10-Q 1 d335402d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

FOR THE QUARTERLY PERIOD ENDED March 31, 2012

or

 

¨ 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)

 

 

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X    No ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one)

 

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

As of May 2, 2012 there were 874,897,323 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

TABLE OF CONTENTS

 

   Part I - Financial Information      Page   

Item 1.

   Financial Statements   
   Consolidated Balance Sheets at March 31, 2012 (unaudited) and December 31, 2011      1   
  

Consolidated Statements of Operations and Other Comprehensive Income for the three months ended March 31, 2012 and 2011 (unaudited)

     2   
  

Consolidated Statement of Changes in Equity for the three months ended March 31, 2012 and 2011 (unaudited)

     3   
  

Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited)

     5   
   Notes to Consolidated Financial Statements (unaudited)      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      35   

Item 4.

   Controls and Procedures      37   

Part II - Other Information

  

Item 1.

   Legal Proceedings      38   

Item 1A.

   Risk Factors      38   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      41   

Item 3.

   Defaults upon Senior Securities      41   

Item 4.

   Mine Safety Disclosures      41   

Item 5.

   Other information      41   

Item 6.

   Exhibits      41   
   Signatures      42   

This Quarterly Report on Form 10-Q 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.

 

-i-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Consolidated Balance Sheets

(Dollar amounts in thousands, except share data)

 

           March 31, 2012           December 31, 2011  

Assets

                        

Investment properties:

        

Land

   $          2,002,380      $          1,938,637   

Building and other improvements

       8,789,405          8,465,602   

Construction in progress

       356,652          323,842   
    

 

 

     

 

 

 

Total

       11,148,437          10,728,081   

Less accumulated depreciation

       (1,385,531       (1,301,899
    

 

 

     

 

 

 

Net investment properties

       9,762,906          9,426,182   

Cash and cash equivalents

       162,558          218,163   

Restricted cash and escrows

       99,831          98,444   

Investment in marketable securities

       318,738          289,365   

Investment in unconsolidated entities

       305,986          316,711   

Accounts and rents receivable (net of allowance of $9,922 and $9,488)

       127,000          114,615   

Intangible assets, net

       313,579          326,332   

Deferred costs and other assets

       112,335          129,378   
    

 

 

     

 

 

 

Total assets

   $          11,202,933      $          10,919,190   
    

 

 

     

 

 

 
Liabilities and Equity         

Liabilities:

        

Mortgages, notes and margins payable, net

   $          6,259,922      $          5,902,712   

Accounts payable and accrued expenses

       99,609          105,153   

Distributions payable

       36,500          36,216   

Intangible liabilities, net

       81,558          83,203   

Other liabilities

       135,391          128,592   
    

 

 

     

 

 

 

Total liabilities

       6,612,980          6,255,876   
    

 

 

     

 

 

 

Commitments and contingencies

        

Stockholders’ equity:

        

Preferred stock, $.001 par value, 40,000,000 shares authorized, none outstanding

       0          0   

Common stock, $.001 par value, 1,460,000,000 shares authorized, 875,998,610 and 869,187,360 shares issued and outstanding

       876          869   

Additional paid in capital (net of offering costs of $828,434, of which $788,272 was paid to affiliates)

       7,825,049          7,775,880   

Accumulated distributions in excess of net loss

       (3,294,722       (3,155,222

Accumulated other comprehensive income

       59,004          41,948   
    

 

 

     

 

 

 

Total Company stockholders’ equity

       4,590,207          4,663,475   
    

 

 

     

 

 

 

Noncontrolling interests

       (254       (161
    

 

 

     

 

 

 

Total equity

       4,589,953          4,663,314   
    

 

 

     

 

 

 

Total liabilities and equity

   $          11,202,933      $          10,919,190   
    

 

 

     

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

-1-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Consolidated Statements of Operations and Other Comprehensive Income

(Dollar amounts in thousands, except share data)

 

           Three months ended
March 31, 2012

(unaudited)
          Three months ended
March 31, 2011
(unaudited)
 

Income:

        

Rental income

   $          165,289      $          158,159   

Tenant recovery income

       24,444          23,653   

Other property income

       4,285          4,831   

Lodging income

       150,076          127,655   
    

 

 

     

 

 

 

Total income

       344,094          314,298   
    

 

 

     

 

 

 

Expenses:

        

General and administrative expenses

       8,872          6,614   

Property operating expenses

       32,240          33,418   

Lodging operating expenses

       99,852          83,797   

Real estate taxes

       25,092          25,085   

Depreciation and amortization

       109,475          106,183   

Business manager management fee

       10,000          10,000   

Provision for asset impairment

       10,429          6,493   
    

 

 

     

 

 

 

Total expenses

       295,960          271,590   
    

 

 

     

 

 

 

Operating income

   $          48,134      $          42,708   
    

 

 

     

 

 

 

Interest and dividend income

       4,911          5,637   

Other income

       342          352   

Interest expense

       (77,903       (77,096

Equity in loss of unconsolidated entities

       (419       (2,297

Impairment of investment in unconsolidated entities

       (4,200       0   

Realized gain on securities

       1,423          3,996   
    

 

 

     

 

 

 

Loss before income taxes

   $          (27,712   $          (26,700
    

 

 

     

 

 

 

Income tax (expense) benefit

   $          (2,498   $          595   
    

 

 

     

 

 

 

Net loss from continuing operations

   $          (30,210   $          (26,105
    

 

 

     

 

 

 

Loss from discontinued operations, net

   $          0      $          (26,298
    

 

 

     

 

 

 

Net loss

   $          (30,210   $          (52,403
    

 

 

     

 

 

 

Less: Net income attributable to noncontrolling interests

       (73       (2,224
    

 

 

     

 

 

 

Net loss attributable to Company

   $          (30,283   $          (54,627
    

 

 

     

 

 

 

Other comprehensive income (loss):

        

Unrealized gain on investment securities

       18,331          7,449   

Reversal of unrealized gain to realized gain on investment securities

       (1,423       (3,996

Unrealized gain on derivatives

       148          852   
    

 

 

     

 

 

 

Comprehensive loss attributable to the Company

   $          (13,227   $          (50,322
    

 

 

     

 

 

 

Net loss per common share, from continuing operations

   $          (0.03   $          (0.03
    

 

 

     

 

 

 

Net loss per common share, from discontinued operations

   $          0      $          (0.03
    

 

 

     

 

 

 

Net loss per common share, basic and diluted

   $          (0.03   $          (0.06
    

 

 

     

 

 

 

Weighted average number of common shares outstanding, basic and diluted

       872,886,566          849,843,349   
    

 

 

     

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

-2-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Consolidated Statements of Changes in Equity

(Dollar amounts in thousands)

For the three months ended March 31, 2012

(unaudited)

 

    Number of
Shares
          Common
Stock
          Additional
Paid-in
Capital
          Accumulated
Distributions in
excess of Net

Loss
          Accumulated
Other
Comprehensive
Income (Loss)
          Noncontrolling
Interests
          Total  

Balance at January 1, 2012

    869,187,360         $          869         $          7,775,880         $          (3,155,222)        $          41,948         $          (161)        $          4,663,314      

Net income (loss)

    0             0             0             (30,283)            0             73             (30,210)     

Unrealized gain on investment securities

    0             0             0             0             18,331             0             18,331      

Reversal of unrealized gain to realized gain on investment securities

    0             0             0             0             (1,423)            0             (1,423)     

Unrealized gain on derivatives

    0             0             0             0             148             0             148      

Distributions declared

    0             0             0             (109,217)            0             (166)            (109,383)     

Proceeds from distribution reinvestment plan

    6,811,250             7             49,169             0             0             0             49,176      
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Balance at March 31, 2012

    875,998,610         $          876         $          7,825,049         $          (3,294,722)        $          59,004         $          (254)        $          4,589,953     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

See accompanying notes to the consolidated financial statements.

 

-3-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Consolidated Statements of Changes in Equity

(Dollar amounts in thousands)

For the three months ended March 31, 2011

(unaudited)

 

        Number of    
Shares
              Common    
Stock
              Additional    
Paid-in

Capital
          Accumulated
    Distributions    
in excess of Net
Loss
          Accumulated Other
    Comprehensive    
Income (Loss)
              Noncontrolling    
Interests
          Total               Noncontrolling    
Redeemable
Interests
 

Balance at January 1, 2011

    846,406,774        $          846        $          7,605,105        $          (2,409,370)       $          49,430         $          17,381         $          5,263,392         $          264,132      

Net income (loss)

    0            0            0            (54,627)           0             (87)           (54,714)           2,311      

Unrealized gain on investment securities

    0            0            0            0             7,449             0             7,449             0      

Reversal of unrealized gain to realized gain on investment securities

    0            0            0            0             (3,996)           0             (3,996)           0      

Unrealized gain on derivatives

    0            0            0            0             852             0             852             0      

Distributions declared

    0            0            0            (106,320)           0             (123)           (106,443)           (2,311)    

Proceeds from distribution reinvestment program

    6,226,585            6            49,992            0             0             0             49,998             0      
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Balance at March 31, 2011

    852,633,359        $          852        $          7,655,097        $          (2,570,317)       $          53,735        $          17,171         $          5,156,538         $          264,132      
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

See accompanying notes to the consolidated financial statements.

 

-4-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

 

            Three months ended
March 31, 2012
(unaudited)
          Three months ended
March 31, 2011
(unaudited)

Cash flows from operating activities:

               

Net loss

   $           (30,210      $           (52,403  

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation and amortization

        109,381              109,456     

Amortization of above and below market leases, net

        (372           (598  

Amortization of debt premiums, discounts and financing costs

        3,967              12,613     

Straight-line rental income

        (2,956           (3,453  

Provision for asset impairment

        10,429              27,967     

Equity in loss of unconsolidated entities

        419              2,297     

Distributions from unconsolidated entities

        3,061              1,425     

Impairment of investment in unconsolidated entities

        4,200              0     

Realized gain on securities

        (1,423           (3,996  

Other non-cash adjustments

        106              648     

Changes in assets and liabilities:

               

Accounts and rents receivable

        (5,461           (5,519  

Deferred costs and other assets

        679              (4,767  

Accounts payable and accrued expenses

        (12,834           (12,557  

Other liabilities

        6,939              6,189     
     

 

 

     

 

 

Net cash flows provided by operating activities

        85,925              77,302     
     

 

 

     

 

 

Cash flows from investing activities:

               

Purchase of investment properties

        (194,514           (61,261  

Acquired in-place and market lease intangibles, net

        (4,526           (5,165  

Capital expenditures and tenant improvements

        (21,182           (14,269  

Investment in development projects

        (23,646           (16,426  

Sale of investment properties

        0              10,848     

Purchase of investment securities

        (19,195           (19,470  

Sale of investment securities

        8,154              21,404     

Investment in unconsolidated entities

        (49           (98  

Distributions from unconsolidated entities

        3,093              9,540     

Payment of leasing fees

        (1,358           (1,900  

Payments from notes receivable

        7              22     

Restricted escrows and other assets

        (6,809           1,645     
     

 

 

     

 

 

Net cash flows used in investing activities

        (260,025           (75,130  
     

 

 

     

 

 

Cash flows from financing activities:

               

Proceeds from the distribution reinvestment program

        49,176              49,998     

Distributions paid

        (108,933           (106,061  

Proceeds from mortgage debt and notes payable

        326,392              56,246     

Payoffs of mortgage debt

        (170,742           (100,585  

Principal payments of mortgage debt

        (10,462           (9,298  

Proceeds from (paydown of) margin securities debt, net

        36,303              (5,812  

Payment of loan fees and deposits

        (3,073           (1,559  

Distributions paid to noncontrolling interests

        (166           (123  

Distributions paid to noncontrolling redeemable interests

        0              (2,311  
     

 

 

     

 

 

Net cash flows provided by (used in) financing activities

        118,495              (119,505  
     

 

 

     

 

 

Net decrease in cash and cash equivalents

        (55,605           (117,333  

Cash and cash equivalents, at beginning of period

        218,163              267,707     
     

 

 

     

 

 

Cash and cash equivalents, at end of period

   $           162,558         $           150,374     
     

 

 

     

 

 

 

-5-

See accompanying notes to the consolidated financial statements.


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Consolidated Statements of Cash Flows

(continued)

(Dollar amounts in thousands)

 

          Three months ended
March 31,  2012
(unaudited)
          Three months ended
March 31, 2011
(unaudited)

Supplemental disclosure of cash flow information:

               

Purchase of investment properties

   $      (373,781      $           (61,689  

Tenant and real estate tax liabilities assumed at acquisition, net

        492              428     

Assumption of mortgage debt at acquisition

        180,000              0     

Non-cash discount of mortgage debt assumed

        (5,746           0     

Assumption of lender held escrows

   $      4,521              0     
     

 

 

     

 

 

   $      (194,514      $           (61,261  
     

 

 

     

 

 

Cash paid for interest, net capitalized interest of $2,790 and $2,481

   $      70,944         $           75,731     
     

 

 

     

 

 

Supplemental schedule of non-cash investing and financing activities:

               

Property acquired through exchange of notes receivable

   $      0         $           20,000     
     

 

 

     

 

 

See accompanying notes to the consolidated financial statements.

 

-6-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Readers of this Quarterly Report should refer to the audited consolidated financial statements of Inland American Real Estate Trust, Inc. for the year ended December 31, 2011, which are included in the Company’s 2011 Annual Report on Form 10-K, as amended, as certain note disclosures contained in such audited consolidated financial statements have been omitted from this Report. In the opinion of management, all adjustments (consisting of normal recurring accruals, except as otherwise noted) necessary for a fair presentation have been included in these financial statements.

(1) Organization

Inland American Real Estate Trust, Inc. (the “Company”) was formed on October 4, 2004 (inception) to acquire and manage a diversified portfolio of commercial real estate, primarily retail, office, industrial, multi-family (both conventional and student housing), and lodging properties, located in the United States.

The accompanying consolidated financial statements include the accounts of the Company, as well as all wholly owned subsidiaries and consolidated joint venture investments. Wholly owned subsidiaries generally consist of limited liability companies (LLCs) and limited partnerships (LPs). The effects of all significant intercompany transactions have been eliminated.

At March 31, 2012, the Company owned a portfolio of 970 commercial real estate properties compared to 983 properties at March 31, 2011. The breakdown by segment is as follows:

 

                     Segment    Property Count    Square Ft/Rooms/Units

Retail

   727    22,651,912 square feet

Lodging

   100    17,899 rooms

Office

   43    10,244,813 square feet

Industrial

   74    16,377,450 square feet

Multi-Family

   26    9,563 units

(2) Summary of Significant Accounting Policies

There have been no changes to the Company’s significant accounting policies in the three months ended March 31, 2012. Refer to the Company’s 2011 Form 10-K for a summary of significant accounting policies.

(3) Acquired Properties

The Company records identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination at fair value. During the three months ended March 31, 2012 and 2011, the Company incurred $590 and $227, respectively, of acquisition and transaction costs that were recorded in general and administrative expenses on the consolidated statements of operations and other comprehensive income.

The table below reflects acquisition activity during the three months ended March 31, 2012.

 

    Segment    Property    Date           Gross Acquisition
Price
     Sq Ft/Units/Rooms
Lodging    Marriott-San Francisco Airport    3/23/2012      $        108,000               685 rooms
Lodging    Hilton St. Louis Downtown    3/23/2012        22,600               195 rooms
Lodging    Renaissance Arboretum – Austin, TX    3/23/2012        103,000               492 rooms
Lodging    Renaissance Waverly – Atlanta, GA    3/23/2012        97,000               521 rooms
Lodging    Marriott Griffin Gate Resort & Spa – Lexington, KY    3/23/2012        62,500               409 rooms
Retail    Tomball Town Center Outparcel    3/30/2012        3,000               6,541 square feet
          

 

 

    

Total

         $          396,100              
          

 

 

    

 

-7-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

For properties acquired during the three months ended March 31, 2012, the Company recorded revenue of $3,223 and property net income of $803 not including related expensed acquisition costs.

(4) Discontinued Operations

The Company has presented separately as discontinued operations the results of operations for all disposed assets in consolidated operations. The Company disposed of no assets for the three months ended March 31, 2012 and 2011. Although, for the three months ended March 31, 2011, we recorded a loss of $26,298 from discontinued operations due to the disposition of 26 properties from April to December 2011. The components of the Company’s discontinued operations are presented below, which include the results of operations for the three months ended March 31, 2011 in which the Company owned such assets.

 

            Three months ended
March 31,  2011
 

Revenues

   $           12,095   

Expenses

        38,393   
     

 

 

 

Loss from discontinued operations, net

   $           (26,298
     

 

 

 

Expenses from discontinued operations include impairments of $21,474 for the three months ended March 31, 2011.

(5) Investment in Partially Owned Entities

Consolidated Entities

The Company has ownership interests of 67% in various limited liability companies which own nine shopping centers. These entities are considered variable interest entities (“VIEs”) as defined in ASC 810, and the Company is considered the primary beneficiary of each of these entities. Therefore, these entities are consolidated by the Company. The entities’ agreements contain put/call provisions which grant the right to the outside owners and the Company to require these entities to redeem the ownership interests of the outside owners during future periods. Because the outside ownership interests are subject to a put/call arrangement requiring settlement for a fixed amount, these entities are treated as 100% owned subsidiaries by the Company with the amount of $47,762 as of March 31, 2012 due to the outside owners reflected as a financing and included within other liabilities in the accompanying consolidated financial statements. Interest expense is recorded on these liabilities in an amount generally equal to the preferred return due to the outside owners as provided in the entities agreements.

For the VIEs where the Company is the primary beneficiary, the following are the liabilities of the consolidated VIE, which are not recourse to the Company, and the assets that can be used only to settle those obligations.

 

            As of
March 31, 2012
           As of
December 31, 2011
 

Net investment properties

   $           116,295      $           117,235   

Other assets

        8,934           9,167   
     

 

 

      

 

 

 

Total assets

        125,229           126,402   

Mortgages, notes and margins payable

        (84,690        (84,823

Other liabilities

        (49,714        (49,073
     

 

 

      

 

 

 

Total liabilities

   $           (134,404   $           (133,896
     

 

 

      

 

 

 

Net assets

   $           (9,175   $           (7,494
     

 

 

      

 

 

 

 

-8-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

Unconsolidated Entities

The entities listed below are owned by the Company and other unaffiliated parties in joint ventures. Net income, distributions and capital transactions for these properties are allocated to the Company and its joint venture partners in accordance with the respective partnership agreements. Refer to the Company’s Form 10-K for the year ended December 31, 2011 for details of each unconsolidated entity.

These entities are not consolidated by the Company and the equity method of accounting is used to account for these investments. Under the equity method of accounting, the net equity investment of the Company and the Company’s share of net income or loss from the unconsolidated entity are reflected in the consolidated balance sheets and the consolidated statements of operations and other comprehensive income.

 

Entity

  

Description

   Ownership %        Investment at
March 31, 2012
            Investment at
December 31, 2011
 

Net Lease Strategic Asset
Fund L.P.

  

Diversified portfolio of net lease assets

   85%(a)   $      19,311           $           26,508       

Cobalt Industrial REIT II

  

Industrial portfolio

   36%        111,787                113,623       

D.R. Stephens Institutional
Fund, LLC

  

Industrial and R&D assets

   90%        36,076                36,218       

Brixmor/IA JV, LLC

  

Retail Shopping Centers

   (b)        101,886                103,567       

Other Unconsolidated Entities

  

Various Real Estate investments

   Various        36,926                36,795       
          

 

 

       

 

 

 
        $      305,986           $           316,711       
          

 

 

       

 

 

 

 

(a) On August 10, 2007, the Company entered a joint venture with The Lexington Master Limited Partnership (“LMLP”) and LMLP GP LLC (“LMLP GP”), for the purpose of directly or indirectly acquiring, financing, holding for investment, operating, and leasing real estate assets as acquired by the joint venture. The Company’s capital contribution was approximately $220,500 and LMLP’s contribution was approximately $39,000. LMLP GP is the general partner who manages investments and day-to-day affairs of the venture, and the Company and LMLP are limited partners.

The Net Lease Strategic Assets Fund, L.P. agreement provides that (1) either limited partner can exercise the buy/sell right of the right of first offer after February 20, 2012 and (2) upon one limited partner’s exercise of either right, the responding partner may not again trigger the buy/sell right or the right of first offer until the termination of all procedures and time frames pursuant to the exercising partner’s chosen right.

On February 21, 2012, the Company delivered to LMLP its right of first offer under the partnership agreement with Net Lease Strategic Asset Fund, LP. Pursuant to the notice, the Company requested the venture sell the assets for a purchase price of $548,706. On February 20 and 21, 2012, LMLP delivered notice to the Company to exercise the buy/sell option under the partnership agreement and provided the price of $213,014 at which they would be willing to purchase the assets. 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, the Company 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 the Company’s investment in the entity as of December 31, 2011 at $26,508 and an impairment charge for the year ended December 31, 2011 of $113,621.

On April 27, 2012, the Company and LMLP entered into an Agreement Regarding Disposition of Property and Other Matters (“Disposition Agreement”). Pursuant to this agreement, the right of first offer and buy/sell option previously delivered by the Company and LMLP, respectively, are deemed to have no force or effect. Under the Disposition Agreement, the Company must provide written notice by September 17, 2012 to LMLP to either (1) buy LMLP’s interest in Net Lease Strategic Asset Fund L.P. for $219,838 less any distributions to LMLP from April 27, 2012 to October 1, 2012 or (2) sell the Company’s interest in the venture for $14,374 less any distributions to the Company from April 27, 2012 to October 1, 2012. For the three months ended March 31, 2012, the Company valued the equity interest in part based on the

 

-9-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

expected future cash distributions and 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 the Company’s investment in the entity as of March 31, 2012 at $19,311 and an additional impairment charge for the three months ended March 31, 2012 of $4,200.

 

(b) The company has a preferred membership interest and is entitled to a 11% preferred dividend in Brixmor/IA JV, LLC.

For the three months ended March 31, 2012 and 2011, the Company recorded impairment of its unconsolidated entities of $4,200 and $0, respectively.

Combined Financial Information

The following table presents the combined financial information for the Company’s investment in unconsolidated entities.

 

            March 31, 2012             December 31, 2011  
            (dollars in thousands)             (dollars in thousands)  

Balance Sheets:

           

Assets:

           

Real estate assets, net of accumulated depreciation

   $           2,033,074         $           1,949,035     

Other assets

        371,464              485,887     
     

 

 

       

 

 

 

Total Assets

   $           2,404,538         $           2,434,922     
     

 

 

       

 

 

 

Liabilities and Equity:

           

Mortgage debt

   $           1,372,755         $           1,402,462     

Other liabilities

        115,751              94,361     

Equity

        916,032              938,094     
     

 

 

       

 

 

 

Total Liabilities and Equity

   $           2,404,538         $           2,434,917     
     

 

 

       

 

 

 

Company’s share of equity

   $           296,837         $           307,684     

Net excess of cost of investments over the net book value of underlying net assets (net of accumulated depreciation of $1,387 and $1,372, respectively)

        9,149              9,027     
     

 

 

       

 

 

 

Carrying value of investments in unconsolidated entities

   $           305,986         $           316,711     
     

 

 

       

 

 

 
            Three months ended
March 31, 2012
            Three months ended
March 31, 2011
 
            (dollars in thousands)             (dollars in thousands)  

Statements of Operations:

           

Revenues

   $           60,261         $           89,379     
     

 

 

       

 

 

 

Expenses:

           

Interest expense and loan cost amortization

   $           17,589         $           27,768     

Depreciation and amortization

        25,371              30,513     

Operating expenses, ground rent and general and administrative expenses

        19,796              43,880     
     

 

 

       

 

 

 

Total expenses

   $           62,756         $           102,161     

Net loss before loss on sale of real estate

   $           (2,495)         $           (12,782)     

Loss on sale of real estate

        0              25     
     

 

 

       

 

 

 

Net loss

   $           (2,495)         $           (12,757)     
     

 

 

       

 

 

 

Company’s share of:

           

Net loss, net of excess basis depreciation of $85 and $95

   $           (419)         $           (2,297)     

Depreciation and amortization (real estate related)

   $           15,590         $           12,332     

 

-10-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

The unconsolidated entities had total third party debt of $1,372,755 at March 31, 2012 that matures as follows:

 

2012

   $           227,335   

2013

        173,087   

2014

        139,152   

2015

        119,773   

2016

        33,318   

Thereafter

        680,090   
     

 

 

 
   $           1,372,755   

The debt maturities of the unconsolidated entities are not recourse to the Company and the Company has no obligation to fund such debt maturities. It is anticipated that the ventures will be able to repay or refinance all of their debt on a timely basis.

(6) Transactions with Related Parties

The following table summarizes the Company’s related party transactions for the three months ended March 31, 2012 and 2011.

 

                  For the three months ended      Unpaid amounts as of  
                  March 31,
2012
            March 31,
2011
            March 31,
2012
            December 31,
2011
 

General and administrative:

                         

General and administrative reimbursement

     (a   $           2,802         $           1,954         $           3,623         $           2,734     

Loan servicing

     (b   $           158         $           147         $           11         $           0     

Investment advisor fee

     (c   $           436         $           382         $           290         $           135     
       

 

 

       

 

 

       

 

 

       

 

 

 

Total general and administrative to related parties

     $           3,396         $           2,483         $           3,924         $           2,869     
       

 

 

       

 

 

       

 

 

       

 

 

 

Property management fees

     (d   $           7,318         $           7,843         $           23         $           (178)     

Business manager management fee

     (e   $           10,000         $           10,000         $           10,000         $           10,000     

Loan placement fees

     (f   $           777         $           103         $           0         $           0     

 

(a) The Business Manager and its related parties are entitled to reimbursement for general and administrative expenses of the Business Manager and its related parties relating to the Company’s administration. Unpaid amounts as of March 31, 2012 and December 31, 2011 are included in accounts payable and accrued expenses on the consolidated balance sheets.

 

(b) A related party of the Business Manager provides loan servicing to the Company for an annual fee. The loan servicing fees are 200 dollars per month, per loan for the Company’s non-lodging properties and 225 dollars per month, per loan for the Company’s lodging properties.

 

(c) The Company pays a related party of the Business Manager to purchase and monitor its investment in marketable securities.

 

(d)

The property managers, entities owned principally by individuals who are related parties of the Business Manager, are entitled to receive property management fees up to 4.5% of gross operating income (as defined), for management and leasing services. In addition, the property managers are entitled to receive an oversight fee of 1% of gross operating income (as defined, provided, however, that (1) for triple-net lease properties, the property managers are entitled to monthly fees equal to 2.9% of the gross income generated by the applicable property each month and (2) for bank branches, the property managers are entitled to monthly fees equal to 2.5% of the gross income generated by the applicable property each month) in operating companies purchased by the Company. Effective January 1, 2012, the Company entered into extension agreements with the property managers to extend the term through June 30, 2012. In consideration for these extensions, the property managers have agreed to reduce the monthly property management fee paid in respect to triple-net lease properties and bank branches as noted above. Unpaid amounts as of March 31, 2012 and December 31, 2011 are included in other liabilities on

 

-11-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

  the consolidated balance sheets. In addition to the fee, the property managers receive reimbursements of payroll costs for property level employees. The Company reimbursed the property managers and other affiliates $3,553 and $3,819 for the three months ended March 31, 2012 and 2011, respectively.

 

(e) After the Company’s stockholders have received a non-cumulative, non-compounded return of 5% per annum on their “invested capital,” the Company pays its 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. For the three months ended March 31, 2012 and 2011, average invested assets were $11,398,118 and $11,321,686, respectively. The Company incurred a business management fee of $10,000 and $10,000, which is equal to .09%, and .09% of average invested assets for the three months ended March 31, 2012 and 2011, respectively. The Business Manager waived the remaining fee of $18,495 and $18,304 for these respective periods.

 

(f) The Company pays a related party of the Business Manager 0.2% of the principal amount of each loan placed for the Company. Such costs are capitalized as loan fees and amortized over the respective loan term.

As of March 31, 2012 and December 31, 2011, the Company had deposited $374 and $373, respectively, in Inland Bank and Trust, a subsidiary of Inland Bancorp, Inc., an affiliate of The Inland Real Estate Group, Inc.

The Company is party to an agreement with an LLC formed as an insurance association captive (the “Captive”), which is wholly-owned by the Company and three related parties, Inland Real Estate Corporation (“IRC”), Retail Properties of America, Inc. and Inland Diversified Real Estate Trust, Inc. The Company paid insurance premiums of $2,931 and $2,328 for the three months ended March 31, 2012 and 2011, respectively.

In addition, the Company held 899,820 shares of IRC valued at $7,981 as of March 31, 2012. As of December 31, 2011, the Company held 889,820 shares of IRC valued at $6,848.

(7) Investment in Marketable Securities

Investment in marketable securities of $318,738 and $289,365 at March 31, 2012 and December 31, 2011, respectively, consists of primarily preferred and common stock investments in other REITs and certain real estate related bonds which are classified as available-for-sale securities and recorded at fair value. The cost basis net of impairments of available-for-sale securities was $257,596 and $245,131 at March 31, 2012 and December 31, 2011, respectively.

Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported as a separate component of comprehensive income until realized. The Company has net accumulated other comprehensive income of $61,142 and $44,234, which includes gross unrealized losses of $5,281 and $9,990 as of March 31, 2012 and December 31, 2011, respectively.

The Company’s policy for assessing recoverability of its available-for-sale securities is to record a charge against net earnings when the Company determines that a decline in the fair value of a security drops below the cost basis and believes that decline to be other-than-temporary. Factors in the assessment of other-than-temporary impairment include determining whether (1) the Company has the ability and intent to hold the security until it recovers, and (2) the length of time and degree to which the security’s price has declined. During the three months ended March 31, 2012 and 2011, the Company did not record any impairment for other-than-temporary declines on available-for-sale securities.

Dividend income is recognized when earned. During the three months ended March 31, 2012 and 2011, dividend income of $4,596 and $4,024, respectively, was recognized and is included in interest and dividend income on the consolidated statements of operations and other comprehensive income.

 

-12-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

(8) Mortgages, Notes and Margins Payable

Mortgage loans outstanding as of March 31, 2012 and December 31, 2011 were $6,137,783 and $5,812,595 and had a weighted average interest rate of 5.2% and 5.2% per annum, respectively. Mortgage premium and discount, net was a discount of $35,022 and $30,741 as of March 31, 2012 and December 31, 2011. As of March 31, 2012, scheduled maturities for the Company’s outstanding mortgage indebtedness had various due dates through December 2047, as follows:

 

Maturity Date

         As of
March 31, 2012
     Weighted average annual
interest  rate
 

2012

  $           402,396                 3.57%           

2013

  $           1,011,142                 4.74%           

2014

  $           607,235                 4.28%           

2015

  $           578,148                 5.01%           

2016

  $           786,454                 5.49%           

Thereafter

  $           2,752,408                 5.74%           

The Company is negotiating refinancing debt maturing in 2012 and 2013 with various lenders at terms that will allow us to pay comparable interest rates. It is anticipated that the Company will be able to repay, refinance or extend the debt maturing in 2012 and 2013, and the Company believes it has adequate sources of funds to meet short term cash needs related to these refinancings. Of the total outstanding debt, approximately $555,211 is recourse to the Company.

Some of the mortgage loans require compliance with certain covenants, such as debt service ratios, investment restrictions and distribution limitations. As of March 31, 2012, the Company was in compliance with all mortgage loan requirements except six loans with a carrying value of $102,853. The loans are collateralized by the underlying properties with a carrying value of $71,923. None of the loans are cross collateralized with any other mortgage loans or recourse to the Company. The stated maturities of the mortgage loans in default are reflected as follows: $12,100 in 2011, $5,310 in 2012, $9,757 in 2016 and $75,686 in 2017.

The Company has purchased a portion of its securities through margin accounts. As of March 31, 2012 and December 31, 2011, the Company has recorded a payable of $157,161 and $120,858, respectively, for securities purchased on margin. At March 31, 2012 and December 31, 2011, this rate was 0.592% and 0.621%. Interest expense in the amount of $199 and $85 was recognized in interest expense on the consolidated statements of operations and other comprehensive income for the three months ended March 31, 2012 and 2011, respectively.

(9) Derivatives

As of March 31, 2012, in connection with certain mortgages payable that have variable interest rates, the Company has entered into interest rate swap agreements, with a notional value of $233,852. The Company’s interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreements without exchange of the underlying notional amount. The interest rate swaps were considered highly effective as of March 31, 2012 and December 31, 2011. The change in the fair value of the Company’s swaps as reflected in other comprehensive income was $148 and $852 for the three months ended March 31, 2012 and 2011, respectively.

 

-13-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

The following table summarizes interest rate swap contracts outstanding as of March 31, 2012 and December 31, 2011:

 

Date Entered    Effective Date    End Date    Pay
Fixed
Rate
    Receive Floating
Rate Index
            Notional
Amount
           

Fair Value

as of March 31,

2012

           

Fair Value

as of December 31,
2011

 

March 28, 2008

   March 28, 2008    March 27, 2013      3.32     1 month LIBOR      $           33,062      $           (985   $           (1,156

January 16, 2009

   January 13, 2009    January 13, 2012      1.62     1 month LIBOR           N/A           0           (10

August 19, 2010

   August 31, 2010    March 27, 2012      0.63     1 month LIBOR           N/A           0           (22

October 15, 2010

   November 1, 2010    April 23, 2013      0.94     1 month LIBOR           29,727           (200        (181

January 7, 2011

   January 7, 2011    January 13, 2013      0.91     1 month LIBOR           26,285           (126        (121

January 7, 2011

   January 7, 2011    January 13, 2013      0.91     1 month LIBOR           22,864           (109        (105

April 28, 2011

   May 3, 2011    September 30, 2012      1.575     1 month LIBOR           56,702           (366        (481

September 1, 2011

   September 29, 2012    September 29, 2014      0.79     1 month LIBOR           56,702           (266        (130

October 14, 2011

   October 14, 2011    October 22, 2013      1.037     1 month LIBOR           8,510           (84        (78
               

 

 

      

 

 

      

 

 

 
             $           233,852      $           (2,136   $           (2,284

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to add stability to interest expense and to manage its exposure to interest rate movements.

Cash Flow Hedges of Interest Rate Risk

The Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company recorded $0 and $(37) of ineffectiveness expense during the three months ended March 31, 2012 and 2011, which is included in interest expense on the consolidated statements of operations and other comprehensive income.

The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations and other comprehensive income for the three months ended March 31, 2012 and 2011:

 

    Derivatives in

    ASC 815 Cash

    Flow Hedging

    Relationships

          Amount of Gain  or
(Loss) Recognized in
OCI on Derivative
(Effective Portion)
     Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)
            Amount of Gain or
(Loss) Reclassified from
Accumulated OCI into
Income (Effective
Portion)
     Location of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)
            Amount of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion and

Amount Excluded from
Effectiveness  Testing)
 
       

 

Three Months Ended

March 31,

  

  

          

 

Three Months Ended

March 31,

  

  

          

 

Three Months Ended

March 31,

  

  

        2012            2011               2012            2011               2012            2011   

Interest Rate Products

   $           148       $           852         Interest expense       $           625       $           (1,229)         Interest expense       $           0       $           (37)   

 

-14-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

(10) Fair Value Measurements

In accordance with ASC 820, Fair Value Measurement and Disclosures, the Company defines fair value based on the price that would be received upon sale of an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:

 

   

Level 1 - Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

 

   

Level 2 - Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

   

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company has estimated the fair value of its financial and non-financial instruments using available market information and valuation methodologies the Company believes to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that would be realized upon disposition.

Recurring Measurements

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of the fair value for each major category of assets and liabilities is presented below:

 

           Fair Value Measurements at March 31, 2012  
Description          Using Quoted Prices
in Active Markets
for Identical Assets

(Level 1)
           Using Significant
Other Observable
Inputs

(Level 2)
          Using Significant
Other Unobservable
Inputs

(Level 3)
 

Available-for-sale real estate equity securities

     $        297,500       $          0      $          0   

Real estate related bonds

       0           21,238          0   
    

 

 

      

 

 

     

 

 

 

Total assets

     $        297,500       $          21,238      $          0   
    

 

 

      

 

 

     

 

 

 

Derivative interest rate instruments

     $        0       $          (2,136   $          0   
    

 

 

      

 

 

     

 

 

 

Total liabilities

     $        0       $          (2,136   $          0   
    

 

 

      

 

 

     

 

 

 
           Fair Value Measurements at December 31, 2011  
Description          Using Quoted Prices
in Active Markets
for Identical Assets

(Level 1)
           Using Significant
Other Observable
Inputs

(Level 2)
          Using Significant
Other Unobservable
Inputs

(Level 3)
 

Available-for-sale real estate equity securities

     $        274,274       $          0      $          0   

Real estate related bonds

       0           15,091          0   
    

 

 

      

 

 

     

 

 

 

Total assets

     $        274,274       $          15,091      $          0   
    

 

 

      

 

 

     

 

 

 

Derivative interest rate instruments

     $        0       $          (2,284   $          0   
    

 

 

      

 

 

     

 

 

 

Total liabilities

     $        0       $          (2,284   $          0   
    

 

 

      

 

 

     

 

 

 

 

-15-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

Level 1

At March 31, 2012 and December 31, 2011, the fair value of the available for sale real estate equity securities have been estimated based upon quoted market prices for the same or similar issues when current quoted market prices are available. Unrealized gains or losses on investment are reflected in unrealized gain on investment securities in other comprehensive income on the consolidated statements of operations and other comprehensive income.

Level 2

To calculate the fair value of the real estate related bonds and the derivative interest rate instruments, the Company primarily uses quoted prices for similar securities and contracts. For the real estate related bonds, the Company reviews price histories for similar market transactions. For the derivatives, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements which utilizes Level 3 inputs, such as estimates of current credit spreads. However, as of March 31, 2012 and December 31, 2011, the Company has assessed that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Non-Recurring Measurements

The following table summarizes activity for the Company’s assets measured at fair value on a non-recurring basis. The Company recognized certain impairment charges to reflect the investments at their fair values for the three months ended March 31, 2012 and 2011. The asset groups that were reflected at fair value through this evaluation are:

 

         For the three months ended
March 31, 2012
     For the three months ended
March 31, 2011
 
         Fair Value
Measurements Using
Significant
Unobservable Inputs

(Level 3)
            Total
Impairment
Losses
            Fair Value
Measurements
Using Significant
Unobservable Inputs

(Level 3)
            Total
Impairment
Losses
 

Investment properties

  $      142,637           $           10,429         $           67,250         $           27,967     

Investment in unconsolidated entity

  $      19,311           $           4,200         $           0         $           0     
    

 

 

       

 

 

       

 

 

       

 

 

 

Total

  $      161,948           $           14,629         $           67,250         $           27,967     
    

 

 

       

 

 

       

 

 

       

 

 

 

The Company’s estimated fair value relating to the investment properties’ impairment analysis was based on a comparison of letters of intent or purchase contracts, broker opinions of value and ten-year discounted cash flow models, which includes contractual inflows and outflows over a specific holding period. The cash flows consist of unobservable inputs such as contractual revenues and forecasted revenues and expenses. These unobservable inputs are based on market conditions and the Company’s expected growth rates. Capitalization rates ranging from 7.25% to 9.00% and discount rates ranging from 7.50% to 8.00% were utilized in the model and are based upon observable rates that the Company believes to be within a reasonable range of current market rates. During the three months ended March 31, 2012, the Company identified certain properties which may have a reduction in the expected holding period and the Company reviewed the probability of these assets’ dispositions. For the three months ended March 31, 2012 and 2011, the impairment of the investment properties was $10,429 and $27,967, respectively. Certain properties have been disposed and were impaired prior to disposition and the related impairment charge of $0 and $21,474 is included in discontinued operations for the three months ended March 31, 2012 and 2011, respectively.

 

-16-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

The Company’s estimated fair value relating to the investment in unconsolidated entity’s impairment analysis was in part based on the expected future cash distributions and 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. The cash flows consist of unobservable inputs such as contractual revenues and forecasted revenues and expenses. These unobservable inputs are based on market conditions and expected growth rates. Capitalization rates ranging from 8.00% to 11.25% and discount rates ranging from 10.00% to 11.00% were utilized in the model and are based upon observable rates that the Company believes to be within a reasonable range of current market rates. These factors resulted in the valuation of the Company’s investment in the entity at $19,311 and an impairment charge of $4,200 for the three months ended March 31, 2012. There were no impairments to investment in unconsolidated entities recorded for the three months ended March 31, 2011.

Financial Instruments not Measured at Fair Value

The table below represents the fair value of financial instruments presented at carrying values in our consolidated financial statements as of March 31, 2012 and December 31, 2011.

 

     March 31, 2012      December 31, 2011  
     Carrying Value      Estimated Fair Value      Carrying Value      Estimated Fair Value  

Mortgage and notes payable

   $     6,137,783       $     5,983,359       $     5,812,595       $     5,524,022   

Margins payable

   $ 157,161       $ 157,161       $ 120,858       $ 120,858   

The Company estimates the fair value of its debt instruments using a weighted average effective interest rate of 5.57% per annum. The assumptions reflect the terms currently available on similar borrowing terms to borrowers with credit profiles similar to the Company’s. The Company has determined that its debt instrument valuations are classified in Level 2 of the fair value hierarchy.

(11) Income Taxes

The Company is qualified and has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, for federal income tax purposes commencing with the tax year ending December 31, 2005. Since the Company qualifies for taxation as a REIT, the Company generally will not be subject to federal income tax on taxable income that is distributed to stockholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distributes at least 90% of its REIT taxable income (subject to certain adjustments) to its stockholders. If the Company fails to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, the Company will be subject to federal and state income tax on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and federal income and excise taxes on its undistributed income.

The Company has elected to treat certain of its consolidated subsidiaries, and may in the future elect to treat newly formed subsidiaries, as taxable REIT subsidiaries pursuant to the Internal Revenue Code. Taxable REIT subsidiaries may participate in non-real estate related activities and/or perform non-customary services for tenants and are subject to federal and state income tax at regular corporate tax rates. The Company’s hotels are leased to certain of the Company’s taxable REIT subsidiaries. Lease revenue from these taxable REIT subsidiaries and its wholly-owned subsidiaries is eliminated in consolidation. For the three months ended March 31, 2012 and 2011, an income tax (expense) benefit of $(2,498) and $595 was included on the consolidated statements of operations and other comprehensive income.

(12) Segment Reporting

The Company has five business segments: Office, Retail, Industrial, Lodging and Multi-family. The Company evaluates segment performance primarily based on net property operations. Net property operations of the segments primarily exclude interest expense, depreciation and amortization, general and administrative expenses, net income of noncontrolling interest and other investment income from corporate investments. The non-segmented assets primarily include the Company’s cash and cash equivalents, investment in marketable securities, construction in progress, investment in unconsolidated entities and notes receivable.

 

-17-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

For the three months ended March 31, 2012, approximately 9% of the Company’s rental revenue was generated by over 400 retail banking properties leased to SunTrust Banks and approximately 7% of the Company’s rental revenue was generated by three properties leased to AT&T, Inc. As a result of the concentration of revenue generated from these properties, if SunTrust or AT&T were to cease paying rent or fulfilling its other monetary obligations, the Company 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.

The following table summarizes net property operations income by segment as of and for the three months ended March 31, 2012.

 

          Total            Office            Retail            Industrial            Lodging            Multi-
Family
 

Property rentals

  $          161,995         $          35,756         $          80,030         $          22,112         $          0         $          24,097     

Straight-line rents

      2,922             818             1,415             584             0             105     

Amortization of acquired above and below market leases, net

      372             33             406             (67)             0             0     
   

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total rental income

  $          165,289         $          36,607         $          81,851         $          22,629         $          0         $          24,202     

Tenant recovery income

      24,444             6,489             16,940             930             0             85     

Other property income

      4,285             933             669             492             0             2,191     

Lodging income

      150,076             0             0             0             150,076             0     
   

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total income

  $          344,094         $          44,029         $          99,460         $          24,051         $          150,076         $          26,478     
   

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Operating expenses

  $          157,184         $          10,899         $          24,714         $          2,080         $          107,003         $          12,488     

Net property operations

  $          186,910         $          33,130         $          74,746         $          21,971         $          43,073         $          13,990     
   

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Non allocated expenses (a)

  $          (128,347)                              

Other income and expenses (b)

  $          (73,725)                              

Equity in loss of unconsolidated entities (c)

  $          (4,619)                              

Provision for asset impairment

  $          (10,429)                              
   

 

 

                          

Net loss from continuing operations

  $          (30,210)                              
   

 

 

                          

Net income attributable to noncontrolling interests

  $          (73)                              
   

 

 

                          

Net loss attributable to Company

  $          (30,283)                              
   

 

 

                          

Balance Sheet Data:

                            

Real estate assets, net (d)

  $          9,720,481         $          1,548,516         $          3,765,949         $          901,740         $          2,749,018         $          755,258     

Non-segmented assets (e)

  $          1,482,452                              
   

 

 

                          

Total Assets

  $          11,202,933                              
   

 

 

                          

Capital expenditures

  $          20,282         $          10         $          5,114         $          1,106         $          13,439         $          613     

 

(a) Non allocated expenses consist of general and administrative expenses, business manager management fee and depreciation and amortization.
(b) Other income and expenses consist of interest and dividend income, interest expense, other income, realized gain on securities, net, and income tax expense.
(c) Loss from unconsolidated entities consists of equity losses in earning of unconsolidated entities and impairment of investment in unconsolidated entities.
(d) Real estate assets includes net intangibles.
(e) Construction in progress is included as non-segmented assets.

 

-18-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

The following table summarizes net property operations income by segment for the three months ended March 31, 2011.

 

            Total             Office             Retail             Industrial             Lodging             Multi-
Family
 

Property rentals

   $           154,003         $           36,540         $           73,834         $           21,206         $           0         $           22,423     

Straight-line rents

        3,378              1,315              1,012              997              0              54     

Amortization of acquired above and below market leases, net

        778              (77)              924              (69)              0              0     
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Total rental income

   $           158,159       $           37,778         $           75,770         $           22,134         $           0         $           22,477     

Tenant recovery income

        23,653              6,340              16,389              808              0              116     

Other property income

        4,831              1,059              1,746              22              0              2,004     

Lodging income

        127,655              0              0              0              127,655              0     
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Total income

   $           314,298         $           45,177         $           93,905         $           22,964         $           127,655         $           24,597     
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Operating expenses

   $           142,300         $           11,508         $           26,445         $           2,265         $           90,248         $           11,834     

Net property operations

   $           171,998         $           33,669         $           67,460         $           20,699         $           37,407         $           12,763     
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Non allocated expenses (a)

   $           (122,797)                                   

Other income and expenses (b)

   $           (66,516)                                   

Equity in loss of unconsolidated entities

   $           (2,297)                                   

Provision for asset impairment

   $           (6,493)                                   
     

 

 

                               

Net loss from continuing operations

   $           (26,105)                                   
     

 

 

                               

Net loss from discontinued operations

   $           (26,298)                                   
     

 

 

                               

Net loss

   $           (52,403)                                   
     

 

 

                               

Net income attributable to noncontrolling interests

   $           (2,224)                                   
     

 

 

                               

Net loss attributable to Company

   $           (54,627)                                   
     

 

 

                               

 

(a) Non allocated expenses consist of general and administrative expenses, business manager management fee and depreciation and amortization.
(b) Other income and expenses consist of interest and dividend income, interest expense, other income and expenses, realized gain on securities, and income tax benefit.

 

-19-


Table of Contents

INLAND AMERICAN REAL ESTATE TRUST, INC.

(A Maryland Corporation)

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except data amounts)

March 31, 2012

(unaudited)

 

(13) Earnings (loss) per Share

Basic earnings (loss) per share (“EPS”) are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period (the “common shares”). Diluted EPS is computed by dividing net income (loss) by the common shares plus potential common shares issuable upon exercising options or other contracts. There are an immaterial amount of potentially dilutive common shares.

The basic and diluted weighted average number of common shares outstanding was 872,886,566 and 849,843,349 for the three months ended March 31, 2012 and 2011, respectively.

(14) Commitments and Contingencies

Certain leases and operating agreements within the lodging segment require the Company to reserve funds relating to replacements and renewals of the hotels’ furniture, fixtures and equipment. As of March 31, 2012, the Company has funded $46,093 in reserves for future improvements. This amount is included in restricted cash and escrows on the consolidated balance sheet as of March 31, 2012.

The Company has learned that the SEC is conducting a non-public, formal, fact-finding investigation to determine whether there have been violations of certain provisions of the federal securities laws regarding the business manager fees, property management fees, transactions with affiliates, timing and amount of distributions paid to investors, determination of property impairments, and any decision regarding whether the Company might become a self-administered REIT. The Company has not been accused of any wrongdoing by the SEC. The Company also has been informed by the SEC that the existence of this investigation does not mean that the SEC has concluded that anyone has broken the law or that the SEC has a negative opinion of any person, entity, or security. The Company has been cooperating fully with the SEC.

The Company cannot reasonably estimate the timing of the investigation, nor can the Company predict whether or not the investigation might have a material adverse effect on the business.

Inland American Business Manager & Advisor, Inc. has offered to the Company’s board of directors that, to the fullest extent permitted by law, it will reduce the business management fee in an aggregate amount necessary to reimburse the Company for any costs, fees, fines or assessments, if any, which may result from the SEC investigation, other than legal fees incurred by the Company, or fees and costs otherwise covered by insurance. On May 4, 2012, Inland American Business Manager & Advisor, Inc. forwarded a letter to the Company that memorializes this arrangement.

The Company has also filed a number of eviction actions against tenants and is involved in a number of tenant bankruptcies. The tenants in some of the eviction cases may file counterclaims against the Company in an attempt to gain leverage against the Company in connection with the eviction. In the opinion of the Company, none of these counterclaims is likely to result in any material losses to the Company.

The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material adverse effect on the financial statements of the Company.

(15) Subsequent Events

Subsequent to March 31, 2012, the Company disposed of 29 retail bank branches for $26,488, resulting in a gain.

 

-20-


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 20549-3628. 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.

Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q 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, estimated per share value of the Company’s common stock 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 Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 11, 2012, as amended. These factors include, but are not limited to: market and economic challenges experienced by the U.S. economy or real estate industry as a whole, including in the lodging industry, 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 or borrowers subject under our notes receivable, 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 three months ended March 31, 2012 and 2011 and as of March 31, 2012 and December 31, 2011. You should read the following discussion and analysis along with our Consolidated Financial Statements and the related notes included in this report.

Overview

We anticipate maintaining a sustainable distribution rate funded by our operations. We intend to dispose of assets we determine to be less strategic and reinvest the capital in real estate assets that we believe will produce attractive current yields and long-term risk-adjusted returns to our stockholders. Another strategy we will continue to employ to achieve these objectives, is actively seeking to lease space at favorable rates, controlling expenses, and maintaining 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 three months ended March 31, 2012 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 expenses relate 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.

 

-21-


Table of Contents

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.

   

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

   

Debt maturities and leverage ratios.

   

Liquidity levels.

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 through the remainder of 2012. We expect to see increased same store operating performance in our lodging and multi-family segments through the remainder of 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.

2012 First Quarter Highlights

 

   

We continue to refine our portfolio. During the first quarter, we acquired five upper upscale lodging properties consisting of 2,302 rooms for a gross acquisition price of $393.1 million. In April of 2012, we disposed of 29 retail bank branches for $26.5 million, resulting in a gain.

   

We successfully completed debt refinancings of approximately $270 million and have maintained a weighted average interest rate of 5.2% per annum.

   

Effective January 1, 2012, we executed an extension agreement with the property managers to extend the term of our property management agreements through June 30, 2012. In consideration for the extensions, the managers have agreed to reduce the monthly property management fees paid (1) for triple-net lease properties, from an amount that previously had ranged from 2.99% to 4.5% of gross income to a lower fee of 2.9% of gross income and (2) for bank branches, from an amount that previously had ranged from 3.9% to 4.5% of gross income to a lower fee of 2.5% of gross income.

   

First Quarter Operating Results on a Same Store Basis (in thousands):

 

     Net operating income for the three
months ended
     Increase
(decrease)
    Increase
(decrease)
    Economic
Occupancy as

of March 31,
2012
    Economic
Occupancy as of
March 31, 2011
 
     March 31, 2012      March 31, 2011           

Retail

   $ 68,502       $ 68,402       $ 100        0.1     93     94

Lodging

     38,570         37,105         1,465        3.9     68     67

Office

     32,506         33,179         (673     (2.0 )%      90     92

Industrial

     20,964         20,880         84        0.4     92     95

Multi-Family

     13,348         12,455         893        7.2     94     93
  

 

 

    

 

 

    

 

 

   

 

 

     
   $ 173,890       $ 172,021       $ 1,869        1.1    

Results of Operations

General

Consolidated Results of Operations

This section describes and compares our results of operations for the three months ended March 31, 2012 and 2011. 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 three months ended March 31, 2012 and 2011, 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).

 

-22-


Table of Contents

Operating Income and Expenses:

 

            Three months
ended
    March 31, 2012    
            Three months
ended
    March 31, 2011    
            2012 Increase
(decrease)
    from 2011    
 

Income:

                 

Rental income

   $           165,289       $           158,159       $           7,130   

Tenant recovery income

        24,444            23,653            791   

Other property income

        4,285            4,831            (546

Lodging income

        150,076            127,655            22,421   

Operating Expenses:

                 

Lodging operating expenses

   $           99,852       $           83,797       $           16,055   

Property operating expenses

        32,240            33,418            (1,178

Real estate taxes

        25,092            25,085            7   

Provision for asset impairment

        10,429            6,493            3,936   

General and administrative expenses

        8,872            6,614            2,258   

Business manager management fee

        10,000            10,000            0   

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 overall increase in property revenues for the three months ended March 31, 2012 over the same period in 2011 was primarily due to the seven retail properties the Company acquired in the second and third quarter of 2011. On a same store basis, consolidated property revenues amounted to $182,089 for the three months ended March 31, 2012 compared to $183,808 for the three months ended March 31, 2011, which was less than a 1% change. Same store property operating expenses amounted to $46,769 for the three months ended March 31, 2012 compared to $48,892 for the three months ended March 31, 2011, which was a 4% decrease.

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 three months ended March 31, 2012 as a result of the three hotels acquired in 2011, starting in February and throughout the year, as well as the five hotels acquired in March 2012. As expected, lodging operating expense increased correspondingly to lodging income.

Provision for Asset Impairment

 

   

For the three months ended March 31, 2012, 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 $10,429, to reduce the book value of certain of our investment properties to their fair values. For the three months ended March 31, 2011, we impaired a total of eight properties. One property impairment of $6,493 was included in the consolidated statement of operations in continuing operations and the remaining seven property impairments of $21,474 were included in discontinued operations as those properties were disposed of by December 31, 2011.

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.

 

-23-


Table of Contents
   

We incurred a business management fee of $10,000 and $10,000, which is equal to .09%, and .09% of average invested assets, and the business manager waived the remaining fee of $18,495 and $18,304 to which it was entitled under the agreement for the three months ended March 31, 2012 and 2011, 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 increase in general and administrative expense from the three months ended March 31, 2012 to the three months ended March 31, 2011 was primarily a result of an increase in acquisition expenses and legal costs, as well an increase in reimbursable expenses as a result of a shift in personnel from our property managers to our business manager. The personnel costs for these persons were not reimbursable under the agreements with our property managers, but are reimbursable in accordance with the reimbursement provisions of the business management agreement.

Non-Operating Income and Expenses:

 

           Three months
ended
     March 31, 2012    
          Three months
ended
     March 31, 2011    
              2012 Increase    
(decrease) from
2011
 

Non-operating income and expenses:

            

Interest and dividend income

   $          4,911      $          5,637      $          (726

Other income

       342          352          (10

Interest expense

       (77,903       (77,096       (807

Equity in loss of unconsolidated entities

       (419       (2,297       1,878   

Impairment of investment in unconsolidated entities

       (4,200       0          (4,200

Realized gain on securities

       1,423          3,996          (2,573

Loss from discontinued operations, net

       0          (26,298       26,298   

Interest Expense

 

   

The principal amount of mortgage debt financings increased from $5,468,570 to $6,137,783 comparing March 31, 2011 to March 31, 2012. Interest expense for the three months ended March 31, 2011 was offset by fully amortizing $10,368 of a mark to market mortgage discount on three properties. The recognition of the $10,368 discount was recorded as a result of the properties’ mortgage loans, totaling $63,955, being in default as of March 31, 2011. The weighted average interest rate was 5.2% for both periods.

Impairment of Investment in Unconsolidated Entities

 

   

On February 21, 2012, we delivered to Lexington Master Limited Partnership (“LMLP”), our joint venture partner for the Net Lease Strategic Assets Fund LP joint venture, a right of first offer under the partnership agreement. On February 20 and 21, 2012, LMLP delivered notice to us to exercise the buy/sell option under the partnership agreement. For the year ended December 31, 2011, we valued the equity interest and recorded an initial impairment of $113,621. On April 27, 2012, we entered into a disposition agreement with LMLP. Pursuant to this agreement, the right of first offer and buy/sell option previously delivered by us and LMLP, respectively, are deemed to have no force or effect. Under the agreement, we must provide written notice by September 17, 2012 to LMLP to either (1) buy LMLP’s interest in Net Lease Strategic Asset Fund L.P. for $219,838 less any distributions to LMLP from April 27, 2012 to October 1, 2012 or (2) sell our interest in the venture for $14,374 less any distributions to us from April 27, 2012 to October 1, 2012. We valued the equity interest in part based on the expected future cash distributions and 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. For the three months ended March 31, 2012, we recorded an additional impairment of $4,200 on our investment in unconsolidated entities related to the Net Lease Strategic Assets Fund LP joint venture. The impairment reduced our investment in the Net Lease Strategic Assets Fund LP joint venture to $19,311 as of March 31, 2012. For the three months ended March 31, 2011, we did not record any impairment of investment in unconsolidated entities.

Discontinued Operations

 

   

There were no dispositions for the three months ended March 31, 2012. For the three months ended March 31, 2011, we recorded a loss of $26,298 from discontinued operations due to the disposition of 26 properties from April to December 2011. The loss from discontinued operations was primarily comprised of a provision for asset impairment of $21,474.

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 944 of our investment properties satisfied the criteria of being owned for the entire three months ended March 31, 2012 and 2011, 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 performance measures for the three months ended March 31, 2012 and 2011. The base rental rates reflected in retail, office, industrial, and multi-family are exclusive of tenant improvements and lease commissions. For the three months ended March 31, 2012, these costs associated with leasing space were not material.

 

-24-


Table of Contents

Retail Segment

Our retail segment net operating income on a same store basis remained stable for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 with a slight increase of less than 1.0%, up $68,502 from $68,402. Although same store average economic occupancy decreased by 1% from 94% for the three months ended March 31, 2011 to 93% for the three months ended March 31, 2012, operating expenses decreased 11% due to lower snow removal cost and a decrease in management fees related to the rate decrease effective January 1, 2012.

 

          Total Retail Properties
          As of March 31,
         

2012

         

2011

Retail Properties                  

Physical occupancy

        93 %               93 %      

Economic occupancy

        94 %               94 %      

Base rent per square foot

   $      15.04          $           15.13      

Gross investment in properties

   $      4,350,340          $           4,219,442      

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

     319         1,171,458         18,208         5.5     5.4     15.54   

2013

     344         1,336,718         21,909         6.3     6.5     16.39   

2014

     318         2,001,120         29,073         9.4     8.7     14.53   

2015

     340         2,364,180         29,710         11.1     8.9     12.57   

2016

     311         1,863,595         27,282         8.8     8.2     14.64   

Thereafter

     1,217         12,524,340         208,470         58.9     62.3     16.65   
  

 

 

 
     2,849         21,261,411         334,652         100     100     15.74   

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%.

Comparison of three months ended March 31, 2012 and 2011

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, 2011. The properties in the same store portfolio were owned for the entire three months ended March 31, 2012 and 2011.

 

Retail         For the three months ended
March 31, 2012
          For the three months ended
March 31, 2011
          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

  $          74,891      $          6,960      $          81,851      $          74,940      $          830      $          75,770      $          (49)        (0.1)%      $          6,081        8.0%   

Tenant recovery income

      15,243          1,697          16,940          15,976          413          16,389          (733)        (4.6)%          551        3.4%   

Other property income

      869          (200)          669          1,741          5          1,746          (872)        (50.1)%          (1,077)        (61.7)%   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Total revenues

  $          91,003      $          8,457      $          99,460      $          92,657      $          1,248      $          93,905      $          (1,654)        (1.8)%      $          5,555        5.9%   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Expenses:

                                   

Property operating expenses

  $          12,999      $          1,285      $          14,284      $          14,671      $          706      $          15,377      $          1,672        11.4%      $          1,093        7.1 %   

Real estate taxes

      9,502          928          10,430          9,584          1,484          11,068          82        0.9%          638        5.8 %   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Total operating expenses

  $          22,501      $          2,213      $          24,714      $          24,255      $          2,190      $          26,445      $          1,754        7.2%      $          1,731        6.5 %   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Net operating income

  $          68,502      $          6,244      $          74,746      $          68,402      $          (942)      $          67,460      $          100        0.1%      $          7,286        10.8%   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Average occupancy for the period

      93%          N/A          93%          94%          N/A          94%               

Number of Properties

      716          11          727          716          6          722               

 

-25-


Table of Contents

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.

On a same store basis, net operating income increased 4% for the three months ended March 31, 2011 to March 31, 2012, from $37,105 to $38,570, which was a result of increased RevPar, ADR and Occupancy. Specifically, we saw these key metrics grow 4%, 3%, and 1%, respectively, for the three months ended March 31, 2011 to March 31, 2012. The seasonality of our lodging segment results in lower revenue and operating income during the first and fourth quarters. We anticipate the operating performance of our lodging portfolio to increase in the second and third quarters of 2012.

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.

 

          Total Lodging Properties
       
 
For the three months ended
March 31,
Lodging Properties         2012         2011

Revenue per available room

   $      83          $           80      

Average daily rate

   $      123          $           119      

Occupancy

        68%               67%      

Gross investment in properties as of March 31,

   $      3,304,224          $           2,892,123      

Comparison of three months ended March 31, 2012 and 2011

The table below represents operating information for the lodging segment and for the same store portfolio for properties acquired prior to January 1, 2011. The properties in the same store portfolio were owned for the entire three months ended March 31, 2012 and 2011.

 

Lodging         For the three months ended March
31, 2012
    For the three months ended March
31, 2011
    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

  $          130,478      $          19,598      $          150,076      $          126,022      $          1,633      $          127,655      $          4,456        3.5%      $          22,421        17.6%   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Expenses:

                                   

Lodging operating expenses

  $          85,373      $          14,479      $