American Financial Realty Trust is a self-administered, self-managed Maryland real estate investment trust, or REIT, with a primary focus on acquiring and operating properties leased to regulated financial institutions. These institutions are, for the most part, deposit taking commercial banks, thrifts and credit unions, which we will generically refer to as “banks.” We believe we are the largest public or private real estate company with this focus. Our portfolio of wholly-owned and jointly-owned bank branches and office buildings is leased to large banks such as Bank of America, N.A., Wachovia Bank, N.A., Regions Financial Corporation and Citizens Financial Group, Inc. and to mid-sized and community banks.
As of December 31, 2007, our portfolio consisted of 929 bank branches, 377 office buildings and 14 land parcels, of which 239 bank branches and one office building were partially-owned through joint ventures. Our wholly-owned properties aggregated approximately 29.9 million rentable square feet and our partially-owned properties aggregated approximately 1.3 million rentable square feet, including 1.0 million rentable square feet in an unconsolidated joint venture. Our properties are located in 36 states and Washington, D.C., with the most aggregate square footage in the Southeast region but closely followed by the Northeast region. As of December 31, 2007, the occupancy of our wholly-owned properties was 86.5% and the occupancy of our partially-owned properties was 99.9%. Our two largest tenants are Bank of America, N.A. and Wachovia Bank, N.A. and as of December 31, 2007, they represented approximately 36% and 15%, respectively, of our portfolio’s rental income and occupied approximately 42.8% and 18.7%, respectively, of our total rentable square feet.
Since our tenants are predominately regulated financial institutions, a significant portion of our base revenue is derived from high credit quality tenants. As of December 31, 2007, 79.9% of base rent from our portfolio was derived from financial institutions in the aggregate and 74.1% was derived from entities with current credit ratings of “A” or better as reported by Standard & Poor’s. The income stream we derive from other banks that are not formally credit rated has the enhanced benefit of being derived from a closely regulated industry. Further, due to the nature of the business of our tenant base, which places a high premium on serving its customers from a well established distribution network, we typically enter into long-term triple net or bond net leases with our tenants. As of December 31, 2007, the weighted average term of our leases was 11.0 years and approximately 76.6% of our base revenue was derived from triple net and bond net leases. With in-house capabilities in acquisitions, property management and leasing, we are focused on maximizing the value of our portfolio through acquisitions and strategic sales and through effective and efficient property management and leasing operations.
We were formed as a Maryland REIT on May 23, 2002 and commenced our operations on September 10, 2002 when we completed our private offering of common shares and acquired our initial portfolio of properties from various individuals, including our founder and parties related to that founder. We completed our initial public offering of common shares on June 27, 2003.
Our interest in our properties is held through our Operating Partnership, First States Group, L.P. Through its wholly-owned subsidiary, First States Group, LLC, American Financial Realty Trust is the sole general partner of the Operating Partnership and held a 98.6% interest in the Operating Partnership as of December 31, 2007. We are organized so as to qualify and have elected to qualify as a REIT under the Internal Revenue Code of 1986, or the Code. If we qualify as a REIT, we generally will not be subject to Federal income tax on our taxable income that is distributed to our shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it distribute to its shareholders at least 90% of its annual REIT taxable income (excluding net taxable gains).
Significant 2007 Developments
In the first of half of 2007, we substantially completed our five point strategic repositioning plan that we announced on August 17, 2006. The substantial completion of this plan was capped by the sale of Fireman’s Fund Headquarters, a three building Class “A” office campus located in Novato, California for a sale price of $312.0 million before transaction costs.
On June 27, 2007, we announced the loss of our president and chief executive officer, Harold W. Pote, who died suddenly and unexpectedly while vacationing with his wife in Turkey. On November 6, 2007, we announced the appointment of David J. Nettina as President and the dissolution of the interim office of the President occupied by our three senior executives.
On November 2, 2007, we entered into an agreement to be acquired by Gramercy Capital Corp., or Gramercy. The joint proxy statement filed by us and Gramercy with the Securities and Exchange Commission on January 7, 2008 describes this merger agreement, or the Merger Agreement, and also includes the Merger Agreement in its entirety. On February 13, 2008, our shareholders approved the Merger Agreement with Gramercy.
Our primary business objective is to become the preferred landlord of banks and other financial institutions, and we believe that this goal is central to our broader objectives of achieving sustainable long-term growth in operating results and maximizing shareholder value. We seek to achieve these broader objectives by assembling and managing a high quality portfolio of bank branches and offices properties leased primarily to financial institutions. Key elements of our strategy are: (i) property acquisitions — acquiring properties from financial institutions that we consider to be central to our customer relationships that offer attractive initial yields as well as future escalations in base rent or which are vacant or have low occupancy and may provide opportunities for capital appreciation; (ii) portfolio dispositions — opportunistic sales of non-strategic assets that are leased to tenants that are not considered to be central to our customer relationships and underperforming assets with low customer occupancy; (iii) leasing; and (iv) property management.
Property Acquisitions. Our acquisition strategy is based on a customer centric model. Simply stated this model is based on developing long-term relationships with our banking customers to foster repeat deal flow. We strive to achieve this objective by understanding the long-term needs of our banking tenants, which often involves structuring lease terms at the time of the acquisition that provide them needed flexibility and providing support through our customer oriented asset management program.
Transactions flow to us in one of three ways:
• Long-term sale-leasebacks on a triple net basis. A triple net lease provides the tenant use and occupancy of a banking facility on a long-term basis, by paying to us a rental stream of payments and all costs associated with the occupancy and management of the property. These arrangements also make the tenant responsible for the capital expenditures needed in the property over the life of the lease.
• Acquiring vacant surplus bank branches. We acquire vacant surplus branch properties either under negotiated long-term contracts (formulated price contracts) or on a transaction by transaction basis. These properties are then re-leased to other banks or sold to alternative users who then typically redevelop the property for a non-bank use. Banks often find leasing these properties attractive since they are in proven locations and have in place much of the physical infrastructure needed to commence banking operations. This allows another bank to save the time of permitting, construction and fixturing, while acquiring the facility through an operating lease, often at a reduced cost over a de novo branch opening. In late 2007, primarily due to current market conditions, we terminated a number of formulated price contracts, including two of our highest volume contracts, to better manage the “put” feature in these contracts which require us to purchase vacant properties at formulated prices. We are currently re-negotiating the terms and conditions of one or more of these terminated contracts.
• Customized or specifically tailored transactions. In specific circumstances, we will enter into customized or specifically tailored transactions, which afford our tenants significant long-term flexibility and a short-term solution to nationally adjust their real estate occupancy requirements. These transactions incorporate elements of our triple net lease structure on some properties, and often result in some properties having a mix of triple net leases and standard commercial leases (differing operating cost recovery methods) and some properties being identified as non-core and therefore slated for sale. Due to their nature, these types of customized or specifically tailored transactions occur infrequently and we cannot predict when, if at all, we will enter into any such transaction in the future.