| BEDFORD PROPERTY INVESTORS INC/MD Item 1A Risk Factors RISKS RELATED TO THE PROPOSED MERGER We may fail to close the proposed merger |
| The proposed merger is subject to the approval of our stockholders and other conditions set forth in the merger agreement |
| We cannot be certain that we will obtain the approval of our stockholders or satisfy the other closing conditions |
| If we do not obtain stockholder approval or are unable to meet certain other conditions and we fail to close the transaction, we may be exposed to significant risks, including those described below: § We may be required to pay LBA Realty a termination fee of dlra16dtta0 million plus documented expenses of up to dlra3dtta5 million |
| § Our stock price may decrease substantially if the merger agreement were terminated or appeared likely to be terminated |
| We have incurred significant transactions costs that will be required to be expensed for accounting purposes and which will reduce our ability to make future dividend distributions to our stockholders |
| As a result of the proposed merger, we have incurred and expect to continue to incur significant transaction costs |
| If the merger agreement were terminated, we would be required to pay such costs |
| 8 Our business could be harmed by the proposed merger |
| Uncertainty about the effect of our pending transaction with LBA could harm our business |
| This uncertainty could lead to revenue declines, an impairment of our ability to make needed improvements in our business (such as capital expenditures, acquisitions or divestitures), an inability to retain or motivate current employees or attract new employees, and deterioration in our results of operations |
| We may also suffer negative effects from management’s time and effort put into the proposed merger rather than the operating future of the company |
| These adverse effects may be enhanced by the fact that the stockholder approval process, including the SEC’s review of our proxy, may be lengthy and the ultimate result is uncertain |
| The merger agreement restricts our ability to incur indebtedness without the prior consent of LBA, which could harm our liquidity position |
| The terms of the merger agreement require us to obtain the prior consent of LBA in order to incur indebtedness, other than borrowings up to dlra115 million under our existing credit agreement and certain other exceptions |
| This could materially limit our ability to borrow under our credit agreement or utilize other sources of liquidity |
| RISKS RELATED TO OUR CONTINUING OPERATIONS The operation of our business is subject to significant risks |
| In the event our proposed merger with LBA does not occur, these risks may harm our results of operations and financial condition |
| You should carefully review the following risks in connection with your investment in us |
| We could experience a reduction in rental income if we are unable to renew or re-lease space on expiring leases on current lease terms, or at all |
| A significant portion of our leases is scheduled to expire in the near future |
| As of December 31, 2005, leases representing 14prca, 16prca, 29prca, and 12prca of our total annualized base rent were scheduled to expire during 2006, 2007, 2008, and 2009, respectively |
| If the rental rates upon re-leasing or renewal of leases are significantly lower than current rates, or if we are unable to lease a significant amount of space on economically favorable terms, or at all, our results of operations could suffer |
| We are subject to the risk that, upon expiration, some of these or other leases will not be renewed, the space may not be re-leased, or the terms of renewal or re-leasing, including the costs of required renovations or concessions to tenants, may be less favorable than current lease terms |
| We could face difficulties re-leasing our space on commercially acceptable terms when it becomes available |
| In addition, we could incur costs in making improvements or repairs to our properties req uired by new or renewing tenants and expenses associated with brokerage commissions payable in connection with the re-leasing of space |
| Similarly, our rental income has in the past and could in the future be reduced by vacancies resulting from lease expirations or by rental rates that are less favorable than our current terms |
| If we are unable to promptly renew leases or re-lease space or if the expenses relating to tenant turnover are greater than expected, our financial results could be harmed |
| Our leases with our 25 largest tenants generate approximately 42prca of our base rent, and the loss of one or more of these tenants, as well as the inability to re-lease this space on equivalent terms, could harm our results of operations |
| As of December 31, 2005, our 25 largest tenants accounted for approximately 42prca of our total annualized base rent |
| In the event that one or more of our larger tenants were to vacate or not renew their lease with us, the re-leasing of the square footage previously leased by these tenants may require considerable capital expenditures and an indeterminate period of time |
| Losses of our larger tenants and our inability to re-lease vacated properties on favorable terms could limit our ability to make distributions to our stockholders |
| 9 A significant portion of our base rent is generated by properties in California, and our business could be harmed by an economic downturn in the California real estate market or a significant earthquake |
| As of December 31, 2005, approximately 41prca of our total annualized base rent was generated by our properties located in the State of California |
| As a result of this geographic concentration, a downturn in the performance of the commercial real estate markets and the local economies in various areas within California could adversely affect the value of these properties and the rental income from these properties and, in turn, our results of operations |
| In addition, the geographic concentration of our properties in California in close proximity to regions known for their seismic activity exposes us to the risk that our operating results could be harmed by a significant earthquake |
| Future declines in the demand for commercial space in the greater San Francisco Bay Area could harm our results of operations and, consequently, our ability to make distributions to our stockholders |
| Approximately 27prca of our net operating income, including income from discontinued operations, for the year ended December 31, 2005 was generated by our properties located in the greater San Francisco Bay Area |
| As a result, our business is somewhat dependent on the condition of the San Francisco Bay Area economy |
| The market for commercial space in the San Francisco Bay Area is still recovering from of one of the most severe downturns of the past several decades |
| This downturn was precipitated by the unprecedented collapse of many technology and so-called “dot com” businesses that, during the 1998-2001 period, had been chiefly responsible for generating demand for, and increased prices of, local office properties |
| This downturn has harmed, and may continue to harm, our results of operations |
| In the event economic conditions in the San Francisco Bay Area fail to improve or worsen, it could harm the market value of our properties, the results derived from such proper ties and our ability to make distributions to our stockholders |
| Real estate investments are inherently risky, and many of the risks involved are beyond our ability to control |
| Real property investments are subject to numerous risks |
| The yields available from an equity investment in real estate depend on the amount of income generated and costs incurred by the related properties |
| If the properties in which we invest do not generate sufficient income to meet costs, including debt service, tenant improvements, third-party leasing commissions, and capital expenditures, our results of operations and ability to make distributions to our stockholders could suffer |
| Revenues and values of our properties may also be harmed by a number of other factors, some of which are beyond our control, including: - the national economic climate; - the local economic climate; - local real estate conditions, including an oversupply of space or a reduction in demand for real estate in an area; - the attractiveness of our properties to tenants; - competition from other available space; - our ability to provide adequate maintenance and insurance to cover other operating costs, government regulations and changes in real estate, zoning or tax laws, and interest rate levels; - the availability of financing; and - potential liabilities under environmental and other laws |
| If our tenants experience financial difficulty or seek the protection of bankruptcy laws, our cash from operating activities could suffer |
| Our commercial tenants may, from time to time, experience downturns in their business operations and finances due to adverse economic conditions or other reasons, which may result in their failure to make rental payments to us on a timely basis or at all |
| Missed rental payments, in the aggregate, could impair our cash flows and, as a result, our ability to make distributions to our stockholders |
| 10 At any time, a tenant could seek the protection of the bankruptcy laws, which might result in the modification or termination of the tenant’s lease and cause a reduction in our cash flow |
| During the year ended December 31, 2005, one of our tenants, representing less than 1prca of our year-to-date base rent, filed for bankruptcy |
| In the event of default by or bankruptcy of a tenant, we may experience delays in enforcing our rights as lessor and may incur substantial costs in protecting our investment |
| The default, bankruptcy, or insolvency of a few major tenants may harm us and our ability to pay dividends to our stockholders |
| Our dependence on smaller businesses to rent office space could negatively affect our cash flow |
| Many of the tenants in our properties operate smaller businesses that may not have the financial strength of larger corporate tenants |
| Smaller companies generally experience a higher rate of failure and are generally more susceptible to financial risks than large, well-capitalized enterprises |
| Dependence on these companies could create a higher risk of tenant defaults, turnover, and bankruptcies, all of which could harm our business as well as our ability to pay dividends |
| The acquisition and development of real estate is subject to numerous risks, and the cost of bringing any acquired property up to the standards of its intended market position could exceed our estimates |
| As a REIT, part of our business strategy has been to pursue acquisitions of additional properties that meet our acquisition criteria from time to time as opportunities arise |
| We may in the future acquire industrial and suburban office properties and portfolios of these properties, which may include the acquisition of other companies and business entities owning the properties |
| Although we engage in due diligence review for each new acquisition, we may not be aware of all potential liabilities and problems associated with a property |
| We may have limited contractual recourse, or no contractual recourse, against the sellers of a property |
| We may abandon development opportunities resulting in direct expenses to us |
| From time to time, we may invest significant time and resources exploring development opportunities that we subsequently decide are not in our best interest |
| The costs of investigating these opportunities will still be considered a direct expense and may harm our financial condition |
| Our uninsured or underinsured losses could result in a loss in value of our properties |
| We currently maintain general liability coverage with primary limits of dlra1 million per occurrence and dlra2 million in the aggregate, as well as dlra40 million of umbrella/excess liability coverage |
| This coverage protects us against liability claims as well as the cost of legal defense |
| We carry property “All Risks” insurance of dlra200 million on a replacement value basis covering both the cost of direct physical damage and the loss of rental income |
| Separate flood and earthquake insurance is provided with an annual aggregate limit of dlra10 million, subject to a deductible of the greater of dlra100cmam000 or 5prca of total insurable value per building and respective rent loss with respect to earthquake coverage |
| Additional excess earthquake coverage with an aggregate limit of dlra20 million is provided for properties located in California, which represent approximately 41prca of our portfolio’s annualized base rent as of December 31, 2005 |
| Some losses, including those due to ac ts of war, nuclear accidents, pollution, mold, or terrorism, may be either uninsurable or not economically insurable |
| However, we do presently carry insurance for terrorism losses as defined under the Terrorism Risk Insurance Act of 2002 under our “All Risks” property policies, liability policies, primary and umbrella/excess policies |
| In addition, “non-certified” terrorism coverage is provided under our property policy for losses in excess of dlra10 million up to the dlra200 million limit |
| Some losses could exceed the limits of our insurance policies or could cause us to bear a substantial portion of those losses due to deductibles under those policies |
| If we suffer an uninsured loss, we could lose both our invested capital in and anticipated cash flow from the property while being obligated to repay any outstanding indebtedness incurred to acquire the property |
| In addition, a majority of our properties are located in areas that are subject to earthquake activity |
| Although we have obtained earthquake insurance policies for all of our properties, if one or more properties sustain damage as a result of an earthquake, we may incur substantial losses up to the amount of the deductible under the earthquake insurance policy and, additionally, to the extent that the damage exceeds the policy’s maximum coverage, we would not have insurance compensation for that portion of the losses |
| Although we have 11 obtained owner’s title insurance policies for each of our properties, the title insurance may be in an amount less than the current market value of some of the properties |
| If a title defect results in a loss that exceeds insured limits, we could lose all or part of our investment in, and anticipated gains, if any, from, the property |
| Furthermore, the current insurance market is characterized by rising premium rates, increasing deductibles, and more restrictive coverage language |
| Continued increases in the costs of insurance coverage or increased limits or exclusions in insurance policy coverage could negatively affect our financial results |
| If we fail to maintain our qualification as a real estate investment trust, we could experience adverse tax and other consequences, including the loss of deductibility of dividends in calculating our taxable income and the imposition of federal income tax at regular corporate rates |
| We have elected to qualify as a real estate investment trust (REIT) under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended |
| However, the IRS could challenge our qualification as a REIT for taxable years still subject to audit, and we may fail to qualify as a REIT in the future |
| Qualification as a REIT involves the application of highly technical and complex tax provisions, and the determination of various factual matters and circumstances not entirely within our control may have an impact on our ability to maintain our qualification as a REIT For example, in order to qualify as a REIT, at least 95prca of our gross income in any year must be derived from qualifying sources and we must make distributions to stockholders aggregating annually at least 90prca of our REIT taxable income, excluding net capital gains |
| In addition, we cannot assure that new legislation, Treasury Regulations, administrative interpretations, or court decisions will not significantly change the tax laws with respect to our qualification as a REIT or the federal income tax consequences of such qualification |
| We are not aware of any proposal to amend the tax laws that would significantly and negatively affect our ability to continue to operate as a REIT If we fail to maintain our qualification as a REIT, or are found not to have qualified as a REIT for any prior year, we would not be entitled to deduct dividends paid to our stockholders and would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates |
| In addition, unless entitled to statutory relief, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost |
| This treatment would reduce amounts available for investment or distribution to stockholders because of any additional tax liability for the year or years involved |
| In addition, we would no longer be required by the Internal Revenue Code to make any distributions |
| As a result, disqualification as a REIT would harm us and our ability to make distributions to our stockholders |
| To the extent that distributions to stockholders have been made in anticipation of our qua lification as a REIT, we might be required to borrow funds or to liquidate investments to pay the applicable tax |
| We must comply with strict income distribution requirements to maintain favorable tax treatment as a REIT If our cash flow is insufficient to meet our operating expenses and the distribution requirements, we may need to incur additional borrowings or otherwise obtain funds to satisfy these requirements |
| To maintain REIT status, we are required each year to distribute to our stockholders at least 90prca of our REIT taxable income, excluding net capital gains |
| In addition, we are subject to a 4prca nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85prca of our ordinary income and 95prca of our capital gain net income for the calendar year plus any amount of such income not distributed in prior years |
| Although we anticipate that cash flow from operations will be sufficient to pay our operating expenses and meet the distribution requirements, we cannot assure you that this will occur, and we may need to incur borrowings or otherwise obtain funds to satisfy the distribution requirements associated with maintaining the REIT qualification |
| In addition, differences in timing between the receipt of income and payment of expenses in arriving at our taxable income could require us to incur borrowings or otherwise obt ain funds to meet the distribution requirements necessary to maintain our qualification as a REIT We cannot assure you that we will be able to borrow funds or otherwise obtain funds if and when necessary to satisfy these requirements |
| 12 As a REIT, we are subject to complex constructive ownership rules that limit any holder to 9dtta8prca in value of our outstanding common and preferred stock, taken together |
| Any shares transferred in violation of this rule are subject to redemption by us and any such transaction is voidable |
| To maintain REIT qualification, our charter provides that no holder is permitted to own more than 9dtta8prca in value of our outstanding common and preferred stock, taken together, or more than 9dtta8prca (in value or number) of our outstanding common stock |
| In addition, no holder is permitted to own any shares of any class of our stock if that ownership would cause more than 50prca in value of our outstanding common and preferred stock, taken together, to be owned by five or fewer individuals, would result in our stock being beneficially owned by less than 100 persons or would otherwise result in our failure to qualify as a REIT Acquisition or ownership of our common or preferred stock in violation of these restrictions results in automatic transfer of the stock to a trust for the benefit of a charitable beneficiary or, under specified circumstances, the violative transfer may be deemed void or we may choose to redeem the violative shares |
| Peter B Bedford, our Chairman of the Board an d Chief Executive Officer, is subject to higher ownership limitations than our other stockholders |
| Specifically, Mr |
| Bedford is not permitted to own more than 15prca of the lesser of the number or value of the outstanding shares of our common stock |
| The ownership limitations described above are applied using the constructive ownership rules of the Internal Revenue Code |
| These rules are complex and may cause common or preferred stock owned beneficially or constructively by a group of related individuals and/or entities to be constructively owned by one individual or entity |
| As a result, the acquisition of less than 9dtta8prca of our outstanding common or preferred stock or the acquisition of an interest in an entity that owns our common or preferred stock by an individual or entity could cause that individual or entity or another individual or entity to constructively own stock in excess of the limits and subject that stock to the ownership restrictions in our charter |
| If we fail to maintain an effective system of internal controls or discover material weaknesses in our internal controls over financial reporting, we may not be able to report our financial results accurately or detect fraud, which could harm our business and the trading price of our stock |
| Effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to prevent financial fraud |
| We are required to periodically evaluate the effectiveness of the design and operation of our internal controls |
| These evaluations may result in the conclusion that enhancements, modifications or changes to our internal controls are necessary or desirable |
| While management evaluates the effectiveness of our internal controls on a regular basis, we cannot provide absolute assurance that these controls will always be effective |
| There are inherent limitations on the effectiveness of internal controls including collusion, management override, and breakdowns in human judgment |
| If we fail to maintain an effective system of internal control or if management or our independent registered public accounting firm were to discover material weakn esses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud and it could harm our financial condition and results of operations and result in loss of investor confidence and a decline in our stock price |
| We rely on the services of our key personnel, and their expertise and knowledge of our business would be difficult to replace |
| We are highly dependent on the efforts of our senior officers |
| While we believe that we could find suitable replacements for these key personnel, the loss of their services could harm our business |
| Pursuant to the terms of his employment agreement with us, our founder Peter Bedfordapstas term of employment as our chief executive officer is expected to continue until at least December 31, 2007 |
| James Moore, our former President and chief operating officer, retired as of June 30, 2005, although he continues to provide services to us as an independent consultant |
| Moore’s announcement of his planned retirement in 2004, we restructured our organization and Stephen M Silla assumed the position of chief operating officer, effective January 31, 2005 |
| Further changes in our senior management and any future departures of key employees or other members of senior management could have a material adverse effect on our ability to implement our business strategy and on our res ults of operations |
| 13 The commercial real estate industry is highly competitive, and we compete with companies, including REITs, that may be able to purchase properties at lower capitalization rates than would be accretive for us |
| We have historically sought to grow our asset base through the acquisition of industrial and suburban office properties and portfolios of these properties, as well as through the development of new industrial and suburban office properties |
| Many real estate companies, including other REITs, compete with us in making bids to acquire new properties |
| The level of competition to acquire income-producing properties is largely measured by the capitalization rates at which properties are trading |
| The capitalization rate is the annual yield that property produces on the investment |
| Currently, capitalization rates are low due to the amount of capital available for investment and attractive debt financing terms |
| As a result, we may not be able to compete effectively with companies, including REITs, which may be able to purchase properties at lower capitalization rates than would be accretive for us |
| Many of our properties are located in markets with an oversupply of space, and our ability to compete effectively with other properties to attract tenants may be limited to the extent that competing properties may be newer, better capitalized or in more desirable locations than our properties |
| Numerous industrial and suburban office properties compete with our properties in attracting tenants |
| Some of these competing properties are newer, better located, or better capitalized than our properties |
| Many of our investments are located in markets that have a significant supply of available space, resulting in intense competition for tenants and lower rents |
| We believe the oversupply of available space relative to demand has increased in recent years due to the softened US economy |
| The number of competitive properties in a particular area could negatively impact our ability to lease space in the properties or at newly acquired or developed properties |
| We could incur costs from environmental liabilities even though we did not cause, contribute to, or know about them |
| Under various federal, state, and local laws, ordinances and regulations, an owner or operator of real estate may be held liable for the costs of removal or remediation of hazardous or toxic substances released on, above, under or in a property |
| These laws often impose liability regardless of whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances |
| In addition, environmental laws often impose liability on a previous owner of property for hazardous or toxic substances present during the prior ownership period |
| A transfer of the property may not relieve an owner of all liability |
| Accordingly, we could be liable for properties previously sold or otherwise divested |
| The costs of removal or remediation could be substantial |
| Additionally, the presence of the substances, or the failure to properly remove them, may harm our ability to borrow using the real estate as collateral |
| All of our properties have had Phase I environmental site assessments, which involve inspection without soil sampling or groundwater analysis, by independent environmental consultants and have been inspected for hazardous materials as part of our acquisition inspections |
| None of the Phase I assessments has revealed any environmental problems requiring material costs for clean up |
| The Phase I assessment for Milpitas Town Center, however, indicates that the groundwater under that property either has been or may in the future be, impacted by the migration of contaminants originating off-site |
| According to information available to us, the responsible party for this offsite source has been identified and has begun clean up |
| We do not believe that this environmental matter will impair the future value of Milpitas Town Center in any significant respect or that we will be required to fund any portion of the cost of remediation |
| We cannot assure you, however, that these Phase I ass essments or our inspections have revealed all environmental liabilities and problems relating to this or any other of our properties |
| We believe that we are in compliance in all material respects with all federal, state, and local laws regarding hazardous or toxic substances |
| To date, compliance with federal, state, and local environmental protection regulations has not had a material effect on us |
| However, we cannot assure you that costs relating to the investigation and remediation of environmental issues for properties currently or previously owned by us, or properties that we may acquire in the future, or other expenditures or liabilities, including claims by private parties, resulting from hazardous substances present in, on, under, or above the properties or resulting from circumstances or other actions or claims relating to environmental matters, will not harm us and our ability to pay dividends to our stockholders |
| 14 Costs associated with moisture infiltration and resulting mold remediation may be significant |
| Concern about indoor exposure to mold, fungi, and mycotoxins has been increasing because this exposure is allegedly linked to various adverse effects on health |
| Increasingly, insurance companies are excluding mold-related risks from their policy coverage, and it is now excluded from our coverage |
| Costs and potential liability stemming from tenant exposure to mold and the increased costs of renovating and remodeling buildings with exposure to mold could harm our financial position and results |
| We have in the past incurred costs for mold remediation in certain of our properties and may incur such costs in the future |
| We could incur unanticipated costs to comply with the Americans with Disabilities Act, and any non-compliance could result in fines |
| Under the Americans with Disabilities Act (the ADA), all public accommodations and commercial facilities are required to meet federal requirements related to access and use by disabled persons |
| Compliance with the ADA requires removal of access barriers, and any non-compliance may result in the imposition of fines by the US government or an award of damages to private litigants |
| Although we believe that our properties are substantially in compliance with these requirements, in the future we may incur costs to comply with the ADA with respect to both existing properties and properties acquired in the future, which could limit our ability to make distributions to stockholders |
| We are subject to numerous federal, state, and local regulatory requirements, and any changes to existing regulations or new laws may result in significant, unanticipated costs |
| Our properties are, and any properties we may acquire in the future will be, subject to various other federal, state, and local regulatory requirements, including local building codes |
| Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants |
| We believe that our properties are currently in substantial compliance with all applicable regulatory requirements, although expenditures at properties owned by us may be necessary to comply with changes in these laws |
| Although no material expenditures are contemplated at this time to comply with any laws or regulations, we cannot assure you that these requirements will not be changed or that new requirements will not be imposed that would require significant unanticipated expenditures by us, which could harm us and our ability to make distributions to our stockholders |
| Similarly, changes in laws increasing the potential liability for enviro nmental conditions existing on our properties could result in significant unanticipated expenditures |
| Our dlra150 million credit agreement and our mortgage loans are collateralized by approximately 94prca of our total real estate assets, and in the event of default under any of these debt instruments, our lenders could foreclose on the collateral securing this indebtedness |
| As of December 31, 2005, our dlra150 million credit facility was collateralized by mortgages on 24 properties that accounted for approximately 26prca of our annualized base rent and approximately 25prca of our total real estate assets |
| All of our mortgage loans were collateralized by 46 properties that accounted for approximately 72prca of our annualized base rent and approximately 69prca of our total real estate assets |
| If we fail to meet our obligations under the credit facility, the mortgage loans, or any other debt instruments we may enter into from time to time, including failure to comply with financial covenants, the holders of this indebtedness generally would be entitled to demand immediate repayment of the principal and to foreclose upon any collateral securing this indebtedness |
| In addition, default under or acceleration of any debt instrument could, pursuant to cross-default clauses, cause or permit the acceleration of other indebtedness |
| Any default or acceleration would har m us, jeopardizing our qualification as a REIT and threatening our continued viability |
| In addition, upon the sale of any property subject to a mortgage loan or which forms part of the collateral for our credit facility, we would be required to apply the proceeds of any such sale first to pay off any mortgage loan on the property or (to the extent the total value of the collateral securing our credit facility after such sale is less than the total amount outstanding under the credit facility) to pay down our credit facility, as applicable |
| 15 Our dlra150 million credit agreement and some of our mortgage loans carry floating interest rates, and increases in market interest rates could harm our results of operations |
| As of December 31, 2005, our dlra150 million credit facility had an outstanding balance of approximately dlra17dtta2 million, and we had other outstanding floating rate loans of dlra21dtta2 million |
| Borrowings under our credit facility bear interest at a floating rate, and we may from time to time incur or assume other indebtedness also bearing interest at a floating rate |
| In that regard, our results of operations in recent years have benefited from low levels of interest rates |
| Should this trend in interest rates reverse itself, our operating results could be harmed |
| We use borrowings to finance the acquisition, development and operation of properties and to repurchase our common stock, and we cannot assure you that financing will be available on commercially reasonable terms, or at all, in the future |
| We borrow money to pay for the acquisition, development, and operation of our properties, to repurchase our common stock, and for other general corporate purposes |
| Our credit facility currently expires on March 31, 2007, when the principal amount of all outstanding borrowings must be paid |
| Since the term of our credit facility is limited, our ability to fund acquisitions and provide funds for working capital and other cash needs following the expiration or utilization of the credit facility will depend primarily on our ability to obtain additional private or public equity or debt financing |
| Such financing may not be available to us on commercially reasonable terms, or at all, at the time we may require such financing |
| In addition, pursuant to the terms of the merger agreement, we may be required to obtain LBA’s consent to incur indebtedness, which consent may be withheld |
| A downturn in the economy could make it difficult for us to borrow money on favorable terms |
| If we are unable to borrow money on favorable terms, we may need to sell some of our assets at unfavorable prices in order to pay our loans |
| We could encounter several problems, including: - insufficient cash flow to meet required payments of principal and interest; - an increase on variable interest rates on indebtedness; and - an inability to refinance existing indebtedness on favorable terms or at all |
| Our leverage could harm our ability to operate our business and fulfill our debt obligations |
| We have significant debt service obligations |
| As of December 31, 2005, we had total liabilities of approximately dlra357dtta4 million, excluding unused commitments under our credit facility, and total stockholders’ equity of approximately dlra321dtta3 million |
| Payments of principal and interest to service our outstanding debt obligations during the year ended December 31, 2005 totaled approximately dlra30dtta6 million |
| Our debt level increases the possibility that we could be unable to generate cash sufficient to pay the principal of, interest on, or other amounts due in respect of our indebtedness |
| In addition, we may incur additional debt from time to time to fund our stock buy back program, finance strategic acquisitions, investments, or for other purposes, subject to the restrictions contained in our debt instruments |
| We have not used derivatives extensively to mitigate our interest rate risks |
| Historically, we have not used interest rate swaps, caps and floors, or other derivative transactions extensively to help us mitigate our interest rate risks because we have determined that the cost of these transactions outweighed their potential benefits and could have, in some cases, jeopardized our status as a REIT Even if we were to use derivative transactions more extensively, we would not be fully insulated from the prepayment and interest rate risks to which we are exposed |
| However, we do not have any policy that prohibits us from using derivative transactions or other hedging strategies more extensively in the future |
| If we do engage in additional derivative transactions in the future, we cannot assure you that a liquid secondary market will exist for any instruments purchased or sold in those transactions, and we may be required to maintain a position until exercise or expiration, which could result in losses |
| 16 An increase in market interest rates could cause the respective prices of our common stock and preferred stock to decrease |
| One of the factors that may influence the respective market prices of our shares of common stock and preferred stock will be the annual dividend yield on the price paid for shares of our common stock or preferred stock as compared to yields on other financial instruments |
| An increase in market interest rates may lead prospective purchasers of our stock to seek a higher annual yield from their investments, which may adversely affect the respective market prices of our common stock and preferred stock |
| As of December 31, 2005, interest rates in the US remained relatively low compared with historical rates |
| We may incur additional indebtedness, which may harm our financial position and cash flow and potentially impact our ability to pay dividends |
| Our existing debt instruments permit us to incur additional indebtedness and other liabilities, subject to the restrictions contained in those debt instruments and contained in the merger agreement |
| As of December 31, 2005, we had approximately dlra296dtta8 million of indebtedness outstanding |
| We may incur additional indebtedness and become more highly leveraged, which could harm our financial position and potentially limit our cash available to pay dividends |
| As a result, we may not have sufficient funds to satisfy our dividend obligations relating to our preferred stock or pay dividends on our common stock, if we assume additional indebtedness |
| We cannot assure you that we will be able to pay dividends regularly although we have done so in the past |
| Our ability to pay dividends in the future is dependent on our ability to operate profitably and to generate cash from our operations |
| Although we have done so in the past, we cannot guarantee that we will be able to pay dividends on a regular quarterly basis in the future |
| Furthermore, any new shares of common stock issued will substantially increase the cash required to continue to pay cash dividends at current levels |
| Any common stock or preferred stock that may in the future be issued to finance acquisitions, upon exercise of stock options or otherwise would have a similar effect |
| In addition, our existing credit facility covenants and merger agreement covenants have specific limits regarding our ability to pay quarterly dividends to stockholders |
| Our ability to pay dividends is further limited by the requirements of Maryland law |
| Our ability to pay dividends on our common stock and preferred stock is further limited by the laws of Maryland |
| Under the Maryland General Corporation Law, a Maryland corporation may not make a distribution if, after giving effect to the distribution, either the corporation would not be able to pay indebtedness of the corporation as the indebtedness becomes due in the usual course of business or the corporation’s total assets would be less than the sum of the corporation’s total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution |
| Accordingly, we cannot make a distribution, except by dividend, on our common stock or preferred stock if, after giving effect to the distribution, our total assets would be less than the sum of our liabilities plus the amount th at would be needed to satisfy the preferential rights upon dissolution of the holders of any shares of preferred stock then outstanding, or if we would not be able to pay our indebtedness as it became due |