Whitestone REIT - Annual Report: 2005 (Form 10-K)
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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[Mark
One]
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ý
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2005
OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ______________ to
______________
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Commission
File Number: 000-50256
___________________________
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Hartman
Commercial Properties REIT
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(Exact
Name of Registrant as Specified in Its
Charter)
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Maryland
(State
or Other Jurisdiction of
Incorporation
or Organization)
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76-0594970
(I.R.S.
Employer
Identification
No.)
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1450
West Sam Houston Parkway North,
Suite 100, Houston, Texas
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77043-3124
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (713)
467-2222
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Securities
registered pursuant to section 12(b) of the Act:
None
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Securities
registered pursuant to section 12(g) of the Act:
Common
Shares of Beneficial Interest, par value $0.001 per
share
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Indicate
by check mark if the Registrant is a well-known seasoned issuer,
as
defined in Rule 405 of the Securities Act. Yes ¨
No ý
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Indicate
by check mark if the Registrant is not required to file reports
pursuant
to Section 13 or 15(d) of the Act. Yes ¨
No ý
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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 ý
No ¨
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best or Registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in
Part III of this Form 10-K or any amendment to this Form 10-K.
¨
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Indicate
by check mark whether the Registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of
the
Exchange Act. (Check one)
Large
accelerated filer ¨
Accelerated
filer ¨ Non-accelerated
filer ý
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Indicate
by check mark whether the Registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act). Yes ¨
No ý
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The
aggregate market value of the voting stock held by nonaffiliates
of the
Registrant as of June 30, 2005 (the last business day of the Registrant's
most recently completed second fiscal quarter) was $72,048,630
assuming a
market value of $10 per share.
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As
of March 30, 2006, the Registrant had 9,346,614 common shares of
beneficial interest outstanding.
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DOCUMENTS
INCORPORATED BY REFERENCE
The
Registrant incorporates by reference portions of its Definitive
Proxy
Statement for the 2006 Annual Meeting of Shareholders, which shall
be
filed no later than April 30, 2006, into Part III of this Form
10-K to the
extent stated herein.
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HARTMAN
COMMERCIAL PROPERTIES REIT
FORM
10-K
Year
Ended December 31, 2005
TABLE
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Forward-Looking
Statements
This
annual report contains forward-looking statements, including discussion and
analysis of the Company’s financial condition, anticipated capital expenditures
required to complete projects, amounts of anticipated cash distributions to
its
shareholders in the future and other matters. These forward-looking statements
are not historical facts but are the intent, belief or current expectations
of
the Company’s management based on its knowledge and understanding of the
Company’s business and industry. Forward-looking statements are typically
identified by the use of terms such as “may,” “will,” “should,” “potential,”
“predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,”
“estimates” or the negative of such terms and variations of these words and
similar expressions. These statements are not guarantees of future performance
and are subject to risks, uncertainties and other factors, some of which are
beyond the Company’s control, are difficult to predict and could cause actual
results to differ materially from those expressed or forecasted in the
forward-looking statements.
Forward-looking
statements that were true at the time made may ultimately prove to be incorrect
or false. You are cautioned to not place undue reliance on forward-looking
statements, which reflect management’s view only as of the date of this Form
10-K. 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. Factors that could cause actual
results to differ materially from any forward-looking statements made in this
Form 10-K include changes in general economic conditions, changes in real estate
conditions, construction costs that may exceed estimates, construction delays,
increases in interest rates, lease-up risks, inability to obtain new tenants
upon the expiration of existing leases, and the potential need to fund tenant
improvements or other capital expenditures out of operating cash flow. The
forward-looking statements should be read in light of these factors and the
factors identified in the “Risk Factors” sections of this Form 10-K and the
Company’s Registration Statement on Form S-11, as amended, as previously filed
with the Securities and Exchange Commission.
PART
I
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Business.
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General
Development of Business
Hartman
Commercial Properties REIT (the “Company”) is a Maryland real estate investment
trust (“REIT”) organized in December 2003 for the purpose of merging with
Hartman Commercial Properties REIT, a Texas real estate investment trust
organized in August 1998. We are the surviving entity resulting from the merger,
which was consummated on July 28, 2004. We have elected to be taxed as a real
estate investment trust under federal income tax laws. The Company invests
in
and operates retail, office-warehouse, and office properties located primarily
in the Houston, Dallas and San Antonio metropolitan areas, and plans to expand
its investments to retail, office and office-warehouse properties located in
major metropolitan cities in the United States, principally in the southern
United States. The Company leases each respective property to one or more
tenants.
Substantially
all of our business is conducted through Hartman REIT Operating Partnership,
L.P., a Delaware limited partnership organized in 1998 (the “Operating
Partnership”). As of December 31, 2005 we were the owner of a 59.55% interest in
the Operating Partnership, and we are the sole general partner of the Operating
Partnership.
Our
external advisor is Hartman Management, L.P. (the “Management Company”), a Texas
limited partnership formed in 1990. The Management Company is an affiliate
of
the Company and is wholly owned by Allen R. Hartman, our president, chief
executive officer and chairman of our board of trustees. The Management Company
is responsible for managing our affairs on a day-to-day basis and for
identifying and making acquisitions and investments on our behalf.
On
December 31, 2005, we owned 37 properties. All of our properties are located
in
the Houston, Dallas and San Antonio, Texas metropolitan areas. The properties
consist of retail, office-warehouse and office properties, and each is designed
to meet the needs of surrounding local communities. In the aggregate, at
December 31, 2005 the properties contained approximately 3,121,000 square feet
of gross leasable area.
1
As
of
December 31, 2005, the properties were approximately 82.3% leased. Substantially
all of our revenues consist of base rents and percentage rents received under
long-term leases. For the year ended December 31, 2005, total rents and other
income were $24,888,214 and percentage rents were $-0-. Approximately 67.9%
of
all existing leases provide for annual increases in the base rental payments
with a “step up” rental clause.
Our
Strategy
With
the
help of the Management Company, we seek to maximize shareholder returns through
a balanced strategy of aggressive leasing and property management, conservative
expense controls and opportunistic portfolio management, with a goal of
continuously increasing both current cash available for distribution to
shareholders and the value of our properties. The key elements of this strategy
include:
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Exploit
Our Value-Added Acquisition Strategy.
We invest in a mixture of (i) properties that we perceive are undervalued
due to low occupancy, poor management, market inefficiencies and/or
inadequate capitalization where we can create value through improved
earnings by implementing our aggressive marketing, leasing and property
management programs, and (ii) stabilized properties that are relatively
well occupied and managed and provide steady current net operating
income
with lower growth potential.
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Leverage
Our Local Market Knowledge.
We leverage our Houston market expertise and business relationships
with
both tenants and brokers to increase occupancy and rental rates through
aggressive marketing and leasing, value-added management of and strategic
improvements to our Houston
properties.
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Take
Advantage of Economic Cycles.
We diversify our property and tenant mixes in order to take advantage
of
opportunities in, and manage the risks resulting from, different
economic
cycles that occur among various property
types.
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Expand
Into Target Markets.
We seek to acquire properties in other Texas markets that we can
effectively manage from our centralized Houston base and which have
similar market demographics and characteristics to our Houston
properties.
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Selectively
Develop Properties.
We intend to selectively develop properties, principally in the retail
and
office-warehouse sectors, in our existing markets where land prices
and
economic trends indicate higher potential future returns from development
than from acquisitions.
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Recycle
Capital for Greater Returns.
We seek to recycle capital through opportunistic property dispositions
where demographic, economic and/or growth trends with respect to
a
property or its sub-market indicate decreasing returns, followed
by
redeployment of the sale proceeds into properties having the potential
for
greater returns.
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Recent
Developments
Initial
Public Offering
On
September 15, 2004, our Registration Statement on Form S-11, with respect to
a
public offering (the “Public Offering”) of up to 10,000,000 common shares of
beneficial interest to be offered at a price of $10.00 per share, was declared
effective under the Securities Act of 1933, as amended. The Registration
Statement also covers up to 1,000,000 shares available for sale pursuant to
our
dividend reinvestment plan, to be offered at a price of $9.50 per share. The
shares are being offered to investors on a best efforts basis, which means
that
the broker-dealers participating in the offering are only required to use their
best efforts to sell the shares and have no firm commitment or obligation to
purchase any of the shares. Post-Effective Amendment No.1 to the Registration
Statement was declared effective by the SEC on June 27, 2005 and Post-Effective
Amendment No. 2 to the Registration Statement was declared effective by the
SEC
on March 9, 2006.
2
As
of
March 30, 2006, we had accepted subscriptions for and issued 2,336,468 shares
in
the Public Offering for gross offering proceeds of $23,335,291. We pay a dealer
manager fee of up to 2.5% of the gross offering proceeds to D.H. Hill
Securities, LLP, our dealer manager for the Public Offering, and also selling
commissions of up to 7.0% of the gross offering proceeds for any sales through
participating broker-dealers and the dealer manager, other than sales by
employees of the Management Company sponsored by the dealer manager.
Additionally, in connection with the Public Offering, we have agreed to pay
the
Management Company, in its capacity as our advisor (i) up to 2.5% of the gross
offering proceeds as reimbursement for the Management Company’s payment of
organization and offering expenses on behalf of the Company and (ii) an
acquisition fee equal to 2.0% of the gross offering proceeds for its services
in
connection with the selection, purchase, development or construction of real
property (payable upon receipt by the Company of such proceeds, rather than
when
a property is acquired). We accrued an aggregate of $1,888,762 in dealer manager
fees, discounts and selling commissions for the subscriptions accepted through
March 30, 2006, resulting in net proceeds to the Company (after the payment
of
such fees, discounts and commissions) of $21,446,529. Out of such net proceeds,
we accrued amounts payable to the Management Company of $569,423 as a
reimbursement of organization and offering expenses and $455,538 pursuant to
the
acquisition fee described above.
Additional
subscription proceeds will be held in escrow until investors are admitted as
shareholders. We close new subscriptions for shares monthly pursuant to the
Public Offering. At each closing we receive proceeds from subscriptions out
of
escrow and use such funds to make investments and pay the dealer manager fee,
selling commissions and other organization and offering expenses. Until required
for such purposes, net offering proceeds are held in short-term, liquid
investments.
Subscriptions
were received for an aggregate of 11,840 shares from three of our independent
trustees. These subscriptions were at a discounted price of $9.05 per share,
reflecting the fact that selling commissions in the amount of $0.70 per share
and dealer manager fees in the amount of $0.25 per share were not payable in
connection with such sales. Accordingly, the net proceeds to us from such sales
made net of commissions were substantially the same as the net proceeds we
receive from sales of shares at the $10.00 per share offering price. The
subscription price for these shares was paid through the trustees’ assignment to
the Company of their right to receive accrued and unpaid trustee fees in the
aggregate amount of $107,150. For a further discussion of discounted sales
of
shares to our trustees, see the “Plan of Distribution” section of our
Registration Statement for the Public Offering.
Recent
Acquisitions
On
March
14, 2005, we purchased Woodlake Plaza, an office building containing
approximately 106,000 rentable square feet located on an approximately
3.4963-acre tract of land in Houston, Texas. The total purchase price of
Woodlake Plaza was $5.5 million, plus closing costs. We funded $3.3 million
of
the purchase price with borrowings under our line of credit at Union Planters
Bank and used working capital to fund the balance. We negotiated the purchase
price with, and acquired the property from, CSFB 1998-P1 Gessner Office Limited
Partnership. CSFB 1998-P1 Gessner Office Limited Partnership is not affiliated
with us, the Operating Partnership or the Management Company. Woodlake Plaza,
which was built in 1975, includes among its major tenants Hibernia Corporation,
Management Alliance Group and Rock Solid Images. At the time of the acquisition,
aggregate annual base rent for all tenants in Woodlake Plaza was approximately
$1,370,403.
On
August
10, 2005, we purchased 9101 LBJ Freeway (formerly know as The Interchange),
an
office building containing approximately 126,000 rentable square feet located
on
an approximately 5.8-acre tract of land in Dallas, Texas (“9101 LBJ Freeway”).
The total purchase price of 9101 LBJ Freeway was $7.98 million, plus closing
costs. We funded $7.6 million of the purchase price with borrowings under our
line of credit at KeyBank and used working capital to fund the balance. We
negotiated the purchase price with, and acquired the property from, CMD Realty
Investment Fund II, L.P. 9101 LBJ Freeway, which was built in 1985, includes
among its major tenants Compass Insurance and Air Liquide. At the time of the
acquisition, the aggregate annual base rent for all tenants in 9101 LBJ Freeway
was approximately $1,314,790.
3
On
November 22, 2005, we purchased Uptown Tower (formerly know as Amberton Tower),
an office building containing approximately 254,000 rentable square feet located
on an approximately 2.98-acre tract of land in Dallas, Texas. The total purchase
price of Uptown Tower was $16.95 million, plus closing costs. We funded $15.95
million of the purchase price with borrowings under our line of credit at
KeyBank and used working capital to fund the balance. We negotiated the purchase
price with, and acquired the property from, Transwestern Amberton Tower, L.P.
Uptown Tower, which was built in 1982, includes among its major tenants
Brockette/Davis/Drake and US Oncology. At the time of the acquisition, the
aggregate annual base rent for all tenants in Uptown Tower was approximately
$3,012,959.
Investment
Objectives and Criteria
The
following is an overview of our current policies with respect to investments,
borrowing, affiliate transactions, equity capital and certain other activities.
All of these policies have been established in our governance documents or
by
our management and may be amended or revised from time to time (and at any
time)
by our management or trustees without a vote or the approval of our
shareholders. We cannot assure you that our policies or investment objectives
will be attained or that the value of our common shares will not
decrease.
General
We
invest
in commercial real estate properties, primarily community retail centers and
office-warehouse properties. Our primary business and investment objectives
are:
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to
maximize cash dividends paid to our
shareholders;
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to
obtain and preserve long-term capital appreciation in the value of
our
properties to be realized upon our ultimate sale of such properties;
and
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to
provide our shareholders with liquidity for their investment in us
by
listing our shares on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq National Market or another national exchange
within
twelve years after the completion of the Public
Offering.
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In
addition, to the extent that our advisor determines that it is advantageous
to
make or invest in mortgage loans, we will also seek to obtain fixed income
through the receipt of payments on mortgage loans. Our management intends to
limit such mortgage investments to 15% of our total investment portfolio unless
prevailing economic or portfolio circumstances require otherwise. We cannot
assure you that we will attain these objectives or that our capital will not
decrease. Pursuant to our advisory agreement, the Management Company will be
indemnified for claims relating to any failure to succeed in achieving these
objectives.
We
may
not materially change our investment objectives, except upon approval of
shareholders holding a majority of our common shares of beneficial interest.
Our
independent trustees will review our investment objectives at least annually
to
determine that our policies are in the best interests of our shareholders.
Decisions relating to the purchase or sale of our investments will be made
by
the Management Company, as our advisor, subject to approval by our board of
trustees, including a majority of our independent trustees.
Acquisition
and Investment Policies
We
intend
to continue to acquire community retail centers, office-warehouse and office
properties for long-term ownership and for the purpose of producing income.
We
seek to acquire and own properties that generally have premier business
addresses in especially desirable locations. Such properties generally are
of
high quality construction, offer personalized tenant amenities and attract
higher quality tenants. We generally intend to hold our properties for an
extended period of time, which we believe is optimal to enable us to capitalize
on the potential for increased income and capital appreciation of our
properties. However, economic or market conditions may influence us to hold
our
investments for different periods of time. Also, management believes that
targeting this type of property for investment will enhance our ability to
enter
into joint ventures with other institutional real property investors (such
as
pension funds, public REITs and other large institutional real estate
investors), thus allowing
greater diversity of investment by increasing the number of properties in which
we invest. Our management also believes that by owning a portfolio consisting
largely of the diverse types of properties described above we enhance our
liquidity opportunities for investors by making the sale of individual
properties, multiple properties or our investment portfolio as a whole
attractive to institutional investors and by making a possible listing of our
shares attractive to the public investment community.
4
We
acquire properties primarily for income. Although we have historically invested
in properties that have been constructed and have operating histories, we may
in
the future become more active in investing in raw land or in properties that
are
under development or construction where we see such properties having the
potential for greater returns than those attainable from acquired properties.
To
the extent feasible, we will invest in a portfolio of properties that will
satisfy our investment objectives of maximizing cash available for payment
of
dividends, preserving our capital and realizing capital appreciation upon the
ultimate sale of our properties.
Our
policy is to continue to acquire properties in the Houston, Dallas and San
Antonio, Texas metropolitan areas where we believe opportunities exist for
acceptable investment returns. We anticipate that we will continue to focus
on
properties in the $1 million to $10 million-value range. We typically lease
our
properties to a wide variety of tenants on a “triple-net” basis, which means
that the tenant is responsible for paying the cost of all maintenance and minor
repairs, property taxes and insurance relating to its leased space. Our
management believes that its extensive experience, market knowledge and network
of industry contacts in the Houston, Dallas and San Antonio metropolitan areas,
and the limitation of our investments to this area, gives us a competitive
advantage and enhances our ability to identify and capitalize on
acquisitions.
Although
we currently intend to invest in or develop community retail centers and other
office-warehouse and office properties in the Houston, Dallas and San Antonio
metropolitan areas, our future investment or redevelopment activities are not
limited to any geographic area or to a specified property type or use. We may
invest in any geographic area and we may invest in other commercial properties
such as manufacturing facilities, and warehouse and distribution facilities
in
order to reduce overall portfolio risk, enhance overall portfolio returns,
or
respond to changes in the real estate market if our advisor determines that
it
would be advantageous to do so.
Although
we are not limited as to the form our investments may take, all of our
properties are owned by the Operating Partnership or by a wholly owned
subsidiary of the Operating Partnership in fee simple title. We expect to
continue to pursue our investment objectives through the direct ownership of
properties. However, in the future, we may also participate with other entities
(including non-affiliated entities) in property ownership, through joint
ventures, limited liability companies, partnership, co-tenancies or other types
of common ownership. We presently have no plans to own any property jointly
with
another entity or entities. In addition, we may purchase properties and lease
them back to the sellers of such properties. While we will use our best efforts
to structure any such sale-leaseback transaction such that the lease will be
characterized as a “true lease” so that we will be treated as the owner of the
property for federal income tax purposes, we cannot assure you that the Internal
Revenue Service will not challenge such characterization. In the event that
any
such sale-leaseback transaction is recharacterized as a financing transaction
for federal income tax purposes, deductions for depreciation and cost recovery
relating to such property would be disallowed.
Terms
of Leases and Tenant Credit Worthiness
While
the
terms and conditions of any lease that we enter into with our tenants may vary
substantially from those described herein, we expect that a majority of our
leases will be a form of lease customarily used between landlords and tenants
in
the geographic area where the property is located. Such leases generally provide
for terms of three to five years and require the tenant to pay a pro rata share
of building expenses. Under such typical leases, the landlord is directly
responsible for all real estate taxes, sales and use taxes, special assessments,
utilities, insurance and building repairs, and other building operation and
management costs.
5
Borrowing
Policies
Our
organizational and governance documents generally limit the maximum amount
of
indebtedness that we may incur to 300% of our net assets as of the date of
any
borrowing. Notwithstanding the foregoing, we may exceed such borrowing limits
if
any excess in borrowing over such 300% level is approved by a majority of our
independent trustees and disclosed to our shareholders in a subsequent quarterly
report. Further, we do not have a policy limiting the amount of indebtedness
we
may incur or the amount of mortgages which may be placed on any one piece of
property. As a general policy, however, we intend to maintain a ratio of total
liabilities to total assets that is less than 50%. As of December 31, 2005,
we
had a ratio of total liabilities to total assets of 48.7%. However, we may
not
be able to continue to achieve this objective.
The
Management Company will cause us to refinance properties during the term of
a
loan only in limited circumstances, such as when a decline in interest rates
makes it beneficial to prepay an existing mortgage, when an existing mortgage
matures or if an attractive investment becomes available and the proceeds from
the refinancing can be used to purchase such investment. The benefits of the
refinancing may include an increased cash flow resulting from reduced debt
service requirements, an increase in dividend distributions from proceeds of
the
refinancing, and an increase in property ownership if refinancing proceeds
are
reinvested in real estate.
We
may
not borrow money from any of our trustees or from the Management Company and
its
affiliates unless such loan is approved by a majority of the trustees, including
a majority of the independent trustees, not otherwise interested in the
transaction, as fair, competitive and commercially reasonable and no less
favorable to us than a comparable loan between unaffiliated
parties.
Disposition
Policies
We
intend
to hold each property that we acquire for an extended period, and we have no
current intention to dispose of any of our properties. However, circumstances
may arise that might compel us to sell certain properties. We might sell
property if, in the judgment of the Management Company, the value of the
property is expected to decline substantially, an opportunity has arisen to
improve other properties that have better long-term prospects for appreciation,
we can increase cash flow through the disposition of the property and
reinvestment of the net proceeds, or the sale of the property is otherwise
in
our best interests. We generally intend to hold our investments long-term;
however, economic or market conditions may influence us to hold our investments
for different periods of time. The determination of whether a particular
property should be sold or otherwise disposed of will be made after
consideration of relevant factors, including prevailing economic conditions,
with a view to achieving maximum capital appreciation. The selling price of
a
leased property will be determined in large part by the amount of rent payable
by the tenants.
Pursuant
to our Declaration of Trust, if our shares are not listed for trading on the
New
York Stock Exchange, the American Stock Exchange, the Nasdaq National Market
or
another national exchange within twelve years of the termination of the Public
Offering, unless such date is extended by the majority vote of both our board
of
trustees and our independent trustees, we will be required to begin the sale
of
all of our properties and to distribute to our shareholders the net sale
proceeds resulting from our liquidation. If at any time after twelve years
of
the termination of the Public Offering we are not in the process of either
(i)
listing our shares for trading on a national securities exchange or including
such shares for quotation on the Nasdaq Stock Market or (ii) liquidating our
assets, investors holding a majority of our shares may vote to require our
liquidation. Depending upon then prevailing market conditions, it is our
intention to begin to consider the process of listing or liquidation prior
to
the twelfth anniversary of the termination of the Public Offering. In making
the
decision to apply for listing of our shares, the trustees will try to determine
whether listing our shares or liquidating our assets will result in greater
value for our shareholders. The circumstances, if any, under which the trustees
will agree to list our shares cannot be determined at this time. Even if our
shares are not listed or included for quotation, we are under no obligation
to
actually sell our portfolio within this period since the precise timing will
depend on real estate and financial markets, economic conditions of the areas
in
which the properties are located and federal income tax effects on shareholders
that may prevail in the future. We may not be able to liquidate our assets.
We
will continue in existence until all properties are sold and our other assets
are liquidated.
6
Securities
of or Interests in Persons Primarily Engaged in Real Estate Activities and
Other
Issuers
Consistent
with the requirements necessary to maintain our qualification as a REIT, we
may
acquire securities of entities engaged in real estate activities or securities
of other issuers, including for the purpose of exercising control over such
entities. We may acquire all or substantially all of the securities or assets
of
REITs or similar entities where such investments would be consistent with our
investment policies. We anticipate that we will only acquire securities or
other
interests in issuers engaged in commercial real estate activities involving
retail, office or office-warehouse properties. We may also invest in entities
owning undeveloped acreage. Neither our Declaration of Trust nor our bylaws
place any limit or restriction on the percentage of our assets that may be
invested in securities of or interests in other issuers. The governance
documents of the Operating Partnership also do not contain any such
restrictions.
We
may
also invest in limited partnership and other ownership interests in entities
that own real property. We expect that we may make such investments when we
consider it more efficient to acquire an entity owning such real property rather
than to acquire the properties directly. We also may acquire less than all
of
the ownership interests of such entities if we determine that such interests
are
undervalued and that a liquidation event in respect of such interests are
expected within the investment holding periods consistent with that for our
direct property investments.
Other
than our interest in the Operating Partnership, we currently do not own any
securities of other entities. We do not presently intend to acquire securities
of any non-affiliated entities.
Equity
Capital
If
our
trustees determine that it is advisable and in our best interests to raise
additional equity capital, they have the authority, without shareholder
approval, to authorize us to issue additional common shares or preferred shares
of beneficial interests. Additionally, our trustees could cause the Operating
Partnership to issue units, which are convertible into our common shares (“OP
Units”). Subject to limitations contained in the organizational and governance
documents of the Operating Partnership and us, the trustees could issue, or
cause to be issued, such securities in any manner (and on such terms and for
such consideration) they deem appropriate, including in exchange for real
estate. We have issued securities in exchange for real estate and we expect
to
continue to do so in the future. Existing shareholders have no preemptive right
to purchase such shares in any offering, and any such offering might cause
dilution of an existing shareholder’s investment in the Company.
Environmental
Matters
All
real
property and the operations conducted on real property are subject to federal,
state and local laws and regulations relating to environmental protection and
human health and safety. These laws and regulations generally govern wastewater
discharges, air emissions, the operation and removal of underground and
above-ground storage tanks, the use, storage, treatment, transportation and
disposal of solid and hazardous materials, and the remediation of contamination
associated with disposals. Under these laws and regulations, a current or
previous owner or operator of real property may be liable for the cost of
removal or remediation of hazardous or toxic substances on, under or in such
property. Some of these laws and regulations may impose joint and several
liability on tenants, owners or operators for the costs of investigation or
remediation of contaminated properties, regardless of fault or the legality
of
the original disposal and whether or not the owner or operator knew of, or
was
responsible for, the presence of such hazardous or toxic substances.
Environmental
laws also may impose restrictions on the manner in which property may be used
or
businesses may be operated, and complying with these restrictions may require
substantial expenditures. Environmental laws provide for sanctions in the event
of noncompliance and may be enforced by governmental agencies or, in certain
circumstances, by private parties. Certain environmental laws and common law
principles could be used to impose liability for release of and exposure to
hazardous substances, including asbestos-containing materials into the air,
and
third parties may seek recovery from owners or operators of real properties
for
personal injury or property damage associated with exposure to released
hazardous substances. Additionally, concern about indoor exposure to mold has
been increasing as exposure to mold may cause a variety of adverse health
effects and
7
symptoms,
including allergic or other reactions. As a result, the presence of significant
mold at any of our properties could require us to undertake a costly remediation
program to contain or remove the mold from the affected property, and could
expose us to liability to our tenants, their employees and others. The cost
of
defending against claims of liability, of compliance with environmental
regulatory requirements, of remediating any contaminated property, or of paying
personal injury claims could materially adversely affect our business, assets
or
results of operations and, consequently, amounts available for payments of
dividends to the Company’s shareholders. In addition, the presence of these
substances, or the failure to properly remediate these substances, may adversely
affect our ability to sell or rent such property or to use the property as
collateral for future borrowing.
Some
of
these laws and regulations have been amended so as to require compliance with
new or more stringent standards as of future dates. Compliance with new or
more
stringent laws or regulations or stricter interpretation of existing laws may
require material expenditures by us. We cannot assure you that future laws,
ordinances or regulations will not impose any material environmental liability,
or that the current environmental condition of our properties will not be
affected by the operations of the tenants, by the existing condition of the
land, by operations in the vicinity of the properties, such as the presence
of
underground storage tanks, or by the activities of unrelated third parties.
In
addition, there are various local, state and federal fire, health, life-safety
and similar regulations that we may be required to comply with, and which may
subject us to liability in the form of fines or damages for
noncompliance.
We
will
not purchase any property unless and until we obtain what is generally referred
to as a “Phase I” environmental site assessment and are generally satisfied with
the environmental status of the property. A Phase I environmental site
assessment basically consists of a visual survey of the building and the
property in an attempt to identify areas of potential environmental concerns,
visually observing neighboring properties to assess surface conditions or
activities that may have an adverse environmental impact on the property, and
contacting local governmental agency personnel and performing a regulatory
agency file search in an attempt to determine any known environmental concerns
in the immediate vicinity of the property. A Phase I environmental site
assessment does not generally include any sampling or testing of soil,
groundwater or building materials from the property. Certain properties that
we
have acquired contain, or contained, dry-cleaning establishments utilizing
solvents. Where believed to be warranted, samplings of building materials or
subsurface investigations were undertaken with respect to these and other
properties. To date, the costs associated with these investigations and any
subsequent remedial measures taken have not been material to the
Company.
We
believe that our properties are in compliance in all material respects with
all
federal, state and local ordinances and regulations regarding the handling,
discharge and emission of hazardous or toxic substances. We have not been
notified by any governmental authority, and are not otherwise aware, of any
material noncompliance, liability or claim relating to hazardous or toxic
substances in connection with any of our present or former properties. We have
not recorded in our financial statements any material liability in connection
with environmental matters. Nevertheless, it is possible that the environmental
assessments we have obtained and/or reviewed have not revealed all potential
environmental liabilities. It is also possible that subsequent environmental
assessments or investigations will identify material contamination, that adverse
environmental conditions have arisen subsequent to the performance of the
environmental assessments, or that there are material environmental liabilities
of which management is unaware.
Competition
We
may
experience competition for tenants from owners and managers of similar projects,
which may include partnerships or other entities managed by the Management
Company. We will experience competition in the acquisition of real estate and
the making of mortgages from similar companies with access to greater resources
than those available to us. At the time we elect to dispose of our properties,
we will also be in competition with sellers of similar properties.
8
Employees
Although
we have executive officers who have management responsibilities with respect
to
the Company, we do not have any direct employees. The employees of the
Management Company and other affiliates of the Company perform a full range
of
real estate services for the Company, including acquisitions, property
management, accounting, asset management, wholesale brokerage and investor
relations. As of December 31, 2005, the Management Company had 95 full time
and
one part time employees, none of whom was represented by a union.
Economic
Dependency
We
are
dependent on our affiliates, including the Management Company, for services
that
are essential to the Company, including the sale of our common shares, asset
acquisition decisions, property management and other general administrative
responsibilities. In the event that these companies were unable to provide
these
services to us, or if we were to terminate management or other agreements with
these companies, we would be required to obtain such services from other
sources.
Financial
Information About Segments
Management
does not differentiate by property types and because no individual property
is
so significant as to be a separate segment, the Company does not present segment
information.
Web
Site Address
The
Company electronically files its 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”). Copies of the Company’s
filings with the SEC may be obtained from the Company’s website at
www.hartmanmgmt.com or at the SEC’s website, at http://www.sec.gov. Access to
these filings is free of charge. The Company’s code of ethics and certain other
corporate governance documentation may also be obtained from the Company’s
website at www.hartmanmgmt.com. The information on our web site is not, and
should not be considered to be, a part of this report.
| Item 1A. |
Risk
Factors.
|
Some
or
all of the following factors may affect our properties, which could adversely
affect our operations and ability to pay dividends to shareholders. The Company
and its performance will be subject to additional risks as have been listed
in
the Company’s Registration Statement on Form S-11, as amended, as previously
filed with the Securities and Exchange Commission.
There
can be no assurance that we will be able to pay or maintain cash dividends
or
that dividends will increase over time.
There
are
many factors that can affect the availability and timing of cash dividends
we
pay to shareholders. Such factors, include general economic conditions, real
estate market conditions, rental and occupancy rates at our properties, our
ability to buy properties as offering proceeds become available, the yields
on
securities of other real estate programs that we invest in, and our operating
expense levels, as well as many other variables. We can give no assurance that
we will be able to pay or maintain dividends or that dividends will increase
over time. We also can give no assurance that rents from our properties will
increase, that the securities we buy will increase in value or provide constant
or increased dividends over time, or that future acquisitions of real
properties, mortgage loans or our investments in securities will increase our
cash available for dividends to shareholders. Our actual results may differ
significantly from the assumptions used by our board of trustees in establishing
the dividend rate to shareholders.
9
If
we experience decreased cash flows, we may need to use other sources of cash
to
fund dividends or we may be unable to pay dividends.
Actual
cash available for dividends may vary substantially from estimates. If our
cash
dividends exceed the amount of cash available for dividends, we may need to
fund
the shortage out of working capital, borrowings under our lines of credit or
out
of proceeds of our Public Offering, which would reduce the amount of proceeds
available for real estate investments. For the year ended December 31, 2005,
our
total distributions exceeded our net cash flow from operating activities by
$605,263. We funded this shortage with cash from borrowings under our KeyBank
credit facility. Should cash flows continue not to cover our total
distributions, our ability to pay dividends at the current rate, or at all,
may
be adversely affected.
We
may need to incur additional borrowings to meet REIT minimum distribution
requirements.
In
order
to maintain our qualification as a REIT, we are required to distribute to our
shareholders at least 90% of our annual net taxable income (excluding any net
capital gain). In addition, the Internal Revenue Code will subject us to a
4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by us with respect to any calendar year are less than the sum of (i) 85%
of
our ordinary income for that year, (ii) 95% of our capital gain net income
for
that year and (iii) 100% of our undistributed taxable income from prior years.
Although we intend to pay dividends to our shareholders in a manner that allows
us to meet the foregoing distribution requirement and avoid this 4% excise
tax,
we cannot assure you that we will always be able to do so.
Our
income consists almost solely of our share of the Operating Partnership’s
income, and the cash available for distribution by us to our shareholders
consists of our share of cash distributions made by the Operating Partnership.
Because we are the sole general partner of the Operating Partnership, our
trustees determine the amount of any distributions made by it. The trustees
may
consider a number of factors in making such distributions,
including:
| · |
the
amount of the cash available for
distribution;
|
| · |
the
Operating Partnership’s
financial
condition;
|
| · |
the
Operating Partnership’s capital expenditure requirements;
and
|
| · |
our
annual distribution requirements necessary to maintain our qualification
as a REIT.
|
Differences
in timing between the actual receipt of income and actual payment of deductible
expenses and the inclusion of such income and deduction of such expenses when
determining our taxable income, as well as the effect of nondeductible capital
expenditures and the creation of reserves or required debt amortization
payments, could require us to borrow funds on a short-term or long-term basis
to
meet the REIT distribution requirements and to avoid the 4% excise tax described
above. In such circumstances, we might need to borrow funds to avoid adverse
tax
consequences even if our management believes that the then prevailing market
conditions generally are not favorable for such borrowings or that such
borrowings would not be advisable in the absence of such tax
consideration.
We
may incur mortgage indebtedness and other borrowings, which may increase our
business risks.
If
it is
determined to be in our best interests, we may, in some instances, acquire
real
properties by using either existing financing or borrowing new funds. In
addition, we may incur or increase our mortgage debt by obtaining loans secured
by some or all of our real properties to obtain funds to acquire additional
real
properties. We may also borrow funds if necessary to satisfy the requirement
that we distribute to shareholders as dividends at least 90% of our annual
REIT
taxable income, or otherwise as is necessary or advisable to assure that we
maintain our qualification as a REIT for federal income tax purposes.
10
We
may
incur mortgage debt on a particular real property if we believe the property’s
projected cash flow is sufficient to service the mortgage debt. However, if
there is a shortfall in cash flow, then the amount available for dividends
to
shareholders may be affected. In addition, incurring mortgage debt increases
the
risk of loss because defaults on indebtedness secured by a property may result
in foreclosure actions initiated by lenders and our loss of the property
securing the loan that is in default. For tax purposes, a foreclosure of any
of
our properties would be treated as a sale of the property for a purchase price
equal to the outstanding balance of the debt secured by the mortgage. If the
outstanding balance of the debt secured by the mortgage exceeds our tax basis
in
the property, we would recognize taxable income on foreclosure, but would not
receive any cash proceeds. We may give full or partial guarantees to lenders
of
mortgage debt to the entities that own our properties. When we give a guaranty
on behalf of an entity that owns one of our properties, we will be responsible
to the lender for satisfaction of the debt if it is not paid by such entity.
If
any mortgages contain cross-collateralization or cross-default provisions,
there
is a risk that more than one real property may be affected by a default. If
any
of our properties are foreclosed upon due to a default, our ability to pay
cash
dividends to our shareholders will be adversely affected.
If
we failed to qualify as a REIT, our operations and dividends to shareholders
would be adversely impacted.
We
intend
to continue to operate so as to qualify as a REIT under the Internal Revenue
Code. A REIT generally is not taxed at the corporate level on income it
currently distributes to its shareholders. Qualification as a REIT involves
the
application of highly technical and complex rules for which there are only
limited judicial or administrative interpretations. The determination of various
factual matters and circumstances not entirely within our control may affect
our
ability to continue to qualify as a REIT. In addition, new legislation, new
regulations, administrative interpretations or court decisions could
significantly change the tax laws with respect to qualification as a REIT or
the
federal income tax consequences of such qualification.
If
we
were to fail to qualify as a REIT in any taxable year:
| · |
we
would not be allowed to deduct our distributions to shareholders
when
computing our taxable income;
|
| · |
we
would be subject to federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate
rates;
|
| · |
we
would be disqualified from being taxed as a REIT for the four taxable
years following the year during which qualification was lost, unless
entitled to relief under certain statutory provisions;
|
| · |
our
cash available for dividends would be reduced and we would have less
cash
to pay dividends to shareholders;
and
|
| · |
we
may be required to borrow additional funds or sell some of our assets
in
order to pay corporate tax obligations we may incur as a result of
our
disqualification.
|
Our
debt agreements impose limits on our operations and our ability to make
distributions to our shareholders.
The
agreements relating to the debt we incur contain financial and operating
covenants that may limit our ability to make distributions or other payments
to
our shareholders. Our existing credit facilities contain financial and operating
covenants, including:
| · |
net
worth requirements;
|
| · |
debt
service coverage of at least 1.5 to
1.0;
|
| · |
loan-to-value
ratio of the borrowing base pool to total funded loan balance of
at least
1.67 to 1.00;
|
| · |
total
debt not to exceed 60% of fair market value of the real estate
assets;
|
11
| · |
the
ratio of secured debt to fair market value of real estate assets
not to
exceed 40%;
|
| · |
interest
coverage ratio of at least 2.0 to
1.0;
|
| · |
we
must hedge certain amounts of variable interest rate
debt;
|
| · |
maintenance
of specific levels of insurance;
and
|
| · |
limitations
on our ability to make distributions or other payments to our
shareholders, sell assets or engage in mergers, consolidation or
make
certain acquisitions.
|
Failure
to comply with these covenants could result from, among other things, changes
in
our results of operations, incurrence of debt or changes in general economic
conditions. These covenants may restrict our ability to fund our operations
and
conduct our business. Failure to comply with any of these covenants could result
in a default under our credit agreement or other debt agreements we may enter
into in the future. A default could cause one or more of our lenders to
accelerate the timing of payments which could force us to dispose of one or
more
of our properties, possibly on disadvantageous terms. As of December 31,
2005, we were in violation of one such covenant. While we are currently in
discussions with the lenders to obtain a waiver, there can be no assurance
that
we will be successful in obtaining such waiver. As this violation
constitutes an event of default, our lenders have the right to accelerate
payment. For more discussion, see Management’s
Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources. Similar violations of our loan covenants may occur
in the future.
Because
of the lack of geographic diversification of our portfolio, an economic downturn
in the Houston, Dallas or San Antonio, Texas metropolitan areas could adversely
impact our operations and ability to pay dividends to our
shareholders.
All
of
our assets and revenues are currently derived from properties located in the
Houston, Dallas and San Antonio, Texas metropolitan areas. Our results of
operation are directly contingent on our ability to attract financially sound
commercial tenants. If Houston, Dallas or San Antonio experiences a significant
economic downturn, our ability to locate and/or retain financially sound tenants
may decrease. Likewise, we may be required to lower our rental rates to attract
desirable tenants in such an environment. Consequently, because of the lack
of
geographic diversity among our current assets, if Houston, Dallas or San Antonio
experiences an economic downturn, our operations and ability to pay dividends
to
our shareholders could be adversely impacted.
There
is no public trading market for our shares of common stock; therefore, it will
be difficult for shareholders to sell their shares.
There
is
no current public market for our shares of common stock. Our charter also
imposes restrictions on the ownership of common shares that will apply to
potential transferees that may inhibit shareholders’ ability to sell their
shares. Moreover, except for requests for redemptions by the estate, heir or
beneficiary of a deceased shareholder, our board of trustees may reject any
request for redemption of shares or amend, suspend or terminate our share
redemption program at any time. Therefore, it will be difficult to sell our
shares promptly or at all, and the seller may have to sell them at a substantial
discount.
We
have acquired a majority of our properties from entities controlled by
Mr. Hartman.
We
acquired 28 of the 37 properties we owned as of December 31, 2005 from entities
controlled by Mr. Hartman. We acquired these properties by either paying cash,
issuing our shares or issuing OP Units. No third parties were retained to
represent or advise these selling entities or us, and the transactions were
not
conducted on an “arm’s-length” basis.
Mr.
Hartman had interests that differed from, and in certain cases conflicted with,
his co-investors in these entities. Mr. Hartman received the following as a
result of such transactions:
| · |
897,117.19
OP Units, as adjusted to reflect the recapitalization, in consideration
of
Mr. Hartman’s general partner interest in the selling
entities;
|
12
| · |
the
ability to limit his future exposure to general partner liability
as a
result of Mr. Hartman no longer serving as the general partner to
certain
of the selling entities; and
|
| · |
the
repayment of debt encumbering various of our properties that was
personally guaranteed by Mr.
Hartman.
|
As
of
December 31, 2005, an affiliate of Mr. Hartman owed us approximately $3.6
million in connection with properties contributed to the Operating Partnership
by such affiliate.
Mr.
Hartman might not have been able to negotiate all of these benefits if the
transactions were negotiated at arm’s length. Further, Mr. Hartman (neither
personally nor in his capacity as a general partner) did not make any
representations or warranties in regard to the properties or the selling
entities in the operative documents executed in order to consummate the
transactions. Consequently, we essentially acquired the properties on an “as is”
basis. Therefore, we will bear the risk associated with any characteristics
or
deficiencies of our properties unknown at the closing of the acquisitions that
may affect the valuation or revenue potential of the properties.
Approximately
29.2% of our gross leasable area is subject to leases that expire during the
two
years ended December 31, 2007.
As
of
December 31, 2005, 29.2% of the aggregate gross leasable area of our properties
is subject to leases that expire prior to December 31, 2007. We are subject
to
the risk that:
| · |
tenants
will not renew such leases;
|
| · |
we
will not be able to re-lease the space subject to such leases;
and
|
| · |
the
terms of any renewal or re-lease will not be as favorable as current
leases.
|
If
any of
these risks materialize, our cash flow and ability to pay dividends could be
adversely affected.
The
value of investments in our common shares will be directly affected by general
economic and regulatory factors we cannot control or
predict.
We
only
own commercial real estate. Investments in real estate typically involve a
high
level of risk as the result of factors we cannot control or predict. One of
the
risks of investing in real estate is the possibility that our properties will
not generate income sufficient to meet operating expenses or will generate
income and capital appreciation, if any, at rates lower than those anticipated
or available through investments in comparable real estate or other investments.
The following factors may affect income from properties and yields from
investments in properties and are generally outside of our control:
| · |
conditions
in financial markets;
|
| · |
over-building
in our markets;
|
| · |
a
reduction in rental income as the result of the inability to maintain
occupancy levels;
|
| · |
adverse
changes in applicable tax, real estate, environmental or zoning
laws;
|
| · |
changes
in general economic conditions;
|
| · |
a
taking of any of our properties by eminent
domain;
|
| · |
adverse
local conditions (such as changes in real estate zoning laws that
may
reduce the desirability of real estate in the area);
|
13
| · |
acts
of God, such as earthquakes or floods and other uninsured
losses;
|
| · |
changes
in supply of or demand for similar or competing properties in an
area;
|
| · |
changes
in interest rates and availability of permanent mortgage funds, which
may
render the sale of a property difficult or unattractive; and
|
| · |
periods
of high interest rates and tight money
supply.
|
Some
or
all of the foregoing factors may affect our properties, which could adversely
affect our operations and ability to pay dividends to shareholders.
Discovery
of previously undetected environmentally hazardous conditions may adversely
affect our operating results.
Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be liable for
the
cost of removal or remediation of hazardous or toxic substances on, under or
in
such property. The costs of removal or remediation could be substantial. Such
laws often impose liability whether or not the owner or operator knew of, or
was
responsible for, the presence of such hazardous or toxic substances.
Environmental laws also may impose restrictions on the manner in which property
may be used or businesses may be operated, and these restrictions may require
substantial expenditures. Environmental laws provide for sanctions in the event
of noncompliance and may be enforced by governmental agencies or, in certain
circumstances, by private parties. Certain environmental laws and common law
principles could be used to impose liability for release of and exposure to
hazardous substances, including asbestos containing materials into the air,
and
third parties may seek recovery from owners or operators of real properties
for
personal injury or property damage associated with exposure to released
hazardous substances. The cost of defending against claims of liability, of
compliance with environmental regulatory requirements, of remediating any
contaminated property, or of paying personal injury claims could materially
adversely affect our business, assets or results of operations and,
consequently, amounts available for payments of dividends to you.
| Item 2. |
Properties.
|
On
December 31, 2005, the Company owned the 37 properties discussed below. All
of
the Company’s properties are located in the Houston, Dallas and San Antonio,
Texas metropolitan areas. The Company’s properties primarily consist of retail
centers and each is designed to meet the needs of surrounding local communities.
A nationally and/or regionally recognized tenant typically anchors each of
the
Company’s properties. In the aggregate, the Company’s properties contain
approximately 3,121,000 square feet of gross leasable area. No individual
property in the Company’s portfolio currently accounts for more than 10% of the
Company’s aggregate leasable area.
As
of
December 31, 2005, the Company’s properties were approximately 82.3% leased.
Anchor space at the properties, representing approximately 7.4% of total
leasable area, was 100.0% leased, while non-anchor space, accounting for the
remaining 92.6% balance, was approximately 80.8% leased. A substantial number
of
the Company’s tenants are local tenants. Indeed, 73.4% of the Company’s tenants
are local tenants and 15.1% and 11.5% of the Company’s tenants are national and
regional tenants, respectively. The Company defines:
| · |
national
tenants as any tenant that operates in at least four metropolitan
areas
located in more than one region (i.e. Northwest, Midwest, Southwest
or
Southeast);
|
| · |
regional
tenants as any tenant that operates in two or more metropolitan areas
located within the same region; and
|
| · |
local
tenants as any tenant that operates stores only within the metropolitan
Houston, Dallas or San Antonio, Texas
area.
|
14
Substantially
all of the Company’s revenues consist of base rents and percentage rents
received under long-term leases. For the year ended December 31, 2005, total
rents and other income were $24,888,214 and percentage rents were $-0-.
Approximately 67.9% of all existing leases provide for annual increases in
the
base rental payments with a “step up” rental clause.
The
following table lists the five properties that generated the most rents during
the year 2005.
|
Property
|
Total
Rents
Received
in 2005
|
Percent
of
Company’s
Total Rents
Received
in 2005
|
|||||
|
Windsor
Park
|
$
|
2,113,291
|
8.49
|
%
|
|||
|
Corporate
Park West
|
1,621,269
|
6.51
|
|||||
|
Corporate
Park Northwest
|
1,523,195
|
6.12
|
|||||
|
Lion
Square
|
1,379,145
|
5.54
|
|||||
|
SugarPark
Plaza
|
1,248,845
|
5.01
|
|||||
|
Total
|
$
|
7,885,745
|
31.67
|
%
|
|||
As
of
December 31, 2005, the Company had no property that accounted for over 10%
of
total gross revenue. Uptown Tower, an office building acquired during 2005
accounts for 10% of the Company’s total fixed assets.
General
Physical Attributes
The
following table lists, for all properties the Company owned on December 31,
2005, the year each property was developed or significantly renovated, the
total
leasable area of each property, the purchase price the Company paid for such
property and the anchor or largest tenant at such property.
|
Property
|
Year
Developed/
Renovated
|
Total
Leasable Area (Sq. Ft.)
|
Purchase
Price
|
|||||||
|
Bissonnet/Beltway
|
1978
|
29,205
|
$
|
2,361,323
|
||||||
|
Webster
Point
|
1984
|
26,060
|
1,870,365
|
|||||||
|
Centre
South
|
1974
|
44,543
|
2,077,198
|
|||||||
|
Torrey
Square
|
1983
|
105,766
|
4,952,317
|
|||||||
|
Providence
|
1980
|
90,327
|
4,593,668
|
|||||||
|
Holly
Knight
|
1984
|
20,015
|
1,612,801
|
|||||||
|
Plaza
Park
|
1982
|
105,530
|
4,195,116
|
|||||||
|
Northwest
Place II
|
1984
|
27,974
|
1,089,344
|
|||||||
|
Lion
Square
|
1980
|
119,621
|
5,835,108
|
|||||||
|
Zeta
Building
|
1982
|
37,740
|
2,456,589
|
|||||||
|
Royal
Crest
|
1984
|
24,900
|
1,864,065
|
|||||||
|
Featherwood
|
1983
|
49,670
|
2,959,309
|
|||||||
|
Interstate
10
|
1980
|
151,000
|
3,908,072
|
|||||||
|
Westbelt
Plaza
|
1978
|
65,619
|
2,733,009
|
|||||||
|
Greens
Road
|
1979
|
20,507
|
1,637,217
|
|||||||
|
Town
Park
|
1978
|
43,526
|
3,760,735
|
|||||||
|
Northeast
Square
|
1984
|
40,525
|
2,572,512
|
|||||||
|
Main
Park
|
1982
|
113,410
|
4,048,837
|
|||||||
|
Dairy
Ashford
|
1981
|
42,902
|
1,437,020
|
|||||||
|
South
Richey
|
1980
|
69,928
|
3,361,887
|
|||||||
|
Corporate
Park Woodland
|
2000
|
99,937
|
6,028,362
|
|||||||
|
South
Shaver
|
1978
|
21,926
|
817,003
|
|||||||
|
Kempwood
Plaza
|
1974
|
112,359
|
2,531,876
|
|||||||
|
Bellnott
Square
|
1982
|
73,930
|
5,792,294
|
|||||||
|
Corporate
Park Northwest
|
1981
|
185,627
|
7,839,539
|
|||||||
|
Westgate
|
1984
|
97,225
|
3,448,182
|
|||||||
|
Garden
Oaks
|
1954
|
95,046
|
6,577,782
|
|||||||
|
Westchase
|
1978
|
42,924
|
2,173,300
|
|||||||
|
Sunridge
|
1979
|
49,359
|
1,461,571
|
|||||||
|
Holly
Hall
|
1980
|
90,000
|
3,123,400
|
|||||||
|
Brookhill
|
1979
|
74,757
|
973,264
|
|||||||
|
Corporate
Park West
|
1999
|
175,665
|
13,062,980
|
|||||||
|
Windsor
Park
|
1992
|
192,458
|
13,102,500
|
|||||||
|
SugarPark
Plaza
|
1974
|
95,032
|
8,906,057
|
|||||||
|
Woodlake
Plaza
|
1974
|
106,169
|
5,532,710
|
|||||||
|
9101
LBJ Freeway
|
1985
|
125,874
|
8,093,296
|
|||||||
|
Uptown
Tower
|
1982
|
253,981
|
17,171,486
|
|||||||
|
Total
|
|
3,121,037
|
$
|
165,962,094
|
||||||
15
General
Economic Attributes
The
following table lists certain information that relates to the rents generated
by
each property. All of the information listed in this table is as of December
31,
2005.
|
Property
|
Percent
Leased
|
Total
Annualized
Rents
Based
on
Occupancy
|
Effective
Net
Rent
Per Sq. Ft.
|
Anchor
or Largest Tenant
|
Lease
Expiration
Date
|
|||||||||||
|
Bissonnet/Beltway
|
81.9
|
%
|
$
|
423,626
|
$
|
14.51
|
Lydia & Ajibade Owoyemi |
9/30/09
|
||||||||
|
Webster
Point
|
72.7
|
%
|
305,098
|
11.71
|
Houston Learning Academy |
12/31/06
|
||||||||||
|
Centre
South
|
66.8
|
%
|
316,665
|
7.10
|
Carlos Alvarez |
10/31/10
|
||||||||||
|
Torrey
Square
|
80.2
|
%
|
805,536
|
7.62
|
99 Cents Only Stores Texas |
9/14/08
|
||||||||||
|
Providence
|
93.5
|
%
|
938,504
|
10.39
|
99 Cents Only Stores Texas |
9/9/08
|
||||||||||
|
Holly
Knight
|
92.5
|
%
|
315,594
|
15.77
|
Quick Wash Laundry |
9/30/09
|
||||||||||
|
Plaza
Park
|
67.4
|
%
|
700,331
|
6.64
|
Pharmedium Services |
5/31/11
|
||||||||||
|
Northwest
Place II
|
61.7
|
%
|
150,494
|
5.38
|
Terra Mar, Inc. |
7/31/08
|
||||||||||
|
Lion
Square
|
100.0
|
%
|
1,375,471
|
11.50
|
Bellaire Marketplace |
9/30/20
|
||||||||||
|
Zeta
Building
|
88.1
|
%
|
493,167
|
13.07
|
Tx Retirement & Tax Advisors |
5/30/11
|
||||||||||
|
Royal
Crest
|
74.9
|
%
|
260,195
|
10.45
|
Emerald Environmental Service |
12/31/07
|
||||||||||
|
Featherwood
|
94.7
|
%
|
839,319
|
16.90
|
Transwestern Publishing |
11/30/07
|
||||||||||
|
Interstate
10
|
80.3
|
%
|
707,315
|
4.68
|
River Oaks L-M, Inc. |
12/31/06
|
||||||||||
|
Westbelt
Plaza
|
66.7
|
%
|
396,546
|
6.04
|
Hartman Management, L.P. |
M-to-M
|
||||||||||
|
Greens
Road
|
72.1
|
%
|
297,327
|
14.50
|
Celaya Meat Market |
1/31/12
|
||||||||||
|
Town
Park
|
91.3
|
%
|
753,576
|
17.31
|
Omar's Meat Market |
12/31/07
|
||||||||||
|
Northeast
Square
|
93.7
|
%
|
567,755
|
14.01
|
Sultan Allana/99 Ct Store |
11/30/08
|
||||||||||
|
Main
Park
|
70.3
|
%
|
510,031
|
4.50
|
Transport Sales Associates |
8/31/08
|
||||||||||
|
Dairy
Ashford
|
32.1
|
%
|
91,597
|
2.14
|
Foster Wheeler USA Corp |
1/31/09
|
||||||||||
|
South
Richey
|
68.3
|
%
|
386,061
|
5.52
|
Kroger |
2/28/06
|
||||||||||
|
Corporate
Park Woodland
|
86.2
|
%
|
986,915
|
9.88
|
Carrier Sales & Distribution |
7/31/08
|
||||||||||
|
South
Shaver
|
84.1
|
%
|
263,266
|
12.01
|
EZ Pawn |
11/30/07
|
||||||||||
|
Kempwood
Plaza
|
73.5
|
%
|
899,397
|
8.00
|
Dollar General |
1/31/08
|
||||||||||
|
Bellnott
Square
|
95.9
|
%
|
794,649
|
10.75
|
Kroger Food Store #277 |
7/31/07
|
||||||||||
|
Corporate
Park Northwest
|
82.7
|
%
|
1,564,226
|
8.53
|
Air Consulting & Engineering |
5/31/08
|
||||||||||
|
Westgate
|
92.9
|
%
|
683,172
|
7.03
|
Postmark DMS, LLC |
2/28/09
|
||||||||||
|
Garden
Oaks
|
75.7
|
%
|
877,349
|
9.23
|
Bally Total Fitness |
12/31/12
|
||||||||||
|
Westchase
|
81.9
|
%
|
485,265
|
11.31
|
Jesus Corral |
2/28/07
|
||||||||||
|
Sunridge
|
89.6
|
%
|
488,000
|
9.89
|
Puro Latino, Inc. |
5/31/10
|
||||||||||
|
Holly
Hall
|
100.0
|
%
|
512,668
|
5.70
|
The Methodist Hospital |
12/31/11
|
||||||||||
|
Brookhill
|
80.7
|
%
|
272,818
|
3.65
|
T.S. Moly-Lubricants |
9/30/07
|
||||||||||
|
Corporate
Park West
|
74.7
|
%
|
1,573,820
|
8.96
|
LTC Pharmacy Services |
5/31/09
|
||||||||||
|
Windsor
Park
|
82.3
|
%
|
1,564,945
|
8.13
|
Sports Authority/Home Depot |
8/31/15
|
||||||||||
|
SugarPark
Plaza
|
100.0
|
%
|
1,238,605
|
13.03
|
Marshall's |
1/31/08
|
||||||||||
|
Woodlake
Plaza
|
82.5
|
%
|
1,306,670
|
12.31
|
Rock Solid Images |
7/31/09
|
||||||||||
|
9101
LBJ Freeway
|
90.4
|
%
|
1,463,084
|
11.62
|
Compass Insurance |
5/31/07
|
||||||||||
|
Uptown
Tower
|
83.3
|
%
|
3,211,264
|
12.64
|
Brockett Davis Drake, Inc. |
4/30/11
|
||||||||||
|
Total/Average
|
82.3
|
%
|
$
|
28,820,321
|
$
|
9.23
|
||||||||||
16
Lease
Expirations
The
following table lists, on an aggregate basis, all of the scheduled lease
expirations over the next 10 years.
|
Gross
Leasable Area
|
Annual
Rental Income
|
|||||||||||||||
|
Year
|
Number
of
Leases
|
Approximate
Square
Feet
|
Percent
of Total
Leasable
Area
|
Amount
|
Percent
of the
Company’s
Total
Rental
Income
|
|||||||||||
|
2006
|
167
|
472,364
|
15.14
|
%
|
$
|
4,520,536
|
15.69
|
%
|
||||||||
|
2007
|
138
|
438,984
|
14.07
|
5,061,562
|
17.56
|
|||||||||||
|
2008
|
147
|
510,982
|
16.37
|
5,615,586
|
19.48
|
|||||||||||
|
2009
|
111
|
360,258
|
11.54
|
4,422,203
|
15.34
|
|||||||||||
|
2010
|
67
|
227,590
|
7.29
|
2,716,267
|
9.42
|
|||||||||||
|
2011
|
50
|
206,266
|
6.61
|
2,494,173
|
8.65
|
|||||||||||
|
2012
|
17
|
75,939
|
2.43
|
933,414
|
3.24
|
|||||||||||
|
2013
|
13
|
61,170
|
1.96
|
714,646
|
2.48
|
|||||||||||
|
2014
|
10
|
39,968
|
1.28
|
545,526
|
1.89
|
|||||||||||
|
2015
|
16
|
99,177
|
3.18
|
1,000,808
|
3.47
|
|||||||||||
|
Total
|
736
|
2,492,698
|
79.87
|
%
|
$
|
28,024,721
|
97.22
|
%
|
||||||||
Insurance
The
Company believes that it has property and liability insurance with reputable,
commercially rated companies. The Company also believes that its insurance
policies contain commercially reasonable deductibles and limits, adequate to
cover its properties. The Company expects to maintain such insurance coverage
and to obtain similar coverage with respect to any additional properties the
Company acquires in the near future. Further, the Company has title insurance
relating to its properties in an aggregate amount that the Company believes
to
be adequate.
Regulations
The
Company’s properties, as well as any other properties that the Company may
acquire in the future, are subject to various federal, state and local laws,
ordinances and regulations, including, among other things, zoning regulations,
land use controls, environmental controls relating to air and water quality,
noise pollution and indirect environmental impacts such as increased motor
vehicle activity. The Company believes that it has all permits and approvals
necessary under current law to operate its properties.
| Item 3. |
Legal
Proceedings.
|
The
nature of the Company’s business exposes it to the risk of lawsuits for damages
or penalties relating to, among other things, breach of contract and employment
disputes. The Company is not currently a party to any pending material
litigation.
| Item 4. |
Submission
of Matters to a Vote of Security
Holders.
|
None.
17
PART
II
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity
Securities.
|
Market
Information
There
is
no established trading market for the Company’s common stock. As of March 30,
2006, the Company had 9,346,614 shares of common stock outstanding held by
a
total of approximately 1,143 shareholders.
Public
Offering Proceeds
The
Company’s Registration Statement on Form S-11 (SEC File No. 333-111674) was
declared effective by the SEC on September 15, 2004 with respect to the Public
Offering described in Item 1 above of up to 10,000,000 shares of the Company’s
common stock to the public at a price of $10 per share, plus up to 1,000,000
shares available for sale pursuant to our dividend reinvestment plan, to be
offered at a price of $9.50 per share, and the Company commenced the Public
Offering on such date. Post-Effective Amendment No. 1 to the Registration
Statement was declared effective by the SEC on June 27, 2005 and Post-Effective
Amendment No. 2 to the Registration Statement was declared effective by the
SEC
on March 9, 2006.
The
10,000,000 shares offered to the public in the Public Offering are being offered
to investors on a best efforts basis by the dealer manager D.H. Hill Securities,
LLP, which means that the broker-dealers participating in the offering are
only
required to use their best efforts to sell the shares and have no firm
commitment or obligation to purchase any of the shares.
As
of
March 30, 2006, 2,336,468 shares had been issued pursuant to the Public Offering
with gross offering proceeds received of $23,335,291.
The
Company’s application of such gross offering proceeds has been as
follows:
|
Description
of Use of Offering Proceeds
|
Amount
of
Proceeds
So
Utilized
|
|||
|
Selling
Commissions paid to broker/ dealers not affiliated with D.H. Hill
Securities , LLP
|
$
|
1,265,955
|
||
|
Selling
Discounts
|
$
|
56,344
|
||
|
Dealer
Manager Fee paid to D.H. Hill Securities , LLP
|
$
|
566,463
|
||
|
Offering
expense reimbursements paid to the Management Company
|
$
|
569,423
|
||
|
Acquisition
Fees paid to the Management Company
|
$
|
455,538
|
||
|
Subtotal
|
$
|
2,913,723
|
||
|
Net
Offering Proceeds
|
$
|
20,421,568
|
||
|
Repayment
of Lines of Credit
|
$
|
11,800,000
|
||
|
Used
for Working Capital
|
$
|
8,621,568
|
||
Although
the immediate use of $11,800,000 of proceeds of the offering was the repayment
of the Company’s lines of credit, and the immediate use of $8,621,568 was for
working capital, subsequent purchases of real estate assets were accomplished
by
re-drawing on the lines of credit and using working capital. Therefore, the
ultimate use of $11,800,000 and $8,621,568 of offering proceeds may be regarded
as being the acquisition of real estate assets.
18
Issuer
Repurchases
The
Company did not repurchase any of its equity securities during the fourth
quarter of the period covered by this Annual Report on Form 10-K. Our board
of
trustees has approved (but delayed the implementation of) a share redemption
program that would enable shareholders to sell shares to the Company after
holding them for at least one year under limited circumstances. We will not
adopt the program until the earlier of (i) the completion of our Public
Offering, which may last until September 15, 2006 or (ii) receipt by us of
SEC
exemptive relief from rules restricting issuer purchases during distributions,
which relief we may never obtain. Our board of trustees could choose not to
implement the share redemption program or to amend its provisions without
shareholder approval.
Dividends
In
order
to remain qualified as a REIT, the Company is required to distribute at least
90% of its annual taxable income to the Company’s shareholders. The Company
currently accrues dividends quarterly and pays such dividends in three monthly
installments following the end of the quarter and intends to continue doing
so.
For a discussion of the Company’s cash flow as compared to dividends, see
Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.
The
following table shows the dividends the Company has paid (including the total
amount paid and the amount paid on a per share basis) for the past two fiscal
years. The amounts provided in the table give effect to our reorganization
as a
Maryland real estate investment trust and the concurrent recapitalization of
our
common shares on July 28, 2004.
|
Month
Paid
|
Total
Amount of
Dividends
Paid
|
Dividends
Per
Share
|
||
|
January
2004
|
$408,762
|
$0.0583
|
||
|
February
2004
|
408,762
|
0.0583
|
||
|
March
2004
|
409,253
|
0.0584
|
||
|
April
2004
|
408,762
|
0.0583
|
||
|
May
2004
|
408,762
|
0.0583
|
||
|
June
2004
|
409,253
|
0.0584
|
||
|
July
2004
|
408,762
|
0.0583
|
||
|
August
2004
|
408,762
|
0.0583
|
||
|
September
2004
|
409,253
|
0.0584
|
||
|
October
2004
|
408,692
|
0.0583
|
||
|
November
2004
|
408,692
|
0.0583
|
||
|
December
2004
|
409,392
|
0.0584
|
||
|
January
2005
|
408,692
|
0.0583
|
||
|
February
2005
|
408,692
|
0.0583
|
||
|
March
2005
|
412,897
|
0.0589
|
||
|
April
2005
|
412,931
|
0.0589
|
||
|
May
2005
|
429,416
|
0.0589
|
||
|
June
2005
|
439,453
|
0.0590
|
||
|
July
2005
|
445,621
|
0.0589
|
||
|
August
2005
|
452,396
|
0.0589
|
||
|
September
2005
|
460,581
|
0.0590
|
||
|
October
2005
|
467,260
|
0.0589
|
||
|
November
2005
|
470,627
|
0.0589
|
||
|
December
2005
|
480,737
|
0.0590
|
||
|
January
2006
|
489,019
|
0.0589
|
||
|
February
2006
|
509,475
|
0.0589
|
||
|
March
2006
|
526,966
|
0.0590
|
||
|
Average
Per Quarter
|
0.1648
|
19
Dividend
Reinvestment Plan
We
have a
dividend reinvestment plan, pursuant to which shareholders may elect to have
dividends from our common shares reinvested in additional common shares. The
purchase price per share under our dividend reinvestment plan is $9.50.
Participants are taxed on income attributable to the reinvested dividends.
We
may terminate the dividend reinvestment plan in our discretion at any time
upon
ten days notice to plan participants.
Incentive
Share Plan
The
Company has adopted an Employee and Trust Manager Incentive Share Plan (the
“Incentive Share Plan”) to
(i)
furnish incentives to individuals chosen to receive share-based awards because
they are considered capable of improving operations and increasing profits;
(ii)
encourage selected persons to accept or continue employment with the Company;
and (iii) increase the interest of employees and Trustees in the Company’s
welfare through their participation and influence on the growth in value of
the
common shares. The class of eligible persons that can receive grants of
incentive awards under the Incentive Share Plan consists of key employees,
directors, non-employee trustees, members of the Management Company and
consultants as determined by the compensation committee of the Board of
Trustees. The total number of common shares that may be issued under the
Incentive Share Plan is an amount of shares equal to 5% of the outstanding
shares on a fully diluted basis, not to exceed 5,000,000 shares. As of December
31, 2005, no options or awards to purchase common shares have been granted
under
the Incentive Share Plan.
The
following shares have been authorized for issuance under Incentive Share
Plan:
|
Plan
Category
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected in
column
(a))
|
|||
|
(a)
|
(b)
|
(c)
|
||||
|
Equity
compensation
plans
approved by
security
holders
|
─
|
─
|
─
|
|||
|
Equity
compensation
plans
not approved by
security
holders
|
─
|
─
|
445,682*
|
|||
|
Total
|
─
|
─
|
445,682
|
|||
| * |
Equals
5% of the outstanding shares on a fully diluted basis as of December
31,
2005, subject to a maximum of 5,000,000
shares
|
20
| Item 6. |
Selected
Financial Data.
|
The
following table sets forth selected consolidated financial information for
the
Company and should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the Company’s
audited consolidated financial statements and the notes thereto, both of which
appear elsewhere in this annual report.
|
Year
Ended December 31,
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||||
|
Income
Statement Data:
|
||||||||||||||||
|
Revenues
|
$
|
25,219
|
$
|
23,484
|
$
|
20,973
|
$
|
20,755
|
$
|
11,704
|
||||||
|
Operating
expenses
|
11,011
|
9,183
|
8,383
|
8,242
|
5,068
|
|||||||||||
|
Interest
|
3,770
|
2,664
|
1,323
|
1,573
|
812
|
|||||||||||
|
Depreciation
and amortization
|
6,099
|
5,223
|
4,758
|
4,042
|
2,151
|
|||||||||||
|
Total
expenses
|
20,880
|
17,070
|
14,464
|
13,857
|
8,031
|
|||||||||||
|
Income
before minority interests
|
4,339
|
6,414
|
6,509
|
6,898
|
3,673
|
|||||||||||
|
Minority
interest in income
|
(1,891
|
)
|
(2,990
|
)
|
(3,035
|
)
|
(3,193
|
)
|
(1,932
|
)
|
||||||
|
Net
income
|
$
|
2,448
|
$
|
3,424
|
$
|
3,474
|
$
|
3,705
|
$
|
1,741
|
||||||
|
Net
income per common share
|
$
|
0.310
|
$
|
0.488
|
$
|
0.496
|
$
|
0.529
|
$
|
0.401
|
||||||
|
Weighted
average shares outstanding
|
7,888
|
7,010
|
7,010
|
7,007
|
4,336
|
|||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Real
estate
|
$
|
153,965
|
$
|
126,547
|
$
|
120,256
|
$
|
109,294
|
$
|
66,269
|
||||||
|
Other
assets
|
17,497
|
16,070
|
13,810
|
17,670
|
4,409
|
|||||||||||
|
Total
assets
|
$
|
171,462
|
$
|
142,617
|
$
|
134,066
|
$
|
126,964
|
$
|
70,678
|
||||||
|
Liabilities
|
$
|
83,462
|
$
|
66,299
|
$
|
55,183
|
$
|
45,617
|
$
|
16,311
|
||||||
|
Minority
interests in Operating Partnership
|
34,272
|
36,489
|
37,567
|
38,598
|
27,264
|
|||||||||||
|
Shareholders’
equity
|
53,728
|
39,829
|
41,316
|
42,749
|
27,103
|
|||||||||||
|
$
|
171,462
|
$
|
142,617
|
$
|
134,066
|
$
|
126,964
|
$
|
70,678
|
|||||||
|
Cash
Flow Data:
|
||||||||||||||||
|
Proceeds
from issuance of common shares
|
$
|
17,035
|
$
|
—
|
$
|
—
|
$
|
155
|
$
|
6,748
|
||||||
|
Additions
to real estate
|
31,792
|
10,277
|
8,242
|
1,983
|
5,028
|
|||||||||||
|
Other
Financial Data:
|
||||||||||||||||
|
Distributions
per share
|
$
|
0.7072
|
$
|
0.7005
|
$
|
0.7000
|
$
|
0.6738
|
$
|
0.5688
|
||||||
The
distributions per share represent payments from cash flow rather than from
the
Company’s net income.
| Item 7. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
You
should read the following discussion of our financial condition and results
of
operations in conjunction with our audited consolidated financial statements
and
the notes thereto included in this annual report. For more detailed information
regarding the basis of presentation for the following information, you should
read the notes to the audited consolidated financial statements included in
this
annual report.
Overview
We
own 37
commercial properties, consisting of 19 retail centers, 12 office-warehouse
properties and 6 office buildings. All of our properties are located in the
Houston, Dallas and San Antonio, Texas metropolitan areas. As of December 31,
2005, we had 754 total tenants. No individual lease or tenant is material to
our
business. Revenues from our largest lease constituted 1.97% of our total
revenues for the year ended December 31, 2005. Leases for our properties range
from one year for our smaller spaces to over ten years for larger tenants.
Our
leases generally include minimum monthly lease payments and tenant
reimbursements for payment of taxes, insurance and maintenance.
We
have
no employees and we do not manage our properties. Our properties and day-to-day
operations are managed by the Management Company under a property management
agreement.
21
Under
the
agreement in effect after September 1, 2004, we pay the Management Company
the
following amounts:
| · |
property
management fees in an amount not to exceed the fees customarily charged
in
arm’s length transactions by others rendering similar services in the
same
geographic area for similar properties as determined by a survey
of
brokers and agents in such area. Generally, we expect these fees
to be
between approximately two and four percent (2.0%-4.0%) of gross revenues
for the management of commercial office buildings and approximately
five
percent (5.0%) of gross revenues for the management of retail and
office-warehouse properties;
|
| · |
for
the leasing of the properties, a separate fee for the leases of new
tenants and renewals of leases with existing tenants in an amount
not to
exceed the fee customarily charged in arm’s length transactions by others
rendering similar services in the same geographic area for similar
properties as determined by a survey of brokers and agents in such
area;
and
|
| · |
except
as otherwise specifically provided, all costs and expenses incurred
by the
Management Company in fulfilling its duties for the account of and
on
behalf of us. Such costs and expenses shall include the wages and
salaries
and other employee-related expenses of all on-site and off-site employees
of the Management Company who are engaged in the operation, management,
maintenance and leasing or access control of our properties, including
taxes, insurance and benefits relating to such employees, and legal,
travel and other out-of-pocket expenses that are directly related
to the
management of specific properties.
|
Gross
revenues are defined as all amounts actually collected as rents or other charges
for the use and occupancy of our properties, but excludes interest and other
investment income and proceeds received for a sale, exchange, condemnation,
eminent domain taking, casualty or other disposition of assets.
Under
an
advisory agreement effective September 1, 2004, we pay the Management Company
for asset management services a quarterly fee in an amount equal to one-fourth
of 0.25% of the gross asset value calculated on the last day of each preceding
quarter.
Gross
asset value is defined as the amount equal to the aggregate book value of our
assets (other than investments in bank accounts, money market funds or other
current assets), before depreciation, bad debts or other similar non-cash
reserves and without reduction for any debt relating to such assets, at the
date
of measurement, except that during such periods in which we are obtaining
regular independent valuations of the current value of our net assets for
purposes of enabling fiduciaries of employee benefit plan shareholders to comply
with applicable Department of Labor reporting requirements. Gross asset value
is
the greater of (i) the amount determined pursuant to the foregoing or (ii)
our
assets’ aggregate valuation established by the most recent such valuation report
without reduction for depreciation, bad debts or other similar non-cash reserves
and without reduction for any debt relating to such assets. The fees
payable to the Management Company under the new agreements effective September
1, 2004 were not intended to be significantly different from those that would
have been payable under the previous agreement. Upon actual calculation,
the asset management fee under the new agreement was significantly higher.
The Management Company waived the excess of the fee for the period September
1,
2004 through December 31, 2005, in perpetuity.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations
are
based on our consolidated financial statements. We prepared these financial
statements in conformity with U.S. generally accepted accounting principles.
The
preparation of these financial statements required us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. We based our estimates on historical
experience and on various other assumptions we believe to be reasonable under
the circumstances. Our results may differ from these estimates. Currently,
we
believe that our accounting policies do not require us to make estimates using
assumptions about matters that are highly uncertain. You should read Note 1,
Summary of Significant Accounting Policies, to our financial statements in
conjunction with this Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
We
have
described below the critical accounting policies that we believe could impact
our consolidated financial statements most significantly.
22
Basis
of Consolidation.
We are
the sole general partner of the Operating Partnership and possess full legal
control and authority over its operations. As of December 31, 2005, we owned
a
majority of the partnership interests in the Operating Partnership.
Consequently, our consolidated financial statements include the accounts of
the
Operating Partnership. All significant intercompany balances have been
eliminated. Minority interest in the accompanying consolidated financial
statements represents the share of equity and earnings of the Operating
Partnership allocable to holders of partnership interests other than us. Net
income is allocated to minority interests based on the weighted-average
percentage ownership of the Operating Partnership during the year. Issuance
of
additional common shares and OP Units changes our ownership interests as well
as
those of minority interests.
Real
Estate.
We
record real estate properties at cost, net of accumulated depreciation. We
capitalize improvements, major renovations and certain costs directly related
to
the acquisition, improvement and leasing of real estate. We charge expenditures
for repairs and maintenance to operations as they are incurred. We calculate
depreciation using the straight-line method over the estimated useful lives
of 5
to 39 years of our buildings and improvements. We depreciate tenant improvements
using the straight-line method over the life of the lease.
We
review
our properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets, including accrued rental
income, may not be recoverable through our operations. We determine whether
an
impairment in value has occurred by comparing the estimated future cash flows
(undiscounted and without interest charges), including the estimated residual
value of the property, with the carrying cost of the property. If impairment
is
indicated, we record a loss for the amount by which the carrying value of the
property exceeds its fair value. We have determined that there has been no
impairment in the carrying value of our real estate assets as of December 31,
2005.
Purchase
Price Allocation.
We
record above-market and below-market in-place lease values for owned properties
based on the present value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases and
(ii) management’s estimate of fair market lease rates for the corresponding
in-place leases, measured over a period equal to the remaining non-cancelable
term of the lease. We amortize the capitalized above-market lease values as
a
reduction of rental income over the remaining non-cancelable terms of the
respective leases. We amortize the capitalized below-market lease values as
an
increase to rental income over the initial term and any fixed-rate renewal
periods in the respective leases. Because most of our leases are relatively
short term, have inflation or other scheduled rent escalations, and cover
periods during which there have been few, and generally insignificant, pricing
changes in the specific properties’ markets, the properties we have acquired
have not been subject to leases with terms materially different than
then-existing market-level terms.
We
measure the aggregate value of other intangible assets acquired based on the
difference between (i) the property valued with existing in-place leases
adjusted to market rental rates and (ii) the property valued as if vacant.
Our
management’s estimates of value are made using methods similar to those used by
independent appraisers, primarily discounted cash flow analysis. Factors
considered by management in its analysis include an estimate of carrying costs
during hypothetical expected lease-up periods considering current market
conditions, and costs to execute similar leases. We also consider information
obtained about each property as a result of our pre-acquisition due diligence,
marketing and leasing activities in estimating the fair value of the tangible
and intangible assets acquired. In estimating carrying costs, management will
also include real estate taxes, insurance and other operating expenses and
estimates of lost rentals at market rates during the expected lease-up periods,
which we expect to primarily range from 4 to 18 months, depending on specific
local market conditions. Our management also estimates costs to execute similar
leases including leasing commissions, legal and other related expenses to the
extent that such costs are not already incurred in connection with a new lease
origination as part of the transaction.
The
total
amount of other intangible assets acquired is further allocated to in-place
lease values and customer relationship intangible values based on our
management’s evaluation of the specific characteristics of each tenant’s lease
and our overall relationship with that respective tenant. Characteristics
considered by our management in allocating these values include the nature
and
extent of our existing business relationships with the tenant, growth prospects
for developing new business with the tenant, the tenant’s credit quality and
expectations of lease renewals (including those existing under the terms of
the
lease agreement), among other factors.
23
We
amortize the value of in-place leases, if any, to expense over the remaining
initial terms of the respective leases, which, for leases with allocated
intangible value, we expect to range generally from five to ten years. The
value
of customer relationship intangibles is amortized to expense over the remaining
initial terms and any renewal periods in the respective leases, but in no event
does the amortization period for intangible assets exceed the remaining
depreciable life of the building. Should a tenant terminate its lease, the
unamortized portion of the in-place lease value and customer relationship
intangibles are charged to expense.
Revenue
Recognition.
All
leases on properties we hold are classified as operating leases, and we
recognize the related rental income on a straight-line basis over the terms
of
the related leases. We capitalize or charge to accrued rent receivable, as
applicable, differences between rental income earned and amounts due per the
respective lease agreements. Percentage rents are recognized as rental income
when the thresholds upon which they are based have been met. Recoveries from
tenants for taxes, insurance, and other operating expenses are recognized as
revenues in the period the corresponding costs are incurred. We provide an
allowance for doubtful accounts against the portion of tenant accounts
receivable which we estimate to be uncollectible.
Liquidity
and Capital Resources
General.
We
generally lease our properties on a triple-net basis or on bases which provide
for tenants to pay for increases in operating expenses over a base year or
set
amount, which means that tenants are required to pay for all repairs and
maintenance, property taxes, insurance and utilities, or increases thereof,
applicable to their space. During the year ended December 31, 2005, our
properties generated sufficient cash flow to cover our operating expenses.
However, our total distributions for 2005 exceeded our net cash flow from
operating activities by $605,263. We funded this shortage with cash from
borrowings under our KeyBank credit facility. This shortage resulted from
decreased revenues during the third and fourth quarters of 2005 caused by a
drop
in the occupancy for the overall portfolio, as well as increased interest
expenses due to rising interest rates and increased borrowings and higher real
estate taxes associated with increased property value assessments. These factors
are expected to be transitory, and management has implemented a series of new
initiatives which are aimed at increasing occupancy. Therefore, we anticipate
that cash flows from operating activities and our borrowing capacity will
provide adequate capital for our working capital requirements, anticipated
capital expenditures and scheduled debt payments during the next 12 months.
We
also believe that cash flows from operating activities and our borrowing
capacity will allow us to make all distributions required for us to continue
to
qualify to be taxed as a REIT.
Cash
and Cash Equivalents.
We had
cash and cash equivalents of $848,998 on December 31, 2005 as compared to
$631,978 on December 31, 2004. The increase was relatively insignificant because
we try to keep cash balances to a minimum by either buying properties, improving
properties, reducing debt or making distributions to shareholders. We place
all
cash in short-term, highly liquid investments that we believe provide
appropriate safety of principal.
Our
Debt for Borrowed Money.
In
December 2002, we refinanced most of our debt with a credit facility from GMAC
Commercial Mortgage Corporation. We used the loan proceeds to repay debt and
the
remainder to pay accrued real estate taxes and other operating expenses. The
loan is secured by, among other things, 18 of our properties, which are held
by
Hartman REIT Operating Partnership II, L.P., a wholly owned subsidiary formed
for the purpose of this credit facility, and the improvements, personal property
and fixtures on the properties, all reserves, escrows and deposit accounts
held
by Hartman REIT Operating Partnership II, L.P., all intangible assets specific
to or used in connection with the properties, and an assignment of rents related
to such properties. We believe the fair market value of these properties was
approximately $62,000,000 at the time the loan was put in place. We may prepay
the loan after July 1, 2005 without penalty. As of December 31, 2005, the
outstanding principal balance under this facility was $34,440,000.
We
are
required to make monthly interest payments under this credit facility. During
the initial term of the note, indebtedness under the credit facility bears
interest at LIBOR plus 2.5% computed on the basis of a 360 day year, adjusted
monthly. The interest rate was 6.79% as of December 31, 2005. We are not
required to make any principal payments prior to the loan’s maturity. The credit
facility matured on January 1, 2006, and we elected the option, subject to
certain conditions, of extending the facility for an additional two-year period.
We entered into a Modification
Agreement on February 28, 2006 which extended the term of the credit facility
to
January 1, 2008. During the extension term, indebtedness under the credit
facility will bear interest at LIBOR plus 3.0%, computed on the basis of a
360
day year, adjusted monthly. In no event shall the interest rate be lower than
4.32% during the extension term.
24
In
addition, Hartman REIT Operating Partnership II, L.P. agreed to certain
covenants pursuant to the credit facility which, among other things, require
it
to maintain specified levels of insurance and use the properties securing the
note only for retail, light industrial, office, warehouse and commercial office
uses. The facility also limits, without the approval of the lender, this wholly
owned subsidiary’s ability to:
| · |
acquire
additional material assets;
|
| · |
merge
or consolidate with any other
entity;
|
| · |
engage
in any other business or activity other than the ownership, operation
and
maintenance of the properties securing the
note;
|
| · |
make
certain investments;
|
| · |
incur,
assume or guarantee additional
indebtedness;
|
| · |
grant
certain liens; and
|
| · |
loan
money to others.
|
The
security documents related to the note contain a covenant which requires Hartman
REIT Operating Partnership II, L.P. to maintain adequate capital in light of
its
contemplated business operations. We believe that this covenant and the other
restrictions provided for in our credit facility will not affect or limit
Hartman REIT Operating Partnership II, L.P.’s ability to make distributions to
us. The note and the security documents related thereto also contain customary
events of default, including, without limitation, payment defaults,
bankruptcy-related defaults and breach of covenant defaults. These covenants
only apply to Hartman REIT Operating Partnership II, L.P. and do not impact
the
other operations of the Operating Partnership, including the operation of
our properties which do not secure this debt.
In
connection with the purchase of the Windsor Park property in December 2003,
we
assumed a note payable in the amount of $6,550,000 secured by the property.
The
balance at December 31, 2005 was $5,610,441. The note is payable in equal
monthly installments of principal and interest of $80,445, with interest at
the
rate of 8.34% per annum. The balance of the note is payable in full on December
1, 2006.
On
June
2, 2005, the Operating Partnership finalized a new revolving line of credit
facility with a consortium of banks led by KeyBank National Association
(“KeyBank”). The credit facility became retroactively effective as of March 11,
2005, the date certain documents for the facility were placed into escrow,
pending the completion of the transaction. The credit facility is secured by
a
pledge of the partnership interests in Hartman REIT Operating Partnership III
LP
(“HROP III”), a new wholly owned subsidiary of the Operating Partnership that
was formed to hold title to the properties comprising the borrowing base pool
for the credit facility. Presently there are 18 properties owned by HROP
III.
The
current limit of the credit facility is $50,000,000 and it may be increased
to
$100,000,000 as the borrowing base pool expands. The purpose of the credit
facility was to refinance the Operating Partnership’s previous loan with Regions
Bank (formerly Union Planter’s Bank, N.A.), to finance property acquisitions and
for general corporate purposes. Simultaneously with the finalization of the
new
credit facility, the Operating Partnership drew $18,975,094, of which
$18,650,000 was used to pay off the principal balance owing under the Regions
Bank loan. Based upon the required ratios explained below, the remaining
availability under the facility as of December 31, 2005 was
$17,024,906.
25
Outstanding
amounts under the facility will accrue interest, at the Company’s option, at
either the LIBOR Rate or the Alternative Base Rate, plus the applicable margin
as determined from the following grid:
|
Total
Leverage Ratio
|
LIBOR
Margin
|
Alternative
Base
Rate
Margin
|
||
|
Less
than 60% but greater than or equal to 50%
|
2.40%
|
1.150%
|
||
|
Less
than 50% but greater than or equal to 45%
|
2.15%
|
1.025%
|
||
|
Less
than 45%
|
1.90%
|
1.000%
|
The
Alternative Base Rate equals a floating rate equal to the higher of KeyBank’s
Base Rate or Federal Funds Rate plus 0.5%. Interest is due monthly in arrears,
computed on the actual number of days elapsed over a 360-day year. LIBOR Rate
loans will be available in one, two, three or six month periods, with a maximum
of six contracts at any time. In the event of default, interest will be
calculated as above plus 2%. The effective interest rate as of December 31,
2005
was 5.68% per annum.
Interest
only is payable monthly under the loan with the total amount of principal due
at
maturity on March 11, 2008. The loan may be prepaid at any time in part or
in
whole, provided that the facility is not in default. If LIBOR Rate pricing
is
elected, there is a prepayment penalty based on a “make-whole” calculation for
all costs associated with prepaying a LIBOR borrowing.
The
revolving line of credit is supported by a pool of eligible properties referred
to as the borrowing base pool. The borrowing base pool must meet the following
criteria:
| · |
The
Company will provide a negative pledge on the borrowing base pool
and may
not provide a negative pledge of the borrowing base pool to any other
lender.
|
| · |
The
properties must be free of all liens, unless otherwise
permitted.
|
| · |
All
eligible properties must be retail, office-warehouse, or office
properties, must be free and clear of material environmental concerns
and
must be in good repair.
|
| · |
The
aggregate physical occupancy of the borrowing base pool must remain
above
80% at all times.
|
| · |
No
property may comprise more than 15% of the value of the borrowing
base
pool with the exception of Corporate Park Northwest, which is allowed
into
the borrowing base pool.
|
| · |
The
borrowing base pool must at all times be comprised of at least 10
properties.
|
| · |
The
borrowing base pool properties may not contain development or
redevelopment projects.
|
Properties
can be added to and removed from the borrowing base pool at any time provided
no
defaults would occur as a result of the removal. If a property does not meet
the
criteria of an eligible property and the Company wants to include it in the
borrowing base pool, a majority vote of the bank consortium is required for
inclusion in the borrowing base pool.
Covenants,
tested quarterly, relative to the borrowing base pool are as
follows:
| · |
The
Company will not permit any liens on the properties in the borrowing
base
pool unless otherwise permitted.
|
| · |
The
ratio of aggregate net operating income from the borrowing base pool
to
debt service shall at all times exceed 1.5 to 1.0. For any quarter,
debt
service shall be equal to the average loan balance for the past quarter
times an interest rate which is the greater of (a) the then current
annual
yield on 10 year United States Treasury notes over 25 years plus
2%; (b) a
6.5% constant; or (c) the actual interest rate for the
facility.
|
26
| · |
The
ratio of the value of the borrowing base pool to total funded loan
balance
must always exceed 1.67 to 1.00. The value of the borrowing base
pool is
defined as aggregate net operating income for the preceding four
quarters,
less a $0.15 per square foot per annum capital expenditure reserve,
divided by a 9.25% capitalization
rate.
|
Covenants,
tested quarterly, relative to the Company are as follows:
| · |
The
Company will not permit its total indebtedness to exceed 60% of the
fair
market value of its real estate assets at the end of any quarter.
Total
indebtedness is defined as all liabilities of the Company, including
this
facility and all other secured and unsecured debt of the Company,
including letters of credit and guarantees. Fair market value of
real
estate assets is defined as aggregate net operating income for the
preceding four quarters, less a $0.15 per square foot per annum capital
expenditure reserve, divided by a 9.25% capitalization
rate.
|
| · |
The
ratio of consolidated rolling four-quarter earnings before interest,
income tax, deprecation and amortization expenses for such quarter
to
total interest expense, including capitalized interest, shall not
be less
than 2.0 to 1.0.
|
| · |
The
ratio of consolidated earnings before interest, income tax, deprecation
and amortization expenses for such quarter to total interest, including
capitalized interest, principal amortization, capital expenditures
and
preferred stock dividends shall not be less than 1.5 to 1.0. Capital
expenditures shall be deemed to be $0.15 per square foot per
annum.
|
| · |
The
ratio of secured debt to fair market value of real estate assets
shall not
be greater than 40%.
|
| · |
The
ratio of declared dividends to funds from operations shall not be
greater
than 95%.
|
| · |
The
ratio of development assets to fair market value of real estate assets
shall not be greater than 20%.
|
| · |
The
Company must maintain its status as a real estate investment trust
for
income tax purposes.
|
| · |
Total
other investments shall not exceed 30% of total asset value. Other
investments shall include investments in joint ventures, unimproved
land,
marketable securities and mortgage notes receivable. Additionally,
the
preceding investment categories shall not comprise greater than 30%,
15%,
10% and 20%, respectively, of total other
investments.
|
Within
six months of closing, the Company must hedge all variable rate debt above
$40
million until the point in which the ratio of variable rate debt to fixed rate
debt is 50% of total debt. Thereafter, the Company must maintain such hedges
during any period in which variable rate debt exceeds 50% of total debt. On
March 27, 2006 the Company executed an interest rate swap dated as of March
16,
2006 for the purpose of hedging variable interest rate exposure, in compliance
with the requirements of the loan agreement. The lender waived default for
the
fact that the hedge was not executed within six months of closing, as required
by the loan agreement.
As
of December 31, 2005, we were in violation of the
covenant which provides that the ratio of declared dividends to funds from
operations (as defined in the loan agreement) shall not be greater than
95%. As this violation constitutes an event of default, our lenders have
the right to accelerate payment of the credit facility. As of December 31,
2005, and continuing through March 31, 2006 we had not received a waiver from
the required majority of the consortium of banks in the facility led by
KeyBank. We are currently in discussions to receive such waiver, and as
our violation constitutes less than 0.4%, we believe that we will receive such
waiver. However, there can be no assurance that we will be successful in
our negotiations to obtain a waiver.
Capital
Expenditures.
We
currently do not expect to make significant capital expenditures or any
significant improvements to any of our currently owned properties during the
next 12 months. However, we may have unexpected capital expenditures or
improvements on our existing assets. Additionally, we intend to continue our
ongoing acquisition strategy of acquiring properties in the Houston, Dallas
and
San Antonio, Texas metropolitan areas where we believe opportunities exist
for
acceptable investment returns (generally in the $1 million to $10 million value
range), and we may incur significant capital expenditures or make significant
improvements in connection with any properties we may acquire.
27
Total
Contractual Cash Obligations.
A
summary of our contractual cash obligations is as follows:
|
Payment
due by period
|
||||||||||
|
Contractual
Obligations
|
Total
|
Less
than
One
Year
|
One
to
Three
Years
|
Three
to
Five
Years
|
More
than
Five
Years
|
|||||
|
Long-Term
Debt Obligations
|
$73,025,535
|
$5,610,441
|
$67,415,094
|
—
|
—
|
|||||
|
Capital
Lease Obligations
|
—
|
—
|
—
|
—
|
—
|
|||||
|
Operating
Lease Obligations
|
—
|
—
|
—
|
—
|
—
|
|||||
|
Purchase
Obligations
|
—
|
—
|
—
|
—
|
—
|
|||||
|
Other
Long-Term Liabilities
Reflected
on the Registrant’s
Balance
Sheet under GAAP
|
—
|
—
|
—
|
—
|
—
|
|||||
|
Total
|
$73,025,535
|
$5,610,441
|
$67,415,094
|
—
|
—
|
|||||
We
have
no commercial commitments such as lines of credit or guarantees that might
result from a contingent event that would require our performance pursuant
to a
funding commitment.
Property
Acquisitions.
During
2005, we acquired from unrelated parties three multi-tenant office buildings
comprising approximately 486,024 square feet of gross leasable area (GLA).
The
properties were acquired for cash in the amount of approximately
$30,430,000.
During
2004, we acquired from an unrelated party one multi-tenant retail center
comprising approximately 95,032 square feet of gross leasable area (GLA). The
property was acquired for cash in the amount of approximately
$8,900,000.
Results
of Operations
Year
Ended December 31, 2005 Compared to Year Ended December 31,
2004
General
The
following table provides a general comparison of our results of operations
for
the years ended December 31, 2004 and December 31, 2005:
|
December
31, 2004
|
December
31, 2005
|
||||||
|
Number
of properties owned and operated
|
34
|
37
|
|||||
|
Aggregate
gross leasable area (sq. ft.)
|
2,635,063
|
3,121,037
|
|||||
|
Occupancy
rate
|
86%
|
|
82%
|
|
|||
|
Total
Revenues
|
$
|
23,483,657
|
$
|
25,219,233
|
|||
|
Total
Operating Expenses
|
$
|
17,069,628
|
$
|
20,880,435
|
|||
|
Income
before Minority Interest
|
$
|
6,414,029
|
$
|
4,338,798
|
|||
|
Minority
Interest in the Operating Partnership
|
$
|
(2,990,410
|
)
|
$
|
(1,890,616
|
)
|
|
|
Net
Income
|
$
|
3,423,619
|
$
|
2,448,182
|
|||
Revenues
We
had
rental income and tenant reimbursements of $24,707,312 for the year ended
December 31, 2005, as compared to revenues of $23,038,966 for the year ended
December 31, 2004, an increase of $1,668,346, or 7%. Substantially all of our
revenues are derived from rents received from the use of our properties. The
increase in our revenues during 2005 as compared to 2004 was due to an increase
in the amount of rent charged at some locations and the purchase of additional
properties. Our average occupancy rate in 2005 was 85%, as compared to 87%
in 2004,
and
our average annualized revenue was $9.09 per square foot in 2005, as compared
to
an average annualized revenue of $9.14 per square foot in 2004.
28
We
had
interest and other income of $511,921 for the year ended December 31, 2005,
as
compared to $444,691 for the year ended December 31, 2004, an increase of
$67,230, or 15%. At December 31, 2005, we held all revenues and escrowed funds
we received from our Public Offering through such date in money market accounts
and other short-term, highly liquid investments. We expect the percentage of
our
total revenues from interest income from investments in money market accounts
or
other short-term, highly liquid investments to decrease as we invest cash
holdings in properties. The increase in interest and other income during 2005
as
compared to 2004 resulted primarily from an increase in non-rent income such
as
sale of rights-of-way and parking fees.
Expenses
Our
total
operating expenses, including interest expense and depreciation and amortization
expense, were $20,880,435 for the year ended December 31, 2005, as compared
to
$17,069,628 for the year ended December 31, 2004, an increase of $3,810,807,
or
22%. We expect that the dollar amount of operating expenses will increase as
we
acquire additional properties and expand our operations. However, we expect
that
general and administrative expenses as a percentage of total revenues will
decline as we acquire additional properties. The increase in our operating
expenses during 2005 was primarily the result of increased maintenance, real
estate taxes, utilities and depreciation and amortization expenses.
The
amount we pay Hartman Management under our management agreement is based on
our
revenues. As a result of our increased revenues in 2005, management fees were
$1,405,587 in 2005, as compared to $1,339,822 in 2004, an increase of $65,765,
or 5%.
Our
interest expense increased by $1,105,501, or 41%, in 2005 as compared to 2004.
Our average outstanding debt increased from $53,705,399 in 2004 to $61,848,873
in 2005 and the average interest rate associated with this debt increased from
4.54% in 2004 to 6.19% in 2005 because our debt is predominantly subject to
floating interest rates.
Finally,
general and administrative expenses increased $85,886, or 8%, in 2005 as
compared to 2004, primarily as the result of an increase in office
expense.
Net Income
Income
provided by operating activities before minority interest was $4,338,798 for
the
year ended December 31, 2005, as compared to $6,414,029 for the year ended
December 31, 2004, a decrease of $2,075,231, or 32%. Net income provided by
operating activities for the year ended December 31, 2005 was $2,448,182, as
compared to $3,423,619 for the year ended December 31, 2004, a decrease of
$975,437, or 28%. These decreases are a result of the increase in expenses,
discussed above.
Year
Ended December 31, 2004 Compared to Year Ended December 31,
2003
General
The
following table provides a general comparison of our results of operations
for
the years ended December 31, 2003 and December 31, 2004:
29
|
December
31, 2003
|
December
31, 2004
|
||||||
|
Number
of properties owned and operated
|
33
|
34
|
|||||
|
Aggregate
gross leasable area (sq. ft.)
|
2,540,031
|
2,635,063
|
|||||
|
Occupancy
rate
|
88%
|
|
86%
|
|
|||
|
Total
Revenues
|
$
|
20,972,951
|
$
|
23,483,657
|
|||
|
Total
Operating Expenses
|
$
|
14,463,982
|
$
|
17,069,628
|
|||
|
Income
before Minority Interest
|
$
|
6,508,969
|
$
|
6,414,029
|
|||
|
Minority
Interest in the Operating Partnership
|
$
|
(3,034,795
|
)
|
$
|
(2,990,410
|
)
|
|
|
Net
Income
|
$
|
3,474,174
|
$
|
3,423,619
|
|||
Revenues
We
had
rental income and tenant reimbursements of $23,038,966 for the year ended
December 31, 2004, as compared to revenues of $20,605,161 for the year ended
December 31, 2003, an increase of $2,433,805, or 12%. Substantially all of
our
revenues are derived from rents received from the use of our properties. The
increase in our revenues during 2004 as compared to 2003 was due to an increase
in the amount of rent charged at some locations and the purchase of additional
properties. Our average occupancy rate in 2004 was 87%, as compared to 90%
in
2003, and our average annualized revenue was $9.14 per square foot in 2004,
as
compared to an average annualized revenue of $8.93 per square foot in
2003.
We
had
interest and other income of $444,691 for the year ended December 31, 2004,
as
compared to $367,790 for the year ended December 31, 2003, an increase of
$76,901, or 21%. At December 31, 2004, we held all revenues and escrowed funds
we received from our Public Offering through such date in money market accounts
and other short-term, highly liquid investments. The increase in interest and
other income during 2004 as compared to 2003 resulted primarily from an increase
in non-rent income such as late fees and deposit forfeitures.
Expenses
Our
total
operating expenses, including interest expense and depreciation and amortization
expense, were $17,069,628 for the year ended December 31, 2004, as compared
to
$14,463,982 for the year ended December 31, 2003, an increase of $2,605,646,
or
18%. The
increase in our operating expenses during 2004 was primarily the result of
increased maintenance, real estate taxes, utilities and depreciation and
amortization expenses, predominantly due to the addition of properties acquired
during the year.
The
amount we pay Hartman Management under our management agreement is based on
our
revenues and the book value of our assets. As a result of our increased revenues
and assets in 2004, management fees were $1,339,822 in 2004, as compared to
$1,232,127 in 2003, an increase of $107,695, or 9%.
Our
interest expense increased by $1,340,757, or 101%, in 2004 as compared to 2003.
Our average outstanding debt increased from $37,264,685 in 2003 to $53,705,399
in 2004 and the average interest rate associated with this debt increased from
3.90% in 2003 to 4.54% in 2004.
Finally,
general and administrative expenses increased $73,644, or 7%, in 2004 as
compared to 2003, primarily as the result of an increase in professional
fees.
Net
Income
Income
provided by operating activities before minority interest was $6,414,029 for
the
year ended December 31, 2004, as compared to $6,508,969 for the year ended
December 31, 2003, a decrease of $94,940, or 1%. Net income provided by
operating activities for the year ended December 31, 2004 was $3,423,619, as
compared to $3,474,174 for the year ended December 31, 2003, a decrease of
$50,555, or 1%.
30
Taxes
We
elected to be taxed as a REIT under the Internal Revenue Code beginning with
our
taxable year ended December 31, 1999. As a REIT, we generally are not subject
to
federal income tax on income that we distribute to our shareholders. If we
fail
to qualify as a REIT in any taxable year, we will be subject to federal income
tax on our taxable income at regular corporate rates. We believe that we are
organized and operate in such a manner as to qualify to be taxed as a REIT,
and
we intend to operate so as to remain qualified as a REIT for federal income
tax
purposes.
Inflation
We
anticipate that our leases will continue to be triple-net leases or otherwise
provide that tenants pay for increases in operating expenses and will contain
provisions that we believe will mitigate the effect of inflation. In addition,
many of our leases are for terms of less than five years, which allows us to
adjust rental rates to reflect inflation and other changing market conditions
when the leases expire. Consequently, increases due to inflation, as well as
ad
valorem tax rate increases, generally do not have a significant adverse effect
upon our operating results.
Off-Balance
Sheet Arrangements
The
Company has no significant off-balance sheet arrangements as of December 31,
2005.
Recent
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share
Based Payment.”
This
statement requires companies to categorize share based payment as either
liability or equity awards. For liability awards, companies will remeasure
the
award at fair value at each balance sheet date until the award is settled.
Equity classified awards are measured at the grant-date fair value and are
not
remeasured. SFAS No. 123R is effective for interim or annual periods beginning
after June 15, 2005. Awards issued, modified or settled after the effective
date
will be measured and recorded in accordance with SFAS No. 123R. On
April 14, 2005, the SEC adopted a new rule that defers the effective date of
SFAS No. 123R and allows companies to implement the provisions of SFAS 123R
at
the beginning of their next fiscal year. Management believes that the
implementation of this standard will not have a material effect on the Company’s
consolidated financial position or results of operations.
In
December 2004, the FASB issued SFAS No. 153, “Accounting
for Non-monetary Transactions.”
This
standard requires that non-monetary exchanges be accounted for at fair value,
recognizing any gain or loss, if the transactions meet a commercial-substance
criteria and fair value is determinable. SFAS No. 153 is effective for
non-monetary transactions occurring in fiscal years beginning after June 15,
2005. Management believes that the implementation of this standard will not
have
a material effect on the Company’s consolidated financial position or results of
operations.
In
May
2005, the FASB issued Statement of Financial Accounting Standards No. 154 (“SFAS
154”), “Accounting
Changes and Error Corrections - A Replacement of APB Opinion No. 2 and FASB
Statement No. 3.”
This
statement changes the requirements for the accounting for and reporting of
a
change in accounting principle. This statement applies to all voluntary changes
in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement
is
effective for fiscal years beginning after December 15, 2005 and is not expected
to have a material impact on the Company’s consolidated financial
statements.
31
| Item 7A. |
Quantitative
and Qualitative Disclosures About Market
Risk.
|
Market
risk is the risk of loss arising from adverse changes in market rates and
prices. The principal market risk to which the Company is exposed is the risk
related to interest rate fluctuations. Based upon the nature of the Company’s operations,
the Company
is not subject to foreign exchange or commodity risk. The Company
will be exposed to changes in interest rates as a result of the Company’s credit
facilities that have floating interest rates. As of December 31, 2005, the
Company had $67,415,000 of indebtedness outstanding under such facilities.
The
impact of a 1% increase in interest rates on the Company’s debt would result in
an increase in interest expense and a decrease in income before minority
interests of approximately $690,000 annually. Pursuant to loan covenants in
our
KeyBank credit facility, on March 27, 2006 the Company executed an interest
rate
swap agreement with KeyBank National Association with a notional amount
of $30,000,000 of its variable rate debt to help mitigate the risk.
The swap agreement is utilized to effectively fix the interest rate on this
debt
at 6.99%.
| Item 8. |
Financial
Statements and Supplementary
Data.
|
The
information required by this Item 8 is hereby incorporated by reference to
the
Company’s Financial Statements beginning on page F-1 of this Annual Report on
Form 10-K.
| Item 9. |
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
None.
| Item 9A. |
Controls
and Procedures.
|
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to the Company’s management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Management necessarily applied its judgment in assessing
the costs and benefits of such controls and procedures which, by their nature,
can provide only reasonable assurance regarding management’s control
objectives.
Because,
as of December 31, 2005, we did not meet the
definition of “accelerated
filer,” as defined
by Rule 12b-2 of the Exchange Act, we were not required to comply with Section
404 of the Sabanes-Oxley Act of 2002. Accordingly, we did not engage our
independent registered public accounting firm to perform an audit of our
internal controls over financial reporting. However, our independent
registered public accounting firm, in the course of the audit of our financial
statements, brought to management’s attention
two
material weaknesses in our internal controls: (1) Inadequate controls and
procedures in place to effectively identify and monitor amendments to lease
agreements and (2) Inadequate controls and procedures in place to effectively
identify and monitor tenant defaults where a lease commission has been
recorded. As a result of these deficiencies, our accounting personnel may
not be made aware of changes to lease agreements and tenant defaults that
require recognition in our financial accounting records. Accordingly,
errors in our accounting for revenue and amortization expense may occur and
may
not be detected. A material weakness (within the meaning of the Public
Accounting Oversight Board Accounting Standard No. 2) is a control deficiency,
or aggregation of control deficiencies, that result in more than a remote risk
that a material mistatement in the Company’s annual
or
interim financial statements will not be prevented or
detected.
As
of the
end of the period covered by this report, an evaluation was carried out under
the supervision and with the participation of the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation and the
material weakness described above, the Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures are not effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) that is
required to be included in the Company’s Exchange Act filings. The Company
is in the process of remediating the material weaknesses and intends to engage
an external consultant to assist management in establishing and maintaining
adequate controls and remediating the identified material
weaknesses.
No
change
in our internal control over financial reporting occurred during the fourth
fiscal quarter of the period covered by this annual report that materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
| Item 9B. |
Other
Information.
|
None.
32
PART
III
| Item 10. |
Directors
and Executive Officers of the
Registrant.
|
We
have
adopted a Code of Business Conduct that applies to all of our executive officers
and trustees, including but not limited to, our principal executive officer
and
principal financial officer. Our Code of Business Conduct may be found at our
website, www.hartmanmanagement.com.
The
other
information required by this Item is incorporated by reference to the Company’s
definitive proxy statement to be filed with the Securities and Exchange
Commission no later than April 30, 2006.
| Item 11. |
Executive
Compensation.
|
The
information required by this Item is incorporated by reference to the Company’s
definitive proxy statement to be filed with the Securities and Exchange
Commission no later than April 30, 2006.
| Item 12. |
Security
Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters.
|
The
information required by this Item is incorporated by reference to the Company’s
definitive proxy statement to be filed with the Securities and Exchange
Commission no later than April 30, 2006.
| Item 13. |
Certain
Relationships and Related
Transactions.
|
The
information required by this Item is incorporated by reference to the Company’s
definitive proxy statement to be filed with the Securities and Exchange
Commission no later than April 30, 2006.
| Item 14. |
Principal
Accounting Fees and
Services.
|
The
information required by this Item is incorporated by reference to the Company’s
definitive proxy statement to be filed with the Securities and Exchange
Commission no later than April 30, 2006.
PART
IV
| Item 15. |
Exhibits
and Financial Statement
Schedules.
|
(a) List
of Documents Filed.
|
1.
|
Financial
Statements. The list of the Company’s financial statements filed as part
of this Annual Report on Form 10-K is set forth on page F-1
herein.
|
|
2.
|
Financial
Statement Schedules. See (c) below.
|
a. Schedule
II - Valuation and Qualifying Amounts
b. Schedule
III - Real Estate and Accumulated Depreciation
|
3.
|
Exhibits.
The list of exhibits filed as part of this Annual Report on Form
10-K in
response to Item 601 of Regulation S-K is submitted on the Exhibit
Index
attached hereto.
|
33
(b) Exhibits.
The
exhibits filed in response to Item 601 of Regulation S-K are listed on the
Exhibit Index attached hereto.
(c) Financial
Statement Schedules.
|
1.
|
Schedule
II - Valuation and Qualifying
Amounts
|
|
2.
|
Schedule
III - Real Estate and Accumulated
Depreciation
|
All
other
financial statement schedules have been omitted because the required information
of such schedules is not present, is not present in amounts sufficient to
require a schedule or is included in the consolidated financial
statements.
34
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
HARTMAN
COMMERCIAL PROPERTIES REIT
|
|
|
Dated:
March 31, 2006
|
/s/
Allen R.
Hartman
|
|
Allen
R. Hartman, President and Trustee
|
POWER
OF ATTORNEY
KNOW
ALL
PERSONS BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints Allen R. Hartman and Terry L. Henderson, and each
of
them, acting individually, as his attorney-in-fact, each with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K, and to file the same, with all exhibits thereto,
and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith and about the
premises, as fully to all intents and purposes as he or she might or could
do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
March
31, 2006
|
/s/
Allen R. Hartman
|
|
Allen
R. Hartman, President and Trustee
|
|
|
(Principal
Executive Officer)
|
|
|
March
31, 2006
|
/s/
Terry Henderson
|
|
Terry
Henderson, Chief Financial Officer and Trustee
|
|
|
(Principal
Financial and Principal Accounting Officer)
|
|
|
March
31, 2006
|
/s/
Chris A. Minton
|
|
Chris
A. Minton, Trustee
|
|
|
March
31, 2006
|
/s/
Jack L. Mahaffey
|
|
Jack
L. Mahaffey, Trustee
|
|
|
March
31, 2006
|
/s/
Chand Vyas
|
|
Chand
Vyas, Trustee
|
35
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets as of December 31, 2005 and 2004
|
F-2
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2005, 2004
and
2003
|
F-4
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the Years Ended
December
31, 2005, 2004 and 2003
|
F-5
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2005,
2004
and 2003
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
|
Schedule
II - Valuation and Qualifying Accounts
|
F-28
|
|
Schedule
III - Real Estate and Accumulated Depreciation
|
F-29
|
All
other
schedules for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
Report
of Independent Registered Public Accounting Firm
To
the
Board of Trustees and Shareholders of
Hartman
Commercial Properties REIT
We
have
audited the accompanying consolidated balance sheets of Hartman Commercial
Properties REIT and subsidiary (the “Company”) as of December 31, 2005 and 2004,
and the related consolidated statements of income, shareholders’ equity and cash
flows, for each of the three years in the period ended December 31, 2005. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Hartman Commercial
Properties REIT and subsidiary as of December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005 in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As
discussed in Note 7 to the consolidated financial
statements, the Company is in default of the declared dividends covenant in
its
revolving credit facility. Management is currently negotiating a waiver of
this event of default, however, there is no assurance that a waiver will be
obtained.
/s/
PANNELL KERR FORSTER OF TEXAS, P.C.
Houston,
Texas
February
17, 2006, except for Note 11, the date of which is
March
9, 2006, and Note 7, the date of which
is
March
31, 2006
F-1
Hartman
Commercial Properties REIT and Subsidiary
Consolidated
Balance Sheets
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Assets
|
|||||||
|
Real
estate
|
|||||||
|
Land
|
$
|
32,770,566
|
$
|
28,446,210
|
|||
|
Buildings
and improvements
|
141,018,810
|
113,551,420
|
|||||
|
173,789,376
|
141,997,630
|
||||||
|
Less
accumulated depreciation
|
(19,824,386
|
)
|
(15,450,416
|
)
|
|||
|
Real
estate, net
|
153,964,990
|
126,547,214
|
|||||
|
Cash
and cash equivalents
|
848,998
|
631,978
|
|||||
|
Escrows
and acquisition deposits
|
5,307,663
|
4,978,362
|
|||||
|
Note
receivable
|
628,936
|
655,035
|
|||||
|
Receivables
|
|||||||
|
Accounts
receivable, net of allowance for doubtful accounts of $472,875 and
$342,690 in 2005 and 2004, respectively
|
1,248,985
|
1,008,621
|
|||||
|
Accrued
rent receivable
|
2,593,060
|
2,594,933
|
|||||
|
Due
from affiliates
|
3,180,663
|
3,300,202
|
|||||
|
Receivables,
net
|
7,022,708
|
6,903,756
|
|||||
|
Deferred
costs, net
|
3,004,218
|
2,797,294
|
|||||
|
Prepaid
expenses and other assets
|
684,536
|
103,301
|
|||||
|
Total
assets
|
$
|
171,462,049
|
$
|
142,616,940
|
|||
See
notes to consolidated financial statements.
F-2
Hartman
Commercial Properties REIT and Subsidiary
Consolidated
Balance Sheets (continued)
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Liabilities
and Shareholders’ Equity
|
|||||||
|
Liabilities
|
|||||||
|
Notes
payable
|
$
|
73,025,535
|
$
|
57,226,111
|
|||
|
Accounts
payable and accrued expenses
|
4,063,126
|
3,354,610
|
|||||
|
Due
to affiliates
|
350,865
|
675,861
|
|||||
|
Tenants’
security deposits
|
1,440,864
|
1,066,147
|
|||||
|
Prepaid
rent
|
470,248
|
254,765
|
|||||
|
Offering
proceeds escrowed
|
1,559,439
|
1,471,696
|
|||||
|
Dividends
payable
|
1,525,460
|
1,230,281
|
|||||
|
Other
liabilities
|
1,026,914
|
1,019,363
|
|||||
|
Total
liabilities
|
83,462,451
|
66,298,834
|
|||||
|
Minority
interests of unit holders in Operating Partnership, 5,808,337 units
at
December 31, 2005 and 2004
|
34,272,074
|
36,489,114
|
|||||
|
Commitments
and contingencies
|
—
|
—
|
|||||
|
Shareholders’
equity
|
|||||||
|
Preferred
shares, $0.001 par value per share; 50,000,000 shares authorized;
none
issued and outstanding at December 31, 2005 and 2004
|
—
|
—
|
|||||
|
Common
shares, $0.001 par value per share; 400,000,000 shares authorized;
8,913,654 and 7,010,146 issued and outstanding at December 31, 2005
and
2004, respectively
|
8,914
|
7,010
|
|||||
|
Additional
paid-in capital
|
62,560,077
|
45,527,152
|
|||||
|
Accumulated
deficit
|
(8,841,467
|
)
|
(5,705,170
|
)
|
|||
|
Total
shareholders’ equity
|
53,727,524
|
39,828,992
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
171,462,049
|
$
|
142,616,940
|
|||
See
notes to consolidated financial statements.
F-3
Hartman
Commercial Properties REIT and Subsidiary
Consolidated
Statements of Income
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Revenues
|
||||||||||
|
Rental
income
|
$
|
20,072,597
|
$
|
18,426,558
|
$
|
16,656,340
|
||||
|
Tenants’
reimbursements
|
4,634,715
|
4,612,408
|
3,948,821
|
|||||||
|
Interest
and other income
|
511,921
|
444,691
|
367,790
|
|||||||
|
Total
revenues
|
25,219,233
|
23,483,657
|
20,972,951
|
|||||||
|
Expenses
|
||||||||||
|
Operation
and maintenance
|
3,227,481
|
2,838,618
|
2,505,756
|
|||||||
|
Interest
expense
|
3,769,636
|
2,664,135
|
1,323,378
|
|||||||
|
Real
estate taxes
|
2,980,709
|
2,595,346
|
2,050,738
|
|||||||
|
Insurance
|
455,577
|
459,801
|
509,498
|
|||||||
|
Electricity,
water and gas utilities
|
1,587,439
|
817,484
|
805,772
|
|||||||
|
Management
and partnership and asset
management fees to an affiliate
|
1,405,587
|
1,339,822
|
1,232,127
|
|||||||
|
General
and administrative
|
1,224,946
|
1,139,060
|
1,065,416
|
|||||||
|
Depreciation
|
4,373,970
|
3,986,136
|
3,728,925
|
|||||||
|
Amortization
|
1,724,905
|
1,237,286
|
1,029,122
|
|||||||
|
Bad
debt expense (recoveries)
|
130,185
|
(8,060
|
)
|
213,250
|
||||||
|
Total
operating expenses
|
20,880,435
|
17,069,628
|
14,463,982
|
|||||||
|
Income
before minority interests
|
4,338,798
|
6,414,029
|
6,508,969
|
|||||||
|
Minority
interests in Operating Partnership
|
(1,890,616
|
)
|
(2,990,410
|
)
|
(3,034,795
|
)
|
||||
|
Net
income
|
$
|
2,448,182
|
$
|
3,423,619
|
$
|
3,474,174
|
||||
|
Net
income per common share
|
$
|
0.310
|
$
|
0.488
|
$
|
0.496
|
||||
|
Weighted-average
shares outstanding
|
7,887,749
|
7,010,146
|
7,010,146
|
|||||||
See
notes to consolidated financial statements.
F-4
Hartman
Commercial Properties REIT and Subsidiary
Consolidated
Statements of Changes in Shareholders’ Equity
|
Common
Stock
|
||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Total
|
||||||||||||
|
Balance,
December 31, 2002
|
7,010,146
|
$
|
7,010
|
$
|
45,527,152
|
$
|
(2,785,244
|
)
|
$
|
42,748,918
|
||||||
|
Net
income
|
—
|
—
|
—
|
3,474,174
|
3,474,174
|
|||||||||||
|
Dividends
|
—
|
—
|
—
|
(4,907,108
|
)
|
(4,907,108
|
)
|
|||||||||
|
Balance,
December 31, 2003
|
7,010,146
|
7,010
|
45,527,152
|
(4,218,178
|
)
|
41,315,984
|
||||||||||
|
Net
income
|
—
|
—
|
—
|
3,423,619
|
3,423,619
|
|||||||||||
|
Dividends
|
—
|
—
|
—
|
(4,910,611
|
)
|
(4,910,611
|
)
|
|||||||||
|
Balance,
December 31, 2004
|
7,010,146
|
7,010
|
45,527,152
|
(5,705,170
|
)
|
39,828,992
|
||||||||||
|
Issuance
of common stock for cash, net of $1,981,276 offering
costs
|
1,865,557
|
1,866
|
16,672,428
|
—
|
16,674,294
|
|||||||||||
|
|
||||||||||||||||
|
Issuance
of shares under dividend reinvestment plan at $9.50 per
share
|
37,951
|
38
|
360,497
|
—
|
360,535
|
|||||||||||
|
Net
income
|
—
|
—
|
—
|
2,448,182
|
2,448,182
|
|||||||||||
|
Dividends
|
—
|
—
|
—
|
(5,584,479
|
)
|
(5,584,479
|
)
|
|||||||||
|
Balance,
December 31, 2005
|
8,913,654
|
$
|
8,914
|
$
|
62,560,077
|
$
|
(8,841,467
|
)
|
$
|
53,727,524
|
||||||
See
notes to consolidated financial statements.
F-5
Hartman
Commercial Properties REIT and Subsidiary
Consolidated
Statements of Cash Flows
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$
|
2,448,182
|
$
|
3,423,619
|
$
|
3,474,174
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||||
|
Depreciation
|
4,373,970
|
3,986,136
|
3,728,925
|
|||||||
|
Amortization
|
1,724,905
|
1,237,286
|
1,029,122
|
|||||||
|
Minority
interests in Operating Partnership
|
1,890,616
|
2,990,410
|
3,034,795
|
|||||||
|
Equity
in income of real estate partnership
|
—
|
(209,737
|
)
|
—
|
||||||
|
Bad
debt expense (recoveries)
|
130,185
|
(8,060
|
)
|
213,250
|
||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Escrows
and acquisition deposits
|
(329,301
|
)
|
(317,739
|
)
|
(223,663
|
)
|
||||
|
Receivables
|
(368,676
|
)
|
(1,105,425
|
)
|
(387,143
|
)
|
||||
|
Due
from affiliates
|
(205,457
|
)
|
297,810
|
(939,038
|
)
|
|||||
|
Deferred
costs
|
(1,588,018
|
)
|
(952,756
|
)
|
(978,398
|
)
|
||||
|
Prepaid
expenses and other assets
|
(590,978
|
)
|
352,586
|
(15,336
|
)
|
|||||
|
Accounts
payable and accrued expenses
|
708,514
|
30,149
|
23,215
|
|||||||
|
Tenants’
security deposits
|
374,717
|
4,938
|
(60,295
|
)
|
||||||
|
Prepaid
rent
|
215,483
|
(198,656
|
)
|
88,828
|
||||||
|
Net
cash provided by operating activities
|
8,784,142
|
9,530,561
|
8,988,436
|
|||||||
|
Cash
flows used in investing activities:
|
||||||||||
|
Additions
to real estate
|
(31,791,746
|
)
|
(10,276,996
|
)
|
(8,242,179
|
)
|
||||
|
Investment
in real estate partnership
|
—
|
(9,033,561
|
)
|
—
|
||||||
|
Distributions
received from real estate partnership
|
9,743
|
9,233,555
|
—
|
|||||||
|
Issuance
of note receivable
|
—
|
—
|
(290,000
|
)
|
||||||
|
Collections of
note receivable
|
26,099
|
31,968
|
22,997
|
|||||||
|
Net
cash used in investing activities
|
(31,755,904
|
)
|
(10,045,034
|
)
|
(8,509,182
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Dividends
paid
|
(5,289,300
|
)
|
(4,907,107
|
)
|
(4,907,108
|
)
|
||||
|
Distributions
paid to OP unit holders
|
(4,100,105
|
)
|
(4,065,839
|
)
|
(4,065,840
|
)
|
||||
|
Proceeds
from stock offering
|
17,034,829
|
1,471,696
|
—
|
|||||||
|
Proceeds
from stock offering escrowed
|
87,743
|
(1,471,974
|
)
|
—
|
||||||
|
Proceeds
from notes payable
|
46,725,322
|
19,013,180
|
6,353,182
|
|||||||
|
Proceeds
from payment of note payable to affiliate
|
—
|
—
|
(3,278,000
|
)
|
||||||
|
Repayments
of notes payable
|
(30,925,898
|
)
|
(9,430,029
|
)
|
—
|
|||||
|
Payments
of loan origination costs
|
(343,809
|
)
|
(42,163
|
)
|
(94,500
|
)
|
||||
|
Net
cash provided by (used in) financing activities
|
23,188,782
|
567,764
|
(5,992,266
|
)
|
||||||
|
Net
increase (decrease) in cash
|
217,020
|
53,291
|
(5,513,012
|
)
|
||||||
|
Cash
and cash equivalents at beginning of year
|
631,978
|
578,687
|
6,091,699
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
848,998
|
$
|
631,978
|
$
|
578,687
|
||||
|
Supplemental
disclosure of cash flow information
|
||||||||||
|
Debt
assumed in connection with acquisition of properties
|
$
|
—
|
$
|
—
|
$
|
6,550,000
|
||||
See
notes to consolidated financial statements.
F-6
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
1 - Summary of Significant Accounting Policies
Description
of business and nature of operations
Hartman
Commercial Properties REIT (“HCP”) was formed as a real estate investment trust,
pursuant to the Texas Real Estate Investment Trust Act on August 20, 1998 to
consolidate and expand the real estate investment strategy of Allen R. Hartman
(“Hartman”) in acquiring and managing office and retail properties. In July
2004, HCP changed its state of organization from Texas to Maryland pursuant
to a
merger of HCP directly with and into a Maryland real estate investment trust
formed for the sole purpose of the reorganization and the conversion of each
outstanding common share of beneficial interest of the Texas entity into 1.42857
common shares of beneficial interest of the Maryland entity (see Note 11).
Hartman, HCP’s Chairman of the Board of Trustees, has been engaged in the
ownership, acquisition, and management of commercial properties in the Houston,
Texas, metropolitan area for over 20 years. HCP serves as the general partner
of
Hartman REIT Operating Partnership, L.P. (the “Operating Partnership” or “HROP”
or “OP”), which was formed on December 31, 1998 as a Delaware limited
partnership. HCP and the Operating Partnership are collectively referred to
herein as the “Company.” HCP currently conducts substantially all of its
operations and activities through the Operating Partnership. As the general
partner of the Operating Partnership, HCP has the exclusive power to manage
and
conduct the business of the Operating Partnership, subject to certain customary
exceptions. Hartman Management, L.P. (the “Management Company”), a company
wholly owned by Hartman, provides a full range of real estate services for
the
Company, including leasing and property management, accounting, asset management
and investor relations. As of December 31, 2005, 2004 and 2003, the Company
owned and operated 37, 34 and 33 office and retail properties in and around
Houston, Dallas and San Antonio, Texas.
Basis
of consolidation
HCP
is
the sole general partner of the Operating Partnership and possesses full legal
control and authority over the operations of the Operating Partnership. As
of
December 31, 2005, HCP owned a majority of the partnership interests in the
Operating Partnership. Consequently, the accompanying consolidated financial
statements of HCP include the accounts of the Operating Partnership. All
significant intercompany balances have been eliminated. Minority interest in
the
accompanying consolidated financial statements represents the share of equity
and earnings of the Operating Partnership allocable to holders of partnership
interests other than the Company. Net income is allocated to minority interests
based on the weighted-average percentage ownership of the Operating Partnership
during the year. Issuance of additional common shares of beneficial interest
in
HCP (“common shares”) and units of limited partnership interest in the Operating
Partnership (“OP Units”) changes the ownership interests of both the minority
interests and HCP.
Basis
of accounting
The
financial records of the Company are maintained on the accrual basis of
accounting whereby revenues are recognized when earned and expenses are recorded
when incurred.
Cash
and cash equivalents
The
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents at December 31, 2005 and 2004 consist of demand deposits at
commercial banks and money market funds.
F-7
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
1 - Summary of Significant Accounting Policies (Continued)
Due
from affiliates
Due
from
affiliates include amounts owed to the Company from Hartman operated limited
partnerships and other entities.
Escrows
and acquisition deposits
Escrow
deposits include escrows established pursuant to certain mortgage financing
arrangements for real estate taxes, insurance, maintenance and capital
expenditures. Escrow deposits also include the proceeds of the Public Offering
until investors are admitted as shareholders as described in Note 11. The
balance in the Public Offering escrow account was $1,559,439 at December 31,
2005 as follows:
|
Gross
offering proceeds
|
$
|
1,560,100
|
||
|
Less
discounts
|
(661
|
)
|
||
|
Balance
in escrow account at December 31, 2005
|
$
|
1,559,439
|
Acquisition
deposits include earnest money deposits on future acquisitions.
Real
estate
Real
estate properties are recorded at cost, net of accumulated depreciation.
Improvements, major renovations, and certain costs directly related to the
acquisition, improvement, and leasing of real estate are capitalized.
Expenditures for repairs and maintenance are charged to operations as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of 5 to 39 years for the buildings and improvements. Tenant
improvements are depreciated using the straight-line method over the life of
the
lease.
Management
reviews its properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets, including accrued
rental income, may not be recoverable through operations. Management determines
whether an impairment in value has occurred by comparing the estimated future
cash flows (undiscounted and without interest charges), including the estimated
residual value of the property, with the carrying cost of the property. If
impairment is indicated, a loss will be recorded for the amount by which the
carrying value of the property exceeds its fair value. Management has determined
that there has been no impairment in the carrying value of the Company’s real
estate assets as of December 31, 2005.
Deferred
costs
Deferred
costs consist primarily of leasing commissions paid to the Management Company
and deferred financing costs. Leasing commissions are amortized using the
straight-line method over the terms of the related lease agreements. Deferred
financing costs are amortized on the straight-line method over the terms of
the
loans, which approximates the interest method. Costs allocated to in-place
leases whose terms differ from market terms related to acquired properties
are
amortized over the remaining life of the respective leases.
F-8
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
1 - Summary of Significant Accounting Policies (Continued)
Offering
costs
Offering
costs include selling commissions, issuance costs, investor relations fees
and
unit purchase discounts. These costs were incurred in the raising of capital
through the sale of common shares and are treated as a reduction of
shareholders’ equity.
Revenue
recognition
All
leases on properties held by the Company are classified as operating leases,
and
the related rental income is recognized on a straight-line basis over the terms
of the related leases. Differences between rental income earned and amounts
due
per the respective lease agreements are capitalized or charged, as applicable,
to accrued rent receivable. Percentage rents are recognized as rental income
when the thresholds upon which they are based have been met. Recoveries from
tenants for taxes, insurance, and other operating expenses are recognized as
revenues in the period the corresponding costs are incurred. The Company
provides an allowance for doubtful accounts against the portion of tenant
accounts receivable which is estimated to be uncollectible.
Federal
income taxes
HCP
is
qualified as a real estate investment trust (“REIT”) under the Internal Revenue
Code of 1986 and is therefore not subject to Federal income taxes provided
it
meets all conditions specified by the Internal Revenue Code for retaining its
REIT status. HCP believes it has continuously met these conditions since
reaching 100 shareholders in 1999 (see Note 9).
Use
of
estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles 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.
Significant estimates used by the Company include the estimated useful lives
for
depreciable and amortizable assets and costs, and the estimated allowance for
doubtful accounts receivable. Actual results could differ from those
estimates.
Fair
value of financial instruments
The
Company’s financial instruments consist primarily of cash, cash equivalents,
accounts receivable and accounts and notes payable. The carrying value of cash,
cash equivalents, accounts receivable and accounts payable are representative
of
their respective fair values due to the short-term nature of these instruments.
The fair value of the Company’s debt obligations is representative of its
carrying value based upon current rates offered for similar types of borrowing
arrangements.
F-9
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
1 - Summary of Significant Accounting Policies (Continued)
Concentration
of risk
Substantially
all of the Company’s revenues are obtained from office, office-warehouse and
retail locations in the Houston, Dallas and San Antonio, Texas metropolitan
areas. The Company maintains cash accounts in major U.S. financial institutions.
The terms of these deposits are on demand to minimize risk. The balances of
these accounts occasionally exceed the federally insured limits, although no
losses have been incurred in connection with such cash balances.
Comprehensive
income
The
Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 130,
“Reporting Comprehensive Income” in 1999. For the years presented, the Company
did not have significant amounts of comprehensive income.
New
accounting pronouncements
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, “Share Based Payment.” This statement requires companies to categorize
share based payment as either liability or equity awards. For liability awards,
companies will remeasure the award at fair value at each balance sheet date
until the award is settled. Equity classified awards are measured at the
grant-date fair value and are not remeasured. SFAS No. 123R is effective for
interim or annual periods beginning after June 15, 2005. Awards issued, modified
or settled after the effective date will be measured and recorded in accordance
with SFAS No. 123R. On April 14, 2005, the SEC adopted a new rule that defers
the effective date of SFAS No. 123R and allows companies to implement the
provisions of SFAS 123R at the beginning of their next fiscal year.
Management believes that the implementation of this standard will not have
a
material effect on the Company’s consolidated financial position or results of
operations.
In
December 2004, the FASB issued SFAS No. 153, “Accounting for Non-monetary
Transactions.” This standard requires that non-monetary exchanges be accounted
for at fair value, recognizing any gain or loss, if the transactions meet a
commercial-substance criteria and fair value is determinable. SFAS No. 153
is
effective for non-monetary transactions occurring in fiscal years beginning
after June 15, 2005. Management believes that the implementation of this
standard will not have a material effect on the Company’s consolidated financial
position or results of operations.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
A Replacement of APB Opinion No. 2 and FASB Statement No. 3.” This statement
changes the requirements for the accounting for and reporting of a change in
accounting principle. This statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement
is
effective for fiscal years beginning after December 15, 2005 and is not expected
to have a material impact on the Company’s consolidated financial
statements.
F-10
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
2 - Real Estate
During
2003, the Company acquired from an unrelated party one multi-tenant retail
center comprising approximately 192,458 square feet of GLA. The property was
acquired for cash and assumption of debt of $6,550,000 for a total consideration
of approximately $13,100,000.
During
2004, the Company acquired from an unrelated party one multi-tenant retail
center comprising approximately 95,032 square feet of GLA. The property was
acquired for cash in the amount of approximately $8,900,000.
On
March
14, 2005, the Company acquired from an unrelated party one multi-tenant office
building comprising approximately 106,169 square feet of GLA. The property
was
acquired for cash in the amount of approximately $5,500,000 plus closing
costs.
On
August
10, 2005, the Company acquired from an unrelated party one multi-tenant office
building comprising approximately 125,874 square feet of GLA. The property
was
acquired for cash in the amount of approximately $7,980,000 plus closing
costs.
On
November 22, 2005, the Company acquired from an unrelated party one multi-tenant
office building comprising approximately 253,981 square feet of GLA. The
property was acquired for cash in the amount of approximately $16,950,000 plus
closing costs.
The
purchase prices the Company paid for the properties were determined by, among
other procedures, estimating the amount and timing of expected cash flows from
the acquired properties, discounted at market rates. This process in general
also results in the assessment of fair value for each property.
The
Company allocates the purchase price of real estate to the acquired tangible
assets, consisting of land, building and tenant improvements, and identified
intangible assets and liabilities, generally consisting of the value of
above-market and below-market leases, other value of in-place leases and value
of tenant relationships, based in each case on management’s estimates of their
fair values.
F-11
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
2 - Real Estate (Continued)
Management
estimates the fair value of acquired tangible assets by valuing the acquired
property as if it were vacant. The “as-if-vacant” value (limited to the purchase
price) is allocated to land, building, and tenant improvements based on
management’s determination of the relative fair values of these assets.
Above-market
and below-market in-place lease values for owned properties are recorded based
on the present value (using an interest rate which reflects the risks associated
with the leases acquired) of the difference between (i) the contractual amounts
to be paid pursuant to the in-place leases and (ii) management’s estimate of
fair market lease rates for the corresponding in-place leases, measured over
a
period equal to the remaining non-cancelable term of the lease. The capitalized
above-market lease values are amortized as a reduction of rental income over
the
remaining non-cancelable terms of the respective leases. The capitalized
below-market lease values are amortized as an increase to rental income over
the
initial term and any fixed-rate renewal periods in the respective leases.
The
aggregate value of other intangible assets acquired is measured based on the
difference between (i) the property valued with existing in-place leases
adjusted to market rental rates and (ii) the property valued as if vacant.
Management’s estimates of value are made using methods similar to those used by
independent appraisers, primarily discounted cash flow analysis. Factors
considered by management in its analysis include an estimate of carrying costs
during hypothetical expected lease-up periods considering current market
conditions, and costs to execute similar leases. The Company also considers
information obtained about each property as a result of its pre-acquisition
due
diligence, marketing and leasing activities in estimating the fair value of
the
tangible and intangible assets acquired. In estimating carrying costs,
management also includes real estate taxes, insurance and other operating
expenses and estimates of lost rentals at market rates during the expected
lease-up periods, which generally range from four to 18 months, depending on
specific local market conditions. Management also estimates costs to execute
similar leases including leasing commissions, legal and other related expenses
to the extent that such costs are not already incurred in connection with a
new
lease origination as part of the transaction.
The
total
amount of other intangible assets acquired is further allocated to in-place
lease values and customer relationship intangible values based on management’s
evaluation of the specific characteristics of each tenant’s lease and the
Company’s overall relationship with that respective tenant. Characteristics
considered by management in allocating these values include the nature and
extent of the Company’s existing business relationships with the tenant, growth
prospects for developing new business with the tenant, the tenant’s credit
quality, and expectations of lease renewals (including those existing under
the
terms of the lease agreement), among other factors.
The
value
of in-place leases, if any, is amortized to expense over the remaining initial
term of the respective leases, which, for leases with allocated intangible
value, are expected to range generally from five to 10 years. The value of
customer relationship intangibles is amortized to expense over the remaining
initial term and any renewal periods in the respective leases, but in no event
does the amortization period for intangible assets exceed the remaining
depreciable life of the building. Should a tenant terminate its lease, the
unamortized portion of the in-place lease value and customer relationship
intangibles are charged to expense.
F-12
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
2 - Real Estate (Continued)
At
December 31, 2005, the Company owned 37 commercial properties in the Houston,
Dallas and San Antonio, Texas areas comprising approximately 3,121,000 square
feet of GLA.
Note
3 - Investment in Real Estate Partnership
During
January 2004, the Company contributed approximately $9,000,000 to Hartman Gulf
Plaza Acquisitions LP, a Texas limited partnership, in which it is a limited
partner with a 73.11% percentage interest. On January 30, 2004, the partnership
purchased Gulf Plaza, a 120,651 square foot office building located in Houston,
Texas. The purpose of the partnership is to acquire and sell tenant-in-common
interests in the building. The Company had received approximately $9,200,000
in
distributions from the partnership for the year ended December 31,
2004.
The
Company’s equity in income of the partnership of $0 and $209,737 for the years
ended December 31, 2005 and 2004 respectively, is included in other income
on
the consolidated statement of income. The partnership owns a one-percent
tenant-in-common interest in the building.
Note
4 - Note Receivable
In
January 2003, the Company partially financed the sale of a property it had
previously sold and for which it had taken a note receivable of $420,000 as
part
of the consideration. The Company advanced $290,000 and renewed and extended
the
balance of $420,000 still due from the original sale.
The
original principal amount of the note receivable, dated January 10, 2003, is
$710,000. The note is payable in monthly installments of $6,382, including
interest at 7% per annum, for the first two years of the note. Thereafter,
monthly installments of $7,489 are due with interest at 10% per annum. The
note
is fully amortizing with the final payment due January 10, 2018.
F-13
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
5 - Deferred Costs
Deferred
costs consist of the following:
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Leasing
commissions
|
$
|
5,921,323
|
$
|
4,333,305
|
|||
|
Deferred
financing costs
|
1,829,191
|
1,485,381
|
|||||
|
7,750,514
|
5,818,686
|
||||||
|
Less:
accumulated amortization
|
(4,746,296
|
)
|
(3,021,392
|
)
|
|||
|
$
|
3,004,218
|
$
|
2,797,294
|
||||
A
summary
of expected future amortization of deferred costs is as
follows:
|
Years
Ended
December
31,
|
||||
|
2006
|
$
|
776,083
|
||
|
2007
|
675,970
|
|||
|
2008
|
458,703
|
|||
|
2009
|
313,239
|
|||
|
2010
|
213,928
|
|||
|
Thereafter
|
566,295
|
|||
|
$
|
3,004,218
|
|||
Note
6 - Future Minimum Lease Income
The
Company leases the majority of its office and retail properties under
noncancelable operating leases which provide for minimum base rentals plus,
in
some instances, contingent rentals based upon a percentage of the tenants’ gross
receipts.
A
summary
of minimum future rentals to be received (exclusive of renewals, tenant
reimbursements, and contingent rentals) under noncancelable operating leases
in
existence at December 31, 2005 is as follows:
|
Years
Ended
December
31,
|
||||
|
2006
|
$
|
19,518,573
|
||
|
2007
|
16,775,309
|
|||
|
2008
|
13,219,848
|
|||
|
2009
|
9,536,569
|
|||
|
2010
|
6,513,033
|
|||
|
Thereafter
|
17,240,829
|
|||
|
$
|
82,804,161
|
|||
F-14
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
7 - Debt
Notes
payable
Mortgages
and other notes payable consist of the following:
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Mortgages
and other notes payable
|
$
|
40,050,441
|
$
|
40,526,111
|
|||
|
Revolving
loan secured by ownership in properties
|
32,975,094
|
16,700,000
|
|||||
|
Total
|
$
|
73,025,535
|
$
|
57,226,111
|
|||
In
December 2002, the Company refinanced substantially all of its mortgage debt
with a $34,440,000 three-year floating rate mortgage loan collateralized by
18
of the Company’s properties and a maturity date of January 1, 2006, extendable
for an additional two years. Effective as of February 28, 2006 we extended
the
loan to January 1, 2008. During the initial term, the loan bore interest at
2.5%
over a 30-day LIBOR (6.79% and 4.79% at December 31, 2005 and 2004,
respectively) computed on the basis of a 360-day year. During the extension
term
the interest rate will be 3.0% over 30-day LIBOR. Interest only payments are
due
monthly and the loan may be repaid in full or in $100,000 increments, with
a
final balloon payment due upon maturity. The Company capitalized loan costs
of
$1,271,043 financed from the proceeds of the refinancing and amortized the
costs
fully over the initial term of the loan. The security documents related to
the
mortgage loan contain a covenant that requires Hartman REIT Operating
Partnership II, L.P., a wholly owned subsidiary formed for the purpose of this
credit facility, to maintain adequate capital in light of its contemplated
operations. This covenant and the other restrictions provided for in the credit
facility do not affect Hartman REIT Operating Partnership II, L.P.’s ability to
make distributions to the Company.
On
June
30, 2003, the Company entered into a $25,000,000 loan agreement with a bank
pursuant to which the Company could, subject to the satisfaction of certain
conditions, borrow funds to acquire additional income producing properties.
The
revolving loan agreement matured in June, 2005 and provided for interest
payments at a rate, adjusted monthly, of either (at the Company’s option) 30-day
LIBOR plus 225 basis points, or the bank’s prime rate less 50 basis points, with
either rate subject to a floor of 3.75% per annum. The loan was secured by
then
owned and otherwise unencumbered properties and could also be secured by
properties acquired with the proceeds drawn from the facility. The Company
was
required to make monthly payments of interest only, with the principal and
all
accrued unpaid interest being due at maturity of the loan. The loan could be
prepaid at any time without penalty. The Company paid off and closed this credit
facility during June 2005.
F-15
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
7 - Debt (Continued)
On
June
2, 2005, the Company finalized a new revolving credit facility with a consortium
of banks. The facility became retroactively effective as of March 11, 2005,
the
date certain documents for the facility were placed into escrow, pending the
completion of the transaction. The credit facility is secured by a pledge of
the
partnership interests in Hartman REIT Operating Partnership III LP (“HROP III”),
a new wholly owned subsidiary of the Operating Partnership that was formed
to
hold title to the properties comprising the borrowing base pool for the
facility. Presently there are 18 properties owned by HROP III.
The
current limit of the credit facility is $50,000,000 and it may be increased
to
$100,000,000 as the borrowing base pool expands. The Company entered into this
credit facility to refinance the $25,000,000 loan described above, to finance
property acquisitions and for general corporate purposes.
As
of
December 31, 2005 the balance outstanding under the facility was $32,975,094
and
the availability to draw was $17,024,906.
Outstanding
amounts under the credit facility accrue interest computed (at the
Company’s option) at either the LIBOR or the Alternative Base Rate on the
basis of a 360 day year, plus the applicable margin as determined from the
following table:
|
Total
Leverage Ratio
|
LIBOR
Margin
|
Alternative
Base Rate Margin
|
||
|
Less
than 60% but greater than or equal to 50%
|
2.40%
|
1.15%
|
||
|
Less
than 50% but greater than or equal to 45%
|
2.15%
|
1.025%
|
||
|
Less
than 45%
|
1.90%
|
1.00%
|
The
Alternative Base Rate is a floating rate equal to the higher of the bank’s base
rate or the Federal Funds Rate plus .5%. LIBOR loans will be available in one,
two, three or six month periods, with a maximum of six contracts at any time.
The effective interest rate as of December 31, 2005 was 5.68% per
annum.
Interest
only is payable monthly under the loan with the total amount of principal due
at
maturity on March 11, 2008. The loan may be prepaid at any time in part or
in
whole, provided that the credit facility is not in default. If LIBOR pricing
is
elected, there is a prepayment penalty based on a “make-whole” calculation for
all costs associated with prepaying a LIBOR borrowing.
On
March
27, 2006 the Company executed an interest rate swap, dated as of March 16,
2006,
for the purpose of hedging variable interest rate exposure, in compliance with
the requirements of the loan agreement. The lender waived default for the fact
that the hedge was not executed within six months of closing, as required by
the
loan agreement.
As
of December 31, 2005, the Company was in
violation of a loan covenant which provides that the ratio of declared
dividends to funds from operations (as defined in the loan agreement) shall
not
be greater than 95%. As this violation constitutes an event of
default, the lenders have the right to accelerate payment of this credit
facility. As of December 31, 2005, and continuing through March 31,
2006 the Company had not received a waiver from the required majority
of the consortium of banks in the credit facility. The Company
is currently in discussions to receive such waiver, and as the
violation constitutes less than 0.4%, management believes that the
Company will receive such waiver. However, there can be no assurance
that management will be successful in its negotiations to obtain a
waiver.
In
connection with the purchase of the Windsor Park property in December 2003,
the
Company assumed a note payable in the amount of $6,550,000 secured by the
property. The balance at December 31, 2005 was $5,610,441. The note is payable
in equal monthly installments of principal and interest of $80,445, with
interest at the rate of 8.34% per annum. The balance of the note is payable
in
full on December 1, 2006.
F-16
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
7 - Debt (Continued)
Anual
maturities of notes payable, including the revolving loan, are as
follows:
|
Year
Ended
December
31,
|
||||
|
2006
|
$
|
5,610,441
|
||
|
2007
|
—
|
|||
|
2008
|
67,415,094
|
|||
|
$
|
73,025,535
|
|||
Note
payable to affiliate
In
November 2002, the Company issued a $3,278,000 note payable bearing interest
at
4.25% per annum to Houston R.E. Income Properties XVI, Ltd., a related party
operated by Hartman. The note was secured by property and was due upon demand
with interest only payments due monthly. The note was repaid in the second
quarter of 2003.
Supplemental
cash flow information
The
Company made cash payments for interest on debt of $3,788,471, $2,728,985 and
$1,321,758 for the years ended December 31, 2005, 2004 and 2003,
respectively.
F-17
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
8 - Earnings Per Share
Basic
earnings per share is computed using net income to common shareholders and
the
weighted average number of common shares outstanding. Diluted earnings per
share
reflects common shares issuable from the assumed conversion of OP Units
convertible into common shares. Only those items that have a dilutive impact
on
basic earnings per share are included in the diluted earnings per share.
Accordingly, excluded from the earnings per share calculation for each of the
years ended December 31, 2005, 2004 and 2003 are 5,808,337 OP units as their
inclusion would be antidilutive.
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
| Basic and diluted earnings per share | ||||||||||
|
Weighted
average common shares outstanding
|
7,887,749
|
7,010,146
|
7,010,146
|
|||||||
|
Basic
and diluted earnings per share
|
$
|
0.310
|
$
|
0.488
|
$
|
0.496
|
||||
|
Net
income
|
$
|
2,448,182
|
$
|
3,423,619
|
$
|
3,474,174
|
||||
Note
9 - Federal Income Taxes
Federal
income taxes are not provided because the Company intends to and believes it
qualifies as a REIT under the provisions of the Internal Revenue Code.
Shareholders of the Company include their proportionate taxable income in their
individual tax returns. As a REIT, the Company must distribute at least 90%
of
its ordinary taxable income to its shareholders and meet certain income sources
and investment restriction requirements. In addition, REITs are subject to
a
number of organizational and operational requirements. If the Company fails
to
qualify as a REIT in any taxable year, the Company will be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate tax rates.
Taxable
income differs from net income for financial reporting purposes principally
due
to differences in the timing of recognition of interest, real estate taxes,
depreciation and rental revenue.
For
Federal income tax purposes, the cash dividends distributed to shareholders
are
characterized as follows for the years ended December 31:
|
2005
|
2004
|
2003
|
||||
|
Ordinary
income (unaudited)
|
62.6%
|
67.7%
|
24.8%
|
|||
|
Return
of capital (unaudited)
|
37.4%
|
32.3%
|
75.2%
|
|||
|
Capital
gain distributions (unaudited)
|
0.0%
|
0.0%
|
0.0%
|
|||
|
Total
|
100.0%
|
100.0%
|
100.0%
|
F-18
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
10 - Related-Party Transactions
In
January 1999, the Company entered into a property management agreement with
the
Management Company. Effective September 1, 2004, this agreement was amended
and
restated. Prior to September 1, 2004, in consideration for supervising the
management and performing various day-to-day affairs, the Company paid the
Management Company a management fee of 5% and a partnership management fee
of 1%
based on Effective Gross Revenues from the properties, as defined. After
September 1, 2004, the Company pays the Management Company management fees
in an
amount not to exceed the fees customarily charged in arm’s length transactions
by others rendering similar services in the same geographic area, as determined
by a survey of brokers and agents in such area. The Company expects these fees
to be between approximately 2% and 4% of Gross Revenues, as such term is defined
in the amended and restated property management agreement, for the management
of
commercial office buildings and approximately 5% of Gross Revenues for the
management of retail and office-warehouse properties. Effective September 1,
2004, the Company entered into an advisory agreement with the Management Company
which provides that the Company pay the Management Company a fee of one-fourth
of .25% of Gross Asset Value, as such term is defined in the advisory agreement,
per quarter for asset management services. The Company incurred total
management, partnership and asset management fees of $1,405,587, $1,339,822
and
$1,232,127 for the years ended December 31, 2005, 2004 and 2003, respectively,
of which $111,286 and $54,331 were payable at December 31, 2005 and 2004,
respectively.
During
July 2004, the Company amended certain terms of its Declaration of Trust. Under
the amended terms, the Management Company may be required to reimburse the
Company for operating expenses exceeding certain limitations determined at
the
end of each fiscal quarter. Reimbursements, if any, from the Management Company
are recorded on a quarterly basis as a reduction in management
fees.
Under
the
provisions of the property management agreements, costs incurred by the
Management Company for the management and maintenance of the properties are
reimbursable to the Management Company. At December 31, 2005 and 2004, $51,675
and $188,772, respectively, was payable to the Management Company related to
these reimbursable costs.
In
consideration of leasing the properties, the Company also pays the Management
Company leasing commissions of 6% for leases originated by the Management
Company and 4% for expansions and renewals of existing leases based on Effective
Gross Revenues from the properties. The Company incurred total leasing
commissions to the Management Company of $1,588,018, $952,756 and $978,398
for
the years ended December 31, 2005, 2004 and 2003, respectively, of which $78,744
and $232,343 were payable at December 31, 2005 and 2004,
respectively.
The
fees
payable to the Management Company under the new agreements effective September
1, 2004 were not intended to be significantly different from those that would
have been payable under the previous agreement. Upon actual calculation, the
asset management fee under the new agreement was significantly higher. The
Management Company waived the excess of the fee for the period September 1,
2004 through December 31, 2005 in perpetuity.
F-19
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
10 - Related-Party Transactions (Continued)
In
connection with the Public Offering described in Note 11, the Company reimburses
the Management Company up to 2.5% of the gross selling price of all common
shares sold for organization and offering expenses (excluding selling
commissions and a dealer manager fee) incurred by the Management Company on
behalf of the Company. The Company pays its dealer manager, through
the Management Company by agreement between them, a fee of up to 2.5% of the
gross selling price of all common shares sold in the offering. The Company
incurred total fees of $929,819 for the year ended December 31, 2005. Such
fees
have been treated as offering costs and netted against the proceeds from the
sale of common shares.
Also
in
connection with the Public Offering described in Note 11, the Management Company
also receives an acquisition fee equal to 2% of the gross selling price of
all
common shares sold for services in connection with the selection, purchase,
development or construction of properties for the Company. The Company will
capitalize this acquisition fee and allocate it to the purchase price of
properties acquired with offering proceeds. The Company incurred total fees
of
$373,111 for the year ended December 31, 2005. At December 31, 2005 and 2004,
$109,160 and $200,415, respectively, were payable to the Management Company
relating to organization and offering expenses, dealer manager fees and
acquisition fees.
The
Management Company paid the Company $110,042, $106,824 and $106,789 for office
space in 2005, 2004 and 2003, respectively. Such amounts are included in rental
income in the consolidated statements of income.
HCP’s
day-to-day operations are strategically directed by the Board of Trustees and
implemented through the Management Company. Hartman is HCP’s Board Chairman and
sole owner of the Management Company. Hartman was owed $47,478 and $47,386
in
dividends payable on his common shares at December 31, 2005 and 2004,
respectively. Hartman owned 3.0%, 3.9% and 3.4% of the issued and outstanding
common shares of the Company as of December 31, 2005, 2004 and 2003,
respectively.
The
Company was a party to various other transactions with related parties which
are
reflected in due to/from affiliates in the accompanying consolidated balance
sheets and also disclosed in Notes 7 and 11.
F-20
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
11 - Shareholders’ Equity
In
July
2004, HCP changed its state of organization from Texas to Maryland pursuant
to a
merger of HCP directly with and into a Maryland real estate investment trust
formed for the sole purpose of the reorganization and the conversion of each
outstanding common share of beneficial interest of the Texas entity into 1.42857
common shares of beneficial interest of the Maryland entity. Under its Articles
of Amendment and Restatement in effect, HCP has authority to issue 400,000,000
common shares of beneficial interest, $0.001 par value per share, and 50,000,000
preferred shares of beneficial interest, $0.001 par value per share. All capital
stock amounts, share and per share information in the accompanying consolidated
financial statements and the related notes to consolidated financial statements
reflect this recapitalization.
On
September 15, 2004, HCP’s Registration Statement on Form S-11, with respect to a
public offering (the “Public Offering”) of up to 10,000,000 common shares of
beneficial interest to be offered at a price of $10 per share was declared
effective under the Securities Act of 1933. The Registration Statement also
covers up to 1,000,000 shares available pursuant to HCP’s dividend reinvestment
plan to be offered at a price of $9.50 per share. The shares are offered to
investors on a best efforts basis. Post-Effective Amendment No. 1 to the
Registration Statement was declared effective by the SEC on June 27, 2005 and
Post-Effective Amendment No. 2 to the Registration Statement was declared
effective by the SEC on March 9, 2006.
F-21
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
11 - Shareholders’ Equity (Continued)
As
of
December 31, 2005, 1,865,557 shares had been issued pursuant to the Public
Offering with offering proceeds received of $16,674,294, net of offering
costs of $1,981,276. An additional 37,951 shares had been issued pursuant to
the
dividend reinvestment plan in lieu of dividends totalling $360,535. An
additional 156,010 shares, with gross offering proceeds of $1,559,439, were
issued during 2006 related to subscriptions received in December
2005.
All
net
proceeds of the Public Offering are contributed by HCP to the Operating
Partnership in exchange for OP Units. The Operating Partnership uses the
proceeds to acquire additional properties and for general working capital
purposes. In accordance with the Operating Partnership’s Agreement of Limited
Partnership, in exchange for the contribution of net proceeds from sales of
stock, HCP received an equivalent number of HROP Units as shares of stock that
are sold.
At
December 31, 2005 and 2004, Hartman and the Board of Trustees collectively
owned
5.95% and 8.22%, respectively of HCP’s outstanding shares.
Operating
Partnership units
Limited
partners in the Operating Partnership holding OP Units have the right to convert
their OP Units into common shares at a ratio of one OP Unit for one common
share. In connection with the reorganization discussed above, OP Unit holders
received 1.42857 OP Units for each OP Unit previously held. Subject to certain
restrictions, OP Units are not convertible into common shares until the later
of
one year after acquisition or an initial public offering of the common shares.
As of December 31, 2005 and 2004 there were 14,360,503 and 12,456,995,
respectively, OP Units outstanding. HCP owned 8,552,166 and 6,648,658 Units
as
of December 31, 2005 and 2004. HCP’s weighted-average share ownership in the
Operating Partnership was approximately 56.44%, 53.37% and 53.37% during the
years ended December 31, 2005, 2004 and 2003, respectively. At December 31,
2005
and 2004, Hartman and the Board of Trustees collectively owned 7.82% and 9.50%,
respectively, of the Operating Partnership’s outstanding units.
F-22
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
11 - Shareholders’ Equity (Continued)
Dividends
and distributions
The
following tables summarize the cash dividends/distributions payable to holders
of common shares and holders of OP Units (after giving effect to the
recapitalization) related to the years ended December 31, 2005 and
2004.
|
HCP
Shareholders
|
|||||||
|
Dividend/Distribution
per
Common
Share
|
Date
Dividend Payable
|
Total
Amount Payable
|
|||||
|
0.0583
|
4/15/04
|
$408,762
|
|||||
|
0.0583
|
5/15/04
|
408,762
|
|||||
|
0.0584
|
6/15/04
|
409,253
|
|||||
|
0.0583
|
7/15/04
|
408,762
|
|||||
|
0.0583
|
8/15/04
|
408,762
|
|||||
|
0.0584
|
9/15/04
|
409,253
|
|||||
|
0.0583
|
10/15/04
|
408,692
|
|||||
|
0.0583
|
11/15/04
|
408,692
|
|||||
|
0.0584
|
12/15/04
|
409,392
|
|||||
|
0.0583
|
1/15/05
|
408,692
|
|||||
|
0.0583
|
2/15/05
|
408,692
|
|||||
|
0.0589
|
3/15/05
|
412,897
|
|||||
|
0.0589
|
4/15/05
|
412,931
|
|||||
|
0.0589
|
5/15/05
|
429,416
|
|||||
|
0.0590
|
6/15/05
|
439,453
|
|||||
|
0.0589
|
7/15/05
|
445,621
|
|||||
|
0.0589
|
8/15/05
|
452,396
|
|||||
|
0.0590
|
9/15/05
|
460,581
|
|||||
|
0.0589
|
10/15/05
|
467,260
|
|||||
|
0.0589
|
11/15/05
|
470,627
|
|||||
|
0.0590
|
12/15/05
|
480,737
|
|||||
|
0.0589
|
1/15/06
|
489,019
|
|||||
|
0.0589
|
2/15/06
|
509,475
|
|||||
|
0.0590
|
3/15/06
|
526,966
|
|||||
|
|
|||||||
F-23
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
11 - Shareholders’ Equity (Continued)
|
OP
Unit Holders Including Minority Unit
Holders
|
||||
|
Dividend/Distribution
per
OP
Unit
|
Date
Dividend Payable
|
Total
Amount Payable
|
||
|
0.0583
|
1/15/04
|
$726,368
|
||
|
0.0583
|
2/15/04
|
726,368
|
||
|
0.0584
|
3/15/04
|
727,240
|
||
|
0.0583
|
4/15/04
|
726,368
|
||
|
0.0583
|
5/15/04
|
726,368
|
||
|
0.0584
|
6/15/04
|
727,240
|
||
|
0.0583
|
7/15/04
|
726,368
|
||
|
0.0583
|
8/15/04
|
726,368
|
||
|
0.0584
|
9/15/04
|
727,240
|
||
|
0.0583
|
10/15/04
|
726,243
|
||
|
0.0583
|
11/15/04
|
726,243
|
||
|
0.0584
|
12/15/04
|
727,488
|
||
|
0.0583
|
1/15/05
|
726,243
|
||
|
0.0583
|
2/15/05
|
726,243
|
||
|
0.0589
|
3/15/05
|
733,717
|
||
|
0.0589
|
4/15/05
|
733,748
|
||
|
0.0589
|
5/15/05
|
748,498
|
||
|
0.0590
|
6/15/05
|
758,154
|
||
|
0.0589
|
7/15/05
|
762,996
|
||
|
0.0589
|
8/15/05
|
768,976
|
||
|
0.0590
|
9/15/05
|
776,345
|
||
|
0.0589
|
10/15/05
|
782,136
|
||
|
0.0589
|
11/15/05
|
785,388
|
||
|
0.0590
|
12/15/05
|
802,101
|
||
|
0.0589
|
01/15/06
|
809,838
|
||
|
0.0589
|
02/15/06
|
830,294
|
||
|
0.0590
|
03/15/06
|
848,042
|
||
F-24
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
12 - Incentive Share Plan
The
Company has adopted an Employee and Trust Manager Incentive Share Plan (the
“Incentive Share Plan”) to (i) furnish incentives to individuals chosen to
receive share-based awards because they are considered capable of improving
operations and increasing profits; (ii) encourage selected persons to accept
or
continue employment with the Company; and (iii) increase the interest of
employees and Trustees in the Company’s welfare through their participation and
influence on the growth in value of the common shares. The class of eligible
persons that can receive grants of incentive awards under the Incentive Share
Plan consists of key employees, directors, non-employee trustees, members of
the
Management Company and consultants as determined by the compensation committee
of the Board of Trustees. The total number of common shares that may be issued
under the Incentive Share Plan is an amount of shares equal to 5% of the
outstanding shares on a fully diluted basis. As of December 31, 2005, no options
or awards to purchase common shares have been granted under the Incentive Share
Plan.
Under
SFAS No. 123, “Accounting for Stock Based Compensation”, and SFAS No. 148,
“Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of FASB Statement No. 123”, the Company is permitted to either record
compensation expense for incentive awards granted to employees and directors
based on their fair value on the date of grant or to apply the intrinsic value
method prescribed in Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees”, and recognize compensation expense,
if any, to the extent that the fair market value of the underlying stock on
the
grant date exceeds the exercise price of the award granted. Compensation expense
for awards granted to employees and directors is currently based on the
intrinsic value method. For awards granted to non-employees, such as Trustees,
employees of the Management Company, and consultants, the Company currently
records expense based on the award’s fair value on its date of grant as required
by SFAS 123 and SFAS 148. Pursuant to SFAS 123R, discussed in Note 1, the
Company will determine upon the award of any shared-based payments whether
the
award should be categorized as an equity award or a liability award, and account
for each accordingly.
Note
13 - Commitments and Contingencies
The
Company is a participant in various legal proceedings and claims that arise
in
the ordinary course of business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, the Company believes that the final outcome of such matters will
not
have a material effect on the financial position, results of operations, or
cash
flows of the Company.
F-25
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
14 - Segment Information
Management
does not differentiate by property types and because no individual property
is
so significant as to be a separate segment, the Company does not present segment
information.
Note
15 - Pro Forma Financial Information (Unaudited)
During
2005 the Company acquired two office buildings for $24,930,000 that the Company
considers to be material. The pro forma financial information for the years
ended December 31, 2005 and 2004 is based on the historical statements of
the Company after giving effect to the acquisitions as if such acquisitions
took
place on January 1, 2004.
The
pro
forma financial information shown below is presented for informational purposes
only and may not be indicative of results that would have actually occurred
if
the acquisition had been in effect at the date indicated, nor does it purport
to
be indicative of the results that may be achieved in the future.
|
Year
Ended
December
31, 2005
|
Year
Ended
December
31, 2004
|
||||||
|
Pro
forma revenues
|
$
|
27,518,098
|
$
|
27,500,345
|
|||
|
Pro
forma net income available to
|
|||||||
|
common
shareholders
|
$
|
2,240,150
|
$
|
3,307,715
|
|||
|
Pro
forma basic and diluted earnings per
|
|||||||
|
common
share
|
$
|
0.284
|
$
|
0.471
|
|||
F-26
Hartman
Commercial Properties REIT and Subsidiary
Notes
to Consolidated Financial Statements
December
31, 2005
Note
16 - Selected Quarterly Financial Data (Unaudited)
The
following is a summary of the unaudited quarterly financial information for
the
years ended December 31, 2005 and 2004:
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||
|
2005
|
|||||||||||||
|
Revenues
|
$
|
6,312,640
|
$
|
6,270,409
|
$
|
6,204,629
|
$
|
6,431,555
|
|||||
|
Income
before minority interests
|
1,521,681
|
1,339,869
|
894,172
|
583,076
|
|||||||||
|
Minority
interest in income
|
(697,237
|
)
|
(593,383
|
)
|
(382,662
|
)
|
(217,334
|
)
|
|||||
|
Net
income
|
824,444
|
746,486
|
511,510
|
365,742
|
|||||||||
|
Basic
and diluted earnings per share
|
$
|
0.114
|
$
|
0.097
|
$
|
0.064
|
$
|
0.035
|
|||||
|
2004
|
|||||||||||||
|
Revenues
|
$
|
5,486,426
|
$
|
6,095,742
|
$
|
5,922,856
|
$
|
5,978,633
|
|||||
|
Income
before minority interests
|
1,384,807
|
1,792,127
|
1,493,760
|
1,743,335
|
|||||||||
|
Minority
interest in income
|
(645,689
|
)
|
(835,606
|
)
|
(696,464
|
)
|
(812,651
|
)
|
|||||
|
Net
income
|
739,118
|
956,521
|
797,296
|
930,684
|
|||||||||
|
Basic
and diluted earnings per share
|
$
|
0.105
|
$
|
0.136
|
$
|
0.114
|
$
|
0.133
|
|||||
F-27
Hartman
Commercial Properties REIT and Subsidiary
Schedule
II - Valuation and Qualifying Accounts
|
Description
|
Balance
at
Beginning
of
Period
|
Additions
Charged
(Recoveries
Credited)
to
Expense
|
Deductions
|
Balance
at
End
of Period
|
||||||||||
|
Allowance
for doubtful accounts:
|
||||||||||||||
|
Year
ended December 31, 2005
|
$
|
342,690
|
$
|
130,185
|
$
|
-
|
$
|
472,875
|
||||||
|
Year
ended December 31, 2004
|
$
|
350,750
|
$
|
(8,060
|
)
|
$
|
-
|
$
|
342,690
|
|||||
|
Year
ended December 31, 2003
|
$
|
391,500
|
$
|
213,250
|
$
|
(254,000
|
)
|
$
|
350,750
|
|||||
F-28
Hartman
Commercial Properties REIT and Subsidiary
Schedule
III - Real Estate and Accumulated Depreciation
December
31, 2005
|
Initial
Cost
|
Costs
Capitalized
Subsequent
to Acquisition
|
Gross
Amount
at
which Carried
at
End of Period (1) (2)
|
|||||||||||||||||||||||
|
Name
|
Description
|
Land
|
Building
and
Improvements
|
Improvements
|
Carrying
Costs
|
Land
|
Building
and
Improvements
|
Total
|
|||||||||||||||||
|
Holly
Knight
|
Retail |
$
|
319,981
|
$
|
1,292,820
|
$
|
38,226
|
-
|
$
|
319,981
|
$
|
1,331,046
|
$
|
1,651,027
|
|||||||||||
|
Kempwood
Plaza
|
Retail |
733,443
|
1,798,433
|
941,766
|
-
|
733,443
|
2,740,199
|
3,473,642
|
|||||||||||||||||
|
Bissonnet
Beltway
|
Retail |
414,515
|
1,946,808
|
162,650
|
-
|
414,515
|
2,109,458
|
2,523,973
|
|||||||||||||||||
|
Interstate
10
|
Office-warehouse |
207,903
|
3,700,169
|
258,711
|
-
|
207,903
|
3,958,880
|
4,166,783
|
|||||||||||||||||
|
West
Belt Plaza
|
Office-warehouse |
567,805
|
2,165,204
|
318,666
|
-
|
567,805
|
2,483,870
|
3,051,675
|
|||||||||||||||||
|
Greens
Road
|
Retail |
353,604
|
1,283,613
|
97,778
|
-
|
353,604
|
1,381,391
|
1,734,995
|
|||||||||||||||||
|
Town
Park
|
Retail |
849,529
|
2,911,206
|
198,963
|
-
|
849,529
|
3,110,169
|
3,959,698
|
|||||||||||||||||
|
Webster
Point
|
Retail |
720,336
|
1,150,029
|
75,253
|
-
|
720,336
|
1,225,282
|
1,945,618
|
|||||||||||||||||
|
Centre
South
|
Retail |
481,201
|
1,595,997
|
386,964
|
-
|
481,201
|
1,982,961
|
2,464,162
|
|||||||||||||||||
|
Torrey
Square
|
Retail |
1,981,406
|
2,970,911
|
378,109
|
-
|
1,981,406
|
3,349,020
|
5,330,426
|
|||||||||||||||||
|
Dairy
Ashford
|
Office-warehouse |
225,544
|
1,211,476
|
90,854
|
-
|
225,544
|
1,302,330
|
1,527,874
|
|||||||||||||||||
|
Main
Park
|
Office-warehouse |
1,327,762
|
2,721,075
|
496,123
|
-
|
1,327,762
|
3,217,198
|
4,544,960
|
|||||||||||||||||
|
Northeast
Square
|
Retail |
564,927
|
2,007,585
|
283,436
|
-
|
564,927
|
2,291,021
|
2,855,948
|
|||||||||||||||||
|
Plaza
Park
|
Office-warehouse |
901,602
|
3,293,514
|
247,948
|
-
|
901,602
|
3,541,462
|
4,443,064
|
|||||||||||||||||
|
Northwest
Place
|
Office-warehouse |
110,790
|
978,554
|
27,365
|
-
|
110,790
|
1,005,919
|
1,116,709
|
|||||||||||||||||
|
Lion
Square
|
Retail |
1,546,010
|
4,289,098
|
281,567
|
-
|
1,546,010
|
4,570,665
|
6,116,675
|
|||||||||||||||||
|
Zeta
Building
|
Office |
637,180
|
1,819,409
|
152,200
|
-
|
637,180
|
1,971,609
|
2,608,789
|
|||||||||||||||||
|
Royal
Crest
|
Office |
508,850
|
1,355,215
|
129,852
|
-
|
508,850
|
1,485,067
|
1,993,917
|
|||||||||||||||||
|
Featherwood
|
Office |
368,283
|
2,591,026
|
479,721
|
-
|
368,283
|
3,070,747
|
3,439,030
|
|||||||||||||||||
|
South
Richey
|
Retail |
777,720
|
2,584,167
|
231,926
|
-
|
777,720
|
2,816,093
|
3,593,813
|
|||||||||||||||||
|
Corporate
Park Woodland
|
Office-warehouse |
651,549
|
5,376,813
|
516,690
|
-
|
651,549
|
5,893,503
|
6,545,052
|
|||||||||||||||||
|
South
Shaver
|
Retail |
184,368
|
632,635
|
192,875
|
-
|
184,368
|
825,510
|
1,009,878
|
|||||||||||||||||
|
Providence
|
Retail |
917,936
|
3,674,732
|
476,520
|
-
|
917,936
|
4,151,252
|
5,069,188
|
|||||||||||||||||
|
Corporate
Park Northwest
|
Office-warehouse |
1,533,940
|
6,305,599
|
453,026
|
-
|
1,533,940
|
6,758,625
|
8,292,565
|
|||||||||||||||||
|
Bellnot
Square
|
Retail |
1,154,239
|
4,638,055
|
53,643
|
-
|
1,154,239
|
4,691,698
|
5,845,937
|
|||||||||||||||||
|
Corporate
Park West
|
Office-warehouse |
2,555,289
|
10,507,691
|
338,354
|
-
|
2,555,289
|
10,846,045
|
13,401,334
|
|||||||||||||||||
|
Westgate
|
Office-warehouse |
672,303
|
2,775,879
|
137,630
|
-
|
672,303
|
2,913,509
|
3,585,812
|
|||||||||||||||||
|
Garden
Oaks
|
Retail |
1,285,027
|
5,292,755
|
185,828
|
-
|
1,285,027
|
5,478,583
|
6,763,610
|
|||||||||||||||||
|
Westchase
|
Retail |
422,745
|
1,750,555
|
240,132
|
-
|
422,745
|
1,990,687
|
2,413,432
|
|||||||||||||||||
|
Sunridge
|
Retail |
275,534
|
1,186,037
|
58,295
|
-
|
275,534
|
1,244,332
|
1,519,866
|
|||||||||||||||||
|
Holly
Hall
|
Office-warehouse |
607,519
|
2,515,881
|
20,803
|
-
|
607,519
|
2,536,684
|
3,144,203
|
|||||||||||||||||
|
Brookhill
|
Office-warehouse |
185,659
|
787,605
|
166,014
|
-
|
185,659
|
953,619
|
1,139,278
|
|||||||||||||||||
|
Windsor
Park
|
Retail |
2,620,500
|
10,482,000
|
-
|
-
|
2,620,500
|
10,482,000
|
13,102,500
|
|||||||||||||||||
|
SugarPark
Plaza
|
Retail |
1,781,211
|
7,124,846
|
20,098
|
-
|
1,781,211
|
7,144,944
|
8,926,155
|
|||||||||||||||||
|
Woodlake
Plaza
|
Office |
1,106,541
|
4,426,169
|
108,582
|
-
|
1,106,541
|
4,534,751
|
5,641,292
|
|||||||||||||||||
|
9101
LBJ Freeway
|
Office |
1,597,190
|
6,077,820
|
-
|
-
|
1,597,190
|
6,077,820
|
7,675,010
|
|||||||||||||||||
|
Uptown
Tower
|
Office |
1,620,625
|
15,550,861
|
-
|
-
|
1,620,625
|
15,550,861
|
17,171,486
|
|||||||||||||||||
|
TOTAL
|
$
|
32,770,566
|
$
|
132,772,242
|
$
|
8,246,568
|
$
|
-
|
$
|
32,770,566
|
$
|
141,018,810
|
$
|
173,789,376
|
|||||||||||
F-29
Hartman
Commercial Properties REIT and Subsidiary
Schedule
III - Real Estate and Accumulated Depreciation
December
31, 2005
(Continued)
|
Name
|
Description
|
Accumulated
Depreciation
|
Date
of Construction
|
Date
Acquired
|
Depreciation
Life
|
|||||||||||
|
Holly
Knight
|
Retail |
$
|
338,536
|
8/1/00
|
5-39
years
|
|||||||||||
|
Kempwood
Plaza
|
Retail |
834,002
|
2/2/99
|
5-39
years
|
||||||||||||
|
Bissonnet
Beltway
|
Retail |
616,715
|
1/1/99
|
5-39
years
|
||||||||||||
|
Interstate
10
|
Office-warehouse |
1,184,715
|
1/1/99
|
5-39
years
|
||||||||||||
|
West
Belt Plaza
|
Office-warehouse |
768,161
|
1/1/99
|
5-39
years
|
||||||||||||
|
Greens
Road
|
Retail |
356,008
|
1/1/99
|
5-39
years
|
||||||||||||
|
Town
Park
|
Retail |
818,353
|
1/1/99
|
5-39
years
|
||||||||||||
|
Webster
Point
|
Retail |
256,690
|
1/1/00
|
5-39
years
|
||||||||||||
|
Centre
South
|
Retail |
512,427
|
1/1/00
|
5-39
years
|
||||||||||||
|
Torrey
Square
|
Retail |
618,091
|
1/1/00
|
5-39
years
|
||||||||||||
|
Dairy
Ashford
|
Office-warehouse |
335,129
|
1/1/99
|
5-39
years
|
||||||||||||
|
Main
Park
|
Office-warehouse |
902,119
|
1/1/99
|
5-39
years
|
||||||||||||
|
Northeast
Square
|
Retail |
541,413
|
1/1/99
|
5-39
years
|
||||||||||||
|
Plaza
Park
|
Office-warehouse |
762,163
|
1/1/00
|
5-39
years
|
||||||||||||
|
Northwest
Place
|
Office-warehouse |
198,531
|
1/1/00
|
5-39
years
|
||||||||||||
|
Lion
Square
|
Retail |
911,889
|
1/1/00
|
5-39
years
|
||||||||||||
|
Zeta
Building
|
Office |
394,162
|
1/1/00
|
5-39
years
|
||||||||||||
|
Royal
Crest
|
Office |
346,036
|
1/1/00
|
5-39
years
|
||||||||||||
|
Featherwood
|
Office |
779,583
|
1/1/00
|
5-39
years
|
||||||||||||
|
South
Richey
|
Retail |
575,481
|
8/25/99
|
5-39
years
|
||||||||||||
|
Corporate
Park Woodland
|
Office-warehouse |
1,257,607
|
11/1/00
|
5-39
years
|
||||||||||||
|
South
Shaver
|
Retail |
239,183
|
12/17/99
|
5-39
years
|
||||||||||||
|
Providence
|
Retail |
584,646
|
3/30/01
|
5-39
years
|
||||||||||||
|
Corporate
Park Northwest
|
Office-warehouse |
832,896
|
1/1/02
|
5-39
years
|
||||||||||||
|
Bellnot
Square
|
Retail |
537,795
|
1/1/02
|
5-39
years
|
||||||||||||
|
Corporate
Park West
|
Office-warehouse |
1,276,672
|
1/1/02
|
5-39
years
|
||||||||||||
|
Westgate
|
Office-warehouse |
367,747
|
1/1/02
|
5-39
years
|
||||||||||||
|
Garden
Oaks
|
Retail |
680,428
|
1/1/02
|
5-39
years
|
||||||||||||
|
Westchase
|
Retail |
298,180
|
1/1/02
|
5-39
years
|
||||||||||||
|
Sunridge
|
Retail |
138,815
|
1/1/02
|
5-39
years
|
||||||||||||
|
Holly
Hall
|
Office-warehouse |
291,896
|
1/1/02
|
5-39
years
|
||||||||||||
|
Brookhill
|
Office-warehouse |
191,030
|
1/1/02
|
5-39
years
|
||||||||||||
|
Windsor
Park
|
Retail |
509,792
|
12/16/03
|
5-39
years
|
||||||||||||
|
SugarPark
Plaza
|
Retail |
266,500
|
9/8/04
|
5-39
years
|
||||||||||||
|
Woodlake
Plaza
|
Office |
102,958
|
3/14/05
|
5-39
years
|
||||||||||||
|
9101
LBJ Freeway
|
Office |
89,990
|
8/10/05
|
5-39
years
|
||||||||||||
|
Uptown
Tower
|
Office |
108,047
|
11/22/05
|
5-39
years
|
||||||||||||
|
TOTAL
|
$
|
19,824,386
|
||||||||||||||
| (1) |
Reconciliations
of total real estate carrying value for the three years ended December
31,
2005 follows:
|
|
2005
|
2004
|
2003
|
||||||||
|
Balance
at beginning of period
|
$
|
141,997,630
|
$
|
131,720,634
|
$
|
117,029,136
|
||||
|
Additions
during the period
|
||||||||||
|
Acquisitions
|
30,379,206
|
8,906,057
|
13,102,500
|
|||||||
|
Improvements
|
1,412,540
|
1,370,939
|
1,588,998
|
|||||||
|
31,791,746
|
10,276,996
|
14,691,498
|
||||||||
|
Deductions
- cost of real estate sold
|
—
|
—
|
—
|
|||||||
|
Balance
at close of period
|
$
|
173,789,376
|
$
|
141,997,630
|
$
|
131,720,634
|
||||
| (2) |
The
aggregate cost of real estate for federal income tax purposes is
$142,764,149.
|
F-30
Hartman
Commercial Properties REIT and Subsidiary
Index
to Exhibits
|
Exhibit
No.
|
Description
|
|
3.1
|
Declaration
of Trust of Hartman Commercial Properties REIT, a Maryland real estate
investment trust (previously filed as and incorporated by reference
to
Exhibit 3.1 to the Registrant’s Registration Statement on Form S-11/A,
Commission File No. 333-111674, filed on May 24, 2004)
|
|
3.2
|
Articles
of Amendment and Restatement of Declaration of Trust of Hartman Commercial
Properties REIT (previously filed as and incorporated by reference
to
Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11/A,
Commission File No. 333-111674, filed on July 29, 2004)
|
|
3.3
|
Bylaws
(previously filed as and incorporated by reference to Exhibit 3.2
to the
Registrant’s Registration Statement on Form S-11, Commission File No.
333-111674, filed on December 31, 2003)
|
|
4.1
|
Specimen
certificate for common shares of beneficial interest, par value $.001
(previously filed as and incorporated by reference to Exhibit 4.2
to the
Registrant’s Registration Statement on Form S-11, Commission File No.
333-111674, filed on December 31, 2003)
|
|
10.1
|
Agreement
of Limited Partnership of Hartman REIT Operating Partnership, L.P.
(previously filed as and incorporated by reference to Exhibit 10.1
to the
Registrant’s General Form for Registration of Securities on Form 10, filed
on April 30, 2003)
|
|
10.2
|
Amended
and Restated Property Management Agreement (previously filed and
incorporated by reference to Exhibit 10.2 to the Registrant’s Form 10-K
Annual Report for the year ended December 31, 2004, filed on March
31,
2005)
|
|
10.3
|
Advisory
Agreement (previously filed and incorporated by reference to Exhibit
10.3
to the Registrant’s Annual Report on Form 10-K for the year ended December
31, 2004, filed on March 31, 2005)
|
|
10.4
|
Certificate
of Formation of Hartman REIT Operating Partnership II GP, LLC (previously
filed as and incorporated by reference to Exhibit 10.3 to the Registrant’s
General Form for Registration of Securities on Form 10, filed on
April 30,
2003)
|
|
10.5
|
Limited
Liability Company Agreement of Hartman REIT Operating Partnership
II GP,
LLC (previously filed as and incorporated by reference to Exhibit
10.4 to
the Registrant’s General Form for Registration of Securities on Form 10,
filed on April 30, 2003)
|
|
10.6
|
Agreement
of Limited Partnership of Hartman REIT Operating Partnership II,
L.P.
(previously filed as and incorporated by reference to Exhibit 10.6
to the
Registrant’s General Form for Registration of Securities on Form 10, filed
on April 30, 2003)
|
|
10.7
|
Promissory
Note, dated December 20, 2002, between Hartman REIT Operating Partnership
II, L.P. and GMAC Commercial Mortgage Corporation (previously filed
as and
incorporated by reference to Exhibit 10.7 to the Registrant’s General Form
for Registration of Securities on Form 10, filed on April 30,
2003)
|
|
Exhibit
No.
|
Description
|
|
10.8
|
Deed
of Trust and Security Agreement, dated December 20, 2002, between
Hartman
REIT Operating Partnership II, L.P. and GMAC Commercial Mortgage
Corporation (previously filed as and incorporated by reference to
Exhibit
10.8 to the Registrant’s General Form for Registration of Securities on
Form 10, filed on April 30, 2003)
|
|
10.9
|
Loan
Agreement between Hartman REIT Operating Partnership, L.P. and Union
Planter’s Bank, N.A. (previously filed as and incorporated by reference to
Exhibit 10.10 to Amendment No. 2 to the Registrant’s General Form for
Registration of Securities on Form 10, filed on August 6,
2003)
|
|
10.10+
|
Employee
and Trust Manager Incentive Plan (previously filed and incorporated
by
reference to Exhibit 10.9 to the Registrant’s General Form for
Registration of Securities on Form 10, filed on April 30,
2003)
|
|
10.11+
|
Summary
Description of Hartman Commercial Properties REIT Trustee Compensation
Arrangements (previously filed and incorporated by reference to Exhibit
10.11 of the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2004, filed on March 31, 2005)
|
|
10.12
|
Form
of Agreement and Plan of Merger and Reorganization (previously filed
as
and incorporated by reference to the Registrant’s Proxy Statement, filed
on April 29, 2004)
|
|
10.13
|
Dealer
Manager Agreement (previously filed and as incorporated by reference
to
Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2004, Commission File No. 000-50256, Central Index
Key
No. 0001175535, filed on March 31, 2005)
|
|
10.14
|
Escrow
Agreement (previously filed as and incorporated by reference to Exhibit
10.14 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2004, filed on March 31, 2005)
|
|
10.15
|
Form
of Amendment to the Agreement of Limited Partnership of Hartman REIT
Operating Partnership, L.P. (previously filed in and incorporated
by
reference to the Registrant’s Registration Statement on Form S-11,
Commission File No. 333-111674, filed on December 31,
2003)
|
|
10.16
|
Revolving
Credit Agreement among Hartman REIT Operating Partnership, L.P.,
Hartman
REIT Operating Partnership III LP, and KeyBank National Association
(together with other participating lenders), dated June 2, 2005
(previously filed as and incorporated by reference to Exhibit 10.13
to
Post-Effective Amendment No. 1 to the Registrant’s Registration Statement
on Form S-11, Commission File No. 333-111674, filed on June 17,
2005)
|
|
10.17
|
Form
of Revolving Credit Note under Revolving Credit Agreement among Hartman
REIT Operating Partnership, L.P., Hartman REIT Operating Partnership
III
LP, and KeyBank National Association (together with other participating
lenders) (previously filed as and incorporated by reference to Exhibit
10.14 to Post-Effective Amendment No. 1 to the Registrant’s Registration
Statement on Form S-11, Commission File No. 333-111674, filed on
June 17,
2005)
|
|
10.18
|
Guaranty
under Revolving Credit Agreement among Hartman REIT Operating Partnership,
L.P., Hartman REIT Operating Partnership III LP, and KeyBank National
Association (together with other participating lenders) (previously
filed
as and incorporated by reference to Exhibit 10.15 to Post-Effective
Amendment No. 1 to the Registrant’s Registration Statement on Form S-11,
Commission File No. 333-111674, filed on June 17,
2005)
|
|
Exhibit
No.
|
Description
|
|
10.19
|
Form
of Negative Pledge Agreement under Revolving Credit Agreement among
Hartman REIT Operating Partnership, L.P., Hartman REIT Operating
Partnership III LP, and KeyBank National Association (together with
other
participating lenders) (previously filed as and incorporated by reference
to Exhibit 10.16 to Post-Effective Amendment No. 1 to the Registrant’s
Registration Statement on Form S-11, Commission File No. 333-111674,
filed
on June 17, 2005)
|
|
10.20
|
Form
of Collateral Assignment of Partnership Interests under Revolving
Credit
Agreement among Hartman REIT Operating Partnership, L.P., Hartman
REIT
Operating Partnership III LP, and KeyBank National Association (together
with other participating lenders) (previously filed as and incorporated
by
reference to Exhibit 10.17 to Post-Effective Amendment No. 1 to the
Registrant’s Registration Statement on Form S-11, Commission File No.
333-111674, filed on June 17, 2005)
|
|
10.21
|
Modification
Agreement, dated as of February 28, 2006, between Hartman REIT Operating
Partnership II, L.P. and GMAC Commercial Mortgage Corporation (previously
filed and incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K, filed March 3, 2006)
|
|
10.22*
|
Interest Rate Swap Agreement dated as of March 16, 2006, between Hartman REIT Operating Partnership, L.P. Hartman REIT Operating Partnership III LP, and KeyBank National Association. |
|
14.1*
|
Code
of Business Conduct
|
|
21.1
|
List
of subsidiaries of Hartman Commercial Properties REIT (previously
filed as
and incorporated by reference to Exhibit 21.1 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2004, filed on
March
31, 2005)
|
|
24.1
|
Power
of Attorney (included on the Signatures page hereto)
|
|
31.1*
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2*
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1*
|
Certificate
of Chief Executive and Financial Officers
|
________________________
*
Filed herewith.
+
Denotes management contract or compensatory plan or arrangement.