10-Q 1 wellsreitii201193010q.htm Wells REITII.2011.9.30.10Q
 
 
 
 
 
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 September 30, 2011
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 000-51262
WELLS REAL ESTATE INVESTMENT TRUST II, INC.
(Exact name of registrant as specified in its charter)
  __________________________________
Maryland
 
20-0068852
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
6200 The Corners Parkway
Norcross, Georgia 30092
(Address of principal executive offices)
(Zip Code)
(770) 449-7800
(Registrant’s telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)
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 (check one).
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x (Do not check if a smaller reporting company)
Smaller reporting company
o
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
Number of shares outstanding of the registrant’s
only class of common stock, as of October 31, 2011: 543,312,563 shares
 
 
 
 
 

FORM 10-Q
WELLS REAL ESTATE INVESTMENT TRUST II, INC.
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.




Page 2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q of Wells Real Estate Investment Trust II, Inc. (“Wells REIT II,” “we,” “our” or “us”) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in those acts. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, including known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the U.S. Securities and Exchange Commission (“SEC”). We make no representations or warranties (express or implied) about the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Any such forward-looking statements are subject to risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual conditions, our ability to accurately anticipate results expressed in such forward-looking statements, including our ability to generate positive cash flow from operations, make distributions to stockholders, and maintain the value of our real estate properties, may be significantly hindered. See Item 1A in Wells REIT II’s Annual Report on Form 10-K/A for the year ended December 31, 2010 for a discussion of some of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements. The risk factors described in our Annual Report are not the only ones we face, but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also harm our business.


Page 3

PART I.
FINANCIAL INFORMATION
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The information furnished in the accompanying consolidated balance sheets and related consolidated statements of operations, equity and cash flows reflects all normal and recurring adjustments that are, in management’s opinion, necessary for a fair and consistent presentation of the aforementioned financial statements.
The accompanying consolidated financial statements should be read in conjunction with the condensed notes to Wells REIT II’s financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this quarterly report on Form 10-Q and with Wells REIT II’s Annual Report on Form 10-K/A for the year ended December 31, 2010. Wells REIT II’s results of operations for the three months and nine months ended September 30, 2011 are not necessarily indicative of the operating results expected for the full year.



Page 4

WELLS REAL ESTATE INVESTMENT TRUST II, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per-share amounts)
 
 
(Unaudited)
 
 
 
September 30,
2011
 
December 31,
2010
Assets:
 
 
 
Real estate assets, at cost:
 
 
 
Land
$
715,872

 
$
571,696

Buildings and improvements, less accumulated depreciation of $491,264 and $414,040 as of September 30, 2011 and December 31, 2010, respectively
3,518,664

 
3,225,708

Intangible lease assets, less accumulated amortization of $367,650 and $355,823 as of September 30, 2011 and December 31, 2010, respectively
410,878

 
428,140

Construction in progress
6,649

 
4,495

Total real estate assets
4,652,063

 
4,230,039

Cash and cash equivalents
31,809

 
38,882

Tenant receivables, net of allowance for doubtful accounts of $3,609 and $3,559 as of September 30, 2011 and December 31, 2010, respectively
123,169

 
108,057

Prepaid expenses and other assets
30,924

 
22,700

Deferred financing costs, less accumulated amortization of $6,128 and $3,975 as of September 30, 2011 and December 31, 2010, respectively
12,296

 
9,827

Intangible lease origination costs, less accumulated amortization of $236,457 and $219,447 as of September 30, 2011 and December 31, 2010, respectively
243,471

 
269,914

Deferred lease costs, less accumulated amortization of $20,167 and $15,734 as of September 30, 2011 and December 31, 2010, respectively
65,645

 
46,266

Investment in development authority bonds
646,000

 
646,000

Total assets
$
5,805,377

 
$
5,371,685

Liabilities:
 
 
 
Line of credit and notes payable
$
1,194,996

 
$
886,939

Bonds payable, net of discount of $1,637 as of September 30, 2011
248,363

 
—

Accounts payable, accrued expenses, and accrued capital expenditures
133,468

 
102,697

Due to affiliates
1,625

 
4,479

Deferred income
35,791

 
26,403

Intangible lease liabilities, less accumulated amortization of $72,173 and $62,165 as of September 30, 2011 and December 31, 2010, respectively
94,028

 
87,934

Obligations under capital leases
646,000

 
646,000

Total liabilities
2,354,271

 
1,754,452

Commitments and Contingencies (Note 6)
—

 
—

Redeemable Common Stock
137,406

 
161,189

Equity:
 
 
 
Common stock, $0.01 par value; 900,000,000 shares authorized; 544,642,842 and 540,906,780 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively
5,446

 
5,409

Additional paid-in capital
4,872,810

 
4,835,088

Cumulative distributions in excess of earnings
(1,412,311
)
 
(1,212,472
)
Redeemable common stock
(137,406
)
 
(161,189
)
Other comprehensive loss
(15,164
)
 
(11,139
)
Total Wells Real Estate Investment Trust II, Inc. stockholders’ equity
3,313,375

 
3,455,697

Nonredeemable noncontrolling interests
325

 
347

Total equity
3,313,700

 
3,456,044

Total liabilities, redeemable common stock, and equity
$
5,805,377

 
$
5,371,685

See accompanying notes.


Page 5

WELLS REAL ESTATE INVESTMENT TRUST II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
 
 
(Unaudited)
 
(Unaudited)
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
Rental income
$
120,920

 
$
112,515

 
$
357,055

 
$
327,531

Tenant reimbursements
27,468

 
26,079

 
78,490

 
71,696

Hotel income
6,271

 
5,501

 
15,638

 
14,900

Other property income
3,744

 
485

 
6,027

 
1,253

 
158,403

 
144,580

 
457,210

 
415,380

Expenses:
 
 
 
 
 
 
 
Property operating costs
45,687

 
42,568

 
133,058

 
122,842

Hotel operating costs
5,001

 
4,499

 
13,282

 
12,950

Asset and property management fees:
 
 
 
 

 
 
Related-party
9,470

 
8,532

 
27,526

 
24,983

Other
696

 
1,011

 
2,334

 
2,946

Depreciation
30,317

 
26,145

 
88,345

 
73,797

Amortization
29,450

 
28,452

 
91,330

 
85,823

General and administrative
6,114

 
6,025

 
19,188

 
18,387

Acquisition fees and expenses
29

 
2,081

 
11,249

 
9,749

 
126,764

 
119,313

 
386,312

 
351,477

Real estate operating income
31,639

 
25,267

 
70,898

 
63,903

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(28,660
)
 
(21,632
)
 
(81,490
)
 
(64,273
)
Interest and other income
10,317

 
11,901

 
32,383

 
32,025

Loss on interest rate swaps
(14,774
)
 
(9,885
)
 
(22,219
)
 
(29,068
)
 
(33,117
)
 
(19,616
)
 
(71,326
)
 
(61,316
)
(Loss) income before income tax (expense) benefit
(1,478
)
 
5,651

 
(428
)
 
2,587

Income tax (expense) benefit
(62
)
 
(111
)
 
337

 
105

(Loss) gain from continuing operations
(1,540
)
 
5,540

 
(91
)
 
2,692

Discontinued operations:
 
 
 
 
 
 
 
Operating loss from discontinued operations
(1,059
)
 
(689
)
 
(4,571
)
 
(2,179
)
Gain (loss) on disposition of discontinued operations
7,705

 
(130
)
 
7,705

 
(130
)
Gain (loss) from discontinued operations
6,646

 
(819
)
 
3,134

 
(2,309
)
Net income
5,106

 
4,721

 
3,043

 
383

Less: net income attributable to nonredeemable noncontrolling interests
(4
)
 
(19
)
 
(11
)
 
(59
)
Net income attributable to the common stockholders of Wells Real Estate Investment Trust II, Inc.
$
5,102

 
$
4,702

 
$
3,032

 
$
324

Per-share information – basic and diluted:

 

 
 
 
 
Income from continuing operations
$
0.00

 
$
0.01

 
$
0.00

 
$
0.01

Gain (loss) from discontinued operations
$
0.01

 
$
0.00

 
$
0.01

 
$
(0.01
)
Net income attributable to the common stockholders of Wells Real Estate Investment Trust II, Inc.
$
0.01

 
$
0.01

 
$
0.01

 
$
0.00

Weighted-average common shares outstanding – basic and diluted
543,288

 
536,582

 
542,169

 
520,221

See accompanying notes.


Page 6

WELLS REAL ESTATE INVESTMENT TRUST II, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 (UNAUDITED)
(in thousands, except per-share amounts)

 
Stockholders’ Equity
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Cumulative
Distributions
in Excess of
Earnings
 
Redeemable
Common
Stock
 
Other
Comprehensive
Loss
 
Total Wells Real
Estate Investment
Trust II, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
Balance, December 31, 2010
540,907

 
$
5,409

 
$
4,835,088

 
$
(1,212,472
)
 
$
(161,189
)
 
$
(11,139
)
 
$
3,455,697

 
$
347

 
$
3,456,044

Issuance of common stock
10,281

 
103

 
97,905

 
—

 
—

 
—

 
98,008

 
—

 
98,008

Redemptions of common stock
(6,545
)
 
(66
)
 
(60,183
)
 
—

 
—

 
—

 
(60,249
)
 
—

 
(60,249
)
Decrease in redeemable common stock
—

 
—

 
—

 
—

 
23,783

 
—

 
23,783

 
—

 
23,783

Distributions to common stockholders
($0.375 per share)
—

 
—

 
—

 
(202,871
)
 
—

 
—

 
(202,871
)
 
—

 
(202,871
)
Distributions to noncontrolling interests
—

 
—

 
 
 
—

 
—

 
—

 
—

 
(33
)
 
(33
)
Components of comprehensive loss:

 

 

 

 

 

 
 
 

 
 
Net income attributable to the common stockholders of Wells Real Estate Investment Trust II, Inc.
—

 
—

 
—

 
3,032

 
—

 
—

 
3,032

 
—

 
3,032

Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
11

 
11

Market value adjustment to interest rate swap
—

 
—

 
—

 
—

 
—

 
(4,025
)
 
(4,025
)
 
—

 
(4,025
)
Comprehensive (loss) income
—

 
—

 
—

 
—

 
—

 
—

 
(993
)
 
11

 
(982
)
Balance, September 30, 2011
544,643

 
$
5,446

 
$
4,872,810

 
$
(1,412,311
)
 
$
(137,406
)
 
$
(15,164
)
 
$
3,313,375

 
$
325

 
$
3,313,700




















Page 7

WELLS REAL ESTATE INVESTMENT TRUST II, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
(in thousands, except per-share amounts)
 
Stockholders’ Equity
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Cumulative
Distributions
in Excess of
Earnings
 
Redeemable
Common
Stock
 
Other
Comprehensive
Loss
 
Total Wells Real
Estate Investment
Trust II, Inc.
Stockholders’
Equity
 
Nonredeemable
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
Balance, December 31, 2009
499,895

 
$
4,999

 
$
4,461,980

 
$
(935,019
)
 
$
(805,844
)
 
$
(8,029
)
 
$
2,718,087

 
$
5,274

 
$
2,723,361

Issuance of common stock
44,916

 
449

 
446,753

 
—

 
—

 
—

 
447,202

 
—

 
447,202

Redemptions of common stock
(6,145
)
 
(61
)
 
(55,094
)
 
—

 
—

 
—

 
(55,155
)
 
—

 
(55,155
)
Decrease in redeemable common stock
—

 
—

 
—

 
—

 
627,038

 
—

 
627,038

 
—

 
627,038

Distributions to common stockholders
($0.43 per share)
—

 
—

 
—

 
(220,119
)
 
—

 
—

 
(220,119
)
 
—

 
(220,119
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(161
)
 
(161
)
Acquisition of noncontrolling interest in consolidated joint venture
—

 
—

 
(1,989
)
 
—

 
—

 
—

 
(1,989
)
 
(3,589
)
 
(5,578
)
Commissions and discounts on stock sales and
related dealer-manager fees
—

 
—

 
(34,292
)
 
—

 
—

 
—

 
(34,292
)
 
—

 
(34,292
)
Other offering costs
—

 
—

 
(4,447
)
 
—

 
—

 
—

 
(4,447
)
 
—

 
(4,447
)
Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common
stockholders of Wells Real Estate Investment Trust II, Inc.
—

 
—

 
—

 
324

 
—

 
—

 
324

 
—

 
324

Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
59

 
59

Market value adjustment to interest rate swap
—

 
—

 
—

 
—

 


 
(6,709
)
 
(6,709
)
 
—

 
(6,709
)
Comprehensive (loss) income
—

 
—

 
—

 
—

 
—

 
—

 
(6,385
)
 
59

 
(6,326
)
Balance, September 30, 2010
538,666

 
$
5,387

 
$
4,812,911

 
$
(1,154,814
)
 
$
(178,806
)
 
$
(14,738
)
 
$
3,469,940

 
$
1,583

 
$
3,471,523

See accompanying notes.




Page 8

WELLS REAL ESTATE INVESTMENT TRUST II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
(unaudited)
 
Nine months ended
September 30,
 
2011
 
2010
Cash Flows from Operating Activities:
 
 
 
Net income
$
3,043

 
$
383

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Straight-line rental income
(13,046
)
 
(4,261
)
Depreciation
89,538

 
75,350

Amortization
93,847

 
91,762

Loss on interest rate swaps
14,644

 
21,945

Loss on sale of discontinued operations
—

 
130

Impairment loss on discontinued operations
5,817

 
—

Gain on early extinguishment of debt on discontinued operations
(13,522
)
 
—

Remeasurement gain on foreign currency
—

 
(167
)
Noncash interest expense
19,619

 
14,009

Changes in assets and liabilities, net of acquisitions:
 
 
 
Increase in tenant receivables, net
(1,702
)
 
(1,296
)
Increase in prepaid expenses and other assets
(3,621
)
 
(5,962
)
Increase in accounts payable and accrued expenses
7,261

 
187

Decrease in due to affiliates
(2,850
)
 
(3,110
)
Increase (decrease) in deferred income
9,388

 
(267
)
Net cash provided by operating activities
208,416

 
188,703

Cash Flows from Investing Activities:
 
 
 
Net proceeds from the sale of real estate
—

 
15,250

Investment in real estate and earnest money paid
(628,141
)
 
(269,184
)
Deferred lease costs paid
(21,782
)
 
(5,448
)
Net cash used in investing activities
(649,923
)
 
(259,382
)
Cash Flows from Financing Activities:
 
 
 
Financing costs paid
(12,337
)
 
(7,314
)
Proceeds from lines of credit and notes payable
1,254,000

 
56,000

Repayments of lines of credit and notes payable
(891,772
)
 
(146,264
)
Proceeds from issuance of bonds payable
248,237

 
—

Redemption of noncontrolling interest
(87
)
 
—

Distributions paid to nonredeemable noncontrolling interests
(33
)
 
(235
)
Issuance of common stock
98,008

 
442,678

Redemptions of common stock
(58,634
)
 
(54,883
)
Distributions paid to stockholders
(104,863
)
 
(110,528
)
Distributions paid to stockholders and reinvested in shares of our common stock
(98,008
)
 
(122,687
)
Commissions on stock sales and related dealer-manager fees paid
—

 
(29,821
)
Other offering costs paid
—

 
(5,495
)
Net cash provided by financing activities
434,511

 
21,451

Net decrease in cash and cash equivalents
(6,996
)
 
(49,228
)
Effect of foreign exchange rate on cash and cash equivalents
(77
)
 
41

Cash and cash equivalents, beginning of period
38,882

 
102,725

Cash and cash equivalents, end of period
$
31,809

 
$
53,538

See accompanying notes.


Page 9

WELLS REAL ESTATE INVESTMENT TRUST II, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(unaudited)
1.
Organization
Wells Real Estate Investment Trust II, Inc. (“Wells REIT II”) is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. Wells REIT II engages in the acquisition and ownership of commercial real estate properties, including properties that are under construction, are newly constructed, or have operating histories. Wells REIT II was incorporated on July 3, 2003 and commenced operations on January 22, 2004. Wells REIT II conducts business primarily through Wells Operating Partnership II, L.P. (“Wells OP II”), a Delaware limited partnership. Wells REIT II is the sole general partner of Wells OP II, and Wells OP II LP, LLC, a wholly owned subsidiary of Wells REIT II, is the sole limited partner of Wells OP II. Therefore, Wells REIT II owns 100% of the equity interests in, and possesses full legal control and authority over, the operations of Wells OP II. Wells OP II acquires, develops, owns, leases, and operates real properties directly, through wholly owned subsidiaries, or through joint ventures. References to Wells REIT II herein shall include Wells REIT II and all subsidiaries of Wells REIT II, including consolidated joint ventures, Wells OP II, Wells OP II LP, LLC, and Wells OP II’s direct and indirect subsidiaries. Wells Real Estate Advisory Services II, LLC ("WREAS II") serves as the external advisor to Wells REIT II. See Note 8 for a discussion of the advisory services provided by WREAS II.
As of September 30, 2011, Wells REIT II owned controlling interests in 71 office properties and one hotel, which include 93 operational buildings. These properties are comprised of approximately 22.6 million square feet of commercial space and are located in 23 states, the District of Columbia, and Moscow, Russia. Of these properties, 69 are wholly owned and three are owned through consolidated joint ventures. As of September 30, 2011, the office properties were approximately 94.3% leased.
On December 1, 2003, Wells REIT II commenced its initial public offering of up to 785.0 million shares of common stock, of which 185.0 million shares were reserved for issuance through Wells REIT II’s dividend reinvestment plan (“DRP”), pursuant to a Registration Statement filed on Form S-11 with the SEC (the “Initial Public Offering”). Except for continuing to offer shares for sale through its DRP, Wells REIT II stopped offering shares for sale under the Initial Public Offering on November 26, 2005. Wells REIT II raised gross offering proceeds of approximately $2.0 billion from the sale of approximately 197.1 million shares under the Initial Public Offering, including shares sold under the DRP through March 2006. On November 10, 2005, Wells REIT II commenced a follow-on offering of up to 300.6 million shares of common stock, of which 0.6 million shares were reserved for issuance under Wells REIT II’s DRP, pursuant to a Registration Statement filed on Form S-11 with the SEC (the “Follow-On Offering”). On April 14, 2006, Wells REIT II amended the aforementioned registration statements to offer in a combined prospectus 300.6 million shares registered under the Follow-On Offering and 174.4 million unsold shares related to the DRP originally registered under the Initial Public Offering. Wells REIT II raised gross offering proceeds of approximately $2.6 billion from the sale of approximately 257.6 million shares under the Follow-On Offering, including shares sold under the DRP, through November 2008. Wells REIT II stopped offering shares for sale under the Follow-On Offering on November 10, 2008.
On November 11, 2008, Wells REIT II commenced a third offering of up to 375.0 million shares of common stock pursuant to a Registration Statement filed on Form S-11 with the SEC (the “Third Offering”). Under the Third Offering registration statement, as amended, Wells REIT II offered up to 300.0 million shares of common stock in a primary offering for $10 per-share, with discounts available to certain categories of purchasers, and up to 75.0 million shares pursuant to its DRP at a purchase price equal to $9.55. Effective June 30, 2010, Wells REIT II ceased offering shares under the Third Offering. On August 27, 2010, the Third Offering was deregistered under the Form S-11 filing and the shares issuable pursuant to the DRP were registered on Form S-3. As of September 30, 2011, Wells REIT II had raised gross offering proceeds of approximately $1.4 billion from the sale of approximately 137.2 million shares under the Third Offering, including shares sold under the DRP.
As of September 30, 2011, Wells REIT II had raised gross offering proceeds from the sale of common stock under its public offerings of approximately $5.9 billion. After deductions from such gross offering proceeds for selling commissions and dealer-manager fees of approximately $509.5 million, acquisition fees of approximately $116.8 million, other organization and offering expenses of approximately $75.9 million, and common stock redemptions pursuant to our share redemption program of approximately $472.6 million, Wells REIT II had received aggregate net offering proceeds of approximately $4.7 billion. Substantially all of Wells REIT II’s net offering proceeds have been invested in real estate.
Wells REIT II’s stock is not listed on a public securities exchange. However, Wells REIT II’s charter requires that in the event Wells REIT II’s stock is not listed on a national securities exchange by October 2015, Wells REIT II must either seek stockholder approval to extend or amend this listing deadline or seek stockholder approval to begin liquidating investments and distributing the resulting proceeds to the stockholders. If Wells REIT II seeks stockholder approval to extend or amend this listing date and does not obtain it, Wells REIT II will then be required to seek stockholder approval to liquidate. In this circumstance, if Wells


Page 10

REIT II seeks and does not obtain approval to liquidate, Wells REIT II will not be required to list or liquidate and could continue to operate indefinitely as an unlisted company.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of Wells REIT II have been prepared in accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, the statements for these unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Results for these interim periods are not necessarily indicative of a full year’s results. Wells REIT II’s consolidated financial statements include the accounts of Wells REIT II, Wells OP II, and any variable interest entity in which Wells REIT II or Wells OP II was deemed the primary beneficiary. With respect to entities that are not variable interest entities, Wells REIT II’s consolidated financial statements shall also include the accounts of any entity in which Wells REIT II, Wells OP II, or their subsidiaries own a controlling financial interest and any limited partnership in which Wells REIT II, Wells OP II, or its subsidiaries own a controlling general partnership interest. For further information, refer to the financial statements and footnotes included in Wells REIT II’s Annual Report on Form 10-K/A for the year ended December 31, 2010.
Fair Value Measurements
Wells REIT II estimates the fair value of its assets and liabilities (where currently required under GAAP) consistent with the provisions of the accounting standard for fair value measurements and disclosures. Under this standard, fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. While various techniques and assumptions can be used to estimate fair value depending on the nature of the asset or liability, the accounting standard for fair value measurements and disclosures provides the following fair value technique parameters and hierarchy, depending upon availability:
Level 1 – Assets or liabilities for which the identical term is traded on an active exchange, such as publicly traded instruments or futures contracts.
Level 2 – Assets and liabilities valued based on observable market data for similar instruments.
Level 3 – Assets or liabilities for which significant valuation assumptions are not readily observable in the market. Such assets or liabilities are valued based on the best available data, some of which may be internally developed. Significant assumptions may include risk premiums that a market participant would consider.
Investment in Real Estate Assets
Wells REIT II is required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income. The estimated useful lives of our assets by class are as follows:
 
Buildings
  
40 years
 
Building improvements
  
5-25 years
 
Site improvements
  
15 years
 
Tenant improvements
  
Shorter of economic life or lease term
 
Intangible lease assets
  
Lease term

Evaluating the Recoverability of Real Estate Assets

Wells REIT II continually monitors events and changes in circumstances that could indicate that the carrying amounts of the real estate and related intangible assets of both operating properties and properties under construction, in which Wells REIT II has an ownership interest, either directly or through investments in joint ventures, may not be recoverable. When indicators of potential impairment are present that suggest that the carrying amounts of real estate assets and related intangible assets (liabilities) may not be recoverable, Wells REIT II assesses the recoverability of these assets by determining whether the respective carrying values will be recovered through the estimated undiscounted future operating cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying values, Wells


Page 11

REIT II adjusts the carrying value of the real estate assets and related intangible assets to the estimated fair values, pursuant to the property, plant, and equipment accounting standard for the impairment or disposal of long-lived assets, and recognizes an impairment loss. Estimated fair values are calculated based on the following information, in order of preference, depending upon availability: (i) recently quoted market prices, (ii) market prices for comparable properties, or (iii) the present value of future cash flows, including estimated salvage value. Certain of our assets may be carried at more than an amount that could be realized in a current disposition transaction.

During the third quarter of 2011, Wells REIT II evaluated the recoverability of the carrying value of the Manhattan Towers property and determined that it was not recoverable, as defined by the accounting policy outlined above. The Manhattan Towers property is located in Manhattan Beach, California and includes two office buildings with total occupancy of 22%. In the third quarter of 2011, upon considering the economic impact of various property disposition scenarios not previously contemplated, including the likelihood of achieving the projected returns associated with each scenario, Wells REIT II opted to transfer the Manhattan Towers property to an affiliate of the lender in full settlement of a $75.0 million nonrecourse mortgage loan through a deed in lieu of foreclosure transaction, which closed on September 6, 2011. As a result of this transaction, Wells REIT II reduced the carrying value of the Manhattan Towers property to its fair value, estimated based on the present value of estimated future property cash flows, by recognizing a property impairment loss of approximately $5.8 million, and recognized a gain on early extinguishment of debt of $13.5 million. The gain on early extinguishment of debt, net of the property impairment loss, is reflected as loss on disposition of discontinued operations in the statement of operations.

The fair value measurements used in this evaluation of nonfinancial assets are considered to be Level 3 valuations within the fair value hierarchy outlined above, as there are significant unobservable inputs. Examples of inputs that were utilized in the fair value calculations include estimated holding periods, discount rates, market capitalization rates, expected lease rental rates, and sales prices. The table below represents the detail of the adjustments recognized quarter and year to date as of September 30, 2011 (in thousands) using Level 3 inputs.
Property
 
Net Book Value
 
Impairment Loss Recognized
 
Fair Value
Manhattan Towers
 
$
65,317

 
$
(5,817
)
 
$
59,500


Intangible Assets and Liabilities Arising from In-Place Leases where Wells REIT II is the Lessor
As of September 30, 2011 and December 31, 2010, Wells REIT II had the following gross intangible in-place lease assets and liabilities (in thousands):
 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place Lease
Liabilities
 
Above-Market
In-Place  Lease
Assets
 
Absorption
Period  Costs
 
September 30, 2011
Gross
$
127,709

 
$
540,147

 
$
479,928

 
$
166,201

 
Accumulated Amortization
$
(83,855
)
 
$
(275,401
)
 
$
(236,457
)
 
$
(72,173
)
 
Net
$
43,854

 
$
264,746

 
$
243,471

 
$
94,028

December 31, 2010
Gross
$
139,014

 
$
534,277

 
$
489,361

 
$
150,099

 
Accumulated Amortization
$
(83,233
)
 
$
(265,747
)
 
$
(219,447
)
 
$
(62,165
)
 
Net
$
55,781

 
$
268,530

 
$
269,914

 
$
87,934

For the nine months ended September 30, 2011 and the year ended December 31, 2010, Wells REIT II recognized the following amortization of intangible lease assets and liabilities (in thousands):
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place Lease
Liabilities
Above-Market
In-Place Lease
Assets
 
Absorption
Period  Costs
 
For the nine months ended September 30, 2011
$
11,104

 
$
47,695

 
$
37,922

 
$
12,764

For the year ended December 31, 2010
$
17,810

 
$
61,743

 
$
51,241

 
$
14,472




Page 12


The remaining net intangible assets and liabilities as of September 30, 2011 will be amortized as follows (in thousands):
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place Lease
Liabilities
Above-Market
In-Place  Lease
Assets
 
Absorption
Period  Costs
 
For the three months ending December 31, 2011
$
2,879

 
$
15,277

 
$
12,132

 
$
4,447

For the years ending December 31:


 

 

 

2012
9,451

 
52,045

 
43,090

 
16,704

2013
7,867

 
45,930

 
40,040

 
16,061

2014
6,722

 
40,390

 
37,082

 
15,629

2015
6,102

 
34,905

 
33,356

 
13,217

2016
5,689

 
24,546

 
25,585

 
8,209

Thereafter
5,144

 
51,653

 
52,186

 
19,761

 
$
43,854

 
$
264,746

 
$
243,471

 
$
94,028

Intangible Assets and Liabilities Arising from In-Place Leases where Wells REIT II is the Lessee
In-place ground leases where Wells REIT II is the lessee may have value associated with effective contractual rental rates that are above or below market rates. Such values are calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place lease and (ii) management’s estimate of fair market lease rates for the corresponding in-place lease, measured over a period equal to the remaining terms of the leases. The capitalized above-market and below-market in-place lease values are recorded as intangible lease liabilities or assets and amortized as an adjustment to property operating cost over the remaining term of the respective leases. Wells REIT II had gross below-market lease assets of approximately $110.7 million as of September 30, 2011 and December 31, 2010, and recognized amortization of these assets of approximately $1.6 million for the nine months ended September 30, 2011 and approximately $2.1 million for the year ended December 31, 2010.
As of September 30, 2011, the remaining net below-market lease asset will be amortized as follows (in thousands):
For the year ending December 31:
 
2011
$
517

2012
2,069

2013
2,069

2014
2,069

2015
2,069

2016
2,069

Thereafter
91,416

 
$
102,278

Bonds Payable
On April 4, 2011, Wells REIT II sold $250 million of its 7-year, unsecured 5.875% senior notes at 99.295 percent of their face value. The discount on bonds payable is amortized to interest expense over the term of the bonds using the effective-interest method.
Redeemable Common Stock
Under Wells REIT II's share redemption program (“SRP”), the decision to honor redemptions, subject to certain plan requirements and limitations, falls outside the control of Wells REIT II. As a result, Wells REIT II records redeemable common stock in the temporary equity section of its consolidated balance sheet. Total redemptions (including those tendered within two years of a stockholder's death) are limited to the extent that they would cause both (i) the aggregate amount paid for all redemptions during the then-current calendar year to exceed 100% of the net proceeds raised under the DRP during such calendar year and (ii) the


Page 13

total number of shares redeemed during the then-current calendar year to exceed 5% of the weighted-average number of shares outstanding in the prior calendar year. Therefore, Wells REIT II measures redeemable common stock at the greater of these limits (or, for the periods presented in this report, 5% of the weighted-average number of shares outstanding in the prior calendar year, multiplied by the maximum price at which future shares could be redeemed), less the amount incurred to redeem shares during the current calendar year. The maximum price at which shares could be redeemed (i.e. in cases of death, disability, or qualification for federal assistance for confinement to a long-term care facility) was measured at the gross issue price under Wells REIT II's primary offerings (generally, $10.00 per share) as of December 31, 2010, and measured at the most recently reported net asset value per share ($7.47 per share - see Subsequent Events Section of Item 2. "Management's Discussion and Analysis" for additional details) as of September 30, 2011.
Interest Rate Swap Agreements
Wells REIT II enters into interest rate swap contracts to mitigate its interest rate risk on the related financial instruments. Wells REIT II does not enter into derivative or interest rate transactions for speculative purposes; however, certain of its derivatives may not qualify for hedge accounting treatment. Wells REIT II records the fair value of its interest rate swaps either as prepaid expenses and other assets or as accounts payable, accrued expenses, and accrued capital expenditures. Changes in the fair value of the effective portion of interest rate swaps that are designated as hedges are recorded as other comprehensive income (loss), while changes in the fair value of the ineffective portion of a hedge, if any, is recognized currently in earnings. Changes in the fair value of interest rate swaps that do not qualify for hedge accounting treatment are recorded as gain (loss) on interest rate swaps. Amounts received or paid under interest rate swap agreements are recorded as interest expense for contracts that qualify for hedge accounting treatment and as gain (loss) on interest rate swaps for contracts that do not qualify for hedge accounting treatment.
The following tables provide additional information related to Wells REIT II’s interest rate swaps as of September 30, 2011 and December 31, 2010 (in thousands):
 
 
 
Estimated Fair Value as of
Instrument Type
Balance Sheet Classification
 
September 30,
2011
 
December 31,
2010
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate contracts
Accounts payable
 
$
(15,248
)
 
$
(11,222
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate contracts
Accounts payable
 
$
(51,853
)
 
$
(37,208
)

Wells REIT II applied the provisions of the accounting standard for fair value measurements and disclosures in recording its interest rate swaps at fair value. The fair values of the interest rate swap, classified under Level 2, were determined using a third-party proprietary model that is based on prevailing market data for contracts with matching durations, current and anticipated London Interbank Offered Rate (“LIBOR”) information, and reasonable estimates about relevant future market conditions. The fair value of Wells REIT II’s interest rate swaps were $(67.1) million and $(48.4) million at September 30, 2011 and December 31, 2010, respectively. Please refer to the Interest Rate Swap Agreements disclosure below for additional details.
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
Market value adjustment to interest rate swap designated as a hedge instrument and included in other comprehensive income
$
(3,198
)
 
$
(2,311
)
 
$
(4,025
)
 
$
(6,709
)
Loss on interest rate swaps recognized through earnings
$
(14,774
)
 
$
(9,885
)
 
$
(22,219
)
 
$
(29,068
)
During the periods presented, there was no hedge ineffectiveness required to be recognized into earnings on the interest rate swaps that qualified for hedge accounting treatment.
Income Taxes
Wells REIT II has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), and has operated as such beginning with its taxable year ended December 31, 2003. To qualify as a REIT, Wells REIT II must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its REIT taxable income, as defined by the Code, to its stockholders. As a REIT, Wells REIT II generally is not subject to income tax on income it distributes



Page 14

to stockholders. Wells REIT II is subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in the accompanying consolidated financial statements.
Wells TRS II, LLC (“Wells TRS”) and Wells KCP TRS, LLC ("Wells KCP TRS") are wholly owned subsidiaries of Wells REIT II, are organized as Delaware limited liability companies, and operate, among other things, a full-service hotel. Wells REIT II has elected to treat Wells TRS and Wells KCP TRS as taxable REIT subsidiaries. Wells REIT II may perform certain additional, noncustomary services for tenants of its buildings through Wells TRS or Wells KCP TRS; however, any earnings related to such services are subject to federal and state income taxes. In addition, for Wells REIT II to continue to qualify as a REIT, Wells REIT II must limit its investments in taxable REIT subsidiaries to 25% of the value of the total assets. Deferred tax assets and liabilities represent temporary differences between the financial reporting basis and the tax basis of assets and liabilities based on the enacted rates expected to be in effect when the temporary differences reverse. Wells REIT II records interest and penalties related to uncertain tax positions as general and administrative expense in the accompanying consolidated statements of operations.
Noncontrolling Interests
Nonredeemable noncontrolling interests are presented separately in the consolidated statements of equity and represent equity interests of consolidated subsidiaries that are not owned by Wells REIT II. Nonredeemable noncontrolling interests are adjusted for contributions, distributions, and earnings attributable to the nonredeemable noncontrolling interests in the consolidated joint ventures. Pursuant to the terms of the consolidated joint venture agreements, all earnings and distributions are allocated to joint venturers in accordance with the terms of the respective joint venture agreements. Earnings allocated to such nonredeemable noncontrolling interest holders are recorded as net (income) loss attributable to nonredeemable noncontrolling interests in the accompanying consolidated statements of operations.
Until June 30, 2011, Wells Capital, Inc. ("Wells Capital") held an interest in Wells OP II's limited partnership units which was redeemable under certain circumstances, and, therefore, the noncontrolling interest in Wells OP II was included in accounts payable, accrued expenses, and accrued capital expenditures in the consolidated balance sheets as of December 31, 2010 ($0.1 million). Effective June 30, 2011, Wells Capital's interest in Wells OP II partnership units were exchanged for shares of Wells REIT II common stock.
Recent Accounting Pronouncements
FASB Accounting Standards Codification (ASC) is a major restructuring of accounting and reporting standards designed to simplify user access to all authoritative U.S. generally accepted accounting principles (GAAP) by providing the authoritative literature in a topically organized structure.
In January 2010, the Financial Accounting Standards Board (the “FASB”) clarified previously issued GAAP and issued new requirements related to Accounting Standards Codifications Topic Fair Value Measurements and Disclosures (“ASU 2010-6”). The clarification component includes disclosures about inputs and valuation techniques used in determining fair value, and providing fair value measurement information for each class of assets and liabilities. The new requirements relate to disclosures of transfers between the levels in the fair value hierarchy, as well as the individual components in the rollforward of the lowest level (Level 3) in the fair value hierarchy. This change in GAAP became effective for Wells REIT II beginning January 1, 2010, except for the provision concerning the rollforward of activity of the Level 3 fair value measurement, which became effective for Wells REIT II on January 1, 2011. The adoption of ASU 2010-6 has not had a material impact on Wells REIT II’s consolidated financial statements or disclosures.
In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement Topic Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). ASU 2011-04 converges the U.S. GAAP and IFRS definition of “fair value,” the requirements for measuring amounts at fair value, and disclosures about these measurements. The update does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The adoption of ASU 2011-04 is effective for Wells REIT II on December 15, 2011. Wells REIT II expects that the adoption of ASU 2011-04 will not have a material impact on Wells REIT II's consolidated financial statements or disclosures.
In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income Topic Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The adoption of


Page 15

ASU 2011-05 is effective for Wells REIT II on December 15, 2011, except for the specific requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income that has been deferred. Wells REIT II expects that the adoption of ASU 2011-05 will not have a material impact on Wells REIT II's consolidated financial statements or disclosures.
3.
Real Estate Acquisitions
 During the nine months ended September 30, 2011, Wells REIT II acquired interests in the following properties (in thousands):
 
 
 
 
 
 
 
 
 
 
 
Intangibles
 
 
 
 
Property Name
City
 
State
 
Acquisition
Date
 
Land
 
Buildings
and
Improvements
 
Intangible
Lease
Assets
 
Intangible
Lease
Origination
 
Below-
Market
Lease
Liability
 
Total
Purchase
Price
 
Lease
Details
Market Square Buildings
Washington, DC
 
N/A
 
3/7/2011
 
$
152,629

 
$
412,548

 
$
45,858

 
$
12,031

 
$
(19,680
)
 
$
603,386

 
(1) 
544 Lakeview(2)
Vernon Hills
 
IL
 
4/1/2011
 
3,006

 
3,100

 
—

 
—

 
—

 
6,106

 
(3) 
 
 
 
 
 
 
 
$
155,635

 
$
415,648

 
$
45,858

 
$
12,031

 
$
(19,680
)
 
$
609,492

 
 
(1) 
As of the acquisition date, the Market Square Buildings were 96.2% leased to 41 tenants, including Fulbright and Jaworski (18.8%), Shearman and Sterling (16.6%), and Edison Electric Institute (11.3%).
(2) 
Wells REIT II acquired a 50% controlling interest in a consolidated joint venture that owns 100% of 544 Lakeview by paying cash of $0.9 million and assuming (i) a mortgage note of $9.1 million, which is included on the consolidated balance sheets as of September 30, 2011, net of discount of $0.4 million, and (ii) escrow balances of approximately $3.2 million.
(3) 
As of the acquisition date, the Lakeview Building is vacant.
Wells REIT II recognized revenues of $26.2 million and a net loss of $12.6 million from the Market Square Buildings acquisition for the period from March 7, 2011 through September 30, 2011. Wells REIT II recognized acquisition-related expenses associated with the Market Square Buildings acquisition of $9.4 million, all of which are recorded as acquisition fees and expenses in the accompanying consolidated statements of operations for the nine months ended September 30, 2011. Please refer to Note 2. Summary of Significant Accounting Policies for a discussion of the estimated useful life for each asset class.
Pro Forma Financial Information for Market Square Buildings Acquisition
The following unaudited pro forma statement of operations presented for the three and nine months ended September 30, 2011 and 2010 have been prepared for Wells REIT II to give effect to the acquisition of the Market Square Buildings as if the acquisition occurred on January 1, 2011 and January 1, 2010, respectively. The unaudited pro forma financial information has been prepared for informational purposes only and is not necessarily indicative of future results or of actual results that would have been achieved had the acquisition of the Market Square Buildings acquisition been consummated as of January 1, 2011 or January 1, 2010. The acquisition of 544 Lakeview is immaterial and, as a result, was not taken into consideration when preparing the following pro forma financial information (in thousands).
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
Revenues
$
158,403

 
$
156,036

 
$
465,950

 
$
449,205

Net income (loss) attributable to common stockholders
$
5,102

 
$
(264
)
 
$
(382
)
 
$
(15,392
)


Page 16

4.
Line of Credit and Notes Payable
As of September 30, 2011 and December 31, 2010, Wells REIT II had the following line of credit and notes payable indebtedness outstanding (excluding bonds payable, see Note 5. Bonds Payable, in thousands):
Facility
September 30,
2011
 
December 31,
2010
Market Square mortgage note
$
325,000

 
$
—

JPMorgan Chase Credit Facility
220,500

 
72,000

222 E. 41st Street Building mortgage note
173,032

 
164,151

100 East Pratt Street Building mortgage note
105,000

 
105,000

Wildwood Buildings mortgage note
90,000

 
90,000

80 Park Plaza Building mortgage note
64,010

 
60,894

263 Shuman Boulevard Building mortgage note
49,000

 
49,000

One West Fourth Street Building mortgage note
40,061

 
41,537

SanTan Corporate Center mortgage notes
39,000

 
39,000

Highland Landmark Building mortgage note
33,840

 
33,840

Three Glenlake Building mortgage note
25,880

 
25,721

215 Diehl Road Building mortgage note
21,000

 
21,000

544 Lakeview Building mortgage note
8,673

 
—

Manhattan Towers Building mortgage note
—

 
75,000

Cranberry Woods Drive mortgage note
—

 
63,396

800 North Frederick Building mortgage note
—

 
46,400

Total indebtedness
$
1,194,996

 
$
886,939

On July 8, 2011, Wells REIT II entered an amendment to the JPMorgan Chase Credit Facility (the “JPMorgan Chase Credit Facility Amendment”) with JPMorgan Chase Bank (the "JPMorgan Chase Bank") to, among other things, (i) extend the maturity date of the facility to May 7, 2015, (ii) enable Wells REIT II to increase the JPMorgan Chase Credit Facility amount by an aggregate of up to $150.0 million to a total facility amount not to exceed $650.0 million on two occasions on or before December 7, 2014, upon meeting certain criteria, and (iii) reduce the interest rate and the facility fee as described below. Except as noted above and described below, the terms of the facility remain materially unchanged by the amendment.
The JPMorgan Chase Credit Facility Amendment provides for interest costs to be incurred based on, at the option of Wells REIT II, the LIBOR for one-, two-, three-, or six-month periods, plus an applicable margin ranging from 1.25% to 2.05% (the “LIBOR Rate”) or at the alternate base rate, plus an applicable margin ranging from 0.25% to 1.05% (the “Base Rate”). The alternate base rate for any day is the greatest of the rate of interest publicly announced by JPMorgan Chase Bank as its prime rate in effect in its principal office in New York City for such day, the federal funds rate for such day plus 0.50%, and the one-month LIBOR Rate for such day plus 1.00%. The margin component of the LIBOR Rate and the Base Rate is based on Wells REIT II's applicable credit rating (as defined in the facility agreement). Additionally, Wells REIT II must pay a per-annum facility fee on the aggregate revolving commitment (used or unused) ranging from 0.25% to 0.45% based on Wells REIT II's applicable credit rating.
In the third quarter of 2011, Wells REIT II used cash on hand and proceeds from the JPMorgan Chase Credit Facility to fully repay the Cranberry Woods Drive mortgage note ($63.4 million) and the 800 North Frederick Building mortgage note ($46.4 million). On September 6, 2011, Wells REIT II settled the Manhattan Towers mortgage note by transferring the Manhattan Towers property, an office building located in Manhattan Beach, California, to an affiliate of its mortgagee through a deed in lieu of foreclosure transaction. As a result of this transaction, Wells REIT II recognized a property impairment loss of $5.8 million and a gain on early extinguishment of debt of $13.5 million, which are included in loss on disposition of discontinued operations in the statement of operations. During the nine months ended September 30, 2011 and 2010, Wells REIT II also made interest payments of approximately $34.2 million and $31.8 million, respectively, including amounts capitalized of $0.0 million and $0.5 million, respectively.



Page 17

The estimated fair value of Wells REIT II’s notes payable as of September 30, 2011 and December 31, 2010 was approximately $1,251.3 million and $915.9 million, respectively. Wells REIT II estimated the fair value of its line of credit by obtaining estimates for similar facilities from multiple market participants as of the respective reporting dates. Therefore, the fair values determined are considered to be based on observable market data for similar instruments (Level 2). The fair values of all other debt instruments were estimated based on discounted cash flow analyses using the current incremental borrowing rates for similar types of borrowing arrangements as of the respective reporting dates. The discounted cash flow method of assessing fair value results in a general approximation of value, and such value may never actually be realized.
As of September 30, 2011, Wells REIT II believes it was in compliance with the restrictive covenants on its outstanding line of credit and notes payable obligations.
5.
Bonds Payable
On April 4, 2011, Wells REIT II sold $250.0 million of its 7-year, unsecured 5.875% senior notes at 99.295 percent of their face value. These notes, and the equivalent notes issued in exchange therefor (as described below), are referred to as the 2018 Bonds Payable (the "2018 Bonds Payable").Wells REIT II received proceeds from the 2018 Bonds Payable, net of fees, of $246.7 million. The 2018 Bonds Payable require semi-annual interest payments each in April and October based on a contractual annual interest rate of 5.875%, which is subject to adjustment in certain circumstances. In the accompanying consolidated balance sheets, the 2018 Bonds Payable are shown net of the initial issuance discount of approximately $1.8 million, which is amortized to interest expense over the term of the 2018 Bonds Payable using the effective interest method. The principal amount of the 2018 Bonds Payable is due and payable on the maturity date. No interest payments were made on the 2018 Bonds Payable during the nine months ended September 30, 2011.
The restrictive covenants on the 2018 Bonds Payable as defined pursuant to an indenture (the "Indenture") include:
•
limits to Wells REIT II's ability to merge or consolidate with another entity or transfer all or substantially all of Wells REIT II’s property and assets, subject to important exceptions and qualifications;
•
a limitation on the ratio of debt to total assets, as defined, to 60%;
•
limits to Wells REIT II's ability to incur debt if the consolidated income available for debt service to annual debt service charge, as defined, for four previous consecutive fiscal quarters is less than 1.5:1 on a pro forma basis;
•
limits to Wells REIT II's ability to incur liens if, on an aggregate basis for Wells REIT II, the secured debt amount would exceed 40% of the value of the total assets; and
•
a requirement that the ratio of unencumbered asset value, as defined, to total unsecured debt be at least 150% at all times.
As of September 30, 2011, Wells REIT II believes it was in compliance with the restrictive covenants on its 2018 Bonds Payable.
The 2018 Bonds Payable were originally issued through a private offering. On September 12, 2011, Wells OP II completed its offer to exchange the 2018 Bonds Payable, for equivalent bonds issued in an offering registered under the Securities Act of 1933, as amended.
The estimated fair value of Wells REIT II’s 2018 Bonds Payable as of September 30, 2011 was approximately $251.2 million. The fair value of the 2018 Bonds Payable was estimated based on discounted cash flow analyses using the current incremental borrowing rates for similar types of borrowing as the 2018 Bonds Payable arrangements as of the respective reporting dates. The discounted cash flow method of assessing fair value results in a general approximation of value, and such value may never actually be realized.
6.
Commitments and Contingencies
Commitments Under Existing Lease Agreements
Certain lease agreements include provisions that, at the option of the tenant, may obligate Wells REIT II to expend capital to expand an existing property or provide other expenditures for the benefit of the tenant. As of September 30, 2011, no tenants have exercised such options that had not been materially satisfied.
Litigation
Wells REIT II is subject to various legal proceedings, claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. Wells REIT II records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be


Page 18

reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, Wells REIT II accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, Wells REIT II accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, Wells REIT II discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, Wells REIT II discloses the nature and estimate of the possible loss of the litigation. Wells REIT II does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of Wells REIT II. Wells REIT II is not currently involved in any legal proceedings of which management would consider the outcome to be reasonably likely to have a material adverse effect on the results of operations or financial condition of Wells REIT II.
7.
Supplemental Disclosures of Noncash Investing and Financing Activities
Outlined below are significant noncash investing and financing activities for the nine months ended September 30, 2011 and 2010 (in thousands): 
 
Nine months ended
September 30,
 
2011
 
2010
Other assets assumed upon acquisition of properties
$
3,202

 
$
—

Other liabilities assumed upon acquisition of property
$
1,174

 
$
6,878

Notes payable assumed upon acquisition of properties
$
8,607

 
$
—

Noncash interest accruing to notes payable
$
11,809

 
$
11,104

Market value adjustment to interest rate swap that qualifies for hedge accounting treatment
$
(4,025
)
 
$
(6,709
)
Accrued capital expenditures and deferred lease costs
$
6,191

 
$
1,547

Accrued deferred financing costs
$
63

 
$
—

Accrued redemptions of common stock
$
1,629

 
$
272

Settlement of redeemable noncontrolling interest through issuance of common stock
$
13

 
$
—

Other offering costs due to affiliate
$
—

 
$
56

Discounts applied to issuance of common stock
$
—

 
$
4,524

Decrease in redeemable common stock
$
(23,783
)
 
$
(627,038
)
Transfer of Manhattan Towers to lender affiliate in settlement of mortgage note
$
75,000

 
$
—

Transfer of development authority bond and corresponding capital lease in connection with sale of New Manchester One
$
—

 
$
18,000

 
8.
Related-Party Transactions and Agreements
Advisory Agreement
Wells REIT II is party to an agreement with WREAS II, under which WREAS II is required to perform certain key functions on behalf of Wells REIT II, including, among others, the investment of capital proceeds and management of day-to-day operations (the “Advisory Agreement”). WREAS II has executed master services agreements with Wells Capital and Wells Management Company, Inc. ("Wells Management") whereby WREAS II may retain the use of Wells Capital’s and Wells Management’s employees as necessary to perform the services required under the Advisory Agreement, and in return, shall reimburse Wells Capital and Wells Management for the associated personnel costs. Further, under the terms of the Advisory Agreement, Wells Real Estate Funds, Inc. ("WREF") guarantees WREAS II’s performance of services and any amounts payable to Wells REIT II in connection therewith. The Advisory Agreement expires on December 31, 2011 and may be terminated, without cause or penalty, by either party upon providing 60 days’ prior written notice to the other party.
Under the terms of the Advisory Agreement, Wells REIT II incurs fees and reimbursements payable to WREAS II and its affiliates for services as described below:
•
Reimbursement of organization and offering costs paid by WREAS II and its affiliates on behalf of Wells REIT II, not to exceed 2.0% of gross offering proceeds.



Page 19

•
Through July 31, 2011, acquisition fees were incurred at 2.0% of gross offering proceeds, subject to certain limitations. Effective August 1, 2011, acquisition fees have been incurred at 1% of the property purchase price (excluding acquisition expenses); however, in no event may total acquisition fees for the 2011 calendar year exceed 2% of total gross offering proceeds. Wells REIT II also reimburses WREAS II and its affiliates for expenses it pays to third parties in connection with acquisitions or potential acquisitions.
•
Monthly asset management fees equal to one-twelfth of 0.625% of the cost of (i) all properties of Wells REIT II (other than those that fail to meet specified occupancy thresholds) and (ii) investments in joint ventures until the monthly payment equals $2.7 million (or $32.5 million annualized), as of the last day of each preceding month. The monthly payment remains capped at that amount until the cost of (i) all properties of Wells REIT II (other than those that fail to meet specified occupancy thresholds) and (ii) investments in joint ventures are at least $6.5 billion, after which the monthly asset management fee will equal one-twelfth of 0.5% of the cost of (i) all properties of Wells REIT II (other than those that fail to meet specified occupancy thresholds) and (ii) investments in joint ventures. However, monthly asset management fees shall be assessed on the Lindbergh Center Buildings and the Energy Center I Building, which were acquired on July 1, 2008 and June 28, 2010, respectively, at one-twelfth of 0.5% immediately. The amount of asset management fees paid in any three-month period is limited to 0.25% of the average of the preceding three months’ net asset value calculations less Wells REIT II’s outstanding debt. Effective April 2011, asset management fees were capped at $2.7 million (or $32.5 million annualized) following the March 2011 acquisition of the Market Square Buildings.
•
Reimbursement for all costs and expenses WREAS II and its affiliates incur in fulfilling its duties as the asset portfolio manager, including (i) wages and salaries (but excluding bonuses other than the signing bonus paid to E. Nelson Mills upon his appointment as President of Wells REIT II) and other employee-related expenses of WREAS II and its affiliates’ employees, who perform a full range of real estate services for Wells REIT II, including management, administration, operations, and marketing, and are billed to Wells REIT II based on the amount of time spent on Wells REIT II by such personnel, provided that such expenses are not reimbursed if incurred in connection with services for which WREAS II and its affiliates receive a disposition fee (described below) or an acquisition fee, and (ii) amounts paid for IRA custodial service costs allocated to Wells REIT II accounts. The Advisory Agreement limits the amount of reimbursements to the Advisor of “portfolio general and administrative expenses” and “personnel expenses,” as defined, to the extent they would exceed $18.7 million and $10.5 million, respectively, for the period from January 1, 2011 through December 31, 2011.
•
For any property sold by Wells REIT II, other than part of a “bulk sale” of assets, as defined, a disposition fee equal to 1.0% of the sales price, with the limitation that the total real estate commissions (including such disposition fee) for any Wells REIT II property sold may not exceed the lesser of (i) 6.0% of the sales price of each property or (ii) the level of real estate commissions customarily charged in light of the size, type, and location of the property.
•
Incentive fee of 10% of net sales proceeds remaining after stockholders have received distributions equal to the sum of the stockholders’ invested capital, plus an 8% per annum, cumulative return of invested capital, which fee is payable only if the shares of common stock of Wells REIT II are not listed on an exchange.
•
Listing fee of 10% of the amount by which the market value of the stock plus distributions paid prior to listing exceeds the sum of 100% of the invested capital, plus an 8% per annum, cumulative return on invested capital, which fee will be reduced by the amount of any incentive fees paid as described in the preceding bullet.
Effective November 8, 2011, the date of Wells REIT II's net asset value publication, asset management fees will be calculated based on the lesser of (i) the amount determined in accordance with the agreement as described above or (ii) the aggregate value of Wells REIT II's interest in the properties and joint ventures as established with the most recent asset-based valuation.
Dealer-Manager Agreement
With respect to the Third Offering, Wells REIT II was party to a dealer-manager agreement (the “Dealer-Manager Agreement”) with Wells Investment Securities, Inc. (“WIS”), whereby WIS, an affiliate of Wells Capital, performed the dealer-manager function for Wells REIT II. For these services, WIS earned a commission of up to 7% of the gross offering proceeds from the sale of the shares of Wells REIT II, of which substantially all was re-allowed to participating broker/dealers. Wells REIT II pays no commissions on shares issued under its DRP.
Additionally, with respect to the Third Offering, Wells REIT II was required to pay WIS a dealer-manager fee of 2.5% of the gross offering proceeds from the sale of Wells REIT II’s stock at the time the shares were sold. Under the Dealer-Manager Agreement, up to 1.5% of the gross offering proceeds were re-allowable by WIS to participating broker/dealers. Wells REIT II pays no dealer-manager fees on shares issued under its DRP.




Page 20

Property Management, Leasing, and Construction Agreement
Wells REIT II and Wells Management, an affiliate of WREAS II, were party to a master property management, leasing, and construction agreement (the “Management Agreement”) during 2008, 2009, and 2010, under which Wells Management received the following fees and reimbursements in consideration for supervising the management, leasing, and construction of certain Wells REIT II properties:
•
Property management fees in an amount equal to a percentage negotiated for each property managed by Wells Management of the gross monthly income collected for that property for the preceding month;
•
Leasing commissions for new, renewal, or expansion leases entered into with respect to any property for which Wells Management serves as leasing agent equal to a percentage as negotiated for that property of the total base rental and operating expenses to be paid to Wells REIT II during the applicable term of the lease, provided, however, that no commission shall be payable as to any portion of such term beyond 10 years;
•
Initial lease-up fees for newly constructed properties under the agreement, generally equal to one month’s rent;
•
Fees equal to a specified percentage of up to 5% of all construction build-out funded by Wells REIT II, given as a leasing concession, and overseen by Wells Management; and
•
Other fees as negotiated with the addition of each specific property covered under the agreement.
Assignment of Management Agreement
Effective January 1, 2011, Wells Management assigned all of its rights, title, and interest in the Management Agreement to WREAS II, and Wells REIT II consented to such assignment. As part of this assignment, Wells Management has guaranteed the performance of all of WREAS II’s obligations under the Management Agreement. Pursuant to its terms, the Management Agreement was renewed on October 24, 2011 for an additional one-year term.
Related-Party Costs
Pursuant to the terms of the agreements described above, Wells REIT II incurred the following related-party costs for the three months and nine months ended September 30, 2011 and 2010, respectively (in thousands):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
Asset management fees
$
8,125

 
$
7,802

 
$
23,969

 
$
22,724

Administrative reimbursements, net(1)
2,913

 
2,682

 
9,337

 
9,565

Property management fees
1,350

 
874

 
3,566

 
2,686

Acquisition fees
—

 
1,933

 
1,307

 
8,853

Construction fees(4)
60

 
33

 
109

 
157

Commissions, net of discounts(2)(3)
—

 
3,762

 
—

 
21,926

Dealer-manager fees, net of discounts(2)
—

 
1,380

 
—

 
7,842

Other offering costs(2)
—

 
269

 
—

 
4,447

Total
$
12,448

 
$
18,735

 
$
38,288

 
$
78,200

(1) 
Administrative reimbursements are presented net of reimbursements from tenants of approximately $1.2 million and $0.6 million for the three months ended September 30, 2011 and 2010, respectively, and approximately $3.0 million and 2.0 million for the nine months ended September 30, 2011 and 2010, respectively.
(2) 
Commissions, dealer-manager fees, and other offering costs were charged against equity as incurred.
(3) 
Substantially all commissions were re-allowed to participating broker/dealers during 2010.
(4) 
Construction fees are capitalized to real estate assets as incurred.
Wells REIT II incurred no related-party incentive fees, listing fees, disposition fees or leasing commissions during the three months and nine months ended September 30, 2011 and 2010, respectively.


Page 21

Due to Affiliates
The detail of amounts due to WREAS II and its affiliates is provided below as of September 30, 2011 and December 31, 2010 (in thousands): 
 
September 30,
2011
 
December 31,
2010
Administrative reimbursements
$
1,160

 
$
1,551

Asset and property management fees
465

 
2,924

Commissions and dealer-manager fees
—

 
4

 
$
1,625

 
$
4,479

Economic Dependency
Wells REIT II has engaged WREAS II and Wells Management to provide certain services that are essential to Wells REIT II, including asset management services, supervision of the property management and leasing of some properties owned by Wells REIT II, asset acquisition and disposition services, as well as other administrative responsibilities for Wells REIT II, including accounting services, stockholder communications, and investor relations. Further, WREAS II has engaged Wells Capital to retain the use of its employees to carry out certain of the services listed above. As a result of these relationships, Wells REIT II is dependent upon WREAS II, Wells Capital, and Wells Management.
WREAS II, Wells Capital, and Wells Management are owned and controlled by WREF. Historically, the operations of WREAS II, Wells Capital, and Wells Management have represented substantially all of the business of WREF. Accordingly, Wells REIT II focuses on the financial condition of WREF when assessing the financial condition of WREAS II, Wells Capital, and Wells Management. In the event that WREF were to become unable to meet its obligations as they become due, Wells REIT II might be required to find alternative service providers.
Future net income generated by WREF will be largely dependent upon the amount of fees earned by WREF’s subsidiaries based on, among other things, the level of investor proceeds raised and the volume of future acquisitions and dispositions of real estate assets by other WREF-sponsored real estate programs, as well as distribution income earned from equity interests in another REIT previously sponsored by Wells Capital. As of September 30, 2011, Wells REIT II has no reason to believe that WREF does not have access to adequate liquidity and capital resources, including cash flow generated from operations, cash on hand, and other investments and borrowing capacity necessary to meet its current and future obligations as they become due.
9.     Comprehensive Income (Loss)
The detail of comprehensive loss is provided below for the three and nine months ended September 30, 2011 and 2010, respectively (in thousands):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
Net income
$
5,106

 
$
4,721

 
$
3,043

 
$
383

Market value adjustment to interest rate swap
(3,198
)
 
(2,311
)
 
(4,025
)
 
(6,709
)
Comprehensive income (loss)
1,908

 
2,410

 
(982
)
 
(6,326
)
Less: Comprehensive income attributable to noncontrolling interests
(4
)
 
(18
)
 
(11
)
 
(59
)
Comprehensive income (loss) attributable to the common stockholders of Wells Real Estate Investment Trust II, Inc.
$
1,904

 
$
2,392

 
$
(993
)
 
$
(6,385
)



Page 22

10.
Discontinued Operations
In accordance with GAAP, gains and losses from the disposition of certain real estate assets and the related historical operating results are required to be included in a separate section, discontinued operations, in the consolidated statements of operations for all periods presented. On September 6, 2011, Wells REIT II transferred the Manhattan Towers property, an office building located in Manhattan Beach, California, to an affiliate of its lender in connection with settling a $75.0 million mortgage note through a deed in lieu of foreclosure transaction, resulting in a $13.5 million gain on extinguishment of debt. On September 15, 2010, Wells REIT II sold New Manchester One, an industrial property located in Douglasville, Georgia, for $15.3 million. The revenues and expenses of the Manhattan Towers property and New Manchester One are presented below:
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2011
 
2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
Rental income
$
404

 
$
2,007

 
$
1,511

 
$
5,882

Tenant reimbursements
5

 
533

 
61

 
1,521

Other property income
42

 
—

 
42

 
—

 
451

 
2,540

 
1,614

 
7,403

 
 
 
 
 
 
 
 
Expenses:

 

 

 

Property operating costs
382

 
921

 
1,842

 
2,649

Asset and property management fees
5

 
178

 
18

 
531

Depreciation
305

 
498

 
1,193

 
1,553

Amortization
18

 
476

 
65

 
1,428

General and administrative
61

 
58

 
168

 
104

Total expenses
771

 
2,131

 
3,286

 
6,265

Real estate operating loss
(320
)
 
409

 
(1,672
)
 
1,138

Other income (expense):

 

 

 

Interest expense
(740
)
 
(1,368
)
 
(2,900
)
 
(4,127
)
Interest and other income
1

 
270

 
1

 
810

Loss from discontinued operations
(1,059
)
 
(689
)
 
(4,571
)
 
(2,179
)
Loss on sale of real estate assets
—

 
(130
)
 
—

 
(130
)
Impairment loss on real estate assets
(5,817
)
 
—

 
(5,817
)
 
—

Gain on early extinguishment of debt
13,522

 
—

 
13,522

 
—

Gain (loss) from discontinued operations
$
6,646

 
$
(819
)
 
$
3,134

 
$
(2,309
)
 
11.     Financial Information for Parent Guarantor, Other Guarantor Subsidiaries and Non-Guarantor Subsidiaries
On April 4, 2011, Wells OP II generated net proceeds of $246.7 million from its sale of the 2018 Bonds Payable (see Note 5. Bonds Payable).
The 2018 Bonds Payable require semi-annual interest payments each in April and October based on a contractual annual interest rate of 5.875%. The 2018 Bonds Payable are shown net of the initial issuance discount of approximately $1.8 million on the accompanying consolidated balance sheets. This discount is accreted on the effective interest method, as additional interest expense from the date of issuance through the maturity date in April 2018 of the 2018 Bonds Payable. The net proceeds from the issuance of the 2018 Bonds Payable in the amount of $246.7 million were used to repay a portion of the JPMorgan Chase Bridge Loan ("the JPMorgan Chase Bridge Loan") , which was used to finance a portion of the March 2011 acquisition of the Market Square Buildings.
The 2018 Bonds Payable are guaranteed by Wells REIT II and certain direct and indirect subsidiaries of each of Wells REIT II and Wells OP II.
In accordance with SEC Rule 3-10(d) Wells REIT II includes herein condensed consolidating financial information in lieu of separate financial statements of the subsidiary issuer (Wells OP II) and Subsidiary Guarantors, as defined in the bond indenture, because all of the following criteria are met:


Page 23

(1)
The subsidiary issuer (Wells OP II) and all Subsidiary Guarantors are 100% owned by the parent company guarantor (Wells REIT II);
(2)
The guarantees are full and unconditional; and
(3)
The guarantees are joint and several.
Wells REIT II uses the equity method with respect to its investment in subsidiaries included in its condensed consolidating financial statements. Set forth below are Wells REIT II’s condensed consolidating balance sheets as of September 30, 2011 and December 31, 2010 (in thousands) as well as its condensed consolidating statements of operations (in thousands) for the three and nine month periods ended September 30, 2011 and 2010; and its condensed consolidating statements of cash flows (in thousands), each for the nine months ended September 30, 2011 and 2010.


Page 24


Condensed Consolidating Balance Sheets (in thousands)

 
As of September 30, 2011
 
Wells REIT II (Parent)
 
Wells OP II 
(the Issuer)
 
Guarantors
 
Non-Guarantors
 
Consolidating adjustments
 
Wells REIT II (Consolidated)
Assets
 
 
 
 
 
 
 
 
 
 
 
Real estate assets, at cost
 
 
 
 
 
 
 
 
 
 
 
Land
$
—

 
$
—

 
$
199,824

 
$
516,048

 
$
—

 
$
715,872

Building and improvements
—

 
—

 
1,392,591

 
2,126,073

 
—

 
3,518,664

Intangible lease assets
—

 
—

 
154,743

 
256,135

 
—

 
410,878

Construction in progress
—

 
—

 
3,105

 
3,544

 
—

 
6,649

Total real estate assets
—

 
—

 
1,750,263

 
2,901,800

 
—

 
4,652,063

 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
11,029

 
5,735

 
4,757

 
10,288

 
—

 
31,809

Investment in subsidiaries
3,458,442

 
2,950,695

 
—

 
—

 
(6,409,137
)
 
—

Tenant receivables, net of allowance
—

 
—

 
54,630

 
74,527

 
(5,988
)
 
123,169

Prepaid expenses and other assets
1,418

 
200,074

 
2,088

 
28,085

 
(200,741
)
 
30,924

Deferred financing costs
—

 
8,849

 
—

 
3,447

 
—

 
12,296

Intangible lease origination costs
—

 
—

 
137,230

 
106,241

 
—

 
243,471

Deferred lease costs
—

 
—

 
14,454

 
51,191

 
—

 
65,645

Investments in development authority bonds
—

 
—

 
466,000

 
180,000

 
—

 
646,000

Total assets
$
3,470,889

 
$
3,165,353

 
$
2,429,422

 
$
3,355,579

 
$
(6,615,866
)
 
$
5,805,377

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Lines of credit and notes payable
$
—

 
$
220,500

 
$
148,150

 
$
1,026,966

 
$
(200,620
)
 
$
1,194,996

Bonds payable
—

 
248,363

 
—

 
—

 
—

 
248,363

Accounts payable, accrued expenses, and accrued capital expenditures
1,667

 
8,575

 
16,842

 
112,372

 
(5,988
)
 
133,468

Due to affiliates
(66
)
 
(210
)
 
1,198

 
824

 
(121
)
 
1,625

Deferred income
—

 
—

 
20,176

 
15,615

 
—

 
35,791

Intangible lease liabilities
—

 
—

 
40,562

 
53,466

 
—

 
94,028

Obligations under capital leases
—

 
—

 
466,000

 
180,000

 
—

 
646,000

Total liabilities
1,601

 
477,228

 
692,928

 
1,389,243

 
(206,729
)
 
2,354,271

 
 
 
 
 
 
 
 
 
 
 
 
Redeemable common stock
137,406

 
—

 
—

 
—

 
—

 
137,406

 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Total Wells Real Estate Investment Trust II, Inc. stockholders’ equity
3,331,882

 
2,688,125

 
1,736,494

 
1,966,011

 
(6,409,137
)
 
3,313,375

 
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
—

 
—

 
—

 
325

 
—

 
325

 
 
 
 
 
 
 
 
 
 
 
 
Total equity
3,331,882

 
2,688,125

 
1,736,494

 
1,966,336

 
(6,409,137
)
 
3,313,700

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities, redeemable common stock, and equity
$
3,470,889

 
$
3,165,353

 
$
2,429,422

 
$
3,355,579

 
$
(6,615,866
)
 
$
5,805,377

 

 

 

 

 

 







Page 25

Condensed Consolidating Balance Sheets (in thousands)

 
As of December 31, 2010
 
Wells REIT II (Parent)
 
Wells OP II 
(the Issuer)
 
Guarantors
 
Non-Guarantors
 
Consolidating adjustments
 
Wells REIT II (Consolidated)
Assets
 
 
 
 
 
 
 
 
 
 
 
Real estate assets, at cost
 
 
 
 
 
 
 
 
 
 
 
Land
$
—

 
$
—

 
$
199,825

 
$
371,871

 
$
—

 
$
571,696

Building and improvements
—

 
—

 
1,423,546

 
1,802,162

 
—

 
3,225,708

Intangible lease assets
—

 
—

 
181,085

 
247,055

 
—

 
428,140

Construction in progress
—

 
—

 
2,424

 
2,071

 
—

 
4,495

Total real estate assets
—

 
—

 
1,806,880

 
2,423,159

 
—

 
4,230,039

 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
8,281

 
11,074

 
8,250

 
11,277

 
—

 
38,882

Investment in subsidiaries
3,623,220

 
3,386,229

 
—

 
—

 
(7,009,449
)
 
—

Tenant receivables, net of allowance
—

 
—

 
49,495

 
62,487

 
(3,925
)
 
108,057

Prepaid expenses and other assets
—

 
196,062

 
988

 
21,205

 
(195,555
)
 
22,700

Deferred financing costs
—

 
5,679

 
—

 
4,148

 
—

 
9,827

Intangible lease origination costs
—

 
—

 
154,923

 
114,991

 
—

 
269,914

Deferred lease costs
—

 
—

 
11,218

 
35,048

 
—

 
46,266

Investments in development authority bonds
—

 
—

 
466,000

 
180,000

 
—

 
646,000

Total assets
$
3,631,501

 
$
3,599,044

 
$
2,497,754

 
$
2,852,315

 
$
(7,208,929
)
 
$
5,371,685

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Lines of credit and notes payable
$
—

 
$
72,000

 
$
149,361

 
$
861,133

 
$
(195,555
)
 
$
886,939

Accounts payable, accrued expenses, and accrued capital expenditures
137

 
966

 
19,132

 
86,387

 
(3,925
)
 
102,697

Due to affiliates
—

 
2,614

 
1,217

 
648

 
—

 
4,479

Deferred income
—

 
—

 
10,988

 
15,415

 
—

 
26,403

Intangible lease liabilities
—

 
—

 
45,895

 
42,039

 
—

 
87,934

Obligations under capital leases
—

 
—

 
466,000

 
180,000

 
—

 
646,000

Total liabilities
137

 
75,580

 
692,593

 
1,185,622

 
(199,480
)
 
1,754,452

 
 
 
 
 
 
 
 
 
 
 
 
Redeemable common stock
161,189

 
—

 
—

 
—

 
—

 
161,189

 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Total Wells Real Estate Investment Trust II, Inc. stockholders’ equity
3,470,175

 
3,523,464

 
1,805,161

 
1,666,346

 
(7,009,449
)
 
3,455,697

 
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable noncontrolling interests
—

 
—

 
—

 
347

 
—

 
347

 
 
 
 
 
 
 
 
 
 
 
 
Total equity
3,470,175

 
3,523,464

 
1,805,161

 
1,666,693

 
(7,009,449
)
 
3,456,044

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities, redeemable common stock, and equity
$
3,631,501

 
$
3,599,044

 
$
2,497,754

 
$
2,852,315

 
$
(7,208,929
)
 
$
5,371,685

 

 

 

 

 

 



Page 26


Consolidating Statements of Operations (in thousands)

 
For the three months ended September 30, 2011
 
Wells REIT II (Parent)
 
Wells OP II
(the Issuer)
 
Guarantors
 
Non-Guarantors
 
Consolidating adjustments
 
Wells REIT II (Consolidated)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Rental income
$
—

 
$
—

 
$
52,155

 
$
70,058

 
$
(1,293
)
 
$
120,920

Tenant reimbursements
—

 
—

 
9,699

 
17,769

 
—

 
27,468

Hotel income
—

 
—

 
—

 
6,271

 
—

 
6,271

Other property income
151

 
38

 
209

 
3,683

 
(337
)
 
3,744

 
151

 
38

 
62,063

 
97,781

 
(1,630
)
 
158,403

 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
Property operating costs
—

 
—

 
16,326

 
29,509

 
(148
)
 
45,687

Hotel operating costs
—

 
—

 
—

 
6,294

 
(1,293
)
 
5,001

Asset & property management fees:
 
 
 
 
 
 
 
 
 
 
 
Related-party
7,952

 
—

 
380

 
1,327

 
(189
)
 
9,470

Other
—

 
—

 
443

 
253

 
—

 
696

Depreciation
—

 
—

 
11,609

 
18,708

 
—

 
30,317

Amortization
—

 
—

 
11,817

 
17,633

 
—

 
29,450

General and administrative
—

 
4,583

 
267

 
1,264

 
—

 
6,114

Acquisition fees and expenses
—

 
—

 
—

 
29

 
—

 
29

 
7,952

 
4,583

 
40,842

 
75,017

 
(1,630
)
 
126,764

 
 
 
 
 
 
 
 
 
 
 
 
Real estate operating income (loss)
(7,801
)
 
(4,545
)
 
21,221

 
22,764

 
—

 
31,639

 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(11
)
 
(6,264
)
 
(10,087
)
 
(16,738
)
 
4,440

 
(28,660
)
Interest and other income
26

 
4,717

 
7,307

 
2,707

 
(4,440
)
 
10,317

Loss on interest rate swap
—

 
—

 
—

 
(14,774
)
 
—

 
(14,774
)
Income from equity investment
12,887

 
18,980

 
—

 
—

 
(31,867
)
 
—

 
12,902

 
17,433

 
(2,780
)
 
(28,805
)
 
(31,867
)
 
(33,117
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income tax (expense) benefit
5,101

 
12,888

 
18,441

 
(6,041
)
 
(31,867
)
 
(1,478
)
Income tax (expense) benefit
—

 
—

 
(91
)
 
29

 
—

 
(62
)
Gain (loss) from continuing operations
5,101

 
12,888

 
18,350

 
(6,012
)
 
(31,867
)
 
(1,540
)
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
Operating loss from discontinued operations
—

 
—

 
—

 
(1,059
)
 
—

 
(1,059
)
Gain on disposition of discontinued operations
—

 
—

 
—

 
7,705

 
—

 
7,705

Gain from discontinued operations
—

 
—

 
—

 
6,646

 
—

 
6,646

Net income (loss)
5,101

 
12,888

 
18,350

 
634

 
(31,867
)
 
5,106

 
 
 
 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
—

 
—

 
—

 
(4
)
 
—

 
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to the common stockholders of Wells REIT II
$
5,101

 
$
12,888

 
$
18,350

 
$
630

 
$
(31,867
)
 
$
5,102



Page 27


Consolidating Statements of Operations (in thousands)

 
For the three months ended September 30, 2010
 
Wells REIT II (Parent)
 
Wells OP II
(the Issuer)
 
Guarantors
 
Non-Guarantors
 
Consolidating adjustments
 
Wells REIT II (Consolidated)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Rental Income
$
—

 
$
—

 
$
52,078

 
$
61,540

 
$
(1,103
)
 
$
112,515

Tenant reimbursements
—

 
—

 
8,852

 
17,227

 
—

 
26,079

Hotel income
—

 
—

 
—

 
5,501

 
—

 
5,501

Other property income
—

 
42

 
7

 
667

 
(231
)
 
485

 
—

 
42

 
60,937

 
84,935

 
(1,334
)
 
144,580

 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
Property operating costs
—

 
—

 
15,574

 
27,183

 
(189
)
 
42,568

Hotel operating costs
—

 
—

 
—

 
5,602

 
(1,103
)
 
4,499

Asset & property management fees:
 
 
 
 
 
 
 
 
 
 
 
Related-party
7,629

 
—

 
234

 
711

 
(42
)
 
8,532

Other
—

 
—

 
568

 
443

 
—

 
1,011

Depreciation
—

 
—

 
11,204

 
14,941

 
—

 
26,145

Amortization
—

 
—

 
12,116

 
16,336

 
—

 
28,452

General and administrative
69

 
4,592

 
308

 
1,056

 
—

 
6,025

Acquisition fees and expenses
1,931

 
—

 
—

 
150

 
—

 
2,081

 
9,629

 
4,592

 
40,004

 
66,422

 
(1,334
)
 
119,313

 
 
 
 
 
 
 
 
 
 
 
 
Real estate operating income (loss)
(9,629
)
 
(4,550
)
 
20,933

 
18,513

 
—

 
25,267

 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
—

 
(1,478
)
 
(10,117
)
 
(14,925
)
 
4,888

 
(21,632
)
Interest and other income
46

 
4,897

 
7,314

 
4,532

 
(4,888
)
 
11,901

Loss on interest rate swap
—

 
—

 
—

 
(9,885
)
 
—

 
(9,885
)
Income from equity investment
14,277

 
12,009

 
—

 
—

 
(26,286
)
 
—

 
14,323

 
15,428

 
(2,803
)
 
(20,278
)
 
(26,286
)
 
(19,616
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income tax expense
4,694

 
10,878

 
18,130

 
(1,765
)
 
(26,286
)
 
5,651

Income tax expense
—

 
—

 
(23
)
 
(88
)
 
—

 
(111
)
Gain (loss) from continuing operations
4,694

 
10,878

 
18,107

 
(1,853
)
 
(26,286
)
 
5,540

 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
Operating loss from discontinued operations
—

 
—

 
—

 
(689
)
 
—

 
(689
)
Loss on sale of discontinued operations
—

 
—

 
—

 
(130
)
 
—

 
(130
)
Loss from discontinued operations
—

 
—

 
—

 
(819
)
 
—

 
(819
)
Net income (loss)
4,694

 
10,878

 
18,107

 
(2,672
)
 
(26,286
)
 
4,721

 
 
 
 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
—

 
—

 
—

 
(19
)
 
—

 
(19
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to the common stockholders of Wells REIT II
$
4,694

 
$
10,878

 
$
18,107

 
$
(2,691
)
 
$
(26,286
)
 
$
4,702



Page 28


Consolidating Statements of Operations (in thousands)

 
For the nine months ended September 30, 2011
 
Wells REIT II (Parent)
 
Wells OP II
(the Issuer)
 
Guarantors
 
Non-Guarantors
 
Consolidating adjustments
 
Wells REIT II (Consolidated)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Rental Income
$
—

 
$
—

 
$
155,759

 
$
205,123

 
$
(3,827
)
 
$
357,055

Tenant reimbursements
—

 
—

 
26,619

 
51,871

 
—

 
78,490

Hotel income
—

 
—

 
—

 
15,638

 
—

 
15,638

Other property income
151

 
109

 
704

 
5,735

 
(672
)
 
6,027

 
151

 
109

 
183,082

 
278,367

 
(4,499
)
 
457,210

 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
Property operating costs
—

 
—

 
46,965

 
86,505

 
(412
)
 
133,058

Hotel operating costs
—

 
—

 
—

 
17,109

 
(3,827
)
 
13,282

Asset & property management fees:
 
 
 
 
 
 
 
 
 
 
 
Related-party
23,188

 
—

 
912

 
3,686

 
(260
)
 
27,526

Other
—

 
—

 
1,498

 
836

 
—

 
2,334

Depreciation
—

 
—

 
34,748

 
53,597

 
—

 
88,345

Amortization
—

 
—

 
37,759

 
53,571

 
—

 
91,330

General and administrative
43

 
14,157

 
1,709

 
3,279

 
—

 
19,188

Acquisition fees and expenses
1,307

 
—

 
—

 
9,942

 
—

 
11,249

 
24,538

 
14,157

 
123,591

 
228,525

 
(4,499
)
 
386,312

 
 
 
 
 
 
 
 
 
 
 
 
Real estate operating income (loss)
(24,387
)
 
(14,048
)
 
59,491

 
49,842

 
—

 
70,898

 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(11
)
 
(22,277
)
 
(30,285
)
 
(42,032
)
 
13,115

 
(81,490
)
Interest and other income
2,079

 
13,381

 
21,923

 
8,115

 
(13,115
)
 
32,383

Loss on interest rate swap
—

 
—

 
—

 
(22,219
)
 
—

 
(22,219
)
Income from equity investment
25,350

 
53,071

 
—

 
—

 
(78,421
)
 
—

 
27,418

 
44,175

 
(8,362
)
 
(56,136
)
 
(78,421
)
 
(71,326
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income tax (expense) benefit
3,031

 
30,127

 
51,129

 
(6,294
)
 
(78,421
)
 
(428
)
Income tax (expense) benefit
—

 
—

 
(134
)
 
471

 
—

 
337

Gain (loss) from continuing operations
3,031

 
30,127

 
50,995

 
(5,823
)
 
(78,421
)
 
(91
)
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
Operating loss from discontinued operations
—

 
—

 
—

 
(4,571
)
 
—

 
(4,571
)
Gain (loss) on disposition of discontinued operations
—

 
—

 
—

 
7,705

 
—

 
7,705

Gain from discontinued operations
—

 
—

 
—

 
3,134

 
—

 
3,134

Net income (loss)
3,031

 
30,127

 
50,995

 
(2,689
)
 
(78,421
)
 
3,043

 
 
 
 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
—

 
—

 
—

 
(11
)
 
—

 
(11
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to the common stockholders of Wells REIT II
$
3,031

 
$
30,127

 
$
50,995

 
$
(2,700
)
 
$
(78,421
)
 
$
3,032



Page 29


Consolidating Statements of Operations (in thousands)

 
For the nine months ended September 30, 2010
 
Wells REIT II (Parent)
 
Wells OP II
(the Issuer)
 
Guarantors
 
Non-Guarantors
 
Consolidating adjustments
 
Wells REIT II (Consolidated)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Rental Income
$
—

 
$
—

 
$
155,760

 
$
175,080

 
$
(3,309
)
 
$
327,531

Tenant reimbursements
—

 
—

 
25,637

 
46,059

 
—

 
71,696

Hotel income
—

 
—

 
—

 
14,900

 
—

 
14,900

Other property income
—

 
67

 
296

 
1,448

 
(558
)
 
1,253

 
—

 
67

 
181,693

 
237,487

 
(3,867
)
 
415,380

 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
Property operating costs
—

 
—

 
46,563

 
76,770

 
(491
)
 
122,842

Hotel operating costs
—

 
—

 
—

 
16,259

 
(3,309
)
 
12,950

Asset & property management fees:
 
 
 
 
 
 
 
 
 
 
 
Related-party
22,203

 
—

 
694

 
2,153

 
(67
)
 
24,983

Other
—

 
—

 
1,657

 
1,289

 
—

 
2,946

Depreciation
—

 
—

 
33,312

 
40,485

 
—

 
73,797

Amortization
—

 
—

 
36,636

 
49,187

 
—

 
85,823

General and administrative
182

 
15,883

 
669

 
1,653

 
—

 
18,387

Acquisition fees and expenses
8,852

 
—

 
206

 
691

 
—

 
9,749

 
31,237

 
15,883

 
119,737

 
188,487

 
(3,867
)
 
351,477

 
 
 
 
 
 
 
 
 
 
 
 
Real estate operating income (loss)
(31,237
)
 
(15,816
)
 
61,956

 
49,000

 
—

 
63,903

 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
—

 
(3,607
)
 
(30,372
)
 
(41,709
)
 
11,415

 
(64,273
)
Interest and other income
111

 
11,455

 
21,928

 
9,946

 
(11,415
)
 
32,025

Loss on interest rate swap
—

 
—

 
—

 
(29,068
)
 
—

 
(29,068
)
Income from equity investment
31,455

 
31,825

 
—

 
—

 
(63,280
)
 
—

 
31,566

 
39,673

 
(8,444
)
 
(60,831
)
 
(63,280
)
 
(61,316
)
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income tax (expense) benefit
329

 
23,857

 
53,512

 
(11,831
)
 
(63,280
)
 
2,587

Income tax (expense) benefit
—

 
—

 
(63
)
 
168

 
—

 
105

Gain (loss) from continuing operations
329

 
23,857

 
53,449

 
(11,663
)
 
(63,280
)
 
2,692

 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
Operating loss from discontinued operations
—

 
—

 
—

 
(2,179
)
 
—

 
(2,179
)
Loss on sale of discontinued operations
—

 
—

 
—

 
(130
)
 
—

 
(130
)
Loss from discontinued operations
—

 
—

 
—

 
(2,309
)
 
—

 
(2,309
)
Net income (loss)
329

 
23,857

 
53,449

 
(13,972
)
 
(63,280
)
 
383

 
 
 
 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
—

 
—

 
—

 
(59
)
 
—

 
(59
)
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to the common stockholders of Wells REIT II
$
329

 
$
23,857

 
$
53,449

 
$
(14,031
)
 
$
(63,280
)
 
$
324





Page 30

Consolidating Statements of Cash Flows (in thousands)

 
For the nine months ended September 30, 2011
 
Wells REIT II (Parent)
 
Wells OP II
(the Issuer)
 
Guarantors
 
Non-Guarantors
 
Wells REIT II (Consolidated)
Cash flow from operations
$
859

 
$
(60,743
)
 
$
137,365

 
$
130,935

 
$
208,416

 
 
 
 
 
 
 
 
 
 
Cash from investing activities:
 
 
 
 
 
 
 
 
 
Investment in real estate and related assets
(604,126
)
 
—

 
(11,297
)
 
(34,500
)
 
(649,923
)
Net cash used in investing activities
(604,126
)
 
—

 
(11,297
)
 
(34,500
)
 
(649,923
)
 
 
 
 
 
 
 
 
 
 
Cash from financing activities:
 
 
 
 
 
 
 
 
 
Borrowings, net of fees
—

 
1,165,529

 
—

 
324,371

 
1,489,900

Repayments
—

 
(780,500
)
 
—

 
(111,272
)
 
(891,772
)
Redemption of noncontrolling interest
—

 
(87
)
 
—

 
—

 
(87
)
Distributions
(202,871
)
 
—

 
—

 
(33
)
 
(202,904
)
Intercompany transfers, net
769,512

 
(329,538
)
 
(129,561
)
 
(310,413
)
 
—

Issuance of common stock, net of redemptions and fees
39,374

 
—

 
—

 
—

 
39,374

Net cash provided by (used in) financing activities
606,015

 
55,404

 
(129,561
)
 
(97,347
)
 
434,511

 
 
 
 
 
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
2,748

 
(5,339
)
 
(3,493
)
 
(912
)
 
(6,996
)
Effect of foreign exchange rate on cash and cash equivalents
—

 
—

 
—

 
(77
)
 
(77
)
Cash and cash equivalents, beginning of period
8,281

 
11,074

 
8,250

 
11,277

 
38,882

Cash and cash equivalents, end of period
$
11,029

 
$
5,735

 
$
4,757

 
$
10,288

 
$
31,809



Page 31


Consolidating Statements of Cash Flows (in thousands)

 
For the nine months ended September 30, 2010
 
Wells REIT II (Parent)
 
Wells OP II
(the Issuer)
 
Guarantors
 
Non-Guarantors
 
Wells REIT II (Consolidated)
Cash flow from operations
$
(9,820
)
 
$
(45,508
)
 
$
126,833

 
$
117,198

 
$
188,703

 
 
 
 
 
 
 
 
 
 
Cash from investing activities:
 
 
 
 
 
 
 
 
 
Investment in real estate and related assets
(12,145
)
 
(242,636
)
 
(8,319
)
 
(11,532
)
 
(274,632
)
Net proceeds from the sale of real estate assets
15,250

 
—

—

—

—

—

 
15,250

Net cash used in investing activities
3,105

 
(242,636
)
 
(8,319
)
 
(11,532
)
 
(259,382
)
 
 
 
 
 
 
 
 
 
 
Cash from financing activities:
 
 
 
 
 
 
 
 
 
Borrowings, net of fees
—

 
48,686

 
—

 
—

 
48,686

Repayments
—

 
—

 
—

 
(146,264
)
 
(146,264
)
Distributions
(233,215
)
 
—

 
—

 
(235
)
 
(233,450
)
Intercompany transfers
(151,296
)
 
228,593

 
(119,327
)
 
42,030

 
—

Issuance of common stock, net of fees
352,479

 
—

 
—

 
—

 
352,479

Net cash provided by financing activities
(32,032
)
 
277,279

 
(119,327
)
 
(104,469
)
 
21,451

 
 
 
 
 
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(38,747
)
 
(10,865
)
 
(813
)
 
1,197

 
(49,228
)
Effect of foreign exchange rate on cash and cash equivalents
—

 
—

 
—

 
41

 
41

Cash and cash equivalents, beginning of period
60,919

 
24,241

 
8,292

 
9,273

 
102,725

Cash and cash equivalents, end of period
$
22,172

 
$
13,376

 
$
7,479

 
$
10,511

 
$
53,538


12.
Subsequent Event
Wells REIT II has evaluated subsequent events in connection with the preparation of its consolidated financial statements and notes thereto included in this report on Form 10-Q and notes the following item in addition to those disclosed elsewhere in this report:
Declaration of Distributions
On November 4, 2011, Wells REIT II's board of directors declared distributions for the fourth quarter of 2011 in the amount of $0.125 (12.5 cents) per-share on the outstanding shares of common stock payable to stockholders of record as of December 15, 2011. These distributions will be paid in December 2011.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as our consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K/A for the year ended December 31, 2010.
Overview
During the periods presented, we continued to receive net equity proceeds from the sale of our common stock under the Third Offering (until it closed in the third quarter of 2010) and through the dividend reinvestment plan (“DRP”). We have used such net equity proceeds, along with borrowings, primarily to invest in real estate assets. As a result, during the periods presented, our real


Page 32

estate portfolio has grown and our real estate operating income has increased. In addition, the closing of the Third Offering has impacted our outlook on future sources of capital.
Liquidity and Capital Resources
Overview
After careful consideration of the size and strength of our portfolio, our board of directors decided to close our primary public equity offering effective mid-2010. As we transitioned out of our offering stage during the second half of 2010, we continued to actively manage our real estate assets and, at the same time, began to explore a variety of strategic opportunities focused on enhancing the composition of our portfolio and the total return for the REIT. In 2011, we have concentrated such exploration efforts on a strategic acquisition opportunity, managing the composition and maturities of the borrowings within our capital structure, and evaluating additional sources of future capital. To date, these efforts have culminated in the following notable events:
•
On March 7, 2011, we acquired the Market Square Buildings, which are located in the Capitol Hill district of Washington D.C., for approximately $603.4 million.
•
On April 4, 2011, we issued $250.0 million of our seven-year, investment-grade, unsecured senior bonds at 99.295 percent of their face value. The coupon interest rate of the bonds is 5.875% per annum, which is subject to adjustment in certain circumstances. We used the bond proceeds to repay amounts drawn on a $300.0 million bridge loan that was used to fund a portion of the purchase price of the Market Square Buildings.
•
On June 30, 2011, we closed on a $325.0 million mortgage secured by the Market Square Buildings, the net proceeds from which were used to pay down borrowings on the JPMorgan Chase Credit Facility that were used to fund substantially all of the remaining purchase price of the Market Square Buildings.
•
On July 8, 2011, we closed on an amendment to the JPMorgan Chase Credit Facility to extend the maturity date of the line until May 2015 at more favorable terms.
Short-term Liquidity and Capital Resources
In determining how and when to allocate cash resources, we initially consider the source of the cash. We expect to continue to use substantially all net operating cash flows to fund distributions to stockholders. We expect to continue to use a portion of our future DRP proceeds to fund future share redemptions (subject to the limitations of our share redemption program), and to make residual DRP proceeds available to fund capital improvements required for our properties and to fund additional real estate investments.
The amount of distributions that we pay to our common stockholders is determined by our board of directors and is dependent upon a number of factors, including the funds available for distribution to common stockholders, our financial condition, our capital expenditure requirements, our expectations of future sources of liquidity, and the annual distribution requirements necessary to maintain our status as a REIT under the Code. When evaluating funds available for stockholder distributions, we consider net cash provided by operating activities, as presented in the accompanying GAAP-basis consolidated statements of cash flows, adjusted to exclude certain costs that were incurred for the purpose of generating future earnings and appreciation in value over the long term, including acquisition fees and expenses.
During the nine months ended September 30, 2011, we generated net cash flows from operating activities of $208.4 million, which consists primarily of receipts from tenants for rent and reimbursements, reduced by payments for operating costs, administrative expenses, and interest expense. Such net cash flows from operating activities are also reduced for acquisition-related costs of $11.2 million. During the same period, we paid total distributions to stockholders, including $98.0 million reinvested in our common stock pursuant to our DRP, of $202.9 million. We expect to use the majority of our future net cash flow from operating activities to fund distributions to stockholders.
In the first quarter of 2011, we acquired the Market Square Buildings for approximately $603.4 million using primarily short-term borrowings. In the second quarter of 2011, we repaid these short-term borrowings with long-term, fixed rate borrowings, which included approximately $250.0 million from 7-year, unsecured bonds, and approximately $325.0 million from a 12-year mortgage secured by the Market Square Buildings. On July 8, 2011, we amended our JPMorgan Chase Credit Facility to extend the maturity date until May 2015 at more favorable terms. During the nine months ended September 30, 2011, we also generated proceeds from the sale of common stock under our DRP, net of acquisition fees and share redemptions, of $28.1 million, a portion of which was used to fund capital expenditures and leasing costs for our properties.
We believe that we have adequate liquidity and capital resources to meet our current obligations as they come due. As of October 31, 2011, we had access to the borrowing capacity under the JPMorgan Chase Credit Facility of $277.0 million.



Page 33

Long-term Liquidity and Capital Resources
Over the long term, we expect that our primary sources of capital will include operating cash flows, proceeds from our DRP, proceeds from secured or unsecured borrowings from third-party lenders, and, if and when deemed appropriate, proceeds from strategic property sales. We expect that our primary uses of capital will continue to include stockholder distributions; redemptions of shares of our common stock under our share redemption program; capital expenditures, such as building improvements, tenant improvements, and leasing costs; repaying or refinancing debt, and selective property acquisitions, either directly or through investments in joint ventures.
We have a policy of maintaining our debt level at no more than 50% of the cost of our assets (before depreciation) and, ideally, at significantly less than this 50% debt-to-real-estate asset ratio. This conservative leverage goal could reduce the amount of current income we can generate for our stockholders, but it also reduces their risk of loss. We believe that preserving investor capital while generating stable current income is in the best interest of our stockholders. As of September 30, 2011, our debt-to-real-estate-asset ratio was approximately 24.8%.
Our board of directors has elected to maintain the quarterly stockholder distribution rate at $0.125 per-share for both the third and fourth quarters of 2011 (fourth quarter 2011 distributions will be paid in December 2011). While operational cash flow from our properties remains strong, economic downturns in our markets or in the particular industries in which our tenants operate could adversely impact the ability of our tenants to make lease payments and our ability to re-lease space on favorable terms when leases expire, either of which circumstance could adversely affect our ability to fund future distributions to stockholders. We are continuing to carefully monitor our cash flows and market conditions and to assess their impact on our future earnings and future distribution projections.
Debt Covenants  
Our portfolio debt instruments, the JPMorgan Chase Credit Facility and the unsecured senior notes, contain certain covenants and restrictions that require us to meet certain financial ratios, including the following key financial covenants and respective covenant levels as of September 30, 2011:
 
 
 
 
Actual Performance
 
Covenant Level
 
September 30, 2011
Credit Facility (as defined in the JPMorgan Chase Credit Facility Amendment):
 
 
 
Total debt to total asset value ratio
Less than 50%
 
29%
Secured debt to total asset value ratio
Less than 40% 
 
19%
Fixed charge coverage ratio
Greater than 1.75x
 
4.51x
Unencumbered interest coverage ratio
Greater than 2.0x
 
8.72x
Unencumbered asset coverage ratio
Greater than 2.0x
 
4.50x
Unsecured Senior Notes due 2018 (as defined in the Indenture):
 
 
 
Aggregate debt test
Less than 60%
 
24%
Debt service test
Greater than 1.5x
 
5.00x
Secured debt test
Less than 40%
 
16%
Maintenance of total unencumbered assets
Greater than 150%
 
845%
We were in compliance with all of our debt covenants as of September 30, 2011. Currently, we expect to continue to meet the requirements of our debt covenants over the short and long term.








Page 34

Contractual Commitments and Contingencies
As of September 30, 2011, our contractual obligations will become payable in the following periods (in thousands):
 
Contractual Obligations
Total
 
2011
 
2012-2013
 
2014-2015
 
Thereafter
Debt obligations
$
1,445,422

 
$
506

 
$
64,561

 
$
325,035

 
$
1,055,320

Interest obligations on debt(1)
492,617

 
19,620

 
146,686

 
126,067

 
200,244

Capital lease obligations(2)
646,000

 
—

 
526,000

 
—

 
120,000

Operating lease obligations
228,455

 
1,246

 
5,233

 
5,260

 
216,716

Total
$
2,812,494

 
$
21,372

 
$
742,480

 
$
456,362

 
$
1,592,280

(1) 
Interest obligations on variable-rate debt are measured at the rate at which they are effectively fixed with interest rate swaps agreements (where applicable), a portion of which is reflected as Loss on interest rate swaps in our consolidated statements of operations. Interest obligations on all other debt are measured at the contractual rate. See Item 3. Quantitative and Qualitative Disclosure About Market Risk for more information regarding our interest rate swaps.
(2) 
Amounts include principal obligations only. We made interest payments on these obligations of $30.0 million during the nine months ended September 30, 2011, all of which was funded with interest income earned on the corresponding investments in development authority bonds.

Results of Operations
Overview
As of September 30, 2011, we owned controlling interests in 71 office properties, which were approximately 94.3% leased, and one hotel. Our real estate operating results have increased for the nine months ended September 30, 2011, as compared to the same period of 2010, primarily due to acquiring properties in 2010 and in the first quarter of 2011. In the near term, we expect future real estate operating income to continue to increase as compared to prior-year levels as a result of the acquisition of the Market Square Buildings for approximately $603.4 million in March of 2011.
Comparison of the three months ended September 30, 2010 versus the three months ended September 30, 2011
Continuing Operations
Rental income increased from $112.5 million for the three months ended September 30, 2010 to $120.9 million for the three months ended September 30, 2011, primarily due to properties acquired or placed in service during 2010 and 2011. Absent changes to the leases currently in place at our properties, rental income is expected to remain at similar levels in future periods.
Tenant reimbursements and property operating costs increased from $26.1 million and $42.6 million, respectively, for the three months ended September 30, 2010 to $27.5 million and $45.7 million, respectively, for the three months ended September 30, 2011, primarily due to properties acquired or placed in service during 2010 and 2011. Absent changes to the leases currently in place at our properties, future tenant reimbursement fluctuations are generally expected to correspond with future property operating cost reimbursements.
Hotel income, net of hotel operating costs, increased slightly from $1.0 million for the three months ended September 30, 2010 to $1.3 million for the three months ended September 30, 2011. Hotel income and hotel operating costs are primarily driven by the local economic conditions and, as a result, are expected to fluctuate in the future primarily based on changes in the supply of, and demand for, hotel and banquet space in Cleveland, Ohio similar to that offered by the Key Center Marriott hotel.
Other property income increased from $0.5 million for the three months ended September 30, 2010 to $3.7 million for the three months ended September 30, 2011, primarily due to fees earned in connection with lease terminations. Future other property income fluctuations are expected to primarily relate to future lease restructuring activities.
Asset and property management fees increased from $9.5 million for the three months ended September 30, 2010 to $10.2 million for the three months ended September 30, 2011, primarily due to properties acquired and placed into service during 2010 and 2011. Future asset and property management fees may fluctuate in response to property dispositions or leasing activities. Pursuant to the limitations outlined in the Advisory Agreement, monthly asset management fees were capped at $2.7 million (or $32.5 million annualized) beginning in April 2011 as a result of the March 2011 acquisition of the Market Square Buildings for $603.4 million. Effective November 8, 2011, the date of our net asset value publication, asset management fees will be based on the lesser of (i) gross cost, as defined by the Advisory Agreement, or (ii) the aggregate value of our investment in the properties and joint ventures as established with the most recent asset-based valuation. Please refer to Note 8. Related-Party Transactions and


Page 35

Agreements in the accompanying consolidated financial statements for additional details.
Depreciation increased from $26.1 million for the three months ended September 30, 2010 to $30.3 million for the three months ended September 30, 2011, primarily due to growth in the portfolio in 2010 and 2011. Excluding the impact of changes to the leases currently in place at our properties, depreciation is expected to continue to increase in future periods, as compared to historical periods, due to ongoing capital improvements to our properties.
Amortization increased from $28.5 million for the three months ended September 30, 2010 to $29.5 million for the three months ended September 30, 2011, primarily due to growth in the portfolio in 2010 and 2011. Excluding the impact of changes to the leases currently in place at our properties, amortization is expected to increase in future periods due to owning new properties for a full period.
General and administrative expenses remained relatively stable at $6.0 million for the three months ended September 30, 2010 and $6.1 million for the three months ended September 30, 2011.
Acquisition fees and expenses decreased from $2.1 million for the three months ended September 30, 2010 to $0.0 million for the three months ended September 30, 2011, primarily due to the closing of the Third Offering effective June 30, 2010 and changing the manner in which acquisition fees are incurred. Through July 31, 2011, acquisition fees were incurred at 2.0% of gross offering proceeds, subject to certain limitations; effective August 1, 2011, acquisition fees are incurred at 1% of the property purchase price (excluding acquisition expenses); however, in no event may acquisition fees cause total acquisition fees for the 2011 calendar year to exceed 2% of total gross offering proceeds. As a result of the change, we expect future acquisition fees and expenses to fluctuate based on future acquisition activity.
Interest expense increased from $21.6 million for the three months ended September 30, 2010 to $28.7 million for the three months ended September 30, 2011, primarily due to debt obtained to fund the acquisition of the Market Square Buildings in March 2011. Future interest expense will depend largely upon changes in market interest rates and our ability to secure financings or refinancings.
Interest and other income decreased from $11.9 million for the three months ended September 30, 2010 to $10.3 million for the three months ended September 30, 2011, primarily due to recovering a tax payment made in connection with a prior-period acquisition in 2010. Interest income is expected to remain relatively consistent in future periods given that the majority of this activity consists of interest income earned on investments in development authority bonds, which had a weighted-average remaining term of approximately 5.9 years as of September 30, 2011. Interest income earned on investments in development authority bonds is entirely offset by interest expense incurred on the corresponding capital leases.
We recognized a loss on interest rate swaps that do not qualify for hedge accounting treatment of $9.9 million for the three months ended September 30, 2010, compared with a loss of $14.8 million for the three months ended September 30, 2011. We anticipate that future gains and losses on interest rate swaps that do not qualify for hedge accounting treatment will fluctuate, primarily due to changes in the estimated fair values of our interest rate swaps relative to then-current market conditions. Market value adjustments to swaps that qualify for hedge accounting treatment are recorded directly to equity, and therefore do not impact net income (loss).
We recognized net income attributable to Wells REIT II of $4.7 million ($0.01 per share) for the three months ended September 30, 2010, as compared to net income of $5.1 million ($0.01 per share) for the three months ended September 30, 2011. The increase in earnings is primarily due to growth in the portfolio in 2010 and 2011. Absent future fluctuations in the market value of our interest rate swaps that do not qualify for hedge accounting treatment, we expect future net income to remain at a level similar to the third quarter 2011 in future periods. Should the decline in the U.S. economy or U.S. real estate markets continue for a prolonged period of time, the creditworthiness of our tenants and our ability to achieve market rents comparable to the leases currently in place at our properties may suffer and could lead to a decline in net income over the long term.
Discontinued Operations
In the third quarter of 2011, we transferred the Manhattan Towers property, an office building located in Manhattan Beach, California, to an affiliate of its lender in connection with settling a $75.0 million mortgage note through a deed in lieu of foreclosure transaction. As a result, we recognized a property impairment loss of $5.8 million and a gain on early extinguishment of debt of $13.5 million, which are included in gain (loss) on disposition of discontinued operations in the statement of operations. In the third quarter of 2010, we sold New Manchester One, an industrial property located in Douglasville, Georgia, for $15.3 million, which resulted in a loss on sale of $0.2 million. In accordance with GAAP, we have classified the results of operations related to Manhattan Towers and New Manchester One as discontinued operations for all periods presented. As a result, earnings from discontinued operations increased from a loss of $(0.8) million for the three months ended September 30, 2010 to a gain of $6.6 million for the three months ended September 30, 2011 due to disposing of Manhattan Towers in the third quarter of 2011.



Page 36

Comparison of the nine months ended September 30, 2010 versus the nine months ended September 30, 2011
Continuing Operations
Rental income increased from $327.5 million for the nine months ended September 30, 2010 to $357.1 million for the nine months ended September 30, 2011, primarily due to properties acquired or placed in service during 2010 and the first three months of 2011. Absent changes to the leases currently in place at our properties, rental income is expected to remain at similar levels in future periods.
Tenant reimbursements and property operating costs increased from $71.7 million and $122.8 million, respectively, for the nine months ended September 30, 2010 to $78.5 million and $133.1 million, respectively, for the nine months ended September 30, 2011, primarily due to properties acquired or placed in service during 2010 and 2011. Absent changes to the leases currently in place at our properties, future tenant reimbursement fluctuations are generally expected to correspond with future property operating cost reimbursements.
Hotel income, net of hotel operating costs, increased from approximately $2.0 million for the nine months ended September 30, 2010 to $2.4 million for the nine months ended September 30, 2011. Hotel income and hotel operating costs are primarily driven by the local economic conditions and, as a result, are expected to fluctuate in the future primarily based on changes in the supply of, and demand for, hotel and banquet space in Cleveland, Ohio similar to that offered by the Key Center Marriott hotel.
Other property income increased from $1.2 million for the nine months ended September 30, 2010 to $6.0 million for the nine months ended September 30, 2011, primarily due to fees earned in connection with lease terminations. Fluctuations in other property income in the future are expected to primarily relate to future lease restructuring activities.
Asset and property management fees increased from $27.9 million for the nine months ended September 30, 2010 to $29.9 million for the nine months ended September 30, 2011, primarily due to properties acquired and placed into service during 2010 and 2011. Future asset and property management fees may fluctuate in response to property dispositions or leasing activities. Pursuant to the limitations outlined in the Advisory Agreement, monthly asset management fees were capped at $2.7 million (or $32.5 million annualized) beginning in April 2011 as a result of the March 2011 acquisition of the Market Square Buildings for $603.4 million. Effective November 8, 2011, the date of our net asset value publication, asset management fees will be based on the lesser of (i) gross cost, as defined by the Advisory Agreement, or (ii) the aggregate value of our investment in the properties and joint ventures as established with the most recent asset-based valuation. Please refer to Note 8. Related-Party Transactions and Agreements in the accompanying consolidated financial statements for additional details.
Depreciation increased from $73.8 million for the nine months ended September 30, 2010 to $88.3 million for the nine months ended September 30, 2011, primarily due to growth in the portfolio in 2010 and the first three months of 2011. Excluding the impact of changes to the leases currently in place at our properties, depreciation is expected to continue to increase in future periods, as compared to historical periods, due to ongoing capital improvements to our properties.
Amortization increased from $85.8 million for the nine months ended September 30, 2010 to $91.3 million for the nine months ended September 30, 2011, primarily due to growth in the portfolio in 2010 and the first three months of 2011. Excluding the impact of changes to the leases currently in place at our properties, amortization is expected to increase in future periods due to owning new properties for a full period.
General and administrative expenses increased from $18.4 million for the nine months ended September 30, 2010 to $19.2 million for the nine months ended September 30, 2011, primarily due to an early lease termination at one of our properties.
Acquisition fees and expenses increased from $9.7 million for the nine months ended September 30, 2010 to $11.2 million for the nine months ended September 30, 2011, primarily due to the acquisition of the Market Square Buildings in March 2011, partially offset by the impact of closing the Third Offering effective June 30, 2010. Through July 31, 2011, acquisition fees were incurred at 2.0% of gross offering proceeds, subject to certain limitations; effective August 1, 2011, acquisition fees are incurred at 1% of the property purchase price (excluding acquisition expenses); however, in no event may acquisition fees cause total acquisition fees for the 2011 calendar year to exceed 2% of total gross offering proceeds. As a result of the change, we expect future acquisition fees and expenses to fluctuate based on future acquisition activity.
Interest expense increased from $64.3 million for the nine months ended September 30, 2010 to $81.5 million for the nine months ended September 30, 2011, primarily due to debt obtained to fund the acquisition of the Market Square Buildings in March 2011 including the offering of bonds in April 2011. Future interest expense will depend largely upon changes in market interest rates and our ability to secure financings or refinancings.



Page 37

Interest and other income increased from $32.0 million for the nine months ended September 30, 2010 to $32.4 million for the nine months ended September 30, 2011, primarily due to settling litigation related to a prospective acquisition that did not close. Interest income is expected to remain relatively consistent in future periods given that the majority of this activity consists of interest income earned on investments in development authority bonds, which had a weighted-average remaining term of approximately 5.9 years as of September 30, 2011. Interest income earned on investments in development authority bonds is entirely offset by interest expense incurred on the corresponding capital leases.
We recognized a loss on interest rate swaps that do not qualify for hedge accounting treatment of $29.1 million for the nine months ended September 30, 2010, compared with a loss of $22.2 million for the nine months ended September 30, 2011. We anticipate that future gains and losses on interest rate swaps that do not qualify for hedge accounting treatment will fluctuate, primarily due to changes in the estimated fair values of our interest rate swaps relative to then-current market conditions. Market value adjustments to swaps that qualify for hedge accounting treatment are recorded directly to equity, and therefore do not impact net income (loss).
We recognized net income attributable to Wells REIT II of $0.3 million ($0.00 per share) for the nine months ended September 30, 2010, as compared to a net income of $3.0 million ($0.01 per share) for the nine months ended September 30, 2011. The increase is primarily attributable to growth in our portfolio in 2010 and 2011, increasing the percentage of borrowings used in our capital structure, and fluctuations in the market value of certain of our interest rate swap agreements. Absent future fluctuations in the market value of our interest rate swaps that do not qualify for hedge accounting treatment, we expect future net income to remain at a level similar to the third quarter 2011 in future periods. Should the decline in the U.S. economy or U.S. real estate markets continue for a prolonged period of time, the creditworthiness of our tenants and our ability to achieve market rents comparable to the leases currently in place at our properties may suffer and could lead to a decline in net income over the long term.
Discontinued Operations
In the third quarter of 2011, we transferred the Manhattan Towers property, an office building located in Manhattan Beach, California, to an affiliate of its lender in connection with settling a $75.0 million mortgage note through a deed in lieu of foreclosure transaction. As a result, we recognized a property impairment loss of $5.8 million and a gain on early extinguishment of debt of $13.5 million, which are included in gain (loss) on disposition of discontinued operations in the statement of operations. In the third quarter of 2010, we sold New Manchester One, an industrial property located in Douglasville, Georgia, for $15.3 million, which resulted in a loss on sale of $0.2 million. In accordance with GAAP, we have classified the results of operations related to Manhattan Towers and New Manchester One as discontinued operations for all periods presented. As a result, earnings from discontinued operations increased from a loss of $2.3 million million for the nine months ended September 30, 2010 to a gain of $3.1 million million for the nine months ended September 30, 2011.
Funds From Operations and Adjusted Funds From Operations
Funds from Operations, as defined by NAREIT (“FFO”), is a non-GAAP financial measure considered by some equity REITs in evaluating operating performance. FFO is computed as GAAP net income (loss), adjusted to exclude: extraordinary items, gains (or losses) from property sales (including deemed sales and settlements of pre-existing relationships), depreciation and amortization of real estate assets, and adjustments for earnings allocated to noncontrolling interests in consolidated partnerships.  We believe it is useful to consider GAAP net income, adjusted to exclude the above-mentioned items, when assessing our performance because excluding the above-described adjustments highlights the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be readily apparent from GAAP net income alone. We do not, however, believe that FFO is the best measure of the sustainability of our operating performance. Changes in the GAAP accounting and reporting rules that were put into effect after the establishment of NAREIT's definition of FFO in 1999 are resulting in the inclusion of a number of items in FFO that do not correlate with the sustainability of our operating performance (e.g. acquisition expenses, market value adjustments to interest rate swaps that do not qualify for hedge accounting treatment, and amortization of certain in-place lease intangible assets and liabilities, among others). Therefore, in addition to FFO, we present FFO, adjusted ("AFFO") to exclude the income and expenses that we believe are not reflective of the sustainability of our ongoing operating performance, as further explained below:
•
Additional amortization of lease assets (liabilities). GAAP implicitly assumes that the value of intangible lease assets (liabilities) diminishes predictably over time and, thus, requires these charges to be recognized ratably over the respective lease terms. Like real estate values, market lease rates in aggregate have historically risen or fallen with local market conditions. As a result, management believes that, by excluding these charges, AFFO provides useful supplemental information that is reflective of the performance of our real estate investments that is useful in assessing the sustainability of our operations.
•
Straight-line rental income. In accordance with GAAP, rental payments are recognized as income on a straight-line basis over the terms of the respective leases. Thus, for any given period, straight-line rental income represents the difference between the contractual rental billings for that period and the average rental billings over the lease term for the same length of time.


Page 38

This application results in income recognition that can differ significantly from the current contract terms. By adjusting for this item, we believe AFFO provides useful supplemental information reflective of the realized economic impact of our leases that is useful in assessing the sustainability of our operating performance.
•
Loss on interest rate swaps and remeasurement of loss on foreign currency. These items relate to fair value adjustments, which are based on the impact of current market fluctuations, underlying market conditions and the performance of the specific holding, which is not attributable to our current operating performance. By adjusting for this item, we believe that AFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals (rather than anticipated gains or losses that may never be realized) that is useful in assessing the sustainability of our operations.
•
Noncash interest expense. This item represents amortization of financing costs paid in connection with executing our debt instruments, and the accretion of premiums (and amortization of discounts) on certain of our debt instruments.  GAAP requires these items to be recognized over the remaining term of the respective debt instrument, which may not correlate with the ongoing operations of our real estate portfolio. By excluding these items, management believes that AFFO provides supplemental information that allows for better comparability of reporting periods and that is useful in assessing the sustainability of our operations.
•
Impairment loss on real estate assets and gain on early extinguishment of debt on discontinued operations. These adjustments are not related to our continuing operations as we are not in the business of trading real properties for short-term gains. Removing the impact of these items from AFFO provides a better indication of the sustainability of operating performance.
•
Real estate acquisition-related costs. Acquisition expenses are incurred for investment purposes (i.e., to promote portfolio appreciation and generation of future earnings over the long term) and, therefore, do not correlate with the ongoing operations of our portfolio. We believe that excluding these items from AFFO provides supplemental information indicative of the sustainability of our operations. This exclusion also improves comparability of our reporting periods and of our company with other real estate operators.
Reconciliations of net income to FFO and to AFFO (in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Reconciliation of Net Income to Funds From Operations and Adjusted Funds From Operations:
 
 
 
 
 
 
 
Net income attributable to the common stockholders of Wells Real Estate Investment Trust II, Inc.
$
5,102

 
$
4,702

 
$
3,032

 
$
324

Adjustments:
 
 
 
 
 
 
 
Depreciation of real estate assets
30,622

 
26,643

 
89,538

 
75,350

Amortization of lease-related costs
29,468

 
28,928

 
91,395

 
87,251

Gain (loss) on sale of discontinued operations
—

 
130

 
—

 
130

Total Funds From Operations adjustments
60,090

 
55,701

 
180,933

 
162,731

Funds From Operations
65,192

 
60,403

 
183,965

 
163,055

 
 
 
 
 
 
 
 
Other income (expenses) included in net income, which do not correlate with our operations:
 
 
 
 
 
 
 
Additional amortization of lease assets (liabilities)
349

 
1,462

 
2,452

 
4,512

Straight-line rental income
(5,289
)
 
(811
)
 
(13,046
)
 
(4,261
)
Loss on interest rate swaps
12,236

 
7,468

 
14,644

 
21,945

Re-measurement loss on foreign currency
—

 
461

 
—

 
(167
)
Noncash interest expense
5,631

 
4,701

 
19,619

 
14,009

Impairment loss on real estate assets
5,817

 
—

 
5,817

 
—

Gain on early extinguishment of debt on discontinued operations
(13,522
)
 
—

 
(13,522
)
 
—

Subtotal
5,222

 
13,281

 
15,964

 
36,038

 
 
 
 
 
 
 
 
Real estate acquisition-related costs
29

 
2,081

 
11,249

 
9,749

Adjusted Funds From Operations
$
70,443

 
$
75,765

 
$
211,178

 
$
208,842



Page 39

Election as a REIT
We have elected to be taxed as a REIT under the Code, and have operated as such beginning with our taxable year ended December 31, 2003. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our adjusted taxable income, as defined in the Code, to our stockholders, computed without regard to the dividends-paid deduction and by excluding our net capital gain. As a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income for that year and for the four years following the year during which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT for federal income tax purposes.
Wells TRS and Wells KCP TRS are wholly owned subsidiaries of Wells REIT II and are organized as Delaware limited liability companies and include the operations of, among other things, a full-service hotel. We have elected to treat Wells TRS and Wells KCP TRS as taxable REIT subsidiaries. We may perform certain additional, noncustomary services for tenants of our buildings through Wells TRS or Wells KCP TRS; however, any earnings related to such services are subject to federal and state income taxes. In addition, for us to continue to qualify as a REIT, we must limit our investments in taxable REIT subsidiaries to 25% of the value of our total assets. Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted rates expected to be in effect when the temporary differences reverse.
No provision for federal income taxes has been made in our accompanying consolidated financial statements, other than the provision relating to Wells TRS, as we made distributions in excess of taxable income for the periods presented. We are subject to certain state and local taxes related to property operations in certain locations, which have been provided for in our accompanying consolidated financial statements.
Inflation
We are exposed to inflation risk, as income from long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per-square-foot basis, or in some cases, annual reimbursement of operating expenses above a certain per-square-foot allowance. However, due to the long-term nature of the leases, the leases may not reset frequently enough to fully cover inflation.
Application of Critical Accounting Policies
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
Investment in Real Estate Assets
We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income. The estimated useful lives of our assets by class are as follows:
 
Buildings
  
40 years
 
Building improvements
  
5-25 years
 
Site improvements
  
15 years
 
Tenant improvements
  
Shorter of economic life or lease term
 
Intangible lease assets
  
Lease term



Page 40

Evaluating the Recoverability of Real Estate Assets
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of the real estate and related intangible assets of both operating properties and properties under construction, in which we have an ownership interest, either directly or through investments in joint ventures, may not be recoverable. When indicators of potential impairment are present that suggest that the carrying amounts of real estate assets and related intangible assets (liabilities) may not be recoverable, we assess the recoverability of these assets by determining whether the respective carrying values will be recovered through the estimated undiscounted future operating cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying values, we adjust the carrying value of the real estate assets and related intangible assets to the estimated fair values, pursuant to the property, plant, and equipment accounting standard for the impairment or disposal of long-lived assets, and recognize an impairment loss. Estimated fair values are calculated based on the following information, in order of preference, depending upon availability: (i) recently quoted market prices, (ii) market prices for comparable properties, or (iii) the present value of future cash flows, including estimated salvage value. Certain of our assets may be carried at more than an amount that could be realized in a current disposition transaction.
During the third quarter of 2011, we evaluated the recoverability of the carrying value of the Manhattan Towers property and determined that it was not recoverable, as defined by the accounting policy outlined above. The Manhattan Towers property is located in Manhattan Beach, California, and includes two office buildings with total occupancy of 22%. In the third quarter of 2011, upon considering the economic impact of various property disposition scenarios not previously contemplated, including the likelihood of achieving the projected returns associated with each scenario, we opted to transfer the Manhattan Towers property to an affiliate of the lender in full settlement of a $75.0 million nonrecourse mortgage loan through a deed in lieu of foreclosure transaction, which closed on September 6, 2011. As a result of this transaction, Wells REIT II reduced the carrying value of the Manhattan Towers property to its fair value, estimated based on the present value of estimated future property cash flows, by recognizing a property impairment loss of approximately $5.8 million, and recognized a gain on early extinguishment of debt of $13.5 million. The gain on early extinguishment of debt, net of the property impairment loss, is reflected as gain (loss) on disposition of discontinued operations in the statement of operations.

The fair value measurements used in this evaluation of nonfinancial assets are considered to be Level 3 valuations within the fair value hierarchy outlined in Note 2. Summary of Significant Accounting Policies of our accompanying consolidated financial statements, as there are significant unobservable inputs. Examples of inputs that were utilized in the fair value calculations include estimated holding periods, discount rates, market capitalization rates, expected lease rental rates, and sales prices. The table below represents the detail of the adjustments recognized quarter and year to date as of September 30, 2011 (in thousands) using Level 3 inputs.
Property
 
Net Book Value
 
Impairment Loss Recognized
 
Fair Value
Manhattan Towers
 
65,317

 
(5,817
)
 
59,500


Projections of expected future operating cash flows require that we estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the property’s fair value and could result in the misstatement of the carrying value of our real estate assets and related intangible assets and net income (loss).
Allocation of Purchase Price of Acquired Assets
Upon the acquisition of real properties, we allocate the purchase price of properties to tangible assets, consisting of land and building, site improvements, and identified intangible assets and liabilities, including the value of in-place leases, based in each case on our estimate of their fair values.
The fair values of the tangible assets of an acquired property (which includes land and building) are determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and building based on our determination of the relative fair value of these assets. We determine the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors we consider in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases, including leasing commissions and other related costs. In estimating carrying costs, we include real estate taxes, insurance, and other operating expenses during the expected lease-up periods based on current market demand.



Page 41

Intangible Assets and Liabilities Arising from In-Place Leases where We are the Lessor
As further described below, in-place leases where we are the lessor may have values related to direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease, tenant relationships, and effective contractual rental rates that are above or below market rates:
•
Direct costs associated with obtaining a new tenant, including commissions, tenant improvements, and other direct costs, are estimated based on management’s consideration of current market costs to execute a similar lease. Such direct costs are included in intangible lease origination costs in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases.
•
The value of opportunity costs associated with lost rentals avoided by acquiring an in-place lease is calculated based on the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Such opportunity costs are included in intangible lease assets in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases.
•
The value of tenant relationships is calculated based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. Values associated with tenant relationships are included in intangible lease assets in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases.
•
The value of effective rental rates of in-place leases that are above or below the market rates of comparable leases is calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be received pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining terms of the leases. The capitalized above-market and below-market lease values are recorded as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases.
As of September 30, 2011 and December 31, 2010, we had the following gross intangible in-place lease assets and liabilities (in thousands):
 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place Lease
Liabilities
 
Above-Market
In-Place  Lease
Assets
 
Absorption
Period  Costs
 
September 30, 2011
Gross
$
127,709

 
$
540,147

 
$
479,928

 
$
166,201

 
Accumulated Amortization
$
(83,855
)
 
$
(275,401
)
 
$
(236,457
)
 
$
(72,173
)
 
Net
$
43,854

 
$
264,746

 
$
243,471

 
$
94,028

December 31, 2010
Gross
$
139,014

 
$
534,277

 
$
489,361

 
$
150,099

 
Accumulated Amortization
$
(83,233
)
 
$
(265,747
)
 
$
(219,447
)
 
$
(62,165
)
 
Net
$
55,781

 
$
268,530

 
$
269,914

 
$
87,934

For the nine months ended September 30, 2011 and the year ended December 31, 2010, we recognized the following amortization of intangible lease assets and liabilities (in thousands):
 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place Lease
Liabilities
Above-Market
In-Place Lease
Assets
 
Absorption
Period  Costs
 
For the nine months ended September 30, 2011
$
11,104

 
$
47,695

 
$
37,922

 
$
12,764

For the year ended December 31, 2010
$
17,810

 
$
61,743

 
$
51,241

 
$
14,472








Page 42

The remaining net intangible assets and liabilities as of September 30, 2011 will be amortized as follows (in thousands):
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place Lease
Liabilities
Above-Market
In-Place  Lease
Assets
 
Absorption
Period  Costs
 
For the three months ending December 31, 2011
$
2,879

 
$
15,277

 
$
12,132

 
$
4,447

For the years ending December 31:

 

 

 

2012
9,451

 
52,045

 
43,090

 
16,704

2013
7,867

 
45,930

 
40,040

 
16,061

2014
6,722

 
40,390

 
37,082

 
15,629

2015
6,102

 
34,905

 
33,356

 
13,217

2016
5,689

 
24,546

 
25,585

 
8,209

Thereafter
5,144

 
51,653

 
52,186

 
19,761

 
$
43,854

 
$
264,746

 
$
243,471

 
$
94,028

Evaluating the Recoverability of Intangible Assets and Liabilities
The values of intangible lease assets and liabilities are determined based on assumptions made at the time of acquisition and have defined useful lives, which correspond with the lease terms. There may be instances in which intangible lease assets and liabilities become impaired and we are required to write-off the remaining asset or liability immediately or over a shorter period of time. Lease restructurings, including lease terminations and lease extensions, may impact the value and useful life of in-place leases. In-place leases that are terminated, partially terminated, or modified will be evaluated for impairment if the original in-place lease terms have been modified. In the event that the discounted cash flows of the original in-place lease stream do not exceed the discounted modified in-place lease stream, we adjust the carrying value of the intangible lease assets to the discounted cash flows and recognize an impairment loss. For in-place lease extensions that are executed more than one year prior to the original in-place lease expiration date, the useful life of the in-place lease will be extended over the new lease term with the exception of those in-place lease components, such as lease commissions and tenant allowances, which have been renegotiated for the extended term. Renegotiated in-place lease components, such as lease commissions and tenant allowances, will be amortized over the shorter of the useful life of the asset or the new lease term.
Intangible Assets and Liabilities Arising from In-Place Leases where We are the Lessee
In-place ground leases where we are the lessee may have value associated with effective contractual rental rates that are above or below market rates. Such values are calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place lease and (ii) management’s estimate of fair market lease rates for the corresponding in-place lease, measured over a period equal to the remaining terms of the leases. The capitalized above-market and below-market in-place lease values are recorded as intangible lease liabilities or assets and amortized as an adjustment to property operating cost over the remaining term of the respective leases. Wells REIT II had gross below-market lease assets of approximately $110.7 million and $110.7 million as of September 30, 2011 and December 31, 2010, and recognized amortization of these assets of approximately $1.6 million for the nine months ended September 30, 2011 and approximately $2.1 million for the year ended December 31, 2010.
As of September 30, 2011, the remaining net below-market lease asset will be amortized as follows (in thousands):
For the year ending December 31:
 
2011
$
517

2012
2,069

2013
2,069

2014
2,069

2015
2,069

2016
2,069

Thereafter
91,416

 
$
102,278



Page 43

Related Parties
Transactions and Agreements
We have entered into agreements with our advisor, WREAS II, and its affiliates, whereby we pay certain fees and reimbursements to WREAS II or its affiliates, for acquisition fees, commissions, dealer-manager fees, asset and property management fees, construction fees, reimbursement of other offering costs, and reimbursement of operating costs. See Note 8 to our accompanying consolidated financial statements included herein for a discussion of the various related-party transactions, agreements, and fees.
Assertion of Legal Action Against Related-Parties
On March 12, 2007, a stockholder of Piedmont Office Realty Trust, Inc. (“Piedmont REIT”) filed a putative class action and derivative complaint, presently styled In re Wells Real Estate Investment Trust, Inc. Securities Litigation, in the United States District Court for the District of Maryland against, among others, Piedmont REIT; Leo F. Wells, III, the Chairman of our Board of Directors; Wells Capital; Wells Management, our property manager; certain affiliates of WREF; the directors of Piedmont REIT; and certain individuals who formerly served as officers or directors of Piedmont REIT prior to the closing of the internalization transaction on April 16, 2007.
The complaint alleged, among other things, violations of the federal proxy rules and breaches of fiduciary duty arising from the Piedmont REIT internalization transaction and the related proxy statement filed with the SEC on February 26, 2007, as amended. The complaint sought, among other things, unspecified monetary damages and nullification of the Piedmont REIT internalization transaction.
On June 27, 2007, the plaintiff filed an amended complaint, which attempted to assert class action claims on behalf of those persons who received and were entitled to vote on the Piedmont REIT proxy statement filed with the SEC on February 26, 2007, and derivative claims on behalf of Piedmont REIT.
On March 31, 2008, the Court granted in part the defendants’ motion to dismiss the amended complaint. The Court dismissed five of the seven counts of the amended complaint in their entirety. The Court dismissed the remaining two counts with the exception of allegations regarding the failure to disclose in the Piedmont REIT proxy statement details of certain expressions of interest in acquiring Piedmont REIT. On April 21, 2008, the plaintiff filed a second amended complaint, which alleges violations of the federal proxy rules based upon allegations that the proxy statement to obtain approval for the Piedmont REIT internalization transaction omitted details of certain expressions of interest in acquiring Piedmont REIT. The second amended complaint seeks, among other things, unspecified monetary damages, to nullify and rescind the internalization transaction, and to cancel and rescind any stock issued to the defendants as consideration for the internalization transaction. On May 12, 2008, the defendants answered and raised certain defenses to the second amended complaint.
On June 23, 2008, the plaintiff filed a motion for class certification. On September 16, 2009, the Court granted the plaintiff’s motion for class certification. On September 20, 2009, the defendants filed a petition for permission to appeal immediately the Court’s order granting the motion for class certification with the Eleventh Circuit Court of Appeals. The petition for permission to appeal was denied on October 30, 2009.
On April 13, 2009, the plaintiff moved for leave to amend the second amended complaint to add additional defendants. The Court denied the plaintiff’s motion for leave to amend on June 23, 2009.
On December 4, 2009, the parties filed motions for summary judgment. On August 2, 2010, the Court entered an order denying the defendants’ motion for summary judgment and granting, in part, the plaintiff’s motion for partial summary judgment. The Court ruled that the question of whether certain expressions of interest in acquiring Piedmont REIT constituted “material” information required to be disclosed in the proxy statement to obtain approval for the Piedmont REIT internalization transaction raises questions of fact that must be determined at trial. A trial date has not been set.
Mr. Wells, Wells Capital, and Wells Management believe that the allegations contained in the complaint are without merit and intend to vigorously defend this action. Any financial loss incurred by Wells Capital, Wells Management, or their affiliates could hinder their ability to successfully manage our operations and our portfolio of investments.


Page 44

Commitments and Contingencies
We are subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 6 of our accompanying consolidated financial statements for further explanation. Examples of such commitments and contingencies include:
•
obligations under operating leases;
•
obligations under capital leases;
•
commitments under existing lease agreements; and
•
litigation.
Subsequent Events
We evaluated subsequent events in connection with the preparation of its consolidated financial statements and notes thereto included in this report on Form 10-Q and note the following items in addition to those disclosed elsewhere in this report:
Determination of Estimated Per-Share Value

Overview
 
On November 8, 2011, Wells REIT II announced an estimated per-share value of our common stock equal to $7.47 per share, calculated as of September 30, 2011. This estimate is being provided to assist broker/dealers in connection with their obligations under applicable Financial Industry Regulatory Authority (“FINRA”) Rules with respect to customer account statements and to assist fiduciaries in discharging their obligations under Employee Retirement Income Security Act (“ERISA”) reporting requirements. 
 
Valuation Methodology
 
Summary:
 
In arriving at this estimate, which was determined as of September 30, 2011, we first engaged Altus Group U.S., Inc., a third-party commercial real estate valuation firm (“Altus”), to appraise our assets, both real estate and other assets, to estimate the fair value of our liabilities, and to use those estimates to calculate an estimated fair value of our shares. The engagement of Altus was approved by the asset management committee of our board of directors, which committee is composed only of directors who are not affiliated with our advisor. Altus's analyses, opinions, and conclusions were developed in conformity with the Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute and in conformity with the Uniform Standards of Professional Appraisal Practice. Altus appraised each of our real estate assets individually, and the asset management committee of our board and our advisor reviewed these analyses and conclusions.
  
Altus worked with our advisor and the asset management committee of our board of directors to gather information regarding our assets and liabilities. On November 3, 2011, Altus delivered a final report to our advisor, who shared the report with the asset management committee of our board of directors. At a subsequent meeting of our board of directors, our advisor presented the report and recommended an estimated per-share value. Our board of directors considered all information provided in light of its own extensive familiarity with our assets and, upon the recommendation of our asset management committee, unanimously agreed upon an estimated value of $7.47 per share, which is consistent with both the advisor's recommendation and Altus's estimate.
 
Our estimated per-share value was calculated by aggregating the value of our real estate and other assets, subtracting the fair value of our liabilities, and dividing the total by the number of our common shares outstanding, all as of September 30, 2011. The potential dilutive effect of our common stock equivalents does not impact our estimated per-share value. Our estimated share value is the same as our net asset value. It does not reflect "enterprise value," which includes a premium for:
 
•
the large size of our portfolio, although it may be true that some buyers are willing to pay more for a large portfolio than they are willing to pay for each property in the portfolio separately;
•
our rights under our advisory agreement and our potential ability to secure the services of a management team on a long-term basis; or
•
the potential increase in our share value if we were to list our shares on a national securities exchange.
 
Our key objectives are to arrive at an estimated per-share value that is supported by methodologies and assumptions that are appropriate based on our current circumstances and calculated using processes and procedures that may be repeated in future


Page 45

periods. Wells REIT II believes that this approach reflects the conservative investment principles that guided the assembly of our portfolio over the past eight years, and comports with industry-standard valuation methodologies used for nontraded real estate companies.

Details:
 
As of September 30, 2011, our estimated per-share value was calculated as follows:

Real estate assets
$
10.13

(1)
Debt
(2.65)
(2)
Other
(0.01)
(3)
Estimated net asset value per-share value
$
7.47

 
Estimated enterprise value premium
None assumed

 
Total estimated per-share value
$
7.47

 
(1) 
Our real estate assets were appraised using valuation methods that we believe are typically used by investors for properties that are similar to ours, including capitalization of the net property operating income, 10-year discounted cash flow models, and comparison with sales of similar properties.  Primary emphasis was placed on the discounted cash flow analysis, with the other approaches used to confirm the reasonableness of the value conclusion. Using this methodology, the appraised value of our real estate assets reflects an overall decline from original purchase price, exclusive of acquisition costs, plus post-acquisition capital investments, of 8.1%.  We believe that the assumptions employed in the valuation are within the ranges used for properties that are similar to ours and held by investors with similar expectations to our investors.
 
The following are the key assumptions (shown on a weighted-average basis) that are used in the discounted cash flow models to estimate the value of our real estate assets:

Exit capitalization rate
7.19
%
Discount rate/internal rate of return ("IRR")
8.19
%
Annual market rent growth rate
3.31
%
Annual holding period
10.3 years


While we believe our assumptions are reasonable, a change in these assumptions would impact the calculation of the value of our real estate assets.  For example, assuming all other factors remain unchanged, a change in the weighted-average annual discount rate/IRR of 0.25% would yield a change in our total real estate asset value of 1.83%.
 
(2) 
The fair value of our debt instruments was estimated using discounted cash flow models, which incorporate assumptions that we believe reflect the terms currently available on similar borrowing arrangements to borrowers with credit profiles similar to ours.
(3) 
The fair value of our non-real estate assets and liabilities is estimated to materially reflect book value given their typically short-term (less than 1 year) settlement periods.

Our estimated per-share value as of September 30, 2011 ($7.47) has been adversely affected by volatility in real estate markets and the current tepid outlook on office sector rents and pricing expectations. Nevertheless, our portfolio is leased largely to creditworthy tenants with long-term leases and we do not foresee any short-term impact on our distribution rate caused by current pricing weakness in this economy. Throughout the economic downturn experienced over the last three years, our portfolio occupancy has remained high (above 90%) and leverage has remained low (around 25% or less).
We plan to update the estimated per-share value on an annual basis.
Limitations and Risks
As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may not be accurate or complete (see footnotes in above Valuation Methodology section).  Different parties with different assumptions and estimates could derive a different estimated per-share value.  Accordingly, with respect to our estimated per-share value, we can provide no assurance that:



Page 46

▪
a stockholder would be able to realize this estimated value per share upon attempting to resell his or her shares;
▪
we would be able to achieve, for our stockholders, the estimated value per share, upon a listing of our shares of common stock on a national securities exchange, selling our real estate portfolio, or merging with another company; or
▪
the estimated share value, or the methodologies relied upon to estimate the share value, will be found by any regulatory authority to comply with FINRA, ERISA, or any other regulatory requirements.
Furthermore, the estimated value of our shares was calculated as of a particular point in time. The value of our shares will fluctuate over time in response to, among other things, changes in real estate market fundamentals, capital markets activities, and attributes specific to the properties and leases within our portfolio.
Share Redemption Program Share Price
Effective November 8, 2011, the price paid for shares redeemed under the SRP in cases of death, disability, or qualification for federal assistance for confinement to a long-term care facility (i.e. a nursing home), will change from 100% of the price at which we issued the share (typically, $10.00) to 100% of the estimated per-share value ($7.47); and the price paid for all other redemptions (“Ordinary Redemptions”) will change from 60% of the price at which we issued the share (typically, $6.00) to $5.50. See Part II. Item 2. "Unregistered Sales of Equity Securities and Use of Proceeds" for information regarding the amendment to our SRP that sets this price for Ordinary Redemptions, effective upon the filing of this Quarterly Report on Form 10-Q.
Dividend Reinvestment Plan Share Price
Effective beginning in the fourth quarter of 2011, the price at which investors may purchase shares under the DRP will change from $9.55 to 95.5% of the estimated per-share value (or, $7.13).
Declaration of Distributions
On November 4, 2011, our board of directors declared distributions for the fourth quarter of 2011 in the amount of $0.125 (12.5 cents) per share on the outstanding shares of common stock payable to stockholders of record as of December 15, 2011. The distributions will be paid in December 2011.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of our debt facilities, we are exposed to interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flow primarily through a low to moderate level of overall borrowings. However, we currently have a substantial amount of debt outstanding. We manage our ratio of fixed- to floating-rate debt with the objective of achieving a mix that we believe is appropriate in light of anticipated changes in interest rates. We closely monitor interest rates and will continue to consider the sources and terms of our borrowing facilities to determine whether we have appropriately guarded ourselves against the risk of increasing interest rates in future periods.
Additionally, we have entered into interest rate swaps, and may enter into other interest rate swaps, caps, or other arrangements to mitigate our interest rate risk on a related financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes; however, certain of our derivatives may not qualify for hedge accounting treatment. All of our debt was entered into for other-than-trading purposes.
On March 7, 2011, we executed the JPMorgan Chase Bridge Loan to finance a portion of the purchase price of the Market Square Buildings. Under the JPMorgan Chase Bridge Loan, interest is incurred based on, at our option, LIBOR for one-, two-, or three-month periods, plus an applicable margin of 2.25% (the “Bridge LIBOR Rate”), or at an alternate base rate, plus an applicable margin of 1.25% (the “Bridge Base Rate”). The Bridge Base Rate for any day is the greatest of (1) the rate of interest publicly announced by JPMorgan Chase Bank as its prime rate in effect in its principal office in New York City for such day, (2) the federal funds rate for such day plus 0.50%, or (3) the one-month LIBOR Rate for such day plus 1.00%. The JPMorgan Bridge Loan was fully repaid on June 3, 2011.
On April 4, 2011, we sold $250.0 million aggregate principal amount of its 5.875% unsecured senior notes due in 2018 at 99.295 percent of their face value in a private placement offering. Two rating agencies have assigned investment-grade ratings to these senior notes. We received proceeds from this bond offering, net of fees, of $246.7 million, all of which were used to reduce amounts outstanding on the JPMorgan Chase Bridge Loan.
On June 30, 2011, we entered into a loan transaction (the “Market Square mortgage note”) with Pacific Life Insurance Company, in the principal amount of $325.0 million. Substantially all of the net proceeds advanced under the Market Square Loan were used to repay amounts outstanding under the $500.0 million revolving credit facility with JPMorgan Chase Bank entered into on May 7,


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2010 (the "JPMorgan Chase Credit Facility"). We used borrowings under the JPMorgan Chase Credit Facility to fund a portion of the March 7, 2011 acquisition of the Market Square Buildings. The Market Square mortgage note, which requires interest-only monthly payments matures on July 1, 2023 and bears interest at an annual rate of 5.07%. We have the right to prepay the outstanding amount in full provided that (i) 30 days' prior written notice of the intent to prepay is provided to the lender and (ii) a prepayment premium is paid to the lender. If the prepayment is made before July 1, 2013, the prepayment premium is equal to the sum of (i) the greater of (a) 1.0% of the outstanding principal or (b) the yield loss amount plus (ii) 3.0% of the outstanding principal. If the prepayment is made on or after July 1, 2013 but before April 1, 2023, the prepayment premium is equal to the greater of (i) 1.0% of the outstanding principal or (ii) the yield loss amount. No prepayment premium need be paid if the prepayment is made on or after April 1, 2023.
On July 8, 2011, we entered an amendment to the JPMorgan Chase Credit Facility (the “JPMorgan Chase Credit Facility Amendment”) with JPMorgan Chase Bank to, among other things, (i) extend the maturity date of the Facility to May 7, 2015, (ii) enable us to increase the JPMorgan Chase Credit Facility amount by an aggregate of up to $150.0 million to a total facility amount not to exceed $650.0 million on two occasions on or before December 7, 2014, upon meeting certain criteria, and (iii) reduce the interest rate and the facility fee as described below. Except as noted above and described below, the terms of the Facility remain materially unchanged by the amendment.
The JPMorgan Chase Credit Facility Amendment provides for interest costs to be incurred based on, at our option, the London Interbank Offered Rate (“LIBOR”) for one, two, three or six month periods, plus an applicable margin ranging from 1.25% to 2.05% (the “LIBOR Rate”) or at the alternate base rate, plus an applicable margin ranging from 0.25% to 1.05% (the “Base Rate”). The alternate base rate for any day is the greatest of the rate of interest publicly announced by JPMorgan Chase Bank as its prime rate in effect in its principal office in New York City for such day, the federal funds rate for such day plus 0.50%, and the one-month LIBOR Rate for such day plus 1.00%. The margin component of the LIBOR Rate and the Base Rate is based on our applicable credit rating (as defined in the Facility agreement). Additionally, we must pay a per annum facility fee on the aggregate revolving commitment (used or unused) ranging from 0.25% to 0.45% based on our applicable credit rating.
On September 6, 2011, Wells REIT II settled the Manhattan Towers mortgage note by transferring the Manhattan Towers property, an office building located in Manhattan Beach, California, to an affiliate of its mortgagee through a deed in lieu of foreclosure transaction. As a result of this transaction, Wells REIT II recognized a property impairment loss of $5.8 million and a gain on early extinguishment of debt of $13.5 million.
During the three months ended September 30, 2011, Wells REIT II used cash on hand and proceeds from the JPMorgan Chase Credit Facility to fully repay the Cranberry Woods Drive mortgage note ($63.4 million) and the 800 North Frederick Building mortgage note ($46.4 million) without incurring prepayment penalties. During the nine months ended September 30, 2011 and 2010, Wells REIT II also made interest payments of approximately $34.2 million and $31.8 million, respectively, including amounts capitalized of approximately $0.0 million and $0.5 million, respectively.
Our financial instruments consist of both fixed-rate and variable-rate debt. Our variable-rate borrowings consist of the JPMorgan Chase Revolving Credit Facility, the JPMorgan Bridge Loan, the 222 E. 41st Street Building mortgage note, the 80 Park Plaza Building mortgage note, and the Three Glenlake Building mortgage note. However, only the JPMorgan Chase Credit Revolving Facility and the JPMorgan Chase Bridge Loan bear interest at an effectively variable rate, as the variable rates on the 222 E. 41st Street Building mortgage note, the 80 Park Plaza Building mortgage note, and the Three Glenlake Building mortgage note have been effectively fixed through the interest rate swap agreements described below. As of September 30, 2011, we had $220.5 million outstanding under the JPMorgan Chase Revolving Credit Facility; $173.0 million outstanding on the 222 E. 41st Street Building mortgage note; $64.0 million outstanding on the 80 Park Plaza Building mortgage note; $25.9 million outstanding on the Three Glenlake Building mortgage note; $248.3 million in 5.875% bonds outstanding; and $711.6 million outstanding on fixed-rate, term mortgage loans. The weighted-average interest rate of all of our debt instruments was 5.44% as of September 30, 2011.
The 80 Park Plaza Building mortgage note was used to purchase the 80 Park Plaza Building. The note bears interest at one-month LIBOR plus 130 basis points (approximately 1.52% per annum as of September 30, 2011) and matures in September 2016. In connection with obtaining the 80 Park Plaza Building mortgage note, we entered into an interest rate swap agreement to hedge exposure to changing interest rates. The interest rate swap agreement has an effective date of September 22, 2006 and matures September 21, 2016. The terms of the interest rate swap agreement effectively fix our interest rate on the 80 Park Plaza Building mortgage note at 6.575% per annum.
The 222 E. 41st Street Building mortgage note was used to purchase the 222 E. 41st Street Building. The note bears interest at one-month LIBOR plus 120 basis points (approximately 1.42% per annum as of September 30, 2011) and matures in August 2017. In connection with obtaining the 222 E. 41st Street Building mortgage note, we entered into an interest rate swap agreement to hedge exposure to changing interest rates. The interest rate swap agreement has an effective date of August 16, 2007 and matures
August 16, 2017. The interest rate swap effectively fixes our interest rate on the 222 E. 41st Street Building mortgage note at


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6.675% per annum.
The Three Glenlake Building mortgage note was used to purchase the Three Glenlake Building. The note bears interest at one-month LIBOR plus 90 basis points (approximately 1.12% per annum as of September 30, 2011), and matures in July 2013. The interest rate swap agreement has an effective date of July 31, 2008 and matures July 31, 2013. Interest is due monthly; however, under the terms of the loan agreement, a portion of the monthly debt service amounts accrues and is added to the outstanding balance of the note over the term. The interest rate swap effectively fixes our interest rate on the Three Glenlake Building mortgage note at 5.95% per annum.
Approximately $1,222.9 million of our total debt outstanding as of September 30, 2011 is subject to fixed rates, either directly or when coupled with an interest rate swap agreement. As of September 30, 2011, these balances incurred interest expense at an average interest rate of 5.63% and have expirations ranging from 2011 through 2023. A change in the market interest rate impacts the net financial instrument position of our fixed-rate debt portfolio; however, it has no impact on interest incurred or cash flows. The amounts outstanding on our variable-rate debt facilities in the future will largely depend upon the level of investor proceeds raised under our DRP and the rate at which we are able to employ such proceeds in acquisitions of real properties.
We do not believe there is any exposure to increases in interest rates related to the capital lease obligations of $646.0 million at September 30, 2011, as the obligations are at fixed interest rates.
Foreign Currency Risk
We are also subject to foreign exchange risk arising from our foreign operations in Russia. Foreign operations represented 1.9% and 2.0% of total assets at September 30, 2011 and December 31, 2010, respectively, and 0.6% and 0.7% of total revenue for the nine months ended September 30, 2011 and 2010, respectively. As compared to rates in effect at September 30, 2011, an increase or decrease in the U.S. dollar to Russian rouble exchange rate by 10% would not materially impact the accompanying consolidated financial statements.
ITEM 4.
CONTROLS AND PROCEDURES
Management’s Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods in SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II.    OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
From time to time, we are party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.
ITEM 1A.
RISK FACTORS
There have been no material changes from the risk factors disclosed in the "Risk Factors" section of our Annual Report on Form 10-K/A for the year ended December 31, 2010.



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ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
All equity securities sold by us in the nine months ended September 30, 2011 were sold in an offering registered under the Securities Act of 1933 with the following exception:
Effective June 30, 2011, we issued 20,000 shares to Wells Capital, Inc. in exchange for 20,000 units of Wells OP II. As a result of the transaction, Wells OP II is now indirectly wholly owned by us. As part of the transaction, we also agreed to reimburse Wells Capital an amount equal to the state and federal income tax liability (if any) that Wells Capital incurs as a result of the exchange, with such payment to be grossed up to include any state or federal income taxes imposed upon Wells Capital as a result of its receipt of any of the reimbursement. The exchange transaction was effected without registration under the securities laws in reliance on the private offering exemption set forth at Section 4(2) of the Securities Act of 1933, as amended, as the purchaser is an accredited investor and no general solicitation was involved in connection with the transaction.
(b)
Not applicable.
(c)
During the quarter ended September 30, 2011, we redeemed shares as follows (in thousands, except per-share amounts):
Period
Total Number  of
Shares
Purchased(1)
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(2)
 
Approximate Dollar
Value of  Shares
Available That May
Yet Be
Redeemed Under
the Program
July 2011
722
 
$
9.39

 
722
 
(3) 
August 2011
620
 
$
9.21

 
620
 
(3) 
September 2011
751
 
$
9.13

 
751
 
(3) 
During the quarter ended September 30, 2011, we redeemed all of the shares eligible and properly submitted for redemption prior to the redemption payment date in June.
(1) 
All purchases of our equity securities by us in the three months ended September 30, 2011, were made pursuant to our SRP.
(2) 
We announced the commencement of the program on December 10, 2003 and amendments to the program on April 22, 2004; March 28, 2006; May 11, 2006; August 10, 2006; August 8, 2007; November 13, 2008; March 31, 2009; August 13, 2009; February 18, 2010; July 21, 2010; September 23, 2010; July 19, 2011; and August 12, 2011.
(3) 
We currently limit the dollar value and number of shares that may yet be redeemed under the program. First, we limit requests for redemptions other than those made within two years of a stockholder's death on a pro rata basis so that the aggregate of such redemptions during any calendar year do not exceed 5.0% of the weighted-average number of shares outstanding in the prior calendar year. Requests precluded by this test are not considered in the test below. In addition, if necessary, we limit all redemption requests, including those sought within two years of a stockholder’s death, on a pro rata basis so that the aggregate of such redemptions during any calendar year do not exceed the greater of 100% of the net proceeds from our DRP during the calendar year or 5.0% of weighted average number of shares outstanding in the prior calendar year.
Our board of directors recently approved an amendment to the SRP to change the price at which we effect Ordinary Redemptions (as defined in our SRP) to $5.50 per share. The amendment also provides that the effective date of an amendment may be accelerated by the board of directors to a date that is fewer than 30 days after the date of the announcement of the amendment if the amendment does not adversely affect the rights of redeeming stockholders. The board of directors set November 8, 2011 as the effective date of the amendment.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
(a)
There have been no defaults with respect to any of our indebtedness.
(b)
Not applicable.
ITEM 4.
RESERVED
ITEM 5.
OTHER INFORMATION
(a)
During the third quarter of 2011, there was no information that was required to be disclosed in a report of Form 8-K that was not disclosed in a report on Form 8-K.


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(b)
There are no material changes to the procedures by which stockholders may recommend nominees to our board of directors since the filing of our Schedule 14A.
ITEM 6.
EXHIBITS
The exhibits required to be filed with this report are set forth on the Exhibit Index to this quarterly report attached hereto.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
WELLS REAL ESTATE INVESTMENT TRUST II, INC.
(Registrant)
 
 
 
 
 
Dated:
November 8, 2011
By:
 
/s/ DOUGLAS P. WILLIAMS
 
 
 
 
Douglas P. Williams
Executive Vice President, Treasurer and
Principal Financial Officer




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EXHIBIT INDEX TO
THIRD QUARTER 2011 FORM 10-Q OF
WELLS REAL ESTATE INVESTMENT TRUST II, INC.
The following documents are filed as exhibits to this report. Exhibits that are not required for this report are omitted.
 
Ex.
Description
3.1
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 3 to the Registration Statement on Form S-11 (No. 333-107066) filed with the Commission on November 25, 2003).
3.2
Articles of Amendment of Wells Real Estate Investment Trust II, Inc., effective as of October 1, 2008 (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K/A for the year ended December 31, 2008).
3.3
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007).
3.4
Amendment No. 1 to Amended and Restated Bylaws (incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007).
4.1
Form of Dividend Reinvestment Enrollment Form (incorporated by reference to Appendix A to the Prospectus included in Post-Effective Amendment No. 7 to the Registration Statement on Form S-11 on Form S-3 (No. 333-144414) and filed with the Commission on August 27, 2010 (the "DRP Registration Statement")).
4.2
Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to Amendment No. 2 to the Registration Statement on Form S-11 (No. 333-144414) filed with the Commission on September 22, 2008).
4.3
Amended and Restated Dividend Reinvestment Plan (incorporated by reference to Appendix B to the Prospectus included in the DRP Registration Statement).
4.4
Amended and Restated Share Redemption Program (incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K filed with the Commission on March 11, 2011).
4.5
Second Amended and Restated Share Redemption Program (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Commission on July 19, 2011).
4.6
Third Amended and Restated Share Redemption Program (incorporated by reference to Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q filed with the Commission on August 12, 2011 and effective as of September 11, 2011).
10.1
Amendment No. 1 to Credit Agreement by and among Wells Operating Partnership II, L.P., as borrower, J.P. Morgan Securities LLC and PNC Capital Markets LLC, as joint lead arrangers and joint bookrunners, JP Morgan Chase Bank, N.A., as administrative agent, and PNC Bank, National Association, as syndication agent and Regions Bank, U.S. Bank National Association and BMO Capital Markets, as documentation agents, and the financial institutions party thereto, dated July 8, 2011 (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-4 filed with the SEC on July 18, 2011).
10.2*
Interim Advisory Agreement by and between the Company and Wells Real Estate Advisory Services II, LLC effective for the month of August 2011
10.3*
Amended Advisory Agreement by and between the Company and Wells Real Estate Advisory Services II, LLC effective as of August 1, 2011
31.1*
Certification of the Principal Executive Officer of the Company, pursuant to Securities Exchange Act Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of the Principal Financial Officer of the Company, pursuant to Securities Exchange Act Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of the Principal Executive Officer and Principal Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**
XBRL Instance Document.
101.SCH**
XBRL Taxonomy Extension Schema.
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase.
101.DEF**
XBRL Taxonomy Extension Definition Linkbase.
101.LAB**
XBRL Taxonomy Extension Label Linkbase.
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase.

*
Filed herewith.
**
Furnished with this Form 10-Q



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