Item 1B.
Unresolved Staff Comments.
None.
DESCRIPTION OF REAL ESTATE
Our investments in real estate assets as of December 31, 2015 consisted of interests in wholly-owned properties and six joint ventures. The following table sets forth information with respect to our real estate assets by segment as of December 31, 2015. We own a fee simple interest in all properties unless otherwise noted.
(1)
We own a majority interest in the joint venture that owns a fee simple interest in this property.
(2)
Built in 1926 and renovated in 2001.
(3)
The parking garage contains 343 stalls. This property is owned leasehold.
(4)
We own a condominium interest in the building that contains a 366 stall parking garage.
(5)
On December 8, 2015, we acquired an approximate 14% interest in a portfolio of 15 urban infill retail properties located in the greater New York City area.
ACQUISITIONS
2015 Acquisitions
On April 15, 2015, we acquired DFW Distribution Center, a two building, 643,000 square foot industrial property located in Grapevine, Texas, for approximately $44,200. The acquisition was financed with a ten-year mortgage loan in the amount of $17,720 that bears interest at a fixed-rate of 3.23%, and cash on hand. The property is 100% leased to nine tenants.
On May 15, 2015, we acquired Skokie Commons, a newly constructed 93,000 square foot grocery-anchored retail property located in Skokie, Illinois, for approximately $43,800. The acquisition was financed with a ten-year mortgage loan in the amount of $24,400 that bears interest at a fixed-rate of 3.31%, and cash on hand. On December 18, 2015, we acquired an adjacent parcel of land under a ground lease to Bank of America. The land was acquired for $4,700 and was funded with cash on hand.
On May 22, 2015, we acquired a 90% interest in Townlake of Coppell, a 398 unit garden style apartment property located in Coppell, Texas, for approximately $43,200. The acquisition was financed with a five-year mortgage loan in the amount of $28,800 that bears interest at a fixed-rate of 3.25%, and cash on hand.
On July 30, 2015, we acquired AQ Rittenhouse, a newly constructed Class A apartment property located near Rittenhouse Square in Philadelphia, Pennsylvania, for approximately $51,000. The 110 unit, 12 story apartment building is complemented by 13,000 square feet of fully leased ground floor commercial space. The acquisition was financed with a ten-year mortgage loan in the amount of $26,370 that bears interest at a fixed-rate of 3.65%, and cash on hand.
On September 30, 2015, we acquired Whitestone Market, a 145,000 square foot, 100% leased, grocery anchored retail center for approximately $51,500. Whitestone Market, located in Austin, Texas, is anchored by an HEB grocery store and was funded with cash on hand. On November 23, 2015, we entered into a ten-year mortgage loan in the amount of approximately $25,800 that bears interest at a fixed-rate of 3.58%.
On September 30, 2015, we acquired O'Hare Industrial Portfolio, a seven property, 642,000 square foot, 92% occupied industrial portfolio for approximately $71,000. O'Hare Industrial Portfolio is located near O'Hare Airport just outside Chicago, Illinois and was funded with cash on hand.
On December 8, 2015, we acquired an approximate 28% interest in a newly formed fund, Madison NYC Core Retail Partners, L.P. (the "Retail Fund"), which acquired an approximate 49% interest in entities that own 15 retail properties located in the greater New York City area (the “NYC Retail Portfolio”), the result of which is that we own an approximate 14% interest in the NYC Retail Portfolio. The purchase price for such portion was approximately $85,600 including closing costs. The NYC Retail Portfolio contains approximately 2,700,000 square feet across urban infill locations in Manhattan, Brooklyn, Queens, the Bronx, Staten Island and New Jersey. In accordance with authoritative guidance the NYC Retail Portfolio will be accounted for as an investment in an unconsolidated real estate affiliate. The acquisition was funded with cash on hand. LaSalle advises two other institutional clients who also entered into agreements to acquire interests in the Retail Fund as limited partners. As a result LaSalle advises clients representing an approximate 90% ownership in the Retail Fund.
On December 21, 2015, we acquired 140 Park Avenue, a newly constructed 100,000 square foot medical office building located in Florham Park, New Jersey, for approximately $45,600. The property is 100% leased for 15 years to Summit Medical Group. The acquisition was funded using cash on hand.
On December 22, 2015, we acquired Maui Mall, a 235,000 square foot, 91% leased, grocery anchored retail center built in 1971 and expanded in 1995, located on the island of Maui in Hawaii and anchored by Whole Foods, Regal Cinemas, CVS and TJ Maxx for approximately $91,100. The acquisition was funded using a draw on our line of credit of $37,000 and cash on hand.
2014 Acquisitions
On January 17, 2014, we acquired Oak Grove Plaza, a 120,000 square foot retail property located in Sachse, Texas, for approximately $22,525. The acquisition was financed with a ten-year mortgage loan in the amount of $10,550 that bears interest at fixed rate of 4.17% and cash on hand.
On January 22, 2014, we acquired Grand Prairie Distribution Center, a 277,000 square foot industrial building located in Grand Prairie, Texas for approximately $17,200, using cash on hand. The property is 100% leased to a single tenant for ten years.
On January 28, 2014, we acquired South Beach Parking Garage, a 343 stall, multi-level parking facility located on South Beach in Miami, Florida for approximately $22,050, using cash on hand and a $13,000 draw on our line of credit.
On June 16, 2014, we acquired Rancho Temecula Town Center, a 165,000 square foot retail property located in Temecula, California, for approximately $60,000. The acquisition was financed with a 12-year fixed rate mortgage loan in the amount of $28,000 which bears interest at a fixed rate of 0.04%, interest-only and cash on hand.
On June 27, 2014, we acquired Charlotte Distribution Center, a 347,000 square foot industrial building located in Charlotte, North Carolina, for approximately $25,550, using cash on hand. The property is 100% leased to a single tenant for 14 years.
On December 23, 2014, we acquired a condominium interest in Chicago Parking Garage, a 366 stall, multi-level parking facility located in Chicago, Illinois for approximately 16,900, using cash on hand. In accordance with authoritative guidance, Chicago Parking Garage will be accounted for as an investment in an unconsolidated real estate affiliate.
2013 Acquisitions
On June 26, 2013, we acquired Joliet Distribution Center, a 442,000 square foot industrial property located in Joliet, Illinois for approximately $21,000, using cash on hand. The property is 100% leased to two tenants with a weighted average remaining lease term of approximately six years.
On June 28, 2013, we acquired Suwanee Distribution Center, a 559,000 square foot industrial property located in suburban Atlanta, Georgia for $37,943, using a $7,000 draw on our revolving line of credit and cash on hand. The property is 100% leased to Mitsubishi Electric & Electronics USA with a remaining lease term of ten years.
On September 17, 2013, we acquired a 90% interest in a joint venture that owns Grand Lakes Marketplace, a 131,000 square foot retail property located in Katy, Texas for $42,975. This acquisition was financed with a $23,900 mortgage note payable secured by Grand Lakes Marketplace. The mortgage note payable has a ten-year term, carries a fixed interest rate of 4.20% and is interest only.
On December 18, 2013, we acquired South Seattle Distribution Center, a three building, 323,000 square foot industrial portfolio located in Seattle, Washington for approximately $39,000, using cash on hand. The portfolio is 100% leased to three tenants with a weighted average remaining lease term of approximately eight years.
DISPOSITIONS
2015 Dispositions
On January 18, 2015, we sold Cabana Beach San Marcos, Cabana Beach Gainesville, Campus Lodge Athens and Campus Lodge Columbia for a total of approximately $123,800. In connection with the disposition, the mortgage loans associated with the four properties totaling $71,000 were retired. We recorded a gain on the sale of the properties in the amount of $30,454 and recorded a loss on the extinguishment of the debt of $1,318.
2014 Dispositions
On August 8, 2014, we sold Stirling Slidell Shopping Centre, a 139,000 square foot retail property located in Slidell, Louisana for $14,600. In conjunction with the sale, we paid off the mortgage loan for $12,007. We recorded a gain on the sale of the property in the amount of $181 and recorded a loss on the extinguishment of the debt of $236.
On September 30, 2014, we transferred our ownership in 4 Research Park Drive, a 60,000 square foot office building located in St. Charles, Missouri, to the lender. We were relieved of a $6,049 mortgage debt obligation as part of the transfer. As a result, a $260 non-cash accounting gain was recognized on the transfer of property representing the difference between the fair value and net book value of the property transferred as of the date of transfer. Upon extinguishment of the mortgage debt obligation, a $384 non-cash accounting gain was recognized representing the difference between the book value of debt, interest payable and other obligations extinguished over the fair value of the property and other assets transferred as of the transfer date. The transfer resulted in a total non-cash accounting gain of $644.
2013 Dispositions
On October 24, 2013, we completed the sale of 13 of our 15 properties in the Dignity Health Office Portfolio, which include 300 Old River Road, 500 Old River Road, 500 West Thomas Road, 1500 South Central Avenue, 18350 Roscoe Boulevard, 18460 Roscoe Boulevard, 18546 Roscoe Boulevard, 4545 East Chandler, 485 South Dobson, 1501 North Gilbert, 116 South Palisade, 525 East Plaza, and 10440 East Riggs (collectively, the "Dignity Health Disposition Portfolio"), for $111,260. In conjunction with the sale, we prepaid the three remaining mortgage loan pools associated with the properties for approximately $60,950, including accrued interested. We reported a gain on sale of $15,048. The results of operations and gain on sale of the properties are reported as discontinued operations for all periods presented. The sale of the Dignity Health Disposition Portfolio properties was prompted by our belief that the future direction of the healthcare industry is moving away from individual physician practices and more towards large physician practice groups. The majority of the space within the Dignity Health Office Portfolio is focused on smaller, individual physician practices.
On October 29, 2013, we sold our 46.5% interest in Legacy Village to our joint venture partners for $27,350. We reported a gain on the sale of $7,290. The sale was the result of our goal to focus our retail investments in grocery anchored community oriented retail properties along with our objective to generally own majority controlling interests in our investments.
On December 10, 2013, we sold Canyon Plaza for $33,750, including the assumption of the existing mortgage note payable. We reported a gain on sale of $218. During the third quarter of 2013 we recorded an impairment charge of $10,182. The results of operations and gain on sale of the property is reported as discontinued operations for all periods presented. The sale was driven by the property no longer being a core asset as a result of the low occupancy and significant capital required to return the building to full occupancy.
FINANCING
The following is a summary of the mortgage notes for our consolidated properties as of December 31, 2015:
On June 8, 2015, we extended our existing $40,000 revolving line of credit agreement with Bank of America, N.A. The line of credit contains an accordion feature that allows us to increase the facility to $100,000, which we exercised in December 2015. The line of credit has a two-year term with a one-year extension at our option and bears interest based on LIBOR plus a spread ranging from 1.35% to 2.10% depending on our leverage ratio (1.60% spread at December 31, 2015). We intend to use the line of credit to cover short-term capital needs, for new property acquisitions and working capital. We may not draw funds on our line of credit if we experience a material adverse effect, which is defined to include, among other things, (a) a material adverse effect upon the operations, business, assets, liabilities or financial condition of the Company, taken as a whole; (b) a material impairment of the rights and remedies of any lender under any loan document or the ability of any loan party to perform its obligations under any loan document; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against any loan party of any loan document to which it is a party. As of December 31, 2015, we believe no material adverse effects had occurred. Our line of credit requires us to meet certain customary debt covenants which include a maximum leverage ratio, a minimum debt service coverage ratio as well as maintaining minimum amounts of equity and liquidity. As of December 31, 2015, we had $30,000 in borrowings outstanding on the revolving line of credit.
At December 31, 2015, we were in compliance with all debt covenants.
INSURANCE
We believe our properties are adequately covered by insurance consistent with the terms and levels of coverage that are standard in our industry.
OPERATING STATISTICS
We generally hold investments in properties with higher occupancy rates leased to quality tenants under long-term, non-cancelable leases. We believe these leases are beneficial to achieving our investment objectives. The following table shows our operating statistics by property type for our consolidated properties as of December 31, 2015:
(1)
Amount calculated as in-place minimum base rent for all occupied space at December 31, 2015 and excludes any straight line rents, tenant recoveries and percentage rent revenues.
As of December 31, 2015, our average effective annual rent per square foot, calculated as average minimum base rent per occupied square foot less tenant concessions and allowances, was $10.68 for our consolidated properties. As of December 31, 2015, the scheduled lease expirations at our consolidated properties are as follows:
(1)
Amount calculated as annualized in-place minimum base rent excluding any straight line rents, tenant recoveries and percentage rent revenues as of December 31, 2015 presented in the year of lease expiration.
(2)
Does not include 2,330 leases totaling approximately 1,366,000 square feet and approximately $22,517 in annualized minimum base rent associated with the five apartment properties we owned as of December 31, 2015.
The following table shows the aggregate occupancy rates for our consolidated properties as of December 31, 2015 and each of the previous five years:
The following tables show the occupancy rates for our consolidated properties by property type as well as the average minimum base rent per occupied square foot as of December 31, 2015 and 2014:
(1)
Amount calculated as in-place minimum base rent for all occupied space and excludes any straight line rents, tenant recoveries and percentage rent revenues.
Our apartment properties occupancy rate remained flat while average minimum base rents per occupied square foot increased at December 31, 2015 when compared to December 31, 2014. During 2015, we sold four student-oriented apartment assets which had lower base rents per square foot and we acquired Townlake of Coppell and AQ Rittenhouse which had higher base rents per square foot.
Our industrial properties occupancy rate decreased slightly while average minimum base rents per occupied square foot at December 31, 2015 increased slightly when compared to December 31, 2014 due to the industrial property acquisitions we made during 2015.
Our office properties occupancy rate decreased from December 31, 2014 to December 31, 2015 as a result of a tenant lease expiration at Railway Street Corporate Centre. The average minimum base rent per occupied square foot for our office properties at December 31, 2015 increased when compared to December 31, 2014, primarily due to leasing activity at Monument IV at Worldgate and 111 Sutter Street.
Our retail properties occupancy rate decreased while average minimum base rent per occupied square foot increased for our retail properties at December 31, 2015 when compared to December 31, 2014, primarily due to the acquisitions of Skokie Commons, Whitestone Market and Maui Mall during 2015.
The overall occupancy rate of our properties was unchanged from December 31, 2014 to December 31, 2015. The average minimum base rent per occupied square foot decreased from December 31, 2014 to December 31, 2015, primarily due to acquiring additional industrial properties which have lower rents per square foot than the other property types.
111 Sutter Street
As of December 31, 2015, 111 Sutter Street comprised approximately 9% of our total book value of assets and for the year ended December 31, 2015, 111 Sutter Street represented approximately 14% of our consolidated gross revenues.
(1)
Amount calculated as in-place minimum base rent for all occupied space at December 31, 2015 and excludes any straight line rents, tenant recoveries and percentage rent revenues.
As of December 31, 2015, the scheduled lease expirations at 111 Sutter Street are as follows:
(1) Amount calculated as annualized in-place minimum base rent excluding any straight line rents, tenant recoveries and percentage rent revenues as of December 31, 2015 presented in the year of lease expiration.
The following table shows the aggregate occupancy rates for 111 Sutter Street as of December 31, 2015 and each of the previous five years.
PRINCIPAL TENANTS
The following table sets forth the top ten tenants of our properties based on their percentage of annualized minimum base rent as of December 31, 2015:
(1)
Annual minimum base rent is calculated as annualized monthly in-place minimum base rent excluding any above- and below-market lease amortization, straight-line rents, tenant recoveries and percentage rent revenues.
(2)
Percent of annualized minimum base rent is calculated as annualized in-place minimum base rent excluding any above- and below-market lease amortization, straight-line rents, tenant recoveries and percentage rent revenues divided by total annualized minimum base rent.
(3)
The lease contains a one-time early termination option whereby the tenant can decrease their leased square footage by 108,206 square feet in May 2022. The tenant must provide notice of its intent to reduce its space by August 2021.
PRINCIPAL PROPERTIES
The following table sets forth our top ten consolidated properties based on percentage of annualized minimum base rent as of December 31, 2015:
(1)
Minimum base rent is calculated as in-place minimum base rent excluding any above and below-market lease amortization, straight-line rents, tenant recoveries and percentage rent revenues.
Item 3.
Item 3.
Legal Proceedings.
We are involved in various claims and litigation matters arising in the ordinary course of business, some of which involve claims for damages. Many of these matters are covered by insurance, although they may nevertheless be subject to deductibles or retentions. Although the ultimate liability for these matters cannot be determined, based upon information currently available, we believe the ultimate resolution of such claims and litigation will not have a material adverse effect on our financial position, results of operations, or liquidity.
Item 4.
Item 4.
Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
MARKET FOR COMMON EQUITY
We have five classes of common stock authorized as of December 31, 2015, Class A, Class M, Class A-I, Class M-I and Class D. On January 16, 2015, our First Extended Public Offering was declared effective, pursuant to which we sell to the public shares of Class A, Class M, Class A-I and Class M-I common stock. On March 3, 2015, we commenced a new private offering of up to $350,000 in shares of our Class D common stock with an indefinite duration. The fees payable to our dealer manager with respect to each outstanding share of each class, as a percentage of NAV, are as follows:
First Extended Public Offering
Private Offering
The selling commission and dealer manager fee are offering costs and will be recorded as a reduction of capital in excess of par value.
Our common stock is not currently traded on any exchange and there is no established public trading market for our common stock. As of March 10, 2016, there were 8,153 stockholders of record of our common stock, including 5,657 holders of Class A, 2,424 holders Class M, 35 holders Class A-I, 36 holders of Class M-I, and 1 holder of Class D shares.
NAV per Share
Beginning on October 1, 2012, at the end of each day the New York Stock Exchange is open for unrestricted trading, before taking into consideration additional issuances of shares of common stock, repurchases or class-specific expense accruals for that day, any change in our aggregate NAV (whether an increase or decrease) is allocated among each class of shares based on each class's relative percentage of the previous aggregate NAV. Changes in our daily NAV reflect factors including, but not limited to, our portfolio income, interest expense and unrealized/realized gains (losses) on assets, and accruals for the advisory fees. The portfolio income is calculated and accrued on the basis of data extracted from (1) the annual budget for each property and at the company level, including organization and offering expenses incurred after commencement of a public offering and certain operating expenses, (2) material, unbudgeted non-recurring income and expense events such as capital expenditures, prepayment penalties, assumption fees, tenant buyouts, lease termination fees and tenant turnover with respect to our properties when our Advisor becomes aware of such events and the relevant information is available and (3) material property acquisitions and dispositions occurring during the month. For the first month following a property acquisition, we calculate and accrue portfolio income with respect to such property based on the performance of the property before the acquisition and the contractual arrangements in place at the time of the acquisition, as identified and reviewed through our due diligence and underwriting process in connection with the acquisition. On an ongoing basis, our Advisor adjusts the accruals to reflect actual operating results and to appropriately reflect the outstanding receivable, payable and other account balances resulting from the accumulation of daily accruals for which financial information is available. The daily accrual of portfolio income also includes reimbursements to our Advisor and dealer manager for organization and offering expenses incurred prior to the date the offering commences and paid on our behalf, which we are reimbursing over the 36 months following the date the offering commences. For the purpose of calculating our NAV, all organization and offering costs incurred after the date the offering commences are recognized as expenses when incurred, and acquisition expenses with respect to each acquired property will be amortized on a daily basis over a five year period following the acquisition date.
Following the allocation of income and expenses as described above, NAV for each class is adjusted for additional issuances of common stock, repurchases and class specific expense accruals, such as the dealer manager fee, to determine the current day's NAV. Our share classes may have different expense accruals associated with the advisory fee we pay to our Advisor because the performance component of the advisory fee is calculated separately with respect to each class. At the close of business on the date that is one business day after each record date for any declared distribution, our NAV for each class will be reduced to reflect the accrual of our liability to pay the distribution to our stockholders of record of each class as of the record date. NAV per share for each class is calculated by dividing such class's NAV at the end of each trading day by the number of shares outstanding for that class on such day.
At the beginning of each calendar year, our Advisor develops a valuation plan with the objective of having each of our wholly owned properties valued each quarter by an appraisal. Newly acquired wholly owned properties are initially valued at cost and thereafter become subject to the quarterly appraisal cycle during the quarter following the first full calendar quarter in which we own the property.
The fair value of our wholly owned properties is done using the fair value methodologies detailed within the FASB Accounting Standards Codification under Topic 820, Fair Value Measurements and Disclosures. Real estate appraisals are reported on a free and clear basis, excluding any property-level indebtedness that may be in place. We expect the primary methodology used to value properties will be the income approach, whereby value is derived by determining the present value of an asset's stream of future cash flows (for example, discounted cash flow analysis). Consistent with industry practices, the income approach incorporates subjective judgments regarding comparable rental and operating expense data, the capitalization or discount rate, and projections of future rent and expenses based on appropriate evidence. Other methodologies that may also be used to value properties include sales comparisons and replacement cost approaches.
Properties held through joint ventures are valued in a manner that is consistent with the guidelines described above for wholly-owned properties. Once the value of a property held by the joint venture is determined by an independent appraisal, the value of our interest in the joint venture would then be determined by applying the distribution provisions of the applicable joint venture agreements to the value of the underlying property held by the joint venture.
Real estate-related assets that we own or may acquire include debt and equity interests backed principally by real estate, such as the common and preferred stock of publicly traded real estate companies, commercial mortgage-backed securities, mortgage loans and participations in mortgage loans (i.e. A-Notes and B-Notes) and mezzanine loans. In general, real estate-related assets are valued according to the procedures specified below upon acquisition or issuance and then quarterly, or in the case of liquid securities, daily, as applicable, thereafter.
Publicly traded debt and real estate-related equity securities (such as bonds and shares issued by listed REITs) that are not restricted as to salability or transferability are valued by our Advisor on the basis of publicly available information provided by third parties. Generally, the third parties will rely on the price of the last trade of such securities that was executed at or prior to closing on the valuation day or, in the absence of such trade, the last “bid” price. Our Advisor may adjust the value of publicly traded debt and real estate-related equity securities that are restricted as to salability or transferability for a liquidity discount. In determining the amount of such discount, consideration will be given to the nature and length of such restriction and the relative volatility of the market price of the security.
Investments in privately placed debt instruments and securities of real estate-related operating businesses (other than joint ventures), such as real estate development or management companies, are valued by our Advisor at cost (purchase price plus all related acquisition costs and expenses, such as legal fees and closing costs) and thereafter will be revalued each quarter at fair value. In evaluating the fair value of our interests in certain commingled investment vehicles (such as private real estate funds), values periodically assigned to such interests by the respective issuers, broker-dealers or managers may be relied upon. Our board of directors may retain additional independent valuation firms to assist with the valuation of our private real estate-related assets.
Individual investments in private mortgages, mortgage participations and mezzanine loans are valued by our Advisor at our acquisition cost and may be revalued by our Advisor from time to time. Revaluations of mortgages reflect the changes in value of the underlying real estate, with anticipated sale proceeds (estimated cash flows) discounted to their present value using a discount rate based on current market rates.
Liquid non-real estate-related assets include credit rated government and corporate debt securities, publicly traded equity securities and cash and cash equivalents. Liquid non-real estate-related assets are valued daily by our Advisor.
Our Advisor includes the book value of our liabilities as part of our NAV calculation. Our liabilities include the fees payable to our Advisor and dealer manager, accounts payable, accrued operating expenses, property-level mortgages, any portfolio-level credit facilities and other liabilities. All liabilities are valued at cost. Costs and expenses that relate to a particular loan will be amortized over the life of the loan. We allocate the financing costs and expenses incurred in connection with obtaining multiple loans that are not directly related to any single loan among the applicable loans, generally pro rata based on the amount of proceeds from each loan. Liabilities allocable to a specific class of shares are only included in the NAV calculation for that class. For non-recourse, property-level mortgages that exceed the value of the underlying property, we assume a value of zero for purposes of the property and the mortgage in the determination of our NAV.
NAV as of December 31, 2015
The following table presents our historical NAV per share for each period indicated below:
The increase in NAV from December 31, 2014 is primarily related to an overall 3.4% increase in the values of our properties during 2015.
The following table provides a breakdown of the major components of our NAV per share as of December 31, 2015:
(1)
The value of our real estate investments was greater than the historical cost by approximately 3.3% as of December 31, 2015.
The following table provides a breakdown of the major components of our NAV per share as of December 31, 2014:
(1) The value of our real estate investments was less than the historical cost by approximately 2.8% as of December 31, 2014.
The following are key assumptions (shown on a weighted-average basis) that are used in the discounted cash flow models to estimate the value of our real estate investments as of December 31, 2015:
(1)
The Other category includes South Beach Parking Garage, which is subject to a ground lease. The appraisal of the garage incorporated discounted cash flows over the remaining term of the ground lease.
The following are key assumptions (shown on a weighted-average basis) that are used in the discounted cash flow models to estimate the value of our real estate investments as of December 31, 2014:
(1)
The Other category includes South Beach Parking Garage, which is subject to a ground lease. The appraisal of the garage incorporated discounted cash flows over the remaining term of the ground lease.
While we believe our assumptions are reasonable, a change in these assumptions would impact the calculation of the value of our real estate investments. For example, assuming all other factors remain unchanged, an increase in the weighted-average discount rate/internal rate of return (IRR) used as of December 31, 2015 of 0.25% would yield a decrease in our total real estate investment value of 1.2% and our NAV per share class would have been $10.96, $10.98, $10.99, $10.98 and $10.97 for Class A, Class M, Class A-I, Class M-I and Class D, respectively. An increase in the weighted-average discount rate/internal rate of return (IRR) used as of December 31, 2014 of 0.25% would yield a decrease in our total real estate asset value of 1.87% and our NAV per share as of December 31, 2014 would have been $10.22, $10.23, $10.23, $10.24 and $10.23 for Class A, Class M, Class A-I, Class M-I and Class D, respectively.
Limitations and Risks
As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different NAV per share. Accordingly, with respect to our NAV per share, we can provide no assurance that:
•
a stockholder would be able to realize this NAV per share upon attempting to resell his or her shares;
•
we would be able to achieve, for our stockholders, the NAV per share, upon a listing of our shares of common stock on a national securities exchange, selling our real estate portfolio, or merging with another company; or
•
the NAV per share, or the methodologies relied upon to estimate the NAV per share, will be found by any regulatory authority to comply with any regulatory requirements.
Furthermore, the NAV per share was calculated as of a particular point in time. The NAV per share will fluctuate over time in response to, among other things, changes in real estate market fundamentals, capital markets activities, and attributes specific to the properties and leases within our portfolio.
REGISTERED SALES OF EQUITY SECURITIES
On October 1, 2012 our registration statement on Form S-11 (Commission File No. 333-177963), registering our Initial Public Offering of up to $3,000,000 in any combination of Class A and Class M shares of our common stock, was declared effective by the SEC under the Securities Act and we commenced our Initial Public Offering. We offered up to $2,700,000 in shares of our common stock to the public in our primary offering and up to $300,000 of shares of our common stock pursuant to our distribution reinvestment plan. The per share purchase price for shares sold in the Initial Public Offering varied from day-to-day and, on each day, equaled our NAV per share for each class of common stock, plus, for Class A shares only, applicable selling commissions. As of January 15, 2015, the date our Initial Public Offering terminated, we had raised aggregate gross proceeds from the sale of shares of our Class A and Class M common stock in our Initial Public Offering of $216,037 and $52,944, respectively.
As of January 15, 2015, we incurred the following costs in connection with the issuance and distribution of shares of our common stock in the Initial Public Offering:
(1)
Comprised of $1,561 in selling commissions, $4,458 in dealer manager fees and $9,178 in other offering costs. Selling commissions and dealer manager fees of $4,305 have been reallowed to third parties.
From the commencement of the Initial Public Offering through January 15, 2015, the net proceeds to us from our Initial Public Offering, excluding DRIP proceeds, after deducting the total expenses incurred described above, were $246,688. From the commencement of the Initial Public Offering through January 15, 2015, net proceeds from our Initial Public Offering have been allocated to reduce borrowings by $121,620 and to purchase interests in real estate of $125,068.
On June 18, 2014, we filed a registration statement on Form S-11 (Commission File No. 333-196886) with the SEC to register a public offering of up to $2,700,000 in any combination of shares of our Class A, Class M, Class A-I and Class M-I common stock, consisting of up to $2,400,000 of shares offered in our primary offering and up to $300,000 in shares offered pursuant to our distribution reinvestment plan. On January 16, 2015, this First Extended Public Offering was declared effective by the SEC and the Initial Public Offering automatically terminated. We reserve the right to terminate the First Extended Public Offering at any time and to extend the First Extended Public Offering term to the extent permissible under applicable law. LaSalle Investment Management Distributors, LLC, an affiliate of our Advisor (the "Dealer Manager") served as the dealer manager for our Initial Public Offering and continues to serve as the dealer manager for the First Extended Public Offering.
From January 16, 2015 through December 31, 2015, we recognized selling commissions, dealer manager fees and organization and other offering costs in our First Extended Public Offering in the amounts set forth below:
From January 16, 2015 through December 31, 2015, the net offering proceeds to us from the sale of Class A, Class M, Class A-I, and Class M-I shares in the First Extended Public Offering, after deducting the total expenses incurred as described above, were approximately $218,650, $64,139, $21,457, and $27,261, respectively. As of December 31, 2015, we have raised $13,630 from the sale of shares pursuant to our distribution reinvestment plan, including $7,562 from the sale of 689,755 Class A shares, $2,475 from the sale of 225,073 Class M shares, $553 from the sale of 50,037 Class A-I shares, $892 from the sale of 80,879 Class M-I shares, and $2,147 from the sale of 194,809 Class D shares. As of December 31, 2015, 37,092,768 shares of Class A common stock, 27,909,411 shares of Class M common stock, 6,116,812 shares of Class A-I common stock, and 3,356,619 shares of Class M-I common stock were outstanding, and held by a total of 7,139 stockholders.
We intend to use the net proceeds from our offerings, which are not used to pay the fees and other expenses attributable to our operations, to (1) grow and further diversify our portfolio by making investments in accordance with our investment strategy and guidelines, (2) reduce borrowings and repay indebtedness incurred under various financing instruments and (3) fund repurchases under our share repurchase plan. As of December 31, 2015, net proceeds from our First Extended Public Offering have been allocated to reduce borrowings by $9,250 and to purchase interests in real estate of $322,257.
UNREGISTERED SALES OF EQUITY SECURITIES
On June 19, 2014, we commenced the Initial Private Offering of up to $400,000 in any combination of our Class A-I, Class M-I and Class D shares of common stock. Upon the SEC declaring the registration statement for our First Extended Public Offering effective, we terminated the Private Offering. As of January 15, 2015, we had raised aggregate gross proceeds from the sale of shares of our Class A-I, Class M-I and Class D common stock in our Initial Private Offering of approximately $43,510. On March 3, 2015, we commenced the Follow-on Private Offering of up to $350,000 in shares of our Class D common stock with indefinite duration. As of December 31, 2015, we have raised aggregate gross proceeds from the sale of 4,429,043 Class D shares in our Follow-on Private Offering of $49,147. The shares of common stock issued in the Private Offering were issued in transactions exempt from registration under the Securities Act pursuant to Rule 506 of Regulation D promulgated under the Securities Act. The Dealer Manager also serves as the dealer manager for the Follow-on Private Offering.
During the year ended December 31, 2015, we have received $2,147 from the sale of 194,809 Class D shares pursuant to our distribution reinvestment plan.
ISSUER PURCHASES OF EQUITY SECURITIES
Share Repurchase Plan
On October 1, 2012, we adopted a share repurchase plan whereby on a daily basis stockholders may request we repurchase all or a portion of their shares of common stock at that day's NAV per share. The share repurchase plan is subject to a one-year holding period, with certain exceptions, and limited to 5% of NAV per quarter. For the year ended December 31, 2013 we repurchased 31,229 and 71,685 shares of Class A and Class M common stock, respectively, for a total of approximately $619 pursuant to our share repurchase plan. On December 2, 2014, our board of directors voted unanimously to increase the repurchase limitation under our share repurchase plan for the quarter ended December 31, 2014 from 5% of the combined NAV of all classes of shares to 6% of the combined NAV of all classes of shares as of September 30, 2014. For the year ended December 31, 2014, we repurchased 292,407 and 2,814,586 shares of Class A and Class M common stock, respectively, for a total of approximately $32,604 pursuant to our share repurchase plan. For the year ended December 31, 2015, we repurchased 494,216, 1,840,770 and 615,509 shares of Class A, Class M, and Class A-I common stock, respectively, for a total of approximately $32,082 pursuant to our share repurchase plan. To date, we have neither deferred nor rejected any request for repurchase under our share repurchase plan. All redemptions were paid out from offering proceeds.
During the quarter ended December 31, 2015, we fulfilled redemption requests and redeemed shares of our common stock pursuant to our share repurchase plan as follows:
(1) Redemptions are limited as described above.
DIVIDEND POLICY
To comply with current tax laws necessary to qualify as a REIT, we expect to distribute at least 90% of our taxable income to our stockholders. Accordingly, we currently intend to make distributions to our stockholders in amounts sufficient to maintain our qualification as a REIT. Before payment of any distribution, we must have cash available after payment of both operating requirements and scheduled debt service on mortgages and loans payable. The declaration of distributions is at the discretion of our board of directors, which decision is made from time to time based on then prevailing circumstances.
Our board of directors and the Advisor will periodically review the dividend policy to determine the appropriateness of our distribution rate relative to our current and forecasted cash flows.
Our board of directors declared quarterly distributions of $0.10 per share for the first, second and third quarters of 2013. Our board of directors declared quarterly distributions of $0.11 per share for each of the fourth quarter of 2013 and the first and second quarters of 2014. Our board of directors declared quarterly distributions of $0.12 per share for each of the third and fourth quarters of 2014 and for each of the quarters of 2015. On March 8, 2016, our board of directors declared a quarterly dividend of $0.12 per share for the first quarter of 2016. The distribution will be paid on or around May 2, 2016. Stockholders will receive $0.12 per share less applicable class-specific fees. There is no guarantee that we will continue to pay distributions at this rate in the future, or at all.
(1)
Annualized rate of return calculated using the weighted average NAV of our common stock as of December 31.
The following table summarizes our distributions paid over the last three fiscal years:
The following table summarizes our distributions paid for each quarter of the last fiscal year:
Distribution Reinvestment Plan
Our distribution reinvestment plan allows stockholders to elect to have their cash distributions reinvested in additional shares of our common stock at the NAV per share on the distribution date. For the year ended December 31, 2013, we issued 196,790 shares of common stock for $1,998 under the distribution reinvestment plan. For the year ended December 31, 2014, we issued 529,036 shares of common stock for $5,505 under the distribution reinvestment plan. For the year ended December 31, 2015, we issued 1,240,552 shares of common stock for $13,630 under the distribution reinvestment plan.
Tax Treatment of Distributions
For the year ended December 31, 2015, we paid distributions to stockholders of approximately $24,441 and for the year ended December 31, 2014, we paid distributions to stockholders of approximately $17,136. For income tax purposes, 100% of the distributions paid in 2015 and 2014 will qualify as a nondividend distribution or return of capital. The distribution declared on November 5, 2015, paid on February 5, 2016, will be taxable in 2016 and is not reflected in the 2015 tax allocation.
The table below summarizes the income tax treatment of distributions paid to Class A stockholders during the year ended December 31, 2015:
(1) Distributions per share are net of dealer manager fees of 1.05% of NAV.
The table below summarizes the income tax treatment of distributions paid to Class M stockholders during the year ended December 31, 2015:
(1) Distributions per share are net of dealer manager fees of 0.30% of NAV.
The table below summarizes the income tax treatment of distributions paid to Class A-I stockholders during the year ended December 31, 2015:
(1) Distributions per share are net of dealer manager fees of 0.30% of NAV.
The table below summarizes the income tax treatment of distributions paid to Class M-I stockholders during the year ended December 31, 2015:
(1) Distributions per share are net of dealer manager fees of 0.05% of NAV.
The table below summarizes the income tax treatment of distributions paid to Class D stockholders during the year ended December 31, 2015:
The table below summarizes the income tax treatment of distributions paid to Class A stockholders during the year ended December 31, 2014:
(1) Distributions per share are net of dealer manager fees of 1.05% of NAV.
The table below summarizes the income tax treatment of distributions paid to Class M stockholders during the year ended December 31, 2014:
(1) Distributions per share are net of dealer manager fees of 0.55% of NAV from January 1, 2014 to May 31, 2014, thereafter reduced to 0.30% of NAV.
The table below summarizes the income tax treatment of distributions paid to Class M-I stockholders during the year ended December 31, 2014:
(1) Distributions per share are net of dealer manager fees of 0.05% of NAV.
The table below summarizes the income tax treatment of distributions paid to Class D stockholders during the year ended December 31, 2014:
Stockholders are advised to consult with their tax advisors about the specific tax treatment of distributions we paid.
Performance Graph (Dollars in whole dollars)
The following graph is a comparison of the cumulative return of our shares of Class M common stock (post leverage and fees), the Standard and Poor’s 500 Index (“S&P 500”) and the National Counsel of Real Estate Investment Fiduciaries ("NCREIF") Fund Index-Open-End Diversified Core Equity (“ODCE”). The graph assumes that $100 was invested on October 1, 2012 in each of shares of Class M common stock, the S&P 500 Index and the ODCE, assuming that all dividends were reinvested without the payment of any commissions. We currently have Class A, Class M, Class A-I, Class M-I and Class D common stock outstanding. There can be no assurance that the performance of our shares will continue in line with the same or similar trends depicted in the graph below.
*The ODCE is a capitalization-weighted, time weighted index of open-end core real estate funds reported net of fees. The term core typically reflects lower risk investment strategies, utilizing low leverage and generally represented by equity ownership positions in stable U.S. operating properties. Funds are weighted by capitalization, so larger funds have a greater impact on index returns. While funds used in this benchmark typically target institutional investors and have characteristics that differ from the Company (including differing fees), we feel that the ODCE is an appropriate and accepted index for the purpose of evaluating returns on investments in direct real estate funds. Investors cannot invest in this index. The Company has the ability to utilize higher leverage than is allowed for the funds in this index, which could increase the Company’s volatility relative to the index.
Item 6.
Item 6.
Selected Financial Data.
The following table sets forth our selected financial and operating data on a historical basis. The following data should be read in conjunction with our consolidated financial statements and the accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K. On October 1, 2012, we declared a stock dividend with respect to all Class E shares at a ratio of 4.786-to-1. The effects of the stock dividend have been applied retroactively to all share and per share amounts for all periods presented.
(1)
Funds from operations (“FFO”) does not represent cash flow from operations as defined by GAAP, should not be considered as an alternative to GAAP net income and is not necessarily indicative of cash available to fund all cash requirements. Please see below for a reconciliation of net income to FFO. Prior year amounts have been recalculated to conform to current year presentation.
(2)
Includes $71,000 of mortgage notes classified as held for sale as of December 31, 2014.
The selected financial data presented above has been impacted by acquisitions and dispositions made since our inception as well as by new accounting guidance impacting the accounting for discontinued operations which we adopted on January 1, 2014. These acquisitions, dispositions and new accounting guidance impact the comparability of our results from operations, financial position and cash flows. We are uncertain how the results from operations, financial position and cash flows will be impacted should we make future acquisitions or dispositions.
FUNDS FROM OPERATIONS
Consistent with real estate industry and investment community preferences, we consider FFO as a supplemental measure of the operating performance for a real estate investment trust and a complement to GAAP measures because it facilitates an understanding of the operating performance of our properties. The National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income (loss) attributable to the Company (computed in accordance with GAAP), excluding gains or losses from cumulative effects of accounting changes, extraordinary items, impairment write-downs of depreciable real estate and sales of properties, plus real estate related depreciation and amortization and after adjustments for these items related to noncontrolling interests and unconsolidated affiliates.
FFO does not give effect to real estate depreciation and amortization because these amounts are computed to allocate the cost of a property over its useful life. Because values for well-maintained real estate assets have historically increased or decreased based upon prevailing market conditions, we believe that FFO provides stockholders with an additional view of our operating performance. We also use Adjusted FFO ("AFFO") as a supplemental measure of operating performance. We define AFFO as FFO adjusted for straight-line rental income, amortization of above- and below-market leases, amortization of net
discount on assumed debt, gains or losses on the extinguishment or modification of debt, performance fees based on the investment returns on shares of our common stock and acquisition related costs.
In order to provide a better understanding of the relationship between FFO, AFFO and GAAP net income, the most directly comparable GAAP financial reporting measure, we have provided reconciliations of GAAP net income (loss) attributable to JLL Income Property Trust, to FFO and FFO to AFFO. FFO and AFFO do not represent cash flow from operating activities in accordance with GAAP, should not be considered as an alternative to GAAP net income and are not necessarily indicative of cash available to fund cash needs.
The following table presents a reconciliation of net income (loss) to FFO for the periods presented:
(1)
Includes amounts attributable to discontinued operations and our ownership share of both consolidated properties and unconsolidated real estate affiliates.
(2)
On October 1, 2012, we declared a stock dividend with respect to all Class E shares at a ratio of 4.786-to-1. The effects of the stock dividend have been applied retroactively to all share and per share amounts for all periods presented.
The following table presents a reconciliation of FFO to AFFO for the periods presented:
(1)
Includes amounts attributable to discontinued operations and our ownership share of both consolidated properties and unconsolidated real estate affiliates.
(2)
On October 1, 2012, we declared a stock dividend with respect to all Class E shares at a ratio of 4.786-to-1. The effects of the stock dividend have been applied retroactively to all share and per share amounts for all periods presented.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management Overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements appearing elsewhere in this Form 10-K. All references to numbered Notes are to specific notes to our Consolidated Financial Statements beginning on page of this Form 10-K, and the descriptions referred to are incorporated into the applicable portion of this section by reference. References to “base rent” in this Form 10-K refer to cash payments made under the relevant lease(s), excluding real estate taxes and certain property operating expenses that are paid by us and are recoverable under the relevant lease(s) and exclude adjustments for straight-line rent revenue and above- and below-market lease amortization.
The discussions surrounding our Consolidated Properties refer to our wholly or majority owned and controlled properties, which as of December 31, 2015 were comprised of:
Apartments
•
Station Nine Apartments,
•
The Edge at Lafayette,
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Campus Lodge Tampa,
•
Townlake of Coppell (acquired in 2015) and
•
AQ Rittenhouse (acquired in 2015).
Industrial
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Kendall Distribution Center,
•
Norfleet Distribution Center,
•
Joliet Distribution Center (acquired in 2013),
•
Suwanee Distribution Center (acquired in 2013),
•
South Seattle Distribution Center (acquired in 2013),
•
Grand Prairie Distribution Center (acquired in 2014),
•
Charlotte Distribution Center (acquired in 2014),
•
DFW Distribution Center (acquired in 2015) and
•
O'Hare Industrial Portfolio (acquired in 2015).
Office
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Monument IV at Worldgate,
•
111 Sutter Street,
•
14600 Sherman Way,
•
14624 Sherman Way,
•
36 Research Park Drive,
•
Railway Street Corporate Centre and
•
140 Park Avenue (acquired in 2015).
Retail
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The District at Howell Mill,
•
Grand Lakes Marketplace (acquired in 2013),
•
Oak Grove Plaza (acquired in 2014),
•
Rancho Temecula Town Center (acquired in 2014),
•
Skokie Commons (acquired in 2015),
•
Whitestone Market (acquired in 2015) and
•
Maui Mall (acquired in 2015).
Other
•
South Beach Parking Garage (acquired in 2014).
Discontinued Operations and Sold Properties (1)
•
Canyon Plaza (sold in 2013, excluded from December 31, 2013 Consolidated Properties),
•
the Dignity Health Disposition Portfolio (sold in 2013, excluded from December 31, 2013 Consolidated Properties),
•
Stirling Slidell Shopping Centre (sold in 2014, excluded from December 31, 2014 Consolidated Properties)
•
4 Research Park Drive (disposed of in 2014, excluded from December 31, 2014 Consolidated Properties),
•
Cabana Beach San Marcos (sold in 2015, excluded from December 31, 2015 Consolidated Properties),
•
Cabana Beach Gainesville (sold in 2015, excluded from December 31, 2015 Consolidated Properties),
•
Campus Lodge Athens (sold in 2015, excluded from December 31, 2015 Consolidated Properties) and
•
Campus Lodge Columbia (sold in 2015, excluded from December 31, 2015 Consolidated Properties).
(1)
In April 2014, FASB issued new guidance requiring reporting of discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. We adopted this guidance during 2014 effective January 1, 2014 and thus our 2014 and 2015 sales are not classified as discontinued operations.
Discussions surrounding our Unconsolidated Properties refer to properties owned through joint venture arrangements or condominium interests, which were comprised of:
(1) Investment was acquired on December 8, 2015. The company has elected the Fair Value Option to account for this investment.
(2) Property was acquired on December 23, 2014.
Our primary business is the ownership and management of a diversified portfolio of apartment, industrial, office, retail and other properties primarily located in the United States. It is expected that over time our real estate portfolio will be further diversified on a global basis and will be complemented by investments in real estate-related assets.
We are managed by our Advisor, LaSalle Investment Management, Inc., a subsidiary of our Sponsor, Jones Lang LaSalle Incorporated (NYSE: JLL), a leading global financial and professional services firm that specializes in commercial real estate services. We hire property management and leasing companies to provide the on-site, day-to-day management and leasing services for our properties. When selecting a property management or leasing company for one of our properties, we look for service providers that have a strong local market or industry presence, create portfolio efficiencies, have the ability to develop new business for us and will provide a strong internal control environment that will comply with our Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) internal control requirements. We currently use a mix of property management and leasing service providers that include large national real estate service firms, including an affiliate of our Advisor and smaller local firms.
We seek to minimize risk and maintain stability of income and principal value through broad diversification across property sectors and geographic markets and by balancing tenant lease expirations and debt maturities across the real estate portfolio. Our diversification goals also take into account investing in sectors or regions we believe will create returns consistent with our investment objectives. Under normal conditions, we intend to pursue investments principally in well-located, well-leased properties within the apartment, industrial, office, retail and other sectors. We expect to actively manage the mix of properties and markets over time in response to changing operating fundamentals within each property sector and to changing economies and real estate markets in the geographic areas considered for investment. When consistent with our investment objectives, we also seek to maximize the tax efficiency of our investments through like-kind exchanges and other tax planning strategies.
The following charts summarize our portfolio diversification by property sector and geographic region based upon the fair value of our properties. These tables provide examples of how our Advisor evaluates our real estate portfolio when making investment decisions.
Estimated Percent of Fair Value as of December 31, 2015
Future Lease Expirations
The future lease expiration table represents the lease expirations by both total square feet and annualized minimum base rents for current tenants of our Consolidated Properties.
(1)
Amount calculated as annualized in-place minimum base rent excluding any straight line rents, tenant recoveries and percentage rent revenues.
(2)
Does not include 2,330 short-term leases totaling approximately 1,366,000 square feet and approximately $22,517 in annualized minimum base rent associated with the seven apartment properties as of December 31, 2015.
Ten-Year Debt Repayment
The ten-year debt repayment table represents debt principal repayments and maturities and the weighted average interest rate of those repayments and maturities for our Consolidated Properties.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, significant estimates and assumptions have been made with respect to the useful lives of assets, recoverable amounts of receivables and initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions. Actual results could differ from those estimates.
Critical Accounting Policies
This MD&A is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are those applicable to the following which can be found in greater detail within Note 2 Summary of Significant Accounting Policies:
Initial Valuations and Estimated Useful Lives or Amortization Periods for Real Estate Investments and Intangibles
These estimates are particularly important as they are used for the allocation of purchase price between depreciable and non-depreciable real estate and other identifiable intangibles, including above, below and at-market leases. As a result, the impact of these estimates on our operations could be substantial. Significant differences in annual depreciation or amortization expense may result from the differing useful life or amortization periods related to such purchased assets and liabilities.
Impairment of Long-Lived Assets
Our estimate of the expected future cash flows used in testing for impairment is highly subjective and based on, among other things, our estimates regarding future market conditions, rental rates, occupancy levels, costs of tenant improvements, leasing commissions and other tenant concessions, assumptions regarding the residual value of our properties at the end of our anticipated holding period, discount rates and the length of our anticipated holding period. These assumptions could differ materially from actual results. If our strategy changes or if market conditions otherwise dictate a reduction in the holding period and an earlier sale date, an impairment loss could be recognized and such loss could be material.
Dealer Manager Fee Accounting
No authoritative GAAP guidance specifically addresses the accounting treatment for dealer manager fees. Dealer manager fees are accrued daily into our NAV based on a specified percentage for each publicly offered share class multiplied by the NAV of that share class at the end of each day. There are two acceptable accounting practices used by the industry to account for dealer manager fees in GAAP based financial statements. The first practice involves accruing the liability for the dealer manager fees on a daily basis as offering costs, which are recorded as a reduction of capital in excess of par value. The second practice involves accruing all future dealer manager fees on the day the share of stock is sold, up to the maximum ten percent as allowed under applicable regulations. The Company has selected the first practice as its accounting policy. The Company selected the policy of accruing dealer manager fees on a daily basis because we are obligated to pay the fee every day that a share of common stock is outstanding until it has been repurchased or we have reached the ten percent limit. The Company believes dealer manager fees are offering costs and recorded as a reduction of capital in excess of par value as there are limited ongoing services required to be performed in order for the dealer manager fee to be paid to our Dealer Manager. In addition, the Dealer Manager reallows a majority of the dealer manager fee to participating broker dealers who receive the fee as compensation for providing services to the stockholders. For common stock sold in the Initial Public Offering and First Extended Public Offering through December 31, 2015, the Company estimates it will pay out an additional $39,508 in offering costs, primarily in the form of dealer manager fees, which are not reflected on our Consolidated Balance Sheet as of December 31, 2015. We estimate the offering costs to be paid out over the next ten years.
Recent Events and Outlook
General Company and Market Commentary
On January 16, 2015, we commenced our First Extended Public Offering of up to $2,700,000 in any combination of Class A, Class M, Class A-I and Class M-I shares of common stock, consisting of up to $2,400,000 of shares in our primary offering and up to $300,000 of shares pursuant to our distribution reinvestment plan, and our Initial Public Offering automatically terminated. We intend to offer shares of our common stock on a continuous basis for an indefinite period of time by filing a new registration statement before the end of each offering period, subject to regulatory approval. The per share purchase price varies from day-to-day and, on each day, equals our NAV per share for each class of common stock, plus, for Class A and Class A-I shares, applicable selling commissions. The Dealer Manager has agreed to distribute shares of our common stock in our First Extended Public Offering. We intend to primarily use the net proceeds from the offering, after we pay the fees and expenses attributable to the offerings and our operations, to (1) grow and further diversify our portfolio by making investments in accordance with our investment strategy and policies, (2) reduce borrowings and repay indebtedness incurred under various financing instruments and (3) fund repurchases of our shares under our share repurchase plan.
On March 3, 2015, we commenced a new private offering of up to $350,000 in shares of our Class D common stock with an indefinite duration. Proceeds from our private offerings will be used for the same corporate purposes as the proceeds of the First Extended Public Offering.
Capital Raised and Use of Proceeds
As of December 31, 2015, we have raised gross proceeds of over $760,000 from our offerings and private share sales since 2012. We used these proceeds along with proceeds from mortgage debt to acquire approximately $940,000 of real estate investments, deleverage the company by repaying mortgage loans of approximately $240,000 and repurchase shares of our common stock of approximately $140,000.
We have executed on a number of our key strategic initiatives during 2015, including:
Property Acquisitions
•
purchased DFW Distribution Center for $44,200;
•
purchased Skokie Commons for $48,500;
•
purchased Townlake of Coppell for $43,200;
•
purchased AQ Rittenhouse for $51,000;
•
purchased Whitestone Market for $51,500;
•
purchased O'Hare Industrial Portfolio for $71,000;
•
purchased investment in NYC Retail Portfolio for $85,600;
•
purchased 140 Park Avenue for $45,600; and
•
purchased Maui Mall for $91,100.
Property Dispositions
•
sold Cabana Beach San Marcos, Cabana Beach Gainesville, Campus Lodge Athens and Campus Lodge Columbia for approximately $123,800.
Financings
•
entered into a $17,700 mortgage note payable on DFW Distribution Center;
•
entered into a $24,400 mortgage note payable on Skokie Commons;
•
entered into a $28,800 mortgage note payable on Townlake of Coppell;
•
entered into a $25,800 mortgage note payable on Whitestone Marketplace;
•
entered into a $26,370 mortgage note payable on AQ Rittenhouse; and
•
expanded our line of credit facility to $100,000.
Leasing
•
signed a lease with Amazon for 83,000 square feet for a term of 10 years at Monument IV at Worldgate;
•
signed new and renewal leases for 75,000 square feet at 111 Sutter Street; and
•
extended a 206,000 square foot lease for one-year at Joliet Distribution Center.
Through these specific and other important accomplishments, we continued to reduce our Company leverage ratio, decreased our average interest rate on debt, increased cash reserves and Company-wide liquidity while at the same time providing cash flow to our stockholders through our regular quarterly distribution payments.
As we entered 2015, we held significant cash reserves throughout the first quarter to satisfy potential repurchase demand. Adding to our cash balances were proceeds from the sale of four of our student-oriented housing properties in January 2015. We sold these properties to reduce risk in our portfolio as we determined that increasing competition in certain markets and exposure to changing university policies were not in keeping with our long-term strategy and the risk adjusted returns did not meet our thresholds. Selling these four properties as a group increased the buyer pool and resulted in a modest premium to their individual appraised values. The only downside to selling these properties was the loss of a large amount of revenue, FFO and AFFO they generated, which lead to a material decrease in total revenues between 2014 and 2015.
To rebuild our apartment segment after the sale of our four student-oriented properties, we began a two tiered acquisition strategy. The first tier is finding apartment properties in highly rated school districts in zip codes ranking in the top 25% in terms of demographics (household income, household growth, population growth, etc.). These markets generally have supply constraints and slightly older product that possibly needs light cosmetic upgrades, as was the case for Townlake of Coppell. The second strategy is acquiring newly constructed apartment properties that have not yet leased up to stabilization, by taking advantage of the urbanization trend we will identify locations that are extremely walkable or transit oriented, as was the case with AQ Rittenhouse. The second strategy causes dividend coverage dilution in the short-term, but allows us to acquire
properties at a lower basis with better dividend coverage in the future. We expect to continue these apartment acquisition strategies into 2016.
During 2015, we acquired nine industrial properties, three grocery anchored retail properties and a medical office building. These properties are in keeping with the investment strategy we began over three years ago and provide solid cash flow and good dividend coverage. We will continue to acquire these types of properties in 2016 and beyond.
In late 2015, we also acquired an approximate 14% interest in a portfolio of 15 urban infill retail properties located in Manhattan, Brooklyn, the Bronx, Staten Island and New Jersey. This investment opportunity gave us access to irreplaceable real estate that would be virtually impossible to for us to acquire on our own given the aggregate portfolio was valued at approximately $1,300,000. The portfolio is 99% leased and gives us the opportunity to add to our dividend coverage as leases expire and new leases are written at higher current market rental rates.
In September 2015, we signed Amazon Corporate LLC to an 83,000 square foot lease at Monument IV at Worldgate. The lease significantly increased the value of the building and keeps the building occupied into 2027. The new Amazon lease required that we early terminate the existing lease with Fannie Mae, sacrificing some revenue in 2015 and 2016, and providing a year of free rent to Amazon, as is typical in the office market for a lease of this duration. The space will become rent bearing late in 2016, providing us with approximately $2,900 in revenue in 2017 and will be accretive to our dividend coverage, but, until then, it will be dilutive to our dividend coverage.
The 2015 property sales, new acquisitions and leasing activity are in line with our long-term strategic objectives of generating attractive income, preserving investor capital and realizing appreciation over time. Some of these longer-term focused activities resulted in a near-term reduction in FFO/AFFO for the year. FFO decreased from $0.68 per share in 2014 to $0.43 per share in 2015 and AFFO decreased from $0.61 per share in 2014 to $0.48 per share in 2015. Our gross dividends paid in 2015 was $0.48 per share. As the items highlighted above work through the portfolio over time, we anticipate our dividend coverage will improve.
To restate, our primary investment objectives are:
•
to generate an attractive level of current income for distribution to our stockholders;
•
to preserve and protect our stockholders' capital investments;
•
to achieve appreciation of our NAV over time; and
•
to enable stockholders to utilize real estate as an asset class in diversified, long-term investment portfolios.
The cornerstone of our investment strategy is to acquire and manage income-producing commercial real estate properties and real estate-related assets. We believe this strategy enables us to provide our stockholders with a portfolio that is well-diversified across property type, geographic region and industry, both in the United States and, over time, internationally. It is our belief that adding international investments to our portfolio over time will serve as an effective tool to construct a well-diversified portfolio designed to provide our stockholders with stable distributions and attractive long-term risk-adjusted returns.
We believe that our broadly diversified portfolio benefits our stockholders by providing:
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diversification of sources of income;
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access to attractive real estate opportunities currently in the United States and, over time, around the world; and
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exposure to a return profile that should have lower correlations with other investments.
Since real estate markets are often cyclical in nature, our strategy allows us to more effectively deploy capital into property types and geographic regions where the underlying investment fundamentals are relatively strong or strengthening and away from those property types and geographic regions where such fundamentals are relatively weak or weakening. We intend to meet our investment objectives by selecting investments across multiple property types and geographic regions to achieve portfolio stability, diversification, current income and favorable risk-adjusted returns. To a lesser degree, we also intend to invest in debt and equity interests backed principally by real estate, which we refer to collectively as “real estate-related assets.”
Our board of directors has adopted investment guidelines for our Advisor to implement and actively monitor in order to allow us to achieve and maintain diversification in our overall investment portfolio. Our board of directors formally reviews our investment guidelines on an annual basis and our investment portfolio on a quarterly basis or, in each case, more often as they deem appropriate. Our board of directors reviews the investment guidelines to ensure that the guidelines are being followed and are in the best interests of our stockholders.
We seek to invest:
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up to 95% of our assets in properties;
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up to 25% of our assets in real estate-related assets; and
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up to 15% of our assets in cash, cash equivalents and other short-term investments.
Notwithstanding the above, the actual percentage of our portfolio that is invested in each investment type may from time to time be outside these target levels due to numerous factors including, but not limited to, large inflows of capital over a short period of time, lack of attractive investment opportunities or increases in anticipated cash requirements for repurchase requests.
We expect to maintain a targeted Company leverage ratio (calculated as our share of total liabilities divided by our share of the fair value of total assets) of between 30% and 50%. We intend to use low leverage, or in some cases possibly no leverage, to finance new acquisitions in order to maintain our targeted Company leverage ratio. Our Company leverage ratio was 39% as of December 31, 2015.
Net Asset Value
The NAV per share for our five classes of common stock was between $11.17 and $11.20 as of December 31, 2015. The increase of approximately $0.09 to $0.10 per share in NAV from September 30, 2015 is primarily related to an increase in the values of our properties and the accrual of property income. Additionally, we paid a distribution of $0.12 per share during the quarter ended December 31, 2015, less share class specific fees. For 2015, our Class A, Class M, Class A-I, and Class M-I common stock had total net returns of 9.61%, 10.37%, 10.37% and 10.64%, respectively, including cash distributions of $0.48 per share, less share class specific fees.
2016 Key Initiatives
During 2016, we intend to use capital raised from our public and private offerings to make new acquisitions that will further our investment objectives and are in keeping with our investment strategy. Likely acquisition candidates may include well-located, well-leased industrial properties, grocery-anchored community oriented retail properties and apartment properties. We will look to acquire other property types when the opportunities and risk profile match our investment objectives and strategy. We will also attempt to further our geographic diversification. We will use debt financing to take advantage of the current favorable interest rate environment, while looking to keep the Company leverage ratio in the 30% to 50% range in the near term. We also intend to use our revolving line of credit to allow us to more efficiently manage our cash flows.
2015 Key Events and Accomplishments
On January 16, 2015, we commenced our First Extended Public Offering of up to $2,700,000 in any combination of Class A, Class M, Class A-I and Class M-I shares of common stock, consisting of up to $2,400,000 of shares in our primary offering and up to $300,000 of shares pursuant to our distribution reinvestment plan, and our Initial Public Offering automatically terminated. We intend to offer shares of our common stock on a continuous basis for an indefinite period of time by filing a new registration statement before the end of each offering period, subject to regulatory approval. The per share purchase price varies from day-to-day and, on each day, equals our NAV per share for each class of common stock, plus, for Class A and Class A-I shares, applicable selling commissions. The Dealer Manager has agreed to distribute shares of our common stock in our First Extended Public Offering. We intend to primarily use the net proceeds from the offering, after we pay the fees and expenses attributable to the offerings and our operations, to (1) grow and further diversify our portfolio by making investments in accordance with our investment strategy and policies, (2) reduce borrowings and repay indebtedness incurred under various financing instruments and (3) fund repurchases of our shares under our share repurchase plan.
On January 18, 2015, we sold Cabana Beach San Marcos, Cabana Beach Gainesville, Campus Lodge Athens and Campus Lodge Columbia for a total of approximately $123,800. In connection with the disposition, the mortgage loans associated with the four properties totaling $71,000 were retired. The sale is consistent with our strategy to reorient our portfolio away from more seasonal student-oriented apartment investments and also to dispose of or refinance our higher loan-to-value investments. At sale, these four properties were at 59% loan-to-value.
On March 3, 2015, we commenced a new private offering of up to $350,000 in shares of our Class D common stock with an indefinite duration. Proceeds from our private offering will be used for the same corporate purposes as the proceeds from the First Extended Public Offering.
On March 20, 2015, we retired the $9,250 mortgage loan secured by South Beach Parking Garage in advance of the March 2017 maturity date using cash on hand.
On April 15, 2015, we acquired DFW Distribution Center, a two building, 643,000 square foot industrial property located in Grapevine, TX, for approximately $44,200. The acquisition was financed with a ten-year mortgage loan that bears
interest at a fixed-rate of 3.23%, in the amount of $17,720, and cash on hand. The property is 100% leased to six tenants with a weighted average lease term of four years.
On May 15, 2015, we acquired Skokie Commons, a newly constructed 93,000 square foot grocery-anchored retail property located in Skokie, IL, for approximately $43,800. The acquisition was financed with a ten-year mortgage loan that bears interest at a fixed-rate of 3.31%, in the amount of $24,400, and cash on hand. On December 18, 2015, we acquired an additional parcel of land containing a ground lease. The land was acquired for $4,700 and was funded with cash on hand.
On May 22, 2015, we acquired a 90% interest in Townlake of Coppell, a 398 unit garden style apartment property, for approximately $43,200. The acquisition was financed with a five-year mortgage loan that bears interest at a fixed-rate of 3.25%, in the amount of $28,800, and cash on hand.
On June 8, 2015, we extended and expanded our revolving line of credit with Bank of America, N.A. The new facility has a two year term with a one-year extension at our option, includes an accordion feature which allows us to expand the available balance from $40,000 to $100,000 and bears interest at a rate of LIBOR plus a spread ranging from 1.35% to 2.10% depending on our company leverage. On December 17, 2015, we expanded our revolving line of credit to increase the available balance from $40,000 to $100,000.
On July 30, 2015, we acquired AQ Rittenhouse, a newly constructed Class A apartment property located near Rittenhouse Square in Philadelphia, PA, for approximately $51,000. The 110 unit, 12 story apartment building, is complemented by 13,000 square feet of fully leased ground floor commercial space. The acquisition was financed with a ten-year mortgage loan that bears interest at a fixed-rate of 3.65%, in the amount of $26,370, and cash on hand.
During September 2015, we signed Amazon Corporate LLC to an expansion and extension of their lease at Monument IV at Worldgate. The lease amendment increases their occupancy in the building by approximately 83,000 square feet and extends the lease expiration to April 2027. The lease amendment keeps the building 100% leased through April 2027.
On September 30, 2015, we acquired Whitestone Market, a 145,000 square foot, 100% leased, grocery anchored retail center for approximately $51,500. Whitestone Market, located in Austin, Texas, is anchored by an HEB grocery store and was funded with cash on hand.
On September 30, 2015, we acquired O'Hare Industrial Portfolio, a seven property, 642,000 square foot, 92% leased industrial portfolio for approximately $71,000. O'Hare Industrial Portfolio is located near O'Hare Airport just outside Chicago, IL and was funded with cash on hand.
On December 8, 2015, we acquired an approximate 14% interest in the NYC Retail Portfolio. The purchase price for such portion is approximately $85,600 including closing costs. The NYC Retail Portfolio contains approximately 2.7 million square feet across 15 urban infill locations in Manhattan, Brooklyn, the Bronx, Staten Island and New Jersey. At December 31, 2015, the NYC Retail Portfolio was approximately 99% leased to a mixture of entertainment companies, large national retail tenants and smaller regional and local retail tenants. The aggregate gross value of the NYC Retail Portfolio is approximately $1.3 billion, with our 14% interest equating to approximately $165 million in gross assets. Each of the 15 properties is encumbered with mortgage debt with a loan to value of approximately 48%. The acquisition was funded with cash on hand.
On December 21, 2015, we acquired 140 Park Avenue, a newly constructed 100,000 square foot medical office building in Florham Park, New Jersey, for approximately $45,600. The property is 100% leased for 15 years to Summit Medical Group, the largest and oldest physician owned multispecialty practice in New Jersey employing more than 550 practitioners and 2,000 employees who support more than 80 medical specialties and services. The acquisition was funded using cash on hand.
On December 22, 2015, we acquired a 100% fee interest in Maui Mall, a 235,000 square foot, 91% leased, grocery anchored retail center, located on the island of Maui in Hawaii for approximately $91,100. Maui Mall is leased to 41 diverse tenants. Whole Foods, Regal Cinemas, CVS and TJ Maxx each individually lease more than 10% of the rentable area of Maui Mall. The acquisition was funded with cash on hand and a draw on our line of credit.
For the year ended December 31, 2015, we repurchased $32,082 of shares of our common stock through the share repurchase plan.
Subsequent Events
On March 1, 2016, we sold 36 Research Park Drive for approximately $7,900 less closing costs. We expect any gain or loss recorded on the sale of the property to be minimal.
On March 8, 2016, our board of directors approved a gross distribution for the first quarter of 2015 of $0.12 per share to stockholders of record as of March 30, 2016, payable on or around May 2, 2016.
Results of Operations
General
Our revenues are primarily received from tenants in the form of fixed minimum base rents and recoveries of operating expenses. Our expenses primarily relate to the costs of operating and financing our properties. Our share of the net income, net loss or dividend income from our unconsolidated properties is included in equity in income of unconsolidated affiliates. We believe the following analysis of reportable segments provides important information about the operating results of our real estate investments, such as trends in total revenues or operating expenses that may not be as apparent in a period-over-period comparison of our entire Company. We group our investments in real estate assets from continuing operations into five reportable operating segments based on the type of property, which are apartment, industrial, office, retail and other. Operations from corporate level items and real estate assets sold are excluded from reportable segments.
Properties acquired or sold during any of the periods are presented within the recent acquisitions and sold properties line until the property has been owned for all periods presented. The properties currently presented within the recent acquisitions and sold properties line include the properties listed as either acquired or sold in the Management Overview section above. Properties owned for the entire years ended December 31, 2015 and 2014 are referred to as our comparable properties.
Results of Operations for the years ended December 31, 2015 and 2014:
Revenues
The following chart sets forth revenues from continuing operations, by reportable segment, for the years ended December 31, 2015 and 2014:
Minimum rents at comparable properties increased by $262 for the year ended December 31, 2015 as compared to the same period in 2014. The increase is primarily due to an increase of $408 at our student-oriented apartment properties due to increases in occupancy and rental rates during the year ended December 31, 2015 as compared to the same period in 2014.
Tenant recoveries and other rental income relate mainly to real estate taxes and certain property operating expenses that are paid by us and are recoverable under the various tenants’ leases. Tenant recoveries and other rental income at comparable properties decreased by $131 for the year ended December 31, 2015 as compared to the same period in 2014. The decrease in our retail and industrial segments is primarily related to lower real estate taxes of $319 at The District at Howell Mill and lower
repair and maintenance expenses of $119 at South Seattle Distribution Center during the year ended December 31, 2015 as compared to the same period in 2014. Partially offsetting these decreases was an increase in recoveries in our office segment of $436 at 111 Sutter Street and $385 at Monument IV at Worldgate related to higher operating expenses. The increase in office segment recoveries was partially offset by a decrease of $430 at Railway Street Corporate Centre related to lower occupancy and an unfavorable exchange rate during the year ended December 31, 2015 as compared to the same period in 2014.
Operating Expenses
The following chart sets forth real estate taxes, property operating expenses and net provisions for doubtful accounts from continuing operations, by reportable segment, for the years ended December 31, 2015 and 2014:
Real estate taxes at comparable properties decreased by $371 for the year ended December 31, 2015 as compared to the same period in 2014. The decrease is primarily related to a decrease of $319 at The District at Howell Mill related to a refund for 2014 taxes received during the year ended December 31, 2015. Our properties are reassessed periodically by the taxing authorities which may result in increases or decreases in real estate taxes that we owe. Overall, we expect real estate taxes to increase over time; however, we utilize real estate tax consultants to attempt to control assessment increases.
Property operating expenses consist of the costs of ownership and operation of the real estate investments, many of which are recoverable under net leases. Examples of property operating expenses include insurance, utilities and repair and maintenance expenses. Property operating expenses at comparable properties increased $280 for the year ended December 31, 2015 as compared to the same period in 2014. The increase is primarily related to higher repairs and maintenance and utilities expenses of $436 at 111 Sutter Street and increased Turn costs and repairs and maintenance expenses of $85 at our student-oriented apartment properties. These increases were partially offset by a decrease of $220 at Railway Street Corporate Centre due to lower occupancy and the impact of exchange rates for the year ended December 31, 2015 as compared to the same
period in 2014.
Net provision for doubtful accounts relates to receivables deemed potentially uncollectible due to the age of the receivable or the status of the tenant. Provision for doubtful accounts increased by $272 for the year ended December 31, 2015 as compared to the same period of 2014, primarily related to $239 of receivables deemed uncollectable at The District at Howell Mill from a tenant bankruptcy that occurred during 2015. Additionally, Campus Lodge Tampa had $90 of higher bad debts related to early move outs that occurred during the year ended December 31, 2015. Partially offsetting these increases were lower bad debts of $62 at the Sherman Way properties related to tenant defaults that occurred during the year ended December 31, 2014.
The following chart sets forth expenses not directly related to the operations of the reportable segments for the years ended December 31, 2015 and 2014:
Advisor fees relate to the fixed advisory and performance fees earned by our Advisor. Fixed fees increase or decrease based on changes in our NAV which will be primarily impacted by changes in capital raised and the value of our properties. The performance fee is accrued when the total return per share for a share class exceeds 7% for that calendar year, wherein our Advisor will receive 10% of the excess total return above the 7% threshold. The increase in advisor fees of $4,473 for the year ended December 31, 2015 as compared to the same period of 2014 is primarily related to the increase in our NAV attributable to capital raised over the past year as well as the performance fee of $2,280 accrued during the year ended December 31, 2015. We accrued $250 of performance fee during the year ended December 31, 2014.
Company level expenses relate mainly to our compliance and administration related costs. Company level expenses decreased $326 for the year ended December 31, 2015 as compared to the same period in 2014 primarily due to costs related to the tender offer conducted in 2014 and reduced professional service fees in 2015.
General and administrative expenses relate mainly to property expenses unrelated to the operations of the property. General and administrative expenses decreased $126 primarily due to the dispositions of four student-oriented apartment properties in January 2015.
Acquisition expenses relate to expenses incurred during the acquisition of a property. Acquisition expenses increased $1,791 for the year ended December 31, 2015 as compared to the same period in 2014 as we acquired significantly more properties in 2015 than we did in 2014.
The provision for impairment of real estate relates to real estate investments whose estimated future undiscounted cash flows have decreased below the carrying value of the property. A provision for impairment of real estate is recorded to write the property down from its carrying value to its fair value. Provision for impairment of real estate at December 31, 2015 is due to impairment charges of $4,928 at 36 Research Park Drive as we lowered the expected holding period for the investment as we consider it a non-strategic investment. The impairment charges had no impact on our NAV as we had previously written the property down to its fair value.
Depreciation and amortization expense is impacted by the values assigned to buildings, personal property and in-place lease assets as part of the initial purchase price allocation. The increase of $5,820 in depreciation and amortization expense for the year ended December 31, 2015 as compared to the same period in 2014 is primarily related to an increase of $8,411 related
to our 2014 and 2015 acquisitions. These increases were partially offset by a decrease of $2,123 related to our four student-oriented apartment properties sold during the year ended December 31, 2015.
Interest expense decreased by $454 for the year ended December 31, 2015 as compared to the same period in 2014 as debt payoffs and interest savings from refinancing loans more than offset new debt incurred as part of our new property acquisitions.
Equity in income of unconsolidated affiliates relates to income from Chicago Parking Garage, which we acquired in December 23, 2014. Going forward, in addition to income from Chicago Parking Garage, changes in the fair value and distributions received from our investment in NYC Retail Portfolio will also be included in equity in income of unconsolidated affiliates.
Gain on disposition of property and extinguishment of debt of $29,009 is related to the dispositions of Cabana Beach San Marcos, Cabana Beach Gainesville, Campus Lodge Athens and Campus Lodge Columbia as well as the payoff of the mortgage note payable on South Beach Parking Garage during the year ended December 31, 2015. During the year ended December 31, 2014, the gain on disposition of property and extinguishment of debt of $589 is related to the dispositions of Stirling Slidell Shopping Centre and 4 Research Park Drive.
Income from discontinued operations for the year ended December 31, 2014 is related to bankruptcy proceeds from the former tenant at Canyon Plaza, a property we sold in 2013.
Results of Operations for the years ended December 31, 2014 and 2013:
Revenues and operating expenses related to Canyon Plaza and the Dignity Health Disposition Portfolio, which we disposed of in 2013, are shown in discontinued operations for the years ended December 31, 2014 and 2013. Properties acquired during any of the periods presented are presented within the recent acquisitions and sold properties line until the property has been owned for all periods presented. Properties sold during 2014 are reported within the recent acquisitions and sold properties line. The properties currently presented within the recent acquisitions and sold properties line include Joliet Distribution Center, Suwanee Distribution Center, Grand Lakes Marketplace, South Seattle Distribution Center, Oak Grove Plaza, South Beach Parking Garage, Grand Prairie Distribution Center, Rancho Temecula Town Center, Charlotte Distribution Center, Stirling Slidell Shopping Centre, and 4 Research Park Drive. Properties owned for the entire years ended December 31, 2014 and 2013 are referred to as our comparable properties.
Revenues
The following chart sets forth revenues from continuing operations, by reportable segment, for the years ended December 31, 2014 and 2013:
Minimum rents at comparable properties increased by $2,187 between the year ended December 31, 2014 and the same period in 2013. The increase is primarily due to increased rents of $1,536 at Monument IV at Worldgate related to the commencement of the Amazon Corporate LLC and Fannie Mae leases. Additionally, there was an increase of $289 at our apartment properties for the year ended December 31, 2014 as compared to the same period in 2013, primarily due to increased occupancy.
Tenant recoveries and other rental income relate mainly to real estate taxes and certain property operating expenses that are paid by us and are recoverable under the various tenants’ leases. Tenant recoveries and other rental income at our comparable properties increased by $1,257 for the year ended December 31, 2014 as compared to the same period in 2013. The increase is primarily related to higher recoveries of $430 at Monument IV at Worldgate and $138 at Railway Street Corporate Centre due to increased occupancy during the year ended December 31, 2014 as compared to the same period in 2013. Additionally, The District at Howell Mill recorded increased recovery revenue of $488 related to higher real estate taxes and operating expenses.
Operating Expenses
The following chart sets forth real estate taxes, property operating expenses and provisions for (recovery of) doubtful accounts from continuing operations, by reportable segment, for the years ended December 31, 2014 and 2013:
Real estate taxes at comparable properties increased by $595 for the year ended December 31, 2014 as compared to the same period in 2013 primarily due to increases of $546, $242 and $105 at The District at Howell Mill, Monument IV at Worldgate, and 111 Sutter Street, respectively, related to higher tax reassessments in the year ended December 31, 2014. These increases were partially offset by decreases of $253 and $81 at Cabana Beach Gainesville and Cabana Beach San Marcos, respectively, related to lower tax reassessments for the year ended December 31, 2014 as compared to the same period in 2013.
Property operating expenses consist of the costs of ownership and operation of the real estate investments, many of which are recoverable under net leases. Examples of property operating expenses include insurance, utilities and repair and maintenance expenses. Property operating expenses at comparable properties increased $776 for the year ended December 31, 2014 as compared to the same period in 2013. The increase is primarily related to higher utility and repair and maintenance expenses at our apartment properties of $222 and higher parking garage expenses of $207 at the Sherman Way properties. Additionally, property operating expenses increased by $133 and $99 at Monument IV at Worldgate and 111 Sutter Street, respectively, related to increased occupancy during the year ended December 31, 2014.
Net provision for (recovery of) doubtful accounts relates to receivables deemed potentially uncollectible due to the age of the receivable or the status of the tenant. Provision for doubtful accounts increased by $2 for the year ended December 31, 2014 as compared to the year ended December 31, 2013, primarily related to $67 of higher bad debts at the Sherman Way
properties related to tenant defaults during the year ended December 31, 2014. This was partially offset by lower bad debts of $43 and $22 at our apartment properties and The District at Howell Mill, respectively, related to collection of previously reserved accounts and a tenant default during the year ended December 31, 2013.
The following chart sets forth expenses not directly related to the operations of the reportable segments for the years ended December 31, 2014 and 2013:
Advisor fees relate to the fixed and performance fees earned by our Advisor. Fixed fees increase or decrease based on changes in our NAV which will be primarily impacted by changes in the value of our properties and capital raised. Performance fees are calculated as 10% of the return in excess of 7% per annum. The increase in advisor fees of $1,513 for the year ended December 31, 2014 as compared to the same period of 2013 is primarily related to the increase in our NAV over the prior year and a $250 performance fee accrued in 2014.
Our Company level expenses relate mainly to our compliance and administration related costs. Company level expenses increased $444 for the year ended December 31, 2014 as compared to the same period in 2013 primarily due to an increase in professional fees and higher corporate legal fees related to conducting the tender offer for our Class M shares.
General and administrative expenses relate mainly to property expenses unrelated to the operations of the property. General and administrative expenses increased $183 due to additional properties acquired in late 2013 and 2014.
Acquisition related expenses relate to expenses incurred during the acquisition of a property. Acquisition expenses were fairly consistent between the years ended December 31, 2014 and 2013.
The provision for impairment of real estate relates to real estate investments whose estimated future undiscounted cash flows have decreased below the carrying value. A provision for impairment of real estate is recorded to write the property down from its carrying value to its fair value. Provision for impairment of real estate at December 31, 2013 is due to impairment charges of $23,466 at Cabana Beach Gainesville, $7,270 at Stirling Slidell Shopping Centre, $3,006 at 14624 Sherman Way, $1,726 at 14600 Sherman Way and $2,888 at 4 Research Park Drive. Our properties were assessed for impairment triggers during 2014 and no impairment was recorded. The impairment charges had no impact on our NAV as we had previously written the properties down to fair value.
Depreciation and amortization expense is impacted by the values assigned to buildings, personal property and in-place lease assets as part of the initial purchase price allocation. The increase of $5,566 in depreciation and amortization expense for the year ended December 31, 2014 as compared to the year ended December 31, 2013 is primarily related to an increase of $6,421 related to our 2013 and 2014 acquisitions. These increases were partially offset by a decrease of $558 and $202 at Railway Street Corporate Centre and 111 Sutter Street, respectively, related to the in-place lease assets becoming fully amortized.
Interest expense decreased by $1,519 for the year ended December 31, 2014 as compared to the year ended December 31, 2013 as debt payoffs and interest savings from loan refinancings more than offset new debt incurred as part of our new property acquisitions.
Debt modification expenses in 2013 are due to expenses incurred for mortgage note modifications at Cabana Beach Gainesville, Cabana Beach San Marcos, Campus Lodge of Athens, Campus Lodge Columbia, The Edge at Lafayette and 111 Sutter Street.
Equity in income of unconsolidated affiliates relates to our share of the income from Legacy Village, which was sold on October 29, 2013 to our joint venture partners.
Gain on disposition of property and extinguishment of debt in 2014 is related to the dispositions of Stirling Slidell Shopping Centre and 4 Research Park Drive and the early debt retirement at 36 Research Park Drive in 2013.
Gain on sale of unconsolidated affiliate for the year ended December 31, 2013 is related to the sale of our 46.5% interest in Legacy Village to our joint venture partners on October 29, 2013.
(Income) loss from discontinued operations for the year ended December 31, 2014 is related to bankruptcy proceeds received from Canyon Plaza. Loss from discontinued operations in the period ended December 31, 2013 is related to the sales of the Dignity Health Disposition Portfolio and Canyon Plaza during 2013. Due to new accounting guidance adopted on January 1, 2014, properties sold in 2014 are not classified as discontinued operations.
Gain on sale of discontinued operations for the year ended December 31, 2013 is related to the sale of the Dignity Health Disposition Portfolio and Canyon Plaza during 2013.
Review of our Policies
Our board of directors, including our independent directors, has reviewed our policies described in this Annual Report on Form 10-K and our registration statement related to our First Extended Public Offering, as well as other policies previously reviewed and approved by our board of directors, and determined that they are in the best interests of our stockholders because: (1) they increase the likelihood that we will be able to acquire a diversified portfolio of income producing properties, thereby reducing risk in our portfolio; (2) there are sufficient property acquisition opportunities with the attributes that we seek; (3) our executive officers, directors and affiliates of our advisor have expertise with the type of real estate investments we seek; (4) borrowings should enable us to purchase assets and earn rental income more quickly; and (5) best practices corporate governance and high ethical standards help promote long-term performance, thereby increasing our likelihood of generating income for our stockholders and preserving stockholder capital.
Liquidity and Capital Resources
Our primary uses and sources of cash are as follows:
Uses
Sources
Short-term liquidity and capital needs such as:
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Operating cash flow, including the receipt of distributions of our share of cash flow produced by our unconsolidated real estate affiliates
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Interest payments on debt
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Distributions to stockholders
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Proceeds from secured loans collateralized by individual properties
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Fees payable to our advisor
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Minor improvements made to individual properties that are not recoverable through expense recoveries or common area maintenance charges to tenants
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Proceeds from our revolving line of credit
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Sales of our shares
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General and administrative costs
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Sales of real estate investments
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Costs associated with our continuous public offering
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Draws from lender escrow accounts
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Other Company level expenses
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Lender escrow accounts for real estate taxes, insurance, and capital expenditures
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Fees payable to our Dealer Manager
Longer-term liquidity and capital needs such as:
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Acquisitions of new real estate investments
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Expansion of existing properties
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Tenant improvements and leasing commissions
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Debt repayment requirements, including both principal and interest
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Repurchases of our shares pursuant to our Share Repurchase Plan
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Fees payable to our Dealer Manager
The sources and uses of cash for the years ended December 31, 2015 and 2014 were as follows:
Cash provided by operating activities decreased by $2,772 for the year ending December 31, 2015, as compared to the same period in 2014. A decrease of $5,209 in cash from operating activities is primarily related to the sale of four student-oriented apartment properties on January 27, 2015. Also impacting our cash provided by operating activities are changes in our working capital, which include tenant accounts receivable, prepaid expenses and other assets, Advisory fee payable, and accounts payable and other accrued expenses. These changes in our working capital caused an increase to cash provided by operating activities of $2,437 between the year ended December 31, 2015 and the same period in 2014, primarily related to an increase in Advisory fee payable.
Cash used in investing activities increased by $276,433 for the year ending December 31, 2015, as compared to the same period in 2014. The increase was primarily generated from an increase in cash used to purchase new properties of $311,695 offset by cash received from the sale of four student-oriented apartment properties totaling $107,681 during the year ended December 31, 2015. Additionally, included in the current year was an increase in cash used of $68,090 related to investments made in unconsolidated real estate affiliates.
Cash provided by financing activities increased by $284,812 for the year ending December 31, 2015 over the same period in 2014. The increase primarily related to $296,135 of net proceeds received from the sale and repurchase of shares during 2015 as compared to 2014.
Financing
We have relied primarily on fixed-rate financing, locking in what were favorable spreads between real estate income yields and mortgage interest rates, and have tried to maintain a balanced schedule of debt maturities. We also use interest rate derivatives to manage our exposure to interest rate movements of our variable rate debt. The following consolidated debt table provides information on the outstanding principal balances and the weighted average interest rate at December 31, 2015 and 2014 for such debt.
Consolidated Debt
Covenants
At December 31, 2015, we were in compliance with all debt covenants.
Other Sources
On January 16, 2015, our First Extended Public Offering registration statement was declared effective with the SEC (Commission File No. 333-196886) to register up to $2,700,000 in any combination of shares of our Class A, Class M, Class A-I and Class M-I common stock, consisting of up to $2,400,000 of shares offered in our primary offering and up to $300,000 in shares offered pursuant to our distribution reinvestment plan. We intend to offer shares of our common stock on a continuous basis for an indefinite period of time by filing a new registration statement before the end of each three-year offering period, subject to regulatory approval. We intend to use the net proceeds from the First Extended Public Offering, which are not used to pay the fees and other expenses attributable to our operations, to (1) grow and further diversify our portfolio by making investments in accordance with our investment strategy and policies, (2) reduce borrowings and repay indebtedness incurred under various financing instruments and (3) fund repurchases under our share repurchase plan.
On March 3, 2015, we commenced a new private offering of up to $350,000 in shares of our Class D common stock with an indefinite duration. Proceeds from our private offerings will be used for the same corporate purposes as the proceeds of our First Extended Public Offering. We will reserve the right to terminate the Follow-on Private Offering at any time and to extend the Follow-on Private Offering term to the extent permissible under applicable law.
Contractual Cash Obligations and Commitments
The following table aggregates our contractual obligations and commitments with payments due subsequent to December 31, 2015. The table does not include commitments with respect to the purchase of services from our Advisor, as future payments due on such commitments cannot be determined.
(1)
Includes interest expense calculated using the effective interest rates of the underlying borrowings for all fixed-rate debt at December 31, 2015, which was 4.37%. Since the interest rates on certain loans are based on a spread over LIBOR, the rates will periodically change; therefore, interest expense for all variable-rate debt was calculated using the effective interest rates of the underlying borrowings at December 31, 2015, which was 2.40%.
We have one long-term debt maturity balloon payment due in October 2016 collateralized by Campus Lodge Tampa in the aggregate amount of $31,730. We will either sell this property, refinance this loan or payoff this loan when the debt matures.
We intend to actively monitor and manage our available liquidity to ensure the long-term viability of our company.
Commitments
From time to time, we have entered into contingent agreements for the acquisition and financing of properties. Such acquisitions and financings are subject to satisfactory completion of due diligence.
We are subject to fixed ground lease payments on South Beach Parking Garage of $94 per year until September 30, 2016. The fixed amount will increase on September 30, 2016 and every five years thereafter by the lesser of 12% or the cumulative CPI over the previous five year period. We are also subject to a variable ground lease payment calculated as 2.5% of revenue. The lease expires September 30, 2041 and has a ten-year renewal option.
The operating agreement for Townlake of Coppell allows the unrelated third party joint venture partner, owning a 10% interest, to put their interest to us at a market determined value for a period of 90 days beginning in 2018.
Off Balance Sheet Arrangements
At December 31, 2015 and 2014, we had approximately $150 in outstanding letters of credit, none of which are reflected as liabilities on our balance sheet. We have no other off balance sheet arrangements.
Distributions to Stockholders
To remain qualified as a REIT for federal income tax purposes, we must distribute or pay tax on 100% of our capital gains and distribute at least 90% of ordinary taxable income to stockholders.
The following factors, among others, will affect operating cash flow and, accordingly, influence the decisions of our board of directors regarding distributions:
•
scheduled increases in base rents of existing leases;
•
changes in minimum base rents and/or overage rents attributable to replacement of existing leases with new or renewal leases;
•
changes in occupancy rates at existing properties and procurement of leases for newly acquired or developed properties;
•
necessary capital improvement expenditures or debt repayments at existing properties; and
•
our share of distributions of operating cash flow generated by the unconsolidated real estate affiliates, less management costs and debt service on additional loans that have been or will be incurred.
We anticipate that operating cash flow, cash on hand, proceeds from dispositions of real estate investments, or refinancings will provide adequate liquidity to conduct our operations, fund general and administrative expenses, fund operating costs and interest payments and allow distributions to our stockholders in accordance with the REIT qualification requirements of the Internal Revenue Code of 1986, as amended.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued an accounting standard update that will use a five step model to recognize revenue from customer contracts in an effort to increase consistency and comparability throughout global capital markets and across industries. The model will identify the contract, identify any separate performance obligations in the contract, determine the transaction price, allocate the transaction price and recognize revenue when the performance obligation is satisfied. The new standard will exclude lease contracts, however will include the sale of real estate and will replace most existing revenue recognition in GAAP when it becomes effective for us on January 1, 2018. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Amendments to the Consolidation Analysis (Topic 810), which improves targeted areas of the consolidation guidance and reduces the number of consolidation models. The amendments in the ASU are effective for annual and interim periods in fiscal years beginning after December 15, 2015, with early adoption permitted. Aside from certain expanded disclosure requirements, we do not expect the adoption of this standard will have a material impact to our consolidated financial statements for the adoption of this standard..
On April 7, 2015, the FASB issued Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. For public business entities, the ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2015, with early adoption permitted. The new guidance will be applied on a retrospective basis.
In February 2016, the FASB issued Accounting Standard Update 2016-02 Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The update is expected to impact our consolidated financial statements as we have certain operating and land lease arrangements for which we are the lessee. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
We are subject to market risk associated with changes in interest rates in terms of the price of our variable-rate debt and the price of new fixed-rate debt for refinancing of existing debt. We manage our interest rate risk exposure by obtaining fixed-rate loans where possible. As of December 31, 2015, we had consolidated debt of $487,615, which included $59,680 of variable-rate debt. Including the $477 net premium on the assumption of debt, we have consolidated debt of $488,092 at December 31, 2015. We also entered into interest rate cap agreements on $17,680 of the variable rate debt which cap the LIBOR rate at between 1.0% and 3.3% over the next year. A 0.25% movement in the interest rate on the $59,680 of variable-rate debt would have resulted in an approximately $149 annualized increase or decrease in consolidated interest expense and cash flow from operating activities.
We are subject to interest rate risk with respect to our fixed-rate financing in that changes in interest rates will impact the fair value of our fixed-rate financing. To determine fair market value, the fixed-rate debt is discounted at a rate based on an estimate of current lending rates, assuming the debt is outstanding through maturity and considering the collateral. At December 31, 2015, the fair value of our mortgage notes payable was estimated to be approximately $927 higher than the carrying value of $488,092. If treasury rates were 0.25% higher at December 31, 2015, the fair value of our mortgage notes payable would have been approximately $5,177 lower than the carrying value.
In August 2007, we purchased Railway Street Corporate Centre located in Calgary, Canada. For this investment, we use the Canadian dollar as the functional currency. When preparing consolidated financial statements, assets and liabilities of foreign entities are translated at the exchange rates at the balance sheet date, while income and expense items are translated at weighted average rates for the period. Foreign currency translation adjustments are recorded in accumulated other comprehensive loss on the Consolidated Balance Sheets and foreign currency translation adjustment on the Consolidated Statements of Operations and Comprehensive Income (Loss).
As a result of our Canadian investment, we are subject to market risk associated with changes in foreign currency exchange rates. These risks include the translation of local currency balances of our Canadian investment and transactions denominated in Canadian dollars. Our objective is to control our exposure to these risks through our normal operating activities. For the year ended December 31, 2015, we recognized a foreign currency translation loss of $1,448 and for the year ended December 31, 2014, we recognized a foreign currency translation loss of $637. At December 31, 2015, a 10% unfavorable exchange rate movement would have caused our $1,448 foreign currency translation loss to be increased by $676 resulting in a foreign currency translation loss of approximately $2,124.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
See “Index to Consolidated Financial Statements” on page of this Form 10-K.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on management’s evaluation as of December 31, 2015, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed under the supervision of our chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2015, our management conducted an assessment of the effectiveness of our internal control over financial reporting based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control-Integrated Framework” (2013).
Based on the assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2015 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information.
None.
PART III
In accordance with the rules of the SEC, certain information required by Part III is omitted and incorporated by reference into this Form 10-K from our definitive proxy statement (our "2016 Proxy Statement") relating to our 2016 annual meeting of stockholders (our “2016 Annual Meeting”) that we intend to file with the SEC no later than April 1, 2016.
On March 8, 2016, our board of directors determined to hold the 2016 Annual Meeting on May 10, 2016.
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required by this Item is incorporated by reference to our 2016 Proxy Statement.
The information required by this Item is incorporated by reference to our 2016 Proxy Statement.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.
The information required by this Item is incorporated by reference to our 2016 Proxy Statement.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to our 2016 Proxy Statement.
Item 14.
Item 14.
Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to our 2016 Proxy Statement.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules.
(1)
Consolidated Financial Statements: See “Index to Consolidated Financial Statements” at page below.
(2)
Financial Statement Schedule: See “Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2015” at page below.
(3)
The Index of Exhibits below is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Jones Lang LaSalle Income Property Trust, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
JONES LANG LASALLE INCOME PROPERTY TRUST, INC.
By:
/S/ C. ALLAN SWARINGEN
Date:
March 10, 2016
C. Allan Swaringen
President, Chief Executive Officer
POWER OF ATTORNEY
Each individual whose signature appears below constitutes and appoints C. Allan Swaringen, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done or by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
*
Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
Jones Lang LaSalle Income Property Trust, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Jones Lang LaSalle Income Property Trust, Inc.:
We have audited the accompanying consolidated balance sheets of Jones Lang LaSalle Income Property Trust, Inc. (the Company) and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income (loss), equity and cash flows for each of the years in the three-year period ended December 31, 2015. In connection with our audits of the consolidated financial statements, we also have audited the 2015 financial statement schedule III. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jones Lang LaSalle Income Property Trust, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Chicago, Illinois
March 10, 2016
Jones Lang LaSalle Income Property Trust, Inc.
CONSOLIDATED BALANCE SHEETS
$ in thousands, except per share amounts
The abbreviation “VIEs” above means Variable Interest Entities.
See notes to consolidated financial statements.
Jones Lang LaSalle Income Property Trust, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
$ in thousands, except per share amounts
See notes to consolidated financial statements.
Jones Lang LaSalle Income Property Trust, Inc.
CONSOLIDATED STATEMENTS OF EQUITY
$ in thousands, except per share amounts
See notes to consolidated financial statements.
Jones Lang LaSalle Income Property Trust, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
$ in thousands, except per share amounts
See notes to consolidated financial statements.
Jones Lang LaSalle Income Property Trust, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$ in thousands, except per share amounts
NOTE 1-ORGANIZATION
General
Except where the context suggests otherwise, the terms “we,” “us,” “our” and the “Company” refer to Jones Lang LaSalle Income Property Trust, Inc. The terms “Advisor” and “LaSalle” refer to LaSalle Investment Management, Inc.
Jones Lang LaSalle Income Property Trust, Inc. is an externally managed, non-listed, daily valued perpetual-life real estate investment trust ("REIT") that owns and manages a diversified portfolio of apartment, industrial, office, retail and other properties located primarily in the United States. We expect over time that our real estate portfolio will be further diversified on a global basis through the acquisition of additional properties outside of the United States and will be complemented by investments in real estate-related debt and equity securities. We were incorporated on May 28, 2004 under the laws of the State of Maryland. We believe that we have operated in such a manner to qualify to be taxed as a REIT for federal income tax purposes commencing with the taxable year ended December 31, 2004, when we first elected REIT status. As of December 31, 2015, we owned interests in a total of 54 properties, 53 of which are located in 14 U.S. states and one of which is located in Canada.
From our inception to October 1, 2012, we raised equity proceeds through private offerings of shares of our undesignated common stock. On October 1, 2012, the Securities and Exchange Commission (the "SEC") declared effective our Registration Statement on Form S-11 with respect to our continuous public offering of up to $3,000,000 in any combination of Class A and Class M shares of common stock (the "Initial Public Offering"). Affiliates of our sponsor, Jones Lang LaSalle Incorporated ("JLL" or our "Sponsor"), have invested an aggregate of $60,200 through purchases of shares of our common stock. As of January 15, 2015, the date our Initial Public Offering terminated, we had raised aggregate gross proceeds from the sale of shares of our Class A and Class M common stock in our Initial Public Offering of $216,037 and $52,944, respectively.
On January 16, 2015, our follow-on Registration Statement on Form S-11 was declared effective by the SEC (Commission File No. 333-196886) with respect to our continuous public offering of up to $2,700,000 in any combination of shares of our Class A, Class M, Class A-I and Class M-I common stock, consisting of up to $2,400,000 of shares offered in our primary offering and up to $300,000 in shares offered pursuant to our distribution reinvestment plan (the “First Extended Public Offering”). We reserve the right to terminate the First Extended Public Offering at any time and to extend the First Extended Public Offering term to the extent permissible under applicable law. As of December 31, 2015, we have raised aggregate gross proceeds from the sale of shares of our Class A, Class M, Class A-I and Class M-I shares in our First Extended Public Offering of $354,749.
On June 19, 2014, we began a private offering of up to $400,000 in any combination of our Class A-I, Class M-I and Class D shares of common stock (the "Initial Private Offering"). Upon the SEC declaring the registration statement for our First Extended Public Offering effective, we terminated the Initial Private Offering. As of January 15, 2015, we had raised aggregate gross proceeds from the sale of shares of our Class A-I, Class M-I and Class D common stock in our Initial Private Offering of approximately $43,510. On March 3, 2015, we commenced a new private offering (the "Follow-on Private Offering") of up to$350,000 in shares of our Class D common stock with an indefinite duration. As of December 31, 2015, we have raised aggregate gross proceeds from the sale of shares of our Class D common stock in our Follow-on Private Offering of approximately $49,147.
As of December 31, 2015, 37,092,768 shares of Class A common stock, 27,909,411 shares of Class M common stock, 6,116,812 shares of Class A-I common stock, 3,356,619 shares of Class M-I common stock, and 7,787,823 shares of Class D common stock were outstanding and held by a total of 7,140 stockholders.
LaSalle acts as our advisor pursuant to the second amended and restated advisory agreement between the Company and LaSalle, which was renewed on June 5, 2015 (the “Advisory Agreement”). Our Advisor, a registered investment advisor with the SEC, has broad discretion with respect to our investment decisions and is responsible for selecting our investments and for managing our investment portfolio pursuant to the terms of the Advisory Agreement. LaSalle is a wholly-owned, but operationally independent subsidiary of JLL, a New York Stock Exchange-listed global financial and professional services firm that specializing in commercial real estate services. We have no employees, as all operations are managed by our Advisor. Our executive officers are employees of and compensated by our Advisor.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), the instructions to Form 10-K and include the accounts of our wholly-owned subsidiaries, consolidated variable interest entities ("VIE") and the unconsolidated investments in real estate affiliates. We consider the authoritative guidance of accounting for investments in common stock, investments in real estate ventures, investors accounting for an investee when the investor has the majority of the voting interest but the minority partners have certain approval or veto rights, determining whether a general partner or general partners as a group controls a limited partnership or similar entity when the limited partners have certain rights, and the consolidation of variable interest entities in which we own less than a 100% interest. All significant intercompany balances and transactions have been eliminated in consolidation.
Parenthetical disclosures are shown on our Consolidated Balance Sheets regarding the amounts of VIE assets and liabilities that are consolidated. As of December 31, 2015, our VIEs include The District at Howell Mill, The Edge at Lafayette, and Campus Lodge Tampa as we maintain control over significant decisions, which began at the time of acquisition of the properties. The creditors of our VIEs do not have general recourse to us.
Noncontrolling interests represent the minority members’ proportionate share of the equity in our VIEs. At acquisition, the assets, liabilities and noncontrolling interests were measured and recorded at the estimated fair value. Noncontrolling interests will increase for the minority members’ share of net income of these entities and contributions and decrease for the minority members’ share of net loss and distributions. As of December 31, 2015, noncontrolling interests represented the minority members’ proportionate share of the equity of the entities listed above as VIEs, Grand Lakes Marketplace and Townlake of Coppell.
Certain of our joint venture agreements include provisions whereby, at certain specified times, each party has the right to initiate a purchase or sale of its interest in the joint ventures at an agreed upon fair value. Under these provisions, we are not obligated to purchase the interest of its outside joint venture partners.
Investments in Real Estate
Real estate assets are stated at cost. Our real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. A real estate asset is considered to be impaired when the estimated future undiscounted operating cash flow over the expected hold period is less than its carrying value in accordance with the authoritative guidance on accounting for the impairment or disposal of long-lived assets. To the extent impairment has occurred, the excess of the carrying value of the asset over its estimated fair value will be charged to operations. The valuation adjustments were calculated based on market conditions and assumptions made by management at the time the valuation adjustments were recorded, which may differ materially from actual results if market conditions or the underlying assumptions change in the future. When we have committed to a plan to sell a property that is available for immediate sale, have the necessary approvals and marketing in place, and believe that the sale of the property is probable the assets selected for disposal will be classified as held-for-sale and carried at the lower of their carrying values (i.e., cost less accumulated depreciation and any impairment loss recognized, where applicable) or estimated fair values less costs to sell. Carrying values are reassessed at each balance sheet date. Due to market fluctuation, actual proceeds realized on the ultimate sale of these properties may differ from estimates and such differences could be material. Depreciation and amortization cease once a property is classified as held-for-sale. We recorded $4,928 of impairment charges for the year ended December 31, 2015. We recorded no impairment charges for the year ended December 31, 2014. We recorded impairment charges for the year ended December 31, 2013 totaling $48,538 including amounts reflected in discontinued operations.
Depreciation expense is computed using the straight-line method based upon the following estimated useful lives:
Maintenance and repairs are charged to expense when incurred. Expenditures for significant betterments and improvements are capitalized.
Investments in Unconsolidated Real Estate Affiliates
We account for our investments in unconsolidated real estate affiliates using either the equity method or the fair value option. Under the equity method the cost of the investment is adjusted for our share of equity in net income or loss and reduced by distributions received and increased by contributions provided. Under the fair value option, the cost basis of the investment is increased for contributions made to the investment and adjusted for our share of changes in the fair value of the investment. Distributions received from investments in unconsolidated real estate affiliates under the fair value option are recorded as income from the unconsolidated affiliates. Distributions that are identified as returns of capital are recorded as a reduction to the cost basis of the investment, whereas distributions identified as capital gains or losses are recorded as realized gains or losses.
We evaluate the carrying value of our investment in unconsolidated real estate affiliate accounted for under the equity method, excluding our investment under the fair value option, in accordance with the authoritative guidance on the equity method of accounting for investments in common stock. We analyze our investment in unconsolidated real estate affiliate when circumstances change and at every reporting period and determine if an “other-than-temporary” impairment exists and, if so, we assess our ability to recover our carrying cost of the investment. We concluded that we did not have any “other than temporary” impairment in our investment in unconsolidated real estate affiliate in 2015 which we account for under the equity method.
Revenue Recognition
Minimum rent revenues are recognized on a straight-line basis over the terms of the related leases. Straight-line rent revenue (representing rents recognized prior to being billed and collectible as provided by the terms of the leases) caused net increases to rent revenue of $1,474, $2,202 and $3,128 for the years ended December 31, 2015, 2014 and 2013, respectively. Also included, as an increase to rent revenue, for the years ended December 31, 2015, 2014 and 2013, are $1,584, $1,395 and $4,844, respectively, of net amortization related to above-and below-market in-place leases at properties acquired as provided by authoritative guidance on goodwill and intangible assets. Tenant recoveries are recognized as revenues in the period the applicable costs are incurred.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is provided against the portion of accounts receivable and deferred rent receivable that is estimated to be uncollectible. Such allowance is reviewed periodically based upon our recovery experience. At December 31, 2015 and 2014, our allowance for doubtful accounts was $312 and $58, respectively.
Cash and Cash Equivalents
We consider all highly-liquid investments purchased with original maturities of three months or less to be cash equivalents. We maintain a portion of our cash in bank deposit accounts, which, at times, may exceed the federally insured limits. No losses have been experienced related to such accounts. We believe our bank deposit accounts are held with quality financial institutions.
Restricted Cash
Restricted cash includes amounts established pursuant to various agreements for loan escrow accounts and loan commitments.
Deferred Expenses
Deferred expenses consist of debt issuance costs and lease commissions. Debt issuance costs are capitalized and amortized over the terms of the respective agreements as a component of interest expense which approximates the effective interest method. Lease commissions are capitalized and amortized over the term of the related lease as a component of depreciation and amortization expense. Accumulated amortization of deferred expenses at December 31, 2015 and 2014 was $3,341 and $3,276, respectively.
Foreign Exchange
We utilize the U.S. dollar as our functional currency, except for our Canadian operations, which use the Canadian dollar as the functional currency. When preparing consolidated financial statements, assets and liabilities of foreign entities are translated at the exchange rates at the balance sheet date, while income and expense items are translated at average rates for the period. Income statement amounts of significant transactions are translated at the rate in effect as of the date of the transactions. Foreign currency translation adjustments are recorded in accumulated other comprehensive loss.
Acquisitions
We use estimates of future cash flows and other valuation techniques to allocate the fair value of acquired property among land, building and other identifiable asset and liability intangibles. Acquisition related costs are expensed as incurred. We record land and building values using an as-if-vacant methodology. We record above- and below-market in-place lease values for acquired properties based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease plus any below-market lease extension option periods. We amortize the capitalized above-market lease values as a reduction of minimum rents over the remaining non-cancelable terms of the respective leases. We amortize the capitalized below-market lease values as an increase to minimum rents over the term of the respective leases plus any below-market lease extension option terms. Should a tenant terminate its lease prior to the contractual expiration, the unamortized portion of the above-market and below-market in-place lease value is immediately charged to minimum rents.
We measure the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases and (ii) the property valued as-if-vacant. Our estimates of value are made using methods similar to those used by independent appraisers, primarily discounted cash flow analyses. Factors considered by us in our analysis include an estimate of carrying costs during the hypothetical expected lease-up periods considering current market conditions at the date of acquisition, and costs to execute similar leases. We also consider information obtained about each property as a result of the pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, we will include estimates of lost rentals during the expected lease-up periods, which is expected to primarily range from one to two years, depending on specific local market conditions, and costs to execute similar leases, including leasing commissions, legal and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to in-place lease values and customer relationship intangible values based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics considered by us in allocating these values include, among other factors, the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement). As of December 31, 2015 and 2014, we have allocated no value to customer relationship value. We amortize the value of in-place leases to expense over the weighted average lease term of the respective leases, which generally range from one to ten years.
Purchase price has been allocated to acquired intangible assets, which include acquired in-place lease intangibles, acquired above-market in-place lease intangibles and acquired ground lease intangibles, which are reported net of accumulated amortization of $21,660 and $25,048 at December 31, 2015 and 2014, respectively, on the accompanying Consolidated Balance Sheets. The acquired intangible liabilities represent acquired below-market in-place leases, which are reported net of accumulated amortization of $3,364 and $2,660 at December 31, 2015 and 2014, respectively, on the accompanying Consolidated Balance Sheets. Our amortizing intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. According to authoritative guidance, an amortizing intangible asset is considered to be impaired when the estimated future undiscounted operating cash flow is less than its carrying value. To the extent impairment has occurred, the excess of the carrying value of the amortizing intangible asset over its estimated fair value will be charged to operations.
Future amortization related to amortizing acquired intangible assets and liabilities as of December 31, 2015 is as follows:
Income Taxes
We made the election to be taxed as a REIT under sections 856-860 of the Internal Revenue Code of 1986 (the “Code”) as of December 23, 2004. To qualify as a REIT, we must meet a number of organizational and operational requirements, including requirements to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gains, and to meet certain quarterly asset and annual income tests. It is our current intention to adhere to these requirements. As a REIT, we will generally not be subject to corporate-level federal income tax to the extent we distribute 100% of our taxable income to our stockholders. Accordingly, the consolidated statements of operations do not reflect a provision for income taxes. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income, property or net worth, and to certain federal income and excise taxes.
Earnings and profits, which determine the tax treatment of dividends to stockholders, differ from net income reported for financial reporting purposes due to differences for federal income tax reporting purposes in computing, among other things, estimated useful lives, depreciable basis of properties and permanent and timing differences on the inclusion or deductibility of elements of income and expense for such purposes.
Business Segments
We align our internal operations along the five primary property types we are targeting for investments resulting in five operating segments: apartment properties, industrial properties, office properties, retail properties and other properties.
At December 31, 2015 and 2014, we held one investment outside the United States. For the years ended December 31, 2015, 2014 and 2013, total revenues of this foreign investment were $3,301, $4,287 and $4,166, respectively. For the years ended December 31, 2015, 2014 and 2013, total revenues of U.S. domiciled investments were $89,929, $93,915 and $72,350, respectively. At December 31, 2015 and 2014, total assets of our foreign investment were $28,617 and $34,471, respectively. The change in total assets from December 31, 2014 to December 31, 2015 at our foreign investment was mainly a result of the change in foreign currency rate between those dates. At December 31, 2015 and 2014, total assets of U.S. domiciled investments were $1,294,075 and $864,295, respectively.
Assets and Liabilities Measured at Fair Value
The Financial Accounting Standards Board’s (“FASB”) guidance for fair value measurement and disclosure states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
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Level 1-Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have access to at the measurement date.
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Level 2-Observable inputs, other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.
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Level 3-Unobservable inputs for the asset or liability. Unobservable inputs are those inputs that reflect our own assumptions that market participants would use to price the asset or liability based on the best available information.
The authoritative guidance requires the disclosure of the fair value of our financial instruments for which it is practicable to estimate that value. The guidance does not apply to all balance sheet items. Market information as available or present value techniques have been utilized to estimate the amounts required to be disclosed. Since such amounts are estimates, there can be no assurance that the disclosed value of any financial instrument could be realized by immediate settlement of the instrument.
Partnership interests accounted for under the fair value option are stated at the fair value of our ownership in the partnership. The fair value is recorded based upon changes in the net asset values of the limited partnership as determined from the financial statements of the limited partnership. As of December 31, 2015, the cost of our investment in NYC Retail Portfolio approximates its fair value (see Note 4-Unconsolidated Real Estate Affiliates). In future periods, any unrealized changes in fair value will be classified within the Level 3 category.
We have estimated the fair value of our mortgage notes payable reflected in the accompanying Consolidated Balance Sheets at amounts that are based upon an interpretation of available market information and valuation methodologies (including discounted cash flow analysis with regard to fixed rate debt) for similar loans made to borrowers with similar credit ratings and for the same maturities. The fair value of our mortgage notes payable using level two inputs was approximately $927 and $10,717 higher than the aggregate carrying amounts at December 31, 2015 and 2014, respectively. Such fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition of our mortgage notes payable.
Derivative Financial Instruments
We record all derivatives on the Consolidated Balance Sheets at fair value in prepaid expenses and other assets or accounts payable and other accrued expenses. Changes in the fair value of our derivatives are recorded on our Consolidated Statements of Operations and Comprehensive Income (Loss) as we have not designated our derivative instruments as hedges. Our objective in using interest rate derivatives is to manage our exposure to interest rate movements. To accomplish this objective, we use interest rate caps and swaps.
As of December 31, 2015, we had the following outstanding interest rate derivatives related to managing our interest rate risk:
The fair value of our interest rate caps and swap represent liabilities of $153 and $96 at December 31, 2015 and 2014, respectively.
Discontinued Operations
Effective January 1, 2014, GAAP was amended to require reporting of discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Sales and the results of operations of individual properties being sold will be presented in the continuing operations section of our Consolidated Statements of Operations and Comprehensive Income (Loss).
Dealer Manager Fees
Dealer manager fees are paid based on a specified percentage for each publicly offered share class multiplied by the NAV of that share class at the end of each day. We accrue a liability for dealer manager fees on a daily basis as offering costs which are recorded as a reduction of capital in excess of par value.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions. These estimates and assumptions impact the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. For example, significant estimates and assumptions have been made with respect to useful lives of assets, recoverable amounts of receivables, fair value of derivatives and real estate assets, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions. Actual results could differ from those estimates.
NOTE 3-PROPERTY
The primary reason we make acquisitions of real estate investments in the apartment, industrial, office, retail and other property sectors is to invest capital contributed by stockholders in a diversified portfolio of real estate assets. The consolidated properties held by us as of December 31, 2015 were as follows:
(1)
The other owner, owning a 22% interest, is an investment fund advised by our Advisor and in which the parent company of our Advisor owns a noncontrolling interest.
(2)
Property includes 127,000 square feet of parking space containing 343 parking spaces and 3,000 square feet of retail space.
During the years ended December 31, 2015, 2014 and 2013, we incurred $2,336, $545, and $599, respectively, of acquisition expenses recorded on the Consolidated Statements of Operations and Other Comprehensive Income (Loss). For properties acquired during 2015, we recorded total revenue of $10,875 and net loss of $2,955 during the year end December 31, 2015. For properties acquired during 2014, we recorded total revenue of $10,481 and net income of $757 during the year ended December 31, 2014. For properties acquired during 2013, we recorded total revenue of $3,482 and net income of $414 during the year ended December 31, 2013.
2015 Acquisitions
On April 15, 2015, we acquired DFW Distribution Center, a two building, 643,000 square foot industrial property located in Grapevine, Texas, for approximately $44,200. The acquisition was financed with a ten-year mortgage loan that bears interest at a fixed-rate of 3.23%, in the amount of $17,720, and cash on hand. The property is 100% leased to nine tenants.
On May 15, 2015, we acquired Skokie Commons, a newly constructed 93,000 square foot grocery-anchored retail property located in Skokie, Illinois, for approximately $43,800. The acquisition was financed with a ten-year mortgage loan that bears interest at a fixed-rate of 3.31%, in the amount of $24,400, and cash on hand. On December 18, 2015, we acquired an adjacent parcel of land under a ground lease to Bank of America. The land was acquired for approximately $4,700 and was funded with cash on hand.
On May 22, 2015, we acquired a 90% interest in Townlake of Coppell, a 398 unit garden style apartment property located in Coppell, Texas, for approximately $43,200. The acquisition was financed with a five-year mortgage loan that bears interest at a fixed-rate of 3.25%, in the amount of $28,800, and cash on hand.
On July 30, 2015, we acquired AQ Rittenhouse, a newly constructed Class A apartment property located near Rittenhouse Square in Philadelphia, Pennsylvania, for approximately $51,000. The 110 unit, 12 story apartment building is complemented by 13,000 square feet of fully leased ground floor commercial space. The acquisition was financed with a ten-year mortgage loan that bears interest at a fixed-rate of 3.65%, in the amount of $26,370, and cash on hand.
On September 30, 2015, we acquired Whitestone Market, a 145,000 square foot, 100% leased, grocery anchored retail center for approximately $51,500. Whitestone Market, located in Austin, Texas, is anchored by an HEB grocery store and was funded with cash on hand. On November 23, 2015, we entered into ten-year mortgage loan that bears interest at a fixed-rate of 3.58%, in the amount of approximately $25,800.
On September 30, 2015, we acquired O'Hare Industrial Portfolio, a seven property, 642,000 square foot, 92% occupied industrial portfolio for approximately $71,000. O'Hare Industrial Portfolio is located near O'Hare Airport just outside Chicago, Illinois and was funded with cash on hand.
On December 21, 2015, we acquired 140 Park Avenue, a newly constructed 100,000 square foot medical office building located in Florham Park, New Jersey, for approximately $45,600. The property is 100% leased for 15 years to Summit Medical Group. The acquisition was funded using cash on hand.
On December 22, 2015, we acquired Maui Mall, a 235,000 square foot, 91% leased, grocery anchored retail center built in 1971 and expanded in 1995, for approximately $91,100. The property is located on the island of Maui in Hawaii. The acquisition was funded using a draw on our line of credit and cash on hand.
We allocated the purchase price of our 2015 acquisitions in accordance with authoritative guidance as follows:
Proforma Information (Unaudited)
The following pro forma financial information is presented as if our 2015 acquisitions had been consummated on the earlier of January 1, 2014 or the date the property began operations. The pro forma financial information is for comparative purposes only and not necessarily indicative of what our actual results of operations would have been had our 2015 acquisitions been consummated on the earlier of January 1, 2014 or the date the property began operations, nor does it purport to represent the results of operations for future periods.
If these acquisitions had occurred on January 1, 2014, our consolidated total revenues and net income for the year ended December 31, 2015 would have been $107,262 and $15,252, respectively, and our total consolidated revenues and net loss for the year ended December 31, 2014 would have been $123,970 and $4,720, respectively. Net income per share for the years ended December 31, 2015 and 2014 would have been $0.25 and $0.10 per share, respectively. Basic per share amounts are based on the weighted average of shares outstanding of 61,237,711 and 45,658,735 for the years ended December 31, 2015 and 2014, respectively.
2014 Acquisitions
On January 17, 2014, we acquired Oak Grove Plaza, a 120,000 square foot retail property located in Sachse, Texas, for approximately $22,525. The acquisition was financed with a ten-year mortgage loan in the amount of $10,550 that bears interest at fixed rate of 4.17% and cash on hand.
On January 22, 2014, we acquired Grand Prairie Distribution Center, a 277,000 square foot industrial building located in Grand Prairie, Texas for approximately $17,200, using cash on hand. The property is 100% leased to a single tenant for ten years.
On January 28, 2014, we acquired South Beach Parking Garage, a 343 stall, multi-level parking facility located on South Beach in Miami, Florida for approximately $22,050, using cash on hand and a $13,000 draw on our line of credit.
On June 16, 2014, we acquired Rancho Temecula Town Center, a 165,000 square foot retail property located in Temecula, California, for approximately $60,000. The acquisition was financed with a 12-year fixed rate mortgage loan in the amount of $28,000 which bears interest at a fixed rate of 4.02%, interest-only and cash on hand.
On June 27, 2014, we acquired Charlotte Distribution Center, a 347,000 square foot industrial building located in Charlotte, North Carolina, for approximately $25,550, using cash on hand. The property is 100% leased to a single tenant for 14 years.
We allocated the purchase price of our 2014 acquisitions in accordance with authoritative guidance as follows:
Proforma Information (Unaudited)
The following pro forma financial information is presented as if our 2014 acquisitions had been consummated on the earlier of January 1, 2013 or the date the property began operations. The pro forma financial information is for comparative purposes only and not necessarily indicative of what our actual results of operations would have been had our 2014 acquisitions been consummated on the earlier of January 1, 2013 or the date the property began operations, nor does it purport to represent the results of operations for future periods.
If these acquisitions had occurred on January 1, 2013, our consolidated total revenues and net income for the year ended December 31, 2014 would have been $102,702 and $7,419, respectively, and our total consolidated revenues and net loss for the year ended December 31, 2013 would have been $93,182 and $27,988, respectively. Net income per share for the years ended December 31, 2014 and 2013 would have been $0.16 and $0.76 per share, respectively. Basic per share amounts are based on the weighted average of shares outstanding of 45,658,735 and 36,681,847 for the years ended December 31, 2014 and 2013, respectively.
2013 Acquisitions
On June 26, 2013, we acquired Joliet Distribution Center, a 442,000 square foot industrial property located in Joliet, Illinois for approximately $21,000, using cash on hand. The property is 100% leased to two tenants with a weighted average remaining lease term of approximately six years.
On June 28, 2013, we acquired Suwanee Distribution Center, a 559,000 square foot industrial property located in suburban Atlanta, Georgia for $37,943, using a $7,000 draw on our revolving line of credit and cash on hand. The property is 100% leased to Mitsubishi Electric & Electronics USA with a remaining lease term of ten years.
On September 17, 2013, we acquired a 90% interest in a joint venture that owns Grand Lakes Marketplace, a 131,000 square foot retail property located in Katy, Texas for $42,975. This acquisition was financed with a $23,900 mortgage note payable secured by Grand Lakes Marketplace. The mortgage note payable has a ten-year term, carries a fixed interest rate of 4.20% and is interest only.
On December 18, 2013, we acquired South Seattle Distribution Center, a three building, 323,000 square foot industrial portfolio located in Seattle, Washington for approximately $39,000, using cash on hand. The portfolio is 100% leased to three tenants with a weighted average remaining lease term of approximately eight years.
We allocated the purchase price of our 2013 acquisitions in accordance with authoritative guidance as follows:
Proforma Information (Unaudited)
The following pro forma financial information is presented as if our 2013 acquisitions had been consummated on the earlier of January 1, 2012 or the date the property began operations. The pro forma financial information is for comparative purposes only and not necessarily indicative of what our actual results of operations would have been had our 2013 acquisitions been consummated on the earlier of January 1, 2012 or the date the property began operations, nor does it purport to represent the results of operations for future periods.
If these acquisitions had occurred on January 1, 2012, our consolidated total revenues and net loss for the year ended December 31, 2013 would have been $85,726 and $27,912, respectively, and our total consolidated revenues and net income for the year ended December 31, 2012 would have been $65,988 and $38,828, respectively. Net loss per share for the year ended December 31, 2013 would have been $0.76 and net income per share for the year ended December 31, 2012 would have been $1.51. Basic per share amounts are based on the weighted average of shares outstanding of 36,681,847 and 25,651,220 for the years ended December 31, 2013 and 2012, respectively.
Impairment of Investments in Real Estate
In accordance with authoritative guidance for impairment of long-lived assets we recorded the following impairments of investments for the years ended December 31, 2015, 2014 and 2013.
The valuation of these assets is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each asset as well as the income capitalization approach considering prevailing market capitalization and discount rates. We review each investment based on the highest and best use of the investment and market participation assumptions. The significant assumptions include the capitalization rate used in the income capitalization valuation and projected property net operating income and net cash flows. Additionally, the valuation considered bid and ask prices for similar properties. We have determined that the significant inputs used to value the impaired assets fall within Level 3 except for the impairment of Canyon Plaza which based on a sale price falls within Level 1. These significant inputs are based on market conditions and our expected growth rates. Capitalization rates ranging from 7.25% to 9.00% and discount rates ranging from 8.25% to 10.00% were utilized in the models and are based upon observable rates that we believe to be within a reasonable range of current market rates.
For the year ended December 31, 2015
As of December 31, 2015 we determined that 36 Research Park Drive no longer fit our current investment objectives and strategy and thus reduced our expected hold period. As such we determined this asset was impaired due to the carrying value of the investment exceeding the fair value. We recognized an impairment charge totaling $4,928 which represents the difference between the fair value and the carrying value of the property.
For the year ended December 31, 2013
On August 23, 2013, Canyon Plaza, a 199,000 square foot office property located in San Diego, California, was classified as held for sale and evaluated for impairment as of that date. We determined the carrying value of the investment exceeded the sale price less cost to sell. As such, we recognized an impairment charge of $10,182.
As of December 31, 2013, we determined that 4 Research Park Drive, Stirling Slidell Shopping Centre, Cabana Beach Gainesville, 14600 Sherman Way and 14624 Sherman Way no longer fit our current investment objectives and strategy and thus reduced our expected hold period. As such we determined these assets were impaired due to the carrying value of the investments exceeding the undiscounted cash flows over our new expected hold period. We recognized impairment charges totaling $38,356 which represents the difference between the fair value and the carrying value of the properties.
2015 Dispositions
On January 18, 2015, we sold Cabana Beach San Marcos, Cabana Beach Gainesville, Campus Lodge Athens and Campus Lodge Columbia for a total of approximately $123,800. In connection with the disposition, the mortgage loans associated with the four properties totaling $71,000 were retired. We recorded a gain on the sale of the properties in the amount of $30,454 and recorded a loss on the extinguishment of the debt of $1,318.
2014 Dispositions
On August 8, 2014, we sold Stirling Slidell Shopping Centre, a 139,000 square foot retail property located in Slidell, Louisana for $14,600. In conjunction with the sale, we paid off the mortgage loan for $12,007. We recorded a gain on the sale of the property in the amount of $181 and recorded a loss on the extinguishment of the debt of $236.
On September 30, 2014, we transferred our ownership in 4 Research Park Drive, a 60,000 square foot office building located in St. Charles, Missouri, to the lender. We were relieved of a $6,049 mortgage debt obligation as part of the transfer. As a result, a $260 non-cash accounting gain was recognized on the transfer of property representing the difference between the fair value and net book value of the property transferred as of the date of transfer. Upon extinguishment of the mortgage debt obligation, a $384 non-cash accounting gain was recognized representing the difference between the book value of debt, interest payable and other obligations extinguished over the fair value of the property and other assets transferred as of the transfer date. The transfer resulted in a total non-cash accounting gain of $644.
Discontinued Operations
On August 23, 2013, in accordance with the authoritative guidance for impairment of long-lived assets held for sale, we determined the carrying value of Canyon Plaza exceeded the fair value less cost to sell. As such, we recognized impairment charges of approximately $10,182. On December 10, 2013 we sold the property for $33,750 resulting in a gain of $218. The results of operations and gain on sale of the property are reported as discontinued operations for all periods presented.
On October 24, 2013, we completed the sale of the Dignity Health Disposition Portfolio for $111,260. In conjunction with the sale, we prepaid the three remaining mortgage loan pools associated with the properties for approximately $60,950 including accrued interest. We recorded a gain on sale of $15,048. The results of operations and gain on sale of the properties are reported as discontinued operations for all periods presented.
The following table summarizes the loss from discontinued operations for Canyon Plaza and the Dignity Health Disposition Portfolio for the years ended December 31, 2014, and 2013:
The dispositions of Cabana Beach San Marcos, Cabana Beach Gainesville, Campus Lodge Athens, Campus Lodge Columbia, Stirling Slidell Centre, and 4 Research Park Drive are not included in discontinued operations as a result of the adoption of new accounting guidance on January 1, 2014. Discontinued operations presented for the year ended December 31, 2014 relate to operations of properties classified as discontinued operations prior to adopting the guidance on January 1, 2014.
NOTE 4-UNCONSOLIDATED REAL ESTATE AFFILIATES
Fair Value Option Investments
NYC Retail Portfolio
On December 8, 2015, a wholly-owned subsidiary of the Company acquired an approximate 28% interest in a newly
formed fund, Madison NYC Core Retail Partners, L.P., which acquired an approximate 49% interest in entities that own 15 retail properties located in the greater New York City area (the “NYC Retail Portfolio”), the result of which is that we own an approximate 14% interest in the NYC Retail Portfolio. The purchase price for such portion is approximately $85,600 including closing costs. The NYC Retail Portfolio contains approximately 2,700,000 square feet across urban infill locations in Manhattan, Brooklyn, Queens, the Bronx, Staten Island and New Jersey.
At acquisition we made the election to account for our interest in the NYC Retail Portfolio under the fair value option. This election was made as we were not the controlling member in the joint venture. Our investment in the NYC Retail Portfolio will be presented on our Consolidated Balance Sheet within investments in unconsolidated real estate affiliates. Changes in the fair value of our investment as well as cash distributions received will be recorded on our Consolidated Statement of Operations and Comprehensive Income (Loss) within equity in income of unconsolidated affiliates. During the year ended December 31, 2015 we recorded no changes in fair value of our investment in the NYC Retail Portfolio and received no cash distributions. At December 31, 2015, the carrying amount of our investment in NYC Retail Portfolio was $85,068. We recorded $532 of acquisition expenses related to the investment for the year ended December 31, 2015 within equity in income of unconsolidated affiliates on our Consolidated Statement of Operations and Comprehensive Income (Loss).
Equity Method Investments
Chicago Parking Garage
On December 23, 2014, we acquired a condominium interest in Chicago Parking Garage, a 366 stall, multi-level parking facility located in a large mixed-use property in Chicago, Illinois for approximately $16,900 using cash on hand. In accordance with authoritative guidance, Chicago Parking Garage is accounted for as an investment in an unconsolidated real estate affiliate. At December 31, 2015, the carrying amount of our investment in Chicago Parking Garage was $17,935.
Legacy Village
On August 25, 2004, we acquired a 46.5% membership interest in Legacy Village Investors, LLC which owns Legacy Village, a 595,000 square-foot lifestyle center in Lyndhurst, Ohio, built in 2003. The aggregate consideration for our 46.5% ownership interest was approximately $35,000. On October 29, 2013, we sold our interest in Legacy Village Investors, LLC to our joint venture partners for $27,350 and recorded a gain on that sale of $7,290.
NOTE 5-MORTGAGE NOTES AND OTHER DEBT PAYABLE
Mortgage notes and other debt payable have various maturities through 2027 and consist of the following:
(1)
This loan is denominated in Canadian dollars, but is reported in U.S. dollars at the exchange rate in effect on the balance sheet date.
(2)
The loan associated with this property was designated as held for sale on December 19, 2014. The property associated with this loan was sold on January 27, 2015 and the loan was repaid.
We have recognized a premium or discount on debt we assumed with the following property acquisitions, the remaining premium or discount is as follows as of December 31, 2015:
Aggregate future principal payments of mortgage notes payable as of December 31, 2015 are as follows:
Land, buildings, equipment and acquired intangible assets related to the mortgage notes payable, with an aggregate cost of approximately $915,000 and $818,000 at December 31, 2015 and 2014, respectively, have been pledged as collateral, and are not available to satisfy our debts and obligations unless first satisfying the mortgage note payable on the property. As our mortgage notes mature, we will explore refinancing and paying off the loans as well as full or partial sales of the properties. To accomplish these refinancings and pay downs, we would use cash on hand, cash from future property operations and capital from the proceeds of the First Extended Public Offering.
Line of Credit
On June 8, 2015, we extended our existing $40,000 revolving line of credit agreement with Bank of America, N.A. The line of credit has a two-year term with a one-year extension at our option and bears interest based on LIBOR plus a spread ranging from 1.35% to 2.10% depending on our leverage ratio (1.60% spread at December 31, 2015). The line of credit contains an accordion feature that allows us to increase the facility to $100,000, which we exercised in December 2015. We intend to use the line of credit to cover short-term capital needs, for new property acquisitions and working capital. We may not draw funds on our line of credit if we experience a material adverse effect, which is defined to include, among other things, (a) a material adverse effect upon the operations, business, assets, liabilities or financial condition of the Company, taken as a whole; (b) a material impairment of the rights and remedies of any lender under any loan document or the ability of any loan party to perform its obligations under any loan document; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against any loan party of any loan document to which it is a party. As of December 31, 2015, we believe no material adverse effects had occurred. Our line of credit does require us to meet certain customary debt covenants which include a maximum leverage ratio, a minimum debt service coverage ratio as well as maintaining minimum amounts of equity and liquidity. As of December 31, 2015, we had $30,000 borrowings outstanding on the revolving line of credit.
Covenants
At December 31, 2015, we were in compliance with all debt covenants.
NOTE 6-COMMON STOCK
We have five classes of common stock authorized as of December 31, 2015: Class A, Class M, Class A-I, Class M-I, and Class D. The fees payable to our dealer manager with respect to each outstanding share of each class, as a percentage of net asset value ("NAV"), are as follow:
(1) Selling commissions are paid on the date of purchase.
(2) Dealer manager fees are accrued daily on a continuous basis equal to 1/365th of the stated fee.
(3) Shares of Class D common stock are only being offered pursuant to a private offering.
The selling commissions and dealer manager fees are offering costs and are recorded as a reduction of additional paid in capital.
Stock Transactions
The stock transactions for each of our classes of common stock for the years ending December 31, 2015, 2014 and 2013 were as follows:
Stock Issuances
The stock issuances for our classes of shares, including those issued through our distribution reinvestment plan, for the years ending December 31, 2015, 2014 and 2013 were as follows:
Share Repurchase Plan
Our share repurchase plan allows stockholders to request that we repurchase all or a portion of their shares of Class A, Class M, Class A-I, Class M-I and Class D common stock on a daily basis at that day's NAV per share for the class of shares being repurchased. The share repurchase plan is subject to a one-year holding period, with certain exceptions, and limited to 5% of NAV per quarter. On December 2, 2014, our board of directors voted unanimously to increase the repurchase limitation under our share repurchase plan for the quarter ended December 31, 2014 from 5% of the combined NAV of all classes of shares to 6% of the combined NAV of all classes of shares as of September 30, 2014. For the year ended December 31, 2015, we repurchased 494,216, 1,840,770, and 615,509 shares of Class A, Class M, and Class A-I common stock, respectively, under our share repurchase plan. During the year ended December 31, 2014 we repurchased 292,407 and 2,814,586 shares of Class A and Class M common stock, respectively. During the year ended December 31, 2013, we repurchased 31,229 and 71,685 shares of Class A and Class M common stock, respectively.
During the year ended December 31, 2014, we repurchased 179,822 of our Class M common stock in private negotiated transactions. During the year ended December 31, 2013, we repurchased 238,087 shares of Class E common stock in private negotiated transactions outside the share repurchase plan described above. The repurchases were made at 2% to 5% discounts to NAV per share on the date of repurchase.
Tender Offers
We also use tender offers to provide liquidity to our stockholders. Beginning on August 25, 2014 and concluding on September 24, 2014, we conducted a tender offer to repurchase up to $40,000 of outstanding shares of Class M common stock at $10.48 per share. Because the tender offer was oversubscribed, we accepted, on a pro rata basis and in accordance with the terms of the tender offer, $46,000, or approximately 71% of each stockholder's validly tendered shares.
(1)
In compliance with SEC rules, the share repurchase plan for Class M common stock was suspended on August 25, 2014 and reopened for repurchases on October 8, 2014.
Distribution Reinvestment Plan
Pursuant to our distribution reinvestment plan, holders of shares of any class of our common stock may elect to have their cash distributions reinvested in additional shares of our common stock at the NAV per share applicable to the class of shares being purchased on the distribution date. For the year ended December 31, 2013, we issued 196,790 shares of common stock for $1,998 under the distribution reinvestment plan. For the year ended December 31, 2014, we issued 529,036 shares of common stock for $5,505 under the distribution reinvestment plan. For the year ended December 31, 2015, we issued 1,240,552 shares of common stock for $13,630 under the distribution reinvestment plan.
Earnings Per Share (“EPS”)
Basic per share amounts are based on the weighted average of shares outstanding of 61,237,711, 45,658,735, and 36,681,847 for the years ended December 31, 2015, 2014 and 2013, respectively. We have no dilutive or potentially dilutive securities.
Organization and Offering Costs
Organization and offering costs include, but are not limited to, legal, accounting and printing fees and personnel costs of our Advisor (including reimbursement of personnel costs for our executive officers prior to the commencement of the offerings) attributable to our organization, preparation of the registration statement, registration and qualification of our common stock for sale with the SEC and in the various states and filing fees incurred by our Advisor. LaSalle agreed to fund our organization and offering expenses through October 1, 2012, which is the date the SEC declared our registration statement effective for the Initial Public Offering, following which time we commenced reimbursing LaSalle over 36 months for organization and offering costs incurred prior to the commencement date of the Initial Public Offering. Following the Initial Public Offering commencement date, we began paying directly or reimbursing LaSalle if it pays on our behalf any organization and offering costs incurred during the Initial Public Offering period (other than selling commissions and dealer manager fees) as and when incurred. After the termination of each of the Initial Public Offering and the First Extended Public Offering, our Advisor has agreed to reimburse us to the extent that the organization and offering costs that we incur exceed 15% of our gross proceeds from each of the Initial Public Offering and the First Extended Public Offering. LaSalle also agreed to fund our organization and offering expenses through January 15, 2015, related to the First Extended Public Offering, following which time we commenced reimbursing LaSalle over 36 months for the organization and offering costs incurred prior to the commencement of the First Extended Public Offering. Organization costs are expensed, whereas offering costs are recorded as a reduction of capital in excess of par value. As of December 31, 2015 and December 31, 2014, LaSalle had paid approximately $2,009 and $1,986, respectively, of organization and offering costs on our behalf which we had not yet reimbursed. These costs are included in Accounts payable and other accrued expenses.
NOTE 7-RENTALS UNDER OPERATING LEASES
We receive rental income from operating leases. The minimum future rentals from consolidated properties based on operating leases in place at December 31, 2015 are as follows:
(1)
Amounts included related to Railway Street Corporate Centre have been converted from Canadian dollars to U.S. dollars using the appropriate exchange rate as of December 31, 2015.
Minimum future rentals do not include amounts payable by certain tenants based upon a percentage of their gross sales or as reimbursement of property operating expenses. During the years ended December 31, 2015, 2014 and 2013, no individual tenant accounted for greater than 10% of minimum base rents. The majority of the decrease in rents from 2016 future rents to 2017 is related to our apartment properties which usually have a one year lease life.
NOTE 8-RELATED PARTY TRANSACTIONS
Effective as of October 1, 2012, we entered into a first amended and restated advisory agreement with LaSalle, pursuant to which we pay a fixed advisory fee of 1.25% of our NAV calculated daily. The Advisory Agreement allows for a performance fee to be earned for each share class based on the total return of that share class during the calendar year. The performance fee is calculated as 10% of the return in excess of 7% per annum. On May 5, 2015, we renewed our Advisory Agreement with our Advisor for one year term expiring on June 5, 2016.
The fixed advisory fees for the years ended December 31, 2015, 2014 and 2013 were $8,374, $5,931 and $4,668, respectively. The performance fees for the year ended December 31, 2015 and 2014 was $2,280 and $250, respectively. There was no performance fee for the year ended December 31, 2013. Included in Advisor fees payable at December 31, 2015 was $3,241 of fixed fee and performance fee expense. Included in Advisor fees payable at December 31, 2014 was $790 of fixed fee and performance fee expense.
We pay Jones Lang LaSalle Americas, Inc. (“JLL Americas”), an affiliate of the Advisor, for property management and leasing services performed at various properties we own, on terms no less favorable than we could receive from other third party service providers. For the years ended December 31, 2015, 2014 and 2013, JLL Americas was paid $610, $918 and $678, respectively. During the year ended December 31, 2015, we paid JLL Americas $383 in loan placement fees related to the mortgage notes payable on Skokie Commons, AQ Rittenhouse and Whitestone Market. During the year ended December 31, 2014, we paid JLL Americas $201 in loan placement fees related to the mortgage notes payable on South Seattle Distribution Center, Oak Grove Plaza, and Charlotte Distribution Center. During the year ended December 31, 2013, we paid JLL Americas $338 in sales brokerage commissions related to the disposition of Canyon Plaza.
We pay the Dealer Manager selling commissions and dealer manager fees in connection with our offerings. For the year ended December 31, 2015 and 2014 we paid the Dealer Manager selling commissions and dealer manager fees totaling $5,993 and $3,599, respectively. A majority of the selling commissions and dealer manager fees are reallowed to participating broker-dealers.
As of December 31, 2015 and 2014, we owed $2,009 and $1,986, respectively, for organization and offering costs paid by LaSalle (see Note 6-Common Stock). These costs are included in Accounts payable and other accrued expenses.
NOTE 9-COMMITMENTS AND CONTINGENCIES
We are involved in various claims and litigation matters arising in the ordinary course of business, some of which involve claims for damages. Many of these matters are covered by insurance, although they may nevertheless be subject to deductibles or retentions. Although the ultimate liability for these matters cannot be determined, based upon information currently available, we believe the ultimate resolution of such claims and litigation will not have a material adverse effect on our financial position, results of operations or liquidity.
From time to time, we have entered into contingent agreements for the acquisition and financing of properties. Such acquisitions and financings are subject to satisfactory completion of due diligence or meeting certain leasing or occupancy thresholds.
We are subject to fixed ground lease payments on South Beach Parking Garage of $94 per year until September 30, 2016. The fixed amount will increase on September 30, 2016 and every five years thereafter by the lesser of 12% or the cumulative CPI over the previous five year period. We are also subject to a variable ground lease payment calculated as 2.5% of revenue. The lease expires September 30, 2041 and has a ten-year renewal option.
The operating agreement for Townlake of Coppell allows the unrelated third party joint venture partner, owning a 10% interest, to put their interest to us at a market determined value for a period of 90 days beginning in 2018.
NOTE 10-SEGMENT REPORTING
We have five operating segments: apartment, industrial, office, retail and other properties. Consistent with how we review and manage our properties, the financial information summarized below is presented by operating segment and reconciled to income (loss) from continuing operations for the years ended December 31, 2015, 2014 and 2013:
(1) Includes $95,161 of Apartments segment assets classified as held for sale as of December 31, 2014.
NOTE 11-DISTRIBUTIONS PAYABLE
On November 5, 2015, our board of directors approved a gross distribution for the fourth quarter of 2015 of $0.12 per share to stockholders of record as of December 30, 2015. The distribution was paid on February 5, 2016. Class A, Class M, Class A-I, Class M-I and Class D stockholders received $0.12 per share, less applicable class-specific fees, if any.
NOTE 12-RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued an accounting standard update that will use a five step model to recognize revenue from customer contracts in an effort to increase consistency and comparability throughout global capital markets and across industries. The model will identify the contract, identify any separate performance obligations in the contract, determine the transaction price, allocate the transaction price and recognize revenue when the performance obligation is satisfied. The new standard will replace most existing revenue recognition in GAAP when it becomes effective for us on January 1, 2018. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, Amendments to the Consolidation Analysis (Topic 810), which improves targeted areas of the consolidation guidance and reduces the number of consolidation models. The amendments in the ASU are effective for annual and interim periods in fiscal years beginning after December 15, 2015, with early adoption permitted. Aside from certain expanded disclosure requirements, we do not expect the adoption of this standard will have a material impact to our consolidated financial statements for the adoption of this standard.
On April 7, 2015, the FASB issued Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. For public business entities, the ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2015, with early adoption permitted. The new guidance will be applied on a retrospective basis.
In February 2016, the FASB issued Accounting Standard Update 2016-02 Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The update is expected to impact our consolidated financial statements as we have certain operating and land lease arrangements for which we are the lessee. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance.
NOTE 13-QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
All significant fluctuations between the quarters are attributable to acquisitions and dispositions made in 2015 and 2014 with the exception of impairment recorded during the quarter ended December 31, 2015.
NOTE 14-SUBSEQUENT EVENTS
On March 1, 2016, we sold 36 Research Park Drive for approximately $7,900 less closing costs. We expect any gain or loss recorded on the sale of the property to be minimal.
On March 8, 2016, our board of directors approved a gross distribution for the first quarter of 2016 of $0.12 per share to stockholders of record as of March 30, 2016, payable on or around May 2, 2016. Class A, Class M, Class A-I, Class M-I and Class D stockholders will receive $0.12 per share, less applicable class-specific fees, if any.
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Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2015
The unaudited aggregate cost and accumulated depreciation for tax purposes was approximately $1,292,351 and $129,110, respectively.
(1)
Includes net provisions for impairment of real estate taken since acquisition of property.
Reconciliation of Real Estate
Reconciliation of Accumulated Depreciation