10-Q 1 hgr063012_10q.htm HGR JUNE 30, 2012 10-Q hgr063012_10q.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
 
FORM 10-Q

(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to

Commission file number: 000-53964
________________
 
Hines Global REIT, Inc.
(Exact name of registrant as specified in its charter)

Maryland
26-3999995
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
2800 Post Oak Boulevard
 
Suite 5000
 
Houston, Texas
77056-6118
(Address of principal executive offices)
(Zip code)

 (888) 220-6121
(Registrant’s telephone number, including area code)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 Large accelerated filer   o
 
     Accelerated Filer   o
 
       
Non-accelerated Filer   x (Do not check if a smaller reporting company)
     Smaller Reporting Company   ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o   No x
 
As of August 8, 2012, approximately 116.2 million shares of the registrant’s common stock were outstanding.
 


 
 
 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
     
       
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
     
     
1
 
     
2
 
     
3
 
     
4
 
     
5
 
Item 2.
   
22
 
Item 3.
   
33
 
Item 4.
   
  35
 
         
PART II – OTHER INFORMATION
       
         
Item 1. 
   
35
 
Item 1A. 
   
  35
 
Item 2.
   
35
 
Item 3. 
   
36
 
Item 4. 
   
36
 
Item 5. 
   
36
 
Item 6.
   
36
 
           
       
EX-10.2          
       
       
       
 
       
 EX-101 Instance Document
       
 EX-101 Schema Document
       
 EX-101 Calculation Linkbase Document
       
 EX-101 Labels Linkbase Document
       
 EX-101 Presentation Linkbase Document
       
 EX-101 Definition Linkbase Document
       
 
       

 
 

 

PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
HINES GLOBAL REIT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands, except per share amounts)
ASSETS
 
 
 
 
 
Investment property, net
 
$
1,095,734 
 
$
950,430 
Investment in unconsolidated entities
 
 
3,298 
 
 
 - 
Cash and cash equivalents
 
 
90,800 
 
 
66,490 
Restricted cash
 
 
7,427 
 
 
6,944 
Derivative instruments
 
 
2,964 
 
 
 - 
Tenant and other receivables
 
 
16,314 
 
 
13,729 
Intangible lease assets, net
 
 
328,774 
 
 
301,273 
Deferred leasing costs, net
 
 
3,478 
 
 
1,852 
Deferred financing costs, net
 
 
10,626 
 
 
8,586 
Real estate loans receivable
 
 
15,185 
 
 
4,919 
Other assets
 
 
12,749 
 
 
27,094 
Total Assets
 
$
1,587,349 
 
$
1,381,317 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
Liabilities:
 
 
 
 
 
Accounts payable and accrued expenses
$
24,791 
 
$
23,049 
Due to affiliates
 
17,610 
 
 
12,527 
Intangible lease liabilities, net
 
14,817 
 
 
16,267 
Other liabilities
 
14,005 
 
 
13,273 
Derivative instruments
 
15,519 
 
 
13,241 
Distributions payable
 
8,903 
 
 
7,996 
Notes payable
 
695,369 
 
 
625,560 
Total Liabilities
 
791,014 
 
 
711,913 
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies (Note 12)
 
 - 
 
 
 - 
 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
Preferred shares, $.001 par value; 500,000 preferred shares authorized, none issued or outstanding as of June 30, 2012 and December 31, 2011
 
 - 
 
 
 - 
Common stock, $.001 par value; 1,500,000 shares authorized, 111,179 and 90,023 issued and outstanding as of June 30, 2012 and December 31, 2011, respectively
 
111 
 
 
90 
Additional paid-in capital
 
893,132 
 
 
738,616 
Accumulated deficit
 
(100,652)
 
 
(82,890)
Accumulated other comprehensive loss
 
(28,688)
 
 
(19,741)
Total stockholders' equity
 
763,903 
 
 
636,075 
Noncontrolling interests
 
32,432 
 
 
33,329 
Total equity
 
796,335 
 
 
669,404 
Total Liabilities and Equity
$
1,587,349 
 
$
1,381,317 
 
 
 
 
 
 
 
 
 
 
See notes to the condensed consolidated financial statements.

 
1

 

HINES GLOBAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the Three and Six Months Ended June 30, 2012 and 2011
(UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012 
 
2011 
 
2012 
 
2011 
 
 
(In thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Rental revenue
 
$
 39,810 
 
$
 20,135 
 
$
 74,318 
 
$
 37,438 
Other revenue
 
 
 2,818 
 
 
 1,727 
 
 
 5,285 
 
 
 3,264 
Total revenues
 
 
 42,628 
 
 
 21,862 
 
 
 79,603 
 
 
 40,702 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Property operating expenses
 
 
 9,295 
 
 
 4,180 
 
 
 17,849 
 
 
 8,505 
Real property taxes
 
 
 3,590 
 
 
 1,696 
 
 
 6,358 
 
 
 3,290 
Property management fees
 
 
 887 
 
 
 501 
 
 
 1,650 
 
 
 1,014 
Depreciation and amortization
 
 20,673 
 
 
 12,859 
 
 
 37,824 
 
 
 23,422 
Acquisition related expenses
 
 
 5,955 
 
 
 2,132 
 
 
 6,722 
 
 
 3,185 
Asset management and acquisition fees
 
 5,820 
 
 
 2,797 
 
 
 8,767 
 
 
 6,663 
General and administrative
 
 
 991 
 
 
 856 
 
 
 1,880 
 
 
 1,609 
Total expenses
 
 
 47,211 
 
 
 25,021 
 
 
 81,050 
 
 
 47,688 
Income (loss) before other income (expenses) and benefit (provision) for income taxes
 
 (4,583)
 
 
 (3,159)
 
 
 (1,447)
 
 
 (6,986)
Other income (expenses):
 
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on derivative instruments
 
 3,745 
 
 
 (8,313)
 
 
 1,821 
 
 
 (6,380)
Other gains (losses)
 
 
 (787)
 
 
 (4)
 
 
 (2,282)
 
 
 22 
Interest expense
 
 
 (8,902)
 
 
 (5,640)
 
 
 (16,525)
 
 
 (10,296)
Interest income
 
 
 13 
 
 
 36 
 
 
 27 
 
 
 75 
Income (loss) before benefit (provision) for income taxes
 
 (10,514)
 
 
 (17,080)
 
 
 (18,406)
 
 
 (23,565)
Benefit (provision) for income taxes
 
 1,126 
 
 
 (767)
 
 
 246 
 
 
 (1,124)
Net income (loss)
 
 
 (9,388)
 
 
 (17,847)
 
 
 (18,160)
 
 
 (24,689)
Net (income) loss attributable to noncontrolling interests
 
 382 
 
 
 1,263 
 
 
 398 
 
 
 629 
Net income (loss) attributable to common stockholders
$
 (9,006)
 
$
 (16,584)
 
$
 (17,762)
 
$
 (24,060)
Basic and diluted income (loss) per common share
$
 (0.09)
 
$
 (0.27)
 
$
 (0.18)
 
$
 (0.44)
Distributions declared per common share
$
 0.16 
 
$
0.17 
 
$
 0.32 
 
$
0.35 
Weighted average number of common shares outstanding
 
 105,560 
 
 
 61,540 
 
 
 100,066 
 
 
 54,609 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
 (9,388)
 
$
 (17,847)
 
$
 (18,160)
 
$
 (24,689)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 (28,389)
 
 
 (339)
 
 
 (8,628)
 
 
 2,248 
Net comprehensive income (loss)
 
 (37,777)
 
 
 (18,186)
 
 
 (26,788)
 
 
 (22,441)
Net comprehensive (income) loss attributable to noncontrolling interests
 
 (1,006)
 
 
 (2,687)
 
 
 79 
 
 
 (724)
Net comprehensive income (loss) attributable to common stockholders
$
 (38,783)
 
$
 (20,873)
 
$
 (26,709)
 
$
 (23,165)
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to the condensed consolidated financial statements.

 
2

 

HINES GLOBAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Six Months Ended June 30, 2012 and 2011
(UNAUDITED)
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Shares
 
 
Amount
 
 
Additional Paid-in Capital
 
 
Accumulated Deficit
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
Total Stockholders' Equity
 
 
Noncontrolling Interests
Balance as of
January 1, 2012
90,023 
 
$
90 
 
$
738,616 
 
$
(82,890)
 
$
(19,741)
 
$
636,075 
 
$
33,329 
Issuance of common shares
 21,755 
 
 
 22 
 
 
 216,141 
 
 
 - 
 
 
 - 
 
 
 216,163 
 
 
 - 
Contribution from noncontrolling interest
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 403 
Distributions declared
 - 
 
 
 - 
 
 
(32,426)
 
 
 - 
 
 
 - 
 
 
(32,426)
 
 
(131)
Distributions on Convertible Preferred Equity Certificates (CPEC)
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
(1,090)
Redemption of common shares
(599)
 
 
 (1)
 
 
(6,076)
 
 
 - 
 
 
 - 
 
 
(6,077)
 
 
 - 
Selling commissions and dealer manager fees
 - 
 
 
 - 
 
 
(19,476)
 
 
 - 
 
 
 - 
 
 
(19,476)
 
 
 - 
Issuer costs
 - 
 
 
 - 
 
 
(3,647)
 
 
 - 
 
 
 - 
 
 
(3,647)
 
 
 - 
Net income (loss)
 - 
 
 
 - 
 
 
 - 
 
 
(17,762)
 
 
 - 
 
 
(17,762)
 
 
(398)
Foreign currency translation adjustment
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
(8,947)
 
 
(8,947)
 
 
319 
Balance as of
June 30, 2012
111,179 
 
$
111 
 
$
893,132 
 
$
(100,652)
 
$
(28,688)
 
$
763,903 
 
$
32,432 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Shares
 
 
Amount
 
 
Additional Paid-in Capital
 
 
Accumulated Deficit
 
 
Accumulated Other Comprehensive Income
 
 
Total Stockholders' Equity
 
 
Noncontrolling Interests
Balance as of
January 1, 2011
41,287 
 
$
41 
 
$
350,561 
 
$
(25,873)
 
$
 1,347 
 
$
326,076 
 
$
38,309 
Issuance of common shares
27,880 
 
 
28 
 
 
277,823 
 
 
 - 
 
 
 - 
 
 
277,851 
 
 
 - 
Distributions declared
 - 
 
 
 - 
 
 
(18,955)
 
 
 - 
 
 
 - 
 
 
(18,955)
 
 
 (4)
Distributions on CPECs
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
(1,912)
Redemption of common shares
(299)
 
 
 - 
 
 
(2,656)
 
 
 - 
 
 
 - 
 
 
(2,656)
 
 
 - 
Selling commissions and dealer manager fees
 - 
 
 
 - 
 
 
(26,425)
 
 
 - 
 
 
 - 
 
 
(26,425)
 
 
 - 
Issuer costs
 - 
 
 
 - 
 
 
(2,296)
 
 
 - 
 
 
 - 
 
 
(2,296)
 
 
 - 
Net income (loss)
 - 
 
 
 - 
 
 
 - 
 
 
(24,060)
 
 
 - 
 
 
(24,060)
 
 
(629)
Foreign currency translation adjustment
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
895 
 
 
895 
 
 
1,353 
Balance as of
June 30, 2011
68,868 
 
$
69 
 
$
578,052 
 
$
(49,933)
 
$
2,242 
 
$
530,430 
 
$
37,117 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to the condensed consolidated financial statements.

 
3

 

HINES GLOBAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2012 and 2011
(UNAUDITED)
 
 
 
 
 
 
 
 
 
2012 
 
2011 
 
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
(In thousands)
Net income (loss)
$
(18,160)
 
$
(24,689)
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
 
 
Depreciation and amortization
 
 41,771 
 
 
 25,705 
Other gains (losses)
 
 
 2,282 
 
 
 - 
(Gain) loss on derivative instruments
 
 (1,821)
 
 
 6,380 
Changes in assets and liabilities:
 
 
 
 
 
  Change in other assets
 
(1,918)
 
 
(825)
  Change in tenant and other receivables
 
(1,779)
 
 
(764)
  Change in deferred leasing costs
 
(1,816)
 
 
 (1,164)
  Change in accounts payable and accrued expenses
 
 (218)
 
 
 4,239 
  Change in other liabilities
 
 682 
 
 
3,360 
  Change in due to affiliates
 
 1,375 
 
 
 1,302 
Net cash from operating activities
 
 20,398 
 
 
13,544 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
Investments in property and acquired lease intangibles
 
(200,078)
 
 
(217,111)
Investments in unconsolidated entities
 
(3,298)
 
 
 - 
Deposits on investment property
 
(7,015)
 
 
 (5,008)
Investments in real estate loans receivable
 
 
(13,373)
 
 
 - 
Proceeds from collection of real estate loans receivable
 
 
3,107 
 
 
 - 
Change in restricted cash
 
(441)
 
 
 (3,384)
Net cash from investing activities
 
(221,098)
 
 
(225,503)
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
Proceeds from issuance of common stock
 
 199,591 
 
 
 267,672 
Contribution from noncontrolling interest
 
 
 403 
 
 
 - 
Redemption of common shares
 
(5,763)
 
 
(2,832)
Payments of issuer costs
 
(2,775)
 
 
(2,360)
Payment of selling commissions and dealer manager fees
 
(18,951)
 
 
(26,649)
Distributions paid to stockholders and noncontrolling interests
 
(16,281)
 
 
(9,450)
Proceeds from notes payable
 
 
 364,959 
 
 
 92,009 
Proceeds from related party notes payable
 
 
 2,146 
 
 
 - 
Payments on notes payable
 
(293,710)
 
 
 (1,010)
Change in security deposit liability
 
338 
 
 
 (4)
Deferred financing costs paid
 
(3,552)
 
 
 (1,960)
Payments related to interest rate swaps
 
 
(643)
 
 
 - 
Net cash from financing activities
 
 225,762 
 
 
 315,416 
Effect of exchange rate changes on cash
 
(752)
 
 
 (184)
Net change in cash and cash equivalents
 
 24,310 
 
 
 103,273 
Cash and cash equivalents, beginning of period
 
 66,490 
 
 
 146,953 
Cash and cash equivalents, end of period
$
 90,800 
 
$
 250,226 
 
 
 
 
 
 
 
See notes to the condensed consolidated financial statements.

 
4

 

HINES GLOBAL REIT, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2012 and 2011

1.  ORGANIZATION

The accompanying interim unaudited condensed consolidated financial information has been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted according to such rules and regulations. For further information, refer to the financial statements and footnotes for the year ended December 31, 2011 included in Hines Global REIT, Inc.’s Annual Report on Form 10-K. In the opinion of management, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly and in conformity with GAAP the financial position of Hines Global REIT, Inc. as of June 30, 2012, the results of operations for the three and six months ended June 30, 2012 and 2011 and cash flows for the six months ended June 30, 2012 and 2011 have been included.  The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Hines Global REIT, Inc. (the “Company”), was formed as a Maryland corporation on December 10, 2008 under the General Corporation Law of the state of Maryland for the purpose of engaging in the business of investing in and owning commercial real estate properties and other real estate investments. The Company conducts substantially all of its operations through Hines Global REIT Properties, LP (the “Operating Partnership”) and subsidiaries of the Operating Partnership. Beginning with its taxable year ended December 31, 2009, the Company operated and intends to continue to operate in a manner to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. The business of the Company is managed by Hines Global REIT Advisors LP (the “Advisor”), an affiliate of Hines Interests Limited Partnership (“Hines”), pursuant to the Advisory Agreement between the Company, the Advisor and the Operating Partnership.

On August 5, 2009, the Company commenced its initial public offering of up to $3.5 billion in shares of common stock for sale to the public (the “Initial Offering”) through which it has received gross offering proceeds of $1.1 billion from the sale of 112.6 million shares through June 30, 2012. The Company engaged Hines Securities, Inc. (the “Dealer Manager”), an affiliate of Hines, to serve as the dealer manager for the Initial Offering. The Dealer Manager is responsible for marketing the Company’s shares being offered pursuant to the Initial Offering. The Company has and intends to continue to invest the net proceeds from the Initial Offering in a diversified portfolio of quality commercial real estate properties and other real estate investments throughout the United States and internationally. Properties purchased by the Company may have varying uses including office, retail, industrial, multi-family residential and hospitality or leisure. The Company may invest in operating properties, properties under development, and undeveloped properties such as land. In addition, the Company may also make other real estate investments including investments in equity or debt interests, which may include securities in other real estate entities and debt related to real estate.

The Company expects to terminate the Initial Offering no later than February 1, 2013 and expects to commence a follow-on offering through which it will offer up to $3.5 billion in shares of common stock (the “Second Offering”) shortly thereafter. The Company filed a registration statement on Form S-11 (File No. 333-182340) with the SEC on June 26, 2012 to register shares of the Company’s common stock for the Second Offering.

The Company made its initial real estate investment in June 2010 and owned interests in 14 properties as of June 30, 2012. The Company’s investments consisted of the following:

·  
Domestic office properties (7 properties)
·  
Domestic industrial properties (1 property)
·  
International office properties (3 properties)
·  
International mixed-use properties (1 property)
·  
International industrial properties (2 properties)

In addition, the Company owned interests in the following other real estate investments as of June 30, 2012:

·  
WaterWall Place JV — 93% interest in a joint venture that was formed to invest in a multi-family development project in Houston, Texas. An affiliate of Hines owns the remaining 7% interest in this joint venture. The joint venture acquired the land in December 2011. Construction began in July 2012 and is expected to be completed by June 2014, although there can be no assurances as to when construction will be completed.

 
5

 
·  
Ashford at Brookhaven Development (“Ashford”) — Multi-family development project in Atlanta, Georgia, which is being developed by an affiliate of Hines. Construction began in July 2012 and is expected to be completed by December 2013, although there can be no assurances as to when construction will be completed. In November 2011, the Company entered into an agreement with Ashford to provide pre-construction financing, secured by a mortgage. All amounts borrowed under this agreement were repaid on June 29, 2012.  In addition, effective June 29, 2012, the Company committed to make a preferred equity investment of $3.6 million in the project, representing a 51.7% ownership, $3.3 million of which was funded on June 29, 2012. An affiliate of Hines owns the remaining interest in the project. The Company accounts for its investment in this development using the equity method of accounting. In addition on June 29, 2012, the Company entered into a $3.2 million mezzanine loan commitment to provide construction financing to the project. No amounts have been drawn under the mezzanine loan to date. See Note 2 for additional discussion regarding the Company’s accounting for Ashford.

·  
Flagship Capital JV — 97% interest in a joint venture with Flagship Capital GP, which was formed to provide approximately $39.0 million of financing for real estate projects. The joint venture has three loans receivable, totaling $15.2 million, outstanding as of June 30, 2012. Flagship Capital GP owns the remaining 3% interest in the joint venture.

·  
Ponce & Bird JV — 83% interest in a joint venture that was formed in July 2012 to invest in a multi-family development project in Miami, Florida. An affiliate of Hines owns the remaining 17% interest in this joint venture. Construction is expected to begin in December 2012 and is expected to be completed by June 2014, although there can be no assurances as to when construction will be completed.

 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Described below are certain of the Company’s significant accounting policies. The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q. Please see the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2011 for a complete listing of all of its significant accounting policies.

Use of Estimates

The Company’s condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company evaluates its assumptions and estimates on an ongoing basis. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Additionally, application of the Company’s accounting policies involves exercising judgments regarding assumptions as to future uncertainties. Actual results may differ from these estimates under different assumptions or conditions.

Basis of Presentation

The condensed consolidated financial statements of the Company include the accounts of Hines Global REIT, Inc., the Operating Partnership and its wholly-owned subsidiaries and certain joint ventures as well as amounts related to noncontrolling interests. All intercompany balances and transactions have been eliminated upon consolidation.
 
International Operations
 
The British pound (“GBP”) is the functional currency for Company’s subsidiaries operating in the United Kingdom, the Russian rouble (“RUB”) is the functional currency for the Company’s subsidiaries operating in Russia, the Polish zloty (“PLN”) is the functional currency for the Company’s subsidiaries operating in Poland and the Australian dollar (“AUD”) is the functional currency for the Company’s subsidiaries operating in Australia. These subsidiaries have translated their financial statements into U.S. dollars for reporting purposes.

Impairment of Investment Property

Real estate assets are reviewed for impairment each reporting period if events or changes in circumstances indicate that the carrying amount of the individual property may not be recoverable. In such an event, a comparison will be made of the current and projected operating cash flows and expected proceeds from the eventual disposition of each property on an undiscounted basis to the carrying amount of such property. If the carrying amount exceeds the undiscounted cash flows, it would be written down to the estimated fair value to reflect impairment in the value of the asset. The determination of whether investment property is impaired requires a significant amount of judgment by management and is based on the best information available to management at the time of the evaluation. No impairment charges were recorded during the six months ended June 30, 2012 and 2011.

 
6

 
Investments in Unconsolidated Entities

The Company has concluded that its investment in Ashford qualifies as a variable interest entity (“VIE”). Ashford is financed with a $23.3 million secured loan made by Cadence Bank, N.A., which is solely guaranteed by the Company’s joint venture partner (the “JV Partner”), and a $3.2 million mezzanine loan commitment made by the Company. The JV Partner is the manager of the project, allowing the JV Partner to direct the activities of the VIE that most significantly impact the VIE’s financial performance. Based upon the loan guarantees and the JV Partner’s ability to direct the activities that significantly impact the economic performance of the VIE, the Company has determined that it is not the primary beneficiary of this VIE. The Company’s maximum loss exposure is expected to change in future periods as a result of income earned, distributions received and contributions made. Other than the initial capital contribution provided by the Company at the inception of the joint venture, the Company has not provided any additional subordinated financial support. The table below includes the Company’s maximum loss exposure related to this investment as of June 30, 2012, which is equal to the carrying value of its investment in the joint venture included in the balance sheet line item “Investments in unconsolidated entities” for each period. Amounts are in thousands:

 Period
 
Investment in Ashford (1)
 
Maximum Risk of Loss
June 30, 2012
 
 3,298 
 
 3,298 
 
 
 
 
 
 
 
 
(1)
Represents the carrying amount of the investment in Ashford, which includes the net effect of contributions made, distributions received and the Company’s share of equity in losses.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents.

Restricted Cash

The Company has restricted cash related to certain escrows required by several of the Company’s mortgage agreements. Specifically, $5.5 million of the restricted cash relates to a reserve that one of the Company’s properties is required to fund related to the refurbishment of one of its buildings.

Tenant and Other Receivables

Tenant and other receivables are recorded at cost, net of any applicable allowance for doubtful accounts.  Tenant and other receivables are shown at cost in the condensed consolidated balance sheets, net of allowance for doubtful accounts of $0.6 million at June 30, 2012. No significant allowances were recorded as of December 31, 2011.

Deferred Leasing Costs

Deferred leasing costs primarily consist of direct leasing costs such as third-party leasing commissions and tenant inducements. Deferred leasing costs are capitalized and amortized over the life of the related lease. Tenant inducement amortization is recorded as a reduction to rental revenue and the amortization of other direct leasing costs is recorded as a component of amortization expense.

Deferred Financing Costs

Deferred financing costs consist of direct costs incurred in obtaining debt financing, including the financing fees paid to the Advisor (see Note 7 – Related Party Transactions). These costs are amortized into interest expense on a straight-line basis, which approximates the effective interest method, over the terms of the obligations. For the three months ended June 30, 2012 and 2011, $0.8 million and $0.4 million, were amortized into interest expense, respectively. For the six months ended June 30, 2012 and 2011, $1.6 million and $0.8 million, were amortized into interest expense, respectively.
 
Real Estate Loans Receivable

Real estate loans receivable included the following (in thousands):

 
 
 
June 30, 2012
 
 
December 31, 2011
Flagship Capital JV
 
$
 15,185 
 
 
$
 2,949 
Ashford
 
 
 - 
 
 
 
 1,970 
Real estate loans receivable
 
$
 15,185 
 
 
$
 4,919 

 
7

 
        The table below provides additional detail on the Company's outstanding real estate loans receivable through the Flagship Capital JV as of June 30, 2012 (in thousands):
 
 
 
 
 
 
 
 
 
 
Property
Original Funding Date
Maturity Date
Interest Rate
 
Total Loan
Commitment
 
Balance as of June 30, 2012
Norchester Village
3/1/2012
2/28/2014
7.75%
 
$
4,961 
 
$
4,229 
Rutland Place
3/28/2012
9/26/2013
7.70%
 
 
7,720 
 
 
6,217 
The Lakeside Apartments
12/23/2011
3/22/2015
12.00%
 
 
5,359 
 
 
4,739 
 
 
 
 
 
$
18,040 
 
$
15,185 

An allowance for the uncollectible portion of the real estate loans receivable is determined based upon an analysis of the borrower’s payment history, the financial condition of the borrower, business conditions in the industry in which the borrower operates and economic conditions in the area in which the property is located.  Real estate loans receivable is shown at cost, net of any applicable allowance for doubtful accounts. As of June 30, 2012 and December 31, 2011, no such allowances have been recorded.

From July 1, 2012 through August 13, 2012, the Flagship Capital JV funded two additional loans which amounted to $15.0 million. The loans bear interest at rates between 7.60% to 7.80% and mature between July 31, 2014 and August 2, 2015.

        Other Assets
 
 
 
 
 
 
 
 
 
 
        Other assets included the following (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
 
December 31, 2011
Deposits
 
$
 7,929 
 
 
$
 24,404 
(1)
Other
 
 
 4,820 
 
 
 
 2,690 
 
Other assets
 
$
 12,749 
 
 
$
 27,094 
 
 
 
 
 
 
 
 
 
 
 
(1)
Primarily relates to $23.5 million paid in connection with the acquisition of the Poland Logistics Portfolio, which was acquired in March 2012. See Note 3 - Investment Property for additional information regarding the Poland Logistics Portfolio.

Revenue Recognition
 
Rental payments are generally paid by the tenants prior to the beginning of each month. As of June 30, 2012 and December 31, 2011, respectively, the Company recorded liabilities of $11.8 million and $11.0 million related to prepaid rental payments which were included in other liabilities in the accompanying condensed consolidated balance sheets. The Company recognizes rental revenue on a straight-line basis over the life of the lease including rent holidays, if any. Straight-line rent receivable was $9.0 million and $5.4 million as of June 30, 2012 and December 31, 2011, respectively. Straight-line rent receivable consisted of the difference between the tenants’ rents calculated on a straight-line basis from the date of acquisition or lease commencement over the remaining terms of the related leases and the tenants’ actual rents due under the lease agreements and is included in tenant and other receivables in the accompanying condensed consolidated balance sheets. Revenues associated with operating expense recoveries are recognized in the period in which the expenses are incurred based upon the tenant lease provisions. Revenues relating to lease termination fees are generally recognized at the time that a tenant’s right to occupy the space is terminated and when the Company has satisfied all obligations under the agreement.

     Other revenues consist primarily of parking revenue and tenant reimbursements. Parking revenue represents amounts generated from contractual and transient parking and is recognized in accordance with contractual terms or as services are rendered. Other revenues relating to tenant reimbursements are recognized in the period that the expense is incurred.

Income Taxes

In connection with the operation of its international properties, the Company has recorded a benefit for foreign income taxes of $1.1 million and $0.2 million for the three and six months ended June 30, 2012, respectively in accordance with tax laws and regulations. The Company recorded a provision for foreign income taxes of $0.8 million and $1.1 million for the three and six months ended June 30, 2011, respectively.

Redemption of Common Stock

The Company has recorded liabilities of $1.0 million and $0.7 million in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets as of June 30, 2012 and December 31, 2011, respectively, related to shares tendered for redemption and approved by the board of directors, but which were not redeemed until the subsequent month. Such amounts have been included in redemption of common shares in the accompanying condensed consolidated statements of equity.

 
8

 
Per Share Data

Net loss per common share is calculated by dividing the net loss attributable to common stockholders for each period by the weighted average number of common shares outstanding during such period. Net loss per common share on a basic and diluted basis is the same because the Company has no potentially dilutive common shares outstanding.

Reclassifications

Certain reclassifications have been made in the condensed consolidated balance sheet for the year ended December 31, 2011 to be consistent with the 2012 presentation. Specifically, real estate loans receivable were reclassified from other assets. Management believes this change in presentation provides useful information related to the Company’s real estate loans receivable, although it does not believe this change is necessary for the fair presentation of the Company’s financial statements.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance on fair value measurements. This guidance results in a consistent definition of fair value and common requirements for measurement of and expanded disclosure about fair value between GAAP and International Financial Reporting Standards. The adoption of this guidance was effective prospectively for interim and annual periods beginning after December 15, 2011. We did not have any changes to our existing classification and measurement of fair value upon adoption on January 1, 2012. Refer to Note 9 ─ Fair Value Measurements for additional disclosures resulting from the adoption of this standard.

In June 2011, FASB issued guidance on the presentation of comprehensive income. This guidance eliminated the prior option to report other comprehensive income and its components in the statement of changes in equity. The adoption of this guidance is effective for interim and annual periods beginning after December 15, 2011.  Further, in December 2011, FASB deferred the effective date pertaining only to the presentation of reclassification adjustments out of accumulated other comprehensive income.  The adoption of this guidance did not have a material effect on the Company’s financial statements.

In December 2011, FASB issued guidance on disclosures about offsetting assets and liabilities. This guidance results in enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either ASC 210-20-45 or ASC 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. The adoption of this guidance is effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The adoption of this guidance is not expected to have a material effect on the Company’s financial statements.

In December 2011, FASB issued guidance to resolve the diversity in practice about whether the derecognition criteria for real estate sales applies to a parent that ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This guidance is effective beginning July 1, 2012 and is not expected to have a material effect on the Company’s financial statements.

3. INVESTMENT PROPERTY
 
Investment property consisted of the following amounts as of June 30, 2012 and December 31, 2011 (in thousands):

 
 
June 30, 2012
 
December 31, 2011
Buildings and improvements
 
$
1,017,734 
 
$
892,743 
Less: accumulated depreciation
 
 
(31,147)
 
 
(18,991)
Buildings and improvements, net
 
 
986,587 
 
 
873,752 
Land
 
 
109,147 
 
 
76,678 
Investment property, net
 
$
1,095,734 
 
$
950,430 

        As of June 30, 2012, the cost basis and accumulated amortization related to lease intangibles was as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease Intangibles
 
 
 
 
 
 
 
 
 
 
Out-of-Market
 
Out-of-Market
 
 
 
 
 
 
 
In-Place Leases
 
Lease Assets
 
Lease Liabilities
Cost
 
$
332,353 
 
$
62,874 
 
$
(18,090)
Less: accumulated amortization
 
 
(56,317)
 
 
(10,136)
 
 
3,273 
Net
 
$
276,036 
 
$
52,738 
 
$
(14,817)

 
9

 
        As of December 31, 2011, the cost basis and accumulated amortization related to lease intangibles was as follows (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lease Intangibles
 
 
 
 
 
 
 
 
Out-of-Market
 
Out-of-Market
 
 
 
 
 
In-Place Leases
 
Lease Assets
 
Lease Liabilities
Cost
 
$
290,696 
 
$
61,689 
 
$
(19,344)
Less: accumulated amortization
 
 
(44,935)
 
 
(6,177)
 
 
3,077 
Net
 
$
245,761 
 
$
55,512 
 
$
(16,267)

Amortization expense of in-place leases was $14.1 million and $9.2 million for the three months ended June 30, 2012 and 2011, respectively. Net amortization of out-of-market leases was a decrease to rental revenue of $1.0 million and $0.5 million for the three months ended June 30, 2012 and 2011, respectively.

Amortization expense of in-place leases was $25.5 million and $16.7 million for the six months ended June 30, 2012 and 2011, respectively. Net amortization of out-of-market leases was a decrease to rental revenue of $2.1 million and $1.1 million for the six months ended June 30, 2012 and 2011, respectively.

Expected future amortization of in-place leases and out-of-market leases, net, for the period from July 1, 2012 through December 31, 2012 and for each of the years ending December 31, 2013 through December 31, 2016 are as follows (in thousands):

 
 
 
 
 
In-Place
 
Out-of-Market
 
 
 
 
 
Leases
 
Leases, Net
July 1 through December 31, 2012
 
$
 25,007 
 
$
 2,454 
2013 
 
 
 46,025 
 
 
 4,747 
2014 
 
 
 40,533 
 
 
 4,302 
2015 
 
 
 35,034 
 
 
 4,705 
2016 
 
 
 28,770 
 
 
 4,086 

        Leases
 
The Company has entered into non-cancelable lease agreements with tenants for space. As of June 30, 2012, the approximate fixed future minimum rentals for the period from July 1, 2012 through December 31, 2012, for each of the years ending December 31, 2013 through December 31, 2016 and for the period thereafter are as follows (in thousands):

 
 
 
 
 
 
 
 
Fixed Future Minimum Rentals
July 1 through December 31, 2012
$
 60,677 
2013 
 
 119,814 
2014 
 
 113,763 
2015 
 
 103,766 
2016 
 
 87,498 
Thereafter
 
 508,005 
Total
$
 993,523 

Pursuant to the lease agreements with certain tenants in one of its buildings, a wholly-owned subsidiary of the Company receives fees for the provision of various telecommunication-related services and the use of certain related facilities. The fixed future minimum rentals expected to be received for such services for the period from July 1 through December 31, 2012 and for each of the years ended December 31, 2013 through 2016 and for the period thereafter are $1.5 million, $2.6 million, $2.9 million, $2.9 million, $2.8 million and $10.6 million, respectively.

Of the Company’s total rental revenue for the six months ended June 30, 2012, approximately 17% was earned from a tenant in the accounting industry who has leases that expire in 2016, 2019 and 2024, approximately 10% was earned from a tenant in the legal industry who has leases that expire in 2016 and approximately 10% was earned from a tenant in the education services industry whose lease expires in 2019.

Of the Company’s total rental revenue for the six months ended June 30, 2011, approximately 18% was earned from a tenant in the accounting industry who has leases that expire in 2016, 2019 and 2024, approximately 13% was earned from a tenant in the legal services industry whose lease expires in 2016, and approximately 12% was earned from a tenant in the education services industry whose lease expires in 2019.

 
10

 
2012 Acquisitions

Poland Logistics Portfolio

On March 29, 2012, a wholly-owned subsidiary of the Company acquired four logistics facilities in Poland which we refer to collectively as the “Poland Logistics Portfolio”: ProLogis Park Warsaw I, located in Warsaw, Poland; ProLogis Park Warsaw III, located in Warsaw, Poland; ProLogis Park Bedzin I, located in Upper Silesia, Poland; and ProLogis Park Wroclaw II, located in Wroclaw, Poland. The Poland Logistics Portfolio consists of 1,763,075 square feet of rentable area that is 92% leased. The total net purchase price for the Poland Logistics Portfolio was €98.6 million (approximately $131.3 million based on a rate of $1.33 per Euro as of the transaction date), exclusive of transaction costs and working capital reserves. 

In addition to these four properties, the Company entered into a purchase agreement related to a fifth property in the Poland Logistics Portfolio, ProLogis Park Sosnowiec. On March 29, 2012, the preliminary purchase agreement for the acquisition of the ProLogis Park Sosnowiec was amended to add certain additional closing conditions to the purchaser’s obligation to acquire the asset and the closing of such asset has been delayed pending the satisfaction of these closing conditions. There can be no assurances that this acquisition will be consummated, and, if the Company elects not to close on this acquisition, it could potentially forfeit its $1.0 million earnest money deposit. The contract purchase price for ProLogis Park Sosnowiec is €19.9 million (approximately $26.1 million based on a rate of $1.31 per Euro as of the contract date), exclusive of transaction costs and working capital reserves. 

144 Montague
 
On April 16, 2012, the Company acquired 144 Montague, an office building located in Brisbane, Australia. 144 Montague consists of 158,682 square feet of rentable area that is 100% leased to Ausenco Limited under a lease that expires in October 2021. The net purchase price for 144 Montague was 88.1 million AUD ($91.3 million assuming a rate of $1.04 per AUD based on the transaction date), exclusive of transaction costs and working capital reserves.

100 Brookes Street
 
On July 13, 2012, the Company acquired 100 Brookes Street, an office building located in Brisbane, Australia. 100 Brookes Street consists of 105,637 square feet of rentable area that is 100% leased to Bechtel Corporation under a lease that expires in January 2018. The net purchase price for 100 Brookes Street was 66.5 million AUD ($67.6 million assuming a rate of $1.02 per AUD based on the exchange rate in effect on the transaction date), exclusive of transaction costs, financing fees and working capital reserves. The acquisition was funded using proceeds from the Initial Offering and a 43.2 million AUD ($43.9 million assuming a rate of $1.02 per AUD based on the transaction date) mortgage loan with the Bank of Western Australia Ltd. The Company has not concluded its accounting for this acquisition as of the date of this filing due to the recent acquisition date. The Company expects that the purchase price will primarily be allocated to building, land and intangible lease assets and liabilities, consistent with its other real estate investments.

Minneapolis Retail Center
 
On August 1, 2012, a wholly-owned subsidiary of the Company acquired Minneapolis Retail Center, a retail project located just outside Minneapolis, Minnesota. The net purchase price was $127.0 million dollars, exclusive of transaction costs and working capital reserves. The acquisition was funded using proceeds from the Initial Offering, borrowings under the Revolving Credit Facility described in Note 4 — Debt Financing and a $65.5 million mortgage loan with Allianz Life Insurance Company of North America. The Company has not concluded its accounting for this acquisition as of the date of this filing due to the recent acquisition date. The Company expects that the purchase price will primarily be allocated to building, land and intangible lease assets and liabilities, consistent with its other real estate investments.

550 Terry Francois

On August 7, 2012, a wholly-owned subsidiary of the Company entered into a contract to acquire 550 Terry Francois, a core office building located in San Francisco, California. 550 Terry Francois was constructed in 2002 and consists of 282,773 square feet of rentable area that is 100% leased to GAP, Inc. under a lease that expires in October 2017. Although not determined until closing, Hines Global expects the total acquisition cost to be approximately $180.0 million exclusive of transaction costs and working capital reserves. Hines Global expects to fund the acquisition using proceeds from its current public offering and the Revolving Credit Facility described in Note 4 — Debt Financing. The Company expects the closing of this acquisition to occur during the third quarter, subject to the completion of a number of closing conditions. Hines Global funded a nonrefundable $15.0 million earnest money deposit on August 10, 2012. There is no guarantee that this acquisition will be consummated, and, if the Company elects not to close on the acquisition of 550 Terry Francois, the Company could forfeit its earnest money deposit.

 
11

 
Real Estate Acquisitions

The amounts recognized for major assets acquired as of the acquisition date were determined by allocating the purchase price of each property acquired in 2012 and 2011 as follows (in thousands):

Property Name
Location
 
Acquisition
Date
   
Building and
Improvements
   
Land
   
In-place
Lease
Intangibles
   
Out-of-
Market Lease
Intangibles, Net
   
Total
 
2012 
   
 
         
 
   
 
   
 
   
 
 
Poland Logistics Portfolio(1)
Poland(2)
    3/2012     $ 79,986     $ 20,744     $ 29,841     $ 760     $ 131,331  
144 Montague(3)
Brisbane, Australia
    4/2012     $ 49,424     $ 13,803     $ 28,083     $ -     $ 91,310  
                                                   
2011 
                                                 
Stonecutter Court(4)
London, England
    3/2011     $ 90,677 (5)   $ -     $ 53,317     $ 1,598     $ 145,592  
FM Logistic
Moscow, Russia
    4/2011     $ 51,588     $ 5,320     $ 15,780     $ (1,840 )   $ 70,848  
Gogolevsky 11
Moscow, Russia
    8/2011     $ 85,120     $ -     $ 11,150     $ (170 )   $ 96,100  
250 Royall
Canton, Massachusetts
    9/2011     $ 22,860     $ 8,910     $ 11,500     $ 13,730     $ 57,000  
Campus at Marlborough
Marlborough, Massachusetts
    10/2011     $ 54,710     $ 23,310     $ 23,770     $ 1,210     $ 103,000  
Fisher Plaza
Seattle, Washington
    12/2011     $ 111,390 (6)   $ 19,560     $ 29,680     $ (630 )   $ 160,000  
9320 Excelsior
Hopkins, Minnesota
    12/2011     $ 51,110     $ 2,730     $ 14,460     $ 1,170     $ 69,470  
 
(1)
These amounts were translated from Euros to U.S. dollars at a rate of $1.33 per Euro, based on the exchange rate in effect on the date of acquisition.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2)
The Poland Logistics Portfolio is comprised of four industrial parks located in Warsaw, Wroclaw and Upper Silesia, Poland.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(3)
These amounts were translated from AUD to U.S. dollars at a rate of $1.04 per AUD, based on the exchange rate in effect on the date of acquisition.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(4)
These amounts were translated from GBP to U.S. dollars at a rate of $1.61 per GBP, based on the exchange rate in effect on the date of acquisition.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(5)
Amount includes approximately $0.7 million of deferred tax assets related to net operating loss carry-forwards at date of acquisition.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(6)
Amount includes approximately $0.2 million of other assets at date of acquisition.

The table below includes the amounts of revenue and net income (loss) of the acquisitions completed during the six months ended June 30, 2012, which are included in the Company’s condensed consolidated results of operations for the three and six months ended June 30, 2012 (in thousands):

2012 Acquisitions
 
 
For the Three Months Ended June 30, 2012
 
For the Six Months Ended June 30, 2012
Poland Logistics Portfolio
Revenue
 
  $
3,473 
 
$
3,567 
 
Net income (loss)
 
  $
(5,500)
 
$
(6,270)
 
 
 
 
 
 
 
 
144 Montague
Revenue
 
  $
2,005 
 
$
2,005 
 
Net income (loss)
 
  $
(5,336)
 
$
(5,336)

 
12

 
The table below includes the amounts of revenue and net loss of the acquisitions completed during the six months ended June 30, 2011, which are included in the Company’s condensed consolidated results of operations for the three and six months ended June 30, 2011 (in thousands):

2011 Acquisitions
 
 
For the Three Months Ended June 30, 2011
 
For the Six Months Ended June 30, 2011
Stonecutter Court
Revenue
 
$
2,576 
 
$
3,174 
 
Net income (loss)
 
$
(4,579)
 
$
(5,830)
 
 
 
 
 
 
 
 
FM Logistic
Revenue
 
$
1,518 
 
$
1,518 
 
Net income (loss)
 
$
(203)
 
$
(203)

The following unaudited consolidated information is presented as if all of the properties in which the Company owned interests as of June 30, 2012 were acquired on January 1, 2011. This information excludes activity that is non-recurring and not representative of our future activity, primarily acquisition fees and expenses of $11.7 million and $2.0 million for the three months ended June 30, 2012 and 2011, respectively, and $15.5 million and $2.9 million for the six months ended June 30, 2012 and 2011, respectively. The information below is not necessarily indicative of what the actual results of operations would have been had we completed these transactions on January 1, 2011, nor does it purport to represent our future operations (amounts in thousands, except per share amounts):
 

 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
Pro Forma 2012
 
Pro Forma 2011
 
Pro Forma 2012
 
Pro Forma 2011
Revenues
 
$
 43,023 
 
$
 42,303 
 
$
 84,819 
 
$
 81,989 
Net income (loss)
 
$
 2,350 
 
$
 (19,231)
 
$
 (7,468)
 
$
 (21,011)
Basic and diluted income (loss) per common share
 
$
 0.02 
 
$
 (0.20)
 
$
 (0.07)
 
$
 (0.22)

4. DEBT FINANCING
 
The following table includes the Company’s outstanding notes payable as of June 30, 2012 and December 31, 2011 (in thousands, except interest rates):

Description
 
Origination or Assumption Date
 
Maturity Date
 
Interest Rate
 
Principal Outstanding at June 30, 2012
 
 
Principal Outstanding at December 31, 2011
Secured Mortgage Debt
 
 
 
 
 
 
 
 
 
 
 
 
 
Brindleyplace Project
 
07/01/10
 
07/07/15
 
3.89%
(1)
$
189,039 
 
 
$
 187,078 
Hock Plaza
 
09/08/10
 
12/06/15
 
5.58%
 
 
78,486 
 
 
 
 79,001 
Southpark
 
10/19/10
 
12/06/16
 
5.67%
 
 
18,000 
 
 
 
 18,000 
Fifty South Sixth
 
11/04/10
 
11/04/15
 
3.62%
(2)
 
95,000 
 
 
 
 95,000 
Stonecutter Court
 
03/11/11
 
03/11/16
 
4.79%
(3)
 
86,558 
 
 
 
 86,629 
Gogolevsky 11
 
08/25/11
 
04/07/21
 
6.72%
(4)
 
38,600 
 
 
 
 39,300 
Campus at Marlborough
 
10/28/11
 
12/01/14
 
5.21%
 
 
 56,510 
 
 
 
 57,123 
Flagship Capital JV
 
03/08/12
 
03/08/17
 
4.50%
(5)
 
 3,118 
 
 
 
 - 
144 Montague
 
04/16/12
 
04/16/17
 
6.23%
(6)
 
57,175 
 
 
 
 - 
Other Notes Payable
 
 
 
 
 
 
 
 
 
 
 
 
 
Bridge Loan - December 2011
 
12/15/11
 
04/15/12
 
Variable
(7)
 
 - 
 
 
 
 65,000 
JPMorgan Chase Revolving Credit Facility
 
04/13/12
 
04/13/15
 
Variable
(8)
 
 74,240 
 
 
 
 - 
Total Principal Outstanding
 
 
 
 
 
$
696,726 
 
 
$
627,131 
Unamortized Discount(9)
 
 
 
 
 
 
 
 
(1,357)
 
 
 
(1,571)
Notes Payable
 
 
 
 
 
$
695,369 
 
 
$
 625,560 

(1) The loan has a floating interest rate of LIBOR plus a margin of 1.60%. At June 30, 2012, the variable rate for the loan was 1.01%. The interest rate on approximately £90.8 million ($137.7 million assuming a rate of $1.52 per GBP based on the exchange rate in effect on the transaction date) of the loan balance was fixed at closing at 2.29% (3.89% including the 1.60% margin) through multiple 5-year interest rate swaps with Eurohypo. See Note 5 – Derivative Instruments for additional information regarding the Company’s interest rate swaps.
 
 
13

 
(2) This loan has a floating interest based on the higher of (i) LIBOR, (ii) the Federal Funds Rate plus 0.5% or (iii) the Prime Rate.  The Company entered into a five-year interest rate swap in order to fix the interest rate at 1.37% (3.62% including the 2.25% margin). At June 30, 2012, the variable rate for the loan was 0.24%. See Note 5 — Derivative Instruments for additional information regarding the Company’s interest rate swaps.
 
(3) The loan has a variable interest rate based on LIBOR plus a margin of 2.08%.  The Company entered into an interest rate swap agreement, which effectively fixed the interest rate of this borrowing at 2.71% (4.79% including the 2.08% margin). At June 30, 2012, the variable rate for the loan was 1.02%. See Note 5 — Derivative Instruments for additional information regarding the Company's interest rate swaps.

(4) This loan has a floating interest rate of LIBOR plus a margin of 6.25%. At June 30, 2012, the variable rate for the loan was 0.47%.

(5) On March 8, 2012, a subsidiary of the Operating Partnership entered into a revolving line of credit agreement with a principal amount of $8.3 million, made by Amegy Bank National Association (“Amegy”). The loan allows for a two-year drawdown period and a three-year term after the drawdown period in which existing loans can remain in the line of credit or be repaid. No new draws can occur during this three year period. The loan requires monthly interest payments based on the Wall Street Journal prime rate plus a margin of 0.50%, subject to a floor of 4.50% during the two year drawdown period. Beginning on March 1, 2014, principal and interest payments will be due monthly. At June 30, 2012, the rate for the loan was 4.50%.

(6) On April 16, 2012, a subsidiary of the Operating Partnership entered into a mortgage agreement with a principal amount of 56.3 million AUD ($58.4 million assuming a rate of $1.04 per AUD based on the transaction date), made by Commonwealth Bank of Australia. The loan requires quarterly interest payments based on a 1-month BBSY screen rate plus a spread of 2.60%. At June 30, 2012, the variable rate for the loan was 3.63%. Concurrently, the Company entered into an interest rate cap with Commonwealth Bank which capped the interest rate at 5.25% on 42.2 million AUD ($43.8 million assuming a rate of $1.04 per AUD based on the transaction date) of the mortgage. See Note 5 — Derivative Instruments for additional information regarding the Company's interest rate cap.

(7) On December 15, 2011, a subsidiary of the Operating Partnership entered into a bridge loan agreement with a principal amount of $65.0 million, made by JPMorgan Chase Bank, N.A (“Chase”). The loan required monthly interest payments based on a floating rate plus a margin of 2.25% and repayment of principal on or before April 15, 2012. This loan was repaid in March 2012 using proceeds from a second bridge loan agreement which was entered into on March 15, 2012. This bridge loan agreement established two loans in the amounts of $75.0 million and €69.0 million, made by Chase. The second bridge loan agreement required monthly interest payments based on a floating rate plus a margin of 2.25% and repayment of principal on or before May 15, 2012. The loans were repaid in April 2012 using proceeds from the Revolving Credit Facility described in note (8) below.

 (8) On April 13, 2012, the Company entered into a credit agreement with Chase that provides for a revolving credit facility with borrowings denominated in U.S. dollars, British pound sterling, Euros, Australian dollars or Canadian dollars (the “Revolving Credit Facility”). The initial maximum aggregate amount of the lenders’ commitments is $265.0 million, with aggregate foreign currency commitments constituting up to $132.5 million of that amount. Pending future commitments by the lenders, the maximum aggregate borrowings could be increased to up to $300.0 million. As of June 30, 2012, borrowings under the Revolving Credit Facility are currently limited to $196.0 million as a result of certain financial covenants. On April 13, 2012, the Company made borrowings of US$60.0 million and €59.0 million ($77.6 million assuming a rate of $1.31 per Euro based on the transaction date) to retire the loans outstanding under the bridge loan it entered into on March 15, 2012.

Interest on the Company’s borrowings under the Revolving Credit Facility will be payable based on either (a) the Alternate Base Rate plus the Applicable Rate or (b) in the case of borrowings in currencies other than the U.S. dollar, Adjusted LIBO Rate plus the Applicable Rate, subject to the Company’s election. The Alternate Base Rate is equal to the greater of: (a) the Prime Rate, (b) Federal Funds Effective Rate plus 0.5%, or (c) an adjusted LIBOR rate for a one month period plus 1.0%. The Applicable Rate is based on the Company’s ratio of indebtedness to total asset value and will be determined as set forth in the table in the Revolving Credit Facility. The Applicable Rate will range from 0.75% to 2.75% depending on the ratio and whether the loan is denominated in a foreign currency.  At June 30, 2012, the variable rate for the loan was 0.33%.

(9) The Company assumed notes payable in connection with various acquisitions, which were recorded at their estimated fair value as of the date of acquisition. The difference between the fair value at acquisition and the principal outstanding is amortized over the term of the related note.

The Company is not aware of any instances of noncompliance with financial covenants on any of its loans as of June 30, 2012.

 
14

 
Subsequent Events

Chase Revolving Credit Facility Activity

From July 1, 2012 through August 13, 2012, the Company made draws of $47.0 million and made payments of $72.5 million under the Revolving Credit Facility resulting in an outstanding principal balance of $47.0 million as of August 13, 2012.
 
100 Brookes Street Debt

On July 13, 2012, a subsidiary of the Operating Partnership entered into a facility agreement with a principal amount of 43.2 million AUD ($43.9 million assuming a rate of $1.02 per AUD based on the transaction date), made by with the Bank of Western Australia LTD. The loan matures on July 31, 2017 and requires monthly interest payments based on a BBSY screen rate plus a margin of 2.65%. The loan may be repaid in full prior to maturity with proper notice and subject to break costs.

Poland Logistics Portfolio Debt

On August 2, 2012, subsidiaries of the Operating Partnership entered into a secured credit facility with Deutsche Pfandbriefbank AG (PBB) which provides for a maximum aggregate lender commitment of €65.5 million ($80.5 million based on the rate in effect on the transaction date). On August 2, 2012, the Company made borrowings of €54.2 million ($66.7 million based on the rate in effect on the transaction date). The remaining amount of the facility may be drawn upon the closing of ProLogis Park Sosnowiec, which is expected to occur prior to year end.

The facility matures on June 30, 2017 and has a floating interest rate of Euribor plus an interest margin of 2.80%. The interest rate on approximately €48.8 million ($60.0 million based on the rate in effect on the transaction date) of the loan balance was capped at closing at 2.00% through a 5-year interest rate cap. Principal and interest payments are due quarterly, in arrears, beginning on August 16, 2012 through maturity. The loan may be repaid in full prior to maturity, subject to a prepayment premium if it is repaid in the first four years, and is prepayable at par thereafter.

Minneapolis Retail Center Debt

 On August 2, 2012, a subsidiary of the Operating Partnership entered into a mortgage agreement with a principal amount of $65.5 million, made with Allianz Life Insurance Company of North America. The loan matures on August 10, 2019 and requires monthly interest payments at a rate of 3.50%. The loan may be repaid in full prior to maturity, subject to a prepayment.

Principal Payments on Notes Payable
 
The Company is required to make the following principal payments on its outstanding notes payable for the period of July 1, 2012 through December 31, 2012, for each of the years ending December 31, 2013 through December 31, 2016 and for the period thereafter. All amounts outstanding under the Company’s revolving credit facility are included in the current year’s principal payments. Amounts are in thousands:

 
 
Payments due by Year
 
 
July 1 - December 31, 2012
 
2013 
 
2014 
 
2015 
 
2016 
 
Thereafter
Principal payments
 
$
76,961 
 
$
5,771 
 
$
59,295 
 
$
363,126 
 
$
 99,379 
 
$
92,194 

5. DERIVATIVE INSTRUMENTS

The Company has entered into several interest rate swap contracts and an interest rate cap agreement as economic hedges against the variability of future interest rates on its variable interest rate borrowings.  The Company’s interest rate swaps effectively fixed the interest rates on each of the loans to which they relate and the interest rate cap contract has effectively limited the interest rate on the loan to which it relates.  The Company has not designated any of these derivatives as cash flow hedges for accounting purposes. The valuation of these derivative instruments is determined based on assumptions that management believes market participants would use in pricing, using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate contracts and interest rate caps have been determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

 
15

 
The Company has also entered into foreign currency forward contracts as economic hedges against the variability of foreign exchange rates on future international investments. These forward contracts effectively fixed the currency exchange rates on each of the investments to which they relate. The Company has not designated any of these contracts as cash flow hedges for accounting purposes. The valuation of these forward contracts is determined based on assumptions that management believes market participants would use in pricing, using widely accepted valuation techniques. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including currency exchange rate curves and implied volatilities.

The discussion below provides additional information regarding each of the Company’s derivative instruments:

Interest Rate Swaps

The table below provides additional information regarding each of the Company’s interest rate swaps.  The notional amounts of the interest rate swap contracts are reported in USD, and all contracts listed below with the exception of the contract dated November 4, 2010 (which is denominated in US dollars), have been converted at a rate of $1.56 per GBP as of June 30, 2012 (in thousands):

Interest Rate Swap Contracts
 
 
 
 
 
 
 
 
 
 
 
Effective Date
 
 
Expiration Date
 
Notional Amount
 
Interest Rate Received
 
 
Interest Rate Paid
July 7, 2010
 
 
July 7, 2015
 
$
22,735 
 
LIBOR
 
 
2.29%
July 7, 2010
 
 
July 7, 2015
 
$
43,644 
 
LIBOR
 
 
2.29%
July 7, 2010
 
 
July 7, 2015
 
$
20,300 
 
LIBOR
 
 
2.29%
July 7, 2010
 
 
July 7, 2015
 
$
35,017 
 
LIBOR
 
 
2.29%
July 7, 2010
 
 
July 7, 2015
 
$
20,084 
 
LIBOR
 
 
2.29%
November 4, 2010
 
 
November 4, 2015
 
$
95,000 
 
LIBOR
 
 
1.37%
March 11, 2011
 
 
March 11, 2016
 
$
89,006 
 
LIBOR
 
 
2.71%

As of June 30, 2012 and December 31, 2011, the fair value of the interest rate swap contracts resulted in liabilities of $15.1 million and $13.2 million, respectively. For the three months ended June 30, 2012 and 2011, the Company recorded $2.4 million and $8.3 million, respectively of losses in gain (loss) on derivative instruments, net on the accompanying condensed consolidated statements of operations related to these interest rate swaps. Additionally, for the six months ended June 30, 2012 and 2011, the Company recorded $1.7 million and $6.4 million, respectively, of losses in gain (loss) on derivative instruments, net on the accompanying condensed consolidated statements of operations related to these interest rate swaps.

Interest Rate Caps

In April 2012, the Company entered into a five-year interest rate cap agreement in connection with its acquisition of 144 Montague and its mortgage agreement with Commonwealth Bank of Australia. This agreement has a notional amount of 42.2 million AUD ($42.9 million assuming a rate of $1.02 per AUD as of June 30, 2012) and effectively caps the interest rate at 5.25%. The Company purchased this interest rate cap for approximately $0.6 million. As of June 30, 2012, the fair value of this interest rate cap resulted in an asset of $0.4 million recorded in derivative instruments on the accompanying condensed consolidated balance sheets. For the three and six months ended June 30, 2012, the Company recorded $0.2 million of losses in gain (loss) on derivative instruments, net on the accompanying condensed consolidated statements of operations.

Foreign Currency Forward Contracts

The table below provides additional information regarding the Company’s foreign currency forward contracts (in thousands).

Foreign Currency Forward Contracts
 
 
 
 
 
 
 
 
 
 
 
Effective Date
 
 
Expiration Date
 
Notional Amount
 
Buy/Sell
 
 
Traded Currency Rate
 
Gain/(Loss) on Settlement
March 19, 2012
 
 
December 19, 2012
 
 
50,000 
 
EUR/USD
 
 
1.32 
 
 
N/A
March 22, 2012
 
 
May 31, 2012
 
 
27,000 
 
AUD/USD
 
 
1.05 
 
$
(73)
March 28, 2012
 
 
July 2, 2012
 
$
23,590 
 
USD/PLN
 
 
3.19 
 
$
1,758 
May 9, 2012
 
 
December 19, 2012
 
 
10,000 
 
EUR/USD
 
 
1.30 
 
 
N/A
May 15, 2012
 
 
December 19, 2012
 
 
10,000 
 
EUR/USD
 
 
1.28 
 
 
N/A

As of June 30, 2012, the fair value of the foreign currency forward contracts resulted in a net asset of $2.1 million. For the three and six months ended June 30, 2012, the Company recorded gains of $6.3 million and $3.8 million, respectively, in gain (loss) on derivative instruments, net in the accompanying condensed consolidated statements of operations.

 
16

 
6.  DISTRIBUTIONS

With the authorization of its board of directors, the Company declared distributions to its stockholders and Hines Global REIT Associates Limited Partnership (“HALP”) for the period from October 20, 2009 through December 31, 2011. These distributions were calculated based on stockholders of record for each day in an amount equal to $0.00191781 per share, per day, which based on a purchase price of $10.00 per share, equated to a 7% annualized distribution rate over that period.

As a result of market conditions and the Company’s goal of increasing its distribution coverage with cash flow from operations, the Company has declared distributions for the months of January 2012 through September 2012 at an amount equal to $0.0017808 per share, per day, which based on a purchase price of $10.00 per share, would equate to a 6.5% annualized distribution rate if it were maintained every day for a twelve-month period. This annualized distribution rate represents a decrease of approximately 7% from the annualized distribution rate that was declared for the period from October 20, 2009 through December 31, 2011. Distributions are paid monthly on the first business day following the completion of each month to which they relate.  All distributions were or will be paid in cash or reinvested in shares of the Company’s common stock for those participating in its distribution reinvestment plan.

In June 2010, the Operating Partnership and Moorfield Real Estate Fund II GP Ltd. (“Moorfield”) formed Hines Moorfield UK Venture I S.A.R.L., (the “Brindleyplace JV”) and, on July 7, 2010, the Brindleyplace JV acquired several properties located in Birmingham, England (the “Brindleyplace Project”).

The Brindleyplace JV declared distributions in the amount of $1.1 million and $1.9 million to Moorfield for the six months ended June 30, 2012 and 2011, respectively, related to the operations of the Brindleyplace Project.  The table below outlines the Company’s total distributions declared to stockholders and noncontrolling interests (HALP, Moorfield and Flagship Capital GP) for the six months ended June 30, 2012 and for each of the quarters ended during 2011, including the breakout between the distributions paid in cash and those reinvested pursuant to the Company’s distribution reinvestment plan (in thousands):

 
 
Stockholders
 
Noncontrolling Interests
Distributions for the three months ended
 
Cash Distributions
 
Distributions Reinvested
 
Total Declared
 
Total Declared
2012 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
$
8,236 
 
$
8,865 
 
$
17,101 
 
$
675 
March 31, 2012
 
 
7,403 
 
 
7,922 
 
 
15,325 
 
 
546 
Total
 
$
15,639 
 
$
16,787 
 
$
32,426 
 
$
1,221 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
$
7,261 
 
$
7,813 
 
$
15,074 
 
$
946 
September 30, 2011
 
 
6,288 
 
 
6,881 
 
 
13,169 
 
 
946 
June 30, 2011
 
 
4,969 
 
 
5,770 
 
 
10,739 
 
 
932 
March 31, 2011
 
 
3,769 
 
 
4,447 
 
 
8,216 
 
 
984 
Total
 
$
22,287 
 
$
24,911 
 
$
47,198 
 
$
3,808 

 
17

 
7.  RELATED PARTY TRANSACTIONS

The table below outlines fees and expense reimbursements incurred that are payable to Hines and its affiliates for the periods indicated below (in thousands):

 
 
 
 
Incurred
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Unpaid as of
Type and Recipient
 
2012 
 
2011 
 
2012 
 
2011 
 
June 30, 2012
 
December 31, 2011
Selling Commissions- Dealer Manager
 
$
 7,762 
 
$
 10,255 
 
$
 14,485 
 
$
 19,727 
 
$
 669 
 
$
 286 
Dealer Manager Fee- Dealer Manager
 
 
 2,672 
 
 
 3,482 
 
 
 4,991 
 
 
 6,698 
 
 
 56 
 
 
 (87)
Issuer Costs- the Advisor
 
 
 2,296 
 
 
 1,433 
 
 
 3,647 
 
 
 2,296 
 
 
 1,357 
 
 
 431 
Acquisition Fee- the Advisor
 
 
 4,148 
 
 
 1,417 
 
 
 7,095 
 
 
 4,353 
 
 
 2,091 
 
 
 1,486 
Asset Management Fee- the Advisor
 
 
 1,672 
 
 
 1,380 
 
 
 1,672 
 
 
 2,310 
 
 
 1,672 
 
 
 935 
Debt Financing Fee- the Advisor
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 920 
 
 
 - 
 
 
 - 
Other (1) - the Advisor
 
 
 446 
 
 
 287 
 
 
 897 
 
 
 626 
 
 
 354 
 
 
 409 
Property Management Fee- Hines
 
 
 681 
 
 
 262 
 
 
 1,294 
 
 
 504 
 
 
 126 
 
 
 70 
Construction Management Fee- Hines
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 263 
Leasing Fee- Hines
 
 
 26 
 
 
 53 
 
 
 48 
 
 
 63 
 
 
 25 
 
 
 - 
Redevelopment Construction Management- Hines
 
 
 42 
 
 
 - 
 
 
 50 
 
 
 - 
 
 
 313 
 
 
 - 
Expense Reimbursement- Hines (with respect to management and operations of the Company's properties)
 
 
 1,092 
 
 
 523 
 
 
 2,144 
 
 
 1,040 
 
 
 398 
 
 
 331 
Note Payable - Hines
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 -