Item 1
Business
Item 1A
Item 1A
Risk Factors
Item 1B
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2.
Properties
As of December 31, 2009, the Company owned and/or managed 111 MOBs and healthcare related facilities, 62 of which are consolidated wholly-owned and joint ventures, three of which are jointly owned with unaffiliated third parties and managed through a TRS, 45 of which are managed for third parties through a TRS and one of which is wholly-owned and classified as discontinued operations and is currently being marketed for sale. MOBs typically contain suites for physicians and physician practice groups and also may include facilities that provide hospitals with ancillary and outpatient services, such as ambulatory surgery centers, imaging and diagnostic centers (offering diagnostic services not typically provided in physician offices or clinics), rehabilitation centers, kidney dialysis centers and cancer treatment centers. The Company’s portfolio of owned and managed properties contains an aggregate of approximately 5.7 million net rentable square feet of as of December 31, 2009. As of December 31, 2009, the Company’s 62 in-service, consolidated wholly-owned and joint venture properties were approximately 91.5% occupied with a weighted average remaining lease term of approximately 4.5 years, accounting for 96.0%, 95.7%, and 94.7% of total rental revenue and property management and other income for the years ended December 31, 2009, 2008, and 2007, respectively.
At December 31, 2009, 78.7% of the Company’s consolidated wholly-owned and joint venture properties are located on hospital campuses, 10.7% are located off-campus but in which a hospital is the sole or anchor tenant, and 10.6% are off campus.
At December 31, 2009, no tenant occupied 10% or more of the net rentable square feet at the Company’s properties.
The following table contains additional information about the Company’s consolidated wholly-owned and joint venture properties as of December 31, 2009:
Future lease expirations by tenants by year under non-cancelable operating leases as of December 31, 2009, were as follows (dollars in thousands, except per leased square foot amounts):
Joint Venture Properties
As of December 31, 2009, the Company has an investment in an unconsolidated real estate partnership that owns three buildings. The following table provides additional information about the Company’s unconsolidated joint venture properties as of December 31, 2009 (dollars in thousands, except per leased square foot amounts):
The Company has a 2.0% ownership in Shannon Health/MOB Limited Partnership No. 1 and a 2.0% ownership in BSB Health/MOB Limited Partnership No. 2. These ownership interests were assumed as part of the Consera acquisition (See Note 5 to the accompanying Notes to Consolidated Financial Statements). The partnership agreements and tenant leases of the limited partners are designed to give preferential treatment to the limited partners as to the operating cash flows from the partnerships. The Company, as the general partner, does not generally participate in the operating cash flows from these entities other than to receive property management fees. The limited partners can remove the Company as the property manager and as the general partner. Due to the structures of the partnership agreements and tenant lease agreements, the Company reports the properties owned by these two joint ventures as fee managed properties owned by third parties.
Item 3.
Item 3. Legal Proceedings
The Company is, from time to time, involved in routine litigation arising out of the ordinary course of business or which is expected to be covered by insurance and which is not expected to harm the Company’s business, financial condition or results of operations. The Company is not, however, involved in any material litigation nor, to its knowledge, is any material litigation pending or threatened against the Company.
Item 4.
Item 4.
Removed and Reversed
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company’s common stock trades on the NYSE under the symbol “CSA.” The following table sets forth, for the period indicated, the high and low sales price for the Company’s common stock as reported by the NYSE and the per share dividends declared:
On March 8, 2010, the closing price of the Company’s common stock as reported by the NYSE was $6.93. At March 8, 2010, the Company had 130 holders of record of its common stock.
Holders of shares of common stock are entitled to receive distributions when and if declared by the Board of Directors out of any assets legally available for that purpose. As a REIT, the Company is required to distribute at least 90% of its “REIT taxable income” (computed without regard to the dividends paid deduction or net capital gains) to shareholders annually in order to maintain the Company’s REIT qualification for U.S. federal income tax purposes. The Company’s Credit Facility includes limitations on the Company’s ability to make distributions to its stockholders, subject to complying with the Company’s REIT requirements.
During 2009, the Company paid two quarterly dividends of $0.225 per share during the first and second quarters of 2009 and two quarterly dividends of $0.10 per share for the third and fourth quarters of 2009, totaling $0.65 per share for 2009. The Company funded the dividend payments for 2009 through a combination of funds from operations and borrowings under the Credit Facility. The Company uses borrowings available under the Credit Facility to fund dividend payments when the timing of the Company’s cash flows from operations is insufficient to meet the dividend payments. The dividend payments of $0.65 per share paid in 2009 are classified for income tax purposes as 61.5% taxable ordinary dividend and 38.5% return of capital.
The Company has reserved 1,000,000 shares of common stock for issuance under its 2005 long-term incentive plan of which 175,103 remained available for issuance as of December 31, 2009.
As of December 31, 2009, there were 50,508,798 OP units outstanding, of which 42,728,592, or 84.6%, were owned by the Company and 7,780,206, or 15.4%, were owned by other partners (including certain directors and senior management).
Stockholder Return Performance
Prior to October 27, 2005, the Company was not publicly traded and there was no public market for the Company’s securities. The following graph compares the cumulative total return on the Company’s common stock with that of the Standard and Poor’s 500 Stock Index (“S&P 500 Index”) and the National Association of Real Estate Investment Trusts Equity Index (“NAREIT Equity Index”) from October 27, 2005 (the date that the Company’s common stock began to trade publicly) through December 31, 2009. The stock price performance graph assumes that an investor invested $100 in each of the Company and the indices, and the reinvestment of any dividends. The comparisons in the graph are provided in accordance with the SEC disclosure requirements and are not intended to forecast or be indicative of the future performance of the Company’s shares of common stock.
Except to the extent that we specifically incorporate this information by reference, the foregoing Stockholder Return Performance information shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under (the Securities Act), or under the Securities Exchange Act of 1934, as amended. This information shall not otherwise be deemed filed under such acts.
Unregistered Sales of Equity Securities and Use of Proceeds
On October 20, 2009, the final escrow release related to the Company's aquisition of MEA in 2008 (the "MEA transaction") occurred and in connection therewith, the Operating Partnership issued an aggregate of 331,812 of OP units, having an aggregate value of $1.6 million based on the Company's closing stock price of $4.74 at the time of issuance, to the MEA sellers. These OP units were issued in exchange for ownership interests in MEA as part of a private placement transaction under Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. These OP units are redeemable for the cash equivalent thereof at a time one year after the date of issuance, or, at the option of the Company, exchangeable into shares of common stock in the Company on a one-for-one basis. No underwriters were used in connection with this issuance of these OP units.
Issuer Purchases of Equity Securities
The Company did not repurchase shares of common stock during the quarter ended December 31, 2009.
Equity Compensation Plan Information
Item 6.
Item 6.
Selected Financial Data
The following table sets forth selected consolidated financial and operating data on an historical basis for the Company. The following table should be read in conjunction with the Financial Statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.
FFO is a supplemental non-GAAP financial measure used by the real estate industry to measure the operating performance of real estate companies. FFOM adds back to traditionally defined FFO non-cash amortization of non-real estate related intangible assets associated with purchase accounting. The Company presents FFO and FFOM because it considers them important supplemental measures of operational performance. The Company believes FFO is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. The Company believes that FFOM allows securities analysts, investors and other interested parties to evaluate current period results to results prior to the MEA transaction. FFO and FFOM are intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO and FFOM excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, they provide performance measures that, when compared year over year, reflect the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing a perspective not immediately apparent from net income. The Company computes FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002), which may differ from the methodology for calculating FFO and FFOM utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. The Company adjusts the NAREIT definition to add back noncontrolling interests in consolidated real estate partnerships before real estate related depreciation and amortization. Further, FFO and FFOM do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO and FFOM should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of the Company’s performance, nor are they indicative of funds available to fund its cash needs, including its ability to pay dividends or make distributions.
The following table presents the reconciliation of FFO and FFOM to net income (loss), which is the most directly comparable GAAP measure to FFO and FFOM (in thousands):
(1)
Real estate depreciation and amortization consists of depreciation and amortization from wholly-owned real estate properties and the Company’s share of real estate depreciation and amortization from consolidated and unconsolidated real estate partnerships.
Item 7.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Cogdell Spencer Inc. Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report on Form 10-K. The Company makes statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Annual Report on Form 10-K entitled “Statements Regarding Forward-Looking Information.” Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this Annual Report on Form 10-K entitled “Risk Factors.”
Overview
The Company is a fully-integrated, self-administered, and self-managed REIT that invests in specialty office buildings for the medical profession, including medical offices and ambulatory surgery and diagnostic centers. The Company focuses on the ownership, strategic planning, delivery (design/build), acquisition and management of strategically located medical office buildings and other healthcare related facilities in the United States of America. The Company has been built around understanding and addressing the specialized real estate needs of the healthcare industry, provides services from strategic planning to long-term property ownership and management. Integrated delivery service offerings include strategic planning, design, construction, development and project management services for properties owned by the Company and for third parties.
The Company is building a national portfolio of healthcare properties primarily located on hospital campuses. Since the Company’s initial public offering in 2005, the Company has grown through acquisitions and facility development to encompass a national footprint, including seven regional offices located throughout the United States (Atlanta, Charlotte, Dallas, Denver, Madison, Seattle, and Washington, D.C.) and 28 property management offices. Client relationships and advance planning services give the Company the ability to be included in the initial project discussions that can lead to ownership and investment in healthcare properties.
The Company derives a majority of its revenues from two main sources: 1) from rents received from tenants under existing leases in medical office buildings and other healthcare related facilities, and 2) from revenue earned from design-build construction contracts and development contracts. To a lesser degree, the Company has revenues from consulting and property management agreements.
The Company expects that rental revenue will remain stable due to multi-year, non-cancellable leases with annual rental increases based on the Consumer Price Index (“CPI”). The Company has been able to maintain a high occupancy rate, 91.5% as of December 31, 2009, for its in-service, consolidated wholly-owned and joint venture properties, due to its focus on customer relationships. During 2009, the Company was able to renew 85% of lease expirations. Generally, the Company’s property operating revenues and expenses have remained consistent over time except for growth due to property developments and property and business acquisitions.
The demand for the Company’s design-build and development services has been, and will likely continue to be, cyclical in nature. Financial results can be affected by the amount and timing of capital spending by healthcare systems and providers, the demand for design-build and development’s services in the healthcare facilities market, the availability of construction level financing, and weather at the construction sites. In periods of adverse economic conditions, the Company’s design-build and development customers may be unwilling or unable to make capital expenditures and they may be unable to obtain debt or equity financings for projects. As a result, customers may defer projects to a later date, which could reduce the Company’s revenues. Due to the adverse economic environment and the volatility in the credit markets experienced in 2008 and 2009, the Company’s Design-Build and Development segment experienced delays in client project starts and cancellations.
During 2009, the Company signed two design-build contracts totaling $88.8 million related to a project in Janesville, Wisconsin. These contracts will generate design-build revenue from 2009 through 2011. The Company also signed several advance planning engagements, which may result in future design-build contracts. However, it can take two to 15 months from the time an advance planning project is completed to the time that revenue from a design-build contract begins. As of December 31, 2009, the Company expects 2010 revenues for the Design-Build and Development segment to be comparable to 2009 revenues before intersegment eliminations. However, the Company expects a higher percentage of Company owned projects to generate revenue compared to third party clients, thus the Company expects 2010 design-build and development revenue after inter-segment revenues to decrease compared to 2009.
The Company reviews the value of goodwill and intangible assets on an annual basis and when circumstances indicate a potential impairment may exist. An interim review of the Design-Build and Development segment’s intangible assets was performed on March 31, 2009, due to a decline in the Company’s stock price, a decline in the cash flow multiples for comparable public engineering and construction companies, and changes in the cash flow projections for the Design-Build and Development segment resulting from a decline in backlog and delays and cancellations of client building projects. The Company has determined an interim review has not been necessary since the previous impairment review performed at March 31, 2009.
As a result of the March 31, 2009 review, the Company recorded, during the three months ended March 31, 2009, a pre-tax, non-cash impairment charge of ($120.9 million) and the Company recognized a non-cash income tax benefit of $19.2 million, resulting in an after-tax impairment charge of ($101.7 million). The Company’s goodwill, amortizing and non-amortizing intangible assets, and deferred tax liabilities associated with the Design-Build and Development segment have been reduced from the December 31, 2008 carrying amounts as a result of the impairment charge. There were no subsequent interim reviews and there was no impairment charge recorded as part of the annual review as of December 31, 2009 (see Note 8 to the accompanying Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K). Deterioration of market or economic conditions and volatility in the financial market has and could continue to influence future revenues, interest, and other costs, and could result in future impairment of goodwill or other intangible assets.
In June 2009, the Company issued 23.0 million shares of common stock in a public offering, resulting in net proceeds to the Company of $76.5 million. The net proceeds were used to fund a $50.0 million repayment under the Term Loan, to reduce borrowings under the Credit Facility, and for working capital purposes.
As of December 31, 2009, the Company owned and/or managed 111 medical office buildings and healthcare related facilities, totaling 5.7 million net rentable square feet and serving 23 hospital systems in 12 states. The Company’s portfolio consists of:
·
properties, comprised of 3.4 million net rentable square feet, each of which the Company wholly-owns or is a consolidated real estate partnership;
·
Three properties, comprised of 0.2 million net rentable square feet, in which the Company owns a noncontrolling interest;
·
properties, comprised of 2.1 million net rentable square feet, that the Company manages for third parties; and
·
One property, comprised of 38,700 net rentable square feet, of which the Company wholly-owns, is actively being marketed for sale as of December 31, 2009, and is presented as discontinued operations in this Annual Report on Form 10-K.
As of December 31, 2009, of the Company’s wholly-owned properties, 78% were located on hospital campuses and an additional 11% were located off-campus, but were hospital anchored. The Company believes that its on-campus and hospital anchored assets occupy a premier franchise location in relation to local hospitals, providing the Company’s properties with a distinct competitive advantage over alternative medical office space in an area. As of December 31, 2009, the Company’s 62 in-service, consolidated wholly-owned and joint venture properties were approximately 91.5% occupied, with a weighted average remaining lease term of approximately 4.5 years. One wholly-owned property was classified as held for sale in December 2009 and presented as discontinued operations for the periods presented in the accompanying consolidated financial statements and notes included in this Annual Report on Form 10-K.
The Company completed the first fully integrated project with the completion of The Woodlands Center for Specialized Medicine during the fourth quarter of 2009. The Company provided development, design/build (architectural, engineering and construction), and property management services for the medical office building and outpatient treatment center. The Company owns 40% of the real estate partnership that owns the property and the real estate partnership is a consolidated partnership.
The Company’s capital projects team also completed Alamance Regional Mebane Outpatient Center in 2008 and completed itscancer center expansion in the third quarter of 2009. The Company has begun construction on four other on-balance sheet investment projects with a total estimated investment of approximately $55.4 million and holds a pipeline of planning and delivery projects throughout the country.
Critical Accounting Estimates
The Company’s discussion and analysis of financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared on the accrual basis of accounting in conformity with GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses in the reporting period. The Company’s actual results may differ from these estimates. Management has provided a summary of the Company’s significant accounting policies in Note 2 to the accompanying consolidated financial statements included in this Annual Report on Form 10-K. Critical accounting policies are those judged to involve accounting estimates or assumptions that may be material due to the levels of subjectivity and judgment necessary to account for uncertain matters or susceptibility of such matters to change. Other companies in similar businesses may utilize different estimation policies and methodologies, which may impact the comparability of the Company’s results of operations and financial condition to those companies.
Acquisition of Real Estate
The price that the Company pays to acquire a property is impacted by many factors, including the condition of the buildings and improvements, the occupancy of the building, the existence of above and below market tenant leases, the creditworthiness of the tenants, favorable or unfavorable financing, above or below market ground leases and numerous other factors. Accordingly, the Company is required to make subjective assessments to allocate the purchase price paid to acquire investments in real estate among the assets acquired and liabilities assumed based on the Company’s estimate of the fair values of such assets and liabilities. This includes determining the value of the buildings and improvements, land, any ground leases, tenant improvements, in-place tenant leases, tenant relationships, the value (or negative value) of above (or below) market leases and any debt assumed from the seller or loans made by the seller to the Company. Each of these estimates requires significant judgment and some of the estimates involve complex calculations. The Company’s calculation methodology is summarized in Note 2 to the accompanying consolidated financial statements included in this Annual Report on Form 10-K. These allocation assessments have a direct impact on the Company’s results of operations because if the Company were to allocate more value to land there would be no depreciation with respect to such amount or if the Company were to allocate more value to the buildings as opposed to allocating to the value of tenant leases, this amount would be recognized as an expense over a much longer period of time, since the amounts allocated to buildings are depreciated over the estimated lives of the buildings whereas amounts allocated to tenant leases are amortized over the terms of the leases. Additionally, the amortization of value (or negative value) assigned to above (or below) market rate leases is recorded as an adjustment to rental revenue as compared to amortization of the value of in-place leases and tenant relationships, which is included in depreciation and amortization in the Company’s consolidated and combined statements of operations.
There were no acquisitions of real estate in 2009.
Acquisition of Business
The price that the Company pays to acquire a business is impacted by many factors, including projected future cash flows, customer lists, contracts and proposals, trade names and trademarks, condition of property, plant, and equipment, and numerous other factors. Accordingly, the Company is required to make subjective assessments to allocate the purchase price paid to acquire investments in business among the assets acquired and liabilities assumed based on the Company’s estimate of the fair values of such assets and liabilities. This includes determining the value of contacts, proposals, customer lists, workforce, trade names and trademarks, receivables, accruals and reserves, and property, plant, and equipment. Each of these estimates requires significant judgment and some of the estimates involve complex calculations. The Company’s calculation methodology is summarized in Note 2 to the accompanying consolidated financial statements included in this Annual Report on Form 10-K. These allocation assessments have a direct impact on the Company’s results of operations because if the Company were to allocate more value to goodwill or a non-amortizing intangible asset there would be no amortization with respect to such amount or if the Company were to allocate more value to a longer-lived asset as opposed to allocating to shorter-lived asset, this amount would be recognized as an expense over a longer period of time.
There were no acquisitions of businesses in 2009.
Useful Lives of Assets
The Company is required to make subjective assessments as to the useful lives of the Company’s properties and intangible assets for purposes of determining the amount of depreciation and amortization to record on an annual basis with respect to the Company’s assets. These assessments have a direct impact on the Company’s net income (loss) because if the Company were to shorten the expected useful lives, then the Company would depreciate or amortize such assets over fewer years, resulting in more depreciation or amortization expense on an annual basis.
Asset Impairment Valuation
The Company reviews the carrying value of its properties, investments in real estate partnerships, and amortizing intangible assets annually and when circumstances, such as adverse market conditions, indicate that a potential impairment may exist. The Company bases its review on an estimate of the future cash flows (excluding interest charges) expected to result from the real estate or business investment’s use and eventual disposition. The Company considers factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If the Company’s evaluation indicates that it may be unable to recover the carrying value of an investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the asset. These losses have a direct impact on the Company’s net income (loss) because recording an impairment loss results in an immediate negative adjustment to operating results. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future sales, backlog, occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Because cash flows on properties considered to be long-lived assets to be held and used are considered on an undiscounted basis to determine whether an asset has been impaired, the Company’s strategy of holding properties over the long-term directly decreases the likelihood of recording an impairment loss for properties. If the Company’s strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If the Company determines that impairment has occurred, the affected assets must be reduced to their fair value. The Company estimates the fair value of rental properties utilizing a discounted cash flow analysis that includes projections of future revenues, expenses and capital improvement costs, similar to the income approach that is commonly utilized by appraisers.
The Company reviews the value of goodwill using an income approach and market approach on an annual basis and when circumstances indicate a potential impairment may exist. The Company’s methodology to review goodwill impairment, which includes a significant amount of judgment and estimates, provides a reasonable basis to determine whether impairment has occurred. However, many of the factors employed in determining whether or not goodwill is impaired are outside of the Company’s control and it is likely that assumptions and estimates will change in future periods. These changes can result in future impairments which could be material.
The goodwill impairment review involves a two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value. Fair value is estimated by utilizing two approaches, an income approach and a market approach. The income approach uses the reporting unit’s projected operating results and discounted cash flows using a weighted-average cost of capital that reflects current market conditions. The cash flow projections use estimates of economic and market information over the projection period, including growth rates in revenues and costs and estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures, and changes in future working capital requirements. The market approach estimates fair value by applying cash flow multiples to the reporting unit's operating performance. The multiples are derived from comparable publicly traded companies with similar operating and profitability characteristics. Additionally, the Company reconciles the total of the estimated fair values of all its reporting units to its market capitalization to determine if the sum of the individual fair values is reasonable compared to the external market indicators.
If the carrying value of the reporting unit is higher than its fair value, then an indication of impairment may exist and a second step must be performed to measure the amount of impairment. The amount of impairment is determined by comparing the implied fair value of the reporting unit’s goodwill to the carrying value of the goodwill calculated in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill, then an impairment charge for the difference would be recorded. For non-amortizing intangible assets, the Company estimates fair value by applying an estimated market royalty rate to projected revenues and discounted using a weighted-average cost of capital that reflects current market conditions.
If market and economic conditions deteriorate and cause (1) declines in the Company’s stock price, (2) increases the estimated weighted-average cost of capital, (3) changes in cash flow multiples or projections, or (4) changes in other inputs to goodwill assessment estimates, then a goodwill impairment review may be required prior to the Company’s next annual test. It is reasonably possible that changes in the numerous variables associated with the judgments, assumptions, and estimates could cause the goodwill or non-amortizing intangible assets to become impaired. If goodwill or non-amortizing intangible assets are impaired, the Company would be required to record a non-cash charge that could have a material adverse affect on its consolidated financial statements.
Revenue Recognition
Rental income related to non-cancelable operating leases is recognized using the straight line method over the terms of the tenant leases. Deferred rents included in the Company’s consolidated balance sheets represent the aggregate excess of rental revenue recognized on a straight line basis over the rental revenue that would be recognized under the cash flow received, based on the terms of the leases. The Company’s leases generally contain provisions under which the tenants reimburse the Company for all property operating expenses and real estate taxes incurred by the Company. Such reimbursements are recognized in the period that the expenses are incurred. Lease termination fees are recognized when the related leases are canceled and the Company has no continuing obligation to provide services to such former tenants. The Company recognizes amortization of the value of acquired above or below market tenant leases as a reduction of rental income in the case of above market leases or an increase to rental revenue in the case of below market leases.
For design-build contracts, the Company recognizes revenue under the percentage of completion method. Due to the volume, varying complexity, and other factors related to the Company’s design-build contracts, the estimates required to determine percentage of completion are complex and use subjective judgments. Changes in labor costs and material inputs can have a significant impact on the percentage of completion calculations. The Company has a long history of developing reasonable and dependable estimates related to design-build contracts with clear requirements and rights of the parties to the contracts. As long-term design-build projects extend over one or more years, revisions in cost and estimate earnings during the course of the work are reflected in the accounting period in which the facts which require the revision become known. At the time a loss on a design-build project becomes known, the entire amount of the estimated ultimate loss is recognized in the consolidated financial statements.
The Company receives fees for property management and development and consulting services from time to time from third parties which are reflected as fee revenue. Management fees are generally based on a percentage of revenues for the month as defined in the related property management agreements. Revenue from development and consulting agreements is recognized as earned per the agreements. Due to the amount of control retained by the Company, most joint venture developments will be consolidated; therefore, those development fees will be eliminated in consolidation.
Other income shown in the statement of operations generally includes interest income, primarily from the amortization of unearned income on a sales-type capital lease recognized in accordance with GAAP, and other income incidental to the Company’s operations and is recognized when earned.
The Company must make subjective estimates as to when the Company’s revenue is earned and the collectibility of the Company’s accounts receivable related to design-build contracts and other sales, deferred rent, expense reimbursements, lease termination fees and other income. The Company specifically analyzes accounts receivable and historical bad debts, tenant and customer concentrations, tenant and customer creditworthiness, and current economic trends when evaluating the adequacy of the allowance for bad debts. These estimates have a direct impact on the Company’s net income because a higher bad debt allowance would result in lower net income, and recognizing rental revenue as earned in one period versus another would result in higher or lower net income for a particular period.
REIT Qualification Requirements
The Company is subject to a number of operational and organizational requirements to qualify and then maintain qualification as a REIT. If the Company does not qualify as a REIT, its income would become subject to U.S. federal, state and local income taxes at regular corporate rates that would be substantial and the Company cannot re-elect to qualify as a REIT for four taxable years following the year it failed to quality as a REIT. The resulting adverse effects on the Company’s results of operations, liquidity and amounts distributable to stockholders would be material.
Changes in Financial Condition
In June 2009, the Company issued 23.0 million shares of common stock in a public offering at a price of $3.50 per share resulting in net proceeds to the Company of approximately $76.5 million. The net proceeds were used to fund a $50.0 million repayment under the Term Loan, to reduce borrowings under the Company’s Credit Facility, and for working capital purposes. For more information on the Credit Facility and the Term Loan, see Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Liquidity and Capital Resources.”
Assets decreased to $752.7 million from $900.1 million for the years ended December 31, 2009 and 2008, respectively, due to an after-tax, goodwill and intangible assets impairment charge of ($101.7 million). See Note 8 within these consolidated financial statements.
Results of Operations
The Company’s income (loss) from operations is generated primarily from operations of its properties and design-build services and to a lesser degree from consulting and property management agreements. The changes in operating results from period to period reflect changes in existing property performance, changes in the number of properties due to development, acquisition, or disposition of properties, and the operating results of the Design-Build and Development segment. For the year ended December 31, 2009, a significant proportion of the Company’s loss from operations is due to the ($101.7 million), net of tax, non-cash impairment charge discussed previously in the “Overview” section.
The Company acquired MEA, known then as Marshall Erdman & Associates, in March 2008 and results for the year ended December 31, 2008, reflect ten months of operating activity related to the subsidiary, reflecting operations from the acquisition date to December 31, 2008. For the year ended December 31, 2009, there are twelve months of operating activity related to the subsidiary.
Business Segments
The Company has two identified reportable segments: (1) Property Operations and (2) Design-Build and Development. The Company defines business segments by their distinct customer base and service provided. While the Company operates as a single entity, it produces discrete financial information for each segment, which is reviewed by the chief operating decision maker to make resource allocation decisions and assess performance. Property Operations includes real estate investment and rental activities as well as properly management for third parties. Design-Build and Development includes design-build construction activities as well as development and consulting activities. For additional information, see Note 6 to the accompanying Notes to Consolidated Financial Statements.
Property Summary
The following is an activity summary of the Company’s property portfolio (excluding unconsolidated real estate partnerships) for the years ended December 31, 2009 and 2008:
The above table includes East Jefferson MRI, which is accounted for as a sales-type capital lease.
A property is considered “in-service” upon the earlier of (1) lease-up and substantial completion of tenant improvements, or (2) one year after cessation of major construction. For portfolio and operational data, a single in-service date is used. For GAAP reporting, a property is placed into service in stages as construction is completed and the property and tenant space is available for its intended use. The Company had zero properties in lease-up at December 31, 2009.
Year ended December 31, 2009 compared to year ended December 31,
Funds from Operations Modified (“FFOM”)
For the year ended December 31, 2009, FFOM, excluding non-recurring events, increased $0.5 million, or 1.8%, compared to the same period in the prior year. Property Operations’ FFOM, excluding non-recurring events and intersegment eliminations, increased slightly from 2008 to 2009. However, Design-Build and Development FFOM, excluding non-recurring events and intersegment eliminations and net of taxes, decreased significantly from 2008 to 2009. The decrease in Design-Build and Development FFOM was offset by a decrease in interest expense. The following is a summary of FFOM for the years ended December 31, 2009 and 2008 (in thousands):
See Note 6 to the accompanying Notes to Consolidated Financial Statements for business segment information and management’s use of FFO and FFOM to evaluate operating performance. The following table presents the reconciliation of FFO and FFOM to net income (loss), which is the most directly comparable GAAP measure to FFO and FFOM, for the years ended December 31, 2009 and 2008 (in thousands):
FFOM attributable to Property Operations, net of intersegment eliminations
The following is a summary of FFOM attributable to property operations, net of intersegment eliminations, for the year ended December 31, 2009 and 2008 (in thousands):
See Note 6 to the accompanying Notes to Consolidated Financial Statements for a reconciliation of above segment FFOM to net income (loss).
For the year ended December 31, 2009, FFOM, net of intersegment eliminations, attributable to property operations increased $0.1 million, or 0.2%, compared to the same period in the prior year. The increase in rental revenue and property operating and management expenses is primarily due to the addition of the Alamance Regional Mebane Outpatient Center property, which began operations in June 2008. Rental revenue also increased due to rental rates associated with CPI increases and reimbursable expenses. These increases were offset by a decrease in occupancy from 2008 to 2009. The decrease in discontinued operations and impairment of real estate property, before real estate related depreciation and amortization, is due to the Company recording a non-cash impairment charge of $1.4 million in order to reduce the carrying value of the Harbison Medical Officer Building (formerly known as Baptist Northwest) real estate property to its estimated net sale proceeds.
FFOM attributable to Design-Build and Development, net of intersegment eliminations
The Design-Build and Development segment includes MEA, which the Company acquired in March 2008, and results for the years ended December 31, 2009 and 2008, reflect twelve and ten months, respectively, of operating activity related to the subsidiary, reflecting operations from the acquisition date to December 31, 2008. The following is a summary of FFOM attributable to Design-Build and Development, net of intersegment eliminations, for the years ended December 31, 2009 and 2008 (in thousands):
See Note 6 to the accompanying Notes to Consolidated Financial Statements for a reconciliation of above segment FFOM to net income (loss).
For the year ended December 31, 2009, FFOM, excluding impairment charge, attributable to Design-Build and Development, net of intersegment eliminations, decreased $7.8 million, or 40.2%, compared to the same period in the prior year. Further, there were twelve months of activity in 2009 compared to ten months of activity in 2008 due to the acquisition of MEA in March 2008. Comparing full year 2009 FFOM to full year 2008 FFOM, there was a larger decrease in FFOM due to a decrease in the volume of project activity.
Revenues (design-build contract revenue and other sales plus development management and other income) decreased $107.7 million, or 42.3%, from 2008 to 2009. This decrease is due to a lower volume of activity as the number of active revenue generating design-build construction projects has decreased from 23 at December 31, 2008 to 18 at December 31, 2009. The decreased activity is due to the current economic environment, the volatility in the credit markets, and general uncertainty regarding government health care reform bills, which have resulted in clients delaying project starts and client project cancellations.
However, gross margin percentage (revenues, as defined above, less design-build contract and development management expenses and as a percent of revenues) increased from 15.9% in 2008 to 22.4% in 2009, or an increase of 40.9%. This increase is primarily due to cost controls implemented by the Company and favorable pricing in the sub-contracting market leading to lower overall costs.
Development management and other income increased $2.5 million, or 280.0%, from 2008 to 2009. The increase is due to three active third party development engagements during 2009 compared to two engagements in 2008. One of the development engagements, which accounted for $2.0 million of the increase, relates to the St. Luke’s Riverside engagement in Bethlehem, Pennsylvania. This was a three building engagement project, of which the Company was to wholly-own or partially-own one of the three buildings. Due to changes in the scope, size, and timing of the project, the Company no longer intends to invest in the building under the original terms. In accordance with the development agreement, the hospital system client paid for all reimbursable projects costs and for development services performed by the Company.
Selling, general, and administrative expenses attributable to the Design-Build and Development segment increased $0.4 million, or 1.8%, from 2008 to 2009. The increase is primarily due to a $2.6 million increase in the allowance for doubtful accounts, of which $2.2 million related to one customer. The increase is also due to two additional months of costs in 2009 as compared to 2008 because the MEA acquisition occurred in March 2008. These increases were offset by fewer employees in 2009 as compared to 2008 due to reductions in force that occurred in December 2008 and May 2009, a $1.5 million expense in 2008 resulting from restructuring and severance charges, and a reduction of incentive compensation in 2009 due to the decreased profitability related to the business segment.
Selling, general, and administrative
For the year ended December 31, 2009, selling, general, and administrative expenses increased $2.1 million, or 6.9%, as compared to the same period in the prior year. Excluding the increase attributable to the Design-Build and Development segment, which is discussed above, selling, general and administrative increased $1.7 million due to several factors including non-recurring costs for consultants, accountants, attorneys, and other service providers associated with the Company’s exploration of a range of strategic alternatives as well as increased costs associated with a branding marketing campaign. These costs were offset by a reduction of incentive compensation due to decreased profitability.
Depreciation and amortization
For the year ended December 31, 2009, depreciation and amortization expenses decreased $10.4 million, or 23.1%, as compared to the same period in the prior year. The decrease is primarily due to a decrease in intangible amortization due to lower carrying values due to the impairment recorded in the first quarter of 2009, as discussed below. The decrease was also due to a decrease in the amortization of acquired in place lease intangible assets associated with properties acquired in 2005 as they have become fully amortized, offset by two additional months of expense in 2009 as compared to 2008 because the MEA acquisition occurred in March 2008.
Impairment charge
The Company reviews the value of goodwill and intangible assets on an annual basis and when circumstances indicate a potential impairment may exist. An interim review of the Design-Build and Development’s intangible assets was performed as of March 31, 2009, due to a decline in the Company’s stock price, a decline in the cash flow multiples for comparable public engineering and construction companies, and changes in the cash flow projections for the Design-Build and Development business segment resulting from a decline in backlog and delays and cancellations of client building projects.
As a result of the March 31, 2009 review, the Company recorded a pre-tax, non-cash impairment charge of ($120.9 million) and the Company recognized a non-cash income tax benefit of $19.2 million, resulting in an after-tax impairment charge of ($101.7 million). The Company’s goodwill, amortizing and non-amortizing intangible assets, and deferred tax liabilities associated with the Design-Build and Development segment have been reduced from the December 31, 2008 carrying amounts as a result of the impairment charge. There were no subsequent interim reviews and there was no impairment charge recorded as part of the annual review as of December 31, 2009.
There was no such charge in the same period in the prior year.
Gain on settlement from MEA transaction
During the year ended December 31, 2009, the final escrow release related to the MEA transaction occurred. Pursuant to an agreement between the Company and the MEA Seller Representatives, $5.0 million of the escrow was paid to the Company in consideration of full and final settlement of certain claims made by the Company in connection with the MEA transaction. The Company recorded other income of $4.9 million related to this settlement. The Company also received cash of $2.9 million and OP units valued at $2.0 million were not issued.
There was no such income in the same period in the prior year.
Interest expense
For the year ended December 31, 2009, interest expense decreased $3.3 million, or 13.2%, as compared to the same period in the prior year. The decrease was due to a decrease in variable interest rates and lower debt balances as the Company used a majority of the proceeds from its June 2009 and September 2008 equity offerings to repay debt offset by two additional months of interest expense in 2009 compared to 2008 relating to the Term Debt.
Income tax benefit
For the year ended December 31, 2009, income tax benefit increased $20.9 million as compared to the same period in the prior year. The increase was primarily due to the non-cash income tax benefit associated with the intangible asset impairment charge recorded during the first quarter of 2009. The increase is also due to lower income for the Design-Build and Development segment, which resulted in a greater income tax benefit in 2009 compared to 2008.
Impairment of real estate property
For the year ended December 31, 2009, the Company reclassified the wholly-owned property Harbison Medical Office Building (formerly known as Baptist Northwest) as held for sale discontinued operations. Related to this property, the Company recorded a non-cash impairment charge of ($1.4 million) in order to reduce the carrying value of the real estate property to its estimated net sale proceeds.
There was no such impairment charge in the same period in the prior year.
Net loss attributable to the noncontrolling interest in Operating Partnership
For the year ended December 31, 2009, net loss attributable to the noncontrolling interest in Operating Partnership increased $29.5 million, or 967.0%, as compared to the same period in the prior year. The increase was primarily due to the increase in net loss, which primarily increased due to the impairment charge offset by a smaller noncontrolling ownership percentage due to the common stock equity raise in June 2009.
Cash Flows
Cash provided by operating activities increased $20.7 million for the year ended December 31, 2009, as compared to the same period in the prior year, and is summarized below for the years ended December 31, 2009 and 2008 (in thousands):
The net loss plus non-cash adjustments increased $4.6 million, or 14.0%, for the year ended December 31, 2009, as compared to the same period in the prior year. The increase is primarily due to the $2.9 million of cash received due to the gain on settlement from the MEA transaction and a $2.6 million increase in the Company’s provision for bad debts. The changes in operating assets and liabilities increased $16.1 million for the year ended December 31, 2009, as compared to the same period in the prior year. The increase is primarily due to 1) a decrease in Design-Build and Development accounts receivable, which increases cash provided by operations and 2) decreased incentive compensation accrued liabilities, which increases cash provided by operations, offset by 1) a decrease in Design-Build and Development billings in excess of costs and estimated earnings on uncompleted contracts, which decreases cash provided by operations and 2) severance costs paid in the first quarter of 2009 compared to no such payments in 2008, which decreases cash provided by operations.
Cash used in investing activities decreased $140.1 million, or 72.1%, for the year ended December 31, 2009, as compared to the same period in the prior year. The decrease is primarily due to the cash paid for the MEA transaction in 2008. The increase in purchases of corporate property, plant, and equipment is primarily due the construction of a steel fabrication facility for the Design-Build and Development segment. The Company is currently leasing a facility on a month-to-month basis. Investment in real estate properties consisted of the following for the year ended December 31, 2009 and 2008 (in thousands):
Cash provided by financing activities decreased $200.6 million, or 100.0%, for the year ended December 31, 2009, as compared to same period in the prior year. The decrease is primarily due to fewer debt and equity proceeds received in 2009 compared to 2008.
Year ended December 31, 2008 compared to year ended December 31,
FFOM
For the year ended December 31, 2008, FFOM, excluding the non-recurring event, increased $12.3 million, or 67.1%, compared to the same period in the prior year. The increase in FFOM was due to: (1) an increase in FFOM for the Design-Build and Development segment, of which the majority of the segment’s increase was due to the inclusion of ten months of design-build operating activity for the year ended December 31, 2008, due to the acquisition of MEA; and (2) an increase in FFOM from property acquisitions and completed developments. These increases in FFOM were offset by an increase in interest expense due to increased outstanding debt balances, an increase in income tax expense primarily related to Design-Build and Development FFOM, a $0.9 million noncontrolling interest charge, an increase in corporate general and administrative expenses primarily due to increased incentive compensation expense, severance expense, and professional fees, and an increase in non-real estate related depreciation related to corporate property, plant, and equipment. The $0.9 million noncontrolling interest charge is due to a consolidated real estate partnership’s negative partner’s equity that resulted primarily from a debt refinance proceeds cash distribution to the 65.5% owner, and subsequent cash distributions to the 65.5% owner. In accordance with GAAP effective in 2008, the consolidating partner is required to record a charge to noncontrolling interest for distributions and GAAP net losses when the partnership’s partners’ equity is negative.
The following is a summary of FFOM for the years ended December 31, 2008 and 2007 (in thousands):
See Note 6 to the accompanying Notes to Consolidated Financial Statements for business segment information and management’s use of FFO and FFOM to evaluate operating performance. The following table presents the reconciliation of FFO and FFOM to net income (loss), which is the most directly comparable GAAP measure to FFO and FFOM, for the years ended December 31, 2008 and 2007 (in thousands):
FFOM attributable to Property Operations
The following is a summary of FFOM attributable to property operations, net of intersegment eliminations, for the year ended December 31, 2008 and 2007 (in thousands):
See Note 6 to the accompanying Notes to Consolidated Financial Statements for a reconciliation of above segment FFOM to net income (loss).
For the year ended December 31, 2008, FFOM attributable to property operations increased $7.9 million, or 19.3%, compared to the same period in the prior year. The increase in rental revenue and property operating and management expenses is primarily due to real estate property acquisitions and completed developments as well as increased rental revenue due to rental rates associated with CPI increases and reimbursable expenses; these amounts are offset by a small reduction in occupancy. The small reduction in occupancy caused same-property revenue to increase at a smaller percentage rate than same-property operating and management expense due to increases in reimbursable expenses such as property taxes, insurance, and utilities.
FFOM attributable to Design-Build and Development, net of intersegment eliminations
The Design-Build and Development segment includes MEA, which the Company acquired in March 2008, and results for the years ended December 31, 2008 and 2007, reflect ten and zero months, respectively, of operating activity related to the subsidiary, reflecting operations from the acquisition date to December 31, 2008. The 2007 activity relates to the development activities performed by the Company prior to the merger with MEA. The following is a summary of FFOM attributable to Design-Build and Development, net of intersegment eliminations, for the years ended December 31, 2008 and 2007 (in thousands):
Selling, general, and administrative
For the year ended December 31, 2008, selling, general, and administrative expenses increased $22.9 million, or 310.3%, as compared to the same period in the prior year. Excluding the increase attributable to the Design-Build and Development segment, which is discussed above, selling, general and administrative increased $3.5 million due to increased accrued incentive compensation, severance compensation, and legal and consulting professional fees.
Depreciation and amortization
For the year ended December 31, 2008, depreciation and amortization expenses increased $17.3 million, or 62.5%, as compared to the same period in the prior year. The increase is primarily due to assets related to the acquisition of MEA and real estate property acquisitions and completed developments.
Interest expense
For the year ended December 31, 2008, interest expense increased $9.2 million, or 58.2%, as compared to the same period in the prior year. The increase was due to an increase in outstanding debt balances, primarily the addition of the Term Debt.
Income tax benefit (expense)
For the year ended December 31, 2008, income tax benefit increased $1.4 million as compared to the same period in the prior year. The benefit is primarily a result of the deferred tax benefit exceeding current income tax expense. The deferred tax benefit is primarily related to the amortization of intangible assets. The income tax expense in 2007 was due to taxable net income computed in accordance with GAAP for Cogdell Spencer Advisors, LLC, a TRS, which was a result of development fees, a non-recurring brokerage commission, and property management activities.
Cash Flows
Cash provided by operating activities increased $1.0 million for the year ended December 31, 2008, as compared to the same period in the prior year, and is summarized below for the years ended December 31, 2008 and 2007 (in thousands):
The net loss plus non-cash adjustments increased $15.0 million, or 83.0%, for the year ended December 31, 2008, as compared to the same period in the prior year. The increase is primarily due the inclusion of operations relating to the acquisition of MEA. The changes in operating assets and liabilities decreased $14.0 million for the year ended December 31, 2008, as compared to the same period in the prior year. The decrease is primarily due to changes in operating assets and liabilities was a result of: 1) $9.6 million paid to Erdman personnel in March 2008 for fiscal year 2007 annual bonuses, profit sharing, and 401(k) employer matching, 2) $20.1 million decrease in billings in excess of costs and estimated earnings on uncompleted contracts; offset by a $6.4 million decrease in retainage receivables and $9.3 million in cash provided due to various changes in operating assets, accrued expenses, accrued incentive compensation, and prepaid rent accounts. The Company accrued the $9.6 million for the Erdman fiscal year 2007 performance bonus payments as part of the Erdman purchase price allocation and the amount was included in the Erdman merger working capital calculation.
Cash used in investing activities increased $77.0 million, or 65.6%, for the year ended December 31, 2008, as compared to the same period in the prior year. The increase is primarily due to the acquisition of MEA. Investment in real estate properties consisted of the following for the year ended December 31, 2008 and 2008 (in thousands):
Cash provided by financing activities increased $104.6 million, or 108.9%, for the year ended December 31, 2008, as compared to same period in the prior year. The increase is primarily due to the issuance of common stock, proceeds from the Term Loan, and borrowing under the Credit Facility to fund the MEA transaction and property acquisitions.
Construction in Progress
Construction in progress at December 31, 2009, consisted of the following (dollars in thousands):
As of December 31, 2008, the Company had construction in progress related to the St. Luke’s Riverside engagement in Bethlehem, Pennsylvania. This was a three building engagement project, of which the Company was to wholly-own or partially-own one of the three buildings. During 2009, due to changes in the scope, size, and timing of the project, the Company no longer intends to invest in the building under the original terms. In accordance with the development agreement, the hospital system client paid for all reimbursable projects costs and for development services performed by the Company.
Liquidity and Capital Resources
At December 31, 2009, the Company had approximately $25.9 million available in cash and cash equivalents. The Company is required to distribute at least 90% of the Company’s net taxable income, excluding net capital gains, to the Company’s stockholders on an annual basis due to qualification requirements as a REIT. Therefore, as a general matter, it is unlikely that the Company will have any substantial cash balances that could be used to meet the Company’s liquidity needs. Instead, these needs must be met from cash generated from operations and external sources of capital.
The Company has a $150.0 million secured revolving credit facility with a syndicate of financial institutions (including Bank of America, N.A., KeyBank National Association, Branch Banking and Trust Company, Wachovia Bank, National Association, M&I Marshall and Ilsley Bank, and Citicorp North America, Inc.) (collectively, the “Lenders”). The Credit Facility is available to fund working capital and for other general corporate purposes; to finance acquisition and development activity; and to refinance existing and future indebtedness. The Credit Facility permits the Company to borrow up to $150.0 million of revolving loans, with sub-limits of $25.0 million for swingline loans and $25.0 million for letters of credit. For additional information, see Note 9 tothe accompanying Notes to Consolidated Financial Statements.
The Credit Facility also allows for up to $100.0 million of increased availability (to a total aggregate available amount of $250.0 million), at the Company’s option but, subject to each Lender’s option to increase its commitment. The interest rate on loans under the Credit Facility equals, at the Company’s election, either (1) LIBOR (0.23% as of December 31, 2009) plus a margin of between 95 to 140 basis points based on the Company’s total leverage ratio (1.15% as of December 31, 2009) or (2) the higher of the federal funds rate plus 50 basis points or Bank of America, N.A.’s prime rate (3.25% as of December 31, 2009).
The Credit Facility contains customary terms and conditions for credit facilities of this type, including, but not limited to: (1) affirmative covenants relating to the Company’s corporate structure and ownership, maintenance of insurance, compliance with environmental laws and preparation of environmental reports, maintenance of the Company’s REIT qualification and listing on the NYSE, (2) negative covenants relating to restrictions on liens, indebtedness, certain investments (including loans and certain advances), mergers and other fundamental changes, sales and other dispositions of property or assets and transactions with affiliates, and (3) financial covenants to be met by the Company at all times, including a maximum total leverage ratio (70%), maximum real estate leverage ratio (70%), minimum fixed charge coverage ratio (1.50 to 1.00), maximum total debt to real estate value ratio (90%) and minimum consolidated tangible net worth ($45 million plus 85% of the net proceeds of equity issuances issued after the closing date).
As of December 31, 2009, there was $61.7 million available under the Credit Facility. There was $80.0 million outstanding at December 31, 2009 and $8.3 million of availability was restricted related to outstanding letters of credit.
The Credit Facility has the following financial covenants as of December 31, 2009 (dollars in thousands):
The Company has $50.0 million outstanding under a $50.0 million Term Loan. The Term Loan was initially $100.0 million and the Company repaid $50.0 million in June 2009. The Term Loan is secured by the stock and certain accounts receivable at the Design-Build and Development segment and is guaranteed by the Company.
The current economic environment and the volatility in the credit markets have affected and, most likely, will continue to affect the Company’s results of operations and financial position and in particular, the results of operations and financial position of the Design-Build and Development segment. During the year ended 2009, the Company experienced delays in client project starts and some contract cancellations. Due to the uncertainty of Design-Build and Development segment’s future operating results, the Company and the Term Loan lenders amended the Term Loan in June 2009. The amendment, among other things, amended certain financial covenants relating to the Design-Build and Development segment, as well as certain other provisions of the Term Loan, including (1) the elimination of the minimum adjusted consolidated EBITDA covenant (previously $22.5 million), (2) a modification of the maximum adjusted consolidated senior indebtedness to adjusted consolidated EBITDA covenant to 3.50 to 1.00 through March 2011, with a one-time ability to exceed 3.50 to 1.00 but not greater than 3.75 to 1.00, and 3.00 to 1.00 from April 2011 to final maturity (previously 4.25 to 1.00 as of March 31, 2009, decreasing to 3.75 to 1.00 as of July 1, 2009), (3) an increase in the interest rate from LIBOR plus 3.50% to LIBOR plus 4.50%, and (4) payment of a market based modification fee. The amendment was subject to the repayment of $50.0 million of the outstanding balance under the Term Loan by the Borrower (which amount was repaid on June 3, 2009) and certain other customary terms and conditions.
The Term Loan, as amended, also has the following financial covenants relating only to the Design-Build and Development business segment as of December 31, 2009:
The Term Loan also contains customary covenants similar to the Credit Facility and financial covenants to be met by the Company at all times under the guaranty, including a maximum total leverage ratio (70%), maximum real estate leverage ratio (70%), minimum fixed charge coverage ratio (1.50 to 1.00), maximum total debt to real estate value ratio (90%) and minimum consolidated tangible net worth ($45 million plus 85% of the net proceeds of equity issuances), as well as being cross defaulted to the Company’s Credit Facility.
If the Company were in default under the Credit Facility or the Term Loan, then the Lenders can declare the Company in default under the other agreement as well. As of December 31, 2009, the Company believes that it is in compliance with all of its debt covenants under the Credit Facility and the Term Loan.
The Credit Facility and Term Loan mature in March 2011. Both have one-time, one year conditional extension options at the Company’s election. As of December 31, 2009, the Company expects to exercise the extension option for both the Credit Facility and the Term Loan.
During 2008, the Company formed a joint venture with Northwestern Mutual. The joint venture, Cogdell Spencer Medical Partners LLC, may acquire up to approximately $350.0 million of medical office buildings and other healthcare facilities nationwide, predominantly associated with not-for-profit healthcare systems and large physician-owned clinics. Through December 31, 2010, the joint venture will be the Company’s exclusive vehicle for cash acquisitions. When the joint venture closes on a specific acquisition, the Company will contribute 20% of the equity capital to fund the acquisition. The Company expects the joint venture will obtain mortgage financing on market terms for its acquisitions, which mortgage financing may come from the joint venture partner. As of December 31, 2009, the joint venture did not have any acquisitions under contract.
Short-Term Liquidity Needs
The Company believes that it will have sufficient capital resources as a result of operations and the borrowings in place to fund ongoing operations and distributions required to maintain REIT compliance. The Company currently anticipates 2010 cash flow from operations, before changes in operating assets and liabilities, to approximate the sum of 2010 cash outflows for dividends to shareholders and distributions to OP Unitholders and capital expenditures and tenant improvement expenditures for properties owned as of December 31, 2009. Subject to IRS guidelines, the Company is permitted to pay a portion of its dividends in the form of common stock in lieu of cash. The Company anticipates using its cash and cash equivalents and Credit Facility availability for changes in operating assets and liabilities, principal maturities, and the Company’s equity funding portion for new developments and acquisitions. For 2010, the Company has one redevelopment project planned with an expected investment of approximately $4.0 million.
As of December 31, 2009, the Company had approximately $25.3 million of principal and maturity payments due in 2010 related to mortgage note payables. The $25.3 million is comprised of $4.4 million for principal amortization and $20.9 million for maturities. Of the $20.9 million in maturing mortgage notes payable, $7.7 million relates to wholly-owned properties and $13.7 million relates to Alamance Regional Medical Outpatient Center, which is a consolidated real partnership in which the Company owns 35.5%.
The Company believes it will be able to refinance the $7.7 million 2010 balloon maturities related to the wholly-owned properties as a result of the current loan to value ratios at the individual properties and preliminary discussions with lenders. The Company believes that it will be able to refinance some, but not all, of the $13.7 million 2010 balloon maturity related to Alamance Regional Medical Outpatient Center. The partners in this real estate partnership, in which the Company owns 35%, may need to contribute equity to the partnership in order to reduce the debt balance.
Should the Company be unable to refinance the 2010 balloon maturities, the Company has $87.6 million combined cash and cash equivalents and Credit Facility availability as of December 31, 2009, which exceeds the 2010 principal and maturity payments due in 2010.
As of December 31, 2009, the Company has no outstanding equity commitments to joint ventures formed prior to December 31, 2009. The Cogdell Spencer Medical Partners LLC acquisition joint venture with Northwestern Mutual has no properties under contract to acquire as of December 31, 2009, thus the Company has no equity commitment to the joint venture as of December 31, 2009.
On December 17, 2009, the Company declared a dividend to common stockholders of record and the Operating Partnership declared a distribution to holders of OP units of record, in each case as of December 31, 2009, totaling $5.1 million, or $0.10 per share or OP unit, covering the period from October 1, 2009 through December 31, 2009. The dividend and distribution were paid on January 21, 2010. The dividend and distribution were equivalent to an annual rate of $0.40 per share and OP unit.
Long-Term Liquidity Needs
The Company’s principal long-term liquidity needs consist primarily of new property development, property acquisitions, and principal payments under various mortgages and other credit facilities and non-recurring capital expenditures. The Company does not expect that its net cash provided by operations will be sufficient to meet all of these long-term liquidity needs. Instead, the Company expects to finance new property developments through modest cash equity capital contributed by the Company together with construction loan proceeds, as well as through cash equity investments by its tenants or third parties. The Company intends to have construction financing agreements in place before construction begins on development projects. The Company expects to fund property acquisitions through a combination of borrowings under its Credit Facility and traditional secured mortgage financing. In addition, the Company may use OP units issued by the Operating Partnership to acquire properties from existing owners seeking a tax deferred transaction.
Although capital markets continued to remain restricted during 2009 and will likely remain restricted in 2010, the Company continues to expect to meet long-term liquidity requirements through net cash provided by operations and through additional equity and debt financings, including loans from banks, institutional investors or other lenders, bridge loans, letters of credit, and other lending arrangements, most of which will be secured by mortgages. Notwithstanding the Company’s expectations discussed above, financial markets continue to experience unusual volatility and uncertainty. Financial systems throughout the world have become illiquid with banks no longer willing to lend substantial amounts to other banks and borrowers. Consequently, there is greater uncertainty regarding the Company’s ability to access the credit market in order to attract financing or capital on reasonable terms or on any terms. The Company may also issue unsecured debt in the future. However, with the current deteriorating general economic conditions and the current volatility of the debt and equity markets, there can be no assurance as to the Company’s ability to raise new debt or equity. The Company does not, in general, expect to meet its long-term liquidity needs through dispositions of its properties. In the event that the Company were to sell any of its properties in the future, depending on which property were to be sold, the Company may need to structure the sale or disposition as a tax deferred transaction which would require the reinvestment of the proceeds from such transaction in another property or, however, the proceeds that would be available to the Company from such sales may be reduced by amounts that the Company may owe under the tax protection agreements entered into in connection with the Company’s formation transactions and certain property acquisitions. In addition, the Company’s ability to sell certain of its assets could be adversely affected by the general illiquidity of real estate assets and certain additional factors particular to the Company’s portfolio such as the specialized nature of its target property type, property use restrictions and the need to obtain consents or waivers of rights of first refusal or rights of first offers from ground lessors in the case of sales of its properties that are subject to ground leases.
The Company intends to repay indebtedness incurred under its Credit Facility from time to time, for acquisitions or otherwise, out of cash flow from operations and from the proceeds, to the extent possible and desirable, of additional debt or equity issuances. In the future, the Company may seek to increase the amount of the Credit Facility, negotiate additional credit facilities or issue corporate debt instruments. However, with the current volatility in the debt markets, there can be no assurance as to the Company’s ability to raise new debt. Any indebtedness incurred or issued by the Company may be secured or unsecured, short-, medium- or long-term, fixed or variable interest rate and may be subject to other terms and conditions the Company deems acceptable. The Company intends to refinance at maturity the mortgage notes payable that have balloon payments at maturity.
Contractual Obligations
The following table summarizes the Company’s contractual obligations as of December 31, 2009, including the maturities and scheduled principal repayments and the commitments due in connection with the Company’s ground leases and operating leases for the periods indicated (in thousands):
For additional information, see Note 11 to the accompanying Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
The Company may guarantee debt in connection with certain of its development activities, including joint ventures, from time to time. As of December 31, 2009, the Company did not have any such guarantees or other off-balance sheet arrangements outstanding.
Real Estate Taxes
The Company’s leases generally require the tenants to be responsible for all real estate taxes.
Inflation
The Company’s leases at wholly-owned and consolidated partnership properties generally provide for either indexed escalators, based on the CPI or other measures or, to a lesser extent, fixed increases in base rents. The leases also contain provisions under which the tenants reimburse the Company for a portion of property operating expenses and real estate taxes. The Company’s property management and related services provided to third parties typically provide for fees based on a percentage of revenues for the month as defined in the related property management agreements. The revenues collected from leases are generally structured as described above, with year over year increases. The Company also pays certain payroll and related costs related to the operations of third party properties that are managed by the Company. Under terms of the related management agreements, these costs are reimbursed by the third party property owners. The Company believes that inflationary increases in expenses will be offset, in part, by the contractual rent increases and tenant expense reimbursements described above.
Seasonality
Business under the Design-Build and Development segment can be subject to seasonality due to weather conditions at construction sites. In addition, construction starts and contract signings can be impacted by the timing of budget cycles at healthcare systems and providers.
Recent Accounting Pronouncements
For additional information, see Note 2 to the accompanying Notes to Consolidated Financial Statements.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
The Company’s future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. The Company uses some derivative financial instruments to manage, or hedge, interest rate risks related to the Company’s borrowings. The Company does not use derivatives for trading or speculative purposes and only enters into contracts with major financial institutions based on their credit rating and other factors.
As of December 31, 2009, the Company had $410.9 million of consolidated debt outstanding (excluding any discounts or premiums related to assumed debt as well as excluding $2.1 million in a mortgage note payable related to discontinued operations). Of the Company’s total consolidated debt, $70.0 million, or 17.1%, was variable rate debt that is not subject to variable to fixed rate interest rate swap agreements. Of the Company’s total indebtedness, $340.8 million, or 82.9%, was subject to fixed interest rates, including variable rate debt that is subject to variable to fixed rate swap agreements. The weighted average interest rate for fixed rate debt was 5.7% as of December 31, 2009.
If LIBOR were to increase by 100 basis points, the increase in interest expense on the Company’s variable rate debt would decrease future earnings and cash flows by approximately $0.6 million. Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on the Company’s financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, the Company may take actions to further mitigate the Company’s exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in the Company’s financial structure.
Item 8.
Item 8.
Financial Statements and Supplementary Data
COGDELL SPENCER INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Operations for the years ended December 31, 2009, 2008, and
Consolidated Statements of Equity for the years ended December 31, 2009, 2008, and
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008, and
Notes to Consolidated Financial Statements
Supplemental Schedule - Schedule III - Real Estate and Accumulated Depreciation
Notes to Schedule III - Real Estate and Accumulated Depreciation
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cogdell Spencer Inc.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of Cogdell Spencer Inc. and subsidiaries (the "Company") as of December 31, 2009 and 2008, and the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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 , such consolidated financial statements present fairly, in all material respects, the financial position of Cogdell Spencer Inc. and subsidiaries at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion , such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the financial statements, on January 1, 2009, the Company changed its method of accounting for noncontrolling interests and retrospectively adjusted all periods presented in the consolidated financial statements.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2010 expressed an unqualified opinion on the Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP
McLean, Virginia
March 16,
COGDELL SPENCER INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
COGDELL SPENCER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
COGDELL SPENCER INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
COGELL SPENCER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
COGDELL SPENCER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Business
Cogdell Spencer Inc., incorporated in Maryland in 2005, together with its subsidiaries (the “Company”) is a fully-integrated, self-administered, and self-managed real estate investment trust (“REIT”) that invests in specialty office buildings for the medical profession, including medical offices and ambulatory surgery and diagnostic centers. The Company focuses on the ownership, delivery, acquisition, and management of strategically located medical office buildings and other healthcare related facilities in the United States of America. The Company has been built around understanding and addressing the full range of specialized real estate needs of the healthcare industry. The Company operates its business through Cogdell Spencer LP, its operating partnership subsidiary (the “Operating Partnership”), and its subsidiaries. The Company has two segments: (1) Property Operations and (2) Design-Build and Development. Property Operations owns and manages properties and manages properties for third parties. Design-Build and Development provides strategic planning, design, construction, development, and project management services for properties owned by the Company and for third parties.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and represent the assets and liabilities and operating results of the Company. The consolidated financial statements include the Company’s accounts, its wholly-owned subsidiaries, as well as the Operating Partnership and its subsidiaries. The consolidated financial statements also include any partnerships for which the Company or its subsidiaries is the general partner or the managing member and the rights of the limited partners do not overcome the presumption of control by the general partner or managing member. The Company reviews its interests in entities to determine if the entity’s assets, liabilities, noncontrolling interests and results of activities should be included in the consolidated financial statements in accordance with the GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Significant estimates and assumptions are used by management in determining the percentage of completion revenue, construction contingency and loss provisions, useful lives of real estate properties and improvements, the initial valuations and underlying allocations of purchase price in connection with business and real estate property acquisitions, and projected cash flow and fair value estimates used for impairment testing. Actual results may differ from those estimates.
Revenue Recognition
The Company derives a majority of its revenues from two main sources: 1) from rents received from tenants under existing leases in medical office buildings and other healthcare related facilities, and 2) from revenue earned from design-build construction contracts and development contracts.
Rental Revenue and Property Management. Rental income related to non-cancelable operating leases is recognized as earned over the term, which is the period from the date the lessee has access and control over the leased space to the lease termination date, of the lease agreements on a straight-line basis. Rental income recognized on a straight-line basis for certain lease agreements results in recognized revenue greater than or less than amounts contractually due from tenants. In addition, the leases generally contain provisions under which the tenants reimburse the Company for a portion of property operating expenses and real estate taxes. At times the Company will receive cash payments at the inception of the lease for tenant improvements and these amounts are amortized into rental revenue over the life of the lease. These amounts are included in “Other liabilities” in the consolidated balance sheets. The Company monitors the creditworthiness of its tenants on a regular basis and maintains an allowance for doubtful accounts.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company receives fees for property management and related services provided to third parties which are reflected as property management fee revenue. Management fees are generally based on a percentage of revenues for the month as defined in the related property management agreements. The Company also pays certain payroll and related costs related to the operations of third party properties that are managed by the Company. Under terms of the related management agreements, these costs are reimbursed by the third party property owners and recognized by the Company as revenue as they are characterized by GAAP as “out of pocket” expenses incurred in the performance of a service.
Design-Build Contract Revenues and Development Management. Design-Build contract revenue is recognized under the percentage-of-completion method of accounting in accordance with GAAP. Revenues are determined by measuring the percentage of costs incurred to date to estimated total costs for each design-build contract based on current estimates of costs to complete. Contract costs include all labor and benefits, materials, subcontracts, and an allocation of indirect costs related to contract performance such as architectural, engineering, and construction management. Indirect costs are allocated to projects based upon labor hours charged. As long-term design-build projects extend over one or more years, revisions in cost and estimated earnings during the course of the work are reflected in the accounting period in which the facts which require the revision become known. At the time a loss on a design-build project becomes known, the entire amount of the estimated ultimate loss is recognized in the consolidated financial statements. Change orders are recognized when they are approved by the client.
Costs and estimated earnings in excess of billings on uncompleted design-build projects (“underbillings”) are included in “Other assets” in the consolidated balance sheets. Billings in excess of costs and estimated earnings on uncompleted design-build projects (“overbillings”) are included in liabilities in the consolidated balance sheets. Customers are billed on a monthly basis at the end of each month, which can be in advance of work performed. As a result, the Company typically generates billings in excess of costs and estimated earnings on design-build projects.
Revenue from project analysis and design agreements is accounted for on the completed contract method. Costs in excess of billings and billings in excess of costs on project analysis and design agreements are included with design-build projects over and underbillings in the consolidated balance sheets. Revenue from development agreements is recognized as earned per the agreements and costs are expensed as incurred.
Other income. Other income on the Company’s statement of operations generally includes income incidental to the operations of the Company and is recognized when earned. Interest and other income includes the amortization of unearned income related to a sales-type capital lease.
Warranties
The Company provides standard industry warranties in its design-build business, which generally are for one year after completion of a project. Buildings are guaranteed against defects in workmanship for one year after completion. The typical warranty requires that the Company replace or repair the defective item. The Company records an estimate for future warranty related costs based on actual historical warranty claims. This estimated liability is included in “Other liabilities” in the consolidated balance sheets. Based on analysis of warranty costs, the warranty provisions are adjusted as necessary. While warranty costs have historically been within calculated expectations, it is possible that future warranty costs could exceed expectations.
The changes in the carrying amounts of the total warranty liabilities for the periods shown are as follows (in thousands):
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company elected to be taxed as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, as amended. REITs are subject to a number of organizational and operational requirements, including a requirement that 90% of ordinary “REIT taxable income” (as determined without regard to the dividends paid deduction or net capital gains) be distributed. As a REIT, the Company will generally not be subject to U.S. federal income tax to the extent that it meets the organization and operational requirements and distributions equal or exceed taxable income. For all periods subsequent to the REIT election, the Company has met the organization and operational requirements and distributions exceeded net taxable income. Accordingly, no provision has been made for federal and state income taxes, except as follows.
The Company, together with Cogdell Spencer TRS Holdings, LLC and its subsidiaries (“TRS Holdings”) have made the election to treat TRS Holdings as a taxable REIT subsidiary. As a taxable REIT subsidiary, the operations of TRS Holdings are generally subject to corporate income taxes.
The Company’s taxable REIT subsidiary accounts for its income taxes in accordance with GAAP, which includes an estimate of the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The calculation of the taxable REIT subsidiary’s tax provision may require interpreting tax laws and regulations and could result in the use of judgments or estimates which could cause its recorded tax liability to differ from the actual amount due. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The taxable REIT subsidiary periodically assesses the realizability of deferred tax assets and the adequacy of deferred tax liabilities, including the results of local, state, or federal statutory tax audits or estimates and judgments used.
The Company and the taxable REIT subsidiary apply the GAAP provisions for measuring and recognizing tax benefits associated with uncertain tax positions. Penalties and interest, if incurred, would be recorded as a component of income tax expense.
The Company defers income taxes paid on intercompany profits for real estate properties remaining with the Company. Such taxes are presented with the related real estate property on the balance sheet, are amortized to income tax expense over the useful life of the related property, are assessed for impairment as part of the asset group and any remaining balance will be removed from the balance sheet when the related property is removed. Such income taxes totaled $2.8 million and approximately $7,000 for the years ended December 31, 2009 and 2008.
During 2009, the Company paid two quarterly dividends of $0.225 per share and two quarterly dividends of $0.10, totaling $0.65 per share for the year. The dividends of $0.65 per share are classified for income tax purposes as 61.5% taxable ordinary dividend and 38.5% return of capital. No portion of the dividends constitutes “qualified dividends” eligible for the reduced rates on dividends pursuant to the Jobs and Growth Tax Relief Reconciliation Act of 2003.
Comprehensive Income or Loss
Comprehensive income or loss includes net income (loss) and all other non-owner changes in stockholders’ equity during the period including unrealized fair value adjustments on certain derivative agreements.
Cash and Cash Equivalents
The Company considers all short-term investments with maturities of three months or less when purchased to be cash equivalents. Restricted cash and short-term investments are excluded from cash for the purpose of preparing the consolidated statements of cash flows.
Restricted Cash
Restricted cash includes escrow accounts held by lenders and banks. Restricted cash also includes proceeds from property sales deposited with a qualified intermediary in accordance with like-kind exchange income tax rules and regulations.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Real Estate Properties and Related Intangible Assets
Land and buildings and improvements are recorded at cost. For developed properties, direct and indirect costs that clearly relate to projects under development are capitalized in accordance with GAAP. Costs include construction costs, professional services such as architectural and legal costs, travel expenses, capitalized interest and direct payroll and other acquisition costs. The Company begins capitalization when the project is probable. Capitalization of interest ceases when the property is ready for its intended use, which is generally near the date that a certificate of occupancy is obtained.
Depreciation and amortization is computed using the straight-line method for financial reporting purposes. Buildings and improvements are depreciated over 13 to 50 years. Tenant improvement costs, which are included in building and improvements in the consolidated balance sheets, are depreciated over the shorter of (i) the related remaining lease term or (ii) the life of the improvement. Corporate property, plant and equipment, which are included in “Other assets,” are depreciated over three to seven years.
Acquisitions of properties are accounted for utilizing the acquisition method in accordance with GAAP and accordingly the purchase cost is allocated to tangible and intangible assets and liabilities based on their fair values. The fair value of tangible assets acquired is determined by valuing the property as if it were vacant, applying methods similar to those used by independent appraisers of income-producing property. The resulting value is then allocated to land, buildings and improvements, and tenant improvements based on management’s determination of the fair value of these assets. The assumptions used in the allocation of fair values to assets acquired are based on management’s best estimates at the time of evaluation.
Fair value is assigned to above-market and below-market leases based on the difference between (a) the contractual amounts to be paid by the tenant based on the existing lease and (b) management’s estimate of current market lease rates for the corresponding in-place leases, over the remaining terms of the in-place leases. Capitalized above-market lease amounts are amortized as a decrease to rental revenue over the remaining terms of the respective leases. Capitalized below-market lease amounts are amortized as an increase to rental revenue over the remaining terms of the respective leases. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off.
The aggregate value of other acquired intangible assets consists of acquired ground leases and acquired in-place leases and tenant relationships. The fair value allocated to acquired in-place leases consists of a variety of components including, but not necessarily limited to: (a) the value associated with avoiding the cost of originating the acquired in-place leases (i.e. the market cost to execute a lease, including leasing commissions and legal fees, if any); (b) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period (i.e. real estate taxes, insurance and other operating expenses); (c) the value associated with lost rental revenue from existing leases during the assumed lease-up period; and (d) the value associated with any other inducements to secure a tenant lease.
As required by GAAP, the Company assesses the potential for impairment of its long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicate that the recorded value might not be fully recoverable. Management determines whether impairment in value has occurred by comparing the estimated future undiscounted cash flows expected from the use and eventual disposition of the asset to its carrying value. If the undiscounted cash flows do not exceed the carrying value, the real estate is adjusted to fair value and an impairment loss is recognized. Assets held for sale are recorded at the lower of cost or fair value less costs to sell.
All operations and gains and losses associated with sales of real estate property or assets classified as held for sale are reclassified and presented as discontinued operations.
Repairs, Maintenance and Major Improvements
The costs of ordinary repairs and maintenance are charged to operations when incurred. Major improvements that enhance the value or extend the life of an asset are capitalized and depreciated over the remaining useful life of the asset. In some circumstances lenders require the Company to maintain a reserve account for future repairs and capital expenditures. These amounts are classified as restricted cash.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalization of Interest
The Company capitalizes interest costs on borrowings incurred during the construction and lease-up periods of qualifying assets. Capitalized interest is added to the cost of the underlying assets and is depreciated over the useful lives of the assets. For the years ended December 31, 2009, 2008, and 2007, the Company capitalized interest of approximately $1.0 million, $0.6 million, and $0.9 million, respectively, in connection with various development projects.
Tenant and Accounts Receivable
Property Operations’ tenant and accounts receivable are recorded and carried at the amount billable per the applicable lease or contract agreement. Straight-line rent adjustments are included in tenant and accounts receivable.
Design-Build and Development’s accounts receivable are comprised primarily of contracts receivable. Contracts receivable from performing construction of healthcare facilities are recorded when invoiced and are based on contracted prices and billing terms. Normal contracts receivable are due 15 to 30 days after the issuance of the invoice. Contract retentions are due 15 to 30 days after completion of the project and acceptance by the owner. Receivables past due more than 180 days are considered delinquent. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer. As construction contracts are long term, a portion of the contract retention receivable balance will not be collected within the next year.
An allowance for uncollectible accounts is made based upon a review of outstanding receivables, historical collection information, existing economic conditions, and other factors that may indicate collection of the full amount is no longer considered probable.
Investment in Capital Lease
Investment in capital lease consists of a building on a sales-type capital lease. Unearned income is amortized into interest income using a method that is not materially different from a method that produces a constant periodic rate of return on the net investment in the lease. The interest income is recorded in “Interest and other income.” The investment in capital lease is included in “Other assets.”
Deferred Financing Costs
Deferred financing costs include fees and costs incurred in conjunction with long-term financings and are amortized over the terms of the related debt using the straight-line method, which approximates the effective interest method. Upon repayment of or in conjunction with a substantial modification in the terms of the underlying debt agreement, any unamortized costs are charged to earnings. Deferred financing costs were $3.1 million, net of accumulated amortization of $3.0 million, as of December 31, 2009 and $4.1 million, net of accumulated amortization of $2.0 million, as of December 31, 2008.
Unconsolidated Real Estate Partnerships
The Company records investments in which it does not control but exercises significant influence under the equity method in accordance with GAAP. In circumstances where the real estate partnerships have distributions in excess of the investment and accumulated earnings or experienced net losses in excess of the investment and the Company has guaranteed debt of the entity or otherwise intends to provide financial support, the Company has reduced the carrying value of its investment below zero and recorded a liability in “Other Liabilities.” Services performed for real estate joint ventures and capitalized by real estate joint ventures are recognized to the extent attributable to the outside interests in the real estate joint venture.
Goodwill and Intangible Assets
The Company accounts for goodwill in accordance with GAAP. Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount, including goodwill, exceeds the reporting unit’s fair value and the implied fair value of goodwill is less than the carrying amount of that goodwill. Non-amortizing intangible assets, such as trade names and trademarks, are subject to an annual impairment test based on fair value and amortizing intangible assets are tested whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
COGDELL SPENCER INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with the Financial Accounting Standards Board (“FASB”), the Company adopted this definition for its financial assets and liabilities on January 1, 2008, and for all nonfinancial assets and nonfinancial liabilities on January 1, 2009. The adoption for non-financial assets and liabilities on January 1, 2009 did not have a material impact on the Company’s consolidated financial position or results of operations.
The Company utilizes the GAAP fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In instances in which the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not readily available for certain financial instruments and fair value is determined using present value or other techniques appropriate for a particular financial instrument. These techniques involve some degree of judgment and as a result are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.
The Company does not hold or issue financial instruments for trading purposes. The Company considers the carrying amounts of cash and cash equivalents, restricted cash, tenant and accounts receivable, accounts payable, and other liabilities to approximate fair value due to the short maturity of these instruments. The Company has estimated the fair value of debt utilizing present value techniques taking into consideration current market conditions. At December 31, 2009 the carrying amount and estimated fair value of debt was $410.9 million and $398.5 million, respectively. The mortgage included in Other liabilities - held for sale has a $2.2 million carrying value and $2.3 million estimated fair value as of December 31, 2009. As of December 31, 2009, the Company reclassified the wholly-owned property Harbison Medical Office Building (formerly known as Baptist Northwest) as held for sale discontinued operations. At December 31, 2008, the carrying amount and estimated fair value of debt was $460.7 million and $451.5 million, respectively.
See Note 8 regarding the write-down of the Company’s goodwill and certain intangible assets to implied fair market value. See Note 10 regarding the fair value of the Company’s interest rate swap agreements. See Note 4 regarding the write-down of real estate property for one property to its implied fair market value less costs to sell.
Offering Costs
Underwriting commissions and other offering costs of raising equity are reflected as a reduction in additional paid-in capital.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share Based Compensation
The Company accounts for share based compensation, including restricted stock grants and long-term incentive units (“LTIP units”), in accordance with GAAP. The Company measures the compensation cost based on the estimated fair value of the award at the grant date. The estimate is based on the share price of the common stock at the grant date. Where an observable market value of a similar instrument is not available an option-pricing model is utilized. The compensation cost is recognized as an expense over the requisite service period required for vesting or when performance criteria for vesting is expected to be achieved.
Per Share Data
Basic and diluted earnings per share are computed based upon the weighted average number of shares outstanding during the respective period.
Concentrations and Credit Risk
The Company maintains its cash in commercial banks. Balances on deposit are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to specific limits. Balances on deposit in excess of FDIC limits are uninsured. At December 31, 2009, the Company had bank cash balances of $29.7 million in excess of FDIC insured limits.
Three customers and one customer accounted for more than 10% of tenant and accounts receivable as of December 31, 2009 and 2008, respectively. One customer or tenant accounted for more than 10% of revenue for the year ended December 31, 2009. No customers or tenants accounted for more than 10% of revenue for the year ended December 31, 2008.
Reclassifications
During 2009, the Company reclassified Harbison Medical Office Building, a wholly-owned real estate property (formerly known as Baptist Northwest), as discontinued operations and has actively marketed the property for sale. The Company expects the sale to close in 2010. Accordingly, the Company has reclassified the assets and liabilities related to this discontinued operations real estate property to “Other assets - held for sale” and “Other liabilities - held for sale,” respectively, as well as the results of operations to “Discontinued Operations” in the consolidated statement of operations for the years ended December 31, 2009, 2008 and 2007. The asset is part of the Property Operations segment.
The accompanying Notes to Consolidated Financial Statements include the retrospective application of the presentation and disclosure requirements of Accounting Standards Codification (“ASC”) 810, Consolidation. ASC 810 is described in “Recent Accounting Pronouncements” below. The retrospective application did not have a material impact on the Company’s financial condition, results of operations, or cash flows. However, it did impact the presentation and disclosure of noncontrolling (minority) interest in the consolidated financial statements. The principal effect to the balance sheet is summarized as follows:
Additionally, the adoption of ASC 810 had the effect of reclassifying earnings attributable to noncontrolling interests in the consolidated statement of operations from before net loss to separate line items after net loss. ASC 810 also requires that a new separate caption for net loss attributable to Cogdell Spencer Inc. be presented in the consolidated statements of operations. Net loss increased by $32.2 million, $2.1 million, and $2.7 million for the fiscal years 2009, 2008, and 2007, respectively and net loss attributable to Cogdell Spencer Inc. equals net loss as previously reported prior to the application ASC 810.
Additionally, ASC 810 requires consolidated comprehensive income (loss) to be adjusted to include the comprehensive income (loss) attributed to noncontrolling interests. The adoption of ASC 810 resulted in a reclassification of Accumulated Other Comprehensive Loss from Cogdell Spencer Inc. stockholder equity to noncontrolling interests. This reclassification resulted in a $2.4 million and $0.4 million decrease in noncontrolling interests in operating partnership at December 31, 2008 and 2007, respectively, and a $1.6 million and zero decrease in noncontrolling interests in real estate partnerships at December 31, 2008 and 2007, respectively. Net loss attributable to Cogdell Spencer Inc., per common share - basic and diluted was not affected by this reclassification.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequent Events
The Company evaluates significant unusual or infrequent events occurring after the financial statement date through the date the financial statements are issued, or available to be issued, to determine if additional disclosures are needed. As of March 16, 2010, the date the financial statements were available to be issued, no significant events have been identified.
Recent Accounting Pronouncements
Effective July 1, 2009, the FASB established the Accounting Standards Codification (“ASC”) as the primary source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities. Although the establishment of the ASC did not change current GAAP, it did change the way current GAAP is referenced.
In December 2007, the FASB issued an accounting standard, codified in ASC 805, Business Combinations, relating to the accounting for and reporting of business combinations using the acquisition method of accounting, which significantly changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. Among these changes, this standard redefines the measurement date of a business combination and requires most transaction costs to be expensed as incurred, and requires expanded disclosure requirements such as reasons for the business combination, amount of third-party related expenses incurred, and a description of the prior relationship between or among the parties. The standard also provides guidance for recognizing and measuring the goodwill acquired in the business combination and requires additional disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This standard is effective prospectively, except for certain retrospective adjustments to deferred tax balances, for fiscal years beginning after December 15, 2008. The adoption of this standard had no impact on the Company’s balance sheet, statement of operations, or changes in equity on December 31, 2009.
In December 2007, the FASB issued an accounting standard, codified in ASC 810, Consolidation, which establishes the accounting for and reporting of noncontrolling interests (“NCI”), formerly referred to as minority interests, in partially owned consolidated subsidiaries and the accounting for and reporting of the change in control of subsidiaries. NCIs are to be reported as a component of equity separate from the parent’s equity and purchases or sales of equity interests that do not result in a change in control are accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest is included in consolidated net income on the face of the income statement and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, except for the presentation and disclosure requirements, which will apply retrospectively. The Company implemented the standard effective January 1, 2009 and has applied the presentation and disclosure requirements retrospectively. Its adoption has resulted in an increase to equity as of December 31, 2008 of $94.0 million for the reclassification of noncontrolling interest to equity for noncontrolling interests in consolidated entities as well as a $4.1 million reclassification of Accumulated Other Comprehensive Loss from Cogdell Spencer Inc. stockholders’ equity to noncontrolling interests as of December 31, 2008. Also, net loss for year ended December 31, 2008 has increased by $2.1 million for the reclassification of loss allocated to noncontrolling interests; however, net loss per common share attributable to Cogdell Spencer Inc. - basic and diluted was not affected by this reclassification.
In March 2008, the FASB issued an accounting standard, codified in ASC 815, Derivatives and Hedging, relating to disclosures about derivative instruments and hedging activities. The standard is intended to provide users of financial statements with an enhanced understanding of derivative instruments and hedging activities by having the Company disclose: (1) how and why the Company uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under GAAP and its related interpretations; and (3) how derivative instruments and related hedged items affect the Company’s financial position, financial performance and cash flows. The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. It also encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of the standard had no impact on the Company’s balance sheet, statement of operations, or changes in equity on January 1, 2009. See Note 8 for additional disclosures.
COGDELL SPENCER INC..
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2008, the FASB issued an accounting standard, codified in ASC 260, Earnings Per Share, clarifying how certain unvested share-based payment awards are accounted for in the computation of earnings per common unit. The guidance states that unvested share-based payment awards containing non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per common unit pursuant to the two-class method. This guidance requires the retrospective adjustment of all prior-period earnings per common unit data presented (including interim financial statements, summaries of earnings, and selected financial data) to conform to the provisions of the standard. As a result, the Company’s unvested LTIP units and restricted stock are considered participating securities and are included in the computation of basic and diluted earnings per common share of the Company if the effect of applying the if-converted method is dilutive. The adoption of this standard did not have a material impact on the Company’s computation of earnings per common share on January 1, 2009.
In November 2008, the FASB issued an accounting standard, codified in ASC 323, Investments - Equity Method and Joint Ventures, relating to certain equity method investment accounting considerations. The standard states, among other things, that transaction costs for an investment should be included in the cost of the equity-method investment (and not expensed) and shares subsequently issued by the equity-method investee that reduce the investor’s ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through earnings. The statement is effective for transactions occurring in fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of this standard had no impact on the Company’s balance sheet, statement of operations, or changes in equity.
In April 2009, the FASB issued an accounting standard, codified in ASC 825, Financial Instruments, regarding interim disclosures about fair value of financial instruments. The standard essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the standard requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. This standard is effective for interim reporting periods ending after June 15, 2009. The additional disclosures required by the standard are included in Note 8 within this Form 10-Q.
In May 2009, and further revised in February 2010, the FASB issued an accounting standard, codified in ASC 855, Subsequent Events, relating to the disclosure of subsequent events. The standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under the new standard, as under previous practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. The statement is effective for interim and annual reporting periods ending after June 15, 2009. The additional disclosure required by the standard is included in Note 2.
In June 2009, the FASB issued an accounting standard, codified in ASC 810, Consolidation, which revises the consolidation guidance for variable-interest entities (“VIE”). The revisions include (1) no longer exempting qualifying special-purpose entities from the scope of the guidance, (2) requiring the continuous reconsideration for determining whether an enterprise is the primary beneficiary of another entity, (3) ignoring kick-out rights unless the rights are held by a single enterprise and (4) requiring consolidation if an entity has power and receives benefits or absorbs losses that are potentially significant to the VIE and not requiring consolidation if power is shared amongst unrelated parties. The revisions also include the enhancement of disclosure requirements. The standard is effective for interim and annual reporting periods beginning after November 15, 2009. The Company is still evaluating the effect of this standard on the Company’s balance sheet, statement of operations, or changes in equity.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, Measuring Liabilities at Fair Value, which provides additional guidance on how companies should measure liabilities at fair value under ASC 820. This update provides alternatives to measuring the fair value of liabilities when a quoted price for an identical liability traded in an active market does not exist. The alternatives include using the quoted price for the identical liability when traded as an asset or the quoted price of a similar liability or of a similar liability when traded as an asset, in addition to valuation techniques based on the amount an entity would pay to transfer the identical liability (or receive to enter into an identical liability). The update is effective for interim and annual reporting periods ending after August 28, 2009. The adoption of this standard had no impact on the Company’s balance sheet, statement of operations, or changes in equity on December 31, 2009.
3. Minimum Future Rental Revenues
The Company’s properties are generally leased to tenants under non-cancelable, fixed-term operating leases with expirations through 2026. Some leases provide for fixed rent renewal terms or market rent renewal terms. The Company’s leases generally require the lessee to pay minimum rent, additional rent based upon increases in the Consumer Price Index, and all taxes (including property tax), insurance, maintenance and other operating costs associated with the leased property. No tenant occupied more than 10% of the Company’s net rentable square footage at December 31, 2009.
Future minimum lease payments by tenants under the non-cancelable operating leases as of December 31, 2009 were as follows (in thousands):
The operating leases held at Harbison Medical Office Building (formerly known as Baptist Northwest), a wholly-owned property, are not included in the above future minimum lease payments schedule as the property was reclassified to discontinued operations during 2009 and is actively being marketed for sale as of December 31, 2009. Future minimum lease payments by tenants under non-cancelable operating leases as of December 31, 2009 relating to Harbison Medical Office Building are $0.2 million, $0.2 million, $0.1 million, and $0.1 million for 2010, 2011, 2012, and 2013, respectively, and zero thereafter.
The Company has one building leased to a tenant under a capital lease that began in 1987 and expires in 2017. The tenant is the owner of the land on which the building sits and has leased the land to the Company for the same term with a bargain renewal option, through 2027, that the Company intends to exercise. Upon renewal of the ground lease, the building lease automatically extends for the same 10 year extension period. The “Investment in capital lease” is included in other assets and was as follows (in thousands):
Total minimum lease payments receivable on the capital lease as of December 31, 2009 exclusive of the operating expense reimbursement payments, are as follows (in thousands):
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.
Acquisitions and Discontinued Operations
Business Acquisition
On March 10, 2008, the Company and the Operating Partnership completed a merger transaction through which they acquired MEA Holdings, Inc. (“MEA”), a design-build construction and engineering company specializing in healthcare facility construction. The transaction was effected pursuant to an Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 23, 2008, as amended, by and among the Company, the Operating Partnership, Goldenboy Acquisition Corp. (a wholly-owned subsidiary of the Operating Partnership), MEA, Marshall Erdman & Associates, Inc., Marshall Erdman Development, LLC, and David Pelisek, David J. Lubar and Scott A. Ransom, in their capacities as the Seller Representatives. MEA’s operating results are included in the consolidated financial statements from March 10, 2008, the acquisition date.
The consideration payable in the merger transaction and in the contribution transactions described below consisted of cash and limited partnership interests issued by the Operating Partnership (the “OP Units”). The Operating Partnership entered into contribution agreements with 40 of MEA’s stockholders (the “Contributors”) pursuant to which the Contributors agreed to “roll over” an aggregate of 1,265,392 shares of MEA (representing in the aggregate approximately 41% of MEA’s outstanding shares on a fully diluted basis) by exchanging those shares for OP Units. The exchange of those shares for OP Units was completed immediately before the completion of the merger provided for in the Merger Agreement (the “Merger”). In the Merger, all the shares of MEA (other than the shares acquired by the Operating Partnership) were converted into the right to receive an amount of cash to be calculated in accordance with the provisions of the Merger Agreement.
The cash consideration per share of MEA common shares payable in the Merger (the “Cash Consideration”) was calculated pursuant to a formula based on an “enterprise value” for 100% of MEA of $247.0 million, subject to certain adjustments. In connection with the Merger, in addition to the cash consideration of approximately $159.6 million paid in the aggregate to the holders of MEA common shares, pursuant to certain contribution agreements entered into in connection with the Merger, the Operating Partnership issued OP Units to the Contributors. The number of OP Units per MEA common share was based on the same value per MEA common share payable in cash under the Merger Agreement, or $17.01 per OP Unit. The OP Units issued in the transaction were of two types - “regular units” and “alternative units.” A total of 4,331,336 OP Units were issued upon the closing of the transaction, of which 3,063,908 were regular units and 1,267,429 were alternative units. In June 2008, a total of 208,496 OP Units, of which all were alternative units, were issued as part of a post-closing claim release. In November 2008, a total of 148,926 OP Units, of which all were alternative units, were issued as part of a post-closing claim release. In October 2009, a total of 331,812 OP units, of which all were alternative units, were issued as part of a post-closing claim release. The alternative units are substantially the same as the regular units, except that the regular units have an exchange feature whereby they are exchangeable, after a one-year lock-up period, on a one-for-one basis, for shares of the Company’s common stock, while the alternative units were not exchangeable for shares of the Company’s common stock until the exchange feature included as a feature of the alternative units was approved by the Company’s stockholders. On May 29, 2008, the Company’s stockholders approved the exchange feature whereby the alternative units are exchangeable, after a one-year lock-up period, on a one-for-one basis, for shares of the Company’s common stock. The fair value per OP Unit issued in connection with the Merger was $15.84, which was determined using the Company’s stock price on and about the January 23, 2008, announcement date of the merger.
In connection with the Merger, one of the former MEA shareholders, Lubar Capital LLC (“Lubar”), received the right to nominate one individual for election to the Company’s Board of Directors. Accordingly, the Company’s Board of Directors increased the size of the Board of Directors and elected David J. Lubar as a director on January 22, 2008. Lubar will continue to retain its right to nominate one individual for so long as Lubar and its affiliates continue to maintain at least 75% of their aggregate initial ownership measured in number of equity securities of the Company and its affiliates.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate consideration paid for the Merger was as follows (in thousands):
The Merger was accounted for under the purchase method in accordance with GAAP. The total purchase price was allocated to assets acquired and liabilities assumed based upon their estimated fair values as determined by management. The estimated fair values were based on information available and assumptions as to future operations at the acquisition date.
The following table is a summary allocation of the total purchase price for the assets acquired and liabilities assumed of MEA as of March 10, 2008 (in thousands):
The Company purchased MEA for an amount in excess of its net tangible assets and as a result has recorded goodwill related to the transaction (see also Note 8). The Company believes that MEA’s service offerings and customer lists are complementary to the Company’s pre-Merger service offerings. As a result of the Merger, the Company became a fully integrated healthcare facilities real estate company. The accompanying statement of operations for the year ended December 31, 2008, includes ten months of Erdman’s operations.
In October 2009, the final escrow release related to the Erdman acquisition occurred. Per agreement between the Company and the MEA Seller Representatives, $5.0 million of the escrow was paid to the Company in consideration of full and final settlement of certain claims made by the Company in connection with the MEA transaction. During the fourth quarter of 2009, $8.1 million of cash was released from the escrow to the Erdman sellers and 331,812 OP units were issued to the Erdman sellers. The Company recorded other income of $4.9 million in 2009 related to this settlement.
Property Acquisitions
Property acquisitions are accounted for in accordance with GAAP. The purchase price is allocated between net tangible and intangible assets based on their estimated fair values as determined by management using methods similar to those used by independent appraisers of income-producing property.
There were no property acquisitions in 2009.
In February 2008, the Company acquired a leasehold interest in floors six and seven of St. Mary’s North Medical Office Building, a seven-story multi-tenant medical office building located on the campus of St. Mary’s Hospital in Richmond, Virginia. The purchase price was $4.6 million less a $0.2 million credit from the seller for unpaid tenant improvement allowances.
In February 2008, the Company acquired East Jefferson Medical Plaza located in Metairie, Louisiana for $19.8 million less a $0.7 million credit from the seller for unpaid tenant improvement allowances. The facility is 123,184 square feet and is located on the campus of East Jefferson General Hospital. With this acquisition, the Company now owns and manages 253,914 square feet of medical office and clinical space on or adjacent to the East Jefferson campus.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 2008, the Company acquired a controlling interest in Genesis Property Holding, LLC (“Genesis”), a pre-development project in 2008, for $2.2 million. Genesis owns the Woodlands Center for Specialized Medicine building, which completed construction and became operational in 2009.
The following table is an allocation of the purchase price of the property acquisitions during the year ended December 31, 2008 (in thousands):
The following summary of selected unaudited pro forma results of operations presents information as if the 2008 property and business acquisitions had occurred at the beginning of the period presented. The unaudited pro forma information is provided for informational purposes only and is not indicative of results that would have occurred or which may occur in the future (in thousands, except per share amount):
Discontinued Operations
As of December 31, 2009, the Company reclassified the wholly-owned property Harbison Medical Office Building (formerly known as Baptist Northwest) as held for sale discontinued operations. Related to this property, the Company recorded a non-cash impairment charge of ($1.4 million) in order to reduce the carrying value of the real estate property to its estimated net sale proceeds.
In accordance with GAAP, net income and loss on discontinued operations of real estate property are reflected in the consolidated statements of operations as “discontinued operations” for all periods presented. Below is a summary of discontinued operations for the real estate property reclassified to discontinued operations and marketed for sale during 2009 (in thousands):
The following table presents information about the Company’s real estate assets held for sale measured at fair value as of December 31, 2009 (in thousands):
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5.
Investments in Real Estate Partnerships
As of December 31, 2009 the Company had an ownership interest in eight limited liability companies or limited partnerships.
The following is a description of the unconsolidated entities:
·
Cogdell Spencer Medical Partners LLC, a Delaware limited liability company, founded in 2008, no assets or liabilities, and 20.0% owned by the Company;
·
BSB Health/MOB Limited Partnership No. 2, a Delaware limited partnership, founded in 2002, owns nine medical office buildings, and 2.0% owned by the Company;
·
Shannon Health/MOB Limited Partnership No. 1, a Delaware limited partnership, founded in 2001, owns ten medical office buildings, and 2.0% owned by the Company; and
·
McLeod Medical Partners, LLC, a South Carolina limited liability company, founded in 1982, owns three medical office buildings, and 1.1% owned by the Company.
The following is a description of the consolidated entities:
·
Genesis Property Holdings, LLC, a Florida limited liability company, founded in 2007, owns one medical office building, and 40.0% owned by the Company;
·
Cogdell General Health Campus MOB, LP, a Pennsylvania limited partnership, founded in 2006, owns one medical office building, and 80.9% owned by the Company;
·
Mebane Medical Investors, LLC, a North Carolina limited liability company, founded in 2006, owns one medical office building, and 35.1% owned by the Company; and
·
Rocky Mount MOB, LLC, a North Carolina limited liability company, founded in 2002, owns one medical office building, and 34.5% owned by the Company.
The Company is the general partner or managing member of these real estate partnerships and manages the properties owned by these entities. The Company may receive design/build revenue, development fees, property management fees, leasing fees, and expense reimbursements from these real estate partnerships. For consolidated entities, these revenues and fees are eliminated in consolidation.
The consolidated entities are included in the Company’s consolidated financial statements because the limited partners or non-managing members do not have sufficient participation rights in the partnerships to overcome the presumption of control by the Company as the managing member or general partner. The limited partners or non-managing members have certain protective rights such as the ability to prevent the sale of building, the dissolution of the partnership or limited liability company, or the incurrence of additional indebtedness, in each case subject to certain exceptions.
The Company’s unconsolidated entities are accounted for under the equity method of accounting based on the Company’s ability to exercise significant influence as the entity’s managing member or general partner. The following is a summary of financial information for the limited liability companies and limited partnerships for the periods indicated. The summary of financial information set forth below reflects the financial position and operations of the unconsolidated real estate partnerships in their entirety, not just the Company’s interest in the entities (in thousands):
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Business Segments
The Company has two identified reportable segments: (1) Property Operations and (2) Design-Build and Development. The Company defines business segments by their distinct customer base and service provided. Each segment operates under a separate management group and produces discrete financial information, which is reviewed by the chief operating decision maker to make resource allocation decisions and assess performance. Inter-segment sales and transfers are accounted for as if the sales and transfers were made to third parties, which involves applying a negotiated fee onto the costs of the services performed. All inter-company balances and transactions are eliminated during the consolidation process.
The Company’s management evaluates the operating performance of its operating segments based on funds from operations (“FFO”) and funds from operations modified (“FFOM”). FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), represents net income (computed in accordance with GAAP), excluding gains from sales of property, plus real estate depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. The Company adjusts the NAREIT definition to add back noncontrolling interests in real estate partnerships before real estate related depreciation and amortization. FFOM adds back to FFO non-cash amortization of non-real estate related intangible assets associated with purchase accounting. The Company considers FFO and FFOM important supplemental measures of the Company’s operational performance. The Company believes FFO is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. The Company believes that FFOM allows securities analysts, investors and other interested parties in evaluating current period results to results prior to the Erdman transaction. FFO and FFOM are intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO and FFOM exclude depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. The Company’s methodology may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO and FFOM do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables represent the segment information for the years ended December 31, 2009, 2008 and 2007 (in thousands):
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Contracts
Revenue and billings to date on uncompleted contracts, from their inception, as of December 31, 2009 and December 31, 2008 (in thousands):
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These amounts are included in the consolidated balance sheet at December 31, 2009 and 2008 as shown below (in thousands). At December 31, 2009, the Company had retainage receivables of $4.5 million, which are included in "Tenant and accounts receivable" in the consolidated balance sheets. The Company estimates that $0.7 million of the December 31, 2009, retainage receivable balance will be collected after one year.
(1) Included in "Other assets" in the consolidated balance sheet
8. Goodwill and Intangible Assets
The Company reviews the value of goodwill and intangible assets on an annual basis and when circumstances indicate a potential impairment may exist. An interim review of the Design-Build and Development’s intangible assets was performed on March 31, 2009, due to a decline in the Company’s stock price, a decline in the cash flow multiples for comparable public engineering and construction companies, and changes in the cash flow projections for the Design-Build and Development business segment resulting from a decline in backlog and delays and cancellations of client building projects. As a result of the March 31, 2009 review, the Company recorded, during the three months ended March 31, 2009, a pre-tax, non-cash impairment charge of ($120.9 million) and the Company recognized a non-cash income tax benefit of $19.2 million, resulting in an after-tax impairment charge of ($101.7 million). The Company’s goodwill, amortizing and non-amortizing intangible assets, and deferred tax liabilities associated with the Design-Build and Development business segment have been reduced from the December 31, 2008 carrying amounts as a result of the impairment charge. The Company determined an interim review has not been necessary since the previous impairment review was performed at March 31, 2009.
The Company performed an annual review of goodwill for impairment as of December 31, 2009 and concluded there was no impairment of goodwill. The Company also performed an annual review for impairment for other non-amortizing intangible assets and concluded no impairment existed.
The goodwill impairment reviews involved a two-step process. The first step was a comparison of the reporting unit’s fair value to its carrying value. Fair value was estimated by using two approaches, an income approach and a market approach. Each approach was weighted 50% in the Company’s analysis as the Company believes a market participant would consider both approaches. The income approach uses the reporting unit’s projected operating results and discounted cash flows using a weighted-average cost of capital that reflects current market conditions, which was 14.0% for the December 31, 2009 review and 14.5% for the March 31, 2009 review. The cash flow projections use estimates of economic and market information over the projection period, including growth rates in revenues and costs and estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures, and changes in future working capital requirements. The market approach estimates fair value by applying cash flow multiples to the reporting unit's operating performance. The multiples are derived from comparable publicly traded companies with similar operating and profitability characteristics. Additionally, the Company reconciled the total of the estimated fair values of all its reporting units to its market capitalization to determine if the sum of the individual fair values is reasonable compared to the external market indicators.
If the carrying value of the reporting unit is higher than its fair value, as it was for March 31, 2009, then an indication of impairment may exist and a second step must be performed to measure the amount of impairment. The amount of impairment is determined by comparing the implied fair value of the reporting unit’s goodwill to the carrying value of the goodwill calculated in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill, then an impairment charge for the difference would be recorded.
For non-amortizing intangible assets, the Company estimates fair value by applying an estimated market royalty rate, 2.0% for both the December 31, 2009 and the March 31, 2009 reviews, to projected revenues and discounted using a weighted-average cost of capital that reflects current market conditions, which was 14.0% for the December 31, 2009 and 14.5% for the March 31, 2009 review.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information about the Company’s goodwill and certain intangible assets measured at fair value as of March 31, 2009 (in thousands):
See Note 2 to these consolidated financial statements for a discussion of the Company’s accounting policy regarding the fair value of financial and non-financial assets.
The following table shows the change in carrying value for the Company’s goodwill and certain intangible assets from the measurement date of March 31, 2009 to December 31, 2009 (in thousands):
Goodwill and trade names and trademarks are not amortized and are associated with the Design-Build and Development business segment. The following table shows the change in carrying value related to goodwill and trade names and trademarks intangible assets for the periods shown (in thousands):
Amortizing intangible assets consisted of the following for the periods shown (in thousands):
Amortization expense related to intangibles for the years ended December 31, 2009, 2008 and 200 was $9.1 million, $19.1 million, and $6.8 million, respectively. The Company expects to recognize amortization expense from the acquired intangible assets as follows (in thousands):
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.
Debt
Debt consisted of the following (in thousands):
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The mortgage note payable for Harbison Medical Office Building (formerly known as Baptist Northwest), a wholly-owned property, is not included in the above debt schedule as the property was reclassified to discontinued operations during December 2009 and is actively being marketed for sale as of December 31, 2009. The Harbison Medical Office Building mortgage matures February 2011 with a fixed interest rate of 8.25% at December 31, 2009, and an outstanding balance of $2.1 million and $2.2 million as of December 31, 2009 and December 31, 2008, respectively.
The LIBOR rate was 0.23% and 0.44% at December 31, 2009 and 2008, respectively. The prime rate was 3.25% at December 31, 2009 and 2008.
Secured Revolving Credit Facility
On March 10, 2008, the Company amended and restated its existing revolving credit facility, dated November 1, 2005 (the “Credit Facility”). Banc of America Securities LLC is acting as sole lead arranger and sole book manager of the Credit Facility. KeyBank National Association is acting as syndication agent. Branch Banking and Trust Company and Wachovia Bank, N.A are acting as co-documentation agents. Bank of America, N.A., KeyBank National Association, Branch Banking and Trust Company, Wachovia Bank, National Association, M&I Marshall and Ilsley Bank, and Citicorp North America, Inc. are lenders (the “Lenders”) thereunder. The Credit Facility is secured by certain of the Company’s properties and is guaranteed by the Company and certain of its subsidiaries. The Credit Facility matures on March 10, 2011, subject to a one-year extension at the Company’s conditional option, and taking into consideration any payment, extension or refinancing of the Term Loan (as described below). The Credit Facility is cross defaulted against the Term Loan. The Company is subject to customary covenants including, but not limited to, (1) affirmative covenants relating to the Company’s corporate structure and ownership, maintenance of insurance, compliance with environmental laws and preparation of environmental reports, maintenance of the Company’s REIT qualification and listing on the NYSE, (2) negative covenants relating to restrictions on liens, indebtedness, certain investments (including loans and certain advances), mergers and other fundamental changes, sales and other dispositions of property or assets and transactions with affiliates, and (3) financial covenants to be met by the Company at all times including a maximum total leverage ratio (70%), maximum real estate leverage ratio (70%), minimum fixed charge coverage ratio (1.50 to 1.00), maximum total debt to real estate value ratio (90%) and minimum consolidated tangible net worth ($45 million plus 85% of the net proceeds of equity issuances issued after the closing date). The interest rate on loans under the Credit Facility equals, at the Company’s election, either (1) LIBOR (0.23% as of December 31, 2009) plus a margin of between 95 to 140 basis points based on the Company’s leverage ratio (1.15% as of December 31, 2009) or (2) the higher of the federal funds rate plus 50 basis points or Bank of America, N.A.’s prime rate (3.25% as of December 31, 2009).
As of December 31, 2009, there was $61.7 million available under the Credit Facility. There was $80.0 million outstanding at December 31, 2009 and $8.3 million of availability was restricted related to outstanding letters of credit.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Term Loan
On March 10, 2008, the Company entered into a $100.0 million senior secured term facility (the “Term Loan”) to finance the cash portion of the Merger. Keybanc Capital Markets is acting as sole lead arranger and sole book manager of the Term Loan. Bank of America, N.A. is acting as syndication agent. Branch Banking and Trust Company and Wachovia Bank, N.A are acting as co-documentation agents. KeyBank National Association, Bank of America, N.A., Branch Banking and Trust Company, Wachovia Bank, National Association, M&I Marshall and Ilsley Bank, and Citicorp North America, Inc. are lenders thereunder. During 2009, the design-build and development segment experienced delays in client project starts and some contract cancellations. Due to the uncertainty of the Design-Build and Development segment’s future operating results, the Company and the Term Loan lenders amended the Term Loan in June 2009 and the Company repaid $50.0 million of the $100.0 million outstanding under the Term Loan. As a result of the amendment, all unamortized Term Loan deferred finance costs and costs paid to the lenders that were party to the amendment were expensed during 2009. The charge to debt extinguishment and interest rate derivative expense was approximately $0.9 million, before income tax benefit. The Company recorded an income tax benefit of approximately $0.4 million related to this charge. The amendment, among other things, amended certain financial covenants relating to the Design-Build and Development segment, as well as certain other provisions of the Term Loan, including (1) the elimination of the minimum adjusted consolidated EBITDA covenant (previously $22.5 million), (2) a modification of the maximum adjusted consolidated senior indebtedness to adjusted consolidated EBITDA covenant to 3.50 to 1.00 through March 2011, with a one-time ability to exceed 3.50 to 1.00 but not greater than 3.75 to 1.00, and 3.00 to 1.00 from April 2011 to final maturity (previously 4.25 to 1.00 as of March 31, 2009, decreasing to 3.75 to 1.00 as of July 1, 2009), (3) an increase in the interest rate from LIBOR plus 3.50% to LIBOR (0.23% as of December 31, 2009) plus 4.50%, and (4) payment of a market based modification fee. The amendment was subject to the repayment of $50.0 million of the outstanding balance under the Term Loan by the Borrower (which amount was repaid on June 3, 2009) and certain other customary terms and conditions.
The Term Loan also contains customary covenants including, but not limited to, (1) affirmative covenants relating to the Company’s corporate structure and ownership, maintenance of insurance, compliance with environmental laws and preparation of environmental reports, maintenance of the Company’s REIT qualification and listing on the New York Stock Exchange, and (2) negative covenants relating to restrictions on liens, indebtedness, certain investments (including loans and certain advances), mergers and other fundamental changes, sales and other dispositions of property or assets and transactions with affiliates, and (3) financial covenants to be met by the Company at all times under the guaranty including a maximum total leverage ratio (70%), maximum real estate leverage ratio (70%), minimum fixed charge coverage ratio (1.50 to 1.00), maximum total debt to real estate value ratio (90%) and minimum consolidated tangible net worth ($45 million plus 85% of the net proceeds of equity issuances), as well as being cross defaulted to the Company’s Credit Facility.
The Term Loan matures on March 10, 2011, subject to a one-year extension at the Company’s conditional option, and taking into consideration the extension of the Credit Facility.
The mortgages are collateralized by property and principal and interest payments are generally made monthly. Scheduled maturities of mortgages, notes payable under the Credit Facility, and Term Loan as of December 31, 2009 are as follows (in thousands):
The scheduled maturities related to the mortgage note payable included in discontinued operations are not included above. The mortgage note payable requires monthly principal and interest payments of approximately $20,000 until February 2011, at which time a balloon payment of approximately $2.1 million is due.
At December 31, 2009, Management believes the Company was in compliance with all its loan covenants.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.
Derivative Financial Instruments
Interest rate swap agreements are utilized to reduce exposure to variable interest rates associated with certain mortgage notes payable, the Term Loan, and the Credit Facility. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the “notional amount”). The interest rate swap agreements are reported at fair value in the condensed consolidated balance sheet within “Other assets” or “Other liabilities” and changes in the fair value, net of tax where applicable, are reported in accumulated other comprehensive income (loss) (“AOCI”) exclusive of ineffectiveness amounts. The following table summarizes the terms of the agreements and their fair values at December 31, 2009 and 2008 (dollars in thousands):
The following tables show the effect of the Company’s derivative instruments designated as cash flow hedges for the year ended December 31, 2009 (in thousands):
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2009, and indicates the fair value hierarchy referenced in Note 2 within these consolidated financial statements, of the valuation techniques utilized by the Company to determine such fair value (in thousands):
The valuation of derivative financial instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The fair values of variable to fixed interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates forward curves derived from observable market interest rate curves. To comply with GAAP, the Company incorporates credit valuation adjustments to appropriately reflect both its nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
The Company previously entered into a $100.0 million interest rate swap agreement in 2008 that fixed the floating rate portion of the $100.0 million Term Loan. Due to the repayment and the amendment to the Term Loan in June 2009, approximately $2.2 million related to swap derivative hedge ineffectiveness was charged to debt extinguishment and interest rate derivative expense during 2009. The non-cash charge represents the portion of the mark to market fair value liability of the interest rate swap agreement for which there are no more future interest payments under the Term Loan. During 2009, the Company recorded an income tax benefit of approximately $0.9 million related to this charge, resulting in after-tax charge of approximately $1.3 million.
The $100.0 million interest rate swap agreement was designated as a hedge instrument from its inception through June 3, 2009, the date of the $50.0 million repayment and amendment of the Term Loan. The agreement was not designated as a hedge instrument from June 4, 2009, through July 19, 2009. On July 20, 2009, the agreement was re-designated as a hedge instrument and will be used to fix the floating rate portion on $50.0 million outstanding on the Term Loan and $50.0 million outstanding under the Credit Facility.
11. Commitments and Contingencies
Construction in Progress
Construction in progress at December 31, 2009, consisted of the following (dollars in thousands):
(1) Represents 4,600 square foot expansion to the existing property.
As of December 31, 2009, the Company has remaining purchase commitments totaling $3.7 million to be paid during 2010 and none thereafter.
Operating Leases
The Company makes payments under operating lease agreements relating to building leases, equipment leases, and ground leases related to many of the Company’s properties. Future minimum lease commitments under these leases are as follows:
Many of the ground leases effectively limit the Company’s control over various aspects of the operation of the applicable building, restrict the Company’s ability to transfer the building and allow the lessor the right of first refusal to purchase the building and improvements. All the ground leases provide for the property to revert to the lessor for no consideration upon the expiration of the ground lease. Many of the ground leases have extension options. At December 31, 2009, the Company holds 29 ground leases that are due to expire between the years 2017 and 2062. Rent expense for the year ended December 31, 2009 was $6.0 million.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax Protection Agreements
In connection with the formation of the Operating Partnership, the Company entered into a tax protection agreement with the former owners of each contributed property who received limited partnership units in the Operating Partnership.
Pursuant to these agreements, the Company will not sell, transfer or otherwise dispose of any of the properties (each a “protected asset”) or any interest in a protected asset prior to the eighth anniversary of the Company’s initial public offering, which was in 2005, unless:
·
a majority-in-interest of the former holders of interests in the predecessor partnerships or contributing entities (or their successors, which may include the Company to the extent any OP units have been redeemed or exchanged) with respect to such protected asset consent to the sale, transfer of other disposition; provided, however, with respect to three of the predecessor entities, Cabarrus POB, LLC, Medical Investors I, LLC and Medical Investors III, LLC, the required consent shall be a majority-in-interest of the beneficial owners of interests in the predecessor entities other than Messrs. Cogdell and Spencer and their affiliates; or
·
the Operating Partnership delivers to each such holder of interests, a cash payment intended to approximate the holder’s tax liability related to the recognition of such holder’s built-in gain resulting from the sale of such protected asset; or
·
the sale, transfer or other disposition would not result in the recognition of any built-in gain by any such holder of interests.
Litigation
In the normal course of business, the Company is subject to claims, lawsuits and legal proceedings. While it is not possible to ascertain with certainty the ultimate outcome of such matters, in management’s opinion, the liabilities, if any, in excess of amounts provided or covered by insurance, are not expected to have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.
Indemnities
At times the Company may be obligated per agreement to indemnify another party with respect to certain matters. Typically, these obligations arise in contracts into which the Company enters, under which it customarily agrees to hold the other party harmless against certain losses arising from breaches of representations, warranties and/or covenants related to such matters as, among others, title to assets, specified environmental matters, qualification to do business, due organization, non-compliance with restrictive covenants, laws, rules and regulations, maintenance of insurance and payment of tax bills due and owing. Additionally, with respect to office lease agreements that are entered into as landlord, the Company may also indemnify the other party against damages caused by its willful misconduct or negligence associated with the operation and management of the building. Although no assurances with certainty can be made, it is believed that if the Company were to incur a loss in any of these matters, such loss would not have a material effect on the Company’s financial condition or results of operations. Historically, payments made with regard to these agreements have not had a material effect on the Company’s financial condition or results of operations.
Employees
The Company has employment agreements with its executive officers, the terms of which expire at various times through 2013. Such agreements, which have been revised from time to time, provide for salary amounts and cash and equity incentive bonuses that are payable if specified annual management goals or project completions are attained. The aggregate commitment for future salaries at December 31, 2009, excluding bonuses, was approximately $4.1 million.
In December 2008, the Company implemented a reduction in force plan and approximately 115 jobs were eliminated in January 2009. In December 2008, the Company recorded an accrued restructuring and severance expense of approximately $1.5 million related to this plan. The expense was recorded to selling, general, and administrative expense.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.
Equity
Shares and Units
An OP Unit and a share of the Company’s common stock have essentially the same economic characteristics as they share equally in the total net income or loss and distributions of the Operating Partnership. An OP Unit may be tendered for redemption for cash, however, the Company has sole discretion and the authorized common stock to exchange for shares of common stock on a one-for-one basis.
LTIP units are a special class of partnership interests in the Operating Partnership. Each LTIP unit awarded will be deemed equivalent to an award of one common share under the 2005 long-term stock incentive plan, reducing the availability for other equity awards on a one-for-one basis. The vesting period for LTIP units, if any, will be determined at the time of issuance. Cash distributions on each LTIP unit, whether vested or not, will be the same as those made on the OP Units. Under the terms of the LTIP units, the Operating Partnership will revalue for tax purposes its assets upon the occurrence of certain specified events, and any increase in valuation from the time of grant until such event will be allocated first to the holders of LTIP units to equalize the capital accounts of such holders with the capital accounts of OP unitholders. Subject to any agreed upon exceptions, once vested, LTIP units are convertible into OP Units in the Operating Partnership on a one for one basis.
As of December 31, 2009, there were 50.5 million OP Units outstanding, of which 42.7 million, or 84.6%, were owned by the Company and 7.8 million, or 15.4%, were owned by other partners, including certain directors, officers and other members of senior management. As of December 31, 2009, the fair market value of the OP Units not owned by the Company was $44.1 million, based on a market value of $5.66 per unit, which was the closing stock price of the Company’s shares on December 31, 2009.
In October 2009, the Company issued 331,812 alternative units relating to the final escrow release related to the Merger. See Note 4 within these consolidated financial statements for additional information.
In 2008, the Company, through the Operating Partnership, redeemed 46,231 units for cash payments, at the Company’s election, totaling $0.8 million. The per unit redemption prices ranged from $8.78 to $18.64, based on the preceding 10 day average of the Company’s common stock price per share. There were no redemption for cash payments in 2009.
The following is net loss attributable to Cogdell Spencer Inc. and the issuance of common stock in exchange for redemptions of OP Units for the years ended December 31, 2009, 2008, and 2007 (in thousands):
The following is a summary of changes of the Company’s common stock for the years ended December 31, 2009, 2008, and 2007 (in thousands):
Dividends and Distributions
During 2009, the Company paid two quarterly dividends of $0.225 per share or unit and two quarterly dividends of $0.10 per share or unit, totaling $0.65 per share or unit for the year. These quarterly distributions were paid in January, April, July, and October 2009. Total dividends paid to common stockholders during 2009 were $16.9 million. Total distributions paid to OP Unit holders, excluding inter-company distributions, during 2009 totaled $5.2 million.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 17, 2009, the Company announced that its Board of Directors had declared a quarterly dividend of $0.10 per share and operating partnership unit that was paid in cash on January 21, 2010 to holders of record on December 31, 2009.
Earnings and profits, which determine the tax treatment of distributions to stockholders, will differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of loss on extinguishment of debt, revenue recognition, compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation.
Noncontrolling Interests in Real Estate Partnerships
Noncontrolling interests in real estate partnerships at December 31, 2009 and 2008 relate to Rocky Mount MOB, LLC, Mebane Medical Investors, LLC, Cogdell General Health Campus MOB, LP, and Genesis Property Holdings, LLC. See Note 5 for additional information regarding the Company’s investments in real estate partnerships.
13.
Income Taxes
TRS Holdings is a taxable entity and its consolidated provision for income taxes consisted of the following for the years ended December 31 (in thousands):
The effective income tax rate is 18.2%, 39.3%, and 39.0% for the years ended December 31, 2009, 2008, and 2007, respectively. The actual tax provision differed from that computed at the federal statutory corporate rate as follows (in thousands):
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are presented below (in thousands):
When goodwill is impaired, such impairment is treated as being of permanent in character (meaning it has no effect on deferred taxes) unless the amount that the goodwill is being impaired down to is less than the original amount of tax basis in goodwill. If the amount that goodwill is impaired down to is less than the original amount of tax basis in the goodwill there will be an adjustment to deferred taxes. As it relates to the impairment in the current period, there is no provision benefit under the policy described above.
At December 31, 2009, there was $1.4 million of deferred tax assets related to inter-company interest expense carry forward, which has an unlimited carry forward period. No valuation allowance has been recorded against the deferred tax assets because the Company believes that these deferred tax assets will, more likely than not, be realized. This determination is based largely upon the TRS Holdings’ anticipated future taxable income, as well as the availability of taxable income in the carry back period and the reversal of deferred tax liabilities.
There was an insignificant amount of penalties or interest recorded during the years ended December 31, 2009, 2008 and 2007. The Company and TRS Holdings have an insignificant amount of unrecognized tax benefits. For tax years 2006, 2007, 2008, and 2009, the United States federal and state tax returns are open for examination.
14.
Incentive and Share-Based Compensation
The Company’s 2005 Long-Term Stock Incentive Plan (“2005 Incentive Plan”) provides for the grant of incentive awards to employees, directors and consultants to attract and retain qualified individuals and reward them for superior performance in achieving the Company’s business goals and enhancing stockholder value. Awards issuable under the incentive award plan include stock options, restricted stock, dividend equivalents, stock appreciation rights, LTIP units, cash performance bonuses and other incentive awards. Only employees are eligible to receive incentive stock options under the incentive award plan. The Company has reserved a total of 1,000,000 shares of common stock for issuance pursuant to the incentive award plan, subject to certain adjustments set forth in the plan. Each LTIP unit issued under the incentive award plan will count as one share of stock for purposes of calculating the limit on shares that may be issued under the plan and the individual award limit discussed below.
In January 2009, the Company issued 500 LTIP units that vested upon issuance to one employee. The LTIP units were valued at $8.70 per unit, which was the Company’s closing stock price on the NYSE on the grant date. The Company has recorded compensation expense of less than $0.1 million in connection with this issuance.
In February 2009, each non-employee member of the Company’s Board of Directors was granted 6,569 shares of the Company’s restricted stock or LTIP units, at each director’s option, that all vested upon issuance. Messrs. Georgius, Lee, Lubar, and Neugent each elected to receive LTIP units and Mr. Jennings and Dr. Smoak each elected to receive shares of restricted stock. The restricted stock and LTIP units were valued at $6.09 per share, which was the Company’s closing stock price on the NYSE on the grant date. The Company has recorded compensation expense of $0.2 million in connection with these issuances
In February 2009, 3,334 LTIP units previously issued, but unvested, became vested based on 2008 Company performance. Compensation expense of $0.1 million was recorded for the year ended December 31, 2008. As of December 31, 2009, there were 114,535 unvested LTIP units that will vest if, and when, the Company achieves certain performance standards as provided in the awards. Any portions of the unvested LTIP units that are not vested as of December 2015 are forfeited. As of December 31, 2009, the Company assessed the probability of the performance conditions being achieved and has recorded no compensation expenses associated with 2009 Company performance.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2009, the Company issued an aggregate of 80,586 LTIP units, all of which vested upon issuance, to certain employees based on 2008 performance goals. The LTIP units were valued at $6.09 per unit, which was the Company’s closing stock price on the grant date. The Company accrued compensation expense in 2008 in connection with this issuance.
In February 2009, the Company issued 4,926 LTIP units to one employee that will vest in February 2010 if such employee’s employment is maintained through February 2010. The LTIP units were valued at $6.09 per unit, which was the Company’s closing stock price on the grant date. The Company recorded compensation expense for the year ended December 31, 2009 of less than $0.1 million in connection with this issuance.
In December 2009, the Company issued an aggregate of 106,756 LTIP units, all of which vested upon issuance, to certain employees based on specific performance goals. The LTIP units were valued at $4.93 per unit, which was the Company’s closing stock price on the grant date. The Company recorded compensation expense of $0.4 million and capitalized $0.1 million as a development project cost.
In February 2008, each non-employee member of the Company’s Board of Directors was granted shares of restricted stock or LTIP units in the Operating Partnership that all vested upon issuance. Messrs. Georgius and Lee and Dr. Smoak were each granted 3,135 LTIP units and Messrs. Jennings and Neugent were each granted 3,135 shares of restricted stock. The restricted stock and LTIP units were valued at $15.00 per share, which was the Company’s closing stock price on the grant date. The Company recorded compensation expense of $0.2 million during the year ended December 31, 2008.
In March 2008, the Company issued an aggregate 156,740 LTIP units, of which 20%, or 31,347, vested upon issuance. The remaining 80% will vest if, and when, the Company achieves certain performance standards as provided in the awards. The one time award was granted in recognition of the role played by certain employees in guiding the Company through the Merger. The LTIP units were valued at $15.72 per unit, which was the Company’s closing stock price on the grant date. The Company recorded compensation expense of $0.5 million in March 2008 related to the 20% of the grant that vested. The value of the unvested LTIP units was $2.0 million. Any portions of the unvested LTIP units that are not vested as of December 2015 are forfeited. During 2008, 7,524 LTIP units were forfeited due to a termination of employment. The Company has assessed the probability of the performance conditions being achieved and as a result has accrued and expensed $0.1 million related to expected vesting associated with 2008 Company performance.
In May 2008, Mr. Cogdell, the Chairman of the Board of Directors of the Company elected to forego his remaining 2008 annual salary. In lieu of receiving his annual salary, Mr. Cogdell was awarded 18,579 LTIP units in the Operating Partnership, under the 2005 Incentive Plan. The LTIP units were valued at $17.62 per unit, which was the Company’s closing stock price on the grant date. The Company recorded compensation expense of $0.3 million.
In July 2008, the Company issued an aggregate of 5,153 LTIP units, all of which vested upon issuance, to certain employees based on specific performance goals. The LTIP units were valued at $15.72 per unit, which was the Company’s closing stock price on the grant date. The Company recorded compensation expense of less than $0.1 million and capitalized $0.1 million as a development project cost.
During 2007, the Company issued 2,500 vested LTIP units. The LTIP units were valued at $21.07 per unit and $0.1 million of compensation expense was recorded.
No other stock options, dividend equivalents, or stock appreciation rights were issued or outstanding in 2009, 2008, and 2007.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of restricted stock and LTIP unit activity for the ended December 31, 2009 (in thousands, except weighted average grant price):
15.
401(k) Savings Plans
Cogdell Spencer LP sponsors a 401(k) plan covering substantially all of its employees. The plan provides for matching as well as profit-sharing contributions. Profit-sharing contributions are made at the discretion of management and are allocated to participants based on their level of compensation. Profit-sharing contributions were not paid in 2009, 2008, or 2007. The Company matched 100% of the employees’ contributions to the plan up to a maximum of 4% of compensation in 2009, 2008, or 2007. The 401(k) matching expense for the year ended December 31, 2009, 2008, and 2007 was approximately $0.1 million, $0.1 million, and $0.1 million, respectively.
MEA sponsors a 401(k)/profit sharing plan covering substantially all salaried employees. MEA’s contribution to the plan is determined annually by management and is limited, by law, to 25% of the annual aggregate compensation of those employees eligible for participation in the plan. There were no profit sharing contributions made during the year ended 2009. The total expense charged to “Costs related to contract and other revenues” and “Selling, general, and administrative expenses” for this plan for the year ended December 31, 2008 was approximately $2.7 million and $0.8 million, respectively. The 401(k) matching expense for the year ended December 31, 2009 and 2008 was approximately $0.9 million and $1.5 million, respectively.
16.
Related Party Transactions
The Fork Farm, a working farm owned by the Company’s Chairman and founder, periodically hosts events on behalf of the Company. Charges of less than $25,000 for each year ended December 31, 2009, 2008, and 2007 are reflected in “Selling, general, and administrative” expenses in the consolidated statement of operations.
The Company has certain design-build contracts for the construction of medical facilities with certain entities in which Mr. Lubar, a member of the Company’s Board of Directors, has an indirect ownership interest and is a director. Mr. Lubar resigned as an officer of the entity in 2008. In addition, Mr. Ransom, a member of the Board of Directors and our President, and certain members of senior management have direct ownership in the entities. The total contract amount is $30.7 million and construction was in process at the time of the MEA transaction. During 2008, construction was completed on one medical facility. For the year ended December 31, 2008, the Company recognized $16.0 million of revenue and at December 31, 2008 had accounts receivable of $2.1 million and billings in excess of costs and estimated earnings on uncompleted contracts of $2.1 million related to both projects. During 2009, construction was completed on the second medical facility and the Company recognized $3.0 million in 2009. As of December 31, 2009, the Company had no accounts receivable or billings in excess of costs and estimated earnings on uncompleted contracts.
17.
Additional Information
During 2009, the Company explored a range of strategic alternatives that included: an assessment of potential change of control transactions; asset dispositions and acquisitions; business and portfolio combinations; debt financings and refinancings. For the year ended December 31, 2009, the selling, general and administrative expense associated with this exercise totaled approximately $2.6 million and included fees for consultants, accountants, attorneys, and other service providers.
During 2008, the Company incurred after-tax restructuring and severance charges of $1.3 million related to severance paid to a member of the senior management team and severance and restructuring due to a planned reduction in force that was announced in 2008 and occurred in 2009. This expense is included in selling, general and administrative.
COGDELL SPENCER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18.
Selected Quarterly Financial Information (unaudited)
The tables below reflect the Company’s selected quarterly information for the Company for the years ended December 31, 2009 and 2008 (in thousands, except per share amounts):
COGDELL SPENCER INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
COGDELL SPENCER INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
COGDELL SPENCER INC.
NOTES TO SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
A summary of activity for real estate properties and accumulated depreciation is as follows:
(1) Includes deferred income tax expense on intersegment profits of $2.8 million for the year ended December 31, 2009 and $7,000 for the year ended December 31, 2008.
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
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, the Company has investments in certain unconsolidated entities. As the Company does not control these entities, the Company’s disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those the Company maintains with respect to its consolidated subsidiaries.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the Company concluded that its internal control over financial reporting was effective as of December 31, 2009.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s internal control over financial reporting as of December 31, 2009, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report which is included below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cogdell Spencer Inc.
Charlotte, North Carolina
We have audited the internal control over financial reporting of Cogdell Spencer Inc. and subsidiaries (the "Company") as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2009 of the Company and our report dated March 16, 2010 expressed an unqualified opinion on those financial statements and financial statement schedule, and included an explanatory paragraph relating to the Company changing its method of accounting for noncontrolling interests on January 1, 2009, and retrospectively adjusting all periods presented in the consolidated financial statements.
DELOITTE & TOUCHE LLP
McLean, Virginia
March 16,
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers, and Corporate Governance
As required by Section 303A.12(a) of the NYSE Listing Company Manual, our Chief Executive Officer made his annual certification to the NYSE stating that he was not aware of any violation by our Company of the corporate governance listing standards of the NYSE. In addition, the Company has filed, as Exhibits to the Annual Report on Form 10-K, the certifications of our Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002 to be filed with the Securities and Exchange Commission regarding the quality of our public disclosure.
Information required by this Item is hereby incorporated by reference to the material appearing in the Company’s Proxy Statement for its 2010 Annual Meeting of Stockholders to be filed within 120 days after December 31, 2009.
Guidelines
The Board of Directors has adopted a Code of Business Ethics, which applies to all employees, officers and directors, including the principal executive officer, principal financial officer and principal accounting officer, and is posted on the Company’s website at www.cogdell.com. The Company intends to satisfy and disclosure requirements under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of this Code of Business Conduct and Ethics by posting such information on its Website at the address and location specified above.
The Board of Directors has adopted Corporate Governance Guidelines and charters for its Audit Committee, Compensation Committee and Nominating and Governance Committee, each of which is posted on the Company’s Web site. Investors may obtain a free copy of the Code of Business Ethics, the Corporate Governance Guidelines or the committee charters by contacting Investor Relations, Cogdell Spencer Inc., 4401 Barclay Downs Drive, Suite 300, Charlotte, North Carolina 28209, Attn: Jaime Buell or by telephoning (704) 940-2900.
Item 11.
Item 11.
Executive Compensation
Information required by this Item is hereby incorporated by reference to the material appearing in the Company’s Proxy Statement for its 2010 Annual Meeting of Stockholders to be filed within 120 days after December 31, 2009.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement for its 2010 Annual Meeting of Stockholders to be filed within 120 days after December 31, 2009 under the captions “Election of Directors - Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management.”
Item 13.
Item 13.
Certain Relationships, Related Transactions, and Director Independence
Information required by this Item is hereby incorporated by reference to the material appearing in the Company’s Proxy Statement for its 2010 Annual Meeting of Stockholders to be filed within 120 days after December 31, 2009.
Item 14.
Item 14.
Principal Accountant Fees and Services
Information required by this Item is hereby incorporated by reference to the material appearing the Company’s Proxy Statement for its 2010 Annual Meeting of Stockholders to be filed within 120 days after December 31, 2009.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(1)
Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COGDELL SPENCER INC.
Registrant
Date: March 16, 2010
/s/ Frank C. Spencer
Frank C. Spencer
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 16, 2010
/s/ Charles M. Handy
Charles M. Handy
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: March 16, 2010
/s/ James W. Cogell
James W. Cogdell
Chairman of the Board of Directors
Date: March 16, 2010
/s/ Frank C. Spencer
Frank C. Spencer
President, Chief Executive Officer and Director
Date: March 16, 2010
/s/ Scott A. Ransom
Scott A. Ransom
President and Chief Executive Officer of Erdman
Date: March 16, 2010
/s/ John R. Georgius
John R. Georgius
Director
Date: March 16, 2010
/s/ Richard B. Jennings
Richard B. Jennings
Director
Date: March 16, 2010
/s/ Christopher E. Lee
Christopher E. Lee
Director
Date: March 16, 2010
/s/ David J. Lubar
David J. Lubar
Director
Date: March 16, 2010
/s/ Richard C. Neugent
Richard C. Neugent
Director
Date: March 16, 2010
/s/ Randolph D. Smoak, M.D.
Randolph D. Smoak, M.D.
Director