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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER 001-16785
American Spectrum Realty, Inc.
(Exact name of Registrant as specified in its charter)
State of Maryland | 52-2258674 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
5850 San Felipe, Suite 450 | ||
Houston, Texas 77057 | 77057 | |
(Address of principal executive offices) | (Zip Code) |
(713) 706-6200
(Registrant’s telephone number, including area code)
(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. Yesþ Noo
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero | Accelerated filero | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller Reporting Companyþ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).o Yesþ No
As of October 31, 2008, 1,384,598 shares of Common Stock ($.01 par value) were outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN SPECTRUM REALTY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except share amounts)
September 30, 2008 | December 31, 2007 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Real estate held for investment | $ | 257,630 | $ | 238,053 | ||||
Accumulated depreciation | (58,469 | ) | (48,757 | ) | ||||
Real estate held for investment, net | 199,161 | 189,296 | ||||||
Real estate held for sale | — | 1,996 | ||||||
Cash and cash equivalents | 1,420 | 847 | ||||||
Restricted cash | — | 3,565 | ||||||
Tenant and other receivables, net of allowance for doubtful accounts of $714 and $186, respectively | 726 | 561 | ||||||
Deferred rents receivable | 1,887 | 1,589 | ||||||
Deferred tax asset | 1,316 | — | ||||||
Investment in management company | 4,000 | 4,000 | ||||||
Prepaid and other assets, net | 13,600 | 10,932 | ||||||
Total Assets | $ | 222,110 | $ | 212,786 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Notes payable, including premium of $30 and $64, respectively | $ | 202,814 | $ | 186,824 | ||||
Liabilities related to real estate held for sale | — | 2,318 | ||||||
Deferred tax liability | — | 1,777 | ||||||
Accounts payable | 2,964 | 2,822 | ||||||
Accrued and other liabilities | 11,150 | 8,457 | ||||||
Total Liabilities | 216,928 | 202,198 | ||||||
Minority interest | 3,815 | 4,522 | ||||||
Stockholders’ Equity: | ||||||||
Preferred stock, $.01 par value; authorized, 25,000,000 shares, none issued and outstanding | — | — | ||||||
Common stock, $.01 par value; authorized, 100,000,000 shares; issued, 1,620,304 and 1,613,554 shares, respectively; outstanding, 1,384,598 and 1,378,214 shares, respectively | 16 | 16 | ||||||
Additional paid-in capital | 46,774 | 46,693 | ||||||
Accumulated deficit | (42,328 | ) | (37,557 | ) | ||||
Treasury stock, at cost, 235,706 and 235,340 shares, respectively | (3,095 | ) | (3,086 | ) | ||||
Total Stockholders’ Equity | 1,367 | 6,066 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 222,110 | $ | 212,786 | ||||
The accompanying notes are an integral part of these consolidated condensed financial statements
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AMERICAN SPECTRUM REALTY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
REVENUES: | ||||||||||||||||
Rental revenue | $ | 9,082 | $ | 7,745 | $ | 26,164 | $ | 22,746 | ||||||||
Interest and other income | 32 | 54 | 162 | 112 | ||||||||||||
Total revenues | 9,114 | 7,799 | 26,326 | 22,858 | ||||||||||||
EXPENSES: | ||||||||||||||||
Property operating expense | 4,958 | 3,679 | 12,740 | 9,964 | ||||||||||||
Corporate general and administrative | 854 | 863 | 2,735 | 2,545 | ||||||||||||
Depreciation and amortization | 3,686 | 3,407 | 10,474 | 9,443 | ||||||||||||
Interest expense | 3,501 | 3,262 | 9,968 | 8,898 | ||||||||||||
Total expenses | 12,999 | 11,211 | 35,917 | 30,850 | ||||||||||||
OTHER LOSS: | ||||||||||||||||
Loss on extinguishment of debt | — | (2,413 | ) | — | (2,413 | ) | ||||||||||
Total other loss | — | (2,413 | ) | — | (2,413 | ) | ||||||||||
Net loss from continuing operations before deferred income tax benefit and minority interest | (3,885 | ) | (5,825 | ) | (9,591 | ) | (10,405 | ) | ||||||||
Deferred income tax benefit | 1,376 | 2,151 | 3,389 | 3,935 | ||||||||||||
Net loss from continuing operations before minority interest | (2,509 | ) | (3,674 | ) | (6,202 | ) | (6,470 | ) | ||||||||
Minority interest (share from continuing operations) | 323 | 475 | 800 | 842 | ||||||||||||
Net loss from continuing operations | (2,186 | ) | (3,199 | ) | (5,402 | ) | (5,628 | ) | ||||||||
Discontinued operations: | ||||||||||||||||
(Loss) gain from discontinued operations | — | (5 | ) | 5 | (26 | ) | ||||||||||
Gain on sale of discontinued operations | — | — | 1,141 | — | ||||||||||||
Deferred income tax benefit (expense) | — | 2 | (421 | ) | 10 | |||||||||||
Minority interest | — | 0 | (94 | ) | 2 | |||||||||||
(Loss) income from discontinued operations | — | (3 | ) | 631 | (14 | ) | ||||||||||
Net loss | $ | (2,186 | ) | $ | (3,202 | ) | $ | (4,771 | ) | $ | (5,642 | ) | ||||
Basic and diluted per share data: | ||||||||||||||||
Net loss from continuing operations | $ | (1.59 | ) | $ | (2.32 | ) | $ | (3.93 | ) | $ | (4.08 | ) | ||||
Income (loss) from discontinued operations | — | — | 0.46 | (0.01 | ) | |||||||||||
Net loss | $ | (1.59 | ) | $ | (2.32 | ) | $ | (3.47 | ) | $ | (4.09 | ) | ||||
Basic weighted average shares used | 1,376,098 | 1,380,093 | 1,375,942 | 1,379,039 |
The accompanying notes are an integral part of these consolidated condensed financial statements
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AMERICAN SPECTRUM REALTY INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)
Common | Common | Additional | ||||||||||||||||||||||
Stock | Stock | Paid-In | Accumulated | Treasury | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Stock | Total Equity | |||||||||||||||||||
Balance, January 1, 2008 | 1,613,554 | $ | 16 | $ | 46,693 | $ | (37,557 | ) | $ | (3,086 | ) | $ | 6,066 | |||||||||||
Common stock repurchase | (9 | ) | (9 | ) | ||||||||||||||||||||
Issuance of common stock to officers and directors | 4,250 | — | — | — | — | — | ||||||||||||||||||
Exercise of stock options | 2,500 | 31 | 31 | |||||||||||||||||||||
Stock-based compensation | 50 | 50 | ||||||||||||||||||||||
Net loss | (4,771 | ) | (4,771 | ) | ||||||||||||||||||||
Balance, September 30, 2008 | 1,620,304 | $ | 16 | $ | 46,774 | $ | (42,328 | ) | $ | (3,095 | ) | $ | 1,367 | |||||||||||
The accompanying notes are an integral part of these consolidated condensed financial statements
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AMERICAN SPECTRUM REALTY, INC
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2008 | 2007 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (4,771 | ) | $ | (5,642 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 10,497 | 9,542 | ||||||
Deferred rental income | (298 | ) | (236 | ) | ||||
Minority interest | (706 | ) | (844 | ) | ||||
Net gain on sale of real estate asset | (1,141 | ) | — | |||||
Loss on extinguishment of debt | — | 2,413 | ||||||
Stock-based compensation expense | 50 | 36 | ||||||
Income tax benefit | (2,968 | ) | (4,047 | ) | ||||
Amortization of note payable premiums, included in interest expense | (34 | ) | (262 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
(Increase) decrease in tenant and other receivables | (28 | ) | 83 | |||||
Increase in prepaid and other assets | (2,526 | ) | (1,355 | ) | ||||
Increase (decrease) in accounts payable | 130 | (279 | ) | |||||
Increase in accrued and other liabilities | 2,302 | 1,369 | ||||||
Net cash provided by operating activities | 507 | 778 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds received from sale of real estate asset | 3,014 | — | ||||||
Real estate acquisitions | (17,250 | ) | (26,140 | ) | ||||
Capital improvements to real estate assets | (3,086 | ) | (3,044 | ) | ||||
Net cash used in investing activities: | (17,322 | ) | (29,184 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from borrowings | 470 | 53,566 | ||||||
Proceeds from borrowings — property acquisitions | 16,950 | 23,422 | ||||||
Repayment of borrowings — property sales | (2,218 | ) | — | |||||
Repayment of borrowings — refinances | (150 | ) | (44,523 | ) | ||||
Repayment of borrowings — scheduled payments | (1,250 | ) | (3,268 | ) | ||||
Repurchase of common stock | (9 | ) | (211 | ) | ||||
Acquisition of minority interest in the operating partnership | (1 | ) | (145 | ) | ||||
Proceeds from exercise of stock options | 31 | 85 | ||||||
Release of restricted cash | 3,565 | — | ||||||
Net cash provided by financing activities: | 17,388 | 28,926 | ||||||
Increase in cash and cash equivalents | 573 | 520 | ||||||
Cash and cash equivalents, beginning of period | 847 | 1,166 | ||||||
Cash and cash equivalents, end of period | $ | 1,420 | $ | 1,686 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | 9,593 | $ | 8,906 | ||||
Cash paid for income taxes | 151 | 325 |
The accompanying notes are an integral part of these consolidated condensed financial statements
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AMERICAN SPECTRUM REALTY, INC.
Notes to Consolidated Condensed Financial Statements
NOTE 1. DESCRIPTION OF BUSINESS
American Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its subsidiaries, the “Company”) is a Maryland corporation established on August 8, 2000. The Company is a full-service real estate corporation, which owns, manages and operates income-producing properties. Substantially all of the Company’s assets are held through an operating partnership (the “Operating Partnership”) in which the Company, as of September 30, 2008, held the sole general partner interest of .98% and a limited partnership interest totaling 86.14%. As of September 30, 2008, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 29 properties, which consisted of 23 office buildings, four industrial properties and two retail properties. The 29 properties are located in five states.
During the nine months ended September 30, 2008, the Company acquired a 178,000 square foot office property consisting of two adjacent buildings located in Houston, Texas. Also during the nine months ended September 30, 2008, the Company sold Columbia, one of the Company’s non-core properties. Columbia is a 58,783 square foot retail center located in Columbia, South Carolina. During 2007, the Company acquired a 400,000 square foot industrial park and two retail properties aggregating 76,000 square feet. All three properties acquired in 2007 are located in Houston, Texas. No properties were sold during 2007. The property acquisitions are part of the Company’s strategy to acquire value-added real estate in its core markets of Texas, California and Arizona.
American Spectrum Realty Management, Inc., (“ASRM”) a wholly-owned subsidiary of the Company, has started a third party management and leasing program. The program was initiated to generate additional income without the heavy capital cost for acquisitions. Currently, ASRM leases and manages approximately 1.2 million square feet of office, retail and industrial projects for third parties. ASRM plans to aggressively pursue third party management and leasing opportunities in the Company’s core markets of California, Texas and Arizona.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Our accompanying condensed consolidated financial statements have been prepared without audit in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Pursuant to such rules and regulations, these financial statements do not include all disclosures required by accounting principles generally accepted in the U.S. for complete financial statements. The condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. Such adjustments are considered to be of a normal recurring nature unless otherwise identified. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or for any future period.
The accompanying condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.
The financial statements include the accounts of the Operating Partnership and all other subsidiaries of the Company. All significant intercompany transactions, receivables and payables have been eliminated in consolidation.
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RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the current year presentation. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, real estate designated as held for sale are accounted for in accordance with the provisions of SFAS No. 144 and the results of operations of these properties are included in income from discontinued operations. Prior periods have been reclassified for comparability, as required.
SEGMENT REPORTING
The Company operates as one business operating and reportable segment.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007),Business Combinations(“SFAS No. 141R”). SFAS No. 141R replaces FASB Statement No. 141,Business Combinations(“SFAS No. 141”). The statement retains the purchase method of accounting used in business combinations but replaces SFAS No. 141 by establishing principles and requirements for the recognition and measurement of assets, liabilities and goodwill, including the requirement that most transaction and restructuring costs related to the acquisition be expensed. In addition, the statement requires disclosures to enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will adopt SFAS No. 141R on January 1, 2009 for acquisitions on or after this date. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 141R on its consolidated results of operations and financial condition.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurement(“SFAS No. 157”), effective for the Company’s fiscal year beginning January 1, 2008. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but simplifies and codifies related guidance within General Accepted Accounting Principles. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. The adoption of this pronouncement did not have a material impact on the Company’s consolidated results of operations and financial condition. As of September 30, 2008, the Company had no financial instruments requiring fair value measurement.
In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51(“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2009. In accordance with SFAS No. 160, effective January 1, 2009, the Company’s minority interest balance, which at September 30, 2008 was $3,815,000, will be included in Stockholders’ Equity as required.
STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004),Share-Based Payment(“SFAS 123R”), using the modified prospective transition method and, therefore, has not restated results for prior periods. Under this transition method, stock-based compensation expense beginning with the first quarter of 2006 included compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS 123”). Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in
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accordance with the provisions of SFAS 123R. The Company is recognizing these compensation costs on a straight-line basis over the requisite service period of the award, which range from immediate vesting to vesting over a three-year period. Prior to the January 1, 2006 adoption of SFAS 123R, the Company recognized stock-based compensation expense in accordance with Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees(“APB 25”). In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. See Note 9 for a further discussion on stock-based compensation.
MINORITY INTEREST
Unit holders in the Operating Partnership (other than the Company) held a 12.88% and 12.94% limited partnership interest in the Operating Partnership, as limited partners, at September 30, 2008 and December 31, 2007, respectively. Each of the holders of the interests in the Operating Partnership (other than the Company) has the option (exercisable after the first anniversary of the issuance of the OP Units) to redeem its OP Units and to receive, at the option of the Company, in exchange for each four OP Units, either (i) one share of Common Stock of the Company, or (ii) cash equal to the value of one share of Common Stock of the Company at the date of conversion, but no fractional shares will be issued.
NET LOSS PER SHARE
Net loss per share is calculated based on the weighted average number of common shares outstanding. The Company incurred net losses for each of the three and nine month periods ended September 30, 2008 and September 30, 2007. In accordance with SFAS No. 128,Earnings Per Share,stock options outstanding of 29,375 and 32,813 and OP Units (other than those held by the Company) outstanding of 823,388 and 823,509 (convertible into approximately 205,847 and 205,877 shares of common stock), at September 30, 2008 and 2007, respectively, have not been included in the Company’s net loss per share calculations for periods presented since their effect would be anti-dilutive.
INCOME TAXES
In May 2006, the State of Texas enacted a margin tax which became effective in 2008. This margin tax required each of the Company’s limited partnerships and limited liability companies that operate in Texas to pay a tax of 1.0% on their “margin” as defined in the law, beginning in 2008 based on 2007 results. The legislation revised the Texas franchise tax to create a new tax on virtually all Texas businesses. The margin tax has not had a material effect on the Company’s income tax liability.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely–than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, the Company adopted the provisions of FIN 48 with was no material effect on its financial statements. As a result, there was no cumulative effect related to adopting FIN 48.
As of September 30, 2008, the Company had unrecognized tax benefits of approximately $127,000, all of which would affect our effective tax rate if recognized. The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months. The Company’s policy is to recognize interest related to any unrecognized tax benefits as interest expense and penalties as operating expenses. There are no significant penalties or interest accrued at September 30, 2008. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company’s federal and state income tax returns are open to audit under the statute of limitations for the years ending December 31, 2004 through 2007.
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NOTE 3. REAL ESTATE
ACQUISITIONS
2008
On April 30, 2008, the Company purchased Fountain View Place, a 178,000 square foot office property located in Houston, Texas. The project, which consists of two adjacent buildings, is within blocks of the Company’s 2401 Fountain View office building. Acquisition costs for the property were funded with new mortgage debt and proceeds from a tax-deferred exchange.
2007
In March and April 2007, the Company completed the acquisition of a multi-tenant industrial park located in Houston, Texas. The industrial park consists of approximately 400,000 leasable square feet. The park includes 12 acres of land on which the Company anticipates developing an additional 100,000 square feet of multi-tenant industrial space. The Company also acquired two retail properties located in Houston Texas in April 2007. These two properties have an aggregate rentable square footage of 76,000 feet. Acquisition costs for the three properties were primarily funded with mortgage debt, with the remainder in cash.
DISPOSITIONS
2008
During the first quarter of 2008, the Company sold a 58,783 square foot retail property (“Columbia’) located in Columbia, South Carolina for $3,200,000. The sale generated net proceeds of approximately $800,000, of which $300,000 was used to assist with the acquisition of Fountain View Place.
2007
No properties were sold during 2007.
NOTE 4. DISCONTINUED OPERATIONS
Real estate assets held for sale.
At December 31, 2007, Columbia was classified as “Real estate held for sale.” The property was sold in February 2008. No real estate assets were classified as held for sale by the Company at September 30, 2008.
The carrying amount of Columbia at December 31, 2007 is summarized below (dollars in thousands).
Consolidated Condensed Balance Sheet | December 31, 2007 | |||
Real estate | $ | 1,808 | ||
Other | 188 | |||
Real estate assets held for sale | $ | 1,996 | ||
Note payable | $ | 2,222 | ||
Accounts payable | 12 | |||
Accrued and other liabilities | 84 | |||
Liabilities related to real estate held for sale | $ | 2,318 | ||
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Net income (loss) from discontinued operations.
The operations of discontinued operations for the three and nine months ended September 30, 2008 and 2007 are summarized below (dollars in thousands):
Three Months Ended September 30, | ||||||||
Consolidated Condensed Statements of Operations | 2008 | 2007 | ||||||
Rental revenue | $ | — | $ | 88 | ||||
Total expenses | — | 93 | ||||||
Loss from discontinued operations before income tax benefit and minority interest | — | (5 | ) | |||||
Income tax benefit | — | 2 | ||||||
Minority interest from discontinued operations | — | — | ||||||
Loss from discontinued operations | $ | — | $ | (3 | ) | |||
Nine Months Ended September 30, | ||||||||
Consolidated Condensed Statements of Operations | 2008 | 2007 | ||||||
Rental revenue | $ | 73 | $ | 265 | ||||
Total expenses | 68 | 291 | ||||||
Income (loss) from discontinued operations before gain on sale, income tax (expense) benefit and minority interest | 5 | (26 | ) | |||||
Gain on sale of discontinued operations | 1,141 | — | ||||||
Income tax (expense) benefit | (421 | ) | 10 | |||||
Minority interest from discontinued operations | (94 | ) | 2 | |||||
Income (loss) from discontinued operations | $ | 631 | $ | (14 | ) | |||
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NOTE 5. NOTES PAYABLE, NET OF PREMIUM
The Company had the following notes payable outstanding as of September 30, 2008 and December 31, 2007 (dollars in thousands):
September 30, 2008 | December 31, 2007 | |||||||||||||||||||
Maturity | Principal | Interest | Principal | Interest | ||||||||||||||||
Property (unless otherwise noted) | Date | Balance | Rate | Balance | Rate | |||||||||||||||
Fixed Rate | ||||||||||||||||||||
Fountain View Place | 4/29/2009 | 1,700 | 10.00 | % | — | — | ||||||||||||||
Fountain View Place | 4/29/2009 | 2,500 | 18.00 | % | — | — | ||||||||||||||
Pacific Spectrum | 6/10/2009 | 5,361 | 8.02 | % | 5,422 | 8.02 | % | |||||||||||||
1501 Mockingbird | 6/30/2009 | 301 | 6.00 | % | 304 | 6.00 | % | |||||||||||||
6430 Richmond Atrium | 6/30/2009 | 718 | 5.50 | % | 726 | 5.50 | % | |||||||||||||
Morenci | 12/01/2009 | 1,547 | 6.60 | % | 1,617 | 6.60 | % | |||||||||||||
Corporate — Secured (1) | 2/7/2010 | 1,947 | 7.50 | % | 1,951 | 8.07 | % | |||||||||||||
Bristol Bay | 8/1/2011 | 7,030 | 7.58 | % | 7,101 | 7.58 | % | |||||||||||||
Technology | 8/1/2011 | 7,271 | 7.44 | % | 7,346 | 7.44 | % | |||||||||||||
Creekside | 12/1/2011 | 5,930 | 7.17 | % | 5,993 | 7.17 | % | |||||||||||||
16350 Park Ten Place | 5/11/2012 | 4,542 | 7.45 | % | 4,586 | 7.45 | % | |||||||||||||
16360 Park Ten Place | 5/11/2012 | 3,559 | 7.45 | % | 3,593 | 7.45 | % | |||||||||||||
2855 Mangum | 5/11/2012 | 2,622 | 7.45 | % | 2,647 | 7.45 | % | |||||||||||||
2855 Mangum | 5/11/2012 | 1,487 | 6.00 | % | 1,531 | 6.00 | % | |||||||||||||
6430 Richmond Atrium | 5/11/2012 | 2,201 | 7.45 | % | 2,222 | 7.45 | % | |||||||||||||
Southwest Pointe | 6/1/2012 | 2,760 | 7.33 | % | 2,787 | 7.33 | % | |||||||||||||
16350 Park Ten Place | 5/11/2012 | 501 | 7.45 | % | 506 | 7.45 | % | |||||||||||||
16360 Park Ten Place | 8/11/2012 | 393 | 7.45 | % | 397 | 7.45 | % | |||||||||||||
11500 Northwest Freeway | 6/1/2014 | 4,162 | 5.93 | % | 4,208 | 5.93 | % | |||||||||||||
11500 Northwest Freeway | 6/1/2014 | 301 | 5.93 | % | 304 | 5.93 | % | |||||||||||||
5850 San Felipe | 8/1/2014 | 5,198 | 5.65 | % | 5,258 | 5.65 | % | |||||||||||||
Northwest Corporate Center | 8/1/2014 | 5,471 | 6.26 | % | 5,527 | 6.26 | % | |||||||||||||
14741 Yorktown | 9/1/2014 | 8,600 | 5.32 | % | 8,600 | 5.32 | % | |||||||||||||
8100 Washington | 2/22/2015 | 2,241 | 5.59 | % | 2,266 | 5.59 | % | |||||||||||||
8300 Bissonnet | 5/1/2015 | 4,614 | 5.51 | % | 4,662 | 5.51 | % | |||||||||||||
1501 Mockingbird | 7/1/2015 | 3,299 | 5.28 | % | 3,332 | 5.28 | % | |||||||||||||
5450 Northwest Central | 9/1/2015 | 2,685 | 5.38 | % | 2,715 | 5.38 | % | |||||||||||||
800 Sam Houston Parkway | 12/29/2015 | 2,384 | 6.25 | % | 2,420 | 6.25 | % | |||||||||||||
888 Sam Houston Parkway | 12/29/2015 | 2,384 | 6.25 | % | 2,420 | 6.25 | % | |||||||||||||
2401 Fountain View | 3/1/2016 | 12,360 | 5.82 | % | 12,482 | 5.82 | % | |||||||||||||
12000 Westheimer | 1/1/2017 | 4,250 | 5.70 | % | 4,250 | 5.70 | % | |||||||||||||
Gray Falls | 1/1/2017 | 3,100 | 5.70 | % | 3,100 | 5.70 | % | |||||||||||||
6420 Richmond Atrium | 6/5/2017 | 6,400 | 5.87 | % | 6,400 | 5.87 | % | |||||||||||||
7700 Building | 8/1/2017 | 45,000 | 5.99 | % | 45,000 | 5.99 | % | |||||||||||||
Fountain View Place | 4/29/2018 | 12,706 | 6.50 | % | — | — | ||||||||||||||
Subtotal | $ | 177,525 | $ | 161,673 | ||||||||||||||||
Variable Rate | ||||||||||||||||||||
Corporate — Unsecured (2) | 1/12/2010 | 1,350 | 7.00 | % | 1,500 | 8.25 | % | |||||||||||||
Beltway Industrial (3) | 5/9/2010 | 17,170 | 7.00 | % | 17,000 | 7.64 | % | |||||||||||||
Corporate — Unsecured (4) | 5/31/2010 | 500 | 7.00 | % | 200 | 8.25 | % | |||||||||||||
Northwest Spectrum Plaza | 4/19/2012 | 3,238 | 4.86 | % | 3,315 | 7.64 | % | |||||||||||||
Windrose | 4/19/2012 | 3,001 | 4.86 | % | 3,072 | 7.64 | % | |||||||||||||
Subtotal | $ | 25,259 | $ | 25,087 | ||||||||||||||||
Loan Premium | 30 | 64 | ||||||||||||||||||
Total | $ | 202,814 | $ | 186,824 | ||||||||||||||||
(1) | In August 2008, the lender extended the maturity date of the note from October 1, 2008 to February 7, 2010. The interest rate changed from a variable rate to a 7.50% fixed rate. | |
(2) | In May 2008, the Company made a principal payment of $150,000 on the note, which reduced the principal balance to $1,350,000 and the lender extended the maturity date of the note from June 12, 2008 to January 12, 2009. In October 2008, the Company made a principal payment of $150,000 on the note which reduced the principal balance to $1,200,000 and the lender extended the maturity date of the note from January 12, 2009 to January 12, 2010. | |
(3) | In August 2008, the lender funded the Company $170,000 for capital expenditures incurred at the property. An additional $205,000 in unfunded principal is currently available for future capital expenditures. |
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(4) | In March 2008, the lender extended the maturity date of the note from May 31, 2008 to May 31, 2010 and funded the Company an additional $300,000, which increased the principal balance to $500,000. |
In April 2008, in connection with the acquisition of Fountain View Place, an office property in Houston, Texas, the Company obtained new mortgage debt of $16,940,000. The debt is comprised of three loans; i) a $12,740,000 ten-year bank loan which bears interest at a fixed rate of 6.5% per annum, ii) a $1,700,000 one-year junior loan from the same bank which bears interest at a fixed rate of 10% per annum, and iii) a $2,500,000 one-year junior loan from a private firm, which bears interest at a rate of 18% per annum. The $2,500,000 loan contains an option to extend maturity for two six-month terms.
The Company is not in compliance with a debt covenant on a mortgage loan secured by one of its office properties located in Houston, Texas. The debt covenant requires the Company to maintain a minimum tangible book net worth as defined in the debt agreement. In the event the lender elects to enforce the non-compliance matter, the Company will attempt to negotiate a revision to the loan covenant. If a refinance of the loan becomes necessary, the Company believes it could obtain a new mortgage loan for an amount in excess of the current debt balance and prepayment costs associated with the current loan.
NOTE 6. NET LOSS ON EXTINGUISHMENT OF DEBT
During the second quarter of 2007, the Company recorded a loss on extinguishment of debt of $2,413,000 in connection with the loan refinance on 7700 Irvine Center, an office property located in Irvine, California. The loss consisted of a prepayment penalty of $3,536,000, partially offset by the write-off of unamortized loan premium of $1,123,000.
The net loss on extinguishment of debt is included in other loss in the consolidated statements of operations.
NOTE 7. MINORITY INTEREST
In accordance with SFAS No. 160, effective January 1, 2009 and more fully described in Note 1, the Company’s minority interest balance, which at September 30, 2008 was $3,815,000, will be included in Stockholders’ Equity as required.
OP Units (other than those held by the Company) of 823,388 (convertible into approximately 205,847 shares of common stock) were outstanding as of September 30, 2008.
During the nine months ended September 30, 2008, 121 OP Units were redeemed for cash of approximately $1,000. No OP Units were exchanged for stock during the nine months ended September 30, 2008.
During the year ended December 31, 2007 a total of 21,998 OP Units were redeemed for cash of approximately $145,000. No OP Units were exchanged for stock during 2007.
NOTE 8. REPURCHASE OF COMMON STOCK
In January 2006, the Company’s Board of Directors authorized the repurchase of up to an additional 100,000 shares of its common stock, which increased the authorized amount to 200,000 shares. The stock repurchases were made from time to time in open market transactions. In May 2008, the authorization to repurchase shares in open market transactions was withdrawn by the Board of Directors.
In April 2008, 366 shares were repurchased in a private transaction for $9,143, or $24.98 per share.
During 2007, a total of 8,590 shares were repurchased in open market transactions, increasing the total number of shares repurchased under the program to 122,206 as of December 31, 2007. The total cost of the 8,590 shares repurchased amounted to $211,000 at an average price of $24.60 per share inclusive of transaction fees.
NOTE 9. STOCK-BASED COMPENSATION
The Company has in effect its Omnibus Stock Incentive Plan (the “Plan”), which is administered by the Board of Directors, and provides for the granting of incentive and non-qualified stock options, stock appreciation rights, restricted stock, performance units and performance shares. The Board has reserved a total of 180,000 shares under the Plan. As of September 30, 2008, 111,314 ASR shares were available for issuance to executive officers, directors or other key employees of the Company.
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In accordance with SFAS No. 123R, stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated on the grant date using the Black-Scholes option-pricing model. The Company recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award.
Total stock-based compensation expense recognized for the three months ended September 30, 2008 and 2007 amounted to $20,000, or $.01 per share and $15,000, or $.01 per share, respectively. Total stock-based compensation expense recognized for the nine months ended September 30, 2008 and 2007 amounted to $50,000, or $.04 per share and $36,000, or $.03 per share, respectively. Compensation expense is included in general and administrative expense in the Company’s consolidated condensed statement of operations for all periods presented.
Stock Options
No stock options have been granted since 2006. The Company has a policy of issuing new shares upon the exercise of stock options. During the nine months ended September 30, 2008, 2,500 options were exercised. Cash of $31,069 was received from the exercise of these options.
The following table summarizes activity and outstanding stock options under the plan:
Shares | Weighted Average | Aggregate | ||||||||||
Under Option | Exercise Price | Intrinsic Value | ||||||||||
Outstanding on January 1, 2008 | 32,813 | $ | 24.07 | |||||||||
Granted | — | — | ||||||||||
Forfeited | (938 | ) | $ | 14.86 | ||||||||
Exercised | (2,500 | ) | $ | 12.43 | $ | 30,181 | ||||||
Outstanding on September 30, 2008 | 29,375 | $ | 23.93 | $ | 406,625 | |||||||
Exercisable as of September 30, 2008 | 27,813 | $ | 24.25 | $ | 384,344 | |||||||
The following table summarizes certain information for stock options outstanding on September 30, 2008:
Weighted Average | Weighted | |||||||||
Range of | Remaining | Average | ||||||||
Exercise | Number | Contractual | Exercise | |||||||
Price | Outstanding | Life | Price | |||||||
$ 8.10 — $12.20 | 12,500 | 5.5 years | $ | 10.66 | ||||||
$18.25 — $27.16 | 11,250 | 6.0 years | $ | 20.65 | ||||||
$60.00 — $60.00 | 5,625 | 3.0 years | $ | 60.00 | ||||||
The following table summarizes certain information for stock options exercisable on September 30, 2008: | ||||||||||
Weighted Average | Weighted | |||||||||
Range of | Remaining | Average | ||||||||
Exercise | Number | Contractual | Exercise | |||||||
Price | Exercisable | Life | Price | |||||||
$ 8.10 — $12.20 | 12,500 | 5.5 years | $ | 10.66 | ||||||
$18.25 — $27.16 | 9,688 | 5.7 years | $ | 21.03 | ||||||
$60.00 — $60.00 | 5,625 | 3.0 years | $ | 60.00 |
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A summary of the status of the Company’s nonvested stock options as of January 1, 2008 and changes during the nine months ended September 30, 2008 is presented below:
Weighted Average | ||||||||
Grant Date | ||||||||
Nonvested Stock Options | Number | Fair Value | ||||||
Nonvested at January 1, 2008 | 5,000 | $ | 9.00 | |||||
Granted | — | — | ||||||
Vested | (2,500 | ) | $ | 8.50 | ||||
Forfeited | (938 | ) | $ | 8.67 | ||||
Nonvested at September 30, 2008 | 1,562 | $ | 10.00 | |||||
As of September 30, 2008, there was $9,000 of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a remaining vesting period of approximately eight months.
Restricted Stock
In May 2008 Company issued 4,250 shares of Common Stock to its officers and directors under the Plan. The restrictions on the shares issued lapse in three equal annual installments commencing on the first anniversary date of the issuance. Compensation expense is recognized on a straight-line basis over the vesting period.
During the three months ended September 30, 2008 and 2007, compensation expense of $17,000 and $15,000, respectively, was recognized for restricted shares. During the nine months ended September 30, 2008 and 2007, compensation expense of $38,000 and $21,000, respectively, was recognized for restricted shares. Recipients of restricted stock have the right to vote all shares, to receive and retain all cash dividends payable to holders of shares of record on or after the date of issuance and to exercise all other rights, powers and privileges of a holder of Company shares, with the exception that the recipient may not transfer the shares during the restriction period.
A summary of the status of the Company’s restricted stock awards as of January 1, 2008 and changes during the nine months ended September 30, 2008 is presented below:
Weighted Average | ||||||||
Number of | Grant Date | |||||||
Restricted Stock Awards | Shares | Fair Value | ||||||
Nonvested at January 1, 2008 | 4,250 | $ | 22.75 | |||||
Granted | 4,250 | $ | 25.00 | |||||
Vested | (1,413 | ) | $ | 22.75 | ||||
Forfeited | — | — | ||||||
Nonvested at September 30, 2008 | 7,087 | $ | 24.10 | |||||
As of September 30, 2008, there was $144,000 of unrecognized compensation cost related to unvested restricted stock awards, which is expected to be recognized over a remaining weighted-average restriction period of 2.1 years.
NOTE 10. RELATED PARTY TRANSACTIONS
During 2007, the Company entered into a lease agreement with Galardi Group for 15,297 square feet of office space at the Company’s 7700 Irvine Center property. John N. Galardi, a principal stockholder and director of the Company, is a principal stockholder, director and officer of Galardi Group. The lease commenced March 1, 2008 and has a five year term. The annual base rent due to the Company pursuant to the lease is $504,081 over the term of the lease.
The Company pays a guarantee fee to William J. Carden, Mr. Galardi and CGS Real Estate Company, Inc., a company owned indirectly by Messrs. Carden and Galardi (“the Guarantors”), in consideration for their guarantees of certain obligations of the Company. Mr. Carden is the Chief Executive Officer, a director
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and a principal stockholder of the Company. The Guarantors are paid an annual guarantee fee equal to between 0.25% and 0.75% (depending on the nature of the guarantee) of the outstanding balance of the guaranteed obligations (“Guarantee Fee”). The Guarantee Fee is paid for a maximum of three years on any particular obligation. The Company accrued $81,000 for the nine months ended September 2008 related to the Guarantee Fee for the 2008 year.
As disclosed in the Company’s proxy statement for its 2008 annual meeting, three directors (Mr. Carden, Mr. Galardi and Timothy R. Brown) adopted a 10b5-1 trading plan in December 2007 to jointly purchase up to 300,000 shares of ASR stock, commencing December 26, 2007; to date, they have jointly purchased 86,455 shares.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company is currently in the process of filing property insurance claims related to Hurricane Ike, which affected the greater Houston area in September 2008. The Company has accrued a $500,000 liability for damages related to this matter. The accrual represents the Company’s aggregate insurance deductible. Currently, the Company cannot accurately determine the amount of insurance proceeds it may to receive in excess of the deductible.
The Company is aware that one of its properties may contain hazardous substances above reportable levels. The property is located in the State of Indiana. The Company retained an environmental expert that developed a clean up and monitoring plan that has been approved by the State of Indiana. In 2005, the Company accrued $75,000 for the future environmental cleanup and monitoring, of which the majority has been spent. The Company does not anticipate that remaining clean up costs will be material.
Certain claims and lawsuits have arisen against the Company in its normal course of business. The Company believes that such claims and lawsuits will not have a material adverse effect on the Company’s financial position, cash flow or results of operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
American Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its subsidiaries, the “Company”) is a Maryland corporation established on August 8, 2000. The Company is a full-service real estate corporation, which owns, manages and operates income-producing properties. Substantially all of the Company’s assets are held through an operating partnership (the “Operating Partnership”) in which the Company, as of September 30, 2008, held the sole general partner interest of 0.98% and a limited partnership interest totaling 86.14%. As of September 30, 2008, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 29 properties, which consisted of 23 office buildings, four industrial properties and two retail properties. The 29 properties are located in five states.
The properties owned by the Company were 85% occupied at September 30, 2008 compared to 87% at September 30, 2007. The Company continues to aggressively pursue prospective tenants to increase its occupancy, which if successful, should have the effect of improving operational results.
During the nine months ended September 30, 2008, the Company acquired a 178,000 square foot office property consisting of two adjacent buildings located in Houston, Texas. Also during the nine months ended September 30, 2008, the Company sold Columbia, one of the Company’s non-core properties. Columbia is a 58,783 square foot retail center located in Columbia, South Carolina. During 2007, the Company acquired a 400,000 square foot industrial park and two retail properties aggregating 76,000 square feet. All three properties acquired in 2007 are located in Houston, Texas. No properties were sold during 2007. The property acquisitions are part of the Company’s strategy to acquire value-added real estate in its core markets of Texas, California and Arizona.
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American Spectrum Realty Management, Inc., (“ASRM”) a wholly-owned subsidiary of the Company, has started a third party management and leasing program. The program was initiated to generate additional income without the heavy capital cost for acquisitions. Currently, ASRM leases and manages approximately 1.2 million square feet of office, retail and industrial projects for third parties. ASRM plans to aggressively pursue third party management and leasing opportunities in the Company’s core markets of California, Texas and Arizona.
In the accompanying financial statements, the results of operations for Columbia are shown in the section “Discontinued operations”. Columbia was classified as “Real estate held for sale” at December 31, 2007. As such, the revenues and expenses reported for the periods presented exclude results from properties sold or classified as held for sale. The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements of the Company, including the notes thereto, included in Item 1.
The Company intends to continue to seek to acquire additional properties in its core markets of Texas, California and Arizona and further reduce its non-core assets while focusing on an aggressive leasing program during the remainder of 2008.
CRITICAL ACCOUNTING POLICIES
The major accounting policies followed by the Company are listed in Note 2 — Summary of Significant Accounting Policies — of the Notes to the Consolidated Financial Statements. The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting period. Actual results could differ materially from those estimates.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:
Investment in Real Estate Assets
Rental properties are stated at cost, net of accumulated depreciation, unless circumstances indicate that cost, net of accumulated depreciation, cannot be recovered, in which case the carrying value of the property is reduced to estimated fair value. Estimated fair value (i) is based upon the Company’s plans for the continued operation of each property and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized net operating income based upon the age, construction and use of the building. The fulfillment of the Company’s plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Company to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, the actual results of operating and disposing of the Company’s properties could be materially different than current expectations.
Depreciation is provided using the straight-line method over the useful lives of the respective assets. The useful lives are as follows:
Building and Improvements | 5 to 40 years | |||
Tenant Improvements | Term of the related lease | |||
Furniture and Equipment | 3 to 5 years |
Allocation of Purchase Price of Acquired Assets
Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible and intangible assets (including land, buildings, tenant improvements, above and below market leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with SFAS No. 141,Business Combinations), and allocates the purchase price to the acquired assets and assumed liabilities. The Company also considers an allocation of purchase price of other acquired intangibles, including acquired in-place leases.
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The Company evaluates acquired “above and below” market leases at their fair value (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases.
Sales of Real Estate Assets
Gains on property sales are accounted for in accordance with the provisions of SFAS No. 66,Accounting for Sales of Real Estate. Gains are recognized in full when real estate is sold, provided (i) the gain is determinable, that is, the collectibility of the sales price is reasonably assured or the amount that will not be collectible can be estimated, and (ii) the earnings process is virtually complete, that is, the Company is not obligated to perform significant activities after the sale to earn the gain. Losses on property sales are recognized immediately.
RESULTS OF OPERATIONS
Discussion of the three months ended September 30, 2008 and 2007.
The following table shows a comparison of rental revenues and certain expenses for the quarter ended:
September 30, | September 30, | Variance | ||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
Rental revenue | $ | 9,082,000 | $ | 7,745,000 | $ | 1,337,000 | 17.3 | % | ||||||||
Operating expenses: | ||||||||||||||||
Property operating expenses | 4,958,000 | 3,679,000 | 1,279,000 | 34.8 | % | |||||||||||
General and administrative | 854,000 | 863,000 | (9,000 | ) | (1.0 | %) | ||||||||||
Depreciation and amortization | 3,686,000 | 3,407,000 | 279,000 | 8.2 | % | |||||||||||
Interest expense | 3,501,000 | 3,262,000 | 239,000 | 7.3 | % |
Rental revenue. Rental revenue increased $1,337,000, or 17.3%, for the three months ended September 30, 2008 in comparison to the three months ended September 30, 2007. This increase was in large part attributable to $838,000 in revenue generated from an office property acquired during the second quarter of 2008. Greater revenues from properties owned for the full three months ended September 30, 2008 and September 30, 2007 accounted for the remaining increase of $499,000. The increase in revenue from the properties owned for the full three months ended September 30, 2008 and September 30, 2007 was primarily due to increases in rental rates and lease termination revenue. The increase was partially offset by a decrease in occupancy. The weighted average occupancy of the Company’s properties was 85% for the three months ended September 2008 compared to 88% for the three months ended September 30, 2007.
Property operating expenses. Property operating expenses increased by $1,279,000, or 34.8%, for the three months ended September 30, 2008 in comparison to the three months ended September 30, 2007. The increase was partially due to operating expenses of $369,000 related to the acquired property mentioned above. Property operating expenses on properties owned for the full three months ended September 30, 2008 and 2007 accounted for the remaining increase. During the third quarter of 2008, the Company accrued a $500,000 liability for damages related to Hurricane Ike. The accrual represents the Company’s insurance aggregate insurance deductible related to this matter. The increase in property operating expenses was also in large part due to higher electricity rates incurred during the three months ended September 30, 2008. Further, janitorial costs and bad debt expense rose during the quarter.
General and administrative. General and administrative costs decreased $9,000, or 1.0%, for the three months ended September 30, 2008 in comparison to the three months ended September 30, 2007. The increase was principally due to higher professional fees incurred during the third quarter of 2008, primarily audit and consulting costs.
Depreciation and amortization. Depreciation and amortization expense increased $279,000, or 8.2%, for the three months ended September 30, 2008 in comparison to the three months ended September 30, 2007.
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The increase was principally attributable to depreciation and amortization of $295,000 related to the acquired properties mentioned above. The increase was partially offset by a reduction in depreciation and amortization attributable to fully depreciated tenant improvements and amortized lease costs associated with properties owned for the full three months ended September 30, 2008 and 2007.
Interest expense. Interest expense increased $239,000, or 7.3%, for the three months ended September 30, 2008 in comparison to the three months ended September 30, 2007. The increase was primarily due to interest expense of $425,000 attributable to the acquired property mentioned above. The increase was partially offset by a reduction in interest expense of $186,000 related to debt on other properties, including the payback of a $2,000,000 secured line of credit in the third quarter of 2007.
Loss on extinguishment of debt.In July 2007, the Company recorded a loss on early extinguishment of debt of $2,413,000 in connection with the loan refinance on 7700 Irvine Center, an office property located in Irvine, California. The loss consisted of a prepayment penalty of $3,536,000, partially offset by the write-off of unamortized loan premium of $1,123,000. The loss is included in other income in the consolidated statements of operations.
Income taxes.The Company recognized a deferred income tax benefit from continuing operations of $1,376,000 for the three months ended September 30, 2008, compared to $2,151,000 for the three months ended September 30, 2007. The decrease in deferred income tax benefit for the third quarter of 2008 corresponds to the decrease in loss from continuing operations for the third quarter of 2008, in comparison to the third quarter of 2007.
Minority interest.The share of loss from continuing operations for the three months ended September 30, 2008 for the holders of OP Units was $323,000, compared to a share of loss of $475,000 for the three months ended September 30, 2007. The minority interest represents the approximate 13% interest in the Operating Partnership not held by the Company.
Discussion of the nine months ended September 30, 2008 and 2007.
The following table shows a comparison of rental revenues and certain expenses for the nine months ended:
September 30, | September 30, | Variance | ||||||||||||||
2008 | 2007 | $ | % | |||||||||||||
Rental revenue | $ | 26,164,000 | $ | 22,746,000 | $ | 3,418,000 | 15.0 | % | ||||||||
Operating expenses: | ||||||||||||||||
Property operating expenses | 12,740,000 | 9,964,000 | 2,776,000 | 27.9 | % | |||||||||||
General and administrative | 2,735,000 | 2,545,000 | 190,000 | 7.5 | % | |||||||||||
Depreciation and amortization | 10,474,000 | 9,443,000 | 1,031,000 | 10.9 | % | |||||||||||
Interest expense | 9,968,000 | 8,898,000 | 1,070,000 | 12.0 | % |
Rental revenue. Rental revenue increased $3,418,000, or 15.0%, for the nine months ended September 30, 2008 in comparison to the nine months ended September 30, 2007. This increase was primarily attributable to $2,096,000 in revenue generated from one office property acquired during the second quarter of 2008 and two retail properties and one industrial property acquired during the second quarter of 2007. Greater revenues from properties owned for the full nine months ended September 30, 2008 and September 30, 2007 accounted for the remaining increase of $1,322,000. The increase in revenue from the properties owned for the full nine months ended September 30, 2008 and September 30, 2007 was primarily due to increases in rental rates and a reduction in rent concessions. The increase was also attributable to higher lease termination revenue. The increase was partially offset by a decrease in occupancy, which on a weighted average basis decreased from 89% for the nine months ended September 30, 2007 to 86% for the nine months ended September 30, 2008.
Property operating expenses. Property operating expenses increased by $2,776,000, or 27.9%, for the nine months ended September 30, 2008 in comparison to the nine months ended September 30, 2007. The increase was partially due to operating expenses of $1,107,000 related to the four acquired properties mentioned above. Property operating expenses on properties owned for the full nine months ended September 30, 2008 and 2007 accounted for the remaining increase of $1,669,000. During the nine months
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ended September 30, 2008, the Company accrued a $500,000 liability for damages related to Hurricane Ike. The accrual represents the Company’s insurance aggregate insurance deductible related to this matter. The increase in operating expenses was also attributable to higher electricity rates, maintenance and repair costs and bad debt expense incurred during the nine months ended September 30, 2008. Furthermore, real estate taxes rose as a result of an increase in the assessed value of several of the Company’s properties.
General and administrative. General and administrative costs increased $190,000, or 7.5%, for the nine months ended September 30, 2008 in comparison to the nine months ended September 30, 2007. The increase was partially due to professional fees incurred during the nine months ended September 30, 2008 related to a potential investment opportunity. The increase was also attributable to an increase in other professional fees, primarily audit and consulting. Compensation costs were also increased for the nine months ended September 30, 2008 when compared to the nine months ended September 30, 2007.
Depreciation and amortization. Depreciation and amortization expense increased $1,031,000, or 10.9%, for the nine months ended September 30, 2008 in comparison to the nine months ended September 30, 2007. The increase was principally attributable to depreciation and amortization of $1,090,000 related to the acquired properties mentioned above. The increase was partially offset by a reduction in depreciation and amortization attributable to fully depreciated tenant improvements and amortized lease costs associated with properties owned for the full nine months ended September 30, 2008 and 2007.
Interest expense. Interest expense increased $1,070,000, or 12.0%, for the nine months ended September 30, 2008 in comparison to the nine months ended September 30, 2007. The increase was primarily due to interest expense associated with the acquired properties mentioned above of $1,041,000. The remaining increase of $29,000 was attributable to properties owned for the full nine months ended September 30, 2008 and 2007.
Loss on extinguishment of debt.In July 2007, the Company recorded a loss on early extinguishment of debt of $2,413,000 in connection with the loan refinance on 7700 Irvine Center, an office property located in Irvine, California. The loss consisted of a prepayment penalty of $3,536,000, partially offset by the write-off of unamortized loan premium of $1,123,000. The loss is included in other income in the consolidated statements of operations.
Income taxes.The Company recognized a deferred income tax benefit from continuing operations of $3,389,000 for the nine months ended September 30, 2008, compared to $3,935,000 for the nine months ended September 30, 2007. The decrease in deferred income tax benefit for the nine months ended September 30, 2008 corresponds to the decrease in loss from continuing operations for the nine months ended September 30 2008, in comparison to the nine months ended September 30, 2007.
Minority interest.The share of loss from continuing operations for the nine months ended September 30, 2008 for the holders of OP Units was $800,000, compared to a share of loss of $842,000 for the nine months ended September 30, 2007. The minority interest represents the approximate 13% interest in the Operating Partnership not held by the Company.
Discontinued operations. The Company recorded income from discontinued operations of $631,000 for the nine months ended September 30, 2008 compared to a loss of $14,000 for the nine months ended September 30, 2007. The income for the nine months ended September 30, 2008 includes the operating results and gain on sale of Columbia. Columbia, a 58,783 square foot retail center located in Columbia, South Carolina, was sold in March 2008. The loss for the nine months ended September 30, 2007 represents Columbia’s results of operations for the period.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2008, the Company derived cash primarily from the collection of rents, proceeds from borrowings, the sale of a property and the release of restricted cash. Major uses of cash included the acquisition of one property, payments for capital improvements to real estate assets, primarily for tenant improvements, payment of operational expenses, repayment of borrowings and scheduled principal and interest payments on borrowings.
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The Company reported a net loss of $4,771,000 for the nine months ended September 30, 2008 compared to a net loss of $5,642,000 for the nine months ended September 30, 2007. These results include the following non-cash items:
Nine Months Ended | ||||||||
September 30, | ||||||||
2008 | 2007 | |||||||
Non-Cash Items: | ||||||||
Depreciation and amortization expense | $ | 10,497 | $ | 9,542 | ||||
Income tax benefit | (2,968 | ) | (4,047 | ) | ||||
Deferred rental income | (298 | ) | (236 | ) | ||||
Minority interest | (706 | ) | (844 | ) | ||||
Stock-based compensation expense | 50 | 36 | ||||||
Amortization of loan premiums | (34 | ) | (262 | ) |
Net cash provided by operating activities amounted to $507,000 for the nine months ended September 30, 2008. The net cash provided by operating activities included $629,000 generated by property operations, partially offset by an increase in net operating assets and liabilities of $122,000. Net cash provided by operating activities amounted to $778,000 for the nine months ended September 30, 2007. The net cash provided by operating activities included $960,000 generated by property operations partially offset by an increase in net operating assets and liabilities of $182,000.
Net cash used in investing activities amounted to $17,322,000 for the nine months ended September 30, 2008. Cash of $17,250,000 was used to acquire one office property and $3,086,000 was used for capital expenditures, primarily tenant improvements. This amount was reduced by proceeds of $3,014,000 received from the sale of Columbia during the period. Net cash used in investing activities amounted to $29,184,000 for the nine months ended September 30, 2007. Cash of $26,140,000 was used to acquire two retail properties and an industrial property. In addition, cash of $3,044,000 was used for capital expenditures, primarily tenant improvements.
Net cash provided by financing activities amounted to $17,388,000 for the nine months ended September 30, 2008, which included $16,950,000 in new borrowings related to the acquisition of an office property, $470,000 from other borrowings and $3,565,000 from the release of restricted cash. This amount was reduced by the repayment of borrowings on the sale of Columbia of $2,218,000, scheduled principal payments of $1,250,000 and other principal repayments of $150,000. Net cash provided by financing activities amounted to $28,926,000 for the nine months ended September 30, 2007. Proceeds from borrowings totaled $53,566,000, which included a new loan on an office property located in Irvine, California and a new loan on an office property located in Houston, Texas. Other borrowings of $23,422,000 were obtained primarily to assist with the acquisition costs associated with three properties acquired during 2007. Repayment of borrowings related to refinances amounted to $44,523,000 and scheduled principal payments amounted to $3,268,000 for the nine months ended September 30, 2007.
The current credit crisis and related turmoil in the global financial system may have an impact on the Company’s liquidity and capital resources. The continuation of the credit crisis or a downturn in the United States or global economy could adversely affect the Company’s business in a number of ways, including effects on its ability to obtain new mortgages, to refinance current debt and to sell properties.
The Company expects to meet its short-term liquidity requirements for normal property operating expenses and general and administrative expenses from cash generated by operations. In addition, the Company expects to incur capital costs related to leasing space and making improvements to properties provided the estimated leasing of space is completed. The Company anticipates meeting these obligations with cash currently held, the use of funds held in escrow by lenders, proceeds from the sale of properties and refinancing activities. There can be no assurance, however, that these activities will occur. If these activities do not occur, the Company will not have sufficient cash to meet its obligations if all leasing projections are met.
The Company has loans totaling $10,580,000, maturing over the next twelve months. One of the loans, with a balance of $2,500,000, contains an option to extend maturity for two six-month terms. Because of
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uncertainties with the current credit crisis, the Company’s current debt level and historical losses there can be no assurances as to the Company’s ability to obtain funds necessary for the refinancing of its maturing debts. If refinancing transactions are not consummated, the Company will seek extensions and/or modifications from existing lenders. If these refinancings do not occur, the Company will not have sufficient cash to meet its obligations.
The Company has a $2,000,000 line of credit available if needed. The entire line was available to the Company as of September 30, 2008. The line of credit expires in April 2009. The line can be extended from time to time if mutually agreed upon by the lender and the Company.
The Company is not in compliance with a debt covenant on a mortgage loan secured by one of its office properties located in Houston, Texas. The debt covenant requires the Company to maintain a minimum tangible book net worth as defined in the debt agreement. In the event the lender elects to enforce the non-compliance matter, the Company will attempt to negotiate a revision to the loan covenant. If a refinance of the loan becomes necessary, the Company believes it could obtain a new mortgage loan for an amount in excess of the current debt balance and prepayment costs associated with the current loan.
INFLATION
Substantially all of the leases at the industrial and retail properties provide for pass-through to tenants of certain operating costs, including real estate taxes, common area maintenance expenses, and insurance. Leases at the office properties typically provide for rent adjustment and pass-through of increases in operating expenses during the term of the lease. All of these provisions may permit the Company to increase rental rates or other charges to tenants in response to rising prices and therefore, serve to reduce the Company’s exposure to the adverse effects of inflation.
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements are based on management’s beliefs and expectations, which may not be correct. Important factors that could cause actual results to differ materially from the expectations reflected in these forward-looking statements include the following: the Company’s level of indebtedness and ability to refinance its debt; the fact that the Company’s predecessors have had a history of losses in the past; unforeseen liabilities which could arise as a result of the prior operations of companies acquired in the 2001 consolidation transaction; risks inherent in the Company’s acquisition and development of properties in the future, including risks associated with the Company’s strategy of investing in under-valued assets; general economic, business and market conditions, including the impact of the current global financial crisis; changes in federal and local laws, and regulations; increased competitive pressures; and other factors, as well as factors set forth elsewhere in this Report on Form 10-Q.
ITEM 4T. CONTROLS AND PROCEDURES
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report. Based on, and as of the date of, that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
There were no changes made in the Company’s internal controls over financial reporting during the third quarter of 2008 that materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain claims and lawsuits have arisen against the Company in its normal course of business. The Company believes that such claims and lawsuits will not have a material adverse effect on the Company’s financial position, cash flow or results of operations.
ITEM 1A. RISK FACTORS
The following additional risk factors have been added to the risk factors previously disclosed in the Company’s latest annual report on Form 10-K.
The global financial crisis may have an impact on the Company’s business and financial condition.
The current credit crisis and related turmoil in the global financial system may have an impact on the Company’s business, including its liquidity, financial condition and results of operations. The continuation of the credit crisis or a downturn in the United States or global economy could adversely affect the Company’s business in a number of ways, including effects on its ability to obtain new mortgages, to refinance current debt and to sell properties. Further, the effect of this crisis on the Company’s tenants may lead to bankruptcies and vacancies at the Company’s properties. Any of these effects could have a material adverse effect on the Company’s financial condition and results of operations.
Delisting could have an adverse effect on the value of the Company’s stock.
As reported in Form 8-K filed September 22, 2008, the Company was notified by the American Stock Exchange LLC (“the Exchange”) that it has fallen below the continued listing criteria due to not maintaining the level of stockholders’ equity required by Sections 1003(a)(ii) and (iii) of the Exchange Company Guide. The Company was afforded the opportunity to submit a plan of compliance to the Exchange that demonstrated its Company’s ability to regain compliance by February 17, 2010. The Company submitted its plan October 16, 2008. As of the date of the filing of this quarterly report on Form 10-Q, the Company has not received a response from the Exchange. Should the plan not be accepted by the Exchange Listing Qualifications Department, the Company will be subject to delisting proceedings as set forth in the Exchange Company Guide. A delisting could have an effect on the marketability of the Company’s stock and on its value.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The Exhibit Index attached hereto is hereby incorporated by reference this item.
(b) Reports on Form 8-K:
On September 22, 2008, a report on Form 8-K was filed with respect to Item 3.02.
On September 15, 2008, a report of Form 8-K was filed with respect to Item 8.01.
On September 9, 2008, a report of Form 8-K was filed with respect to Item 8.01.
On August 13, 2008, a report of Form 8-K was filed with respect to Item 2.02.
On September 15, 2008, a report of Form 8-K was filed with respect to Item 8.01.
On September 9, 2008, a report of Form 8-K was filed with respect to Item 8.01.
On August 13, 2008, a report of Form 8-K was filed with respect to Item 2.02.
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SIGNATURES
Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN SPECTRUM REALTY, INC. | ||||
Date: November 13, 2008 | By: | /s/ William J. Carden | ||
William J. Carden | ||||
Chairman of the Board, President and, Chief Executive Officer (Principal Executive Officer) | ||||
Date: November 13, 2008 | By: | /s/ G. Anthony Eppolito | ||
G. Anthony Eppolito | ||||
Vice President, Chief Financial Officer, (Principal Financial Officer and Accounting Officer), Treasurer and Secretary |
EXHIBIT INDEX
Exhibit No. | Exhibit Title | |
31.1 | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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