Piedmont Realty Trust - 10-Q quarterly report FY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland		58-2328421
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
6200 The Corners Pkway., Atlanta, Georgia		30092
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code     (770) 449-7800
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 

 

 

 

 

 

				Page No.
PART I.		FINANCIAL INFORMATION
Item 1.		Consolidated Financial Statements
		Consolidated Balance Sheets—June 30, 2002 (unaudited) and December 31, 2001		4
		Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2002 and 2001 (unaudited)		5
		Consolidated Statements of Shareholders’ Equity for the Year Ended December 31, 2001 and the Six Months Ended June 30, 2002 (unaudited)		6
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (unaudited)		7
		Condensed Notes to Consolidated Financial Statements (unaudited)		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
PART II.		OTHER INFORMATION		24

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Effective June 26, 2002, Wells Real Estate Investment Trust, Inc. (the “Company”) engaged Ernst & Young LLP (“Ernst & Young”) as its principal accountants to audit the Company’s financial statements. In accordance with the relief granted to former auditing clients of Arthur Andersen LLP in SEC Release No. 34-45589, Ernst & Young completed its review of the unaudited financial statements of the Registrant for the quarter ended March 31, 2002 pursuant to Rule 10-01(d) of Regulation S-X within the 60-day period allowed pursuant to the SEC Release, and no material modifications to the previously reported financial information were required.

 

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		June 30, 2002				December 31, 2001
		(unaudited)
ASSETS
REAL ESTATE, at cost:
Land		$	110,330,449			$	86,246,985
Building and improvements, less accumulated depreciation of $37,717,737 in 2002 and $24,814,454 in 2001			689,490,969				472,383,102
Construction in progress			16,081,841				5,738,573
Total real estate			815,903,259				564,368,660
INVESTMENT IN JOINT VENTURES			76,217,870				77,409,980
CASH AND CASH EQUIVALENTS			341,909,775				75,586,168
INVESTMENT IN BONDS			22,000,000				22,000,000
ACCOUNTS RECEIVABLE			10,709,104				6,003,179
NOTES RECEIVABLE			5,149,792				0
DEFERRED LEASE ACQUISITION COSTS, net			1,790,608				1,525,199
DEFERRED PROJECT COSTS			14,314,914				2,977,110
DUE FROM AFFILIATES			1,897,309				1,692,727
DEFERRED OFFERING COSTS			1,392,934				0
PREPAID EXPENSES AND OTHER ASSETS, net			1,881,308				718,389
Total assets		$	1,293,166,873			$	752,281,412
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Notes payable		$	15,658,141			$	8,124,444
Obligation under capital lease			22,000,000				22,000,000
Accounts payable and accrued expenses			11,840,214				8,727,473
Dividends payable			4,538,635				1,059,026
Deferred rental income			1,013,544				661,657
Due to affiliates			2,106,790				2,166,161
Total liabilities			57,157,324				42,738,761
MINORITY INTEREST OF UNIT HOLDER IN OPERATING PARTNERSHIP			200,000				200,000
SHAREHOLDERS’ EQUITY:
Common shares, $.01 par value; 125,000,000 shares authorized, 145,589,053 shares issued and 144,366,772 outstanding at June 30, 2002, and 83,761,469 shares issued and 83,206,429 shares outstanding at December 31, 2001			1,455,890				837,614
Additional paid-in capital			1,290,858,515				738,236,525
Cumulative distributions in excess of earnings			(43,991,669	)			(24,181,092	)
Treasury stock, at cost, 1,222,381 shares at June 30, 2002 and 555,040 shares at December 31, 2001			(12,223,808	)			(5,550,396	)
Other comprehensive loss			(289,379	)			0
Total shareholders’ equity			1,235,809,549				709,342,651
Total liabilities and shareholders’ equity		$	1,293,166,873			$	752,281,412

 

See accompanying condensed notes to financial statements.

 

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		Three Months Ended						Six Months Ended
		June 30, 2002			June 30, 2001			June 30, 2002			June 30, 2001
REVENUES:
Rental income		$	21,833,652		$	9,851,167		$	38,571,815		$	19,711,252
Equity in income of joint ventures			1,271,863			809,481			2,478,686			1,519,194
Interest income			1,534,636			93,092			2,648,351			193,007
Take out fee			0			137,500			134,102			137,500
			24,640,151			10,891,240			43,832,954			21,560,953
EXPENSES:
Depreciation			7,158,830			3,206,638			12,903,282			6,393,817
Operating costs, net of reimbursements			1,439,299			783,244			2,063,997			1,874,428
Management and leasing fees			1,003,587			552,188			1,903,082			1,117,902
Administrative costs			592,426			584,184			1,121,457			759,291
Interest expense			440,001			648,946			880,002			2,809,373
Amortization of deferred financing costs			249,530			77,142			424,992			291,899
			10,883,673			5,852,342			19,296,812			13,246,710
NET INCOME		$	13,756,478		$	5,038,898		$	24,536,142		$	8,314,243
BASIC AND DILUTED EARNINGS PER SHARE		$	0.11		$	0.12		$	0.22		$	0.22
BASIC AND DILUTED WEIGHTED AVERAGE SHARES			126,037,819			42,192,347			110,885,641			38,328,405

 

See accompanying condensed notes to financial statements.

 

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		Common Stock Shares		Common Stock Amount			Additional Paid-In Capital				Cumulative Distributions in Excess of Earnings				Retained Earnings				Treasury Stock Shares			Treasury Stock Amount				Other Comprehensive Income				Total Shareholders’ Equity
BALANCE, December 31, 2000		31,509,807		$	315,097		$	275,573,339			$	(9,133,855	)		$	0			(141,297	)		$	(1,412,969	)		$	0			$	265,341,612
Issuance of common stock		52,251,662			522,517			521,994,103				0				0			0				0				0				522,516,620
Treasury stock purchased		0			0			0				0				0			(413,743	)			(4,137,427	)			0				(4,137,427	)
Net income		0			0			0				0				21,723,967			0				0				0				21,723,967
Dividends ($.76 per share)		0			0			0				(15,047,237	)			(21,723,967	)		0				0				0				(36,771,204	)
Sales commissions and discounts		0			0			(49,246,118	)			0				0			0				0				0				(49,246,118	)
Other offering expenses		0			0			(10,084,799	)			0				0			0				0				0				(10,084,799	)
BALANCE, December 31, 2001		83,761,469			837,614			738,236,525				(24,181,092	)			0			(555,040	)			(5,550,396	)			0				709,342,651
Issuance of common stock		61,827,594			618,276			617,657,655				0				0			0				0				0				618,275,931
Treasury stock purchased		0			0			0				0				0			(667,341	)			(6,673,412	)			0				(6,673,412	)
Net income		0			0			0				0				24,536,142			0				0				0				24,536,142
Dividends ($.39 per share)		0			0			0				(19,810,577	)			(24,536,142	)		0				0				0				(44,346,719	)
Sales commissions and discounts		0			0			(58,958,984	)			0				0			0				0				0				(58,958,984	)
Other offering expenses		0			0			(6,076,681	)			0				0			0				0				0				(6,076,681	)
Gain/(loss) on interest rate swap		0			0			0				0				0			0				0				(289,379	)			(289,379	)
BALANCE, June 30, 2002 (unaudited)		145,589,063		$	1,455,890		$	1,290,858,515			$	(43,991,669	)		$	0			(1,222,381	)		$	(12,223,808	)		$	(289,379	)		$	1,235,809,549

 

See accompanying condensed notes to financial statements.

 

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		Six Months Ended
		June 30, 2002				June 30, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	24,536,142			$	8,314,243
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in income of joint venture			(2,478,686	)			(1,519,194	)
Depreciation			12,903,282				6,393,817
Amortization of deferred financing costs			424,992				291,899
Amortization of deferred leasing costs			150,815				151,674
Changes in assets and liabilities:
Accounts receivable			(4,705,925	)			(1,304,851	)
Due from affiliates			(30,532	)
Deferred rental income			351,887				(285,776	)
Accounts payable and accrued expenses			3,112,741				425,824
Prepaid expenses and other assets, net			(1,017,517	)			3,525,288
Due to affiliates			(108,912	)			295,385
Net cash provided by operating activities			33,138,287				16,288,309
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in real estate			(259,535,578	)			(3,784,088	)
Investment in joint venture			0				(16,126,925	)
Deferred project costs paid			(22,008,219	)			(5,642,317	)
Distributions received from joint ventures			3,496,746				1,784,599
Deferred lease acquisition costs paid			(400,000	)			0
Net cash used in investing activities			(278,447,051	)			(23,768,731	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable			7,533,697				21,398,850
Repayment of note payable			0				(138,763,187	)
Dividends paid			(40,867,110	)			(13,795,534	)
Issuance of common stock			618,275,931				162,606,610
Sales commissions paid			(58,958,984	)			(15,314,860	)
Offering costs paid			(6,817,978	)			(4,836,272	)
Treasury stock purchased			(6,673,412	)			(1,397,561	)
Deferred financing costs paid			(859,773	)			(640,999	)
Net cash provided by financing activities			511,632,371				9,257,047
NET INCREASE IN CASH AND CASH EQUIVALENTS			266,323,607				1,776,625
CASH AND CASH EQUIVALENTS, beginning of year			75,586,168				4,298,301
CASH AND CASH EQUIVALENTS, end of period		$	341,909,775			$	6,074,926
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Deferred project costs applied to real estate assets		$	10,068,319			$	5,516,763
Deferred project costs applied to joint ventures		$	0			$	671,961
Deferred project costs due to affiliate		$	512,044			$	335,667
Interest rate swap		$	(289,379	)		$	0
Deferred offering costs due to affiliate		$	1,392,934			$	731,573
Other offering costs due to affiliate		$	201,811			$	287,715

 

 

See accompanying condensed notes to financial statements.

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Wells Real Estate Investment Trust, Inc. (the “Company”) is a Maryland corporation formed on July 3, 1997, which qualifies as a real estate investment trust (“REIT”). Substantially all of the Company’s business is conducted through Wells Operating Partnership, L.P. (“Wells OP”), a Delaware limited partnership organized for the purpose of acquiring, developing, owning, operating, improving, leasing, and otherwise managing income producing commercial properties for investment purposes on behalf of the Company. The Company is the sole general partner of Wells OP.

 

On January 30, 1998, the Company commenced its initial public offering of up to 16,500,000 shares of common stock at $10 per share pursuant to a Registration Statement on Form S-11 filed under the Securities Act of 1933. The Company commenced active operations on June 5, 1998, upon receiving and accepting subscriptions for 125,000 shares. The Company terminated its initial public offering on December 19, 1999 at which time gross proceeds of approximately $132,181,919 had been received from the sale of approximately 13,218,192 shares. The Company commenced its second public offering of shares of common stock on December 20, 1999, which was terminated on December 19, 2000 after receipt of gross proceeds of approximately $175,229,193 from the sale of approximately 17,522,919 shares from the second public offering. The Company commenced its third public offering of the shares of common stock on December 20, 2000. As of June 30, 2002, the Company has received gross proceeds of approximately $1,148,480,413 from the sale of approximately 114,848,041 shares from its third public offering. Accordingly, as of June 30, 2002, the Company has received aggregate gross offering proceeds of approximately $1,455,891,526 from the sale of 145,589,153 shares of its common stock to investors. After payment of $50,528,371 in acquisition and advisory fees and acquisition expenses, payment of $163,576,134 in selling commissions and organization and offering expenses, capital contributions to joint ventures and acquisitions expenditures by Wells OP of $885,294,095 for property acquisitions, and common stock redemptions of $12,223,808 pursuant to the Company’s share redemption program, the Company was holding net offering proceeds of $344,269,118 available for investment in properties, as of June 30, 2002.

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As of June 30, 2002, the Company owned interests in 52 properties listed in the table below through its ownership in Wells OP. As of June 30, 2002, all of these properties were 100% leased.

 

Property Name		Tenant		Property Location		% Owned		Purchase Price				Square Feet		Annual Rent
MFS Phoenix		Massachusetts Financial Services Company		Phoenix, AZ		100%		$	25,800,000			148,605		$	2,347,959
TRW Denver		TRW, Inc.		Aurora, CO		100%		$	21,060,000			108,240		$	2,870,709
Agilent Boston		Agilent Technologies, Inc.		Boxborough, MA		100%		$	31,742,274			174,585		$	3,578,993
Experian/TRW		Experian Information Solutions, Inc.		Allen, TX		100%		$	35,150,000			292,700		$	3,438,277
BellSouth Ft. Lauderdale		BellSouth Advertising and Publishing Corporation		Ft. Lauderdale, FL		100%		$	6,850,000			47,400		$	747,033
Agilent Atlanta		Agilent Technologies, Inc. Koninklijke Philips Electronics N.V.		Alpharetta, GA		100%		$	15,100,000			66,811 34,396		$ $	1,344,905 692,391
Travelers Express Denver		Travelers Express Company, Inc.		Lakewood, CO		100%		$	10,395,845			68,165		$	1,012,250
Dana Kalamazoo		Dana Corporation		Kalamazoo, MI		100%		$	41,950,000	(1)		147,004		$	1,842,800
Dana Detroit		Dana Corporation		Farmington Hills, MI		100%			(see above)	(1)		112,480		$	2,330,600
Novartis Atlanta		Novartis Opthalmics, Inc.		Duluth, GA		100%		$	15,000,000			100,087		$	1,426,240
Transocean Houston		Transocean Deepwater Offshore Drilling, Inc. Newpark Drilling Fluids, Inc.		Houston, TX		100%		$	22,000,000			103,260 52,731		$ $	2,110,035 1,153,227
Arthur Andersen		Arthur Andersen LLP		Sarasota, FL		100%		$	21,400,000			157,700		$	1,988,454
Windy Point I		TCI Great Lakes, Inc. The Apollo Group, Inc. Global Knowledge Network Various other tenants		Schaumburg, IL		100%		$	32,225,000	(2)		129,157 28,322 22,028 8,884		$ $ $ $	2,067,204 477,226 393,776 160,000
Windy Point II		Zurich American Insurance		Schaumburg, IL		100%		$	57,050,000	(2)		300,034		$	5,091,577
Convergys		Convergys Customer Management Group, Inc.		Tamarac, FL		100%		$	13,255,000			100,000		$	1,248,192
ADIC		Advanced Digital Information Corporation		Parker, CO		68.2%		$	12,954,213			148,204		$	1,222,683
Lucent		Lucent Technologies, Inc.		Cary, NC		100%		$	17,650,000			120,000		$	1,800,000
Ingram Micro		Ingram Micro, L.P.		Millington, TN		100%		$	21,050,000			701,819		$	2,035,275
Nissan (3)		Nissan Motor Acceptance Corporation		Irving, TX		100%		$	42,259,000	(4)		268,290		$	4,225,860	(5)
IKON		IKON Office Solutions, Inc.		Houston, TX		100%		$	20,650,000			157,790		$	2,015,767
State Street		SSB Realty, LLC		Quincy, MA		100%		$	49,563,000			234,668		$	6,922,706
AmeriCredit		AmeriCredit Financial Services Corporation		Orange Park, FL		68.2%		$	12,500,000			85,000		$	1,336,200
Comdata		Comdata Network, Inc.		Brentwood, TN		55.0%		$	24,950,000			201,237		$	2,458,638
AT&T Oklahoma		AT&T Corp. Jordan Associates, Inc.		Oklahoma City, OK		55.0%		$	15,300,000			103,500 25,000		$ $	1,242,000 294,500
Metris Minnesota		Metris Direct, Inc.		Minnetonka, MN		100%		$	52,800,000			300,633		$	4,960,445
Stone & Webster		Stone & Webster, Inc. SYSCO Corporation		Houston, TX		100%		$	44,970,000			206,048 106,516		$ $	4,533,056 2,130,320
Motorola Plainfield		Motorola, Inc.		S. Plainfield, NJ		100%		$	33,648,156			236,710		$	3,324,428
Quest		Quest Software, Inc.		Irvine, CA		15.8%		$	7,193,000			65,006		$	1,287,119
Delphi		Delphi Automotive Systems, LLC		Troy, MI		100%		$	19,800,000			107,193		$	1,955,524
Avnet		Avnet, Inc.		Tempe, AZ		100%		$	13,250,000			132,070		$	1,516,164
Siemens		Siemens Automotive Corp.		Troy, MI		56.8%		$	14,265,000			77,054		$	1,374,643
Motorola Tempe		Motorola, Inc.		Tempe, AZ		100%		$	16,000,000			133,225		$	1,843,834
ASML		ASM Lithography, Inc.		Tempe, AZ		100%		$	17,355,000			95,133		$	1,927,788
Dial		Dial Corporation		Scottsdale, AZ		100%		$	14,250,000			129,689		$	1,387,672
Metris Tulsa		Metris Direct, Inc.		Tulsa, OK		100%		$	12,700,000			101,100		$	1,187,925
Cinemark		Cinemark USA, Inc. The Coca-Cola Company		Plano, TX		100%		$	21,800,000			65,521 52,587		$ $	1,366,491 1,354,184
Gartner		The Gartner Group, Inc.		Ft. Myers, FL		56.8%		$	8,320,000			62,400		$	830,656
Videojet Technologies Chicago		Videojet Technologies, Inc.		Wood Dale, IL		100%		$	32,630,940			250,354		$	3,376,746
Johnson Matthey		Johnson Matthey, Inc.		Wayne, PA		56.8%		$	8,000,000			130,000		$	854,748
Alstom Power Richmond (3)		Alstom Power, Inc.		Midlothian, VA		100%		$	11,400,000			99,057		$	1,213,324
Sprint		Sprint Communications Company, L.P.		Leawood, KS		56.8%		$	9,500,000			68,900		$	1,102,404
EYBL CarTex		EYBL CarTex, Inc.		Fountain Inn, SC		56.8%		$	5,085,000			169,510		$	550,908

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Property Name		Tenant		Property Location		% Owned			Purchase Price			Square Feet		Annual Rent
Matsushita (3)		Matsushita Avionics Systems Corporation		Lake Forest, CA		100	%		$	18,431,206		144,906		$	2,005,464
AT&T Pennsylvania		Pennsylvania Cellular Telephone Corp.		Harrisburg, PA		100	%		$	12,291,200		81,859		$	1,442,116
PwC		PricewaterhouseCoopers, LLP		Tampa, FL		100	%		$	21,127,854		130,091		$	2,093,382
Cort Furniture		Cort Furniture Rental Corporation		Fountain Valley, CA		44.0	%		$	6,400,000		52,000		$	834,888
Fairchild		Fairchild Technologies U.S.A., Inc.		Fremont, CA		77.5	%		$	8,900,000		58,424		$	920,144
Avaya		Avaya, Inc.		Oklahoma City, OK		3.7	%		$	5,504,276		57,186		$	536,977
Iomega		Iomega Corporation		Ogden, UT		3.7	%		$	5,025,000		108,250		$	659,868
Interlocken		ODS-Technologies, L.P. and GAIAM, Inc.		Broomfield, CO		3.7	%		$	8,275,000		51,975		$	1,070,515
Ohmeda		Ohmeda, Inc.		Louisville, CO		3.7	%		$	10,325,000		106,750		$	1,004,520
Alstom Power Knoxville		Alstom Power, Inc.		Knoxville, TN		3.7	%		$	7,900,000		84,404		$	1,106,520

 

 

 

 

 

 

Wells OP owns interests in properties directly and through equity ownership in the following joint ventures:

 

Joint Venture		Joint Venture Partners		Properties Held by Joint Venture
Fund XIII-REIT Joint Venture		Wells Operating Partnership, L.P. Wells Real Estate Fund XIII, L.P.		AmeriCredit ADIC
Fund XII-REIT Joint Venture		Wells Operating Partnership, L.P. Wells Real Estate Fund XII, L.P.		Siemens AT&T Oklahoma Comdata
Fund XI-XII-REIT Joint Venture		Wells Operating Partnership, L.P. Wells Real Estate Fund XI, L.P. Wells Real Estate Fund XII, L.P.		EYBL CarTex Sprint Johnson Matthey Gartner
Fund IX-X-XI-REIT Joint Venture		Wells Operating Partnership, L.P. Wells Real Estate Fund IX, L.P. Wells Real Estate Fund X, L.P. Wells Real Estate Fund XI, L.P.		Alstom Power Knoxville Ohmeda Interlocken Avaya Iomega
Wells/Fremont Associates Joint Venture (the “Fremont Joint Venture”)		Wells Operating Partnership, L.P. Fund X-XI Joint Venture		Fairchild
Wells/Orange County Associates Joint Venture (the “Orange County Joint Venture”)		Wells Operating Partnership, L.P. Fund X-XI Joint Venture		Cort Furniture
Fund VIII-IX-REIT Joint Venture		Wells Operating Partnership, L.P. Fund VIII-IX Joint Venture		Quest

 

 

The Company’s accounting policies have been established in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including

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making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied; thus, resulting in a different presentation of our financial statements. Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters which are inherently uncertain.

 

 

The Company recognizes rental income generated from all leases on real estate assets in which the Company has an ownership interest, either directly or through investments in joint ventures, on a straight-line basis over the terms of the respective leases. If a tenant was to encounter financial difficulties in future periods, the amount recorded as a receivable may not be realized.

 

 

The Company generally bills tenants for operating cost reimbursements, either directly or through investments in joint ventures, on a monthly basis at amounts estimated largely based on actual prior period activity, the current year budget and the respective lease terms. Such billings are generally adjusted on an annual basis to reflect reimbursements owed to the landlord based on the actual costs incurred during the period and the respective lease terms. Financial difficulties encountered by tenants may result in receivables not being realized.

 

 

Management continually monitors events and changes in circumstances indicating that the carrying amounts of the real estate assets in which the Company has an ownership interest, either directly or through investments in joint ventures, may not be recoverable. When such events or changes in circumstances are present, management assesses the potential impairment by comparing the fair market value of the asset, estimated at an amount equal to the future undiscounted operating cash flows expected to be generated from tenants over the life of the asset and from its eventual disposition, to the carrying value of the asset. In the event that the carrying amount exceeds the estimated fair market value, the Company would recognize an impairment loss in the amount required to adjust the carrying amount of the asset to its estimated fair market value. Neither the Company nor its joint ventures have recognized impairment losses on real estate assets in 2002 or 2001.

 

 

The Company records acquisition and advisory fees and acquisition expenses payable to Wells Capital, Inc. (the “Advisor”) by capitalizing deferred project costs and reimbursing the Advisor in an amount equal to 3.5% of cumulative capital raised to date. As the Company invests its capital proceeds, deferred project costs are applied to real estate assets, either directly or through contributions to joint ventures, and depreciated over the useful lives of the respective real estate assets. Acquisition and advisory fees and acquisition expenses paid as of June 30, 2002, amounted to $50,528,371 and represented approximately 3.5% of capital contributions received. These fees are allocated to specific properties as they are purchased or developed and are included in capitalized assets of the joint venture, or real estate assets. Deferred project costs at June 30, 2002 and December 31, 2001, represent fees paid, but not yet applied to properties.

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The Advisor expects to continue to fund 100% of the organization and offering costs and recognize related expenses, to the extent that such costs exceed 3% of cumulative capital raised, on behalf of the Company. Organization and offering costs include items such as legal and accounting fees, marketing and promotional costs, and printing costs, and specifically exclude sales costs and underwriting commissions. The Company records offering costs by accruing deferred offering costs, with an offsetting liability included in due to affiliates, at an amount equal to the lesser of 3% of cumulative capital raised to date or actual costs incurred from third-parties less reimbursements paid to the Advisor. As the actual equity is raised, the Company reverses the deferred offering costs accrual and recognizes a charge to stockholders’ equity upon reimbursing the Advisor. As of June 30, 2002, the Advisor had paid organization and offering expenses on behalf of the Company in an aggregate amount of $27,886,146, of which the Advisor had been reimbursed $25,572,034, which did not exceed the 3% limitation. Deferred offering costs in the accompanying balance sheet represent costs incurred by the Advisor which will be reimbursed by the Company.

 

 

The Company will make distributions each taxable year (not including a return of capital for federal income tax purposes) equal to at least 90% of its real estate investment trusts’ taxable income. The Company intends to make regular quarterly distributions to stockholders. Distributions will be made to those stockholders who are stockholders as of the record date selected by the Directors. The Company currently calculates quarterly dividends based on the daily record and dividend declaration dates; thus, stockholders are entitled to receive dividends immediately upon the purchase of shares.

 

Dividends to be distributed to the stockholders are determined by the Board of Directors and are dependent on a number of factors related to the Company, including funds available for payment of dividends, financial condition, capital expenditure requirements and annual distribution requirements in order to maintain the Company’s status as a REIT under the Code. Operating cash flows are expected to increase as additional properties are added to the Company’s investment portfolio.

 

 

The Company has made an election under Section 856 (C) of the Internal Revenue Code of 1986, as amended (the “Code”), to be taxed as a Real Estate Investment Trust (“REIT”) under the Code beginning with its taxable year ended December 31, 1998. As a REIT for federal income tax purposes, the Company generally will not be subject to federal income tax on income that it distributes to its shareholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to federal income tax on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost. Such an event could materially adversely affect the Company’s net income and net cash available to distribute to shareholders. However, the Company believes that it is organized and operates in such a manner as to qualify for treatment as a REIT and intends to continue to operate in the foreseeable future in such a manner so that the Company will remain qualified as a REIT for federal income tax purposes.

 

 

The Company has no direct employees. The employees of the Advisor and Wells Management Company, Inc. (Wells Management), an affiliate of the Company and the Advisor, perform a full range of real estate services including leasing and property management, accounting, asset management and

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investor relations for the Company. The Company has reimbursed the Advisor and Wells Management for allocated salaries, wages and other payroll related costs totaling $683,535 and $254,000 for the six months ended June 30, 2002 and 2001, respectively and $366,380 and $163,725 for the three months ended June 30, 2002 and 2001, respectively.

 

 

Wells Management Company, Inc., an affiliate of the Company and the Advisor, carries comprehensive liability and extended coverage with respect to all the properties owned directly or indirectly by the Company. In the opinion of management, the properties are adequately insured.

 

 

The Company will experience competition for tenants from owners and managers of competing projects, which may include its affiliates. As a result, the Company may be required to provide free rent, reduced charges for tenant improvements and other inducements, all of which may have an adverse impact on results of operations. At the time the Company elects to dispose of its properties, the Company will also be in competition with sellers of similar properties to locate suitable purchasers for its properties.

 

 

For the purpose of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents include cash and short-term investments.

 

 

Substantially all of the Company’s business is conducted through Wells OP. On December 31, 1997, Wells OP issued 20,000 limited partner units to the Advisor in exchange for a capital contribution of $200,000. The Company is the sole general partner in Wells OP; consequently, the accompanying consolidated balance sheet of the Company includes the amounts of the Company and Wells OP. The Advisor, a limited partner, is not currently receiving distributions from its investment in Wells OP.

 

The consolidated financial statements of the Company have been prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These quarterly statements have not been examined by independent accountants, but in the opinion of the Board of Directors, the statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary to present a fair presentation of the results for such periods. Results for interim periods are not necessarily indicative of full year results. For further information, refer to the financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2001.

 

 

 

As of June 30, 2002, the Company owned interests in 17 properties in joint ventures with related entities through its ownership in Wells OP, which owns interests in seven such joint ventures. The Company does not have control over the operations of these joint ventures; however, it does exercise significant influence. Accordingly, investment in joint ventures is recorded using the equity method.

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The following information summarizes the operations of the unconsolidated joint ventures in which the Company, through Wells OP, had ownership interests as of June 30, 2002 and 2001, respectively. There were no additional investments in joint ventures made by the Company during the three months and six months ended June 30, 2002.

 

		Total Revenues						Net Income						Wells OP’s Share of   Net Income
		Three Months Ended						Three Months Ended						Three Months Ended
		June 30, 2002			June 30, 2001			June 30, 2002			June 30, 2001			June 30, 2002			June 30, 2001
Fund IX-X-XI-REIT Joint Venture		$	1,436,601		$	1,087,746		$	619,173		$	734,418		$	22,982		$	27,258
Cort Joint Venture			208,707			198,881			140,206			131,374			61,224			57,367
Fremont Joint Venture			227,023			225,178			140,944			135,990			109,237			105,398
Fund XI-XII-REIT Joint Venture			859,027			847,767			545,009			499,960			309,363			283,792
Fund XII-REIT Joint Venture			1,483,224			1,102,873			852,672			587,864			468,646			310,812
Fund VIII-IX-REIT Joint Venture			309,605			313,539			147,998			155,320			23,370			24,854
Fund XIII-REIT Joint Venture			707,919			0			406,236			0			277,041			0
		$	5,232,106		$	3,775,984		$	2,852,238		$	2,244,926		$	1,271,863		$	809,481