Edgar Filing: Cogdell Spencer Inc.

csa3q09_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission file number 001-32649

COGDELL SPENCER INC.

(Exact name of registrant as specified in its charter)

Maryland	20-3126457
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

4401 Barclay Downs Drive, Suite 300
Charlotte, North Carolina	28209
(Address of principal executive offices)	(Zip code)

(704) 940-2900

(Registrant's telephone number, including area code)

N/A

(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. 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 filed, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer [ ]

Accelerated filer [X]

Non-accelerated filer [ ]

Smaller reporting company [ ].

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). [ ] Yes [X] No

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 42,552,984 shares of common stock, par value $.01 per share, outstanding as of November 6, 2009.

TABLE OF CONTENTS

		Page


PART I	FINANCIAL INFORMATION	2

Item 1	Financial Statements	2
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3	Quantitative and Qualitative Disclosures about Market Risk	40
Item 4	Controls and Procedures	40

PART II	Other Information	41

Item 1	Legal Proceedings	41
Item 1A	Risk Factors	41
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3	Defaults Upon Senior Securities	41
Item 4	Submission of Matters to a Vote of Securities Holders	41
Item 5	Other Information	41
Item 6	Exhibits	41

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COGDELL SPENCER INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(unaudited)

	September 30, 2009			December 31, 2008
Assets
Real estate properties:
Land	$	30,673		$	30,673
Buildings and improvements		508,431			501,259
Less: Accumulated depreciation		(87,733	)		(69,285	)
Net operating real estate properties		451,371			462,647
Construction in progress		52,260			15,314
Net real estate properties		503,631			477,961
Cash and cash equivalents		25,773			34,668
Restricted cash		13,188			12,964
Tenant and accounts receivable, net of allowance of $1,836 in 2009 and $194 in 2008		17,910			43,523
Goodwill		108,683			180,435
Trade names and trademarks		41,240			75,969
Intangible assets, net of accumulated amortization of $42,598 in 2009 and $38,054 in 2008		22,837			45,363
Other assets		29,241			29,207
Total assets	$	762,503		$	900,090

Liabilities and equity
Mortgage notes payable	$	266,961		$	240,736
Revolving credit facility		80,000			124,500
Term loan		50,000			100,000
Accounts payable		18,714			22,090
Billings in excess of costs and estimated earnings on uncompleted contracts		23,216			17,025
Deferred income taxes		14,635			34,176
Payable to prior Erdman shareholders		18,002			18,002
Other liabilities		47,751			60,567
Total liabilities		519,279			617,096
Commitments and contingencies
Equity:
Cogdell Spencer Inc. stockholders' equity:
Preferred stock, $0.01 par value; 50,000 shares authorized, none issued or outstanding		-			-
Common stock; $0.01 par value; 200,000 shares authorized, 42,547 and 17,699 shares
issued and outstanding in 2009 and 2008, respectively		425			177
Additional paid-in capital		369,539			275,380
Accumulated other comprehensive loss		(3,160	)		(5,106	)
Accumulated deficit		(161,604	)		(77,438	)
Total Cogdell Spencer Inc. stockholders' equity		205,200			193,013
Noncontrolling interests:
Real estate partnerships		4,857			4,657
Operating partnership		33,167			85,324
Total noncontrolling interests		38,024			89,981
Total equity		243,224			282,994
Total liabilities and equity	$	762,503		$	900,090

COGDELL SPENCER INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2009			2008			2009			2008
Revenues:
Rental revenue	$	20,049		$	19,631		$	59,376		$	57,622
Design-Build contract revenue and other sales		30,298			72,914			113,399			174,870
Property management and other fees		816			852			2,530			2,524
Development management and other income		239			622			3,266			751
Total revenues		51,402			94,019			178,571			235,767
Expenses:
Property operating and management		8,163			8,370			23,975			23,403
Design-Build contracts and development management		21,166			59,578			92,573			146,907
Selling, general, and administrative		7,876			7,599			21,218			20,396
Depreciation and amortization		8,047			11,871			27,136			33,275
Impairment charges		-			-			120,920			-
Total expenses		45,252			87,418			285,822			223,981
Income (loss) from operations before other income (expense) and income tax benefit (expense)		6,150			6,601			(107,251	)		11,786
Other income (expense):
Interest and other income		161			210			456			682
Interest expense		(5,072	)		(6,743	)		(16,691	)		(18,695	)
Debt extinguishment and interest rate derivative expense		(10	)		-			(2,501	)		-
Equity in earnings (loss) of unconsolidated real estate partnerships		(4	)		10			4			18
Total other income (expense)		(4,925	)		(6,523	)		(18,732	)		(17,995	)
Income (loss) from operations before income tax benefit (expense)		1,225			78			(125,983	)		(6,209	)
Income tax benefit (expense)		231			(883	)		22,065			(143	)
Net income (loss)		1,456			(805	)		(103,918	)		(6,352	)
Net loss (income) attributable to the noncontrolling interest in:
Real estate partnerships		(17	)		(920	)		(158	)		(859	)
Operating partnership		(191	)		639			32,791			2,480
Net income (loss) attributable to Cogdell Spencer Inc.	$	1,248		$	(1,086	)	$	(71,285	)	$	(4,731	)

Net income (loss) per share attributable to Cogdell Spencer Inc. - basic and diluted	$	0.03		$	(0.07	)	$	(2.43	)	$	(0.31	)

Weighted average common shares - basic and diluted		42,539			15,747			29,299			15,710

See notes to condensed consolidated financial statements.

COGDELL SPENCER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

(unaudited)

							Cogdell Spencer Inc. Stockholders
										Accumulated							Noncontrolling			Noncontrolling
										Other					Additional		Interests in			Interests in
	Total			Comprehensive			Accumulated			Comprehensive			Common		Paid-in		Operating			Real Estate
	Equity			Loss			Deficit			Loss			Stock		Capital		Partnership			Partnerships

Balance at December 31, 2008	$	282,994		$	-		$	(77,438	)	$	(5,106	)	$	177	$	275,380	$	85,324		$	4,657
Comprehensive loss:
Net income (loss)		(103,918	)		(103,918	)		(71,285	)		-			-		-		(32,791	)		158
Unrealized gain on interest rate swaps, net of tax		3,371			3,371			-			2,424			-		-		366			581
Comprehensive loss		(100,547	)	$	(100,547	)
Issuance of common stock, net of costs		76,457						-			-			230		76,227		-			-
Conversion of operating partnership units to common stock		-						-			(478	)		18		17,805		(17,345	)		-
Restricted stock and LTIP unit grants		817						-			-			-		80		737			-
Amortization of restricted stock grants		75						-			-			-		47		28			-
Dividends and distributions		(16,572	)					(12,881	)		-			-		-		(3,152	)		(539	)

Balance at September 30, 2009	$	243,224					$	(161,604	)	$	(3,160	)	$	425	$	369,539	$	33,167		$	4,857

See notes to condensed consolidated financial statements.

COGDELL SPENCER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

(unaudited)

							Cogdell Spencer Inc. Stockholders
										Accumulated							Noncontrolling			Noncontrolling
										Other					Additional		Interests in			Interests in
	Total			Comprehensive			Accumulated			Comprehensive			Common		Paid-in		Operating			Real Estate
	Equity			Loss			Deficit			Loss			Stock		Capital		Partnership			Partnerships

Balance at December 31, 2007	$	162,256		$	-		$	(50,751	)	$	(884	)	$	119	$	166,901	$	44,437		$	2,434
Comprehensive loss:
Net income (loss)		(6,352	)		(6,352	)		(4,731	)		-			-		-		(2,480	)		859
Unrealized gain (loss) on interest rate swaps, net of tax		1,469			1,469			-			872			-		-		626			(29	)
Comprehensive loss		(4,883	)	$	(4,883	)
Issuance of common stock and operating partnership units, net of costs		148,754						-			-			57		91,288		57,409			-
Contributed equity in partnership		3,876																			3,876
Redemptions of operating partnership units		(476	)					-			-			-		-		(476	)		-
Restricted stock and LTIP unit grants		1,034						-			-			-		94		940			-
Amortization of restricted stock grants		75						-			-			-		47		28			-
Dividends and distributions		(27,418	)					(16,934	)		-			-		-		(9,520	)		(964	)
Adjustment to record change of interest in the operating partnership due to the issuance of operating partnership units in excess of book value		14,502						-			-			-		15,305		(803	)		-

Balance at September 30, 2008	$	297,720					$	(72,416	)	$	(12	)	$	176	$	273,635	$	90,161		$	6,176

See notes to condensed consolidated financial statements.

COGDELL SPENCER INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	For the Nine Months Ended
	September 30, 2009			September 30, 2008
Operating activities:
Net loss	$	(103,918	)	$	(6,352	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		27,136			33,275
Amortization of acquired above market leases and acquired below market leases, net		(410	)		(533	)
Straight line rental revenue		(407	)		(422	)
Amortization of deferred finance costs and debt premium		1,190			878
Provision for bad debts		1,642			135
Deferred income taxes		(20,234	)		(468	)
Equity-based compensation		893			1,110
Equity in earnings (loss) of unconsolidated real estate partnerships		(4	)		(18	)
Change in fair value of interest rate swap agreements		(449	)		-
Debt extinguishment and interest rate derivative expense		2,501			-
Impairment of goodwill, trade names and trademarks and intangible assets		120,920			-
Changes in operating assets and liabilities:
Tenant and accounts receivable and other assets		23,921			13,515
Accounts payable and other liabilities		(15,059	)		(7,042	)
Billings in excess of costs and estimated earnings on uncompleted contracts		6,191			(9,518	)
Net cash provided by operating activities		43,913			24,560
Investing activities:
Business acquisitions, net of cash acquired		-			(130,264	)
Investment in real estate properties		(40,671	)		(38,633	)
Purchase of noncontrolling interests in operating partnership		-			(754	)
Proceeds from sales-type capital lease		229			230
Purchase of corporate property, plant and equipment		(1,586	)		(1,068	)
Distributions received from unconsolidated real estate partnerships		8			5
Increase in restricted cash		(224	)		(16,585	)
Net cash used in investing activities		(42,244	)		(187,069	)
Financing activities:
Proceeds from mortgage notes payable		38,240			8,087
Repayments of mortgage notes payable		(11,962	)		(13,733	)
Proceeds from revolving credit facility		3,500			110,500
Repayments to revolving credit facility		(48,000	)		(99,700	)
Proceeds from term loan		-			100,000
Repayment of term loan		(50,000	)		-
Net proceeds from sale of common stock		76,657			91,344
Dividends and distributions		(17,173	)		(22,831	)
Equity contribution from noncontrolling interest in real estate partnerships		-			517
Distributions to noncontrolling interests in real estate partnerships		(539	)		(963	)
Payment of deferred financing costs		(1,287	)		(3,630	)
Net cash provided by (used in) financing activities		(10,564	)		169,591
Increase (decrease) in cash and cash equivalents		(8,895	)		7,082
Balance at beginning of period		34,668			3,555
Balance at end of period	$	25,773		$	10,637

Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized interest	$	16,004		$	17,596

Cash paid for income taxes	$	10		$	3,039

Supplemental cash flow information - noncash investing and financing activities:
Operating Partnership Units converted into common stock	$	17,345		$	-
Debt assumed with purchase of property		-			2,733
Noncontrolling interest assumed with purchase of property		-			3,359
Investment in real estate properties included in accounts payable and other liabilities		4,042			519
Accrued dividends and distributions		5,007			9,379
Operating Partnership Units issued or to be issued in connection with the acquisition of a business or real estate property		-			81,673

See notes to condensed consolidated financial statements.

COGDELL SPENCER INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.	Business Description

Cogdell Spencer Inc., incorporated in Maryland in 2005, together with its subsidiaries (the “Company”) is a fully-integrated, self-administered, and self-managed real estate investment trust (“REIT”) that invests in specialty office buildings for the medical profession, including medical offices and ambulatory surgery and diagnostic centers. The Company focuses on the ownership, delivery, acquisition, and management of strategically located medical office buildings and other healthcare related facilities in the United States of America. The Company has been built around understanding and addressing the full range of specialized real estate needs of the healthcare industry. The Company operates its business through Cogdell Spencer LP, its operating partnership subsidiary (the “Operating Partnership”), and its subsidiaries. The Company has two segments: (1) Property Operations and (2) Design-Build and Development. Property Operations owns and manages properties and manages properties for third parties. Design-Build and Development provides strategic planning, design, construction, development, and project management services for properties owned by the Company and for third parties.

2.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and represent the assets and liabilities and operating results of the Company. The condensed consolidated financial statements include the Company’s accounts, its wholly-owned subsidiaries, as well as the Operating Partnership and its subsidiaries. The condensed consolidated financial statements also include any partnerships for which the Company or its subsidiaries is the general partner or the managing member and the rights of the limited partners do not overcome the presumption of control by the general partner or managing member. The Company reviews its interests in entities to determine if the entity’s assets, liabilities, noncontrolling interests and results of activities should be included in the condensed consolidated financial statements in accordance with the GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.

Interim Financial Statements

The condensed consolidated financial statements for the three and nine months ended September 30, 2009 and 2008 are unaudited, but include all adjustments, consisting of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations, changes in equity and cash flows for such periods. Operating results for the three and nine months ended September 30, 2009 and 2008 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal years of 2009 or 2008 or any other future period. These condensed consolidated financial statements do not include all disclosures required by GAAP for annual consolidated financial statements. The Company’s audited consolidated financial statements are contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and should be read in conjunction with these interim financial statements.

Use of Estimates in Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Significant estimates and assumptions are used by management in determining the percentage of completion revenue, useful lives of real estate properties and improvements, the initial valuations and underlying allocations of purchase price in connection with business and real estate property acquisitions, and projected cash flow and fair value estimates used for impairment testing. Actual results may differ from those estimates.

Fair Value Measurements

The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with the Financial Accounting Standards Board (“FASB”), the Company adopted this definition for its financial assets and liabilities on January 1, 2008, and for all nonfinancial assets and nonfinancial liabilities on January 1, 2009. The adoption for non-financial assets and liabilities on January 1, 2009 did not have a material impact on the Company’s consolidated financial position or results of operations.

The Company utilizes the GAAP fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Fair values determined by Level 1 inputs utilize observable inputs such as quoted prices in active markets for identical assets or liabilities the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In instances in which the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not readily available for certain financial instruments and fair value is determined using present value or other techniques appropriate for a particular financial instrument. These techniques involve some degree of judgment and as a result are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.

The Company does not hold or issue financial instruments for trading purposes. The Company considers the carrying amounts of cash and cash equivalents, restricted cash, tenant and accounts receivable, accounts payable, and other liabilities to approximate fair value due to the short maturity of these instruments. The Company has estimated the fair value of debt utilizing present value techniques taking into consideration current market conditions. At September 30, 2009, the carrying amount and estimated fair value of debt was $397.0 million and $390.8 million, respectively. At December 31, 2008, the carrying amount and estimated fair value of debt was $465.2 million and $453.8 million, respectively.

See Note 7 regarding the write-down of the Company’s goodwill and certain intangible assets to implied fair market value. See Note 8 regarding the fair value of the Company’s interest rate swap agreements.

Concentrations and Credit Risk

The Company maintains its cash in commercial banks. Balances on deposit are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to specific limits. Balances on deposit in excess of FDIC limits are uninsured. At September 30, 2009, the Company had bank cash balances of $30.4 million in excess of FDIC insured limits.

Four customers accounted for more than 10% of tenant and accounts receivable at September 30, 2009 and one customer accounted for more than 10% of tenant and accounts receivable at September 30, 2008. One customer accounted for more than 10% of revenue for the three and nine months ended September 30, 2009. Zero customers accounted for more than 10% of revenue for the three and nine months ended September 30, 2008.

Subsequent Events

The Company evaluates significant unusual or infrequent events occurring after the financial statement date through the date the financial statements are issued, or available to be issued, to determine if additional disclosures are needed. As of November 9, 2009, the date the financial statements were available to be issued, no significant events have been identified, except those described in Note 3 within this Form 10-Q.

Recent Accounting Pronouncements

Effective July 1, 2009, the FASB established the Accounting Standards Codification (“ASC”) as the primary source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities. Although the establishment of the ASC did not change current GAAP, it did change the way current GAAP is referenced.

In December 2007, the FASB issued an accounting standard, codified in ASC 805, Business Combinations, relating to the accounting for and reporting of business combinations using the acquisition method of accounting, which significantly changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. Among these changes, this standard redefines the measurement date of a business combination and requires most transaction costs to be expensed as incurred, and requires expanded disclosure requirements such as reasons for the business combination, amount of third-party related expenses incurred, and a description of the prior relationship between or among the parties. The standard also provides guidance for recognizing and measuring the goodwill acquired in the business combination and requires additional disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This standard is effective prospectively, except for certain retrospective adjustments to deferred tax balances, for fiscal years beginning after December 15, 2008. The adoption of this standard had no impact on the Company’s balance sheet, statement of operations, or changes in equity on January 1, 2009.

In December 2007, the FASB issued an accounting standard, codified in ASC 810, Consolidation, which establishes the accounting for and reporting of noncontrolling interests (“NCI”), formerly referred to as minority interests, in partially owned consolidated subsidiaries and the accounting for and reporting of the change in control of subsidiaries. NCIs are to be reported as a component of equity separate from the parent’s equity and purchases or sales of equity interests that do not result in a change in control are accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest is included in consolidated net income on the face of the income statement and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, except for the presentation and disclosure requirements, which will apply retrospectively. The Company implemented the standard effective January 1, 2009 and has applied the presentation and disclosure requirements retrospectively. Its adoption has resulted in an increase to equity as of December 31, 2008 of $94.0 million for the reclassification of minority interest to equity for noncontrolling interests in consolidated entities as well as a $4.1 million reclassification of Accumulated Other Comprehensive Loss from Cogdell Spencer Inc. stockholders’ equity to noncontrolling interests as of December 31, 2008. Also, net loss for the three and nine months ended September 30, 2008 has decreased by $0.3 and increased by $1.6 million, respectively, for the reclassification of loss allocated to noncontrolling interests; however, net loss per common share attributable to Cogdell Spencer Inc. – basic and diluted was not affected by this reclassification.

In March 2008, the FASB issued an accounting standard, codified in ASC 815, Derivatives and Hedging, relating to disclosures about derivative instruments and hedging activities. The standard is intended to provide users of financial statements with an enhanced understanding of derivative instruments and hedging activities by having the Company disclose: (1) how and why the Company uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under GAAP and its related interpretations; and (3) how derivative instruments and related hedged items affect the Company’s financial position, financial performance and cash flows. The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. It also encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of the standard had no impact on the Company’s balance sheet, statement of operations, or changes in equity on January 1, 2009. See Note 8 for additional disclosures.

In June 2008, the FASB issued an accounting standard, codified in ASC 260, Earnings Per Share, clarifying how certain unvested share-based payment awards are accounted for in the computation of earnings per common unit. The guidance states that unvested share-based payment awards containing non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per common unit pursuant to the two-class method. This guidance requires the retrospective adjustment of all prior-period earnings per common unit data presented (including interim financial statements, summaries of earnings, and selected financial data) to conform to the provisions of the standard. As a result, the Company’s unvested LTIP Units and restricted stock are considered participating securities and are included in the computation of basic and diluted earnings per common share of the Company if the effect of applying the if-converted method is dilutive. The adoption of this standard did not have a material impact on the Company’s computation of earnings per common share on January 1, 2009.

In November 2008, the FASB issued an accounting standard, codified in ASC 323, Investments – Equity Method and Joint Ventures, relating to certain equity method investment accounting considerations. The standard states, among other things, that transaction costs for an investment should be included in the cost of the equity-method investment (and not expensed) and shares subsequently issued by the equity-method investee that reduce the investor’s ownership percentage should be accounted for as if the investor had sold a proportionate share of its investment, with gains or losses recorded through earnings. The statement is effective for transactions occurring in fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of this standard had no impact on the Company’s balance sheet, statement of operations, or changes in equity.

In April 2009, the FASB issued an accounting standard, codified in ASC 825, Financial Instruments, regarding interim disclosures about fair value of financial instruments. The standard essentially expands the disclosure about fair value of financial instruments that were previously required only annually to also be required for interim period reporting. In addition, the standard requires certain additional disclosures regarding the methods and significant assumptions used to estimate the fair value of financial instruments. This standard is effective for interim reporting periods ending after June 15, 2009. The additional disclosures required by the standard are included in Note 8 within this Form 10-Q.

In May 2009, the FASB issued an accounting standard, codified in ASC 855, Subsequent Events, relating to the disclosure of subsequent events. The standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, with the requirements concerning recognition and disclosure of subsequent events remaining essentially unchanged. This guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under the new standard, as under previous practice, an entity must record the effects of subsequent events that provide evidence about conditions that existed at the balance sheet date and must disclose but not record the effects of subsequent events which provide evidence about conditions that did not exist at the balance sheet date. The new standard requires an entity, unlike previous practice, to disclose the date through which it has evaluated subsequent events and the basis for that date, whether that date represents the date the financial statements were issued or were available to be issued. The statement is effective for interim and annual reporting periods ending after June 15, 2009. The additional disclosure required by the standard is included in Note 2 within this Form 10-Q.

In June 2009, the FASB issued an accounting standard, codified in ASC 810, Consolidation, which revises the consolidation guidance for variable-interest entities (“VIE”). The revisions include (1) no longer exempting qualifying special-purpose entities from the scope of the guidance, (2) requiring the continuous reconsideration for determining whether an enterprise is the primary beneficiary of another entity, (3) ignoring kick-out rights unless the rights are held by a single enterprise and (4) requiring consolidation if an entity has power and receives benefits or absorbs losses that are potentially significant to the VIE and not requiring consolidation if power is shared amongst unrelated parties. The revisions also include the enhancement of disclosure requirements. The standard is effective for interim and annual reporting periods beginning after November 15, 2009. The Company is still evaluating the effect of this standard on the Company’s balance sheet, statement of operations, or changes in equity.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, Measuring Liabilities at Fair Value, which provides additional guidance on how companies should measure liabilities at fair value under ASC 820. This update provides alternatives to measuring the fair value of liabilities when a quoted price for an identical liability traded in an active market does not exist. The alternatives include using the quoted price for the identical liability when traded as an asset or the quoted price of a similar liability or of a similar liability when traded as an asset, in addition to valuation techniques based on the amount an entity would pay to transfer the identical liability (or receive to enter into an identical liability). The update is effective for interim and annual reporting periods ending after August 28, 2009. The Company does not expect the update to have a material impact on the Company’s balance sheet, statement of operations, or changes in equity.

3.	Acquisitions

At September 30, 2009, related to the Erdman acquisition, there was $18.0 million in escrow, which consisted of $10.9 million in cash and $7.1 million to be paid in Operating Partnership Units (“OP units”), which represents 446,779 OP units. Subsequent to September 30, 2009, the final escrow release related to the Erdman acquisition occurred. Per agreement between the Company and the MEA Holdings, Inc. Seller Representatives, $5.0 million of the escrow was paid to the Company in consideration of full and final settlement of certain claims made by the Company in connection with the Erdman transaction. The $5.0 million will be recorded as income during the three months ending December 31, 2009. During the fourth quarter of 2009, $8.1 million of cash was released from the escrow to the Erdman sellers and 331,812 OP units were issued to the Erdman sellers.

4.	Investments in Real Estate Partnerships

As of September 30, 2009, the Company had an ownership interest in eight limited liability companies or limited partnerships.

The following is a description of the unconsolidated entities:


	•	Cogdell Spencer Medical Partners LLC, a Delaware limited liability company, founded in 2008, has no assets, and is 20.0% owned by the Company;

	•	BSB Health/MOB Limited Partnership No. 2, a Delaware limited partnership, founded in 2002, owns nine medical office buildings, and is 2.0% owned by the Company;

	•	Shannon Health/MOB Limited Partnership No. 1, a Delaware limited partnership, founded in 2001, owns ten medical office buildings, and is 2.0% owned by the Company; and

	•	McLeod Medical Partners, LLC, a South Carolina limited liability company, founded in 1982, owns three medical office buildings, and is 1.1% owned by the Company.

The following is a description of the consolidated entities:


	•	Genesis Property Holdings, LLC, a Florida limited liability company, founded in 2007, has one medical office building under construction, and is 40.0% owned by the Company;

	•	Cogdell General Health Campus MOB, LP, a Pennsylvania limited partnership, founded in 2006, owns one medical office building, and is 80.9% owned by the Company;

	•	Mebane Medical Investors, LLC, a North Carolina limited liability company, founded in 2006, owns one medical office building, and is 35.1% owned by the Company; and

	•	Rocky Mount MOB, LLC, a North Carolina limited liability company, founded in 2002, owns one medical office building, and is 34.5% owned by the Company.

The Company is the general partner or managing member of these real estate partnerships and manages the properties owned by these entities. The Company may receive design/build revenue, development fees, property management fees, leasing fees, and expense reimbursements from these real estate partnerships. For the consolidated entities, these revenues and fees are eliminated in consolidation.

The consolidated entities are included in the Company’s condensed consolidated financial statements because the limited partners or non-managing members do not have sufficient participation rights in the partnerships to overcome the presumption of control by the Company as the managing member or general partner. The limited partners or non-managing members have certain protective rights such as the ability to prevent the sale of building, the dissolution of the partnership or limited liability company, or the incurrence of additional indebtedness, in each case subject to certain exceptions.

The Company has a 2.0% ownership in Shannon Health/MOB Limited Partnership No. 1 and a 2.0% ownership in BSB Health/MOB Limited Partnership No. 2. The partnership agreements and tenant leases of the limited partners are designed to give preferential treatment to the limited partners as to the operating cash flows from the partnerships. The Company, as the general partner, does not generally participate in the operating cash flows from these entities other than to receive property management fees. The limited partners can remove the Company as the property manager and as the general partner. Due to the structures of the partnership agreements and tenant lease agreements, the Company reports the properties owned by these two joint ventures as fee managed properties owned by third parties.

The unconsolidated entities are accounted for under the equity method of accounting based on the Company’s inability to exercise significant influence as the entity’s managing member or general partner. The following is a summary of financial information for the unconsolidated entities for the periods indicated and reflects the financial position and operations of these entities, not just the Company’s interest in the entities (in thousands):

	September 30, 2009		December 31, 2008
Financial position:
Total assets	$	55,414	$	56,262
Total liabilities		49,434		49,831
Members' equity		5,980		6,431

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2009			September 30, 2008			September 30, 2009		September 30, 2008
Results of operations:
Total revenues	$	2,974		$	3,025		$	9,189	$	9,107
Operating and general and administrative expenses		1,624			1,555		$	4,503		4,263
Net income (loss)		(137	)		(28	)	$	374		446

5.	Business Segments

The Company has two identified reportable segments: (1) Property Operations and (2) Design-Build and Development. The Company defines business segments by their distinct customer base and service provided. Each segment operates under a separate management group and produces discrete financial information, which is reviewed by the chief operating decision maker to make resource allocation decisions and assess performance. Inter-segment sales and transfers are accounted for as if the sales and transfers were made to third parties, which involves applying a negotiated fee onto the costs of the services performed. All inter-company balances and transactions are eliminated during the consolidation process.

The Company’s management evaluates the operating performance of its operating segments based on funds from operations (“FFO”) and funds from operations modified (“FFOM”). FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), represents net income (computed in accordance with GAAP), excluding gains from sales of property, plus real estate depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. The Company adjusts the NAREIT definition to add back noncontrolling interests in real estate partnerships before real estate related depreciation and amortization. FFOM adds back to FFO non-cash amortization of non-real estate related intangible assets associated with purchase accounting. The Company considers FFO and FFOM important supplemental measures of the Company’s operational performance. The Company believes FFO is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. The Company believes that FFOM allows securities analysts, investors and other interested parties in evaluating current period results to results prior to the Erdman transaction. FFO and FFOM are intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO and FFOM exclude depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. The Company’s methodology may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO and FFOM do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties.

The following tables represent the segment information for the three and nine months ended September 30, 2009 and 2008 (in thousands):

Three months ended September 30, 2009:	Property Operations			Design-Build and Development			Intersegment Eliminations			Unallocated and Other			Total

Revenues:
Rental revenue	$	20,072		$	-		$	(23	)	$	-		$	20,049
Design-Build contract revenue and other sales		-			40,644			(10,346	)		-			30,298
Property management and other fees		816			-			-			-			816
Development management and other income		-			723			(484	)		-			239
Total revenues		20,888			41,367			(10,853	)		-			51,402

Certain operating expenses:
Property operating and management		8,163			-			-			-			8,163
Design-Build contracts and development management		-			31,169			(10,003	)		-			21,166
Selling, general, and administrative		-			6,098			(23	)		-			6,075
Total certain operating expenses		8,163			37,267			(10,026	)		-			35,404
		12,725			4,100			(827	)		-			15,998

Interest and other income		134			24			-			3			161
Corporate general and administrative expenses		-			-			-			(1,801	)		(1,801	)
Interest expense		-			-			-			(5,072	)		(5,072	)
Debt extinguishment and interest rate derivative expense		-			-			-			(10	)		(10	)
Benefit from income taxes applicable to funds from operations modified		-			-			-			6			6
Non-real estate related depreciation and amortization		-			(190	)		-			(57	)		(247	)
Earnings from unconsolidated real estate partnerships, before real estate related depreciation and amortization		(1	)		-			-			-			(1	)
Noncontrolling interests in real estate partnerships, before real estate related depreciation and amortization		(206	)		-			-			-			(206	)
Funds from operations modified (FFOM)		12,652			3,934			(827	)		(6,931	)		8,828

Amortization of intangibles related to purchase accounting, net of income tax benefit		(42	)		(536	)		-			225			(353	)
Funds from operations (FFO)		12,610			3,398			(827	)		(6,706	)		8,475

Real estate related depreciation and amortization		(7,225	)		-			-			-			(7,225	)
Noncontrolling interests in real estate partnerships, before real estate related depreciation and amortization		206			-			-			-			206
Net income (loss)		5,591			3,398			(827	)		(6,706	)		1,456
Net (income) attributable to the noncontrolling interest in:
Real estate partnerships		(17	)		-			-			-			(17	)
Operating partnership		-			-			-			(191	)		(191	)
Net income (loss) attributable to Cogdell Spencer Inc.	$	5,574		$	3,398		$	(827	)	$	(6,897	)	$	1,248

Total assets	$	562,911		$	199,116		$	-		$	476		$	762,503

Three months ended September 30, 2008:	Property Operations			Design-Build and Development			Intersegment Eliminations			Unallocated and Other			Total

Revenues:
Rental revenue	$	19,653		$	-		$	(22	)	$	-		$	19,631
Design-Build contract revenue and other sales		-			74,276			(1,362	)		-			72,914
Property management and other fees		852			-			-			-			852
Development management and other income		-			1,127			(505	)		-			622
Total revenues		20,505			75,403			(1,889	)		-			94,019

Certain operating expenses:
Property operating and management		8,370			-			-			-			8,370
Design-Build contracts and development management		-			61,026			(1,448	)		-			59,578
Selling, general, and administrative		-			5,048			(183	)		-			4,865
Total certain operating expenses		8,370			66,074			(1,631	)		-			72,813
		12,135			9,329			(258	)		-			21,206

Interest and other income		143			52			-			15			210
Corporate general and administrative expenses		-			-			-			(2,734	)		(2,734	)
Interest expense		-			-			-			(6,743	)		(6,743	)
Provision for income taxes applicable to funds from operations modified		-			-			-			(2,411	)		(2,411	)
Non-real estate related depreciation and amortization		-			(348	)		-			(57	)		(405	)
Earnings from unconsolidated real estate partnerships, before real estate related depreciation and amortization		13			-			-			-			13
Noncontrolling interests in real estate partnerships, before real estate related depreciation and amortization		(977	)		-			-			-			(977	)
Funds from operations modified (FFOM)		11,314			9,033			(258	)		(11,930	)		8,159

Amortization of intangibles related to purchase accounting, net of income tax benefit		(42	)		(3,876	)		-			1,528			(2,390	)
Funds from operations (FFO)		11,272			5,157			-			(10,402	)		5,769

Real estate related depreciation and amortization		(7,551	)		-			-			-			(7,551	)
Noncontrolling interests in real estate partnerships, before real estate related depreciation and amortization		977			-			-			-			977
Net income (loss)		4,698			5,157			-			(10,402	)		(805	)
Net loss (income) attributable to the noncontrolling interest in:
Real estate partnerships		(920	)		-			-			-			(920	)
Operating partnership		-			-			-			639			639
Net income (loss) attributable to Cogdell Spencer Inc.	$	3,778		$	5,157		$	-		$	(9,763	)	$	(1,086	)

Total assets	$	575,244		$	308,878		$	-		$	952		$	885,074

Nine months ended September 30, 2009:	Property Operations			Design-Build and Development			Intersegment Eliminations			Unallocated and Other			Total

Revenues:
Rental revenue	$	59,445		$	-		$	(69	)	$	-		$	59,376
Design-Build contract revenue and other sales		-			133,813			(20,414	)		-			113,399
Property management and other fees		2,530			-			-			-			2,530
Development management and other income		-			5,793			(2,527	)		-			3,266
Total revenues		61,975			139,606			(23,010	)		-			178,571

Certain operating expenses:
Property operating and management		23,975			-			-			-			23,975
Design-Build contracts and development management		-			112,236			(19,663	)		-			92,573
Selling, general, and administrative		-			14,758			(69	)		-			14,689
Impairment charges		-			120,920			-			-			120,920
Total certain operating expenses		23,975			247,914			(19,732	)		-			252,157
		38,000			(108,308	)		(3,278	)		-			(73,586	)

Interest and other income		404			28			-			24			456
Corporate general and administrative expenses		-			-			-			(6,529	)		(6,529	)
Interest expense		-			-			-			(16,691	)		(16,691	)
Prepayment penalty on early extinguishment of debt		-			-			-			(2,501	)		(2,501	)
Benefit from income taxes applicable to funds from operations modified		-			-			-			20,316			20,316
Non-real estate related depreciation and amortization		-			(580	)		-			(168	)		(748	)
Earnings from unconsolidated real estate partnerships, before real estate related depreciation and amortization		13			-			-			-			13
Noncontrolling interests in real estate partnerships, before real estate related depreciation and amortization		(676	)		-			-			-			(676	)
Funds from operations modified (FFOM)		37,741			(108,860	)		(3,278	)		(5,549	)		(79,946	)

Amortization of intangibles related to purchase accounting, net of income tax benefit		(127	)		(4,357	)		-			1,749			(2,735	)
Funds from operations (FFO)		37,614			(113,217	)		(3,278	)		(3,800	)		(82,681	)

Real estate related depreciation and amortization		(21,913	)		-			-			-			(21,913	)
Noncontrolling interests in real estate partnerships, before real estate related depreciation and amortization		676			-			-			-			676
Net income (loss)		16,377			(113,217	)		(3,278	)		(3,800	)		(103,918	)
Net loss (income) attributable to the noncontrolling interest in:
Real estate partnerships		(158	)		-			-			-			(158	)
Operating partnership		-			-			-			32,791			32,791
Net income (loss) attributable to Cogdell Spencer Inc.	$	16,219		$	(113,217	)	$	(3,278	)	$	28,991		$	(71,285	)

Total assets	$	562,911		$	199,116		$	-		$	476		$	762,503

Nine months ended September 30, 2008:	Property Operations			Design-Build and Development			Intersegment Eliminations			Unallocated and Other			Total

Revenues:
Rental revenue	$	57,687		$	-		$	(65	)	$	-		$	57,622
Design-Build contract revenue and other sales		-			176,232			(1,362	)		-			174,870
Property management and other fees		2,524			-						-			2,524
Development management and other income		-			1,353			(602	)		-			751
Total revenues		60,211			177,585			(2,029	)		-			235,767

Certain operating expenses:
Property operating and management		23,403			-			-			-			23,403
Design-Build contracts and development management		-			148,355			(1,448	)		-			146,907
Selling, general, and administrative		-			13,012			(464	)		-			12,548
Total certain operating expenses		23,403			161,367			(1,912	)		-			182,858
		36,808			16,218			(117	)		-			52,909

Interest and other income		456			137			-			89			682
Corporate general and administrative expenses		-			-			-			(7,848	)		(7,848	)
Interest expense		-			-			-			(18,695	)		(18,695	)
Provision for income taxes applicable to funds from operations modified		-			-			-			(3,719	)		(3,719	)
Non-real estate related depreciation and amortization		-			(772	)		-			(176	)		(948	)
Earnings from unconsolidated real estate partnerships, before real estate related depreciation and amortization		27			-			-			-			27
Noncontrolling interests in real estate partnerships, before real estate related depreciation and amortization		(1,128	)		-			-			-			(1,128	)
Funds from operations modified (FFOM)		36,163			15,583			(117	)		(