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| APO > SEC Filings for APO > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing in this report. Historical
results set forth in Management's Discussion and Analysis of Financial Condition
and Results of Operation and the Financial Statements should not be taken as
indicative of our future operations.
This quarterly report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
include statements about our business outlook, market and economic conditions,
strategies, future plans, anticipated costs and expenses, capital spending, and
any other statements that are not historical. The accuracy of these statements
is subject to a number of risks, uncertainties, and other factors that may cause
our actual results, performance or achievements of the Company to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Those items are discussed under
"Risk Factors" in Part I, Item 1A to the Form 10-K for the year ended December
31, 2007.
EXECUTIVE SUMMARY OF RESULTS
Consolidated operating revenues are derived primarily from rental revenue,
community development land sales and home sales. For the nine and three months
ended September 30, 2008, our consolidated rental revenues increased $1,424,000
and $319,000 or 3% and 2%, respectively, as compared to the same periods of
2007. The increase was primarily attributable to construction of new units in
our United States segment as well as overall rent increases at comparable
properties in both the United States and Puerto Rico segments.
Community development land sales for the nine and three months ended September
30, 2008 decreased $1,575,000 and $1,603,000 or 20% or 78%, respectively, as
compared to the same period of 2007. Land sales revenue in any one period is
affected by the timing of lot sales, the mix of lot type as well as a mix
between residential and commercial sales. For the nine-month period, community
development land sales were less than the prior period due to decreases in
commercial land sales, decreases in the recognition of previously deferred
revenue, offset in part by increases in residential lot sales. For the
three-month period, community development land sales were also less than prior
period as there were no residential lot sales and less recognition of previously
deferred revenue during the third quarter 2008.
Home sales for the nine and three months ended September 30, 2008 decreased
$2,637,000 and $405,000 or 43% and 45%, respectively, as compared to the same
period of 2007. Home sales, currently sourced from the Puerto Rico segment, are
impacted by the local real estate market. The Company settled fourteen and two
units during the nine and three months ended September 30, 2008, respectively,
as compared to twenty-three and three units, respectively, closed during the
same periods of 2007. As of September 30, 2008, seven completed units remain
within inventory, of which we currently have one unit under contract. We
currently believe that the remaining units will sell within the next twelve
months.
On a consolidated basis, the Company reported a net loss for the nine and three
months ended September 30, 2008 of $2,001,000 and $630,000, respectively. The
net losses for the nine and three months ended September 30, 2008 include
$993,000 and $443,000 as benefits for income taxes, resulting in consolidated
effective tax rates of approximately 33% and 41%, respectively. The consolidated
effective rate for the nine months ended September 30, 2008 was impacted by the
benefit recorded for the net losses, offset by accrued penalties on uncertain
tax positions and certain nondeductible permanent items. The consolidated
effective rate for the three months ended September 30, 2008 was the result of a
benefit recorded for losses from our United States segment at the United States
statutory rate offset in part by a provision recorded for income reported for
the Puerto Rico segment at the Puerto Rico statutory rate. For further
discussion of these items, see the provision for income taxes discussion within
the United States and Puerto Rico segment discussion.
Please refer to the Results of Operations section of Management's Discussion and
Analysis for additional details surrounding the results of each of our operating
segments.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States, which we refer to as GAAP, requires
management to use judgment in the application of accounting policies, including
making estimates and assumptions. These judgments affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. If our judgment or interpretation of the
facts and circumstances relating to various transactions had been different, it
is possible that different accounting policies would have been applied resulting
in a different presentation of our financial statements.
Refer to the Company's 2007 Annual Report on Form 10-K for a discussion of
critical accounting policies, which include sales, profit recognition and cost
capitalization, investment in unconsolidated real estate entities, impairment of
long-lived assets, depreciation of investments in real estate, income taxes and
contingencies. For the nine and three months ended September 30, 2008, there
were no material changes to our policies.
RESULTS OF OPERATIONS
The following discussion is based on the consolidated financial statements of
the Company. It compares the results of operations of the Company for the nine
and three months ended September 30, 2008 (unaudited), with the nine and three
months ended September 30, 2007 (unaudited). Historically, the Company's
financial results have been significantly affected by the cyclical nature of the
real estate industry. Accordingly, the Company's historical financial statements
may not be indicative of future results. This discussion should be read in
conjunction with the accompanying consolidated financial statements and notes
included elsewhere in this report and within our Annual Report on Form 10-K for
the year ended December 31, 2007.
Rental Property Revenues and Operating Expenses - U.S. Operations:
As of September 30, 2008, nineteen U.S. based apartment properties, representing
3,256 units, in which we hold an ownership interest qualified for the
consolidation method of accounting. The rules of consolidation require that we
include within our financial statements the consolidated apartment properties'
total revenue and operating expenses.
As of September 30, 2008, thirteen of the consolidated properties were market
rent properties, representing 1,856 units, allowing us to determine the
appropriate rental rates. Even though we can determine the rents, 54 of our
units at one of our market rent properties must be leased to tenants with low to
moderate income. HUD subsidizes three of the properties representing 836 units
and the three remaining properties are a mix of 137 subsidized units and 427
market rent units. HUD dictates the rents of the subsidized units.
Apartment Construction and Acquisitions
On January 31, 2007, we completed our newest addition to our rental apartment
properties in St. Charles' Fairway Village, the Sheffield Greens Apartments
("Sheffield Greens"). The 252-unit apartment project consists of nine, 3-story
buildings and offers 1 and 2 bedroom units ranging in size from 800 to 1,400
square feet. Construction activities were started in the fourth quarter of 2005
and leasing efforts began in the first quarter of 2006. The first five buildings
became available for occupancy during the fourth quarter of 2006 and the final
four buildings were ready for occupancy in January 2007.
Nine months ended
For the nine months ended September 30, 2008, rental property revenues increased
$1,147,000 or 4% to $29,676,000 compared to $28,529,000 for the nine months
ended September 30, 2007. The increase in rental revenues was primarily the
result of additional revenues for Sheffield Greens Apartments which accounted
for approximately $664,000 of the difference. The increase was also attributable
to an overall 2% increase in rents between periods. These rental revenue
increases were offset in part by increases in the vacancy rate at certain
multifamily apartment properties in St. Charles and Baltimore. However,
incentives implemented by management to address the vacancy rates at these
properties have been successful as vacancy rates have been reduced between the
second and third quarters of 2008.
Rental property operating expenses decreased $640,000 or 4% for the nine months
ended September 30, 2008 to $13,736,000 compared to $14,376,000 for the same
period of 2007. The overall decrease in rental property operating expenses was
the result of cost cutting measures implemented at the end of 2007 and into
2008. The cost cutting measures resulted in decreased operating expenses for
comparable properties of $673,000 or 5%. The decreases were experienced
primarily in advertising expense, office salaries and expenses, security,
grounds expense, repairs and maintenance, snow removal, rehabilitation, painting
& decorating and insurance. This amount is net of a significant increase noted
in property taxes of $193,000 or 14% at comparable properties. Partially
offsetting these decreases was an increase in operating expenses for Sheffield
Greens Apartments of $322,000 related to partial operations in the first half of
2007.
Three months ended
For the three months ended September 30, 2008, rental property revenues
increased $159,000 or 2% to $9,982,000 compared to $9,823,000 for the three
months ended September 30, 2007. Overall, comparable gross potential rental
revenues increased $181,000 or 2%. (The increase was offset in part by a
$22,000 increase in vacancy rates.) As noted above, incentives implemented by
management to address the vacancy rates have been successful and management has
noted improvement in vacancies since the second quarter.
Rental property operating expenses decreased $375,000 or 8% for the third
quarter of 2008 to $4,512,000 compared to $4,887,000 for the third quarter of
2007. The overall decrease in rental property operating expenses was the result
of cost cutting measures implemented at the end of 2007 and into 2008. Operating
expense decreases were experienced primarily within advertising, concessions,
office salaries and expenses, grounds and repairs and maintenance. Offsetting
the noted decreases were increases in utilities and real estate taxes.
Residential Land Sales
For the nine months ended September 30, 2008, we recognized $5,479,000 related
to the delivery of eight townhome lots and sixty-one single family lots to
Lennar as compared to $2,255,000 consisting of twenty-four townhome lots and
three single family lots delivered in the nine months ended September 30,
2007. For the lots delivered in 2008, we recognized as revenue the minimum
guaranteed price of $68,000 per townhome lot and $78,000 per single family lot,
plus water and sewer fees, road fees and other off-site fees. For the lots
delivered in 2007, we recognized as revenue an average minimum guaranteed price
of $76,667 per townhome lot and $115,333 per single family lot, plus water and
sewer fees, road fees and other off-site fees.
For the three months ended September 30, 2008, we did not deliver any lots to
Lennar. For the same period of 2007, we recognized $650,000 related to the
delivery of ten townhome lots. These lots represent an average minimum
guaranteed price of $65,000 per townhome lot. In addition, the Company receives
water and sewer fees, road fees and other off-site fees.
The Company recognizes additional revenue based on a percentage of the final
settlement price of the home sold by Lennar to the homebuyer, to the extent
greater than the guaranteed minimum price, as provided by our agreement with
Lennar. For the nine and three months ended September 30, 2008, the Company
recognized $424,000 and $211,000, respectively, of additional revenue for lots
that were previously delivered to Lennar. For the nine and three months ended
September 30, 2007, the Company recognized $1,813,000 and $727,000,
respectively, of additional revenue for lots that were previously delivered to
Lennar.
As of September 30, 2008, 1,441 lots remained under contract to Lennar, of which
60 single family lots were developed and ready for delivery.
Commercial Land Sales
For the nine months ended September 30, 2008, we sold 1.89 commercial acres in
St. Charles for $362,000. This compares to 6.81 commercial acres in St. Charles
for $2,717,000 for the nine months ended September 30, 2007. For the three
months ended September 30, 2008, we sold .90 commercial acres in St. Charles for
$178,000 compared to 1.03 commercial acres for $180,000 for the third quarter
2007. As of September 30, 2008, our commercial sales backlog contained 82.15
acres under contract for a total of $16,275,000.
Gross Margin on Land Sales
The gross margin on land sales for the nine and three months ended September 30,
2008 were 19% and negative 7%, respectively, as compared to 26% and 24% for the
same periods of 2007, respectively. Gross margins differ from period to period
depending on the mix of land sold as well as volume of sales available to absorb
certain period costs. Excluding period costs, gross margins for the nine months
ended September 30, 2008 were 27% for residential land sales and 30% for
commercial sales as compared to residential margins of 42% and commercial
margins of 17% for the same period 2007. The commercial margins for 2007 were
impacted by increases in the estimated cost of constructing a boardwalk within
the O'Donnell Lake Restaurant Park as the actual bid proposals received were
higher than the engineer's expected cost.
For the three months ended September 30, 2008, sales volumes were insufficient
to absorb period costs, resulting in negative margins. Excluding period costs,
gross margins for the three months ended September 30, 2008 were 27% for
residential land sales and 29% for commercial sales as compared to residential
margins of 30% and commercial margins of 37% for the same period 2007.
Customer Dependence
Residential land sales to Lennar within our U.S. segment were $5,903,000 for the
nine months ended September 30, 2008, which represents 16% of the U.S. segment's
revenue and 10% of our total year-to-date consolidated revenue. No other
customers accounted for more than 10% of our consolidated revenue for the nine
months ended September 30, 2008. Loss of all or a substantial portion of our
land sales, as well as the joint venture's land sales, to Lennar would have a
significant adverse effect on our financial results until such lost sales could
be replaced.
Management and Other Fees - U.S. Operations:
We earn monthly management fees from all of the apartment properties that we
own, as well as our management of apartment properties owned by third parties
and affiliates of J. Michael Wilson. Effective February 28, 2007, the Company's
management agreement with G.L. Limited Partnership was terminated upon the sale
of the apartment property to a third party. Management fees generated by this
property accounted for less than 1% of the Company's total revenue.
We receive an additional fee from the properties that we manage for their use of
the property management computer system and a fee for vehicles purchased by the
Company for use on behalf of the properties. The costs of the computer system
and vehicles are reflected within depreciation expense.
The Company manages the project development of the joint venture with Lennar for
a market rate fee pursuant to a management agreement. These fees are based on
the cost of the project and a prorated share is earned when each lot is sold. As
noted above, the Company is currently negotiating with Lennar for their purchase
of the Company's equity within the Joint Venture, at which point the Company
would no longer receive management fees from the Joint Venture.
Management fees for the nine months ended September 30, 2008 decreased $182,000
to $117,000 as compared to $299,000 for the same period of 2007. Management fees
for the three months ended September 30, 2008 decreased $53,000 to $38,000 as
compared to $91,000 for the same period of 2007. The decreases in the nine and
three month periods were primarily as a result of the reduction in number of
lots delivered by the joint venture. Management fees presented on the
consolidated income statements include only the fees earned from the
non-controlled properties; the fees earned from the controlled properties are
eliminated in consolidation.
Depreciation Expense - U.S. Operations:
Depreciation expense increased $432,000 to $4,684,000 for the first nine months
of 2008 compared to $4,252,000 for the same period in 2007. The increase in
depreciation is primarily the result of depreciation related to the addition of
Sheffield Greens Apartments. Depreciation expense for the third quarter 2008
increased $18,000 to $1,525,000 compared to $1,507,000 for the third quarter
2007.
Interest Income - U.S. Operations:
Interest income decreased $543,000 to $300,000 for the nine months ended
September 30, 2008, as compared to $843,000 for the nine months ended September
30, 2007. For the three months ended September 30, 2008, interest income
decreased $181,000 to $71,000, as compared to $252,000 for the three months
ended September 30, 2007. The decrease was primarily the result of undistributed
bond proceeds held by the County being used to fund development costs, resulting
in a reduction of interest income earned on these funds. In addition, the
interest rate earned on the escrowed funds decreased between periods.
Interest Expense - U.S. Operations:
The Company considers interest expense on all U.S. debt available for
capitalization to the extent of average qualifying assets for the
period. Interest specific to the construction of qualifying assets, represented
primarily by our recourse debt, is first considered for capitalization. To the
extent qualifying assets exceed debt specifically identified, a weighted average
rate including all other debt of the U.S. segment is applied. Any excess
interest is reflected as interest expense. For 2008 and 2007, the excess
. . .
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