10-K 1 d286855d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

 

¨ 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: 000-51609

 

 

Inland American Real Estate Trust, Inc.

(Exact name of registrant as specified in its charter)

Maryland   34-2019608

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2901 Butterfield Road, Oak Brook, Illinois   60523
(Address of principal executive offices)   (Zip Code)

630-218-8000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, $0.001 par value per share

(Title of Class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 the filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, 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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

There is no established market for the registrant’s shares of common stock. The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2011 (the last business day of the registrant’s most recently completed second quarter) was approximately $6,698,005,345, based on the estimated per share value of $8.03, as established by the registrant on September 21, 2010.

As of March 1, 2012, there were 873,737,630 shares of the registrant’s common stock outstanding.

The registrant incorporates by reference portions of its Definitive Proxy Statement for the 2012 Annual Meeting of Stockholders, which is expected to be filed no later than April 29, 2012, into Part III of this Form 10-K to the extent stated herein.

 

 

 


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

TABLE OF CONTENTS

 

          Page  
   Part I   

Item 1.

  

Business

     01   

Item 1A.

  

Risk Factors

     06   

Item 1B.

  

Unresolved Staff Comments

     28   

Item 2.

  

Properties

     28   

Item 3.

  

Legal Proceedings

     32   

Item 4.

  

Mine Safety Disclosures

     32   
   Part II   

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     33   

Item 6.

  

Selected Financial Data

     36   

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     38   

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

     60   

Item 8.

  

Consolidated Financial Statements and Supplementary Data

     62   

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     199   

Item 9A.

  

Controls and Procedures

     199   

Item 9B.

  

Other Information

     199   
   Part III   

Item 10.

  

Directors, Executive Officers and Corporate Governance

     200   

Item 11.

  

Executive Compensation

     200   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     200   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     200   

Item 14.

  

Principal Accounting Fees and Services

     200   
   Part IV   

Item 15.

  

Exhibits and Financial Statement Schedules

     201   
  

Signatures

     202   

This Annual Report on Form 10-K includes references to certain trademarks. Courtyard by Marriott®, Marriott®, Marriott Suites®, Residence Inn by Marriott® and SpringHill Suites by Marriott® trademarks are the property of Marriott International, Inc. (“Marriott”) or one of its affiliates. Doubletree®, Embassy Suites®, Hampton Inn®, Hilton Garden Inn®, Hilton Hotels® and Homewood Suites by Hilton® trademarks are the property of Hilton Hotels Corporation (“Hilton”) or one or more of its affiliates. Hyatt Place® trademark is the property of Hyatt Corporation (“Hyatt”). Intercontinental Hotels ® trademark is the property of IHG. Wyndham ® and Baymont Inn & Suites ® trademarks are the property of Wyndham Worldwide. Comfort Inn ® trademark is the property of Choice Hotels International. Fairmont Hotels and Resorts is a trademark. The Aloft service name is the property of Starwood. For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be included wherever the above-referenced terms are used.

 

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PART I

Item 1. Business

General

Inland American Real Estate Trust, Inc., a Maryland corporation, was incorporated in October 2004. We have elected to be taxed, and currently qualify, as a real estate investment trust (“REIT”) for federal tax purposes. We acquire, own, operate and develop a diversified portfolio of commercial real estate, including retail, multi-family, industrial, lodging, and office properties, located in the United States. In addition, we own assets through joint ventures in which we do not own a controlling interest, as well as properties in development. We also invest in marketable securities and other assets. The following chart depicts the allocation of each type of asset, as of December 31, 2011, based on undepreciated values.

 

LOGO

As of December 31, 2011, 86% of our total portfolio was comprised of our “core” assets, which consisted of 964 properties comprised of 49.3 million square feet of retail, office and industrial space, 9,563 multi-family units and 15,597 hotel rooms. We believe that a diversified portfolio balances our risk exposure compared to a portfolio with a single asset class. We believe that a diversified portfolio like ours provides our stockholders with significant benefits, and reduces their risk relative to a portfolio concentrated on one property sector or properties located in one geographical area or region. Because we believe that most real estate markets are cyclical in nature, we believe that our diversified investment strategy allows us to more effectively deploy capital into sectors and locations where the underlying investment fundamentals are relatively strong and away from sectors where the fundamentals are relatively weak. Further, we believe that an investment strategy that combines real property investments with other real estate-related investments, like ours, provides our stockholders with additional diversification benefits. The following chart depicts the allocation of our core assets for each segment, as of December 31, 2011, based on undepreciated assets within our property portfolio.

 

LOGO

 

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Objectives & Strategy

We focus on maximizing stockholder value by utilizing the depth of our expertise to capitalize on opportunities in the real estate industry. We believe our capacity to identify and react to investment opportunities is one of our biggest strengths. Our strategies for reaching this objective are:

 

   

Maintaining a reliable and sustainable distribution rate

 

   

Disposing of less strategic assets and deploying capital into quality assets in higher performing asset segments to further enhance the value of our segments

 

   

Positioning our capital structure to capture near-term acquisition opportunities through a conservative balance sheet and manageable debt maturities

 

   

Maximizing revenue from our existing properties by improving occupancy at market rents, controlling both operating and capital expenditures

 

   

Maximizing stockholder value through liquidity events on a segment by segment basis

2011 Highlights

Distributions

We have paid a monthly cash distribution to our stockholders which totaled $428.7 million for the year ended December 31, 2011, which was equal to $0.50 per share for 2011. The distributions paid for the year ended December 31, 2011 were funded from cash flow from operations and distributions from unconsolidated joint ventures.

Investing Activities

During 2011, we continued to refine our asset portfolio. We acquired three upper upscale lodging properties consisting of 1,172 rooms for $166.5 million. In addition, we acquired seven high quality multi-tenant retail properties consisting of 1,673,701 square feet for $282.8 million. As part of our strategy to realign our asset segments with higher performing assets, we sold 26 properties for a gross disposition price of $242.3 million, including fourteen retail properties, six midscale lodging properties, four office properties, one industrial property, and one multi-family property.

Financing Activities

We successfully refinanced our 2011 maturities of approximately $540 million and placed debt on new and existing properties. We were able to obtain favorable rates while still maintaining a manageable debt maturity schedule for future years. As of December 31, 2011, we had mortgage debt of approximately $5.8 billion, of which $671 million matures in 2012. Subsequently, we have refinanced or extended approximately $200 million. Our debt increased by $303.9 million from 2010 and have a weighted average interest rate of 5.2% per annum.

Operating Results

We saw significant net operating income increases in our same store lodging and multi-family properties from the year ended December 31, 2010 to 2011, offset by a slight decrease in net operating income in our retail, office and industrial portfolios. In 2012, we expect similar operating results in our lodging and multi-family portfolios due to the growth projected in these segments. We expect to maintain high occupancy in our retail, office, and industrial portfolios, which will result in consistent operating performance in the retail and industrial segments and a slight decrease in our office performance.

 

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The following table represents our same store net operating results for the years ended December 31, 2011 and 2010.

 

     2011 Net
operating
income
     2010 Net
operating
income
     Increase
(decrease)
    Increase
(decrease)
    Economic
Occupancy
as of
December 31,
2011
    Economic
Occupancy
as of
December 31,
2010
 

Retail

   $ 220,592       $ 222,908       $ (2,316     -1.0     94     94

Lodging

     158,567         143,161         15,406        10.8     71     70

Office

     129,383         132,956         (3,573     -2.7     92     94

Industrial

     76,206         76,917         (711     -0.9     92     92

Multi-Family

     43,554         37,336         6,218        16.7     92     91
  

 

 

    

 

 

    

 

 

   

 

 

     
   $ 628,302       $ 613,278       $ 15,024        2.4    
  

 

 

    

 

 

    

 

 

   

 

 

     

Segment Data

We have five business segments: Retail, Lodging, Office, Industrial, and Multi-family. We evaluate segment performance primarily based on net property operations. Net property operations of the segments do not include interest expense, depreciation and amortization, general and administrative expenses, or interest and other investment income from corporate investments. The non-segmented assets include our cash and cash equivalents, investment in marketable securities, construction in progress, and investment in unconsolidated entities. Information related to our business segments including a measure of profits or loss and revenues from external customers for each of the last three fiscal years and total assets for each of the last two fiscal years is set forth in Note 14 to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

Significant Tenants

For the year ended December 31, 2011, we generated more than 16% of our rental revenue from two tenants, SunTrust Bank and AT&T, Inc. SunTrust Bank leases multiple properties throughout the United States, which collectively generated approximately 9% of our rental revenue for the year ended December 31, 2011. For the year ended December 31, 2011, approximately 7% of our rental revenue was generated by three properties leased to AT&T, Inc.

Tax Status

We have elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986 as amended (the “Code”) beginning with the tax year ended December 31, 2005. Because we qualify for taxation as a REIT, we generally will not be subject to federal income tax on taxable income that is distributed to stockholders. If we fail to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, we will be subject to federal and state income tax on our taxable income at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income, property or net worth, respectively, and to Federal income and excise taxes on our undistributed income.

Competition

The commercial real estate market is highly competitive. We compete in all of our markets with other owners and operators of commercial properties. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to tenants’ needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on a property’s occupancy levels, rental rates and operating income.

 

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We compete with many third parties engaged in real estate investment activities including other REITs, including other REITs sponsored by our sponsor, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies and other entities. There are also other REITs with investment objectives similar to ours and others may be organized in the future. In addition, these same entities seek financing through the same channels that we do. Therefore, we compete for funding in a market where funds for real estate investment may decrease, or grow less than the underlying demand.

Employees

As of December 31, 2011, we have 99 full-time individuals employed primarily by our multi-family subsidiaries.

Our executive officers do not receive any compensation from us for their services as such officers. Our executive officers are officers of one or more of The Inland Group, Inc.’s affiliated entities, including our business manager, and are compensated by these entities, in part, for their services rendered to us. For the purposes of reimbursement, our secretary is not considered an “executive officer.”

We have entered into a business management agreement with Inland American Business Manager & Advisor, Inc. to serve as our business manager, with responsibility for overseeing and managing our day-to-day operations. We have also entered into property management agreements with each of our property managers. We pay fees to our business manager and our property managers in consideration for the services they perform for us pursuant to these agreements.

Conflicts of Interest

Our governing documents require a majority of our directors to be independent. Further, any transactions between The Inland Group, Inc. or its affiliates and us must be approved by a majority of our independent directors.

Environmental Matters

Compliance with federal, state and local environmental laws has not had a material adverse effect on our business, assets, or results of operations, financial condition and ability to pay distributions, and we do not believe that our existing portfolio will require us to incur material expenditures to comply with these laws and regulations. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on our properties.

Seasonality

The lodging segment is seasonal in nature, reflecting higher revenue and operating income during the second and third quarters. This seasonality can be expected to cause fluctuations in our net property operations for the lodging segment. None of our other segments are seasonal in nature.

Access to Company Information

We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (“SEC”). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.

We make available, free of charge, by responding to requests addressed to our customer relations group, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all

 

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amendments to those reports on our website, www.inland-american.com. These reports are available as soon as reasonably practicable after such material is electronically filed or furnished to the SEC.

Certifications

We have filed with the Securities and Exchange Commission the principal executive officer and principal financial officer certifications required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, which are attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K.

 

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Item 1A. Risk Factors

The occurrence of any of the risks discussed below could have a material adverse effect on our business, financial condition, results of operations and ability to pay distributions to our stockholders.

Risks Related to Our Business

Recent disruptions in the financial markets and current economic conditions could adversely affect our ability to refinance or secure additional debt financing at attractive terms and the values of our investments.

The capital and credit markets have been extremely volatile since the fall of 2008. In particular, the real estate debt markets have experienced volatility as a result of certain factors, including the tightening of underwriting standards by lenders and credit rating agencies, therefore making it more costly to refinance our existing debt and to obtain new financing on attractive terms. If overall borrowing costs continue to increase, either by increases in the index rates or by increases in lender spreads, our operations may generate lower returns.

In addition, the disruptions in the financial markets and recent economic conditions have negatively impacted commercial real estate fundamentals, which could have, and in some cases have already had, various negative impacts on the value of our investments, including:

 

   

a decrease in the values of our investments in commercial properties, below the amounts paid for such investments; or

 

   

a decrease in revenues from our properties, due to lower occupancy and rental rates, which may make it more difficult for us to pay distributions or meet our debt service obligations on debt financing.

Our ongoing strategy depends, in part, upon future acquisitions, and we may not be successful in identifying and consummating these transactions.

Our business strategy involves realigning on assets through disposal of assets and acquisition of higher performing properties. We may not be successful in identifying suitable properties or other assets or in consummating these transactions on satisfactory terms, if at all.

Further, we face significant competition for attractive investment opportunities from an indeterminate number of other real estate investors, including investors with significant capital resources such as domestic and foreign corporations and financial institutions, publicly traded and privately held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds. As a result of competition, we may be unable to acquire additional properties as we desire or the purchase price may be significantly elevated.

In light of current market conditions and depressed real estate values, property owners in many markets remain hesitant to sell their properties, resulting in fewer opportunities to acquire properties. Of the limited number of desirable properties that we are seeing come to market, we are either facing significant competition to acquire stabilized properties, or having to accept lease-up risk associated with properties that have lower occupancy. As market conditions and real estate values recover, more properties may become available for acquisition, but we can provide no assurances that these properties will meet our investment objectives or that we will be successful in acquiring these properties. Although conditions in the credit markets have improved over the past year, the ability of buyers to utilize higher levels of leverage to finance property acquisitions has been, and remains, somewhat limited. If we are unable to acquire sufficient debt financing at suitable rates or at all, we may be unable to acquire as many additional properties as we anticipate.

Our ongoing strategy involves the disposition of properties; however, we may be unable to sell a property on acceptable terms and conditions, if at all.

Another one of our strategies is to dispose of certain properties. We believe that in certain instances, it makes economic sense to sell properties in today’s market, such as when we believe the value of the leases in place at a

 

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property will significantly decline over the remaining lease term, when the property has limited or no equity with a near-term debt maturity, when a property has equity but the projected returns do not justify further investment or when the equity in a property can be redeployed in the portfolio in order to achieve better returns or strategic goals. However, the general economic climate along with property specific issues, such as vacancies and lease terminations, have negatively affected the value of certain of our properties and therefore reduced our ability to sell these properties on acceptable terms. Real estate investments often cannot be sold quickly. As a result of current economic conditions, potential purchasers may be unable to obtain financing on acceptable terms, if at all, thereby delaying our ability to sell our properties. In addition, the capitalization rates at which properties may be sold could have risen since our acquisition of the properties, thereby reducing our potential proceeds from sale. Furthermore, properties that we have owned for a significant period of time or that we acquired in exchange for partnership interests in our operating partnership may have a low tax basis. If we were to dispose of any of these properties in a taxable transaction, we may be required under provisions of the Code applicable to REITs to distribute a significant amount of the taxable gain, if any, to our stockholders and this could, in turn, impact our cash flow. In some cases, tax protection agreements with third parties may prevent us from selling certain properties in a taxable transaction without incurring substantial costs. In addition, purchase options and rights of first refusal held by tenants or partners in joint ventures may also limit our ability to sell certain properties.

If we lose or are unable to obtain key personnel, our ability to implement our investment strategies could be delayed or hindered.

Our success depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our business manager and property managers. If any of the key personnel of our business manager or property managers were to cease their affiliation with our business manager or property managers, respectively, our operating results could suffer. Further, we do not separately maintain “key person” life insurance that would provide us with proceeds in the event of death or disability of these persons. We believe our future success depends, in part, upon the ability of our business manager and property managers to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure you that our business manager or property managers will be successful in attracting and retaining skilled personnel.

If we internalize our management functions, your interest in us could be diluted and we may be unable to retain key personnel.

At some point in the future, we may consider internalizing the functions performed for us by our business manager or property managers. The method by which we could internalize these functions could take many forms, and the method and cost of internalizing cannot be determined or estimated at this time. If we acquired our business manager or property managers as part of an internalization, the amount and form of any consideration that we would pay in this type of transaction could take many forms. For example, we could acquire the business manager or property managers through a merger in which we issue shares of our common stock for all of the outstanding common stock or assets of these entities. Issuing shares of our common stock would reduce the percentage of our outstanding shares owned by stockholders prior to any transaction. Issuing promissory notes could reduce our net income, cash flow from operating activities and our ability to make distributions, particularly if internalizing these functions does not produce cost savings. Further, if we internalize our management functions, certain key employees may not become our employees but may instead remain employees of our business manager and property managers, or their respective affiliates, especially if we internalize our management functions but do not acquire our business manager or property managers. See If we seek to internalize our management functions, other than by acquiring our business manager or property managers, we could incur greater costs and lose key personnel below. An inability to manage an internalization transaction could effectively result in our incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. These deficiencies could cause us to incur additional costs, and our management’s attention could be diverted from most effectively managing our investments, which could result in us being sued and incurring litigation-associated costs in connection with the internalization transaction.

 

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If we pursue the acquisition of our business manager or property managers, there is no assurance that we will reach an agreement with these parties as to the terms of the transaction.

Even if we pursue the acquisition of our business manager and property managers, neither entity is obligated to enter into a transaction with us or to do so at any particular price. If we desire to internalize our management functions by acquiring our business manager and property managers, our independent directors, as a whole, or a committee thereof, will have to negotiate the specific terms and conditions of any agreement or agreements to acquire these entities, including the actual purchase price. There is no assurance that we will be able to enter into an agreement with the business manager and property managers on mutually acceptable terms. Accordingly, we would have to seek alternative courses of actions to internalize our management functions.

If we seek to internalize our management functions, other than by acquiring our business manager or property managers, we could incur greater costs and lose key personnel.

If our board deems an internalization to be in our best interests, it may decided that we should pursue an internalization by hiring our own group of executives and other employees or entering into an agreement with a third party, such as a merger, instead of by acquiring our business manager and property managers. The costs that we would incur in this case are uncertain and may be substantial. In addition, certain key personnel of the business manager and or property managers have employment agreements with those entities, which could restrict our ability to retain such personnel if we do not acquire the business manager and or property managers. Further, we would lose the benefit of the experience of business manager and property managers.

The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and make additional investments.

We have deposited our cash and cash equivalents in several banking institutions in an attempt to minimize exposure to the failure or takeover of any one of these entities. However, the Federal Insurance Deposit Corporation, or “FDIC,” generally only insures limited amounts per depositor per insured bank. At December 31, 2011, we had cash and cash equivalents and restricted cash deposited in interest bearing transaction accounts at certain financial institutions exceeding these federally insured levels. If any of the banking institutions in which we have deposited funds ultimately fails, we may lose our deposits over the federally insured levels. The loss of our deposits could reduce the amount of cash we have available to distribute or invest.

Risks Related to our Real Estate Assets

There are inherent risks with real estate investments.

Investments in real estate assets are subject to varying degrees of risk. For example, an investment in real estate cannot generally be quickly converted to cash, limiting our ability to promptly vary our portfolio in response to changing economic, financial and investment conditions. Investments in real estate assets also are subject to adverse changes in general economic conditions which, for example, reduce the demand for rental space.

Among the factors that could impact our real estate assets and the value of an investment in us are:

 

   

local conditions such as an oversupply of space or reduced demand for real estate assets of the type that we own or seek to acquire, including, with respect to our lodging facilities, quick changes in supply of and demand for rooms that are rented or leased on a day-to-day basis;

 

   

inability to collect rent from tenants;

 

   

vacancies or inability to rent space on favorable terms;

 

   

inflation and other increases in operating costs, including insurance premiums, utilities and real estate taxes;

 

   

increases in energy costs or airline fares or terrorist incidents which impact the propensity of people to travel and therefore impact revenues from our lodging facilities, although operating costs cannot be adjusted as quickly;

 

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adverse changes in the federal, state or local laws and regulations applicable to us, including those affecting rents, zoning, prices of goods, fuel and energy consumption, water and environmental restrictions;

 

   

the relative illiquidity of real estate investments;

 

   

changing market demographics;

 

   

an inability to acquire and finance, or refinance, properties on favorable terms, if at all;

 

   

acts of God, such as earthquakes, floods or other uninsured losses; and

 

   

changes or increases in interest rates and availability of financing.

In addition, periods of economic slowdown or recession, or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or increased defaults under existing leases.

We depend on tenants for our revenue, and accordingly, lease terminations and tenant defaults could adversely affect the income produced by our properties.

The success of our investments depends on the financial stability of our tenants. The current economic conditions have adversely affected, and may continue to adversely affect, one or more of our tenants. For example, business failures and downsizings have affected the tenants of our office and industrial properties, and reduced consumer demand for retail products and services has affected the tenants of our retail properties. In addition, our retail shopping center properties typically are anchored by large, nationally recognized tenants, any of which may experience a downturn in their business that may weaken significantly their financial condition. Further, mergers or consolidations among large retail establishments could result in the closure of existing stores or duplicate or geographically overlapping store locations, which could include tenants at our retail properties.

As a result of these factors, our tenants may delay lease commencements, decline to extend or renew their leases upon expiration, fail to make rental payments when due, or declare bankruptcy. Any of these actions could result in the termination of the tenants’ leases, the expiration of existing leases without renewal, or the loss of rental income attributable to the terminated or expired leases. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment and re-leasing our property. Specifically, a bankruptcy filing by, or relating to, one of our tenants or a lease guarantor would bar efforts by us to collect pre-bankruptcy debts from that tenant or lease guarantor, or its property, unless we receive an order permitting us to do so from the bankruptcy court. In addition, we cannot evict a tenant solely because of bankruptcy. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. If, however, a lease is rejected by a tenant in bankruptcy, we would have only a general, unsecured claim for damages. An unsecured claim would only be paid to the extent that funds are available and only in the same percentage as is paid to all other holders of general, unsecured claims. Restrictions under the bankruptcy laws further limit the amount of any other claims that we can make if a lease is rejected. As a result, it is likely that we would recover substantially less than the full value of the remaining rent during the term.

Two of our tenants generated a significant portion of our revenue, and rental payment defaults by these significant tenants could adversely affect our results of operations.

For the year ended December 31, 2011, approximately 9% of our rental revenue was generated by over 400 retail banking properties leased to SunTrust Bank. Also, for the year ended December 31, 2011, approximately 7% of our rental revenue was generated by three properties leased to AT&T, Inc. The lease for one of the AT&T

 

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properties, with approximately 1.7 million square feet, expires in 2016. As a result of the concentration of revenue generated from these properties, if either SunTrust or AT&T were to cease paying rent or fulfilling its other monetary obligations, we could have significantly reduced rental revenues or higher expenses until the defaults were cured or the properties were leased to a new tenant or tenants.

We may suffer adverse consequences due to the financial difficulties, bankruptcy or insolvency of our tenants.

Recent economic conditions have caused, and may continue to cause, our tenants to experience financial difficulties, including bankruptcy, insolvency, or a general downturn in their business. The retail sector in particular has been, and could continue to be, adversely affected by weakness in the national, regional and local economies, the level of consumer spending and consumer confidence, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, the excess amount of retail space in a number of markets and increasing competition from discount retailers, outlet malls, internet retailers and other online businesses. We cannot provide assurance that any tenant that files for bankruptcy protection will continue to pay us rent. A bankruptcy filing by, or relating to, one of our tenants or a lease guarantor would bar efforts by us to collect pre-bankruptcy debts from that tenant or lease guarantor, or its property, unless we receive an order permitting us to do so from the bankruptcy court. In addition, we cannot evict a tenant solely because of bankruptcy. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. If, however, a lease is rejected by a tenant in bankruptcy, we would have only a general, unsecured claim for damages. An unsecured claim would only be paid to the extent that funds are available and only in the same percentage as is paid to all other holders of general, unsecured claims. Restrictions under the bankruptcy laws further limit the amount of any other claims that we can make if a lease is rejected. As a result, it is likely that we would recover substantially less than the full value of the remaining rent during the term.

Leases representing approximately 5.4% of the rentable square feet of our retail, office, and industrial portfolio are scheduled to expire in 2012. We may be unable to renew leases or lease vacant space at favorable rates or at all.

As of December 31, 2011, leases representing approximately 5.4% of the 49,267,633 rentable square feet of our retail, office, and industrial portfolio were scheduled to expire in 2012, and an additional 7.0% of the square footage of our retail, office, and industrial portfolio was available for lease. We may be unable to extend or renew any of these leases, or we may be able to lease these spaces only at rental rates equal to or below existing rental rates. In addition, some of our tenants have leases that include early termination provisions that permit the lessee to terminate all or a portion of its lease with us after a specified date or upon the occurrence of certain events with little or no liability to us. We may be required to offer substantial rent abatements, tenant improvements, early termination rights or below-market renewal options to retain these tenants or attract new ones. Portions of our properties may remain vacant for extended periods of time. Further, some of our leases currently provide tenants with options to renew the terms of their leases at rates that are less than the current market rate or to terminate their leases prior to the expiration date thereof. If we are unable to obtain new rental rates that are on average comparable to our asking rents across our portfolio, then our ability to generate cash flow growth will be negatively impacted.

We may be required to make significant capital expenditures to improve our properties in order to retain and attract tenants.

We expect that, upon the expiration of leases at our properties, we may be required to make rent or other concessions to tenants, accommodate requests for renovations, build-to-suit remodeling and other improvements or provide additional services to our tenants. As a result, we may have to pay for significant leasing costs or tenant improvements in order to retain tenants whose leases are expiring and to attract new tenants in sufficient numbers. Additionally, we may need to raise capital to make such expenditures. If we are unable to do so or

 

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capital is otherwise unavailable, we may be unable to make the required expenditures. This could result in non-renewals by tenants upon expiration of their leases, which would result in declines in revenues from operations.

We face significant competition in the leasing market, which may decrease or prevent increases in the occupancy and rental rates of our properties.

We own properties located throughout the United States. We compete with numerous developers, owners and operators of commercial properties, many of which own properties similar to, and in the same market areas as, our properties. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge in order to attract new tenants and retain existing tenants when their leases expire. Also, if our competitors develop additional properties in locations near our properties, there may be increased competition for creditworthy tenants, which may require us to make capital improvements to properties that we would not have otherwise made.

Geographic concentration of our portfolio may make us particularly susceptible to adverse economic developments in the real estate markets of those areas or natural disasters in those areas.

Because our properties are concentrated in certain geographic areas, our operating results are likely to be impacted by economic changes affecting the real estate markets in those areas. As of December 31, 2011, approximately, 4%, 5%, 7% and 12% of our base rental income of our consolidated portfolio, excluding our lodging facilities, was generated by properties located in the Minneapolis, Dallas, Chicago and Houston metropolitan areas, respectively.

Additionally, at December 31, 2011, 34 of our lodging facilities, or approximately 36% of our lodging portfolio, were located in Washington D.C. and the eight eastern seaboard states ranging from Connecticut to Florida, which includes 11 hotels in North Carolina. Additionally, 19 properties were located in Texas. Adverse events in these areas, such as recessions, hurricanes or other natural disasters, could cause a loss of revenues from these hotels. Further, several of the hotels are located near the water and are exposed to more severe weather than hotels located inland. Elements such as salt water and humidity can increase or accelerate wear on the hotels’ weatherproofing and mechanical, electrical and other systems, and cause mold issues. As a result, we may incur additional operating costs and expenditures for capital improvements at these hotels. Geographic concentration also exposes us to risks of oversupply and competition in these markets. Significant increases in the supply of certain property types, including hotels, without corresponding increases in demand could have a material adverse effect on our financial condition, results of operations and our ability to pay distributions.

To qualify as a REIT, we must rely on third parties to operate our hotels.

To continue qualifying as a REIT, we may not, among other things, operate any hotel, or directly participate in the decisions affecting the daily operations of any hotel. Thus, we have retained third party managers to operate our hotel properties. We do not have the authority to directly control any particular aspect of the daily operations of any hotel, such as setting room rates. Thus, even if we believe our hotels are being operated in an inefficient or sub-optimal manner, we may not be able to require an immediate change to the method of operation. Our only alternative for changing the operation of our hotels may be to replace the third party manager of one or more hotels in situations where the applicable management agreement permits us to terminate the existing manager. Certain of these agreements may not be terminated without cause, which generally requires fraud, misrepresentation and other illegal acts. Even if we terminate or replace any manager, there is no assurance that we will be able to find another manager or that we will be able to enter into new management agreements favorable to us. Any change of hotel management would cause a disruption in operations.

 

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Conditions of franchise agreements could adversely affect us.

Our lodging properties are operated pursuant to agreements with nationally recognized franchisors including Marriott International, Inc., Hilton Hotels Corporation, Intercontinental Hotels Group PLC, Hyatt Corporation, Wyndham Worldwide Corporation and Choice Hotels International. These agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor’s system. These standards are subject to change over time, in some cases at the discretion of the franchisor, and may restrict our ability to make improvements or modifications to a hotel, causing us to incur significant costs, without the consent of the franchisor. Conversely, these standards may require us to make certain improvements or modifications to a hotel, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment.

These agreements also permit the franchisor to terminate the agreement in certain cases such as a failure to pay royalties and fees or to perform under covenants under the franchise agreement, bankruptcy, abandonment of the franchise, commission of a felony, assignment of the franchise without the consent of the franchisor or failure to comply with applicable law or maintain applicable standards in the operation and condition of the relevant hotel. If a franchise license terminates due to our failure to comply with the terms and conditions of the agreement, we may be liable to the franchisor for a termination payment. These payments vary. Also, these franchise agreements do not renew automatically.

Actions of our joint venture partners could negatively impact our performance.

As of December 31, 2011 we had entered into joint venture agreements with 11 entities to fund the investment of office, industrial/distribution, retail, lodging, and mixed use properties. The carrying value of our investment in these joint ventures, which we do not consolidate for financial reporting purposes, was $317 million. For the year ended December 31, 2011, we recorded losses of $13 million and impairments net of gains of $106 million associated with these ventures.

With respect to these investments, we are not in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Consequently, our joint venture investments may involve risks not otherwise present with other methods of investing in real estate. For example, our co-member, co-venturer or partner may have economic or business interests or goals which are or which become inconsistent with our business interests or goals or may take action contrary to our instructions or requests or contrary to our policies or objectives. We have experienced these events from time to time with our current venture partners, which in some cases has resulted in litigation with these partners. There can be no assurance that an adverse outcome in any lawsuit will not have a material effect on our results of operations for any particular period. In addition, any litigation increases our expenses and prevents our officers and directors from focusing their time and effort on other aspects of our business. Our relationships with our venture partners are contractual in nature. These agreements may restrict our ability to sell our interest when we desire or on advantageous terms and, on the other hand, may be terminated or dissolved under the terms of the agreements and, in each event, we may not continue to own or operate the interests or assets underlying the relationship or may need to purchase these interests or assets at an above-market price to continue ownership.

Current credit market disruptions and recent economic trends may increase the likelihood of a commercial developer defaulting on its obligations with respect to our development projects, including projects where we have notes receivable, or becoming bankrupt or insolvent.

We have entered into, and may continue to enter into, projects that are in various stages of pre-development and development. Investing in properties under development, and in lodging facilities in particular, which typically must be renovated or otherwise improved on a regular basis, including renovations and improvements required by existing franchise agreements, subjects us to uncertainties such as the ability to achieve desired zoning for

 

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development, environmental concerns of governmental entities or community groups, ability to control construction costs or to build in conformity with plans, specifications and timetables. The current economic climate has continued to impact real estate developments as well. The current slow-down in consumer spending has negatively impacted the retail environment in particular, and is causing many retailers to reduce new leasing and expansion plans. We believe that our retail developments will experience longer lease-up periods and that actual lease rates will be less than the leasing rates originally underwritten.

In addition, recent economic conditions have caused an increase in developer failures. The developers of the projects in which we have invested are exposed to risks not only with respect to our projects, but also other projects in which they are involved. A default by a developer in respect of one of our development project investments, or the bankruptcy, insolvency or other failure of a developer for one of these projects, may require that we determine whether we want to assume the senior loan, fund monies beyond what we are contractually obligated to fund, take over development of the project, find another developer for the project, or sell our interest in the project. Developer failures could give tenants the right to terminate pre-construction leases, delay efforts to complete or sell the development project and could ultimately preclude us from realizing our anticipated returns. These events could cause a decrease in the value of our assets and compel us to seek additional sources of liquidity, which may or may not be available, in order to hold and complete the development project.

Generally, under bankruptcy law and the bankruptcy guarantees we have required of certain of our joint venture development partners, we may seek recourse from the developer-guarantor to complete our development project with a substitute developer partner. However, in the event of a bankruptcy by the developer-guarantor, we cannot provide assurance that the developer or its trustee will satisfy its obligations. The bankruptcy of any developer or the failure of the developer to satisfy its obligations would likely cause us to have to complete the development or find a replacement developer on our own, which could result in delays and increased costs. We cannot provide assurance that we would be able to complete the development on terms as favorable as when we first entered into the project. If we are not able to, or elect not to, proceed with a development opportunity, the development costs ordinarily would be charged against income for the then-current period if we determine our costs are not recoverable.

Sale leaseback transactions may be recharacterized in a manner unfavorable to us.

From time to time we have entered into a sale leaseback transaction where we purchase a property and then lease the property to the seller. These transactions could, however, be characterized as a financing instead of a sale in the case of the seller’s bankruptcy. In this case, we would not be treated as the owner of the property but rather as a creditor with no interest in the property itself. The seller may have the ability in a bankruptcy proceeding to restructure the financing by imposing new terms and conditions. The transaction also may be recharacterized as a joint venture. In this case, we would be treated as a joint venturer with liability, under some circumstances, for debts incurred by the seller relating to the property.

Our investments in equity and debt securities have materially impacted, and may in the future materially impact, our results.

As of December 31, 2011, we had investments valued at $289 million in real estate related equity and debt securities. Real estate related equity securities are always unsecured and subordinated to other obligations of the issuer. Investments in real estate-related equity securities are subject to numerous risks including: (1) limited liquidity in the secondary trading market in the case of unlisted or thinly traded securities; (2) substantial market price volatility resulting from, among other things, changes in prevailing interest rates in the overall market or related to a specific issuer, as well as changing investor perceptions of the market as a whole, REIT or real estate securities in particular or the specific issuer in question; (3) subordination to the liabilities of the issuer; (4) the possibility that earnings of the issuer may be insufficient to meet its debt service obligations or to pay distributions; and (5) with respect to investments in real estate-related preferred equity securities, the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause

 

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the issuer to redeem the securities. In addition, investments in real estate-related securities involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer. Issuers of real estate-related securities generally invest in real estate or real estate-related assets and are subject to the inherent risks associated with real estate-related investments discussed herein. In fact, many of the entities that we have invested in have reduced the dividends paid on their securities. The stock prices for some of these entities have declined since our initial purchase, and in certain cases we have sold these investments at a loss.

Any mortgage loans that we originate or purchase are subject to the risks of delinquency and foreclosure.

We may originate and purchase mortgage loans. These loans are subject to risks of delinquency and foreclosure, and risks of loss. The ability of a borrower to repay a loan secured by an income-producing property depends primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. A property’s net operating income can be affected by the any of the potential issues associated with real estate-related investments as discussed herein. We bear the risks of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to that borrower will be deemed to be collateralized only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. We may also be forced to foreclose on certain properties, be unable to sell these properties and be forced to incur substantial expenses to improve operations at the property.

We may make a mortgage loan to affiliates of, or entities sponsored by, our sponsor.

If we have excess working capital, we may, from time to time, and subject to the conditions in our articles, make a mortgage loan to affiliates of, or entities sponsored by, our sponsor. These loan arrangements will not be negotiated at arm’s length and may contain terms and conditions that are not in our best interest and would not otherwise be applicable if we entered into arrangements with a third-party borrower not affiliated with these entities.

An increase in real estate taxes may decrease our income from properties.

From time to time, the amount we pay for property taxes increases as either property values increase or assessment rates are adjusted. Increases in a property’s value or in the assessment rate result in an increase in the real estate taxes due on that property. If we are unable to pass the increase in taxes through to our tenants, our net operating income for the property decreases.

Uninsured losses or premiums for insurance coverage may adversely affect a stockholder’s returns.

We attempt to adequately insure all of our properties against casualty losses. There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders sometimes require commercial property owners to purchase specific coverage against terrorism as a condition for providing mortgage loans. These policies may not be available at a reasonable cost, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide

 

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other financial support, either through financial assurances or self-insurance, to cover potential losses. If we incur any casualty losses not fully covered by insurance, the value of our assets will be reduced by the amount of the uninsured loss. In addition, other than any reserves we may establish, we have no designated source of funding to repair or reconstruct any uninsured damaged property.

Terrorist attacks and other acts of violence or war may affect the markets in which we operate, our operations and our profitability.

We own estate assets located in areas that are susceptible to attack. These attacks may directly impact the value of our assets through damage, destruction, loss or increased security costs. Although we may obtain terrorism insurance, we may not be able to obtain sufficient coverage to fund any losses we may incur. Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Further, certain losses resulting from these types of events are uninsurable or not insurable at reasonable costs.

More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in, or damage to, the United States and worldwide financial markets and economy. Any terrorist incident may, for example, deter people from traveling, which could affect the ability of our hotels to generate operating income and therefore our ability to pay distributions. Additionally, increased economic volatility could adversely affect our tenants’ ability to pay rent on their leases or our ability to borrow money or issue capital stock at acceptable prices.

The cost of complying with environmental and other governmental laws and regulations may adversely affect us.

All real property and the operations conducted on real property are subject to federal, state and local laws and regulations (including those of foreign jurisdictions) relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. We also are required to comply with various local, state and federal fire, health, life-safety and similar regulations. Some of these laws and regulations may impose joint and several liability on tenants or owners for the costs of investigating or remediating contaminated properties. These laws and regulations often impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The cost of removing or remediating could be substantial. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent a property or to use the property as collateral for borrowing.

Environmental laws and regulations also may impose restrictions on the manner in which properties may be used or businesses may be operated, and these restrictions may require substantial expenditures by us. Environmental laws and regulations provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Third parties may seek recovery from owners of real properties for personal injury or property damage associated with exposure to released hazardous substances. Compliance with new or more stringent laws or regulations or stricter interpretations of existing laws may require material expenditures by us. For example, various federal, regional and state laws and regulations have been implemented or are under consideration to mitigate the effects of climate change caused by greenhouse gas emissions. Among other things, “green” building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and efficiency, and waste management. We are not aware of any such existing requirements that we believe will have a material impact on our current operations. However, future requirements could increase the costs of maintaining or improving our existing properties or developing new properties.

 

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Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

The presence of mold at any of our properties could require us to undertake a costly program to remediate, contain or remove the mold. Mold growth may occur when moisture accumulates in buildings or on building materials. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing because exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. The presence of mold could expose us to liability from our tenants, their employees and others if property damage or health concerns arise.

We may incur significant costs to comply with the Americans With Disabilities Act.

Our properties generally are subject to the Americans With Disabilities Act of 1990, as amended. Under this act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The act’s requirements could require us to remove access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages.

Risks Associated with Debt Financing

Borrowings may reduce the funds available for distribution and increase the risk of loss since defaults may cause us to lose the properties securing the loans.

We have acquired, and may continue to acquire, real estate assets by using either existing financing or borrowing new monies. Our articles generally limit the total amount we may borrow to 300% of our net assets. In addition, we may obtain loans secured by some or all of our properties or other assets to fund additional acquisitions or operations including to satisfy the requirement that we distribute at least 90% of our annual “REIT taxable income” (subject to certain adjustments) to our stockholders, or as is otherwise necessary or advisable to assure that we qualify as a REIT for federal income tax purposes. Payments required on any amounts we borrow reduce the funds available for, among other things, distributions to our stockholders because cash otherwise available for distribution is required to pay principal and interest associated with amounts we borrow.

Defaults on loans secured by a property we own may result in us losing the property or properties securing the loan that is in default as a result of foreclosure actions initiated by a lender. For tax purposes, a foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the property. If the outstanding balance of the debt exceeds our tax basis in the property, we would recognize taxable gain on the foreclosure but would not receive any cash proceeds. We also may fully or partially guarantee any monies that subsidiaries borrow to purchase or operate real estate assets. In these cases, we will be responsible to the lender for repaying the loans if the subsidiary is unable to do so. If any mortgage contains cross-collateralization or cross-default provisions, more than one property may be affected by a default.

Lenders may restrict certain aspects of our operations, which could, among other things, limit our ability to make distributions.

The terms and conditions contained in any of our loan documents may require us to maintain cash reserves; limit the aggregate amount we may borrow on a secured and unsecured basis; require us to satisfy restrictive financial covenants; prevent us from entering into certain business transactions, such as a merger, sale of assets or other business combination; restrict our leasing operations; or require us to obtain consent from the lender to complete transactions or make investments that are ordinarily approved only by our board of directors. In addition, secured lenders typically restrict our ability to discontinue insurance coverage on a mortgaged property even though we may believe that the insurance premiums paid to insure against certain losses, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, are greater than the potential risk of loss.

 

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Interest-only indebtedness may increase our risk of default.

We have obtained, and continue to incur interest related to, interest-only mortgage indebtedness. During the interest only period, the amount of each scheduled payment is less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan is not reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we are required either to make scheduled payments of amortized principal and interest or to make a lump-sum or “balloon” payment at maturity. These required principal or balloon payments increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan and reduce the funds available for distribution to our stockholders.

Increases in interest rates could increase the amount of our debt payments.

As of December 31, 2011, approximately $1.5 billion of our indebtedness bore interest at variable rates. Increases in interest rates in variable rate debt that has not otherwise been hedged through the use of swap agreements reduce the funds available for other needs, including distribution to our stockholders. As fixed rate debt matures, we may not be able to secure low fixed rate financing. In addition, if rising interest rates cause us to need additional capital to repay indebtedness, we may be forced to sell one or more of our properties or investments in real estate at times which may not permit us to realize the return on the investments we would have otherwise realized.

To hedge against interest rate fluctuations, we use derivative financial instruments, which may be costly and ineffective.

From time to time, we use derivative financial instruments to hedge exposures to changes in interest rates on certain loans secured by our assets. Our derivative instruments currently consist of interest rate swap contracts but may, in the future, include, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions are determined in light of the facts and circumstances existing at the time of the hedge. There is no assurance that our hedging strategy will achieve our objectives. We may be subject to costs, such as transaction fees or breakage costs, if we terminate these arrangements.

To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we are exposed to credit risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. A counterparty could fail, shut down, file for bankruptcy or be unable to pay out contracts. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract to cover our risk. We cannot provide assurance that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

Further, the REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. We may be unable to manage these risks effectively.

 

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We may be contractually obligated to purchase property even if we are unable to secure financing for the acquisition.

We typically finance a portion of the purchase price for each property that we acquire. However, to ensure that our offers are as competitive as possible, we generally do not enter into contracts to purchase property that include financing contingencies. Thus, we may be contractually obligated to purchase a property even if we are unable to secure financing for the acquisition. In this event, we may choose to close on the property by using cash on hand, which would result in less cash available for our operations and distributions to stockholders. Alternatively, we may choose not to close on the acquisition of the property and default on the purchase contract. If we default on any purchase contract, we could lose our earnest money and become subject to liquidated or other contractual damages and remedies.

Risks Related to Our Common Stock

There is no public market for our shares, and you may not be able to sell your shares, including through our share repurchase program.

There is no public market for our shares and no assurance that one may develop. Our charter does not require our directors to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require our directors to list our shares for trading by a specified date. Further, our amended and restated share repurchase program permits us to repurchase shares only from a beneficiary of a stockholder that has died or from stockholders that have a qualifying disability or that are confined to a long-term care facility.

There is no assurance that we will be able to continue paying cash distributions or that distributions will increase over time.

We intend to continue paying regular monthly cash distributions to our stockholders. However, there are many factors that can affect the availability and timing of cash distributions to stockholders such as our ability to earn positive yields on our real estate assets, the yields on securities of other entities in which we invest, our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. There is no assurance that we will be able to continue paying distributions at the current level or that the amount of distributions will increase, or not decrease, over time. Even if we are able to continue paying distributions, the actual amount and timing of distributions is determined by our board of directors in its discretion and typically depends on the amount of funds available for distribution, which depends on items such as current and projected cash requirements and tax considerations. As a result, our distribution rate and payment frequency may vary from time to time.

Funding distributions from sources other than cash flow from operating activities may negatively impact our ability to sustain or pay distributions and will result in us having less cash available for other uses.

If our cash flow from operating activities is not sufficient to fully fund the payment of distributions, the level of our distributions may not be sustainable and some or all of our distributions will be paid from other sources. For example, from time to time, our business manager has determined, in its sole discretion, to either forgo or defer a portion of the business management fee, which has had the effect of increasing cash flow from operations for the relevant period because we have not had to use that cash to pay any fee or reimbursement which was foregone or deferred during the relevant period. For the year ended December 31, 2011, we paid a business management fee of $40 million, or approximately 0.35% of our average invested assets on an annual basis, as well as an investment advisory fee of approximately $1.6 million, together which are less than the full 1% fee that the business manager could be paid. However, there is no assurance that our business manager will forgo or defer any portion of its business management fee in the future. Further, we would need to use cash at some point in the future to pay any fee or reimbursement that is deferred. We also may use cash from financing activities, components of which may include borrowings (including borrowings secured by our assets), as well as proceeds from the sales of our properties, to fund distributions. To the extent distributions are paid from financing activities, we will have less money available for other uses, such as cash needed to refinance existing indebtedness.

 

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Risks Related to Conflicts of Interest

There are conflicts of interest between us and affiliates of our sponsor that may affect our acquisition of properties and financial performance.

During the ten years ended December 31, 2011, our sponsor and Inland Private Capital Corporation (“IPCC”) had sponsored, in the aggregate, three other REITs and 107 real estate exchange private placement limited partnerships and limited liability companies. Two of the REITs, Inland Diversified Real Estate Trust, Inc. and Inland Monthly Income Trust, Inc., are, or in the case of Inland Monthly Income Trust will be, managed by affiliates of our business manager. Two other REITs, Inland Real Estate Corporation and Inland Western Retail Real Estate Trust, Inc., are self-managed, but our sponsor and its affiliates continue to hold a significant investment in these entities. We may be seeking to buy real estate assets at the same time as certain of these other programs. Further, certain programs sponsored by our sponsor or IPCC own and manage the type of properties that we own, and in the same geographical areas in which we own them. Therefore, our properties may compete for tenants with other properties owned and managed by these other programs. Persons performing services for our property managers may face conflicts of interest when evaluating tenant leasing opportunities for our properties and other properties owned and managed by these programs, and these conflicts of interest may have an adverse impact on our ability to attract and retain tenants.

Our sponsor may face a conflict of interest in allocating personnel and resources between its affiliates, our business manager and our property managers.

We rely, to a great extent, on persons performing services for our business manager and property managers and their affiliates to manage our day-to-day operations. Some of these persons also provide services to one or more investment programs previously sponsored by our sponsor. These individuals face competing demands for their time and service and may have conflicts in allocating their time between our business and assets and the business and assets of our sponsor, its affiliates and the other programs formed and organized by our sponsor. In addition, if another investment program sponsored by our sponsor decides to internalize its management functions in the future, it may do so by hiring and retaining certain of the persons currently performing services for our business manager and property managers, and if it did so, would likely not allow these persons to perform services for us.

We do not have arm’s-length agreements with our business manager, our property managers or any other affiliates of our sponsor.

None of the agreements and arrangements with our business manager, our property managers or any other affiliates of our sponsor was negotiated at arm’s-length. These agreements may contain terms and conditions that are not in our best interest and would not otherwise be applicable if we entered into arm’s length agreements with third parties.

Our business manager and its affiliates face conflicts of interest caused by their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders.

We pay significant fees to our business manager, property managers and other affiliates of our sponsor for services provided to us. Most significantly, our business manager receives fees based on the aggregate book value, including acquired intangibles, of our invested assets. Further, our property managers receive fees based on the gross income from properties under management. Other parties related to, or affiliated with, our business manager or property managers may also receive fees or cost reimbursements from us. These compensation arrangements may cause these entities to take or not take certain actions. For example, these arrangements may provide an incentive for our Business Manager to borrow more money than prudent to increase the amount we can invest. Ultimately, the interests of these parties in receiving fees may conflict with the interest of our stockholders in earning income on their investment in our common stock.

 

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We rely on entities affiliated with our sponsor to identify real estate assets.

We rely on Inland Real Estate Acquisitions, Inc. (“IREA”) and other affiliates of our sponsor to identify suitable investment opportunities for us. Other public or private programs sponsored by our sponsor or IPCC also rely on these entities to identify potential investments. These entities have, in some cases, rights of first refusal or other pre-emptive rights to the properties that IREA identifies. Our right to acquire properties identified by IREA is subject to the exercise of any prior rights vested in these entities. We may not, therefore, be presented with opportunities to acquire properties that we otherwise would be interested in acquiring.

Risks Related to Our Organization and Structure

Stockholders have limited control over changes in our policies and operations.

Our board of directors determines our major policies, including those regarding investment policies and strategies, financing, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise certain of these and other policies without a vote of the stockholders.

Stockholders’ interest in us will be diluted if we issue additional shares.

Stockholders do not have preemptive rights to any shares issued by us in the future. Our articles authorize us to issue up to 1.5 billion shares of capital stock, of which 1.46 billion shares are designated as common stock and 40 million are designated as preferred stock. Future issuances of common stock, including issuances through our distribution reinvestment plan (“DRP”), will reduce the percentage of our shares owned by our current stockholders who do not participate in future stock issuances. Stockholders generally will not be entitled to vote on whether or not we issue additional shares. In addition, depending on the terms and pricing of an additional offering of our shares and the value of our properties, our stockholders may experience dilution in both the book value and fair value of their shares. Further, our board could authorize the issuance of stock with terms and conditions that could subordinate the rights of the holders of our current common stock or have the effect of delaying, deferring or preventing a change in control in us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for our stockholders.

Stockholders’ returns may be reduced if we are required to register as an investment company under the Investment Company Act.

We are not registered, and do not intend to register our company or any of our subsidiaries, as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”). If we become obligated to register our company or any of our subsidiaries as an investment company, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:

 

   

limitations on capital structure;

 

   

restrictions on specified investments;

 

   

prohibitions on transactions with affiliates; and

 

   

compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.

We intend to continue conducting our operations, directly and through wholly or majority-owned subsidiaries, so that we and each of our subsidiaries continue to be exempt from registration as an investment company under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is not deemed to be an “investment company” if it neither is, nor holds itself out as being, engaged primarily, nor proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of

 

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the Investment Company Act, a company is not deemed to be an “investment company” if it neither is engaged, nor proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and does not own or propose to acquire “investment securities” having a value exceeding 40% of the value of its total assets on an unconsolidated basis, which we refer to as the “40% test.”

We believe that we and most, if not all, of our wholly and majority-owned subsidiaries are not considered investment companies under either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. In the event that the company or any of its wholly or majority-owned subsidiaries would ever inadvertently fall within one of the definitions of “investment company,” we intend to rely on the exception provided by Section 3(c)(5)(C) of the Investment Company Act.

Under Section 3(c)(5)(C), the SEC staff generally requires us to maintain at least 55% of our assets directly in qualifying assets to qualify for this exception. Mortgage-backed securities may or may not constitute qualifying assets, depending on the characteristics of the mortgage-backed securities, including the rights that we have with respect to the underlying loans. Our ownership of mortgage-backed securities, therefore, is limited by provisions of the Investment Company Act and SEC staff interpretations.

The method we use to classify our assets for purposes of the Investment Company Act is based in large measure upon no-action positions taken by the SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than ten years ago. No assurance can be given that the SEC staff will concur with our classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of qualifying for exemption from regulation under the Investment Company Act. If we are required to re-classify our assets, we may no longer be in compliance with the exclusion from the definition of an “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act.

A change in the value of any of our assets could cause us to fall within the definition of “investment company” and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To avoid being required to register our company or any of our subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy.

If we were required to register the company as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.

Maryland law and our organizational documents limit a stockholder’s right to bring claims against our officers and directors.

Subject to the limitations set forth in our articles, a director will not have any liability for monetary damages under Maryland law so long as he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interest, and with the care that an ordinary prudent person in a like position would use under similar circumstances. In addition, our articles, in the case of our directors, officers, employees and agents, and the business management agreement and the property management agreements, in the case of our business manager and property managers, respectively, require us to indemnify these persons for actions taken by them in good faith and without negligence or misconduct, or, in the case of our independent directors, actions taken in good faith without gross negligence or willful misconduct. As a result, we and our stockholders may

 

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have more limited rights against these persons than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by these persons in some cases.

Our board of directors may, in the future, adopt certain measures under Maryland law without stockholder approval that may have the effect of making it less likely that stockholders would receive a “control premium” for their shares.

Corporations organized under Maryland law are permitted to protect themselves from unsolicited proposals or offers to acquire the company. Although we are not subject to these provisions, our stockholders could approve an amendment to our articles eliminating this restriction. If we do become subject to these provisions, our board of directors would have the power under Maryland law to, among other things, amend our articles without stockholder approval to:

 

   

stagger our board of directors into three classes;

 

   

require a two-thirds vote of stockholders to remove directors;

 

   

empower only remaining directors to fill any vacancies on the board;

 

   

provide that only the board can fix the size of the board;

 

   

provide that all vacancies on the board, regardless of how the vacancy was created, may be filled only by the affirmative vote of a majority of the remaining directors in office; and

 

   

require that special stockholders meetings be called only by holders of a majority of the voting shares entitled to be cast at the meeting.

These provisions may discourage an extraordinary transaction, such as a merger, tender offer or sale of all or substantially all of our assets, all of which might provide a premium price for a stockholder’s shares.

Further, under the Maryland Business Combination Act, we may not engage in any merger or other business combination with an “interested stockholder” or any affiliate of that interested stockholder for a period of five years after the most recent purchase of stock by the interested stockholder. After the five-year period ends, any merger or other business combination with the interested stockholder must be recommended by our board of directors and approved by the affirmative vote of at least:

 

   

80% of all votes entitled to be cast by holders of outstanding shares of our voting stock; and

 

   

two-thirds of all of the votes entitled to be cast by holders of outstanding shares of our voting stock other than those shares owned or held by the interested stockholder unless, among other things, our stockholders receive a minimum payment for their common stock equal to the highest price paid by the interested stockholder for its common stock.

Our articles exempt any business combination involving us and The Inland Group or any affiliate of The Inland Group, including our business manager and property managers, from the provisions of this law.

Our articles place limits on the amount of common stock that any person may own without the prior approval of our board of directors.

To qualify as a REIT, no more than 50% of the outstanding shares of our common stock may be beneficially owned, directly or indirectly, by five or fewer individuals at any time during the last half of each taxable year. Our articles prohibit any persons or groups from owning more than 9.8% of our common stock without the prior approval of our board of directors. These provisions may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets that might involve a premium price for holders of our common stock. Further, any person or group attempting to purchase shares exceeding these limits could be compelled to sell the additional shares and, as a result, to forfeit the benefits of owning the additional shares.

 

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Our articles permit our board of directors to issue preferred stock on terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.

Our board of directors is permitted, subject to certain restrictions set forth in our articles, to issue up to forty million shares of preferred stock without stockholder approval. Further, subject to certain restrictions set forth in our articles, our board may classify or reclassify any unissued preferred stock and establish the preferences, conversions or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms or conditions of redemption of any preferred stock. Thus, our board of directors could authorize us to issue shares of preferred stock with terms and conditions that could subordinate the rights of the holders of our common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets, that might provide a premium price for holders of our common stock.

Maryland law limits, in some cases, the ability of a third party to vote shares acquired in a “control share acquisition.”

Under the Maryland Control Share Acquisition Act, persons or entities owning “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights with respect to those shares except to the extent approved by a vote of two-thirds of the corporation’s disinterested stockholders. Shares of stock owned by the acquirer or by officers or directors who are employees of the corporation, are not considered disinterested for these purposes. “Control shares” are shares of stock that, taken together with all other shares of stock the acquirer previously acquired, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:

 

   

one-tenth or more but less than one-third of all voting power;

 

   

one-third or more but less than a majority of all voting power; or

 

   

a majority or more of all voting power.

Control shares do not include shares of stock the acquiring person is entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of control shares, subject to certain exceptions. The Control Share Acquisition Act does not apply to (1) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (2) acquisitions approved or exempted by our articles or bylaws. Our articles exempt transactions between us and The Inland Group and its affiliates, including our business manager and property managers, from the limits imposed by the Control Share Acquisition Act. This statute could have the effect of discouraging offers from third parties to acquire us and increase the difficulty of successfully completing this type of offer by anyone other than The Inland Group and its affiliates.

Federal Income Tax Risks

If we fail to qualify as a REIT, we will have less cash to distribute to our stockholders.

Our qualification as a REIT depends on our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets as well as other tests imposed by the Internal Revenue Code of 1986, as amended (the “Code”). We cannot assure you that our actual operations for any one taxable year will satisfy these requirements. Further, new legislation, regulations, administrative interpretations or court decisions could significantly affect our ability to qualify as a REIT and/or the federal income tax consequences of our qualification as a REIT. If we were to fail to qualify as a REIT and did not qualify for certain statutory relief provisions:

 

   

we would not be allowed to deduct distributions paid to stockholders when computing our taxable income;

 

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we would be subject to federal, state and local income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;

 

   

we would be disqualified from being taxed as a REIT for the four taxable years following the year during which we failed to qualify, unless qualify for certain statutory relief provisions;

 

   

we would have less cash to pay distributions to stockholders; and

 

   

we may be required to borrow additional funds or sell some of our assets in order to pay the corporate tax obligations we may incur as a result of being disqualified.

In addition, if we were to fail to qualify as a REIT, we would not be required to pay distributions to stockholders, and all distributions to stockholders that we did pay would be subject to tax as regular corporate dividends to the extent of our current and accumulated earnings and profits. This means that, under current law, which is subject to change, our U.S. stockholders who are taxed at individual rates would be taxed on our dividends at long-term capital gains rates through 2012 and that our corporate stockholders generally would be entitled to the dividends received deduction with respect to such dividends, subject, in each case, to applicable limitations under the Code.

To maintain REIT status, we may be forced to borrow funds or dispose of assets during unfavorable market conditions to make distributions to our stockholders, which could increase our operating costs and decrease the value of an investment in our company.

To qualify as a REIT, we must distribute 90% of our REIT taxable income (which is determined without regard to the dividends-paid deduction or net capital gain) to our stockholders each year. At times, we may not have sufficient funds to satisfy these distribution requirements and may need to borrow funds or dispose of assets to make these distributions and maintain our REIT status and avoid the payment of income and excise taxes. Our inability to satisfy the distribution requirements with operating cash flow could result from (1) differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes; (2) the effect of non-deductible capital expenditures; (3) the creation of reserves; or (4) required debt amortization payments. We may need to borrow funds at times when market conditions are unfavorable. Further, if we are unable to borrow funds when needed for this purpose, we would have to fund alternative sources of funding or risk losing our status as a REIT.

Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.

Even if we qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets. For example:

 

   

We will be subject to tax on any undistributed income. We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year plus amounts retained for which federal income tax was paid are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.

 

   

If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.

 

   

If we sell a property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% “prohibited transactions” tax.

 

   

Our taxable REIT subsidiaries are subject to regular corporate federal, state and local taxes.

 

   

We will be subject to a 100% penalty tax on transactions with a taxable REIT subsidiary that are not conducted on an arm’s-length basis.

Any of these taxes would decrease cash available for distributions to our stockholders.

 

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The prohibited transactions tax may limit our ability to dispose of our properties.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transactions tax equal to 100% of net gain upon a disposition of a property. Although a safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction is available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through a taxable REIT subsidiary, which would be subject to federal, state and local income taxation.

We may fail to qualify as a REIT if the Internal Revenue Service (the “IRS”) successfully challenges the valuation of our common stock used for purposes of our DRP.

In order to satisfy the REIT distribution requirements, the dividends we pay must not be “preferential.” A dividend determined to be preferential will not qualify for the dividends paid deduction. To avoid paying preferential dividends, we must treat every stockholder of a class of stock with respect to which we make a distribution the same as every other stockholder of that class, and we must not treat any class of stock other than according to its dividend rights as a class. For example, if certain stockholders receive a distribution that is more or less than the distributions received by other stockholders of the same class, the distribution will be preferential. If any part of a distribution is preferential, none of that distribution will be applied towards satisfying our REIT distribution requirements.

Stockholders participating in our DRP receive distributions in the form of shares of our common stock rather than in cash. Currently, the purchase price per share under our DRP is equal to 100% of the “market price” of a share of our common stock. Because our common stock is not yet listed for trading, for these purposes, “market price” means the fair market value of a share of our common stock, as estimated by us. In the past, our DRP has offered participants the opportunity to acquire newly-issued shares of our common stock at a discount to the “market price.” Pursuant to an IRS ruling, the prohibition on preferential dividends does not prohibit a REIT from offering shares under a distribution reinvestment plan at discounts of up to 5% of fair market value, but a discount in excess of 5% of the fair market value of the shares would be considered a preferential dividend. Any discount we have offered in the past was intended to fall within the safe harbor for such discounts set forth in the ruling published by the IRS. However, the fair market value of our common stock has not been susceptible to a definitive determination. If the purchase price under our DRP is deemed to have been at more than a 5% discount at any time, we would be treated as having paid one or more preferential dividends. Similarly, we would be treated as having paid one or more preferential dividends if the IRS successfully asserted that the value of the common stock distributions paid to stockholders participating in our DRP exceeded on a per-share basis the cash distribution paid to our other stockholders, which could occur if the IRS successfully asserted that the fair market value of our common stock exceeded the “market value” used for purposes of calculating the distributions under our DRP. If we are determined to have paid preferential dividends as a result of our DRP, we would likely fail to qualify as a REIT.

Complying with the REIT requirements may force us to liquidate otherwise attractive investments.

To maintain qualification as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including shares of stock in other REITs, certain mortgage loans and mortgage-backed securities. The remainder of our investment in securities (other than governmental securities, qualified real estate assets and securities of taxable REIT subsidiaries) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, qualified real estate assets and securities of taxable REIT subsidiaries) can consist of the securities of any one issuer, and no more than 25% of

 

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the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within thirty days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments in order to maintain our REIT status.

If our leases are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.

To qualify as a REIT, we must satisfy two gross income tests, pursuant to which specified percentages of our gross income must be passive income such as rent. For the rent to we receive under our lease to be treated as qualifying income for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and must not be treated as service contracts, joint ventures or some other type of arrangement. There are no controlling Treasury regulations, published rulings or judicial decisions involving leases with terms substantially the same as our hotel leases that discuss whether such leases constitute true leases for federal income tax purposes. We believe that all of our leases, including our hotel leases, will be respected as true leases for federal income tax purposes. There can be no assurance, however, that the IRS will agree with this characterization. If a significant portion of our leases were not respected as true leases for federal income tax purposes, we would not be able to satisfy either of the two gross income tests and each would likely lose its REIT status.

If MB REIT failed to qualify as a REIT, we would like fail to qualify as a REIT.

We own 100% of the common stock of MB REIT, which owns a significant portion of our properties and has elected to be taxed as a REIT for federal income tax purposes. MB REIT is subject to the various REIT qualification requirements and other limitations that apply to us. We believe that MB REIT has operated and will continue to operate in a manner to permit it to qualify for taxation as a REIT for federal income tax purposes. However, if MB REIT were to fail to qualify as a REIT, then (1) MB REIT would become subject to regular corporation income tax and (2) our ownership of shares MB REIT would cease to be a qualifying real estate asset for purposes of the 75% asset test applicable to REITs and would become subject to the 5% asset test, the 10% vote test, and the 10% value test generally applicable to our ownership in corporations other than REITs, qualified REIT subsidiaries and taxable REIT subsidiaries. If MB REIT were to fail to qualify as a REIT, we would not satisfy the 5% asset test, the 10% value test, or the 10% vote test, in which event we would fail to qualify as a REIT unless we qualified for certain statutory relief provisions.

If our hotel managers do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT.

Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. We lease our hotels to our certain of our taxable REIT subsidiaries. A taxable REIT subsidiary will not be treated as a “related party tenant,” and will not be treated as directly operating a lodging facility, which is prohibited, to the extent that hotels that our taxable REIT subsidiaries lease are managed by an “eligible independent contractor.”

We believe that the rent paid by our taxable REIT subsidiaries that lease our hotels is qualifying income for purposes of the REIT gross income tests and that our taxable REIT subsidiaries qualify to be treated as “taxable REIT subsidiaries” for federal income tax purposes, but there can be no assurance that the IRS will not challenge this treatment or that a court would not sustain such a challenge. If the IRS successfully challenged this treatment, we would likely fail to satisfy the asset tests applicable to REITs and a significant portion of our income would fail to qualify for the gross income tests. If we failed to satisfy either the asset or gross income tests, we would likely lose our REIT qualification for federal income tax purposes, unless we qualified for certain statutory relief provisions.

 

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If our hotel managers do not qualify as “eligible independent contractors,” we may fail to qualify as a REIT. Each of the hotel management companies that enters into a management contract with our taxable REIT subsidiaries that lease our hotels must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by taxable REIT subsidiaries to be qualifying income for gross income tests. Among other requirements, in order to qualify as an eligible independent contractor, (1) a manager must be actively engaged in the trade or business of operating hotels for third parties at the time the manger enters into a management contract with a taxable REIT subsidiary lessee and (2) the manager must not own more than 35% of our outstanding shares (by value) and no person or group of persons can own more than 35% of our outstanding shares and the ownership interests of the manager. Although we believe that all of our hotel managers qualify as eligible independent contractors, no complete assurance can be provided that the IRS will not successfully challenge that position.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. Under current law, any income that we generate from derivatives or other transactions intended to hedge our interest rate risk with respect to borrowings made to acquire or carry real estate assets generally will not constitute gross income for purposes of the two gross income tests applicable to REITs, so long as we clearly identify any such transactions as hedges for tax purposes before the close of the day on which they are acquired or entered into and we satisfy other identification requirements. In addition, any income from other hedging transactions would generally not constitute gross income for purposes of both the gross income tests. Accordingly, we may have to limit the use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.

Legislative or regulatory action could adversely affect you.

Changes to the tax laws are likely to occur, and these changes may adversely affect the taxation of our stockholders. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. You are urged to consult with your own tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.

The maximum tax rate on qualified dividends paid by corporations to stockholders taxed at individual rates is 15% through 2012. REIT dividends, however, generally do not constitute qualified dividends and consequently are not eligible for favorable capital gains tax rates. Therefore, our stockholders will pay federal income tax on our dividends (other than capital gains dividends, dividends designated as qualified dividends (generally, qualified dividend income received by us from a taxable REIT subsidiary or other corporate investment or previously taxable to us in a prior year as undistributed income) or distributions which represent a return of capital or in excess of tax basis for tax purposes) at the applicable “ordinary income” rate, the maximum of which is 35% through 2012. However, as a REIT, we generally would not be subject to federal or state corporate income taxes on that portion of our ordinary income or capital gain that we distribute currently to our stockholders, and we thus expect to avoid the “double taxation” to which other corporations are typically subject.

Future legislation might result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed, for federal income tax purposes, as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.

 

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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We own interests in retail, office, industrial, multi-family and lodging properties. As of December 31, 2011, we, directly or indirectly, including through joint ventures in which we have a controlling interest, owned an interest in 869 properties, excluding our lodging and development properties, located in 35 states and the District of Columbia. In addition, we, through our wholly-owned subsidiaries, Inland American Winston Hotels, Inc., Inland American Orchard Hotels, Inc., Inland American Urban Hotels, Inc., and Inland American Lodging Corporation, own 95 lodging properties in 26 states and the District of Columbia. (Dollar amounts stated in thousands, except for revenue per available room, average daily rate and average rent per square foot).

General

The following table sets forth information regarding the 10 individual tenants in descending order based on base rent paid in 2011 but excluding our lodging, multi-family, and development properties. (Dollar amounts stated in thousands.)

 

Tenant Name

  

Type

   2011
Base
Rental
Income ($)
     % of Total
Portfolio
Income
    Square
Footage
     % of Total
Portfolio
Square
Footage
 

SunTrust Bank

   Retail/Office      55,408         8.60     2,269,901         4.30

AT&T, Inc.

   Office      44,310         6.88     3,407,651         6.46

Citizens Banks

   Retail      19,996         3.11     986,378         1.87

Sanofi-Aventis

   Office      16,408         2.55     736,572         1.40

United Healthcare Services

   Office      16,238         2.52     1,210,670         2.29

C&S Wholesalers

   Industrial/Distribution      15,119         2.35     3,031,295         5.75

Atlas Cold Storage

   Industrial/Distribution      13,201         2.05     1,896,815         3.60

Stop N Shop

   Retail      10,228         1.59     601,652         1.14

Cornell Corrections

   Industrial/Distribution      10,024         1.56     301,029         0.57

Lockheed Martin Corporation

   Office      8,589         1.33     342,516         0.65

The following sections set forth certain summary information about the character of the properties that we owned at December 31, 2011. Certain of the Company’s properties are encumbered by mortgages, totaling $5,770,595, and additional detail about the mortgages can be found on Schedule III – Real Estate and Accumulated Depreciation.

Retail Segment

As of December 31, 2011, our retail segment consisted of 726 properties. Our retail segment is centered on multi-tenant properties with an average of approximately 140,000 square feet of total space, located in stable communities, primarily in the southwest and southeast regions of the country. Our retail tenants are largely necessity-based retailers such as grocery and pharmacy, as well as moderate-fashion shoes and clothing retailers, and services such as banking. We own the following types of retail centers:

 

   

The majority of our single tenant retail properties are bank branches operated by SunTrust Bank or Citizens Bank. The bank branches typically offer a wide range of face-to-face or automated banking services to their customers and are often located on corners or out parcels. Typically, these tenants pay rents with contractual increases over time and bear virtually all expenses associated with operating the facility.

 

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Community or neighborhood centers are generally open air and designed for tenants that offer a larger array of apparel and other soft goods. Typically, these centers contain anchor stores and other national retail tenants. Our neighborhood shopping centers are generally in-line strip centers with a grocery store anchor, a drugstore, and other small retailers. Tenants of these centers typically offer necessity-based products.

 

   

Power centers consist of several anchors, such as department stores, off-price stores, warehouse clubs or stores that offer a large selection of merchandise. Typically, the number of specialty tenants is limited.

We have not experienced bankruptcies or receivable write-offs in our retail portfolio that have materially impacted our result of operations in the economy or retail environment. Our retail business is not highly dependent on specific retailers or specific retail industries, which we believe shields the portfolio from significant revenue variances over time.

The following table reflects the types of properties within our retail segment as of December 31, 2011.

 

Retail Properties

  Number of
Properties
    Total Gross
Leasable
Area (Sq.Ft.)
    % of
Economic
Occupancy
as of
December 31,
2011
    Total # of
Financially
Active Leases
as of
December 31,
2011
    Sum of
Annualized
Rent ($)
    Average
of Rent
PSF ($)
 

Single Tenant

    593        3,752,717        100     593        84,461        22.55   

Community & Neighborhood Center

    83        8,602,538        93     1,237        108,755        13.61   

Power Center

    50        10,290,116        93     1,022        125,490        13.11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    726        22,645,371        94     2,852        318,706        14.96   

The following table represents lease expirations for the retail segment:

 

Lease Expiration Year

   Number of
Expiring Leases
     GLA of Expiring
Leases (Sq. Ft.)
     Annualized Base
Rent of Expiring
Leases ($)
     Percent of
Total GLA
    Percent of
Total
Annualized
Base Rent
    Expiring
Rent/Square
Foot
 

2012

     419         1,507,086         24,099         7.1     7.2     15.99   

2013

     342         1,412,621         22,574         6.6     6.7     15.98   

2014

     316         2,002,890         28,984         9.4     8.7     14.47   

2015

     335         2,352,018         29,497         11.0     8.8     12.54   

2016

     291         1,813,058         26,273         8.5     7.9     14.49   

Thereafter

     1,149         12,220,059         203,047         57.4     60.7     16.62   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     2,852         21,307,732         334,474         100.0     100.0     15.70   

We have staggered our lease expirations so that we can manage lease rollover. The average percentage of leases expiring over the next five years is less than 10%.

Lodging Segment

Lodging facilities have characteristics different from those found in office, retail, industrial, and multi-family properties. Revenue, operating expenses, and net income of lodging properties are directly tied to the daily hotel sales operation whereas these other asset classes generate revenue from medium to long-term lease contracts. In this way, net operating income for properties in our other asset classes is somewhat more predictable than lodging properties, though we believe that opportunities to increase revenue are, in many cases, limited because of the duration of the existing lease contracts. We believe lodging facilities have the benefit of capturing

 

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increased revenue opportunities on a daily or weekly basis but are also subject to immediate decreases in lodging revenue as a result of declines in daily rental rates and/or daily occupancy when demand is reduced. Due to seasonality, we expect our lodging revenues to be greater during the second and third quarters with lower revenues in the first and fourth quarters.

We follow two practices common for REITs that own lodging properties: 1) association with national franchise organizations and 2) management of the properties by third-party hotel managers. We have aligned our portfolio with what we believe are the top franchise enterprises in the lodging industry: Marriott, Hilton, Intercontinental, Hyatt, Wyndham, Choice, Fairmont and Starwood Hotels. Our lodging facilities and these franchise enterprises are generally classified in the “upscale” or “upper-upscale” lodging categories. By entering into franchise agreements with these organizations, we believe our lodging operations benefit from enhanced advertising, marketing, and sales programs through the franchisor (in this case, the organization) while the franchisee (in this case, us) pays only a fraction of the overall cost for these programs. We believe effective TV, radio, print, on-line, and other forms of advertisement are necessary to draw customers to our lodging facilities, thus, creating higher occupancy and rental rates, and increased revenue. Additionally, by using the franchise system we are also able to benefit from the frequent traveler rewards programs or “point awards” systems of the franchisor which we believe further bolsters occupancy and overall daily rental rates.

The following table reflects the types of properties within our lodging segment as of December 31, 2011.

 

Lodging Properties

   Number
of
Properties
     Number of
Rooms
     Average
Occupancy for
the Year ended
December 31,
2011
    Average Revenue Per
Available Room for
the Year ended
December 31, 2011 ($)
     Average Daily
Rate for the
Year 2011 ($)
 

Marriot

     49         7,821         71     87         122   

Hilton

     38         5,661         73     87         120   

Other

     8         2,115         70     84         120   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     95         15,597         71     86         121   

Office Segment

Our investments in office properties largely represent assets leased to and occupied by either a diverse group of tenants or to a single tenant that fully occupy the leased space. Examples of our multi-tenant properties include the IDS Center located in the central business district of Minneapolis, Minnesota and Dulles Executive Plaza and Worldgate Plaza, both located in metropolitan Washington D.C., with space leased to high-technology companies and federal government contractors. Examples of our single tenant properties include three buildings leased and occupied by AT&T and located in three distinct US office markets—Chicago, Illinois, St. Louis, Missouri, and Cleveland, Ohio. In addition, our single tenant office portfolio includes bank offices leased on a net basis to SunTrust, with locations in the east and southeast regions of the country.

The following table reflects the types of properties within our office segment as of December 31, 2011.

 

Office Properties

   Number
of
Properties
     Total Gross
Leasable Area
(Sq. Ft.)
     % of Economic
Occupancy as of
December 31,
2011
    Total # of
Financially
Active Leases as
of December 31,
2011
     Sum of
Annualized
Rent ($)
     Average
of Rent
PSF ($)
 

Single-Tenant

     32         7,431,526         95     31         95,583         13.59   

Multi-Tenant

     11         2,813,287         85     239         47,508         19.77   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     43         10,244,813         92     270         143,091         15.17   

 

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The following table represents lease expirations for the office segment:

 

Lease Expiration Year

   Number of
Expiring Leases
     GLA of Expiring
Leases (Sq. Ft.)
     Annualized Base
Rent of Expiring
Leases ($)
     Percent of
Total GLA
    Percent of
Total
Annualized
Base Rent
    Expiring
Rent/Square
Foot
 

2012

     32         386,410         7,325         4.1     4.6     18.96   

2013

     30         651,173         12,251         6.9     7.8     18.81   

2014

     52         246,368         4,266         2.6     2.7     17.31   

2015

     43         393,614         7,753         4.2     4.9     19.70   

2016

     38         2,546,212         41,409         27.0     26.3     16.26   

Thereafter

     75         5,210,487         84,701         55.2     53.7     16.26   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     270         9,434,264         157,705         100.0     100.0     16.72   

The percentage of leases expiring each year for the next four years is low. During the fifth year, 67% of the lease expiration relates to one property, with approximately 1.7 million square feet, occupied by AT&T in Hoffman Estates, Illinois, which is in the greater metro Chicago market.

Industrial Segment

Our industrial segment is comprised of four types of properties: distribution centers, specialty distribution centers, charter schools, and correctional facilities. Our distribution centers are warehouses or other specialized buildings which stock products to be distributed to retailers, wholesalers or directly to consumers. Some properties are located in what we believe are active and sought-after industrial markets, such as the O’Hare airport market of Chicago, Illinois. The specialty distribution centers consist of refrigeration or air conditioned buildings which supply grocery stores in various locations across the country. The charter schools and correctional facilities consist of ten properties under long-term triple net leases.

The following table reflects the types of properties within our industrial segment as of December 31, 2011.

 

Industrial Properties

  Number
of
Properties
    Total Gross
Leasable Area
(Sq. Ft.)
    % of Economic
Occupancy as of
December 31,
2011
    Total # of
Financially
Active Leases as of
December 31,
2011
    Sum of
Annualized
Rent ($)
    Average
of Rent
PSF ($)
 

Distribution Center

    53        13,658,572        91     64        55,168        4.45   

Specialty Distribution Center

    11        1,896,815        100     11        13,201        6.96   

Charter Schools

    8        364,718        100     8        7,232        19.83   

Correctional Facility

    2        457,345        100     2        12,194        26.66   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    74        16,377,450        92     85        87,795        5.81   

The following table represents lease expirations for the industrial segment:

 

Lease Expiration Year

   Number of
Expiring Leases
     GLA of Expiring
Leases (Sq. Ft.)
     Annualized Base
Rent of Expiring
Leases ($)
     Percent of
Total GLA
    Percent of Total
Annualized Base
Rent
    Expiring
Rent/Square
Foot
 

2012

     17         783,973         2,287         5.2     2.3     2.92   

2013

     14         1,457,625         8,337         9.7     8.5     5.72   

2014

     3         453,528         2,517         3.0     2.6     5.55   

2015

     7         1,124,703         4,520         7.4     4.6     4.02   

2016

     5         1,420,677         5,137         9.4     5.2     3.62   

Thereafter

     39         9,862,827         75,354         65.3     76.8     7.64   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     85         15,103,333         98,152         100.0     100.00     6.50   

The percentage of leases expiring each year for the next five years is less than 10%. We believe this is a manageable percentage of lease rollover.

 

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Multi-Family Segment

Our multi-family portfolio consists of conventional apartments and student housing. Our conventional apartment properties are upscale with resident amenities such as business centers, fitness centers, swimming pools, landscaped grounds and clubhouse facilities. The apartment buildings are typically three-story walk-up buildings offering one, two and three bedroom apartments and are leased on per unit basis. Our student-housing portfolio consists of residential and mixed-use communities close to university campuses and in urban infill locations. Student-housing facilities are leased on a per bed basis rather than per unit. These five student housing properties were constructed between mid-2007 and 2010.

The following table reflects the types of properties within our multi-family segment as of December 31, 2011.

 

Multi-family Properties

   Number
of
Properties
     Total Gross
Leasable  Area

(Sq. Ft.)
     % of Economic
Occupancy as of
December 31,
2011
    Total #
of Units/
Beds
Occupied
     Rent
per
Unit/
Bed ($)
 

Conventional

     21         6,489,579         92.32     6,382         965.35   

Student-Housing

     5         936,766         92.79     2,458         661.50   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     26         7,426,345         92.45     8,840         880.86   

Item 3. Legal Proceedings

None.

Item 4. Mine Safety Disclosures

Not applicable.

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

There is no public trading market for the common stock. We announced an estimated value per share of our common stock equal to $7.22 as of December 29, 2011. We intend on estimating our value per share on an annual basis.

We published an estimated per share value of our common stock to assist broker-dealers that sold our common stock in our initial and follow-on “best efforts” offerings to comply with the rules published by the Financial Industry Regulatory Authority (“FINRA”) and to assist fiduciaries of retirement plans subject to annual reporting requirements of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), whose clients purchased our common stock. Specifically, FINRA requires registered broker-dealers to disclose in a customer’s account statement an estimated value for a REIT’s securities if the annual report of that REIT discloses a per share estimated value. The FINRA rules presently prohibit broker-dealers from using a per share estimated value developed from data that is more than eighteen months old.

The FINRA rules provide no guidance regarding the methodology a REIT must use to determine its estimated value per share. As with any valuation methodology, the methodology employed by our business manager was based upon a number of estimates and assumptions that may not be reflective of actual results. Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our estimated value per share. The estimated per share value published by us represents neither the fair value according to U.S. generally accepted accounting principles (or “GAAP”) of our assets less liabilities, nor the amount our shares would trade at on a national securities exchange or the amount a stockholder would obtain if he or she tried to sell his or her shares or if we liquidated our assets and distributed the proceeds after paying all of our expenses and liabilities.

Share Repurchase Program

Our board of directors adopted a share repurchase program, which became effective August 31, 2005 and was suspended as of March 30, 2009. Our board later adopted an Amended and Restated Share Repurchase Program, which was effective from April 11, 2011 through January 31, 2012 (the “First Amended Program”). Our board subsequently adopted a Second Amended and Restated Share Repurchase Program, which became effective as of February 1, 2012 (the “Second Amended Program”).

Under the First Amended Program, we were permitted to repurchase shares of our common stock, on a quarterly basis, upon the death of the beneficial owners of our shares. We were authorized to repurchase shares at a price per share equal to 90% of the most recently disclosed estimated per share value of our common stock, which, on each of the relevant repurchase dates, was equal to $7.23 per share. Our obligation to repurchase any shares under the First Amended Program was conditioned upon our having sufficient funds available to complete the repurchase. Our board had reserved $5.0 million per calendar quarter for this purpose. In addition, notwithstanding anything to the contrary, at no time during any consecutive twelve month period could the aggregate number of shares repurchased under the First Amended Program exceed 5.0% of the aggregate number of issued and outstanding shares of our common stock at the beginning of the twelve month period. If our funds were insufficient to repurchase all of the shares for which repurchase requests have been submitted in a particular quarter, or if the number of shares accepted for repurchase would cause us to exceed the 5.0% limit, we would repurchase the shares in chronological order, based upon the beneficial owner’s date of death.

Under the Second Amended Program, we may repurchase shares of our common stock, on a quarterly basis, from the beneficiary of a stockholder that has died or from stockholders that have a “qualifying disability” or are confined to a “long-term care facility” (together, referred to herein as “hardship repurchases”). We are authorized

 

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to repurchase shares at a price per share equal to 100% of the most recently disclosed estimated per share value of our common stock, which currently is equal to $7.22 per share. Our obligation to repurchase any shares under the Second Amended Program is conditioned upon our having sufficient funds available to complete the repurchase. Our board has initially reserved $10.0 million per calendar quarter for the purpose of funding repurchases associated with death and $15.0 million per calendar quarter for the purpose of funding hardship repurchases. In addition, notwithstanding anything to the contrary, at no time during any consecutive twelve month period may the aggregate number of shares repurchased under the Second Amended Program exceed 5.0% of the aggregate number of issued and outstanding shares of our common stock at the beginning of the twelve month period. For any calendar quarter, if the number of shares accepted for repurchase would cause us to exceed the 5.0% limit, repurchases for death will take priority over any hardship repurchases, in each case in accordance with the procedures, and subject to the funding limits, described in the Second Amended Program and summarized herein.

If, on the other hand, the funds reserved for either category of repurchase under the Second Amended Program are insufficient to repurchase all of the shares for which repurchase requests have been received for a particular quarter, or if the number of shares accepted for repurchase would cause us to exceed the 5.0% limit, we will repurchase the shares in the following order:

 

   

for death repurchases, we will repurchase shares in chronological order, based upon the beneficial owner’s date of death; and

 

   

for hardship repurchases, we will repurchase shares on a pro rata basis, up to, but not in excess of, the limits described herein; provided, that in the event that the repurchase would result in a stockholder owning less than 150 shares, we will repurchase all of that stockholder’s shares.

The Second Amended Program will immediately terminate if our shares are approved for listing on any national securities exchange. We may amend or modify any provision of the Second Amended Program, or reject any request for repurchase, at any time in our board’s sole discretion.

The table below outlines the shares of common stock we repurchased pursuant to the First Amended Program during the three months ended December 31, 2011:

 

Month

   Total
Number of
Shares
Redeemed
     Average
Price Paid
per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
     Maximum
Number of Shares
That May Yet be
Purchased Under the
Plans or Programs
 

October 2011

     0         N/A         0         (1

November 2011

     0         N/A         0         (1

December 2011

     691,563       $ 7.23         691,563         (1

 

(1) A description of the First Amended Program, including the date that the program was amended, the dollar amount approved, the expiration date and the maximum number of shares that may be purchased thereuder is included in the narrative preceding this table.

Stockholders

As of March 1, 2012, we had 187,276 stockholders of record.

Distributions

We have been paying monthly cash distributions since October 2005. During the years ended December 31, 2011 and 2010, we declared cash distributions, which are paid monthly in arrears to stockholders, totaling $429.6 million and $417.9 million, respectively, in each case equal to $.50 per share on an annualized basis. For Federal income tax purposes for the years ended December 31, 2011 and 2010, 62% and 66% of the distributions paid constituted a return of capital in the applicable year.

 

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We intend to continue paying regular monthly cash distributions to our stockholders. However, there are many factors that can affect the amount and timing of cash distributions to stockholders. There is no assurance that we will be able to continue paying distributions at the current level or that the amount of distributions will increase, or not decrease further, over time. Even if we are able to continue paying distributions, the actual amount and timing of distributions is determined by our board of directors in its discretion and typically depends on the amount of funds available for distribution, which depends on items such as current and projected cash requirements and tax considerations. As a result, our distribution rate and payment frequency may vary from time to time.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information regarding our equity compensation plans as of December 31, 2011.

Equity Compensation Plan Information

 

Plan category

   Number of securities to
be issued upon
exercise of outstanding
options,

warrants and rights (a)
     Weighted-average
exercise price of
outstanding options,

warrants
and rights (b)
     Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
shares reflected in

column (a)) (c)
 

Equity compensation plans approved by security holders:

        

Independent Director Stock Option Plan

     32,000       $ 9.05         43,000   
  

 

 

    

 

 

    

 

 

 

Equity compensation plans not approved by security holders

     0       $ 0         0   
  

 

 

    

 

 

    

 

 

 

Total:

     32,000       $ 9.05         43,000   
  

 

 

    

 

 

    

 

 

 

We have adopted an Independent Director Stock Option Plan, as amended, which, subject to certain conditions, provides for the grant to each independent director of an option to purchase 3,000 shares following their becoming a director and for the grant of additional options to purchase 500 shares on the date of each annual stockholder’s meeting. The options for the initial 3,000 shares are exercisable as follows: 1,000 shares on the date of grant and 1,000 shares on each of the first and second anniversaries of the date of grant. All other options are exercisable on the second anniversary of the date of grant. The exercise price for all options is equal to the fair value of our shares, as defined in the plan, on the date of each grant.

 

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Recent Sales of Unregistered Securities

None.

Item 6. Selected Financial Data

The following table shows our consolidated selected financial data relating to our consolidated historical financial condition and results of operations. Such selected data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes appearing elsewhere in this report (dollar amounts are stated in thousands, except per share amounts).

 

    As of and for the year ended December 31,  
    2011     2010     2009     2008     2007  

Balance Sheet Data:

         

Total assets

  $ 10,919,190       11,391,502       11,328,211       11,136,866       8,114,714  

Mortgages, notes and margins payable

  $ 5,902,712       5,532,057       5,085,899       4,437,997       3,028,647  

Operating Data:

         

Total income

  $ 1,323,151       1,186,894       1,058,574       965,274       458,905  

Total interest and dividend income

  $ 22,869       33,068       55,161       77,997       84,201  

Net income (loss) attributable to Company

  $ (316,253     (176,431     (397,960     (365,178     55,922  

Net income (loss) per common share, basic and diluted

  $ (0.37     (0.21     (0.49     (0.54     0.14  

Common Stock Distributions:

         

Distributions declared to common stockholders

  $ 429,599       417,885       405,337       418,694       242,606  

Distributions per weighted average common share

  $ 0.50       0.50       0.51       0.62       0.61  

Funds from Operations:

         

Funds from operations (a)

  $ 443,460       321,828       142,601       140,064        244,299  

Cash Flow Data:

         

Cash flows provided by operating activities

  $ 397,949       356,660       369,031       384,365       263,420  

Cash flows used in investing activities

  $ (286,896     (380,685     (563,163     (2,484,825     (4,873,404

Cash flows provided by (used in) financing activities

  $ (160,597     (208,759     (250,602     2,636,325       4,716,852  

Other Information:

         

Weighted average number of common shares outstanding, basic and diluted

    858,637,707       835,131,057       811,400,035       675,320,438       396,752,280  

 

(a) Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts or NAREIT, an industry trade group, has promulgated a standard known as “Funds from Operations, or “FFO”, which it believes reflects the operating performance of a REIT. As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization and impairment charges on real property and after adjustments for unconsolidated partnerships and joint ventures in which we hold an interest. In calculating FFO, impairment charges of depreciable real estate assets are added back even though the impairment charge may represent a permanent decline in value due to decreased operating performance of the applicable property. Further, because gains and losses from sales of property are excluded from FFO, it is consistent and appropriate that impairments, which are often early recognition of losses on prospective sales of property, also be excluded. If evidence exists that a loss reflected in the investment of an unconsolidated entity is due to the write-down of depreciable real estate assets, these impairment charges are added back to FFO. The methodology is consistent with the concept of excluding impairment charges of depreciable assets or early recognition of losses on sale of depreciable real estate assets held by the Company.

In 2011, NAREIT clarified the FFO definition to exclude impairment charges of depreciable real estate assets as well as the gains and or losses related to unconsolidated entities to the extent they are due to the depreciable real estate assets. Consequently, we have restated prior years’ FFO to reflect these changes.

 

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FFO is neither intended to be an alternative to “net income” nor to “cash flows from operating activities” as determined by GAAP as a measure of our capacity to pay distributions. We believe that FFO is a better measure of our properties’ operating performance because FFO excludes non-cash items from GAAP net income. FFO is calculated as follows (in thousands):

 

          Year ended December 31,  
          2011     2010     2009  
   Net loss attributable to Company    $ (316,253     (176,431     (397,960

Add:

   Depreciation and amortization related to investment properties      439,077       443,100       394,995  
   Depreciation and amortization related to investment in unconsolidated entities      63,645        43,845       41,300  
   Provision for asset impairment      105,795       3,180       1,117  
   Provision for asset impairment included in discontinued operations      57,846       44,349       32,934  
   Impairment of investment in unconsolidated entities      113,621       11,239       7,443  
   Impairment reflected in equity in earnings of unconsolidated entities      16,739       10,710       75,787  

Less:

   Gains from property sales and transfer of assets      16,510       55,412       0  
  

Gains from property sales reflected in equity in earnings of unconsolidated entities

     11,141        242       10,500  
  

Gains from sale of unconsolidated entities

     7,545       0       0  
  

Noncontrolling interest share of depreciation and amortization related to investment properties

     1,814       2,510       2,515  
     

 

 

   

 

 

   

 

 

 
   Funds from operations    $ 443,460       321,828       142,601  
     

 

 

   

 

 

   

 

 

 

Below is additional information related to certain items that significantly impact the comparability of our Funds from Operations and Net Loss or significant non-cash items from the periods presented (in thousands):

 

     Year ended December 31,  
     2011     2010     2009  

Gain on conversion of note receivable to equity interest

   $ (17,150     0       0  

Payment from note receivable previously impaired

   $ (2,422     0       0  

Provision for goodwill impairment

   $ 0       0       26,676  

Impairment of notes receivable

   $ 0       111,896       74,136  

Impairment on securities

   $ 24,356       1,856       4,038  

(Gain) loss on consolidated investment

   $ 0       (433     148,887  

Straight-line rental income

   $ (13,841     (17,705     (16,329

Amortization of above/below market leases

   $ (1,326     (433     (1,688

Amortization of mark to market debt discounts

   $ 7,973       6,203       1,695  

Gain on extinguishment of debt

   $ (10,848     (19,227     0  

Acquisition Costs

   $ 1,680       1,805       9,617  

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-K constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical, including statements regarding management’s intentions, beliefs, expectations, representations, plans or predictions of the future and are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “will,” “should” and “could.” Similarly, statements that describe or contain information related to matters such as management’s intent, belief or expectation with respect to the Company’s financial performance, investment strategy and portfolio, cash flows, growth prospects, legal proceedings, amount and timing of anticipated future cash distributions, and other matters are forward-looking statements. These forward-looking statements are not historical facts but are the intent, belief or current expectations of the Company’s management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under “Risk Factors” in this Annual Report on Form 10-K . These factors include, but are not limited to: market and economic volatility experienced by the U.S. economy or real estate industry as a whole, and the local economic conditions in the markets in which the Company’s properties are located; the Company’s ability to refinance maturing debt or to obtain new financing on attractive terms; the availability of cash flow from operating activities to fund distributions; future increases in interest rates; and actions or failures by the Company’s joint venture partners, including development partners. The Company intends that such forward-looking statements be subject to the safe harbors created by Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.

The following discussion and analysis relates to the years ended December 31, 2011, 2010 and 2009 and as of December 31, 2011 and 2010. You should read the following discussion and analysis along with our Consolidated Financial Statements and the related notes included in this report.

Overview

We continue to maintain a sustainable distribution rate funded by our operations. In 2011, we began disposing of assets we determined less strategic and reinvesting the capital in real estate assets that we believe will produce attractive current yields and long-term risk-adjusted returns to our stockholders. To achieve these objectives, our property managers for our non-lodging properties actively seek to lease space at favorable rates, control expenses, and maintain strong tenant relationships. We oversee the management of our lodging facilities through active engagement with our third party managers and franchisors to maximize occupancy and daily rates as well as control expenses.

On a consolidated basis, essentially all of our revenues and cash flows from operations for the year ended December 31, 2011 were generated by collecting rental payments from our tenants, room revenues from lodging properties, distributions from unconsolidated entities and dividend income earned from investments in marketable securities. Our largest cash expense relates to the operation of our properties as well as the interest expense on our mortgages. Our property operating expenses include, but are not limited to, real estate taxes, regular repair and maintenance, management fees, utilities and insurance (some of which are recoverable). Our lodging operating expenses include, but are not limited to, rooms, food and beverage, utility, administrative and marketing, payroll, franchise and management fees and repairs and maintenance expenses.

 

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In evaluating our financial condition and operating performance, management focuses on the following financial and non-financial indicators, discussed in further detail herein:

 

   

Cash flow from operations as determined in accordance with U.S. generally accepted accounting principles (“GAAP”).

 

   

Funds from Operations (“FFO”), a supplemental non-GAAP measure to net income determined in accordance with GAAP.

 

   

Economic and physical occupancy and rental rates.

 

   

Leasing activity and lease rollover.

 

   

Managing operating expenses.

 

   

Average daily room rate, revenue per available room, and average occupancy to measure our lodging properties.

 

   

Debt maturities and leverage ratios.

 

   

Liquidity levels.

During 2012, we will continue to execute on our strategy to dispose of less strategic assets and deploy the capital into higher performing asset segments. We believe that our debt maturities over the next five years are manageable and although we believe interest rates will rise in the future, we anticipate low interest rates in 2012. We expect to see increased same store operating performance in our lodging and multi-family segments in 2012. The lodging industry is expected to have positive growth for 2012 and the rental growth is projected to continue for the multi-family properties in 2012. Our retail, office and industrial portfolios are expected to maintain high occupancy and have limited lease rollover in the coming years. We believe the retail and industrial segments same store income will be consistent with 2011 results. We do expect to see lower income in the office segment compared to 2011 results. We believe we will be maintain our cash distribution in 2012 and anticipate distributions to be funded by cash flow from operations as well as distributions from unconsolidated entities and gains on sales of properties.

Results of Operations

General

Consolidated Results of Operations

This section describes and compares our results of operations for the years ended December 31, 2011, 2010 and 2009. We generate most of our net operating income from property operations. In order to evaluate our overall portfolio, management analyzes the operating performance of all properties from period to period and properties we have owned and operated for the same period during each year. Investment properties owned for the entire years ended December 31, 2011 and 2010 and December 31, 2010 and 2009, respectively, are referred to herein as “same store” properties. Unless otherwise noted, all dollar amounts are stated in thousands (except per share amounts, per square foot amounts, revenue per available room and average daily rate).

 

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Comparison of the years ended December 31, 2011, 2010 and 2009

Operating Income and Expenses:

 

    Year ended
December 31, 2011
    Year ended
December 31, 2010
    Year ended
December 31, 2009
    2011 Increase
(decrease) from
2010
    2010 Increase
(decrease) from
2009
 

Income:

         

Rental income

    640,118       605,665       520,154       34,453       85,511  

Tenant recovery income

    93,816       87,730       80,072       6,086       7,658  

Other property income

    18,113       16,909       18,323       1,204       (1,414

Lodging income

    571,104       476,590       440,025       94,514       36,565  

Operating Expenses:

         

Lodging operating expenses

    364,617       302,651       277,411       61,966       25,240  

Property operating expenses

    137,281       128,906       106,368       8,375       22,538  

Real estate taxes

    94,511       87,315       80,344       7,196       6,971  

Provision for asset impairment

    105,795       3,180       1,117       102,615       2,063  

General and administrative expenses

    31,033       36,668       43,499       (5,635     (6,831

Business manager management fee

    40,000       36,000       39,000       4,000       (3,000

Property Income and Operating Expenses

Rental income for non-lodging properties consists of basic monthly rent, straight-line rent adjustments, amortization of acquired above and below market leases, fee income, and percentage rental income recorded pursuant to tenant leases. Tenant recovery income consists of reimbursements for real estate taxes, common area maintenance costs, management fees, and insurance costs. Tenant recovery income generally fluctuates correspondingly with property operating expenses and real estate taxes. Other property income for non-lodging properties consists of lease termination fees and other miscellaneous property income. Property operating expenses for non-lodging properties consist of real estate taxes, regular repair and maintenance, management fees, utilities and insurance (some of which are recoverable from the tenant).

 

   

The increase in property revenues in the year ended December 31, 2011 was primarily due to a full year of operations reflected in 2011 for properties acquired during 2010 in addition to 2011 acquisition of seven properties. Same store consolidated property revenues amounted to $637,894 in 2011 compared to $639,181 in 2010, which was less than a 1% change. In correlation, same store property operating expenses increased from $114,892 in 2010 to $114,992 in 2011, which was also less than a 1% change. Real estate taxes on a a same store basis decreased less than 2%, from $54,173 in 2010 to $53,168 in 2011.

 

   

Similarly, the increase in property revenues in the year ended December 31, 2010 was primarily due to a full year of operations reflected in 2010 for properties acquired during 2009 in addition to 2010 acquisitions of 28 properties. Same store consolidated property revenues amounted to $545,502 in 2010 compared to $550,410 in 2009, which was less than a 1% change. In correlation, same store property operating expenses increased from $97,828 in 2009 to $101,077 in 2010, which was a 3% change. Real estate taxes on a same store basis decreased by 5%, from $50,176 in 2009 to $47,721 in 2010.

 

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Lodging Income and Operating Expenses

Our lodging properties generate revenue through sales of rooms and associated food and beverage services. Lodging operating expenses include the room maintenance, food and beverage, utilities, administrative and marketing, payroll, franchise and management fees, and repairs and maintenance expenses.

 

   

Lodging income increased in the year ended December 31, 2011 primarily due to a full year of operations reflected in 2011 for hotels acquired in 2010 in addition to 2011 acquisition of three hotels. In general, the economy was better in 2011 than in the prior year and businesses held more meetings at hotels, which also resulted in additional income through the sale of food and drinks. As expected, lodging operating expense increased correspondingly to lodging income.

 

   

Lodging income increased in the year ended December 31, 2010 primarily due to occupancy increases across the lodging segment. Due to the economic recovery during the latter part of 2010, hotel performances increased which allowed for an increase in the demand for hotel rooms. This in turn increased the occupancy rate and the average daily rate for some areas as corporate business travel and leisure travel improved. Additional hotels purchased in mid-year also contributed to the increase in revenue by adding a better mix of hotels to the total portfolio.

Provision for Asset Impairment

 

   

For the year ended December 31, 2011, we identified certain properties which may have a reduction in the expected holding period and reviewed the probability of these assets’ dispositions. As a result, we recorded a provision for asset impairment of $105,795 for continuing operations and $57,846 for discontinued operations, to reduce the book value of certain of our investment properties to their fair values.

 

   

For the years ended December 31, 2010 and 2009, we recorded a provision for asset impairment of $3,180 and $1,117, respectively, to reduce the book value of certain of our investment properties to their new fair values. We disposed of many of the properties impaired in 2010 and 2009 by December 31, 2011, and therefore, the related impairment charges of $44,349 and $32,934, respectively, are reflected in discontinued operations.

General Administrative Expenses and Business Management Fee

After our stockholders have received a non-cumulative, non-compounded return of 5% per annum on their “invested capital,” we pay our business manager an annual business management fee of up to 1% of the “average invested assets,” payable quarterly in an amount equal to 0.25% of the average invested assets as of the last day of the immediately preceding quarter. Once we have satisfied the minimum return on invested capital, the amount of the actual fee paid to the business manager is determined by the business manager up to the amount permitted by the agreement.

 

   

We incurred a business management fee of $40,000, $36,000 and $39,000, which is equal to 0.35%, 0.32%, and 0.38% of average invested assets, and the business manager waived the remaining fee of $75,155, $78,120, and $64,584 for the years ended December 31, 2011, 2010, and 2009, respectively. There is no assurance that our business manager will continue to forego or defer all or a portion of its business management fee.

 

   

The decrease in general and administrative expense from the year ended December 31 2010 to the year ended December 31, 2011 was primarily a result of a decrease in legal and consulting costs. We saw a decrease from the year ended December 31, 2009 to the year ended December 31, 2010 due primarily to the slow down in acquisition activity in 2010 as compared to 2009 activity.

 

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Non-Operating Income and Expenses:

 

    Year ended
December 31, 2011
    Year ended
December 31, 2010
    Year ended
December 31, 2009
    2011 Increase
(decrease) from
2010
    2010 Increase
(decrease) from
2009
 

Non-operating income and expenses:

         

Other income

    19,160       1,771       599       17,389       1,172  

Interest expense

    310,174       285,654       243,212       24,520       42,442  

Equity in loss of unconsolidated entities

    12,802       18,684       78,487       (5,882     (59,803

Gain (impairment) of investment in unconsolidated entities, net

    (106,023     (11,239     (7,443     (94,784     (3,796

Realized gain (loss) and impairment on securities

    (16,219     21,073       34,155       (37,292     (13,082 )

Income (loss) from discontinued operations

    (29,608     23,254       (39,066     (52,862     62,320  

Other Income

 

   

The increase in other income in the year ended December 31, 2011 was primarily due to the gain recognized on the conversion of a note receivable to equity of $17,150 in an unconsolidated entity. Other income in the years ended December 31, 2010 and 2009 were minimal compared to the year ended December 31, 2011.

Interest Expense

 

   

The increase in interest expense in the year ended December 31, 2011 was primarily due to the principal amount of mortgage debt financings during 2011 which increased by $303,927 from 2010 as well as a $6,362 amortization of a mark to market mortgage discount as a result of two property loans, totaling $43,236 being in default. Similarly, the principal amount of mortgage debt financings during 2010 increased by $452,270 from 2009. Our weighted average interest rate on outstanding debt was 5.2%, 5.1%, and 4.9% per annum for the years ended December 31, 2011, 2010, and 2009 respectively.

Equity in Loss of Unconsolidated Entities

 

   

For the year ended December 31, 2011, we recognized our share of a gain on the sales of properties in two unconsolidated entities which total $11,141, offset by impairment charges recognized by two unconsolidated entities of which our portion was $16,739. The decrease in equity in loss of unconsolidated entities for the year ended December 31, 2011 was primarily due to impairments recorded by our joint ventures for the year ended December 31, 2010, of which our portion was $10,710 incurred by our DR Stephens joint venture, with no offset by gain on sales of properties.

 

   

The decrease in equity in loss of unconsolidated entities for the year ended December 31, 2010 was primarily due to significant losses incurred and impairments recorded by our Concord debt joint ventures for the year ended December 31, 2009, of which our portion was $75,787.

 

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Gain (Impairment) of Investment in Unconsolidated Entities, net

 

   

For the year ended December 31, 2011, we recorded an impairment of $113,621 on our investment in unconsolidated entities related to the Net Lease Strategic Assets Fund LP joint venture. The impairment reduced our investment in the unconsolidated entity to $26,508. On February 21, 2012, we delivered to our joint venture partner a right of first offer under the partnership agreement. Pursuant to the notice, we have requested the venture sell the assets for a purchase price of $548,706. On February 20 and 21, 2012, our partner delivered notice to us to exercise the buy sell option under the partnership agreement at a purchase price of $213,014. If the right of first offer is not accepted, the partnership agreement allows a third party buyer to be sought. For the year ended December 31, 2011, we valued the equity interest in part based on the fair value of the underlying assets of the investment using a discounted cash flow model, including discount rates and capitalization rates on the expected future cash flows of the properties. These factors resulted in the valuation of our investment in the entity at $26,508 and an impairment charge of $113,621. The impairment is offset by a $7,545 gain on our investment in unconsolidated entities due to the sale of 100% of our equity in the NRF Healthcare LLC.

 

   

For the year ended December 31, 2010, we recorded an impairment of $11,239 on our investment in unconsolidated entities related to a retail development center and two lodging developments.

 

   

For the year ended December 31, 2009, we recorded an impairment of $7,443 on our investment in unconsolidated entities relate to a retail center and a lodging development venture.

Realized Gain (Loss) and Impairment on Securities

 

   

Realized gain (loss) and impairment on securities was a gain in the year ended December 31, 2010 and a loss in the year ended December 31, 2011. In 2011, we took an impairment charge of $24,356 on existing securities which was offset by $6,125 sale of impaired securities which resulted in a gain. In 2010, we sold impaired stock which resulted in a $33,834 gain, which was offset by a $12,475 loss on the impaired bonds. For the year ended December 31, 2009, we recorded an impairment charge of $4,038 offset by realized gains on the sales of securities.

Discontinued Operations

 

   

For the year ended December 31, 2011, we recorded loss of $29,608 from discontinued operations, which primarily included a gain on sale of properties of $11,964, a gain on extinguishment of debt of $10,848, a gain on transfer of assets of $4,546, and provision for asset impairment of $57,846.

 

   

For the year ended December 31, 2010, we recorded income of $23,254 from discontinued operations, which primarily included a gain on sale of properties of $55,412, a gain on extinguishment of debt of $19,227, and a provision for asset impairment of $44,349.

 

   

For the year ended December 31, 2009, we recorded a loss of $39,066 from discontinued operations, which primarily included a provision for asset impairment of $32,934.

Segment Reporting

An analysis of results of operations by segment is below. In order to evaluate our overall portfolio, management analyzes the operating performance of all properties from period to period and properties we have owned and operated for the same period during each year. A total of 910 and 877 of our investment properties satisfied the criteria of being owned for the entire years ended December 31, 2011 and 2010 and December 31, 2010 and 2009, respectively, and are referred to herein as “same store” properties. This same store analysis allows management to monitor the operations of our existing properties for comparable periods to determine the effects of our new acquisitions on net income. The tables contained throughout summarize certain key operating

 

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performance measures for the years ended December 31, 2011, 2010 and 2009. The base rental rates reflected in retail, office, industrial, and multi-family are exclusive of tenant improvements and lease commissions. For the year ended December 31, 2011, these costs associated with leasing space were not material.

Retail Segment

Our retail segment net operating income on a same store basis remained stable for the year ended December 31, 2011 compared to year ended December 31, 2010 with a slight decrease of 1.0%, down $220,592 from $222,908, respectively. This is a result of the strong same store economic occupancy percentage of 94% for both periods and comparable lease rates year to year. We had similar economic occupancy of 93% for the same store properties for the years ended December 31, 2010 and 2009, but saw a decrease in net operating income of 2.5%, to $181,778 from $186,405, respectively, due to less lease termination income in 2010 compared to 2009. During 2009, 2010, and 2011, we acquired fifty-five retail properties totaling approximately 9 million square feet. These acquisitions were well matched with our retail business, which is centered on multi-tenant properties, located in stable communities. The tenants largely consist of necessity-based retailers such as grocery and pharmacy, as well as moderate-fashion shoes and clothing retailers, and services.

Base rental rates have decreased slightly from $15.90 per square foot as of December 31, 2009 to $15.05 per square foot as of December 31, 2010 to $14.96 per square foot as of December 31, 2011. The decrease was offset by increase in economic occupancy over the same period, which resulted in a less than 1% change in base rent income on a same store basis for the comparable periods. For 2012, we expect rental rates to remain consistent with 2011.

 

     Total Retail Properties  
     As of December 31,  
     2011     2010     2009  
Retail Properties       

Physical occupancy

     93     93     93

Economic occupancy

     94     94     94

Base rent per square foot

   $ 14.96      $ 15.05      $ 15.90   

Gross investment in properties

   $ 4,341,644      $ 4,152,647      $ 3,465,640   

Comparison of Years Ended December 31, 2011 and 2010

The table below represents operating information for the retail segment and for the same store retail segment consisting of properties acquired prior to January 1, 2010. The properties in the same store portfolio were owned for the entire years ended December 31, 2011 and 2010.

 

Retail

  For the year ended
December 31, 2011
    For the year ended
December 31, 2010
    Same Store
Portfolio
Change
Favorable/
(Unfavorable)
    Total  Company
Change
Favorable/
(Unfavorable)
 
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Amount     %     Amount     %  

Revenues:

                   

Rental income

  $ 245,778      $ 65,726      $ 311,504      $ 246,467      $ 41,973      $ 288,440      $ (689     (0.3 %)    $ 23,064       8.0

Tenant recovery incomes

    45,715        18,370        64,085        47,469        11,151        58,620        (1,754     (3.7 %)      5,465       9.3

Other property income

    4,369        1,042        5,411        3,798        1,200        4,998        571       15.0     413       8.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 295,862      $ 85,138      $ 381,000      $ 297,734      $ 54,324      $ 352,058      $ (1,872     (0.6 %)    $ 28,942       8.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

                   

Property operating expenses

  $ 47,300      $ 16,617      $ 63,917      $ 46,179      $ 10,904      $ 57,083      $ (1,121     (2.4 %)    $ (6,834     (12.0 %) 

Real estate taxes

    27,970        12,217        40,187        28,647        6,269        34,916        677       2.4     (5,271     (15.1 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ 75,270      $ 28,834      $ 104,104      $ 74,826      $ 17,173      $ 91,999      $ (444     (0.6 %)    $ (12,105     (13.2 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

    220,592        56,304        276,896        222,908        37,151        260,059        (2,316     (1.0 %)      16,837       6.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average occupancy for the period

    94     n/a        93     94     n/a        94        

Number of Properties

    698        28        726        698        21        719           

 

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Comparison of Years Ended December 31, 2010 and December 31, 2009

The table below represents operating information for the retail segment and for the same store retail segment consisting of properties acquired prior to January 1, 2009. The properties in the same store portfolio were owned for the entire years ended December 31, 2011 and 2010.

 

Retail

  For the year ended
December 31, 2010
    For the year ended
December 31, 2009
    Same  Store
Portfolio
Change
Favorable/
(Unfavorable)
    Total Company
Change  Favorable/
(Unfavorable)
 
     Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Amount     %     Amount     %  

Revenues:

                   

Rental income

  $ 200,676      $ 87,764      $ 288,440      $ 203,413      $ 31,132      $ 234,545      $ (2,737     (1.3 %)    $ 53,895       22.9

Tenant recovery incomes

    37,067        21,553        58,620        39,247        8,536        47,783        (2,180     (5.6 %)      10,837       22.7

Other property income

    3,372        1,626        4,998        6,080        207        6,287        (2,708     (44.5 %)      (1,289     (20.5 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 241,115      $ 110,943      $ 352,058      $ 248,740      $ 39,875      $ 288,615      $ (7,625     (3.1 %)    $ 63,443       22.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

                   

Property operating expenses

  $ 35,766      $ 21,317      $ 57,083      $ 37,397      $ 7,492      $ 44,889      $ 1,631        4.4   $ (12,194     (27.2 %) 

Real estate taxes

    23,571        11,345        34,916        24,938        3,878        28,816        1,367        5.5     (6,100     (21.2 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ 59,337      $ 32,662      $ 91,999      $ 62,335      $ 11,370      $ 73,705      $ 2,998        4.8   $ (18,294     (24.8 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

    181,778        78,281        260,059        186,405        28,505        214,910        (4,627     (2.5 %)      45,149       21.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average occupancy for the period

    93     n/a        94     93     n/a        94        

Number of Properties

    671        48        719        671        49        720           

Lodging Segment

We measure our financial performance for lodging properties by revenue generated per available room known as RevPAR, which is an operational measure commonly used in the lodging industry to evaluate lodging performance. RevPAR represents the product of the average daily room rate charged and the average daily occupancy achieved but excludes other revenue generated by a hotel property, such as food and beverage, parking, telephone and other guest service revenues.

Our lodging portfolio has seen significant increases in net operating income year over year comparing 2009, 2010 and 2011. On a same store basis, net operating income increased 4.1% for the years ended December 31, 2009 to December 31, 2010, from $137,552 to $143,161. The same store properties for the years ended December 31, 2011 and December 31, 2010 also had an increase in net operating income of 10.8%, from $143,161 to $158,567. During 2009, the hotel industry experienced declines in both occupancy levels and rental rates (better known as “Average Daily Rate” or “ADR”). The downturn in performance affected all major segments of the travel industry (e.g. corporate travel, group travel, and leisure travel). Hotel performance has been steadily climbing up from the economic downturn as occupancy started increasing in 2010 followed by increases in average daily rates in the fourth quarter 2010. In 2011, occupancy growth slightly outpaced the ADR growth but US RevPar increased 8.2% and our lodging portfolio increased 7.5%.

We are optimistic our lodging portfolio will continue its strong performance in 2012. Business and leisure travel is forecasted to remain strong in 2012. While occupancy continues to rise, pricing increases will lag behind as both types of travel remain sensitive to price increases. We expect ADR growth in 2012 to be slightly higher than in 2011. RevPar is expected to steadily grow in 2012, specifically in the upscale and above segments. We believe we will have strong increases in our revenue per available room consistent with industry expectations. Our third party managers and asset management are focusing on increasing average daily rates, maintaining and growing occupancy while controlling operating costs to improve cash flow to the owner.

 

-45-


Table of Contents
     Total Lodging Properties  
     As of December 31,  
     2011     2010     2009  
Lodging Properties       

Revenue per available room

   $ 86      $ 80      $ 78   

Average daily rate

   $ 121      $ 115      $ 118   

Occupancy

     71     70     66

Gross investment in properties

   $ 2,908,323      $ 2,856,899      $ 2,730,022   

Comparison of Years Ended December 31, 2011 and 2010

The table below represents operating information for the lodging segment and for the same store portfolio for properties acquired prior to January 1, 2010. The properties in the same store portfolio were owned for the entire years ended December 31, 2011 and 2010.

 

Lodging

  For the year ended
December 31, 2011
    For the year ended
December 31, 2010
    Same Store
Portfolio
Change  Favorable/
(Unfavorable)
    Total  Company
Change
Favorable/
(Unfavorable)
 
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Amount     %     Amount     %  

Revenues:

                   

Lodging operating income

  $ 488,183      $ 82,921      $ 571,104      $ 454,395      $ 22,195      $ 476,590      $ 33,788       7.4   $ 94,514        19.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

                   

Lodging operating expenses

  $ 307,735      $ 56,882      $ 364,617      $ 287,887      $ 14,764      $ 302,651      $ (19,848     (6.9 %)    $ (61,966     (20.5 %) 

Real estate taxes

    21,881        3,569        25,450        23,347        955        24,302        1,466       6.3     (1,148     (4.7 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ 329,616      $ 60,451      $ 390,067      $ 311,234      $ 15,719      $ 326,953      $ (18,382 )     (5.9 %)    $ (63,114     (19.3 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

    158,567        22,470        181,037        143,161        6,476        149,637        15,406       10.8     31,400        21.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average occupancy for the period

    72     n/a        71     70     n/a        70        

Number of Properties

    85        10        95        85        7        92           

Comparison of Years Ended December 31, 2010 and December 31, 2009

The table below represents operating information for the lodging segment and for the same store portfolio of properties acquired prior to January 1, 2009. The properties in the same store portfolio were owned for the entire years ended December 31, 2010 and December 31, 2009.

 

Lodging

  For the year ended
December 31, 2010
    For the year ended
December 31, 2009
    Same Store
Portfolio
Change
Favorable/
(Unfavorable)
    Total
Company

Change
Favorable/
(Unfavorable)
 
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Amount     %     Amount     %  

Revenues:

                   

Lodging operating income

  $ 454,395      $ 22,195      $ 476,590      $ 437,256      $ 2,769      $ 440,025      $ 17,139        3.9   $ 36,565        8.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

                   

Lodging operating expenses

  $ 287,887      $ 14,764      $ 302,651      $ 275,200      $ 2,211      $ 277,411      $ (12,687     (4.6 %)    $ (25,240     (9.1 %) 

Real estate taxes

    23,347        955        24,302        24,504        269        24,773        1,157        4.7     471        1.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ 311,234      $ 15,719      $ 326,953      $ 299,704      $ 2,480      $ 302,184      $ (11,530     (3.8 %)    $ (24,769     (8.2 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

    143,161        6,476        149,637        137,552        289        137,841        5,609        4.1     11,796        8.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average occupancy for the period

    70     n/a        70     66     n/a        66        

Number of Properties

    85        7        92        85        7        92           

 

-46-


Table of Contents

Office Segment

Our office portfolio has remained consistent on a total segment basis as net operating income slightly decreased from $136,469 to $133,614 and to $132,050 for the years ended December 31, 2009, 2010 and 2011, respectively. On a same store basis, net operating income is down approximately 2.7% comparing the years ended December 31, 2011 to 2010 and 6.3% comparing the years ended December 31, 2010 to 2009. For the same comparative periods, rental income is down 2.2% and 4.3%, respectively. This correlation can be attributed to a decrease in occupancy coupled with releasing at rates lower than expiring lease rental rates.

Although we see market rates continuing to decrease from the current rates, occupancy is stable at 92% with limited lease rollover in the next three to five years.

 

     Total Office Properties  
     As of December 31,  
     2011     2010     2009  
Office Properties       

Physical occupancy

     92     94     96

Economic occupancy

     92     94     96

Base rent per square foot

   $ 15.17      $ 15.17      $ 14.97   

Gross investment in properties

   $ 1,927,181      $ 2,024,202      $ 2,076,959   

Comparison of Years Ended December 31, 2011 and 2010

The table below represents operating information for the office segment and for the same store portfolio consisting of properties acquired prior to January 1, 2010. The properties in the same store portfolio were owned for the years ended December 31, 2011 and 2010.

 

Office

  For the year ended
December 31, 2011
    For the year ended
December 31, 2010
    Same Store
Portfolio
Change Favorable/
(Unfavorable)
    Total
Company

Change
Favorable/
(Unfavorable)
 
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Amount     %     Amount     %  

Revenues:

                   

Rental income

  $ 143,759      $ 3,500      $ 147,259      $ 147,052      $ 606      $ 147,658      $ (3,293     (2.2 %)    $ (399     (0.3 %) 

Tenant recovery incomes

    24,199        1,101        25,300        26,195        224        26,419        (1,996     (7.6 %)      (1,119     (4.2 %) 

Other property income

    3,857        28        3,885        4,229        (2     4,227        (372     (8.8 %)      (342     (8.1 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 171,815      $ 4,629      $ 176,444      $ 177,476      $ 828      $ 178,304      $ (5,661     (3.2 %)    $ (1,860     (1.0 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

                   

Property operating expenses

  $ 29,958      $ 1,094      $ 31,052      $ 31,008      $ (28   $ 30,980      $ 1,050        3.4   $ (72     (0.2 %) 

Real estate taxes

    12,474        868        13,342        13,512        198        13,710        1,038        7.7     368        2.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ 42,432      $ 1,962      $ 44,394      $ 44,520      $ 170      $ 44,690      $ 2,088        4.7   $ 296        0.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

    129,383        2,667        132,050        132,956        658        133,614        (3,573     (2.7 %)      (1,564     (1.2 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average occupancy for the period

    93     n/a        92     95     n/a        95        

Number of Properties

    40        3        43        40        3        43           

 

-47-


Table of Contents

Comparison of Years Ended December 31, 2010 and December 31, 2009

The table below represents operating information for the office segment and for the same store portfolio consisting of properties acquired prior to January 1, 2009. The properties in the same store portfolio were owned for the years ended December 31, 2010 and December 31, 2009.

 

Office

  For the year ended
December 31, 2010
    For the year ended
December 31, 2009
    Same Store
Portfolio
Change
Favorable/
(Unfavorable)
    Total Company
Change
Favorable/
(Unfavorable)
 
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Amount     %     Amount     %  

Revenues:

                   

Rental income

  $ 117,228      $ 30,430      $ 147,658      $ 122,434      $ 25,288      $ 147,722      $ (5,206     (4.3 %)    $ (64     (0.1 %) 

Tenant recovery incomes

    25,286        1,133        26,419        26,979        1,097        28,076        (1,693     (6.3 %)      (1,657     (5.9 %) 

Other property income

    4,218        9        4,227        6,055        17        6,072        (1,837     (30.3 %)      (1,845     (30.4 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 146,732      $ 31,572      $ 178,304      $ 155,468      $ 26,402      $ 181,870      $ (8,736     (5.6 %)    $ (3,566     (2.0 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

                   

Property operating expenses

  $ 27,846      $ 3,134      $ 30,980      $ 28,575      $ 2,278      $ 30,853      $ 729        2.6   $ (127     (0.4 %) 

Real estate taxes

    13,018        692        13,710        14,004        544        14,548        986        7.0     838        5.8

Total operating expenses

  $ 40,864      $ 3,826      $ 44,690      $ 42,579      $ 2,822      $ 45,401      $ 1,715        4.0   $ 711        1.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

    105,868        27,746        133,614        112,889        23,580        136,469        (7,021     (6.2 %)      (2,855     (2.1 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average occupancy for the period

    94     n/a        95     96     n/a        96        

Number of Properties

    34        9        43        34        6        40           

Industrial Segment

During 2011, our industrial holdings continued to experience high economic occupancy and maintained consistent rental rates, which is reflected in same store net operating income decrease of less than 1% for the year ended December 31, 2010 to December 31, 2011. In early 2010, we acquired charter schools and correctional facilities consisting of nine properties under long-term triple net leases. These acquisitions contributed to total segment net operating income for December 31, 2010 exceeding the prior year by $11,023 or 15.2%. On a same store basis for the year ended December 31, 2010 compared to December 31, 2009, we saw net operating income decrease $3,908, or 5.5%, which was a result of increased lease rates.

Rental rates are expected to remain consistent in 2012 for our specialty distribution centers and slightly increase for our distribution centers constructed in the past ten years as well as our charter school and correctional facilities.

 

     Total Industrial Properties  
     As of December 31,  
     2011     2010     2009  
Industrial Properties       

Physical occupancy

     91     92     95

Economic occupancy

     92     92     96

Base rent per square foot

   $ 5.81      $ 5.74      $ 5.46   

Gross investment in properties

   $ 1,102,041      $ 1,093,330      $ 1,012,545   

 

-48-


Table of Contents

Comparison of Years Ended December 31, 2011 and 2010

The table below represents operating information for the industrial segment and for the same store portfolio consisting of properties acquired prior to January 1, 2010. The properties in the same store portfolio were owned for the years ended December 31, 2011 and December 31, 2010.

 

Industrial    For the year ended December 31,
2011
    For the year ended December 31,
2010
    Same Store
Portfolio
Change
Favorable/
(Unfavorable)
    Total Company
Change
Favorable/
(Unfavorable)
 
     Same
Store
Portfolio
    Non-Same
Store
     Total
Company
    Same
Store
Portfolio
    Non-Same
Store
     Total
Company
    Amount     %     Amount     %  

Revenues:

                      

Rental income

   $ 81,154      $ 7,627       $ 88,781      $ 82,160      $ 5,444       $ 87,604      $ (1,006     (1.2 %)    $ 1,177        1.3

Tenant recovery incomes

     3,803        162         3,965        2,318        0         2,318        1,485        64.1     1,647        71.1

Other property income

     138        1,050         1,188        63        1,041         1,104        75        119.0     84        7.6
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 85,095      $ 8,839       $ 93,934      $ 84,541      $ 6,485       $ 91,026      $ 554        0.7   $ 2,908        3.2
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

                      

Property operating expenses

   $ 5,016      $ 510       $ 5,526      $ 5,160      $ 9       $ 5,169      $ 144        2.8   $ (357     (6.9 %) 

Real estate taxes

     3,873        165         4,038        2,464        0         2,464        (1,409     (57.2 %)      (1,574     (63.9 %) 

Total operating expenses

   $ 8,889      $ 675       $ 9,564      $ 7,624      $ 9       $ 7,633      $ (1,265     (16.6 %)    $ (1,931     (25.3 %) 
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

     76,206        8,164         84,370        76,917        6,476         83,393        (711     (0.9 %)      977        1.2
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average occupancy for the period

     93     n/a         93     95     n/a         95        

Number of Properties

     64        10         74        64        9         71           

Comparison of Years Ended December 31, 2010 and December 31, 2009

The table below represents operating information for the industrial segment and for the same store portfolio consisting of properties acquired prior to January 1, 2009. The properties in the same store portfolio were owned for the years ended December 31, 2010 and December 31, 2009.

 

Industrial   For the year ended December 31,
2010
    For the year ended December 31,
2009
    Same Store
Portfolio
Change
Favorable/
(Unfavorable)
    Total Company
Change
Favorable/
(Unfavorable)
 
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Amount     %     Amount     %  

Revenues:

                   

Rental income

  $ 72,191      $ 15,413      $ 87,604      $ 75,154      $ 236      $ 75,390      $ (2,963     (3.9 %)    $ 12,214        16.2

Tenant recovery incomes

    2,318        0        2,318        3,918        0        3,918        (1,600     (40.8 %)      (1,600     (40.8 %) 

Other property income

    63        1,041        1,104        83        1,000        1,083        (20     (24.1 %)      21        1.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 74,572      $ 16,454      $ 91,026      $ 79,155      $ 1,236      $ 80,391      $ (4,583     (5.8 %)    $ 10,635        13.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

                   

Property operating expenses

  $ 4,882      $ 287      $ 5,169      $ 4,987      $ 0      $ 4,987      $ 105        2.1   $ (182     (3.6 %) 

Real estate taxes

    2,464        0        2,464        3,034        0        3,034        570        18.8     570        18.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ 7,346      $ 287      $ 7,633      $ 8,021      $ 0      $ 8,021      $ 675        8.4   $ 388        4.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

    67,226        16,167        83,393        71,134        1,236        72,370        (3,908     (5.5 %)      11,023        15.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average occupancy for the period

    95     n/a        95     97     n/a        97        

Number of Properties

    63        8        71        63        8        71           

 

-49-


Table of Contents

Multi-family Segment

Our multi-family portfolio continues to perform remarkably well with net operating income increasing $11,069 or 26.8% on a total segment basis for the year ended December 31, 2011 compared to the year ended December 31, 2010 and $8,457 or 25.7% for the year ended December 31, 2010 compared to the year ended December 31, 2009. The significant increases are a result of increased occupancy coupled with increased rental rates and decrease in concessions, specifically in 2011. On a same store basis, net operating income increased $6,218 or 16.7% for the year ended December 31, 2011 compared to the year ended December 31, 2010 and $861 or 2.9% for the year ended December 31, 2010 compared to the year ended December 31, 2009. The same store increases mirror the total segment increases and are consistent with the conventional multi-family and the student housing portfolios.

During 2010 and 2011, we acquired 3,833 units, placed in service 482 units, and disposed of 1,239 units. As of December 31, 2011, we had five student housing properties. We anticipate placing three additional student housing properties in service; two in the fall of 2012 and one in the fall of 2013. We anticipate placing one additional conventional multi-family property in service in the spring of 2013. We expect to see rates in the student housing and conventional multi-family continue to rise in 2012 and occupancy to remain consistent with 2011.

 

     Total Multi-family Properties  
     As of December 31,  
     2011     2010     2009  
Multi-Family Properties       

Economic occupancy

     92     91     84

End of month scheduled base rent per unit per month

   $ 881      $ 861      $ 864   

Gross investment in properties

   $ 887,496      $ 892,693      $ 810,574   

Comparison of Years Ended December 31, 2011 and 2010

The table below represents operating information for the multi-family segment and for the same store portfolio consisting of properties acquired prior to January 1, 2010. The properties in the same store portfolio were owned for the years ended December 31, 2011 and 2010.

 

Multi-family   For the year ended December 31,
2011
    For the year ended December 31,
2010
    Same Store
Portfolio
Change
Favorable/
(Unfavorable)
    Total
Company

Change
Favorable/
(Unfavorable)
 
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Same
Store
Portfolio
    Non-Same
Store
    Total
Company
    Amount     %     Amount     %  

Revenues:

                   

Rental income

  $ 78,216      $ 14,358      $ 92,574      $ 73,157      $ 8,806      $ 81,963      $ 5,059        6.9   $ 10,611        12.9

Tenant recovery incomes

    465        1        466        373        0        373        92        24.7     93        24.9

Other property income

    6,441        1,188        7,629        5,901        679        6,580        540        9.2     1,049        15.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 85,122      $ 15,547      $ 100,669      $ 79,431      $ 9,485      $ 88,916      $ 5,691        7.2   $ 11,753        13.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

                   

Property operating expenses

  $ 32,717      $ 4,068      $ 36,785      $ 32,545      $ 3,130      $ 35,675      $ (172     (0.53 %)    $ (1,110     (3.1 %) 

Real estate taxes

    8,851        2,644        11,495        9,550        2,372        11,922        699        7.3     427        3.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ 41,568      $ 6,712      $ 48,280      $ 42,095      $ 5,502      $ 47,597      $ 527        1.3   $ (683     (1.4 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

    43,554        8,835        52,389        37,336        3,983        41,319        6,218        16.7     11,070