Lightstone Value Plus REIT V, Inc. - Quarter Report: 2013 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

Commission File Number: 000-53650

 

Behringer Harvard Opportunity REIT II, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

15601 Dallas Parkway, Suite 600, Addison, Texas 75001

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code:  (866) 655-3600

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

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

 

 

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

 

As of April 30, 2013, Behringer Harvard Opportunity REIT II, Inc. had 26,040,582 shares of common stock outstanding.

 

 

Table of Contents

 

BEHRINGER HARVARD OPPORTUNITY REIT II, INC.

FORM 10-Q

Quarter Ended March 31, 2013

 

		Page
PART I
FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012	3
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2013 and 2012	4
	Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2013 and 2012	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosure	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
Signature		36

 

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PART I

FINANCIAL INFORMATION

 

Item 1.                   Financial Statements.

 

Behringer Harvard Opportunity REIT II, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except shares)

(unaudited)

 

		March 31,			December 31,
		2013			2012
Assets
Real estate
Land and improvements, net		$	65,531		$	73,380
Buildings and improvements, net		217,237			199,915
Real estate under development		6			838
Total real estate		282,774			274,133
Assets associated with real estate held for sale		24,520			—
Cash and cash equivalents		69,427			77,752
Restricted cash		3,841			3,491
Accounts receivable, net		3,063			3,008
Receivable from related party		—			3,269
Prepaid expenses and other assets		1,469			1,781
Furniture, fixtures and equipment, net		7,816			6,864
Acquisition deposits		609			—
Deferred financing fees, net		3,609			3,398
Lease intangibles, net		5,304			5,370
Total assets		$	402,432		$	379,066
Liabilities and Equity
Notes payable		$	199,156		$	183,308
Accounts payable		1,489			1,777
Payables to related parties		568			—
Acquired below-market leases, net		805			904
Accrued and other liabilities		6,957			6,544
Obligations associated with real estate held for sale		11,322			—
Total liabilities		220,297			192,533
Commitments and contingencies
Equity
Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none outstanding		—			—
Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 outstanding		—			—
Common stock, $.0001 par value per share; 350,000,000 shares authorized, 26,040,582 and 26,060,612 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		3			3
Additional paid-in capital		233,112			233,283
Accumulated distributions and net loss		(62,581		)	(58,249		)
Accumulated other comprehensive income		(197		)	126
Total Behringer Harvard Opportunity REIT II, Inc. equity		170,337			175,163
Noncontrolling interest		11,798			11,370
Total equity		182,135			186,533
Total liabilities and equity		$	402,432		$	379,066

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Behringer Harvard Opportunity REIT II, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share amounts)

(unaudited)

 

		Three months ended March 31,
		2013			2012
Revenues
Rental revenue		$	8,665		$	7,924
Hotel revenue		3,617			2,475
Total revenues		12,282			10,399
Expenses:
Property operating expenses		5,815			5,261
Interest expense		2,044			1,878
Real estate taxes		1,189			1,052
Property management fees		446			380
Asset management fees		681			770
General and administrative		801			624
Acquisition expense		1,871			—
Depreciation and amortization		3,684			3,773
Total expenses		16,531			13,738
Interest income, net		32			31
Other income (expense)		(11		)	30
Loss from continuing operations		(4,228		)	(3,278		)
Income (loss) from discontinued operations, including gains on disposition		(285		)	7,400
Net income (loss)		(4,513		)	4,122
Noncontrolling interest in continuing operations		124			244
Noncontrolling interest in discontinued operations		57			(673		)
Net (income) loss attributable to the noncontrolling interest		181			(429		)
Net income (loss) attributable to the Company		$	(4,332	)	$	3,693
Amounts attributable to the Company
Continuing operations		$	(4,104	)	$	(3,034	)
Discontinued operations		(228		)	6,727
Net income (loss) attributable to the Company		$	(4,332	)	$	3,693
Weighted average shares outstanding:
Basic and diluted		26,054			25,728
Net income (loss) per share
Continuing operations		$	(0.16	)	$	(0.12	)
Discontinued operations		(0.01		)	0.26
Basic and diluted income (loss) per share		$	(0.17	)	$	0.14
Comprehensive income (loss):
Net income (loss)		$	(4,513	)	$	4,122
Other comprehensive income (loss):
Reclassification of unrealized loss on interest rate derivatives to net income		32			—
Unrealized loss on interest rate derivatives		—			(1		)
Foreign currency translation gain (loss)		(352		)	97
Total other comprehensive income (loss)		(320		)	96
Comprehensive income (loss)		(4,833		)	4,218
Comprehensive (income) loss attributable to noncontrolling interest		178			(429		)
Comprehensive income (loss) attributable to common shareholders		$	(4,655	)	$	3,789

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Behringer Harvard Opportunity REIT II, Inc.

Condensed Consolidated Statements of  Equity

(unaudited)

(in thousands)

 

																		Accumulated
		Convertible Stock					Common Stock					Additional			Accumulated			Other
		Number		Par			Number		Par			Paid-in			Distributions and			Comprehensive			Noncontrolling			Total
		of Shares		Value			of Shares		Value			Capital			Net (Loss)			Income (loss)			Interest			Equity
Balance at January 1, 2012		1		$	—		25,267		$	3		$	225,968		$	(43,657	)	$	83		$	14,607		$	197,004
Net income															3,693						429			4,122
Issuance of common stock, net							835		—			7,654												7,654
Redemption of common stock							(80	)				(725		)										(725		)
Distributions declared on common stock															(16,257		)							(16,257		)
Contributions from noncontrolling interest																					1,209			1,209
Distributions to noncontrolling interest																					(6,687		)	(6,687		)
Other comprehensive income (loss):
Unrealized losses on interest rate derivatives																		(1		)	—			(1		)
Foreign currency translation gain																		97						97
Balance at March 31, 2012		1		—			26,022		3			232,897			(56,221		)	179			9,558			$	186,416
Balance at January 1, 2013		1		$	—		26,060		$	3		$	233,283		$	(58,249	)	$	126		$	11,370		$	186,533
Net loss															(4,332		)				(181		)	(4,513		)
Redemption of common stock							(20	)				(171		)										(171		)
Contributions from noncontrolling interest																					663			663
Distributions to noncontrolling interest																					(57		)	(57		)
Other comprehensive income (loss):
Reclassification of unrealized loss on interest rate derivatives to net income																		29			3			32
Foreign currency translation loss																		(352		)				(352		)
Balance at March 31, 2013		1		$	—		26,040		$	3		$	233,112		$	(62,581	)	$	(197	)	$	11,798		$	182,135

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Behringer Harvard Opportunity REIT II, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

		Three months ended March 31,
		2013			2012
Cash flows from operating activities:
Net income (loss)		$	(4,513	)	$	4,122
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
Depreciation and amortization		3,913			4,382
Amortization of deferred financing fees		256			253
Gain on sale of discontinued operations		—			(9,264		)
Loss on early extinguishment of debt		—			1,236
Loss on derivatives		71			—
Change in operating assets and liabilities:
Accounts receivable		(278		)	(104		)
Interest receivable-real estate loan receivable		—			—
Prepaid expenses and other assets		92			(328		)
Accounts payable		(249		)	(2,219		)
Accrued and other liabilities		379			1,166
Payables to related parties		5			28
Addition of lease intangibles		(501		)	(103		)
Cash used in operating activities		(825		)	(831		)
Cash flows from investing activities:
Acquisition deposits		(290		)	—
Purchases of real estate		(35,337		)	—
Proceeds from sale of discontinued operations		—			38,684
Additions of property and equipment		(2,827		)	(1,839		)
Change in restricted cash		(152		)	(337		)
Cash provided by (used in) investing activities		(38,606		)	36,508
Cash flows from financing activities:
Financing costs		(471		)	(788		)
Proceeds from notes payable		28,089			25
Payments on notes payable		(393		)	(20,188		)
Purchase of interest rate derivatives		(133		)	—
Payment of loan deposits		(60		)	—
Issuance of common stock		—			6,141
Redemptions of common stock		(171		)	(725		)
Offering costs receivable from related party		3,832			(553		)
Distributions		—			(1,100		)
Contributions from noncontrolling interest holders		663			1,209
Distributions to noncontrolling interest holders		(57		)	(6,687		)
Cash provided by (used in) financing activities		31,299			(22,666		)
Effect of exchange rate changes on cash and cash equivalents		(193		)	28
Net change in cash and cash equivalents		(8,325		)	13,039
Cash and cash equivalents at beginning of period		77,752			80,130
Cash and cash equivalents at end of period		$	69,427		$	93,169

 

See Notes to Unaudited Condensed Consolidated Financial Statements.

 

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.                                      Business and Organization

 

Business

 

Behringer Harvard Opportunity REIT II, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”) was organized as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

 

We acquire and operate commercial real estate and real estate-related assets.  In particular, we focus generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines.  In addition, our current opportunistic investment strategy also includes investments in real estate-related assets that present opportunities for higher current income.  Such investments may have capital gain characteristics, whether as a result of a discount purchase or related equity participations.  We may acquire a wide variety of commercial properties, including office, industrial, retail, hospitality, recreation and leisure, single-tenant, multifamily, and other real properties.  These properties may be existing, income-producing properties, newly constructed properties, or properties under development or construction.  They may include multifamily properties purchased for conversion into condominiums and single-tenant properties that may be converted for multi-tenant use.  We may invest in real estate-related securities, including securities issued by other real estate companies, either for investment or in change of control transactions completed on a negotiated basis or otherwise.  Further, we also may originate or invest in collateralized mortgage-backed securities and mortgage, bridge or mezzanine loans, or in entities that make investments similar to the foregoing.  We expect to make our investments in or in respect of real estate assets located in the United States and other countries based on our view of existing market conditions.  As of March 31, 2013, we had 11 real estate investments, all of which were consolidated into our condensed consolidated financial statements, including the remaining three buildings at Interchange Business Center classified as held for sale.

 

Substantially all of our business is conducted through Behringer Harvard Opportunity OP II LP, a limited partnership organized in Delaware (“Behringer Harvard Opportunity OP II”).  As of March 31, 2013, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, was the sole general partner of Behringer Harvard Opportunity OP II and owned a 0.1% partnership interest in Behringer Harvard Opportunity OP II.  As of March 31, 2013, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of Behringer Harvard Opportunity OP II and owned the remaining 99.9% interest in Behringer Harvard Opportunity OP II.

 

We are externally managed and advised by Behringer Harvard Opportunity Advisors II, LLC.  The Advisor is responsible for managing our day-to-day affairs and for identifying and making acquisitions and investments on our behalf.

 

Organization

 

In connection with our initial capitalization, on January 19, 2007, we issued 22,471 shares of our common stock and 1,000 shares of our convertible stock to Behringer Harvard Holdings.  Behringer Harvard Holdings transferred its shares of convertible stock to the Advisor on April 2, 2010.

 

As of March 31, 2013, we had issued 26.7 million shares of our common stock, including 22,471 shares owned by Behringer Harvard Holdings and 2.2 million shares issued through the distribution reinvestment plan (the “DRP”).  As of March 31, 2013, we had redeemed 0.7 million shares of our common stock and had 26.0 million shares of common stock outstanding.  As of March 31, 2013, we had 1,000 shares of convertible stock issued and outstanding to the Advisor.

 

Our common stock is not currently listed on a national securities exchange.  Depending upon then prevailing market conditions, it is our intention to consider beginning the process of liquidating our assets and distributing the net proceeds to our stockholders within three to six years after the termination of our initial public offering of common stock.  If we do not begin an orderly liquidation within that period, we may seek to have our shares listed on a national securities exchange.

 

2.                                      Interim Unaudited Financial Information

 

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on March 28, 2013.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this report on Form 10-Q pursuant to the rules and regulations of the SEC.

 

The results for the interim periods shown in this report are not necessarily indicative of future financial results.  The accompanying condensed consolidated balance sheet as of March 31, 2013, the condensed consolidated statements of

 

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

operations and comprehensive income (loss), changes in equity, and cash flows for the three months ended March 31, 2013 and 2012 have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to fairly present our condensed consolidated financial position as of March 31, 2013 and December 31, 2012 and our condensed consolidated results of operations and cash flows for the periods ended March 31, 2013 and 2012.  Such adjustments are of a normal recurring nature.

 

3.                                      Summary of Significant Accounting Policies

 

Described below are certain of our significant accounting policies.  The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q.  Please see our Annual Report on Form 10-K for a complete listing of all of our significant accounting policies.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates include such items as purchase price allocation for real estate acquisitions, impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts.  Actual results could differ from those estimates.

 

Principles of Consolidation and Basis of Presentation

 

Our consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control.  All inter-company transactions, balances, and profits have been eliminated in consolidation.  Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary.  If the interest in the entity is determined not to be a VIE, then the entity will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.  In the Notes to Condensed Consolidated Financial Statements, all dollar and share amounts in tabulation are in thousands of dollars and shares, respectively, unless otherwise noted.

 

There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether we are the primary beneficiary.  The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity.  Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses.  A change in the judgments, assumptions, and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment using the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.

 

Real Estate

 

Upon the acquisition of real estate properties, we recognize the assets acquired, the liabilities assumed and any noncontrolling interest as of the acquisition date, measured at their fair values.  The acquisition date is the date on which we obtain control of the real estate property.  The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities and asset retirement obligations. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships.  Identified intangible liabilities generally consist of below-market leases. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired.  Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired.  Acquisition-related costs are expensed in the period incurred.  Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.

 

The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings.  Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants.  The value of buildings is depreciated over the estimated useful life of 25 years using the straight-line method.

 

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption.  Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.

 

We determine the value of above-market and below-market leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management’s estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining non-cancelable lease term for above-market leases, or (b) the remaining non-cancelable lease term plus any below-market fixed rate renewal options that, based on a qualitative assessment of several factors, including the financial condition of the lessee, the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, are reasonably assured to be exercised by the lessee for below-market leases.  We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the determined lease term.

 

The total value of identified real estate intangible assets acquired is further allocated to in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant.  The aggregate value for tenant improvements and leasing commissions is based on estimates of these costs incurred at inception of the acquired leases, amortized through the date of acquisition.  The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model.  The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces considering current market conditions.  In estimating the carrying costs that would have otherwise been incurred had the leases not been in place, we include such items as real estate taxes, insurance and other operating expenses as well as lost rental revenue during the expected lease-up period based on current market conditions.  The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal fees and tenant improvements as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis.

 

We amortize the value of in-place leases, in-place tenant improvements and in-place leasing commissions to expense over the initial term of the respective leases.  The tenant relationship values are amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense.

 

Anticipated amortization expense associated with the acquired lease intangibles for each of the following five years excluding properties classified as discontinued operations as of March 31, 2013 is as follows:

 

Year		Lease / Other Intangibles
April 1, 2013 - December 31, 2013		$	1,418
2014		709
2015		380
2016		244
2017		195

 

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Accumulated depreciation and amortization related to our consolidated investments in real estate assets and intangibles were as follows:

 

											Acquired
		Buildings and			Land and			Lease			Below-Market
March 31, 2013		Improvements			Improvements			Intangibles			Leases
Cost		$	236,087		$	67,467		$	14,168		$	(2,173	)
Less: depreciation and amortization		(18,850		)	(1,936		)	(8,864		)	1,368
Net (1)		$	217,237		$	65,531		$	5,304		$	(805	)

 

											Acquired
		Buildings and			Land and			Lease			Below-Market
December 31, 2012		Improvements			Improvements			Intangibles			Leases
Cost		$	217,343		$	75,873		$	14,041		$	(2,196	)
Less: depreciation and amortization		(17,428		)	(2,493		)	(8,671		)	1,292
Net		$	199,915		$	73,380		$	5,370		$	(904	)

 

(1)         Excludes the remaining three industrial buildings at Interchange Business Center, which were sold on April 12, 2013 (classified as held for sale as of March 31, 2013).

 

Real Estate Held for Sale

 

We classify properties as held for sale when certain criteria are met, in accordance with GAAP.  At that time we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property.  Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell.  As of March 31, 2013, the remaining three industrial buildings at Interchange Business Center were classified as held for sale and a sale of the property was completed on April 12, 2013.

 

Investment Impairment

 

For all of our real estate and real estate related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to:  a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions.  Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at a portion of our properties within a short time period, which may result in asset impairments.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.  We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist.  While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

 

In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, and the projected sales price of each of the properties.  A future change in these estimates and assumptions could result in understating or overstating the carrying value of our investments, which could be material to our financial statements.

 

We believe the carrying value of our operating real estate is currently recoverable.  Accordingly, there were no impairment charges for the three months ended March 31, 2013 or 2012.  However, if market conditions worsen beyond our current expectations, or if changes in our strategy significantly affect any key assumptions used in our fair value calculations,

 

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

we may need to take charges in future periods for impairments related to our existing investments.  Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.

 

Revenue Recognition

 

We recognize rental income generated from leases on real estate assets on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  Straight-line rental revenue of $0.2 million and $0.1 million was recognized in rental revenues for the three months ended March 31, 2013 and 2012, respectively, and includes amounts recognized in discontinued operations.  Net below market lease amortization of less than $0.1 million was recognized in rental revenues for the three months ended March 31, 2013 and 2012 and includes amounts recognized in discontinued operations.

 

Hotel revenue is derived from the operations of the Courtyard Kauai at Coconut Beach Hotel, consisting of guest room, food and beverage, and other revenue, and is recognized as the services are rendered.

 

Accounts Receivable

 

Accounts receivable primarily consist of receivables related to our consolidated properties of $3.2 million which includes straight-line rental revenue receivables of $1.4 million as of March 31, 2013.  Accounts receivable primarily consisted of receivables related to our consolidated properties of $2.8 million which includes straight-line rental revenue receivables of $1.2 million as of December 31, 2012.

 

Furniture, Fixtures, and Equipment

 

Furniture, fixtures, and equipment are recorded at cost and are depreciated according to the company’s capitalization policy which uses the straight-line method over their estimated useful lives of five to seven years.  Maintenance and repairs are charged to operations as incurred.  Accumulated depreciation associated with our furniture, fixtures, and equipment was $2.7 million and $2.3 million as of March 31, 2013 and December 31, 2012, respectively.

 

Deferred Financing Fees

 

Deferred financing fees are recorded at cost and are amortized to interest expense of our notes payable using a straight-line method that approximates the effective interest method over the life of the related debt.  Accumulated amortization of deferred financing fees was $1.6 million and $1.4 million as of March 31, 2013 and December 31, 2012, respectively.

 

Income Taxes

 

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and have qualified as a REIT since the year ended December 31, 2008.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level.  We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code and intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT.

 

We have reviewed our tax positions under GAAP guidance that clarifies the relevant criteria and approach for the recognition and measurement of uncertain tax positions.  The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return.  A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination.  We believe it is more likely than not that the tax positions taken relative to our status as a REIT will be sustained in any tax examination.

 

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Foreign Currency Translation

 

For our international investment where the functional currency is other than the U.S. dollar, assets and liabilities are translated using period-end exchange rates, while the statement of operations amounts are translated using the average exchange rates for the respective period.  Gains and losses resulting from the change in exchange rates from period to period are reported separately as a component of other comprehensive income (loss) (“OCI”).  Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations and comprehensive income (loss).

 

The Euro is the functional currency for the operations of Holstenplatz and Alte Jakobstraße.  We also maintain a Euro-denominated bank account that is translated into U.S. dollars at the current exchange rate at each reporting period.  For the three months ended March 31, 2013, the foreign currency translation adjustment was a loss of $0.4 million.  For the three months ended March 31, 2012, the foreign currency translation adjustment was a gain of $0.1 million.

 

Concentration of Credit Risk

 

At March 31, 2013 and December 31, 2012, we had cash and cash equivalents deposited in certain financial institutions in excess of federally insured levels.  We have diversified our cash and cash equivalents among several banking institutions in an attempt to minimize exposure to any one of these entities.  We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents or restricted cash.

 

Noncontrolling Interest

 

Noncontrolling interest represents the noncontrolling ownership interest’s proportionate share of the equity in our consolidated real estate investments.  Income and losses are allocated to noncontrolling interest holders based generally on their ownership percentage.  In certain instances, our joint venture agreement provides for liquidating distributions based on achieving certain return metrics (“promoted interest”).  If a property reaches a defined return threshold, then it will result in distributions to noncontrolling interest which is different from the standard pro-rata allocation percentage.

 

Earnings per Share

 

Net income (loss) per share is calculated based on the weighted average number of common shares outstanding during each period.  The weighted average shares outstanding used to calculate both basic and diluted income (loss) per share were the same for each of the three months ended March 31, 2013 and 2012, as there were no potentially dilutive securities outstanding.

 

Subsequent Events

 

We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements and noted no subsequent events that would require adjustment to the condensed consolidated financial statements or additional disclosure.

 

4.                                      New Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-02 (“ASU 2013-02”), Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The update clarifies how to report the effect of significant reclassifications out of accumulated other comprehensive income.  ASU 2013-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012 and is to be applied prospectively.  Our adoption of this ASU in the first quarter of 2013 did not materially change the presentation of our consolidated condensed financial statements.

 

5.                                      Assets and Liabilities Measured at Fair Value

 

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.

 

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access.  Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or

 

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

liability, either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s own assumptions, as there is little, if any, related market activity.  In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

Recurring Fair Value Measurements

 

Currently, we use interest rate swaps and caps to manage our interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative.  This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, and foreign currency exchange rates.

 

We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties.  However, as of March 31, 2013, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

The following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012.

 

March 31, 2013		Level 1			Level 2			Level 3			Total
Assets
Derivative financial instruments		$	—		$	106		$	—		$	106

 

December 31, 2012		Level 1			Level 2			Level 3			Total
Assets
Derivative financial instruments		$	—		$	13		$	—		$	13

 

Derivative financial instruments classified as assets are included in prepaid expenses and other assets on the balance sheet.

 

6.                                      Financial Instruments not Reported at Fair Value

 

We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies.  However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

As of March 31, 2013 and December 31, 2012, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses, other liabilities and payables/receivables from related parties were at amounts that reasonably approximated their fair value based on their highly-liquid nature and/or short-term maturities.  The notes payable, including the loan classified as obligations associated with real estate held for sale at March 31, 2013 secured by the three remaining industrial buildings at Interchange Business Center, totaling $210.4 million and $183.3 million as of March 31, 2013 and December 31, 2012, respectively, have a fair value of approximately $207.2 million and $179.4 million as of March 31, 2013 and December 31, 2012, respectively, based upon interest rates for debt with similar terms and remaining maturities that management believes we could obtain.  The fair value of the notes payable is categorized as a Level 2 basis.  The fair value is estimated using a discounted cash flow analysis valuation on the borrowing rates currently available for loans with similar terms and maturities.  The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate.  Disclosure about fair value of financial instruments is based on pertinent information available to management as of March 31, 2013 and December 31, 2012.

 

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Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

7.                                      Real Estate and Real Estate-Related Investments

 

As of March 31, 2013, we consolidated 11 real estate investments, including one investment classified as held for sale on our condensed consolidated balance sheet.  The following table presents certain information about our consolidated investments as of March 31, 2013:

 

Property Name		Location		Date Acquired		Ownership Interest
1875 Lawrence		Denver, CO		October 28, 2008		100	%
Holstenplatz		Hamburg, Germany		June 30, 2010		100	%
Florida MOB Portfolio	(1)	South Florida		October 8, 2010/October 20, 2010		90	%
Courtyard Kauai Coconut Beach Hotel		Kauai, Hawaii		October 20, 2010		80	%
Interchange Business Center	(2)	San Bernardino, California		November 23, 2010		80	%
River Club and the Townhomes at River Club		Athens, Georiga		April 25, 2011		85	%
Babcock Self Storage		San Antonio, Texas		August 30, 2011		85	%
Lakes of Margate		Margate, Florida		October 19, 2011		92.5	%
Arbors Harbor Town		Memphis, Tennessee		December 20, 2011		94	%
Alte Jakobstraße		Berlin, Germany		April 5, 2012		99.7	%
Wimberly at Deerwood		Jacksonville, Florida		February 19, 2013		95	%

 

(1) We acquired a portfolio of eight medical office buildings, known as the Original Florida MOB Portfolio on October 8, 2010.  We acquired a medical office building known as Gardens Medical Pavilion on October 20, 2010.  Collectively, the Original Florida MOB Portfolio and Gardens Medical Pavilion are referred to as the Florida MOB Portfolio.  The Florida MOB Portfolio consists of nine Medical Office Buildings.  We own 90% of each of eight of the buildings. We own 90% of a 90% joint venture interest in the ninth building, Gardens Medical Pavilion.

 

(2) On October 18, 2012, we sold one of the four industrial buildings at Interchange Business Center.  On April 12, 2013, we sold the remaining three buildings.  The three buildings are classified as held for sale on our condensed consolidated balance sheet as of March 31, 2013.

 

Real Estate Asset Acquisitions

 

Wimberly at Deerwood

 

On February 19, 2013, we acquired Wimberly at Deerwood (“Wimberly”), a 322-unit multifamily community in Jacksonville, Florida, from an unaffiliated third party.  The purchase price for Wimberly, excluding closing costs, was approximately $35.6 million.  In connection with the acquisition of Wimberly, on February 19, 2013, we entered into a loan for approximately $26.7 million with an unaffiliated third party.   The loan bears interest at a variable annual rate of approximately 2.28% plus 30-day LIBOR and requires interest-only payments for the first 24 months.  The loan may not be prepaid in whole or in part during the first year.  After the first year, the loan may be prepaid in whole (but not in part) with payment of prepayment fees.  The loan must be repaid in its entirety by March 2023.

 

Wimberly contributed rental revenue of $0.4 million and a GAAP net loss of $1.2 million to our condensed consolidated statements of operations for the period from February 19, 2013 through March 31, 2013. During the three months ended March 31, 2013, we incurred $0.8 million in unaffiliated third party acquisition expenses related to the acquisition of Wimberly. The following unaudited pro forma summary presents consolidated information as if the business combination had occurred on January 1, 2012:

 

		Pro Forma for the Three Months Ended March 31,
		2013			2012
Revenue		$	12,852		$	11,360
Net income (loss)		$	(4,698	)	$	898
Net income (loss) per share		$	(0.18	)	$	0.03

 

These pro forma amounts have been calculated after applying our accounting policies and adjusting the results of Wimberly to reflect additional depreciation and amortization that would have been charged assuming the fair value adjustments to the tangible and intangible assets had been applied from January 1, 2012.  Included in the pro forma net income (loss) for the three months ended March 31, 2013 and 2012 is depreciation and amortization expense of $0.4 million and $1 million, respectively.

 

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the amounts of identified assets acquired at the acquisition date:

 

		Wimberly
Building		$	28,089
Land		4,540
Furniture, fixtures and equipment		1,204
Lease intangibles, net		815
Land improvements		533
Signage, landscaping and misc. site improvements		400
Total identifiable net assets		$	35,581

 

We are in the process of finalizing our acquisition allocations, which are subject to change until the information is finalized, which will be no later than twelve months from the acquisition date.

 

Real Estate Asset Dispositions

 

Interchange Business Center

 

On October 18, 2012, we sold one of the four industrial buildings at Interchange Business Center for a contract sales price of approximately $7.5 million, excluding transaction costs.  On April 12, 2013, we sold the remaining three buildings for a contract sales price of approximately $40.4 million, excluding transaction costs.  A portion of the proceeds from the sale of the asset were used to pay off in full the existing indebtedness of approximately $11.3 million secured by the property.  The remaining three buildings were classified as held for sale on our condensed consolidated balance sheet as of March 31, 2013.

 

8.                                      Notes Payable

 

The following table sets forth information on our notes payable as of March 31, 2013 and December 31, 2012:

 

		Notes Payable as of						Interest		Maturity
Description		March 31, 2013			December 31, 2012			Rate		Date
1875 Lawrence		$	15,500		$	15,500		30-day LIBOR + 5.35% (1)		01/01/16
Interchange Business Center		—			9,882			30-day LIBOR + 5% (1)(2)(3)		12/01/13
Holstenplatz		10,009			10,375			3.887%		04/30/15
Courtyard Kauai at Coconut Beach Hotel		38,000			38,000			30-day LIBOR + .95% (1)		11/09/15
Florida MOB Portfolio - Palmetto Building		6,039			6,077			4.55%		01/01/16
Florida MOB Portfolio - Victor Farris Building		12,174			12,249			4.55%		01/01/16
Florida MOB Portfolio - Gardens Medical Pavilion		14,300			14,385			4.9%		01/01/18
River Club and the Townhomes at River Club		25,200			25,200			5.26%		05/01/18
Babcock Self Storage		2,214			2,225			5.80%		08/30/18
Lakes of Margate		15,126			15,182			5.49% and 5.92%		01/01/20
Arbors Harbor Town		26,000			26,000			3.985%		01/01/19
Alte Jakobstraße		7,909			8,233			2.3%		12/30/15
Wimberly at Deerwood		26,685			—			30-day LIBOR + 2.28%		03/01/23
		$	199,156		$	183,308
Notes Payable included with Obligations associated with real estate held for sale:
Interchange Business Center (3)		$	11,286					30-day LIBOR + 5% (1)(2)(3)		12/01/13

 

(1)         30-day LIBOR was 0.20% at March 31, 2013.

(2)         The 30-day LIBOR rate is set at a minimum value of 2.5%.

(3)         On October 18, 2012, we sold one of the four industrial buildings at Interchange Business Center to an unaffiliated third party.  On April 12, 2013, we sold the remaining three buildings to an unaffiliated third party (classified as obligations associated with real estate held for sale on our condensed consolidated balance sheet as of March 31, 2013).  A portion of the proceeds from the sale of the remaining three buildings were used to pay off in full the existing indebtedness associated with the property.

 

At March 31, 2013, our notes payable balance, including the loan classified as obligations associated with real estate held for sale secured by the remaining three industrial buildings at Interchange Business Center, was $210.4 million and consisted of the notes payable related to our consolidated properties.  We have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the Courtyard Kauai at Coconut Beach Hotel and Wimberly notes payable.  For the three months ended March 31, 2013, in connection with the acquisition of Wimberly, we entered into a loan for approximately $26.7 million with an unaffiliated third party.  On April 12, 2013, we sold the remaining three industrial buildings at Interchange Business Center to an unaffiliated third party and used a portion of the proceeds from the sale to pay off in full

 

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