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Dividend Capital Diversified Property Fund Inc. – ‘10-Q’ for 6/30/10

On:  Friday, 8/13/10, at 7:45am ET   ·   For:  6/30/10   ·   Accession #:  1193125-10-188067   ·   File #:  0-52596

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/13/10  Div Cap Diversified Prop Fd Inc.  10-Q        6/30/10   24:6.5M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    781K 
 2: EX-2.1      Purchase and Sale Agreement                         HTML    293K 
 3: EX-2.1.1    First Amendment to Purchase and Sale Agreement      HTML     26K 
 4: EX-2.1.2    Second Amendment to Purchase and Sale Agreement     HTML     57K 
 5: EX-2.1.3    Third Amendment to Purchase and Sale Agreement      HTML     26K 
 6: EX-2.1.4    Fourth Amendment to Purchase and Sale Agreement     HTML     65K 
 7: EX-2.2      Member Interest Purchase and Sale Agreement         HTML    504K 
 8: EX-2.2.1    First Amendment to Member Interest Purchase and     HTML     22K 
                          Sale Agreement                                         
 9: EX-2.2.2    Second Amendment to Member Interest Purchase and    HTML     41K 
                          Sale Agreement                                         
10: EX-2.2.3    Third Amendment to Member Interest Purchase and     HTML     23K 
                          Sale Agreement                                         
11: EX-2.2.4    Fourth Amendment to Member Interest Purchase and    HTML     54K 
                          Sale Agreement                                         
12: EX-2.3      Partnership Interests Purchase and Sale Agreement   HTML    279K 
13: EX-2.4      Member Interest Purchase and Sale Agreement         HTML    274K 
14: EX-10.1     Dividend Capital Floating Rate Office Portfolio     HTML    614K 
                          Loan Agreement                                         
15: EX-10.2     Dividend Capital Fixed Rate Office Portfolio Loan   HTML    615K 
                          Agreement                                              
16: EX-10.3     Loan Agreement for Floating Rate Portfolio          HTML    365K 
17: EX-10.4     Loan Agreement for Fixed Rate Portfolio             HTML    435K 
18: EX-10.5     Mortgage, Assignment of Leases & Rents, Security    HTML    339K 
                          Agreement and Fixture Filings                          
19: EX-10.5.1   Side Letter Agreement Related to Mortgage           HTML     80K 
20: EX-10.6     Master Repurchase and Securities Contract           HTML    572K 
                          Agreement                                              
21: EX-31.1     Section 302 CEO Certification                       HTML     15K 
22: EX-31.2     Section 302 CFO Certification                       HTML     16K 
23: EX-32.1     Section 906 CEO Certification                       HTML     12K 
24: EX-32.2     Section 906 CFO Certification                       HTML     12K 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2010

Or

For the transition period from              to              .

Commission File No. 000-52596

DIVIDEND CAPITAL TOTAL REALTY TRUST INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (303) 228-2200

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

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

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

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

As of August 6, 2010, 184,225,172 shares of common stock of Dividend Capital Total Realty Trust Inc., par value $0.01 per share, were outstanding.

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Dividend Capital Total Realty Trust Inc.

Form 10-Q

June 30, 2010

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

DIVIDEND CAPITAL TOTAL REALTY TRUST INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share information)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DIVIDEND CAPITAL TOTAL REALTY TRUST INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share information)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DIVIDEND CAPITAL TOTAL REALTY TRUST INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

(In thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DIVIDEND CAPITAL TOTAL REALTY TRUST INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DIVIDEND CAPITAL TOTAL REALTY TRUST INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

1. ORGANIZATION

Dividend Capital Total Realty Trust Inc. is a Maryland corporation formed on April 11, 2005 to invest in a diverse portfolio of real property and real estate-related investments. As used herein, “the Company,” “we,” “our” and “us” refer to Dividend Capital Total Realty Trust Inc. and its consolidated subsidiaries and partnerships, except where the context otherwise requires.

We operate in a manner intended to qualify as a real estate investment trust (“REIT”) for federal income tax purposes, commencing with the taxable year ended December 31, 2006, when we first elected REIT status. We utilize an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) organizational structure to hold all or substantially all of our assets through our operating partnership, Dividend Capital Total Realty Operating Partnership, L.P. (our “Operating Partnership”). Furthermore, our Operating Partnership wholly owns a taxable REIT subsidiary, DCTRT Leasing Corp. (our “TRS”), through which we execute certain business transactions that might otherwise have an adverse impact on us and/or our status as a REIT if such business transactions were to occur directly or indirectly through our Operating Partnership.

Our day-to-day activities are managed by Dividend Capital Total Advisors LLC (our “Advisor”), an affiliate, under the terms and conditions of an advisory agreement (as amended from time to time, the “Advisory Agreement”). Our Advisor and its affiliates receive various forms of compensation, reimbursements and fees for services relating to the investment and management of our real estate assets.

We have invested in a diverse portfolio of real properties, debt related investments and real estate securities. We primarily seek to invest in real property consisting of office, industrial, retail, multifamily, hospitality and other properties, primarily located in North America. Additionally, we have invested in certain debt related investments, including originating and participating in mortgage loans secured by real estate, junior portions of first mortgages on commercial properties (“B-notes”), mezzanine debt and other related investments as well as real estate securities, including securities issued by other real estate companies, commercial mortgage-backed securities (“CMBS”) and commercial real estate collateralized debt obligations (“CRE-CDOs”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements

The accompanying condensed consolidated financial statements (herein referred to as “financial statements”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the Securities and Exchange Commission’s (the “Commission”) instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, these statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments, consisting only of normal recurring items necessary for their fair presentation in conformity with GAAP. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited financial statements as of December 31, 2009 and related notes thereto, included in our Annual Report on Form 10-K filed with the Commission on March 23, 2010.

Principles of Consolidation

Due to our control of our Operating Partnership through our sole general partnership interest and the limited rights of the limited partners, we consolidate our Operating Partnership and limited partner interests not held by us, which are reflected as noncontrolling interests in the accompanying financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.

Our financial statements also include the accounts of our consolidated subsidiaries and joint ventures through which we are the primary beneficiary, when such subsidiaries and joint ventures are variable interest entities, or through which we have a controlling interest. In determining whether we have a controlling interest in a joint venture and the requirement to consolidate the accounts of that entity, we consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity in which we have the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the entity or the right to receive benefits from the entity that could potentially be significant to the entity.

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Judgments made by us with respect to our level of influence or control of an entity and whether we are the primary beneficiary of a variable interest entity involve consideration of various factors, including the form of our ownership interest, the size of our investment (including loans) and our ability to direct the activities of the entity. Our ability to correctly assess our influence or control over an entity affects the presentation of these investments in our financial statements and, consequently, our financial position and specific items in our results of operations that are used by our stockholders, lenders and others in their evaluation of us. As of June 30, 2010 and December 31, 2009, we consolidated approximately $799.2 million and $800.4 million, respectively, in real property investments, before accumulated depreciation and amortization of approximately $107.0 million and $92.5 million, respectively, and approximately $492.2 million and $496.2 million, respectively, in mortgage note borrowings associated with our consolidated variable interest entities. The maximum risk of loss related to our investment in these unconsolidated variable interest entities is limited to our recorded net investments in such entities. The creditors of the consolidated variable interest entities do not have recourse to our general credit.

Generally, we consolidate real estate partnerships and other entities that are not variable interest entities when we own, directly or indirectly, a majority voting interest in the entity.

Reclassifications

Certain items in the financial statements corresponding to prior periods have been reclassified to conform to the current period presentation.

Concentration of Credit Risk and Other Risks and Uncertainties

All of our investments are subject to the various risks inherent in the current economic environment but certain of our investments, particularly our real estate securities and debt related investments, have been significantly impacted by the current economic environment. Over the past few years, the economic environment and credit market conditions have also impacted the performance and value of our debt related investments, specifically, those investments made prior to or during the recession. As of June 30, 2010, we recognized provision for loan losses on two of our debt related investments due to our determination that the collectability of future cash flows from those debt related investments was highly uncertain and that our collateral position had no value. If the current economic environment were to persist or worsen in the markets where the properties securing our debt related investments are located, our debt related investments may become further impaired as a result. Continued volatility in the fair value and operating performance of commercial real estate has made estimating cash flows from our debt related investments increasingly difficult, since such estimates are dependent upon our judgment regarding numerous factors, including, but not limited to, current and potential future refinancing availability, fluctuations in regional or local real estate values and fluctuations in regional or local rental or occupancy rates, real estate tax rates and other operating expenses.

New Accounting Pronouncements

We adopted a new accounting standard effective January 1, 2010 that revised the guidance on how a reporting entity evaluates whether an entity is a variable interest entity and which entity is considered the primary beneficiary of a variable interest entity and is, therefore, required to consolidate such variable interest entity. This accounting standard requires assessments at each reporting period of which party within the variable interest entity is considered the primary beneficiary and requires a number of new disclosures related to variable interest entities. Upon our adoption of this accounting standard, we reconsidered our previous consolidation conclusions for all entities with which we are involved pursuant to this accounting pronouncement. There was no impact to our financial position or results of operations as a result of our adoption of this accounting standard.

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3. INVESTMENTS IN REAL PROPERTY

Our consolidated investments in real property consist of investments in office, industrial and retail properties. The following tables summarize our consolidated investments in real property as of June 30, 2010 and December 31, 2009 (amounts in thousands).

National Office and Industrial Portfolio Acquisition

On June 25, 2010, through various wholly-owned subsidiaries, we completed the acquisition of a 100% equity interest in a portfolio of 32 office and industrial properties (the “National Office and Industrial Portfolio” or the “NOIP Portfolio”) from several subsidiaries of iStar Financial Inc. (the “Sellers”). The aggregate purchase price of the NOIP Portfolio was approximately $1.35 billion, adjusted for closing costs and customary prorations of taxes, operating expenses, leasing costs and other items.

The following table summarizes properties, or interests therein, included in the NOIP Portfolio by geographic market and property type (dollar and square footage amounts in thousands).

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Upon acquisition of the NOIP Portfolio, the purchase price of the acquisition is allocated to the properties based on their fair value. The total purchase price of a property is then allocated to land, building, tenant improvements and intangible lease assets and liabilities. The allocation of the total purchase price to land and building is based on our estimate of the property’s as-if vacant fair value. The as-if vacant fair value is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. The allocation of the total purchase price of a property to an intangible lease asset includes the value associated with the in-place leases, which may include lost rent, leasing commissions, legal and other costs. We record acquired “above-market” and “below-market” leases at their fair value equal to the difference between the contractual amounts to be paid pursuant to each in-place lease and our estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the remaining term of the lease plus the term of any below-market fixed-rate renewal option periods for below-market leases.

As of June 30, 2010, we have made a preliminary allocation of the purchase price of the NOIP Portfolio to land, building, tenant improvements and intangible lease assets and liabilities. The fair value of the acquired assets is provisional pending receipt of the final valuation for those assets. Based on this provisional allocation of the purchase price of the NOIP Portfolio, we attributed approximately $180.5 million to land, approximately $816.5 million to building and improvements, approximately $406.0 million to intangible lease assets and approximately $55.2 million to intangible lease liabilities.

We acquired the NOIP Portfolio using cash on hand and through the incurrence of debt obligations of approximately $858.6 million. For a detailed discussion of these debt obligations see Note 6 to these financial statements. In connection with the acquisition of the NOIP Portfolio, we incurred acquisition costs of approximately $19.1 million, which included an acquisition fee paid to our Advisor of approximately $13.5 million. In addition, we incurred deferred financing costs associated with the debt obligations used to partially finance our acquisition of the NOIP Portfolio of approximately $12.3 million.

Future Minimum Rentals

Future minimum rentals to be received under non-cancelable operating and ground leases from our real properties including the NOIP Portfolio in effect as of June 30, 2010 are as follows (amounts in thousands).

The table above does not reflect future rental revenues from the potential renewal or replacement of existing and future leases, excludes property operating expense reimbursements and assumes no early termination of leases.

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Pro Forma Financial Information

The following table has been prepared to provide estimated pro forma information for the three and six month periods ended June 30, 2010 and 2009 with regards to our acquisition of the NOIP Portfolio and the related financing. This pro forma information includes the amounts included in revenues and net income since our acquisition of the NOIP Portfolio on June 25, 2010 and our estimate of the pro forma impact that the acquisition of each respective property would have had on our revenues and net loss had we acquired these properties (i) as of January 1, 2010 for the three and six months ended June 30, 2010, and (ii) January 1, 2009 for the three and six months ended June 30, 2009. These estimated results of operations of the NOIP Portfolio are preliminary estimates and not necessarily reflective of the audited financial statements and pro formas that we will file under item 9.01 on Form 8-K in compliance with Rule 3-14 of the Commission.

This pro forma information may not be indicative of the results that actually would have occurred if these transactions had been made as of January 1, 2010 or 2009, nor does it purport to represent the results of operation for future periods. The accompanying pro forma information does not contemplate certain amounts that are not readily determinable, such as additional general and administrative expenses and other related items (amounts in thousands).

Rental Revenue

The following table summarizes the adjustments to rental revenue related to the amortization of above-market lease assets and, below-market lease liabilities and for straight-line rental adjustments for the three and six months ended June 30, 2010 and 2009 (amounts in thousands).

Tenant recovery income includes payments from tenants for real estate taxes, insurance and other property operating expenses and is recognized as rental revenue. Tenant recovery income recognized as rental revenue for the three and six months ended June 30, 2010 was approximately $7.4 million and $14.6 million, respectively. For the same period ended June 30, 2009, tenant recovery income recognized was approximately $7.3 million and $14.3 million, respectively.

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4. INVESTMENT IN REAL ESTATE SECURITIES

As of June 30, 2010, the weighted average term remaining until expected maturity of our CMBS and CRE-CDO investments, based on amounts invested, was approximately 4.6 years. As of June 30, 2010, the weighted average publicly available rating of our CMBS and CRE-CDO securities, as provided by Standard and Poor’s, were approximately B- and CCC-, respectively. Our preferred equity securities are perpetual in nature and therefore do not have expected maturity dates and approximately 77% of our preferred equity securities, based on amount invested, do not have credit ratings. The following table describes our investments in real estate securities as of June 30, 2010 and December 31, 2009 (dollar amounts in thousands).