2008, the Company sold Columbia, one of the Company's non-core properties. Columbia is a 58,783 square foot retail center located in Columbia, South Carolina. During 2007, the Company acquired a 400,000 square foot industrial park and two retail properties aggregating 76,000 square feet. All three properties acquired in 2007 are located in Houston, Texas. No properties were sold during 2007. The property acquisitions are part of the Company's strategy to acquire value-added real estate in its core markets of Texas, California and Arizona.
The properties held for investment by the Company were 88% occupied at June 30, 2008 and June 30, 2007. The Company continues to aggressively pursue prospective tenants to increase its occupancy, which if successful, should have the effect of improving operational results.
In the accompanying financial statements, the results of operations for Columbia are shown in the section "Discontinued operations". Columbia was classified as "Real estate held for sale" at December 31, 2007. As such, the revenues and expenses reported for the periods presented exclude results from properties sold or classified as held for sale. The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements of the Company, including the notes thereto, included in Item 1.
The Company intends to continue to seek to acquire additional properties in its core markets of Texas, California and Arizona and further reduce its non-core assets while focusing on an aggressive leasing program during 2008.
CRITICAL ACCOUNTING POLICIES
The major accounting policies followed by the Company are listed in Note 2 - Summary of Significant Accounting Policies - of the Notes to the Consolidated Financial Statements. The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting period. Actual results could differ materially from those estimates.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:
Investment in Real Estate Assets
Rental properties are stated at cost, net of accumulated depreciation, unless circumstances indicate that cost, net of accumulated depreciation, cannot be recovered, in which case the carrying value of the property is reduced to estimated fair value. Estimated fair value (i) is based upon the Company's plans for the continued operation of each property and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized net operating income based upon the age, construction and use of the building. The fulfillment of the Company's plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Company to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, the actual results of operating and disposing of the Company's properties could be materially different than current expectations.
Depreciation is provided using the straight-line method over the useful lives of the respective assets. The useful lives are as follows:

              Building and Improvements   5 to 40 years
              Tenant Improvements         Term of the related lease
              Furniture and Equipment     3 to 5 years

Allocation of Purchase Price of Acquired Assets Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible and intangible

assets (including land, buildings, tenant improvements, above and below market leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with SFAS No. 141, Business Combinations), and allocates the purchase price to the acquired assets and assumed liabilities. The Company also considers an allocation of purchase price of other acquired intangibles, including acquired in-place leases. The Company evaluates acquired "above and below" market leases at their fair value (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management's estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases.
Sales of Real Estate Assets
Gains on property sales are accounted for in accordance with the provisions of SFAS No. 66, Accounting for Sales of Real Estate. Gains are recognized in full when real estate is sold, provided (i) the gain is determinable, that is, the collectibility of the sales price is reasonably assured or the amount that will not be collectible can be estimated, and (ii) the earnings process is virtually complete, that is, the Company is not obligated to perform significant activities after the sale to earn the gain. Losses on property sales are recognized immediately.

RESULTS OF OPERATIONS
Discussion of the three months ended June 30, 2008 and 2007.
The following table shows a comparison of rental revenues and certain expenses
for the quarter ended:

                                       June 30,        June 30,             Variance
                                         2008            2007             $           %
     Rental revenue                  $ 8,778,000     $ 7,822,000     $ 956,000       12.2 %
     Operating expenses:
     Property operating expenses       4,216,000       3,296,000       920,000       27.9 %
     General and administrative        1,025,000         955,000        70,000        7.3 %
     Depreciation and amortization     3,550,000       3,092,000       458,000       14.8 %
     Interest expense                  3,362,000       3,078,000       284,000        9.2 %

Rental revenue. Rental revenue increased $956,000, or 12.2%, for the three months ended June 30, 2008 in comparison to the three months ended June 30, 2007. This increase was primarily attributable to $654,000 in revenue generated from one office property acquired during the second quarter of 2008 and two retail properties and one industrial property acquired during the second quarter of 2007. Greater revenues from properties owned for the full three months ended June 30, 2008 and June 30, 2007 accounted for the remaining increase of $302,000. The increase in revenue from the properties owned for the full three months ended June 30, 2008 and June 30, 2007 was primarily due to increases in rental rates and lease termination revenue. The increase was also attributable to a reduction in rent concessions. The weighted average occupancy of the Company's properties was 88% as of June 30, 2008.
Property operating expenses. Property operating expenses increased by $920,000, or 27.9%, for the three months ended June 30, 2008 in comparison to the three months ended June 30, 2007. The increase was partially due to operating expenses of $410,000 related to the four acquired properties mentioned above. Property operating expenses on properties owned for the full three months ended June 30, 2008 and 2007 accounted for the remaining increase of $510,000. This increase was in large part attributable to higher electricity rates and an increase in repairs and maintenance costs when compared to the same period in the prior year. The increase was also due to a increase in bad debt expense incurred during the period.
General and administrative. General and administrative costs increased $70,000, or 7.3%, for the three months ended June 30, 2008 in comparison to the three months ended June 30, 2007. The increase was principally due to professional fees incurred during the second quarter of 2008 related to a potential

investment opportunity. The increase was also attributable to an increase in other professional fees, primarily accounting and tax.
Depreciation and amortization. Depreciation and amortization expense increased $458,000, or 14.8%, for the three months ended June 30, 2008 in comparison to the three months ended June 30, 2007. The increase was principally attributable to depreciation and amortization of $427,000 related to the acquired properties mentioned above. The increase was also due to the depreciation of additional capital improvements and amortization of capitalized lease costs incurred between periods.
Interest expense. Interest expense increased $284,000, or 9.2%, for the three months ended June 30, 2008 in comparison to the three months ended June 30, 2007. The increase was primarily due to interest expense associated with the acquired properties mentioned above of $212,000. The increase was also due to the write-off of a loan premium on one of the Company's loans refinanced in July 2007, which also contributed to the increase in interest expense. The loan premium, which had an unamortized balance of $1,123,000 at the time of the refinance, was amortized as an offset to interest expense during the three months ended June 30, 2007.
Income taxes. The Company recognized a deferred income tax benefit from continuing operations of $1,165,000 for the three months ended June 30, 2008, compared to $1,092,000 for the three months ended June 30, 2007. The increase in deferred income tax benefit for the second quarter of 2008 corresponds to the increase in loss from continuing operations for the second quarter of 2008, in comparison to the second quarter of 2007.
Minority interest. The share of loss from continuing operations for the three months ended June 30, 2008 for the holders of OP Units was $280,000, compared to a share of loss of $193,000 for the three months ended June 30, 2007. The minority interest represents the approximate 13% interest in the Operating Partnership not held by the Company.
Discussion of the six months ended June 30, 2008 and 2007.
The following table shows a comparison of rental revenues and certain expenses for the six months ended:

                                      June 30,         June 30,              Variance
                                        2008             2007              $            %
   Rental revenue                  $ 17,042,000     $ 15,001,000     $ 2,041,000       13.6 %
   Operating expenses:
   Property operating expenses        7,744,000        6,285,000       1,459,000       23.2 %
   General and administrative         1,881,000        1,682,000         199,000       11.8 %
   Depreciation and amortization      6,788,000        6,036,000         752,000       12.5 %
   Interest expense                   6,467,000        5,636,000         831,000       14.7 %

Rental revenue. Rental revenue increased $2,041,000, or 13.6%, for the six months ended June 30, 2008 in comparison to the six months ended June 30, 2007. This increase was primarily attributable to $1,258,000 in revenue generated from one office property acquired during the second quarter of 2008 and two retail properties and one industrial property acquired during the second quarter of 2007. Greater revenues from properties owned for the full six months ended June 30, 2008 and June 30, 2007 accounted for the remaining increase of $783,000. The increase in revenue from the properties owned for the full six months ended June 30, 2008 and June 30, 2007 was primarily due to increases in rental rates and a reduction in rent concessions. The increase was also attributable to higher lease termination revenue. The increase was partially offset by a decrease in occupancy, which on a weighted average basis decreased from 89% for the six months ended June 30, 2007 to 86% for the six months ended June 30, 2008. The weighted average occupancy of the Company's properties was 88% as of June 30, 2008.
Property operating expenses. Property operating expenses increased by $1,459,000, or 23.2%, for the six months ended June 30, 2008 in comparison to the six months ended June 30, 2007. The increase was partially due to operating expenses of $738,000 related to the four acquired properties mentioned above. Property operating expenses on properties owned for the full six months ended June 30, 2008 and 2007 accounted for the remaining increase of $721,000. This increase was partially attributable to an increase in

repairs and maintenance costs and electricity rates. The increase was also due to an increase in bad debt expense incurred during the period. Furthermore, real estate taxes rose as a result of an increase in the assessed value of several of the Company's properties.
General and administrative. General and administrative costs increased $199,000, or 11.8%, for the six months ended June 30, 2008 in comparison to the six months ended June 30, 2007. The increase was partially due to professional fees incurred during the second quarter of 2008 related to a potential investment opportunity. The increase was also attributable to an increase other professional fees, primarily accounting and tax. Compensation costs were also increased during the period in comparison to the same period in the prior year. Depreciation and amortization. Depreciation and amortization expense increased $752,000, or 12.5%, for the six months ended June 30, 2008 in comparison to the six months ended June 30, 2007. The increase was principally attributable to depreciation and amortization of $795,000 related to the acquired properties mentioned above. The increase was partially offset by a reduction in depreciation and amortization attributable to fully depreciated tenant improvements and amortized lease costs associated with properties owned for the full six months ended June 30, 2008 and 2007.
Interest expense. Interest expense increased $831,000, or 14.7%, for the six months ended June 30, 2008 in comparison to the six months ended June 30, 2007. The increase was primarily due to interest expense associated with the acquired properties mentioned above of $616,000. The increase was also due to the write-off of a loan premium on one of the Company's loans refinanced in July 2007, which accounted for $194,000 of the increase in interest expense. The loan premium, which had an unamortized balance of $1,123,000 at the time of the refinance, was amortized as an offset to interest expense during the six months ended June 30, 2007.
Income taxes. The Company recognized a deferred income tax benefit from continuing operations of $2,013,000 for the six months ended June 30, 2008, compared to $1,784,000 for the six months ended June 30, 2007. The increase in deferred income tax benefit for the six months ended June 30, 2008 corresponds to the increase in loss from continuing operations for the six months ended June 30 2008, in comparison to the six months ended June 30, 2007. Minority interest. The share of loss from continuing operations for the six months ended June 30, 2008 for the holders of OP Units was $477,000, compared to a share of loss of $367,000 for the six months ended June 30, 2007. The minority interest represents the approximate 13% interest in the Operating Partnership not held by the Company.
Discontinued operations. The Company recorded income from discontinued operations of $631,000 for the six months ended June 30, 2008 compared to a loss of $11,000 for the six months ended June 30, 2007. The income for the six months ended June 30, 2008 includes the operating results and gain on sale of Columbia. Columbia, a 58,783 square foot retail center located in Columbia, South Carolina, was sold in March 2008. The loss for the six months ended June 30, 2007 represents Columbia's results of operations for the period.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 2008, the Company derived cash primarily from the collection of rents, proceeds from borrowings, the sale of a property and the release of restricted cash. Major uses of cash included the acquisition of one property, payments for capital improvements to real estate assets, primarily for tenant improvements, payment of operational expenses, repayment of borrowings and scheduled principal payments on borrowings.

The Company reported a net loss of $2,587,000 for the six months ended June 30, 2008 compared to a net loss of $2,440,000 for the six months ended June 30, 2007. These results include the following non-cash items:

                                                   Six Months Ended June 30,
                                                    2008               2007
       Non-Cash Items:
       Depreciation and amortization expense    $     6,810        $     6,102
       Income tax benefit                            (1,592 )           (1,860 )
       Deferred rental income                          (260 )             (284 )
       Minority interest                               (383 )             (369 )
       Stock-based compensation expense                  30                 21
       Amortization of loan premiums                    (23 )             (218 )

Net cash used in operating activities amounted to $331,000 for the six months ended June 30, 2008. The net cash used in operating activities consisted of a net increase in operating assets and liabilities of $1,185,000, partially offset by $854,000 generated by property operations. Net cash provided by operating activities amounted to $1,573,000 for the six months ended June 30, 2007. The net cash provided by operating activities consisted of $952,000 generated by property operations and $621,000 attributable to a net decrease in operating assets and liabilities.
Net cash used in investing activities amounted to $16,098,000 for the six months ended June 30, 2008. Cash of $17,250,000 was used to acquire one office property and $1,862,000 was used for capital expenditures, primarily tenant improvements. This amount was reduced by proceeds of $3,014,000 received from the sale of Columbia during the period. Net cash used in investing activities amounted to $28,375,000 for the six months ended June 30, 2007. Cash of $26,108,000 was used to acquire two retail properties and an industrial property. In addition, cash of $2,267,000 was used for capital expenditures, primarily tenant improvements. Net cash provided by financing activities amounted to $17,640,000 for the six months ended June 30, 2008, which included $16,950,000 in new borrowings related to the acquisition of an office property, $300,000 from an additional borrowing on an unsecured loan and $3,565,000 from the release of restricted cash. This amount was reduced by the repayment of borrowings on the sale of Columbia of $2,218,000, scheduled principal payments of $829,000 and other principal repayments of $150,000. Net cash provided by financing activities amounted to $26,413,000 for the six months ended June 30, 2007. Proceeds from borrowings totaled $12,125,000, which included a $6,400,000 new loan on an office property located in Houston, Texas. Other borrowings of $23,422,000 were obtained primarily to assist with the acquisition costs associated with three properties acquired during 2007. Repayment of borrowings related to refinances amounted to $8,067,000 and scheduled principal payments amounted to $869,000 for the six months ended June 30, 2007.
The Company expects to meet its short-term liquidity requirements for normal property operating expenses and general and administrative expenses from cash generated by operations. In addition, the Company expects to incur capital costs related to leasing space and making improvements to properties provided the estimated leasing of space is completed. The Company anticipates meeting these obligations with cash currently held, the use of funds held in escrow by lenders, proceeds from the sale of assets and refinancing activities. There can be no assurance, however, that these activities will occur. If these activities do not occur, the Company will not have sufficient cash to meet its obligations if all leasing projections are met.
The Company has loans totaling $11,955,000, maturing over the next twelve months, of which $10,605,000 is secured and $1,350,000 is unsecured. One of the secured loans, with a balance of $2,500,000, contains an option to extend maturity for two six-month terms. Based on uncertainties with the current credit market and the Company's historical losses and current debt level, there can be no assurances as to the Company's ability to obtain funds necessary for the refinancing of its maturing debts. If refinancing transactions are not consummated, the Company will seek extensions and/or modifications from existing lenders. If these refinancings do not occur, the Company will not have sufficient cash to meet its obligations.

The Company has a $2,000,000 line of credit available if needed. The entire line was available to the Company as of June 30, 2008. The line of credit expires in April 2009. The line can be extended from time to time if mutually agreed upon by the lender and the Company.
The Company is not in compliance with a debt covenant on a mortgage loan secured by one of its office properties located in Houston, Texas. The debt covenant requires the Company to maintain a minimum tangible book net worth as defined in the debt agreement. In the event the lender elects to enforce the non-compliance matter, the Company will attempt to negotiate a revision to the loan covenant. If a refinance of the loan becomes necessary, the Company believes it could obtain a new mortgage loan for an amount in excess of the current debt balance and prepayment costs associated with the current loan.
INFLATION
Substantially all of the leases at the industrial and retail properties provide for pass-through to tenants of certain operating costs, including real estate taxes, common area maintenance expenses, and insurance. Leases at the office properties typically provide for rent adjustment and pass-through of increases in operating expenses during the term of the lease. All of these provisions may permit the Company to increase rental rates or other charges to tenants in response to rising prices and therefore, serve to reduce the Company's exposure to the adverse effects of inflation.
FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements are based on management's beliefs and expectations, which may not be correct. Important factors that could cause actual results to differ materially from the expectations reflected in these forward-looking statements include the following: the Company's level of indebtedness and ability to refinance its debt; the fact that the Company's predecessors have had a history of losses in the past; unforeseen liabilities which could arise as a result of the prior operations of companies acquired in the 2001 consolidation transaction; risks inherent in the Company's acquisition and development of properties in the future, including risks associated with the Company's strategy of investing in under-valued assets; general economic, business and market conditions, including the impact of the current economic downturn; changes in federal and local laws, and regulations; increased competitive pressures; and other factors, including the factors set forth below, as well as factors set forth elsewhere in this Report on Form 10-Q.