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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


__________________________________


FORM 10-Q


__________________________________


(Mark One) xQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


for the quarterly period ended March 31, 2011


OR oTransition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the transition period from ______ to ______


Commission file number 000-51262


WELLS REAL ESTATE INVESTMENT TRUST II, INC.


(Exact name of registrant as specified in its charter)


__________________________________


Maryland20-0068852(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)


6200 The Corners Parkway


Norcross, Georgia 30092


(Address of principal executive offices)


(Zip Code)


(770) 449-7800


(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 o


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).


[Not yet applicable to registrant.]    Yes o No o


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).


Large accelerated fileroAccelerated fileroNon-accelerated filerx(Do not check if a smaller reporting company)Smaller reporting companyo


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes o No x


Number of shares outstanding of the registrant’s


only class of common stock, as of April 30, 2011 : 541,700,151 shares





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FORM 10-Q


WELLS REAL ESTATE INVESTMENT TRUST II, INC.


TABLE OF CONTENTS





Page No.PART I. FINANCIAL INFORMATIONItem 1.Condensed Consolidated Financial StatementsConsolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010Page 5Consolidated Statements of Operations for the Three Months Ended March 31, 2011 (unaudited)and 2010 (unaudited)Page 6Consolidated Statements of Equity for the Three Months Ended March 31, 2011 (unaudited)and 2010 (unaudited)Page 7Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 (unaudited) and 2010 (unaudited)Page 9Condensed Notes to Consolidated Financial Statements (unaudited)Page 10Item 2.Management’s Discussion and Analysis of Financial Condition and Results of OperationsPage 21Item 3.Quantitative and Qualitative Disclosures About Market RiskPage 30Item 4.Controls and ProceduresPage 32PART II. OTHER INFORMATIONItem 1.Legal ProceedingsPage 32Item 1A.Risk FactorsPage 32Item 2.Unregistered Sales of Equity Securities and Use of ProceedsPage 32Item 3.Defaults Upon Senior SecuritiesPage 33Item 4.RESERVEDPage 33Item 5.Other InformationPage 33Item 6.ExhibitsPage 33








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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS


Certain statements contained in this Form 10-Q of Wells Real Estate Investment Trust II, Inc. (“Wells REIT II,” “we,” “our” or “us”) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in those acts. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, including known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the U.S. Securities and Exchange Commission (“SEC”). We make no representations or warranties (express or implied) about the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.


Any such forward-looking statements are subject to risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual conditions, our ability to accurately anticipate results expressed in such forward-looking statements, including our ability to generate positive cash flow from operations, make distributions to stockholders, and maintain the value of our real estate properties, may be significantly hindered. See Item 1A in Wells REIT II’s Annual Report on Form 10-K/A for the year ended December 31, 2010 for a discussion of some of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements. The risk factors described in our Annual Report are not the only ones we face, but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also harm our business.





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|        |                      
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|PART I. | FINANCIAL INFORMATION




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|------- | -------------------------------------------
|ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The information furnished in the accompanying consolidated balance sheets and related consolidated statements of operations, equity and cash flows reflects all normal and recurring adjustments that are, in management’s opinion, necessary for a fair and consistent presentation of the aforementioned financial statements.


The accompanying consolidated financial statements should be read in conjunction with the condensed noted to Wells REIT II’s financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this quarterly report on Form 10-Q and with Wells REIT II’s Annual Report on Form 10-K/A for the year ended December 31, 2010 . Wells REIT II’s results of operations for the three months ended March 31, 2011 are not necessarily indicative of the operating results expected for the full year.





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WELLS REAL ESTATE INVESTMENT TRUST II, INC.


CONSOLIDATED BALANCE SHEETS


(in thousands, except share and per-share amounts)





(Unaudited)March 31, 2011December 31, 2010Assets:Real estate assets, at cost:Land$724,325$571,696Buildings and improvements, less accumulated depreciation of $442,158 and $414,040 as of March 31, 2011 and December 31, 2010, respectively3,612,3143,225,708Intangible lease assets, less accumulated amortization of $360,328 and $355,823 as of March 31, 2011 and December 31, 2010, respectively451,755428,140Construction in progress7,1494,495Total real estate assets4,795,5434,230,039Cash and cash equivalents32,62038,882Tenant receivables, net of allowance for doubtful accounts of$4,404and $3,559 as of March 31, 2011 and December 31, 2010, respectively110,231108,057Prepaid expenses and other assets25,71622,700Deferred financing costs, less accumulated amortization of$5,490and $3,975 as of March 31, 2011 and December 31, 2010, respectively12,4999,827Intangible lease origination costs, less accumulated amortization of $226,532 and $219,447 as of March 31, 2011 and December 31, 2010, respectively268,886269,914Deferred lease costs, less accumulated amortization of $17,063 and $15,734 as of March 31, 2011 and December 31, 2010, respectively60,07246,266Investment in development authority bonds646,000646,000Total assets$5,951,567$5,371,685Liabilities:Line of credit and notes payable$1,494,294$886,939Accounts payable, accrued expenses, and accrued capital expenditures112,480102,697Due to affiliates1,7464,479Deferred income26,01926,403Intangible lease liabilities, less accumulated amortization of $66,458 and $62,165 as of March 31, 2011 and December 31, 2010, respectively102,83787,934Obligations under capital leases646,000646,000Total liabilities2,383,3761,754,452Commitments and Contingencies (Note 5)——Redeemable Common Stock246,141161,189Equity:Common stock, $0.01 par value; 900,000,000 shares authorized; 542,398,002 and 540,906,780 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively5,4245,409Additional paid-in capital4,850,3624,835,088Cumulative distributions in excess of earnings(1,277,546)(1,212,472)Redeemable common stock(246,141)(161,189)Other comprehensive loss(10,387)(11,139)Total Wells Real Estate Investment Trust II, Inc. stockholders’ equity3,321,7123,455,697Nonredeemable noncontrolling interests338347Total equity3,322,0503,456,044Total liabilities, redeemable common stock, and equity$5,951,567$5,371,685


See accompanying notes.


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WELLS REAL ESTATE INVESTMENT TRUST II, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per-share amounts)





(Unaudited)Three months endedMarch 31,20112010Revenues:Rental income$114,865$107,756Tenant reimbursements26,20923,364Hotel income4,1514,042Other property income283412145,508135,574Expenses:Property operating costs43,29240,661Hotel operating costs4,0123,936Asset and property management fees:Related-party8,7688,283Other9271,001Depreciation28,11823,469Amortization30,39229,229General and administrative6,6566,040Acquisition fees and expenses10,0263,390132,191116,009Real estate operating income13,31719,565Other income (expense):Interest expense(23,239)(22,196)Interest and other income12,05510,041Gain (loss) on interest rate swaps89(4,860)(11,095)(17,015)Income before income tax benefit2,2222,550Income tax benefit231236Income from continuing operations2,4532,786Discontinued operations:Operating loss from discontinued operations(38)(259)Loss from discontinued operations(38)(259)Net income2,4152,527Less: net income attributable to nonredeemable noncontrolling interests(4)(18)Net income attributable to the common stockholders of Wells Real Estate Investment Trust II,Inc.$2,411$2,509Per share information – basic and diluted:Income from continuing operations$—$0.01Loss from discontinued operations$—$—Net income attributable to the common stockholders of Wells Real Estate Investment Trust II, Inc.$—$0.01Weighted-average common shares outstanding – basic and diluted541,012505,018


See accompanying notes.


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WELLS REAL ESTATE INVESTMENT TRUST II, INC.


CONSOLIDATED STATEMENTS OF EQUITY


FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 (UNAUDITED)


(in thousands, except per-share amounts)





Stockholders’ EquityCommon StockAdditionalPaid-InCapitalCumulativeDistributionsin Excess ofEarningsRedeemableCommonStockOtherComprehensiveLossTotal Wells RealEstate InvestmentTrust II, Inc.Stockholders’EquityNonredeemableNoncontrollingInterestsTotalEquitySharesAmountBalance, December 31, 2010540,907$5,409$4,835,088$(1,212,472)$(161,189)$(11,139)$3,455,697$347$3,456,044Issuance of common stock3,3923432,360———32,394—32,394Redemptions of common stock(1,901)(19)(17,086)———(17,105)—(17,105)Increase in redeemable common stock————(84,952)—(84,952)—(84,952)Distributions to common stockholders($0.125 per share)———(67,485)——(67,485)—(67,485)Distributions to noncontrolling interests———————(13)(13)Components of comprehensive income:Net income attributable to the common stockholders of Wells Real Estate Investment Trust II, Inc.———2,411——2,411—2,411Net income attributable to noncontrolling interests———————44Market value adjustment to interest rate swap—————752752—752Comprehensive income——————3,16343,167Balance, March 31, 2011542,398$5,424$4,850,362$(1,277,546)$(246,141)$(10,387)$3,321,712$338$3,322,050


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Stockholders’ EquityCommon StockAdditionalPaid-InCapitalCumulativeDistributionsin Excess ofEarningsRedeemableCommonStockOtherComprehensiveLossTotal Wells RealEstate InvestmentTrust II, Inc.Stockholders’EquityNonredeemableNoncontrollingInterestsTotalEquitySharesAmountBalance, December 31, 2009499,895$4,999$4,461,980$(935,019)$(805,844)$(8,029)$2,718,087$5,274$2,723,361Issuance of common stock14,836148148,215———148,363—148,363Redemptions of common stock(1,781)(18)(17,539)———(17,557)—(17,557)Increase in redeemable common stock————(61,764)—(61,764)—(61,764)Distributions to common stockholders($0.15 per share)———(75,812)——(75,812)—(75,812)Distributions to noncontrolling interests———————(49)(49)Commissions and discounts on stock sales andrelated dealer-manager fees——(11,970)———(11,970)—(11,970)Other offering costs——(1,882)———(1,882)—(1,882)Components of comprehensive income:Net income attributable to commonstockholders of Wells Real Estate Investment Trust II, Inc.———2,509——2,509—2,509Net income attributable to noncontrolling interests———————1818Market value adjustment to interest rate swap————(856)(856)—(856)Comprehensive income——————1,653181,671Balance, March 31, 2010512,950$5,129$4,578,804$(1,008,322)$(867,608)$(8,885)$2,699,118$5,243$2,704,361





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WELLS REAL ESTATE INVESTMENT TRUST II, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)





(unaudited)Three months endedMarch 31,20112010Cash Flows from Operating Activities:Net income$2,415$2,527Adjustments to reconcile net income to net cash provided by operating activities:Straight-line rental income(1,092)(828)Depreciation28,11823,579Amortization32,18330,787(Gain) loss on interest rate swaps(2,554)2,534Remeasurement (gain) loss on foreign currency—76Noncash interest expense5,3564,608Changes in assets and liabilities, net of acquisitions:Decrease (increase) in tenant receivables, net146(2,105)Increase in prepaid expenses and other assets(1,613)(3,506)Decrease in accounts payable and accrued expenses(2,086)(1,124)Decrease in due to affiliates(2,729)(2,998)(Decrease) increase in deferred income(384)2,509Net cash provided by operating activities57,76056,059Cash Flows from Investing Activities:Investment in real estate and earnest money paid(604,143)(45,009)Deferred lease costs paid(8,187)(1,235)Net cash used in investing activities(612,330)(46,244)Cash Flows from Financing Activities:Deferred financing costs paid(3,847)—Proceeds from lines of credit and notes payable624,000—Repayments of lines of credit and notes payable(20,485)(546)Distributions paid to noncontrolling interests(13)(123)Issuance of common stock32,394146,140Redemptions of common stock(16,292)(17,557)Distributions paid to stockholders(35,048)(34,898)Distributions paid to stockholders and reinvested in shares of our common stock(32,437)(40,567)Commissions on stock sales and related dealer-manager fees paid—(9,331)Other offering costs paid—(2,261)Net cash provided by financing activities548,27240,857Net (decrease) increase in cash and cash equivalents(6,298)50,672Effect of foreign exchange rate on cash and cash equivalents36301Cash and cash equivalents, beginning of period38,882102,725Cash and cash equivalents, end of period$32,620$153,698


See accompanying notes.


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WELLS REAL ESTATE INVESTMENT TRUST II, INC.


CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2011


(unaudited)





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|-- | ------------
|1. | Organization

Wells Real Estate Investment Trust II, Inc. (“Wells REIT II”) is a Maryland corporation that has elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. Wells REIT II engages in the acquisition and ownership of commercial real estate properties, including properties that are under construction, are newly constructed, or have operating histories. Wells REIT II was incorporated on July 3, 2003 and commenced operations on January 22, 2004. Wells REIT II conducts business primarily through Wells Operating Partnership II, L.P. (“Wells OP II”), a Delaware limited partnership. Wells REIT II is the sole general partner of Wells OP II and possesses full legal control and authority over the operations of Wells OP II. Wells REIT II owns more than 99.9% of the equity interests in Wells OP II. Wells Capital, Inc. (“Wells Capital”), an affiliate of Wells Real Estate Advisory Services II, LLC (“WREAS II”), the external advisor to Wells REIT II, is the sole limited partner of Wells OP II. Wells OP II acquires, develops, owns, leases, and operates real properties directly, through wholly owned subsidiaries or through joint ventures. References to Wells REIT II herein shall include Wells REIT II and all subsidiaries of Wells REIT II, including consolidated joint ventures, Wells OP II, and Wells OP II’s direct and indirect subsidiaries. See Note 7 for a discussion of the advisory services provided by WREAS II.


As of March 31, 2011 , Wells REIT II owned controlling interests in 71 office properties and one hotel, which include 94 operational buildings. These properties are comprised of approximately 22.8 million square feet of commercial space and are located in 23 states, the District of Columbia, and Moscow, Russia. Of these properties, 70 are wholly owned and two are owned through consolidated joint ventures. As of March 31, 2011 , the office properties were approximately 94.6% leased.


On December 1, 2003, Wells REIT II commenced its initial public offering of up to 785.0 million shares of common stock, of which 185.0 million shares were reserved for issuance through Wells REIT II’s dividend reinvestment plan (“DRP”), pursuant to a Registration Statement filed on Form S-11 with the SEC (the “Initial Public Offering”). Except for continuing to offer shares for sale through its DRP, Wells REIT II stopped offering shares for sale under the Initial Public Offering on November 26, 2005. Wells REIT II raised gross offering proceeds of approximately $2.0 billion from the sale of approximately 197.1 million shares under the Initial Public Offering, including shares sold under the DRP through March 2006. On November 10, 2005, Wells REIT II commenced a follow-on offering of up to 300.6 million shares of common stock, of which 0.6 million shares were reserved for issuance under Wells REIT II’s DRP, pursuant to a Registration Statement filed on Form S-11 with the SEC (the “Follow-On Offering”). On April 14, 2006, Wells REIT II amended the aforementioned registration statements to offer in a combined prospectus 300.6 million shares registered under the Follow-On Offering and 174.4 million unsold shares related to the DRP originally registered under the Initial Public Offering. Wells REIT II raised gross offering proceeds of approximately $2.6 billion from the sale of approximately 257.6 million shares under the Follow-On Offering, including shares sold under the DRP, through November 2008. Wells REIT II stopped offering shares for sale under the Follow-On Offering on November 10, 2008.


On November 11, 2008, Wells REIT II commenced a third offering of up to 375.0 million shares of common stock pursuant to a Registration Statement filed on Form S-11 with the SEC (the “Third Offering”). Under the Third Offering registration statement, as amended, Wells REIT II offered up to 300.0 million shares of common stock in a primary offering for $10 per share, with discounts available to certain categories of purchasers, and up to 75.0 million shares pursuant to its DRP at a purchase price equal to the higher of $9.55 per share or 95% of the estimated value of a share of its common stock. Effective June 30, 2010, Wells REIT II ceased offering shares under the Third Offering. On August 27, 2010, the Third Offering was deregistered under the Form S-11 filing and the shares issuable pursuant to the DRP were registered on Form S-3. As of March 31, 2011 , Wells REIT II had raised gross offering proceeds of approximately $1.3 billion from the sale of approximately 130.3 million shares under the Third Offering, including shares sold under the DRP.


As of March 31, 2011 , Wells REIT II had raised gross offering proceeds from the sale of common stock under its public offerings of approximately $5.9 billion. After deductions from such gross offering proceeds for selling commissions and dealer-manager fees of approximately $518.7 million, acquisition fees of approximately $116.1 million, other organization and offering expenses of approximately $76.2 million, and common stock redemptions pursuant to our share redemption program of approximately $426.1 million, Wells REIT II had received aggregate net offering proceeds of approximately $4.7 billion. Substantially all of Wells REIT II’s net offering proceeds have been invested in real estate.


Wells REIT II’s stock is not listed on a public securities exchange. However, Wells REIT II’s charter requires that in the event Wells REIT II’s stock is not listed on a national securities exchange by October 2015, Wells REIT II must either seek stockholder approval to extend or amend this listing deadline or seek stockholder approval to begin liquidating investments and distributing the resulting proceeds to the stockholders. If Wells REIT II seeks stockholder approval to extend or amend this listing date and


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does not obtain it, Wells REIT II will then be required to seek stockholder approval to liquidate. In this circumstance, if Wells REIT II seeks and does not obtain approval to liquidate, Wells REIT II will not be required to list or liquidate and could continue to operate indefinitely as an unlisted company.





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|2. | Summary of Significant Accounting Policies

Basis of Presentation


The consolidated financial statements of Wells REIT II have been prepared in accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, the statements for these unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Results for these interim periods are not necessarily indicative of a full year’s results. Wells REIT II’s consolidated financial statements include the accounts of Wells REIT II, Wells OP II, and any variable interest entity in which Wells REIT II or Wells OP II was deemed the primary beneficiary. For further information, refer to the financial statements and footnotes included in Wells REIT II’s Annual Report on Form 10-K/A for the year ended December 31, 2010 .


Investment in Real Estate Assets





We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income. The estimated useful lives of our assets by class are as follows:


Buildings40 yearsBuilding improvements5-25 yearsSite improvements15 yearsTenant improvementsShorter of economic life or lease termIntangible lease assetsLease term


Intangible Assets and Liabilities Arising from In-Place Leases where Wells REIT II is the Lessor


As of March 31, 2011 and December 31, 2010 , Wells REIT II had the following gross intangible in-place lease assets and liabilities (in thousands):


Intangible Lease AssetsIntangibleLeaseOriginationCostsIntangibleBelow-MarketIn-Place LeaseLiabilitiesAbove-MarketIn-Place  LeaseAssetsAbsorptionPeriod  CostsMarch 31, 2011Gross$133,453$567,958$495,418$169,295Accum$(82,296)$(270,672)$(226,532)$(66,458)Net$51,157$297,286$268,886$102,837December 31, 2010Gross$139,014$534,277$489,361$150,099Accum$(83,233)$(265,747)$(219,447)$(62,165)Net$55,781$268,530$269,914$87,934


For the three months ended March 31, 2011 and the year ended December 31, 2010 , Wells REIT II recognized the following amortization of intangible lease assets and liabilities (in thousands):


Intangible Lease AssetsIntangibleLeaseOriginationCostsIntangibleBelow-MarketIn-Place LeaseLiabilitiesAbove-MarketIn-Place LeaseAssetsAbsorptionPeriod  CostsFor the three months ended March 31, 2011$3,810$15,273$12,601$3,828For the year ended December 31, 2010$17,810$61,743$51,241$14,472








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The remaining net intangible assets and liabilities as of March 31, 2011 will be amortized as follows (in thousands):


Intangible Lease AssetsIntangibleLeaseOriginationCostsIntangibleBelow-MarketIn-Place LeaseLiabilitiesAbove-MarketIn-Place  LeaseAssetsAbsorptionPeriod  CostsFor the nine months ending December 31, 2011$10,352$46,335$36,344$13,041For the years ending December 31:20129,90653,54743,53616,86920137,98746,31540,31816,26920146,84340,62537,24415,83720156,15735,33733,47513,55520165,73824,72425,6268,301Thereafter4,17450,40352,34318,965$51,157$297,286$268,886$102,837


Redeemable Common Stock


Under Wells REIT II’s share redemption program (“SRP”), the decision to honor redemptions, subject to certain plan requirements and limitations, falls outside of the control of Wells REIT II. As a result, Wells REIT II records redeemable common stock in the temporary equity section of its consolidated balance sheet.


Interest Rate Swap Agreements


Wells REIT II enters into interest rate swap contracts to mitigate its interest rate risk on the related financial instruments. Wells REIT II does not enter into derivative or interest rate transactions for speculative purposes; however, certain of its derivatives may not qualify for hedge accounting treatment. Wells REIT II records the fair value of its interest rate swaps either as prepaid expenses and other assets or as accounts payable, accrued expenses, and accrued capital expenditures. Changes in the fair value of the effective portion of interest rate swaps that are designated as hedges are recorded as other comprehensive income (loss), while changes in the fair value of the ineffective portion of a hedge, if any, is recognized currently in earnings. Changes in the fair value of interest rate swaps that do not qualify for hedge accounting treatment are recorded as gain (loss) on interest rate swaps. Amounts received or paid under interest rate swap agreements are recorded as interest expense for contracts that qualify for hedge accounting treatment and as gain (loss) on interest rate swaps for contracts that do not qualify for hedge accounting treatment.


The following tables provide additional information related to Wells REIT II’s interest rate swaps as of March 31, 2011 and December 31, 2010 (in thousands):





Estimated Fair Value as ofInstrument TypeBalance Sheet ClassificationMarch 31, 2011December 31, 2010Derivatives designated as hedging instruments:Interest rate contractsAccounts payable$(10,470)$(11,222)Derivatives not designated as hedging instruments:Interest rate contractsAccounts payable$(34,654)$(37,208)





Three months endedMarch 31,20112010Market value adjustment to interest rate swap designated as a hedge instrumentand included in other comprehensive income$752$(856)(Loss) gain on interest rate swaps recognized through earnings$89$(4,860)


During the periods presented, there was no hedge ineffectiveness required to be recognized into earnings on the interest rate swaps that qualified for hedge accounting treatment.





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Fair Value Measurements





Wells REIT II estimates the fair value of its assets and liabilities (where currently required under GAAP) consistent with the provisions of the accounting standard for fair value measurements and disclosures, which became effective for financial assets and liabilities on January 1, 2008. Under this standard, fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. While various techniques and assumptions can be used to estimate fair value depending on the nature of the asset or liability, the accounting standard for fair value measurements and disclosures provides the following fair value technique parameters and hierarchy, depending upon availability:


Level 1 – Assets or liabilities for which the identical term is traded on an active exchange, such as publicly traded instruments or futures contracts.


Level 2 – Assets and liabilities valued based on observable market data for similar instruments.


Level 3 – Assets or liabilities for which significant valuation assumptions are not readily observable in the market. Such assets or liabilities are valued based on the best available data, some of which may be internally developed. Significant assumptions may include risk premiums that a market participant would consider.


Wells REIT II records its interest rate swaps at fair value estimated using Level 2 techniques and assumptions, as defined above. The fair value of Wells REIT II’s interest rate swaps were $(45.1) million and $(48.4) million at March 31, 2011 and December 31, 2010 , respectively. Please refer to the Interest Rate Swap Agreements disclosure above for additional details.


Income Taxes


Wells REIT II has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), and has operated as such beginning with its taxable year ended December 31, 2003. To qualify as a REIT, Wells REIT II must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its REIT taxable income, as defined by the Code, to its stockholders. As a REIT, Wells REIT II generally is not subject to income tax on income it distributes to stockholders. Wells REIT II is subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in the accompanying consolidated financial statements.


Wells TRS II, LLC (“Wells TRS”) is a wholly owned subsidiary of Wells REIT II and is organized as a Delaware limited liability company and operates, among other things, a full-service hotel. Wells REIT II has elected to treat Wells TRS as a taxable REIT subsidiary. Wells REIT II may perform certain additional, noncustomary services for tenants of its buildings through Wells TRS; however, any earnings related to such services are subject to federal and state income taxes. In addition, for Wells REIT II to continue to qualify as a REIT, Wells REIT II must limit its investments in taxable REIT subsidiaries to 25% of the value of the total assets of Wells REIT II for 2010. Deferred tax assets and liabilities represent temporary differences between the financial reporting basis and the tax basis of assets and liabilities based on the enacted rates expected to be in effect when the temporary differences reverse. Wells REIT II records interest and penalties related to uncertain tax positions as general and administrative expense in the accompanying consolidated statements of operations.


Noncontrolling Interests


Nonredeemable noncontrolling interests represent the equity interests of consolidated subsidiaries that are not owned by Wells REIT II. Nonredeemable noncontrolling interests are adjusted for contributions, distributions, and earning attributable to the nonredeemable noncontrolling interests in the consolidated joint ventures. Pursuant to the terms of the consolidated joint venture agreements, all earnings and distributions are allocated to joint venturers in accordance with the terms of the respective joint venture agreements. Earnings allocated to such nonredeemable noncontrolling interest holders are recorded as net (income) loss attributable to nonredeemable noncontrolling interests in the accompanying consolidated statements of operations.  Nonredeemable noncontrolling interests are presented separately in the consolidated statements of equity.


Under certain circumstances, Wells REIT II may redeem Wells Capital’s interest in Wells OP II’s partnership units. As such, Wells Capital’s noncontrolling interest in Wells OP II is included in accounts payable, accrued expenses, and accrued capital expenditures in the consolidated balance sheets ($0.1 million as of both March 31, 2011 and December 31, 2010 ), and its allocation of Wells OP II’s earnings (loss) is included in general and administrative expenses in the consolidated statements of operations.


Recent Accounting Pronouncements


In January 2010, the Financial Accounting Standards Board (the “FASB”) clarified previously issued GAAP and issued new requirements related to Accounting Standards Codification Topic Fair Value Measurements and Disclosures (“ASC 820”). The clarification component includes disclosures about inputs and valuation techniques used in determining fair value, and providing


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fair value measurement information for each class of assets and liabilities. The new requirements relate to disclosures of transfers between the levels in the fair value hierarchy, as well as the individual components in the rollforward of the lowest level (Level 3) in the fair value hierarchy. This change in GAAP was effective for Wells REIT II beginning January 1, 2010, except for the provision concerning the rollforward of activity of the Level 3 fair value measurement, which became effective for Wells REIT II on January 1, 2011. The adoption of ASC 820 did not have a material impact on Wells REIT II’s consolidated financial statements or disclosures.





|   |                         
|-- | ------------------------
|3. | Real Estate Acquisitions




During the three months ended March 31, 2011, Wells REIT II acquired the following property (in thousands):


IntangiblesProperty NameCityStateAcquisitionDateLandBuildingsandImprovementsIntangibleLeaseAssetsIntangibleLeaseOriginationBelow-MarketLeaseLiabilityTotalPurchasePriceLeaseDetailsMarket Square BuildingsWashington, DCN/A3/7/2011$152,629$412,548$45,858$12,031$(19,680)$603,386(1)


|    |                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of the acquisition date, the Market Square Buildings were 96.2% leased to 41 tenants, including Fulbright and Jaworski (18.8%), Shearman and Sterling (16.6%), and Edison Electric Institute (11.3%).




Wells REIT II recognized revenues of $3.3 million and a net loss of $9.1 million from the Market Square Buildings acquisition for the period from March 7, 2011 through March 31, 2011.  Wells REIT II recognized acquisition-related expenses associated with the Market Square Buildings acquisition of $9.3 million all of which are recorded as acquisition fees and expenses in the accompanying consolidated statements of operations for the three months ended March 31, 2011.





The purchase price for the acquisition includes allocations based upon preliminary estimates of the fair value of the assets and liabilities acquired. These allocations may be adjusted in the future upon finalization of these preliminary estimates. Please refer to Note 2. Summary of Significant Accounting Policies for a discussion of the estimated useful life for each asset class.





Pro Forma Financial Information for Real Estate Acquisition





The following unaudited pro forma statement of operations presented for the three months ended March 31, 2011 and  2010 have been prepared for Wells REIT II to give effect to the acquisition of the Market Square Buildings as if the acquisition occurred on January 1, 2011 and January 1, 2010, respectively. The unaudited pro forma financial information has been prepared for informational purposes only and is not necessarily indicative of future results or of actual results that would have been achieved had the acquisition of the Market Square Buildings acquisition been consummated as of January 1, 2011 or January 1, 2010.





For the Three Months Ended March 31,20112010Revenues$154,248$146,688Net loss attributable to common stockholders$(664)$(2,996)








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4.    Line of Credit and Notes Payable


As of March 31, 2011 and December 31, 2010 , Wells REIT II had the following indebtedness outstanding (in thousands):





FacilityMarch 31, 2011December 31, 2010JPMorgan Chase Revolving Credit Facility$376,000$72,000JPMorgan Chase Bridge Loan300,000—222 E. 41stStreet Building mortgage note166,905164,151100 East Pratt Street Building mortgage note105,000105,000Wildwood Buildings mortgage note90,00090,000Manhattan Towers Building mortgage note75,00075,000Cranberry Woods Drive mortgage note63,39663,39680 Park Plaza Building mortgage note61,90060,894263 Shuman Boulevard Building mortgage note49,00049,000800 North Frederick Building mortgage note46,40046,400One West Fourth Street Building mortgage note41,05241,537SanTan Corporate Center mortgage notes39,00039,000Highland Landmark Building mortgage note33,84033,840Three Glenlake Building mortgage note25,80125,721215 Diehl Road Building mortgage note21,00021,000Total indebtedness$1,494,294$886,939





On March 7, 2011, Wells REIT II entered into a $300.0 million, six-month, unsecured loan to finance a portion of the purchase price for the Market Square Buildings with JPMorgan Chase Bank (the “JPMorgan Chase Bridge Loan”).  Under the JPMorgan Chase Bridge Loan, interest is incurred based on, at Wells REIT II's option, LIBOR for one-, two-, or three-month periods, plus an applicable margin of 2.25% (the “Bridge LIBOR Rate”), or at an alternate base rate, plus an applicable margin of 1.25% (the “Bridge Base Rate”).  The Bridge Base Rate for any day is the greatest of (1) the rate of interest publicly announced by JPMorgan Chase Bank as its prime rate in effect in its principal office in New York City for such day, (2) the federal funds rate for such day plus 0.50%, or (3) the one-month LIBOR Rate for such day plus 1.00%. Should any unpaid principal remain outstanding on the JPMorgan Chase Bridge Loan as of June 5, 2011, Wells REIT II would incur an additional duration fee equal to 0.25% of the principal outstanding on the JPMorgan Chase Bridge Facility at that time.Under the terms of the JPMorgan Chase Bridge Loan, accrued interest on Bridge Base Rate loans is payable in arrears on the first day of each calendar month. The accrued interest on Bridge LIBOR Rate loans is payable on the last day of each one-, two-, or three-month interest period. Wells REIT II is required to repay outstanding principal and accrued interest six months after the respective funding dates. All such borrowings shall be prepaid with (a) 100% of the net cash proceeds of all asset sales or other dispositions of properties, (b) 100% of the net cash proceeds of issuances, offerings, or placements of debt obligations, and (c) 100% of the net cash proceeds of issuances of equity securities. Wells REIT II may also prepay all or part of the JPMorgan Chase Bridge Loan at any time subject to, in the case of LIBOR borrowings, payment for any loss, cost or expense incurred by lender as a result of prepayment before the end of the chosen LIBOR interest period.  As of March 31, 2011, the JPMorgan Chase Bridge Loan incurred interest at a rate of approximately 2.56% per annum.


During the three months ended March 31, 2011 and 2010 , Wells REIT II also made interest payments of approximately $8.2 million and $10.8 million, respectively, including amounts capitalized of approximately $0.0 million and $0.5 million, respectively.


As of March 31, 2011 , Wells REIT II believes it was in compliance with the restrictive covenants on its outstanding debt obligations.


The estimated fair value of Wells REIT II’s notes payable as of March 31, 2011 and December 31, 2010 was approximately $1,233.6 million and $915.9 million, respectively. Wells REIT II estimated the fair value of its line of credit by obtaining estimates for similar facilities from multiple market participants as of the respective reporting dates. The fair values of all other debt instruments were estimated based on discounted cash flow analyses using the current incremental borrowing rates for similar types of borrowing arrangements as of the respective reporting dates. The discounted cash flow method of assessing fair value results in a general approximation of value, and such value may never actually be realized.


Please refer to Note 9. Subsequent Events regarding the sale of $250 million 5.875% unsecured senior notes for net proceeds of


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$246.7 million in April 2011 and the partial repayment of the JPMorgan Chase Bridge Loan.





|   |                              
|-- | -----------------------------
|5. | Commitments and Contingencies

Commitments Under Existing Lease Agreements


Certain lease agreements include provisions that, at the option of the tenant, may obligate Wells REIT II to expend capital to expand an existing property or provide other expenditures for the benefit of the tenant. As of March 31, 2011 , no tenants have exercised such options that had not been materially satisfied.





Litigation





From time to time, Wells REIT II is party to legal proceedings, which arise in the ordinary course of its business. Wells REIT II is not currently involved in any legal proceedings of which management would consider the outcome to be reasonably likely to have a material adverse effect on the results of operations or financial condition of Wells REIT II. Wells REIT II is not aware of any such legal proceedings contemplated by governmental authorities.





|   |                                                                       
|-- | ----------------------------------------------------------------------
|6. | Supplemental Disclosures of Noncash Investing and Financing Activities

Outlined below are significant noncash investing and financing activities for the three months ended March 31, 2011 and 2010 (in thousands):





Three months endedMarch 31,20112010Other liabilities assumed upon acquisition of property$6,430$617Noncash interest accruing to notes payable$3,840$3,593Market value adjustment to interest rate swap that qualifies for hedge accounting treatment$752$(856)Accrued capital expenditures and deferred lease costs$8,481$2,205Accrued deferred financing costs$342$—Accrued redemptions of common stock$827$196Commissions on stock sales and related dealer-manager fees due to affiliate$—$469Other offering costs due to affiliate$—$725Distributions payable to stockholders$—$13,443Discounts applied to issuance of common stock$—$2,223Increase in redeemable common stock$84,952$61,764





|   |                                          
|-- | -----------------------------------------
|7. | Related-Party Transactions and Agreements




Advisory Agreement





Wells REIT II is party to an agreement with WREAS II, under which WREAS II is required to perform certain key functions on behalf of Wells REIT II, including, among others, the investment of capital proceeds and management of day-to-day operations (the “Advisory Agreement”). WREAS II has executed master services agreements with Wells Capital and Wells Management Company, Inc. ("Wells Management") whereby WREAS II may retain the use of Wells Capital’s and Wells Management’s employees as necessary to perform the services required under the Advisory Agreement, and in return, shall reimburse Wells Capital and Wells Management for the associated personnel costs. Further, under the terms of the Advisory Agreement, Wells Real Estate Funds, Inc. ("WREF") guarantees WREAS II’s performance of services and any amounts payable to Wells REIT II in connection therewith.





Under the terms of the Advisory Agreement, Wells REIT II incurs fees and reimbursements payable to WREAS II and its affiliates for services as described below:


|  |                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Reimbursement of organization and offering costs paid by WREAS II and its affiliates on behalf of Wells REIT II, not to exceed 2.0% of gross offering proceeds.

|  |                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Acquisition fees of 2.0% of gross offering proceeds, subject to certain limitations; Wells REIT II also reimburses WREAS II and its affiliates for expenses it pays to third parties in connection with acquisitions or potential acquisitions.

|  |                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------
|• | Monthly asset management fees equal to one-twelfth of 0.625% of the cost of (i) all properties of Wells REIT II (other than

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those that fail to meet specified occupancy thresholds) and (ii) investments in joint ventures until the monthly payment equals $2.7 million (or $32.5 million annualized), as of the last day of each preceding month.  The monthly payment remains capped at that amount until the cost of (i) all properties of Wells REIT II (other than those that fail to meet specified occupancy thresholds) and (ii) investments in joint ventures are at least $6.5 billion, after which the monthly asset management fee will equal one-twelfth of 0.5% of the cost of (i) all properties of Wells REIT II (other than those that fail to meet specified occupancy thresholds) and (ii) investments in joint ventures. However, monthly asset management fees shall be assessed on the Lindbergh Center Buildings and the Energy Center I Building, which were acquired on July 1, 2008 and June 28, 2010, respectively, at one-twelfth of 0.5% immediately. The amount of asset management fees paid in any three-month period is limited to 0.25% of the average of the preceding three months’ net asset value calculations less Wells REIT II’s outstanding debt.


Effective April 2011, we expect monthly asset management fees to be capped at $2.7 million (or $32.5 million annualized) following the March 2011 acquisition of the Market Square Buildings.


|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Reimbursement for all costs and expenses WREAS II and its affiliates incur in fulfilling its duties as the asset portfolio manager, including (i) wages and salaries (but excluding bonuses other than the signing bonus paid to E. Nelson Mills upon his appointment as President of Wells REIT II) and other employee-related expenses of WREAS II and its affiliates’ employees, who perform a full range of real estate services for Wells REIT II, including management, administration, operations, and marketing, and are billed to Wells REIT II based on the amount of time spent on Wells REIT II by such personnel, provided that such expenses are not reimbursed if incurred in connection with services for which WREAS II and its affiliates receive a disposition fee (described below) or an acquisition fee, and (ii) amounts paid for IRA custodial service costs allocated to Wells REIT II accounts. The Advisory Agreement limits the amount of “portfolio general and administrative expenses” and “personnel expenses,” as defined in the Advisory Agreement, incurred during the seven months ended July 31, 2011 to the extent they would exceed $11.2 million and $6.4 million, respectively.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | For any property sold by Wells REIT II, other than part of a “bulk sale” of assets, as defined, a disposition fee equal to 1.0% of the sales price, with the limitation that the total real estate commissions (including such disposition fee) for any Wells REIT II property sold may not exceed the lesser of (i) 6.0% of the sales price of each property or (ii) the level of real estate commissions customarily charged in light of the size, type, and location of the property.

|  |                                                                                                                                                                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Incentive fee of 10% of net sales proceeds remaining after stockholders have received distributions equal to the sum of the stockholders’ invested capital plus an 8% return of invested capital, which fee is payable only if the shares of common stock of Wells REIT II are not listed on an exchange.

|  |                                                                                                                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Listing fee of 10% of the amount by which the market value of the stock plus distributions paid prior to listing exceeds the sum of 100% of the invested capital plus an 8% return on invested capital, which fee will be reduced by the amount of any incentive fees paid as described in the preceding bullet.




The Advisory Agreement expires on July 31, 2011 and may be terminated, without cause or penalty, by either party upon providing 60 days’ prior written notice to the other party. Renewal discussions are underway.





Dealer-Manager Agreement





With respect to the Third Offering, Wells REIT II was party to a dealer-manager agreement (the “Dealer-Manager Agreement”) with Wells Investment Securities, Inc. (“WIS”), whereby WIS, an affiliate of Wells Capital, performed the dealer-manager function for Wells REIT II. For these services, WIS earned a commission of up to 7% of the gross offering proceeds from the sale of the shares of Wells REIT II, of which substantially all was re-allowed to participating broker/dealers. Wells REIT II pays no commissions on shares issued under its DRP.





Additionally, with respect to the Third Offering, Wells REIT II was required to pay WIS a dealer-manager fee of 2.5% of the gross offering proceeds from the sale of Wells REIT II’s stock at the time the shares were sold. Under the Dealer-Manager Agreement, up to 1.5% of the gross offering proceeds were re-allowable by WIS to participating broker/dealers. Wells REIT II pays no dealer-manager fees on shares issued under its DRP.





Property Management, Leasing, and Construction Agreement





Wells REIT II and Wells Management, an affiliate of WREAS II, were party to a master property management, leasing, and construction agreement (the “Management Agreement”) during 2008, 2009, and 2010, under which Wells Management received the following fees and reimbursements in consideration for supervising the management, leasing, and construction of certain Wells REIT II properties:


|  |                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------
|• | Property management fees in an amount equal to a percentage negotiated for each property managed by Wells Management

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of the gross monthly income collected for that property for the preceding month;


|  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Leasing commissions for new, renewal, or expansion leases entered into with respect to any property for which Wells Management serves as leasing agent equal to a percentage as negotiated for that property of the total base rental and operating expenses to be paid to Wells REIT II during the applicable term of the lease, provided, however, that no commission shall be payable as to any portion of such term beyond 10 years;

|  |                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------
|• | Initial lease-up fees for newly constructed properties under the agreement, generally equal to one month’s rent;

|  |                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Fees equal to a specified percentage of up to 5% of all construction build-out funded by Wells REIT II, given as a leasing concession, and overseen by Wells Management; and

|  |                                                                                                  
|- | -------------------------------------------------------------------------------------------------
|• | Other fees as negotiated with the addition of each specific property covered under the agreement.




Assignment of Management Agreement





Effective January 1, 2011, Wells Management assigned all of its rights, title, and interest in the Management Agreement to WREAS II, and Wells REIT II consented to such assignment. As part of this assignment, Wells Management has guaranteed the performance of all of WREAS II’s obligations under the Management Agreement.





Related-Party Costs





Pursuant to the terms of the agreements described above, Wells REIT II incurred the following related-party costs for the three months ended March 31, 2011 and 2010 , respectively (in thousands):





Three months endedMarch 31,20112010Asset management fees$7,719$7,402Administrative reimbursements, net(1)2,8403,112Property management fees1,049911Acquisition fees6482,924Construction fees(4)3977Commissions, net of discounts(2)(3)—7,267Dealer-manager fees, net of discounts(2)—2,480Other offering costs(2)—1,882Total$12,295$26,055


|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Administrative reimbursements are presented net of reimbursements from tenants of approximately $0.8 million and $0.6 million for the three months endedMarch 31, 2011and2010, respectively.

|    |                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------
|(2) | Commissions, dealer-manager fees, and other offering costs were charged against equity as incurred.

|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Substantially all commissions were re-allowed to participating broker/dealers during the three months ended2010for shares sold under the Third Offering, which was terminated effective June 2010.

|    |                                                                     
|--- | --------------------------------------------------------------------
|(4) | Construction fees are capitalized to real estate assets as incurred.

Wells REIT II incurred no related-party incentive fees, listing fees, disposition fees or leasing commissions during the three months ended March 31, 2011 and 2010 , respectively. Wells REIT II will continue to incur organizational and offering costs and acquisition fees on shares issued under its DRP.


Due to Affiliates


The detail of amounts due to WREAS II and its affiliates is provided below as of March 31, 2011 and December 31, 2010 (in thousands):





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March 31, 2011December 31, 2010Administrative reimbursements$1,346$1,551Asset and property management fees4002,924Commissions and dealer-manager fees—4$1,746$4,479


Economic Dependency


Wells REIT II has engaged WREAS II, and Wells Management, to provide certain services that are essential to Wells REIT II, including asset management services, supervision of the property management and leasing of some properties owned by Wells REIT II, asset acquisition and disposition services, as well as other administrative responsibilities for Wells REIT II, including accounting services, stockholder communications, and investor relations. Further, WREAS II has engaged Wells Capital to retain the use of its employees to carry out certain of the services listed above. As a result of these relationships, Wells REIT II is dependent upon WREAS II, Wells Capital, and Wells Management.


WREAS II, Wells Capital, and Wells Management are owned and controlled by WREF. Historically, the operations of WREAS II, Wells Capital, and Wells Management have represented substantially all of the business of WREF. Accordingly, Wells REIT II focuses on the financial condition of WREF when assessing the financial condition of WREAS II, Wells Capital, and Wells Management. In the event that WREF were to become unable to meet its obligations as they become due, Wells REIT II might be required to find alternative service providers.


Future net income generated by WREF will be largely dependent upon the amount of fees earned by WREF’s subsidiaries based on, among other things, the level of investor proceeds raised and the volume of future acquisitions and dispositions of real estate assets by other WREF-sponsored real estate programs, as well as distribution income earned from equity interests in another REIT previously sponsored by Wells Capital. As of March 31, 2011 , Wells REIT II has no reason to believe that WREF does not have access to adequate liquidity and capital resources, including cash flow generated from operations, cash on hand, and other investments and borrowing capacity necessary to meet its current and future obligations as they become due.








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8.    Discontinued Operations


On September 15, 2010, Wells REIT II sold a 593,404-square foot industrial property located in Douglasville, Georgia ("New Manchester One") for a loss of $0.2 million and net proceeds of $15.3 million.  The revenue and expenses of New Manchester One are recorded as discontinued operations in the accompanying consolidated statements of operations.  The components of the revenues and expenses of New Manchester One are provided below:





Three months endedMarch 31,20112010Revenues:Rental income$—$—Tenant reimbursements——Other property income——Total revenues——Expenses:Property operating costs(7)111Asset and property management fees—30Depreciation—110Amortization——General and administrative458Total expenses38259Real estate operating loss(38)(259)Other income (expense):Interest expense—(270)Interest and other income—270Loss from discontinued operations$(38)$(259)








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9.      Subsequent Events


Wells REIT II has evaluated subsequent events in connection with the preparation of its consolidated financial statements and notes thereto included in this report on Form 10-Q and notes the following items in addition to those disclosed elsewhere in this report:





Private Bond Offering





On April 4, 2011, Wells REIT II sold $250 million aggregate principal amount of 5.875% unsecured senior notes due in 2018 at 99.295 percent of their face value in a private bond offering. Two rating agencies have assigned investment-grade ratings to these senior notes.  Wells REIT II received proceeds from this bond offering, net of fees, of $246.7 million, all of which were used to reduce amounts outstanding on the JPMorgan Chase Bridge Loan.





|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as our consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K/A for the year ended December 31, 2010 .





Overview





During the periods presented, we continued to receive net equity proceeds from the sale of our common stock under the Third Offering (until it closed in the third quarter of 2010) and through the DRP.   We have used such net equity proceeds, along with borrowings, primarily to invest in real estate assets.  As a result, during the periods presented, our real estate portfolio has grown and our real estate operating income has increased.   In addition, the closing of the Third Offering has impacted our outlook on future sources of capital.





Liquidity and Capital Resources





Overview





After careful consideration of the size and strength of our portfolio, our board of directors decided to close our primary public equity offering effective mid-2010.  As we transitioned out of our offering stage during the second half of 2010, we continued to actively manage our real estate assets and, at the same time, began to explore a variety of strategic opportunities focused on enhancing the composition of our portfolio and the total return for the REIT.  In 2011, we have concentrated such exploration efforts on a strategic acquisition opportunity, managing the composition and maturities of the borrowings within our capital structure, and evaluating additional sources of future capital.  To date, these efforts have culminated in the following notable  events:





|  |                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | On March 7, 2011, we acquired the Market Square Buildings, which are located in the Capitol Hill district of Washington D.C., for approximately $603.4 million.

|  |                                                                                                                                                                                                                                                                                                                                                                                   
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | On April 4, 2011, we issued $250.0 million of seven-year, investment-grade, unsecured bonds at 99.295 percent of their face value.  The coupon interest rate of the bonds is 5.875% per annum.  We used the bond proceeds to pay down amounts drawn on a $300.0 million bridge loan that was used to fund approximately half of the purchase price of the Market Square Buildings.




We expect that our primary source of future operating cash flows will be cash generated from the operations of our properties, equity proceeds generated from the sale of shares under our DRP, net of share redemptions, and selective borrowings.  Currently, we expect to use substantially all of our future operating cash flows to fund distributions to stockholders.  The amount of future distributions to be paid to our stockholders will be largely dependent upon the amount of cash generated from our operating activities, our expectations of future operating cash flows, and our determination of near-term cash needs for capital improvements, tenant re-leasing, redemptions of our common stock, and debt repayments.  Currently, we expect to use the majority of the equity proceeds raised under our DRP,  net of share redemptions, to fund capital expenditures and leasing costs for our properties.


Short-term Liquidity and Capital Resources


During the three months ended March 31, 2011 , we generated net cash flows from operating activities of $57.8 million , which


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consists primarily of receipts of rental payments, tenant reimbursements, hotel room fees, and interest income, reduced by payments for operating costs, interest expense, asset and property management fees, general and administrative expenses, and acquisition fees and expenses. Net cash flows from operating activities, adjusted to exclude the impact of acquisition-related costs of $10.0 million , were used to fund distributions to stockholders of approximately $67.5 million during this period. We expect to use the majority of our future net cash flow from operating activities to fund distributions to stockholders as well (please refer to the “Distributions” section below for additional information).





During the three months ended March 31, 2011, we acquired the Market Square Buildings for approximately $603.4 million primarily using net debt proceeds of $300.0 million obtained from a bridge loan with JPMorgan Chase Bank and draws made under our revolving credit facility with JPMorgan Chase Bank.  In April 2011, we issued unsecured bonds and used the net bond proceeds of approximately $246.7 million to pay down the JPMorgan Chase Bridge Loan.  During the three months ended March 31, 2011, we also generated proceeds from the sale of common stock under our DRP, net of acquisition fees and share redemptions, of $6.1 million, the majority of which were used to fund capital expenditures and leasing costs for our properties.





We believe that we have adequate liquidity and capital resources to meet our current obligations as they come due.  As of April 30, 2011, we had access to the borrowing capacity under the JPMorgan Chase Revolving Credit Facility of $117.0 million.  We are in the process of negotiating a long-term borrowing arrangement, which would allow us to repay our short-term borrowings, and, thereby, increase our borrowing capacity available under the JPMorgan Chase Revolving Credit Facility.


Long-term Liquidity and Capital Resources





Over the long term, we expect that our primary sources of capital will include operating cash flows, proceeds from our DRP, proceeds from secured or unsecured borrowings from third-party lenders, and, if and when deemed appropriate, proceeds from strategic property sales. We expect that our primary uses of capital will continue to include stockholder distributions, redemptions of shares of our common stock under our share redemption program, capital expenditures, such as building improvements, tenant improvements and leasing costs, repaying or refinancing debt, and selective property acquisitions, either directly or through investments in joint ventures.


We have a policy of maintaining our debt level at no more than 50% of the cost of our assets (before depreciation) and, ideally, at significantly less than this 50% debt-to-real-estate asset ratio. This conservative leverage goal could reduce the amount of current income we can generate for our stockholders, but it also reduces their risk of loss. We believe that preserving investor capital while generating stable current income is in the best interest of our stockholders. As of March 31, 2011 , our debt-to-real-estate asset ratio was approximately 25.2%.


In determining how and when to allocate cash resources, we initially consider the source of the cash. We expect to use substantially all future net operating cash flows to fund distributions to stockholders. We expect to use a portion of our future DRP proceeds to fund future share redemptions (subject to the limitations of our share redemption program), and to make residual DRP proceeds available to fund capital improvements required for our properties and to fund additional real estate investments.





In the first quarter of 2011, our board of directors elected to reduce the quarterly stockholder distribution rate from $0.15 per share (a 6.0% annualized yield on a $10.00 original share price) to $0.125 per share (a 5.0% annualized yield on a $10.00 original share price) primarily due to economic conditions in the U.S. and deterioration in real estate market fundamentals. During the first quarter of 2011, we funded our stockholder distributions with current period operating cash flows, adjusted for certain acquisition-related costs as described above.  While operational cash flow from our properties remains strong, economic downturns in our markets or in the particular industries in which our tenants operate, could adversely impact the ability of our tenants to make lease payments and our ability to re-lease space on favorable terms when leases expire, either of which circumstance could further adversely affect our ability to fund future distributions to stockholders. We are continuing to carefully monitor our cash flows and market conditions and to assess their impact on our future earnings and future distribution projections.


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Contractual Commitments and Contingencies


As of March 31, 2011 , our contractual obligations will become payable in the following periods (in thousands):





Contractual ObligationsTotal20112012-20132014-2015ThereafterDebt obligations(1)$1,494,294$348,092$503,683$95,435$547,084Interest obligations on debt(2)259,58344,09797,45970,76947,258Capital lease obligations(3)646,000—526,000—120,000Operating lease obligations225,5351,8155,0875,114213,519Total$2,625,412$394,004$1,132,229$171,318$927,861


|    |                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On March 29, 2011, we announced that we had committed to sell $250.0 million aggregate principal amount of 5.875% unsecured senior notes at 99.295 percent of their face value in a private offering, which closed on April 4, 2011.  These notes are due in 2018.

|    |                                                                                                                                                                                                                                                                                                          
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|(2) | Interest obligations are measured at the contractual rate for fixed-rate  debt, or at the effectively fixed-rate for variable- rate debt with interest rate swaps agreements. SeeItem 3. Quantitative and Qualitative Disclosure About Market Riskfor more information regarding our interest rate swaps.

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|(3) | Amounts include principal obligations only. We made interest payments on these obligations of $10.0 million during thethreemonths endedMarch 31, 2011, all of which was funded with interest income earned on the corresponding investments in development authority bonds.




Results of Operations


Overview


As of March 31, 2011 , we owned controlling interests in 71 office properties, which were approximately 94.6% leased, and one hotel.  Our real estate operating results have increased for the three months ended March 31, 2011, as compared to the same period of 2010, primarily due to acquiring properties in 2010 and in the first quarter of 2011.  In the near term, we expect future real estate operating income to continue to increase as a result of the acquisition of the Market Square Buildings for approximately $603.4 million in March of 2011.


Comparison of the three months ended March 31, 2010 versus the three months ended March 31, 2011





Continuing Operations





Rental income increased from $107.8 million for the three months ended March 31, 2010 to $114.9 million for the three months ended March 31, 2011 , primarily due to properties acquired or placed into service during 2010 and the first three months of 2011. Absent changes to the leases currently in place at our properties, rental income is expected to remain at similar levels  in future periods.


Tenant reimbursements and property operating costs increased from $23.4 million and $40.7 million , respectively, for the three months ended March 31, 2010 , to $26.2 million and $43.3 million , respectively, for the three months ended March 31, 2011 , primarily due to properties acquired or placed in service during 2010 and in the first three months of 2011. Absent changes to the leases currently in place at our properties, future tenant reimbursement fluctuations are generally expected to correspond with future property operating cost reimbursements.


Hotel income, net of hotel operating costs, remained relatively stable at approximately $0.1 million for the three months ended March 31, 2010 and 2011. Hotel income and hotel operating costs are primarily driven by the local economic conditions and, as a result, are expected to fluctuate in the future primarily based on changes in the supply of, and demand for, hotel and banquet space in Cleveland, Ohio similar to that offered by the Key Center Marriott hotel.


Asset and property management fees increased from $9.3 million for the three months ended March 31, 2010 to $9.7 million for the three months ended March 31, 2011 primarily due to properties acquired and placed into service during 2010 and the first three months of 2011. Future asset and property management fees may fluctuate in response to property dispositions or leasing activities.   Pursuant to the limitations outlined in the Advisory Agreement, monthly asset management fees will be capped at $2.7 million (or $32.5 million annualized) beginning in April 2011 as a result of the March 2011 acquisition of the Market Square Buildings for $603.4 million.  Please refer to Note 7. Related-Party Transactions and Agreements in the accompanying consolidated financial statements for additional details.


Acquisition fees and expenses increased from $3.4 million for the three months ended March 31, 2010 to $10.0 million for the


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three months ended March 31, 2011 , primarily due to the acquisition of the Market Square Buildings in March 2011. Wells REIT II incurs acquisition fees equal to 2.0% of gross offering proceeds raised, including equity raised through our DRP. Please refer to Note 7. Related-Party Transactions and Agreements in the accompanying consolidated financial statements for additional details. We expect future acquisition fees and expenses to decrease as a result of terminating the Third Offering effective June 30, 2010.


Depreciation increased from $23.5 million for the three months ended March 31, 2010 to $28.1 million for the three months ended March 31, 2011 , primarily due to growth in the portfolio in 2010 and the first three months of 2011. Excluding the impact of changes to the leases currently in place at our properties, depreciation is expected to continue to increase in future periods, as compared to historical periods, due to ongoing capital improvements to our properties.


Amortization increased slightly from $29.2 million for the three months ended March 31, 2010 to $30.4 million for the three months ended March 31, 2011 . Excluding the impact of changes to the leases currently in place at our properties, amortization is expected to increase in future periods due to owning new properties for a full period.


General and administrative expenses increased from $6.0 million for the three months ended March 31, 2010 to $6.7 million for the three months ended March 31, 2011 , primarily due to bad debt expense incurred in connection with reserving tenant receivables.


Interest expense increased slightly from $22.2 million for the three months ended March 31, 2010 to $23.2 million for the three months ended March 31, 2011 primarily due to debt obtained to fund the acquisition of the Market Square Buildings in March 2011. Future interest expense will depend largely upon changes in market interest rates and our ability to secure financings or refinancings.


Interest and other income increased from $10.0 million for the three months ended March 31, 2010 to $12.1 million for the three months ended March 31, 2011 primarily due to settling litigation related to a prospective acquisition that did not close. Interest income is expected to remain relatively consistent in future periods given that the majority of this activity consists of interest income earned on investments in development authority bonds, which had a weighted-average remaining term of approximately 6.4 years as of March 31, 2011 . Interest income earned on investments in development authority bonds is entirely offset by interest expense incurred on the corresponding capital leases.


We recognized a loss on interest rate swaps that do not qualify for hedge accounting treatment of $4.9 million for the three months ended March 31, 2010 , compared with a gain of $0.1 million for the three months ended March 31, 2011 . We anticipate that future gains and losses on interest rate swaps that do not qualify for hedge accounting treatment will fluctuate, primarily due to changes in the estimated fair values of our interest rate swaps relative to then-current market conditions. Market value adjustments to swaps that qualify for hedge accounting treatment are recorded directly to equity, and therefore do not impact net income (loss).


We recognized net income attributable to Wells REIT II of $2.5 million ( $0.01 per share) for the three months ended March 31, 2010 , as compared to a net income of $2.4 million ( $0.00 per share) for the three months ended March 31, 2011 . The slight decrease is primarily attributable to acquisition fees and expenses associated with an acquisition in the first quarter of 2011 offset by an increase in the value of interest rate swaps.  Absent future fluctuations in the market value of our interest rate swaps that do not qualify for hedge accounting treatment, we expect future net income to remain at a level similar to the first quarter 2011 in future periods. Should the decline in the U.S. economy or U.S. real estate markets continue for a prolonged period of time, the creditworthiness of our tenants and our ability to achieve market rents comparable to the leases currently in place at our properties may suffer and could lead to a decline in net income over the long term.


Discontinued Operations





In the third quarter of 2010, we sold New Manchester One, an industrial property located in Douglasville, Georgia, for net proceeds of $15.3 million and a loss of $0.2 million. In accordance with GAAP, we have classified the results of operations related to New Manchester One as discontinued operations for all periods presented. Loss from discontinued operations decreased from $(0.3) million for the three months ended March 31, 2010 to $(38.0) thousand for the three months ended March 31, 2011 as a result of the sale of the property in the third quarter of 2010 and the loss recognized on the sale of this property.





Distributions





The amount of distributions that we pay to our common stockholders is determined by our board of directors and is dependent upon a number of factors, including the funds available for distribution to common stockholders, our financial condition, our capital expenditure requirements, our expectations of future sources of liquidity and the annual distribution requirements necessary to maintain our status as a REIT under the Code.


Since inception, our cash management policy has called for quarterly stockholder distributions to be principally funded with operational cash flows over the long-term. When evaluating funds available for stockholder distributions, we consider net cash


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provided by operating activities (as defined by Generally Accepted Accounting Principles ("GAAP") and presented in the accompanying GAAP-basis consolidated statements of cash flows), adjusted to exclude certain costs that were incurred for the purpose of generating future earnings and appreciation in value over the long term, including acquisition costs. As provided in the prospectuses for our public offerings of common stock, acquisition-related costs have been and are expected to continue to be funded with cash generated from the sale of common stock and, therefore, are not expected to be funded with cash generated from operations.


During the three months ended March 31, 2011 , we used net cash provided by operating activities, adjusted to exclude the impact of $10.0 million for acquisition-related costs funded with cash generated from the sale of common stock under our DRP offering, of $67.8 million to fund distributions paid to common stockholders (inclusive of $32.4 million reinvested in our common stock pursuant to our DRP) of $67.5 million .


In the first quarter of 2011, our board of directors elected to reduce the quarterly stockholder distribution rate from $0.15 per share (a 6.0% annualized yield on a $10.00 original share price) to $0.125 per share (a 5.0% annualized yield on a $10.00 original share price) primarily due to economic conditions in the U.S. and deterioration in real estate market fundamentals. During the first quarter of 2011, we funded our stockholder distributions with current period operating cash flows, adjusted for certain acquisition-related costs as described above.  While operational cash flow from our properties remains strong, economic downturns in our markets or in the particular industries in which our tenants operate, could adversely impact the ability of our tenants to make lease payments and our ability to re-lease space on favorable terms when leases expire, either of which circumstance could further adversely affect our ability to fund future distributions to stockholders. We are continuing to carefully monitor our cash flows and market conditions and to assess their impact on our future earnings and future distribution projections.


Election as a REIT


We have elected to be taxed as a REIT under the Code, and have operated as such beginning with our taxable year ended December 31, 2003. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our adjusted taxable income, as defined in the Code, to our stockholders, computed without regard to the dividends-paid deduction and by excluding our net capital gain. As a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income for that year and for the four years following the year during which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT for federal income tax purposes.


Wells TRS is a wholly owned subsidiary of Wells REIT II that is organized as a Delaware limited liability company and includes the operations of, among other things, a full-service hotel. We have elected to treat Wells TRS as a taxable REIT subsidiary. We may perform certain additional, noncustomary services for tenants of our buildings through Wells TRS; however, any earnings related to such services are subject to federal and state income taxes. In addition, for us to continue to qualify as a REIT, we must limit our investments in taxable REIT subsidiaries to 25% of the value of our total assets. Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted rates expected to be in effect when the temporary differences reverse.


No provision for federal income taxes has been made in our accompanying consolidated financial statements, other than the provision relating to Wells TRS, as we made distributions in excess of taxable income for the periods presented. We are subject to certain state and local taxes related to property operations in certain locations, which have been provided for in our accompanying consolidated financial statements.


Inflation


We are exposed to inflation risk, as income from long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per-square-foot basis, or in some cases, annual reimbursement of operating expenses above a certain per-square-foot allowance. However, due to the long-term nature of the leases, the leases may not reset frequently enough to fully cover inflation.


Application of Critical Accounting Policies


Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates


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of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.


Investment in Real Estate Assets





We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income. The estimated useful lives of our assets by class are as follows:


Buildings40 yearsBuilding improvements5-25 yearsSite improvements15 yearsTenant improvementsShorter of economic life or lease termIntangible lease assetsLease term


Evaluating the Recoverability of Real Estate Assets


We continually monitor events and changes in circumstances that could indicate that the carrying amounts of the real estate and related intangible assets of both operating properties and properties under construction, in which we have an ownership interest, either directly or through investments in joint ventures, may not be recoverable. When indicators of potential impairment are present that suggest that the carrying amounts of real estate assets and related intangible assets (liabilities) may not be recoverable, we assess the recoverability of these assets by determining whether the respective carrying values will be recovered through the estimated undiscounted future operating cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying values, we adjust the carrying value of the real estate assets and related intangible assets to the estimated fair values, pursuant to the property, plant, and equipment accounting standard for the impairment or disposal of long-lived assets, and recognize an impairment loss. Estimated fair values are calculated based on the following information, in order of preference, depending upon availability: (i) recently quoted market prices, (ii) market prices for comparable properties, or (iii) the present value of future cash flows, including estimated salvage value. We have determined that there has been no impairment in the carrying value of our real estate assets and related intangible assets (liabilities), as defined above, to date; however, certain of our assets may be carried at more than an amount that could be realized in a current disposition transaction.


Projections of expected future operating cash flows require that we estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the property’s fair value and could result in the misstatement of the carrying value of our real estate assets and related intangible assets and net income (loss).


Allocation of Purchase Price of Acquired Assets


Upon the acquisition of real properties, we allocate the purchase price of properties to tangible assets, consisting of land and building, site improvements, and identified intangible assets and liabilities, including the value of in-place leases, based in each case on our estimate of their fair values.


The fair values of the tangible assets of an acquired property (which includes land and building) are determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and building based on our determination of the relative fair value of these assets. We determine the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors we consider in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases, including leasing commissions and other related costs. In estimating carrying costs, we include real estate taxes, insurance, and other operating expenses during the expected lease-up periods based on current market demand.


Intangible Assets and Liabilities Arising from In-Place Leases where We are the Lessor


As further described below, in-place leases where we are the lessor may have values related to direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease, tenant relationships,


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and effective contractual rental rates that are above or below market rates:


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|• | Direct costs associated with obtaining a new tenant, including commissions, tenant improvements and other direct costs, are estimated based on management’s consideration of current market costs to execute a similar lease. Such direct costs are included in intangible lease origination costs in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases.

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|• | The value of opportunity costs associated with lost rentals avoided by acquiring an in-place lease is calculated based on the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Such opportunity costs are included in intangible lease assets in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases.

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|• | The value of tenant relationships is calculated based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. Values associated with tenant relationships are included in intangible lease assets in the accompanying consolidated balance sheets and are amortized to expense over the remaining terms of the respective leases.

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|• | The value of effective rental rates of in-place leases that are above or below the market rates of comparable leases is calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be received pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining terms of the leases. The capitalized above-market and below-market lease values are recorded as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases.




As of March 31, 2011 and December 31, 2010 , Wells REIT II had the following gross intangible in-place lease assets and liabilities (in thousands):


Intangible Lease AssetsIntangibleLeaseOriginationCostsIntangibleBelow-MarketIn-Place LeaseLiabilitiesAbove-MarketIn-Place  LeaseAssetsAbsorptionPeriod  CostsMarch 31, 2011Gross$133,453$567,958$495,418$169,295Accum$(82,296)$(270,672)$(226,532)$(66,458)Net$51,157$297,286$268,886$102,837December 31, 2010Gross$139,014$534,277$489,361$150,099Accum$(83,233)$(265,747)$(219,447)$(62,165)Net$55,781$268,530$269,914$87,934


For the three months ended March 31, 2011 and the year ended December 31, 2010 , Wells REIT II recognized the following amortization of intangible lease assets and liabilities (in thousands):





Intangible Lease AssetsIntangibleLeaseOriginationCostsIntangibleBelow-MarketIn-Place LeaseLiabilitiesAbove-MarketIn-Place LeaseAssetsAbsorptionPeriod  CostsFor the three months ended March 31, 2011$3,810$15,273$12,601$3,828For the year ended December 31, 2010$17,810$61,743$51,241$14,472





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The remaining net intangible assets and liabilities as of March 31, 2011 will be amortized as follows (in thousands):





Intangible Lease AssetsIntangibleLeaseOriginationCostsIntangibleBelow-MarketIn-Place LeaseLiabilitiesAbove-MarketIn-Place  LeaseAssetsAbsorptionPeriod  CostsFor the nine months ending December 31, 2011$10,352$46,335$36,344$13,041For the years ending December 31:20129,90653,54743,53616,86920137,98746,31540,31816,26920146,84340,62537,24415,83720156,15735,33733,47513,55520165,73824,72425,6268,301Thereafter4,17450,40352,34318,965$51,157$297,286$268,886$102,837


Evaluating the Recoverability of Intangible Assets and Liabilities





The values of intangible lease assets and liabilities are determined based on assumptions made at the time of acquisition and have defined useful lives, which correspond with the lease terms. There may be instances in which intangible lease assets and liabilities become impaired and we are required to write-off the remaining asset or liability immediately or over a shorter period of time. Lease restructurings, including lease terminations and lease extensions, may impact the value and useful life of in-place leases. In-place leases that are terminated, partially terminated, or modified will be evaluated for impairment if the original in-place lease terms have been modified. In the event that the discounted cash flows of the original in-place lease stream do not exceed the discounted modified in-place lease stream, we adjust the carrying value of the intangible lease assets to the discounted cash flows and recognize an impairment loss. For in-place lease extensions that are executed more than one year prior to the original in-place lease expiration date, the useful life of the in-place lease will be extended over the new lease term with the exception of those in-place lease components, such as lease commissions and tenant allowances, which have been renegotiated for the extended term. Renegotiated in-place lease components, such as lease commissions and tenant allowances, will be amortized over the shorter of the useful life of the asset or the new lease term.





Intangible Assets and Liabilities Arising from In-Place Leases where We are the Lessee





In-place ground leases where we are the lessee may have value associated with effective contractual rental rates that are above or below market rates. Such values are calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place lease and (ii) management’s estimate of fair market lease rates for the corresponding in-place lease, measured over a period equal to the remaining terms of the leases. The capitalized above-market and below-market in-place lease values are recorded as intangible lease liabilities or assets and amortized as an adjustment to property operating cost over the remaining term of the respective leases. Wells REIT II had a gross below-market lease asset of approximately $110.7 million and $110.7 million as of March 31, 2011 and December 31, 2010 , and recognized amortization of this asset of approximately $0.5 million for the three months ended March 31, 2011 and approximately $2.1 million for the year ended December 31, 2010 .


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As of March 31, 2011 , the remaining net below-market lease asset will be amortized as follows (in thousands):





For the year ending December 31:2011$1,55120122,06920132,06920142,06920152,06920162,069Thereafter91,416$103,312











Related Parties





Transactions and Agreements





We have entered into agreements with our advisor, WREAS II, and its affiliates, whereby we pay certain fees and reimbursements to WREAS II or its affiliates, for acquisition fees, commissions, dealer-manager fees, asset and property management fees, construction fees, reimbursement of other offering costs, and reimbursement of operating costs. See Note 7 to our accompanying consolidated financial statements included herein for a discussion of the various related-party transactions, agreements, and fees.


Assertion of Legal Action Against Related-Parties


On March 12, 2007, a stockholder of Piedmont Office Realty Trust, Inc. (“Piedmont REIT”) filed a putative class action and derivative complaint, presently styled In re Wells Real Estate Investment Trust, Inc. Securities Litigation , in the United States District Court for the District of Maryland against, among others, Piedmont REIT; Leo F. Wells, III, the Chairman of our Board of Directors; Wells Capital; Wells Management, our property manager; certain affiliates of WREF; the directors of Piedmont REIT; and certain individuals who formerly served as officers or directors of Piedmont REIT prior to the closing of the internalization transaction on April 16, 2007.


The complaint alleged, among other things, violations of the federal proxy rules and breaches of fiduciary duty arising from the Piedmont REIT internalization transaction and the related proxy statement filed with the SEC on February 26, 2007, as amended. The complaint sought, among other things, unspecified monetary damages and nullification of the Piedmont REIT internalization transaction.


On June 27, 2007, the plaintiff filed an amended complaint, which attempted to assert class action claims on behalf of those persons who received and were entitled to vote on the Piedmont REIT proxy statement filed with the SEC on February 26, 2007, and derivative claims on behalf of Piedmont REIT.





On March 31, 2008, the Court granted in part the defendants’ motion to dismiss the amended complaint. The Court dismissed five of the seven counts of the amended complaint in their entirety. The Court dismissed the remaining two counts with the exception of allegations regarding the failure to disclose in the Piedmont REIT proxy statement details of certain expressions of interest in acquiring Piedmont REIT. On April 21, 2008, the plaintiff filed a second amended complaint, which alleges violations of the federal proxy rules based upon allegations that the proxy statement to obtain approval for the Piedmont REIT internalization transaction omitted details of certain expressions of interest in acquiring Piedmont REIT. The second amended complaint seeks, among other things, unspecified monetary damages, to nullify and rescind the internalization transaction, and to cancel and rescind any stock issued to the defendants as consideration for the internalization transaction. On May 12, 2008, the defendants answered and raised certain defenses to the second amended complaint.


On June 23, 2008, the plaintiff filed a motion for class certification. On September 16, 2009, the Court granted the plaintiff’s motion for class certification. On September 20, 2009, the defendants filed a petition for permission to appeal immediately the Court’s order granting the motion for class certification with the Eleventh Circuit Court of Appeals. The petition for permission to appeal was denied on October 30, 2009.


On April 13, 2009, the plaintiff moved for leave to amend the second amended complaint to add additional defendants. The Court


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denied the plaintiff’s motion for leave to amend on June 23, 2009.


On December 4, 2009, the parties filed motions for summary judgment. On August 2, 2010, the Court entered an order denying the defendants’ motion for summary judgment and granting, in part, the plaintiff’s motion for partial summary judgment. The Court ruled that the question of whether certain expressions of interest in acquiring Piedmont REIT constituted “material” information required to be disclosed in the proxy statement to obtain approval for the Piedmont REIT internalization transaction raises questions of fact that must be determined at trial. A trial date has not been set.


Mr. Wells, Wells Capital, and Wells Management believe that the allegations contained in the complaint are without merit and intend to vigorously defend this action. Any financial loss incurred by Wells Capital, Wells Management, or their affiliates could hinder their ability to successfully manage our operations and our portfolio of investments.


Commitments and Contingencies


We are subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 5 of our accompanying consolidated financial statements for further explanation. Examples of such commitments and contingencies include:


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|• | obligations under operating leases;

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|• | obligations under capital leases;

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|• | commitments under existing lease agreements; and

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|- | -----------
|• | litigation.




Subsequent Events





We evaluated subsequent events in connection with the preparation of its consolidated financial statements and notes thereto included in this report on Form 10-Q and note the following items in addition to those disclosed elsewhere in this report:





Private Bond Offering





On April 4, 2011, we sold $250.0 million aggregate principal amount of 5.875% unsecured senior notes due in 2018 (the "Notes") at 99.295 percent of their face value in a private offering. Two separate rating agencies have assigned investment-grade ratings to the Notes. The proceeds from the bond offering, net of fees, of $246.7 million were used to reduce amounts outstanding on the JPMorgan Chase Bridge Loan.





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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a result of our debt facilities, we are exposed to interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flow primarily through a low to moderate level of overall borrowings. However, we currently have a substantial amount of debt outstanding. We manage our ratio of fixed- to floating-rate debt with the objective of achieving a mix that we believe is appropriate in light of anticipated changes in interest rates. We closely monitor interest rates and will continue to consider the sources and terms of our borrowing facilities to determine whether we have appropriately guarded ourselves against the risk of increasing interest rates in future periods.


Additionally, we have entered into interest rate swaps, and may enter into other interest rate swaps, caps, or other arrangements to mitigate our interest rate risk on a related financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes; however, certain of our derivatives may not qualify for hedge accounting treatment. All of our debt was entered into for other-than-trading purposes.


On April 4, 2011, we sold $250.0 million aggregate principal amount of 5.875% unsecured senior notes due in 2018 at 99.295 percent of their face value in a private bond offering. Two rating agencies have assigned investment-grade ratings to these senior notes.  Wells REIT II received proceeds from this bond offering, net of fees, of $246.7 million, all of which were used to reduce amounts outstanding on the JPMorgan Chase Bridge Loan.


On March 7, 2011, we executed the JPMorgan Chase Bridge Loan to finance a portion of the purchase price of the Market Square Buildings.  Under the JPMorgan Chase Bridge Loan, interest is incurred based on, at Wells REIT II's option, LIBOR for one-, two-, or three-month periods, plus an applicable margin of 2.25% (the “Bridge LIBOR Rate”), or at an alternate base rate, plus an applicable margin of 1.25% (the “Bridge Base Rate”).  The Bridge Base Rate for any day is the greatest of (1) the rate of interest publicly announced by JPMorgan Chase Bank as its prime rate in effect in its principal office in New York City for such day, (2) the federal funds rate for such day plus 0.50%, or (3) the one-month LIBOR Rate for such day plus 1.00%.  Should any unpaid principal remain outstanding on the JPMorgan Chase Bridge Facility as of June 5, 2011, we would incur an additional duration fee equal to 0.25% of the principal outstanding on the JPMorgan Chase Bridge Facility at that time. Under the terms of the JPMorgan


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Chase Bridge Loan, accrued interest on Bridge Base Rate loans is payable in arrears on the first day of each calendar month. The accrued interest on Bridge LIBOR Rate loans is payable on the last day of each one-, two-, or three-month interest period. We are required to repay outstanding principal and accrued interest six months after the respective funding dates. All such borrowings shall be prepaid with (a) 100% of the net cash proceeds of all asset sales or other dispositions of properties, (b) 100% of the net cash proceeds of issuances, offerings, or placements of debt obligations, and (c) 100% of the net cash proceeds of issuances of equity securities. We may also prepay all or part of the JPMorgan Chase Bridge Loan at any time subject to, in the case of LIBOR borrowings, payment for any loss, cost or expense incurred by lender as a result of prepayment before the end of the chosen LIBOR interest period.  As of March 31, 2011, the JPMorgan Chase Bridge Loan incurred interest at a rate of approximately 2.56% per annum.


Our financial instruments consist of both fixed-rate and variable-rate debt. Our variable-rate borrowings consist of the JPMorgan Chase Revolving Credit Facility, the JPMorgan Bridge Loan, the Cranberry Woods Drive mortgage note, the 222 E. 41st Street Building mortgage note, the 80 Park Plaza Building mortgage note, and the Three Glenlake Building mortgage note. However, only the JPMorgan Chase Credit Revolving Facility, the JPMorgan Chase Bridge Loan, and the Cranberry Woods Drive mortgage note bear interest at an effectively variable rate, as the variable rates on the 222 E. 41st Street Building mortgage note, the 80 Park Plaza Building mortgage note, and the Three Glenlake Building mortgage note have been effectively fixed through the interest rate swap agreements described below. As of March 31, 2011 , we had $376.0 million outstanding under the JPMorgan Chase Revolving Credit Facility; $300.0 million outstanding on the JPMorgan Chase Bank Bridge Loan; $63.4 million outstanding on the Cranberry Woods Drive variable-rate, term mortgage loan; $166.9 million outstanding on the 222 E. 41st Street Building mortgage note; $61.9 million outstanding on the 80 Park Plaza Building mortgage note; $25.8 million outstanding on the Three Glenlake Building mortgage note; and $500.3 million outstanding on fixed-rate, term mortgage loans. The weighted-average interest rate of all of our debt instruments was 4.43% as of March 31, 2011 .


The 80 Park Plaza Building mortgage note was used to purchase the 80 Park Plaza Building. The note bears interest at one-month LIBOR plus 130 basis points (approximately 1.56% per annum as of March 31, 2011 ) and matures in September 2016. In connection with obtaining the 80 Park Plaza Building mortgage note, we entered into an interest rate swap agreement to hedge exposure to changing interest rates. The interest rate swap agreement has an effective date of September 22, 2006 and matures September 21, 2016. The terms of the interest rate swap agreement effectively fix our interest rate on the 80 Park Plaza Building mortgage note at 6.575% per annum.


The 222 E. 41st Street Building mortgage note was used to purchase the 222 E. 41st Street Building. The note bears interest at one-month LIBOR plus 120 basis points (approximately 1.46% per annum as of March 31, 2011 ) and matures in August 2017. In connection with obtaining the 222 E. 41st Street Building mortgage note, we entered into an interest rate swap agreement to hedge exposure to changing interest rates. The interest rate swap agreement has an effective date of August 16, 2007 and matures August 16, 2017. The interest rate swap effectively fixes our interest rate on the 222 E. 41st Street Building mortgage note at 6.675% per annum.


The Three Glenlake Building mortgage note was used to purchase the Three Glenlake Building. The note bears interest at one-month LIBOR plus 90 basis points (approximately 1.16% per annum as of March 31, 2011 ), and matures in July 2013. The interest rate swap agreement has an effective date of July 31, 2008 and matures July 31, 2013. Interest is due monthly; however, under the terms of the loan agreement, a portion of the monthly debt service amounts accrues and is added to the outstanding balance of the note over the term. The interest rate swap effectively fixes our interest rate on the Three Glenlake Building mortgage note at 5.95% per annum.


Approximately $754.9 million of our total debt outstanding as of March 31, 2011 is subject to fixed rates, either directly or when coupled with an interest rate swap agreement. As of March 31, 2011 , these balances incurred interest expense at an average interest rate of 5.71% and have expirations ranging from 2011 through 2018. A change in the market interest rate impacts the net financial instrument position of our fixed-rate debt portfolio; however, it has no impact on interest incurred or cash flows. The amounts outstanding on our variable-rate debt facilities in the future will largely depend upon the level of investor proceeds raised under our DRP and the rate at which we are able to employ such proceeds in acquisitions of real properties.


We do not believe there is any exposure to increases in interest rates related to the capital lease obligations of $646.0 million at March 31, 2011 , as the obligations are at fixed interest rates.


Foreign Currency Risk


We are also subject to foreign exchange risk arising from our foreign operations in Russia. Foreign operations represented 1.9% and 2.0% of total assets at March 31, 2011 and December 31, 2010 , respectively, and 0.5% and 0.0% of total revenue for the three months ended March 31, 2011 and 2010 , respectively. As compared to rates in effect at March 31, 2011 , an increase or decrease in the U.S. dollar to Russian rouble exchange rate by 10% would not materially impact the accompanying consolidated financial statements.


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|------- | -----------------------
|ITEM 4. | CONTROLS AND PROCEDURES

Management’s Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures


We carried out an evaluation, under the supervision and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods in SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.


Changes in Internal Control Over Financial Reporting


There have been no significant changes in our internal control over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





|         |                  
|-------- | -----------------
|PART II. | OTHER INFORMATION




|        |                  
|------- | -----------------
|ITEM 1. | LEGAL PROCEEDINGS

From time to time, we are party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.





|         |             
|-------- | ------------
|ITEM 1A. | RISK FACTORS

There have been no material changes from the risk factors disclosed in the "Risk Factors" section of our Annual Report on Form 10-K/A for the year ended December 31, 2010 .





|        |                                                            
|------- | -----------------------------------------------------------
|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

|    |                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------
|(a) | All equity securities sold by us in the quarter endedMarch 31, 2011were sold in an offering registered under the Securities Act of 1933.

|    |                
|--- | ---------------
|(b) | Not applicable.

|    |                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------
|(c) | During the quarter endedMarch 31, 2011, we redeemed shares as follows (in thousands, except per-share amounts):

PeriodTotal Number  ofSharesPurchased(1)Average PricePaid per ShareTotal Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms(2)Approximate DollarValue of  SharesAvailable That MayYet BeRedeemed Underthe ProgramJanuary 2011414$8.63414(3)February 2011607$8.98607(3)March 2011797$9.11797(3)


|    |                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------
|(1) | All purchases of our equity securities by us in the three months endedMarch 31, 2011, were made pursuant to our SRP.

|    |                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | We announced the commencement of the program on December 10, 2003 and amendments to the program on April 22, 2004; March 28, 2006; May 11, 2006; August 10, 2006; August 8, 2007; November 13, 2008; March 31, 2009; August 13, 2009; February 18, 2010; July 21, 2010; and September 23, 2010.

|    |                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------
|(3) | We currently limit the dollar value and number of shares that may yet be redeemed under the program as described below.




Under the SRP, we limit the number and dollar value of shares that may be redeemed under the plan as follows:


|  |                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | First, we limit requests for  redemptions other than those made within two years of a stockholder's death on a pro rata basis so that the aggregate of such redemptions during any calendar year do not exceed 5.0% of the weighted-average

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number of shares outstanding in the prior calendar year. Requests precluded by this test are not considered in the test below.


|  |                                                                                                                                                                                                                                                                                                                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | In addition, if necessary, we limit all redemption requests, including those sought within two years of a stockholder’s death, on a pro rata basis so that the aggregate of such redemptions during any calendar year do not exceed the greater of 100% of the net proceeds from our DRP during the calendar year or 5.0% of weighted average number of shares outstanding in the prior calendar year.

Some stockholders may, due to financial hardship, need to sell their shares. Given the current illiquidity of our shares, some third parties have sought to exploit these hardships by offering to purchase our shares at prices substantially below the price at which the shares were issued by us. (Third-party tender offers have been conducted at $3.00, $4.00, $4.25 and $4.50 per share during the nine months ended March 31, 2011 .) In order to offer stockholders who are facing a financial hardship a liquidity option that is more attractive than the steeply discounted prices recently offered for our shares by third-party tender offerors, we effect Ordinary Redemptions (as defined in the SRP) at a redemption price equal to 60.0% of the price at which the share was originally issued by us. This redemption price for Ordinary Redemptions will remain in effect until the date that we publish an estimate of the value of a share of our common stock which estimate is not based on the most recent prices paid in a public offering of our common stock (the “Net Asset Value Publication Date”). This price will automatically adjust for special distributions and to account for certain recapitalizations. On or after the Net Asset Valuation Date, the Ordinary Redemption price will be 95.0% of the estimated per share value.


When setting the price at which Ordinary Redemptions are effected (up to $6.00 per share as described more fully below), we did not conduct a valuation of our portfolio. Rather we chose a redemption price that was substantially higher than the prices offered in recent tender offers for our shares but that was low enough that we could be confident that redemptions at such price would be an attractive use of cash without having to engage an appraiser or another party to value our portfolio. The $6.00 price at which ordinary redemptions will generally be effected is not an expression of our view of a value of our shares.


Participation in the SRP is limited to exclude shares purchased from another stockholder if the purchase occured after July 27, 2010. In other words, if shares are transferred for value by a stockholder after July 27, 2010, the transferee and all subsequent holders of such shares are not eligible to participate in the SRP with respect to such shares.


The full text of the Amended and Restated Share Redemption Program was filed as an exhibit to our Annual Report on Form 10-K and filed with the Commission on March 11, 2011.





|        |                                
|------- | -------------------------------
|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES

|    |                                                                     
|--- | --------------------------------------------------------------------
|(a) | There have been no defaults with respect to any of our indebtedness.

|    |                
|--- | ---------------
|(b) | Not applicable.




|        |         
|------- | --------
|ITEM 4. | RESERVED




|        |                  
|------- | -----------------
|ITEM 5. | OTHER INFORMATION

|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | During thefirstquarter of2011, there was no information that was required to be disclosed in a report on Form 8-K that was not disclosed in a report on Form 8-K.

|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | There are no material changes to the procedures by which stockholders may recommend nominees to our board of directors since the filing of our Schedule 14A.




|        |         
|------- | --------
|ITEM 6. | EXHIBITS

The exhibits required to be filed with this report are set forth on the Exhibit Index to this quarterly report attached hereto.





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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





WELLS REAL ESTATE INVESTMENT TRUST II, INC.(Registrant)Dated:May 6, 2011By:/s/ DOUGLAS P. WILLIAMSDouglas P. WilliamsExecutive Vice President, Treasurer andPrincipal Financial Officer








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EXHIBIT INDEX TO


FIRST QUARTER 2011 FORM 10-Q OF


WELLS REAL ESTATE INVESTMENT TRUST II, INC.


The following documents are filed as exhibits to this report. Exhibits that are not required for this report are omitted.





Exhibit No.Description3.1Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 3 to the Registration Statement on Form S-11 (No. 333-107066) filed with the Commission on November 25, 2003).3.2Articles of Amendment of Wells Real Estate Investment Trust II, Inc., effective as of October 1, 2008 (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2008).3.3Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007).3.4Amendment No. 1 to Amended and Restated Bylaws (incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007).4.1Form of Dividend Reinvestment Enrollment Form (incorporated by reference to Appendix A to the Prospectus included in Post-Effective Amendment No. 7 to the Registration Statement on Form S-11 on Form S-3 (No. 333-144414) and filed with the Commission on August 27, 2010(the "DRP Registration Statement")).4.2Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to Amendment No. 2 to the Registration Statement on Form S-11 (No. 333-144414) filed with the Commission on September 22, 2008).4.3Amended and Restated Dividend Reinvestment Plan (incorporated by reference to Appendix B to the Prospectus included in the DRP Registration Statement).4.4Amended and Restated Share Redemption Program (incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K filed with the Commission on March 11, 2011).10.1Advisory Agreement between the Company and Wells Real Estate Advisory Services II, LLC (the "Advisor") dated January 1, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K filed with the Commission on March 11, 2011).10.2*Assignment and Assumption of Master Property Management  Leasing and Construction Agreement by and among Wells Management Company, Inc., the Advisor, and the Company dated January 1, 2011.10.3*Purchase and Sale Agreement by and between Avenue Associates Limited Partnership and the Company dated February 22, 2011.10.4*Bridge Note between Wells Operating Partnership II, L.P. and J.P. Morgan Chase Bank, N.A. dated March 7, 2011.10.5*Credit Agreement by and among Wells Operating Partnership II, L.P. and J.P. Morgan Securities Inc. as lead arranger sole bookrunner and J.P. Morgan Chase Bank, N.A., as administrative agent dated March 7, 2011.31.1*Certification of the Principal Executive Officer of the Company, pursuant to Securities Exchange Act Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*Certification of the Chief Financial Officer of the Company, pursuant to Securities Exchange Act Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*Certification of the Principal Executive Officer and Chief Financial Officer of the Company, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 *Filed herewith.





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