation techniques including, but not limited
to, discounted cash flow models, quoted market values and
third-party independent appraisals. No impairment losses were
recognized by the Company during 2007.
Tenant
origination and lease intangibles
The Company recorded tenant origination intangible assets and
lease intangible assets for those contractual agreements in
place at the time the buildings were purchased. The recorded
values are amortized over the remaining terms of the specific
leases. Tenant origination intangibles are recognized as
amortization expense, while lease intangibles are recognized as
a reduction of rental revenues within the statement of
operations and changes in members equity.
Other
assets
Leasing commissions are amortized by the straight-line method
over the term of the lease. Debt financing costs resulting from
the acquisition transaction are being amortized by use of the
straight-line method over sixty months.
Income
taxes
The Company, with the consent of its members, elected under the
Internal Revenue Code and comparable state laws, to become a
Limited Liability Company (LLC). Since members of an LLC are
taxed on their proportionate share of the LLCs taxable
income, an LLC is generally not subject to either federal or
state income taxes at the partnership level. Therefore, no
provision or liability for federal or state income taxes is
included in these financial statements.
F-115
Notes to
financial statements of Intercen Partners, LLC December 31,
2007
The Company has a concentration in its base rent revenues. Three
tenants comprised approximately 52% of the Companys base
rent revenues from operations during 2007.
Accounts receivable consist of the following at
December 31, 2007:
|
|
|
|
|
Accounts receivable
|
|
$
|
96,219
|
|
Other receivable
|
|
|
49,148
|
|
|
|
|
|
|
Total
|
|
$
|
145,367
|
|
|
|
|
|
|
Real estate consists of the following at December 31, 2007:
|
|
|
|
|
Land
|
|
$
|
4,880,341
|
|
Buildings
|
|
|
29,404,674
|
|
Tenant improvements
|
|
|
8,982,979
|
|
|
|
|
|
|
|
|
|
43,267,994
|
|
Less accumulated depreciation
|
|
|
(4,460,417
|
)
|
|
|
|
|
|
Total
|
|
$
|
38,807,577
|
|
|
|
|
|
|
Intangible assets subject to amortization consist of the
following at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
basis
|
|
|
amortization
|
|
|
Net
|
|
|
|
|
Tenant origination intangibles
|
|
$
|
4,318,264
|
|
|
$
|
3,708,455
|
|
|
$
|
609,809
|
|
Prepaid leasing commissions
|
|
|
2,445,840
|
|
|
|
553,598
|
|
|
|
1,892,242
|
|
Lease intangibles
|
|
|
1,926,254
|
|
|
|
1,626,374
|
|
|
|
299,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,690,358
|
|
|
$
|
5,888,427
|
|
|
$
|
2,801,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated amortization expense of intangible assets for the
next five years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenant
|
|
|
Prepaid
|
|
|
|
|
|
|
origination
|
|
|
leasing
|
|
|
Lease
|
|
|
|
costs
|
|
|
commissions
|
|
|
intangibles
|
|
|
|
|
2008
|
|
$
|
349,146
|
|
|
$
|
333,383
|
|
|
$
|
249,660
|
|
2009
|
|
|
96,656
|
|
|
|
323,418
|
|
|
|
16,070
|
|
2010
|
|
|
56,089
|
|
|
|
300,136
|
|
|
|
11,076
|
|
2011
|
|
|
54,457
|
|
|
|
277,191
|
|
|
|
11,076
|
|
2012
|
|
|
48,872
|
|
|
|
270,644
|
|
|
|
11,076
|
|
F-116
Notes to
financial statements of Intercen Partners, LLC December 31,
2007
Other assets consist of the following at December 31, 2007:
|
|
|
|
|
Debt financing costs
|
|
$
|
976,766
|
|
Less accumulated amortization
|
|
|
554,283
|
|
|
|
|
|
|
Net
|
|
$
|
422,483
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loan payable to a financial institution for up to
$41,750,000 due August 1, 2009 with interest and escrow
payments due monthly. Interest is charged at the 30 day
LIBOR rate, plus a margin of 4.25%, which totaled 8.85% at
December 31, 2007. The mortgage loan requires the Company
to maintain certain financial ratios and covenants and is
subject to a security agreement. Outstanding borrowings under
this agreement are secured by substantially all corporate assets
and guaranteed by the Companys controlling member. The
mortgage was assigned and renegotiated with a new bank in July
2008, the new loan is due July 31, 2011
|
|
$
|
40,734,199
|
|
|
|
|
|
|
Capital lease obligations, at implicit rates of 9%, payable in
monthly installments totaling $4,277, secured by the equipment.
(see Note 8)
|
|
|
47,534
|
|
|
|
|
|
|
Total
|
|
$
|
40,781,733
|
|
|
|
|
|
|
Scheduled maturities of long-term debt are as follows at
December 31, 2007:
|
|
|
|
|
2008
|
|
$
|
36,719
|
|
2009
|
|
|
40,745,014
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
40,781,733
|
|
|
|
|
|
|
|
|
8.
|
CAPITAL LEASE
OBLIGATIONS
|
The Company leases various items of equipment over three-year
terms. The Company is obligated to pay costs of insurance,
taxes, repairs and maintenance pursuant to the terms of the
leases.
Property and equipment include the following amounts for
equipment under capital leases at December 31, 2007:
|
|
|
|
|
Equipment
|
|
$
|
134,796
|
|
Accumulated amortization
|
|
|
24,390
|
|
|
|
|
|
|
Net equipment under capital leases
|
|
$
|
110,406
|
|
|
|
|
|
|
At December 31, 2007, the Company had the following minimum
commitments for payment of rentals under leases which at
inception had a noncancellable term of more than one year.
|
|
|
|
|
2008
|
|
$
|
39,191
|
|
2009
|
|
|
11,101
|
|
|
|
|
|
|
Total minimum lease commitments
|
|
|
50,292
|
|
Less amount representing interest
|
|
|
2,758
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
|
|
(included in long-term debt Note 7)
|
|
$
|
47,534
|
|
|
|
|
|
|
F-117
Notes to
financial statements of Intercen Partners, LLC December 31,
2007
The Company leases various office space to tenants over terms
ranging from 1 to 17 years. Some of the leases have renewal
options for additional terms. The leases provide for base
monthly rentals and reimbursements for real estate taxes and
common area maintenance.
At December 31, 2007, the Company had the following future
minimum base rentals on noncancellable leases:
|
|
|
|
|
|
2008
|
|
$
|
5,108,467
|
|
2009
|
|
|
5,338,934
|
|
2010
|
|
|
5,244,405
|
|
2011
|
|
|
4,854,739
|
|
2012
|
|
|
4,124,849
|
|
After 2012
|
|
|
7,330,582
|
|
|
|
|
|
|
Total minimum base lease commitments
|
|
$
|
32,001,976
|
|
|
|
|
|
|
|
|
10.
|
TRANSACTIONS WITH
RELATED PARTIES
|
The Company has a management and leasing agreement with an
entity related to a member and is charged management fees at
3.25% of gross receipts, which totaled $281,830 in 2007. Leasing
commissions paid to the related entity totaled $616,842 in 2007.
During 2005, the Company entered into a lease with Welsh
Companies, LLC, an entity related through common owners, to rent
space at International Center I. During 2007, Welsh Companies,
LLC paid $74,242 in rent and $69,048 in cost recovery expenses
to Intercen Partners, LLC.
During 2007, the Company paid various entities, related through
common owners, $472,392 for operating expenses and $1,968,652
for building and tenant improvements. The Company owed these
related parties $1,021 at December 31, 2007, which is
included in accounts payable.
The Companys outstanding membership interests consist of
the aggregate of each members capital account and are
governed by a limited liability company agreement.
F-118
Columbus
Portfolio
Stockholders and Board of Directors
Welsh Property Trust, Inc.:
We have audited the accompanying statement of revenue and
certain expenses of Columbus Portfolio for the year ended
December 31, 2009. This financial statement is the
responsibility of the management of Welsh Property Trust, Inc.
Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statement. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was
prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission and for
inclusion in the registration statement on
Form S-11
of Welsh Property Trust, Inc., as described in Note 1 to
the financial statement. It is not intended to be a complete
presentation of Columbus Portfolios revenue and expenses.
In our opinion, the financial statement referred to above
presents fairly, in all material respects, the revenue and
certain expenses, as described in Note 1, of Columbus
Portfolio for the year ended December 31, 2009, in
conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Minneapolis, MN
April 9, 2010
F-119
Columbus
Portfolio
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
|
ended
|
|
|
Year ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
717
|
|
|
$
|
2,776
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
717
|
|
|
|
2,776
|
|
Certain expenses:
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
2
|
|
|
|
13
|
|
Real estate taxes
|
|
|
139
|
|
|
|
466
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
141
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
Revenue in excess of certain expenses
|
|
$
|
576
|
|
|
$
|
2,297
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the statements of
revenue and certain expenses.
F-120
Columbus
Portfolio
|
|
1.
|
ORGANIZATION AND
DESCRIPTION OF BUSINESS
|
The accompanying statements of revenue and certain expenses
include the operations of Columbus portfolio (the
Property) which is anticipated to be acquired by
Welsh Property Trust, L.P. (the Partnership), from a
nonaffiliated third party for approximately $22.0 million.
The Property has approximately 760,000 leasable square feet.
The Property is owned by UST-Columbus, L.P. (the
Seller). The Partnership entered into an agreement
with the Seller to purchase the Property in connection with the
proposed initial public offering of Welsh Property Trust, Inc.
The purchase of the Property is expected to occur upon the
consummation of the offering.
|
|
2.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
presentation
The accompanying statements of revenue and certain expenses have
been prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission and,
accordingly, is not representative of the actual results of
operations of the Property for the year ended December 31,
2009 due to the exclusion of the following expenses, which may
not be comparable to the proposed future operations of the
Property:
|
|
Ø
|
depreciation and amortization;
|
|
Ø
|
management fee revenue received from tenants and management fee
expenses incurred; and
|
|
Ø
|
other costs not directly related to the proposed future
operations of the Property.
|
Revenue
recognition
Rental revenue includes rents that each tenant pays in
accordance with the terms of its respective lease reported on a
straight-line basis over the non-cancellable term of the
respective leases.
Accounting
estimates
The preparation of the financial statements requires management
to use estimates and assumptions that affect the reported
amounts of revenue and certain expenses during the reporting
period. It is at least reasonably possible that these estimates
could change in the near term.
Unaudited interim
statement
The statement of revenue and certain expenses for the three
months ended March 31, 2010 is unaudited. In the opinion of
management, the statement reflects all adjustments necessary for
a fair presentation of the results of the interim period. All
such adjustments are of a normal recurring nature.
On June 7, 2010, the purchase agreement with the Seller was
amended to increase the purchase price of the Property by
$0.3 million. As a result of this increase, the Property is
anticipated to be acquired for approximately $22.3 million.
F-121
Notes to
statements of revenue and certain expenses of Columbus portfolio
March 31, 2010 (unaudited) and December 31,
2009
The Property leases industrial space under three lease
agreements with its tenant. The leases are accounted for as
operating leases. The leases contain renewal options at various
periods at various rental rates.
At December 31, 2009, the following future minimum rentals
on noncancellable leases (in thousands):
|
|
|
|
|
2010
|
|
$
|
2,192
|
|
2011
|
|
|
2,213
|
|
2012
|
|
|
2,279
|
|
2013
|
|
|
2,301
|
|
2014
|
|
|
2,371
|
|
Thereafter
|
|
|
7,971
|
|
|
|
|
|
|
Total base lease commitments
|
|
$
|
19,327
|
|
|
|
|
|
|
Certain expenses include only those costs expected to be
comparable to the proposed future operations of the Property.
Repairs and maintenance expense are charged to operations as
incurred. Costs such as depreciation, amortization and
management fees are excluded from the statements of revenue and
certain expenses.
|
|
5.
|
CONCENTRATION OF
CREDIT RISK
|
The Property had one tenant in 2009, which represented 100% of
total revenue.
|
|
6.
|
COMMITMENTS AND
CONTINGENCIES
|
The Seller is not subject to any material litigation nor to
managements knowledge is any material litigation currently
threatened against the Seller other than routine litigation,
claims and administrative proceedings arising in the ordinary
course of business. Management believes that such routine
litigation, claims and administrative proceedings will not have
a material adverse impact on the Sellers combined
financial position or combined results of operations.
F-122
Denver/Lakeland
Portfolio
Stockholders and Board of Directors
Welsh Property Trust, Inc.:
We have audited the accompanying combined statement of revenue
and certain expenses of Denver / Lakeland Portfolio
for the year ended December 31, 2009. This combined
financial statement is the responsibility of the management of
Welsh Property Trust, Inc. Our responsibility is to express an
opinion on this combined financial statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statement. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying combined statement of revenue and certain
expenses was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission
and for inclusion in the registration statement on
Form S-11
of Welsh Property Trust, Inc., as described in Note 1 to
the combined financial statement. It is not intended to be a
complete presentation of Denver / Lakeland Portfolio
combined revenue and expenses.
In our opinion, the combined financial statement referred to
above presents fairly, in all material respects, the combined
revenue and certain expenses, as described in Note 1, of
Denver / Lakeland Portfolio for the year ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
Minneapolis, Minnesota
April 9, 2010
F-123
Denver/Lakeland
Portfolio
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
|
ended
|
|
|
Year ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
709
|
|
|
$
|
2,821
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
709
|
|
|
|
2,821
|
|
Certain expenses:
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
48
|
|
|
|
213
|
|
Real estate taxes
|
|
|
79
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
Total certain expenses
|
|
|
127
|
|
|
|
517
|
|
|
|
|
|
|
|
|
|
|
Revenue in excess of certain expenses
|
|
$
|
582
|
|
|
$
|
2,304
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
statements of revenue and certain expenses.
F-124
Denver/Lakeland
Portfolio
|
|
1.
|
ORGANIZATION AND
DESCRIPTION OF BUSINESS
|
The accompanying combined statements of revenue and certain
expenses include the operations of Denver / Lakeland
portfolio (the Properties) which are anticipated to
be acquired by Welsh Property Trust, L.P. (the
Partnership), from a nonaffiliated third party, for
approximately $26.8 million through cash payments of
approximately $19.1 million and the issuance of Partnership
units of approximately $7.7 million. The Properties have
approximately 502,000 of leasable square feet.
The Properties are owned by Fort III OH, LLC (the
Seller). The Partnership entered into an agreement
with the Seller to purchase the Properties in connection with
the proposed initial public offering of Welsh Property Trust,
Inc. The purchase of the Properties is expected to occur upon
the consummation of the offering.
|
|
2.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
presentation
The accompanying combined statements of revenue and certain
expenses have been prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange
Commission and, accordingly, is not representative of the actual
results of operations of the Properties for the year ended
December 31, 2009 due to the exclusion of the following
expenses, which may not be comparable to the proposed future
operations of the Properties:
|
|
Ø
|
depreciation and amortization;
|
|
Ø
|
management fee revenue received from tenants and management fee
expenses incurred; and
|
|
Ø
|
other costs not directly related to the proposed future
operations of the Properties.
|
Revenue
recognition
Rental revenue includes rents that each tenant pays in
accordance with the terms of its respective lease reported on a
straight-line basis over the non-cancellable term of the
respective leases.
Accounting
estimates
The preparation of the combined financial statements requires
management to use estimates and assumptions that affect the
reported amounts of revenue and certain expenses during the
reporting period. It is at least reasonably possible that these
estimates could change in the near term.
Unaudited
interim combined statement
The combined statement of revenue and certain expenses for the
three months ended March 31, 2010 is unaudited. In the
opinion of management, the statement reflects all adjustments
necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal recurring nature.
On April 19, 2010, the purchase agreement with the Seller was
amended to reduce the purchase price of the properties by $1.0
million. As a result of this reduction, the properties are
anticipated to be acquired for approximately $24.5 million
(exclusive of acquisition costs of approximately $1.5 million)
through cash payments of $17.8 million and the issuance of
Partnership units of approximately $7.7 million.
F-125
Notes to combined
statements of revenue and certain expenses of Denver / Lakeland
Portfolio March 31, 2010 (unaudited) and December 31,
2009
On June 21, 2010, the purchase agreement with the Seller
was further amended to reallocate the amount of cash and number
of Partnership units for the acquisition of the Properties. At
the current price of $9.50 per unit, the Properties are
anticipated to be acquired for approximately $21.8 million
(exclusive of acquisition costs of approximately
$1.5 million) through cash payments of $19.8 million
and the issuance of Partnership units of approximately
$2.0 million.
The Properties lease industrial space under various lease
agreements with their tenants. All leases are accounted for as
operating leases. The leases include provisions under which the
Properties are reimbursed for common area, real estate, and
insurance costs. Revenue related to these reimbursed costs is
recognized in the period the applicable costs are incurred and
billed to tenants pursuant to the lease agreements. Certain
leases contain renewal options at various periods at various
rental rates.
At December 31, 2009, the following future minimum rents on
noncancellable leases (in thousands):
|
|
|
|
|
2010
|
|
$
|
2,415
|
|
2011
|
|
|
2,463
|
|
2012
|
|
|
2,522
|
|
2013
|
|
|
2,487
|
|
2014
|
|
|
1,498
|
|
Thereafter
|
|
|
1,379
|
|
|
|
|
|
|
Total base lease commitments
|
|
$
|
12,764
|
|
|
|
|
|
|
Certain expenses include only those costs expected to be
comparable to the proposed future operations of the Properties.
Repairs and maintenance expense are charged to operations as
incurred. Costs such as depreciation, amortization and
management fees are excluded from the statements of revenue and
certain expenses.
|
|
5.
|
CONCENTRATION OF
CREDIT RISK
|
The Properties had three tenants account for more than 10% of
the revenue in 2009, which represented 100% of total revenue.
|
|
6.
|
COMMITMENTS AND
CONTINGENCIES
|
The Seller is not subject to any material litigation nor to
managements knowledge is any material litigation currently
threatened against the Seller other than routine litigation,
claims and administrative proceedings arising in the ordinary
course of business. Management believes that such routine
litigation, claims and administrative proceedings will not have
a material adverse impact on the Sellers combined
financial position or combined results of operations.
F-126
Kansas City
Property
Stockholders and Board of Directors
Welsh Property Trust, Inc.:
We have audited the accompanying statement of revenue and
certain expenses of Kansas City Property for the year ended
December 31, 2009. This financial statement is the
responsibility of the management of Welsh Property Trust, Inc.
Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statement. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was
prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission and for
inclusion in the registration statement on
Form S-11
of Welsh Property Trust, Inc., as described in Note 1 to
the financial statement. It is not intended to be a complete
presentation of Kansas City Propertys revenue and expenses.
In our opinion, the financial statement referred to above
presents fairly, in all material respects, the revenue and
certain expenses, as described in Note 1, of Kansas City
Property for the year ended December 31, 2009, in
conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Minneapolis, Minnesota
May 10, 2010
F-127
Kansas City
Property
|
|
|
|
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue:
|
|
|
|
|
Rental and related revenue
|
|
$
|
1,782
|
|
|
|
|
|
|
Total revenue
|
|
|
1,782
|
|
Certain expenses:
|
|
|
|
|
Cost of rental operations
|
|
|
27
|
|
Real estate taxes
|
|
|
271
|
|
|
|
|
|
|
Total certain expenses
|
|
|
298
|
|
|
|
|
|
|
Revenue in excess of certain expenses
|
|
$
|
1,484
|
|
|
|
|
|
|
The accompanying notes are an integral part of the statement of
revenue and certain expenses.
F-128
Kansas City
Property
|
|
1.
|
ORGANIZATION AND
DESCRIPTION OF BUSINESS
|
The accompanying statement of revenue and certain expenses
includes the operations of Kansas City property (the
Property), which was acquired from
Crow-Spaulding #7 LP (the Seller), a
nonaffiliated third party, in March 2010 by an affiliate of
Welsh Property Trust, LP (the Partnership) for
$12.5 million. The Property will be contributed to the
Partnership in return for operating units of the Partnership
upon the consummation of the offering.
The Property includes a single tenant building that has
approximately 311,000 of leasable square feet.
|
|
2.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
presentation
The accompanying statement of revenue and certain expenses has
been prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission and,
accordingly, is not representative of the actual results of
operations of the Property for the year ended December 31,
2009 due to the exclusion of the following expenses, which may
not be comparable to the proposed future operations of the
Property:
|
|
Ø
|
depreciation and amortization;
|
|
Ø
|
management fee revenues received from tenants and management fee
expenses incurred; and
|
|
Ø
|
other costs not directly related to the proposed future
operations of the Property.
|
Revenue
recognition
Rental revenue includes rent that the tenant pays in accordance
with the terms of its lease reported on a straight-line basis
over the non-cancellable term of the lease.
Accounting
estimates
The preparation of the financial statement requires management
to use estimates and assumptions that affect the reported
amounts of revenue and certain expenses during the reporting
period. It is at least reasonably possible that these estimates
could change in the near term.
The Property leases industrial space under a lease agreement
with its tenant. The lease is accounted for as an operating
lease. The lease includes a provision under which the Property
is reimbursed for common area, real estate, and insurance costs.
Revenue related to these reimbursed costs is recognized in the
period the applicable costs are incurred and billed to tenant
pursuant to the lease agreement. The lease contains renewal
options at various periods at various rental rates.
F-129
Notes to
statement of revenue and certain expenses of Kansas City
property December 31, 2009
At December 31, 2009, the following future minimum rentals
on the non-cancellable lease are as follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
1,556
|
|
2011
|
|
|
1,556
|
|
2012
|
|
|
1,556
|
|
2013
|
|
|
1,556
|
|
2014
|
|
|
1,695
|
|
Thereafter
|
|
|
6,781
|
|
|
|
|
|
|
Total base lease commitments
|
|
$
|
14,700
|
|
|
|
|
|
|
4. CERTAIN
EXPENSES
Certain expenses include only those costs expected to be
comparable to the proposed future operations of the Property.
Repairs and maintenance expense are charged to operations as
incurred. Costs such as depreciation, amortization, and
management fees are excluded from the statement of revenue and
certain expenses.
|
|
5.
|
CONCENTRATION OF
CREDIT RISK
|
The Property had one tenant in 2009, which represented 100% of
total revenue.
|
|
6.
|
COMMITMENTS AND
CONTINGENCIES
|
The Seller is not subject to any material litigation nor to
managements knowledge is any material litigation currently
threatened against the Seller other than routine litigation,
claims and administrative proceedings arising in the ordinary
course of business. Management believes that such routine
litigation, claims and administrative proceedings will not have
a material adverse impact on the Sellers financial
position or results of operations.
F-130
Memphis
Portfolio
Stockholders and Board of Directors
Welsh Property Trust, Inc.:
We have audited the accompanying statement of revenue and
certain expenses of Memphis Portfolio for the year ended
December 31, 2009. This financial statement is the
responsibility of the management of Welsh Property Trust, Inc.
Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statement. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was
prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission and for
inclusion in the registration statement on
Form S-11
of Welsh Property Trust, Inc., as described in Note 1 to
the financial statement. It is not intended to be a complete
presentation of Memphis Portfolios revenue and expenses.
In our opinion, the financial statement referred to above
presents fairly, in all material respects, the revenue and
certain expenses, as described in Note 1, of Memphis
Portfolio for the year ended December 31, 2009, in
conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Minneapolis, Minnesota
May 14, 2010
F-131
Memphis
Portfolio
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
|
ended
|
|
|
Year ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
812
|
|
|
$
|
3,277
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
812
|
|
|
|
3,277
|
|
Certain expenses:
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
48
|
|
|
|
231
|
|
Real estate taxes
|
|
|
203
|
|
|
|
763
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
251
|
|
|
|
994
|
|
|
|
|
|
|
|
|
|
|
Revenue in excess of certain expenses
|
|
$
|
561
|
|
|
$
|
2,283
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the statements of
revenue and certain expenses.
F-132
Memphis
Portfolio
|
|
1.
|
ORGANIZATION AND
DESCRIPTION OF BUSINESS
|
The accompanying statements of revenue and certain expenses
include the operations of Memphis portfolio (the
Properties) which is anticipated to be acquired by
Welsh Property Trust, L.P. (the Partnership), from a
nonaffiliated third party, for approximately $20.3 million
in cash. The Properties include two multi-tenant industrial
buildings located in Memphis, Tennessee that have approximately
816,000 of leasable square feet.
The Properties are owned by Principal Life Insurance Company
(the Seller). The Partnership entered into an
agreement with the Seller to purchase the Properties in
connection with the proposed initial public offering of Welsh
Property Trust, Inc. The purchase of the Properties is expected
to occur upon the consummation of the offering.
|
|
2.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
presentation
The accompanying statements of revenue and certain expenses have
been prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission and,
accordingly, is not representative of the actual results of
operations of the Properties for the year ended
December 31, 2009 due to the exclusion of the following
expenses, which may not be comparable to the proposed future
operations of the Properties:
|
|
Ø
|
depreciation and amortization;
|
|
Ø
|
management fee revenues received from tenants; and
|
|
Ø
|
other costs not directly related to the proposed future
operations of the Properties.
|
Revenue
recognition
Rental revenue includes rents that the tenants pay in accordance
with the terms of their respective leases reported on a
straight-line basis over the non-cancellable terms of the leases.
Accounting
estimates
The preparation of the financial statements requires management
to use estimates and assumptions that affect the reported
amounts of revenue and certain expenses during the reporting
period. It is at least reasonably possible that these estimates
could change in the near term.
Unaudited interim
statement
The statement of revenue and certain expenses for the three
months ended March 31, 2010 is unaudited. In the opinion of
management, the statement reflects all adjustments necessary for
a fair presentation of the results of the interim period. All
such adjustments are of a normal recurring nature.
On June 25, 2010, the purchase agreement with the Seller
was amended to increase the purchase price of the Property by
$0.4 million. As a result of this increase, the Property is
anticipated to be acquired for approximately $20.7 million.
F-133
Notes to
statements of revenue and certain expenses of Memphis portfolio
March 31, 2010 (unaudited) and December 31, 2009
The Properties lease industrial space under various lease
agreements with their tenants. All leases are accounted for as
operating leases. The leases include provisions under which the
Properties are reimbursed for common area, real estate, and
insurance costs. Revenue related to these reimbursed costs is
recognized in the period the applicable costs are incurred and
billed to tenants pursuant to the lease agreements. Certain
leases contain renewal options at various periods at various
rental rates.
At December 31, 2009, the following future minimum rentals
on the non-cancelable operating leases are as follows (in
thousands):
|
|
|
|
|
2010
|
|
$
|
1,943
|
|
2011
|
|
|
1,949
|
|
2012
|
|
|
1,545
|
|
2013
|
|
|
1,508
|
|
2014
|
|
|
1,409
|
|
Thereafter
|
|
|
4,285
|
|
|
|
|
|
|
Total base lease commitments
|
|
$
|
12,639
|
|
|
|
|
|
|
Certain expenses include only those costs expected to be
comparable to the proposed future operations of the Properties.
Repairs and maintenance expense are charged to operations as
incurred. Costs such as depreciation, amortization, and
management fees are excluded from the statements of revenue and
certain expenses.
|
|
5.
|
CONCENTRATION OF
CREDIT RISK
|
The Properties had four tenants account for more than 10% of the
revenues in 2009. These tenants represented approximately 91% of
total revenue.
|
|
6.
|
COMMITMENTS AND
CONTINGENCIES
|
The Seller is not subject to any material litigation nor to
managements knowledge is any material litigation currently
threatened against the Seller other than routine litigation,
claims and administrative proceedings arising in the ordinary
course of business. Management believes that such routine
litigation, claims and administrative proceedings will not have
a material adverse impact on the Sellers financial
position or results of operations.
F-134
Nashville
Property
Stockholders and Board of Directors
Welsh Property Trust, Inc.:
We have audited the accompanying statement of revenue and
certain expenses of Nashville Property for the year ended
December 31, 2009. This financial statement is the
responsibility of the management of Welsh Property Trust, Inc.
Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statement. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was
prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission and for
inclusion in the registration statement on
Form S-11
of Welsh Property Trust, Inc., as described in Note 1 to
the financial statement. It is not intended to be a complete
presentation of Nashville Propertys revenue and expenses.
In our opinion, the financial statement referred to above
presents fairly, in all material respects, the revenue and
certain expenses, as described in Note 1, of Nashville
Property for the year ended December 31, 2009, in
conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Minneapolis, Minnesota
May 10, 2010
F-135
Nashville
Property
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
|
ended
|
|
|
Year ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
327
|
|
|
$
|
1,308
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
327
|
|
|
|
1,308
|
|
Certain expenses:
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
|
|
|
|
|
|
Real estate taxes
|
|
|
37
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
37
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
Revenue in excess of certain expenses
|
|
$
|
290
|
|
|
$
|
1,161
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the statements of
revenue and certain expenses.
F-136
Nashville
Property
|
|
1.
|
ORGANIZATION AND
DESCRIPTION OF BUSINESS
|
The accompanying statements of revenue and certain expenses
include the operations of Nashville property (the
Property) which is anticipated to be acquired by
Welsh Property Trust, L.P. (the Partnership), from a
nonaffiliated third party, for approximately $11.1 million
in cash. The Property includes a single tenant industrial
building located in Nashville, Tennessee that has approximately
418,000 of leasable square feet.
The property is owned by Ron Buck (the Seller). The
Partnership entered into an agreement with the Seller to
purchase the Property in connection with the proposed initial
public offering of Welsh Property Trust, Inc. The purchase of
the Property is expected to occur upon the consummation of the
offering.
|
|
2.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
presentation
The accompanying statements of revenue and certain expenses have
been prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission and,
accordingly, is not representative of the actual results of
operations of the Property for the three months ended
March 31, 2010 and year ended December 31, 2009 due to
the exclusion of the following expenses, which may not be
comparable to the proposed future operations of the Property:
|
|
Ø
|
depreciation and amortization;
|
|
Ø
|
management fee revenue received from the tenant and management
fee expenses incurred; and,
|
|
Ø
|
other costs not directly related to the proposed future
operations of the Property.
|
Revenue
recognition
Rental revenues include rents that the tenants pay in accordance
with the terms of their set lease reported on a straight-line
basis over the non-cancellable term of the lease.
Accounting
estimates
The preparation of the financial statements requires management
to use estimates and assumptions that affect the reported
amounts of revenue and certain expenses during the reporting
period. It is at least reasonably possible that these estimates
could change in the near term.
Unaudited interim
statement
The statement of revenue and certain expenses for the three
months ended March 31, 2010 is unaudited. In the opinion of
management, the statement reflects all adjustments necessary for
a fair presentation of the results of the interim period. All
such adjustments are of a normal recurring nature.
On June 10, 2010, the purchase agreement with the Seller
was amended to increase the purchase price of the Property by
$0.1 million. As a result of this increase, the Property is
anticipated to be acquired for approximately $11.2 million.
F-137
Notes to
statements of revenue and certain expenses of Nashville Property
March 31, 2010 (unaudited) and December 31,
2009
The Property leases industrial space under a lease agreement
with its tenant. The lease is accounted for an operating lease.
At December 31, 2009, the following future minimum rentals
on the non-cancellable lease are as follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
1,130
|
|
2011
|
|
|
1,151
|
|
2012
|
|
|
1,172
|
|
2013
|
|
|
1,173
|
|
2014
|
|
|
1,184
|
|
|
|
|
|
|
Total base lease commitments
|
|
$
|
5,810
|
|
|
|
|
|
|
Certain expenses include only those costs expected to be
comparable to the proposed future operations of the Property.
Real estate tax expense is charged to operations as incurred.
Costs such as depreciation, amortization, and management fees
are excluded from the statements of revenue and certain expenses.
|
|
5.
|
CONCENTRATION OF
CREDIT RISK
|
The Property had one tenant in 2009, which represented 100% of
total revenue.
|
|
6.
|
COMMITMENTS AND
CONTINGENCIES
|
The Seller is not subject to any material litigation nor to
managements knowledge is any material litigation currently
threatened against the Seller other than routine litigation,
claims and administrative proceedings arising in the ordinary
course of business. Management believes that such routine
litigation, claims and administrative proceedings will not have
a material adverse impact on the Sellers financial
position or results of operations.
F-138
Brookville/Tejon
Portfolio
Stockholders and Board of Directors
Welsh Property Trust, Inc.:
We have audited the accompanying combined statement of revenue
and certain expenses of Brookville/Tejon Portfolio for the year
ended December 31, 2009. This combined financial statement
is the responsibility of the management of Welsh Property Trust,
Inc. Our responsibility is to express an opinion on this
combined financial statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statement. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying combined statement of revenue and certain
expenses was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission
and for inclusion in the registration statement on
Form S-11
of Welsh Property Trust, Inc., as described in Note 1 to
the combined financial statement. It is not intended to be a
complete presentation of Brookville/Tejon Portfolios
revenue and expenses.
In our opinion, the combined financial statement referred to
above presents fairly, in all material respects, the revenue and
certain expenses, as described in Note 1, of
Brookville/Tejon Portfolio for the year ended December 31,
2009, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Minneapolis, Minnesota
May 10, 2010
F-139
Brookville/Tejon
Portfolio
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
|
ended
|
|
|
Year ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
1,750
|
|
|
$
|
6,630
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,750
|
|
|
|
6,630
|
|
Certain expenses:
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
4
|
|
|
|
34
|
|
Real estate taxes
|
|
|
128
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
132
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
Revenue in excess of certain expenses
|
|
$
|
1,618
|
|
|
$
|
6,262
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
statements of revenue and certain expenses.
F-140
Brookville/Tejon
Portfolio
|
|
1.
|
ORGANIZATION AND
DESCRIPTION OF BUSINESS
|
The accompanying combined statements of revenue and certain
expenses include the operations of Brookville/Tejon portfolio
(the Properties) which are anticipated to be
acquired by Welsh Property Trust, L.P. (the
Partnership), from a nonaffiliated third party, for
approximately $69.4 million through cash payments of
approximately $67.3 million and the issuance of Partnership
units of approximately $2.1 million. The Properties have
approximately 1,152,000 of leasable square feet. Construction of
the Tejon Portfolio was completed in June 2009.
The Properties are owned by Clayco Realty Group (the
Seller). The Partnership entered into an agreement
with the Seller to purchase the Properties in connection with
the proposed initial public offering of Welsh Property Trust,
Inc. The purchase of the Properties is expected to occur upon
the consummation of the offering.
|
|
2.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
presentation
The accompanying combined statements of revenue and certain
expenses have been prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange
Commission and, accordingly, are not representative of the
actual results of operations of the Properties for the three
months ended March 31, 2010 and year ended
December 31, 2009 due to the exclusion of the following
expenses, which may not be comparable to the proposed future
operations of the Properties:
|
|
Ø
|
depreciation and amortization;
|
|
Ø
|
management fee revenue received from tenants and management fee
expenses incurred; and
|
|
Ø
|
other costs not directly related to the proposed future
operations of the Properties.
|
Revenue
Recognition
Rental revenue includes rents that the tenants pay in accordance
with the terms of their respective leases reported on a
straight-line basis over the non-cancellable term of the leases.
Accounting
estimates
The preparation of the combined financial statements requires
management to use estimates and assumptions that affect the
reported amounts of revenue and certain expenses during the
reporting period. It is at least reasonably possible that these
estimates could change in the near term.
Unaudited interim
combined statement
The combined statement of revenue and certain expenses for the
three months ended March 31, 2010 is unaudited. In the
opinion of management, the statement reflects all adjustments
necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal recurring nature.
On June 10, 2010, the purchase agreement with the Seller
was amended to reallocate the amount of cash and number of
Partnership units for the acquisition of the Properties. At the
current price of $9.50 per unit, the Properties are anticipated
to be acquired for approximately $68.4 million through cash
payments of $67.2 million and the issuance of Partnership
units of approximately $1.2 million.
F-141
Notes to combined
statements of revenue and certain expenses of Brookville/Tejon
Portfolio March 31, 2010 (unaudited) and December 31,
2009
The Properties lease industrial space under lease agreements
with their tenants. All leases are accounted for as operating
leases. The leases include provisions under which the Properties
are reimbursed for common area, real estate, and insurance
costs. Revenue related to these reimbursed costs is recognized
in the period the applicable costs are incurred and billed to
the tenants pursuant to the lease agreements. The leases contain
renewal options at various periods at various rental rates.
At December 31, 2009, the following future minimum rents on
the non-cancellable leases are as follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
5,777
|
|
2011
|
|
|
5,777
|
|
2012
|
|
|
5,777
|
|
2013
|
|
|
6,004
|
|
2014
|
|
|
6,333
|
|
Thereafter
|
|
|
71,450
|
|
|
|
|
|
|
Total base lease commitments
|
|
$
|
101,118
|
|
|
|
|
|
|
Certain expenses include only those costs expected to be
comparable to the proposed future operations of the Properties.
Repairs and maintenance expense are charged to operations as
incurred. Costs such as depreciation, amortization, and
management fees are excluded from the combined statements of
revenue and certain expenses.
|
|
5.
|
CONCENTRATION OF
CREDIT RISK
|
The Properties had two tenants account for more than 10% of
revenue in 2009, which represented 100% of the combined total
revenue in 2009.
|
|
6.
|
COMMITMENTS AND
CONTINGENCIES
|
The Seller is not subject to any material litigation nor to
managements knowledge is any material litigation currently
threatened against the Seller other than routine litigation,
claims and administrative proceedings arising in the ordinary
course of business. Management believes that such routine
litigation, claims and administrative proceedings will not have
a material adverse impact on the Sellers combined
financial position or combined results of operations.
F-142
Eastern National
Industrial Portfolio
Stockholders and Board of Directors
Welsh Property Trust, Inc.:
We have audited the accompanying combined statement of revenue
and certain expenses of Eastern National Industrial Portfolio
for the year ended December 31, 2009. This combined
financial statement is the responsibility of the management of
Welsh Property Trust, Inc. Our responsibility is to express an
opinion on this combined financial statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statement. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying combined statement of revenue and certain
expenses was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission
and for inclusion in the registration statement on
Form S-11
of Welsh Property Trust, Inc., as described in Note 1 to
the combined financial statement. It is not intended to be a
complete presentation of Eastern National Industrial
Portfolios combined revenue and expenses.
In our opinion, the combined financial statement referred to
above presents fairly, in all material respects, the combined
revenue and certain expenses, as described in Note 1, of
Eastern National Industrial Portfolio for the year ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
Minneapolis, Minnesota
May 10, 2010
F-143
Eastern National
Industrial Portfolio
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
|
ended
|
|
|
Year ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(dollars in
thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Rental and related revenue
|
|
$
|
1,494
|
|
|
$
|
5,846
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,494
|
|
|
|
5,846
|
|
Certain expenses:
|
|
|
|
|
|
|
|
|
Cost of rental operations
|
|
|
136
|
|
|
|
458
|
|
Real estate taxes
|
|
|
136
|
|
|
|
539
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
272
|
|
|
|
997
|
|
|
|
|
|
|
|
|
|
|
Revenue in excess of certain expenses
|
|
$
|
1,222
|
|
|
$
|
4,849
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the combined
statements of revenue and certain expenses.
F-144
Eastern National
Industrial Portfolio
|
|
1.
|
ORGANIZATION AND
DESCRIPTION OF BUSINESS
|
The accompanying combined statements of revenue and certain
expenses include the operations of Eastern National Industrial
portfolio (the Properties) which is anticipated to
be acquired by Welsh Property Trust, L.P. (the
Partnership), from a nonaffiliated third party. The
Properties include six multi-tenant and single tenant industrial
buildings located in the southeast of the United States and have
approximately 1,338,272 of leasable square feet.
The Properties are owned by Exeter Property Group (the
Seller). The Partnership entered into an agreement
with Seller to purchase the Properties for $58.2 million in
connection with the proposed initial public offering of Welsh
Property Trust, Inc.. The purchase of the Properties is expected
to occur upon the consummation of the offering.
|
|
2.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
Presentation
The accompanying combined statements of revenue and certain
expenses have been prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange
Commission and, accordingly, is not representative of the actual
results of operations of the Properties for the three month
period ended March 31, 2010 and the year ended
December 31, 2009 due to the exclusion of the following
expenses, which may not be comparable to the proposed future
operations of the Properties:
|
|
Ø
|
depreciation and amortization;
|
|
Ø
|
management fee revenues received from tenants and management fee
expenses incurred; and
|
|
Ø
|
other costs not directly related to the proposed future
operations of the Properties.
|
Revenue
Recognition
Rental revenue includes rents that tenants pay in accordance
with the terms of their respective leases reported on a
straight-line basis over the non-cancellable term of the leases.
Accounting
Estimates
The preparation of the combined financial statements requires
management to use estimates and assumptions that affect the
reported amounts of revenue and certain expenses during the
reporting period. It is at least reasonably possible that these
estimates could change in the near term.
Unaudited Interim
Combined Statement
The combined statement of revenue and certain expenses for the
three months ended March 31, 2010 is unaudited. In the
opinion of management, the statement reflects all adjustments
necessary for a fair presentation of the results of the interim
period. All such adjustments are of a normal recurring nature.
The Properties lease spaces under various lease agreements with
their tenants. All leases are accounted for as operating leases.
The leases include provisions under which the Properties are
reimbursed for
F-145
Notes to combined
statements of revenue and certain expenses of Eastern National
Industrial portfolio March 31, 2010 (unaudited) and
December 31, 2009
common area, real estate, and insurance costs. Revenue related
to these reimbursed costs is recognized in the period the
applicable costs are incurred and billed to tenants pursuant to
the lease agreements. Certain leases contain renewal options at
various periods at various rental rates.
At December 31, 2009, the following future minimum rentals
on non-cancellable leases are as follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
4,679
|
|
2011
|
|
|
4,510
|
|
2012
|
|
|
2,563
|
|
2013
|
|
|
2,056
|
|
2014
|
|
|
1,655
|
|
Thereafter
|
|
|
2,539
|
|
|
|
|
|
|
Total base lease commitments
|
|
$
|
18,002
|
|
|
|
|
|
|
Certain expenses include only those costs expected to be
comparable to the proposed future operations of the Properties.
Repairs and maintenance expense are charged to operations as
incurred. Costs such as depreciation, amortization, and
management fees are excluded from the combined statements of
revenue and certain expenses.
|
|
5.
|
CONCENTRATION OF
CREDIT RISK
|
The Properties had three tenants account for more than 10% of
revenues in 2009. These tenants represented approximately 77% of
total revenue in 2009.
|
|
6.
|
COMMITMENTS AND
CONTINGENCIES
|
The Seller is not subject to any material litigation nor to
managements knowledge is any material litigation currently
threatened against the Seller other than routine litigation,
claims and administrative proceedings arising in the ordinary
course of business. Management believes that such routine
litigation, claims and administrative proceedings will not have
a material adverse impact on the Sellers combined
financial position or combined results of operations.
F-146
Welsh office locations
Shaded states denote
properties owned Denotes city of
probable acquisition
Ranked #1 Medium-Sized Best Place to Work in the Twin Cities in 2009
4350 Baker Road, Suite 400 Minnetonka, Minnesota welshpt.com
|
PROSPECTUS
UBS Investment Bank
Part IIInformation
not required in prospectus
|
|
ITEM 31.
|
OTHER EXPENSES OF
ISSUANCE AND DISTRIBUTION
|
Expenses in connection with the issuance and distribution of the
securities being registered hereunder are below. All amounts set
forth are estimates except for the SEC registration fee and the
FINRA filing fee. We will pay the expenses of this registration.
|
|
|
|
|
SEC registration fee
|
|
$
|
28,698
|
|
FINRA filing fee
|
|
|
40,750
|
|
NYSE filing fee
|
|
|
125,000
|
|
Legal fees and expenses
|
|
|
4,275,000
|
|
Accounting fees and expenses
|
|
|
8,400,000
|
|
Printing and engraving expenses
|
|
|
650,000
|
|
Transfer agent and registrar fees and expenses
|
|
|
20,000
|
|
|
|
|
|
|
Total
(1)
|
|
$
|
13,539,448
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Approximately $3.2 million of such expenses have been
previously paid using debt financing; we expect to repay such
indebtedness using net proceeds from this offering
|
|
|
ITEM 32.
|
SALES TO SPECIAL
PARTIES
|
See Item 33.
|
|
ITEM 33.
|
RECENT SALES OF
UNREGISTERED SECURITIES
|
On December 18, 2009, in connection with the formation and
initial capitalization of our company, we issued 100 shares
of common stock to each of Mr. Doyle, Mr. Frederiksen,
and Ms. Kane for an aggregate purchase price of $300. The
shares were issued in reliance on the exemption set forth in
Section 4(2) of the Securities Act.
In connection with the formation transactions, 7,582,460 OP
units with an aggregate value of $72,033,370 assuming a price
per share or unit at the midpoint of the initial public offering
price range set forth on the cover page of the prospectus that
forms a part of this registration statement, will be issued by
our operating partnership to certain persons transferring
interests in our services business, the property subsidiaries
and certain properties in our acquisition portfolio to us in
consideration of such transfer. All of such persons are
accredited investors as defined under
Regulation D of the Securities Act. The issuance of such OP
units will be effected in reliance upon an exemption from
registration provided by Section 4(2) under the Securities
Act and Rule 506 thereunder.
|
|
ITEM 34.
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
|
Maryland law permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money
damages except for liability resulting from (1) actual
receipt of an improper benefit or profit in money, property or
services or (2) active and deliberate dishonesty that is
established by a final judgment and is material to the cause of
action. Our charter contains such a provision that limits such
liability to the maximum extent permitted by Maryland law.
The MGCL requires a Maryland corporation (unless its charter
provides otherwise, which our charter does not) to indemnify a
director or officer who has been successful in the defense of
any proceeding to which he or she is made or threatened to be
made a party by reason of his or her service in that capacity.
The MGCL permits a corporation to indemnify its present and
former directors and officers,
II-1
Part IIInformation
not required in prospectus
among others, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made or threatened to
be made a party by reason of their service in those or other
capacities unless it is established that: (1) the act or
omission of the director or officer was material to the matter
giving rise to the proceeding and (A) was committed in bad
faith or (B) was the result of active and deliberate
dishonesty; (2) the director or officer actually received
an improper personal benefit in money, property or services; or
(3) in the case of any criminal proceeding, the director or
officer had reasonable cause to believe that the act or omission
was unlawful.
However, under the MGCL, a Maryland corporation may not
indemnify a director or officer in a suit by or in the right of
the corporation in which the director or officer was adjudged
liable to the corporation or for a judgment of liability on the
basis that a personal benefit was improperly received. A court
may order indemnification if it determines that the director or
officer is fairly and reasonably entitled to indemnification,
even though the director or officer did not meet the prescribed
standard of conduct, was adjudged liable to the corporation or
was adjudged liable on the basis that personal benefit was
improperly received. However, indemnification for an adverse
judgment in a suit by us or in our right, or for a judgment of
liability on the basis that personal benefit was improperly
received, is limited to expenses.
In addition, the MGCL permits a corporation to advance
reasonable expenses to a director or officer upon the
corporations receipt of: (1) a written affirmation by
the director or officer of his or her good faith belief that he
or she has met the standard of conduct necessary for
indemnification by the corporation; and (2) a written
undertaking by the director or officer or on the directors
or officers behalf to repay the amount paid or reimbursed
by the corporation if it is ultimately determined that the
director or officer did not meet the standard of conduct.
Our charter authorizes us to obligate ourselves and our bylaws
obligate us, to the maximum extent permitted by Maryland law in
effect from time to time, to indemnify and, without requiring a
preliminary determination of the ultimate entitlement to
indemnification, pay or reimburse reasonable expenses in advance
of final disposition of a proceeding to (1) any present or
former director or officer who is made or threatened to be made
a party to the proceeding by reason of his or her service in
that capacity; or (2) any individual who, while a director
or officer of our company and at our request, serves or has
served as a director, officer, partner, member, manager or
trustee of another corporation, REIT, partnership, limited
liability company, joint venture, trust, employee benefit plan
or any other enterprise and who is made or threatened to be made
a party to the proceeding by reason of his or her service in
that capacity.
Our charter and bylaws also permit us to indemnify and advance
expenses to any person who served a predecessor of ours in any
of the capacities described above and to any employee or agent
of our company or a predecessor of our company.
Following completion of this offering, we intend to enter into
agreements with our directors and executive officers providing
for indemnification and advancement or reimbursement of the
reasonable expenses of such directors and officers, to the
maximum extent permitted by Maryland law. In addition, pursuant
to a separate indemnification agreement, our operating
partnership has agreed to indemnify our principals and certain
other parties participating in the contribution transaction to
the extent each has guaranteed certain obligations or agreed to
provide indemnification for certain liabilities arising out of
or related to the real property or the use, maintenance and
operation of the real property and other assets owned by the
entities being contributed to the operating partnership in the
contribution transaction.
Following the completion of this offering and the formation
transactions, we intend to purchase and maintain insurance on
behalf of all of our directors and executive officers against
liability asserted
II-2
Part IIInformation
not required in prospectus
against or incurred by them in their official capacities,
whether or not we are required or have the power to indemnify
them against the same liability.
Insofar as the foregoing provisions permit indemnification of
directors, officers or persons controlling us for liability
arising under the Securities Act, we have been informed that, in
the opinion of the SEC, this indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
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ITEM 35.
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TREATMENT OF
PROCEEDS FROM STOCK BEING REGISTERED
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None of the proceeds will be credited to an account other than
the appropriate capital share account.
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ITEM 36.
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FINANCIAL
STATEMENTS AND EXHIBITS
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(a) Financial Statements. See Index to Consolidated
Financial Statements and the related notes thereto.
(b) Exhibits. The list of exhibits following the
signature pages of this registration statement on
Form S-11
is incorporated herein by reference.
(f) The undersigned registrant hereby undertakes to
provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(h) Insofar as indemnification for liabilities
arising under the Securities Act of 1933, as amended, may be
permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of
1933, as amended, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act of 1933, as amended, and will be governed by
the final adjudication of such issue.
(i) The undersigned registrant hereby further
undertakes that:
(1) For purposes of determining any liability under
the Securities Act of 1933, as amended, the information omitted
from the form of prospectus filed as part of this registration
statement in reliance under Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4), or 497(h) under the Securities Act
of 1933, as amended, shall be deemed to part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability
under the Securities Act of 1933, as amended, each
post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
Signatures
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form S-11
and has duly caused this Amendment No. 6 to the
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on June 28, 2010.
WELSH PROPERTY TRUST, INC.
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By:
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/s/ Scott
T. Frederiksen
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Scott T. Frederiksen
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act, this
Amendment No. 6 to the registration statement has been
signed by the following persons in the capacities and on the
dates indicated.
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Signature
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Title
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Date
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*
Dennis
J. Doyle
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Chairman
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June 28, 2010
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/s/ Scott
T. Frederiksen
Scott
T. Frederiksen
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Chief Executive Officer and Director (Principal Executive
Officer)
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June 28, 2010
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*
Jean
V. Kane
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President, Chief Operating Officer and Director
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June 28, 2010
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/s/ Dennis
G. Heieie
Dennis
G. Heieie
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Chief Financial Officer and Treasurer(Principal Financial
Officer and Principal Accounting Officer)
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June 28, 2010
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*
Milo
D. Arkema
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Director
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June 28, 2010
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*
James
L. Chosy
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Director
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June 28, 2010
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*
Peter
D. Linneman
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Director
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June 28, 2010
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|
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*
Patrick
H. OSullivan
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Director
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June 28, 2010
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|
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*
Paul
L. Snyder
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Director
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June 28, 2010
|
II-4
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Signature
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Title
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Date
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|
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*
Lawrence
W. Stranghoener
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Director
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June 28, 2010
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By:
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/s/ Scott
T. Frederiksen
Scott
T. Frederiksen
Attorney-in-fact
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June 28, 2010
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II-5
Index to exhibits
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|
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Exhibit
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number
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|
Description
|
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1.1
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Underwriting Agreement**
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3.1
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Articles of Amendment and Restatement**
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3.2
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Amended and Restated Bylaws of the Registrant**
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4.1
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Reference is made to Exhibits 3.1 and 3.2
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4.2
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Specimen common stock certificate of the Registrant**
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5
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Opinion of Venable LLP
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8
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Tax Opinion of Briggs and Morgan, P.A.
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10.1
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Amended and Restated Agreement of Limited Partnership of Welsh
Property Trust, L.P**
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10.2
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Registration Rights Agreement, by and among the Registrant and
the parties listed on Schedule A thereto**
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10.3
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Long-Term Equity Incentive Plan**
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10.4
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Restricted Stock Unit Agreement by and between the Registrant
and Scott T. Frederiksen**
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10.5
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Restricted Stock Unit Agreement by and between the Registrant
and Jean V. Kane**
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10.6
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Executive Employment Agreement by and between the Registrant and
Scott T. Frederiksen**
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10.7
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Executive Employment Agreement by and between the Registrant and
Jean V. Kane**
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10.8
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Contribution Agreement by and between Welsh Property Trust, L.P.
and Welsh US Real Estate Fund, LLC**
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10.9
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Contribution Agreement by and between Welsh Property Trust, L.P.
and Welsh Midwest Real Estate Fund, LLC**
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10.10
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Contribution Agreement by and between the Registrant and Welsh
Property Trust, L.P.**
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10.11
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Contribution Agreement by and between Welsh Enterprises, LLC,
Welsh Holdings, LLC, Welsh Ventures, LLC and Welsh Property
Trust, L.P., including First Amendment thereto**
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10.12
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Representations and Warranty Agreement**
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10.13
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Agreement between Welsh Companies, LLC and Mogul Financial
Group, Ltd**
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10.14
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Indemnification Agreement by and among Welsh Property Trust,
L.P. and the parties listed on Schedule A thereto**
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10.15
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First Amendment to Contribution Agreement by and between the
Registrant and Welsh Property Trust, L.P.**
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10.16
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First Amendment to Representations and Warranty Agreement**
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10.17
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Second Amendment to Contribution Agreement by and between Welsh
Enterprises, LLC, Welsh Holdings, LLC, Welsh Ventures, LLC and
Welsh Property Trust, L.P.**
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10.18
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First Amendment to Contribution Agreement by and between Welsh
Property Trust, L.P. and Welsh US Real Estate Fund, LLC**
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10.19
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Third Amendment to Contribution Agreement by and between Welsh
Enterprises, LLC, Welsh Holdings, LLC, Welsh Ventures, LLC and
Welsh Property Trust, L.P.
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10.20
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Second Amendment to Contribution Agreement by and between the
Registrant and Welsh Property Trust, L.P.
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10.21
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Second Amendment to Contribution Agreement by and between Welsh
Property Trust, L.P. and Welsh US Real Estate Fund, LLC
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10.22
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First Amendment to Contribution Agreement by and between Welsh
Property Trust, L.P. and Welsh Midwest Real Estate Fund, LLC
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21
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List of Subsidiaries of the Registrant**
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23.1
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Consent of KPMG LLP
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23.2
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Consent of KPMG LLP
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E-1
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Exhibit
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|
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number
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|
Description
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23.3
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Consent of Boulay, Heutmaker, Zibell & Co. P.L.L.P.
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23.4
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Consent of Venable LLP (included in Exhibit 5)
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23.5
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Consent of Briggs and Morgan, P.A. (included in Exhibit 8)
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24
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Power of Attorney (included on the signature page)**
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*
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To be filed by amendment.
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**
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Previously filed.
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E-2