COLE CREDIT PROPERTY TRUST II, INC.
Filed
Pursuant to Rule 424(b)(3)
Registration No. 333-138444
COLE CREDIT PROPERTY TRUST II, INC.
SUPPLEMENT NO. 1 DATED MAY 16, 2007
TO THE PROSPECTUS DATED MAY 11, 2007
This document supplements, and should be read in conjunction with, the prospectus of Cole
Credit Property Trust II, Inc. dated May 11, 2007. Unless otherwise defined in this supplement,
capitalized terms used in this supplement shall have the same meanings as set forth in the
prospectus.
The purpose of this supplement is to describe the following:
(1) the status of the offering of shares in Cole Credit Property Trust II, Inc.;
(2)
recent real property investments;
(3)
an updated Managements Discussion and Analysis of Financial Condition and Results of Operations;
and
(4) updated financial information regarding Cole Credit Property Trust II, Inc.
Status of Our Public Offerings
We commenced our initial public offering on June 27, 2005. We have accepted investors
subscriptions received through May 11, 2007, and have issued an
aggregate of approximately 51,600,000 shares of our common stock to stockholders, with gross proceeds of approximately $515.3
million distributed to us.
On
May 11, 2007, our follow-on offering of 150,000,000 shares of
common stock was declared effective by the Securities and Exchange
Commission.
Of these shares, we are offering 125,000,000 shares in a primary
offering and 25,000,000 shares
under our distribution reinvestment plan. As of May 15, 2007, we had received no proceeds in our
follow-on offering. We expect to begin accepting investors
subscriptions in connection with our follow-on offering after we
terminate our initial public offering on or about May 23, 2007.
Real Property Investments
The section captioned Prospectus Summary Description of Real Estate Investments beginning
on page 7 of the prospectus is supplemented with the following information:
The
following table provides information regarding properties we acquired since May 11,
2007, the date of our prospectus. We purchased each property from an unaffiliated
third party:
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Rentable Square |
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Purchase |
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Property Description |
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Tenant |
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Feet |
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Price |
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Rite Aid Lima, OH |
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Rite Aid of Ohio, Inc. |
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14,564 |
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$ |
4,745,962 |
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Rite Aid Allentown, PA |
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Rite Aid of Pennsylvania, Inc. |
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14,564 |
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5,561,112 |
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29,128 |
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$ |
10,307,074 |
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We expect to use substantially all of the net proceeds from this offering to acquire and
operate a portfolio of commercial real estate consisting primarily of freestanding, single-tenant
commercial properties net leased to investment grade tenants, which generally are companies that
have a debt rating by Moodys of Baa3 or better or a credit rating by Standard & Poors of BBB or
better, or are guaranteed by a company with such rating, and other creditworthy tenants located
throughout the United States. We also may invest in a smaller number of multi-tenant properties
that compliment our overall investment objectives. In addition, we may invest in entities that make
similar investments. If our advisor determines that, due to the state of the real estate market or
in order to diversify our investment portfolio, it would be advantageous to us, we also may invest
in mortgage loans secured by commercial properties similar to those in which we invest directly. We
intend to hold each property for eight to ten years.
Our advisor, Cole Advisors II, makes recommendations to our board of directors for our
investments. All acquisitions of commercial properties are evaluated for tenant creditworthiness
and the reliability and stability of their future income and capital appreciation potential. We
consider the risk profile, credit quality and reputation of potential tenants and the impact of
each particular acquisition as it relates to the portfolio as a whole. Our board of directors will
exercise its fiduciary duties to our stockholders in
determining to approve or reject each of these investment recommendations. See the section of
this prospectus captioned Investment Objectives and Policies Real Property Investments for a
description of our properties as of the date of this prospectus. As we acquire properties, we will
supplement this prospectus to describe material changes to our portfolio.
The
following information supplements the section of our prospectus
captioned Investment Objectives and Policies Real Property Investments beginning on page 84 of
the prospectus:
We engage in the acquisition and ownership of commercial properties throughout the
United States. We invest primarily in income-generating retail properties, net leased to investment
grade and other creditworthy tenants.
Since
May 11, 2007, the date of prospectus, we, through separate
wholly-owned limited liability companies, have acquired a 100% fee
simple interest in two properties consisting of approximately 29,000 gross rentable square
feet located in two states.
We purchased each property from an unaffiliated third party through the use of mortgage notes
payable and proceeds from our ongoing public offering of our common stock. The following table
summarizes these properties in order of acquisition date:
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Rentable |
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Year |
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Purchase |
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Fees Paid to |
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Square |
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Physical |
Property |
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Type |
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Date Acquired |
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Built |
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Price |
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Sponsor(1) |
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Feet |
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Occupancy |
Rite Aid Lima, OH |
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Drugstore |
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5/14/07 |
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2005 |
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$ |
4,745,962 |
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$ |
125,949 |
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14,564 |
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100% |
Rite Aid
Allentown, PA |
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Drugstore |
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5/15/07 |
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2006 |
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5,561,112 |
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147,372 |
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14,564 |
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100% |
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$ |
10,307,074 |
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$ |
273,321 |
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29,128 |
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(1) |
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Fees paid to sponsor include payments made to an affiliate of our advisor
for acquisition fees in connection with the property acquisition and payments to our advisor for
finance coordination fees for services in connection with the origination or assumption of debt
financing obtained to acquire the respective property. For more detailed information on fees paid
to affiliates of our sponsor, see the section captioned Management Compensation beginning on page
58 of the prospectus. |
The following table sets forth the principal provisions of the lease terms for the major tenants at
each property listed above:
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Total |
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% of |
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Current |
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Base |
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Number |
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Square |
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Total |
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Annual |
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Rent per |
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of |
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Feet |
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Square |
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Renewal |
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Base |
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Square |
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Lease Term |
Property |
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Tenants |
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Major Tenants* |
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Leased |
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Feet |
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Options** |
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Rent |
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Foot |
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Beginning |
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To |
Rite Aid Lima, OH
(Bellefontaine) |
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1 |
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Rite Aid of Ohio, Inc. |
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14,564 |
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100 |
% |
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6/5 yr |
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$ |
370,185 |
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25.42 |
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5/14/07 |
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1/31/26 |
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Rite Aid Allentown, PA |
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1 |
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Rite Aid of Pennsylvania, Inc. |
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14,564 |
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100 |
% |
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6/5 yr. |
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419,864 |
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28.83 |
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5/15/07 |
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2/21/27 |
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* |
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Major tenants include those tenants that occupy greater than 10.0% of the rentable square feet of their respective property. |
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** |
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Represents option renewal period/term of each option. |
Cole Realty Advisors has the sole and exclusive right to manage, operate, lease and supervise
the overall maintenance of the properties listed above and currently will receive a property
management fee of up to 2.0% of the monthly gross revenues from our
single-tenant properties and up to 4.0% of the monthly gross revenues from our
multi-tenant properties. We currently have no plan
for any renovations, improvements or development of the properties
listed above.
2
In connection with the property acquisitions noted above we incurred the following fixed
and variable rate mortgage notes:
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Fixed |
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Rate |
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Fixed |
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Loan |
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Interest |
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Maturity |
Property |
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Amount |
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Rate |
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Date |
Rite Aid Lima,
OH (Bellefontaine) |
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$ |
3,103,000 |
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5.46% |
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6/1/17 |
Rite Aid
Allentown, PA |
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3,615,000 |
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5.78% |
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6/1/17 |
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$ |
6,718,000 |
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(5) |
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Lender: Bear Stearns Commercial Mortgage. |
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(7) |
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Lender: Wachovia Bank, N.A. |
The fixed rate debt mortgage notes require monthly interest-only payments with the
principal balance due on various dates from May 2017 through June 2017. The variable rate debt
mortgage notes bear interest at the one-month LIBOR rate plus 200 basis points and require monthly
interest-only payments and generally mature within 90 days. Each of the mortgage notes are secured
by the respective property. The mortgage notes are generally non-recourse to the Company and Cole
Op II, but both are liable for customary non-recourse carveouts.
The fixed rate mortgage notes generally may not be prepaid, in whole or in part, except under
the following circumstances: (i) full prepayment may be made on any of the three (3) monthly
payment dates occurring immediately prior to the maturity date, and (ii) partial prepayments
resulting from the application of insurance or condemnation proceeds to reduce the outstanding
principal balance of the mortgage notes. Notwithstanding the prepayment limitations, the Company
may sell the properties to a buyer that assumes the respective mortgage loan. The transfer would be
subject to the conditions set forth in the individual propertys mortgage note document, including
without limitation, the lenders approval of the proposed buyer and the payment of the lenders
fees, costs and expenses associated with the sale of the property and the assumption of the loan.
In the event that a mortgage note is not paid off on the respective maturity date, each
mortgage note includes hyperamortization provisions. The interest rate during the hyperamortization
period shall be the fixed interest rate as stated on the respective mortgage note agreement plus
two percent (2.0%). The individual mortgage note maturity date, under the hyperamortization
provisions, will be extended by twenty (20) years. During such period, the lender will apply 100%
of the rents collected to (i) all payments for escrow or reserve accounts, (ii) payment of interest
at the original fixed interest rate, (iii) payments for the replacement reserve account, (iv) any
other amounts due in accordance with the mortgage note agreement other than any additional interest
expense, (v) any operating expenses of the property pursuant to an approved annual budget, (vi) any
extraordinary expenses, (vii) payments to be applied to the reduction of the principal balance of
the mortgage note, and (viii) any additional interest expense, which is not paid will be added to
the principal balance of the mortgage note.
For federal income tax purposes, the depreciable basis in the properties noted above is
approximately $10.3 million in total. When we calculate depreciation expense for tax purposes, we
will use the straight-line method. We depreciate buildings and improvements based upon estimated
useful lives of 40 years, respectively. The depreciable basis in the properties noted above are
detailed as follows:
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Depreciable |
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Property |
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Tax Basis |
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Rite Aid Lima, OH (Bellefontaine) |
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$ |
4,745,962 |
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Rite Aid Allentown, PA |
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5,561,112 |
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$ |
10,307,074 |
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Tenant
Lease Expirations
For
each property supplemented above no lease expirations are scheduled
during the next ten years.
3
Potential Property Investments
Our advisor has identified the following properties as potential suitable investments
for us. The acquisition of each such property is subject to a number of conditions. A significant
condition to acquiring any one of these potential acquisitions is our ability to raise sufficient
proceeds in this offering to pay a portion of the purchase price. An additional condition to
acquiring these properties will be our securing debt financing to pay the balance of the purchase
price. Such financing may not be available on acceptable terms or at all.
Our evaluation of a property as a potential acquisition, including the appropriate
purchase price, will include our consideration of a property condition report; unit-level store
performance; property location, visibility and access; age of the property, physical condition and
curb appeal; neighboring property uses; local market conditions, including vacancy rates; area
demographics, including trade area population and average household income; neighborhood growth
patterns and economic conditions; and the presence of demand generators.
We will decide whether to acquire these properties generally based upon:
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satisfaction of the conditions to the acquisitions contained in the respective contracts; |
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no material adverse change occurring relating to the properties, the tenants or in the local economic conditions; |
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our receipt of sufficient net proceeds from the offering of our common stock to the
public and financing proceeds to make these acquisitions; and |
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our receipt of satisfactory due diligence information including appraisals,
environmental reports and tenant and lease information. |
Other properties may be identified in the future that we may acquire before or instead
of these properties. Due to the considerable conditions to the consummation of the acquisition of
these properties, we cannot make any assurances that the closing of these acquisitions is probable.
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Approximate |
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Expected |
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Approximate |
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Compensation to |
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Property |
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Acquisition Date |
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Seller(1) |
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Purchase Price(2) |
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Sponsor(3) |
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Staples Warsaw, IN |
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May 2007 |
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Ric Warsaw Trust |
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$ |
3,215,000 |
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$ |
96,000 |
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Kroger La Grange, GA |
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May 2007 |
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Commerce, LLC |
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7,300,000 |
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219,000 |
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$ |
10,515,000 |
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$ |
315,000 |
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(1) |
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Seller is an unaffiliated third party. |
4
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(2) |
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Approximate purchase price does not include acquisition costs which we expect to be
approximately 3.0% of the contract purchase price. |
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(3) |
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Amounts include acquisition fees payable to an affiliate of our advisor for
acquisition fees in connection with the property acquisition and payments to our advisor for
finance coordination fees for services in connection with the origination or assumption of debt
financing to acquire the respective property. |
Each potential property acquisition is subject to a net lease, pursuant to which the
tenants are required to pay substantially all operating expenses and capital expenditures in
addition to base rent. In the case of a multi-tenant commercial property the tenants are also
required to pay a proportionate amount of common area maintenance charges in addition to the items
listed above.
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Total Square |
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% of Total Square |
Property |
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Major Tenants* |
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Guarantor |
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Feet Leased |
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Feet Leased |
Staples Warsaw, IN |
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Staples the Office Superstore East, Inc. |
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Staples, Inc. |
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23,990 |
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100 |
% |
Kroger La Grange, GA |
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The Kroger Company |
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N/A |
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61,331 |
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100 |
% |
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85,321 |
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* |
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Major tenants are those tenants that occupy greater than 10.0% of the
rentable square of their respective property. |
The table below provides leasing information for the major tenants at each respective
property:
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Renewal |
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Annual |
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Base Rent per |
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Lease Term |
Property |
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Major Tenants* |
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Options |
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Base Rent |
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Square Foot |
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Beginning |
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To |
Staples Warsaw, IN |
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Staples the Office Superstore East, Inc. |
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4/5 yr. |
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261,491 |
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$ |
10.90 |
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5/1/98 |
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5/31/13 |
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Kroger La Grange, GA |
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The Kroger Company |
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6/5 yr. |
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531,126 |
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8.66 |
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2/1/98 |
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1/31/18 |
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The following table outlines the anticipated loan terms on debt financing to be secured
in connection with the purchase of the potential property acquisitions our advisor has identified
for us. Generally, we expect the loans to have a fixed rate, with interest only payments and a five
to ten-year maturity.
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Property |
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Debt Financing |
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Type |
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Rate |
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Maturity Date |
Staples Warsaw, IN |
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$ |
1,864,700 |
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Interest Only |
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5.75 |
% |
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June 2017 |
Kroger La Grange, GA |
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4,745,000 |
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Interest Only |
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5.79 |
% |
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June 2017 |
Each of our properties is adequately covered by insurance and we intend to obtain
adequate insurance coverage for all future properties that we acquire.
5
The prospectus is hereby supplemented with the following Managements Discussion and Analysis
of Financial Condition and Results of Operations:
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our accompanying
consolidated financial statements and notes thereto.
Overview
We commenced our principal operations on September 23, 2005, when we issued the initial
486,000 shares of common stock in our Initial Public Offering. Prior to such date, we were considered a
development stage company.
We derive a substantial portion of our revenue from our rental income. As a result, our
operating results and cash flows are primarily influenced by rental income from our commercial
properties and interest expense on our property acquisition indebtedness. Rental income accounted
for approximately 93% and 95% of total revenue during the three months ended March 31, 2007 and
2006, respectively. As approximately 100% of the rentable square feet at our properties is under
lease, with an average remaining lease term of approximately 11.8 years, we believe our exposure to
changes in commercial rental rates on our portfolio is substantially mitigated. As of March 31,
2007, the debt leverage ratio of our portfolio, which is the ratio of mortgage notes payable to
total real estate assets, was approximately 53%, with approximately 1% of the debt, or $4.5
million, subject to variable interest rates. We intend to manage our interest rate risk by repaying
approximately $4.5 million, of which approximately $1.9 million has been paid as of May 11, 2007,
or 100%, of our short-term variable rate debt as it matures during the three-month period ending
June 30, 2007. We expect to fund the repayments with proceeds from the sale of our common stock.
Additionally, as we continue to raise capital from the sale of our common stock and invest the
proceeds in commercial real estate, we will be subject to changes in real estate prices and changes
in interest rates on new indebtedness used to acquire the properties. We may manage our risk of
changes in real estate prices on future property acquisitions by entering into purchase agreements
and loan commitments simultaneously such that our operating yield is determinable, by contracting
with developers for future delivery of properties, or by entering into sale-leaseback transactions.
We expect to manage our interest rate risk by monitoring the interest rate environment in
connection with our planned property acquisitions to determine the appropriate acquisition
financing, which may include fixed rate loans, variable rate loans or interest rate hedges. If we
are unable to acquire suitable properties or obtain suitable financing for future acquisitions, our
results of operations may be adversely affected.
Our management is not aware of any material trends or uncertainties, other than national
economic conditions affecting real estate generally (such as lower capitalization rates and
increasing interest rates which lead to higher interest expense), that may reasonably be expected
to have a material impact, favorable or unfavorable, on revenues or income from the acquisition and
operation of real properties and mortgage loans, other than those
referred to in the section of this prospectus captioned Risk
Factors.
As of March 31, 2007, we owned 92 single-tenant, freestanding retail properties, 15
single-tenant freestanding commercial properties, and eight multi-tenant retail properties, all of
which were approximately 100% leased. During the three months ended March 31, 2007, we acquired 18
single-tenant, freestanding retail properties, two single-tenant, freestanding commercial
properties and four multi-tenant retail properties (see Notes 3 and 4 to the condensed consolidated
financial statements for the three months ended March 31, 2007). Our results of operations
are not indicative of those expected in future periods as we expect that rental income, operating
expenses, asset management fees, depreciation expense, interest expense, and net income will each
increase in the future as we acquire additional properties and as our current properties are owned
for an entire period.
Results of Operations
Three Months Ended March 31, 2007 Compared to the Three Months Ended March 31, 2006
As of March 31, 2007, we owned 115 commercial properties compared to 28 commercial properties
at March 31, 2006, all of which were approximately 100% leased. Accordingly, our results of
operations for the three months ended March 31, 2007 as compared to the three months ended March
31, 2006 reflect significant increases in all categories.
Revenue. Rental income increased approximately $9.3 million to approximately $11.8 million for
the three months ended March 31, 2007 compared to approximately $2.4 million for the three months
ended March 31, 2006. Additionally, tenant reimbursement income increased approximately $697,000 to
approximately $821,000 for the three months ended March 31, 2007 compared to approximately $124,000
for the three months ended March 31, 2006. The increases in rental income and tenant reimbursement
income were primarily due to the acquisition of 87 new properties after March 31, 2006. Our revenue
primarily consists of rental income from net leased commercial properties, which accounted for
approximately 93% and 95% of total revenues during the three months ended March 31, 2007 and 2006,
respectively.
General and Administrative Expenses. General and administrative expenses increased
approximately $103,000 to approximately $314,000 for the three months ended March 31, 2007 compared
to approximately $211,000 for the three
6
months ended March 31, 2006. The increase was primarily due
to increases in state franchise and income taxes due to the increase in the number of properties
owned, from 28 properties in 2006 to 115 properties in 2007. The primary general and administrative
expense items are legal and accounting fees, organizational costs, state franchise and income
taxes, other licenses and fees, and insurance.
Property Operating Expenses. Property operating expenses increased approximately $889,000 to
approximately $1.0 million for the three months ended March 31, 2007 compared to approximately
$140,000 for the three months ended March 31, 2006. The increase was primarily due to the
acquisition of certain properties subsequent to March 31, 2006, for which we initially paid certain
operating expenses and are reimbursed by the tenant in accordance with the respective lease
agreements, including six multi-tenant shopping centers. At March 31, 2007, we owned eight
multi-tenant shopping centers compared to two at March 31, 2006. The increase was also due to an
increase in bad debt expense of approximately $184,000. The primary property operating expense
items are repairs and maintenance, property taxes, bad debt expense and insurance.
Property and Asset Management Fees. Pursuant to the advisory agreement with our advisor, we
are required to pay to our advisor a monthly asset management fee equal to 1/12 of 0.25%
of the aggregate asset value of our properties determined in accordance with the advisory agreement
as of the last day of the preceding month. Pursuant to the property management agreement with our
property manager, we have been required to pay to our property manager a property
management and leasing fee in an amount up to 2.0% of gross revenues determined pursuant to the
agreement, less all payments to third-party management subcontractors.
Property and asset management fees increased approximately $414,000 to approximately $540,000
for the three months ended March 31, 2007 compared to approximately $126,000 for the three months
ended March 31, 2006. Property management fees increased approximately $168,000 to approximately
$213,000 in 2007 from approximately $45,000 in 2006. The increase in property management fees was
primarily due to an increase in rental income to approximately $11.8 million in 2007 from
approximately $2.4 million in 2006. Asset management fees increased approximately $246,000 to
approximately $327,000 in 2007 from approximately $81,000 in 2006. The increase in asset management
fees was primarily due to an increase in the average aggregate book value of properties owned to
approximately $596.5 million at March 31, 2007 from approximately $131.0 million at March 31, 2006.
Depreciation & Amortization Expenses. Depreciation and amortization expenses increased
approximately $3.4 million to approximately $4.3 million for the three months ended March 31, 2007
compared to approximately $832,000 for the three months ended March 31, 2006. The increase was
primarily due to an increase in the average aggregate book value of properties owned to
approximately $596.5 million at March 31, 2007 from approximately $131.0 million at March 31, 2006.
The increase in aggregate book value is due to the acquisition of 87 new properties subsequent to
March 31, 2006.
Interest Income. Interest income increased approximately $306,000 to approximately $351,000
during the three months ended March 31, 2007 compared to approximately $46,000 for the three months
ended March 31, 2006. The increase was primarily due to having higher uninvested cash throughout
the year due to proceeds from our initial public offering. Cash and cash equivalents was approximately
$37.7 million at March 31, 2007 compared to approximately $5.1 million at March 31, 2006.
Interest Expense. Interest expense increased approximately $3.6 million to approximately $5.1
million for the three months ended March 31, 2007 compared to approximately $1.5 million during the
three months ended March 31, 2006. The increase was primarily due to an increase in the average
mortgage notes payable outstanding during 2007 to approximately $304.0 million from approximately
$87.0 million during 2006. The increase in average mortgage notes payable was primarily due to the
acquisition of 87 new properties subsequent to March 31, 2006.
Our property acquisitions during the three months ended March 31, 2007 were financed in part
with short-term and long-term notes payable as discussed in Note 4 to our condensed consolidated
financial statements. Our interest expense in future periods will vary based on our level of future
borrowings, which will depend on the level of proceeds raised in our
initial public offering and our follow-on
public offering, the cost of borrowings, and the opportunity to acquire real estate assets which meet our
investment objectives.
Funds From Operations
We believe that funds from operations (FFO) is a beneficial indicator of the performance of
a REIT. Because FFO calculations exclude such factors as depreciation and amortization of real
estate assets and gains or losses from sales of operating real estate assets (which can vary among
owners of identical assets in similar conditions based on historical cost accounting and
useful-life estimates), they facilitate comparisons of operating performance between periods and
between other REITs. Our management believes that accounting for real estate assets in accordance
with generally accepted accounting principles in the United States (GAAP) implicitly assumes that
the value of real estate assets diminishes
7
predictability over time. Since real estate values have
historically risen or fallen with market conditions, many industry investors and analysts have
considered the presentation of operating results for real estate companies that use historical cost
accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together
with the required GAAP presentations, provide a more complete understanding of our performance
relative to our competitors and a more informed and appropriate basis on which to make decisions
involving operating, financing, and investing activities. Other REITs may not define FFO in
accordance with the current National Association of Real Estate Investment Trusts (NAREIT)
definition (as we do) or may interpret the current NAREIT definition differently than we do.
FFO is a non-GAAP financial measure and does not represent net income as defined by GAAP. Net
income as defined by GAAP is the most relevant measure in determining our operating performance
because FFO includes adjustments that
investors may deem subjective, such as adding back expenses such as depreciation and amortization.
Accordingly, FFO should not be considered as an alternative to net income as an indicator of our
operating performance.
Our calculation of FFO is presented in the following table for the periods ended as indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Net Income (loss) |
|
$ |
1,684,727 |
|
|
$ |
(182,588 |
) |
Add: |
|
|
|
|
|
|
|
|
Depreciation of real estate assets |
|
|
2,971,234 |
|
|
|
578,996 |
|
Amortization of lease related costs |
|
|
1,300,031 |
|
|
|
253,499 |
|
|
|
|
|
|
|
|
FFO |
|
$ |
5,955,992 |
|
|
$ |
649,907 |
|
|
|
|
|
|
|
|
Set forth below is additional information (often considered in conjunction with FFO)
that may be helpful in assessing our operating results:
|
|
|
In order to recognize revenues on a straight-line basis
over the terms of the respective leases, we recognized
additional revenue by straight-lining rental revenue of
approximately $559,000 and $132,000 during the three months
ended March 31, 2007 and 2006, respectively. |
|
|
|
|
During the three months ended March 31, 2007 and 2006
amortization of deferred financing costs totaled
approximately $292,000 and $73,000, respectively. |
Liquidity and Capital Resources
We expect to continue to raise capital through the sale of our common stock and to utilize the
net proceeds from the sale of our common stock and proceeds from secured or unsecured financings to
complete future property acquisitions. As of March 31, 2007, we had received and accepted
subscriptions for 43,405,817 shares of common stock in our initial public offering for gross proceeds of
approximately $433.5 million.
Short-term Liquidity and Capital Resources
We expect to meet our short-term liquidity requirements through net cash provided by property
operations and proceeds from the sale of our common stock. We expect our operating cash flows to
increase as additional properties are added to our portfolio. We expect that approximately 88.6% of
the gross proceeds from the sale of our common stock will be invested in real estate, approximately
9.2% will be used to pay sales commissions, dealer manager fees and offering and organizational
costs, with the remaining 2.2% used to pay acquisition and advisory fees and acquisition expenses.
The offering and organizational costs associated with the sale of our common stock are initially
paid by our advisor, and reimbursed by us up to 1.5% of the capital raised by us in connection with
our offering of shares of common stock. As of March 31, 2007, Cole Advisors II had paid
approximately $3.8 million of offering and organization costs since the inception of the initial
public offering and we had reimbursed our advisor for approximately $3.8 million of such costs, of which
approximately $59,000 was expensed as organizational costs.
Between March 31, 2007 and May 15, 2007, we completed the acquisition of 18 single-tenant properties,
three multi-tenant properties, and a portfolio consisting of 22 single-tenant restaurants in
separate transactions for an aggregate purchase price of approximately $220.4 million, exclusive of
closing costs. The acquisitions were funded with proceeds from the initial public offering and
approximately $161.5 million in aggregate proceeds from 25 loans.
8
On March 28, 2007, our board of directors declared a daily distribution of $0.0017808 per
share for stockholders of record as of the close of business on each day of the period commencing
on April 1, 2007 and ending on June 30, 2007. The payment date for each record date in April 2007
will be in May 2007, the payment date for each record date in May 2007 will be in June 2007, and
the payment date for each record date in June 2007 will be in July 2007.
Long-term Liquidity and Capital Resources
We expect to meet our long-term liquidity requirements through proceeds from the sale of our
common stock , proceeds from secured or unsecured financings from banks and other lenders, the
selective and strategic sale of properties and net cash flows from operations. We expect that our
primary uses of capital will be for property acquisitions, for the payment of tenant improvements,
for the payment of offering-related costs, for the payment of operating expenses, including
interest expense on any outstanding indebtedness, and for the payment of distributions to our
stockholders.
We expect that substantially all net cash generated from operations will be used to pay
distributions to our stockholders
after certain capital expenditures, including tenant improvements and leasing commissions, are
paid at the properties; however, we may use other sources to fund distributions as necessary. To
the extent that cash flows from operations are lower due to fewer properties being acquired or
lower returns on the properties, distributions paid to our stockholders may be lower. We expect
that substantially all net cash resulting from equity or debt financing will be used to fund
acquisitions, certain capital expenditures identified at acquisition, repayments of outstanding
debt, or distributions to our stockholders. Over the long term, we intend to reduce our aggregate
borrowings as a percentage of our real estate assets.
As of March 31, 2007, we had cash and cash equivalents of approximately $37.7 million, which
we expect to be used primarily to invest in additional real estate, pay operating expenses and pay
stockholder distributions.
Our contractual obligations as of March 31, 2007, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less Than 1 |
|
|
|
|
|
|
|
|
|
|
More Than 5 |
|
|
|
Total |
|
|
Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
Years |
|
Principal payments
fixed rate debt |
|
$ |
385,148,900 |
|
|
$ |
348,519 |
|
|
$ |
26,826,362 |
|
|
$ |
53,518,574 |
|
|
$ |
304,455,445 |
|
Interest payments
fixed rate debt |
|
|
188,429,220 |
|
|
|
16,645,094 |
|
|
|
65,615,682 |
|
|
|
37,235,837 |
|
|
|
68,932,607 |
|
Principal payments
variable rate
debt |
|
|
4,531,000 |
|
|
|
4,531,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments
variable rate
debt (1) |
|
|
70,948 |
|
|
|
70,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
578,180,068 |
|
|
$ |
21,595,561 |
|
|
$ |
92,442,044 |
|
|
$ |
90,754,411 |
|
|
$ |
373,388,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A rate of 7.38% was used to calculate the variable debt payment
obligations in future periods. This is the rate effective as of March
31, 2007. |
Cash Flow Analysis
Three Months Ended March 31, 2007 Compared to the Three Months Ended March 31, 2006
Operating Activities
Net cash provided by operating activities increased approximately $6.8 million to
approximately $7.5 million for the three months ended March 31, 2007 compared to approximately
$702,000 for the three months ended March 31, 2006. The increase was primarily due to an increase
in net income for the period of approximately $1.9 million, increases in depreciation and
amortization expenses totaling approximately $3.6 million and an increase in deferred rent and
other liabilities of approximately $1.1 million. See
Results of Operations for a more complete
discussion of the factors impacting our operating performance.
Investing Activities
Net cash used in investing activities increased approximately $220.0 million to approximately
$292.5 million for the
9
three months ended March 31, 2007 compared to approximately $72.5 million
for the three months ended March 31, 2006. The increase was primarily due to the acquisition of 24
real estate properties during the 2007 period compared to the
acquisition of 14 properties during the 2006 period and an
approximately $6.7 million increase in restricted cash, due to an increase cash held in escrow
pending the issuance of shares to investors.
Financing Activities
Net cash provided by financing activities increased approximately $212.8 million to
approximately $285.2 million for the three months ended March 31, 2007 compared to approximately
$72.3 million for the three months ended March 31, 2006. The increase was primarily due to an
increase in net proceeds from the issuance of common stock in the
initial public offering of approximately
$82.4 million and an increase in proceeds from the issuance of mortgage and affiliate notes of
approximately $154.2 million, offset by an increase in repayments of mortgage and affiliate notes
payable of approximately $22.9 million. The increase in proceeds from issuance of mortgage and
affiliate notes payable was due to the issuance of 21 new mortgages
in the 2007 period compared to 12 new
mortgages in the 2006 period and borrowing of approximately $22.2 million on its revolving mortgage notes
payable. The increase in repayments of mortgage and affiliate notes payable was due to the
repayment of short-term variable rate debt at its maturity during 2007 and the repayment of the
approximately $22.2 million in borrowings on its revolving mortgage notes payable during the three
months ended March 31, 2007.
Election as a REIT
We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code
commencing with our taxable year ended December 31, 2005. If we qualify for taxation as a REIT, we
generally will not be subject to federal corporate income tax to the extent we distribute our REIT
taxable income to our stockholders, and so long as we distribute at least 90% of our REIT taxable
income. REITs are subject to a number of other organizational and operational requirements. Even if
we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income
and property, and federal income and excise taxes on our undistributed income. We believe we are
organized and operating in such a manner as to qualify to be taxed as a REIT for the taxable year
ended December 31, 2007.
Inflation
The real estate market has not been affected significantly by inflation in the past several
years due to the relatively low inflation rate. However, in the event inflation does become a
factor, the leases on the real estate we may acquire may not include provisions that would protect
us from the impact of inflation.
Critical Accounting Policies and Estimates
Our accounting policies have been established to conform to GAAP. The preparation of financial
statements in conformity with GAAP requires us to use judgment in the application of accounting
policies, including making estimates and assumptions. These judgments affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenue and expenses during the reporting periods.
If our judgment or interpretation of the facts and circumstances relating to the various
transactions had been different, it is possible that different accounting policies would have been
applied, thus, resulting in a different presentation of the financial statements. Additionally,
other companies may utilize different estimates that may impact comparability of our results of
operations to those of companies in similar businesses. We consider our critical accounting
policies to be the following:
|
|
|
Investment in Real Estate Assets; |
|
|
|
|
Allocation of Purchase Price of Acquired Assets; |
|
|
|
|
Valuation of Real Estate Assets; |
|
|
|
|
Revenue Recognition, and |
|
|
|
|
Income Taxes. |
A complete description of such policies and our considerations is contained in our Annual
Report on Form 10-K for the year ended December 31, 2006. The information included in this
Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial
statements as of and for the year ended December 31, 2006, and related notes thereto.
Commitments and Contingencies
We are subject to certain contingencies and commitments with regard to certain transactions.
Refer to Note 6 to our
10
condensed consolidated financial statements for further explanations.
Related-Party Transactions and Agreements
We have entered into agreements with Cole Advisors II and its affiliates, whereby we pay
certain fees or reimbursements to our Advisor or its affiliates for acquisition fees and expenses,
organization and offering costs, sales commissions, dealer manager fees, asset and property
management fees and reimbursement of operating costs. Additionally, we have entered into certain
transactions with affiliates of Cole Advisors II. See Note 7 to our condensed consolidated
financial statements included in this report for a discussion of the various related-party
transactions, agreements and fees.
Subsequent Events
Certain events occurred subsequent to March 31, 2007 through the date of this Report. Refer to
Note 11 to our condensed consolidated financial statements for further explanation. Such events
include:
|
|
|
Sale of shares of common stock; |
|
|
|
|
Acquisition of various properties; |
|
|
|
|
Mortgage notes payable incurred in connection with acquisitions; |
|
|
|
|
Repayments on certain mortgage notes payable; |
|
|
|
|
Execution of an extended rate lock agreement; |
|
|
|
|
On May 11, 2007, the registration statement relating to our Follow-on
Offering was declared effective by the SEC; and |
|
|
|
|
On May 11, 2007, we amended our agreement of limited partnership; and
effective May 11, 2007, we amended the fees payable pursuant to our
Property Management and Leasing Agreement to (i) up to 2% of gross
revenues from our single-tenant properties and (ii) up to 4% of
revenues from our multi-tenant properties.. |
Recent Accounting Pronouncements
Refer to Note 9 to our condensed consolidated financial statements for further explanation of applicable recent accounting pronouncements.
11
The following financial pages supplement, and should be read in connection with, the financial
pages beginning on page F-1 of the prospectus and all supplements thereto.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
|
|
|
|
Unaudited Financial Statements of Cole Credit Property Trust II, Inc. |
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006 (Unaudited) |
|
|
F-2 |
|
|
|
|
|
|
Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 (Unaudited) |
|
|
F-3 |
|
|
|
|
|
|
Condensed Consolidated Statements of Stockholders Equity for the three months ended March 31, 2007 (Unaudited) |
|
|
F-4 |
|
|
|
|
|
|
Condensed Consolidated Statements of Cash flows for the three months ended March 31, 2007 and 2006 (Unaudited) |
|
|
F-5 |
|
|
|
|
|
|
Notes to
Condensed Consolidated Financial Statements (Unaudited) |
|
|
F-6 |
|
F-1
COLE CREDIT PROPERTY TRUST II, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
ASSETS: |
|
|
|
|
|
|
|
|
Real estate assets, at cost: |
|
|
|
|
|
|
|
|
Land |
|
$ |
166,930,667 |
|
|
$ |
109,506,269 |
|
Buildings and improvements, less accumulated
depreciation of $7,519,166 and $4,547,932, at March 31,
2007 and December 31, 2006, respectively |
|
|
479,536,419 |
|
|
|
282,468,749 |
|
Acquired intangible lease assets, less accumulated
amortization of $3,622,906 and $2,251,172 at March 31,
2007 and December 31, 2006, respectively |
|
|
82,117,662 |
|
|
|
54,569,023 |
|
|
|
|
|
|
|
|
Total real estate assets |
|
|
728,584,748 |
|
|
|
446,544,041 |
|
Cash and cash equivalents |
|
|
37,735,612 |
|
|
|
37,566,490 |
|
Restricted cash |
|
|
14,722,513 |
|
|
|
5,839,733 |
|
Rents and tenant receivables, less allowance for
doubtful accounts of $184,149 and $75,000 at March 31,
2007 and December 31, 2006, respectively |
|
|
3,588,151 |
|
|
|
2,432,536 |
|
Prepaid expenses, mortgage loan deposits and other assets |
|
|
7,852,788 |
|
|
|
4,248,973 |
|
Deferred financing costs, less accumulated amortization
of $737,990 and $565,946 at March 31, 2007 and December
31, 2006, respectively |
|
|
5,985,610 |
|
|
|
3,789,019 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
798,469,422 |
|
|
$ |
500,420,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
389,679,900 |
|
|
$ |
218,265,916 |
|
Accounts payable and accrued expenses |
|
|
3,186,044 |
|
|
|
2,016,343 |
|
Escrowed investor proceeds |
|
|
14,678,510 |
|
|
|
5,710,730 |
|
Acquired below market lease intangibles, less
accumulated amortization of $194,383 and $96,484 at
March 31, 2007 and December 31, 2006, respectively |
|
|
5,287,698 |
|
|
|
2,649,374 |
|
Distributions payable |
|
|
2,255,891 |
|
|
|
1,612,094 |
|
Deferred rent and other liabilities |
|
|
1,745,486 |
|
|
|
408,582 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
416,833,529 |
|
|
|
230,663,039 |
|
|
|
|
|
|
|
|
Redeemable Common Stock |
|
|
6,285,696 |
|
|
|
3,521,256 |
|
STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 10,000,000 shares
authorized, none issued and outstanding at March 31,
2007 and December 31, 2006 |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 240,000,000 shares
authorized, 43,405,817 and 30,691,204 shares issued and
outstanding at March 31, 2007 and December 31, 2006,
respectively |
|
|
434,058 |
|
|
|
306,912 |
|
Capital in excess of par value |
|
|
386,580,943 |
|
|
|
273,385,603 |
|
Accumulated distributions in excess of earnings |
|
|
(11,664,804 |
) |
|
|
(7,456,018 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
375,350,197 |
|
|
|
266,236,497 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
798,469,422 |
|
|
$ |
500,420,792 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
F-2
COLE CREDIT PROPERTY TRUST II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
Rental income |
|
$ |
11,776,758 |
|
|
$ |
2,448,252 |
|
Tenant reimbursement income |
|
|
820,593 |
|
|
|
123,534 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
12,597,351 |
|
|
|
2,571,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
General and administrative |
|
|
314,069 |
|
|
|
210,573 |
|
Property operating expenses |
|
|
1,029,571 |
|
|
|
140,165 |
|
Property and asset management fees |
|
|
539,676 |
|
|
|
125,854 |
|
Depreciation |
|
|
2,971,234 |
|
|
|
578,996 |
|
Amortization |
|
|
1,300,031 |
|
|
|
253,499 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
6,154,581 |
|
|
|
1,309,087 |
|
|
|
|
|
|
|
|
Real estate operating income |
|
|
6,442,770 |
|
|
|
1,262,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income |
|
|
351,272 |
|
|
|
45,555 |
|
Interest expense |
|
|
(5,109,315 |
) |
|
|
(1,490,842 |
) |
|
|
|
|
|
|
|
Total other expense |
|
|
(4,758,043 |
) |
|
|
(1,445,287 |
) |
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,684,727 |
|
|
$ |
(182,588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
36,777,369 |
|
|
|
4,367,120 |
|
|
|
|
|
|
|
|
Diluted |
|
|
36,777,559 |
|
|
|
4,367,120 |
|
|
|
|
|
|
|
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
0.05 |
|
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
F-3
COLE CREDIT PROPERTY TRUST II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
Accumulated |
|
|
Total |
|
|
|
Number of |
|
|
|
|
|
|
Capital in Excess |
|
|
Distributions in |
|
|
Stockholders' |
|
|
|
Shares |
|
|
Par Value |
|
|
of Par Value |
|
|
Excess of Earnings |
|
|
Equity |
|
Balance, December 31, 2006 |
|
|
30,691,204 |
|
|
$ |
306,912 |
|
|
$ |
273,385,603 |
|
|
$ |
(7,456,018 |
) |
|
$ |
266,236,497 |
|
Issuance of common stock |
|
|
12,726,300 |
|
|
|
127,263 |
|
|
|
127,017,665 |
|
|
|
|
|
|
|
127,144,928 |
|
Distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,893,513 |
) |
|
|
(5,893,513 |
) |
Commissions on stock sales and
related dealer manager fees |
|
|
|
|
|
|
|
|
|
|
(10,346,261 |
) |
|
|
|
|
|
|
(10,346,261 |
) |
Other offering costs |
|
|
|
|
|
|
|
|
|
|
(614,496 |
) |
|
|
|
|
|
|
(614,496 |
) |
Common stock repurchased |
|
|
(11,687 |
) |
|
|
(117 |
) |
|
|
(110,993 |
) |
|
|
|
|
|
|
(111,110 |
) |
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
13,865 |
|
|
|
|
|
|
|
13,865 |
|
Redeemable common stock |
|
|
|
|
|
|
|
|
|
|
(2,764,440 |
) |
|
|
|
|
|
|
(2,764,440 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,684,727 |
|
|
|
1,684,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2007 |
|
|
43,405,817 |
|
|
$ |
434,058 |
|
|
$ |
386,580,943 |
|
|
$ |
(11,664,804 |
) |
|
$ |
375,350,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).
F-4
COLE CREDIT PROPERTY TRUST II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,684,727 |
|
|
$ |
(182,588 |
) |
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
2,971,234 |
|
|
|
578,996 |
|
Amortization |
|
|
1,566,265 |
|
|
|
333,519 |
|
Stock compensation expense |
|
|
13,865 |
|
|
|
15,110 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Rents and tenant receivables |
|
|
(1,155,615 |
) |
|
|
(305,074 |
) |
Prepaid expenses and other assets |
|
|
(79,135 |
) |
|
|
(137,238 |
) |
Accounts payable and accrued expenses |
|
|
1,169,701 |
|
|
|
179,548 |
|
Deferred rent and other liabilities |
|
|
1,336,904 |
|
|
|
219,243 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
7,507,946 |
|
|
|
701,516 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investment in real estate and related assets |
|
|
(257,463,302 |
) |
|
|
(60,462,032 |
) |
Acquired intangible lease assets |
|
|
(28,920,373 |
) |
|
|
(10,559,125 |
) |
Acquired below market lease intangibles |
|
|
2,736,223 |
|
|
|
676,994 |
|
Restricted cash |
|
|
(8,882,780 |
) |
|
|
(2,182,182 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(292,530,232 |
) |
|
|
(72,526,345 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
124,380,488 |
|
|
|
34,423,959 |
|
Redemptions of common stock |
|
|
(111,110 |
) |
|
|
|
|
Proceeds from mortgage and affiliate notes payable |
|
|
201,612,050 |
|
|
|
47,385,400 |
|
Repayment of mortgage and affiliate notes payable |
|
|
(30,198,066 |
) |
|
|
(7,344,413 |
) |
Refund of loan deposits |
|
|
2,382,520 |
|
|
|
|
|
Payment of loan deposits |
|
|
(5,907,200 |
) |
|
|
|
|
Escrowed investor proceeds liability |
|
|
8,967,780 |
|
|
|
2,182,182 |
|
Offering costs on issuance of common stock |
|
|
(10,960,757 |
) |
|
|
(3,409,085 |
) |
Distributions to investors |
|
|
(2,485,276 |
) |
|
|
(195,209 |
) |
Deferred financing costs paid |
|
|
(2,489,021 |
) |
|
|
(698,766 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
285,191,408 |
|
|
|
72,344,068 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
169,122 |
|
|
|
519,239 |
|
Cash and cash equivalents, beginning of period |
|
|
37,566,490 |
|
|
|
4,575,144 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
37,735,612 |
|
|
$ |
5,094,383 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Non-Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
Dividends declared and unpaid |
|
$ |
2,255,891 |
|
|
$ |
621,070 |
|
|
|
|
|
|
|
|
Mortgage notes assumed in real estate acquisitions |
|
$ |
|
|
|
$ |
7,234,787 |
|
|
|
|
|
|
|
|
Common stock issued through distribution reinvestment plan |
|
$ |
2,764,440 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Disclosures: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
4,271,791 |
|
|
$ |
1,500,595 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited)
F-5
COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
(Unaudited)
Note 1 Organization
Cole Credit Property Trust II, Inc. (the Company) was formed on September 29, 2004 and is a
Maryland corporation that is organized and operating as a real estate investment trust (REIT) for
federal income tax purposes. Substantially all of the Companys business is conducted through Cole
Operating Partnership II, LP (Cole OP II), a Delaware limited partnership. The Company is the
sole general partner of and owns an approximately 99.99% partnership interest in Cole OP II. Cole
REIT Advisors II, LLC (Cole Advisors II), the affiliate advisor to the Company, is the sole
limited partner and owner of an approximately 0.01% (minority interest) of the partnership
interests of Cole OP II.
At March 31, 2007, the Company owned 115 properties comprising approximately 5.5 million
square feet of single and multi-tenant commercial space located in 32 states and the U.S. Virgin
Islands. At March 31, 2007, approximately 100% of the rentable square feet of these properties
were leased.
On June 27, 2005, the Company commenced an initial public offering on a best efforts
basis of up to 45,000,000 shares of common stock offered at a price of $10.00 per share, subject to
certain volume and other discounts, pursuant to a Registration Statement on Form S-11 filed with
the Securities and Exchange Commission (the SEC) under the Securities Act of 1933, as amended
(the Initial Offering). The Registration Statement also covered up to 5,000,000 shares available
pursuant to a distribution reinvestment plan (the DRIP) under which our stockholders may elect to
have their distributions reinvested in additional shares of the Companys common stock at the
greater of $9.50 per share or 95% of the estimated value of a share of common stock. On November
13, 2006, the Company increased the aggregate amount of the public offering to 49,390,000 shares
for the primary offering and 5,952,000 shares pursuant to the distribution reinvestment plan, in a
related registration statement on Form S-11. Subsequently, the Company reallocated the shares of
common stock such that a maximum of 54,140,000 shares of common stock was available under the
primary offering, for an aggregate offering price of $541,400,000, and a maximum of 1,202,000
shares was available under the distribution reinvestment plan, for an aggregate offering price of
$11,419,000.
The Company filed a registration statement with the SEC with respect to a proposed
secondary public offering of up to 150,000,000 shares of common stock (the Follow-on Offering).
The Follow-on Offering includes up to 125,000,000 shares to be offered for sale at $10.00 per share
in the primary offering and up to 25,000,000 shares to be offered for sale pursuant to the
Companys DRIP. The registration was declared effective by the SEC as of May 11, 2007. To date,
no shares have been sold in the Follow-on Offering.
The Company commenced its principal operations on September 23, 2005, when it issued the
initial 486,000 shares of our common stock in the Initial Offering. Prior to such date, the Company
was considered a development stage company. As of March 31, 2007, the Company had accepted
subscriptions for 43,405,817 shares of its common stock, including 20,000 shares owned by Cole
Holdings Corporation (Cole Holdings), for aggregate gross proceeds of approximately $433.7
million before offering costs and selling commissions of approximately $40.3 million. As of March
31, 2007, the Company was authorized to issue 10,000,000 shares of preferred stock, but had none
issued or outstanding. As of May 11, 2007, the Company had raised approximately $515.3 million in
offering proceeds through the issuance of 51,600,767 shares of its common stock. As of May 11,
2007, approximately $37.4 million in shares (3,741,233 shares) remained available for sale to the
public under the Initial Offering, exclusive of shares available under the DRIP.
The Companys stock is not currently listed on a national securities exchange. The
Company may seek to list its stock for trading on a national securities exchange only if a majority
of its independent directors believe listing would be in the best interest of its stockholders. The
Company does not intend to list its shares at this time. The Company does not anticipate that there
would be any market for its common stock until its shares are listed for trading. In the event it
does not obtain listing prior to the tenth anniversary of the completion or termination of the
Initial Offering, its charter requires that it either: (1) seek stockholder approval of an
extension or amendment of this listing deadline; or (2) seek stockholder approval to adopt a plan
of liquidation of the corporation.
F-6
COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2007
(Unaudited)
Note 2 Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements of the Company have been prepared in
accordance with the rules and regulations of the Securities and Exchange Commission, including the
instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the
information and footnotes required by accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion of management, the statements for the
unaudited interim periods presented include all adjustments, which are of a normal and recurring
nature, necessary to present a fair presentation of the results for such periods. Results for these
interim periods are not necessarily indicative of full year results. The information included in
this Form 10-Q should be read in conjunction with the Companys audited consolidated financial
statements as of and for the year ended December 31, 2006, and related notes thereto.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Restricted Cash and Escrowed Investor Proceeds
The Company is currently engaged in a public offering of its common stock. Included in
restricted cash and escrowed investor proceeds is approximately $14.7 million of offering proceeds
for which shares of common stock had not been issued as of March 31, 2007.
Redeemable Common Stock
The Companys share redemption program provides that all redemptions during any calendar year,
including those upon death or qualifying disability, are limited to those that can be funded with
proceeds from the Companys DRIP. In accordance with Accounting Series Release No. 268,
Presentation in Financial Statements of Redeemable Preferred Stock, the Company accounts for
proceeds received from its DRIP as redeemable common stock, outside of permanent equity. As of
March 31, 2007 and December 31, 2006, the Company had issued approximately 662,000 and 371,000
shares of common stock under the DRIP, respectively, for proceeds of approximately $6.3 million and
$3.5 million under its DRIP, respectively, which have been recorded as redeemable common stock in
the respective condensed consolidated balance sheets. As of March 31, 2007 the Company had
redeemed approximately 12,000 shares of common stock for a cost of approximately $111,000. As of
December 31, 2006, no shares of common stock had been redeemed by the Company.
Reportable Segments
The Financial Accounting Standards Board (FASB) issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which establishes standards for reporting
financial and descriptive information about an enterprises reportable segments. The Company
determined that it has one reportable segment, with activities related to investing in real estate.
The Companys investments in real estate generate rental revenue and other income through the
leasing of properties, which comprised 100% of our total consolidated revenues for the three-month
period ended March 31, 2007 and 2006. Although the Companys investments in real estate are
geographically diversified throughout the United States, management evaluates operating performance
on an individual property level. The Companys properties have been aggregated into one reportable
segment.
Investment in Real Estate Assets
The Company continually monitors events and changes in circumstances that could indicate that
the carrying amounts of its real estate and related intangible assets may not be recoverable. When
indicators of potential impairment are present that indicate that the carrying amounts of real
estate and related intangible assets may not be recoverable, the Company assesses the
recoverability of the assets by determining whether the carrying value of the assets will be
recovered through the undiscounted future operating cash flows expected from the use of the assets
and their eventual disposition. In the event that such expected undiscounted future cash flows do
not exceed the carrying value, the Company will adjust the real estate and related intangible
assets to the fair value and recognize an impairment loss. As of March 31, 2007 the undiscounted
future
F-7
COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2007
(Unaudited)
operating cash flows of any property with potential impairment indicators exceeded its carrying
value and no impairment losses had been recorded.
Note 3 Real Estate Acquisitions
During the three months ended March 31, 2007, the Company acquired the following properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property |
|
Acquisition Date |
|
Location |
|
Square Feet |
|
|
Purchase Price |
|
HOM furniture retail |
|
January 4, 2007 |
|
Fargo, ND |
|
|
122,108 |
|
|
$ |
12,000,000 |
|
La-Z-Boy furnishings store |
|
January 5, 2007 |
|
Newington, CT |
|
|
20,701 |
|
|
|
6,900,000 |
|
Advance Auto specialty retail |
|
January 12, 2007 |
|
Maryland Heights, MO |
|
|
7,000 |
|
|
|
1,893,000 |
|
Victoria Crossing shopping center |
|
January 12, 2007 |
|
Victoria, TX |
|
|
87,473 |
|
|
|
12,335,753 |
|
Academy Sports headquarters |
|
January 18, 2007 |
|
Katy, TX |
|
|
1,500,596 |
|
|
|
102,000,000 |
|
Gordmans department store |
|
January 18, 2007 |
|
Peoria, IL |
|
|
60,947 |
|
|
|
9,000,000 |
|
One Pacific Place shopping center |
|
February 6, 2007 |
|
Omaha, NE |
|
|
91,564 |
|
|
|
36,000,000 |
|
Sack n Save grocery
OReilly Auto specialty retail |
|
February 6, 2007 |
|
Dallas, TX |
|
|
65,295 |
|
|
|
5,060,000 |
|
Tractor Supply specialty retail |
|
February 9, 2007 |
|
Ankeny, IA |
|
|
19,097 |
|
|
|
3,000,000 |
|
ABX Air distribution |
|
February 16, 2007 |
|
Coventry, RI |
|
|
33,000 |
|
|
|
4,090,000 |
|
Office Depot office supply |
|
February 27, 2007 |
|
Enterprise, AL |
|
|
20,000 |
|
|
|
2,776,357 |
|
Northern Tool specialty retail |
|
February 28, 2007 |
|
Blaine, MN |
|
|
25,488 |
|
|
|
4,900,000 |
|
Office Max office supply |
|
February 28, 2007 |
|
Orangeburg, SC |
|
|
23,500 |
|
|
|
3,125,000 |
|
Walgreens drugstore |
|
March 6, 2007 |
|
Cincinnati, OH |
|
|
15,120 |
|
|
|
5,140,000 |
|
Walgreens drugstore |
|
March 6, 2007 |
|
Madeira, OH |
|
|
13,905 |
|
|
|
4,425,000 |
|
Walgreens drugstore |
|
March 6, 2007 |
|
Sharonville, OH |
|
|
13,905 |
|
|
|
4,085,000 |
|
AT&T telecommunications |
|
March 19, 2007 |
|
Beaumont, TX |
|
|
141,525 |
|
|
|
12,275,000 |
|
Walgreens drugstore |
|
March 23, 2007 |
|
Shreveport, LA |
|
|
13,905 |
|
|
|
4,140,000 |
|
Cost-u-Less warehouse retail |
|
March 26, 2007 |
|
St. Croix, USVI |
|
|
38,365 |
|
|
|
6,210,000 |
|
Gallina Centro shopping center |
|
March 26, 2007 |
|
Collierville, TN |
|
|
142,727 |
|
|
|
17,750,000 |
|
Apria Healthcare healthcare |
|
March 28, 2006 |
|
St. John, MO |
|
|
52,200 |
|
|
|
6,500,000 |
|
Logans Roadhouse restaurant |
|
March 28, 2007 |
|
Fairvax, VA |
|
|
7,839 |
|
|
|
3,209,000 |
|
Logans Roadhouse restaurant |
|
March 28, 2007 |
|
Johnson City, TN |
|
|
7,839 |
|
|
|
3,866,000 |
|
Center at 7500 Cottonwood shopping center |
|
March 30, 2007 |
|
Jenison, MI |
|
|
84,933 |
|
|
|
5,290,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
2,609,032 |
|
|
$ |
275,970,110 |
|
|
|
|
|
|
|
|
|
|
|
|
The Company allocated the purchase price of these properties, including aggregate
acquisition costs of approximately $7,677,000 to the fair value of the assets acquired and
liabilities assumed. The Company allocated approximately $57,424,000 to land, approximately
$200,039,000 to building and improvements, approximately $28,920,000 to acquired in-place leases,
and approximately ($2,736,000) to acquired below-market leases during the three months ended March
31, 2007.
F-8
COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2007
(Unaudited)
Note 4 Notes Payable
As of March 31, 2007, the Company had total mortgage notes payable of approximately $389.7
million. During the three months ended March 31, 2007, the Company incurred, or assumed, the
following mortgage notes payable in connection with the real estate acquisitions described in Note
3 above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
|
|
|
|
Variable Rate |
|
|
|
|
|
|
|
|
|
|
Fixed Rate |
|
|
Interest |
|
|
|
|
|
|
Loan Amount |
|
|
|
|
|
|
Property |
|
Location |
|
Loan Amount |
|
|
Rate |
|
|
Maturity Date |
|
|
(1) |
|
|
Maturity Date |
|
Total Loan |
|
HOM furniture retail |
|
Fargo, ND |
|
$ |
4,800,000 |
|
|
|
5.56 |
% |
|
February 1, 2017 |
|
$ |
|
|
|
N/A |
|
$ |
4,800,000 |
|
La-Z-Boy
furnishings store |
|
Newington, CT |
|
|
4,140,000 |
|
|
|
5.66 |
% |
|
February 1, 2012 |
|
|
|
|
|
N/A |
|
|
4,140,000 |
|
Victoria Crossing
shopping center |
|
Victoria, TX |
|
|
8,288,000 |
|
|
|
5.71 |
% |
|
February 11, 2017 |
|
|
1,912,000 |
(1) |
|
April 12, 2007 |
|
|
10,200,000 |
|
Academy Sports
Headquarters |
|
Katy, TX |
|
|
68,250,000 |
|
|
|
5.61 |
% |
|
February 1, 2017 |
|
|
|
|
|
N/A |
|
|
68,250,00 |
|
Gordmans department
store |
|
Peoria, IL |
|
|
4,950,000 |
|
|
|
5.71 |
% |
|
February 1, 2017 |
|
|
|
|
|
N/A |
|
|
4,950,000 |
|
One Pacific Place
shopping center |
|
Omaha, NE |
|
|
23,400,000 |
|
|
|
5.53 |
% |
|
March 1, 2017 |
|
|
|
|
|
N/A |
|
|
23,400,000 |
|
Sack n Save
grocery OReilly
Auto auto parts |
|
Dallas, TX |
|
|
3,290,000 |
|
|
|
5.54 |
% |
|
March 1, 2017 |
|
|
|
|
|
N/A |
|
|
3,290,000 |
|
ABX Air distribution |
|
Coventry, RI |
|
|
2,454,000 |
|
|
|
5.70 |
% |
|
April 1, 2012 |
|
|
|
|
|
N/A |
|
|
2,454,000 |
|
Office Depot office
supply |
|
Enterprise, AL |
|
|
1,850,000 |
|
|
|
6.29 |
% |
|
March 1, 2017 |
|
|
|
|
|
N/A |
|
|
1,850,000 |
|
Northern Tool
specialty retail |
|
Blaine, MN |
|
|
3,185,000 |
|
|
|
6.00 |
% |
|
September 1, 2016 |
|
|
|
|
|
N/A |
|
|
3,185,000 |
|
Office Max office
supply |
|
Orangeburg, SC |
|
|
1,875,00 |
|
|
|
5.61 |
% |
|
April 1, 2012 |
|
|
|
|
|
N/A |
|
|
1,875,000 |
|
Walgreens drugstore |
|
Cincinnati, OH |
|
|
3,341,000 |
|
|
|
6.00 |
% |
|
September 1, 2016 |
|
|
|
|
|
N/A |
|
|
3,341,000 |
|
Walgreens drugstore |
|
Madeira, OH |
|
|
2,876,000 |
|
|
|
5.70 |
% |
|
April 1, 2012 |
|
|
|
|
|
N/A |
|
|
2,876,000 |
|
Walgreens drugstore |
|
Sharonville, OH |
|
|
2,655,000 |
|
|
|
5.62 |
% |
|
April 1, 2012 |
|
|
|
|
|
N/A |
|
|
2,655,000 |
|
AT&T
telecommunications |
|
Beaumont, TX |
|
|
8,592,000 |
|
|
|
5.87 |
% |
|
April 1, 2017 |
|
|
|
|
|
N/A |
|
|
8,592,000 |
|
Walgreens drugstore |
|
Shreveport, LA |
|
|
2,815,000 |
|
|
|
5.56 |
% |
|
April 11, 2017 |
|
|
497,000 |
(1) |
|
June 23, 2007 |
|
|
3,312,000 |
|
Cost-U-Less
warehouse retail |
|
St. Croix, USVI |
|
|
4,035,000 |
|
|
|
5.76 |
% |
|
April 1, 2017 |
|
|
|
|
|
N/A |
|
|
4,035,000 |
|
Gallina Centro
shopping center |
|
Collierville, TN |
|
|
14,200,000 |
|
|
|
5.72 |
% |
|
February 11, 2017 |
|
|
|
|
|
N/A |
|
|
14,200,000 |
|
Logans Roadhouse
restaurant |
|
Fairfax, VA |
|
|
1,605,000 |
|
|
|
6.00 |
% |
|
April 11, 2017 |
|
|
962,000 |
(1) |
|
June 27, 2007 |
|
|
2,567,000 |
|
Logans Roadhouse
restaurant |
|
Johnson City, TN |
|
|
1,933,000 |
|
|
|
6.00 |
% |
|
April 11, 2017 |
|
|
1,160,000 |
(1) |
|
June 27, 2007 |
|
|
3,093,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indebtedness |
|
|
|
$ |
168,534,000 |
|
|
|
|
|
|
|
|
|
|
$ |
4,531,000 |
|
|
|
|
$ |
173,065,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The variable rate mortgage notes bear interest at the one-month LIBOR rate plus 200 basis points with interest only paid monthly. |
During the three months ended March 31, 2007, the Company borrowed and subsequently
repaid an aggregate of approximately $22.2 million on two revolving mortgage notes payable to
partially fund certain of the real estate acquisitions described in Note 3. The revolving notes
payable bear interest at a variable rate equal to the one-month LIBOR plus 2%.
F-9
COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2007
(Unaudited)
On March 2, 2007, the Company repaid a fixed rate mortgage loan of approximately $5.2 million
that was due on October 1, 2016. As a result, approximately $113,000 of unamortized deferred
financing costs was expensed and included in
interest expense in the condensed consolidated financial statements for the three months ended
March 31, 2007.
Note 5 Extended Rate Lock Agreement
During the period from January 1, 2007 through March 31, 2007, the Company entered into Rate
Lock Agreements with Bear Stearns Commercial Mortgage (Bear Stearns) to lock interest rates
ranging from 5.49% to 5.80% for up to approximately $265.3 million in borrowings. Under the terms
of Rate Lock Agreements, the Company made rate lock deposits totaling approximately $5.9 million to
Bear Stearns. As of March 31, 2007, the Company had available total borrowings of approximately
$343.8 million under the Rate Locks and approximately $7.5 million in rate lock deposits
outstanding.
The deposits are refundable to the Company in amounts generally equal to 2% of any loans
funded under the agreements. The Rate Locks expire 60 days from execution and may be extended by 30
days for a rate lock fee of 0.25% of the loan amount or, at the borrowers election, by converting
the fee into interest rate spread.
Note 6 Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims.
There are no material legal proceedings pending or known to be contemplated against us.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be
liable for costs and damages related to environmental matters. The Company has not been notified by
any governmental authority of any non-compliance, liability or other claim, and the Company is not
aware of any other environmental condition that it believes will have a material adverse effect on
the consolidated results of operations.
Note 7 Related-Party Transactions and Arrangements
Certain affiliates of the Company receive, and will continue to receive fees and compensation
in connection with the sale of the Companys common stock, and the acquisition, management and sale
of the assets of the Company. Cole Capital Corporation (Cole Capital), the affiliated dealer
manager, receives, and will continue to receive a selling commission of up to 7% of gross offering
proceeds before reallowance of commissions earned by participating broker-dealers. Cole Capital
reallows, and intends to continue to reallow 100% of commissions earned to participating
broker-dealers. In addition, Cole Capital will receive up to 1.5% of the gross proceeds from the
Initial Offering and up to 2.0% of gross offering proceeds from the Follow-on Offering, before
reallowance to participating broker-dealers, as a dealer-manager fee. Cole Capital, in its sole
discretion, may reallow all or a portion of its dealer-manager fee to such participating
broker-dealers as a marketing and due diligence expense reimbursement, based on such factors as the
volume of shares sold by such participating broker-dealers and marketing support incurred as
compared to those of other participating broker-dealers. No selling commissions or dealer-manager
fees are paid to Cole Capital in respect of shares sold under the DRIP. During the three months
ended March 31, 2007 and 2006, the Company paid approximately $10.3 million and $2.9 million,
respectively, to Cole Capital for commissions and dealer manager fees, of which approximately $9.2
million and $2.4 million, respectively, was reallowed to participating broker-dealers.
All organization and offering expenses associated with the sale of the Companys common stock
(excluding selling commissions and the dealer-manager fee) are paid for by Cole Advisors II or its
affiliates and are reimbursed by the Company up to 1.5% of gross offering proceeds. Cole Advisors
II or its affiliates also receive acquisition and advisory fees of up to 2% of the contract
purchase price of each asset for the acquisition, development or construction of real property and
will be reimbursed for acquisition costs incurred in the process of acquiring properties, but not
to exceed 2.0% of the contract purchase price. The Company expects the acquisition expenses to be
approximately 0.5% of the purchase price of each property. During the three months ended March 31,
2007 and 2006, the Company reimbursed Cole Advisors II approximately $500,000 and approximately
$516,000, respectively, for organizational and offering expenses. At March 31, 2007,
F-10
COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2007
(Unaudited)
approximately $2,000 of such costs had been incurred by Cole Advisors II but had not been
reimbursed by the Company. During the three months ended March 31, 2007 and 2006, the Company paid
an affiliate of Cole Advisors II approximately $5.5 million and approximately $1.2 million for
acquisition fees, respectively.
If Cole Advisors II provides substantial services, as determined by the Companys independent
directors, in connection
with the origination or refinancing of any debt financing obtained by the Company that is used to
acquire properties or to make other permitted investments, or that is assumed, directly or
indirectly, in connection with the acquisition of properties, the Company will pay Cole Advisors II
a financing coordination fee equal to 1% of the amount available under such financing; provided,
however, that Cole Advisors II shall not be entitled to a financing coordination fee in connection
with the refinancing of any loan secured by any particular property that was previously subject to
a refinancing in which Cole Advisors II received such a fee. Financing coordination fees payable
from loan proceeds from permanent financing will be paid to Cole Advisors II as the Company
acquires such permanent financing. However, no fees will be paid on loan proceeds from any line of
credit until such time as all net offering proceeds have been invested by the Company. During the
three months ended March 31, 2007 and 2006, the Company paid Cole Advisors II approximately $1.7
million and approximately $423,000 for finance coordination fees, respectively.
The Company pays, and expects to continue to pay, Cole Realty Advisors, Inc., (Cole Realty),
its affiliated property manager, fees for the management and leasing of the Companys properties.
Such fees currently equal, and are expected to continue to equal 2% of gross revenues, plus leasing
commissions at prevailing market rates; provided however, that the aggregate of all property
management and leasing fees paid to affiliates plus all payments to third parties will not exceed
the amount that other nonaffiliated management and leasing companies generally charge for similar
services in the same geographic location. Cole Realty may subcontract its duties for a fee that may
be less than the fee provided for in the property management agreement. During the three months
ended March 31, 2007 and 2006, the Company paid Cole Realty approximately $213,000 and
approximately $45,000 for property management fees, respectively.
The Company pays Cole Advisors II an annualized asset management fee of 0.25% of the aggregate
asset value of the Companys assets. The fee is payable monthly in an amount equal to 0.02083% of
aggregate asset value as of the last day of the immediately preceding month. During the three
months ended March 31, 2007 and 2006, the Company paid Cole Advisors II approximately $327,000 and
approximately $81,000 for asset management fees, respectively.
If Cole Advisors II or its affiliates provides a substantial amount of services, as determined
by the Companys independent directors, in connection with the sale of one or more properties, the
Company will pay Cole Advisors II up to one-half of the brokerage commission paid, but in no event
to exceed an amount equal to 2% of the sales price of each property sold. In no event will the
combined real estate commission paid to Cole Advisors II, its affiliates and unaffiliated third
parties exceed 6% of the contract sales price. In addition, after investors have received a return
of their net capital contributions and an 8% annual cumulative, non-compounded return, then Cole
Advisors II is entitled to receive 10% of remaining net sale proceeds. During the three months
ended March 31, 2007 and 2006, the Company did not pay any fees or amounts to Cole Advisors II
relating to the sale of properties.
In the event the Companys common stock is listed in the future on a national securities
exchange, a subordinated incentive listing fee equal to 10% of the amount by which the market value
of the Companys outstanding stock plus all distributions paid by the Company prior to listing,
exceeds the sum of the total amount of capital raised from investors and the amount of cash flow
necessary to generate an 8% annual cumulative, non-compounded return to investors will be paid to
Cole Advisors II.
In the event that the advisory agreement with Cole Advisors II is terminated, other than
termination by the Company because of a material breach of the advisory agreement by Cole Advisors
II, a subordinated performance fee of 10% of the amount, if any, by which (i) the appraised asset
value of the Company at the time of such termination plus total distributions paid to stockholders
through the termination date exceeds (ii) the aggregate capital contribution contributed by
investors less distributions from sale proceeds plus payment to investors of an 8% annual,
cumulative, non-compounded return on capital. No subordinated performance fee will be paid if the
Company has already paid or become obligated to pay Cole Advisors II a subordinated incentive
listing fee.
The Company may reimburse Cole Advisors II for all expenses it paid or incurred in connection
with the services provided to the Company, subject to the limitation that the Company does not
reimburse for any amount by which its operating expenses (including the asset management fee) at
the end of the four preceding fiscal quarters exceeds the greater
F-11
COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2007
(Unaudited)
of (i) 2% of average invested assets, or (ii) 25% of net income other than any additions to
reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from
the sale of assets for that period unless the Companys independent directors find that based on
unusual and non-recurring factors a higher level of expense is justified for that year. The Company
will not reimburse for personnel costs in connection with services for which Cole Advisors II
receives acquisition fees or real estate commissions. During the three months ended March 31, 2007
and 2006, the Company did not reimburse the Advisor for any such costs.
At March 31, 2007 and December 31, 2006, the Company had approximately $38,000 and
approximately $68,000,
respectively, due to affiliates, which is included in Deferred Rent and Other Liabilities in the
condensed consolidated balance sheets and is payable to Cole Advisors II. At March 31, 2007 and
2006, amounts due to affiliates consisted of amounts payable to Cole Advisors II for reimbursement
of legal fees, and amounts payable to Cole Capital for commissions and dealer manager fees payable
on stock issuances.
Note 8 Economic Dependency
Under various agreements, the Company has engaged or will engage Cole Advisors II and its
affiliates to provide certain services that are essential to the Company, including asset
management services, supervision of the management and leasing of properties owned by the Company,
asset acquisition and disposition decisions, the sale of shares of the Companys common stock
available for issue, as well as other administrative responsibilities for the Company including
accounting services and investor relations.
As a result of these relationships, the Company is dependent upon Cole Advisors II and its
affiliates. In the event that these companies were unable to provide the Company with the
respective services, the Company would be required to find alternative providers of these services.
Note 9 New Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of SFAS No.109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 became effective for the Company on January 1, 2007 and its adoption did not have a material
impact on its consolidated financial statements.
Note 10 Independent Directors Stock Option Plan
The Company has a stock option plan, the Independent Directors Stock Option Plan (the
IDSOP), which authorizes the grant of non-qualified stock options to the Companys independent
directors, subject to the absolute discretion of the board of directors and the applicable
limitations of the plan. The Company intends to grant options under the IDSOP to each qualifying
director annually. The exercise price for the options granted under the IDSOP initially will be
$9.15 per share. It is intended that the exercise price for future options granted under the IDSOP
will be at least 100% of the fair market value of the Companys common stock as of the date the
option is granted. As of March 31, 2007 and December 31, 2006, the Company had granted options to
purchase 20,000 shares at $9.15 per share, each with a one year vesting period. A total of
1,000,000 shares have been authorized and reserved for issuance under the IDSOP. On January 1,
2006, we adopted SFAS 123R which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors, including stock options related
to the IDSOP, based on estimated fair values. The Company adopted FAS 123R using the modified
prospective application. Accordingly, prior period amounts were not restated.
During the three months ended March 31, 2007 and 2006, the Company recorded stock-based
compensation charges of approximately $14,000 and approximately $15,000, respectively. Stock-based
compensation expense is based on awards ultimately expected to vest, and has been reduced for
estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Companys calculations do not assume any forfeitures.
F-12
COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2007
(Unaudited)
During the three months ended March 31, 2007 and 2006, no options were granted, forfeited,
became vested, or were exercised. As of March 31, 2007, options to purchase 20,000 shares at $9.15
per share remained outstanding and options to purchase 10,000 shares options were unvested with a
weighted average contractual remaining life of approximately nine years. As of March 31, 2007,
there was approximately $8,000 of total unrecognized compensation cost related to unvested
share-based compensation awards granted under the IDSOP. That cost is expected to be recognized
through the quarter ended June 30, 2007.
Note 11 Subsequent Events
Sale of Shares of Common Stock
As of May 11, 2007, the Company had raised approximately $515.3 million of gross proceeds
through the issuance of approximately 51.6 million shares of its common stock under the Initial
Offering (including shares sold under the DRIP). As of May 11, 2007, approximately $37.4 million
(3.7 million shares) remained available for sale to the public under the Initial Offering,
exclusive of shares available under the DRIP. As of May 11, 2007, no shares had been sold in the
Follow-on Offering and all 150,000,000 shares remained available for sale under the Follow-on
Offering.
Real Estate Acquisitions
The Company acquired the following properties subsequent to March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property |
|
Location |
|
Acquisition Date |
|
Square Feet |
|
Purchase Price |
Tractor Supply specialty retail |
|
Greenfield, MN |
|
April 2, 2007 |
|
|
22,512 |
|
|
$ |
4,050,000 |
|
Eckerd drugstore |
|
Lincolnton, NC |
|
April 3, 2007 |
|
|
10,908 |
|
|
|
2,262,000 |
|
Lincoln Place shopping center |
|
Fairview Heights, IL |
|
April 5, 2007 |
|
|
185,416 |
|
|
|
44,000,000 |
|
Ashley Furniture home furnishings |
|
Amarillo, TX |
|
April 6, 2007 |
|
|
74,797 |
|
|
|
5,920,000 |
|
Pocatello Square shopping center |
|
Pocatello, ID |
|
April 6, 2007 |
|
|
125,554 |
|
|
|
23,000,000 |
|
Tractor Supply specialty retail |
|
Paw Paw, MI |
|
April 9, 2007 |
|
|
22,670 |
|
|
|
3,095,000 |
|
Tractor Supply specialty retail |
|
Marinette, WI |
|
April 9, 2007 |
|
|
19,097 |
|
|
|
2,950,000 |
|
Staples office supply |
|
Greenville, SC |
|
April 11, 2007 |
|
|
20,388 |
|
|
|
4,545,000 |
|
Big 5 Center retail center |
|
Aurora, CO |
|
April 11, 2007 |
|
|
13,500 |
|
|
|
4,290,000 |
|
Rite Aid drugstore |
|
Plains, PA |
|
April 16, 2007 |
|
|
14,564 |
|
|
|
5,200,000 |
|
Tractor Supply specialty retail |
|
Navasota, TX |
|
April 18, 2007 |
|
|
22,670 |
|
|
|
3,015,000 |
|
Sportsmans Warehouse sporting goods |
|
DePere, WI |
|
April 20, 2007 |
|
|
48,453 |
|
|
|
6,010,000 |
|
Eckerd drugstore |
|
Easton, PA |
|
April 24, 2007 |
|
|
13,813 |
|
|
|
5,970,000 |
|
Applebees Portfolio |
|
Various |
|
April 28, 2007 |
|
|
120,246 |
|
|
|
65,000,000 |
|
Walgreens drugstore |
|
Bridgetown, OH |
|
April 30, 2007 |
|
|
13,905 |
|
|
|
4,475,000 |
|
Rite Aid drugstore |
|
Fredericksburg, VA |
|
May 2, 2007 |
|
|
14,564 |
|
|
|
5,415,000 |
|
Sams Club warehouse club |
|
Anderson, SC |
|
May 8, 2007 |
|
|
134,664 |
|
|
|
12,000,000 |
|
Tractor
Supply specialty retail |
|
Fredericksburg, TX |
|
May 7, 2007 |
|
|
22,670 |
|
|
|
3,125,000 |
|
Walgreens drugstore |
|
Dallas, TX |
|
May 9, 2007 |
|
|
13,905 |
|
|
|
3,150,000 |
|
Wal-Mart discount retailer |
|
New London, WI |
|
May 9, 2007 |
|
|
51,985 |
|
|
|
2,614,000 |
|
Rite Aid drugstore |
|
Lima, OH |
|
May 14, 2007 |
|
|
14,564 |
|
|
|
4,745,962 |
|
Rite Aid drugstore |
|
Allentown, PA |
|
May 15, 2007 |
|
|
14,564 |
|
|
|
5,561,112 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
995,409 |
|
|
$ |
220,392,774 |
|
|
|
|
|
|
|
|
|
|
|
|
F-13
COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2007
(Unaudited)
Mortgage Notes Payable
Subsequent to March 31, 2007, the Company incurred or assumed the following mortgage notes
payable in connection with the real estate acquisitions described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
|
|
|
|
Variable Rate |
|
|
|
|
|
|
|
|
|
|
Fixed Rate |
|
|
Interest |
|
|
|
|
|
|
Loan Amount |
|
|
|
|
|
|
Property |
|
Location |
|
Loan Amount |
|
|
Rate |
|
|
Maturity Date |
|
|
(1) |
|
|
Maturity Date |
|
Total Loan |
|
Tractor Supply
specialty retail |
|
Greenfield, MN |
|
$ |
2,227,500 |
|
|
|
5.57 |
% |
|
July 1, 2017 |
|
$ |
|
|
|
N/A |
|
$ |
2,227,500 |
|
Eckerd drugstore |
|
Lincolnton, NC |
|
|
1,538,000 |
|
|
|
5.80 |
% |
|
April 11, 2017 |
|
|
271,000 |
|
|
July 3, 2007 |
|
|
1,809,000 |
|
Lincoln Place
shopping center |
|
Fairview Heights, IL |
|
|
35,432,000 |
|
|
|
5.70 |
% |
|
May 1, 2017 |
|
|
|
|
|
N/A |
|
|
35,432,000 |
|
Ashley Furniture |
|
Amarillo, TX |
|
|
4,026,000 |
|
|
|
5.59 |
% |
|
April 11, 2017 |
|
|
710,000 |
|
|
July 5, 2007 |
|
|
4,736,000 |
|
Pocatello Square |
|
Pocatello, ID |
|
|
17,250,000 |
|
|
|
5.53 |
% |
|
April 11, 2017 |
|
|
1,150,000 |
|
|
August 6, 2007 |
|
|
18,400,000 |
|
Tractor Supply
specialty retail |
|
Paw Paw, MI |
|
|
2,048,000 |
|
|
|
5.65 |
% |
|
May 1, 2017 |
|
|
|
|
|
N/A |
|
|
2,048,000 |
|
Tractor Supply
specialty retail |
|
Marinette, WI |
|
|
1,918,000 |
|
|
|
5.65 |
% |
|
May 1, 2017 |
|
|
|
|
|
N/A |
|
|
1,918,000 |
|
Tractor Supply
specialty retail |
|
Ankeny, IA |
|
|
1,950,500 |
|
|
|
5.65 |
% |
|
May 1, 2017 |
|
|
|
|
|
N/A |
|
|
1,950,500 |
|
Staples office
supply |
|
Greenville, SC |
|
|
2,955,000 |
|
|
|
5.51 |
% |
|
June 1, 2017 |
|
|
|
|
|
N/A |
|
|
2,955,000 |
|
Big 5 Center retail
center |
|
Aurora, CO |
|
|
2,804,000 |
|
|
|
5.57 |
% |
|
May 1, 2017 |
|
|
|
|
|
N/A |
|
|
2,804,000 |
|
Rite Aid drug store |
|
Plains, PA |
|
|
3,380,000 |
|
|
|
5.60 |
% |
|
June 1, 2017 |
|
|
|
|
|
N/A |
|
|
3,380,000 |
|
Tractor Supply
specialty retail |
|
Navasota, TX |
|
|
2,050,000 |
|
|
|
5.80 |
% |
|
May 11, 2017 |
|
|
362,000 |
|
|
July 18, 2007 |
|
|
2,412,000 |
|
Sportsmans
Warehouse sporting
goods |
|
DePere, WI |
|
|
3,906,500 |
|
|
|
5.52 |
% |
|
May 1, 2017 |
|
|
|
|
|
N/A |
|
|
3,906,500 |
|
Eckerd drugstore |
|
Easton, PA |
|
|
4,060,000 |
|
|
|
5.80 |
% |
|
April 11, 2017 |
|
|
716,000 |
|
|
July 4, 2007 |
|
|
4,776,000 |
|
Walgreens drugstore |
|
Bridgetown, OH |
|
|
3,043,000 |
|
|
|
5.80 |
% |
|
May 11, 2017 |
|
|
537,000 |
|
|
August 27, 2007 |
|
|
3,580,000 |
|
Applebees Portfolio |
|
Various |
|
|
42,250,000 |
(1) |
|
|
5.68 |
% |
|
May 11, 2017 |
|
|
|
|
|
N/A |
|
|
42,250,000 |
|
Rite Aid drug store |
|
Fredericksburg, VA |
|
|
2,979,000 |
|
|
|
5.92 |
% |
|
May 11, 2017 |
|
|
1,353,000 |
|
|
August 2, 2007 |
|
|
4,332,000 |
|
Sams Club
warehouse club |
|
Anderson, SC |
|
|
8,160,000 |
|
|
|
5.80 |
% |
|
May 11, 2017 |
|
|
1,440,000 |
|
|
August 4, 2007 |
|
|
9,600,000 |
|
Tractor Supply
specialty retail |
|
Fredericksburg, TX |
|
|
2,031,250 |
|
|
|
5.57 |
% |
|
June 1, 2017 |
|
|
|
|
|
N/A |
|
|
2,031,250 |
|
Walgreens drugstore |
|
Dallas, TX |
|
|
2,175,000 |
|
|
|
5.76 |
% |
|
June 1, 2017 |
|
|
|
|
|
N/A |
|
|
2,175,000 |
|
Wal-Mart discount
retailer |
|
New London, WI |
|
|
1,778,000 |
|
|
|
5.80 |
% |
|
May 11, 2017 |
|
|
313,000 |
|
|
August 9, 2007 |
|
|
2,091,000 |
|
Rite Aid drugstore |
|
Lima, OH |
|
|
3,103,000 |
|
|
|
5.46 |
% |
|
June 1, 2017 |
|
|
|
|
|
N/A |
|
|
3,103,000 |
|
Rite Aid drugstore |
|
Allentown, PA |
|
|
3,615,000 |
|
|
|
5.78 |
% |
|
June 1, 2017 |
|
|
|
|
|
N/A |
|
|
3,615,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indebtedness |
|
|
|
$ |
154,679,750 |
|
|
|
|
|
|
|
|
|
|
$ |
6,852,000 |
|
|
|
|
$ |
161,531,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Applebees Portfolio consists of 3 separate master loan agreements. |
F-14
COLE CREDIT PROPERTY TRUST II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2007
(Unaudited)
In addition, subsequent to March 31, 2007, the Company repaid an aggregate of
approximately $1.9 million of variable rate short-term debt related to one loan.
Extended Rate Lock Agreement
During the period from April 1, 2007 through May 11, 2007, the Company entered into a Rate
Lock Agreement with Bear Stearns to lock an interest rate of 5.69% for up to $75 million in
borrowings. Under the terms of the Rate Lock Agreement, the Company made a rate lock deposit
totaling $1.5 million to Bear Stearns. As of May 11, 2007, the Company had available total
borrowings of approximately $353.1 million under the Rate Locks and approximately $7.7 million in
rate lock deposits outstanding.
The deposit is refundable to the Company in an amount generally equal to 2% of any loans
funded under the agreement. The Rate Lock expires 60 days from execution and may be extended by 30
days for a rate lock fee of 0.25% of the loan amount or, at the borrowers election, by converting
the fee into interest rate spread.
F-15