Cogdell Spencer Inc.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2005
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
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Commission file number
001-32649
COGDELL SPENCER INC.
(Exact name of registrant as
specified in its charter)
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Maryland
(State or other
jurisdiction of
incorporation or organization)
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20-3126457
(I.R.S. Employer
Identification No.)
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4401 Barclay Downs Drive,
Suite 300
Charlotte, North Carolina
(Address of principal
executive offices)
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28209
(Zip
code)
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Registrants telephone number, including area code:
(704) 940-2900
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Exchange on Which
Registered
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Common Stock, $0.01 par
value
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New York Stock Exchange,
Inc.
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment of this
Form 10-K. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filed, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ.
Indicate by check mark whether the registrant is a Shell Company
(as defined in
rule 12b-2
of the Exchange
Act). Yes o No þ
Aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day
of the registrants most recently completed fiscal quarter.
Not applicable.
Indicate the number of shares outstanding of each of the
issuers classes of common stock as of the latest
practicable date: 7,999,574 shares of common stock, par
value $0.01 per share, outstanding as of March 15,
2006.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for
the registrants 2006 Annual Meeting, to be filed within
120 days after the registrants fiscal year, are
incorporated by reference into Part III of this Annual
Report on
Form 10-K.
COGDELL
SPENCER INC.
TABLE OF CONTENTS
Explanatory
Note
Note that the financial statements covered in this report for
the period from January 1, 2005 to October 31, 2005
and for the years ended December 31, 2004 and 2003, contain
the results of operations and financial condition of Cogdell
Spencer Inc. Predecessor, which is not a legal entity, but
represents a combination of certain real estate entities based
on common management by Cogdell Spencer Advisors, Inc. In
addition, the financial statements covered in this report
contain the results of operations and financial condition of
Cogdell Spencer Inc. for the period from November 1, 2005
to December 31, 2005. Due to the timing of the initial
public offering and the formation transactions, Cogdell Spencer
Inc. (the Company) does not believe that the results
of operations set forth in this document are necessarily
indicative of the Companys future operating results as a
publicly-held company.
Statements
Regarding Forward-Looking Information
When used in this discussion and elsewhere in this Annual
Report on
Form 10-K,
the words believes, anticipates,
projects, should, estimates,
expects, and similar expressions are intended to
identify forward-looking statements with the meaning of that
term in Section 27A of the Securities Act of 1933, as
amended, and in Section 21F of the Securities and Exchange
Act of 1934, as amended. Actual results may differ materially
due to uncertainties including:
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the Companys business strategy;
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the Companys ability to obtain future financing
arrangements;
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estimates relating to the Companys future distributions;
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the Companys understanding of the Companys
competition;
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the Companys ability to renew the Companys ground
leases;
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changes in the reimbursement available to the Companys
tenants by government or private payors;
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the Companys tenants ability to make rent payments;
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defaults by tenants;
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market trends; and
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projected capital expenditures.
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Forward-looking statements are based on estimates as of the date
of this report. The Company disclaims any obligation to publicly
release the results of any revisions to these forward-looking
statements reflecting new estimates, events or circumstances
after the date of this report.
i
PART I
The
Company
Cogdell Spencer Inc. (the Company), incorporated in
Maryland in 2005, is a fully-integrated, self-administered and
self-managed real estate investment trust (REIT)
that invests in specialty office buildings for the medical
profession, including medical offices, ambulatory surgery and
diagnostic centers. The Company focuses on the ownership,
development, redevelopment, acquisition and management of
strategically located medical office buildings and other
healthcare related facilities primarily in the southeastern
United States. The Company has been built around understanding
and addressing the specialized real estate needs of the
healthcare industry. The Companys management team has
developed long-term and extensive relationships through
developing and maintaining modern, customized medical office
buildings and healthcare related facilities. The Company has
been able to maintain occupancy above market levels and secure
strategic hospital campus locations. The Company operates its
business through Cogdell Spencer LP, its operating partnership
subsidiary, and its subsidiaries.
The Company derives a significant portion of its revenues from
rents received from tenants under existing leases in medical
office buildings and other healthcare related facilities. The
Company derives a lesser portion of its revenues from fees that
are paid for managing and developing medical office buildings
and other healthcare related facilities for third parties. The
Companys management believes a strong internal property
management capability is a vital component of the Companys
business, both for the properties the Company owns and for those
that the Company manages.
As of December 31, 2005, the Company owned
and/or
managed 72 medical office buildings and healthcare related
facilities, serving 18 hospital systems in seven states. The
Companys aggregate portfolio was comprised of:
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45 wholly owned properties;
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eight joint venture properties; and
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19 properties owned by third parties (17 of which are for
clients with whom the Company has an existing investment
relationship).
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At December 31, 2005, the Companys aggregate
portfolio contains approximately 3.5 million net rentable
square feet, consisting of approximately 2.2 million net
rentable square feet from wholly owned properties, approximately
0.4 million net rentable square feet from joint venture
properties, and approximately 0.9 million net rental square
feet from properties owned by third parties and managed by the
Company. Approximately 73.0% of the net rentable square feet of
the wholly owned properties are situated on hospital campuses.
As such, the Company believes its assets occupy a premier
franchise location in relationship to local hospitals, providing
the Companys properties with a distinct competitive
advantage over alternative medical office space in an area. As
of December 31, 2005, the Companys wholly owned
properties were approximately 95.7% occupied, with a weighted
average remaining lease term of approximately 3.5 years.
Initial
Public Offering and Formation Transactions
The Company completed its initial public offering (the
Offering) on November 1, 2005. The
Offering resulted in the sale of 5,800,000 shares of common
stock at a price of $17.00 per share, generating gross
proceeds to the Company of $98.6 million. On
November 29, 2005, an additional 300,000 shares of
common stock were sold at $17.00 per share as a result of
the underwriters exercising their over-allotment option,
generating gross proceeds to the Company of $5.1 million.
The aggregate proceeds to the Company, net of underwriters
discounts, commissions and financial advisory fees and other
offering costs, were approximately $89.9 million.
On November 1, 2005, concurrent with the consummation of
the Offering, the Company and a newly formed majority-owned
limited partnership, Cogdell Spencer LP (the Operating
Partnership), and its taxable REIT subsidiary, together
with the partners and members of the affiliated partnerships and
limited liability companies of Cogdell Spencer Inc. Predecessor
(the Predecessor), engaged in certain formation
transactions (the Formation Transactions). The
Operating Partnership received a contribution of interests in
the Predecessor in exchange for
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units of limited partnership interest in the Operating
Partnership, shares of the Companys common stock
and/or cash.
The Company used the net proceeds from the Offering, borrowings
under the Companys unsecured credit facility, and cash to:
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repay approximately $71.2 million existing indebtedness,
including accrued interest;
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pay $36.5 million to acquire interests in the predecessor
entities from those investors who elected to receive cash in the
Formation Transactions;
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pay $1.1 million to acquire a fee simple interest in the
Companys Baptist Northwest property; and
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pay unsecured credit facility fees of $0.5 million.
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The
Companys Management Company
The Company will elect to be taxed as a REIT for federal income
tax purposes commencing with the tax year ended
December 31, 2005. In order to qualify as a REIT, a
specified percentage of the Companys gross income must be
derived from real property sources, which would generally
exclude the Companys income from providing development and
management services to third parties. In order to avoid
realizing such income in a manner that would adversely affect
the Companys ability to qualify as a REIT, some services
are provided through the Companys Management Company,
electing, together with the Company, to be treated as a
taxable REIT subsidiary or TRS. The
Management Company is wholly owned and controlled by the
Operating Partnership.
Management
The Companys senior management team has an average of more
than ten years of healthcare real estate experience and has been
involved in the development, redevelopment and acquisition of a
broad array of medical office space. The Companys Chairman
and founder, James W. Cogdell, has been in the healthcare real
estate business for more than 33 years, and Frank C.
Spencer, Chief Executive Officer, President and a member of the
Companys board of directors, has more than ten years of
experience in the industry. Three members of the senior
management team have entered into employment agreements with the
Company.. At December 31, 2005, the Companys senior
management team owned approximately 21.7% of the Operating
Partnership units and Company common stock on a fully diluted
basis.
Business
and Growth Strategies
The Companys primary business objective is to develop and
maintain client relationships in order to maximize cash flow
available for distribution to the Companys stockholders.
Operating
Strategy
The Companys operating strategy consists of the following
principal elements:
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Strong Relationships with Physicians and Hospitals.
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Healthcare is fundamentally a local business. The Company
believes it has developed a reputation based on trust and
reliability among physicians and hospitals and believes that
these relationships position the Company to secure new
development projects and new property acquisition opportunities
with both new and existing parties. Many of the Companys
healthcare system clients have collaborated with the Company on
multiple projects, including the Companys five largest
healthcare system clients, with which exists an average
relationship lasting more than 22 years. The Companys
strategy is to continue to grow its portfolio by leveraging
these relationships to acquire existing properties and to
selectively develop new medical office buildings and healthcare
related facilities in communities in need of additional
facilities to support the delivery of medical services. The
Company believes that physicians particularly value renting
space from a trusted and reliable property owner that
consistently delivers an office environment that meets their
specialized needs.
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Active Management of the Companys Properties.
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The Company has developed a comprehensive approach to property
and operational management to maximize the operating performance
of its medical office buildings and healthcare related
facilities, leading to high levels of tenant satisfaction. This
fully-integrated property and operating management allows the
Company to provide high quality seamless services to its tenants
on a cost-effective basis. The Company believes its operating
efficiencies, which consistently exceed industry standards, will
allow the Company to control costs for its tenants. The Company
intends to maximize the Companys stockholders return
on their investment and to achieve long-term functionality and
appreciation in its medical office buildings and healthcare
related facilities through continuing its practice of active
management of its properties. The Company manages its properties
with a view toward creating an environment that supports
successful medical practices. The properties are clean and kept
in a condition that is conducive to the delivery of top-quality
medical care to patients. The Company understands that in order
to maximize the value of its investments, its tenants must
prosper as well. Therefore, the Company is committed to
maintaining its properties at the highest possible level.
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Key On-Campus Locations.
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At December 31, 2005, approximately 73.0% of the net
rentable square feet of the wholly owned properties are situated
on hospital campuses. On-campus properties provide the
Companys physician-lessees and their patients with a
convenient location so that they can move between medical
offices and hospitals with ease, which drives revenues for the
Companys physician-lessees. Many of these properties
occupy a premier franchise location in relationship to the local
hospital, providing the Companys properties with a
distinct competitive advantage over alternative medical office
space in the area. The Company has found that the factors most
important to physician-lessees when choosing a medical office
building or healthcare related facility in which to locate their
offices are convenience to a hospital campus, clean and
attractive common areas,
state-of-the-art
amenities and tenant improvements tailored to each practice.
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Loyal and Diverse Tenant Base.
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The Companys focus on maintaining the Companys
physician-lessees loyalty is a key component of the
Companys marketing and operating strategy. A focus on
physician-lessee loyalty and the involvement of the
physician-tenants and hospitals as investors in the
Companys properties results in one of the more stable and
diversified tenant bases of any office company in the United
States. The Companys lease renewal rates, based on net
rentable square feet renewing each year, were 87.3% in 2005,
94.7% in 2004, and 98.0% in 2003. In addition, as of
December 31, 2005, the Companys properties had an
average occupancy rate of approximately 95.7%. The
Companys tenants are diversified by type of medical
practice, medical specialty and sub-specialty. As of
December 31, 2005 no single tenant accounted for more than
7.1% of the annualized base rental revenue at the wholly owned
properties. None of the tenants are in default.
The Company focuses exclusively on the ownership, development,
redevelopment, acquisition and management of medical office
buildings and healthcare related facilities primarily in the
southeastern United States. The Company believes this targeted
focus on the Southeast enables the Company to capitalize on
favorable demographic and population growth trends. In addition,
this focus on medical office buildings and healthcare related
facilities allows the Company to own, develop, redevelop, manage
and acquire medical office buildings and healthcare related
facilities more effectively and profitably than its competition.
Unlike many other public companies that simply engage in
sale/leaseback arrangements in the healthcare real estate
sector, the Company operates its properties. The Company
believes that this focus may position the Company to achieve
additional cash flow growth.
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Acquisition
and Development Strategy
The Companys acquisition and development strategy consists
of the following principal elements:
The Companys development activities have been focused on
the design, construction and financing of medical office
buildings and healthcare related facilities. The Companys
Predecessor has completed the development of more than 70
medical office properties, many of which represent repeat
business with its clients. The Company has built strong
relationships with leading for-profit and non-profit medical
institutions who look to us to provide real estate solutions
that will support the growth of a medical community built around
their hospitals and regional medical centers. The Company
focuses exclusively on medical office buildings and healthcare
related facilities and believe that the Companys
understanding of real estate and healthcare gives us a
competitive advantage over less specialized developers. Further,
the Companys regional focus has provided extensive local
industry knowledge and insight. The Company believes the network
of relationships that have been developed in both the real
estate and healthcare industries over the past 33 years
provides access to a large volume of potential development and
acquisition opportunities.
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Selective Development and Acquisitions.
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The Companys intends to leverage its strong development
and acquisition track record to continue to grow its portfolio
of medical office buildings and healthcare related facilities by
selectively acquiring existing medical office buildings and by
developing new projects in communities in need of additional
facilities to support the delivery of medical services.
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Develop and Maintain Strategic Relationships.
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The Company intends to build upon its key strategic
relationships with physicians, hospitals,
not-for-profit
agencies and religious entities that sponsor healthcare services
to further enhance the Companys franchise. Historically,
the Predecessor financed real property acquisitions through
joint ventures in which the physician-lessees, and in some cases
local hospitals or regional medical centers, provided the equity
capital. The Company expects to continue entering into joint
ventures with individual physicians, physician groups and
hospitals. These joint ventures have been, and the Company
believes will continue to be, a source of development and
acquisition opportunities. Of the 48 healthcare properties the
management team developed or acquired over the past ten years,
34 of them represent repeat transactions with an existing client
institution. The Company anticipates that it will also continue
to offer potential physician-lessees the opportunity to invest
in the Company in order that they may continue to feel a strong
sense of attachment to the property in which they practice. The
Company intends to continue to work closely with its tenants in
order to cultivate long-term working relationships and to
maximize new business opportunities. From time to time, the
Company may make investments or agree to terms that support the
objectives of clients without necessarily maximizing the
Companys short-term financial return. The Company believes
that this philosophy allows the Company to build long-term
relationships and obtain franchise locations otherwise
unavailable to the Companys competition.
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Investment Criteria and Funding.
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The Company intends to expand in its existing markets and into
markets that research indicates will meet its investment
strategy in the future. The Company generally will seek to
select clients and assets in locations that the Company believes
will complement its existing portfolio. The Company may also
selectively pursue portfolio opportunities outside of its
existing markets that will not only add incremental value, but
will also add diversification and economies of scale to the
existing portfolio.
In assessing a potential development or acquisition opportunity,
the Company focuses on the economics of the medical community
and the strength of local hospitals. The analysis focuses on
trying to place the project on a hospital campus or in a
strategic growth corridor based on demographics.
As an incentive for future development deals, the Company
intends to establish a program whereby units of limited
partnership interests or common stock can be offered to
potential development partners to help
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finance a project. Historically, the Company has financed real
property acquisitions through joint ventures in which the
physicians who lease space at the properties, and in some cases,
local hospitals or regional medical centers, provided the equity
capital. The Company expects to continue this practice of
entering into joint ventures with individual physicians,
physician groups and hospitals.
On November 1, 2005, the Company, as guarantor, and its
Operating Partnership entered into a $100.0 million
unsecured revolving credit facility (the Credit
Facility). As of December 31, 2005, the Credit
Facility had approximately $79.9 million of available
borrowings, which the Company can use to finance development and
acquisition opportunities. The Company plans to finance future
acquisitions through a combination of borrowings under the
Credit Facility, traditional secured mortgage financing, and
equity offerings.
Regulation
The following discussion describes certain material
U.S. federal healthcare laws and regulations that may
affect the Companys operations and those of the
Companys tenants. However, the discussion does not address
state healthcare laws and regulations, except as otherwise
indicated. These state laws and regulations, like the
U.S. federal healthcare laws and regulations, could affect
the Companys operations and those of the Companys
tenants.
The regulatory environment remains stringent for healthcare
providers. Fraud and abuse statutes that regulate hospital and
physician relationships continue to broaden the industrys
awareness of the need for experienced real estate management.
New requirements for Medicare coding, physician recruitment and
referrals, outlier charges to commercial and government payors,
and corporate governance have created a difficult operating
environment for some hospitals.
Generally, healthcare real estate properties are subject to
various laws, ordinances and regulations. Changes in any of
these laws or regulations, such as the Comprehensive
Environmental Response and Compensation Liability Act, increase
the potential liability for environmental conditions or
circumstances existing or created by tenants or others on
properties. In addition, laws affecting development,
construction, operation, upkeep, safety and taxation
requirements may result in significant unanticipated
expenditures, loss of healthcare real estate property sites or
other impairments to operations, which would adversely affect
the Companys cash flows from operating activities.
As the existing entities are not healthcare providers, the
healthcare regulatory restrictions that apply to physician
investment in healthcare providers are not applicable to the
ownership interests held by physicians in the existing
properties. For example, the Stark II law, which prohibits
physicians from referring patients to any entity if they have a
financial relationship with or ownership interest in the entity
and the entity provides certain designated health services, does
not apply to physician ownership in the existing entities
because these entities do not own or operate hospitals, nor do
they provide any designated health services. In addition, the
Federal Anti-Kickback Statute, which generally prohibits payment
or solicitation of remuneration in exchange for referrals for
items and services covered by federal health care programs to
persons in a position to refer such business, also does not
apply to ownership in the existing properties as these entities
do not provide or bill for medical services of any kind. Similar
state laws that prohibit physician self referrals or kickbacks
also do not apply for the same reasons. Notwithstanding the
foregoing, the Company cannot assure you that regulatory
authorities will agree with the Companys interpretation of
these laws.
Under the Americans with Disabilities Act of 1990, or the ADA,
all places of public accommodation are required to meet certain
U.S. federal requirements related to access and use by
disabled persons. A number of additional U.S. federal, state and
local laws also exist that may require modifications to
properties, or restrict certain further renovations thereof,
with respect to access thereto by disabled persons.
Noncompliance with the ADA could result in the imposition of
fines or an award of damages to private litigants and also could
result in an order to correct any non-complying feature, and in
substantial capital expenditures. To the extent the
Companys properties are not in compliance, the Company may
incur additional costs to comply with the ADA.
Property management activities are often subject to state real
estate brokerage laws and regulations as determined by the
particular real estate commission for each state.
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In addition, state and local laws regulate expansion, including
the addition of new beds or services or acquisition of medical
equipment, and the construction of healthcare related
facilities, by requiring a certificate of need, which is issued
by the applicable state health planning agency only after that
agency makes a determination that a need exists in a particular
area for a particular service or facility, or other similar
approval. New laws and regulations, changes in existing laws and
regulations or changes in the interpretation of such laws or
regulations could negatively affect the financial condition of
the Companys lessees. These changes, in some cases, could
apply retroactively. The enactment, timing or effect of
legislative or regulatory changes cannot be predicted. In
addition, certain of the Companys medical office buildings
and healthcare related facilities and their lessees may require
licenses or certificates of need to operate. Failure to obtain a
license or certificate of need, or loss of a required license
would prevent a facility from operating in the manner intended
by the lessee.
Environmental
Matters
Pursuant to U.S. federal, state and local environmental
laws and regulations, a current or previous owner or operator of
real property may be required to investigate, remove
and/or
remediate a release of hazardous substances or other regulated
materials at or emanating from such property. Further, under
certain circumstances, such owners or operators of real property
may be held liable for property damage, personal injury
and/or
natural resource damage resulting from or arising in connection
with such releases. Certain of these laws have been interpreted
to be joint and several unless the harm is divisible and there
is a reasonable basis for allocation of responsibility. The
failure to properly remediate the property may also adversely
affect the owners ability to lease, sell or rent the
property or to borrow funds using the property as collateral.
In connection with the ownership, operation and management of
the Companys current or past properties and any properties
that the Company may acquire
and/or
manage in the future, the Company could be legally responsible
for environmental liabilities or costs relating to a release of
hazardous substances or other regulated materials at or
emanating from such property. In order to assess the potential
for such liability, the Company conducts an environmental
assessment of each property prior to acquisition and manages the
Companys properties in accordance with environmental laws
while the Company owns or operates them. All of the
Companys leases contain a comprehensive environmental
provision that requires tenants to conduct all activities in
compliance with environmental laws and to indemnify the owner
for any harm caused by the failure to do so. In addition, the
Company has engaged qualified, reputable and adequately insured
environmental consulting firms to perform environmental site
assessments of all of the Companys properties and is not
aware of any environmental issues that are expected to have
materially impacted the operations of any property.
Insurance
The Company believes that its properties are covered by adequate
fire, flood, earthquake, wind (as deemed necessary or as
required by the Companys lenders) and property insurance,
as well as commercial liability insurance, provided by reputable
companies and with commercially reasonable deductibles and
limits. Furthermore, the Company believes its businesses and
assets are likewise adequately insured against casualty loss and
third party liabilities. The Company engages a risk management
consultant. Changes in the insurance market since
September 11, 2001 have caused increases in insurance costs
and deductibles, and have led to more active management of the
insurance component of the Companys budget for each
project; however, most of the Companys leases provide that
insurance premiums are considered part of the operating expenses
of the respective property, and the tenants are therefore
responsible for any increases in the Companys premiums.
Competition
The Company competes in developing and acquiring medical office
buildings and healthcare related facilities with financial
institutions, institutional pension funds, real estate
developers, other REITs, other public and private real estate
companies and private real estate investors.
Depending on the characteristics of a specific market, the
Company may also face competition in leasing available medical
office buildings and healthcare related facilities to
prospective tenants. However, the Company believes that it
brings a depth of knowledge and experience in working with
physicians, hospitals,
not-for-profit
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agencies and religious entities that sponsor healthcare services
that makes us an attractive real estate partner for both
development projects and acquisitions.
Code of
Business Ethics and Corporate Governance Guidelines
The information required by this item with respect to the
adoption of a code of ethics is hereby incorporated by reference
to the material appearing in the Companys Proxy Statement.
The Companys Code of Business Ethics, which applies to all
employees, officers and directors, including the principal
executive officer, principal financial officer and principal
accounting officer, is posted on the Companys website at
http://www.cogdellspencer.com.
The Board of Directors has adopted Corporate Governance
Guidelines and charters for its Audit Committee and
Compensation, Nominating and Governance Committee, each of which
is posted on the Companys Web site. Investors may obtain a
free copy of the Code of Business Ethics, the Corporate
Governance Guidelines or the committee charters by contacting
Investor Relations, Cogdell Spencer Inc., 4401 Barclay Downs
Drive, Suite 300, Charlotte, North Carolina 28209, Attn:
Dana Crothers or by telephoning
(704) 940-2900.
Employees
As of December 31, 2005, the Company has 80 full-time
employees. The Companys employees perform various property
management, maintenance, acquisition, renovation and management
functions. The Company believes that the Companys
relationships with the Companys employees are good. None
of the Companys employees are represented by a union.
Offices
The Companys corporate headquarters are located at 4401
Barclay Downs Drive, Suite 300, Charlotte, North Carolina
28209-4670.
The Company has 16 regional offices located in Florida, Georgia,
Kentucky, Louisiana, Mississippi, North Carolina and South
Carolina. The Company believes that its current offices are
adequate for its present and future operations, although it may
add regional offices depending on the volume and nature of
future acquisition and development projects.
Available
Information
The Company files its annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports to the Securities and
Exchange Commission (the SEC). You may obtain copies
of these documents by visiting the SECs Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C.
20549, by calling the SEC at
1-800-SEC-0330
or by accessing the SECs Web site at www.sec.gov. The
Companys Web site is www.cogdellspencer.com. Its reports
on
Forms 10-K,
10-Q, and
8-K, and all
amendments to those reports are posted on the Companys Web
site as soon as reasonably practicable after the reports and
amendments are electronically filed with or furnished to the
SEC. The contents of the Companys Web site are not
incorporated by reference.
Risks
Related to the Companys Properties and
Operations
The
Companys real estate investments are concentrated in
medical office buildings and healthcare related facilities,
making the Company more vulnerable economically than if the
Companys investments were diversified.
As a REIT, the Company invests primarily in real estate. Within
the real estate industry, the Company selectively owns,
develops, redevelops, acquires and manages medical office
buildings and healthcare related facilities. The Company is
subject to risks inherent in concentrating investments in real
estate. The risks resulting from a lack of diversification
become even greater as a result of the Companys business
strategy to invest primarily in medical office buildings and
healthcare related facilities. A downturn in the medical office
building industry or in the commercial real estate industry
generally, could significantly adversely affect the value of the
Companys properties. A downturn in the healthcare industry
could negatively affect the Companys tenants ability
to make
7
rent payments to the Company, which may have a material adverse
effect on the Companys business, financial condition and
results of operations, the Companys ability to make
distributions to the Companys stockholders and the trading
price of the Companys common stock. These adverse effects
could be more pronounced than if the Company diversified the
Companys investments outside of real estate or outside of
medical office buildings and healthcare related properties.
The
Company depends on significant tenants.
As of December 31, 2005, the Companys five largest
tenants represented $10.3 million, or 24.2%, of the
annualized rent generated by the Companys properties. The
Companys five largest tenants based on annualized rents
are NorthEast Medical Center, Palmetto Health Alliance, Gaston
Memorial Hospital, University Health Services, and Carolinas
HealthCare System. The Companys 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. In the event of
any tenant default, the Company may experience delays in
enforcing the Companys rights as landlord and may incur
substantial costs in protecting the Companys investment.
The
bankruptcy or insolvency of the Companys tenants under the
Companys leases could seriously harm the Companys
operating results and financial condition.
The Company will receive substantially all of the Companys
income as rent payments under leases of space in the
Companys properties. The Company has no control over the
success or failure of the Companys tenants
businesses and, at any time, any of the Companys tenants
may experience a downturn in its business that may weaken its
financial condition. As a result, the Companys tenants may
delay lease commencement or renewal, fail to make rent payments
when due or declare bankruptcy. Any leasing delays, lessee
failures to make rent payments when due or tenant bankruptcies
could result in the termination of the tenants lease and,
particularly in the case of a large tenant, may have a material
adverse effect on the Companys business, financial
condition and results of operations, the Companys ability
to make distributions to the Companys stockholders and the
trading price of the Companys common stock.
If tenants are unable to comply with the terms of the
Companys leases, the Company may be forced to modify lease
terms in ways that are unfavorable to the Company.
Alternatively, the failure of a tenant to perform under a lease
or to extend a lease upon expiration of its term could require
the Company to declare a default, repossess the property, find a
suitable replacement tenant, operate the property or sell the
property. There is no assurance that the Company will be able to
lease the property on substantially equivalent or better terms
than the prior lease, or at all, find another tenant,
successfully reposition the property for other uses,
successfully operate the property or sell the property on terms
that are favorable to the Company.
If any lease expires or is terminated, the Company will be
responsible for all of the operating expenses for that vacant
space until it is re-let. If the Company experiences high levels
of vacant space, the Companys operating expenses may
increase significantly. Any significant increase in the
Companys operating costs may have a material adverse
effect on the Companys business, financial condition and
results of operations, the Companys ability to make
distributions to the Companys stockholders and the trading
price of the Companys common stock.
Any bankruptcy filings by or relating to one of the
Companys tenants could bar all efforts by the Company to
collect pre-bankruptcy debts from that lessee or seize its
property, unless the Company receives an order permitting the
Company to do so from the bankruptcy court, which the Company
may be unable to obtain. A tenant bankruptcy could also delay
the Companys efforts to collect past due balances under
the relevant leases and could ultimately preclude full
collection of these sums. If a tenant assumes the lease while in
bankruptcy, all pre-bankruptcy balances due under the lease must
be paid to the Company in full. However, if a tenant rejects the
lease while in bankruptcy, the Company would have only a general
unsecured claim for pre-petition damages. Any unsecured claim
the Company holds may be paid only to the extent that funds are
available and only in the same percentage as is paid to all
other holders of unsecured claims. It is possible that the
Company may recover substantially less than the full value of
any unsecured claims the Company holds, if any, which may have a
material adverse effect on the Companys business,
financial condition and results of operations, the
Companys ability to make distributions to the
Companys stockholders and the trading price of the
Companys common stock. Furthermore, dealing with a tenant
bankruptcy or other default may divert managements
attention and cause the Company to incur substantial legal and
other costs.
8
The
long-term effects of Hurricane Katrina may adversely affect the
ability of the Companys tenants at two of the
Companys properties to meet future rent
obligations.
Two of the Companys properties, East Jefferson Medical
Specialty Building and East Jefferson Medical Office Building,
are located in Metairie, Louisiana (Jefferson Parish) which was
affected by Hurricane Katrina. East Jefferson Medical Specialty
Building, which represented approximately 2.2% of the
Companys annualized rent as of December 31, 2005,
sustained no significant damage from the hurricane and is fully
functional. East Jefferson Medical Office Building, which
represented approximately 5.2% of the Companys annualized
rent as of December 31, 2005, sustained some roof damage,
broken windows and wind blown water penetration. Both properties
are insured and the Companys Predecessor had cash reserves
for replacement in an amount sufficient to cover any deductible.
Accordingly, the Company does not expect to incur any additional
capital costs to fully repair damage to East Jefferson Medical
Office Building.
The Company believes Jefferson Parish will recover substantially
faster than New Orleans. A slower than anticipated general
recovery in Jefferson Parish may adversely affect the ability of
some of the Companys tenants to meet future rent
obligations. In addition, the Company cannot predict what
long-term effects the hurricane will have on medical office
buildings and other healthcare related facilities in and around
the affected area. A sustained decrease in the population of the
areas served by the Companys buildings or increased
competition resulting from additional hospitals or medical
offices being constructed as part of a recovery plan could
affect the ability of some of the Companys tenants to meet
future rent obligations, which could have a material adverse
effect on the Companys business, financial condition and
results of operations.
Adverse
economic or other conditions in the markets in which the Company
do business could negatively affect the Companys occupancy
levels and rental rates and therefore the Companys
operating results.
The Companys operating results are dependent upon its
ability to maximize occupancy levels and rental rates in the
Companys portfolio. Adverse economic or other conditions
in the markets in which the Company operates may lower the
Companys occupancy levels and limit the Companys
ability to increase rents or require the Company to offer rental
discounts. The following factors are primary among those which
may adversely affect the operating performance of the
Companys properties:
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the national economic climate and the local or regional economic
climate in the markets in which the Company operates, which may
be adversely impacted by, among other factors, industry
slowdowns, relocation of businesses and changing demographics;
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periods of economic slowdown or recession, rising interest rates
or declining demand for medical office buildings and healthcare
related facilities, or the public perception that any of these
events may occur, could result in a general decline in rental
rates or an increase in tenant defaults;
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local or regional real estate market conditions such as the
oversupply of medical office buildings and healthcare related
facilities or a reduction in demand for medical office buildings
and healthcare related facilities in a particular area;
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negative perceptions by prospective tenants of the safety,
convenience and attractiveness of the Companys properties
and the neighborhoods in which they are located;
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lack of continued success of the hospitals on whose campuses the
Companys medical office buildings and healthcare related
facilities are located;
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increased operating costs, including expenditures for capital
improvements, insurance premiums, real estate taxes and
utilities;
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changes in supply of or demand for similar or competing
properties in an area;
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the impact of environmental protection laws;
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earthquakes and other natural disasters, terrorist acts, civil
disturbances or acts of war which may result in uninsured or
underinsured losses; and
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changes in the tax, real estate and zoning laws.
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9
The failure of the Companys properties to generate
revenues sufficient to meet the Companys cash
requirements, including operating and other expenses, debt
service and capital expenditures, may have a material adverse
effect on the Companys business, financial condition and
results of operations, the Companys ability to make
distributions to the Companys stockholders and the trading
price of the Companys common stock.
All of
the Companys wholly owned properties are located in South
Carolina, North Carolina, Georgia, Louisiana and Kentucky, and
changes in these markets may materially adversely affect the
Company.
The Companys wholly owned properties located in South
Carolina, North Carolina, Georgia, Louisiana and Kentucky
provides approximately 39.4%, 37.6%, 11.8%, 7.4% and 3.8%,
respectively, of the Companys total annualized rent as of
December 31, 2005. As a result of the geographic
concentration of properties in these markets, the Company is
particularly exposed to downturns in these local economies or
other changes in local real estate market conditions. In the
event of negative economic changes in these markets, the
Companys business, financial condition and results of
operations, the Companys ability to make distributions to
the Companys stockholders and the trading price of the
Companys common stock may be materially and adversely
affected.
The
Company may not be successful in identifying and consummating
suitable acquisitions or investment opportunities, which may
impede the Companys growth and negatively affect the
Companys results of operations.
The Companys ability to expand through acquisitions is
integral to its business strategy and requires the Company to
identify suitable acquisition candidates or investment
opportunities that meet its criteria and are compatible with its
growth strategy. The Company may not be successful in
identifying suitable properties or other assets that meet the
Companys acquisition criteria or in consummating
acquisitions or investments on satisfactory terms or at all.
Failure to identify or consummate acquisitions or investment
opportunities will slow the Companys growth, which could
in turn adversely affect the Companys stock price.
The Companys ability to acquire properties on favorable
terms and successfully integrate and operate them may be
constrained by the following significant risks:
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competition from other real estate investors with significant
capital, including other publicly-traded REITs and institutional
investment funds;
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competition from other potential acquirers may significantly
increase the purchase price for an acquisition property, which
could reduce the Companys profitability;
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unsatisfactory results of the Companys due diligence
investigations or failure to meet other customary closing
conditions;
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failure to finance an acquisition on favorable terms or at all;
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the Company may spend more than the time and amounts budgeted to
make necessary improvements or renovations to acquired
properties; and
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the Company may acquire properties subject to liabilities and
without any recourse, or with only limited recourse, with
respect to unknown liabilities such as liabilities for
clean-up of
undisclosed environmental contamination, claims by persons in
respect of events transpiring or conditions existing before the
Company acquired 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 any of these risks are realized, the Companys business,
financial condition and results of operations, the
Companys ability to make distributions to the
Companys stockholders and the trading price of the
Companys common stock may be materially and adversely
affected.
10
If the
Company is unable to promptly re-let its properties, if the
rates upon such re-letting are significantly lower than expected
or if the Company is required to undertake significant capital
expenditures to attract new tenants, then the Companys
business and results of operations would be adversely
affected.
Virtually all of the Companys leases are on a multiple
year basis. As of December 31, 2005, leases representing
20% of the Companys net rentable square feet will expire
in 2006, 12% in 2007 and 16% in 2008. These expirations would
account for 20%, 12% and 14% of the Companys annualized
rent, respectively. Approximately 72.4% of the square feet of
the Companys properties and 55.6% of the number of the
Companys properties are subject to certain restrictions.
These restrictions include limits on the Companys ability
to re-let these properties to tenants not affiliated with the
healthcare system that owns the underlying property, rights of
first offer on sales of the property and limits on the types of
medical procedures that may be performed. In addition, lower
than expected rental rates upon re-letting could impede the
Companys growth. The Company cannot assure you that it
will be able to re-let space on terms that are favorable to the
Company or at all. Further, the Company may be required to make
significant capital expenditures to renovate or reconfigure
space to attract new tenants. If it is unable to promptly re-let
its properties, if the rates upon such re-letting are
significantly lower than expected or if the Company is required
to undertake significant capital expenditures in connection with
re-letting units, the Companys business, financial
condition and results of operations, the Companys ability
to make distributions to the Companys stockholders and the
trading price of the Companys common stock may be
materially and adversely affected.
Certain
of the Companys properties may not have efficient
alternative uses.
Some of the Companys properties, such as the
Companys ambulatory surgery centers, are specialized
medical facilities. If the Company or the Companys tenants
terminate the leases for these properties or the Companys
tenants lose their regulatory authority to operate such
properties, the Company may not be able to locate suitable
replacement tenants to lease the properties for their
specialized uses. Alternatively, the Company may be required to
spend substantial amounts to adapt the properties to other uses.
Any loss of revenues
and/or
additional capital expenditures occurring as a result may have a
material adverse effect on the Companys business,
financial condition and results of operations, the
Companys ability to make distributions to the
Companys stockholders and the trading price of the
Companys common stock.
The
Company faces increasing competition for the acquisition of
medical office buildings and healthcare related facilities,
which may impede the Companys ability to make future
acquisitions or may increase the cost of these
acquisitions.
The Company competes with many other entities engaged in real
estate investment activities for acquisitions of medical office
buildings and healthcare related facilities, including national,
regional and local operators, acquirers and developers of
healthcare real estate properties. The competition for
healthcare real estate properties may significantly increase the
price the Company must pay for medical office buildings and
healthcare related facilities or other assets the Company seeks
to acquire and the Companys competitors may succeed in
acquiring those properties or assets themselves. In addition,
the Companys potential acquisition targets may find the
Companys competitors to be more attractive because they
may have greater resources, may be willing to pay more for the
properties or may have a more compatible operating philosophy.
In particular, larger healthcare REITs may enjoy significant
competitive advantages that result from, among other things, a
lower cost of capital and enhanced operating efficiencies. In
addition, the number of entities and the amount of funds
competing for suitable investment properties may increase. This
competition will result in increased demand for these assets and
therefore increased prices paid for them. Because of an
increased interest in single-property acquisitions among
tax-motivated individual purchasers, the Company may pay higher
prices if the Company purchases single properties in comparison
with portfolio acquisitions. If the Company pays higher prices
for medical office buildings and healthcare related facilities
or other assets, the Companys business, financial
condition and results of operations, the Companys ability
to make distributions to the Companys stockholders and the
trading price of the Companys common stock may be
materially and adversely affected.
11
The
Company may not be successful in integrating and operating
acquired properties.
The Company expects to make future acquisitions of medical
office buildings and healthcare related facilities. If the
Company acquires medical office buildings and healthcare related
facilities, the Company will be required to integrate them into
the Companys existing portfolio. The acquired properties
may turn out to be less compatible with the Companys
growth strategy than originally anticipated, may cause
disruptions in the Companys operations or may divert
managements attention away from
day-to-day
operations, any or all of which may have a material adverse
effect on the Companys business, financial condition and
results of operations, the Companys ability to make
distributions to the Companys stockholders and the trading
price of the Companys common stock.
The
Companys medical office buildings and healthcare related
facilities, their associated hospitals and the Companys
tenants may be unable to compete successfully.
The Companys medical office buildings and healthcare
related facilities, and their associated hospitals often face
competition from nearby hospitals and other medical office
buildings that provide comparable services. Some of those
competing facilities are owned by governmental agencies and
supported by tax revenues, and others are owned by nonprofit
corporations and may be supported to a large extent by
endowments and charitable contributions. These types of support
are not available to the Companys buildings.
Similarly, the Companys tenants face competition from
other medical practices in nearby hospitals and other medical
facilities. The Companys tenants failure to compete
successfully with these other practices could adversely affect
their ability to make rental payments, which could adversely
affect the Companys rental revenues. Further, from time to
time and for reasons beyond the Companys control, referral
sources, including physicians and managed care organizations,
may change their lists of hospitals or physicians to which they
refer patients. This could adversely affect the Companys
tenants ability to make rental payments, which could
adversely affect the Companys rental revenues.
Any reduction in rental revenues resulting from the inability of
the Companys medical office buildings and healthcare
related facilities, their associated hospitals and the
Companys tenants to compete successfully may have a
material adverse effect on the Companys business,
financial condition and results of operations, the
Companys ability to make distributions to the
Companys stockholders and the trading price of the
Companys common stock.
The
Companys investments in development and redevelopment
projects may not yield anticipated returns, which would harm the
Companys operating results and reduce the amount of funds
available for distributions.
A key component of the Companys growth strategy is
exploring new-asset development and redevelopment opportunities
through strategic joint ventures. To the extent that the Company
engages in these development and redevelopment activities, they
will be subject to the following risks normally associated with
these projects:
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the Company may be unable to obtain financing for these projects
on favorable terms or at all;
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the Company may not complete development projects on schedule or
within budgeted amounts;
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the Company may encounter delays or refusals in obtaining all
necessary zoning, land use, building, occupancy and other
required governmental permits and authorizations;
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occupancy rates and rents at newly developed or redeveloped
properties may fluctuate depending on a number of factors,
including market and economic conditions, and may result in the
Companys investment not being profitable; and
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start-up
costs may be higher than anticipated.
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In deciding whether to develop or redevelop a particular
property, the Company makes certain assumptions regarding the
expected future performance of that property. The Company may
underestimate the costs necessary to bring the property up to
the standards established for its intended market position or
the Company may be unable to increase occupancy at a newly
acquired property as quickly as expected or at all. Any
substantial unanticipated delays or expenses could adversely
affect the investment returns from these development or
redevelopment projects
12
and have a material adverse effect on the Companys
business, financial condition and results of operations, the
Companys ability to make distributions to the
Companys stockholders and the trading price of the
Companys common stock.
The Company may in the future develop medical office buildings
and healthcare related facilities in geographic regions where
the Company does not currently have a significant presence and
where the Company does not possess the same level of
familiarity, which could adversely affect the Companys
ability to develop such properties successfully or at all or to
achieve expected performance.
The Company relies to a large extent on the investments of the
Companys joint venture partners for the funding of the
Companys development and redevelopment projects. If the
Companys reputation in the healthcare real estate industry
changes or the number of investors considering the Company as an
attractive strategic partner is otherwise reduced, the
Companys ability to develop or redevelop properties could
be affected, which would limit the Companys growth.
If the Companys investments in development and
redevelopment projects do not yield anticipated returns for any
reason, including those set forth above, the Companys
business, financial condition and results of operations, the
Companys ability to make distributions to the
Companys stockholders and the trading price of the
Companys common stock may be materially and adversely
affected.
Uninsured
losses or losses in excess of the Company insurance coverage
could adversely affect the Companys financial condition
and the Companys cash flow.
The Company maintains comprehensive liability, fire, flood,
earthquake, wind (as deemed necessary or as required by the
Companys lenders), extended coverage and rental loss
insurance with respect to the Companys properties with
policy specifications, limits and deductibles customarily
carried for similar properties. Certain types of losses,
however, may be either uninsurable or not economically
insurable, such as losses due to earthquakes, riots, acts of war
or terrorism. Should an uninsured loss occur, the Company could
lose both the Companys investment in and anticipated
profits and cash flow from a property. If any such loss is
insured, the Company may be required to pay a significant
deductible on any claim for recovery of such a loss prior to the
Companys insurer being obligated to reimburse the Company
for the loss, or the amount of the loss may exceed the
Companys coverage for the loss. In addition, future
lenders may require such insurance, and the Companys
failure to obtain such insurance could constitute a default
under loan agreements. As a result, the Companys business,
financial condition and results of operations, the
Companys ability to make distributions to the
Companys stockholders and the trading price of the
Companys common stock may be materially and adversely
affected.
The
Companys mortgage agreements and ground leases contain
certain provisions that may limit the Companys ability to
sell certain of the Companys medical office buildings and
healthcare related facilities.
In order to assign or transfer the Companys rights and
obligations under certain of the Companys mortgage
agreements, the Company generally must:
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obtain the consent of the lender;
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pay a fee equal to a fixed percentage of the outstanding loan
balance; and
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pay any costs incurred by the lender in connection with any such
assignment or transfer.
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In addition, ground leases on certain of the Companys
properties contain restrictions on transfer such as limiting the
assignment or subleasing of the facility only to practicing
physicians or physicians in good standing with an affiliated
hospital. These provisions of the Companys mortgage
agreements and ground leases may limit the Companys
ability to sell certain of the Companys medical office
buildings and healthcare related facilities which, in turn,
could adversely impact the price realized from any such sale.
13
19 of
the Companys wholly owned properties are subject to ground
leases that expose the Company to the loss of such properties
upon breach or termination of the ground leases.
The Company has 19 wholly owned properties that are subject to
leasehold interests in the land underlying the buildings and the
Company may acquire additional buildings in the future that are
subject to similar ground leases. These 19 wholly owned
properties represent 52.7% of the Companys total net
rentable square feet. As lessee under a ground lease, the
Company is exposed to the possibility of losing the property
upon termination, or an earlier breach by the Company, of the
ground lease, which may have a material adverse effect on the
Companys business, financial condition and results of
operations, the Companys ability to make distributions to
the Companys stockholders and the trading price of the
Companys common stock.
Environmental
compliance costs and liabilities associated with operating the
Companys properties may affect the Companys results
of operations.
Under various U.S. federal, state and local laws,
ordinances and regulations, owners and operators of real estate
may be liable for the costs of investigating and remediating
certain hazardous substances or other regulated materials on or
in such property. Such laws often impose such liability without
regard to whether the owner or operator knew of, or was
responsible for, the presence of such substances or materials.
The presence of such substances or materials, or the failure to
properly remediate such substances, may adversely affect the
owners or operators ability to lease, sell or rent
such property or to borrow using such property as collateral.
Persons who arrange for the disposal or treatment of hazardous
substances or other regulated materials may be liable for the
costs of removal or remediation of such substances at a disposal
or treatment facility, whether or not such facility is owned or
operated by such person. Certain environmental laws impose
liability for release of asbestos-containing materials into the
air and third parties may seek recovery from owners or operators
of real properties for personal injury associated with
asbestos-containing materials.
Certain environmental laws also impose liability, without regard
to knowledge or fault, for removal or remediation of hazardous
substances or other regulated materials upon owners and
operators of contaminated property even after they no longer own
or operate the property. Moreover, the past or present owner or
operator from which a release emanates could be liable for any
personal injuries or property damages that may result from such
releases, as well as any damages to natural resources that may
arise from such releases.
Certain environmental laws impose compliance obligations on
owners and operators of real property with respect to the
management of hazardous materials and other regulated
substances. For example, environmental laws govern the
management of asbestos-containing materials and lead-based
paint. Failure to comply with these laws can result in penalties
or other sanctions.
No assurances can be given that existing environmental studies
with respect to any of the Companys properties reveal all
environmental liabilities, that any prior owner or operator of
the Companys properties did not create any material
environmental condition not known to the Company, or that a
material environmental condition does not otherwise exist as to
any one or more of the Companys properties. There also
exists the risk that material environmental conditions,
liabilities or compliance concerns may have arisen after the
review was completed or may arise in the future. Finally, future
laws, ordinances or regulations and future interpretations of
existing laws, ordinances or regulations may impose additional
material environmental liability.
The realization of any or all of these risks may have a material
adverse effect on the Companys business, financial
condition and results of operations, the Companys ability
to make distributions to the Companys stockholders and the
trading price of the Companys common stock.
Costs
associated with complying with the Americans with Disabilities
Act of 1990 may result in unanticipated expenses.
Under the Americans with Disabilities Act of 1990, or the ADA,
all places of public accommodation are required to meet certain
U.S. federal requirements related to access and use by
disabled persons. A number of additional U.S. federal, state and
local laws may also require modifications to the Companys
properties, or restrict certain further renovations of the
properties, with respect to access thereto by disabled persons.
Noncompliance
14
with the ADA could result in the imposition of fines or an award
of damages to private litigants
and/or an
order to correct any non-complying feature, which could result
in substantial capital expenditures. The Company has not
conducted an audit or investigation of all of the Companys
properties to determine the Companys compliance and the
Company cannot predict the ultimate cost of compliance with the
ADA or other legislation. If one or more of the Companys
properties is not in compliance with the ADA or other related
legislation, then the Company would be required to incur
additional costs to bring the facility into compliance. If the
Company incurs substantial costs to comply with the ADA or other
related legislation, the Companys business, financial
condition and results of operations, the Companys ability
to make distributions to the Companys stockholders and the
trading price of the Companys common stock may be
materially and adversely affected.
Risks
Related to the Healthcare Industry
Adverse
trends in healthcare provider operations may negatively affect
the Companys lease revenues and the Companys ability
to make distributions to the Companys
stockholders.
The healthcare industry is currently experiencing:
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changes in the demand for and methods of delivering healthcare
services;
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changes in third party reimbursement policies;
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substantial competition for patients among healthcare providers;
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continued pressure by private and governmental payors to reduce
payments to providers of services; and
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increased scrutiny of billing, referral and other practices by
U.S. federal and state authorities.
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These factors may adversely affect the economic performance of
some or all of the Companys tenants and, in turn, the
Companys lease revenues, which may have a material adverse
effect on the Companys business, financial condition and
results of operations, the Companys ability to make
distributions to the Companys stockholders and the trading
price of the Companys common stock.
Reductions
in reimbursement from third party payors, including Medicare and
Medicaid, could adversely affect the profitability of the
Companys tenants and hinder their ability to make rent
payments to the Company.
Sources of revenue for the Companys tenants may include
the U.S. federal Medicare program, state Medicaid programs,
private insurance carriers and health maintenance organizations,
among others. Healthcare providers continue to face increased
government and private payor pressure to control or reduce
costs. Efforts by such payors to reduce healthcare costs will
likely continue, which may result in reductions or slower growth
in reimbursement for certain services provided by some of the
Companys tenants. In addition, the failure of any of the
Companys tenants to comply with various laws and
regulations could jeopardize their ability to continue
participating in Medicare, Medicaid and other government
sponsored payment programs. A reduction in reimbursements to the
Companys tenants from third party payors for any reason
could adversely affect the Companys tenants ability
to make rent payments to the Company, which may have a material
adverse effect on the Companys business, financial
condition and results of operations, the Companys ability
to make distributions to the Companys stockholders and the
trading price of the Companys common stock.
The
healthcare industry is heavily regulated, and new laws or
regulations, changes to existing laws or regulations, loss of
licensure or failure to obtain licensure could result in the
inability of the Companys tenants to make rent payments to
the Company.
The healthcare industry is heavily regulated by
U.S. federal, state and local governmental bodies. The
Companys tenants generally will be subject to laws and
regulations covering, among other things, licensure,
certification for participation in government programs and
relationships with physicians and other referral sources.
In addition, state and local laws regulate expansion, including
the addition of new beds or services or acquisition of medical
equipment, and the construction of healthcare related
facilities, by requiring a certificate of
15
need, which is issued by the applicable state health planning
agency only after that agency makes a determination that a need
exists in a particular area for a particular service or
facility, or other similar approval. New laws and regulations,
changes in existing laws and regulations or changes in the
interpretation of such laws or regulations could negatively
affect the financial condition of the Companys tenants.
These changes, in some cases, could apply retroactively. The
enactment, timing or effect of legislative or regulatory changes
cannot be predicted. In addition, certain of the Companys
medical office buildings and healthcare related facilities and
their tenants may require licenses or certificates of need to
operate. Failure to obtain a license or certificate of need, or
loss of a required license would prevent a facility from
operating in the manner intended by the tenant.
These events could adversely affect the Companys
tenants ability to make rent payments to the Company,
which may have a material adverse effect on the Companys
business, financial condition and results of operations, the
Companys ability to make distributions to the
Companys stockholders and the trading price of the
Companys common stock.
The
Companys tenants are subject to fraud and abuse laws, the
violation of which by a tenant may jeopardize the tenants
ability to make rent payments to the Company.
There are various federal and state laws prohibiting fraudulent
and abusive business practices by healthcare providers who
participate in, receive payments from or are in a position to
make referrals in connection with government-sponsored
healthcare programs, including the Medicare and Medicaid
programs. The Companys lease arrangements with certain
tenants may also be subject to these fraud and abuse laws.
These laws include:
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the Federal Anti-Kickback Statute, which prohibits, among other
things, the offer, payment, solicitation or receipt of any form
of remuneration in return for, or to induce, the referral of
Medicare and Medicaid patients;
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the Federal Physician Self-Referral Prohibition, which, subject
to specific exceptions, restricts physicians who have financial
relationships with healthcare providers from making referrals
for specifically designated health services for which payment
may be made under Medicare or Medicaid programs to an entity
with which the physician, or an immediate family member, has a
financial relationship;
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the False Claims Act, which prohibits any person from knowingly
presenting false or fraudulent claims for payment to the federal
government, including under the Medicare and Medicaid
programs; and
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the Civil Monetary Penalties Law, which authorizes the
Department of Health and Human Services to impose monetary
penalties for certain fraudulent acts.
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Each of these laws includes criminal
and/or civil
penalties for violations that range from punitive sanctions,
damage assessments, penalties, imprisonment, denial of Medicare
and Medicaid payments
and/or
exclusion from the Medicare and Medicaid programs. Additionally,
certain laws, such as the False Claims Act, allow for
individuals to bring whistleblower actions on behalf of the
government for violations thereof. Imposition of any of these
penalties upon one of the Companys tenants or associated
hospitals could jeopardize that tenants ability to operate
or to make rent payments or affect the level of occupancy in the
Companys medical office buildings or healthcare related
facilities associated with that hospital, which may have a
material adverse effect on the Companys business,
financial condition and results of operations, the
Companys ability to make distributions to the
Companys stockholders and the trading price of the
Companys common stock.
Risks
Related to the Real Estate Industry
Illiquidity
of real estate investments could significantly impede the
Companys ability to respond to adverse changes in the
performance of the Companys properties.
Because real estate investments are relatively illiquid, the
Companys ability to promptly sell one or more properties
in the Companys portfolio in response to changing
economic, financial and investment conditions is limited. The
real estate market is affected by many factors, such as general
economic conditions, availability of financing, interest rates
and other factors, including supply and demand, that are beyond
the Companys control.
16
The Company cannot predict whether the Company will be able to
sell any property for the price or on the terms set by the
Company or whether any price or other terms offered by a
prospective purchaser would be acceptable to the Company. The
Company also cannot predict the length of time needed to find a
willing purchaser and to close the sale of a property.
The Company may be required to expend funds to correct defects
or to make improvements before a property can be sold. The
Company cannot assure you that it will have funds available to
correct those defects or to make those improvements. In
acquiring a property, the Company may agree to transfer
restrictions that materially restrict it from selling that
property for a period of time or impose other restrictions, such
as a limitation on the amount of debt that can be placed or
repaid on that property. These transfer restrictions would
impede the Companys ability to sell a property even if the
Company deems it necessary or appropriate. These facts and any
others that would impede the Companys ability to respond
to adverse changes in the performance of its properties may have
a material adverse effect on its business, financial condition,
results of operations, or ability to make distributions to the
Companys stockholders and the trading price of the
Companys common stock.
Any
investments in unimproved real property may take significantly
longer to yield income-producing returns, if at all, and may
result in additional costs to the Company to comply with
re-zoning restrictions or environmental
regulations.
The Company has in the past, and may in the future, invest in
unimproved real property. Unimproved properties generally take
longer to yield income-producing returns based on the typical
time required for development. Any development of unimproved
real property may also expose the Company to the risks and
uncertainties associated with re-zoning the land for a higher
use or development and environmental concerns of governmental
entities
and/or
community groups. Any unsuccessful investments or delays in
realizing an income-producing return or increased costs to
develop unimproved real property could restrict the
Companys ability to earn its targeted rate of return on an
investment or adversely affect the Companys ability to pay
operating expenses, which may have a material adverse effect on
the Companys business, financial condition and results of
operations, the Companys ability to make distributions to
the Companys stockholders and the trading price of the
Companys common stock.
Risks
Related to the Companys Debt Financings
Required
payments of principal and interest on borrowings may leave the
Company with insufficient cash to operate the Companys
properties or to pay the distributions currently contemplated or
necessary to qualify as a REIT and may expose the Company to the
risk of default under the Companys debt
obligations.
At December 31, 2005, the Company has approximately
$159.5 million of outstanding indebtedness, 88% of which is
secured. Approximately 9.3% and 23.1% of the Companys
outstanding indebtedness will mature in 2006 and 2007,
respectively. The Company expects to incur additional debt in
connection with future acquisitions. The Company may borrow
under its Credit Facility, or borrow new funds to acquire these
future properties. Additionally, the Company does not anticipate
that the Companys internally generated cash flow will be
adequate to repay the Companys existing indebtedness upon
maturity and, therefore, the Company expects to repay the
Companys indebtedness through refinancings and future
offerings of equity
and/or debt.
If the Company is required to utilize the Companys Credit
Facility for purposes other than acquisition activity, this will
reduce the amount available for acquisitions and could slow the
Companys growth. Therefore, the Companys level of
debt and the limitations imposed on the Company by the
Companys debt agreements could have adverse consequences,
including the following:
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the Companys cash flow may be insufficient to meet the
Companys required principal and interest payments;
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the Company may be unable to borrow additional funds as needed
or on favorable terms, including to make acquisitions;
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the Company may be unable to refinance the Companys
indebtedness at maturity or the refinancing terms may be less
favorable than the terms of the Companys original
indebtedness;
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because a portion of the Companys debt bears interest at
variable rates, an increase in interest rates could materially
increase the Companys interest expense;
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the Company may be forced to dispose of one or more of the
Companys properties, possibly on disadvantageous terms;
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after debt service, the amount available for distributions to
the Companys stockholders is reduced;
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the Companys debt level could place the Company at a
competitive disadvantage compared to the Companys
competitors with less debt;
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the Company may experience increased vulnerability to economic
and industry downturns, reducing the Companys ability to
respond to changing business and economic conditions;
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the Company may default on the Companys obligations and
the lenders or mortgagees may foreclose on the Companys
properties that secure their loans and receive an assignment of
rents and leases;
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the Company may violate financial covenants which would cause a
default on the Companys obligations;
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the Company may inadvertently violate non-financial restrictive
covenants in the Companys loan documents, such as
covenants that require the Company to maintain the existence of
entities, maintain insurance policies and provide financial
statements, which would entitle the lenders to accelerate the
Companys debt obligations; and
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the Company defaults under any one of the Companys
mortgage loans with cross-default or cross-collateralization
provisions could result in default on other indebtedness or
result in the foreclosures of other properties.
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The realization of any or all of these risks may have a material
adverse effect on the Companys business, financial
condition and results of operations, the Companys ability
to make distributions to the Companys stockholders and the
trading price of the Companys common stock.
The
Companys ability to pay distributions following the
Companys initial annual period is dependent on a number of
factors and is not assured.
The Companys ability to make distributions depends upon a
variety of factors, including efficient management of the
Companys properties and the successful implementation by
the Company of a variety of the Companys growth
initiatives, and may be adversely affected by the risks
described elsewhere in this prospectus. All distributions will
be made at the discretion of the Companys board of
directors and depend on the Company earnings, the Companys
financial condition, the REIT distribution requirements and
other factors that the Companys board of directors may
consider from time to time. The Company cannot assure you that
the level of the Companys distributions will increase over
time or that the Company will be able to maintain the
Companys future distributions at levels that equal or
exceed the Companys initial distributions. The Company may
be required to fund future distributions either from borrowings
under the Companys Credit Facility, with the proceeds from
equity offerings, which could be dilutive, or from property
sales, which could be at a loss, or reduce such distributions.
The
Company could become highly leveraged in the future because the
Companys organizational documents contain no limitations
on the amount of debt the Company may incur.
The Companys organizational documents contain no
limitations on the amount of indebtedness that the Company or
the Companys operating partnership may incur. The Company
could alter the balance between the Companys total
outstanding indebtedness and the value of the Companys
wholly owned properties at any time. If the Company becomes more
highly leveraged, the resulting increase in debt service could
adversely affect the Companys ability to make payments on
the Companys outstanding indebtedness and to pay the
Companys anticipated distributions
and/or the
distributions required to qualify as a REIT, and may materially
and adversely
18
affect the Companys business, financial condition, results
of operations, the Companys ability to make distributions
to the Companys stockholders and the trading price of the
Companys common stock.
Increases
in interest rates may increase the Companys interest
expense and adversely affect the Companys cash flow and
the Companys ability to service the Companys
indebtedness and make distributions to the Companys
stockholders.
As of December 31, 2005, the Company has approximately
$159.5 million of outstanding indebtedness, of which
approximately $58.1 million, or 36.4%, is subject to
variable interest rates (excluding debt subject to variable to
fixed interest rate swap agreements). This variable rate debt
had a weighted average interest rate of approximately
5.9% per year as of December 31, 2005. Increases in
interest rates on this variable rate debt would increase the
Companys interest expense, which could adversely affect
the Companys cash flow and the Companys ability to
pay distributions. For example, if market rates of interest on
this variable rate debt increased by 100 basis points, the
increase in interest expense would decrease future earnings and
cash flows by approximately $0.6 million annually.
Failure
to hedge effectively against interest rate changes may adversely
affect the Companys results of operations.
In certain cases, the Company may seek to manage the
Companys exposure to interest rate volatility by using
interest rate hedging arrangements. Hedging involves risks, such
as the risk that the counterparty may fail to honor its
obligations under an arrangement, that the arrangements may not
be effective in reducing the Companys exposure to interest
rate changes and that a court could rule that such an agreement
is not legally enforceable. In addition, the Company may be
limited in the type and amount of hedging transactions the
Company may use in the future by the Companys need to
satisfy the REIT income tests under the Code. Failure to hedge
effectively against interest rate changes may have a material
adverse effect on the Companys business, financial
condition and results of operations, the Companys ability
to make distributions to the Companys stockholders and the
trading price of the Companys common stock.
The
Companys Credit Facility contains financial covenants that
could limit the Companys operations and the Companys
ability to make distributions to the Companys
stockholders.
The Companys Credit Facility contains financial and
operating covenants, including net worth requirements, fixed
charge coverage and debt ratios and other limitations on the
Companys ability to make distributions or other payments
to the Companys stockholders (other than those required by
the Code), sell all or substantially all of the Companys
assets and engage in mergers, consolidations and certain
acquisitions.
The Credit Facility contains customary terms and conditions for
credit facilities of this type, including (1) limitations
on our ability to (A) incur additional indebtedness,
(B) subject to complying with REIT requirements, make
distributions to our stockholders, and (C) make certain
investments, (2) maintenance of a pool of unencumbered
assets subject to certain minimum valuations thereof and
(3) requirements for us to maintain certain financial
coverage ratios. These customary financial coverage ratios and
other conditions include a maximum leverage ratio (65%, with
flexibility for one two quarter increase to not more than 75%),
minimum fixed charge coverage ratio (175%), maximum combined
secured indebtedness (50%), maximum recourse indebtedness (15%),
maximum unsecured indebtedness (60%, with flexibility for one
two quarter increase to not more than 75%), minimum unencumbered
interest coverage ratio (200%) and minimum combined tangible net
worth ($30 million plus 85% of net proceeds of equity
issuances by the Company and its subsidiaries after
November 1, 2005). Failure to meet the Companys
financial covenants could result from, among other things,
changes in the Companys results of operations, the
incurrence of debt or changes in general economic conditions.
Advances under the Companys Credit Facility may be subject
to borrowing base requirements on the Companys
unencumbered medical office buildings or healthcare related
facilities. These covenants may restrict the Companys
ability to engage in transactions that the Company believes
would otherwise be in the best interests of the Companys
stockholders. Failure to comply with any of the covenants in the
Companys Credit Facility could result in a default under
one or more of the Companys debt instruments. This could
cause one or more of the Companys lenders to accelerate
the timing of payments and may have a material adverse effect on
the Companys business, financial condition and
19
results of operations, the Companys ability to make
distributions to the Companys stockholders and the trading
price of the Companys common stock.
Risks
Related to the Companys Organization and
Structure
The
Companys management has no prior experience operating a
REIT or a public Company and therefore may have difficulty in
successfully and profitably operating the Companys
business, or complying with regulatory requirements, including
the Sarbanes-Oxley Act of 2002.
Prior to the Offering and the Formation Transactions, the
Companys management had no experience operating a REIT or
a public company, or complying with regulatory requirements,
including the Sarbanes-Oxley Act of 2002. As a result, the
Company cannot assure you that it will be able to successfully
operate as a REIT, execute the Companys business
strategies as a public Company, or comply with regulatory
requirements applicable to public companies, and you should be
especially cautious in drawing conclusions about the ability of
the Companys management team to execute the Companys
business plan.
The
Companys two largest stockholders, Mr. Cogdell, the
Companys Chairman, and Mr. Spencer, the
Companys Chief Executive Officer, President and a member
of the Companys board of directors, and their respective
affiliates owned 17.4% and 3.7%, respectively, as of
December 31, 2005 of the Companys outstanding common
stock and units of limited partnership interest in the Operating
Partnership (OP units) on a fully-diluted basis and
therefore have the ability to exercise significant influence
over the Company and any matter presented to the Companys
stockholders.
The Companys two largest stockholders, Mr. Cogdell,
the Companys Chairman, and Mr. Spencer, the
Companys Chief Executive Officer, President and a member
of the Companys board of directors, and their respective
affiliates owned approximately 17.4%, and 3.7%, respectively, as
of December 31, 2005 of the Companys outstanding
common stock and OP units on a fully-diluted basis.
Consequently, those stockholders, individually or, to the extent
their interests are aligned, collectively, may be able to
influence the outcome of matters submitted for stockholder
action, including the election of the Companys board of
directors and approval of significant corporate transactions,
including business combinations, consolidations and mergers and
the determination of the Company
day-to-day
corporate and management policies. Therefore, these stockholders
have substantial influence over the Company and could exercise
their influence in a manner that is not in the best interests of
the Companys other stockholders.
The
Companys business could be harmed if key personnel
terminate their employment with the Company.
The Companys success depends, to a significant extent, on
the continued services of Mr. Cogdell, the Companys
Chairman, Mr. Spencer, the Companys Chief Executive
Officer, President and a member of the Companys board of
directors, and the other members of the Companys senior
management team. The Companys senior management team has
an average of ten years of experience in the healthcare real
estate industry. In addition, the Companys ability to
continue to acquire and develop properties depends on the
significant relationships the Companys senior management
team has developed. There is no guarantee that any of them will
remain employed by the Company. The Company does not maintain
key person life insurance on any of the Companys officers.
The loss of services of one or more members of the
Companys senior management team could harm the
Companys business and the Companys prospects.
Tax
indemnification obligations could limit the Companys
operating flexibility by limiting the Companys ability to
sell specified properties.
In connection with the formation transactions, the Company
entered into a tax protection agreement with the former owners
of each contributed medical office building or healthcare
related facility who received OP units.
20
Pursuant to these agreements, the Company will not sell,
transfer or otherwise dispose of any of the medical office
buildings or healthcare related facilities (each a
protected asset) or any interest in a protected
asset prior to the eighth anniversary of the closing of the
offering unless:
(1) a
majority-in-interest
of the holders of interests in the existing entities (or their
successors, which may include the Company to the extent any OP
units have been redeemed or exchanged) with respect to such
protected asset consent to the sale, transfer or other
disposition; provided, however, with respect to three of the
existing entities, Cabarrus POB, LLC, Medical Investors I,
LLC and Medical Investors III, LLC, the required consent
shall be a
majority-in-interest
of the beneficial owners of interests in the existing entities
other than Messrs. Cogdell and Spencer and their
affiliates; or
(2) the operating partnership delivers to each such holder
of interests, a cash payment intended to approximate the
holders tax liability related to the recognition of such
holders built-in gain resulting from the sale of such
protected asset; or
(3) the sale, transfer or other disposition would not
result in the recognition of any built-in gain by any such
holder of interests.
Protected assets represent approximately 85.7% of the
Companys total net rentable square feet. The Company
estimates that if the Company were to sell all of these
protected assets immediately following the closing of the
offering and the price received by the Company in such sale was
equal to the value estimated for these assets in the
consolidation transaction, and the Company undertook such sale
without obtaining the requisite consent of the contributing
holders, the Company would be required to make payments to these
holders of approximately $31.6 million. The prospect of
making payments under the tax protection agreements could impede
the Companys ability to respond to changing economic,
financial and investment conditions. For example, it may not be
economical for the Company to raise cash quickly through a sale
of one or more of the Companys protected assets or dispose
of a poorly performing protected asset until the expiration of
the eight-year protection period.
Tax
indemnification obligations may require the operating
partnership to maintain certain debt levels.
The Companys tax protection agreements also provide that
during the period from the closing of the Offering through the
twelfth anniversary thereof, the Operating Partnership will
offer each holder who continues to hold at least 50% of the OP
units received in respect of the consolidation transaction the
opportunity to: (1) guarantee debt or (2) enter into a
deficit restoration obligation. If the Company fails to offer
such opportunities, the Company will be required to deliver to
each holder a cash payment intended to approximate the
holders tax liability resulting from the Companys
failure to make such opportunities available to that holder. The
Company agreed to these provisions in order to assist such
holders in deferring the recognition of taxable gain as a result
of and after the consolidation transaction. These obligations
may require the Company to maintain more or different
indebtedness than the Company would otherwise require for the
Companys business.
The
Company may pursue less vigorous enforcement of terms of
contribution and other agreements because of conflicts of
interest with certain of the Companys
officers.
Mr. Cogdell, the Companys Chairman, Mr. Spencer,
the Companys Chief Executive Officer, President and a
member of the Companys board of directors, Charles M.
Handy, the Companys Chief Financial Officer, Senior Vice
President and Secretary, and other members of the Companys
management team, have direct or indirect ownership interests in
certain properties contributed to the Companys Operating
Partnership in the Formation Transactions. The Company, under
the agreements relating to the contribution of such interests,
is entitled to indemnification and damages in the event of
breaches of representations or warranties made by the
contributors. The Company may choose not to enforce, or to
enforce less vigorously, the Companys rights under these
agreements because of the Companys desire to maintain the
Companys ongoing relationships with the individuals
party to these agreements. In addition, the Company is party to
employment agreements with Messrs. Cogdell, Spencer and
Handy, which provide for additional severance following
termination of employment if the Company elects to subject the
executive officer to certain non-competition, confidentiality
and non-solicitation provisions. Although their employment
agreements require that they devote substantially all of their
full business time and attention to the Company, if the
executive officer forgoes the additional severance, he will not
be subject to such
21
non-competition provisions, which would allow him to compete
with the Company. None of these agreements were negotiated on an
arms-length basis.
Conflicts
of interest could arise as a result of the Company UPREIT
structure.
Conflicts of interest could arise in the future as a result of
the relationships between the Company and the Companys
affiliates, on the one hand, and the Companys Operating
Partnership or any partner thereof, on the other. The
Companys directors and officers have duties to the Company
under applicable Maryland law in connection with their
management of the Company. At the same time, the Company,
through the Companys wholly owned subsidiary, has
fiduciary duties, as a general partner, to the Companys
Operating Partnership and to the limited partners under Delaware
law in connection with the management of the Companys
Operating Partnership. The Companys duties, through the
Companys wholly owned subsidiary, as a general partner to
the Companys Operating Partnership and its partners may
come into conflict with the duties of the Companys
directors and officers. The partnership agreement of the
Companys Operating Partnership does not require the
Company to resolve such conflicts in favor of either the
Companys stockholders or the limited partners in the
Companys Operating Partnership.
Unless otherwise provided for in the relevant partnership
agreement, Delaware law generally requires a general partner of
a Delaware limited partnership to adhere to fiduciary duty
standards under which it owes its limited partners the highest
duties of good faith, fairness and loyalty and which generally
prohibit such general partner from taking any action or engaging
in any transaction as to which it has a conflict of interest.
Additionally, the partnership agreement expressly limits the
Companys liability by providing that neither the Company,
nor the Companys wholly owned Maryland business trust
subsidiary, as the general partner of the Operating Partnership,
nor any of the Company or its trustees, directors or officers,
will be liable or accountable in damages to the Companys
Operating Partnership, the limited partners or assignees for
errors in judgment, mistakes of fact or law or for any act or
omission if the general partner or such trustee, director or
officer, acted in good faith. In addition, the Companys
Operating Partnership is required to indemnify the Company, the
Companys affiliates and each of the Companys
respective trustees, officers, directors, employees and agents
to the fullest extent permitted by applicable law against any
and all losses, claims, damages, liabilities (whether joint or
several), expenses (including, without limitation,
attorneys fees and other legal fees and expenses),
judgments, fines, settlements and other amounts arising from any
and all claims, demands, actions, suits or proceedings, civil,
criminal, administrative or investigative, that relate to the
operations of the operating partnership, provided that the
Companys operating partnership will not indemnify any such
person for (1) willful misconduct or a knowing violation of
the law, (2) any transaction for which such person received
an improper personal benefit in violation or breach of any
provision of the partnership agreement, or (3) in the case
of a criminal proceeding, the person had reasonable cause to
believe the act or omission was unlawful.
The provisions of Delaware law that allow the common law
fiduciary duties of a general partner to be modified by a
partnership agreement have not been resolved in a court of law,
and the Company has not obtained an opinion of counsel covering
the provisions set forth in the partnership agreement that
purport to waive or restrict the Companys fiduciary duties
that would be in effect under common law were it not for the
partnership agreement.
Certain
provisions of the Companys organizational documents,
including the stock ownership limit imposed by the
Companys charter, could prevent or delay a change in
control transaction.
The Companys charter, subject to certain exceptions,
authorizes the Companys directors to take such actions as
are necessary and desirable to preserve the Companys
qualification as a REIT and to limit any person to actual or
constructive ownership of 7.75% (by value or by number of
shares, whichever is more restrictive) of the Companys
outstanding common stock or 7.75% (by value or by number of
shares, whichever is more restrictive) of the Companys
outstanding capital stock. The Companys board of
directors, in its sole discretion, may exempt additional persons
from the ownership limit. However, the Companys board of
directors may not grant an exemption from the ownership limit to
any proposed transferee whose ownership could jeopardize the
Companys qualification as a REIT. These restrictions on
ownership will not apply if the Companys board of
directors determines that it is no longer in the Companys
best interests to attempt to qualify, or to continue to qualify,
as a
22
REIT. The ownership limit may delay or impede a transaction or a
change of control that might involve a premium price for the
Companys common stock or otherwise be in the best
interests of the Companys stockholders. Different
ownership limits apply to Mr. Cogdell, certain of his
affiliates, family members and estates and trusts formed for the
benefit of the foregoing, and Mr. Spencer, certain of his
affiliates, family members and estates and trusts formed for the
benefit of the foregoing. These ownership limits, which the
Companys board of directors has determined will not
jeopardize the Company REIT qualification, allow
Mr. Cogdell, certain of his affiliates, family members and
estates and trusts formed for the benefit of the foregoing, as
an excepted holder, to hold up to 18.0% (by value or by number
of shares, whichever is more restrictive) of the Companys
common stock or up to 18.0% (by value or by number of shares,
whichever is more restrictive) of the Companys outstanding
capital stock.
Certain
provisions of Maryland law may limit the ability of a third
party to acquire control of the Company.
Certain provisions of the Maryland General Corporation Law, or
the MGCL, may have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company
that might involve a premium price for holders of the
Companys common stock or otherwise be in their best
interests, including:
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|
|
business combination provisions that, subject to
certain limitations, prohibit certain business combinations
between the Company and an interested stockholder
(defined generally as any person who beneficially owns 10% or
more of the voting power of the Companys shares or an
affiliate thereof) for five years after the most recent date on
which the stockholder becomes an interested stockholder, and
thereafter impose special minimum price provisions and special
stockholder voting requirements on these combinations; and
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|
control share provisions that provide that
control shares of the Company (defined as shares
which, when aggregated with other shares controlled by the
stockholder, 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
control shares) have no voting rights except to the
extent approved by the Companys 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.
|
These provisions of the MGCL relating to business combinations
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, the Companys board
of directors has by resolution exempted Mr. Cogdell, his
affiliates and associates and all persons acting in concert with
the foregoing, and Mr. Spencer, his affiliates and
associates and all persons acting in concert with the foregoing,
from these provisions of the MGCL and, consequently, the
five-year prohibition and the supermajority vote requirements
will not apply to business combinations between the Company and
these persons. As a result, these persons may be able to enter
into business combinations with the Company that may not be in
the best interests of the Companys stockholders without
compliance by the Company with the supermajority vote
requirements and the other provisions of the statute. In
addition, the Companys by-laws contain a provision
exempting from the provisions of the MGCL relating to control
share acquisitions any and all acquisitions by any person of the
Companys common stock. There can be no assurance that such
provision will not be amended or eliminated at any time in the
future.
Additionally, Title 3, Subtitle 8 of the MGCL permits
the Companys board of directors, without stockholder
approval and regardless of what is currently provided in the
Companys charter or bylaws, to take certain actions that
may have the effect of delaying, deferring or preventing a
transaction or a change in control of the Company that might
involve a premium to the market price of the Companys
common stock or otherwise be in the Companys
stockholders best interests.
The
Companys board of directors has the power to cause the
Company to issue additional shares of the Companys stock
and the general partner has the power to issue additional OP
units without stockholder approval.
The Companys charter authorizes the Companys board
of directors to cause the Company to issue additional authorized
but unissued shares of common stock, or preferred stock and to
amend the Companys charter to increase
23
the aggregate number of authorized shares or the authorized
number of shares of any class or series without stockholder
approval. The general partner will be given the authority to
issue additional OP units. In addition, the Companys board
of directors may classify or reclassify any unissued shares of
common stock or preferred stock and set the preferences, rights
and other terms of the classified or reclassified shares. The
Companys board of directors could cause the Company to
issue additional shares of the Companys common stock or
establish a series of preferred stock that could have the effect
of delaying, deferring or preventing a change in control or
other transaction that might involve a premium price for the
Companys common stock or otherwise be in the best
interests of the Companys stockholders.
The
Companys rights and the rights of the Companys
stockholders to take action to recover money damages from the
Companys directors and officers are limited.
The Companys charter eliminates the Companys
directors and officers liability to the Company and
the Companys stockholders for money damages, except for
liability resulting from actual receipt of an improper benefit
in money, property or services or active and deliberate
dishonesty established by a final judgment and which is material
to the cause of action. The Companys charter authorizes
the Company, and the Companys bylaws require the Company,
to indemnify the Companys directors and officers for
liability resulting from actions taken by them in those
capacities to the maximum extent permitted by Maryland law. In
addition, the Company may be obligated to fund the defense costs
incurred by the Companys directors and officers.
You
will have limited ability as a stockholder to prevent the
Company from making any changes to the Company policies that you
believe could harm the Companys business, prospects,
operating results or share price.
The Companys board of directors will adopt policies with
respect to certain activities, such as investments,
dispositions, financing, lending, the Companys equity
capital, conflicts of interest and reporting. These policies may
be amended or revised from time to time at the discretion of the
Companys board of directors without a vote of the
Companys stockholders. This means that the Companys
stockholders will have limited control over changes in the
Companys policies. Such changes in the Companys
policies intended to improve, expand or diversify the
Companys business may not have the anticipated effects and
consequently may have a material adverse effect on the
Companys business, financial condition and results of
operations, the Companys ability to make distributions to
the Companys stockholders and the trading price of the
Companys common stock.
To the
extent the Companys distributions represent a return of
capital for tax purposes you could recognize an increased
capital gain upon a subsequent sale by you of the Companys
common stock.
Distributions in excess of the Companys current and
accumulated earnings and profits and not treated by the Company
as a dividend will not be taxable to a U.S. stockholder to
the extent those distributions do not exceed the
stockholders adjusted tax basis in its common stock, but
instead will constitute a return of capital and will reduce the
stockholders adjusted tax basis in its common stock. If
distributions result in a reduction of a stockholders
adjusted basis in such holders common stock, subsequent
sales of such holders common stock potentially will result
in recognition of an increased capital gain or reduced capital
loss due to the reduction in such adjusted basis.
Risks
Related to Qualification and Operation as a REIT
The
Companys failure to qualify or remain qualified as a REIT
would have significant adverse consequences to the Company and
the value of the Companys common stock.
The Company intends to operate in a manner that will allow the
Company to qualify as a REIT for U.S. federal income tax
purposes under the Code. The Company has not requested and does
not plan to request a ruling from the IRS that the Company
qualifies as a REIT, and the statements in the Companys
prospectus and other filings are not binding on the IRS or any
court. If the Company fails to qualify or loses the
Companys qualification as a REIT, the
24
Company will face serious Company tax consequences that would
substantially reduce the funds available for distribution to the
Companys stockholders for each of the years involved
because:
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|
|
|
|
the Company would not be allowed a deduction for distributions
to stockholders in computing the Companys taxable income
and the Company would be subject to U.S. federal income tax
at regular corporate rates;
|
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|
|
the Company also could be subject to the U.S. federal
alternative minimum tax and possibly increased state and local
taxes; and
|
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|
|
unless the Company is entitled to relief under applicable
statutory provisions, the Company could not elect to be taxed as
a REIT for four taxable years following a year during which the
Company was disqualified.
|
In addition, if the Company loses the Companys
qualification as a REIT, the Company will not be required to
make distributions to stockholders, and all distributions to the
Companys stockholders will be subject to tax as regular
corporate dividends to the extent of the Companys current
and accumulated earnings and profits. This means that the
Companys U.S. individual stockholders would be taxed
on the Companys dividends at a maximum U.S. federal income
tax rate of 15% (through 2008), and the Companys corporate
stockholders generally would be entitled to the dividends
received deduction with respect to such dividends, subject, in
each case, to applicable limitations under the Code.
Qualification as a REIT involves the application of highly
technical and complex Code provisions and regulations
promulgated thereunder for which there are only limited judicial
and administrative interpretations. The complexity of these
provisions and of the applicable U.S. Treasury Department
regulations, or Treasury Regulations, that have been promulgated
under the Code is greater in the case of a REIT that, like the
Company, holds its assets through a partnership. The
determination of various factual matters and circumstances not
entirely within the Companys control may affect the
Companys ability to qualify as a REIT. In order to qualify
as a REIT, the Company must satisfy a number of requirements,
including requirements regarding the composition of the
Companys assets and sources of the Companys gross
income. Also, the Company must make distributions to
stockholders aggregating annually at least 90% of the
Companys net taxable income, excluding capital gains.
As a result of these factors, the Companys loss of its
qualifications as a REIT also could impair the Companys
ability to expand the Companys business and raise capital,
and would adversely affect the value of the Companys
common stock.
To
maintain the Company REIT qualification, the Company may be
forced to borrow funds during unfavorable market
conditions.
To qualify as a REIT, the Company generally must distribute to
the Companys stockholders at least 90% of the
Companys net taxable income each year, excluding net
capital gains, and the Company will be subject to regular
corporate income taxes to the extent that the Company
distributes less than 100% of the Companys net taxable
income each year. In addition, the Company will be subject to a
4% nondeductible excise tax on the amount, if any, by which
distributions paid by the Company in any calendar year are less
than the sum of 85% of the Companys ordinary income, 95%
of the Companys capital gain net income and 100% of the
Companys undistributed income from prior years. In order
to qualify as a REIT and avoid the payment of income and excise
taxes, the Company 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
inclusion of income for U.S. federal income tax purposes,
the effect of non-deductible capital expenditures, the creation
of reserves or required debt amortization payments.
Dividends
payable by REITs generally do not qualify for reduced tax
rates.
The maximum tax rate for dividends payable by domestic
corporations to individual U.S. stockholders (as such term
is defined under U.S. Federal Income Tax
Considerations below), is 15% (through 2008). Dividends
payable by REITs, however, are generally not eligible for the
reduced rates. The more favorable rates applicable to regular
corporate dividends could cause stockholders who are individuals
to perceive investments in REITs to be relatively
25
less attractive than investments in the stocks of non-REIT
corporations that pay dividends, which could adversely affect
the value of the stock of REITs, including the Companys
common stock.
In addition, the relative attractiveness of real estate in
general may be adversely affected by the favorable tax treatment
given to corporate dividends, which could negatively affect the
value of the Companys properties.
Possible
legislative or other actions affecting REITs could adversely
affect the Company and the Companys
stockholders.
The rules dealing with U.S. federal income taxation are
constantly under review by persons involved in the legislative
process and by the IRS and the U.S. Treasury Department. Changes
to tax laws (which changes may have retroactive application)
could adversely affect the Company or the Companys
stockholders. The Company cannot predict whether, when, in what
forms, or with what effective dates, the tax laws applicable to
the Company or the Companys stockholders will be changed.
Complying
with REIT requirements may cause the Company to forego otherwise
attractive opportunities.
To qualify as a REIT for U.S. federal income tax purposes,
the Company must continually satisfy tests concerning, among
other things, the sources of the Companys income, the
nature and diversification of the Companys assets, the
amounts the Company distribute to the Companys
stockholders and the ownership of the Companys stock. In
order to meet these tests, the Company may be required to forego
attractive business or investment opportunities. Thus,
compliance with the REIT requirements may adversely affect the
Companys ability to operate solely to maximize profits.
The
Company will pay some taxes.
Even if the Company qualifies as a REIT for U.S. federal
income tax purposes, the Company will be required to pay some
U.S. federal, state and local taxes on the Companys
income and property. In addition, the Companys taxable
REIT subsidiary, Cogdell Spencer Advisors, LLC,
(TRS) is a fully taxable corporation that will be
subject to taxes on its income, including its management fee
income, and that may be limited in its ability to deduct
interest payments made to the Company or the Companys
operating partnership. The Company also will be subject to a
100% penalty tax on certain amounts if the economic arrangements
among the Companys tenants, the Companys TRS and the
Company are not comparable to similar arrangements among
unrelated parties or if the Company receives payments for
inventory or property held for sale to customers in the ordinary
course of business. To the extent that the Company or the
Companys taxable REIT subsidiary is required to pay U.S.
federal, state or local taxes, the Company will have less cash
available for distribution to the Companys stockholders.
The
ability of the Companys board of directors to revoke the
Company REIT election without stockholder approval may cause
adverse consequences to the Companys
stockholders.
The Companys charter provides that the Companys
board of directors may revoke or otherwise terminate the Company
REIT election, without the approval of the Companys
stockholders, if it determines that it is no longer in the
Companys best interests to continue to qualify as a REIT.
If the Company ceases to qualify as a REIT, the Company would
become subject to U.S. federal income tax on the
Companys taxable income and the Company would no longer be
required to distribute most of the Companys taxable income
to the Companys stockholders, which may have adverse
consequences on the total return to the Companys
stockholders.
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Item 1B.
|
Unresolved
Staff Comments
|
None.
As of December 31, 2005, the Company owns
and/or
manages 72 medical office buildings and healthcare related
facilities, 45 of which are wholly owned, eight of which are
jointly owned with unaffiliated third parties and
26
managed through the TRS, 19 of which are managed for third
parties through the TRS (17 of which are for clients with whom
the Company has an existing investment relationship). Medical
office buildings typically contain suites for physicians and
physician practice groups and also may include facilities that
provide hospitals with ancillary and outpatient services, such
as ambulatory surgery centers, imaging and diagnostic centers
(offering diagnostic services not typically provided in
physician offices or clinics), rehabilitation centers, kidney
dialysis centers and cancer treatment centers. The
Companys aggregate portfolio contains an aggregate of
approximately 3.5 million net rentable square feet of as of
December 31, 2005. As of December 31, 2005, the
Companys wholly owned properties were approximately 95.7%
occupied, with a weighted average remaining lease term of
approximately 3.5 years, and accounted for 94.3% of total
revenues for the year ended December 31, 2005 and 93.0% of
total revenues for the year ended December 31, 2004.
At December 31, 2005, 73% of the Companys
wholly-owned properties are located on hospital campuses and 9%
are located off-campus but in which a hospital is the sole or
anchor tenant.
The following table contains additional information about the
Companys wholly owned properties as of December 31,
2005.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Rent per
|
|
|
|
|
|
|
|
|
|
|
Rentable
|
|
|
|
|
|
|
|
|
Leased
|
|
|
Associated
|
|
|
|
|
Year
|
|
|
Square
|
|
|
Occupancy
|
|
|
Annualized
|
|
|
Square
|
|
|
Health Care
|
Wholly Owned Property
|
|
City
|
|
Built(1)
|
|
|
Feet(2)
|
|
|
Rate
|
|
|
Rent
|
|
|
Foot(4)(5)
|
|
|
System
|
|
Georgia:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Augusta POB I(6)(7)
|
|
Augusta
|
|
|
1978
|
|
|
|
99,493
|
|
|
|
97.9
|
%
|
|
$
|
1,128,986
|
|
|
$
|
11.59
|
|
|
University Health Services
|
Augusta POB II(6)(7)
|
|
Augusta
|
|
|
1987
|
|
|
|
125,634
|
|
|
|
98.3
|
|
|
|
2,598,858
|
|
|
|
21.04
|
|
|
University Health Services
|
Augusta POB III(6)(7)
|
|
Augusta
|
|
|
1994
|
|
|
|
47,034
|
|
|
|
90.7
|
|
|
|
711,772
|
|
|
|
16.68
|
|
|
University Health Services
|
Augusta POB IV(6)(7)
|
|
Augusta
|
|
|
1995
|
|
|
|
55,134
|
|
|
|
89.6
|
|
|
|
750,157
|
|
|
|
15.19
|
|
|
University Health Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Georgia
|
|
|
|
|
|
|
|
|
327,295
|
|
|
|
95.6
|
|
|
|
5,189,773
|
|
|
|
16.59
|
|
|
|
Kentucky:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Lady of Bellefonte(6)(8)(9)
|
|
Ashland
|
|
|
1997
|
|
|
|
46,908
|
|
|
|
90.0
|
|
|
|
927,626
|
|
|
|
21.97
|
|
|
Our Lady of Bellefonte Hospital
|
Adjacent Parking Deck
|
|
|
|
|
1997
|
|
|
|
|
|
|
|
|
|
|
|
756,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Kentucky
|
|
|
|
|
|
|
|
|
46,908
|
|
|
|
90.0
|
|
|
|
1,683,800
|
|
|
|
21.97
|
(10)
|
|
|
Louisiana:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East Jefferson Medical Office
Building(6)(8)(9)
|
|
Metairie
|
|
|
1985
|
|
|
|
119,921
|
|
|
|
100.0
|
|
|
|
2,303,877
|
|
|
|
19.21
|
|
|
East Jefferson General Hospital
|
East Jefferson Medical Specialty
Building(6)(8)(9)(11)
|
|
Metairie
|
|
|
1985
|
|
|
|
10,809
|
|
|
|
100.0
|
|
|
|
958,896
|
|
|
|
88.71
|
|
|
East Jefferson General Hospital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Louisiana
|
|
|
|
|
|
|
|
|
130,730
|
|
|
|
100.0
|
|
|
|
3,262,773
|
|
|
|
24.96
|
|
|
|
North Carolina:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barclay Downs
|
|
Charlotte
|
|
|
1987
|
|
|
|
38,395
|
|
|
|
97.1
|
|
|
|
758,211
|
|
|
|
20.34
|
|
|
|
Birkdale Medical Village(9)(12)
|
|
Huntersville
|
|
|
1997
|
|
|
|
64,669
|
|
|
|
100.0
|
|
|
|
1,363,212
|
|
|
|
21.08
|
|
|
NorthEast Medical Center
|
Birkdale Retail(9)
|
|
Huntersville
|
|
|
2001
|
|
|
|
8,269
|
|
|
|
100.0
|
|
|
|
186,980
|
|
|
|
22.61
|
|
|
|
Cabarrus POB(6)(8)(9)
|
|
Concord
|
|
|
1997
|
|
|
|
84,972
|
|
|
|
98.4
|
|
|
|
1,704,399
|
|
|
|
20.38
|
|
|
NorthEast Medical Center
|
Cabarrus Pediatrics(9)(12)
|
|
Concord
|
|
|
1997
|
|
|
|
9,423
|
|
|
|
100.0
|
|
|
|
240,852
|
|
|
|
25.56
|
|
|
NorthEast Medical Center
|
Copperfield Medical Mall(12)
|
|
Concord
|
|
|
1989
|
|
|
|
26,000
|
|
|
|
100.0
|
|
|
|
559,520
|
|
|
|
21.52
|
|
|
NorthEast Medical Center
|
Copperfield MOB(6)(8)(9)
|
|
Concord
|
|
|
2005
|
|
|
|
63,907
|
|
|
|
82.8
|
|
|
|
1,064,055
|
|
|
|
20.11
|
|
|
NorthEast Medical Center
|
East Rocky Mount Kidney
Center(9)(13)
|
|
Rocky Mount
|
|
|
2000
|
|
|
|
8,043
|
|
|
|
100.0
|
|
|
|
161,023
|
|
|
|
20.02
|
|
|
|
Gaston Professional Center(6)(8)(9)
|
|
Gastonia
|
|
|
1997
|
|
|
|
114,956
|
|
|
|
100.0
|
|
|
|
2,636,937
|
|
|
|
22.94
|
|
|
Caramont Health System
|
Adjacent Parking Deck
|
|
|
|
|
1997
|
|
|
|
|
|
|
|
|
|
|
|
608,162
|
|
|
|
|
|
|
|
Harrisburg Family Physicians
Building(12)
|
|
Harrisburg
|
|
|
1996
|
|
|
|
8,202
|
|
|
|
100.0
|
|
|
|
202,671
|
|
|
|
24.71
|
|
|
Carolinas HealthCare System
|
Harrisburg Medical Mall(9)(12)
|
|
Harrisburg
|
|
|
1997
|
|
|
|
18,360
|
|
|
|
100.0
|
|
|
|
438,620
|
|
|
|
23.89
|
|
|
NorthEast Medical Center
|
Lincoln/ Lakemont Family Practice
Center(12)
|
|
Lincolnton
|
|
|
1998
|
|
|
|
16,500
|
|
|
|
100.0
|
|
|
|
359,115
|
|
|
|
21.76
|
|
|
Carolinas HealthCare System
|
Mallard Crossing Medical Park(9)
|
|
Charlotte
|
|
|
1997
|
|
|
|
52,540
|
|
|
|
92.8
|
|
|
|
1,162,789
|
|
|
|
23.85
|
|
|
|
Midland Medical Mall(9)(12)
|
|
Midland
|
|
|
1998
|
|
|
|
14,610
|
|
|
|
100.0
|
|
|
|
377,680
|
|
|
|
25.85
|
|
|
NorthEast Medical Center
|
Mulberry Medical
Park (6) (8)(9)
|
|
Lenoir
|
|
|
1982
|
|
|
|
24,992
|
|
|
|
100.0
|
|
|
|
471,085
|
|
|
|
18.85
|
|
|
Caldwell Memorial Hospital, Inc.
|
Northcross Family Medical Practice
Building(12)
|
|
Charlotte
|
|
|
1993
|
|
|
|
8,018
|
|
|
|
100.0
|
|
|
|
211,916
|
|
|
|
26.43
|
|
|
Carolinas HealthCare System
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Rent per
|
|
|
|
|
|
|
|
|
|
|
Rentable
|
|
|
|
|
|
|
|
|
Leased
|
|
|
Associated
|
|
|
|
|
Year
|
|
|
Square
|
|
|
Occupancy
|
|
|
Annualized
|
|
|
Square
|
|
|
Health Care
|
Wholly Owned Property
|
|
City
|
|
Built(1)
|
|
|
Feet(2)
|
|
|
Rate
|
|
|
Rent
|
|
|
Foot(4)(5)
|
|
|
System
|
|
Randolph Medical Park(9)
|
|
Charlotte
|
|
|
1973
|
|
|
|
84,131
|
|
|
|
89.9
|
|
|
|
1,524,590
|
|
|
|
20.16
|
|
|
|
Rocky Mount Kidney Center(9)
|
|
Rocky Mount
|
|
|
1990
|
|
|
|
10,364
|
|
|
|
100.0
|
|
|
|
193,005
|
|
|
|
18.62
|
|
|
|
Rocky Mount Medical Park(9)
|
|
Rocky Mount
|
|
|
1991
|
|
|
|
96,993
|
|
|
|
95.8
|
|
|
|
1,760,371
|
|
|
|
18.95
|
|
|
|
Rowan Outpatient Surgery
Center(6)(7)(13)
|
|
Salisbury
|
|
|
2003
|
|
|
|
19,464
|
|
|
|
100.0
|
|
|
|
404,073
|
|
|
|
20.76
|
|
|
Rowan Regional Medical Center
|
Weddington Internal &
Pediatric Medicine(12)
|
|
Concord
|
|
|
2000
|
|
|
|
7,750
|
|
|
|
100.0
|
|
|
|
166,703
|
|
|
|
21.51
|
|
|
NorthEast Medical Center
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North Carolina
|
|
|
|
|
|
|
|
|
780,558
|
|
|
|
96.2
|
|
|
|
16,555,969
|
|
|
|
21.24
|
(14)
|
|
|
South Carolina:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190 Andrews(6)(8)
|
|
Greenville
|
|
|
1994
|
|
|
|
22,898
|
|
|
|
100.0
|
|
|
|
414,982
|
|
|
|
18.12
|
|
|
Bon Secours St. Francis Health System
|
Baptist Northwest(9)
|
|
Columbia
|
|
|
1986
|
|
|
|
38,703
|
|
|
|
96.2
|
|
|
|
678,616
|
|
|
|
18.23
|
|
|
|
Beaufort Medical Plaza(6)(8)(9)
|
|
Beaufort
|
|
|
1999
|
|
|
|
59,340
|
|
|
|
100.0
|
|
|
|
1,192,193
|
|
|
|
20.09
|
|
|
Beaufort Memorial Hospital
|
Mt. Pleasant MOB(3)(6)(9)
|
|
Mt. Pleasant
|
|
|
2001
|
|
|
|
38,735
|
|
|
|
77.4
|
|
|
|
702,153
|
|
|
|
23.42
|
|
|
Roper St. Francis Healthcare
|
Medical Arts Center of
Orangeburg(7)(9)
|
|
Orangeburg
|
|
|
1984
|
|
|
|
49,024
|
|
|
|
97.3
|
|
|
|
877,628
|
|
|
|
18.40
|
|
|
The Regional Medical
Center of Orangeburg
and Calhoun Counties
|
One Medical
Park HMOB(6)(8)(9)
|
|
Columbia
|
|
|
1984
|
|
|
|
69,840
|
|
|
|
100.0
|
|
|
|
1,536,132
|
|
|
|
22.00
|
|
|
Palmetto Health Alliance
Sisters of Charity
|
Providence MOB I(6)(8)(9)
|
|
Columbia
|
|
|
1979
|
|
|
|
48,500
|
|
|
|
100.0
|
|
|
|
964,186
|
|
|
|
19.88
|
|
|
Providence Hospitals
Sisters of Charity
|
Providence MOB II(6)(8)(9)
|
|
Columbia
|
|
|
1985
|
|
|
|
23,280
|
|
|
|
100.0
|
|
|
|
453,976
|
|
|
|
19.50
|
|
|
Providence Hospitals
Sisters of Charity
|
Providence MOB III(6)(7)(9)
|
|
Columbia
|
|
|
1991
|
|
|
|
54,417
|
|
|
|
100.0
|
|
|
|
1,095,657
|
|
|
|
20.13
|
|
|
Providence Hospitals
|
River Hills Medical Plaza(9)(12)
|
|
Little River
|
|
|
1999
|
|
|
|
27,566
|
|
|
|
100.0
|
|
|
|
802,099
|
|
|
|
29.10
|
|
|
Grand Strand Regional
|
Roper MOB(6) (8)(9)
|
|
Charleston
|
|
|
1990
|
|
|
|
121,723
|
|
|
|
88.9
|
|
|
|
2,100,341
|
|
|
|
19.41
|
|
|
Roper St. Francis Healthcare
|
St. Francis Community Medical
Office Building(6)(8)(9)
|
|
Greenville
|
|
|
2001
|
|
|
|
45,140
|
|
|
|
100.0
|
|
|
|
1,028,805
|
|
|
|
22.79
|
|
|
Bon Secours St. Francis
Health System
|
St. Francis Medical Plaza(6)(8)(9)
|
|
Greenville
|
|
|
1998
|
|
|
|
62,724
|
|
|
|
94.0
|
|
|
|
1,183,107
|
|
|
|
20.07
|
|
|
Bon Secours St. Francis
Health System
|
St. Francis MOB(6)(8)(9)
|
|
Greenville
|
|
|
1984
|
|
|
|
49,767
|
|
|
|
95.6
|
|
|
|
855,540
|
|
|
|
17.98
|
|
|
Bon Secours St. Francis
Health System
|
St. Francis Womens
Center(6)(8)(9)
|
|
Greenville
|
|
|
1991
|
|
|
|
57,593
|
|
|
|
76.2
|
|
|
|
863,535
|
|
|
|
19.68
|
|
|
Bon Secours St. Francis
Health System
|
Three Medical Park(6)(8)(9)
|
|
Columbia
|
|
|
1988
|
|
|
|
88,755
|
|
|
|
100.0
|
|
|
|
1,912,941
|
|
|
|
21.55
|
|
|
Palmetto Health Alliance
|
West Medical I(6)(8)(9)
|
|
Charleston
|
|
|
2003
|
|
|
|
29,721
|
|
|
|
100.0
|
|
|
|
681,823
|
|
|
|
22.94
|
|
|
Roper St. Francis Healthcare
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total South Carolina
|
|
|
|
|
|
|
|
|
887,726
|
|
|
|
95.0
|
|
|
|
17,343,714
|
|
|
|
20.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
2,173,217
|
|
|
|
95.7
|
%
|
|
$
|
44,036,029
|
|
|
$
|
20.52
|
(15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the year in which the property was placed in service. |
|
(2) |
|
Net rentable square feet represents the current square feet at a
building under lease as specified in the lease agreements plus
managements estimate of space available for lease. Net
rentable square feet includes tenants proportional share
of common areas. |
|
(3) |
|
Annualized rent represents the annualized monthly contracted
rent under existing leases as of December 31, 2005. |
|
(4) |
|
Annualized rent per leased square foot represents annualized
rent, excluding revenues attributable to parking, divided by the
net rentable square feet divided by occupancy rate. |
|
(5) |
|
Unless otherwise indicated, annualized rent per leased square
foot includes reimbursement to the Company for the payment for
property operating expenses, real estate taxes and insurance
with respect to such property. |
|
(6) |
|
On-campus facility. |
28
|
|
|
(7) |
|
Subject to a restrictive deed on the property. |
|
(8) |
|
Property is a tenant under a long-term ground lease on the
property with an unrelated third party. |
|
(9) |
|
The Company developed this property. |
|
(10) |
|
Excludes annualized rent of adjacent parking deck to The
Companys Lady of Bellefonte from calculation. |
|
(11) |
|
East Jefferson Medical Specialty Building is recorded as a
sales-type capital lease in the Companys consolidated
financial statements. As such, the annualized rent related to
the minimum lease payments is not reflected as rental revenue in
the statement of operations. However amortization of unearned
income is recorded in interest income. |
|
(12) |
|
Off-campus facility hospital
anchored. |
|
(13) |
|
The annualized rent per leased square foot does not include any
payments to us for payment of property operating expenses, real
estate taxes and insurance with respect to such property. The
tenant is responsible for payment of these expenses. |
|
(14) |
|
Excludes annualized rent of adjacent parking deck to Gaston
Professional Center from calculation. |
|
(15) |
|
Excludes annualized rent of adjacent parking decks to The
Companys Lady of Bellefonte and Gaston Professional Center
from calculation. |
Joint
Venture Properties
As of December 31, 2005, the Company manages and jointly
owns eight properties with unaffiliated third parties. The
Companys ownership interest in these properties ranges
from 1.0% to 34.5%.
The following table provides additional information about the
Companys joint venture properties as of December 31,
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Rent per
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rentable
|
|
|
|
|
|
|
|
|
Leased
|
|
|
|
|
|
|
|
|
Associated
|
|
|
|
|
Year
|
|
|
Square
|
|
|
Occupancy
|
|
|
Annualized
|
|
|
Square
|
|
|
Ownership
|
|
|
Debt
|
|
|
Healthcare
|
Property
|
|
City, State
|
|
Built
|
|
|
Feet
|
|
|
Rate
|
|
|
Rent
|
|
|
Foot
|
|
|
Percentage
|
|
|
Balance(1)
|
|
|
System
|
|
Kannapolis Medical Mall
|
|
Kannapolis, NC
|
|
|
1987
|
|
|
|
28,033
|
|
|
|
100.0
|
%
|
|
$
|
641,752
|
|
|
$
|
22.89
|
|
|
|
5.0
|
%
|
|
$
|
|
|
|
NorthEast Medical
Center
|
Mary Black MOB(2)
|
|
Spartanburg, SC
|
|
|
1988
|
|
|
|
45,047
|
|
|
|
98.5
|
|
|
|
772,511
|
|
|
|
17.41
|
|
|
|
9.6
|
|
|
|
2,120,234
|
|
|
Triad
|
Mary Black MOB II(3)
|
|
Spartanburg, SC
|
|
|
1993
|
|
|
|
15,143
|
|
|
|
100.0
|
|
|
|
273,156
|
|
|
|
18.04
|
|
|
|
1.0
|
|
|
|
976,272
|
|
|
Triad
|
Mary Black Westside(4)
|
|
Spartanburg, SC
|
|
|
1991
|
|
|
|
37,455
|
|
|
|
100.0
|
|
|
|
758,998
|
|
|
|
20.26
|
|
|
|
5.0
|
|
|
|
2,712,166
|
|
|
Triad
|
McLeod MOB East(5)
|
|
Florence, SC
|
|
|
1993
|
|
|
|
127,458
|
|
|
|
95.6
|
|
|
|
1,871,433
|
|
|
|
15.36
|
|
|
|
1.1
|
|
|
|
13,327,371
|
|
|
McLeod Regional
Medical Center
|
McLeod Pee Dee Medical Park(5)
|
|
Florence, SC
|
|
|
1982
|
|
|
|
33,756
|
|
|
|
99.5
|
|
|
|
499,375
|
|
|
|
14.87
|
|
|
|
1.1
|
|
|
|
13,327,371
|
|
|
McLeod Regional
Medical Center
|
McLeod MOB West(5)
|
|
Florence, SC
|
|
|
1986
|
|
|
|
52,574
|
|
|
|
96.7
|
|
|
|
679,584
|
|
|
|
13.37
|
|
|
|
1.1
|
|
|
|
13,327,371
|
|
|
McLeod Regional
Medical Center
|
Rocky Mount MOB
|
|
Rocky Mt., NC
|
|
|
2002
|
|
|
|
35,393
|
|
|
|
95.7
|
|
|
|
786,676
|
|
|
|
23.23
|
|
|
|
34.5
|
|
|
|
4,339,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
374,859
|
|
|
|
|
|
|
$
|
6,283,485
|
|
|
|
|
|
|
|
|
|
|
$
|
23,475,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts are for the entity, not just the Companys interest
in the real estate joint venture. |
|
(2) |
|
The Company expects to sell its 9.6% interest in this property
to the associated healthcare system for $0.3 million in
cash during the second quarter in 2006. The Company expects to
continue to manage this property following this sale. |
|
(3) |
|
The Company expects to sell its 1.0% interest in this property
to the associated healthcare system for approximately five
thousand dollars in cash during the second quarter in 2006. The
Company expects to continue to manage this property following
this sale. |
|
(4) |
|
The Company expects to purchase the 95.0% interest in this
property held by the associated healthcare system for
$2.3 million in cash during the second quarter in 2006. The
Company expects to fund this acquisition initially by drawing on
its Credit Facility. |
|
(5) |
|
Total debt of $13.3 million is secured by all three
properties listed. |
29
|
|
Item 3.
|
Legal
Proceedings
|
The Company is, from time to time, involved in routine
litigation arising out of the ordinary course of business or
which is expected to be covered by insurance and which is not
expected to harm the Companys business, financial
condition or results of operations. The Company is not, however,
involved in any material litigation nor, to its knowledge, is
any material litigation pending or threatened against the Company
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the quarter ended December 31, 2005.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Market
Information
The Companys common stock trades on the New York Stock
Exchange (NYSE) under the symbol CSA.
The following table sets forth, for the period indicated, the
high and low sales price for the Companys common stock as
reported by the NYSE and the per share dividends declared:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
Period
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
October 27, 2005 to
December 31, 2005
|
|
$
|
17.29
|
|
|
$
|
15.98
|
|
|
$
|
0.2333(1
|
)
|
|
|
|
(1) |
|
Pro-rata quarterly dividend is for the period November 1,
2005 through December 31, 2005 and is based on a dividend
of $0.35 per share for a full quarter. |
On March 15, 2006, the closing price of the Companys
common stock as reported by the NYSE was $20.15. At
March 15, 2006, the Company had 95 holders of record of its
Common Stock.
Holders of shares of Common Stock are entitled to receive
distributions when declared by the Companys board of
directors out of any assets legally available for that purpose.
As a REIT, the Company is required to distribute at least 90% of
its REIT taxable income, which, as defined by the
relevant tax status and regulations, is generally equivalent to
net taxable ordinary income, to shareholders annually in order
to maintain the Companys REIT status for federal income
tax purposes. The Companys Credit Facility includes
limitations on the Companys ability to make distributions
to its stockholders, subject to complying with REIT requirements.
The Company has reserved 1,000,000 shares of its common
stock for issuance under its 2005 long-term incentive plan.
Unregistered
Sales of Equity Securities and Use of Proceeds
In connection with the Offering, the Company issued shares as
part of various Formation Transactions:
|
|
|
|
|
Pursuant to separate merger, contribution and related
agreements, the holders of ownership interests in the
Predecessor (other than Cogdell Spencer Advisors, Inc.)
contributed their interests in the properties and assets owned
by the existing entities to the Company and interests in eight
existing joint ventures with third parties in exchange for
approximately 378,153 shares of the Companys common
stock and 3,838,587 OP units having an aggregate value of
approximately $71.7 million;
|
|
|
|
The stockholders of Cogdell Spencer Advisors, Inc. exchanged all
of their stock in Cogdell Spencer Advisors, Inc. for
approximately 1,464,121 shares of the Companys common
stock; and
|
|
|
|
The Company acquired one property, 190 Andrews, located in
Greenville, South Carolina. This property was acquired from its
tenant-owners in exchange for 188,236 OP units, equal to
$3.2 million, based upon the initial public offering price
of $17.00 per share.
|
30
The effective date of the Companys Registration Statement
filed on
Form S-11
under the Securities Act relating to the Offering of shares of
common stock was October 26, 2005. A total of
5,800,000 shares of common stock were sold initially, and
an additional 300,000 were sold under an over-allotment option.
The co-lead underwriters for the offering were Banc of America
Securities LLC and Citigroup. The co-manager was BB&T
Capital Markets.
The Offering closed November 1, 2005. The aggregate
offering price was $98.6 million. The underwriting discount
and commissions were $6.3 million, none of which were paid
to the Companys affiliates. The Company received net
proceeds of $89.9 million after the exercise of the
over-allotment, after deducting the underwriting discounts and
commissions, financial advisory fees and estimated expenses of
the offering.
The Company used the net proceeds from the Offering, borrowings
under the Companys Credit Facility, and assumed cash to:
|
|
|
|
|
repay approximately $71.2 million existing indebtedness,
including accrued interest;
|
|
|
|
pay $36.5 million to acquire interests in the predecessor
entities from those investors who elected to receive cash in the
Formation Transactions;
|
|
|
|
pay $1.1 million to acquire a fee simple interest in the
Companys Baptist Northwest property; and
|
|
|
|
pay Credit Facility fees of $0.5 million.
|
(c) Not applicable.
31
|
|
Item 6.
|
Selected
Financial Data
|
The following table sets forth selected consolidated financial
and operating data on an historical basis for the Company and a
combined historical basis for Cogdell Spencer Inc. Predecessor.
The Predecessor is not a legal entity, but represents a
combination of certain real estate entities based on common
management by Cogdell Spencer Advisors, Inc. No historical
information for the Company is presented prior to the
consummation of the Offering because the Company did have any
corporate activity until the completion of the Offering other
than the issuance of shares of common stock in connection with
the initial capitalization of the Company.
The following table should be read in conjunction with the
Financial Statements and notes thereto included in Item 8,
Financial Statements and Supplementary Data and
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Predecessor
|
|
|
|
November 1, 2005 -
|
|
|
January 1, 2005 -
|
|
|
For the Year Ended
December 31,
|
|
|
|
December 31, 2005
|
|
|
October 31, 2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands, except per share
amounts)
|
|
|
Statements of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$
|
7,044
|
|
|
$
|
35,986
|
|
|
$
|
40,657
|
|
|
$
|
38,993
|
|
|
$
|
37,676
|
|
|
$
|
34,912
|
|
Fee revenue
|
|
|
221
|
|
|
|
1,450
|
|
|
|
2,364
|
|
|
|
1,361
|
|
|
|
1,871
|
|
|
|
2,302
|
|
Expense reimbursements
|
|
|
94
|
|
|
|
565
|
|
|
|
840
|
|
|
|
806
|
|
|
|
875
|
|
|
|
775
|
|
Interest and other income
|
|
|
127
|
|
|
|
879
|
|
|
|
843
|
|
|
|
849
|
|
|
|
843
|
|
|
|
989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
7,486
|
|
|
|
38,880
|
|
|
|
44,704
|
|
|
|
42,009
|
|
|
|
41,265
|
|
|
|
38,978
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating
|
|
|
2,596
|
|
|
|
13,124
|
|
|
|
14,837
|
|
|
|
14,116
|
|
|
|
13,335
|
|
|
|
12,290
|
|
General and administrative
|
|
|
7,791
|
|
|
|
5,130
|
|
|
|
3,076
|
|
|
|
2,929
|
|
|
|
2,847
|
|
|
|
2,960
|
|
Interest
|
|
|
1,512
|
|
|
|
8,275
|
|
|
|
9,067
|
|
|
|
11,422
|
|
|
|
15,707
|
|
|
|
14,508
|
|
Depreciation and amortization
|
|
|
4,142
|
|
|
|
8,480
|
|
|
|
9,620
|
|
|
|
9,797
|
|
|
|
9,561
|
|
|
|
8,938
|
|
Loss from early extinguishment of
debt
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
16,144
|
|
|
|
35,009
|
|
|
|
36,600
|
|
|
|
38,264
|
|
|
|
41,450
|
|
|
|
38,696
|
|
Income (loss) from continuing
operations before gain on sale of real estate properties, equity
earnings (loss) on unconsolidated real estate partnerships and
minority interests
|
|
|
(8,658
|
)
|
|
|
3,871
|
|
|
|
8,104
|
|
|
|
3,745
|
|
|
|
(185
|
)
|
|
|
282
|
|
Gain on sale or (impairment) of
real estate properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
(225
|
)
|
Equity earnings (loss) on
unconsolidated real estate partnerships
|
|
|
3
|
|
|
|
(47
|
)
|
|
|
(60
|
)
|
|
|
(74
|
)
|
|
|
(136
|
)
|
|
|
(36
|
)
|
Minority interests
|
|
|
3,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(5,600
|
)
|
|
|
3,824
|
|
|
|
8,044
|
|
|
|
3,671
|
|
|
|
(294
|
)
|
|
|
21
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
507
|
|
Gain on sale of real estate
properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
693
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,600
|
)
|
|
$
|
3,824
|
|
|
$
|
8,044
|
|
|
$
|
3,671
|
|
|
$
|
399
|
|
|
$
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Predecessor
|
|
|
|
November 1, 2005 -
|
|
|
January 1, 2005 -
|
|
|
For the Year Ended
December 31,
|
|
|
|
December 31, 2005
|
|
|
October 31, 2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands, except per share
amounts)
|
|
|
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
0.2333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss basic and
diluted
|
|
$
|
(0.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares basic and diluted
|
|
|
7,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares and
units basic and diluted
|
|
|
12,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate properties, net
|
|
$
|
258,523
|
|
|
|
|
|
|
$
|
156,509
|
|
|
$
|
149,584
|
|
|
$
|
148,720
|
|
|
$
|
150,871
|
|
Other assets, net
|
|
|
49,959
|
|
|
|
|
|
|
|
21,916
|
|
|
|
16,415
|
|
|
|
17,950
|
|
|
|
14,622
|
|
Assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
308,482
|
|
|
|
|
|
|
$
|
178,425
|
|
|
$
|
165,999
|
|
|
$
|
166,670
|
|
|
$
|
166,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and owners
equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages and line of credit
|
|
$
|
160,234
|
|
|
|
|
|
|
$
|
214,818
|
|
|
$
|
202,522
|
|
|
$
|
198,550
|
|
|
$
|
187,892
|
|
Other liabilities, net
|
|
|
7,762
|
|
|
|
|
|
|
|
10,034
|
|
|
|
10,564
|
|
|
|
11,809
|
|
|
|
9,256
|
|
Liabilities related to assets held
of sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,276
|
|
Minority interests
|
|
|
62,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owners equity (deficit)
|
|
|
78,468
|
|
|
|
|
|
|
|
(46,427
|
)
|
|
|
(47,087
|
)
|
|
|
(43,689
|
)
|
|
|
(31,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and owners
equity (deficit)
|
|
$
|
308,482
|
|
|
|
|
|
|
$
|
178,425
|
|
|
$
|
165,999
|
|
|
$
|
166,670
|
|
|
$
|
166,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
1,635
|
|
|
$
|
10,312
|
|
|
$
|
16,089
|
|
|
$
|
12,738
|
|
|
$
|
13,326
|
|
|
$
|
13,230
|
|
Net cash used in investing
activities
|
|
|
(27,462
|
)
|
|
|
(5,939
|
)
|
|
|
(13,767
|
)
|
|
|
(7,523
|
)
|
|
|
(8,584
|
)
|
|
|
(18,903
|
)
|
Net cash provided by (used in)
financing activities
|
|
|
35,398
|
|
|
|
(5,863
|
)
|
|
|
1,880
|
|
|
|
(6,339
|
)
|
|
|
(3,644
|
)
|
|
|
5,190
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations(1)
|
|
$
|
(4,518
|
)
|
|
$
|
12,303
|
|
|
$
|
17,656
|
|
|
$
|
13,462
|
|
|
$
|
9,276
|
|
|
$
|
9,384
|
|
|
|
|
(1)
|
|
As defined by the National
Association of Real Estate Investment Trusts, or NAREIT, funds
from operations, or FFO, represents net income (computed in
accordance with generally accepted accounting principles, or
GAAP), excluding gains 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. The Company
present FFO because the Company consider it an important
supplemental measure of the Companys operational
performance and believes it is frequently used by securities
analysts, investors and other interested parties in the
evaluation of REITs, many of which present FFO when reporting
their results. FFO is intended to exclude GAAP historical cost
depreciation and amortization of real estate and related assets,
which assumes that the value of real estate assets diminishes
ratably over time. Historically, however, real estate values
have risen or fallen with market conditions. Because FFO
excludes depreciation and amortization unique to real estate,
gains and losses from property dispositions and extraordinary
items, it provides a performance measure that, when compared
year over year, reflects the impact to operations from trends in
occupancy rates, rental rates, operating costs, development
activities and interest costs, providing perspective not
immediately apparent from net income. The Company computes FFO
in accordance with standards established by the Board of
Governors of NAREIT in its March 1995 White Paper (as amended in
November 1999 and April 2002), which may differ from the
methodology for calculating FFO utilized by other equity REITs
and, accordingly, may not be comparable to such other REITs.
Further, FFO does not represent amounts available for
managements discretionary use because of needed capital
replacement or expansion, debt service obligations, or other
commitments and uncertainties. FFO should not be considered as
an alternative to net income (loss)
|
33
|
|
|
|
|
(computed in accordance with GAAP)
as an indicator of the Companys performance, nor is it
indicative of funds available to fund the Companys cash
needs, including the Companys ability to pay dividends or
make distributions.
|
The following table presents the reconciliation of FFO to net
income (loss), which is the most directly comparable GAAP
measure to FFO (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Predecessor
|
|
|
|
November 1, 2005 -
|
|
|
January 1, 2005 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
October 31, 2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Funds from
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,600
|
)
|
|
$
|
3,824
|
|
|
$
|
8,044
|
|
|
$
|
3,671
|
|
|
$
|
399
|
|
|
$
|
528
|
|
Minority interests
|
|
|
(3,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate depreciation and
amortization
|
|
|
4,128
|
|
|
|
8,384
|
|
|
|
9,533
|
|
|
|
9,702
|
|
|
|
9,466
|
|
|
|
8,856
|
|
Unconsolidated entities real
estate depreciation and amortization
|
|
|
9
|
|
|
|
95
|
|
|
|
79
|
|
|
|
89
|
|
|
|
51
|
|
|
|
|
|
Gain on sale of real estate
properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funds from
operations
|
|
$
|
(4,518
|
)
|
|
$
|
12,303
|
|
|
$
|
17,656
|
|
|
$
|
13,462
|
|
|
$
|
9,276
|
|
|
$
|
9,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7.
|
Management
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with
the financial statements and notes thereto appearing elsewhere
in this report. Where appropriate, the following discussion
includes analysis of the effects of the Companys Offering,
the Formation Transactions and related refinancing transactions
and certain other transactions. The Company makes statements in
this section that are forward-looking statements within the
meaning of the federal securities laws. For a complete
discussion of forward-looking statements, see the section in
this
Form 10-K
entitled Statements Regarding Forward-Looking
Information. Certain risk factors may cause actual
results, performance or achievements to differ materially from
those expressed or implied by the following discussion. For a
discussion of such risk factors, see the section in this
Form 10-K
entitled Statements Regarding Forward-Looking
Information.
Overview
The Company is a fully-integrated, self-administered and
self-managed REIT that invests in specialty office buildings for
the medical profession, including medical offices, ambulatory
surgery and diagnostic centers. The Company focuses on the
ownership, development, redevelopment, acquisition and
management of strategically located medical office buildings and
other healthcare related facilities primarily in the
southeastern United States. The Company has been built around
understanding and addressing the specialized real estate needs
of the healthcare industry. The Companys management team
has developed long-term and extensive relationships through
developing and maintaining modern, customized medical office
buildings and healthcare related facilities. The Company has
been able to maintain occupancy above market levels and secure
strategic hospital campus locations. The Company operates its
business through Cogdell Spencer LP, its operating partnership
subsidiary, and its subsidiaries.
The Company derives a significant portion of its revenues from
rents received from tenants under existing leases in medical
office buildings and other healthcare related facilities. The
Company derives a lesser portion of its revenues from fees that
are paid for managing and developing medical office buildings
and other healthcare related facilities for third parties. The
Companys management believes a strong internal property
management capability is a vital component of the Companys
business, both for the properties the Company owns and for those
that the Company manages.
34
As of December 31, 2005, the Company owned
and/or
managed 72 medical office buildings and healthcare related
facilities, serving 18 hospital systems in seven states. The
Companys aggregate portfolio was comprised of:
|
|
|
|
|
45 wholly owned properties;
|
|
|
|
eight joint venture properties; and
|
|
|
|
19 properties owned by third parties (17 of which are for
clients with whom the Company has an existing investment
relationship).
|
At December 31, 2005, the Companys aggregate
portfolio contains approximately 3.5 million net rentable
square feet, consisting of approximately 2.2 million net
rentable square feet from wholly owned properties, approximately
0.4 million net rentable square feet from joint venture
properties, and approximately 0.9 million net rental square
feet from properties owned by third parties and managed by the
Company. Approximately 73.0% of the net rentable square feet of
the wholly owned properties are situated on hospital campuses.
As such, the Company believes its assets occupy a premier
franchise location in relationship to local hospitals, providing
the Companys properties with a distinct competitive
advantage over alternative medical office space in an area. As
of December 31, 2005, the Companys wholly owned
properties were approximately 95.7% occupied, with a weighted
average remaining lease term of approximately 3.5 years.
The Company completed its Offering on November 1, 2005. The
Offering resulted in the sale of 5,800,000 shares of common
stock at a price of $17.00 per share, generating gross
proceeds to the Company of $98.6 million. On
November 29, 2005, an additional 300,000 shares of
common stock were sold at $17.00 per share as a result of
the underwriters exercising their over-allotment option,
generating gross proceeds to the Company of $5.1 million.
The aggregate proceeds to the Company, net of underwriters
discounts, commissions and financial advisory fees and other
offering costs, were approximately $89.9 million.
On November 1, 2005, concurrent with the consummation of
the Offering, the Company and a newly formed majority-owned
limited partnership, the Operating Partnership, and its taxable
REIT subsidiary, together with the partners and members of the
affiliated partnerships and limited liability companies of the
Predecessor, engaged in certain Formation Transactions. The
Operating Partnership received a contribution of interests in
the Predecessor in exchange for units of limited partnership
interest in the Operating Partnership, shares of the
Companys common stock
and/or cash.
Factors
Which May Influence Future Results of Operations
Generally, the Companys revenues and expenses have
remained consistent except for development fees and changes in
the fair value of interest rate swap agreements reflected in
interest expense. The Companys development fees will
continue to vary from period to period due to the level of
development activity at that time. Changes in fair values
related to the Companys interest rate swap agreements,
which vary from period to period based on changes in market
interest rates, are recorded in interest expense.
Critical
Accounting Policies
The Companys discussion and analysis of financial
condition and results of operations are based upon the
Companys consolidated financial statements and the
Companys Predecessors combined financial statements,
which have been prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the
United States (GAAP). All significant intercompany
balances and transactions have been eliminated in consolidation
and combination.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amount of
revenues and expenses in the reporting period. The
Companys actual results may differ from these estimates.
Management has provided a summary of the Companys
significant accounting policies in Note 2 to the
Companys consolidated and combined financial statements
included in this Annual Report on
Form 10-K.
Critical accounting policies are those judged to involve
accounting estimates or assumptions that may be material due to
the levels of subjectivity and judgment necessary to account for
uncertain matters or susceptibility of such
35
matters to change. Other companies in similar businesses may
utilize different estimation policies and methodologies, which
may impact the comparability of the Companys results of
operations and financial condition to those companies.
Investments
in Real Estate
Acquisition of real estate. The price that the
Company pays to acquire a property is impacted by many factors,
including the condition of the buildings and improvements, the
occupancy of the building, the existence of above and below
market tenant leases, the creditworthiness of the tenants,
favorable or unfavorable financing, above or below market ground
leases and numerous other factors. Accordingly, the Company is
required to make subjective assessments to allocate the purchase
price paid to acquire investments in real estate among the
assets acquired and liabilities assumed based on the
Companys estimate of the fair values of such assets and
liabilities. This includes determining the value of the
buildings and improvements, land, any ground leases, tenant
improvements, in-place tenant leases, tenant relationships, the
value (or negative value) of above (or below) market leases and
any debt assumed from the seller or loans made by the seller to
the Company. Each of these estimates requires significant
judgment and some of the estimates involve complex calculations.
The Companys calculation methodology is summarized in
Note 2 to the Companys audited consolidated and
combined financial statements included this Annual Report on
Form 10-K.
These allocation assessments have a direct impact on the
Companys results of operations because if the Company were
to allocate more value to land there would be no depreciation
with respect to such amount or if the Company were to allocate
more value to the buildings as opposed to allocating to the
value of tenant leases, this amount would be recognized as an
expense over a much longer period of time, since the amounts
allocated to buildings are depreciated over the estimated lives
of the buildings whereas amounts allocated to tenant leases are
amortized over the terms of the leases. Additionally, the
amortization of value (or negative value) assigned to above (or
below) market rate leases is recorded as an adjustment to rental
revenue as compared to amortization of the value of in-place
leases and tenant relationships, which is included in
depreciation and amortization in the Companys consolidated
and combined statements of operations.
Useful lives of assets. The Company is
required to make subjective assessments as to the useful lives
of the Companys properties for purposes of determining the
amount of depreciation to record on an annual basis with respect
to the Companys investments in real estate. These
assessments have a direct impact on the Companys net
income because if the Company were to shorten the expected
useful lives of the Companys investments in real estate
the Company would depreciate such investments over fewer years,
resulting in more depreciation expense and lower net income on
an annual basis.
Asset impairment valuation. The Company
reviews the carrying value of the Companys properties when
circumstances, such as adverse market conditions, indicate a
potential impairment may exist. The Company bases the
Companys review on an estimate of the future cash flows
(excluding interest charges) expected to result from the real
estate investments use and eventual disposition. The
Company considers factors such as future operating income,
trends and prospects, as well as the effects of leasing demand,
competition and other factors. If the Companys evaluation
indicates that the Company may be unable to recover the carrying
value of a real estate investment, an impairment loss is
recorded to the extent that the carrying value exceeds the
estimated fair value of the property. These losses have a direct
impact on the Companys net income because recording an
impairment loss results in an immediate negative adjustment to
net income. The evaluation of anticipated cash flows is highly
subjective and is based in part on assumptions regarding future
occupancy, rental rates and capital requirements that could
differ materially from actual results in future periods. Since
cash flows on properties considered to be long-lived assets to
be held and used are considered on an undiscounted basis to
determine whether an asset has been impaired, the Companys
strategy of holding properties over the long-term directly
decreases the likelihood of recording an impairment loss. If the
Companys strategy changes or market conditions otherwise
dictate an earlier sale date, an impairment loss may be
recognized and such loss could be material. If the Company
determines that impairment has occurred, the affected assets
must be reduced to their fair value. No such impairment losses
have been recognized to date. The Company estimates the fair
value of rental properties utilizing a discounted cash flow
analysis that includes projections of future revenues, expenses
and capital improvement costs, similar to the income approach
that is commonly utilized by appraisers.
36
Revenue
Recognition
Rental income related to non-cancelable operating leases is
recognized using the straight line method over the terms of the
tenant leases. Deferred rents included in the Companys
combined balance sheets represent the aggregate excess of rental
revenue recognized on a straight line basis over the rental
revenue that would be recognized under the terms of the leases.
The Companys leases generally contain provisions under
which the tenants reimburse the Company for all property
operating expenses and real estate taxes incurred by the
Company. Such reimbursements are recognized in the period that
the expenses are incurred. Lease termination fees are recognized
when the related leases are canceled and the Company has no
continuing obligation to provide services to such former
tenants. As discussed above, the Company recognizes amortization
of the value of acquired above or below market tenant leases as
a reduction of rental income in the case of above market leases
or an increase to rental revenue in the case of below market
leases. The Company receives fees for property management and
development and consulting services from time to time from third
parties which is reflected as fee revenue. Management fees are
generally based on a percentage of revenues for the month as
defined in the related property management agreements.
Development and consulting fees are recorded on a percentage of
completion method using managements best estimate of time
and costs to complete projects. The Company has a long history
of developing reasonable and dependable estimates related to
development or consulting contracts with clear requirements and
rights of the parties to the contracts. Although not frequent,
occasionally revisions to estimates of costs are necessary and
are reflected as a change in estimate when known. Other income
shown in the statement of operations, generally includes
interest income, primarily from the amortization of unearned
income on a sales-type capital lease recognized in accordance
with Statement of Financial Accounting Standards No. 13,
and other income incidental to the Companys operations and
is recognized when earned.
The Company must make subjective estimates as to when the
Companys revenue is earned and the collectibility of the
Companys accounts receivable related to minimum rent,
deferred rent, expense reimbursements, lease termination fees
and other income. The Company specifically analyzes accounts
receivable and historical bad debts, tenant concentrations,
tenant creditworthiness, and current economic trends when
evaluating the adequacy of the allowance for bad debts. These
estimates have a direct impact on the Companys net income
because a higher bad debt allowance would result in lower net
income, and recognizing rental revenue as earned in one period
versus another would result in higher or lower net income for a
particular period.
REIT
Qualification Requirements
The Company is subject to a number of operational and
organizational requirements to qualify and then maintain
qualification as a REIT. If the Company does not qualify as a
REIT, its income would become subject to U.S. federal, state and
local income taxes at regular corporate rates that would be
substantial and the Company cannot re-elect to qualify as a REIT
for five years. The resulting adverse effects on the
Companys results of operations, liquidity and amounts
distributable to stockholders would be material.
Results
of Operations
The discussion below relates to the financial condition and
results of operations for the years ended December 31,
2005, 2004, and 2003. The results of operations for
January 1, 2005 through October 31, 2005 and
November 1, 2005 through December 31, 2005 have been
combined to provide a meaningful comparison to the results of
operations for the year ended December 31, 2004.
Year
ended December 31, 2005 compared to year ended
December 31, 2004
Overview. Results for the year ended
December 31, 2005 included the operations of 45 wholly
owned properties compared to the results for the year ended
December 31, 2004, which included the operations of 44
wholly owned properties. Copperfield MOB was placed into service
in the first quarter of 2005. During 2004, one property was
added in July 2004 and another property was added December 2004.
Total Revenue. Total revenue increased
$1.7 million, or 3.7%, for the year ended December 31,
2005 compared to the year ended December 31, 2004.
37
Rental revenue increased 5.8%, from $40.7 million for the
year ended December 31, 2004 to $43.0 million for the
year ended December 31, 2005, due primarily to general
increases in rent related to CPI escalation clauses as well as a
full year of operations for properties added during 2004 and
operations for Copperfield MOB.
Development fees earned on third party development contracts
decreased 27.3% from $1.1 million for the year ended
December 31, 2004 to $0.8 million for the year ended
December 31, 2005 due to one development fee recognized in
2004, that accounted for approximately 54.5% of the total 2004
development fees, that was non-recurring in 2005.
Advisory fees decreased 100%, from $0.3 million for the
year ended December 31, 2004 to zero for the year ended
December 31, 2005, due to no advisory projects being
performed in 2005.
Management fees earned from management contracts and payable by
third parties, expense reimbursements and interest and other
income did not change significantly from 2004 to 2005.
Property Operating Expenses. Property
operating expenses increased 6.0%, from $14.8 million for
the year ended December 31, 2004 to $15.7 million for
the year ended December 31, 2005, as the result of general
expense increases related to inflation as well as experiencing a
full year of operations in 2005 for properties added in 2004 and
Copperfield MOB added in the first quarter of 2005.
Interest Expense. Interest expense for the
year ended December 31, 2005 was $9.8 million compared
to $9.1 million for the year ended December 31, 2004,
an increase of $0.7 million, or 7.9%. This change was
primarily due to interest on three new properties, a smaller
reduction of interest expense due to changes in the fair value
of the Companys interest rate swap agreements, an increase
in interest expense on variable rate debt related to an increase
in interest rates, offset by a decrease in interest expense due
to the repayment of $71.0 million of debt in November 2005.
The Companys interest rate swap agreements are reported at
fair value in the Companys balance sheet and changes in
fair value are recorded as increase or decrease to interest
expense. During the year ended December 31, 2005, interest
expense was reduced by $2.5 million related to increases in
the fair value of the interest rate swap agreements. During the
year ended December 31, 2004, interest expense was reduced
by $2.9 million related to net increases in the fair value
of the interest rate swap agreements.
Depreciation and Amortization
Expenses. Depreciation and amortization for the
year ended December 31, 2005 was $12.6 million
compared to $9.6 million for the year ended
December 31, 2004, an increase of $3.0 million, or
31.2%. The increase was primarily due to the increase in the
cost basis for the real estate properties and intangible assets
as a result of the purchase accounting resulting from the
Formation Transactions on November 1, 2005.
General and Administrative Expenses. General
and administrative expenses for the year ended December 31,
2005 was $12.9 million compared to $3.1 million for
the year ended December 31, 2004, an increase of
$9.8 million, or 321.1%. The increase was due primarily to
$6.4 million related to a non-cash compensation charge
incurred in connection with the grant of vested equity
incentives to the Companys management team and employees
in connection with the completion of the initial public offering
and an increase of $1.7 million related to legal, tax,
accounting and auditing costs associated with preparing for the
initial public offering and for the 2005 audit and tax
compliance. The remaining increase relates to increased staffing
and changed job responsibilities to meet the reporting and
operational demands of a publicly registered company, Sarbanes
Oxley Section 404 compliance and other consulting costs,
travel, and reduction of capitalized development personnel
compensation due a decrease in wholly-owned construction
projects in 2005.
Minority Interests. Loss allocated to the
Operating Partnership represents 35.3% of the net loss
subsequent to the initial public offering and totaled
$3.1 million for the year ended December 31, 2005.
The above changes contributed to net income for the year ended
December 31, 2004 decreasing from net income of
$8.0 million to a net loss of $1.8 million for the
year ended December 31, 2005, or a $9.8 million
decrease.
Year
ended December 31, 2004 compared to year ended
December 31, 2003
Overview. Results for the year ended
December 31, 2004 included the operations of 44 wholly
owned properties compared to the results for the year ended
December 31, 2003, which included the operations of 42
38
wholly owned properties. Of the 44 wholly owned properties, one
wholly owned property was added during July and one wholly owned
property was added in December.
Total Revenue. Total revenues increased 6.4%
from $42.0 million in 2003 to $44.7 million in 2004.
Rental revenue increased 4.3%, from $39.0 million for the
year ended December 31, 2003 to $40.7 million for the
year ended December 31, 2004, due primarily to general
increases in rent related to CPI escalation clauses as well as a
full year of operations for one of our wholly owned properties
which opened in December 2003 and the lease up of vacant space
at another property. The addition of one property in July 2004
also contributed to the increase.
Management fees earned from management contracts and payable by
third parties decreased 10% from $1.0 million for the year
ended December 31, 2003 to $0.9 million for the year
ended December 31, 2004 due to reduced tenant build-out
fees.
Development fees earned on third party development contracts
increased 267% from $0.3 million for the year ended
December 31, 2003 to $1.1 million for the year ended
December 31, 2004 due to one significant project for
$0.6 million where revenue recognition was deferred until
2004 due to uncertainty regarding collection.
Advisory fees increased 200%, from $0.1 million for the
year ended December 31, 2003 to $0.3 million for the
year ended December 31, 2004, due to one engagement in 2004
for $0.2 million that was a nonrecurring engagement.
Expense reimbursements and interest and other income did not
change from 2003 to 2004.
Property Operating Expenses. Property
operating expenses increased 5.1%, from $14.1 million for
the year ended December 31, 2003 to $14.8 million for
the year ended December 31, 2004, as the result of general
expense increases related to inflation as well as experiencing a
full year of operations in 2004 for one of our wholly owned
properties which was placed in service during the fourth quarter
of 2003.
Interest Expense. Interest expense for the
year ended December 31, 2004 was $9.1 million compared
to $11.4 million for the year ended December 31, 2003,
a decrease of $2.4 million, or 20.6%. This change was
primarily the result of a reduction of interest expense of
approximately $2.9 million related to the increase in the
fair value of interest rate swap agreements resulting from the
upward movement of LIBOR rates experienced during the year ended
December 2004 versus a reduction of only $0.7 million
during the year ended December 31, 2003.
Depreciation and Amortization
Expenses. Depreciation and amortization for the
year ended December 31, 2004 was $9.6 million compared
to $9.8 million for the year ended December 31, 2003,
a decrease of $0.2 million, or 1.8%. The decrease was due
primarily to lower depreciation taken on tenant improvements as
a result of underlying tenant lease maturities.
General and Administrative Expenses. General
and administrative expenses for the year ended December 31,
2004 was $3.1 million compared to $2.9 million for the
year ended December 31, 2003, an increase of
$0.2 million, or 6.9%. The increase was due primarily to
increased personnel costs related to higher third party
development activity experienced during 2004 versus 2003.
The above changes contributed to an increase in net income of
119.1% from $3.7 million for the year ended
December 31, 2003 to $8.0 million for the year ended
December 31, 2004.
Cash
Flows
Year
Ended December 31, 2005 compared to the Year Ended
December 31, 2004
Cash provided by operations was $11.9 million and
$16.1 million for the years ended December 31, 2005
and 2004, respectively. The decrease in 2005 was due primarily
to an increase in general and administrative costs paid during
2005, a decrease in development and advisory fees received, and
an increase in interest payments associated with higher debt
balances and increasing interest rates on variable rate debt.
Cash used in investing activities was $33.4 million and
$13.8 million for the years ended December 31, 2005
and 2004, respectively. The increase was due to
$36.5 million paid to certain Predecessor members and
partners
39
who elected cash as part of the Formation Transactions, offset
by $9.5 million of cash assumed from the Predecessor
entities. During 2004, the Predecessor paid $4.2 million to
acquire Rowan OSC Investors, whereas in 2005, except for the
Formation Transactions, there were no acquisitions funded using
cash proceeds. During 2005, restricted cash decreased
$2.4 million due to the release of restrictions when the
associated debt was repaid.
Cash provided by financing activities was $29.4 million and
$1.9 million for the years ended December 31, 2005 and
2004, respectively. The change was primarily due to the receipt
of the net proceeds from the sale of common stock offset by the
repayment in full of certain mortgages and notes payables.
Year
Ended December 31, 2004 compared to the Year Ended
December 31, 2003
Cash provided by operations was $16.1 million and
$12.7 million for the years ended December 31, 2004
and 2003, respectively. The increase in 2004 was primarily due
to an increase in net income before change in value of interest
rate swap agreements of $2.2 million and a
$1.2 million increase in accounts payable and accrued
expenses recognized in 2004 but not paid until 2005 and prepaid
rent from our tenants.
Cash used in investing activities was $13.8 million and
$7.5 million for the years ended December 31, 2004 and
2003, respectively. The increase in 2004 was primarily due to
two development projects in 2004 compared to one in 2003.
Cash provided by (used in) financing activities was
$1.8 million and $(6.3) million for the years ended
December 31, 2004 and 2003, respectively. The increase in
2004 was primarily due to increased proceeds from mortgages to
finance development activity partially offset by higher
distributions.
Construction
in Progress
Construction in progress at December 31, 2005 consisted of
one development project, Carolina Forest Medical Plaza, for
which the Company has acquired the land but has not begun
construction.
Recent
Developments
On March 30, 2006, the Company acquired a portfolio
consisting of two medical office buildings located in Glendale,
California and one building located in Richmond, Virginia
(collectively, the Portfolio) for approximately
$36.1 million. The portfolio consists of approximately
163,000 square feet of medical office space. The Company
assumed $5.2 million of mortgage debt and the Company
borrowed $30.0 million from the Companys Credit
Facility.
On February 15, 2006, the Company acquired Methodist
Professional Center One, located on the campus of Methodist
Hospital in Indianapolis, Indiana, for approximately
$39.9 million. The acquisition includes 171,500 square
feet of medical office space and an adjacent 951 space parking
deck. The acquisition was funded by the Companys Credit
Facility.
Liquidity
and Capital Resources
As of December 31, 2005, the Company had $9.6 million
available in cash and cash equivalents. The Company is required
to distribute at least 90% of the Companys net taxable
income, excluding net capital gains, to the Companys
stockholders on an annual basis due to qualification
requirements as a REIT. Therefore, as a general matter, it is
unlikely that the Company will have any substantial cash
balances that could be used to meet the Companys liquidity
needs. Instead, these needs must be met from cash generated from
operations and external sources of capital.
As a result of the Offering and the Formation Transactions, the
Companys debt and liquidity changed significantly. The
Company believes that the Offering and the Formation
Transactions improves the capital structure and financial
flexibility of its business compared to its Predecessors
structure. The Company also expects to access additional funds
through secured and unsecured borrowings. As a public company,
the Company also believes it will have greater access to capital
through public and private debt and equity offerings. This
enhanced access to capital will allow the Company to acquire
additional assets, exploit advantageous market conditions,
respond efficiently to changing market conditions and otherwise
execute its business and growth strategy.
40
On November 1, 2005, the Company, as guarantor, and the
Operating Partnership entered into our $100.0 million
Credit Facility, with a syndicate of financial institutions
(including Bank of America, N.A., Citicorp North America, Inc.
and Branch Banking & Trust Company) (collectively, the
Lenders), with Bank of America, N.A., as the
administrative agent for the Lenders, and Banc of America
Securities LLC and Citigroup Global Markets Inc., as joint lead
arrangers and joint book managers. The Credit Facility shall be
available to fund working capital and other corporate purposes;
finance acquisition and development activity; and refinance
existing and future indebtedness. The Credit Facility permits
the Operating Partnership to borrow up to $100 million of
revolving loans, with sub-limits of $25.0 million for
swingline loans and $25.0 million for letters of credit.
The Credit Facility shall terminate and all amounts outstanding
thereunder shall be due and payable in full three years from
November 1, 2005, subject to a one-year extension, at the
Operating Partnerships option. The Credit Facility also
allows for up to $150.0 million of increased availability
(to a total aggregate available amount of $250.0 million),
at the Operating Partnerships option but subject to each
Lenders option to increase its commitments. This Credit
Facility is guaranteed by the Company and certain of its
subsidiaries. The interest rate on loans under the Credit
Facility equals, at the Companys election, either
(1) LIBOR plus a margin of between 100 to 130 basis points
based on the Companys leverage ratio or (2) the
higher of the federal funds rate plus 50 basis points or
Bank of America, N.A.s prime rate.
The Credit Facility contains customary terms and conditions for
credit facilities of this type, including: (1) limitations
on the Companys ability to (A) incur additional
indebtedness, (B) make distributions to the Companys
stockholders, subject to complying with REIT requirements, and
(C) make certain investments, (2) maintenance of a
pool of unencumbered assets subject to certain minimum
valuations thereof and (3) requirements for us to maintain
certain financial coverage ratios. These customary financial
coverage ratios and other conditions include a maximum leverage
ratio (65%, with flexibility for one two quarter increase to not
more than 75%), minimum fixed charge coverage ratio (175%),
maximum combined secured indebtedness (50%), maximum recourse
indebtedness (15%), maximum unsecured indebtedness (60%, with
flexibility for one two quarter increase to not more than 75%),
minimum unencumbered interest coverage ratio (200%) and minimum
combined tangible net worth ($30 million plus 85% of net
proceeds of equity issuances by the Company and its subsidiaries
after November 1, 2005).
As of December 31, 2005 there was $79.9 million
available under the Companys Credit Facility. There is
$19.6 million outstanding at December 31, 2005 and
$0.5 million of availability is restricted related to an
outstanding letter of credit.
Using proceeds from the Offering and borrowings under the Credit
Facility, the Company repaid $71.2 million of principal and
accrued interest related to the mortgage notes payable assumed
as part of the Formation Transactions.
Management believes that the Company will have sufficient
capital resources as a result of operations and the borrowings
in place and availability under the Companys Credit
Facility to fund ongoing operations.
The Company declared and paid a pro rata dividend for the period
from November 1, 2005 through December 31, 2005.
The declared divided was $0.2333 per common share and per
OP Unit and was paid on December 27, 2005. The total
distribution was approximately $2.9 million.
The Company declared a dividend for the period January 1,
2006 through March 31, 2006. The declared dividend is
$0.35 per common share and per OP Unit and is payable
on April 19, 2006, to stockholders of record on
March 22, 2006. The total distribution is expected to be
approximately $4.3 million.
Long-Term
Liquidity Needs
The Companys principal long-term liquidity needs consists
primarily of new property development, property acquisitions,
principal payments under various mortgages and other credit
facilities and non-recurring capital expenditures. The Company
does not expect that its net cash provided by operations will be
sufficient to meet all of these long-term liquidity needs.
Instead, the Company expects to finance new property
developments through modest cash equity capital contributed by
the Company together with construction loan proceeds, as well as
through cash equity investments by its tenants. The Company
expects to fund property acquisitions through a combination
41
of borrowings under its Credit Facility and traditional secured
mortgage financing. In addition, the Company expects to use
OP Units issued by the operating partnership to acquire
properties from existing owners seeking a tax deferred
transaction. The Company expects to meet other long-term
liquidity requirements through net cash provided by operations
and through additional equity and debt financings, including
loans from banks, institutional investors or other lenders,
bridge loans, letters of credit, and other lending arrangements,
most of which will be secured by mortgages. The Company may also
issue unsecured debt in the future. However, in view of the
Companys strategy to grow its portfolio over time, the
Company does not, in general expect to meet its long-term
liquidity needs through sales of its properties. In the event
that, notwithstanding this intent, the Company was in the future
to consider sales of its properties from time to time, the
proceeds that would be available to the Company from such sales,
may be reduced by amounts that the Company may owe under the tax
protection agreements or those properties would need to be sold
in a tax deferred transaction which would require reinvestment
of the proceeds in another property. In addition, the
Companys ability to sell certain of its assets could be
adversely affected by the general illiquidity of real estate
assets and certain additional factors particular to our
portfolio such as the specialized nature of its target property
type, property use restrictions and the need to obtain consents
or waivers of rights of first refusal or rights of first offers
from ground lessors in the case of sales of its properties that
are subject to ground leases.
The Company intends to repay indebtedness incurred under its
Credit Facility from time to time, for acquisitions or
otherwise, out of cash flow and from the proceeds of additional
debt or equity issuances. In the future, the Company may seek to
increase the amount of its credit facilities, negotiate
additional credit facilities or issue corporate debt
instruments. Any indebtedness incurred or issued by the Company
may be secured or unsecured, short-, medium- or long-term, fixed
or variable interest rate and may be subject to other terms and
conditions the Company deems acceptable. The Company intends to
refinance at maturity the mortgage notes payable that have
balloon payments at maturity.
Contractual
Obligations
The following table summarizes the Companys contractual
obligations as of December 31, 2005, including the
maturities and scheduled principal repayments and the
commitments due in connection with the Companys ground
leases and operating leases for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
Total
|
|
|
Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt principal payments
and maturities(1)
|
|
$
|
14,809
|
|
|
$
|
36,821
|
|
|
$
|
47,022
|
|
|
$
|
11,597
|
|
|
$
|
1,456
|
|
|
$
|
47,825
|
|
|
$
|
159,530
|
|
Standby letters of credit(2)
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
Interest payments(3)
|
|
|
9,165
|
|
|
|
7,734
|
|
|
|
5,275
|
|
|
|
3,405
|
|
|
|
2,945
|
|
|
|
7,397
|
|
|
|
35,921
|
|
Ground leases(4)
|
|
|
95
|
|
|
|
95
|
|
|
|
95
|
|
|
|
95
|
|
|
|
95
|
|
|
|
1,997
|
|
|
|
2,472
|
|
Operating leases(5)
|
|
|
21
|
|
|
|
5
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,590
|
|
|
$
|
44,655
|
|
|
$
|
52,395
|
|
|
$
|
15,097
|
|
|
$
|
4,496
|
|
|
$
|
57,219
|
|
|
$
|
198,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes notes payable under the Companys Credit Facility |
|
(2) |
|
As collateral for performance on a mortgage note payable, the
Company is contingently liable under a standby letter of credit,
which also reduces the availability under the Credit Facility |
|
(3) |
|
Assumes one-month LIBOR of 4.39% and Prime Rate of 7.25% |
|
(4) |
|
Substantially all of the ground leases effectively limit our
control over various aspects of the operation of the applicable
property, restrict our ability to transfer the property and
allow the lessor the right of first refusal to purchase the
building and improvements. All of the ground leases provide for
the property to revert to the lessor for no consideration upon
the expiration or earlier termination of the ground lease. |
|
(5) |
|
Payments under operating lease agreements relate to various of
our properties equipment leases. The future minimum lease
commitments under these leases are as indicated above. |
42
Off-Balance
Sheet Arrangements
The Company guarantees debt in connection with certain of its
development activities, including joint ventures. The Company
has guaranteed, in the event of a default, the mortgage notes
payable for two unconsolidated real estate joint ventures. An
initial liability of $0.1 million has been recorded for
these guarantees using expected present value measurement
techniques. For one mortgage note payable with a principal
balance of $11.1 million at December 31, 2005, the
guarantee will be released upon completion of the project and
commencement of rental income, which is expected to occur in the
first quarter of 2006. The other guarantee, with a principal
balance of $9.2 million at December 31, 2005, will be
released upon the full repayment of the mortgage note payable,
which matures in December 2006. The mortgages are collateralized
by property and the collateral will revert to the guarantor in
the event the guarantee is performed.
As the Company has never had to perform on debt that the Company
has guaranteed, the probability the Company will have to perform
on any guarantees in the future is minimal and therefore the
Company does not expect the Companys guarantees to have a
material impact on the Companys financial statements.
Real
Estate Taxes
The Companys leases generally require the tenants to be
responsible for all real estate taxes.
Inflation
Inflation in the United States has been relatively low in recent
years and did not have a material impact on the results of
operations for the periods shown in the consolidated and
combined financial statements. Although the impact of inflation
has been relatively insignificant in recent years, it remains a
factor in the United States economy and may increase the cost of
acquiring or replacing properties.
Seasonality
The Company does not consider its business to be subject to
material seasonality fluctuations.
Recent
Accounting Pronouncements
In June 2005, the FASB ratified the EITFs consensus on
Issue
No. 04-5
Determining 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
(EITF 04-5).
This consensus establishes the presumption that general partners
in a limited partnership control that limited partnership
regardless of the extent of the general partners ownership
interest in the limited partnership. The consensus further
establishes that the rights of the limited partners can overcome
the presumption of control by the general partners, if the
limited partners have either (a) the substantive ability to
dissolve (liquidate) the limited partnership or otherwise remove
the general partners without cause or (b) substantive
participating rights. Whether the presumption of control is
overcome is a matter of judgment based on facts and
circumstances, for which the consensus provides additional
guidance. This consensus is currently applicable for new or
modified partnerships, and will otherwise be applicable to
existing partnerships in 2006. This consensus applies to limited
partnerships or similar entities, such as limited liability
companies that have governing provisions that are the functional
equivalent of a limited partnership. The Company is currently
evaluating if any of the Companys unconsolidated real
estate joint ventures will need to be consolidated in accordance
with
EITF 04-5.
However, the Company does not expect any impact to net income
(loss) should any unconsolidated real estate joint ventures be
required to be consolidated.
In March 2005, the FASB issued Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations,
and Interpretation of FASB Statement No. 143
(FIN 47). FIN 47 refers to a legal
obligation to perform an asset retirement activity in which the
timing
and/or
method of settlement are conditional on a future event that may
or may not be within the control of the entity. An entity is
required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. The fair value of a
liability for the conditional asset retirement obligation should
be recognized when incurred, generally upon acquisition,
construction, or development and through the normal operation of
the asset. This interpretation is
43
effective for fiscal year ended December 31, 2005 and its
adoption did not have any effect on the Companys
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123R
(Revised), Share-Based Payment
(SFAS 123R). SFAS 123R is a revision of
SFAS No. 123, Accounting for Stock Based
Compensation, and supersedes APB 25. Among other
items, SFAS 123R eliminates the use of APB 25 and the
intrinsic value method of accounting and requires companies to
recognize the cost of employee services received in exchange for
awards of share based payments, based on the grant date fair
value of those awards, in the financial statements. The Company
adopted SFAS 123R effective November 1, 2005. The
Predecessor did not issue any share based payments.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
The Companys future income, cash flows and fair values
relevant to financial instruments are dependent upon prevalent
market interest rates. Market risk refers to the risk of loss
from adverse changes in market prices and interest rates. The
Company uses some derivative financial instruments to manage, or
hedge, interest rate risks related to the Companys
borrowings. The Company does 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 December 31, 2005, the Company had approximately
$159.5 million of consolidated debt outstanding.
Approximately $58.1 million, or 36.4%, of the
Companys total consolidated debt was variable rate debt
that are not subject to variable to fixed rate interest rate
swap agreements. Approximately $101.4 million, or 63.6%, of
the Companys total indebtedness was subject to fixed
interest rates, including variable rate debt that is subject to
variable to fixed rate swap agreements.
If LIBOR were to increase by 100 basis points, the increase
in interest expense on the Companys variable rate debt
would decrease future earnings and cash flows by approximately
$0.6 million. Interest rate risk amounts were determined by
considering the impact of hypothetical interest rates on the
Companys financial instruments. These analyses do not
consider the effect of any change in overall economic activity
that could occur in that environment. Further, in the event of a
change of that magnitude, the Company may take actions to
further mitigate the Companys exposure to the change.
However, due to the uncertainty of the specific actions that
would be taken and their possible effects, these analyses assume
no changes in the Companys financial structure.
44
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
INDEX TO THE CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
|
74
|
|
|
|
|
76
|
|
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cogdell Spencer Inc.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheet of
Cogdell Spencer Inc. and subsidiaries (the Company)
as of December 31, 2005 and the combined balance sheet of
Cogdell Spencer Inc. Predecessor, as defined in note 1 to
the consolidated and combined financial statements, as of
December 31, 2004, and the related consolidated statements
of operations, stockholders equity, and cash flows of
Cogdell Spencer Inc. and subsidiaries for the period from
November 1, 2005 (commencement of operations) through
December 31, 2005, the related combined statements of
operations, owners deficit and cash flows of Cogdell
Spencer Inc. Predecessor for the period from January 1,
2005 through October 31, 2005 and for the years ended
December 31, 2004 and 2003. Our audit for the year ended
December 31, 2005, also included the financial statement
schedule listed in the Index at Item 8. These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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, such consolidated and combined financial
statements present fairly, in all material respects, the
consolidated financial position of Cogdell Spencer Inc. and
subsidiaries at December 31, 2005 and the combined
financial position of Cogdell Spencer Inc. Predecessor at
December 31, 2004 , the consolidated results of operations
and cash flows of Cogdell Spencer Inc. and subsidiaries for the
period from November 1, 2005 (commencement of operations)
through December 31, 2005, the combined results of
operations and cash flows of Cogdell Spencer Inc. Predecessor
for the period from January 1, 2005 through
October 31, 2005 and for the years ended December 31,
2004 and 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the
information set forth therein.
/s/ DELOITTE &
TOUCHE LLP
Charlotte, North Carolina
March 30, 2006
46
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Predecessor
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
ASSETS
|
Real estate properties:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
17,047
|
|
|
$
|
10,947
|
|
Buildings and improvements
|
|
|
243,090
|
|
|
|
234,516
|
|
Construction in progress
|
|
|
1,099
|
|
|
|
6,049
|
|
Less: Accumulated depreciation
|
|
|
(2,713
|
)
|
|
|
(95,003
|
)
|
|
|
|
|
|
|
|
|
|
Total real estate properties, net
|
|
|
258,523
|
|
|
|
156,509
|
|
Cash and cash equivalents
|
|
|
9,571
|
|
|
|
13,459
|
|
Restricted cash
|
|
|
779
|
|
|
|
3,162
|
|
Investment in capital lease
|
|
|
6,499
|
|
|
|
1,623
|
|
Acquired above market leases, net
of accumulated amortization of $25 in 2005
|
|
|
852
|
|
|
|
|
|
Acquired in place lease value and
deferred leasing costs, net of accumulated amortization of
$1,399 in 2005 and $7 in 2004
|
|
|
21,220
|
|
|
|
280
|
|
Acquired ground leases, net of
accumulated amortization of $15 in 2005
|
|
|
2,919
|
|
|
|
|
|
Deferred financing costs, net of
accumulated amortization of $31 in 2005 and $1,941 in 2004
|
|
|
913
|
|
|
|
1,418
|
|
Goodwill
|
|
|
2,875
|
|
|
|
|
|
Other assets
|
|
|
4,331
|
|
|
|
1,974
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
308,482
|
|
|
$
|
178,425
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS AND OWNERS EQUITY
|
Notes payable under line of credit
|
|
|
19,600
|
|
|
|
1,513
|
|
Mortgage loans
|
|
|
140,634
|
|
|
|
213,305
|
|
Accounts payable and accrued
liabilities
|
|
|
4,699
|
|
|
|
7,712
|
|
Acquired below market leases, net
of accumulated amortization of $164 in 2005
|
|
|
2,893
|
|
|
|
|
|
Interest rate swap agreements
|
|
|
170
|
|
|
|
2,322
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
167,996
|
|
|
|
224,852
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Minority interests in operating
partnership
|
|
|
62,018
|
|
|
|
|
|
Stockholders and
owners equity (deficit):
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value; 50,000 shares authorized, none issued or outstanding
|
|
|
|
|
|
|
|
|
Common Stock; $0.01 par
value; 200,000 shares authorized, 8,000 shares issued
and outstanding
|
|
|
80
|
|
|
|
|
|
Additional paid-in capital
|
|
|
86,154
|
|
|
|
|
|
Unamortized restricted stock
compensation
|
|
|
(299
|
)
|
|
|
|
|
Accumulated deficit
|
|
|
(7,467
|
)
|
|
|
|
|
Predecessors owners
deficit
|
|
|
|
|
|
|
(46,427
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders and
owners equity (deficit)
|
|
|
78,468
|
|
|
|
(46,427
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders and owners equity
|
|
$
|
308,482
|
|
|
$
|
178,425
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated and combined financial statements
47
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Predecessor
|
|
|
|
November 1, 2005 -
|
|
|
January 1, 2005 -
|
|
|
For the Year Ended
December 31,
|
|
|
|
December 31, 2005
|
|
|
October 31, 2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share
amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$
|
7,044
|
|
|
$
|
14,270
|
|
|
$
|
15,699
|
|
|
$
|
16,070
|
|
Rental related
party
|
|
|
|
|
|
|
21,716
|
|
|
|
24,958
|
|
|
|
22,923
|
|
Fee revenue
|
|
|
221
|
|
|
|
1,450
|
|
|
|
2,364
|
|
|
|
1,361
|
|
Expense reimbursements
|
|
|
94
|
|
|
|
565
|
|
|
|
840
|
|
|
|
806
|
|
Interest and other income
|
|
|
127
|
|
|
|
879
|
|
|
|
843
|
|
|
|
849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
7,486
|
|
|
|
38,880
|
|
|
|
44,704
|
|
|
|
42,009
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating
|
|
|
2,596
|
|
|
|
13,124
|
|
|
|
14,837
|
|
|
|
14,116
|
|
General and administrative
|
|
|
7,791
|
|
|
|
5,130
|
|
|
|
3,076
|
|
|
|
2,929
|
|
Depreciation
|
|
|
2,727
|
|
|
|
8,421
|
|
|
|
9,550
|
|
|
|
9,710
|
|
Amortization
|
|
|
1,415
|
|
|
|
59
|
|
|
|
70
|
|
|
|
87
|
|
Interest
|
|
|
1,512
|
|
|
|
8,275
|
|
|
|
9,067
|
|
|
|
11,422
|
|
Loss from early extinguishment of
debt
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
16,144
|
|
|
|
35,009
|
|
|
|
36,600
|
|
|
|
38,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
before equity in earnings (loss) on unconsolidated real estate
partnerships and minority interests in operating
partnership
|
|
|
(8,658
|
)
|
|
|
3,871
|
|
|
|
8,104
|
|
|
|
3,745
|
|
Equity in earnings (loss) on
unconsolidated real estate partnerships
|
|
|
3
|
|
|
|
(47
|
)
|
|
|
(60
|
)
|
|
|
(74
|
)
|
Minority interests in operating
partnership
|
|
|
3,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,600
|
)
|
|
$
|
3,824
|
|
|
$
|
8,044
|
|
|
$
|
3,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares basic and diluted
|
|
|
7,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated and combined financial statements
48
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
CONSOLIDATED
AND COMBINED STATEMENTS OF STOCKHOLDERS AND
OWNERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
Restricted
|
|
|
|
|
|
Predecessors
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Accumulated
|
|
|
Owners
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance at December 31,
2002
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(43,689
|
)
|
|
$
|
(43,689
|
)
|
|
|
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
592
|
|
|
|
592
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,661
|
)
|
|
|
(7,661
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,671
|
|
|
|
3,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,087
|
)
|
|
|
(47,087
|
)
|
|
|
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,744
|
|
|
|
6,744
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,128
|
)
|
|
|
(14,128
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,044
|
|
|
|
8,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,427
|
)
|
|
|
(46,427
|
)
|
|
|
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
320
|
|
|
|
320
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,250
|
)
|
|
|
(9,250
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,824
|
|
|
|
3,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31,
2005
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(51,533
|
)
|
|
$
|
(51,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of
costs and adjusted for
EITF 94-2
historical cost basis
|
|
|
7,942
|
|
|
$
|
79
|
|
|
$
|
85,516
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
85,595
|
|
|
|
|
|
Issuance of restricted stock
grants, net of minority interests
|
|
|
58
|
|
|
|
1
|
|
|
|
638
|
|
|
|
(639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock vested at
Offering, net of minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
327
|
|
|
|
|
|
Amortization of restricted stock
compensation, net of minority interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,867
|
)
|
|
|
|
|
|
|
(1,867
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,600
|
)
|
|
|
|
|
|
|
(5,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2005
|
|
|
8,000
|
|
|
$
|
80
|
|
|
$
|
86,154
|
|
|
$
|
(299
|
)
|
|
$
|
(7,467
|
)
|
|
$
|
|
|
|
$
|
78,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated and combined financial statements
49
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Predecessor
|
|
|
|
November 1, 2005 -
|
|
|
January 1, 2005 -
|
|
|
For the Year Ended
December 31,
|
|
|
|
December 31, 2005
|
|
|
October 31, 2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,600
|
)
|
|
$
|
3,824
|
|
|
$
|
8,044
|
|
|
$
|
3,671
|
|
Adjustments to reconcile net income
(loss) to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in operating
partnership
|
|
|
(3,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of real estate
properties
|
|
|
2,713
|
|
|
|
8,325
|
|
|
|
9,463
|
|
|
|
9,615
|
|
Depreciation of corporate
furniture, fixtures and equipment
|
|
|
14
|
|
|
|
96
|
|
|
|
87
|
|
|
|
95
|
|
Amortization of acquired ground
leases, acquired in place lease value and deferred leasing costs
|
|
|
1,415
|
|
|
|
59
|
|
|
|
70
|
|
|
|
87
|
|
Amortization of acquired above
market leases and acquired below market leases, net
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt premium
|
|
|
(49
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
Amortization of deferred finance
costs
|
|
|
31
|
|
|
|
411
|
|
|
|
485
|
|
|
|
618
|
|
Amortization of restricted stock
compensation
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on unconsolidated real
estate partnerships
|
|
|
(3
|
)
|
|
|
47
|
|
|
|
60
|
|
|
|
74
|
|
Change in fair value of interest
rate swap agreements
|
|
|
(14
|
)
|
|
|
(2,436
|
)
|
|
|
(2,874
|
)
|
|
|
(652
|
)
|
Compensation expense for fully
vested equity grants
|
|
|
6,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-off of debt premium upon
extinguishment of debt
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
137
|
|
|
|
(2,112
|
)
|
|
|
(469
|
)
|
|
|
(181
|
)
|
Accounts payable and accrued
expenses
|
|
|
(147
|
)
|
|
|
2,138
|
|
|
|
1,223
|
|
|
|
(589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
1,635
|
|
|
|
10,312
|
|
|
|
16,089
|
|
|
|
12,738
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid in Formation
Transactions, net of cash assumed
|
|
|
(27,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition and development of real
estate properties
|
|
|
(2,715
|
)
|
|
|
(6,067
|
)
|
|
|
(13,182
|
)
|
|
|
(7,581
|
)
|
Proceeds from sale of real estate
properties and capital lease
|
|
|
51
|
|
|
|
61
|
|
|
|
73
|
|
|
|
556
|
|
Advances to unconsolidated real
estate partnerships
|
|
|
|
|
|
|
(82
|
)
|
|
|
(209
|
)
|
|
|
(170
|
)
|
Distributions received from
unconsolidated real estate partnerships
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
Decrease (increase) in restricted
cash
|
|
|
2,234
|
|
|
|
149
|
|
|
|
(503
|
)
|
|
|
(328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(27,462
|
)
|
|
|
(5,939
|
)
|
|
|
(13,767
|
)
|
|
|
(7,523
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from mortgage notes payable
|
|
|
4,550
|
|
|
|
1,987
|
|
|
|
32,084
|
|
|
|
11,600
|
|
Repayments of mortgage notes payable
|
|
|
(71,357
|
)
|
|
|
(4,154
|
)
|
|
|
(19,264
|
)
|
|
|
(11,012
|
)
|
Proceeds from line of credit
|
|
|
19,600
|
|
|
|
3,198
|
|
|
|
|
|
|
|
498
|
|
Repayments to line of credit
|
|
|
(4,711
|
)
|
|
|
|
|
|
|
(525
|
)
|
|
|
|
|
Equity contributions to Predecessor
entities
|
|
|
|
|
|
|
142
|
|
|
|
3,349
|
|
|
|
592
|
|
Net proceeds from sale of common
stock
|
|
|
91,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and distributions
|
|
|
(2,886
|
)
|
|
|
(7,026
|
)
|
|
|
(13,143
|
)
|
|
|
(7,661
|
)
|
Termination of interest rate swap
agreement
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing costs
|
|
|
(944
|
)
|
|
|
(10
|
)
|
|
|
(621
|
)
|
|
|
(356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
35,398
|
|
|
|
(5,863
|
)
|
|
|
1,880
|
|
|
|
(6,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
9,571
|
|
|
|
(1,490
|
)
|
|
|
4,202
|
|
|
|
(1,124
|
)
|
Balance at beginning of period
|
|
|
|
|
|
|
13,459
|
|
|
|
9,257
|
|
|
|
10,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
9,571
|
|
|
$
|
11,969
|
|
|
$
|
13,459
|
|
|
$
|
9,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of
capitalized interest
|
|
$
|
1,672
|
|
|
$
|
10,464
|
|
|
$
|
12,045
|
|
|
$
|
12,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions (See Note 4 for
purchase price allocation):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and limited
partnership units issued in connection with the acquisition of
real estate properties, net of
EITF 94-2
historical cost basis adjustment
|
|
$
|
55,773
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Debt assumed with purchase of
properties
|
|
|
212,393
|
|
|
|
|
|
|
|
|
|
|
|
2,886
|
|
Assumption of accounts payable and
accrued expenses and interest rate swap agreements
|
|
|
5,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumption of construction in
progress, restricted cash, and other assets
|
|
|
5,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions receivable
|
|
|
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
Accrued distributions
|
|
|
|
|
|
|
2,348
|
|
|
|
|
|
|
|
|
|
Negative carrying amount in
unconsolidated real estate partnership distributed to owners
|
|
|
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
Property contribution from member
|
|
|
|
|
|
|
|
|
|
|
3,395
|
|
|
|
|
|
Property distribution to member
|
|
|
|
|
|
|
|
|
|
|
985
|
|
|
|
|
|
See notes to consolidated and combined financial statements
50
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
(Dollars in thousands, except per share amounts)
|
|
1.
|
Organization
and Ownership
|
Cogdell Spencer Inc. Predecessor (the Predecessor)
was engaged in the business of owning, developing, redeveloping,
acquiring and managing medical office buildings and other
healthcare related facilities (the Medical
Properties) primarily in the southeastern United States.
The Predecessor was not a legal entity, but represented a
combination of certain real estate entities based on common
management. During all periods presented in the accompanying
combined financial statements of the Predecessor it had the
responsibility for the
day-to-day
operations of such combined entities. Cogdell Spencer Advisors,
Inc. had management agreements with other entities that have not
been combined with the Predecessor entities as other partners or
members are not contributing their interests as part of the
formation transactions discussed below.
James W. Cogdell (the Founder) formed Cogdell
Spencer Inc. (the Company) with the intent to
qualify as a real estate investment trust (a REIT)
under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended, and to effect an initial public offering
(the Offering) of the common stock of the Company.
The Company completed its initial public offering on
November 1, 2005. The Offering resulted in the sale of
5,800,000 shares of common stock at a price of
$17.00 per share, generating gross proceeds to the Company
of $98,600. On November 29, 2005, an additional
300,000 shares of common stock were sold at $17.00 per
share as a result of the underwriters exercising their
over-allotment option, generating gross proceeds to the Company
of $5,100. The aggregate proceeds to the Company, net of
underwriters discounts, commissions and financial advisory
fees and other offering costs, were approximately $89,900.
On November 1, 2005, concurrent with the consummation of
the Offering, the Company and a newly formed majority-owned
limited partnership, Cogdell Spencer LP (the Operating
Partnership), and its taxable REIT subsidiary, together
with the partners and members of the affiliated partnerships and
limited liability companies of the Predecessor, engaged in
certain formation transactions (the Formation
Transactions). The Operating Partnership received a
contribution of interests in the Predecessor in exchange for
units of limited partnership interest in the Operating
Partnership, shares of the Companys common stock
and/or cash
(see Note 4). Substantially all of the operations of the
Company are carried out through the Operating Partnership. A
wholly-owned subsidiary of the Company is acting as sole general
partner of the Operating Partnership.
The Company, through its Operating Partnership, is a
self-advised, self-managed business engaged in the ownership,
development, redevelopment, acquisition and management of
medical office buildings and other healthcare related facilities
in the United States. The Company and the Operating Partnership
had no operations prior to the Offering.
51
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The Predecessor consists of Cogdell Spencer Advisors, Inc., and
the limited liability companies and partnerships as shown in the
following chart:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Entity
|
|
Property Location
|
|
Property Type
|
|
Properties
|
|
|
Augusta Medical Partners, LLC
|
|
Augusta, GA
|
|
Medical Office
|
|
|
4
|
|
Baptist Northwest Limited
Partnership
|
|
Columbia, SC
|
|
Medical Office
|
|
|
1
|
|
Barclay Downs Associates,
LLC/Matthews
Land Group, LLC
|
|
Charlotte, NC
|
|
Corporate Offices
|
|
|
1
|
|
Beaufort Medical Plaza, LLC
|
|
Beaufort, SC
|
|
Medical Office
|
|
|
1
|
|
Cabarrus Medical Partners, LLC
|
|
Greater Concord, NC
|
|
Medical Office
|
|
|
5
|
|
Cabarrus POB, LLC
|
|
Concord, NC
|
|
Medical Office
Wellness, Medical
|
|
|
1
|
|
Cogdell Investors (Birkdale), LLC
|
|
Huntersville, NC
|
|
Office
|
|
|
1
|
|
Cogdell Investors (Mallard), LLC
|
|
Charlotte, NC
|
|
Medical Office
|
|
|
1
|
|
Cogdell Investors
(Birkdale II), LLC
|
|
Huntersville, NC
|
|
Retail Center
|
|
|
1
|
|
Copperfield MOB, LLC
|
|
Concord, NC
|
|
Medical Office
|
|
|
1
|
|
East Jefferson Medical Office
Building
Limited Partnership
|
|
Metairie, LA
|
|
Medical Office
|
|
|
1
|
|
East Jefferson Medical Specialty
Building
Limited Partnership
|
|
Metairie, LA
|
|
Medical Office
Medical Office,
|
|
|
1
|
|
East Rocky Mount Kidney Center, LLC
|
|
Rocky Mount, NC
|
|
Kidney Dialysis
Medical Office,
|
|
|
1
|
|
Franciscan Development Company, LLC
|
|
Ashland, KY
|
|
Surgery
|
|
|
1
|
|
Gaston MOB, LLC
|
|
Gastonia, NC
|
|
Medical Office
|
|
|
1
|
|
HMOB Associates Limited Partnership
|
|
Columbia, SC
|
|
Medical Office
|
|
|
1
|
|
Medical Arts Center of
Orangeburg
General Partnership
|
|
Orangeburg, SC
|
|
Medical Office
|
|
|
1
|
|
Medical Investors, LLC, Medical
Investors
|
|
Charlotte, NC and
|
|
|
|
|
|
|
I, LLC, Medical
Investors III, LLC
|
|
Charleston, SC
|
|
Medical Office
|
|
|
5
|
|
Medical Park Three Limited
Partnership
|
|
Columbia, SC
|
|
Medical Office
|
|
|
1
|
|
Mulberry Medical Park Limited
Partnership
|
|
Lenoir, NC
|
|
Medical Office
|
|
|
1
|
|
Providence Medical Office
Building, LLC
|
|
Columbia, SC
|
|
Medical Office
|
|
|
3
|
|
River Hills Medical Associates, LLC
|
|
Little River, SC
|
|
Medical Office
|
|
|
1
|
|
Rocky Mount Kidney Center
Limited
Partnership
|
|
Rocky Mount, NC
|
|
Medical Office,
Kidney Dialysis
|
|
|
1
|
|
Rocky Mount MOB, LLC
|
|
Rocky Mount, NC
|
|
Medical Office
|
|
|
1
|
|
Rocky Mount Medical Park
Limited
Partnership
|
|
Rocky Mount, NC
|
|
Medical Office
|
|
|
1
|
|
Roper MOB, LLC
|
|
Charleston, SC
|
|
Medical Office
|
|
|
1
|
|
Rowan OSC Investors, LLC
|
|
Salisbury, NC
|
|
Surgery Center
|
|
|
1
|
|
St. Francis Community MOB, LLC
|
|
Greenville, SC
|
|
Medical Office
|
|
|
2
|
|
St. Francis Medical Plaza, LLC
|
|
Greenville, SC
|
|
Medical Office
|
|
|
2
|
|
West Medical Office I, LLC
|
|
Charleston, SC
|
|
Medical Office
|
|
|
1
|
|
52
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The accompanying consolidated and combined financial statements
have been prepared in conformity with accounting principles
generally accepted in the United States (GAAP) and
represent the assets and liabilities and operating results of
the Company and the Predecessor. The consolidated financial
statements include the Companys accounts, its wholly-owned
subsidiaries, as well as the Operating Partnership and its
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation and
combination. The accounting policies of the Predecessor and the
Company are consistent with each other, except as noted.
Use of
Estimates in Financial Statements
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect amounts reported in the financial statements and
accompanying notes. Significant estimates and assumptions are
used by management in determining the useful lives of real
estate properties and the initial valuations and underlying
allocations of purchase price in connection with real estate
property acquisitions. Actual results may differ from those
estimates.
Revenue
Recognition
The Company recognizes revenues related to leasing activities at
properties owned by the Company, management fees related to
managing third party properties, development fees related to the
general oversight of medical property development, other
advisory fees, and operating expense reimbursement for payroll
related and other expenses incurred by third party properties
managed by the Company.
Rental income related to non-cancelable operating leases is
recognized as earned over the life of the lease agreements on a
straight-line basis. Rental income recognized on a straight-line
basis for certain lease agreements results in recognized revenue
exceeding amounts contractually due from tenants. These leases
generally contain provisions under which the tenants reimburse
the Company for a portion of property operating expenses and
real estate taxes. At times the Company will receive cash
payments at the inception of the lease for tenant improvements
and these amounts are amortized into rental revenue over the
life of the lease. These amounts are included in Accounts
payable and accrued expenses in the consolidated and
combined balance sheets. The Company monitors the
creditworthiness of its tenants on a regular basis and maintains
an allowance for doubtful accounts. Such amount is immaterial to
the financial statements.
The Company recognizes sales of real estate properties upon
closing. Payments received from purchasers prior to closing are
recorded as deposits. Profit on real estate sold is recognized
using the full accrual method upon closing when the
collectibility of the sales price is reasonably assured and the
Company is not obligated to perform significant activities after
the sale. This includes the buyers initial and continuing
investments being adequate to demonstrate a commitment to pay
for the property and the Company not having substantial
continuing involvement whereby the usual risks and rewards of
ownership would not be transferred to the buyer. Profit may be
deferred in whole or part until the sales meet the requirements
of profit recognition on sales of real estate under Financial
Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 66,
Accounting for Sales of Real Estate
(SFAS No. 66).
The Company receives fees for property management and
development and consulting services provided from time to time
to third parties which are reflected as fee revenue. Management
fees are generally based on a percentage of revenues for the
month as defined in the related property management agreements.
Development and advisory fees are recorded based on a percentage
of completion method using managements best estimate of
time and costs to complete projects. There are no significant
over-billed or under-billed amounts and changes in estimates
during the three years ended December 31, 2005 have not
been material. Other income on the Companys
53
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
statement of operations generally includes income incidental to
the operations of the Company and is recognized when earned.
Interest income includes the amortization on unearned income
related to a sales-type capital lease.
The Company pays certain payroll and related costs related to
the operations of third party properties that are managed by the
Company. Under terms of the related management agreements, these
costs are reimbursed by the third party property owners. The
amounts billed to the third party owners are recognized as
revenue in accordance with FASB Emerging Issues Task Force
(EITF) Abstract
No. 01-14,
Income Statement Characterization of Reimbursements
Received for Out of Pocket Expenses Incurred.
Fee revenue for the year ended December 31, 2004, includes
$617 of revenue related to a project where services were
performed prior to 2004 but collectibility was not assured.
During 2004, payment for services performed was received and the
revenue has been reflected as fee revenue in 2004.
Income
Taxes
The Company will elect to be taxed as a REIT under
sections 856 through 860 of the Internal Revenue Code of
1986, as amended, when it files its federal income tax return
for December 31, 2005. REITs are subject to a number of
organizational and operational requirements, including a
requirement that 90% of ordinary taxable income to be
distributed. As a REIT, the Company will generally not be
subject to federal income tax to the extent that it meets the
organization and operational requirements and distributions
exceed taxable income. For the year ended December 31,
2005, the Company met the organization and operational
requirements and distributions exceeded net taxable income.
Accordingly, no provision has been made for federal and state
income taxes.
Cogdell Spencer Advisors, LLC (CSA, LLC),
wholly-owned by the Operating Partnership, has elected to be a
Taxable REIT Subsidiary. As a Taxable REIT Subsidiary, the
operations of CSA, LLC are generally subject to corporate income
taxes. For the year ended December 31, 2005, CSA, LLC
incurred a net operating loss for income tax purposes. The
Company has recorded a full valuation allowance against the net
deferred tax assets and believes that these assets and related
valuation allowances are immaterial to the accompanying
consolidated financial statements.
The distribution of $0.2333 for the period November 1, 2005
through December 31, 2005 and paid December 27, 2005,
was classified for income tax purposes, and to be reported to
stockholders, as five percent (5%) taxable ordinary dividend and
ninety-five (95%) return of capital (non-taxable).
No provision for income taxes is included in the
Predecessors combined financial statements, as each
shareholder, partner or member is individually responsible for
reporting its respective share of the S-Corporations,
partnerships or limited liability companys taxable
income or loss in its income tax returns.
Comprehensive
Income or Loss
The Company did not have any items of comprehensive income or
loss other than net income in the three years ended
December 31, 2005.
Cash
and Cash Equivalents
The Company considers all short-term investments with maturities
of three months or less when purchased to be cash equivalents.
Restricted cash and short-term investments are excluded from
cash for the purpose of preparing the combined statements of
cash flows.
The Company maintains cash balances in various banks. At times
the amounts of cash may exceed the $100 amount insured by the
FDIC. The Company does not believe it is exposed to any
significant credit risk on cash and cash equivalents.
54
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Restricted
Cash
Restricted cash includes escrow accounts held by lenders.
Restricted cash also includes proceeds from property sales
deposited with a qualified intermediary in accordance with
like-kind exchange income tax rules and regulations.
Real
Estate Properties
Land, buildings and improvements, and furniture, fixtures and
equipment are recorded at cost. For developed properties, direct
and indirect costs that clearly relate to projects under
development are capitalized in accordance with FASB
SFAS No. 67, Accounting for Costs and Initial
Rental Operations of Real Estate Projects. Costs include
construction costs, professional services such as architectural
and legal costs, travel expenses, capitalized interest and
direct payroll and other acquisition costs. Capitalization of
interest ceases when the property is ready for its intended use,
which is generally near the date that a certificate of occupancy
is obtained.
Depreciation and amortization is computed using the
straight-line method for financial reporting purposes. Buildings
and improvements are depreciated over 20 to 50 years.
Tenant improvement costs, which are included in building and
improvements in the consolidated and combined balance sheets,
are depreciated over the shorter of (i) the related
remaining lease term or (ii) the life of the improvement.
Corporate furniture, fixtures and equipment, which are included
in Other assets, are depreciated over three to seven
years.
Acquisitions of properties are accounted for utilizing the
purchase method in accordance with FASB SFAS No. 141,
Business Combinations, and accordingly the purchase
cost is allocated to tangible and intangible assets and
liabilities based on their relative fair values. The fair value
of tangible assets acquired is determined by valuing the
property as if it were vacant, applying methods similar to those
used by independent appraisers of income-producing property. The
resulting value is then allocated to land, buildings, tenant
improvements, and furniture, fixtures and equipment based on
managements determination of the relative fair value of
these assets. The assumptions used in the allocation of fair
values to assets acquired are based on managements best
estimates at the time of evaluation.
Fair value is assigned to above-market and below-market leases
based on the difference between (a) the contractual amounts
to be paid by the tenant based on the existing lease and
(b) managements estimate of current market lease
rates for the corresponding in-place leases, over the remaining
terms of the in-place leases. Capitalized above-market lease
amounts are amortized as a decrease to rental revenue over the
remaining terms of the respective leases. Capitalized
below-market lease amounts are amortized as an increase to
rental revenue over the remaining terms of the respective
leases. If a tenant vacates its space prior to the contractual
termination of the lease and no rental payments are being made
on the lease, any unamortized balance of the related intangible
will be written off.
The aggregate value of other acquired intangible assets consists
of acquired in-place leases and tenant relationships. The fair
value allocated to acquired in-place leases consists of a
variety of components including, but not necessarily limited to:
(a) the value associated with avoiding the cost of
originating the acquired in-place leases (i.e. the market cost
to execute a lease, including leasing commissions and legal
fees, if any); (b) the value associated with lost revenue
related to tenant reimbursable operating costs estimated to be
incurred during the assumed
lease-up
period (i.e. real estate taxes, insurance and other operating
expenses); (c) the value associated with lost rental
revenue from existing leases during the assumed
lease-up
period; and (d) the value associated with any other
inducements to secure a tenant lease.
As required by SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets
(SFAS No. 144), the Company assesses the
potential for impairment of its long-lived assets, including
real estate properties, whenever events occur or a change in
circumstances indicate that the recorded value might not be
fully recoverable. Management determines whether impairment in
value has occurred by comparing the estimated future
undiscounted cash flows expected from the use and eventual
disposition of the asset to its carrying value. If
55
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
the undiscounted cash flows do not exceed the carrying value,
the real estate is adjusted to fair value and an impairment loss
is recognized.
SFAS No. 144 requires that the operations and gains
and losses associated with sales of components of an
entity, as defined in SFAS No. 144, be
reclassified and presented as discontinued operations. The
Company generally has no plans to actively engage in the
disposition of any specific real estate property or group of
real estate properties, but does from time to time dispose of
properties in the normal course of business. For the three years
ended December 31, 2005, there were no dispositions.
Repairs,
Maintenance and Major Improvements
The costs of ordinary repairs and maintenance are charged to
operations when incurred. Major improvements that extend the
life of an asset are capitalized and depreciated over the
remaining useful life of the asset. In some circumstances
lenders require the Company to maintain a reserve account for
future repairs and capital expenditures. These amounts are
classified as restricted cash.
Capitalization
of Interest
The Company capitalizes interest costs on borrowings incurred
during the new construction or redevelopment of qualifying
assets. Capitalized interest is added to the cost of the
underlying assets and is depreciated over the useful lives of
the assets. For the years ended December 31, 2005, 2004 and
2003, the Company capitalized interest of $24, $52, and $13,
respectively, in connection with various development projects.
Tenant
Receivables
Tenant receivables are recorded and carried at the amount
billable per the applicable lease agreement, less any allowance
for uncollectible accounts. An allowance for uncollectible
accounts is made when collection of the full amounts is no
longer considered probable. There are allowances for
uncollectible accounts for each period presented which are not
significant. Tenant receivables and straight-line rent
adjustments are recorded in Other assets in the
accompanying consolidated and combined balance sheets.
Investment
in Capital Lease
Investment in capital lease consists of a building on a
sales-type capital lease. The Company recognizes the sale in
accordance with SFAS No. 66. Unearned income is
amortized into interest income using a method that is not
materially different from a method that produces a constant
periodic rate of return on the net investment in the lease. The
interest income is recorded in Interest and other
income.
Deferred
Financing Costs
Deferred financing costs include fees and costs incurred in
conjunction with long-term financings and are amortized over the
terms of the related debt using the straight-line method, which
approximates the effective interest method. Upon repayment of or
in conjunction with a material change in the terms of the
underlying debt agreement, any unamortized costs are charged to
earnings. For the year ended December 31, 2003, the
Predecessor expensed $180 of deferred finance costs related to
material changes in debt agreements. The expense is included in
Interest in the statements of operations.
Unconsolidated
Real Estate Partnerships
The Company reviews its interests in non-consolidated entities
to determine if the entitys assets, liabilities,
noncontrolling interests and results of activities should be
consolidated by an entity that is included in the consolidated
financial statements in accordance with FASB Interpretation
No. 46 (revised December 2003), Consolidation of
Variable Interest Entities (FIN 46R). The
Company records investments in which it exercises
56
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
significant influence under the equity method in accordance with
Accounting Principles Board (APB) Opinion
No. 18, The Equity Method of Accounting for Common
Stock, and AICPA Statement of Position 78-9,
Accounting for Investments in Real Estate Ventures.
Equity method investment balances totaling $831 at
December 31, 2005 are included in Other assets
in the consolidated balance sheet. There were no equity
investment balances at December 31, 2004. Included in
Other assets are advances to equity method investees
of $695 at December 31, 2004. There were no such advances
at December 31, 2005. In circumstances where the real
estate partnerships have distributions in excess of the
investment and accumulated earnings or experienced net losses in
excess of the investment and the Company has guaranteed debt of
the entity or otherwise intends to provide financial support,
the Company has reduced the carrying value of its investment
below zero and recorded a liability in Accounts payable
and accrued expenses. Services performed for real estate
joint ventures and capitalized by real estate joint ventures are
recognized to the extent attributable to the outside interests
in the real estate joint venture.
Guarantees
The Company records a liability using expected present value
measurement techniques for guarantees entered into or modified
subsequent to December 31, 2003 in accordance with FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
(FIN 45).
Fair
Value of Financial Instruments
The Company follows SFAS No. 107, Disclosures
about the Fair Value of Financial Instruments which
requires the disclosure of the fair value of financial
instruments for which it is practicable to estimate. The Company
does not hold or issue financial instruments for trading
purposes. The Company considers the carrying amounts of cash and
cash equivalents, restricted cash, tenant receivables, accounts
payable and accrued expenses to approximate fair value due to
the short maturity of these instruments. The Company has
estimated the fair value of the mortgages and notes payable
utilizing present value techniques. At December 31, 2005,
the carrying amount and estimated fair value of the mortgages
and notes payable was $160,234 and $160,745, respectively. At
December 31, 2004, the carrying amount and estimated fair
value of the mortgages and notes payable was $214,818 and
$214,983, respectively.
Offering
Costs
Underwriting commissions and other offering costs are reflected
as a reduction in additional paid-in capital.
Stock
Based Compensation
The Company accounts for stock based compensation, including
restricted stock grants and fully vested long-term incentive
units granted in connection with the Offering, in accordance
with SFAS No. 123R (Revised), Share-Based
Payment (SFAS 123R). The Company measures
the compensation cost based on the estimated fair value of the
award at the grant date. The estimate is based on the share
price of the common stock at the grant date. Where an observable
market value of a similar instrument is not available an
option-pricing model is utilized. The compensation cost is
recognized as an expense over the requisite service period
required for vesting.
The estimated fair value of fully vested stock awards and
long-term incentive units (LTIP) granted on the
offering date was recorded as an expense upon closing of the
Offering. The estimated fair value of the restricted stock
granted by the Company is being amortized over the vesting
period of the restricted stock agreements. On November 1,
2005, the Company recorded compensation expense of $6,384
related to the grant of vested equity incentives in connection
with the completion of the Offering.
57
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Reclassifications
Certain 2004 and 2003 amounts have been reclassified to conform
to the 2005 presentation. The reclassifications did not affect
previously reported owners equity or net income.
Recent
Accounting Pronouncements
In June 2005, the FASB ratified the EITFs consensus on
Issue
No. 04-5
Determining 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
(EITF 04-5).
This consensus establishes the presumption that general partners
in a limited partnership control that limited partnership
regardless of the extent of the general partners ownership
interest in the limited partnership. The consensus further
establishes that the rights of the limited partners can overcome
the presumption of control by the general partners, if the
limited partners have either (a) the substantive ability to
dissolve (liquidate) the limited partnership or otherwise remove
the general partners without cause or (b) substantive
participating rights. Whether the presumption of control is
overcome is a matter of judgment based on facts and
circumstances, for which the consensus provides additional
guidance. This consensus is currently applicable for new or
modified partnerships, and will otherwise be applicable to
existing partnerships in 2006. This consensus applies to limited
partnerships or similar entities, such as limited liability
companies that have governing provisions that are the functional
equivalent of a limited partnership. The Company is currently
evaluating if any of the Companys unconsolidated real
estate joint ventures will need to be consolidated in accordance
with
EITF 04-5.
However, the Company does not expect any impact to net income
(loss) should any unconsolidated real estate partnerships be
required to be consolidated.
In March 2005, the FASB issued Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations,
and Interpretation of FASB Statement No. 143
(FIN 47). FIN 47 refers to a legal
obligation to perform an asset retirement activity in which the
timing
and/or
method of settlement are conditional on a future event that may
or may not be within the control of the entity. An entity is
required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. The fair value of a
liability for the conditional asset retirement obligation should
be recognized when incurred, generally upon acquisition,
construction, or development and through the normal operation of
the asset. This interpretation is effective for the fiscal year
ended December 31, 2005 and its adoption did not have any
effect on the Companys consolidated financial statements.
In December 2004, the FASB issued SFAS 123R. SFAS 123R
is a revision of SFAS No. 123, Accounting for
Stock Based Compensation, and supersedes APB 25.
Among other items, SFAS 123R eliminates the use of
APB 25 and the intrinsic value method of accounting and
requires companies to recognize the cost of employee services
received in exchange for awards of share based payments, based
on the grant date fair value of those awards, in the financial
statements. The Company adopted SFAS 123R effective
November 1, 2005. The Predecessor did not issue any share
based payments.
|
|
3.
|
Minimum
Future Rental Revenues
|
The Companys properties are generally leased to tenants
under non-cancelable, fixed-term operating leases with
expirations through 2020. Some leases provide for fixed rent
renewal terms or market rent renewal terms. The Companys
leases generally require the lessee to pay minimum rent,
additional rent based upon increases in the Consumer Price Index
and all taxes (including property tax), insurance, maintenance
and other operating costs associated with the leased property.
58
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Future minimum lease payments by tenants under the
non-cancelable operating leases as of December 31, 2005
were as follows:
|
|
|
|
|
For the year ending:
|
|
|
|
|
2006
|
|
$
|
37,565
|
|
2007
|
|
|
29,794
|
|
2008
|
|
|
24,795
|
|
2009
|
|
|
18,921
|
|
2010
|
|
|
14,009
|
|
Thereafter
|
|
|
32,522
|
|
|
|
|
|
|
|
|
$
|
157,606
|
|
|
|
|
|
|
The Company has one building leased to a tenant under a capital
lease that began in 1987 and expires in 2017, with a bargain
renewal option through 2027 that the Company intends to
exercise. The tenant is the owner of the land and has leased the
land to the Company. Upon renewal of the ground lease, the
building lease automatically extends for the same 10 year
extension period. The components of the Investment in
capital lease are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Total minimum lease payments
|
|
$
|
14,948
|
|
|
$
|
15,702
|
|
Less: Unearned income
|
|
|
(8,449
|
)
|
|
|
(14,079
|
)
|
|
|
|
|
|
|
|
|
|
Investment in capital lease
|
|
$
|
6,499
|
|
|
$
|
1,623
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments receivable on the capital lease as
of December 31, 2005, exclusive of the operating expense
reimbursement payments, are as follows:
|
|
|
|
|
For the year ending:
|
|
|
|
|
2006
|
|
$
|
760
|
|
2007
|
|
|
766
|
|
2008
|
|
|
772
|
|
2009
|
|
|
778
|
|
2010
|
|
|
784
|
|
Thereafter
|
|
|
11,088
|
|
|
|
|
|
|
|
|
$
|
14,948
|
|
|
|
|
|
|
59
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
On November 1, 2005, as discussed in note 1, the
Operating Partnership engaged in certain formation transactions
that resulted in the acquisition of 44 properties, the
acquisition of minority ownership interests in eight real estate
properties, and the acquisition of Cogdell Spencer Advisors,
Inc. Concurrent with the Formation Transactions, the Company
acquired a majority ownership in the Operating Partnership. In
connection with the Formation Transactions, 3,831,040 Operating
Partnership units and 1,842,274 shares of common stock were
issued. The Formation Transactions purchase price was
allocated as follows:
|
|
|
|
|
Operating Partnership units issued
|
|
$
|
65,132
|
|
Common shares issued
|
|
|
31,319
|
|
Cash
|
|
|
36,454
|
|
Assumption of liabilities
|
|
|
216,764
|
|
Assumption of assets, including
cash
|
|
|
(17,916
|
)
|
EITF 94-2
historical cost basis adjustment
|
|
|
(43,878
|
)
|
|
|
|
|
|
Purchase price to be allocated
|
|
$
|
287,875
|
|
|
|
|
|
|
In accordance with the EITF Abstract
No. 94-2,
Treatment of Minority Interests in Certain Real Estate
Investment
(EITF 94-2)
and SEC Staff Accounting Bulletin No. 48,
Transfers of Nonmonetary Assets by Promoters or
Stockholders, the transfers made by the Promoter, James W.
Cogdell, in exchange for Operating Partnership units and common
shares have been recorded at his historical cost basis. To the
extent the other investors exchanged their ownership interests;
the acquisition has been recorded at the estimated fair value of
the consideration exchanged.
The following is a preliminary allocation of the purchase price
in accordance with SFAS 141:
|
|
|
|
|
Land
|
|
$
|
15,868
|
|
Buildings and improvements
|
|
|
238,798
|
|
Investment in capital lease
|
|
|
6,550
|
|
Acquired above market leases
|
|
|
877
|
|
Acquired in place lease value and
deferred leasing costs
|
|
|
22,399
|
|
Acquired ground leases
|
|
|
2,661
|
|
Goodwill
|
|
|
2,875
|
|
Other assets
|
|
|
1,712
|
|
Premium, net on assumed debt
|
|
|
(823
|
)
|
Acquired below market leases
|
|
|
(3,042
|
)
|
|
|
|
|
|
Total purchase price allocated
|
|
$
|
287,875
|
|
|
|
|
|
|
On November 1, 2005, the Company, through its Operating
Partnership, acquired 190 Andrews Medical Office Building
located in Greenville, South Carolina from unaffiliated third
parties. The property was acquired in exchange for 188,236
Operating Partnership units, equal to $3,200, based upon the
Offering price of $17.00 per share, and the assumption of
$53 in cash, for a total consideration of $3,147. The following
table is a preliminary allocation of the purchase price in
accordance with SFAS 141. The pro forma results had the
building been acquired at the beginning of the year would have
been immaterial to both revenue and net income for the year.
|
|
|
|
|
Building and improvements
|
|
$
|
2,663
|
|
Acquired in place lease value and
deferred leasing costs
|
|
|
221
|
|
Acquired ground lease
|
|
|
274
|
|
Acquired below market leases
|
|
|
(11
|
)
|
|
|
|
|
|
Total purchase price allocated
|
|
$
|
3,147
|
|
|
|
|
|
|
60
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
In connection with an acquisition in July 2004, the Predecessor
formed Rowan OSC Investors, LLC (Rowan OSC
Investors), which acquired a surgery center, and in
connection with an acquisition in June 2003, the Predecessor
formed Barclay Downs Associates, LLC (Barclay
Downs), which acquired an office building. Both properties
were acquired for investment purposes. Barclay Downs is also the
location of the Companys corporate offices. The purchase
prices were allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
Rowan OSC
|
|
|
|
|
|
|
Investors
|
|
|
Barclay Downs
|
|
|
Land
|
|
$
|
607
|
|
|
$
|
2,396
|
|
Building and improvements
|
|
|
3,305
|
|
|
|
2,827
|
|
Acquired in place lease value and
deferred leasing costs
|
|
|
290
|
|
|
|
|
|
Debt premium
|
|
|
|
|
|
|
(228
|
)
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
4,202
|
|
|
$
|
4,995
|
|
|
|
|
|
|
|
|
|
|
Barclay Downs assumed $2,886 of debt from the seller and paid
$2,109 in cash. Rowan OSC Investors was purchased for cash. No
intangible assets were recorded related to the Barclay Downs
acquisition because the single tenant defaulted on their lease.
The pro forma results if either building had been acquired at
the beginning of the year would have been immaterial to both
revenue and net income for each respective year. Amortization
expense and accumulated amortization related to intangible
assets for the year ended December 31, 2004 were $7. There
have been no other recent acquisitions that would have required
purchase accounting, thus no other such intangible assets are
recorded.
61
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Mortgages,
Notes Payable and Guarantees
|
Mortgages and notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
Outstanding at
|
|
|
Outstanding at
|
|
|
Stated
|
|
|
Rate at
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Interest
|
|
|
December 31,
|
|
|
Maturity
|
|
|
|
|
Entity
|
|
2005
|
|
|
2004
|
|
|
Rate
|
|
|
2005
|
|
|
Date
|
|
|
Amortization
|
|
|
Augusta Medical Partners, LLC
|
|
$
|
|
|
|
$
|
25,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baptist Northwest Medical Park LP
|
|
|
2,344
|
|
|
|
2,388
|
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
2/1/2011
|
|
|
|
25 years
|
|
Beaufort Medical Plaza, LLC
|
|
|
5,270
|
|
|
|
5,379
|
|
|
|
LIBOR + .95
|
|
|
|
5.34
|
|
|
|
8/18/2008
|
|
|
|
25 years
|
|
Cabarrus Medical Partners, LLC
|
|
|
10,378
|
|
|
|
10,560
|
|
|
|
LIBOR + 1.50
|
(1)
|
|
|
5.89
|
|
|
|
12/15/2014
|
|
|
|
25 years
|
|
Cabarrus POB, LLC
|
|
|
|
|
|
|
8,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cogdell Investors (Birkdale), LLC
|
|
|
7,758
|
|
|
|
7,884
|
|
|
|
6.75
|
|
|
|
6.75
|
|
|
|
10/1/2008
|
|
|
|
25 years
|
|
Cogdell Investors (Mallard), LLC
|
|
|
|
|
|
|
6,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cogdell Investors
(Birkdale II), LLC
|
|
|
|
|
|
|
944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copperfield MOB, LLC
|
|
|
|
|
|
|
3,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East Jefferson Medical Office
Building LP
|
|
|
9,773
|
|
|
|
9,945
|
|
|
|
6.01
|
|
|
|
6.01
|
|
|
|
8/10/2014
|
|
|
|
25 years
|
|
East Rocky Mount Kidney Center, LLC
|
|
|
|
|
|
|
1,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franciscan Development Company, LLC
|
|
|
|
|
|
|
10,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaston MOB, LLC
|
|
|
17,358
|
|
|
|
18,150
|
|
|
|
LIBOR + 1.25
|
|
|
|
5.64
|
|
|
|
11/22/2007
|
|
|
|
25 years
|
|
Gaston MOB, LLC
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HMOB Associates Limited Partnership
|
|
|
5,935
|
|
|
|
6,116
|
|
|
|
5.93
|
|
|
|
5.93
|
|
|
|
11/1/2013
|
|
|
|
20 years
|
|
Barclay Downs Associates, LLC
|
|
|
|
|
|
|
2,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barclay Downs Associates, LLC
|
|
|
4,550
|
|
|
|
|
|
|
|
6.50
|
|
|
|
6.50
|
|
|
|
11/15/2012
|
|
|
|
25 years (6
|
)
|
Matthews Land Group, LLC/Barclay
Downs Associates, LLC
|
|
|
|
|
|
|
1,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Arts Center of Orangeburg GP
|
|
|
2,723
|
|
|
|
2,812
|
|
|
|
5.95
|
|
|
|
5.95
|
|
|
|
12/18/2007
|
|
|
|
20 years
|
|
Medical Investors I, LLC
|
|
|
8,962
|
|
|
|
9,109
|
|
|
|
LIBOR + 1.85
|
|
|
|
6.24
|
|
|
|
12/10/2007
|
|
|
|
25 years
|
|
Medical Investors III, LLC
|
|
|
|
|
|
|
4,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Park Three Limited
Partnership
|
|
|
8,418
|
|
|
|
8,583
|
|
|
|
5.55
|
|
|
|
5.55
|
|
|
|
3/25/2014
|
|
|
|
25 years
|
|
Mulberry Medical Park LP
|
|
|
1,152
|
|
|
|
1,207
|
|
|
|
5.95
|
|
|
|
5.95
|
|
|
|
10/15/2006
|
|
|
|
20 years
|
|
Providence Medical Office Building,
LLC
|
|
|
9,206
|
|
|
|
9,398
|
|
|
|
6.12
|
|
|
|
6.12
|
|
|
|
1/12/2013
|
|
|
|
25 years
|
|
River Hills Medical Associates, LLC
|
|
|
3,161
|
|
|
|
3,247
|
|
|
|
LIBOR + 2.00
|
|
|
|
6.39
|
|
|
|
11/30/2008
|
|
|
|
22 years
|
|
River Hills Medical Associates, LLC
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
River Hills Medical Associates, LLC
|
|
|
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocky Mount Kidney Center LP
|
|
|
1,141
|
|
|
|
1,173
|
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
1/21/2009
|
|
|
|
20 years
|
|
Rocky Mount MOB, LLC
|
|
|
|
|
|
|
4,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocky Mount MOB, LLC
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocky Mount Medical Park LP
|
|
|
7,953
|
|
|
|
8,122
|
|
|
|
Prime
|
|
|
|
7.25
|
|
|
|
8/15/2008
|
|
|
|
25 years
|
|
Rocky Mount Medical Park LP
|
|
|
|
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roper MOB, LLC
|
|
|
10,164
|
|
|
|
10,280
|
|
|
|
LIBOR + 1.50
|
|
|
|
5.89
|
|
|
|
7/10/2009
|
|
|
|
18 years(2
|
)
|
Rowan OSC Investors, LLC
|
|
|
3,547
|
|
|
|
3,614
|
|
|
|
6.00
|
|
|
|
6.00
|
|
|
|
7/6/2014
|
|
|
|
25 years
|
|
St. Francis Community MOB, LLC
|
|
|
9,448
|
|
|
|
9,603
|
|
|
|
LIBOR + 1.40
|
|
|
|
5.79
|
|
|
|
8/18/2007
|
|
|
|
25 years
|
|
St. Francis Community MOB, LLC
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
St. Francis Community MOB, LLC
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
St. Francis Medical Plaza, LLC
|
|
|
10,689
|
|
|
|
10,964
|
|
|
|
LIBOR + 1.325
|
|
|
|
5.72
|
|
|
|
2/15/2006
|
|
|
|
25 years
|
|
St. Francis Medical Plaza, LLC
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Medical Office I, LLC
|
|
|
|
|
|
|
3,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Medical Office I, LLC
|
|
|
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cogdell Spencer Advisors, Inc.(3)
|
|
|
|
|
|
|
975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cogdell Spencer Advisors, Inc
|
|
|
|
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cogdell Spencer Advisors, Inc
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cogdell Spencer LP (4)(5)
|
|
|
19,600
|
|
|
|
|
|
|
|
|
|
|
|
5.50
|
|
|
|
10/31/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
159,530
|
|
|
|
214,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium, net
|
|
|
704
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
160,234
|
|
|
$
|
214,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Maximum interest of 8.25%; Minimum interest rate of 3.25%. |
62
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
(2) |
|
Interest only through July 2005. |
|
(3) |
|
Revolving line of credit, repaid November 2005. |
|
(4) |
|
Unsecured revolving credit facility. |
|
(5) |
|
The interest rate is, at the Companys election, either
(1) LIBOR plus a margin of between 100 to 130 basis
points based on the Companys leverage ratio or
(2) the higher of the federal funds rate plus 50 basis
points or Bank of America, N.A.s prime rate. |
|
(6) |
|
Interest only through January 2008. |
The LIBOR rate was 4.39% and 2.40% at December 31, 2005 and
2004, respectively. The prime rate was 7.25% and 5.25% at
December 31, 2005 and 2004, respectively.
On November 1, 2005, the Company, as guarantor, and the
Operating Partnership entered into a $100,000 unsecured
revolving credit facility (the Credit Facility),
with a syndicate of financial institutions (including Bank of
America, N.A., Citicorp North America, Inc. and Branch
Banking & Trust Company) (collectively, the
Lenders), with Bank of America, N.A., as the
administrative agent for the Lenders, and Banc of America
Securities LLC and Citigroup Global Markets Inc., as joint lead
arrangers and joint book managers. The Credit Facility is
available to fund working capital and other corporate purposes;
finance acquisition and development activity; and refinance
existing and future indebtedness. The Credit Facility permits
the Operating Partnership to borrow up to $100,000 of revolving
loans, with sub-limits of $25,000 for swingline loans and
$25,000 for letters of credit.
The Credit Facility shall terminate and all amounts outstanding
thereunder shall be due and payable in full three years from
November 1, 2005, subject to a one-year extension, at the
Operating Partnerships option. The Credit Facility also
allows for up to $150,000 of increased availability (to a total
aggregate available amount of $250,000), at the Operating
Partnerships option but subject to each Lenders
option to increase its commitments. This Credit Facility is
guaranteed by the Company and certain of its subsidiaries. The
interest rate on loans under the Credit Facility equals, at the
Companys election, either (1) LIBOR plus a margin of
between 100 to 130 basis points based on the Companys
leverage ratio or (2) the higher of the federal funds rate
plus 50 basis points or Bank of America, N.A.s prime
rate.
The Credit Facility contains customary terms and conditions for
credit facilities of this type, including: (1) limitations
on our ability to (A) incur additional indebtedness,
(B) make distributions to our stockholders, subject to
complying with REIT requirements, and (C) make certain
investments, (2) maintenance of a pool of unencumbered
assets subject to certain minimum valuations thereof and
(3) requirements for us to maintain certain financial
coverage ratios. These customary financial coverage ratios and
other conditions include a maximum leverage ratio (65%, with
flexibility for one two quarter increase to not more than 75%),
minimum fixed charge coverage ratio (175%), maximum combined
secured indebtedness (50%), maximum recourse indebtedness (15%),
maximum unsecured indebtedness (60%, with flexibility for one
two quarter increase to not more than 75%), minimum unencumbered
interest coverage ratio (200%) and minimum combined tangible net
worth ($30 million plus 85% of net proceeds of equity
issuances by the Company and its subsidiaries after
November 1, 2005).
As of December 31, 2005 there was $79,900 available under
the Companys Credit Facility. There was $19,600
outstanding at December 31, 2005 and $500 of availability
is restricted related to an outstanding letter of credit.
The mortgages are collateralized by property and payments are
made monthly.
63
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Scheduled maturities of mortgages and notes payable as of
December 31, 2005 are as follows:
|
|
|
|
|
For the year ending:
|
|
|
|
|
2006
|
|
$
|
14,809
|
|
2007
|
|
|
36,821
|
|
2008
|
|
|
47,022
|
|
2009
|
|
|
11,597
|
|
2010
|
|
|
1,456
|
|
Thereafter
|
|
|
47,825
|
|
|
|
|
|
|
Total mortgages and notes payable
|
|
$
|
159,530
|
|
|
|
|
|
|
Certain of the Companys mortgage notes payable and the
Companys Credit Facility require that the Company comply
with certain affirmative, negative and financial covenants. The
Company was in compliance with the covenants as of
December 31, 2005.
Guarantees
The Company has guaranteed, in the event of a default, the
mortgage notes payable for two unconsolidated real estate joint
ventures. An initial liability of $131 has been recorded for
these guarantees using expected present value measurement
techniques. For one mortgage note payable with a principal
balance of approximately $11,100 at December 31, 2005, the
guarantee will be released upon completion of the project and
commencement of rental income, which is expected to occur in the
second quarter of 2006. The other guarantee, with a principal
balance of approximately $9,200 at December 31, 2005, will
be released upon the full repayment of the mortgage note
payable, which matures in December 2006. The mortgages are
collateralized by property and the collateral will revert to the
guarantor in the event that the guarantee is performed.
|
|
6.
|
Derivative
Financial Instruments Interest Rate Swap
Agreements
|
The Company utilizes interest rate swap agreements to reduce its
exposure to variable interest rates associated with certain of
its mortgage notes payable. These agreements involve an exchange
of fixed and floating interest payments without the exchange of
the underlying principal amount (the notional
amount). The net difference between the interest paid and
the interest received is reflected as an adjustment to interest
expense.
64
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The interest rate swap agreements have been recorded on the
balance sheet at their estimated fair values and included in
Other assets or Interest Rate Swap
Agreements. The agreements have not been designated for
hedge accounting and, accordingly, any changes in fair values
are recorded in interest expense. For the years ended
December 31, 2005, 2004 and 2003, ($2,451), ($2,874), and
($652), respectively, was recorded as a decrease in interest
expense as a result of the change in the interest rate swap
agreements fair value. The following table summarizes the
terms of the agreements and their fair values at
December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount as of December 31,
|
|
|
|
|
|
|
|
|
Effective
|
|
|
Expiration
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
Entity
|
|
2005
|
|
|
Receive Rate
|
|
|
Pay Rate
|
|
|
Date
|
|
|
Date
|
|
|
Asset
|
|
|
Liability
|
|
|
Asset
|
|
|
Liability
|
|
|
Augusta Medical Partners, LLC(1)
|
|
$
|
25,211
|
|
|
|
1 Month LIBOR
|
|
|
|
5.75
|
%
|
|
|
5/25/2001
|
|
|
|
6/26/2006
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
941
|
|
Beaufort Medical Plaza, LLC
|
|
|
5,165
|
|
|
|
1 Month LIBOR
|
|
|
|
5.81
|
|
|
|
10/25/1999
|
|
|
|
7/25/2008
|
|
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
371
|
|
Gaston MOB, LLC
|
|
|
17,358
|
|
|
|
1 Month LIBOR
|
|
|
|
3.25
|
|
|
|
1/23/2003
|
|
|
|
11/22/2007
|
|
|
|
467
|
|
|
|
|
|
|
|
121
|
|
|
|
|
|
Medical Investors I, LLC
|
|
|
8,962
|
|
|
|
1 Month LIBOR
|
|
|
|
4.82
|
|
|
|
2/10/2003
|
|
|
|
12/10/2007
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
377
|
|
River Hills Medical Associates, LLC
|
|
|
3,161
|
|
|
|
1 Month LIBOR
|
|
|
|
3.63
|
|
|
|
3/10/2003
|
|
|
|
12/15/2008
|
|
|
|
94
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Roper MOB, LLC
|
|
|
10,280
|
|
|
|
1 Month LIBOR
|
|
|
|
4.45
|
|
|
|
7/26/2004
|
|
|
|
7/10/2009
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
186
|
|
St. Francis CMOB, LLC(2)
|
|
|
9,265
|
|
|
|
1 Month LIBOR
|
|
|
|
5.58
|
|
|
|
4/3/2001
|
|
|
|
8/18/2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171
|
|
St. Francis Medical Plaza, LLC(2)
|
|
|
10,956
|
|
|
|
1 Month LIBOR
|
|
|
|
5.52
|
|
|
|
1/8/1999
|
|
|
|
12/15/2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
651
|
|
|
$
|
170
|
|
|
$
|
131
|
|
|
$
|
2,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Notional amount as of December 31, 2004, swap terminated in
2005. |
|
(2) |
|
Notional amount as of December 31, 2004, expired in 2005. |
|
|
7.
|
Commitments
and Contingencies
|
Construction
in Progress
As of December 31, 2005, the Company had no unfunded
financing commitments from financial institutions relating to
properties under development.
65
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Operating
Leases
The Company makes payments under operating lease agreements
relating to various equipment leases and ground leases related
to many of the Companys properties. Future minimum lease
commitments under these leases are as follows:
|
|
|
|
|
For the year ending:
|
|
|
|
|
2006
|
|
$
|
116
|
|
2007
|
|
|
100
|
|
2008
|
|
|
98
|
|
2009
|
|
|
95
|
|
2010
|
|
|
95
|
|
Thereafter
|
|
|
1,997
|
|
|
|
|
|
|
|
|
$
|
2,501
|
|
|
|
|
|
|
Many of the ground leases effectively limit the Companys
control over various aspects of the operation of the applicable
building, restrict the Companys ability to transfer the
building and allow the lessor the right of first refusal to
purchase the building and improvements. All the ground leases
provide for the property to revert to the lessor for no
consideration upon the expiration of the ground lease.
Tax
Protection Agreements
In connection with the Formation Transactions, the Company
entered into a tax protection agreement with the former owners
of each contributed property who received OP units.
Pursuant to these agreements, the Company will not sell,
transfer or otherwise dispose of any of the properties (each a
protected asset) or any interest in a protected
asset prior to the eighth anniversary of the closing of the
offering unless:
(1) a
majority-in-interest
of the holders of interests in the existing entities (or their
successors, which may include the Company to the extent any OP
units have been redeemed or exchanged) with respect to such
protected asset consent to the sale, transfer or other
disposition; provided, however, with respect to three of the
existing entities, Cabarrus POB, LLC, Medical Investors I,
LLC and Medical Investors III, LLC, the required consent
shall be a
majority-in-interest
of the beneficial owners of interests in the existing entities
other than Messrs. Cogdell and Spencer and their
affiliates; or
(2) the operating partnership delivers to each such holder
of interests, a cash payment intended to approximate the
holders tax liability related to the recognition of such
holders built-in gain resulting from the sale of such
protected asset; or
(3) the sale, transfer or other disposition would not
result in the recognition of any built-in gain by any such
holder of interests.
Litigation
In the normal course of business, the Company is subject to
claims, lawsuits and legal proceedings. While it is not possible
to ascertain with certainty the ultimate outcome of such
matters, in managements opinion, the liabilities, if any,
in excess of amounts provided or covered by insurance, are not
expected to have a material adverse effect on the consolidated
financial position, results of operations or liquidity of the
Company.
66
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Indemnities
At times the Company may be obligated per agreement to indemnify
another party with respect to certain matters. Typically, these
obligations arise in contracts into which the Company enters,
under which it customarily agrees to hold the other party
harmless against certain losses arising from breaches of
representations, warranties
and/or
covenants related to such matters as, among others, title to
assets, specified environmental matters, qualification to do
business, due organization, non-compliance with restrictive
covenants, laws, rules and regulations, maintenance of insurance
and payment of tax bills due and owing. Additionally, with
respect to office lease agreements that are entered into as
landlord, the Company may also indemnify the other party against
damages caused by its willful misconduct or negligence
associated with the operation and management of the building.
Although no assurances with certainty can be made, it is
believed that if the Company were to incur a loss in any of
these matters, such loss would not have a material effect on the
Companys financial condition or results of operations.
Historically, payments made with regard to these agreements have
not had a material effect on the Companys financial
condition or results of operations.
|
|
8.
|
Investments
in Real Estate Partnerships Company
|
As of December 31, 2005, the Company has an ownership
interest in six limited liability companies or limited
partnerships. The following is a description of each of the
entities:
|
|
|
|
|
Cabarrus Land Company, LLC, a North Carolina limited liability
company, founded in 1987, 5.0% owned by the Company, and owns
one medical office building,
|
|
|
|
Mary Black MOB Limited Partnership, a South Carolina limited
partnership, founded in 1988, 9.6% owned by the Company, and
owns one medical office building,
|
|
|
|
Mary Black MOB II Limited Partnership, a South Carolina
limited partnership, founded in 1993, 1.0% owned by the Company,
and owns one medical office building,
|
|
|
|
Mary Black Westside Medical Park I Limited Partnership, a South
Carolina limited partnership, founded in 1991, 5.0% owned by the
Company, and owns one medical office building,
|
|
|
|
McLeod Medical Partners, LLC, a South Carolina limited liability
company, founded in 1982, 1.1% owned by the Company, and owns
three medical office buildings, and
|
|
|
|
Rocky Mount MOB, LLC, a North Carolina limited liability
company, founded in 2002, 34.5% owned by the Company, and owns
one medical office building.
|
The Company accounts for these unconsolidated real estate
partnerships under the equity method of accounting based on the
Companys ability to exercise significant influence. The
Company manages the properties owned by these entities and
receives property management fees, leasing fees, and expense
reimbursements. The following is a summary of financial
information for the limited liability companies and limited
partnerships as of December 31, 2005 and for the period
November 1 through December 31, 2005. The information
set forth below reflects the financial position and operations
of the entities in their entirety, not just the Companys
interest in the real estate partnership.
|
|
|
|
|
|
|
December 31, 2005
|
|
|
Financial position:
|
|
|
|
|
Total assets
|
|
$
|
32,606
|
|
Total liabilities
|
|
|
23,752
|
|
Members equity
|
|
|
8,854
|
|
67
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
November 1, 2005 -
|
|
|
|
December 31, 2005
|
|
|
Results of
operations:
|
|
|
|
|
Revenues
|
|
$
|
1,070
|
|
Operating and general and
administrative expenses
|
|
|
375
|
|
Net income
|
|
|
44
|
|
|
|
9.
|
Investments
in Real Estate
Partnerships Predecessor
|
The Predecessor held a significant variable interest in five
Variable Interest Entities (VIEs) as defined in
FIN 46R; however, the Predecessor and the Founder,
individually or jointly, were not the primary beneficiaries. On
July 31, 2005, the Predecessor transferred all of its
ownership in Cogdell Investors (CFVN), LLC, Cogdell Investors
(Charleston), LLC, Cogdell Investors (Lenoir), LLC, Cogdell
Investors (OSS), LLC, and Cogdell Investors Gulfport MOB, LLC to
its owners. Due to the Predecessors share of equity losses
exceeding its investments, these investments had a negative
carrying value of $124. On the transfer date, $124 was recorded
as a negative distribution in Predecessors
owners deficit and the negative carrying value was
removed from the balance sheet.
The five limited liability companies each own a medical office
building and were initially 100% financed by a third party
lender. The Predecessors commitment was limited to its
initial capital contribution, which was de minimis. The lessees
under each of the master leases have the ability to purchase the
Predecessors and members ownership in the VIEs for
an amount based on a multiple of historical cash flows received
by the Predecessor and the members or a fixed amount. The
lessees under each of the master leases are entitled to a rent
rebate equal to the excess cash flows as defined in the lease
agreements, thus the historical cash flows received by the
Predecessor were fixed at an immaterial amount. If operating or
financing expenses are greater than expected, the lessees
rent is adjusted to reflect the increased costs. As a result of
the lease agreement and the ability to purchase the
Predecessors and members ownership, the lessee bears
a majority of expected losses and expected residual returns and
the risks and rewards of ownership of the property did not
reside with the Predecessor.
The Predecessor provided asset management, financing, legal,
development, and marketing services to the VIEs and receives
fees based on a percentage of revenue, typically 1-2% of
revenue. The Predecessor received property management fees for
management services performed for the VIEs. The Company
continues to manage these properties. The mortgage notes payable
were non-recourse to the Predecessor (except as discussed in
Note 5 Guarantees). These investments were
accounted for under the equity method of accounting. Significant
accounting policies used by the VIEs were similar to those used
by the Predecessor. The aggregate assets and liabilities of the
five VIEs were $49,738 and $54,552, respectively, at
December 31, 2004. The aggregate revenues for the five VIEs
were $5,725 for the year ended December 31, 2004. The
Predecessor recognized fee revenue and expense reimbursements of
$749 for the period January 1, 2005 through
October 31, 2005 and $806 and $479 for the years ended
December 31, 2004 and 2003, respectively, related to these
entities. The Predecessors loss on these entities for the
ten months ended October 31, 2005, was $26 and for the
years ended December 31, 2004 and 2003, the loss was $42
and $52, respectively.
The Predecessor has investments in limited liability companies
and limited partnerships that are accounted for under the equity
method of accounting based on the Predecessors ability to
exercise significant influence. These entities primarily own
medical office buildings or hold investments in companies that
own medical office buildings.
68
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The following is a summary of financial information for the
limited liability companies and limited partnerships, excluding
the five VIEs, as of and for the periods indicated:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
Financial position:
|
|
|
|
|
Total assets
|
|
$
|
34,320
|
|
Total liabilities
|
|
|
26,630
|
|
Members equity
|
|
|
7,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Months
|
|
|
|
|
|
|
|
|
|
Ended October 31,
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Results of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,126
|
|
|
$
|
5,604
|
|
|
$
|
3,949
|
|
Operating and general and
administrative expenses
|
|
|
2,527
|
|
|
|
2,302
|
|
|
|
1,630
|
|
Net income
|
|
|
466
|
|
|
|
663
|
|
|
|
655
|
|
Shares
and Units
An Operating Partnership unit and a share of the Companys
common stock have essentially the same economic characteristics
as they share equally in the total net income or loss and
distributions of the Operating Partnership. An Operating
Partnership unit may be redeemed for cash, or, at the
Companys option, exchanged for shares of common stock on a
one-for-one
basis after one year from issuance. An LTIP unit is generally
the economic equivalent of an Operating Partnership unit.
Dividends
On November 28, 2005, the Company declared a dividend to
common stockholders of record and the Operating Partnership
declared a distribution to Unit holders of record, in each case
as of December 15, 2005, totaling approximately $2,886 or
$0.2333 per share or unit, covering the period from the
completion of the Offering on November 1, 2005 through
December 31, 2005. The dividend and distribution were paid
on December 27, 2005. The dividend and distribution were
equivalent to an annual rate of $1.40 per share and unit.
Distributions
Earnings and profits, which determine the tax treatment of
distributions to stockholders, will differ from income reported
for financial reporting purposes due to the differences for
federal income tax purposes in the treatment of loss on
extinguishment of debt, revenue recognition, compensation
expense and in the basis of depreciable assets and estimated
useful lives used to compute depreciation.
69
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The following is a summary of the elements used in calculating
basic and diluted loss per share (in thousands, except per share
amount):
|
|
|
|
|
|
|
November 1, 2005
|
|
|
|
through
|
|
|
|
December 31, 2005
|
|
|
Net loss
|
|
$
|
(5,600
|
)
|
Weighted average shares
outstanding basic and diluted(1)
|
|
|
7,972
|
|
Net loss per
share basic and diluted
|
|
$
|
(0.70
|
)
|
|
|
|
(1) |
|
28 shares of unvested restricted common stock are
anti-dilutive due to the net loss. |
Minority interests of unit holders in the Operating Partnership
at December 31, 2005 were $62,018.
As of December 31, 2005, there were 12,365,413 units
of limited partnership in the Operating Partnership
(OP Units) outstanding, of which 8,000,374, or
64.6%, were owned by the Company and 4,365,039, or 35.4%, were
owned by other partners (including certain of our directors and
senior management).
The Companys 2005 Long-Term Stock Incentive Plan
(2005 Incentive Plan) provides for the grant of
incentive awards to employees, directors and consultants to
attract and retain qualified individuals and reward them for
superior performance in achieving the Companys business
goals and enhancing stockholder value. Awards issuable under the
incentive award plan include stock options, restricted stock,
dividend equivalents, stock appreciation rights, LTIP, cash
performance bonuses and other incentive awards. Only employees
are eligible to receive incentive stock options under the
incentive award plan. The Company has reserved a total of
1,000,000 shares of common stock for issuance pursuant to
the incentive award plan, subject to certain adjustments set
forth in the plan. Each LTIP issued under the incentive award
plan will count as one share of stock for purposes of
calculating the limit on shares that may be issued under the
plan and the individual award limit discussed below.
In connection with the Offering, the Company issued 345,793
vested LTIP units, 22,600 vested shares of restricted stock, and
35,500 shares of restricted stock that vested 20% on
November 1, 2005 and will vest 20% on January 1, 2007,
2008, 2009, and 2010, respectively. The LTIP Units and
restricted stock were valued at $17.00 per share resulting
in a compensation charge of $6,384 for the period
November 1, 2005 through December 31, 2005. The
compensation expense associated with the unvested restricted
stock is recognized over the vesting period.
No stock options, dividend equivalents, or stock appreciation
rights were issued in 2005. The Company values stock options
using an option pricing model in accordance with SFAS 123R.
The Company sponsors a 401(k) plan (the Plan)
covering substantially all of its employees. The Plan provides
for the Company to make matching as well as profit-sharing
contributions. Profit-sharing contributions are made at the
discretion of management and are allocated to participants based
on their level of compensation. Profit-sharing contributions
were not paid in 2005, 2004 or 2003. The Predecessor matched
100% of the employees contributions to the Plan up to a
maximum of 4% of compensation in 2005, 2004 and 2003. The 401(k)
matching expense for the year ended December 31, 2005, 2004
and 2003 was $146, $147, and $123, respectively.
70
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
Related
Party Transactions
|
Pursuant to an engagement letter entered into on
December 1, 2004, the Predecessor engaged Realty Capital
International Inc., an affiliate of Richard B. Jennings, one of
the Companys directors, to provide advisory services to
the Predecessor relating to the structure and terms of the
Formation Transactions and the Offering. As part of this
engagement, the Predecessor paid $10 in cash per month in fees
for its role as adviser through the closing of the Offering.
Upon the closing of the Offering, Realty Capital International
Inc. receive a success fee of $545, which was equal to 0.5% of
the gross offering proceeds, inclusive of the over-allotment
proceeds.
Certain partners, including hospitals which may be lessors under
air rights or ground leases, and members of the affiliated
partnerships and limited liability companies of the Predecessor
are also tenants in the properties in which they have an
ownership. Total rental revenues related to these partners and
members is reflected as Rental-related party revenue
in the accompanying combined statements of operations. Tenant
receivables and payables to these partners and members are
reflected were $84 and $174, respectively, at December 31,
2004. These balances generally reflect cost pass through
amounts. Subsequent to the Formation Transactions, OP
unitholders or common stockholders of the Company who are also
tenants do not qualify as related parties.
At December 31, 2004, Barclay Downs Associates, LLC had a
payable of $134 to one of its Members related to an advance for
capital expenditures. The amount is reflected in Accounts
payable and accrued expenses in the accompanying balance
sheet.
Effective January 2005, Copperfield MOB, LLC, as the lessor, has
a master lease agreement with an entity related by common
ownership. The master lease provides for a rental payment based
on the unleased square footage in the building and expires in
2009. The maximum annual rental payment from the lessee related
to the unleased square footage is $367. For the ten months ended
October 31, 2005, rental revenue related to this lease was
$289.
The Predecessor provided certain payroll, employee benefit and
other administrative services for The Fork Farm, a working farm
owned by the Predecessors founder. These services are
fully reimbursed by The Fork Farm to the Predecessor at the
Predecessors cost, which was approximately $100 annually.
In addition, The Fork Farm periodically hosts events on behalf
of the Company and the Predecessor and charges for such events
of approximately $20 annually are reflected in general and
administrative expenses in the consolidated and the
combined statement of operations.
The Company defines business segments by their distinct customer
base and service provided based on the financial information
used by our chief operating decision maker to make resource
allocation decisions and assess performance. There are two
identified reportable segments: (1) property operations and
(2) real estate services. Management evaluates each
segments performance based on net operating income, which
is defined as income before corporate general and administrative
expenses, depreciation, amortization, interest expense, loss on
early extinguishment of debt, gain on sale of real estate
property, loss on unconsolidated real estate joint ventures, and
minority interests in operating partnership. Intersegment
revenues and expenses are reflected at the contractually
71
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
stipulated amounts and eliminated in consolidation or
combination. The following table represents the segment
information for the three years ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Predecessor
|
|
|
|
November 1, 2005 -
|
|
|
January 1, 2005 -
|
|
|
For the Year Ended
December 31,
|
|
|
|
December 31, 2005
|
|
|
October 31, 2005
|
|
|
2004
|
|
|
2003
|
|
|
Property operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
$
|
7,044
|
|
|
$
|
35,986
|
|
|
$
|
40,657
|
|
|
$
|
38,993
|
|
Interest and other income
|
|
|
116
|
|
|
|
878
|
|
|
|
831
|
|
|
|
840
|
|
Operating and general and
administrative expenses
|
|
|
(2,596
|
)
|
|
|
(11,188
|
)
|
|
|
(11,644
|
)
|
|
|
(11,346
|
)
|
Intersegment expenses
|
|
|
(507
|
)
|
|
|
(2,778
|
)
|
|
|
(3,228
|
)
|
|
|
(3,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
$
|
4,057
|
|
|
$
|
22,898
|
|
|
$
|
26,616
|
|
|
$
|
25,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets, end of period
|
|
$
|
303,322
|
|
|
|
|
|
|
$
|
176,929
|
|
|
$
|
165,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee revenue
|
|
$
|
221
|
|
|
$
|
1,450
|
|
|
$
|
2,364
|
|
|
$
|
1,360
|
|
Expense reimbursements
|
|
|
94
|
|
|
|
565
|
|
|
|
840
|
|
|
|
807
|
|
Interest and other income
|
|
|
11
|
|
|
|
1
|
|
|
|
12
|
|
|
|
9
|
|
Intersegment revenues
|
|
|
507
|
|
|
|
2,778
|
|
|
|
3,228
|
|
|
|
3,083
|
|
Operating and general and
administrative expenses
|
|
|
(652
|
)
|
|
|
(3,893
|
)
|
|
|
(4,900
|
)
|
|
|
(4,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
$
|
181
|
|
|
$
|
901
|
|
|
$
|
1,544
|
|
|
$
|
854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets, end of period
|
|
$
|
5,160
|
|
|
|
|
|
|
$
|
1,496
|
|
|
$
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenues
|
|
$
|
7,993
|
|
|
$
|
41,658
|
|
|
$
|
47,932
|
|
|
$
|
45,092
|
|
Elimination of intersegment revenues
|
|
|
(507
|
)
|
|
|
(2,778
|
)
|
|
|
(3,228
|
)
|
|
|
(3,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total combined revenues
|
|
$
|
7,486
|
|
|
$
|
38,880
|
|
|
$
|
44,704
|
|
|
$
|
42,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net operating income
|
|
$
|
4,238
|
|
|
$
|
23,799
|
|
|
$
|
28,160
|
|
|
$
|
26,258
|
|
Corporate general and
administrative expenses
|
|
|
(7,139
|
)
|
|
|
(3,173
|
)
|
|
|
(1,369
|
)
|
|
|
(1,294
|
)
|
Depreciation and amortization
expense
|
|
|
(4,142
|
)
|
|
|
(8,480
|
)
|
|
|
(9,620
|
)
|
|
|
(9,797
|
)
|
Interest expense
|
|
|
(1,512
|
)
|
|
|
(8,275
|
)
|
|
|
(9,067
|
)
|
|
|
(11,422
|
)
|
Loss from early extinguishment of
debt
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on unconsolidated real
estate partnerships
|
|
|
3
|
|
|
|
(47
|
)
|
|
|
(60
|
)
|
|
|
(74
|
)
|
Minority interests in operating
partnership
|
|
|
3,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,600
|
)
|
|
$
|
3,824
|
|
|
$
|
8,044
|
|
|
$
|
3,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets, end of period
|
|
$
|
308,482
|
|
|
|
|
|
|
$
|
178,425
|
|
|
$
|
165,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
COGDELL
SPENCER INC. AND COGDELL SPENCER INC. PREDECESSOR
NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
17.
|
Quarterly
Financial Information (unaudited)
|
The tables below reflect the Companys selected quarterly
information for the Company and the Predecessor for the years
ended December 31, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
2005(1)
|
|
|
September 30,
2005
|
|
|
June 30, 2005
|
|
|
March 31, 2005
|
|
|
Total revenue
|
|
$
|
11,702
|
|
|
$
|
11,557
|
|
|
$
|
11,528
|
|
|
$
|
11,579
|
|
Income (loss) before minority
interests
|
|
|
(8,094
|
)
|
|
|
842
|
|
|
|
(54
|
)
|
|
|
2,475
|
|
Net income (loss)
|
|
|
(5,039
|
)
|
|
|
842
|
|
|
|
(54
|
)
|
|
|
2,475
|
|
Net loss per
share basic and diluted(2)
|
|
$
|
(0.70
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Weighted-average
shares basic and diluted(2)
|
|
|
7,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31, 2004
|
|
|
September 30,
2004
|
|
|
June 30, 2004
|
|
|
March 31, 2004
|
|
|
Total revenue
|
|
$
|
11,322
|
|
|
$
|
10,946
|
|
|
$
|
11,446
|
|
|
$
|
10,990
|
|
Net income
|
|
|
2,332
|
|
|
|
564
|
|
|
|
4,378
|
|
|
|
770
|
|
|
|
|
(1) |
|
Represents consolidated operating results for the Company for
the period from November 1, 2005 to December 31, 2005
and combined operating results for the Predecessor for the
period October 1, 2005 to October 31, 2005. The
operating results for the quarter ended December 31, 2005
may not be comparable to future expected operating results of
the Company since they include various Offering-related charges. |
|
(2) |
|
The net loss per share-basic and diluted is for the period from
November 1, 2005 to December 31, 2005. This may
not be comparable to future net income (loss) per share since it
includes the effect of various Offering-related charges. |
|
|
18.
|
Subsequent
Events (unaudited)
|
On March 30, 2006, the Company acquired a portfolio
consisting of two medical office buildings located in Glendale,
California and one building located in Richmond, Virginia
(collectively, the Portfolio) for approximately
$36,100. The portfolio consists of approximately
163,000 square feet of medical office space. The Company
assumed $5,178 of mortgage debt and the Company borrowed $30,000
from the Companys Credit Facility.
On February 15, 2006, the Company acquired Methodist
Professional Center One, located on the campus of Methodist
Hospital in Indianapolis, Indiana, for approximately $39,900.
The acquisition includes 171,500 square feet of medical
office space and an adjacent 951 space parking deck. The
acquisition was funded by the Companys Credit Facility.
73
COGDELL
SPENCER INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Capitalized
|
|
|
Gross Amount at Which Carried
at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Costs
|
|
|
Subsequent to
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building and
|
|
|
Acquisition or
|
|
|
|
|
|
Building and
|
|
|
|
|
|
Accumulated
|
|
|
Date
|
|
|
Date
|
|
|
|
|
Property Name
|
|
Location
|
|
Encumbrances
|
|
|
Land
|
|
|
Improvements(A)
|
|
|
Development
|
|
|
Land
|
|
|
Improvements(A)
|
|
|
Total(B)
|
|
|
Depreciation
|
|
|
Constructed(C)
|
|
|
Acquired
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Augusta POB I
|
|
Georgia
|
|
$
|
|
|
|
$
|
259
|
|
|
$
|
8,431
|
|
|
$
|
|
|
|
$
|
259
|
|
|
$
|
8,431
|
|
|
$
|
8,690
|
|
|
$
|
104
|
|
|
|
1978
|
|
|
|
2005
|
|
|
|
|
|
Augusta POB II
|
|
Georgia
|
|
|
|
|
|
|
602
|
|
|
|
10,646
|
|
|
|
33
|
|
|
|
602
|
|
|
|
10,679
|
|
|
|
11,281
|
|
|
|
132
|
|
|
|
1987
|
|
|
|
2005
|
|
|
|
|
|
Augusta POB III
|
|
Georgia
|
|
|
|
|
|
|
339
|
|
|
|
3,986
|
|
|
|
|
|
|
|
339
|
|
|
|
3,986
|
|
|
|
4,325
|
|
|
|
49
|
|
|
|
1994
|
|
|
|
2005
|
|
|
|
|
|
Augusta POB IV
|
|
Georgia
|
|
|
|
|
|
|
551
|
|
|
|
4,672
|
|
|
|
|
|
|
|
551
|
|
|
|
4,672
|
|
|
|
5,223
|
|
|
|
59
|
|
|
|
1995
|
|
|
|
2005
|
|
|
|
|
|
Our Lady of Bellefonte
|
|
Kentucky
|
|
|
|
|
|
|
|
|
|
|
13,938
|
|
|
|
|
|
|
|
|
|
|
|
13,938
|
|
|
|
13,938
|
|
|
|
120
|
|
|
|
1997
|
|
|
|
2005
|
|
|
|
|
|
East Jefferson Medical Office
Building
|
|
Louisiana
|
|
|
9,773
|
|
|
|
|
|
|
|
12,239
|
|
|
|
8
|
|
|
|
|
|
|
|
12,247
|
|
|
|
12,247
|
|
|
|
131
|
|
|
|
1985
|
|
|
|
2005
|
|
|
|
|
|
Barclay Downs
|
|
North Carolina
|
|
|
4,550
|
|
|
|
2,084
|
|
|
|
3,363
|
|
|
|
87
|
|
|
|
2,084
|
|
|
|
3,450
|
|
|
|
5,534
|
|
|
|
56
|
|
|
|
1987
|
|
|
|
2005
|
|
|
|
|
|
Birkdale Medical Village
|
|
North Carolina
|
|
|
7,758
|
|
|
|
1,087
|
|
|
|
5,829
|
|
|
|
|
|
|
|
1,087
|
|
|
|
5,829
|
|
|
|
6,916
|
|
|
|
61
|
|
|
|
1997
|
|
|
|
2005
|
|
|
|
|
|
Birkdale Retail
|
|
North Carolina
|
|
|
|
|
|
|
142
|
|
|
|
992
|
|
|
|
6
|
|
|
|
142
|
|
|
|
998
|
|
|
|
1,140
|
|
|
|
10
|
|
|
|
2001
|
|
|
|
2005
|
|
|
|
|
|
Cabarrus POB
|
|
North Carolina
|
|
|
|
|
|
|
|
|
|
|
7,446
|
|
|
|
27
|
|
|
|
|
|
|
|
7,473
|
|
|
|
7,473
|
|
|
|
73
|
|
|
|
1997
|
|
|
|
2005
|
|
|
|
|
|
Cabarrus Pediatrics
|
|
North Carolina
|
|
|
(D
|
)
|
|
|
249
|
|
|
|
1,140
|
|
|
|
4
|
|
|
|
249
|
|
|
|
1,144
|
|
|
|
1,393
|
|
|
|
14
|
|
|
|
1997
|
|
|
|
2005
|
|
|
|
|
|
Copperfield Medical Mall
|
|
North Carolina
|
|
|
(D
|
)
|
|
|
1,380
|
|
|
|
3,147
|
|
|
|
26
|
|
|
|
1,380
|
|
|
|
3,173
|
|
|
|
4,553
|
|
|
|
39
|
|
|
|
1989
|
|
|
|
2005
|
|
|
|
|
|
Copperfield MOB
|
|
North Carolina
|
|
|
|
|
|
|
|
|
|
|
9,281
|
|
|
|
|
|
|
|
|
|
|
|
9,281
|
|
|
|
9,281
|
|
|
|
63
|
|
|
|
2005
|
|
|
|
2005
|
|
|
|
|
|
East Rocky Mount Kidney Center
|
|
North Carolina
|
|
|
|
|
|
|
260
|
|
|
|
1,194
|
|
|
|
|
|
|
|
260
|
|
|
|
1,194
|
|
|
|
1,454
|
|
|
|
13
|
|
|
|
2000
|
|
|
|
2005
|
|
|
|
|
|
Gaston Professional Center
|
|
North Carolina
|
|
|
17,358
|
|
|
|
|
|
|
|
21,358
|
|
|
|
446
|
|
|
|
|
|
|
|
21,804
|
|
|
|
21,804
|
|
|
|
244
|
|
|
|
1997
|
|
|
|
2005
|
|
|
|
|
|
Harrisburg Family Physicians
Building
|
|
North Carolina
|
|
|
(E
|
)
|
|
|
270
|
|
|
|
509
|
|
|
|
|
|
|
|
270
|
|
|
|
509
|
|
|
|
779
|
|
|
|
8
|
|
|
|
1996
|
|
|
|
2005
|
|
|
|
|
|
Harrisburg Medical Mall
|
|
North Carolina
|
|
|
(D
|
)
|
|
|
441
|
|
|
|
2,222
|
|
|
|
|
|
|
|
441
|
|
|
|
2,222
|
|
|
|
2,663
|
|
|
|
28
|
|
|
|
1997
|
|
|
|
2005
|
|
|
|
|
|
Lincoln/Lakemont Family Practice
Center
|
|
North Carolina
|
|
|
(E
|
)
|
|
|
270
|
|
|
|
1,025
|
|
|
|
|
|
|
|
270
|
|
|
|
1,025
|
|
|
|
1,295
|
|
|
|
17
|
|
|
|
1998
|
|
|
|
2005
|
|
|
|
|
|
Mallard Crossing Medical Park
|
|
North Carolina
|
|
|
|
|
|
|
1,256
|
|
|
|
4,626
|
|
|
|
|
|
|
|
1,256
|
|
|
|
4,626
|
|
|
|
5,882
|
|
|
|
70
|
|
|
|
1997
|
|
|
|
2005
|
|
|
|
|
|
Midland Medical Mall
|
|
North Carolina
|
|
|
(D
|
)
|
|
|
288
|
|
|
|
1,434
|
|
|
|
|
|
|
|
288
|
|
|
|
1,434
|
|
|
|
1,722
|
|
|
|
18
|
|
|
|
1998
|
|
|
|
2005
|
|
|
|
|
|
Mulberry Medical Park
|
|
North Carolina
|
|
|
1,152
|
|
|
|
|
|
|
|
2,283
|
|
|
|
|
|
|
|
|
|
|
|
2,283
|
|
|
|
2,283
|
|
|
|
40
|
|
|
|
1982
|
|
|
|
2005
|
|
|
|
|
|
Northcross Family Medical Practice
Building
|
|
North Carolina
|
|
|
(E
|
)
|
|
|
270
|
|
|
|
498
|
|
|
|
|
|
|
|
270
|
|
|
|
498
|
|
|
|
768
|
|
|
|
8
|
|
|
|
1993
|
|
|
|
2005
|
|
|
|
|
|
Randolph Medical Park
|
|
North Carolina
|
|
|
(E
|
)
|
|
|
1,621
|
|
|
|
5,386
|
|
|
|
|
|
|
|
1,621
|
|
|
|
5,386
|
|
|
|
7,007
|
|
|
|
90
|
|
|
|
1973
|
|
|
|
2005
|
|
|
|
|
|
Rocky Mount Kidney Center
|
|
North Carolina
|
|
|
1,141
|
|
|
|
198
|
|
|
|
1,366
|
|
|
|
|
|
|
|
198
|
|
|
|
1,366
|
|
|
|
1,564
|
|
|
|
14
|
|
|
|
1990
|
|
|
|
2005
|
|
|
|
|
|
Rocky Mount Medical Park
|
|
North Carolina
|
|
|
7,953
|
|
|
|
982
|
|
|
|
9,854
|
|
|
|
41
|
|
|
|
982
|
|
|
|
9,895
|
|
|
|
10,877
|
|
|
|
168
|
|
|
|
1991
|
|
|
|
2005
|
|
|
|
|
|
Rowan Outpatient Surgery Center
|
|
North Carolina
|
|
|
3,547
|
|
|
|
399
|
|
|
|
4,666
|
|
|
|
|
|
|
|
399
|
|
|
|
4,666
|
|
|
|
5,065
|
|
|
|
37
|
|
|
|
2003
|
|
|
|
2005
|
|
|
|
|
|
Weddington Internal &
Pediatric Medicine
|
|
North Carolina
|
|
|
(D
|
)
|
|
|
489
|
|
|
|
938
|
|
|
|
|
|
|
|
489
|
|
|
|
938
|
|
|
|
1,427
|
|
|
|
12
|
|
|
|
2000
|
|
|
|
2005
|
|
|
|
|
|
190 Andrews
|
|
South Carolina
|
|
|
|
|
|
|
|
|
|
|
2,663
|
|
|
|
|
|
|
|
|
|
|
|
2,663
|
|
|
|
2,663
|
|
|
|
31
|
|
|
|
1994
|
|
|
|
2005
|
|
|
|
|
|
Baptist Northwest
|
|
South Carolina
|
|
|
2,344
|
|
|
|
398
|
|
|
|
2,534
|
|
|
|
1,179
|
|
|
|
1,577
|
|
|
|
2,534
|
|
|
|
4,111
|
|
|
|
35
|
|
|
|
1986
|
|
|
|
2005
|
|
|
|
|
|
Beaufort Medical Plaza
|
|
South Carolina
|
|
|
5,270
|
|
|
|
|
|
|
|
7,399
|
|
|
|
|
|
|
|
|
|
|
|
7,399
|
|
|
|
7,399
|
|
|
|
66
|
|
|
|
1999
|
|
|
|
2005
|
|
|
|
|
|
Mt. Pleasant MOB
|
|
South Carolina
|
|
|
|
|
|
|
|
|
|
|
3,605
|
|
|
|
|
|
|
|
|
|
|
|
3,605
|
|
|
|
3,605
|
|
|
|
46
|
|
|
|
2001
|
|
|
|
2005
|
|
|
|
|
|
Medical Arts Center of Orangeburg
|
|
South Carolina
|
|
|
2,723
|
|
|
|
605
|
|
|
|
4,172
|
|
|
|
2
|
|
|
|
605
|
|
|
|
4,174
|
|
|
|
4,779
|
|
|
|
41
|
|
|
|
1984
|
|
|
|
2005
|
|
|
|
|
|
One Medical
Park HMOB
|
|
South Carolina
|
|
|
5,935
|
|
|
|
|
|
|
|
8,767
|
|
|
|
4
|
|
|
|
|
|
|
|
8,771
|
|
|
|
8,771
|
|
|
|
79
|
|
|
|
1984
|
|
|
|
2005
|
|
|
|
|
|
Providence MOB I
|
|
South Carolina
|
|
|
(F
|
)
|
|
|
|
|
|
|
5,002
|
|
|
|
|
|
|
|
|
|
|
|
5,002
|
|
|
|
5,002
|
|
|
|
64
|
|
|
|
1979
|
|
|
|
2005
|
|
|
|
|
|
Providence MOB II
|
|
South Carolina
|
|
|
(F
|
)
|
|
|
|
|
|
|
2,441
|
|
|
|
|
|
|
|
|
|
|
|
2,441
|
|
|
|
2,441
|
|
|
|
31
|
|
|
|
1985
|
|
|
|
2005
|
|
|
|
|
|
Providence MOB III
|
|
South Carolina
|
|
|
(F
|
)
|
|
|
|
|
|
|
5,609
|
|
|
|
|
|
|
|
|
|
|
|
5,609
|
|
|
|
5,609
|
|
|
|
72
|
|
|
|
1990
|
|
|
|
2005
|
|
|
|
|
|
River Hills Medical Plaza
|
|
South Carolina
|
|
|
3,161
|
|
|
|
1,428
|
|
|
|
4,202
|
|
|
|
|
|
|
|
1,428
|
|
|
|
4,202
|
|
|
|
5,630
|
|
|
|
35
|
|
|
|
1999
|
|
|
|
2005
|
|
|
|
|
|
Roper MOB
|
|
South Carolina
|
|
|
10,164
|
|
|
|
|
|
|
|
11,586
|
|
|
|
33
|
|
|
|
|
|
|
|
11,619
|
|
|
|
11,619
|
|
|
|
158
|
|
|
|
1990
|
|
|
|
2005
|
|
|
|
|
|
St. Francis Community Medical
Office Building
|
|
South Carolina
|
|
|
(G
|
)
|
|
|
|
|
|
|
5,449
|
|
|
|
329
|
|
|
|
|
|
|
|
5,778
|
|
|
|
5,778
|
|
|
|
61
|
|
|
|
2001
|
|
|
|
2005
|
|
|
|
|
|
St. Francis Medical Plaza
|
|
South Carolina
|
|
|
10,689
|
|
|
|
|
|
|
|
8,007
|
|
|
|
|
|
|
|
|
|
|
|
8,007
|
|
|
|
8,007
|
|
|
|
55
|
|
|
|
1998
|
|
|
|
2005
|
|
|
|
|
|
St. Francis MOB
|
|
South Carolina
|
|
|
(G
|
)
|
|
|
|
|
|
|
6,007
|
|
|
|
|
|
|
|
|
|
|
|
6,007
|
|
|
|
6,007
|
|
|
|
67
|
|
|
|
1984
|
|
|
|
2005
|
|
|
|
|
|
St. Francis Womens Center
|
|
South Carolina
|
|
|
(G
|
)
|
|
|
|
|
|
|
7,352
|
|
|
|
95
|
|
|
|
|
|
|
|
7,447
|
|
|
|
7,447
|
|
|
|
51
|
|
|
|
1991
|
|
|
|
2005
|
|
|
|
|
|
Three Medical Park
|
|
South Carolina
|
|
|
8,418
|
|
|
|
|
|
|
|
10,405
|
|
|
|
|
|
|
|
|
|
|
|
10,405
|
|
|
|
10,405
|
|
|
|
108
|
|
|
|
1988
|
|
|
|
2005
|
|
|
|
|
|
West Medical I
|
|
South Carolina
|
|
|
|
|
|
|
|
|
|
|
3,792
|
|
|
|
488
|
|
|
|
|
|
|
|
4,280
|
|
|
|
4,280
|
|
|
|
35
|
|
|
|
2003
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
15,868
|
|
|
$
|
241,461
|
|
|
$
|
2,808
|
|
|
$
|
17,047
|
|
|
$
|
243,090
|
|
|
$
|
260,137
|
|
|
$
|
2,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
(A) |
|
- Includes building and improvements, site improvements,
furniture, fixtures, and equipment and construction in progress.
|
|
(B) |
|
- The aggregate cost for federal income tax purposes was
$295,103 as of December 31, 2005. Depreciable lives range
from 3-50 years.
|
|
(C) |
|
- Represents the year in which the property was placed in
service. |
|
(D) |
|
- Collateral for variable rate mortgage which had a balance of
$10,378 at December 31, 2005 |
|
(E) |
|
- Collateral for variable rate mortgage which had a balance of
$8,962 at December 31, 2005 |
|
(F) |
|
- Collateral for fixed rate mortgage which had a balance of
$9,206 at December 31, 2005 |
|
(G) |
|
- Collateral for variable rate mortgage which had a balance of
$9,448 at December 31, 2005 |
75
A summary
of activity for real estate properties and accumulated
depreciation is as follows:
|
|
|
|
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Real estate
properties:
|
|
|
|
|
Balance, November 1, 2005
|
|
$
|
|
|
Formation Transactions
|
|
|
254,666
|
|
Property acquisition
|
|
|
2,663
|
|
Improvements
|
|
|
2,808
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
260,137
|
|
|
|
|
|
|
Accumulated
depreciation:
|
|
|
|
|
Balance, November 1, 2005
|
|
$
|
|
|
Depreciation
|
|
|
2,713
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
2,713
|
|
|
|
|
|
|
76
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None
|
|
Item 9A.
|
Controls
and Procedures
|
The Companys Chief Executive Officer and Chief Financial
Officer, based on the evaluation of the Companys
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities and Exchange Act of 1934, as amended)
required by paragraph (b) of
Rule 13a-15
or
Rule 15d-15,
have concluded that as of the end of the period covered by this
report, the Companys disclosure controls and procedures
were effective to give reasonable assurances to the timely
collection, evaluation and disclosure of information relating to
the Company that would potentially be subject to disclosure
under the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
During the three month period ended December 31, 2005,
there was no change in the Companys internal control over
financial reporting that has materially affected, or is
reasonably likely to materially affect, the Predecessors
or the Companys internal control over financial reporting.
Item 9B.
Other Information
None.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
Information required by this Item is hereby incorporated by
reference to the material appearing in the Companys Proxy
Statement for its 2006 Annual Meeting of Stockholders to be
filed within 120 days after December 31, 2005.
|
|
Item 11.
|
Executive
Compensation
|
Information required by this Item is hereby incorporated by
reference to the material appearing in the Companys Proxy
Statement for its 2006 Annual Meeting of Stockholders to be
filed within 120 days after December 31, 2005.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is hereby incorporated by
reference to the material appearing in the Proxy Statement under
the captions Election of
Directors Security Ownership of
Certain Beneficial Owners and Security Ownership of
Management.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
Information required by this Item is hereby incorporated by
reference to the material appearing in the Companys Proxy
Statement for its 2006 Annual Meeting of Stockholders to be
filed within 120 days after December 31, 2005.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Information required by this Item is hereby incorporated by
reference to the material appearing the Companys Proxy
Statement for its 2006 Annual Meeting of Stockholders to be
filed within 120 days after December 31, 2005.
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
|
|
|
|
3
|
.1(1)
|
|
Articles of Amendment and
Restatement of Cogdell Spencer Inc.
|
|
3
|
.2(1)
|
|
Bylaws of Cogdell Spencer Inc.
|
|
3
|
.3(1)
|
|
Amended and Restated Agreement of
Limited Partnership of Cogdell Spencer LP.
|
|
3
|
.4(1)
|
|
Declaration of Trust of CS
Business Trust I.
|
|
3
|
.5(1)
|
|
Declaration of Trust of CS
Business Trust II.
|
|
4
|
.0(1)
|
|
Form of stock certificate.
|
77
|
|
|
|
|
|
10
|
.1(2)
|
|
Form of Registration Rights
Agreement, by and among Cogdell Spencer Inc. and the parties
listed on Schedule I thereto.
|
|
10
|
.3(1)
|
|
Form of 2005 Long-Term Stock
Incentive Plan.
|
|
10
|
.4(1)
|
|
Form of Long-Term Stock Incentive
Plan Award for employees without employment agreements.
|
|
10
|
.5(1)
|
|
Form of Cogdell Spencer Inc.
Performance Bonus Plan.
|
|
10
|
.6(1)
|
|
Merger Agreement for Cogdell
Spencer Inc., CS Merger Sub LLC and Cogdell Spencer Advisors,
Inc. dated August 9, 2005.
|
|
10
|
.7(1)
|
|
Form of Indemnification Agreement.
|
|
10
|
.8(1)
|
|
Employment Agreement, dated
October 21, 2005, by and between Cogdell Spencer Inc. and
James W. Cogdell.
|
|
10
|
.9(1)
|
|
Employment Agreement, dated
October 21, 2005, by and between Cogdell Spencer Inc. and
Frank C. Spencer.
|
|
10
|
.10(1)
|
|
Employment Agreement, dated
October 21, 2005, by and between Cogdell Spencer Inc. and
Charles M. Handy.
|
|
10
|
.11(1)
|
|
Engagement Letter from the Company
to Realty Capital International Inc.
|
|
10
|
.12(1)
|
|
Irrevocable Exchange and
Subscription Agreement by and among James W. Cogdell, Cogdell
Spencer Advisors, Inc., Cogdell Spencer LP and Cogdell Spencer
Inc.
|
|
10
|
.13(1)
|
|
Irrevocable Exchange and
Subscription Agreement by and among Frank C. Spencer, Cogdell
Spencer Advisors, Inc., Cogdell Spencer LP and Cogdell Spencer
Inc.
|
|
10
|
.14(1)
|
|
Form of Irrevocable Exchange and
Subscription Agreement for all holders of interests in the
Existing Entities, with the exclusion of James W. Cogdell and
Frank C. Spencer.
|
|
10
|
.15(1)
|
|
Form of Tax Protection Agreement
for Existing Entities, except for Cabarrus POB, LLC, Medical
Investors I, LLC and Medical Investors III, LLC.
|
|
10
|
.16(1)
|
|
Form of Tax Protection Agreement
for Cabarrus POB, LLC, Medical Investors I, LLC and Medical
Investors III, LLC.
|
|
10
|
.17(1)
|
|
Form of Transaction Agreement by
and among Cogdell Spencer Inc., Cogdell Spencer LP, the
applicable Existing Entity and CS Merger Sub LLC.
|
|
10
|
.18(1)
|
|
Commitment letter dated
October 4, 2005, for $100,000,000 senior unsecured
revolving credit facility among Cogdell Spencer Inc., Bank of
America, N.A., Bank of America Securities LLC, Citigroup Global
Markets Inc., and Citigroup North America, Inc.
|
|
10
|
.19(1)
|
|
Form of Cogdell Spencer Inc. 2005
Equity Incentive Plan Restricted Stock Award Agreement.
|
|
10
|
.20(1)
|
|
Put Assignment Agreement dated
August 11, 2005.
|
|
10
|
.21(1)
|
|
Form of Consent and Election Form.
|
|
10
|
.22(1)
|
|
Form of Long-Term Stock Incentive
Plan Award for employees with employment agreements.
|
|
10
|
.23(1)
|
|
Schedule to Exhibit 10.14
reflecting consideration to be received by Randolph D. Smoak,
M.D. and Charles M. Handy.
|
|
14
|
.1(3)
|
|
Code of Ethics.
|
|
21
|
.1(1)
|
|
List of Subsidiaries of Cogdell
Spencer Inc.
|
|
23
|
.1(3)
|
|
Consent of Deloitte &
Touche LLP.
|
|
31
|
.1(3)
|
|
Certifications pursuant to
Rule 13a-14(a)
and
15d-14(a).
|
|
32
|
.1(3)
|
|
Certifications pursuant to
Section 1350.
|
|
|
|
(1) |
|
Incorporated by reference to the Companys Registration
Statement on Form
S-11 (File
No. 333-127396). |
|
(2) |
|
Incorporated by reference to the Companys quarterly report
on
Form 10-Q
for the period ended September 30, 2005. |
|
(3) |
|
Filed herewith. |
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
COGDELL SPENCER INC.
Registrant
|
|
|
|
Date: March 31, 2006
|
|
/s/ Frank C. Spencer
|
|
|
Frank C. Spencer
President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
Date: March 31, 2006
|
|
/s/ Charles M. Handy
|
|
|
Charles M. Handy
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
|
|
Date: March 31, 2006
|
|
/s/ James W. Cogdell
|
|
|
James W. Cogdell
Chairman of the Board of Directors
|
|
|
|
Date: March 31, 2006
|
|
/s/ Frank C. Spencer
|
|
|
Frank C. Spencer
President, Chief Executive Officer and Director
|
|
|
|
Date: March 31, 2006
|
|
/s/ John R. Georgius
|
|
|
John R. Georgius
Director
|
|
|
|
Date: March 31, 2006
|
|
/s/ Christopher E.
Lee
|
|
|
Christopher E. Lee
Director
|
|
|
|
Date: March 31, 2006
|
|
/s/ Randolph D. Smoak,
M.D.
|
|
|
Randolph D. Smoak, M.D.
Director
|
|
|
|
Date: March 31, 2006
|
|
/s/ Richard C.
Neugent
|
|
|
Richard C. Neugent
Director
|
|
|
|
Date: March 31, 2006
|
|
/s/ Richard B.
Jennings
|
|
|
Richard B. Jennings
Director
|
79