AmREIT Monthly Income & Growth Fund III Ltd - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - AmREIT Monthly Income & Growth Fund III Ltd	Financial_Report.xls
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - AmREIT Monthly Income & Growth Fund III Ltd	amreit132297migiii_ex31-1.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - AmREIT Monthly Income & Growth Fund III Ltd	amreit132297migiii_ex31-2.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - AmREIT Monthly Income & Growth Fund III Ltd	amreit132297migiii_ex32-2.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - AmREIT Monthly Income & Growth Fund III Ltd	amreit132297migiii_ex32-1.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



FORM 10-Q


(Mark One)
	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013


	o	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________


Commission file number 000-52619

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD.

(Exact Name of Registrant as Specified in Its Charter)


Texas		20-2964630
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

8 Greenway Plaza, Suite 1000
Houston, TX		77046
(Address of Principal Executive Offices)		(Zip Code)

(713) 850-1400

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


	Large accelerated filer o		Accelerated filer o
	Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

TABLE OF CONTENTS


			PAGE

Definitions			ii
PART I - FINANCIAL INFORMATION
	ITEM 1.	Financial Statements.	1
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	14
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk.	17
	ITEM 4.	Controls and Procedures.	17
PART II - OTHER INFORMATION
	ITEM 1.	Legal Proceedings.	18
	ITEM 1A.	Risk Factors.	18
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	18
	ITEM 3.	Defaults Upon Senior Securities.	18
	ITEM 4.	Mine Safety Disclosures.	18
	ITEM 5.	Other Information.	18
	ITEM 6.	Exhibits.	18
SIGNATURES			19
EXHIBIT INDEX			20

Table of Contents

DEFINITIONS

As used in this Quarterly Report, the following abbreviations and terms have the meanings as listed below. Additionally, the terms “we,” “our,” “MIG III,” the “Partnership” and “us” refer collectively to AmREIT Monthly Income & Growth Fund III, Ltd. and its subsidiaries, including joint ventures, unless the context clearly indicates otherwise.


ABBREVIATION		DEFINITION

AmREIT		AmREIT, Inc., a Maryland corporation and parent of our General Partner.

ARIC		AmREIT Realty Investment Corporation and its consolidated subsidiaries, a wholly-owned taxable REIT subsidiary of AmREIT.

CEO		Chief Executive Officer.

CFO		Chief Financial Officer.

Exchange Act		Securities Exchange Act of 1934, as amended.

GAAP		U.S. generally accepted accounting principles.

General Partner		AmREIT Monthly Income & Growth III Corporation, a wholly-owned subsidiary of AmREIT, Inc.

GLA		Gross leasable area.

LIBOR		London interbank offered rate.

Limited Partners		Owners / holders of our Units.

MIG IV		AmREIT Monthly Income & Growth Fund IV, L.P., an affiliated entity.

NYSE		New York Stock Exchange.

Offering		Both the issuance and sale of our initial 80 Units pursuant to the terms of a private placement memorandum dated April 19, 2005, and subsequent sale of Units through October 31, 2006 (a total of 2,844 Units).

Partners		Collectively our General Partner and Limited Partners.

PTC/BSQ		PTC/BSQ Holding Company LLC.

REIT		Real Estate Investment Trust.

SEC		Securities and Exchange Commission.

Securities Act		Securities Act of 1933, as amended.

Units		Limited partnership units sold in our Offering.

Quarterly Report		Quarterly Report on Form 10-Q filed with the SEC for the three months ended March 31, 2013.

Table of Contents

PART I – FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS.

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for Unit data)


	March 31, 2013			December 31, 2012
ASSETS	(unaudited)
Real estate investments at cost:
Land	$	11,089		$	11,089
Buildings		21,484			21,484
Tenant improvements		1,303			1,217
		33,876			33,790
Less accumulated depreciation and amortization		(5,953	)		(5,732	)
		27,923			28,058

Investment in non-consolidated entities		20,611			20,749
Acquired lease intangibles, net		14			28
Net real estate investments		48,548			48,835

Cash and cash equivalents		888			3,170
Tenant and account receivables, net		450			462
Accounts receivable - related party		452			470
Notes receivable		116			103
Deferred costs, net		637			710
Other assets		498			543
TOTAL ASSETS	$	51,589		$	54,293

LIABILITIES AND PARTNERS’ CAPITAL
Liabilities:
Notes payable	$	24,715		$	24,759
Notes payable - related party		3,485			5,622
Accounts payable and other liabilities		528			629
Accounts payable - related party		110			49
Acquired below-market lease intangibles, net		—			4
Security deposits		127			127
TOTAL LIABILITIES		28,965			31,190
Partners’ capital:
General partner		—			—
Limited partners, 2,833 Units outstanding at March 31, 2013 and December 31, 2012		22,624			23,103
TOTAL PARTNERS’ CAPITAL		22,624			23,103

TOTAL LIABILITIES AND PARTNERS’ CAPITAL	$	51,589		$	54,293

See Notes to Consolidated Financial Statements.

Table of Contents

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2013 and 2012
(in thousands, except for per Unit data)
(unaudited)


	Three months ended March 31,
	2013			2012

Revenues:
Rental income from operating leases	$	850		$	686
Total revenues		850			686

Expenses:
General and administrative		32			25
General and administrative - related party		91			94
Asset management fees - related party		59			59
Property expense		207			316
Property management fees - related party		31			27
Legal and professional		66			130
Depreciation and amortization		263			273
Total operating expenses		749			924

Operating income (loss)		101			(238	)

Other income (expense):
Interest and other income		2			37
Interest expense		(387	)		(402	)
Equity in losses from non-consolidated entities		(196	)		(212	)
Margin tax expense (refund)		1			(5	)
Total other expense		(580	)		(582	)

Loss before discontinued operations		(479	)		(820	)

Income from discontinued operations:
Income from real estate operations		—			10
Gain on debt extinguishment		—			1,533
Income from discontinued operations		—			1,543

Net (loss) income	$	(479	)	$	723

Weighted average Units outstanding		2,833			2,833
Net (loss) income per Unit	$	(169.08	)	$	255.21

See Notes to Consolidated Financial Statements.

Table of Contents

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
For the three months ended March 31, 2013
(in thousands)
(unaudited)


	Partners’ Capital

	General Partner		Limited Partners			Total

Balance at December 31, 2012	$	—	$	23,103		$	23,103
Net loss attributable to Partners ⁽¹⁾		—		(479	)		(479	)
Balance at March 31, 2013	$	—	$	22,624		$	22,624



	(1)	The allocation of net loss includes a curative allocation to increase the General Partner capital account by $5 for the three months ended March 31, 2013. The cumulative curative allocation since inception of the Partnership is $392. The Partnership Agreement provides that no Partner shall be required to fund a deficit balance in their capital account.

See Notes to Consolidated Financial Statements.

Table of Contents

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


	Three months ended March 31,
	2013			2012
Cash flows from operating activities:
Net income (loss)	$	(479	)	$	723
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on extinguishment of debt		—			(1,533	)
Equity in losses from non-consolidated entities		196			212
Depreciation and amortization		320			359
Bad debt (recovery) expense		(53	)		9
Increase in tenant and accounts receivables		49			15
Decrease in accounts receivable - related party		213			8
Increase in deferred costs		—			(100	)
Decrease (increase) in other assets		45			(9	)
Decrease in accounts payable and other liabilities		(101	)		(264	)
Increase in accounts payable - related party		136			256
Decrease in security deposits		—			(41	)
Net cash provided by (used in) operating activities		326			(365	)

Cash flows from investing activities:
Improvements to real estate		(102	)		(73	)
Payments received on notes receivable		3			—
Investments in and advances to non-consolidated entities		(305	)		(73	)
Distributions from non-consolidated entities		90			180
Net cash provided by (used in) investing activities		(314	)		34

Cash flows from financing activities:
Payments on notes payable		(44	)		(45	)
Proceeds from notes payable - related party		—			257
Payments on notes payable - related party		(2,250	)		—
Loan acquisition costs		—			(25	)
Net cash provided by (used in) financing activities		(2,294	)		187

Net decrease in cash and cash equivalents		(2,282	)		(144	)
Cash and cash equivalents, beginning of period		3,170			1,815
Cash and cash equivalents, end of period	$	888		$	1,671

Supplemental schedule of cash flow information:

Cash paid during the period for interest	$	306		$	259
Cash received during the period for taxes	$	7		$	—

Supplemental schedule of noncash investing and financing activities:

Increase in notes payable - related party for accrued interest	$	113		$	230
Property delivered as settlement of debt	$	—		$	9,628
Construction fees included in accounts payable	$	38		$	15
Reclass from tenant and accounts receivable to notes receivable	$	16		$	—

See Notes to Consolidated Financial Statements.

Table of Contents

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(unaudited)

1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS

General

We were formed on April 19, 2005 to acquire, develop and operate, directly or indirectly through joint venture arrangements, a portfolio of commercial real estate consisting primarily of multi-tenant shopping centers and mixed-use developments. Our General Partner is a subsidiary of AmREIT, an SEC reporting, publicly-traded Maryland corporation that has a class of securities traded on the NYSE and that has elected to be taxed as a REIT. As of March 31, 2013, our investments included two wholly-owned properties comprising approximately 125,000 square feet of GLA and seven properties in which we own a non-controlling interest through joint ventures comprising approximately 1,190,000 square feet of GLA. A majority of our properties are located in highly populated, suburban communities in Texas.

As of the date of this Quarterly Report, our operating period, which ended on October 31, 2012, has expired and we have entered into our liquidation period. However, an orderly liquidation of all of our properties will likely take years for our General Partner to complete and wind up our operations. Because we have entered into our liquidation period, we will not invest in any new real estate without approval from our Limited Partners. However, because liquidation was not imminent as of March 31, 2013, the financial statements are presented assuming we continue as a going concern.

Economic Conditions and Liquidity

Over the past several years our results of operations and valuations of our real estate assets have been negatively impacted by overall economic conditions. The United States economy is still experiencing weakness from the past economic recession, which resulted in increased unemployment, weakening of tenant financial condition, large-scale business failures and tight credit markets. High levels of unemployment have persisted, and rental rates and valuations for retail space have not fully recovered to pre-recession levels and may not for a number of years. Most of our retail properties were purchased prior to 2008 when retail real estate market prices were much higher, and our property valuations have been negatively impacted by these market dynamics.

We have faced significant liquidity challenges over the last several years. Other than with our Olmos Creek property (which was delivered to the lender as settlement of unpaid debt in February 2012), we have been successful in meeting our historic cash shortfalls through (1) managing the timing of forecasted capital expenditures related to the lease-up of properties, (2) managing the timing of operating expense payments and, to the extent possible, accelerating cash collections, (3) deferring the payment of fees owed to our General Partner and its affiliates, (4) selling certain of our properties and investments in non-consolidated entities, including the anticipated sale of a single tenant building and portion of land by our Woodlake Pointe joint venture (see Note 4) and/or (5) obtaining funds through additional borrowings from AmREIT.

We expect to fund approximately $1.5 million in capital expenditures over the next two years at our Casa Linda property (a 50% joint venture between us and MIG IV) representing our 50% share of a lease-up strategy at this property. The lease-up strategy includes certain tenant build-out and site improvements. The $38.0 million mortgage on the property matures in January 2014. The joint venture will likely require a one-year extension of the loan to complete this strategy and then refinance the property on a long-term basis. We believe we will be successful in obtaining a one-year extension based on our preliminary discussions with the lending agent; however, no assurances can be given that we will be successful. We do not guarantee this debt, and our risk of loss is limited to our ownership interest in the property.

On April 5, 2013, our Woodlake Pointe joint venture entered into a sales agreement to sell a portion of the land and a single tenant building at our Woodlake Pointe property for $12.0 million to an unrelated third party. The land and building are secured by a $6.7 million loan that will be repaid in full with proceeds from the sale. The sale is expected to close in the third quarter of 2013, and we estimate that our portion of the net cash proceeds (30%) would be approximately $1.5 million. We plan to use the proceeds to fund the Casa Linda lease-up strategy and for working capital needs.

Table of Contents

There is no guarantee that we and our joint ventures will be successful with all of the above liquidity initiatives, and we may continue to look to AmREIT to provide additional financial support to us to meet our operating cash needs. Historically, AmREIT has deferred payment of advisory fees earned to the extent such deferrals of fees were necessary for our continued operation. Such fees included property management, asset management, development fees, interest expense on amounts owed to AmREIT and reimbursements of certain of AmREIT’s general and administrative costs. During 2013, we resumed monthly payments of interest, asset management fees and overhead allocations to AmREIT. However, AmREIT has agreed that it will not require us to repay the $3.1 million notes payable–related party we owe to AmREIT until a date subsequent to January 1, 2014, if requiring such repayment would prevent the execution of our strategy or present an unnecessary financial hardship. In the event our liquidity is not sufficient to execute our strategy, AmREIT has agreed to provide financial support and defer payments, subject to its continued ability to do so. Although no assurance can be given, we believe that we will be able to generate liquidity sufficient to continue to execute our strategic plan through a combination of the foregoing liquidity initiatives.

Strategic Plan

We believe that the retail real estate market is likely to remain at depressed levels in 2013 when compared to pre-recession levels; however, it is difficult to determine the breadth and duration of the unfavorable financial market conditions and how such conditions may affect our tenants and the valuation of our assets. To navigate these challenging market conditions, we and our General Partner have created a strategic plan to maximize the potential value of our real estate portfolio and execute an orderly, but opportunistic liquidation. The components of this strategic plan are as follows:


	•	Complete our development and redevelopment projects with a goal to stabilize these projects during the balance of 2013. We believe that completing our development and redevelopment projects, including their lease-up and stabilization, will allow us to maximize the return on these properties upon sale. Our investments in 5433 Westheimer and PTC/BSQ represent our assets currently under development/redevelopment. See Note 4 for further discussion of redevelopment plans at each of these properties.

	•	Continue to operate our projects in a first-class manner with a goal to generate operating cash flow in order to re-commence distributions in 2014. We believe that upon stabilization of our development and redevelopment properties, coupled with the continued and intense oversight of our properties, we will generate liquidity that could allow us to re-commence distributions to our Limited Partners; however, this will most likely not occur until we begin to sell our real estate assets.

	•	Sell our properties opportunistically, likely beginning in 2014, after the market has had a chance to recover. Once a property is marketed for sale, it may take several months to receive offers and complete due diligence by both parties. Our General Partner has in good faith begun to review market sales opportunities for our operating properties, but believes that retail property valuations continue to be challenged, and, accordingly, that attractive sales opportunities may not exist in the near term. When deciding whether or when to sell properties, our General Partner will consider factors such as potential appreciation of value, and timing of cash flows. As we have now entered the liquidation period, we will not be acquiring new real estate investments, but we will be completing our development and redevelopment projects and distributing net proceeds generated from property sales to our Limited Partners unless the General Partner has identified attractive acquisition opportunities and obtained a majority vote of the Limited Partners to re-invest such proceeds.

An orderly liquidation of all of our properties will take years for our General Partner to complete and wind up our operations. Because of challenging real estate market conditions, it is possible that investors may not recover all of their original investment. Although we believe that our strategic plan maximizes the potential value of our properties and is in the best interest of our Limited Partners, no assurances can be given that this strategy will be successful. Deterioration in the United States economy or the bankruptcy or insolvency of one or more of our significant tenants could cause this strategy to be insufficient. Even with the above strategic plan and liquidity initiatives, we still may incur cash shortfalls, we may be required to perform under certain guarantees of our joint ventures or be unable to refinance certain debt as it comes due that could result in lender repossession of one or more properties owned by us and/or our joint ventures or we may be forced to sell one or more properties at a time when it is disadvantageous to do so, potentially resulting in losses on the disposition of those properties.

Table of Contents

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred. The consolidated financial statements include our accounts as well as the accounts of any wholly- or majority-owned subsidiaries in which we have a controlling financial interest. Investments in joint ventures and partnerships where we have the ability to exercise significant influence but do not exercise financial and operating control are accounted for using the equity method (see Note 4). The significant accounting policies of our non-consolidated entities are consistent with those of our subsidiaries in which we have a controlling financial interest. As of March 31, 2013, we do not have any interests in variable interest entities. All significant inter-company accounts and transactions have been eliminated in consolidation.

The consolidated financial statements included in this Quarterly Report have been prepared pursuant to the rules and regulations of the SEC and are unaudited. In our opinion, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted of normal recurring items. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from these statements pursuant to the SEC rules and regulations and, accordingly, these financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks and money market funds.

Revenue Recognition

Rental income from operating leases – We lease space to tenants under agreements with varying terms. Our leases are accounted for as operating leases, and, although certain leases of the properties provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases, revenue is recognized on a straight-line basis over the terms of the individual leases. Revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, possession or control occurs on the lease commencement date. In all cases, we have determined that we are the owner of any tenant improvements that we fund pursuant to the lease terms. In cases where significant tenant improvements are made prior to lease commencement, the leased asset is considered to be the finished space, and revenue recognition therefore begins when the improvements are substantially complete. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Accrued rents are included in tenant and accounts receivable, net.

Receivables and Allowance for Uncollectible Accounts

Tenant and Accounts Receivable, Net - Included in tenant and accounts receivable are base rents, tenant reimbursements and adjustments related to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. Bad debt expenses and any related recoveries are included in property expense. As of March 31, 2013 and December 31, 2012, our allowance for uncollectible accounts related to our tenant receivables was $79,000 and $132,000, respectively.

Accounts Receivable – Related Party - Included in accounts receivable related-party are short-term cash advances provided to certain of our affiliated investment entities primarily for their development needs. These cash advances are due upon demand.

Table of Contents

Development Properties

Expenditures related to the development of real estate are capitalized as part of construction in progress, which includes carrying charges, primarily interest, real estate taxes and loan acquisition costs, and direct and indirect development costs related to buildings under construction. The capitalization of such costs ceases at the earlier of one year from the date of completion of major construction or when the property, or any completed portion, becomes available for occupancy. We capitalize costs associated with pending acquisitions of raw land once the acquisition of the property is determined to be probable.

Acquired Properties and Acquired Intangibles

We account for operating real estate acquisitions as an acquisition of a business as we believe most operating real estate meets the definition of a “business” under GAAP. Accordingly, we allocate the purchase price of acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values. Identifiable intangibles include amounts allocated to acquired above and below market leases, the value of in-place leases and customer relationship value, if any. We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include (i) an estimate of carrying costs during the expected lease-up periods, considering market conditions, and (ii) costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to in-place lease value and above and below-market leases are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Below market leases include fixed-rate renewal periods where we believe the renewal is reasonably assured. Premiums or discounts on debt are amortized to interest expense over the remaining term of such debt. Costs related to acquiring operating properties are expensed as incurred.

Depreciation

Depreciation is computed using the straight-line method over an estimated useful life of up to 39 years for buildings, up to 11 years for site improvements and over the term of the lease for tenant improvements. We re-evaluate the useful lives of our buildings and improvements as warranted by changing conditions at our properties. As part of this re-evaluation, we may also consider whether such changing conditions indicate a potential impairment, and we perform an impairment analysis, as necessary, at the property level. In the case of a property redevelopment, we reassess the useful lives of specific buildings or other improvements to be demolished as part of that redevelopment once the redevelopment is probable of occurring.

Impairment

We review our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including acquired lease intangibles and accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the property, with the carrying value of the individual property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors that require complex and subjective judgments to be made by management. Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant creditworthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each property. For our multi-building retail centers, we consider the entire retail center as the asset group for purposes of our impairment analysis. We review our investments in non-consolidated entities for impairment based on a similar review of the properties held by the investee entity. No impairment charges were recognized during the three months ended March 31, 2013 and 2012.

Fair Value Measurements

GAAP emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. GAAP requires the use of observable market data, when available, in making fair value measurements. Observable inputs are inputs that the market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of ours. When market data inputs are unobservable, we utilize inputs that we believe reflect our best estimate of the assumptions market participants would use in pricing the asset or liability. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified that are within Level 3 of the hierarchy). The three levels of inputs used to measure fair value are as follows:

Table of Contents


	•	Level 1 Inputs – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Partnership has the ability to access.

	•	Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

	•	Level 3 Inputs – Unobservable inputs for the asset or liability, which are typically based on the Partnership’s own assumptions, as there is little, if any, related market activity.

Recurring Fair Value Measurements and Financial Instruments - Our consolidated financial instruments consist of cash and cash equivalents, tenant and accounts receivables, accounts receivable – related party, notes receivable, notes payable, notes payable – related party, accounts payable – related party, and accounts payable and other liabilities. The carrying values of all of these financial instruments, except for our notes payable, are representative of the fair values due to the short-term nature of the instruments. See Note 5 for fair value disclosures of our notes payable.

Subsequent Events

We did not have any material subsequent events as of the date of this filing that impacted our consolidated financial statements.

3. REAL ESTATE DISPOSITIONS AND DISCONTINUED OPERATIONS

Olmos Creek - Our Olmos Creek mortgage of $11.2 million matured unpaid on November 1, 2011. We assessed the Olmos Creek property for impairment and recorded an impairment of $2.1 million in order to reflect it at its estimated fair value during the third quarter of 2011. The lender subsequently sold the note (including the right to the property) in January 2012. We entered into a settlement agreement with the new owner of the mortgage and delivered the property to the purchaser on February 6, 2012 in exchange for a release of substantially all of the obligations under the Olmos Creek mortgage. The settlement of the debt resulted in a gain on debt extinguishment of approximately $1.5 million as reported in income from discontinued operations on the consolidated statement of operations for the three months ended March 31, 2012.

The Olmos Creek property has been reflected as discontinued operations in the accompanying consolidated statement of operations. The following is a summary of our income from discontinued real estate operations for the periods presented below (amounts in thousands):


	For the three months ended March 31,
	2013		2012
Revenues:
Rental income from operating leases	$	—	$	91
Total revenues		—		91
Expenses:
Property expense		—		21
Property management fees - related party		—		3
Legal and professional		—		15
Depreciation and amortization		—		31
Total operating expenses		—		70
Operating income		—		21
Other expense:
Margin tax expense		—		(11	)
Total other expense		—		(11	)
Income from real estate operations		—		10
Gain on debt extinguishment		—		1,533
Income from discontinued operations	$	—	$	1,543

Table of Contents

4. INVESTMENTS IN NON-CONSOLIDATED ENTITIES

We have investments in five entities through which we own an interest in seven properties that are accounted for using the equity method of accounting due to our ability to exercise significant influence over them. Our investment balances as reported on our consolidated balance sheet are as follows (amounts in thousands):


			March 31,		December 31,
Investment	Ownership		2013		2012
5433 Westheimer		57.5%	$	3,014	$	3,087
Casa Linda		50%		2,565		2,707
Woodlake Pointe		30%		4,714		4,623
PTC/BSQ		20%		9,866		9,882
Woodlake Square		3%		452		450
Total			$	20,611	$	20,749

5433 Westheimer – We own a 57.5% interest in 5433 Westheimer, LP, which owns an office building with 134,000 square feet of GLA and formerly owned a 152-room hotel in Houston, Texas. The remaining 42.5% is owned by a third party, joint-venture partner. The property is not consolidated into our financial statements as we and our joint venture partner share equally in decision making rights. The debt securing the 5433 Westheimer property matured unpaid in December 2011. On April 10, 2012, 5433 Westheimer, LP sold the 152-room hotel for $28.7 million, and net the proceeds received were used to pay down the loan balance to $3.8 million. 5433 Westheimer, LP continues to own and operate the office building. The lender extended the remaining debt outstanding through October 31, 2012. On October 19, 2012, 5433 Westheimer, LP refinanced this debt with a five-year term loan in the amount of $8.7 million, which includes amounts to be funded in the form of construction draws related to the planned redevelopment at the property. We and our joint venture partner are joint and several guarantors of 25% of this debt. We and our joint venture partner have initiated a redevelopment plan, primarily in the form of building and site improvements that we believe will allow for lease-up of the property at improved rental rates. We estimate that the redevelopment will cost approximately $6.8 million (including lease-up costs), which is expected to be entirely funded by the property’s cash flows and construction draws under the loan.

Casa Linda - We own a 50% interest in AmREIT Casa Linda, LP, which owns a multi-tenant retail property located in Dallas, Texas with a combined GLA of 325,000 square feet. The remaining 50% is owned by MIG IV, an affiliate of our General Partner. The property is secured by a $38.0 million, seven-year mortgage loan that matures in January 2014. The loan bears an annual interest rate of 5.48% and is interest-only until maturity. During 2012, we and MIG IV initiated a lease-up strategy for the property that includes certain tenant build-out and site improvements. The joint venture will likely require a one-year extension of the loan to complete this strategy. We believe we will be successful in obtaining a one-year extension based on our preliminary discussions with the lending agent; however, no assurances can be given that we will be successful. We do not guarantee this debt and our risk of loss is limited to our ownership interest in the property. We expect that our portion (50%) of the costs to be incurred as part of the lease-up strategy is approximately $1.5 million. We expect to fund our capital requirements with cash on hand, cash proceeds from the anticipated sale of a portion of the land and single tenant building at our Woodlake Pointe property (discussed below) and operating cash flows.

Woodlake Pointe - We own a 30% interest in AmREIT Westheimer Gessner, LP, which owns Woodlake Pointe, a multi-tenant retail property located in Houston, Texas with a combined GLA of 82,120 square feet. The remaining 70% is owned by affiliated AmREIT entities, MIG IV (60%) and ARIC (10%). During 2011, we signed a lease with a large national fitness tenant, and we completed construction of a 45,000 square foot building on the property during 2012. We are in discussions with another anchor tenant for the existing building. As of March 31, 2013, Woodlake Pointe had incurred approximately $5.7 million in redevelopment costs with a total expected cost of approximately $6.7 million, including tenant improvements and leasing costs. On April 5, 2013, our Woodlake Pointe joint venture entered into a sales agreement to sell a portion of the land and a single tenant building at our Woodlake Pointe property for $12.0 million to an unrelated third party. The land and building are secured by a $6.7 million loan that will be repaid in full with proceeds from the sale. The sale is expected to close in the third quarter of 2013 subject to customary closing conditions, and our portion of the net cash proceeds (30%) is estimated to be approximately $1.5 million. We plan to use the proceeds to fund the Casa Linda lease-up strategy and for working capital needs.

Table of Contents

PTC/BSQ - We own a 20% interest in PTC/BSQ Holding Company LLC, which owns three multi-tenant retail properties located in Plano, Texas with a combined GLA of 460,000 square feet. The remaining 80% is owned by an unaffiliated third party. During the second quarter of 2011, we invested $1.8 million (our funding requirement of 20%) in this holding company in order to acquire the vacant anchor building within the Preston Towne Crossing shopping center. In December 2011, the joint venture refinanced the mortgage loans with a $44.4 million term loan maturing December 27, 2014. The loan has two one-year extension options, provided certain conditions are met. The term loan provides for $7.0 million of capital expenditures, which are held in escrow until the construction costs are incurred. The term loan allocates $6.0 million for redevelopment of the recently acquired vacant anchor building within the Preston Towne Crossing shopping center and $1.0 million for improvements to the remaining portion of the center. Redevelopment began in January 2012 and is expected to be completed in the third quarter of 2013. In connection with the planned refinance of this joint venture’s debt, the joint venture initiated additional redevelopment to be primarily funded with loan proceeds. Based on preliminary discussions with a lender, we expect to refinance and increase this debt to $54.0 million with an additional $4.5 million in future available drawings for additional capital improvements and lease-up costs at the properties. The preliminary terms include a three year maturity with two one-year extension options. Proceeds from the expected refinance are to be used for additional capital improvements as well as to return a portion of equity to us and our joint venture partner. As of March 31, 2013, approximately $7.1 million in redevelopment costs have been incurred out of a total expected cost of $11.9 million, including tenant improvements and leasing costs.

Woodlake Square - We own a 3% interest in AmREIT Woodlake Square, LP, which owns a multi-tenant retail property located in Houston, Texas with a combined GLA of 161,000 square feet. The remaining 97% is owned by the third-party institutional partner (90%), ARIC (1%) and by MIG IV (6%). Our interest in Woodlake Square also carries a promoted interest in profits and cash flows once an 11.65% return is met on the project. The joint venture commenced redevelopment of this property in the third quarter of 2010 and completed the redevelopment in April 2011. As of March 31, 2013, Woodlake Square had incurred approximately $6.8 million in redevelopment costs with a total expected cost of approximately $8.3 million, including additional tenant improvements and leasing costs. On February 23, 2012, this entity sold a parcel of land that resulted in a gain of approximately $437,000. Our 3% share of this gain is included in our equity in losses from non-consolidated entities on our consolidated statement of operations.

Combined condensed financial information for our non-consolidated entities (at 100%) is summarized for the three months ended March 31, 2013 and 2012, as follows (amounts in thousands):


	Three months ended March 31,
Combined Statements of Operations (in thousands)	2013		2012

Revenues	$	4,726	$	5,046
Depreciation and amortization		1,718		1,590
Interest expense		1,242		1,102
Net Loss		191		369

5. NOTES PAYABLE

Our outstanding debt as of March 31, 2013 and December 31, 2012 was as follows (amounts in thousands):


	March 31,		December 31,
Notes payable	2013		2012
Lantern Lane	$	15,000	$	15,000
Westside Plaza		9,715		9,759
Total	$	24,715	$	24,759

Our Lantern Lane debt is a variable-rate mortgage loan that bears interest at one-month LIBOR plus 2.75% and matures in 2015. We are currently delaying scheduled payments on our Westside Plaza fixed-rate mortgage loan and are in discussions with the lender to restructure the terms of the loan. Our mortgage loans are secured by our real estate properties and may be prepaid but could be subject to a yield-maintenance premium or prepayment penalty. Our mortgage loans are generally due in monthly installments of interest and principal and our mortgages mature in 2015. As of March 31, 2013, the weighted-average interest rate on our fixed-rate debt was 6.1%, and the weighted average remaining life of such debt was 2.2 years.

Table of Contents

We also serve as guarantor on debt in the amount of $18.3 million that is the primary obligation of our non-consolidated joint ventures. The remainder of the debt that we guarantee matures in 2013 and 2014. We have not accrued any liability with respect to these guarantees as we believe it is unlikely we would be required to perform and, therefore, the fair value of any obligation would be insignificant.

Notes Payable – Related Party – As of March 31, 2013 and December 31, 2012, our notes payable – related party were $3.5 million and $5.6 million, respectively. Approximately $1.0 million of our notes payable – related party is secured by our investment in the Woodlake Pointe property. Of the total balance, $414,000 accrues interest monthly at LIBOR plus a spread of 4.0% with a floor of 7.0%, and the remaining balance accrues interest monthly at 2.78%.

Fair Value of Notes Payable – We record our debt instruments based on contractual terms, net of any applicable premium or discount on our consolidated balance sheet. We did not elect to apply the alternative GAAP provisions of the fair value option for recording financial assets and financial liabilities. In determining the fair value of our debt instruments, we determine the appropriate treasury bill rate based on the remaining time to maturity for each of the debt instruments. We then add the appropriate yield spread to the treasury bill rate. The yield spread is a risk premium estimated by investors to account for credit risk involved in debt financing. The spread is typically estimated based on the property type and loan-to-value ratio of the debt instrument. The result is an estimate of the market interest rate a typical investor would expect to receive given the underlying subject asset (property type) and remaining time to maturity. The fair value of our notes payable is classified in Level 2 of the fair value hierarchy. Based on these estimates, the fair value of notes payable was $25.3 million and $25.3 million at March 31, 2013 and December 31, 2012, respectively.

6. CONCENTRATIONS

As of March 31, 2013 and December 31, 2012, each of our two consolidated properties individually comprised greater than 10% of our consolidated total assets. Consistent with our strategy of investing in geographic areas that we know well, both properties are located in the Houston metropolitan area. These Houston properties represent 100% of our rental income for the three months ended March 31, 2013 and 2012. Houston is Texas’ largest city and the fourth largest city in the United States.

Following are the base rents generated by our top five tenants during the three months ended March 31, 2013 and 2012 (amounts in thousands):


	Three months ended March 31,
Tenant	2013		2012
Trend Mall	$	95	$	95
CVS/Pharmacy⁽¹⁾		59		—
Rice Food Markets, Inc.		54		73
Fidelity Investments		53		46
Fadis Mediterranean Delight		35		33
Totals	$	296	$	247


(1)	Rent commenced on a new lease with CVS/Pharmacy during the second quarter of 2012.

7. PARTNERS’ CAPITAL AND NON-CONTROLLING INTEREST

Distributions - We suspended all distribution payments in July 2009 and do not anticipate reinstating distributions until we have stabilized our properties and we generate liquidity that could allow us to re-commence distributions. Once we re-commence distributions, net cash flow, as defined, will be distributed among the Limited Partners and the General Partner in the following manner:


	•	first - 99% to the Limited Partners and 1% to the General Partner until such time as the Limited Partners have received cumulative distributions from all sources (including monthly cash distributions during the operating stage of the Partnership) equal to 100% of their unreturned invested capital plus an amount equal to 10% per annum uncompounded on their invested capital;

Table of Contents


	•	second - 100% to the General Partner until it has received cumulative distributions from all sources (other than with respect to its Limited Partner units it purchased) in an amount equal to 40% of the net cash flow paid to date to the Limited Partners in excess of their adjusted capital; and

	•	thereafter - 60% to the limited partners and 40% to the General Partner.

8. RELATED PARTY TRANSACTIONS

Certain of our affiliates receive fees for ongoing property management and administrative services. In the event that these companies are unable to provide us with the respective services, we would be required to find alternative providers of these services. The following table summarizes the amount of such compensation incurred by us during the three months ended March 31, 2013 and 2012 (amounts in thousands):


	Three months ended March 31,
Type of service	2013		2012

Asset management fees	$	59	$	59
Property management fees		31		27
Leasing costs		13		15
Administrative cost reimbursements		91		94
	$	194	$	195

In addition to the above fees incurred by us, the non-consolidated entities in which we have investments pay property management and leasing fees to one of our affiliated entities. During the three months ended March 31, 2013 and 2012, such fees totaled $287,000 and $490,000, respectively. For more information, see Note 4 regarding investments in non-consolidated entities.

9. COMMITMENTS AND CONTINGENCIES

Litigation - In the ordinary course of business, we may become subject to litigation or claims. There are no material pending legal proceedings known to be contemplated against us.

Environmental matters - In connection with the ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. In particular, we are subject to numerous environmental laws and regulations as they apply to real estate pertaining to chemicals used by the dry cleaning industry, the existence of asbestos in older shopping centers, and underground petroleum storage tanks. We have not been notified by any governmental authority of any non-compliance, liability or other claim.

Table of Contents


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

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

Certain information presented in this Quarterly Report constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include, but are not limited to, the following: changes in general economic conditions, changes in real estate market conditions, continued availability of proceeds from our debt or equity capital, our ability to locate suitable tenants for our properties, the ability of tenants to make payments under their respective leases, timing of acquisitions, development starts and sales of properties, the ability to meet development and redevelopment schedules and other risks, uncertainties and assumptions. Any forward-looking statement speaks only as of the date on which it was made, and the Partnership undertakes no duty or obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

OVERVIEW

We are a Texas limited partnership formed to acquire, develop and operate, directly or indirectly through joint venture arrangements, commercial real estate consisting primarily of single-tenant and multi-tenant retail properties. Our Units are not currently listed on a securities exchange, and there currently is no established public trading market for our Units. We do not intend to list our Units on a securities exchange in the future.

Our General Partner is a Texas corporation and wholly-owned subsidiary of AmREIT, an SEC reporting Maryland corporation that is publicly traded on the NYSE and has elected to be taxed as a REIT. Our General Partner has the exclusive right to manage our business and affairs on a day-to-day basis pursuant to our limited partnership agreement. The Limited Partners have the right to remove and replace our General Partner, with or without cause, by a vote of the Limited Partners owning a majority of the outstanding Units (excluding any Units held by our General Partner). Our General Partner is responsible for all of our investment decisions, including decisions relating to the properties to be developed, the method and timing of financing or refinancing the properties, the selection of tenants, the terms of the leases, the method and timing of the sale of the properties and the reinvestment of net sales proceeds. Our General Partner utilizes the services of AmREIT and its affiliates in performing its duties under our limited partnership agreement.

As of March 31, 2013, our investments include two wholly-owned properties comprising approximately 125,000 square feet of GLA and seven properties in which we own a non-controlling interest through joint ventures comprising approximately 1,190,000 square feet of GLA. A majority of our properties are located in highly populated, suburban communities in Texas. Substantially all of our revenue is derived from rental income from these properties, primarily from net leasing arrangements, where most of the operating expenses of the properties are absorbed by our tenants. As a result, our operating results and cash flows are primarily influenced by rental income from our properties and interest expense on our property acquisition indebtedness. Rental income accounted for 100% of our total revenue during the three months ended March 31, 2013 and 2012. As of March 31, 2013, our properties had an average occupancy rate of approximately 97%, and the average debt leverage ratio of the properties in which we have an investment interest was approximately 57%, with 51% of such debt carrying a fixed rate of interest.

As of the date of this Quarterly Report, our operating period, which ended on October 31, 2012, has expired and we have entered into our liquidation period. However, an orderly liquidation of all of our properties will take years for our General Partner to complete and wind up our operations. Because we have entered into our liquidation period, we will not invest in any new real estate without approval from our Limited Partners.

Over the past several years our results of operations and valuations of our real estate assets have been negatively impacted by overall economic conditions. The United States economy is still experiencing weakness from the past economic recession, which resulted in increased unemployment, weakening of tenant financial condition, large-scale business failures and tight credit markets. High levels of unemployment have persisted, and rental rates and valuations for retail space have not fully recovered to pre-recession levels and may not for a number of years. Furthermore, the uncertainty surrounding the rapidly increasing national debt of the United States and continuing global economic uncertainty have kept markets volatile. Most of our retail properties were purchased prior to 2008 when retail real estate market prices were much higher, and our property valuations have been negatively impacted by these market dynamics.

Table of Contents


	•	Complete our development and redevelopment projects with a goal to stabilize these projects during the balance of 2013. We believe that completing our development and redevelopment projects, including their lease-up and stabilization, will allow us to maximize the return on these properties upon sale. Our investments in 5433 Westheimer and PTC/BSQ represent our assets currently under development/redevelopment. See Note 4 of the Notes to the Consolidated Financial Statements for further discussion of redevelopment plans at each of these properties.

	•	Continue to operate our projects in a first-class manner with a goal to generate operating cash flow in order to re-commence distributions in 2014. We believe that upon stabilization of our development and redevelopment properties, coupled with the continued and intense oversight of our properties, we will generate liquidity that could allow us to re-commence distributions to our Limited Partners; however, this most likely will not occur until we begin to sell our real estate assets.

	•	Sell our properties opportunistically, likely beginning in 2014, after the market has had a chance to recover. Once a property is marketed for sale, it may take several months to receive offers and complete due diligence by both parties. Our General Partner has in good faith begun to review market sales opportunities for our operating properties, but believes that retail property valuations continue to be challenged, and, accordingly, that attractive sales opportunities may not exist in the near term. When deciding whether or when to sell properties, our General Partner will consider factors such as potential appreciation of value, and timing of cash flows. As we have now entered the liquidation period, we will not be acquiring new real estate investments, but we will be completing our development and redevelopment projects and we will be distributing net proceeds generated from property sales to our Limited Partners unless the General Partner has identified attractive acquisition opportunities and obtained a majority vote of the Limited Partners to re-invest such proceeds.

RESULTS OF OPERATIONS

Below is a discussion of our results of operations for the three months ended March 31, 2013, as compared to the same period in 2012. For purposes of comparing our results for the period presented below, the operating results from Olmos Creek have been presented separately as discontinued operations.

Three Months Ended March 31, 2013 compared to Three Months Ended March 31, 2012

Revenue. Revenue increased $164,000, or 24%, during the first quarter of 2013 as compared to the same period during 2012 ($850,000 in 2013 versus $686,000 in 2012). The increase was primarily due to increased occupancy at our Lantern Lane property with the addition of two new tenants as compared to the same period in 2012.

Property Expense. Property expense decreased $109,000, or 34%, during the first quarter of 2013 as compared to the same period during 2012 ($207,000 in 2013 versus $316,000 in 2012). The decrease is primarily related to bad debt recoveries of $49,000 during 2013 as compared to bad debt expense of $9,000 during 2012 as well as non-reimbursable repairs of $50,000 during 2012 that were not incurred during 2013.

Legal and professional. Legal and professional expense decreased $64,000, or 49%, during the first quarter of 2013 as compared to the same period in 2012 ($66,000 in 2013 versus $130,000 in 2012). This decrease is due to higher expenses in 2012 related to the disposition of Olmos Creek and additional professional fees for the resolution of an environmental matter at our Lantern Lane property during the three months ended March 2012 with no similar expenses during 2013.

Table of Contents

Income (Loss) from Discontinued Operations. Loss from discontinued operations was $1.5 million during the first quarter of 2012 due to the $1.5 million gain on debt extinguishment recorded on our Olmos Creek property, as discussed in Note 3 of the Notes to Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents are our primary sources of liquidity. As of March 31, 2013, and December 31, 2012, our cash and cash equivalents totaled approximately $888,000 and approximately $3.2 million, respectively.

Our short-term liquidity requirements consist primarily of operating expenses and other expenditures associated with our properties, regular debt service requirements and capital expenditures. We anticipate that our primary long-term liquidity requirements will include, but will not be limited to, operating expenses, making scheduled debt service payments and funding redevelopments and other significant capital expenditures for our portfolio of properties.

We have faced significant liquidity challenges over the last several years. Other than with our Olmos Creek property (which was delivered to the lender as settlement of unpaid debt in February 2012), we have been successful in meeting our historic cash shortfalls through (1) managing the timing of forecasted capital expenditures related to the lease-up of properties, (2) managing the timing of operating expense payments and, to the extent possible, accelerating cash collections, (3) deferring the payment of fees owed to our General Partner and its affiliates, (4) selling certain of our properties and investments in non-consolidated entities, including the anticipated sale of a single tenant building and portion of land by our Woodlake Pointe joint venture (see Note 4 of the Notes to Consolidated Financial Statements) and/or (5) obtaining funds through additional borrowings from AmREIT.

We expect to fund approximately $1.5 million in capital expenditures over the next two years at our Casa Linda property (a 50% joint venture between us and MIG IV) representing our 50% share of a lease-up strategy at this property. The lease-up strategy includes certain tenant build-out and site improvements. The joint venture will likely require a one-year extension of the loan to complete this strategy and refinance the property on a long-term basis. We believe we will be successful in obtaining a one-year extension based on our preliminary discussions with the lending agent; however, no assurances can be given that we will be successful. We do not guarantee this debt and our risk of loss is limited to our ownership interest in the property. We expect to fund our capital requirements with cash on hand, cash proceeds from the anticipated sale of a portion of the land and single tenant building at our Woodlake Pointe property (discussed below) and operating cash flows.

On April 5, 2013, our Woodlake Pointe joint venture entered into a sales agreement to sell a portion of the land and a single tenant building at our Woodlake Pointe property for $12.0 million to an unrelated third party. The land and building are secured by a $6.7 million loan that will be repaid in full with proceeds from the sale. The sale is expected to close in the third quarter of 2013, and we estimate that our portion of the net cash proceeds (30%) is expected to be approximately $1.5 million. We plan to use the proceeds to fund the Casa Linda lease-up strategy and for working capital needs.

There is no guarantee that we and our joint ventures will be successful with all of the above liquidity initiatives and we may continue to look to AmREIT to provide additional financial support to us to meet our operating cash needs. Historically, AmREIT has deferred payment of advisory fees earned and payable to the extent such deferrals of fees were necessary for our continued operation. Such fees included property management, asset management, development fees, interest expense on amounts owed to AmREIT and reimbursements of certain of AmREIT’s general and administrative costs. During 2013, we resumed monthly payments of interest, asset management fees and overhead allocations to AmREIT. However, AmREIT has agreed that it will not require us to repay the $3.1 million notes payable–related party we owe to AmREIT as of March 31, 2013, until a date subsequent to January 1, 2014, if requiring such repayment would prevent the execution of our strategy or present an unnecessary financial hardship. In the event our liquidity is not sufficient to execute our strategy, AmREIT has agreed to provide financial support and defer payments subject to its continued ability to do so. Although no assurance can be given, we believe that we will be able to generate liquidity sufficient to continue to execute our strategic plan through a combination of the foregoing liquidity initiatives.

Even with the above strategic plan and liquidity initiatives, we still may incur cash shortfalls, we may be required to perform under certain guarantees of our joint ventures or be unable to refinance certain debt as it comes due that could result in lender repossession of one or more properties owned by us and/or our joint ventures or we may be forced to sell one or more properties at a time when it is disadvantageous to do so, potentially resulting in losses on the disposition of those properties.

Table of Contents

Current Market Conditions

Over the past several years our results of operations and valuations of our real estate assets have been negatively impacted by overall economic conditions. The United States economy is still experiencing weakness from the past economic recession, which resulted in increased unemployment, weakening of tenant financial condition, large-scale business failures and tight credit markets. High levels of unemployment have persisted, and rental rates and valuations for retail space have not fully recovered to pre-recession levels and may not for a number of years. Our General Partner believes that the retail real estate market is likely to remain depressed throughout 2013; however, it is difficult to determine the breadth and duration of the financial market problems and how such problems may affect our tenants and the valuation of our assets. To navigate these challenging market conditions, we have created a strategic plan to maximize value and execute an orderly, but opportunistic liquidation as further described in the “Overview” section above.

Cash Flow Activities for the Three Months Ended March 31, 2013 and 2012

Cash flows provided by (used in) operating activities, investing activities and financing activities during the three months ended March 31, 2013 and 2012, are as follows (in thousands):


	Three months ended March 31,
	2013			2012
Operating activities	$	326		$	(365	)
Investing activities		(314	)		34
Financing activities		(2,294	)		187

Net cash flows from operating activities increased by $691,000 during the three months ended March 31, 2013, as compared to the same period in 2012 ($326,000 provided by operating activities in 2013 versus $365,000 used in operating activities in 2012). This decrease in operating cash outflows was primarily attributable to (1) increases in revenue at our Lantern Lane property with two new tenants, (2) a decrease in non-reimbursable expenses and (3) improved collections on accounts receivable – related party.

Net cash flows from investing activities decreased by $348,000 during the three months ended March 31, 2013, as compared to the same period in 2012 ($314,000 used in investing activities in 2013 versus $34,000 provided by investing activities in 2012). This decrease in cash inflows is primarily due to an increase in investments in and advances to non-consolidated entities as well as a decrease in distributions from such entities.

Net cash flows from financing activities decreased by $2.5 million for the three months ended March 31, 2013, as compared to the same period in 2012 ($2.3 million used in financing activities in 2013 versus $187,000 provided by financing activities in 2012). This decrease was primarily due to payments made during 2013 on notes payable – related party.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.


ITEM 4.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our General Partner’s CEO and CFO, our General Partner’s management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of March 31, 2013. Based on that evaluation, our General Partner’s CEO and CFO concluded that, as of March 31, 2013, our disclosure controls and procedures were effective in causing material information relating to us to be recorded, processed, summarized and reported by management on a timely basis and to ensure the quality and timeliness of our public disclosures in accordance with SEC disclosure obligations.

Changes in Internal Controls Over Financial Reporting

There has been no change to our internal control over financial reporting during the quarter ended March 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II – OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS.

In the ordinary course of business, we may become subject to litigation or claims. Neither we nor our properties are the subject of any non-routine pending legal proceeding, nor are we aware of any legal proceeding that a government authority is contemplating against us.


ITEM 1A.	RISK FACTORS.

Not applicable.

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

None.

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.	MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.	OTHER INFORMATION.

None.

ITEM 6.	EXHIBITS.

The exhibits listed on the accompanying Exhibit Index are filed, furnished, or incorporated by reference (as stated therein) as part of this Quarterly Report.

Table of Contents

SIGNATURES

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


	AmREIT Monthly Income & Growth Fund III, Ltd.

	By:	AmREIT Monthly Income & Growth III Corporation, its General Partner

Date: May 14, 2013	By:	/s/ H. Kerr Taylor
		H. Kerr Taylor
		President, Chief Executive Officer, and Director

Date: May 14, 2013	By:	/s/ Chad C. Braun
		Chad C. Braun
		Executive Vice President, Chief Financial Officer, Chief Operating Officer, Treasurer and Secretary

Table of Contents

EXHIBIT INDEX


Exhibit 3.1	Certificate of Limited Partnership of AmREIT Monthly Income & Growth Fund III, Ltd., dated April 19, 2005 (incorporated herein by reference from Exhibit 3.1 to the Partnership’s Registration Statement on Form 10-SB dated April 30, 2007).

Exhibit 3.2	Agreement of Limited Partnership of AmREIT Monthly & Income Growth Fund III, Ltd., dated April 19, 2005 (incorporated herein by reference from Exhibit 3.2 to the Partnership’s Registration Statement on Form 10-SB dated April 30, 2007).

Exhibit 31.1	Certification of the Chief Executive Officer of the Partnership’s General Partner pursuant to Exchange Act Rule 13a-14(a) (filed herewith).

Exhibit 31.2	Certification of the Chief Financial Officer of the Partnership’s General Partner pursuant to Exchange Act Rule 13a-14(a) (filed herewith).

Exhibit 32.1	Certification of the Chief Executive Officer of the Partnership’s General Partner pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

Exhibit 32.2	Certification of the Chief Financial Officer of the Partnership’s General Partner pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

Exhibit 101.INS	XBRL Instance Document*

Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document*

Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*

Exhibit 101.LAB	XBRL Taxonomy Extension Label Linkbase Document*

Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

Exhibit 101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*



	*	Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of March 31, 2013, (unaudited) and December 31, 2012, (ii) the Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012, (unaudited), (iii) the Consolidated Statements of Partners’ Capital for the three months ended March 31, 2013, (unaudited), (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012, (unaudited) and (v) the Notes to the Consolidated Financial Statements (unaudited).

		Pursuant to Rule 406T of Regulation S-T, the Interactive Data File on Exhibit 101 hereto is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.

Attached files

AmREIT Monthly Income & Growth Fund III Ltd Reports

Also read