UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): March 25, 2013
SELECT INCOME REIT
(Exact Name of Registrant as Specified in Its Charter)
Maryland (State or Other Jurisdiction of Incorporation) |
||
001-35442 (Commission File Number) |
45-4071747 (IRS Employer Identification No.) |
|
Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts (Address of Principal Executive Offices) |
02458-1634 (Zip Code) |
617-796-8303
(Registrant's Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Item 9.01. Financial Statements and Exhibits.
This Current Report on Form 8-K includes (i) the Statement of Revenues and Certain Operating Expenses of three properties located at 45101 - 45301 Warp Drive, Sterling, Virginia, or, collectively, Warp Drive, for the year ended December 31, 2011 (audited) and the nine months ended September 30, 2012, pursuant to the requirements of Rule 3-14 of Regulation S-X and (ii) unaudited pro forma financial data for Select Income REIT, or the Company, which gives effect to transactions the Company has completed since January 1, 2012, as if those transactions all occurred on that date.
This historical and pro forma financial information is not necessarily indicative of the expected financial position or results of operations of the Company for any future period. Differences could result from many factors, including future changes in the Company's investments, changes in interest rates and changes in the capital structure of the Company.
Neither the Company nor its affiliates are related to the sellers of Warp Drive. The historical financial statements listed in Item 9.01(a) present the results of operations of Warp Drive during periods prior to their acquisition by the Company and exclude, as permitted by Rule 3-14 of Regulation S-X, items of revenue and expense which the Company expects may not be comparable to the expected future operation by the Company. In assessing Warp Drive, the Company considered each property's revenue sources, including those which have been affected, and are expected to be affected in the future, by factors including, but not limited to, demand, supply and competitive factors present in the local and national markets for single tenant, net leased properties and the ability of tenants to make payments when due. The Company also considered the properties' expenses including, but not limited to, utility costs, tax rates and other expenses, and the portion of such expenses which may be recovered from tenants. Changes in these factors or other factors described in the notes to the pro forma data provided below will cause future operating results to differ from the historical and pro forma operating results presented, but cannot be predicted at this time; however, after reasonable inquiry, the Company is not currently aware of any other material factors relating to the properties that would cause the financial information reported herein not to be indicative of future operating results.
Statement of Revenues and Certain Operating Expenses of Warp Drive
Report of Independent Registered Public Accounting Firm |
F-1 | |||
Statement of Revenues and Certain Operating Expenses for the Year Ended December 31, 2011 (audited) and the Nine Months Ended September 30, 2012 (unaudited) |
F-2 | |||
Notes to Statement of Revenues and Certain Operating Expenses |
F-3 |
Introduction to Unaudited Pro Forma Consolidated Financial Statements |
F-5 | |||
Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2012 |
F-8 | |||
Unaudited Pro Forma Consolidated Statements of Income and Comprehensive Income for the Year Ended December 31, 2012 |
F-9 | |||
Notes to Unaudited Pro Forma Consolidated Financial Statements |
F-10 |
i
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Select Income REIT:
We have audited the accompanying statement of revenues and certain operating expenses of 45101 - 45301 Warp Drive for the year ended December 31, 2011. This financial statement is the responsibility of Select Income REIT's management. Our responsibility is to express an opinion on the financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatements. We were not engaged to perform an audit of 45101 - 45301 Warp Drive's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statement was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in Amendment No. 1 to the Registration Statement on Form S-11 of Select Income REIT, as described in Note 1, and is not intended to be a complete presentation of 45101 - 45301 Warp Drive's revenues and expenses.
In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenues and certain operating expenses described in Note 1 of 45101 - 45301 Warp Drive for the year ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston,
Massachusetts
November 23, 2012, except for Note 3,
as to which the date is November 30, 2012
F-1
45101 - 45301 Warp Drive
Statement of Revenues and Certain Operating Expenses
|
Nine Months Ended September 30, 2012 |
Year Ended December 31, 2011 |
|||||
---|---|---|---|---|---|---|---|
|
(unaudited) |
|
|||||
REVENUES: |
|||||||
Rental income |
$ | 4,978,137 | $ | 6,730,121 | |||
Reimbursement from tenants and other income |
2,116,871 | 2,665,675 | |||||
|
7,095,008 | 9,395,796 | |||||
CERTAIN OPERATING EXPENSES: |
|||||||
Property operating expenses |
1,110,857 | 1,490,867 | |||||
Real estate taxes and insurance |
932,660 | 1,096,245 | |||||
General and administrative |
73,354 | 78,563 | |||||
|
2,116,871 | 2,665,675 | |||||
REVENUES IN EXCESS OF CERTAIN OPERATING EXPENSES |
$ | 4,978,137 | $ | 6,730,121 | |||
See accompanying notes.
F-2
45101 - 45301 Warp Drive
Notes to Statement of Revenues and Certain Operating Expenses
Nine months ended September 30, 2012 (unaudited) and year ended
December 31, 2011
1. General Information and Summary of Significant Accounting Policies
TMW Weltfonds Loudoun, L.P., a Delaware limited partnership, owns and operates three properties located at 45101 - 45301 Warp Drive, in Sterling, Virginia (the "Properties"). Select Income REIT ("SIR") has signed a Purchase and Sale Agreement as of October 19, 2012 with TMW Weltfonds Loudoun, L.P. to acquire 45101 - 45301 Warp Drive and will assume management and ownership responsibilities upon closing.
The accompanying financial statement has been prepared in accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission for inclusion in the Registration Statement on Form S-11 of SIR. Accordingly, certain historical expenses that may not be comparable to the expenses expected to be incurred in the future have been excluded. Excluded expenses consist of depreciation and amortization, interest expense and other costs not directly related to the future operations of the Properties.
Use of Estimates. Preparation of this financial statement in conformity with U.S. generally accepted accounting principles requires SIR's management to make estimates and assumptions that may affect the amounts reported in the financial statement and related notes. Actual results could differ from those estimates.
Revenue Recognition. The tenant lease is accounted for as an operating lease. Rental income is recognized on a straight line basis over the term of the lease agreement. Straight line rent adjustments included in rental income on the statement of revenues and certain operating expenses totaled $934,393 for the year ended December 31, 2011, and $1,077,815 included in the unaudited period for the nine months ended September 30, 2012.
Reimbursement from Tenants. The tenant bears 100% of the cost for operating and real estate tax expense of the buildings.
Repairs and Maintenance. Expenditures for repairs and maintenance are expensed as incurred.
2. Leases
TMW Weltfonds Loudoun, L.P., as lessor, has entered into three non-cancelable operating leases at the Properties. These leases will be assumed by SIR assuming the purchase is completed in November 2012. Future minimum rentals under the lease in effect at December 31, 2011, are summarized as follows:
Year
|
Amount | |||
---|---|---|---|---|
2012 |
$ | 5,610,912 | ||
2013 |
5,764,913 | |||
2014 |
5,923,410 | |||
2015 |
6,085,841 | |||
2016 |
6,889,568 | |||
Thereafter |
51,473,639 | |||
|
$ | 81,748,283 | ||
F-3
45101 - 45301 Warp Drive
Notes to Statement of Revenues and Certain Operating Expenses
Nine months ended September 30, 2012 (unaudited) and year ended December 31, 2011
(Continued)
2. Leases (Continued)
The leases are for twelve years and provide for 100% recovery of operating and real estate tax expense and include two (2) successive five (5)-year renewal options, commencing immediately following the end of the Lease Term.
3. Subsequent Events
SIR acquired the Properties from TMW Weltfonds Loudoun, L.P. on November 29, 2012 and will assume management and ownership responsibilities.
F-4
SELECT INCOME REIT
Introduction to Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands)
Select Income REIT, or we or us, was formerly a wholly owned subsidiary of CommonWealth REIT, or CWH, a NYSE-listed real estate investment trust, or REIT, that primarily owns office properties. CWH created us to concentrate its ownership of certain net leased lands located in Hawaii that CWH purchased in 2003 and 2005 from the Damon Estate and the Campbell Estate, respectively, and other net leased properties. On February 16, 2012, CWH contributed 251 properties with a combined total of approximately 21.4 million rentable square feet, or the Initial Properties, to us and in return we issued to CWH: (1) 22,000,000 of our common shares of beneficial interest, $.01 par value per share, or Shares (including 1,000 Shares initially issued to CWH on December 21, 2011 in connection with our formation); and (2) a $400,000 demand promissory note, or the CWH Note.
On March 6, 2012, we priced our initial public offering, or the IPO, of 8,000,000 Shares. The sale of those Shares and an additional 1,200,000 Shares pursuant to the full exercise of the underwriters' option to purchase additional Shares, closed on March 12, 2012, and we became a public company. Simultaneous with the closing of the IPO, we entered into a $500,000 revolving credit facility that is available for general business purposes, including acquisitions. We used the net proceeds from the IPO and borrowings under our revolving credit facility to repay in full the CWH Note and to reimburse CWH for costs that CWH incurred in connection with our organization and preparation for the IPO.
Since the IPO, we have acquired 21 properties from unrelated third parties with a combined total of approximately 4.0 million rentable square feet for an aggregate purchase price of $596,333, including the assumption of $26,000 in mortgage debt and excluding closing costs. Details of these acquisitions are as follows:
F-5
SELECT INCOME REIT
Introduction to Unaudited Pro Forma Consolidated Financial Statements (Continued)
(dollars in thousands)
On December 11, 2012, we completed the sale of 8,050,000 Shares, including 1,050,000 Shares sold when the underwriters exercised in full their option to purchase additional shares, in a public offering at a price of $24.00 per share, raising net proceeds of approximately $182,843, after deducting the underwriting discounts and commissions and other offering expenses. We used the net proceeds to partially repay amounts outstanding under our revolving credit facility and for general business activities, including acquisitions.
The following unaudited pro forma consolidated balance sheet as of December 31, 2012 is intended to present the financial position of us and our consolidated subsidiaries as if the transactions described in the notes had been consummated as of December 31, 2012. The following unaudited pro forma consolidated statements of income and comprehensive income for the year ended December 31, 2012 are intended to present our results of operations as if the transactions described in the notes had been consummated on January 1, 2012.
F-6
SELECT INCOME REIT
Introduction to Unaudited Pro Forma Consolidated Financial Statements (Continued)
(dollars in thousands)
The following unaudited pro forma consolidated financial statements are not necessarily indicative of the expected financial position or results of our operations for any future period. Differences could result from many factors, including future changes in our investments, changes in interest rates and changes in our capital structure. The pro forma information should be read in conjunction with the financial statements and related notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2012.
F-7
SELECT INCOME REIT
Unaudited Pro Forma Consolidated Balance Sheet
December 31, 2012
(amounts in thousands, except share data)
|
Historical(A) | Acquistions Since December 31, 2012(B) |
Pro Forma | |||||||
---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||||
Real estate properties: |
||||||||||
Land |
$ | 675,092 | $ | 16,704 | $ | 691,796 | ||||
Buildings and improvements |
620,686 | 133,006 | 753,692 | |||||||
|
1,295,778 | 149,710 | 1,445,488 | |||||||
Accumulated depreciation |
(46,697 | ) | | (46,697 | ) | |||||
|
1,249,081 | 149,710 | 1,398,791 | |||||||
Acquired real estate leases, net |
95,248 |
8,889 |
104,137 |
|||||||
Cash and cash equivalents |
20,373 | (320 | ) | 20,053 | ||||||
Restricted cash |
42 | | 42 | |||||||
Rents receivable, net |
38,885 | | 38,885 | |||||||
Deferred leasing costs, net |
4,816 | | 4,816 | |||||||
Deferred financing costs, net |
5,517 | | 5,517 | |||||||
Due from related persons |
585 | | 585 | |||||||
Other assets |
16,105 | (10,000 | ) | 6,105 | ||||||
Total assets |
$ | 1,430,652 | $ | 148,279 | $ | 1,578,931 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||||
Revolving credit facility |
$ | 95,000 | $ | 148,000 | $ | 243,000 | ||||
Term loan |
350,000 | | 350,000 | |||||||
Mortgage notes payable |
27,778 | | 27,778 | |||||||
Accounts payable and accrued expenses |
19,703 | | 19,703 | |||||||
Assumed real estate lease obligations, net |
20,434 | 279 | 20,713 | |||||||
Rents collected in advance |
6,518 | | 6,518 | |||||||
Security deposits |
9,335 | | 9,335 | |||||||
Due to related persons |
1,701 | | 1,701 | |||||||
Total liabilities |
530,469 | 148,279 | 678,748 | |||||||
Commitments and contingencies |
||||||||||
Shareholders' equity: |
||||||||||
Common shares of beneficial interest, $0.01 par value: 50,000,000 shares authorized, 39,282,592 shares issued and outstanding |
393 | | 393 | |||||||
Additional paid in capital |
876,920 | | 876,920 | |||||||
Cumulative net income |
51,251 | | 51,251 | |||||||
Cumulative other comprehensive income |
25 | | 25 | |||||||
Cumulative common distributions |
(28,406 | ) | | (28,406 | ) | |||||
Total shareholders' equity |
900,183 | | 900,183 | |||||||
Total liabilities and shareholders' equity |
$ | 1,430,652 | $ | 148,279 | $ | 1,578,931 | ||||
See accompanying notes
F-8
SELECT INCOME REIT
Unaudited Pro Forma Consolidated Statements of Income and Comprehensive Income
For the Year Ended December 31, 2012
(amounts in thousands, except per share data)
|
Historical(A) | Formation Transactions(C) |
The Term Loan(D) |
December 2012 Offering(E) |
Properties Acquired Prior to December 31, 2012(F) |
Properties Acquired Since December 31, 2012(G) |
Pro Forma Adjustments |
Pro Forma | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Revenues: |
|||||||||||||||||||||||||
Rental income |
$ | 105,559 | $ | | $ | | $ | | $ | 29,067 | $ | 14,317 | $ | (502 | )(H) | $ | 148,441 | ||||||||
Tenant reimbursements and other income |
17,231 | | | | 4,975 | 7,659 | | 29,865 | |||||||||||||||||
Total revenues |
122,790 | | | | 34,042 | 21,976 | (502 | ) | 178,306 | ||||||||||||||||
Expenses: |
|||||||||||||||||||||||||
Real estate taxes |
15,370 | | | | 1,986 | 1,823 | | 19,179 | |||||||||||||||||
Other operating expenses |
8,426 | | | | 3,703 | 5,904 | | 18,033 | |||||||||||||||||
Depreciation and amortization |
14,860 | | | | | | 13,936 | (I) | 28,796 | ||||||||||||||||
Acquisition related costs |
2,470 | | | | | | (2,470 | )(J) | | ||||||||||||||||
General and administrative |
8,203 | | | | | | 2,615 | (K) | 10,818 | ||||||||||||||||
Total expenses |
49,329 | | | | 5,689 | 7,727 | 14,081 | 76,826 | |||||||||||||||||
Operating income |
73,461 |
|
|
|
28,353 |
14,249 |
(14,583 |
) |
101,480 |
||||||||||||||||
Interest expense |
(7,565 |
) |
(1,182 |
) |
(705 |
) |
2,657 |
(827 |
) |
|
(6,897 |
)(L) |
(14,520 |
) |
|||||||||||
Equity in earnings of an investee |
269 | | | | | | | 269 | |||||||||||||||||
Income before income tax expense |
66,165 | (1,182 | ) | (705 | ) | 2,657 | 27,526 | 14,249 | (21,480 | ) | 87,229 | ||||||||||||||
Income tax expense |
(290 | ) | | | | | | | (290 | ) | |||||||||||||||
Net income |
65,875 | (1,182 | ) | (705 | ) | 2,657 | 27,526 | 14,249 | (21,480 | ) | 86,939 | ||||||||||||||
Other comprehensive income: |
|||||||||||||||||||||||||
Equity in unrealized gain of an investee |
25 | | | | | | | 25 | |||||||||||||||||
Other comprehensive income |
25 | | | | | | | 25 | |||||||||||||||||
Comprehensive income |
$ | 65,900 | $ | (1,182 | ) | $ | (705 | ) | $ | 2,657 | $ | 27,526 | $ | 14,249 | $ | (21,480 | ) | $ | 86,964 | ||||||
Weighted average common shares outstanding |
27,122 |
4,080 |
|
8,050 |
|
|
|
39,252 |
|||||||||||||||||
Net income per common share |
$ |
2.43 |
$ |
2.21 |
|||||||||||||||||||||
See accompanying notes
F-9
SELECT INCOME REIT
Notes to Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands, except Share data)
Basis of Presentation
On March 6, 2012, we priced our initial public offering, or IPO, of 8,000,000 Shares. The sale of these shares and an additional 1,200,000 of our Shares pursuant to the exercise in full of our IPO underwriters' option to purchase additional Shares closed on March 12, 2012, or the Closing Date, and we became a public company. We used the net proceeds from the IPO and borrowings under our revolving credit facility to repay in full the CWH Note.
Unaudited Pro Forma Consolidated Balance Sheet Adjustments
Date
|
Location | Number of Properties | Square Feet | Purchase Price(1) | Land | Building and Improvements | Acquired Real Estate Leases | Assumed Real Estate Lease Obligations | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
January 2013 |
Addison, TX | 2 | 553,799 | $ | 105,000 | $ | 10,107 | $ | 94,893 | $ | | $ | | |||||||||||
February 2013 |
Provo, UT | 2 | 125,225 | 34,720 | 3,400 | 25,938 | 5,382 | | ||||||||||||||||
March 2013 |
San Antonio, TX | 1 | 99,986 | 18,600 | 3,197 | 12,175 | 3,507 | (279 | ) | |||||||||||||||
|
5 | 779,010 | $ | 158,320 | $ | 16,704 | $ | 133,006 | $ | 8,889 | $ | (279 | ) | |||||||||||
F-10
SELECT INCOME REIT
Notes to Unaudited Pro Forma Consolidated Financial Statements (Continued)
(dollars in thousands, except Share data)
Unaudited Pro Forma Consolidated Statements of Income and Comprehensive Income Adjustments
|
For the Year Ended December 31, 2012 |
|||
---|---|---|---|---|
Revolving Credit Facility |
||||
Initial borrowings net of overallotment proceeds |
$ | 227,000 | ||
Weighted average revolving credit facility interest rate(1) |
1.54 | % | ||
Interest Expense |
3,496 | |||
Add: Annual amortization of deferred financing fees |
1,033 | |||
Add: Annual administrative fees |
50 | |||
Add: Annual facility fee (0.30% of a $500,000 loan commitment)(2) |
1,500 | |||
Total interest expense |
6,079 | |||
Percent of annual days adjusted |
19.45 | % | ||
Total interest expense pro forma adjustment |
$ | 1,182 | ||
F-11
SELECT INCOME REIT
Notes to Unaudited Pro Forma Consolidated Financial Statements (Continued)
(dollars in thousands, except Share data)
Pro Forma Interest Expense Calculation
|
For the Year Ended December 31, 2012 |
|||
---|---|---|---|---|
Term Loan |
||||
Principal amounts outstanding |
$ | 350,000 | ||
Weighted average term loan interest rate(1) |
1.78 | % | ||
Interest expense before amortization of deferred financing fees |
6,230 | |||
Add: Annual amortization of deferred financing fees |
448 | |||
Total term loan interest expense |
6,678 | |||
Percent of annual days adjusted |
52.88 | % | ||
Total term loan interest expense |
3,531 | |||
Revolving Credit Facility |
||||
Revolving credit facility borrowing repaid by term loan |
347,000 | |||
Weighted average revolving credit facility interest rate(2) |
1.54 | % | ||
Percent of annual days adjusted |
52.88 | % | ||
Forgone interest expense |
2,826 | |||
Total interest expense pro forma adjustment |
$ |
705 |
||
F-12
SELECT INCOME REIT
Notes to Unaudited Pro Forma Consolidated Financial Statements (Continued)
(dollars in thousands, except Share data)
F-13
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
SELECT INCOME REIT | |||||
|
By: |
/s/ John C. Popeo |
||||
|
Name: | John C. Popeo | ||||
|
Title: | Treasurer and Chief Financial Officer |
Date: March 25, 2013