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EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 - AmREIT Monthly Income & Growth Fund III Ltd | amreit152599migiii_ex31-1.htm |
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 - AmREIT Monthly Income & Growth Fund III Ltd | amreit152599migiii_ex32-1.htm |
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 - AmREIT Monthly Income & Growth Fund III Ltd | amreit152599migiii_ex31-2.htm |
EX-32.2 - CERTIFICATION PURSUANT TO SECTION 906 - AmREIT Monthly Income & Growth Fund III Ltd | amreit152599migiii_ex32-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015
OR
☐ | 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 Incorporation or Organization) |
(I.R.S.
Employer Identification No.) |
8 Greenway Plaza, Suite 1000 | 77046 |
Houston, TX | (Zip Code) |
(Address of Principal Executive Offices) |
(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 ☒ No ☐
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 ☒ No ☐
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 ☐ | Accelerated filer ☐ | ||||
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☒ | ||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
i |
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.
As further defined below, “AmREIT” and its wholly-owned subsidiaries “ARIC” and AmREIT Monthly Income & Growth III Corporation (our General Partner) were acquired by Edens on February 18, 2015 in an all-cash transaction whereby AmREIT and its wholly-owned subsidiaries were merged into Saturn Subsidiary, LLC (an indirect, wholly-owned subsidiary of Edens) with Saturn Subsidiary, LLC as the surviving entity. Subsequent to the acquisition, all of the functions formerly performed by AmREIT and its designated affiliates are performed on our behalf by Edens, Saturn Subsidiary, LLC or one of its designated affiliates, including that of our General Partner. References herein to “AmREIT” (including its wholly-owned subsidiaries), “ARIC” or AmREIT Monthly Income & Growth III Corporation refer to the period prior to the acquisition. References herein to “Edens” (including Saturn Subsidiary, LLC or one of its designated affiliates) refer to periods after the acquisition.
ABBREVIATION | DEFINITION | |
AmREIT | AmREIT, Inc., formerly a Maryland corporation that, prior to February 18, 2015, was a SEC reporting corporation that had a class of securities listed on the NYSE and that had elected to be taxed as a REIT. From January 1, 2015 through February 18, 2015, AmREIT was the owner of our General Partner. On February 18, 2015, all of AmREIT’s common stock was acquired by Edens in the AmREIT Acquisition when AmREIT and its wholly-owned subsidiaries were merged with and into Saturn Subsidiary, LLC (an indirect, wholly-owned subsidiary of Edens, “Saturn”) with Saturn being the surviving entity. Upon the acquisition of all of the outstanding common stock of AmREIT, Edens became the parent company of our General Partner. | |
AmREIT Acquisition | The purchase of all of AmREIT’s common stock for $26.55 per share in an all-cash transaction by Edens on February 18, 2015. Upon the acquisition of all of the outstanding common stock of AmREIT, Edens became the parent company of our General Partner. Effective February 18, 2015, all of the functions formerly performed by AmREIT and its wholly-owned subsidiaries are now performed by Edens or one of its designated subsidiaries, including those of our General Partner. | |
Annual Report | Annual report on Form 10-K filed with the SEC as of and for the year ended December 31, 2014. | |
AOCI | Accumulated Other Comprehensive Income (Loss). | |
ARIC | AmREIT Realty Investment Corporation and its consolidated subsidiaries, a wholly-owned taxable REIT subsidiary of Edens. | |
ASU | Accounting Standards Update. | |
Edens | Edens Investment Trust, which acquired all of AmREIT’s common stock in an all-cash transaction on February 18, 2015. Effective February 18, 2015, Edens is the parent company of our General Partner. | |
Exchange Act | Securities Exchange Act of 1934, as amended. | |
FASB | Financial Accounting Standards Board. | |
GAAP | U.S. generally accepted accounting principles. | |
General Partner | AmREIT Monthly Income & Growth III Corporation. From January 1, 2015 through February 18, 2015, our General Partner was a wholly-owned subsidiary of AmREIT, Inc. On February 18, 2015, all of AmREIT’s common stock was acquired by Edens in an all cash transaction. Subsequent to this acquisition, Edens, is the parent company of our General Partner. |
ii |
GLA | Gross leasable area. | |
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. | |
Quarterly Report | Quarterly Report on Form 10-Q filed with the SEC as of and for the three and six months ended June 30, 2015. | |
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. |
iii |
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) |
June 30, | December 31, | |||||||
2015 | 2014 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Real estate investments at cost: | ||||||||
Land | $ | — | $ | 4,760 | ||||
Buildings | — | 9,723 | ||||||
Tenant improvements | — | 323 | ||||||
— | 14,806 | |||||||
Less accumulated depreciation and amortization | — | (2,787 | ) | |||||
Real estate investments held for sale, net | — | 12,019 | ||||||
Investment in non-consolidated entities | 14,409 | 14,991 | ||||||
Net real estate investments | 14,409 | 27,010 | ||||||
Cash and cash equivalents | 5,359 | 4,044 | ||||||
Tenant and account receivables, net | 105 | 222 | ||||||
Accounts receivable - related party | 285 | 262 | ||||||
Notes receivable | 13 | 93 | ||||||
Notes receivable - related party | 1,093 | 312 | ||||||
Deferred costs, net | — | 208 | ||||||
Other assets | — | 420 | ||||||
TOTAL ASSETS | $ | 21,264 | $ | 32,571 | ||||
LIABILITIES AND PARTNERS’ CAPITAL | ||||||||
Liabilities: | ||||||||
Notes payable | $ | — | $ | 8,980 | ||||
Accounts payable and other liabilities | 96 | 649 | ||||||
Accounts payable - related party | 749 | 215 | ||||||
Security deposits | — | 68 | ||||||
TOTAL LIABILITIES | 845 | 9,912 | ||||||
Partners’ capital: | ||||||||
General partner | — | — | ||||||
Limited partners, 2,833 Units outstanding at June 30, 2015 and December 31, 2014 | 20,446 | 22,694 | ||||||
AOCI of non-consolidated entity | (27 | ) | (35 | ) | ||||
TOTAL PARTNERS’ CAPITAL | 20,419 | 22,659 | ||||||
TOTAL LIABILITIES AND PARTNERS’ CAPITAL | $ | 21,264 | $ | 32,571 |
See Notes to Consolidated Financial Statements. |
1 |
AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
(in thousands, except for per Unit data) |
(unaudited) |
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Income (loss) from non-consolidated entities | $ | (33 | ) | $ | (150 | ) | $ | (213 | ) | $ | (226 | ) | ||||
Expenses: | ||||||||||||||||
General and administrative | 32 | 22 | 41 | 41 | ||||||||||||
General and administrative - related party | 91 | 88 | 166 | 175 | ||||||||||||
Asset management fees - related party | 88 | 89 | 177 | 178 | ||||||||||||
Legal and professional | 82 | 58 | 145 | 131 | ||||||||||||
Total operating expenses | 293 | 257 | 529 | 525 | ||||||||||||
Operating income (loss) | (326 | ) | (407 | ) | (742 | ) | (751 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest income - related party | 28 | — | 50 | — | ||||||||||||
Interest and other income | 2 | — | 4 | — | ||||||||||||
Interest expense | — | (2 | ) | — | (5 | ) | ||||||||||
Federal Income Tax Expense | (10 | ) | — | (10 | ) | — | ||||||||||
Total other income (expense), net | 20 | (2 | ) | 44 | (5 | ) | ||||||||||
Income (loss) from continuing operations | $ | (306 | ) | $ | (409 | ) | $ | (698 | ) | $ | (756 | ) | ||||
Income (loss) from discontinued operations | (205 | ) | (68 | ) | (1,550 | ) | (13 | ) | ||||||||
Gain (loss) on sale of real estate acquired for investment | — | 6,798 | — | 6,798 | ||||||||||||
Income (loss) from discontinued operations | (205 | ) | 6,730 | (1,550 | ) | 6,785 | ||||||||||
Net income (loss) attributable to partners | $ | (511 | ) | $ | 6,321 | $ | (2,248 | ) | $ | 6,029 | ||||||
Loss from continuing operations per Unit | $ | (108.01 | ) | $ | (144.37 | ) | $ | (246.38 | ) | $ | (266.85 | ) | ||||
Income (loss) from discontinued operations per Unit | (72.36 | ) | 2,375.57 | (547.12 | ) | 2,394.99 | ||||||||||
Net income (loss) per Unit | $ | (180.37 | ) | $ | 2,231.20 | $ | (793.50 | ) | $ | 2,128.14 | ||||||
Weighted average Units outstanding | 2,833 | 2,833 | 2,833 | 2,833 | ||||||||||||
Net income (loss) attributable to partners | $ | (511 | ) | $ | 6,321 | $ | (2,248 | ) | $ | 6,029 | ||||||
Other comprehensive income of non-consolidated entity | 10 | (3 | ) | 8 | (2 | ) | ||||||||||
Net comprehensive income (loss) | $ | (501 | ) | $ | 6,318 | $ | (2,240 | ) | $ | 6,027 |
See Notes to Consolidated Financial Statements. |
2 |
AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL |
For the six months ended June 30, 2015 |
(in thousands) |
(unaudited) |
Partners’ Capital | ||||||||||||||||
General Partner | Limited Partners | AOCI
of non- consolidated entity | Total | |||||||||||||
Balance at December 31, 2014 | $ | — | $ | 22,694 | $ | (35 | ) | $ | 22,659 | |||||||
Net income (loss) attributable to partners(1) | — | (2,248 | ) | — | (2,248 | ) | ||||||||||
Other comprehensive income of non-consolidated entity | — | — | 8 | 8 | ||||||||||||
Balance at June 30, 2015 | $ | — | $ | 20,446 | $ | (27 | ) | $ | 20,419 |
(1) | The allocation of net loss includes a curative allocation to increase the General Partner capital account by $22 for the six months ended June 30, 2015. The cumulative curative allocation since inception of the Partnership is $376. 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. |
3 |
AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(in thousands) |
(unaudited) |
Six months ended June 30, | ||||||||
2015 | 2014 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (2,248 | ) | $ | 6,029 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
(Gain) Loss on sale of real estate | — | (6,798 | ) | |||||
Impairment | 1,342 | — | ||||||
Income (loss) from non-consolidated entities | 213 | 226 | ||||||
Depreciation and amortization | 208 | 524 | ||||||
(Increase) decrease in tenant and accounts receivables | 107 | (25 | ) | |||||
Decrease (increase) in accounts receivable - related party | (50 | ) | — | |||||
Decrease (increase) in other assets | (132 | ) | (124 | ) | ||||
Increase (decrease) in accounts payable and other liabilities | (229 | ) | (648 | ) | ||||
Increase (decrease) in accounts payable - related party | 323 | 374 | ||||||
Net cash provided by (used in) operating activities | (466 | ) | (442 | ) | ||||
Cash flows from investing activities: | ||||||||
Improvements to real estate | (72 | ) | (53 | ) | ||||
Payments received on notes receivable | 2 | 6 | ||||||
Advances for notes receivable - related parties | (440 | ) | — | |||||
Repayments from related party | 41 | 400 | ||||||
Repayments to related party | (167 | ) | — | |||||
Investments in and advances to non-consolidated entities | (51 | ) | (104 | ) | ||||
Distributions from non-consolidated entities | 465 | 517 | ||||||
Proceeds from property sale | 10,983 | 22,700 | ||||||
Net cash provided by (used in) investing activities | 10,761 | 23,466 | ||||||
Cash flows from financing activities: | ||||||||
Payments on notes payable | (8,980 | ) | (15,424 | ) | ||||
Payments on notes payable - related party | — | (550 | ) | |||||
Loan modification costs | — | (266 | ) | |||||
Net cash provided by (used in) financing activities | (8,980 | ) | (16,240 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 1,315 | 6,784 | ||||||
Cash and cash equivalents, beginning of period | 4,044 | 1,203 | ||||||
Cash and cash equivalents, end of period | $ | 5,359 | $ | 7,987 | ||||
Supplemental schedule of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 237 | $ | 869 | ||||
Cash paid during the period for taxes | $ | 65 | $ | 20 | ||||
Supplemental schedule of noncash investing and financing activities: | ||||||||
Distributions declared, but unpaid | $ | — | $ | 3,734 | ||||
Reclassification of notes receivable - related party and accounts payable - related party | $ | 341 | $ | 283 | ||||
Construction fees from non-consolidated entities included in accounts payable | $ | 37 | $ | 28 |
See Notes to Consolidated Financial Statements. |
4 |
AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2015
(unaudited)
1. | DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS |
General
We are a Texas limited partnership 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 Texas corporation and, prior to February 18, 2015, was a wholly-owned subsidiary of AmREIT. Effective February 18, 2015, Edens became the parent company of our General Partner in connection with the AmREIT Acquisition when AmREIT merged with and into Saturn Subsidiary, LLC (an indirect, wholly-owned subsidiary of Edens, “Saturn”), with Saturn being the surviving entity, after Edens acquired all of the outstanding common stock of AmREIT in an all-cash transaction.
As of June 30, 2015, we do not own any consolidated properties. On April 10, 2015, we sold Westside Plaza, our final consolidated property. See Note 3. Our investments in real estate include six properties in which we own a non-controlling interest through four joint ventures comprising approximately 987,000 square feet of GLA. The joint venture properties are located in highly populated, suburban communities in Texas.
Strategic Plan
Our operating period ended on October 31, 2012, and we have entered into our liquidation period pursuant to the terms of our partnership agreement. Our General Partner is reviewing market sales opportunities in good faith, but attractive sales opportunities may not exist in the near term. While we believe an orderly liquidation of our assets will be completed within the next 12 months, successful wind-down of our operations may take longer for our General Partner to complete. During the liquidation period, we plan to distribute net proceeds generated from property sales to our Limited Partners. Although our General Partner will pursue sales opportunities that are in the best interest of our Limited Partners, we do not expect that our investors will recover all of their original investment. We do not expect that the AmREIT Acquisition will impact the orderly liquidation of our assets.
Economic Conditions and Liquidity
As of June 30, 2015, we have $5.4 million in cash on hand. Most of our investments in retail properties were purchased prior to 2008 when retail real estate market prices were much higher, and our property valuations were negatively impacted by the recent, severe recession. The United States has experienced recent improvements in the general economy; however, it is difficult to determine if the improvements experienced will continue through 2015 and into the future.
A significant portion of Houston’s and Dallas’ industry is in oil and gas as well as oilfield services. The price of oil declined to five-year lows set in late March of 2015. Oil benchmarks have rallied somewhat from their lows; however, the recovery is only moderate with prices trading in a narrow range around $60 a barrel since early May 2015. It is unknown when or whether oil prices will continue to increase, and if they increase, how much and for what duration. We are unable to predict the impact, if any, that lower oil prices could have on economies in which our properties are located. However, a prolonged period of depressed oil prices could potentially be adverse to these economies, the profitability of our tenants and, ultimately, the value of our properties.
Current strategies and recent transactions that have impacted current and future liquidity include:
| We and our joint venture partner of the 5433 Westheimer property are reviewing market opportunities to sell this property. However, we and our joint venture partner believe that we need to continue to hold and lease-up this property in order to maximize its value in the near term. Our 5433 Westheimer joint venture is unable to generate sufficient liquidity to fund the expenditures needed to complete its renovation and prepare the property for sale on its own. We have provided additional, short-term liquidity in the form of a promissory note up to a maximum of $1.5 million with repayment upon disposition of the property. As of June 30, 2015, we have advanced $1.1 million under this promissory note. Based upon current estimates of fair value, sufficient equity exists in the property post-renovation to recover our advances under this note. |
5 |
| On April 10, 2015, we sold our Westside Plaza property for $11.0 million in an all-cash transaction. We evaluated Westside Plaza for impairment as of March 31, 2015 and recorded an impairment of $1.3 million during the first quarter of 2015 which represented the amount that the carrying value of the property exceeded the net sales proceeds received. See Notes 3 and 6. |
| On June 25, 2015, we signed a purchase/sale agreement with a third party to sell the Woodlake Pointe property held within the underlying joint venture for $11.5 million in an all-cash transaction. We expect the joint venture to close on the sale during the third quarter of 2015 and record a gain on sale of approximately $2.9 million, $870,000 of which represents our 30% portion. |
Future liquidity sources will include cash on hand, distributions from our joint venture properties and sales proceeds from the sales of our real estate investments. Our continuing short-term and long-term liquidity requirements will include, but will not be limited to, corporate and administrative expenses of the Partnership, funding our proportionate share of renovations, expansions, and other significant capital expenditures for our existing joint venture properties to the extent they are unable to fund such expenditures on their own (such as our 5433 Westheimer property) and, ultimately, distributions to our Limited Partners upon sale of our real estate investments. Although no assurance can be given, we believe that we have sufficient liquidity to complete our orderly liquidation in accordance with our strategic plan.
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 June 30, 2015, 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 as of and for the year ended December 31, 2014.
The approved plan for liquidation does not differ from our partnership agreement. As such, as of June 30, 2015, the financial statements are presented assuming we continue as a going concern.
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.
Reclassifications
Certain reclassifications have been made to our consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2014 to conform to current period presentation. The items had no impact on previously reported net income (loss), our Consolidated Balance Sheets, or Consolidated Statement of Cash Flows. See Note 3 for a discussion of our presentation of discontinued operations.
6 |
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.
Investments in and income (loss) from nonconsolidated investments
Our investments in non-consolidated entities are accounted for under the equity method because we exercise significant influence over such entities. We record our percentage interest in the earnings and losses of these entities in our statement of operations on a net basis as prescribed under GAAP. See Note 4 for further disclosure related to our investments in non-consolidated entities. The significant accounting policies of our non-consolidated entities are consistent with those of our subsidiaries in which we have a controlling financial interest.
Revenue Recognition
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 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.
Depreciation
Depreciation is computed using the straight-line method over an estimated useful life of up to 39 years for buildings and site improvements and over the lesser of the useful life or the respective lease term 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. As of March 31, 2015, we ceased depreciating our Westside Plaza property as it met the criteria as real estate held for sale.
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. 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. We evaluated Westside Plaza for impairment as of March 31, 2015 based upon its sale on April 10, 2015, and we recorded an impairment of $1.3 million representing the amount the carrying value of the property at March 31, 2015 exceeded the net sales proceeds received. See Note 6. No impairment charges were recognized for the three and six months ended June 30, 2014; however, our Woodlake Pointe joint venture recorded an impairment of $2.0 million as of December 31, 2014, $600,000 of which represents our 30% portion. See Note 4.
New Accounting Pronouncements
In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” This update changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The new guidance is effective for public business entities in fiscal years beginning after December 15, 2015. Early adoption is allowed, including early adoption in an interim period. We are currently evaluating this accounting to determine what impact, if any, this new guidance could have on our consolidated financial statements.
7 |
In May 2014, the FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers” that will supersede the existing revenue recognition guidance under GAAP. The accounting update states that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. It also establishes a five-step model that requires companies to exercise judgment when considering the terms of a contract and all relevant facts and circumstances. It is effective for annual reporting periods beginning after December 15, 2016. This standard does not supersede current accounting literature for lease contracts. We are currently evaluating this accounting update and our existing revenue recognition policies for contracts, other than our lease contracts with tenants, to determine what impact, if any, this new guidance could have on our consolidated financial statements.
Subsequent Events
We did not identify any additional subsequent events as of the date of this filing that materially impacted our consolidated financial statements.
3. | ASSET DISPOSITIONS AND DISCONTINUED OPERATIONS |
Effective January 1, 2015 we adopted ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“the ASU”). The ASU is effective on a prospective basis for disposals or assets meeting the definition as held-for-sale for accounting periods beginning on or after December 15, 2014. Under the ASU, discontinued operations are defined as either:
1) a component of an entity (or group of components) that:
(i) has been disposed of or meets the criteria to be classified as held-for-sale and
(ii) represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, or
2) a business or nonprofit activity that on acquisition, meets the criteria to be classified as held-for-sale.
On April 10, 2015, we sold our Westside Plaza property for $11.0 million in an all-cash transaction. The ASU notes that a strategic shift could include a disposal of a major geographical area, a major line of business, a major equity investment, or other major parts of an entity. We believe that the results of operations from our Westside Plaza property constitute “a major part” of our operations. Accordingly, we have classified the results of operations of our Westside Plaza property as discontinued operations.
On June 25, 2014, we sold our Lantern Lane property to AmREIT for $22.7 million, which generated net sales proceeds of approximately $7.4 million, net of closing costs and the repayment of the mortgage loan secured by the property. We recognized a gain of $6.8 million on the sale and have presented the operating results of this property as discontinued operations.
A summary of our discontinued operations for the periods presented is detailed below. The operations of these properties have been eliminated from ongoing operations, and we will not have continuing involvement after disposition. Prior period operating activity related to such properties has been reclassified as discontinued operations in our Consolidated Statements of Operations and Comprehensive Income (Loss) for all periods presented (amounts in thousands):
|
Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | ||||||||||||||||||||||
Lantern Lane | Westside Plaza | Total | Lantern Lane | Westside Plaza | Total | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Rental income from operating leases | $ | — | $ | 33 | $ | 33 | $ | 529 | $ | 312 | $ | 841 | ||||||||||||
Total revenues | — | 33 | 33 | 529 | 312 | 841 | ||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
General and administrative | — | 2 | 2 | 10 | 2 | 12 | ||||||||||||||||||
Property expense | — | 25 | 25 | 156 | 94 | 250 | ||||||||||||||||||
Property management fees- related party | — | — | — | 19 | 12 | 31 | ||||||||||||||||||
Legal and professional | — | 5 | 5 | 2 | 1 | 3 | ||||||||||||||||||
Depreciation and amortization | — | 29 | 29 | 156 | 88 | 244 | ||||||||||||||||||
Impairment | — | 74 | 74 | — | — | — | ||||||||||||||||||
Total operating expenses | — | 135 | 135 | 343 | 197 | 540 | ||||||||||||||||||
Operating income (loss) | — | (102 | ) | (102 | ) | 186 | 115 | 301 | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest expense | — | (103 | ) | (103 | ) | (109 | ) | (260 | ) | (369 | ) | |||||||||||||
Total other income (expense), net | — | (103 | ) | (103 | ) | (109 | ) | (260 | ) | (369 | ) | |||||||||||||
Income (loss) from discontinued operations | $ | — | $ | (205 | ) | $ | (205 | ) | $ | 77 | $ | (145 | ) | $ | (68 | ) |
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|
Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 | ||||||||||||||||||||||
Lantern Lane | Westside Plaza | Total | Lantern Lane | Westside Plaza | Total | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Rental income from operating leases | $ | — | $ | 354 | $ | 354 | $ | 1,115 | $ | 615 | $ | 1,730 | ||||||||||||
Total revenues | — | 354 | 354 | 1,115 | 615 | 1,730 | ||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
General and administrative | — | 7 | 7 | 16 | 2 | 18 | ||||||||||||||||||
Property expense | — | 128 | 128 | 324 | 189 | 513 | ||||||||||||||||||
Property management fees- related party | — | 13 | 13 | 43 | 25 | 68 | ||||||||||||||||||
Legal and professional | — | 8 | 8 | 2 | 9 | 11 | ||||||||||||||||||
Depreciation and amortization | — | 117 | 117 | 311 | 175 | 486 | ||||||||||||||||||
Impairment | — | 1,341 | 1,341 | — | — | — | ||||||||||||||||||
Total operating expenses | — | 1,614 | 1,614 | 696 | 400 | 1,096 | ||||||||||||||||||
Operating income (loss) | — | (1,260 | ) | (1,260 | ) | 419 | 215 | 634 | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest expense | — | (290 | ) | (290 | ) | (231 | ) | (416 | ) | (647 | ) | |||||||||||||
Total other income (expense), net | — | (290 | ) | (290 | ) | (231 | ) | (416 | ) | (647 | ) | |||||||||||||
Income (loss) from discontinued operations | $ | — | $ | (1,550 | ) | $ | (1,550 | ) | $ | 188 | $ | (201 | ) | $ | (13 | ) |
4. | INVESTMENTS IN NON-CONSOLIDATED ENTITIES |
As of June 30, 2015, we have investments in four entities: PTC/BSQ Holding Company LLC, Casa Linda, Woodlake Pointe, and 5433 Westheimer, through which we owned an interest in six 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 sheets are as follows ($ in thousands):
Investment | Ownership | June 30, 2015 | December 31, 2014 | |||||||||
PTC/BSQ | 20 | % | $ | 7,279 | $ | 7,444 | ||||||
Casa Linda | 50 | % | 2,751 | 2,875 | ||||||||
Woodlake Pointe | 30 | % | 2,291 | 2,303 | ||||||||
5433 Westheimer | 57.5 | % | 2,088 | 2,369 | ||||||||
Total | $ | 14,409 | $ | 14,991 |
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 447,799 square feet. The remaining 80% is owned by an unaffiliated third party. Our PTC/BSQ joint venture is secured by a $54.0 million mortgage loan with an additional $4.5 million available for future capital improvements. The loan is scheduled to mature in June 2016; however, the loan contains two, one-year extension options. PTC/BSQ Holding Company LLC has entered into an interest rate swap with a notional amount of $54.0 million, effectively fixing the interest rate on this debt at 2.51% in order to manage the volatility inherent in a variable-rate mortgage. The interest rate swap was designated as a cash flow hedge for financial reporting purposes. Changes in fair value of derivatives that qualify as cash flow hedges are recognized in other comprehensive income. For the six months ended June 30, 2015, our portion of the fair value decrease of the liability totaled $8,000 and is recorded as “other comprehensive income of non-consolidated entities” on our Consolidated Statements of Operations and Comprehensive Income (Loss).
Casa Linda - We own a 50% interest in AmREIT Casa Linda, LP, which owns a 324,569 square foot retail shopping center located in Dallas, Texas. The remaining 50% is owned by MIG IV, an affiliate of our General Partner. Albertson’s is the largest tenant, occupying 59,561 square feet with a lease scheduled to expire in July 2016.
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During 2012, we and MIG IV initiated a lease-up strategy at our Casa Linda property (a 50% joint venture between us and MIG IV). As of June 30, 2015, the joint venture had substantially completed the lease-up strategy and incurred approximately $2.6 million of $3.0 million in planned capital expenditures, including certain tenant build-out and site improvements. We continue to evaluate the need for additional capital improvements at this property; however, none are planned in the near-term. The property is secured by a $38.0 million non-recourse, mortgage loan that matures in December 2017. Additionally, the loan contains a provision that would allow for an additional funding of approximately $4.5 million should the joint venture elect to acquire an adjacent property. The mortgage loan bears interest at a variable rate; however, AmREIT Casa Linda, LP entered into an interest rate cap agreement that provides for a maximum rate of 3% per annum. The interest rate cap was not designated as a hedge for financial reporting purposes, and our portion of the change in fair value is recognized in income (loss) from non-consolidated entities. For the six months ended June 30, 2015 and 2014, our portion of the decrease in fair value totaled $8,000 and $47,000, respectively, and is included in income (loss) from non-consolidated entities on our Consolidated Statements of Operations and Comprehensive Income (Loss).
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%). We and our joint venture partners recorded an impairment for this property as of December 31, 2014 of $2.0 million. In arriving at our fair value estimate we utilized both comparable sales information of similar properties assuming a “sell as is” scenario and a discounted cash flow model assuming that the property entered into a long term lease and redeveloped the property. The fair value determined under each of these scenarios was approximately $8.2 million. Accordingly, the joint venture recorded an impairment at the property of $2.0 million as of December 31, 2014, $600,000 of which represents our 30% portion and is included in our investment balance.
On June 25, 2015, we signed a purchase/sale agreement with a third party to sell our Woodlake Pointe property for $11.5 million in an all-cash transaction. We expect the joint venture to close on the sale during the third quarter of 2015 and record a gain on sale of approximately $2.9 million, $870,000 of which represents our proportionate share.
5433 Westheimer – We own a 57.5% interest in 5433 Westheimer, LP, which owns an office building with 132,427 square feet of GLA in Houston, Texas. The remaining 42.5% is owned by a third party, joint venture partner. The property is accounted for under the equity method of accounting as we and our joint venture partner share equally in decision-making rights. The property is secured by a five-year term loan in the amount of $8.7 million, including construction draws for the redevelopment of the property. As of June 30, 2015, this loan had an outstanding balance of $8.2 million. On October 18, 2014, our 5433 Westheimer joint venture modified its mortgage loan. Among other things, the modification waived prior non-compliance with its debt covenants through October 18, 2014, modified ongoing debt service operating covenants, extended the term to October 2017 and extended the interest-only payment terms to October 2015. While we serve as guarantor on this debt, we do not believe that we would be required to perform under the guarantee as the estimated fair value of the property exceeds the amount of the loan.
We and our joint venture partner initiated a redevelopment plan, primarily in the form of building and site improvements. Additionally, we and our joint venture partner are reviewing market opportunities to sell this property. However, we and our joint venture partner believe that we need to continue to hold and lease-up this property in order to maximize its value in the near term. As of June 30, 2015, approximately $6.7 million in redevelopment costs have been incurred out of a total expected cost of approximately $8.2 million (including lease-up costs). 5433 Westheimer has not had sufficient liquidity to fund the redevelopment costs needed to ready the property for sale solely from its own cash flows. Additionally, the property owed ARIC and us approximately $400,000 in deferred asset management fees and margin taxes. As such, we provided the joint venture with an advancing promissory note with a 10% interest rate to fund up to approximately $1.5 million to:
| complete the renovations to ready the property for sale, |
| roll in the accounts payable owed to ARIC and us, and |
| fund remaining working capital needs until the property is sold. |
As of June 30, 2015, we have advanced our 5433 Westheimer joint venture $1.1 million under this promissory note. The promissory note will be due upon sale of the property. Based upon estimates of fair value, sufficient equity exists in the property post-renovation to recover our current investment and any current and future loans to the joint venture. However, we can provide no assurances that we will be able to do so, or under circumstances and timing that allow us to maximize the value of the property; thus, all or a portion of our investment of $2.1 million as well as all or a portion of the $1.1 million outstanding under the promissory note is subject to risk of loss.
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Combined condensed financial information for our non-consolidated entities, at 100%, is summarized for the three and six months ended June 30, 2015 and 2014, as follows (amounts in thousands):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenue | $ | 4,465 | $ | 4,160 | $ | 8,705 | $ | 8,587 | ||||||||
Depreciation and amortization | 1,455 | 1,553 | 3,029 | 3,187 | ||||||||||||
Interest expense | 887 | 992 | 1,881 | 1,959 | ||||||||||||
Net income (loss) | 500 | (86 | ) | 247 | (150 | ) |
5. | NOTES PAYABLE |
Our outstanding consolidated debt to third party lenders as of June 30, 2015 and December 31, 2014 was as follows (amounts in thousands):
June 30, | December 31, | |||||||
Notes payable | 2015 | 2014 | ||||||
Westside Plaza | — | 8,980 | ||||||
Total | $ | — | $ | 8,980 |
The Westside Plaza mortgage loan was secured by the underlying real estate in the joint venture and was scheduled to mature in July 2015. Note A payments were interest-only at 5.62% and Note B payments were deferred with no interest due until the debt was refinanced or the property was sold. Upon the sale of the property on April 10, 2015, the outstanding mortgage loan was repaid in full.
We also serve as joint and several guarantor of up to 25% of the $8.2 million mortgage loan held by our 5433 Westheimer joint venture, of which we own 57.5%. The debt matures in October 2017. See Note 4. While we serve as guarantor on this debt, we do not believe that we would be required to perform under the guarantee as the estimated fair value of the property exceeds the amount of the loan, and therefore we believe that our potential exposure is limited to our investment balance.
6. | 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:
| 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. |
Our consolidated financial instruments consist of cash and cash equivalents, tenant and accounts receivable, accounts receivable - related party, notes receivable, notes payable, accounts payable - related party, and accounts payable and other liabilities. The carrying values of all of these financial instruments are representative of the fair values due to the short-term nature of these instruments and negligible credit risks.
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Non-Recurring Fair Value Measurements, Impairment – We determine whether an impairment in value 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 evaluated our Westside Plaza property for impairment as of March 31, 2015, based upon its sale on April 10, 2015, and we recorded an impairment of $1.3 million representing the amount that the carrying value of the property exceeded the net sales proceeds received.
7. | PARTNERS’ CAPITAL AND NON-CONTROLLING INTEREST |
Distributions – With the sale of our Westside Plaza property in April 2015, we expect that we will make a distribution to our limited partners during 2015. During 2014, we made a distribution of approximately $3.7 million to our Limited Partners related to the sale of our Lantern Lane property. Distributions will be made to 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; |
| 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 |
We have no employees or offices. Certain of our affiliates receive fees and compensation from the Partnership, including compensation for providing services to us in the areas of asset management, development and acquisitions, property management and leasing, financing, brokerage and administration. We reimburse our General Partner for an allocation of general and administrative costs. The following table summarizes the amount of such costs incurred by us during the three and six months ended June 30, 2015 and 2014 (amounts in thousands):
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
Type of service | 2015 | 2014 | 2015 | 2014 | ||||||||||||
Asset management fees | $ | 88 | $ | 89 | $ | 177 | $ | 178 | ||||||||
Property management fees | — | 31 | 13 | 68 | ||||||||||||
Leasing costs | — | 9 | — | 13 | ||||||||||||
Interest expense - related party | — | 1 | — | 5 | ||||||||||||
Administrative costs reimbursements | 91 | 88 | 166 | 175 | ||||||||||||
$ | 179 | $ | 218 | $ | 356 | $ | 439 |
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 six months ended June 30, 2015 and 2014, such fees totaled $476,000 and $617,000, respectively. For more information, see Note 4 regarding investments in non-consolidated entities.
We also receive interest payments from 5433 Westheimer for the advancing promissory note. During the three and six months ended June 30, 2015 and 2014, interest income-related party totaled $28,000 and $50,000, respectively.
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.
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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 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 we undertake 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 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 Texas corporation, and, prior to February 18, 2015, was a wholly-owned subsidiary of AmREIT. Effective February 18, 2015, Edens became the parent company of our General Partner in connection with the AmREIT Acquisition when AmREIT merged with and into Saturn Subsidiary, LLC (an indirect, wholly-owned subsidiary of Edens, “Saturn”), with Saturn being the surviving entity after Edens acquired all of the outstanding common stock of AmREIT in an all cash transaction.
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 Edens and its affiliates in performing its duties under our limited partnership agreement.
As of June 30, 2015, we no longer own any consolidated properties. Our investments in real estate include six properties in which we own a non-controlling interest through joint ventures comprising approximately 987,000 square feet of GLA. All of our properties are located in highly populated, suburban communities in Texas. As of June 30, 2015, our properties had a weighted average occupancy rate of approximately 86.4%.
On April 10, 2015, we sold our Westside Plaza property to a third party (see Note 3 of the Notes to Consolidated Financial Statements). We evaluated Westside Plaza for impairment as of March 31, 2015 and recorded an impairment of $1.3 million representing the amount that the carrying value of our Westside Plaza property assets exceeded the net sales proceeds received.
On June 25, 2015, we signed a purchase/sale agreement with a third party to sell the Woodlake Pointe property held within the underlying joint venture for $11.5 million in an all-cash transaction. We expect the joint venture to close on the sale during the third quarter of 2015 and record a gain on sale of approximately $2.9 million, $870,000 of which represents our 30% portion.
Income from our non-controlling interests in our joint ventures 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.
Strategic Plan
Our operating period ended on October 31, 2012, and we have entered into our liquidation period pursuant to the terms of our partnership agreement. Our General Partner is reviewing market sales opportunities in good faith, but attractive sales opportunities may not exist in the near term. While we believe an orderly liquidation of our assets will be completed within the next 12 months, successful wind-down of our operations may take longer for our General Partner to complete. During the liquidation period, we plan to distribute net proceeds generated from property sales to our Limited Partners. Although our General Partner will pursue sales opportunities that are in the best interest of our Limited Partners, we do not expect that our investors will recover all of their original investment. We do not expect that the AmREIT Acquisition described above will impact the orderly liquidation of our assets.
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RESULTS OF OPERATIONS
Below is a discussion of our results of operations for the three months and six months ended June 30, 2015, as compared to the same periods in 2014.
Comparison of the Three Months Ended June 30, 2015, to the Three Months Ended June 30, 2014
Income (loss) from non-consolidated entities. Loss from non-consolidated entities decreased approximately $117,000 for the three months ended June 30, 2015, as compared to the same period in 2014. These amounts represent our ownership portion of our joint ventures’ net income or loss for the period. The decreased loss is primarily due to higher net income in 2015 from our Casa Linda and PTC/BSQ joint venture properties. This is off-set by $29,000 recorded to increase our investment in Woodlake Square as a result of a higher than expected promote distribution and $37,000 related to income at Woodlake Pointe during 2014, which was not recognized in 2015.
Interest income – related party. Interest income – related party increased approximately $28,000 for the three months ended June 30, 2015, as compared to the same period in 2014. The increase is due to interest income from our note receivable – related party due from our 5433 Westheimer joint venture that was established during the fourth quarter of 2014.
Income (loss) from discontinued operations. Loss from discontinued operations increased approximately $137,000 for the three months ended June 30, 2015, as compared to the same period in 2014. The increase in loss is due to operations at Westside Plaza.
Gain (loss) on sale of real estate acquired for investment. Gain on sale of real estate acquired for investment decreased approximately $6.8 million for the three months ended June 30, 2015, as compared to the same period in 2014 as a result of a $6.8 million gain that was recorded in 2014 related to the sale of Lantern Lane.
Comparison of the Six Months Ended June 30, 2015, to the Six Months Ended June 30, 2014
Income (loss) from non-consolidated entities. Loss from non-consolidated entities decreased approximately $13,000 for the six months ended June 30, 2015, as compared to the same period in 2014. These amounts represent our ownership portion of our joint ventures’ net income or loss for the period. The decreased loss is primarily due to higher income in 2015 from our Casa Linda and PTC/BSQ joint venture properties.
Interest income – related party. Interest income – related party increased approximately $50,000 for the six months ended June 30, 2015, as compared to the same period in 2014. The increase is due to interest income from our note receivable – related party due from our 5433 Westheimer joint venture that was established during the fourth quarter of 2014.
Income (loss) from discontinued operations. Loss from discontinued operations increased approximately $1.5 million for the six months ended June 30, 2015, as compared to the same period in 2014. This increase in loss is due to impairment of $1.3 million recorded on our Westside Plaza property during the first quarter of 2015. See Notes 2 and 6 of the Notes to Consolidated Financial Statements.
Gain (loss) on sale of real estate acquired for investment. Gain on sale of real estate acquired for investment decreased approximately $6.8 million for the six months ended June 30, 2015, as compared to the same period in 2014 as a result of a $6.8 million gain that was recorded in 2014 related to the sale of Lantern Lane.
Liquidity and Capital Resources
As of June 30, 2015, we have $5.4 million in cash on hand. With the sale of our Westside Plaza property, we expect that we will make a distribution during 2015. Current strategies and recent transactions that have impacted current and future liquidity include:
• We and our joint venture partner of the 5433 Westheimer property are reviewing market opportunities to sell this property. However, we and our joint venture partner believe that we need to continue to hold and lease-up this property in order to maximize its value in the near term. Our 5433 Westheimer joint venture is unable to generate sufficient liquidity to fund the expenditures needed to complete its renovation and prepare the property for sale on its own. We have provided additional, short-term liquidity in the form of a promissory note up to a maximum of $1.5 million with repayment upon disposition of the property. As of June 30, 2015, we have advanced $1.1 million under this promissory note. Based upon current estimates of fair value, sufficient equity exists in the property post-renovation to recover our advances under this note.
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• On April 10, 2015, we sold our Westside Plaza property for $11.0 million in an all-cash transaction. We evaluated Westside Plaza for impairment as of March 31, 2015 and recorded an impairment of $1.3 million during the first quarter of 2015, which represented the amount that the carrying value of the property exceeded the net sales proceeds received. See Notes 3 and 6 of the Notes to Consolidated Financial Statements.
Future liquidity sources will include cash on hand, distributions from our joint venture properties and sales proceeds from the sales of our real estate investments. Our continuing short-term and long-term liquidity requirements will include, but will not be limited to, corporate and administrative expenses of the Partnership, funding our proportionate share of renovations, expansions, and other significant capital expenditures for our existing joint venture properties to the extent they are unable to fund such expenditures on their own (such as our 5433 Westheimer property) and, ultimately, distributions to our Limited Partners upon sale of our real estate investments. Although no assurance can be given, we believe that we have sufficient liquidity to complete our orderly liquidation in accordance with our strategic plan.
Market Conditions
Our operations are sensitive to changes in overall economic conditions that impact our tenants, including market and economic challenges experienced by the U.S. economy, the real estate industry or within the geographic markets where our properties are located. Most of our retail properties were purchased prior to 2008 when retail real estate market prices were much higher, and our property valuations were negatively impacted by the recent, severe recession. The United States has experienced recent improvements in the general economy; however, it is difficult to determine if the improvements experienced will continue through 2015 and into the future.
A general reduction in the level of tenant leasing or shifts in tenant leasing practices could adversely affect the business, financial condition, liquidity, results of operations, our redevelopment projects and future property dispositions of our joint ventures. Additionally, if credit markets and/or debt or equity capital markets contract, our ability to obtain financing on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our joint ventures’ ability to refinance existing debt and increase future interest expense.
A significant portion of Houston’s and Dallas’ industry is in oil and gas as well as oilfield services. The price of oil declined to five-year lows set in late March of 2015. Oil benchmarks have rallied somewhat from their lows; however, the recovery is only moderate with prices trading in a narrow range around $60 a barrel since early May 2015. It is unknown when or whether oil prices will continue to increase, and if they increase, how much and for what duration. We are unable to predict the impact, if any, that lower oil prices could have on economies in which our properties are located. However, a prolonged period of depressed oil prices could potentially be adverse to these economies, the profitability of our tenants and, ultimately, the value of our properties.
Cash Flow Activities for the Six months Ended June 30, 2015 and 2014
Cash flows provided by (used in) operating activities, investing activities and financing activities during the six months ended June 30, 2015 and 2014, are as follows (in thousands):
Six months ended June 30, | ||||||||
2015 | 2014 | |||||||
Operating activities | $ | (466 | ) | $ | (442 | ) | ||
Investing activities | 10,761 | 23,466 | ||||||
Financing activities | (8,980 | ) | (16,240 | ) |
Net cash flows used in operating activities increased by $24,000, from cash used by operations of $442,000 during the six months ended June 30, 2014 to cash used in operations of $466,000 during the six months ended June 30, 2015. This increase is primarily due to lower net income, exclusive of the gain on sale of real estate and impairment of approximately $137,000, compared to the same period in 2014. In addition, there was a decrease in payments of liabilities of approximately $419,000 compared to the same period in 2014.
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Net cash flows provided by investing activities decreased by $12.7 million, from cash provided by investing activities of $23.5 million during the six months ended June 30, 2014 to $10.8 million during the six months ended June 30, 2015. This decrease in cash inflows is primarily due to an $11.7 million reduction in proceeds received from the sales of properties. During 2014, we sold Lantern Lane for $22.7 million, and during 2015, we sold Westside Plaza for $11.0 million. We received cash payments of $400,000 from related parties during the six months ended June 30, 2014 with only $41,000 in comparable receipts during the six months ended June 30, 2015. Additionally, we loaned $440,000 to our 5433 Westheimer joint venture during the six months ended June 30, 2015 with no comparable outflows during the six months ended June 30, 2014. We also repaid Edens approximately $167,000 for asset management fees and overhead allocations during the six months ended June 30, 2015 with no comparable payments during the six months ended June 30, 2014.
Net cash flows used in financing activities decreased by $7.3 million for the six months ended June 30, 2015, as compared to the same period in 2014. This decrease was related to repayment activity on mortgage notes payable. During 2014 we repaid $15.4 million of notes payable, primarily related to the repayment of the $15.0 million Lantern Lane note payable upon the sale of the Lantern Lane property, and during 2015, we repaid approximately $9.0 million related to the repayment of the Westside Plaza note payable upon sale of the Westside Plaza property. In addition, in 2014, we made approximately $550,000 in payments on our note payable – related party, which was fully paid off in 2015. The remaining variance is due to loan modification costs that were paid in 2014 related to the Westside Plaza loan modification.
OFF BALANCE SHEET ARRANGEMENTS
We also serve as guarantor for up to 25% of the $8.2 million mortgage loan held by our 5433 Westheimer joint venture, of which we own 57.5%. The debt matures in October 2017. See Note 4 of the Notes to Consolidated Financial Statements. While we serve as guarantor on this debt, we do not believe that we would be required to perform under the guarantee as the estimated fair value of the property exceeds the amount of the loan, and therefore we believe that our potential exposure is limited to our investment balance.
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 principal executive officer and principal financial officer, 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 June 30, 2015. Based on that evaluation, our General Partner’s principal executive officer and principal financial officer concluded that, as of June 30, 2015, 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 June 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 material 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. | |
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The exhibits listed on the accompanying Exhibit Index are filed, furnished, or incorporated by reference (as stated therein) as part of this Quarterly Report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AmREIT Monthly Income & Growth Fund III, Ltd. | ||||
By: | AmREIT Monthly Income & Growth III Corporation, its General Partner | |||
Date: August 11, 2015 | By: | /s/ Jodie W. McLean | ||
Jodie W. McLean | ||||
President and Director (authorized officer) |
||||
Date: August 11, 2015 | By: | /s/ Mark P. Garside | ||
Mark P. Garside | ||||
Secretary, Vice President and Director | ||||
Date: August 11, 2015 | By: | /s/ Chad C. Braun | ||
Chad C. Braun | ||||
Vice President |
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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 principal executive officer of the Partnership’s General Partner pursuant to Exchange Act Rule 13a-14(a) (filed herewith). |
Exhibit 31.2 | Certification of the principal financial officer of the Partnership’s General Partner pursuant to Exchange Act Rule 13a-14(a) (filed herewith). |
Exhibit 32.1 | Certification of the principal 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 principal 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 June 30, 2015 (unaudited) and December 31, 2014, (ii) the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and 2014 (unaudited), (iii) the Consolidated Statements of Partners’ Capital for the six months ended June 30, 2015 (unaudited), (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited) and (v) the Notes to Consolidated Financial Statements (unaudited). |
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