ITEM 1. BUSINESS
General
We provide comprehensive integrated real estate solutions for our own property portfolio (properties in which we own a controlling interest or in properties where we are the primary beneficiary of a variable interest entity (“a VIE”)) and the portfolios of our third party clients. We own and/or manage commercial, industrial, retail, self-storage and multi-family, student housing income properties, and offer our third party clients comprehensive integrated real estate solutions, including management and transaction services based on our market expertise. We conduct our business in the continental United States. American Spectrum Realty, Inc. was incorporated in Maryland in August of 2000.
Our business is conducted through an Operating Partnership in which we are the sole general partner and a limited partner with a total equity interest of 93% at December 31, 2012. As the sole general partner of the Operating Partnership, we have the exclusive power to manage and conduct the business of the Operating Partnership. In general, except as noted below, the Operating Partnership units that are not held by us (approximately 7% of the outstanding units) are exchangeable for either common stock on a one-to-one basis or cash equal to the value of such stock at our sole discretion.
Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us”, “the Company” and “ASR” refer to American Spectrum Realty, Inc. and its consolidated subsidiaries.
Corporate Background
Our principal offices are located at 2401 Fountain View, Suite 750, Houston, Texas 77057 and our telephone number is (713) 706-6200. Our Annual Reports on Form 10-K, as well as our Code of Ethics, Corporate Governance Guidelines, and Audit Committee, Compensation Committee and Nominating Committee Charters are available through our website, www.americanspectrum.com, under the “Investor Relations” section, free of charge. Our filings with the Securities and Exchange Commission, or SEC, are posted as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge at www.sec.gov.
Description of Business
We operate as one segment that encompasses all geographic regions. We provide one group of comprehensive real estate services. The following is a summary of the percentage of our net revenues by revenue source within our single segment:
At December 31, 2012, we consolidated 41 properties(including 18 properties owned primarily by us and 23 properties owned by VIEs in which we were deemed the primary beneficiary), which consisted of 11 office properties, 12 self-storage facilities, 9 commercial/industrial properties, 6 multi-family, two retail properties, and a parcel of land. The properties are located in 15 states.
We deliver integrated property, facility, asset, business and engineering management services to a host of third party clients as well as to our own properties. We offer customized programs that focus on tenant retention through cost-efficient operations.
We are committed to expanding the scope of products and services offered. We believe this expansion will help us meet our own portfolio property needs as well as the needs of our third party clients. During 2013, we intend to expand the number of third party properties that we manage.
We have a management presence in 18 states.
Industry, Competition and Strategy
The availability of real estate financing has greatly diminished over the past few years as a result of the global credit crisis and overall decline in the real estate market. These events have had an adverse impact on our liquidity and capital resources. These economic conditions have increased the complexity in obtaining real estate loans and have reduced the number of loans available to finance new real estate opportunities and refinance existing real estate. These factors have increased the time and marketing costs necessary to sell properties.
We are currently focused on a strategy that includes;
Disposing of properties in our portfolio to lower our total debt, and improve our liquidity.
During 2012 we sold six properties, including five owned primarily by us and one owned by a VIE, which generated $5.7 million in net proceeds after repayment of $37.8 million of debt and related obligations. The proceeds were substantially used to reduce corporate and other debt. Lenders also foreclosed on five properties, including one property owned by a VIE, as a result of our election to strategically default on the approximately $26.2 million of non-recourse debt associated with them.
Currently we have five of our consolidated properties listed for sale, from which we will receive approximately $7.7 million of the net proceeds after repayment of debt and other obligations.
Currently we are strategically defaulting on the debt of three additional consolidated properties including two ASR properties and one VIE property, as a result of the properties’ sustained and significant negative cash flows. We are in negotiations with the lenders of these three properties in an effort to restructure and or modify the debt. All three of the properties have had foreclosure proceedings initiated by the lender. Our efforts to work with the lenders may fail. If we cannot successfully negotiate new terms, the properties will eventually return to the lender. Substantially all of the debt is non-recourse. See Note 11. Notes Payable.
Concentrating our leasing and management efforts on those portfolio properties where we can improve the cash flows, economic returns and long term values.
We believe that stabilizing our portfolio and improving our liquidity, if we are successful in doing so, will provide us with an opportunity to acquire interests in or ownership of undervalued and undermanaged properties as well as allow us to expand our transaction services to additional third party clients. We believe that there are many properties currently priced below their replacement costs. We believe that with a stable portfolio and greater liquidity, our presence in 18 states, coupled with our local market knowledge and management expertise, will allow us to capitalize on these opportunities.
We face competition from other regional and national service providers. Many of our competitors are local or regional firms that are similarly sized; some competitors are substantially larger than we are on a local, regional, national and/or international basis. In most of the markets in which we do business, both institutional and private investors and developers of properties compete vigorously for the acquisition, development and leasing of space. Many of these competitors have greater resources and more experience than we do.
Employees
As of December 31, 2012, the Company employed a total of 180 individuals.
Environmental Matters
Federal, state and local laws and regulations impose environmental restrictions, use controls, disclosure obligations and other restrictions that impact the management, development, use, and/or sale of real estate. Such laws and regulations tend to discourage sales and leasing activities, as well as the willingness of mortgage lenders to provide financing, with respect to some properties. These laws and regulations could cause transactions that we are involved in to be delayed or abandoned as a result of these restrictions. In addition, if we fail to disclose known environmental concerns in connection with a real estate transaction we may be subject to liability.
We generally undertake a third party Phase I investigation of potential environmental risks when evaluating an acquisition. A Phase I investigation is an investigation for the presence or likely presence of hazardous substances or petroleum products under conditions that indicate an existing release, a post release or a material threat of a release. A Phase I investigation does not typically include any sampling. We may acquire a property with environmental contamination, subject to a determination of the level of risk and potential cost of remediation.
Various environmental laws and regulations also can impose liability for the costs of investigating or remediation of hazardous or toxic substances at sites currently or formerly owned or operated by a party, or at off-site locations to which such party sent wastes for disposal. In addition, an increasing number of federal, state, local and foreign governments have enacted various treaties, laws and regulations that apply to environmental and climate change, in particular seeking to limit or penalize the discharge of materials such as green house gas into the environment or otherwise relating to the protection of the environment. As a property manager, we could be held liable as an operator for any such contamination or discharges; even if the original activity was legal and we had no knowledge of, or did not cause, the release or contamination. Further, because liability under some of these laws is joint and several, we could be held responsible for more than our share, or even all, of the costs for such contaminated site if the other responsible parties are unable to pay. We could also incur liability for property damage or personal injury claims alleged to result from environmental contamination or discharges, or from asbestos-containing materials or lead-based paint present at the properties that we manage. Insurance for such matters may not always be available, or sufficient to cover our losses. Certain requirements governing the removal or encapsulation of asbestos-containing materials, as well as recently enacted local ordinances obligating property managers to inspect for and remove lead-based paint in certain buildings, could increase our costs to comply and could potentially subject us to violations or claims. Although such costs have not had a material impact on our financial results in 2012, the enactment of additional regulations, or more stringent enforcement of existing regulations, could cause us to incur significant costs in the future, and/or adversely impact our business.
ITEM 1A.
ITEM 1A. RISK FACTORS
Risks Related to Our Business in General
The recent economic downturn in the general economy and its continuing effects on the real estate market have negatively impacted and could continue to negatively impact our business and financial results.
Periods of economic slowdown or recession, significantly reduced access to credit, declining employment levels, decreasing demand for real estate, declining real estate values or the perception that any of these events may occur, can reduce transaction volumes or demand for our services. The recent recession and the downturn in the real estate market could result in:
a decline in acquisition, disposition and leasing activity;
a decline in the supply of capital invested in commercial and residential real estate; and
a decline in the value of real estate and in rental rates, which would cause us to realize lower revenue from:
property management and transaction fees, which in certain cases are calculated as a percentage of the revenue of the property under management; and
rental revenue, respectively.
The fragile state of the credit markets, the fear of a global recession for an extended period and the current economic environment have impacted real estate services and management firms like ours through reduced transaction volumes, falling transaction values, lower real estate valuations, liquidity restrictions, market volatility, and the loss of consumer confidence.
Due to the continuing economic uncertainty and the instability in credit markets, it may take us longer to sell real estate assets and investments and the selling prices may be lower than originally anticipated. In addition, the performance of certain properties in our management portfolio may be negatively impacted, which would likewise affect our fees. As a result, the carrying value of certain of our real estate investments may become impaired and we could record losses as a result of such impairment or we could experience reduced profitability related to declines in real estate values.
We are not able to predict the severity or duration of the disruption in the financial markets. The real estate market tends to be cyclical and related to the condition of the overall economy and to the perceptions of investors, developers and other market participants as to the economic outlook. The ongoing uncertainty in the credit and real estate markets has negatively impacted and could continue to negatively impact our business and our results of operations.
The ongoing adverse conditions in the credit markets and the risk of continued market deterioration have adversely affected our revenues, expenses and operating results and may continue to do so.
We are sensitive to credit cost and availability as well as market place liquidity. We anticipate needing to borrow funds to meet our operating cash flow needs. In addition, the revenues in our business are dependent to some extent on overall volume of activity and pricing in the real estate market.
Disruptions in the credit markets could adversely affect our business of providing services to owners, purchasers, sellers, investors and occupants of real estate in connection with acquisitions, dispositions and leasing of real property. If we and/or our clients are unable to obtain credit on favorable terms, there will be fewer completed acquisitions, dispositions and leases of property. In addition, if purchasers of real estate are not able to obtain favorable financing resulting in a lack of disposition opportunities for funds, our property management fee revenues will decline and we may also experience losses on real estate held for investment.
The difficulty in obtaining financing has either eliminated or severely reduced the availability of our historical funding sources and to the extent credit remains available, it is currently more expensive. We may not be able to continue to access sources of funding for our needs, or, if sources are available to us, those sources may not be available with favorable terms. Any decision by lenders to make additional funds available to us in the future for our operational or investment needs will depend upon a number of factors, such as industry and market trends in our business, the lenders’ own resources and policies concerning loans and investments, and the relative attractiveness of alternative investment or lending opportunities.
The depth and duration of credit market disruptions are impossible to predict. In fact, the magnitude of the 2010 credit market disruption exceeded the expectations of most if not all market participants. This uncertainty limits our ability to develop future business plans and we believe that it limits the ability of other participants in the credit markets and the real estate markets to do so as well. This uncertainty may lead market participants to act more conservatively than in recent history, which may continue to depress demand and pricing in our markets.
A potential change in U.S. accounting standards regarding operating leases may make the leasing of our properties less attractive to our potential tenants, which could reduce overall demand for our leasing services.
Under current authoritative accounting guidance for leases, a lease is classified by a tenant as a capital lease if the significant risks and rewards of ownership are considered to reside with the tenant. Under capital lease accounting for a tenant, both the leased asset and liability are reflected on their balance sheet. If the lease does not meet any of the criteria for a capital lease, the lease is considered an operating lease by the tenant, and the obligation does not appear on the tenant's balance sheet; rather, the contractual future minimum payment obligations are only disclosed in the footnotes thereto. Thus, entering into an operating lease can appear to enhance a tenant's balance sheet in comparison to direct ownership. The Financial Accounting Standards Board, or the FASB, and the International Accounting Standards Board, or the IASB, conducted a joint project to re-evaluate lease accounting. In August 2010, the FASB and the IASB jointly released exposure drafts of a proposed accounting model that would significantly change lease accounting. The final standards have yet to be released. Changes to the accounting guidance could affect both our accounting for leases as well as that of our current and potential tenants. These changes may affect how our real estate leasing business is conducted. For example, if the accounting standards regarding the financial statement classification of operating leases are revised, then companies may be less willing to enter into leases with us in general or desire to enter into leases with us with shorter terms because the apparent benefits to their balance sheets could be reduced or eliminated.
We are in a highly competitive business with numerous competitors; some competitors may have greater financial and operational resources than we do.
We compete in a variety of service disciplines within the real estate industry. Each of these areas is highly competitive on a national as well as on a regional and local level. We face competition not only from national real estate service providers, but also from global real estate service providers and boutique real estate firms. Depending on the service, we also face competition from other real estate service providers, institutional lenders, insurance companies, investment banking firms, investment managers and accounting firms, some of which may have greater financial resources than we do. We are also subject to competition from other large national firms and from multi-national firms that have similar service competencies to us. Although many of our competitors are local or regional firms that are similarly sized, many of our competitors are substantially larger than us on a local, regional, national or international basis. In general, there can be no assurance that we will be able to continue to compete effectively with respect to any of our business or on an overall basis, or to maintain current fee levels, or maintain or increase our market share.
As a service-oriented company, we depend upon the retention of senior management and key personnel, and the loss of our current personnel or our failure to hire and retain additional personnel could harm our business.
Our success is dependent upon our ability to retain our executive officers and other key employees and to attract and retain highly skilled personnel. We believe that our future success in developing our business and maintaining a competitive position will depend in large part on our ability to identify, recruit, hire, train, retain and motivate highly skilled executive, managerial, sales, marketing and customer service personnel. Competition for these personnel is intense, and we may not be able to successfully recruit, assimilate or retain sufficiently qualified personnel. We use equity incentives to attract and retain our key personnel. Poor performance of our stock may diminish our ability to offer attractive incentive awards to new hires. Our failure to recruit and retain necessary executive, managerial, sales, marketing and customer service personnel could harm our business and our ability to obtain new customers.
If we fail to manage any future growth effectively, we may experience a material adverse effect on our financial condition and results of operations.
The future integration of acquisitions and additional growth may place a significant strain upon management, administrative, operational and financial infrastructure. Our ability to grow also depends upon our ability to successfully hire, train, supervise and manage additional executive officers and new employees, obtain financing for our capital needs, expand our systems effectively, allocate our human resources optimally, maintain clear lines of communication between our transactional and management functions and our finance and accounting functions, and manage the pressures on our management and administrative, operational and financial infrastructure. Additionally, managing future growth may be difficult due to the new geographic locations and service offerings. There can be no assurance that we will be able to accurately anticipate and respond to the changing demands we will face as we integrate and continue to expand our operations, and we may not be able to manage growth effectively or to achieve growth at all. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Property Management
If the properties that we manage fail to perform, then our business and results of operations could be harmed.
Our success partially depends upon the performance of the properties we manage. We could be adversely affected by the nonperformance of, or the deteriorating financial condition of, certain of our clients. The revenue we generate from our property management fees is generally a percentage of aggregate rent collections from the properties. The performance of these properties will depend upon the following factors, among others, many of which are partially or completely outside of our control:
our ability to attract and retain creditworthy tenants;
the magnitude of defaults by tenants under their respective leases;
our ability to control operating expenses;
governmental regulations, local rent control or stabilization ordinances which are in, or may be put into, effect;
various uninsurable risks;
financial condition of certain clients;
the nature and extent of competitive properties; and
the general real estate market.
These or other factors may negatively impact the properties that we manage, which could have a material adverse effect on our business and results of operations.
We may have liabilities in connection with property and facilities management activities.
We could become subject to claims by participants in real estate sales, as well as building owners and companies for whom we provide management services, claiming that we did not fulfill our statutory obligations as a broker.
In addition, with regard to our property and facilities management services, we hire and supervise third party contractors to provide construction and engineering services for our properties and our third party clients properties. While our role is limited to that of a supervisor, we may be subject to claims for construction defects or other similar actions. Adverse outcomes of property and facilities management litigation could have a material adverse effect on our business, financial condition and results of operations.
Third party management contracts can be terminated. Loss of a significant number of contracts and fees could have a material adverse effect on our business, results of operations and financial condition.
Environmental regulations may adversely impact our business and/or cause us to incur costs for cleanup of hazardous substances or wastes or other environmental liabilities.
Federal, state and local laws and regulations impose various environmental restrictions, use controls, and disclosure obligations which impact the management, development, use, and/or sale of real estate. Such laws and regulations tend to discourage sales and leasing activities, as well as mortgage lending availability, with respect to some properties. A decrease or delay in such transactions may adversely affect our results of operations and financial condition. In addition, a failure by us to disclose environmental concerns in connection with a real estate transaction may subject us to liability to a buyer or lessee of property.
In addition, in our role as a property manager, we could incur liability under environmental laws for the investigation or remediation of hazardous or toxic substances or wastes at properties we currently or formerly managed, or at off-site locations where wastes from such properties were disposed. Such liability can be imposed without regard for the lawfulness of the original disposal activity, or our knowledge of, or fault for, the release or contamination. Further, liability under some of these laws may be joint and several, meaning that one liable party could be held responsible for all costs related to a contaminated site. We could also be held liable for property damage or personal injury claims alleged to result from environmental contamination, or from asbestos-containing materials or lead-based paint present at the properties we manage. Insurance for such matters may not be available or sufficient.
Certain requirements governing the removal or encapsulation of asbestos-containing materials, as well as recently enacted local ordinances obligating property managers to inspect for and remove lead-based paint in certain buildings, could increase our cost to comply with the law and potentially subject us to violations or claims. Although such costs have not had a material impact on our financial results or competitive position during fiscal year 2012 or 2011, the enactment of additional regulations, or more stringent enforcement of existing regulations, could cause us to incur significant costs in the future, and/or adversely impact our management services fees.
Risks Related to Investment in Properties
We are subject to the risks related to the ownership and operation of real estate that can adversely impact our business and financial condition.
The value of our investments may be reduced by general risks of real estate ownership: Since we derive income from real estate operations, we are subject to the general risks of acquiring and owning real estate-related assets, including:
changes in the national, state and local economic climate and real estate conditions, such as oversupply of or reduced demand for real estate space and changes in market rental rates;
how prospective tenants perceive the attractiveness, convenience and safety of our properties;
difficulties in consummating and financing acquisitions and/or enhancements on advantageous terms and the failure of properties to perform as expected;
our ability to provide adequate management, maintenance and insurance;
natural disasters, such as earthquakes, hurricanes and floods, which could exceed the aggregate limits of our insurance coverage;
the expense of periodically renovating, repairing and re-letting spaces;
the impact of environmental protection laws;
compliance with federal, state, and local laws and regulations;
increasing operating and maintenance costs, including property taxes, insurance and utilities, if these increased costs cannot be passed through to tenants;
adverse changes in tax, real estate and zoning laws and regulations;
increasing competition from other properties in our market;
tenant defaults and bankruptcies;
tenants’ right to sublease space; and
concentration of properties leased to non-rated private companies with uncertain financial strength.
Certain significant costs, such as mortgage payments, real estate taxes, insurance and maintenance, generally are not reduced even when a property’s rental income is reduced. In addition, environmental and tax laws, interest rate levels, the availability of financing and other factors may affect real estate values and property income. Furthermore, the supply of space fluctuates with market conditions.
If our properties do not generate sufficient income to meet operating expenses, including any debt service, tenant improvements, lease commissions and other capital expenditures, we may have to borrow additional amounts to cover fixed costs, we may elect to not service the debt and attempt to negotiate different terms with the bank, or we may sell the property, or the property may be repossessed by the lender.
Properties that we acquire may be located in new markets where we may face risks associated with investing in an unfamiliar market.
We may acquire or accept management responsibilities for properties in markets that are new to us. When we acquire or manage properties located in these markets, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and local procedures.
Because real estate investments are generally illiquid, and various factors limit our ability to dispose of assets, we may not be able to sell properties when appropriate.
Real estate investments are relatively illiquid and, therefore, we have limited ability to vary our portfolio quickly in response to changes in economic or other conditions.
Climate change and weather pattern shifts may adversely affect our profitability.
We consider our largest risk related to climate change to be legislative and regulatory changes intended to slow or prevent it, and the potential costs to us to implement these changes. We are also subject to physical risks inherent in owning real property that include but are not limited to; severe weather events such as hurricanes, tornadoes, and wildfires. To the extent that changes in climate effect changes in weather patterns (such as more severe weather events) or changes in sea level where we have properties, we could be adversely affected. To the extent that climate change results in changes in sea level, we would expect such effects to be gradual and amenable to structural mitigation during the useful life of our buildings. However, if this is not the case it is possible that we would be impacted in an adverse way, potentially materially so. We could experience both risks and opportunities as a result of related physical impacts. For example, more extreme weather patterns - namely, a warmer summer or a cooler winter - could increase demand for our properties in areas that are not as adversely impacted as other areas. However, we also could experience more difficult operating conditions in that type of environment. We maintain various types of insurance in amounts we consider appropriate for risks associated with weather events.
Should an uninsured loss or a loss in excess of insured limits occur, we could lose our capital invested in the property, as well as the anticipated future revenues from the property and, in the case of debt which has recourse provisions, we would remain obligated for any mortgage debt or other financial obligations related to the property. Any such loss would adversely affect us. We will generally be liable for any unsatisfied obligations other than non-recourse obligations. We believe that our properties are adequately insured. No assurance can be given that material losses in excess of insurance proceeds will not occur in the future.
Joint venture investments will expose us to certain risks.
We may from time to time enter into joint venture transactions for portions of our existing or future real estate assets. Investing in this manner subjects us to certain risks, among them the following:
we will not exercise sole decision making authority regarding the joint ventures business and assets and, thus, we may not be able to take actions that we believe are in our company’s best interests;
we may be required to accept liability for obligations of the joint venture (such as recourse carve-outs on mortgage loans beyond our economic interest;
our returns on joint venture assets may be adversely affected if the assets are not held for the long-term.
Our ability to renew leases or re-lease space on favorable terms as leases expire significantly affects our business.
We are subject to the risks that, upon expiration of leases for space located in our properties, the premises may not be re-let or the terms of re-letting (including the cost of concessions to tenants) may be less favorable than current lease terms. If a tenant does not renew its lease or if a tenant defaults on its lease obligations, there is no assurance we could obtain a substitute tenant on acceptable terms. If we cannot obtain another tenant with comparable needs, we may be required to modify the property for a different use, which may involve a significant capital expenditure and a delay in releasing the property. Further, if we are unable to re-let promptly all or a substantial portion of our space or if the rental rates upon such re-letting were significantly lower than expected rates, our revenues and ability to provide cash for our operations would be adversely affected. There can be no assurance that we will be able to retain tenants in any of our properties upon the expiration of their leases.
A property that incurs a vacancy could be difficult to sell or re-lease.
A property may incur a vacancy either by the continued default of a tenant under its lease or the expiration of one of our leases. Certain of our properties may be specifically suited to the particular needs of a tenant. We may have difficulty obtaining a new tenant for any vacant space we have in our properties. If the vacancy continues for a long period of time, we may suffer reduced revenues resulting in less cash available to meet our operational needs. In addition, the resale value of a property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.
Leveraging our portfolio subjects us to increased risk of loss, including loss of properties in the event of a foreclosure.
Our portfolio is highly leveraged. The use of leverage presents an additional element of risk in the event that;
the cash flow from lease payments on our properties is insufficient to meet debt obligations;
we are unable to refinance our debt obligations as necessary or on as favorable terms; or
there is an increase in interest rates.
If a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the property could be foreclosed upon with a consequent loss of income and asset value to us.
Our organization documents contain no limitation on the amount or percentage of indebtedness which we may incur. Therefore, our board of directors, without a vote of the stockholders, could alter the general policy on borrowings at any time. If our debt capitalization policy were changed, we could become more highly leveraged, resulting in an increase in debt service that could adversely affect our operating cash flow and our ability to make expected cash distributions for our operating needs, and could result in an increased risk of default on our obligations. See Item 8 - Consolidated Financial Statements Note 11. Notes Payable for additional information on our debt.
Covenants in our credit agreements could limit our flexibility and adversely affect our financial condition.
The terms of our credit facilities and other indebtedness require us to comply with a number of customary financial and other covenants. These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we have satisfied our payment obligations. If our properties were foreclosed upon, or if we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our cash flows and our financial condition could be adversely affected. See Item 8 - Consolidated Financial Statements and Supplementary Date Note 11. Notes Payable, for additional information regarding our debt.
Other Risks
Certain officers and directors may have interests that conflict with the interests of stockholders.
Certain of our officers and members of our board of directors may have personal interests that conflict with the interests of our stockholders with respect to business decisions affecting us and our Operating Partnership, such as interests in the timing and pricing of property sales or refinancing in order to obtain favorable tax treatment. As a result, the effect of certain transactions on these members of management may influence our decisions affecting these properties.
Our goodwill and other intangible assets could become further impaired, which may require us to take significant non-cash charges against earnings.
Under current accounting guidelines, we must assess, at least annually and potentially more frequently, whether the value of our goodwill and other intangible assets has been impaired. Any impairment of goodwill or other intangible assets as a result of such analysis would result in a non-cash charge against earnings, which charge could materially adversely affect our reported results of operations, stockholders’ equity and our stock price. A significant and sustained decline in our future cash flows, a significant adverse change in the economic environment, slower growth rates or if our stock price falls below our net book value per share for a sustained period, all could result in the need to perform additional impairment analysis in future periods. If we were to conclude that a future write-down of goodwill or other intangible assets is necessary, then we would record such additional charges, which could materially adversely affect our results of operations.
We have a history of losses which may continue, which may negatively impact our ability to achieve our business objectives.
We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the establishment of a business enterprise. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether we will be able to continue expansion of our revenue. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on us.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
The Location and Type
The following table sets forth the location, type and size of the properties (by rentable square feet) along with annualized net rent, rented square feet, occupancy, and rent per square foot consolidated by us as of December 31, 2012. All properties listed below are encumbered by debt.
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For the year ended December 31, 2012, no tenant contributed 10% or more of our total rental revenue. A complete listing of properties consolidated by us at December 31, 2012, is included as part of Schedule III in Item 15. Five of the properties listed above are held for sale at December 31, 2012; please see Part II, Item 8 Financial Statements and Supplementary Data, Note 4. Assets Held for Sale.
Lease Expirations
The following table sets forth, for the periods specified, the number of expiring leases by property category (excluding multi-family, student housing and self-storage due to their prevailing month to month nature), the total rented area subject to expiring leases, annual base rent represented by expiring leases, and percentage of total annual base rent represented by expiring leases for our consolidated properties.
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Footnotes
(1)
Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases).
(2)
2013 includes leases that have initial terms of less than one year.
(3)
This figure is based on square footage actually occupied (which excludes vacant space), which accounts for the difference between this figure and total gross leasable area (which includes vacant space).
(4)
This figure is based on square footage actually occupied and incorporates contractual rent increases arising after 2012, and thus differs from annualized net rent in the table under “The Location and Type of the Company’s Properties”, which is based on 2012 rents.
Office Properties
At December 31, 2012, we owned eleven office properties with total rentable square footage of 1,051,148. The office properties range in size from 44,080 square feet to 175,423 square feet, and have remaining lease terms ranging from less than one to ten years. Most of the leases are for one to three years, thus requiring us to renew leases on a continuing basis. Of the approximately 280,000 square feet of leases expiring in the next twelve months, we are currently working on renewing the expiring leases or attracting new tenants. If the tenants elect not to renew we can make no guarantees that we will be able to lease the space timely or at historic rent levels.
The office leases generally require the tenant to reimburse us for increases in building operating costs over a base amount. Certain of the leases provide for rent increases that are either fixed or based on a consumer price index. As of December 31, 2012, the weighted average occupancy of the office properties was 82%. The weighted average base rent per square foot, calculated as total annualized base rents divided by gross leasable area actually occupied as of December 31, 2012, was $14.82.
We are currently actively marketing our empty square footage but do not know if, when or at what rent rates we will be able to lease the vacant office spaces.
Industrial/Commercial Properties
At December 31, 2012, we consolidated nine industrial properties (one owned by us and eight owned by VIEs) with total rentable square footage of 4,715,684. The industrial properties are primarily designed for warehouse, distribution and light manufacturing usage and range in size from 105,600 square feet to 1,439,000 square feet. As of December 31, 2012, the weighted average occupancy of the industrial properties was 76%. The weighted average base rent per square foot, calculated as total annualized base rents divided by gross leasable area actually occupied as of December 31, 2012, was $4.04.
The industrial properties have leases whose remaining terms range from less than one to ten years. Of the approximately 42,000 square feet of leases expiring in the next twelve months, we are currently working on renewing the expiring leases or attracting new tenants. If the tenants elect not to renew we can make no guarantees that we will be able to lease the space timely or at historic rent levels. Most of the leases are industrial gross leases whereby the tenant pays as additional rent its pro rata share of common area maintenance and repair costs and its share of the increase in taxes and insurance over a base amount. Certain of these leases call for fixed or consumer-price-index-based rent increases. Some of the leases are triple net leases whereby the tenants are required to pay their pro rata share of the properties' operating costs, common area maintenance, property taxes, insurance and non-structural repairs.
Retail Properties
At December 31, 2012, we owned two retail properties in Houston, Texas with rentable square footage of 76,315. The leases require the tenants to reimburse us for certain building operating costs. As of December 31, 2012, the occupancy of the retail property was 79%. The average base rent per square foot, calculated as total annualized base rents divided by gross leasable area actually occupied as of December 31, 2012, was $10.04.
Multi-Family, Student Housing Properties
At December 31, 2012, we consolidated six multi-family/student housing properties (all owned by VIEs) with total rentable square footage of 1,456,875. These properties are typically leased for one year or on a month to month basis. As of December 31, 2012, multiple tenants occupied all of these properties. As of December 31, 2012, the weighted average occupancy of the multi-family/student housing properties was 88%. The weighted average base rent per square foot, was $10.66. Although these properties are leased on short-term basis, we do not anticipate a drop in occupancy or additional rental rate declines for these properties in the foreseeable future.
Self-Storage Properties
At December 31, 2012, we consolidated twelve self-storage properties (three owned by us and nine owned by VIEs) with total rentable square footage of 1,335,934. The self-storage properties are primarily month-to-month lease terms. Due to the economy, our rental rates for these properties have dropped from last year in our effort to maintain and increase our occupancy percentages. As of December 31, 2012, the weighted average occupancy of the self-storage properties was 86%. The weighted average base rent per square foot, calculated as total annualized base rents divided by gross leasable area actually occupied as of December 31, 2012, was $5.78. We do not anticipate a drop in occupancy or additional rental rate declines for these properties in the foreseeable future.
Development Land
The Company owns an 11.86 acre parcel of land in Houston, Texas. The land is adjacent to a retail property owned by the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On March 2, 2011, we filed an action against Evergreen Realty Group, LLC and certain of its affiliates ("Evergreen") relating to our acquisition of assets from Evergreen in January 2010. The purchase price of the assets was $18.0 million, subject to adjustment as provided in the purchase agreement, and was paid in the form of (a) the assumption of $500,000 of payables, (b) the issuance of a $9.5 million promissory note and (c) the issuance of operating partnership units which would be redeemable by Evergreen after June 30, 2011 for a number of shares of our common stock (or, at our option, the cash equivalent) equal to the quotient obtained by dividing $8.0 million by the greater of our share price or net asset value as of December 31, 2010. (Our share price as of December 31, 2010 was $17.52; our net asset value as of December 31, 2010 has not been definitively determined.) In our action, we are alleging various offsets and adjustments to the purchase price, as well as defaults by Evergreen, and are seeking damages and a declaration that the principal amount of the promissory note should be reduced to zero, that the operating partnership units should be cancelled and that Evergreen should refund to us payments of at least $578,000 which have been made on the promissory note. On March 7, 2011, New West Realty, Inc. (“New West”), an affiliate of Evergreen, filed a complaint for damages in Orange County Superior Court against ASR and other related entities. New West alleges in the complaint that ASR had failed to pay amounts then due under a $9.5 million promissory note held by New West. We have subsequently paid all amounts currently due and payable under the note and therefore dispute the claim and deny that any payment is now due under the note, and we have filed a separate lawsuit against New West and others seeking damages in excess of the amount of New West’s claim.
During the second quarter of 2012, we repurchased all of the operating partnership units (“OP Units”) issued to Evergreen Realty Group, LLC and certain of its affiliates (“Evergreen”) in 2010. We had issued the OP Units to Evergreen in connection with the acquisition of assets from Evergreen on January 17, 2010. The OP Units issued to Evergreen were repurchased by the Company for one dollar as provided in the purchase and sell agreement.
In January 2013, we came to terms with Evergreen to settle the $9.5 million promissory note. The proposed terms of the settlement agreement have been formalized. We have agreed to pay $4.6 million in a combination of cash, a new note, and nonconvertible preferred stock as settlement of the note. The new debt will mature in 2017. The required documentation and approval by all parties of the settlement agreement is anticipated to be completed in the second quarter of 2013.
We are in default on a $1.0 million unsecured note, which matured in May 2012. The loan is guaranteed by John N. Galardi, a principal shareholder of the Company. The lender on the note has initiated legal proceedings to collect on the debt. Negotiations are in progress to settle this debt.
Certain other claims and lawsuits have arisen against us in our normal course of business, including lawsuits by creditors with respect to past due accounts payable. We believe that such claims and lawsuits will not have a material adverse effect on our financial position, cash flows or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no submission of matters to a vote of security holders during the quarter ended December 31, 2012.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s Common Stock trades on the NYSE Amex under the symbol AQQ. The following table sets forth the high and low closing prices per share of the Company’s Common Stock for the periods indicated, as reported by the NYSE Amex.
As of February 28, 2013, there were approximately 2,100 holders of record of our common stock.
Dividend Policy
Common Stock
Cash dividends were last declared to holders of the Company’s Common Stock in 2003.
The Company’s Board of Directors has a policy of meeting on or about the 40th day after the end of each calendar quarter to consider the declaration and payment of dividends on Common Stock.
Preferred Stock
Series A Preferred Stock holders are entitled to cumulative dividends at a rate of 15% per year. These dividends are payable quarterly. Dividends of $0.2 million were paid during the year ended December 31, 2011. No dividends were paid during the year ended December 31, 2012. As of December 31, 2012 there were accrued and unpaid dividends on the outstanding preferred stock of $0.4 million. The shares were issued in a private transaction exempt from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.
Securities Authorized for Issuance under Equity Compensation Plan
See the information incorporated by reference into Part III, Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this report for information regarding securities authorized for issuance under our equity compensation plans.
During the years ended December 31, 2012 and 2011 we issued 7,000 and 34,500 shares of restricted stock, respectively, to certain employees and board members under our equity compensation plan. The recipient has 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 our shares, with the exception that the recipient may not transfer the shares during the restriction period that lapses over various periods ranging from one to five years. The issuances of Common Stock were exempt from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.
Unregistered Sales of Equity Securities
In 2012, the Company issued 41,910 shares of common stock to a law firm as consideration for legal services in the amount of $0.2 million. The issuance of common stock was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to section 4(2) and Rule 506 of Regulation D promulgated thereafter.
Issuer Purchases of Equity Securities
Neither we nor any affiliated purchaser of ours purchased any of our equity securities during the year ended December 31, 2012.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW
The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and financial condition of American Spectrum Realty, Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements (“Notes”).
Business Overview
We provide comprehensive integrated real estate solutions for our own property portfolio and the portfolios of our third party clients. We own and manage; commercial, industrial, retail, self-storage and multi-family, student housing income properties, and offer our third party clients comprehensive integrated real estate solutions, including management and transaction services based on our market expertise. We conduct our business in the continental United States.
Our business is conducted through an Operating Partnership in which we are the sole general partner and a limited partner with a total equity interest of 93% at December 31, 2012. As the sole general partner of the Operating Partnership, we have the exclusive power to manage and conduct the business of the Operating Partnership. We periodically examine our corporate structure in order to evaluate if we are positioned to take advantage of the most favorable tax treatments for ourselves, our shareholders and our clients. We evaluate the potential tax benefits and consequences of a variety of business models that include but are not limited to: joint ventures, partnerships, limited liability companies (LLC), limited liability partnerships (LLP) and real estate investment trusts (REIT) for ourselves and our investors. It is our objective to consider all applicable tax laws that legally reduce the tax consequences and maximize the tax benefits associated with real estate transactions.
The REIT structure has many specific requirements that must be met and maintained in order to qualify. As of December 31, 2012 our ownership structure does not allow us to elect REIT status.
Our primary business objective is to acquire and manage multiple tenant real estate in strategically located areas where our cost effective enhancements combined with effective leasing and management strategies, can improve the long term values and economic returns of those properties. We focus on the following fundamentals to achieve this objective:
-An opportunistic and disciplined disposition strategy that enhances investment performance and takes advantage of realized gains. We typically dispose of properties when the return from selling is higher than the projected return from holding the property,
-Organic (internally developed opportunities) and in-organic (acquisition generated opportunities) growth of our third party property management contracts and transaction service fees. We intend to focus on the acquisition of third party management contracts in 2013 coupled with;
-An opportunistic yet disciplined acquisition strategy that focuses on mid-tier multi-tenant real estate in locations that allow us to capitalize on our existing management infrastructure currently servicing our own properties and that of our third party clients.
As of December 31, 2012, the properties that we manage were as follows:
During the year ended December 31, 2012, we sold six properties, one of which was owned by a VIE. We also strategically defaulted on the non-recourse debt of five properties, including one of which was owned by a VIE, that were foreclosed by the lender.
During the second quarter of 2012, we repurchased all of the operating partnership units (“OP Units”) issued to Evergreen Realty Group, LLC and certain of its affiliates (“Evergreen”) in 2010. We had issued the OP Units to Evergreen in connection with the acquisition of assets from Evergreen on January 17, 2010. The OP Units issued to Evergreen were repurchased by the Company for one dollar as provided in the purchase and sell agreement.
Financial Operations Overview
Revenues:
Rental Revenues. We derive rental revenues from tenants that occupy space in our portfolio of consolidated properties. There are three key drivers to rental revenue;
1. Occupancy - Rental revenues are dependent on our ability to lease spaces to quality tenants.
We were able to achieve occupancy increases in our portfolio’s office, self-storage and retail properties in comparison to the prior year. Our multi-family/Student Housing properties experienced a decline in occupancy, primarily due to lower occupancy at College Park Student Apartments. With regard to our industrial properties, we saw a reduction in the number of buildings in our consolidated portfolio over last year by three buildings which on average had higher occupancies. We are currently in the process of aggressively marketing all vacated spaces but cannot make any guarantees as to the speed at which we will be able to find quality tenants or what, if any, reduction in rental rates we might experience.
2. Rental rates - Market rental rates are often inversely related to vacancy rates. Increased vacancy in the market place tends to drive down rental rates. Our leases typically have one to ten year terms based on property type. As leases expire, we replace the existing leases with new leases at the current market rental rate.
We were able to achieve higher base rents at our Multi-family/Student Housing properties in comparison to the prior year.
We experienced a decrease in the weighted average base rent of our office, industrial, retail and self-storage properties in comparison to the prior year. The decrease was primarily related to pressures on rent as a result of the economy. We do not anticipate rent rates to continue to decline in the near term for these properties and anticipate that our weighted average base rent will be consistent in the coming year with its present level. We are currently actively marketing our empty square footage but do not know if, when or at what rent rates we will be able to lease the vacant spaces.
3. Tenant retention - Retaining existing tenants is essential, as high customer retention leads to increased occupancy, less downtime between leases, and reduced leasing costs. We believe in providing superior customer service; hiring, training, retaining and empowering our employees. We strive to create an environment of open communication both internally and externally with our customers.
Of the leases that expired during 2012, we were able to retain tenants leasing approximately 55% of the expiring square footage. We continue to aggressively pursue high quality tenants for all of our vacant square footage. We can make no guarantees as to our ability to fill vacant space in a timely manner or at the same or higher rents than historically charged.
Third party management and leasing revenue. We derive these revenues from the fees charged to our third party clients for management services, tenant acquisition fees, leasing fees and loan advisory fees for arranging financing related to properties under management. When and if our third party clients elect to sell a property we manage for them, we will receive transaction fees and commissions relating to the sale of the property. Our same core skill set that influences our rental income also drives our third party client revenue. Many of the fees we charge our third party clients are linked to occupancy, rental rates and customer retention.
Expenses:
Property operating expenses. Property operating expenses consist primarily of property taxes, insurance, repairs and maintenance, personnel costs and building service contracts.
General and administrative expenses. General and administrative expenses consist primarily of personnel expenses for accounting, human resources, information technology and corporate administration, and professional fees, including audit and legal fees.
Depreciation and amortization expenses. Depreciation and amortization expenses consist primarily of depreciation associated with our real estate held for investment, amortization of purchased intangibles, depreciation of additional capital improvements and the amortization of lease costs associated with consolidated properties.
Interest expenses. Interest expenses consist primarily of the interest owed to creditors for debt associated with our consolidated properties.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, 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 reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we re-evaluate our judgments and estimates. We base our estimates and judgments on our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that are believed to be reasonable under the circumstances. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these policies.
We believe the following critical accounting policies reflect our most significant estimates, judgments and assumptions used in the preparation of our consolidated financial statements:
Variable Interest Entity (VIE) accounting;
Business combinations;
Investment in real estate assets;
Assets held for sale;
Discontinued operations;
Sales of real estate assets;
Fair value measurements;
Impairment or assets; and
Income taxes.
Variable Interest Entity Accounting
Our determination of the appropriate accounting method with respect to our VIEs is based on Accounting Standards Update, or ASU, 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” This ASU incorporates Statement of Financial Accounting Standards, or SFAS, No. 167, “Amendments to FASB Interpretation No. 46(R),” issued by the Financial Accounting Standards Board, or FASB, in June 2009. The amendments in this ASU replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with a primarily qualitative approach focused on identifying which reporting entity has both (1) the power to direct the activities of a variable interest entity that most significantly impact such entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits from such entity that could potentially be significant to such entity. The entity which satisfies these criteria is deemed to be the primary beneficiary of the VIE.
We analyze our interests in VIEs to determine if we are the primary beneficiary. We consider a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, (a) sign and enter into leases; set, distribute, and implement the capital budgets, the authority to refinance or sell the property within contractually defined limits and, (b) the ability to receive fees that are significant to the property and (c) a necessity of funding any deficit cash flows.
We consolidate any VIE of which we are the primary beneficiary (see Note 5 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report). We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. If we made different judgments or utilized different estimates in these evaluations, it could result in differing conclusions as to whether or not an entity is a VIE and whether or not to consolidate such entity. We deconsolidate a VIE when we determine that we are no longer the primary beneficiary. For VIEs in which we own an insignificant interest in, we deconsolidate the VIE by eliminating the accounts from the balance sheet with a corresponding offset to the equity of the non-controlling interest. Operations are recognized through the date of deconsolidation.
Business Combinations
We apply the provisions of FASB ASC Topic 805 to all transactions or events in which we obtain control of one or more businesses, including those effected without the transfer of consideration, for example, by contract or through a lapse of minority veto rights. These provisions require the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establish the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and require expensing of most transaction and restructuring costs.
We determine and allocate the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the business combination date. The purchase price allocation process requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date. We utilize third-party valuation companies to help us determine certain fair value estimates used for assets and liabilities.
Additionally, the purchase price of the applicable property is allocated to the above or below market value of in-place leases and the value of in-place leases and related tenant relationships. The value allocable to the above or below market component of the acquired in-place leases is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) our estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to below market lease values are included in accrued and other liabilities in the accompanying consolidated balance sheets and are amortized to rental income over the remaining non-cancelable lease term plus any below market renewal options of the acquired leases with each property.
While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is generally one year from the business combination date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.
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.
Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. The useful lives are as follows:
We evaluate each of our real estate assets on a quarterly basis in order to determine the classification of each asset in our consolidated balance sheet. This evaluation requires judgment by us in considering certain criteria that must be evaluated under Topic 360: Property, Plant and Equipment, such as the estimated timeframe in which we expect to sell our real estate assets. The classification of real estate assets determines which real estate assets are to be depreciated as well as what method is used to evaluate and measure impairment. Had we evaluated our assets differently, the balance sheet classification of such assets, depreciation expense and impairment losses could have been different.
Assets Held for Sale
We classify assets as held for sale when management a) approves the action and commits to a plan to sell the asset(s); b) the asset(s) are available for immediate sale in its present condition customary for sales of those types of assets; c) an active program to locate a buyer and other actions required to complete the plan to sell the asset(s) have been initiated; d) the sale of the asset(s) is probable, and transfer of the asset(s) is expected to within one year; e) the asset(s) is being actively marketed for sale at a price that is reasonable in relation to its current fair value and; f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. We disclose operating properties as properties held for sale in the period in which all of the required criteria are met.
Assets held for sale are recorded at the lower of cost or estimated fair value less cost to sell. If an asset’s fair value less cost to sell, based on discounted future cash flows, management estimates or market comparisons, is less than its carrying amount, an impairment is recorded against the asset. Determining an asset’s fair value and the related allowance to record requires us to utilize judgment and estimates.
Discontinued Operations
Topic 360 extends the reporting of a discontinued operation to a “component of an entity,” and further requires that a component be classified as a discontinued operation if the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the entity in the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. As defined in Topic 360, a “component of an entity” comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. Because each of our real estate assets is generally accounted for in a discrete subsidiary, many constitute a component of an entity under Topic 360, increasing the likelihood that the disposition of assets are required to be recognized and reported as operating profits and losses on discontinued operations in the periods in which they occur. The evaluation of whether the component’s cash flows have been eliminated and the level of our continuing involvement require judgment by us and a different assessment could result in items not being reported as discontinued operations.
Sales of Real Estate Assets
Gains on property sales are recognized in full when real estate is sold, provided (i) the gain is determinable, that is, the collectability 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, we are not obligated to perform significant activities after the sale to earn the gain. Losses on property sales are recognized immediately.
Fair Value Measurements
Our acquisitions require the application of purchase accounting, which results in tangible and identifiable intangible assets and liabilities of the acquired entity being recorded at fair value. The difference between the purchase price and the fair value of net assets acquired is recorded as goodwill. In determining the fair values of assets and liabilities acquired in a business combination, we use a variety of valuation methods including present value, depreciated replacement cost, market values (where available) and selling prices less costs to dispose. We are responsible for determining the valuation of assets and liabilities and for the allocation of purchase price to assets acquired and liabilities assumed.
Assumptions must often be made in determining fair values, particularly where observable market values do not exist. Assumptions may include discount rates, growth rates, cost of capital, royalty rates, tax rates and remaining useful lives. These assumptions can have a significant impact on the value of identifiable assets and accordingly can impact the value of goodwill recorded. Different assumptions could result in different values being attributed to assets and liabilities. Since these values impact the amount of annual depreciation and amortization expense, different assumptions could also impact our statement of operations and could impact the results of future impairment reviews.
Impairment of Assets
Goodwill is assessed for impairment annually or more frequently if events or changes in circumstances indicate potential impairment. We may first assess qualitative factors to determine whether it is more-likely-than-not that the carrying value of a reporting unit exceeds its fair value. If this assessment indicates that it is more-likely-than-not that the carrying value of a reporting unit exceeds its fair value, a two-step quantitative assessment will be completed. The first step used to identify potential impairment involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. We use a discounted cash flow approach to estimate the fair value of our reporting units. Management judgment is required in developing the assumptions for the discounted cash flow model. These assumptions include revenue growth rates, profit margin percentages, discount rates, etc. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered to not be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated impairment. The implied fair value of goodwill is determined similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. Due to the many variables inherent in the estimation of a business’s fair value and the relative size of our goodwill, if different assumptions and estimates were used, it could have an adverse effect on our impairment analysis.
Impairment indicators for our rental properties are assessed by property and include, but is not limited to, significant fluctuations in estimated net operating income, occupancy changes, rental rates and other market factors. When these indicators of impairment are present, real estate held for investment is evaluated for impairment and losses are recorded when undiscounted cash flows estimated to be generated by an asset or market comparisons are less than the asset’s carrying amount. The amount of the impairment loss is calculated as the excess of the asset’s carrying value over its fair value, which is determined using a discounted cash flow analysis, management estimates or market comparisons.
When we performed our impairment review, we determined that impairment existed, refer to Part II Item 8 Financial Statements and Supplementary Data Note 8 Asset Impairments for additional information regarding our impairment charges taken during the year.
Income Taxes
We account for income taxes under the liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. We have assessed, using all available positive and negative evidence, the likelihood that the deferred tax assets will be recovered from future taxable income.
An enterprise must use judgment in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists (i) the more positive evidence is necessary and (ii) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion, or all, of the deferred tax asset. Among the more significant types of evidence that we considered are: that future anticipated property sales will produce more than enough taxable income to realize the deferred tax asset; taxable income projections in future years; and whether the carry-forward period is so brief that it would limit realization of tax benefits.
Historically, we have incurred taxable losses in years in which we do not sell any real estate assets for gains. In 2012, we realized a gain $11.5 million on the sale of five of our owned properties. In 2011 a gain of $23.3 million was realized on the sale of another owned property. We expect to sell real estate assets in the future and have determined that it is more likely than not that future taxable income, primarily from gains on the sales of real estate assets, will be sufficient to enable us to realize all of our deferred tax assets. Therefore, for each of the two years ended December 31, 2012 and 2011, no valuation allowance has been recorded.
RESULTS OF OPERATIONS
Revenues by Period
The following table sets forth revenues for 2012 and 2011, and the change between periods.
The changes in revenues during 2012 as compared to 2011 were primarily due to the following:
Rental revenue decreased by approximately $3.7 million for the year ended December 31, 2012 compared to the year ended December 31, 2011. The decrease in rental revenue was primarily due the deconsolidation of VIEs, which resulted in a reduction in rental revenue of approximately $4.3 million. Rental revenue from our VIE properties consolidated for the full years 2012 and 2011 increased by approximately $0.6 million, primarily due to an increase in occupancy. Rental revenue for our owned properties was virtually unchanged. The weighted average occupancy of all properties consolidated was 80% at December 31, 2012.
Third party management and leasing revenue decreased by approximately $0.8 million for the year ended December 31, 2012 compared to the year ended December 31, 2011. The decrease was primarily due to a decrease in management, leasing and auxiliary service revenue resulting from lost contracts.
Operating Expenses by Period
The following table sets forth expenses for 2012 and 2011, and the percentage and dollar change between periods.
The changes in operating expenses during 2012 as compared to 2011 were primarily due to the following:
Property operating expenses increased by approximately $0.4 million for the year ended December 31, 2012 compared to the year ended December 31, 2011. Property operating expenses for properties consolidated for the full year 2012 and 2011 increased by approximately $2.3 million. This increase was primarily due to increases in utilities, property taxes, personnel costs and repairs and maintenance. The increase was offset by the full year effect in 2012 of the deconsolidation of VIEs during 2011, which accounted for a decrease of approximately $1.9 million.
Corporate general and administrative expenses decreased by approximately $1.7 million for the year ended December 31, 2012 compared to the year ended December 31, 2011. The decrease was primarily attributable to a decrease in legal costs, in large part costs related to the Evergreen lawsuit incurred in 2011. The decrease was also attributable to a decrease in corporate personnel costs, principally due to the relocation of our accounting department from our Irvine office to our Houston office, in addition to other cost cutting measures implemented by management.
Depreciation and amortization expense decreased by approximately $4.3 million for the year ended December 31, 2012 compared to the year ended December 31, 2011. The decrease was in large part due to the full year effect in 2012 of the deconsolidation of VIEs during 2011, which accounted for approximately $2.0 million of this decrease. An increase in fully depreciated and amortized assets accounted for the remainder of the decrease.
Interest expense decreased by approximately $1.7 million for the year ended December 31, 2012 compared to the year ended December 31, 2011. This decrease was in large part due to the full year effect in 2012 of the deconsolidation of VIEs during 2011, which accounted for a decrease of approximately $1.4 million. Interest expense for properties consolidated for the full year 2012 and 2011 decreased by approximately $0.3 million, primarily due to a decrease in debt between periods.
Impairment expense decreased by approximately $2.8 million. This decrease was primarily attributable to a decrease in impairment charges on real estate assets. Impairment charges on real estate assets totaled $2.5 million in 2011. No impairment charges on real estate assets were recorded in 2012. Impairment charges on purchased intangibles decreased by $0.3 million for the year ended December 31, 2012 compared to the year ended December 31, 2011.
All of our expenses are significantly influenced by the number of VIEs which are consolidated. We expect all our operating expenses to remain relatively the same over the next year for the properties consolidated as of December 31, 2012.
Other Income Statement Items by Period
The following table sets forth our other income statement items for the fiscal years ending 2012 and 2011, and the dollar and percentage change between periods.
The changes in other income statement items during 2012 as compared to 2011 were primarily due to the following:
Income from discontinued operations for the year ended December 31, 2012 includes the net gain from properties disposed of in 2012 of $15.0 million, the net operating loss from these properties through the date of disposition of $2.4 million and income tax expense of $4.3 million. Income from discontinued operations for the year ended December 31, 2011 includes the net gain on properties disposed of in 2011 of $26.0 million, the net operating loss of properties disposed of in 2011 and 2012 of $8.9 million and income tax expense of $4.5 million.
Non-controlling interests consist of operating partnership unit holders other than us, the non-controlling interests in our partially owned properties, and the non-controlling interests in our VIEs held by others. The decrease was primarily due to a decrease in non-controlling interest in the Operating Partnership, which decreased from 27% at December 31, 2011 to 7% at December 31, 2012. The decrease ownership interest was primarily due our repurchase of operating partnership units held by Evergreen Realty Group, LLC and certain of its affiliates in the second quarter of 2012. During the second quarter of 2012, we repurchased all of the operating partnership units (“OP Units”) issued to Evergreen Realty Group, LLC and certain of its affiliates (“Evergreen”) in 2010. We had issued the OP Units to Evergreen in connection with the acquisition of assets from Evergreen on January 17, 2010. The OP Units issued to Evergreen were repurchased by the Company for one dollar as provided in the purchase and sell agreement.
Gain on litigation settlement for 2011 represents settlement of our lawsuit with our insurance carrier related to our Hurricane Ike claims.
Other income for 2012 primarily represents a discounted payoff made on our $1.7 million corporate loan with California Bank and Trust. We paid the bank $1.0 million for a complete satisfaction of the loan, which had a principal balance and accrued interest due of approximately $1.8 million. Other income for 2011 represents discounts negotiated with several of our accounts payable creditors.
We anticipate continuing to offer certain properties for sale and currently have five consolidated properties on the market. We can make no guarantees as to the timing of the sale of any of our consolidated properties or the cash that we will be able to receive as a result of those sales. See Part II Item 8 Financial Statements - Note 4.
LIQUIDITY AND CAPITAL RESOURCES
We have a need for significant amounts of cash to fund our operations. Not all cash generated by our consolidated business is available to pay all liabilities presented on the balance sheet. We separately disclose on the face of the balance sheet (in parentheses) assets and liabilities relating to our consolidated VIEs. Those assets and liabilities are the exclusive responsibility of the VIEs, as our actual ownership percentage and the business structure of the VIEs does not allow the assets and liabilities to be comingled with those of ASR.
With regards to our wholly owned properties, our rental revenues remained relatively unchanged in 2012 compared to 2011. Third party management and leasing revenue declined by approximately $0.8 million for 2012 compared to 2011, primarily due to a decrease in management, leasing and auxiliary service revenues resulting from lost contracts. With regards to the properties in which we have a variable interest and the cash associated with these properties is available only to service their own debts, we experienced a decrease in rental in rental revenue of $3.7 million for the year ended December 31, 2012 in comparison to the year ended December 31, 2011. This decrease was primarily the result of the deconsolidation of VIEs.
We are in default on the notes listed below. The balances disclosed in the table below exclude additional fees that may be the result of non-payment.
We have elected not to make payments on the debt secured by Morenci, 11500 Northwest Freeway and Fishers Indiana due to operating deficiencies of the properties and/or the unpaid balances of the mortgages exceeding the market value of the properties. The debt on Fishers Indiana, a VIE property, is matured. The lenders holding the debt on these properties have placed these assets into receivership and have initiated foreclosure proceedings.
We are in default on our debt secured by 1501 Mockingbird, 8100 Washington and Gray Falls/12000 Westheimer due to past due debt service. We anticipate bringing these three loans current in the second quarter of 2013. In the case of 1501 Mockingbird, we currently have this property listed for sale and anticipate disposing of the property in the second quarter of 2013. We believe the market value of these properties is in excess of their current loan balances.
Two additional loans; one secured by 6430 Richmond and one by 2640/2650 Fountain View are matured. We are currently negotiating extensions with the lenders on these loans.
All of the properties securing the debt in default are held by consolidated wholly owned subsidiaries or consolidated VIE’s. These mortgages are not guaranteed by us. All of the notes in default have payment acceleration clauses and payment in full, including additional fees and interest, could be demanded by the lenders holding these notes.
We have three mortgage loans that are cross-collateralized by a second property.
We also are in default on a $1.0 million corporate note, which matured in May 2012. The loan is guaranteed by Mr. Galardi, a former member of the Board of Directors. The lender on the note has initiated legal proceedings to collect on the debt. Negotiations are in progress to settle this debt.
We can make no guarantee as to the timing of the sale of any of these properties. We cannot guarantee that the lenders on the properties in some stage of foreclosure will not take back the properties before we can sell them or renegotiate the debt. All of the notes on which we have strategically defaulted have payment acceleration clauses, and payment in full could be demanded by the lenders holding these notes. The loans not being paid are secured only by the real estate assets. The disposal of these properties is not expected to have a material effect on our cash flows subsequent to the disposals.
See Notes 11 and 17 for additional details of notes payable and commitments and Note 19 for subsequent events.
As of December 31, 2012, we had accounts payable over 90 days totaling approximately $4.9 million (all of it relating to properties owned primarily by us and corporate). In addition, we have extended payment terms with creditors holding payables as of December 31, 2012, which total approximately $2.7 million. These payables are recorded as notes payable.
During the year ended December 31, 2012, we sold Park Ten Place I and II, Sierra Southwest Pointe, Beltway Industrial Park, 8300 Bissonnet and Foxborough. The sale of these properties generated net proceeds of approximately $5.7 million. These proceeds were primarily used to reduce debt and other liabilities and for working capital (See Note 7. Discontinued Operations).
Our discontinued operations are not stated separately in the Statement of Cash Flows. Our discontinued operations used cash from operating activities of $0.6 million during the year ended December 31, 2012. In the future we do not anticipate that the absence of these properties will have a material effect on cash flow.
We have taken the following steps to meet our liquidity needs:
1.
We reduced our overhead structure in 2012, primarily due to the relocation of our accounting department from Irvine, California to Houston, Texas.
2.
We continue to strategically default on mortgages where we have determined that the market value of the property does not and will not exceed the balance of the notes payable securing the property in the foreseeable future and/or the property is in a severe and sustained negative cash flow position.
3.
We are currently marketing properties for sale in an effort to generate cash for operations and debt reduction in the next year.
4.
We will continue to focus on increasing occupancy rates and managing our cost structure.
5.
We will continue to reduce our expenses, restructure our operations, and negotiate with our creditors for extended terms in order to meet our cash flow needs.
The liquidity matters discussed above are a continuation of the economic and market factors that have been affecting us and the overall real estate industry for several years. Although there are indicators of improvement and resurgence in the real estate industry, we continue to struggle with cashflow deficits from operations after debt service and capital expenditures, primarily related to office/commercial buildings. In order to meet our cash needs, we have been and will continue to sell properties that have appreciated values in addition to steps previously discussed above. Proceeds from the sale of assets were $42.9 million and $51.1 million for 2012 and 2011, respectively. These sales provided the net proceeds after repayment of related debt and other obligations that were sufficient to meet our ongoing cash deficits from operations. We are forecasting sales of real estate of $51.6 million in 2013 from which the net proceeds will exceed our forecasted cash deficit from operations.
As of year-end, we have five properties held for sale and are forecasting these to be sold in the second, third and fourth quarters of 2013. We forecast that the proceeds available from these sales after repayment of debt and other related obligations will generate approximately $7.7 million. This amount is in excess of our forecasted deficit from operations for 2013. We believe that our forecast is achievable due to our history of demonstrating our ability in consummating sales in prior years when we have been under the similar cash shortages. In addition to property sales, we continue to negotiate refinancing of properties allowing for reduced interest and monthly payments as well as refinancing that allow us to access funds from appreciated values. The combination of the forecasted sales of real estate and the refinancing of loans is expected to meet our cash needs in the short-term and allow us to reduce our accounts payable.
We have a number of properties that we believe have appreciated values in addition to the five held for sale, and we will continue this approach over the long-term until we meet our cash needs through profitable operations, infusion of cash from other investors allowing us to reduce debt and expand operations, or other strategies being considered.
Through March 29, 2013, as forecasted, we have executed sale contracts on two of the five properties held for sale and have letters of intent on one other property. In addition, we have consummated the refinancing for one property, and we have negotiated a term sheet for refinancing of another property. The total 2013 forecasted net proceeds from these transactions are $4.3 million.
On March 27, 2013, we obtained a $1.8 million loan to assist with liquidity needs. We intend to repay the loan upon the sale of two of our properties held for sale.
There can be no assurance as to our ability to meet our short-term or long-term cash needs.
DISCUSSION OF THE CONSOLIDATED STATEMENT OF CASH FLOWS
FROM OPERATIONS:
Historically and currently, our consolidated cash from operations has been provided by rent payments, management fees and transaction fees. Our historic and current uses of consolidated cash from operations have mainly been property operating costs, general and administrative costs and interest on debt service. During the year ended December 31, 2012, our consolidated operations provided $9.1 million in cash, of which $9.2 million was provided by our consolidated VIEs.
FROM INVESTING ACTIVITIES:
Historically and currently, our consolidated cash from investing activities has been provided by proceeds from the sale of assets. Our historic and current uses of consolidated cash from investing activities have primarily been property improvements. During the year ended December 31, 2012, our consolidated investing activities provided $41.4 million in cash, which consisted of proceeds from property sales of $42.9 million, partially offset by capital improvements to real estate assets of $1.5 million.
FROM FINANCING ACTIVITIES:
Historically and currently, our consolidated cash from financing activities has been provided by proceeds from borrowing money and proceeds from equity placements. Our historic and current uses of consolidated cash from financing activities have primarily been principal payments on borrowings and cash used to acquire assets. During the year ended December 31, 2012, our consolidated operations used $50.5 million in cash. We received proceeds from borrowings of $19.9 million and repaid borrowings of $64.7 million, in large part related to property dispositions. We made distributions to non-controlling interests of $7.7 million and received contributions from non-controlling interests of $2.0 million.
FUNDS FROM OPERATIONS
We believe that Funds From Operations (“FFO”) is a useful supplemental measure of our operating performance. We computed FFO in accordance with standards established by the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in April 2002. The White Paper defines FFO as net income or loss computed in accordance with Generally Accepted Accounting Principles (“GAAP”), excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We believe that FFO is helpful to investors as a measure of our performance because, along with cash flow from operating activities, FFO provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. FFO is a non-GAAP financial measure. FFO does not represent net income or cash flows from operations, as defined by GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our operating performance or as an alternative to cash flows from operating, investing and financing activities (determined in accordance with GAAP) as a measure of liquidity. FFO does not necessarily indicate that cash flows will be sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders. Further, FFO as disclosed by other companies may not be comparable to our calculation of FFO.
The following table sets forth our calculation of FFO for the year ending December 31, 2012 and December 31, 2011:
INFLATION
Inflation has not had a significant impact on our results because of the relatively low inflation rate in our geographic areas of operation. Additionally, most of our leases require the customers to pay their pro rata share of operating expenses, including common area maintenance, real estate taxes, utilities and insurance, thereby reducing our exposure to increases in operating expenses resulting from inflation.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN SPECTRUM REALTY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
American Spectrum Realty, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of American Spectrum Realty, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations, equity, and cash flows for the periods ended December 31, 2012 and 2011. American Spectrum’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Spectrum Realty, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the periods ended December 31, 2012 and 2011 in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to examine management’s assertion about the effectiveness of American Spectrum Realty, Inc.’s internal controls over financial reporting as of December 31, 2012 and 2011 included in the accompanying Management’s Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.
EEPB, PC
Houston, Texas
March 29, 2013
AMERICAN SPECTRUM REALTY, INC
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements
AMERICAN SPECTRUM REALTY, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements
AMERICAN SPECTRUM REALTY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in thousands, except share amounts)
The accompanying notes are an integral part of these consolidated financial statements
AMERICAN SPECTRUM REALTY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The accompanying notes are an integral part of these consolidated financial statements
NOTE 1. Business Overview
Business Overview
We provide comprehensive integrated real estate solutions for our own property portfolio and the portfolios of our third party clients. We own and manage; commercial, industrial, retail, self-storage and multi-family, student housing income properties, and offer our third party clients comprehensive integrated real estate solutions, including management and transaction services based on our market expertise. We conduct our business in the continental United States.
Our business is conducted through an Operating Partnership in which we are the sole general partner and a limited partner with a total equity interest of 93% at December 31, 2012. As the sole general partner of the Operating Partnership, we have the exclusive power to manage and conduct the business of the Operating Partnership. We periodically examine our corporate structure in order to evaluate if we are positioned to take advantage of the most favorable tax treatments for ourselves, our shareholders and our clients. We evaluate the potential tax benefits and consequences of a variety of business models that include but are not limited to: joint ventures, partnerships, limited liability companies (LLC), limited liability partnerships (LLP) and real estate investment trusts (REIT) for ourselves and our investors. It is our objective to consider all applicable tax laws that legally reduce the tax consequences and maximize the tax benefits associated with real estate transactions.
The REIT structure has many specific requirements that must be met and maintained in order to qualify. As of December 31, 2012 our ownership structure does not allow us to elect REIT status.
Our primary business objective is to acquire and manage multiple tenant real estate in strategically located areas where cost effective enhancements combined with effective leasing and management strategies, can improve the long term values and economic returns of those properties. We focus on the following fundamentals to achieve this objective:
-An opportunistic and disciplined disposition strategy that enhances investment performance and takes advantage of realized gains. We typically dispose of properties when the return from selling is higher than the projected return from holding the property;
-Organic (internally developed opportunities) and in-organic (acquisition generated opportunities) growth of our third party property management contracts and transaction service fees, coupled with;
-An opportunistic yet disciplined acquisition strategy that focuses on mid-tier multi-tenant real estate in locations that allow us to capitalize on our existing management infrastructure currently servicing our own properties and that of our third party clients.
NOTE 2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America.
Principles of Consolidation and Basis of Presentation.
The consolidated financial statements include the accounts of American Spectrum Realty, Inc., its subsidiaries and those variable interest entities in which American Spectrum Realty, Inc. is the primary beneficiary. Intercompany transactions and balances have been eliminated.
Use of Estimates.
Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were management’s estimates used for the analyses of the possible impairment of goodwill and real estate assets. The analysis of impairment of goodwill is based on a discounted cash flow method of determining the fair value of the applicable reporting unit. The discounted cash flow method included assumptions concerning future net cash flows, discount rates and capitalization rates. The analysis of impairment of real estate assets is initially based on an undiscounted cash flow method. The undiscounted cash flow method included assumptions concerning future net cash flows including property absorption rates, rental rate growth, inflation, estimated sales prices and capitalization rates. Management has evaluated the key factors and assumptions used to develop the estimates in determining that it is reasonable in relation to the financial statements taken as a whole. Actual results could differ from those estimates.
Reclassifications
Certain balance sheet amounts in the 2011 financial statements have been reclassified to conform to the 2012 presentation.
SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
We consider all highly-liquid investment instruments with an original maturity of three months or less to be cash equivalents. As of December 31, 2012 and 2011, we held our cash and cash equivalents in checking accounts, money market accounts and investment accounts with several financial institutions. Some accounts exceeded FDIC insurance limits.
Restricted Cash
We had restricted cash of $3.7 million as of December 31, 2012, all of which was related to consolidated VIEs.
Fair Value of Financial Instruments
Our financial instruments, including cash, prepaid expenses and other current assets, accrued liabilities and accounts payable are carried at cost, which approximates fair value because of the short term nature of those instruments.
Deferred Financing and Other Fees
Fees paid in connection with the financing and leasing of our properties are amortized to interest expense using the effective interest method over the term of the related note payable or lease and are included in other assets.
Rental Revenue.
We record rental income for the full term of each lease on a straight-line basis. Any rent holidays given to the tenant as part of their lease is recorded as a deferred rent receivable. When a property is acquired, the term of existing leases is considered to commence as of the acquisition date for purposes of this calculation.
Many of our leases provide for Common Area Maintenance Escalations (“CAM/ESC”) as additional rental revenue. Each tenant is typically responsible for their prorated share of increases in operating expenses. Tenants are billed an estimated CAM/ESC charge based on the budgeted operating expenses for the year. Within 90 days after the end of each fiscal year, a reconciliation and true up billing of CAM/ESC charges is performed based on actual operating expenses.
For each of the two years ended December 31, 2012 and 2011 no tenant represented 10% or more of our rental revenue.
Allowance for Doubtful Accounts
We maintain an allowance for accounts receivable which may not be ultimately collected. The allowance balance maintained is based upon historical collection experience, current aging of amounts due and specific evaluations of the collectability of individual balances. All tenant account balances over 90 days past due are fully reserved. Accounts are written off against the reserve when they are deemed to be uncollectible.
Goodwill and Intangible Assets
Goodwill is assessed for impairment annually, or more frequently if events or changes in circumstances indicate potential impairment. We may first assess qualitative factors to determine whether it is more-likely-than-not that the carrying value of a reporting unit exceeds its fair value. If this assessment indicates that it is more-likely-than-not that the carrying value of a reporting unit exceeds its fair value, a two-step quantitative assessment will be completed. If the assessment indicates that the fair value of the goodwill is lower than its carrying amount, impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill are not recognized in the financial statements.
Intangible assets are amortized on a straight-line basis over their estimated lives. Such assets are evaluated for impairment whenever events or changes in circumstances indicate that the recoverability of their carrying value may be impaired.
Variable Interest Entity (“VIE”) Accounting
Our determination of the appropriate accounting method with respect to our VIEs is based on Accounting Standards Update, or ASU, 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” This ASU incorporates Statement of Financial Accounting Standards, or SFAS, No. 167, “Amendments to FASB Interpretation No. 46(R),” issued by the Financial Accounting Standards Board, or FASB, in June 2009. The amendments in this ASU replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with a primarily qualitative approach focused on identifying which reporting entity has both (1) the power to direct the activities of a variable interest entity that most significantly impact such entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits from such entity that could potentially be significant to such entity. The entity which satisfies these criteria is deemed to be the primary beneficiary of the VIE.
We analyze our interests in VIEs to determine if we are the primary beneficiary. We consider a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, (a) sign and enter into leases; set, distribute, and implement the capital budgets, the authority to refinance or sell the property within contractually defined limits and, (b) the ability to receive fees that are significant to the property and (c) a necessity of funding any deficit cash flows.
We consolidate any VIE of which we are the primary beneficiary (see Note 5 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report). We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. If we made different judgments or utilized different estimates in these evaluations, it could result in differing conclusions as to whether or not an entity is a VIE and whether or not to consolidate such entity. We deconsolidate a VIE when we determine that we are no longer the primary beneficiary. For VIEs in which we own an insignificant interest in, we deconsolidate the VIE by eliminating the accounts from the balance sheet with a corresponding offset to the equity of the non-controlling interest. Operations are recognized through the date of deconsolidation.
Assets Held for Sale
We classify assets as held for sale when management a) approves the action and commits to a plan to sell the asset(s); b) the asset(s) are available for immediate sale in its present condition customary for sales of those types of assets; c) an active program to locate a buyer and other actions required to complete the plan to sell the asset(s) have been initiated; d) the sale of the asset(s) is probable, and transfer of the asset(s) is expected to within one year; e) the asset(s) is being actively marketed for sale at a price that is reasonable in relation to its current fair value and; f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
At the time a property is held for sale, the property is carried at the lower of (i) its carrying amount or (ii) fair value less costs to sell. We disclose operating properties as properties held for sale in the period in which all of the required criteria are met.
Discontinued Operations
We report, for both current and prior periods, the assets, liabilities and results of operations of any component of the Company which has either been disposed of, or is under contract with all contingencies removed, as discontinued operations.
Sales of Real Estate Assets
Gains on property sales are recognized in full when real estate is sold, provided (i) the gain is determinable, that is, the collectability 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, we are not obligated to perform significant activities after the sale to earn the gain. Losses on property sales are recognized immediately.
Real Estate Held for Investment
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, actual results could be materially different from current expectations.
Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. The useful lives are as follows:
Rental properties are individually evaluated for impairment when conditions exist which may indicate it is probable that the sum of expected future undiscounted cash flows for each property is less than the carrying amount of that property. Impairment indicators for our rental properties are assessed by property and include, but are not limited to, significant fluctuations in estimated net operating income, occupancy changes, rental rates and other market factors. The Company assesses the expected undiscounted cash flows based upon numerous factors, including, but not limited to, appropriate capitalization rates, available market information, historical operating results, known trends and market/economic conditions that may affect the property and our assumptions about the use of the asset. Upon determination that impairment has occurred and that the future undiscounted cash flows are less than the carrying amount, a write-down will be recorded to reduce the carrying amount to its estimated fair value.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” These amendments were issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards (IFRS). ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements. This ASU is effective for interim and annual periods beginning after December 15, 2011. The adoption of this update did not have a material effect on our consolidated financial position or results of operations.
In September 2011, the FASB issued ASU 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” This ASU gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this update did not have a material impact on the disclosure requirements for our consolidated financial statements.
In December 2011, the FASB issued ASU 2011-10, “Property, Plant, and Equipment (Topic 360): De-recognition of in Substance Real Estate-a Scope Clarification.” This ASU requires that a reporting entity that ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt would apply FASB ASC Subtopic 360-20, Property, Plant, and Equipment-Real Estate Sales, to determine whether to derecognize assets and liabilities of that subsidiary. ASU 2011-10 is effective prospectively for a deconsolidation event that takes place in fiscal years, and interim periods within those years, beginning on or after June 15, 2012. The adoption of this update did not have a material effect on our consolidated financial condition or results of operations.
In July 2012, the FASB issued ASU 2012-02, “Intangibles, Goodwill, and Other (Topic 350): Testing Indefinite-Lived Intangibles for Impairment”. This ASU adds new accounting guidance that simplifies how an entity tests indefinite-lived intangible assets other than goodwill for impairment. It permits an entity to first assess qualitative factors to determine whether further testing for impairment of indefinite-lived intangible assets other than goodwill is required. This accounting guidance will be effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We believe that the adoption of this accounting guidance will not have a material effect on our financial condition or results of operations.
NOTE 3. ACQUISITION ACTIVITIES
Property Acquisitions
The Company acquired the Tampa and Ocala self-storage properties during the third quarter of 2012 from a previously consolidated VIE. See Note 5.
NOTE 4. ASSETS HELD FOR SALE
Below is a listing of the consolidated properties we have listed for sale. We can make no guarantees as to our ability to sell any of our consolidated properties. We further cannot assure you that we will achieve a sales price that allows us to receive cash to fund our operations.
For those consolidated properties listed for sale that we do not have an ownership percentage in (VIE properties), we will receive transaction fees if/when a sale is successfully executed.
NOTE 5. VARIABLE INTEREST ENTITIES
We have identified multiple Variable Interest Entities where we are the primary beneficiary for accounting purposes. As a result, these VIE entities were consolidated in the condensed consolidated financial statements, after eliminating intercompany transactions and presenting the interests that are not owned by us as non-controlling interests in the condensed consolidated balance sheets.
The entities being consolidated as of December 31, 2012 include 9 self-storage properties, 2 multifamily properties, 4 student housing properties and 8 commercial properties. The entities are generally financed through cash flows from property operations.
The Variable Interest Entities at December 31, 2012 were:
During the fourth quarter of 2012, we deconsolidated one VIE. The deconsolidation was due to the foreclosure of Charleston Blvd, a self-storage facility owned by the VIE. We no longer manage or have a continuing involvement with this property.
During the third quarter of 2012, we acquired two self-storage properties from Central Florida Self Storage Acquisitions, LLC, a VIE previously consolidated. The properties were acquired in lieu of foreclosure on related mortgage notes held by the Company. As the properties were under common control, they were recorded at their carryover basis. The differences between the carryover basis and the carrying amounts of the mortgages were recorded in stockholders equity. Post-acquisition, we deconsolidated the remaining balances in the VIE after determining that we were no longer the primary beneficiary and no longer manage or have a continuing involvement with this entity.
During the first quarter of 2012, we deconsolidated one VIE. The deconsolidation was due to the sale of Foxborough Business Park Center, a commercial property owned by the VIE. We no longer manage or have a continuing involvement with this property.
The impact of the deconsolidation of VIE’s on our 2012 Consolidated Financial Statements was a decrease in total assets of $1.1 million, a decrease in total liabilities of $1.4 million, and an increase in non-controlling interest of $0.3 million. Net loss attributable to non-controlling interests from the deconsolidated VIE’s for 2012 was $0.6 million. The deconsolidation of the VIE’s did not result in a gain or loss in the Consolidated Statement of Operations as the carrying amount of the non-controlling interest in the former subsidiaries at the deconsolidation dates were the same as the carrying amount of the former subsidiary’s assets minus liabilities at the date of the deconsolidation.
We own an insignificant interest in most of the VIE’s, and therefore, substantially all operations are included in the net income attributable to non-controlling interests.
The carrying amounts associated with the VIE’s, after eliminating the effect of intercompany transactions, were as follows (in thousands):
At December 31, 2012, the liabilities in the above table are solely the obligations of the VIE’s and are not guaranteed by us. In addition, we do not have the ability to leverage the assets of the above identified VIE’s for the purpose of providing ourselves cash. The notes payable are solely secured by the property of the respective VIE’s.
During the year ended December 31, 2012, we did not provide short term advances to any properties that have been consolidated or deconsolidated. A minimal balance is still owed to us as of December 31, 2012 relating to prior advances. We do not believe we have significant exposure to losses related to the VIE’s.
NOTE 6. REAL ESTATE
The cost and accumulated depreciation of rental property held for investment as of December 31, 2012 and 2011 are as follows (in thousands):
FUTURE MINIMUM RENTS
The Company leases its office, industrial, retail center and self-storage property under non-cancelable operating lease agreements. Future minimum rents to be received as of December 31, 2012, are as follows (in thousands):
ACQUIRED LEASE INTANGIBLES
Upon acquisitions of real estate, we assess 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), and allocates the purchase price to the acquired assets and assumed liabilities. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases.
We evaluate 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.
Acquired lease intangible assets (in-place leases and above-market leases) are amortized over the leases’ remaining terms, which range from 1 month to 6 years. Amortization of above-market leases is recorded as a reduction of rental income and the amortization of in-place leases is recorded to amortization expense. We currently have no intangible lease costs related to above-market leases.
Acquired lease intangible liabilities (below-market leases) are accreted over the leases’ remaining terms, which range from 1 month to 6 years. Accretion of below-market leases was approximately $0.3 million and $0.4 million for the two years ended December 31, 2012 and 2011, respectively. Such accretion is recorded as an increase to rental income.
The estimated aggregate amortization amounts from acquired lease intangibles for each of the next five years are as follows (in thousands):
NOTE 7. DISCONTINUED OPERATIONS
2012 Dispositions
In November 2012, the lender for Charleston Blvd. Self-Storage foreclosed on the asset. We had elected to discontinue servicing the unpaid balance of the debt, which totaled $2.6 million, due to the balance exceeding the market value of the property. The property securing the debt was held by a consolidated VIE which had not guaranteed the debt. The transaction generated a gain upon disposition of $0.5 million. No proceeds were received as a result of the transaction.
In October 2012, we sold Beltway Industrial Park for $20.7 million. The transaction generated a gain on sale of approximately $5.6 million. Net proceeds received from the sale amounted to approximately $1.8 million. The proceeds were primarily used to reduce debt.
In October 2012, we sold 8300 Bissonnet. The property was in receivership. We consented to the sale of the property in exchange for being released from all liability on the note. The transaction generated a gain on sale of approximately $1.4 million. No proceeds were received as a result of the transaction.
Our preferred equity partner on 2855 Mangum acquired the mortgage loan from the property’s lender and foreclosed on the asset in July 2012. We had elected to sell the property to our preferred equity partner in 2011. We chose not to make debt service payments due to the mortgage balance exceeding the market value of the property. The property securing the debt was held by a consolidated subsidiary that had not guaranteed the debt. The transaction generated a gain of approximately $0.01 million. No proceeds were received as a result of the transaction.
In April 2012 and May 2012, the lenders for our Bristol Bay and Pacific Spectrum properties notified us that they had foreclosed on the assets. The properties securing the debt were each held by consolidated wholly-owned subsidiaries that had not guaranteed the debt. The transactions generated a gain upon disposition of approximately $2.9 million. No proceeds were received as a result of these transactions.
In March 2012, we sold Park Ten Place I and II for $10.7 million and Sierra Southwest Pointe for $3.9 million. These transactions generated a gain on sale of approximately $4.4 million. Net proceeds received from the sales amounted to approximately $3.0 million. The proceeds were used to reduce corporate bank debt by $2.0 million and other debt by $1.0 million.
In March 2012, we sold Foxborough Business Park Center, owned by a VIE, for $4.9 million. The transaction generated a loss of approximately $0.7 million. Our ownership interest in the VIE was less than 1%. Net proceeds received from the sale amounted to $0.9 million, which was distributed to non-controlling interests.
In March 2012, the lender for our Atrium 6420 property foreclosed on the asset. We had elected to discontinue servicing the unpaid balance of the debt, which totaled $6.3 million, due to the balance exceeding the market value of the property. The property securing the debt was held by a consolidated wholly-owned subsidiary that had not guaranteed the debt. The transaction generated a gain upon disposition of $0.9 million. No proceeds were received as a result of the transaction.
2011 Dispositions
In December 2011, the lender for our Technology property foreclosed on the asset. The 118,413 square foot industrial property is located in Austin, Texas. We had elected to discontinue servicing the unpaid balance of the debt, which totaled $7.1 million, due to the balance exceeding the market value of the property. The property securing the debt was held by a consolidated wholly-owned subsidiary that had not guaranteed the debt. The transaction generated a gain of $1.7 million. No proceeds were received as a result of the transaction.
In November 2011, the lender for our Northwest Corporate Center property foreclosed on the asset. The 86,900 square foot office property is located in St. Louis, Missouri. We had elected to discontinue servicing the unpaid balance of the debt, which totaled $5.3 million, due to the balance exceeding the market value of the property. The property securing the debt was held by a consolidated wholly-owned subsidiary that had not guaranteed the debt. The transaction generated a gain of $0.6 million. No proceeds were received as a result of the transaction.
In August 2011, the lender for our Creekside property foreclosed on the asset. The 47,810 square foot office property is located in San Ramon, California. We had elected to discontinue servicing the unpaid balance of the debt, which totaled $5.7 million, due to the balance exceeding the market value of the property. The property securing the debt was held by a consolidated wholly-owned subsidiary that had not guaranteed the debt. The transaction generated a gain of $0.4 million. No proceeds were received as a result of the transaction.
7700 Irvine Center, a 209,343 square foot office property, located in Irvine, California was sold on June 28, 2011 for $56.5 million, resulting in net proceeds of approximately $6.1 million. The transaction generated a gain on sale before income tax expense of $23.3 million. The gain on the sale of the property significantly diminished our federal net operating loss carry-forward. The proceeds from the sale were used to distribute $2.5 million to the non-controlling interest in 7700 Irvine Center, and to reduce debt, accrued liabilities and accounts payables.
The consolidated statements of operations of discontinued operations for the years ending December 31, 2012 and 2011 are summarized below:
____________________
Income from discontinued operations for the year ended December 31, 2012 includes the net gain resulting from the dispositions of Beltway Industrial Park, Park Ten Place I and II, Sierra Southwest Pointe, Bristol Bay, Pacific Spectrum, 8300 Bissonnet, 2855 Mangum, 6420 Richmond, Foxborough Business Center Park and Charleston Blvd, and the operating results of these properties through the date of disposition.
Income from discontinued operations for the year ending December 31, 2011 includes the gain resulting from the dispositions of 7700 Irvine Center, Creekside, Northwest Corporate Center and Technology, and the operating results of properties disposed of in 2011 and 2012. See Note 16 - Restructuring of Debt.
Our total assets and total liabilities decreased by $59.0 million and $69.4 million respectively, as a result of the 2012 dispositions.
NOTE 8. ASSET IMPAIRMENTS
Purchased Intangibles Subject to Amortization
During the years ended December 31, 2012 and 2011, we had our contractual relationships terminated or modified by the entities that owned some of the third party properties we manage. Based on this triggering event we evaluated the management contracts associated with some of our purchased intangibles for impairment and determined that impairment had occurred. We recorded impairment charges of $1.0 million and $0.7 million for years ended December 31, 2012 and 2011, respectively, which reduced the fair value of the impaired contracts to zero. See Note 5 - Variable Interest Entities for additional information.
Goodwill
In the third quarter of 2011 we performed an assessment of goodwill that indicated the carrying value of goodwill exceeded the fair value requiring us to perform the second step of the impairment test. In the second step, we estimated the fair value of the goodwill using the income approach. Using the income approach required management to evaluate the factors associated with the goodwill. Management then estimated gross probable income, the probable expenses that would be incurred to generate the income. After the estimated expenses were deducted from the estimated gross income the resulting estimated probable net operating income was present valued using ranges that management believed was reasonable. Level 3 assumptions used by management can have a significant impact on the value of identifiable assets and accordingly can impact the value of goodwill recorded. Level 3 assumptions are based on management’s internal analysis and are not completely derived from an observable market. Different assumptions could result in different values being attributed to assets and liabilities. Since these values impact the amount of impairment expense, different assumptions could impact our statement of operations and could impact the results of future impairment reviews.
As a result of this analysis, we recorded $1.3 million of impairment expense related to goodwill. The impairment reduced the beginning value of goodwill of $8.0 million to $6.7 million as of December 31, 2011.
A quantitative analysis was performed in the fourth quarter of 2012 resulting in no additional impairment charge.
Real Estate Held for Investment
Rental properties are individually evaluated for impairment when conditions exist which may indicate it is probable that the sum of expected future undiscounted cash flows is less than the carrying amount. Impairment indicators for our rental properties are assessed by project and include, but are not limited to, significant fluctuations in estimated net operating income, occupancy changes, rental rates and other market factors. We assess the expected undiscounted cash flows based upon numerous factors and estimates, including, but not limited to, appropriate capitalization rates, available market information, historical operating results, known trends and market/economic conditions that may affect the property and our assumptions about the use of the asset, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration. Upon determination that impairment has occurred and that the future undiscounted cash flows are less than the carrying amount, a write-down will be recorded to reduce the carrying amount to its estimated fair value. During the year ended December 31, 2011, we determined that certain conditions existed that an evaluation for impairment was needed on certain of our properties and recorded impairment charges of $1.8 million on real estate held for investment. The impairment charges were primarily due a determination that the market value of two of our assets were lower than their carrying value as a result of an analysis of future undiscounted cash flows and market data.
NOTE 9. FAIR VALUE MEASUREMENTS
The “Fair Value Measurements and Disclosures” Topic of the FASB ASC (Topic 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1-Quoted prices in active markets for identical assets or liabilities.
Level 2-Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3-Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. The fair value measurements employed for our impairment evaluations were generally based on a discounted cash flow approach and/or review of comparable activities in the market place. Inputs used in these evaluations included risk-free rates of return, estimated risk premiums as well as other economic variables.
Assets Measured at Fair Value on a Non-Recurring Basis. We measure our goodwill and real estate assets on a non-recurring basis for impairment of fair value using an income approach. Using the income approach requires management to estimate the gross probable income for the reporting unit associated with the asset. Management then estimates and deducts from the gross probable income, the estimated probable expenses that would be incurred to generate the income. After the estimated probable expenses were deducted from the estimated gross probable income the resulting estimated probable net income was present valued using a factor that management believes is reasonable. The assumptions used by management can have a significant impact on the value of identifiable assets and accordingly can impact the value recorded. These assumptions are based on management’s internal analysis and are not derived from an observable market. The assumptions would be considered Level 3 assumptions in the Fair Value Hierarchy. Different assumptions could result in different values being attributed to assets and liabilities. Since these values impact the amount of impairment expense, different assumptions could impact our statement of operations and could impact the results of future impairment reviews.
See Note 8. Asset Impairments for information relating to impairment expense recorded in prior interim periods in 2011 as the result of the assessment of impairment of goodwill and real estate assets using this approach.
NOTE 10. RELATED PARTY TRANSACTIONS
In December 2011, John N. Galardi, a principal shareholder, loaned $0.3 million to the Company and pledged $0.4 million in certificates of deposit to additionally secure another loan of the Company.
We pay a guarantee fee to William J. Carden and Mr. Galardi (“the Guarantors”), in consideration for their guarantees of certain obligations of the Company. Mr. Carden is president, a principal shareholder and a director of the Company. The Guarantors are paid an annual guarantee fee equal to between .25% and .75% (depending on the nature of the guarantee) of the outstanding balance as of December 31 of the guaranteed obligations (“Guarantee Fee”). Guarantee fees for the year ended December 31, 2012 totaled approximately $0.2 million, all of which was paid to Mr. Carden. The following property notes are being guaranteed: 800/888 Sam Houston Parkway, 2620/2630 Fountain View, and 2640/2650 Fountain View. There are also five corporate notes being guaranteed. The guaranteed notes total $9.3 million at December 31, 2012.
NOTE 11. NOTES PAYABLE
We had the following notes payable outstanding as of December 31, 2012 and 2011 secured by the following properties (dollars in thousands):
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(1)
We are currently electing not to pay monthly debt service and are negotiating term modifications with the lender. See additional information regarding this debt below.
(2)
We are currently negotiating extension terms with lender.
(3)
Loan or carve-out is guaranteed by us and in some cases by Mr. Carden and/or Mr. Galardi.
(4)
Loan was paid in connection with the sale of the property in March 2012.
(5)
Property was foreclosed upon by the lender in March 2012.
(6)
Property was foreclosed upon by the lender in April 2012.
In September 2012, we obtained a short-term loan in the amount of $1.2 million. The loan proceeds were primarily used to satisfy our $1.7 million corporate loan with California Bank and Trust. We paid the bank $1.0 million for a complete satisfaction of the loan, which had a principal balance and accrued interest due of approximately $1.8 million. A mutual release settled all issues regarding this loan for both parties. A gain of approximately $0.8 million was recognized on the transaction.
The required principal payments on our consolidated debt for the next five years and thereafter, as of December 31, 2012 are as follows (in thousands):
We are in default on the notes listed below. The balances disclosed on the table below exclude additional fees that may be the result of non-payment.
We have elected not to make payments on the debt secured by Morenci, 11500 Northwest Freeway and Fishers Indiana due to operating deficiencies of the properties and/or the unpaid balances of the mortgages exceeding the market value of the properties. The debt on Fishers Indiana, a VIE property, is matured. The lenders holding the debt on these properties have placed these assets into receivership and have initiated foreclosure proceedings.
We are in default on our debt secured by 1501 Mockingbird, 8100 Washington and Gray Falls/12000 Westheimer due to past due debt service. We anticipate bringing these three loans current in the second quarter of 2013. In the case of 1501 Mockingbird, we currently have this property listed for sale and anticipate disposing of the property in the second quarter of 2013. We believe the market value of these properties is in excess of their current loan balances.
Two additional loans: one secured by 6430 Richmond and one by 2640/2650 Fountain View are matured. We are currently negotiating extensions with the lenders on these loans.
All of the properties securing the debt in default are held by consolidated wholly owned subsidiaries or consolidated VIE’s. These mortgages are not guaranteed by us. All of the notes in default have payment acceleration clauses and payment in full, including additional fees and interest, could be demanded by the lenders holding these notes.
We also are in default on a $1.0 million corporate note, which matured in May 2012. The loan is guaranteed by Mr. Galardi. The lender on the note has initiated legal proceedings to collect on the debt. Negotiations are in progress to settle this debt.
Unamortized financing costs at December 31, 2012 and December 31, 2011 were $0.8 million and $1.2 million, respectively. Most of our mortgage debt is not cross-collateralized. We have three mortgage loans that are cross-collateralized with a second property.
NOTE 12. NON-CONTROLLING INTERESTS AND OPERATING PARTNERSHIP UNITS
During the second quarter of 2012, we repurchased all of the operating partnership units (“OP Units”) issued to Evergreen Realty Group, LLC and certain of its affiliates (“Evergreen”) in 2010. We had issued the OP Units to Evergreen in connection with our acquisition of assets from Evergreen on January 17, 2010. OP Units issued to Evergreen were repurchased by the Company for a total of one dollar, in accordance with the purchase agreement.
To reflect the change in ownership in the operating partnership, we have adjusted the non-controlling interest by the approximate carrying amount of the OP Units.
See Note 17 - Commitments and Contingencies for additional information.
The following table summarizes the activity for the operating partnership units (”OP Units”):
The following represents the effects of changes in the Company’s equity related to non-controlling interests:
NOTE 13. INCOME TAXES
The provision for income taxes from continuing operations on income consists of the following for the years ended December 31, 2012 and 2011 (in thousands):
We have federal and state net operating loss carry-forwards of approximately $25.0 million and $8.6 million, respectively, as of December 31, 2012.
We are a loss corporation as defined in Section 382 of the Internal Revenue Code. Therefore, if certain changes in our ownership should occur, there could be a significant annual limitation on the amount of loss carry-forwards and future recognized losses that can be utilized and ultimately some amount of loss carry-forwards may not be available. Such changes could result in additional tax provision. The net operating loss carry-forwards expire in 2024 through 2031.
For the two years ended December 31, 2012, the reported income tax benefit differs from the amount of benefit determined by applying the federal statutory rate of 34% before income taxes as a result of the following:
The components of deferred tax assets and liabilities consist of the following as of December 31, 2012 and December 31, 2011, respectively:
Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. We have assessed, using all available positive and negative evidence, the likelihood that the deferred tax assets will be recovered from future taxable income.
An enterprise must use judgment in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists (i) the more positive evidence is necessary and (ii) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion, or all, of the deferred tax asset. Among the more significant types of evidence that we considered are: that future anticipated property sales will produce more than enough taxable income to realize the deferred tax asset; taxable income projections in future years; and whether the carry-forward period is so brief that it would limit realization of tax benefits.
We had no unrecognized tax benefits as of December 31, 2012. We do not expect that this will change significantly within the next twelve months. Our policy is to recognize interest related to any unrecognized tax benefits as interest expense and penalties as operating expenses. There are no penalties or interest accrued at December 31, 2012 related to unrecognized tax benefits. We believe that we have the appropriate support for the income tax positions taken and to be taken on our tax returns and that our 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. Our federal and state tax returns open to audit generally include all years from 2009 and beyond.
We expect to sell real estate assets in the future and have determined that it is more likely than not that future taxable income, primarily from gains on the sales of real estate assets, will be sufficient to enable us to realize all of our deferred tax assets. Therefore, for each of the two years ended December 31, 2012 and 2011, no valuation allowance has been recorded.
NOTE 14. NET INCOME PER SHARE
Net income per share is calculated based on the weighted average number of common shares outstanding. Stock options outstanding, OP Units and preferred shares have not been included in the net loss per share calculation since their effect on the losses would be antidilutive. Net income per share for each of the two years ended December 31, 2012 and 2011 is as follows (in thousands, except for shares and per share amounts):
The following weighted average preferred shares, stock options and OP units outstanding that can be converted into common stock on a one for one basis were excluded from the computation of diluted net income per share as they had an anti-dilutive effect:
NOTE 15. SHARE-BASED COMPENSATION
Share-based compensation expense is measured at grant date, based on the fair value of the instrument, and is recognized as expense over the requisite service period.
The following table sets forth the total share-based compensation expense included in our Consolidated Statements of Operations:
As of December 31, 2012, approximately $0.2 million total unrecognized share-based compensation expense related to non-vested awards is expected to be recognized over the respective vesting terms of each award over the weighted average period of 3.4 years.
Valuation Assumptions
Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables.
No options were granted during the twelve month periods ending December 31, 2012 and 2011.
The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model, consistent with the provisions of ASC 718. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock.
Our issued and outstanding stock options at December 31, 2012 and 2011 are fully vested and expensed.
We declared and paid cash dividends to common shareholders in 2003 but do not plan to pay cash dividends to common stock shareholders in the foreseeable future.
The fair value of each restricted stock award (RSA) is estimated on the date of grant based on the closing price of our stock on the grant date. Share-based compensation expense related to RSAs is recognized over the requisite service period.
Equity Incentive Program and Restricted Stock Awards
We grant incentive and nonqualified stock options and RSA’s to employees, consultants and directors under the Omnibus Stock Incentive Plan (“the Plan”). Stock options expire 10 years from the date they are granted and generally vest over service periods that range over three years. New shares are issued for options exercised and RSA’s released. RSA’s give the recipient 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 our shares, with the exception that the recipient may not transfer the shares during the restriction period that lapses over various periods ranging from one to three years.
We have reserved 360,000 shares under the Plan. As of December 31, 2012, we had issued 132,780 shares under the Plan.
The following table summarizes the combined activity under the equity incentive plans for the indicated periods:
The RSA’s had no intrinsic value as of December 31, 2012. No options were outstanding at December 31, 2012.
During the years ended December 31, 2012 and 2011, we granted 7,000 and 34,500 restricted stock awards to certain officers and employees, respectively. The value of the restricted stock awards was based on the closing market price of our common stock on the date of each award. The total grant date fair value of the restricted stock awards granted during the year ended December 31, 2012 and 2011 was approximately $0.03 million and $0.6 million, respectively, which will be recognized over the vesting periods ranging from three to five years from the date of grant. The expense recorded for the years ended December 31, 2012 and 2011 was approximately $0.2 million and $0.2 million, respectively.
Awards to Non-Employees
In January 2012, we issued 41,910 shares of Common Stock to a firm as consideration for legal services. The fair value of the stock was based on the closing market price of our common stock on the date of the grant. The consideration for the shares amounted to $0.2 million in services.
In February 2011, we issued 15,000 shares of Common Stock to a firm as consideration for business advisory services. The fair value of the stock was based on the closing market price of our common stock on the date of the grant. The consideration for the shares amounted to $0.2 million.
In July 2011, we issued 3,000 shares of Common Stock to a firm as consideration for consulting services. The fair value of the stock was based on the closing market price of our common stock on the date of the grant. The consideration for the shares amounted to $0.1 million.
In November 2011, we issued 25,685 shares of Common Stock to a firm as consideration as consideration for utility services. The fair value of the stock was based on the closing market price of our common stock on the date of grant. The consideration for the shares amounted to $0.3 million
NOTE 16. RESTRUCTURING OF DEBT
During the year ended December 31, 2012, we satisfied our $1.7 million corporate loan with California Bank and Trust. We paid the bank $1.0 million for a complete satisfaction of the loan, which had a principal balance and accrued interest due of approximately $1.8 million. A mutual release settled all issues regarding this loan for both parties. We recorded other income of approximately $0.8 million in connection with the transaction.
We recorded a net gain of $4.3 million on the foreclosure of five properties in 2012, which is included as a component of discontinued operations. The combined gain of $5.1 million, net of taxes, amounted to $0.91 per share. We also negotiated extended payment terms on approximately $1.4 million in accounts payable in 2012 with several vendors.
During the year ended December 31, 2011, we have re-negotiated some of our accounts payable which resulted in extended payment terms and/or discounted amounts. Six agreements have promissory notes with interest rates that range between 5%-9% and the maturities of all fifteen arrangements range between July 2011 and December 2015. We settled certain accounts payable during the year ending December 31, 2011 with creditors on a discounted basis and recorded other income of $0.5 million. We also recorded a gain of $2.7 million on the foreclosure of three properties in 2011, which is included as a component of discontinued operations. The combined gain of $3.2 million, net of taxes, amounted to $0.67 per share.
NOTE 17. COMMITMENTS AND CONTINGENCIES
On March 2, 2011, we filed an action against Evergreen Realty Group, LLC and certain of its affiliates ("Evergreen") relating to its acquisition of assets from Evergreen in January 2010. The purchase price of the assets was $18.0 million, subject to adjustment as provided in the purchase agreement, and was paid in the form of (a) the assumption of $500,000 of payables, (b) the issuance of a $9.5 million promissory note and (c) the issuance of 800,000 operating partnership units which would be redeemable by Evergreen after June 30, 2011 for a number of shares of our common stock (or, at our option, the cash equivalent) equal to the quotient obtained by dividing $8.0 million by the greater of our share price or net asset value as of December 31, 2010. (Our share price as of December 31, 2010 was $17.52; our net asset value as of December 31, 2010 has not been definitively determined.) In our action, we are alleging various offsets and adjustments to the purchase price, as well as defaults by Evergreen, and are seeking damages and a declaration that the principal amount of the promissory note should be reduced to zero, that the operating partnership units should be cancelled and that Evergreen should refund to us payments of at least $578,000 which have been made on the promissory note. On March 7, 2011, New West Realty, Inc. (“New West”), an affiliate of Evergreen, filed a complaint for damages in Orange County Superior Court against ASR and other related entities. New West alleges in the complaint that ASR had failed to pay amounts then due under a $9.5 million promissory note held by New West. We have subsequently paid all amounts currently due and payable under the note and therefore dispute the claim and deny that any payment is now due under the note, and we have filed a separate lawsuit against New West and others seeking damages in excess of the amount of New West’s claim.
In January 2013, we came to terms with Evergreen to settle the $9.5 million promissory note. The proposed terms of the settlement agreement have been formalized. We have agreed to pay $4.6 million in a combination of cash, a new note, and nonconvertible preferred stock as settlement of the note. The new debt will mature in 2017. The required documentation and approval by all parties of the settlement agreement is anticipated to be completed in the second quarter of 2013.
During the second quarter of 2012, we repurchased all of the operating partnership units (“OP Units”) issued to Evergreen Realty Group, LLC and certain of its affiliates (“Evergreen”) in 2010. We had issued the OP Units to Evergreen in connection with the acquisition of assets from Evergreen on January 17, 2010. The OP Units issued to Evergreen were repurchased by the Company for one dollar as provided in the purchase and sell agreement. See Note 12 - Non-Controlling Interests and Operating Partnership Units for additional information.
We are in default on a $1.0 million unsecured note, which matured in May 2012. The loan is guaranteed by Mr. Galardi. The lender on the note has initiated legal proceedings to collect on the debt. Negotiations are in progress to settle this debt.
Some of our notes payable require that we maintain minimum cash and tangible net worth. We believe we are in compliance with these requirements, except as to our loans in default.
Certain other claims and lawsuits have arisen against us in our normal course of business including lawsuits by creditors with respect to past due accounts payable. We believe that such claims and lawsuits will not have a material adverse effect on our financial position, cash flows or results of operations.
NOTE 18. PREFERRED STOCK
We are authorized to issue up to 25.0 million shares of one or more classes or series of preferred stock with a par value of $.01 per share.
On December 30, 2008, we filed Articles Supplementary to our Articles of Incorporation, which authorized the issuance of 68,965 of Series A Preferred Stock (“Preferred Stock”).
On December 31, 2008, we issued 55,172 shares of the Preferred Stock to Mr. Carden, Mr. Galardi and Timothy R. Brown. Each share of Preferred Stock was sold for $29.00 and is entitled to annual dividends, payable quarterly, at an annual rate of 15%, and to a preference on liquidation equal to the following: (a) if on or prior to December 31, 2011, the sum of $29.00 and any accrued and unpaid dividends or (b) if after December 31, 2011, the greater of (x) the sum of $29.00 and any accrued and unpaid dividends or (y) the amount which would be paid on account of each share of common stock upon liquidation if each share of Preferred Stock had hypothetically been converted into one share of common stock. The Preferred Stock is not required to be redeemed by us and the holders will have no right to require redemption. The Preferred Stock is redeemable at our option at any time after December 31, 2011. The shares were issued in a private transaction exempt from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.
As of December 31, 2012 there were accrued and unpaid dividends on the outstanding preferred shares of $0.4 million, or $.10 per common share.
NOTE 19. SUBSEQUENT EVENTS
During the first quarter of 2013, we deconsolidated the VIE which owns Fishers Indiana Distribution Center. The debt on the property is matured and the lender has placed the asset into receivership. We have determined that we are no longer the primary beneficiary of the VIE which owns the property
In March 2013, we obtained a $1.8 million loan secured by two real estate assets. The loan is for a 1-year term and bears interest at a fixed rate of 12% per annum. The loan proceeds will be used to reduce accounts payable and for other obligations.
In March 2013, we refinanced our loan on Windrose Plaza. The new loan, in the amount of $3.5 million, is for a 10-year term and bears interest a fixed rate at 5.5% per annum.
In January 2013, we came to terms with Evergreen to settle the $9.5 million promissory note. The proposed terms of the settlement agreement have been formalized. We have agreed to pay $4.6 million in a combination of cash, a new note, and nonconvertible preferred stock as settlement of the note. The new debt will mature in 2017. The required documentation and approval by all parties of the settlement agreement is anticipated to be completed in the second quarter of 2013.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, are responsible for evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Securities Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. As of the date of this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports our Company files and submits under the Securities Exchange Act is recorded, processed, summarized and reported as and when required.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive, principal accounting and principal financial officers, or persons performing similar functions, and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management, including the Company’s Chief Executive Officer and Principal Financial Officer assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment, management used the framework in “Internal Control - Integrated Framework” promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria. Based on the assessment performed, management believes that as of December 31, 2012, the Company’s internal control over financial reporting was effective based upon the COSO criteria. Additionally, based on management’s assessment, the Company determined that there were no material weaknesses in its internal control over financial reporting as of December 31, 2012.
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Controls
There has not been any change in our internal control over financial reporting during the fourth quarter of 2012 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference from the Company’s definitive proxy statement to be filed on or before April 30, 2013 for its annual stockholder’s meeting.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the Company’s definitive proxy statement to be filed on or before April 30, 2013 for its annual stockholder’s meeting.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference from the Company’s definitive proxy statement to be filed on or before April 30, 2013 for its annual stockholder’s meeting.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference from the Company’s definitive proxy statement to be filed on or before April 30, 2013 for its annual stockholder’s meeting.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated by reference from the Company’s definitive proxy statement to be filed on or before April 30, 2013 for its annual stockholder’s meeting.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Consolidated Financial Statements and Supplementary Data
The following financial statements are included herein under Item 8 of this report:
AMERICAN SPECTRUM REALTY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
NOTE TO SCHEDULE III-REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
Changes in real estate investments and accumulated depreciation for the year ended December 31 were as follows:
NOTE TO SCHEDULE III-REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
____________________
(1)
Initial cost and date acquired, where applicable.
(2)
Costs are offset by retirements and write-offs.
(3)
The aggregate cost for federal income tax purposes is $57,761.
(4)
Valuation allowance established in 2011 as the estimated fair value decline below book value; Atrium 6430 - $1,395 and Morenci Professional Park - $429.
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
By: American Spectrum Realty Inc.,
EXHIBIT INDEX
____________________
(1)
Incorporated herein by reference to the Company’s Registration Statement on Form S-4 (Registration No. 333-43686), which became effective August 8, 2001.