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RPI > SEC Filings for RPI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for ROBERTS REALTY INVESTORS INC

Form 10-Q for ROBERTS REALTY INVESTORS INC


9-Nov-2012

Quarterly Report


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

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements in this report that are not historical facts are forward-looking statements that involve a number of known and unknown risks, uncertainties, and other factors, all of which are difficult or impossible to predict and many of which are beyond our control, that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by those forward-looking statements. These risks are detailed in (a) Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2011; (b) Part II, Item 1A, Risk Factors, in this report; and
(c) our other SEC filings. Please also see the cautionary statements included in the Note Regarding Forward-Looking Statements at the beginning of this report.

Overview

We are a self-administered, self-managed equity real estate investment trust, or REIT. Our primary business is to develop, construct, own, and manage multifamily apartment communities. The operating partnership, either directly or through one of its wholly owned subsidiaries, owns all of our properties. At September 30, 2012, we were its sole general partner and owned an 82.81% interest in the operating partnership. We expect to continue to conduct our business in this organizational structure. As of the filing date of this report, we own the following properties, all of which are located in metropolitan Atlanta, Georgia:

three tracts of land totaling 70 acres that are zoned for 720 multifamily units and are in various phases of development and construction;

three tracts of land totaling 34 acres that are zoned for 473 multifamily units, including an 11-acre tract zoned for 220 multifamily units and a 20.6-acre tract zoned for 253 multifamily units that are under contract to be sold (we have classified those assets in the condensed consolidated balance sheets as real estate assets held for sale);

two retail shopping centers; and

an office building, part of which serves as our corporate headquarters.

We intend to continue exiting the retail business and focusing on our core business of developing, constructing, and managing high quality multifamily apartment communities for cash flow and long-term capital appreciation. We have significantly reduced our debt and our negative cash flow during the past year, and we are continuing these efforts.

Recent Developments

Extension of Closing Date for the Sale of the Northridge Land

As part of our strategy to address our needs for liquidity and capital resources, we entered into a contract on June 30, 2011 to sell our 11-acre Northridge land parcel to Roberts Properties, Inc. ("Roberts Properties"), which is owned by Mr. Charles S. Roberts, our President and Chairman of the Board. Under the sales contract as amended, the closing was scheduled to occur no later than October 30, 2012. In October 2012, Roberts Properties requested an extension of the closing date to January 31, 2013. Roberts Properties has obtained the land disturbance, water, and sewer permits for the Northridge land.


These entitlements enhance and benefit the Northridge land. Roberts Properties is currently seeking the equity and debt required to purchase the Northridge land. Based on this progress, on October 22, 2012, the sales contract was amended to extend the closing date to January 31, 2013. Under the terms of the contract as amended, the purchase price is $4,070,000, plus the reimbursement of $303,789 in development and construction expenses, and the closing is scheduled to occur on or before January 31, 2013. Additionally, Roberts Properties is obligated to reimburse us for any development and construction expenses incurred from June 30, 2011 until the closing date. At the closing, we would use $2,000,000 of the sale proceeds to repay our Northridge land loan.

Sales Contract for the Sale of Peachtree Parkway Land

As part of our strategy to address our needs for liquidity and capital resources, we have decided to sell our Peachtree Parkway land to reduce our outstanding debt, to reduce our negative operating cash flow and to release the lender's lien on our North Springs property, which currently provides additional security for the Peachtree Parkway loan. As described below, we sold part of the Peachtree Parkway property on September 27, 2012 and entered into a sales contract on October 9, 2012 to sell the remaining 20.6 acres of the Peachtree Parkway land parcel to Lennar Multifamily Investors, LLC ("Lennar") for $7,590,000 ($7,090,000 net of a $500,000 payment required to release a restrictive covenant on the property). Lennar deposited $50,000 with an escrow agent as earnest money on October 12, 2012. Lennar has until November 30, 2012 to conduct its due diligence and must deposit another $250,000 in earnest money no later than December 6, 2012 if it elects to move forward with the purchase. If Lennar elects not to proceed with the transaction by giving notice of that election to us by November 30, 2012, the contract will be terminated, and Lennar's $50,000 escrow payment will be refunded to it. If Lennar elects to proceed and pays the $250,000 in earnest money as required, our only remedy for Lennar's failure to close and consummate its acquisition of the Peachtree Parkway property will be to obtain the earnest money deposit. The closing of the transaction is scheduled for January 31, 2013, and we would use $7,000,200 of the sale proceeds to repay the Peachtree Parkway loan. Additionally, after the closing of the Peachtree Parkway sale our North Springs property, which has a book value of $11,000,000, would be unencumbered.

Sale of 2.937 acres of the Peachtree Parkway Land

On September 27, 2012, we sold 2.937 acres of our Peachtree Parkway property for $1,200,000. We also received the reimbursement of $515,530 of costs that were previously expended to allow the Peachtree Parkway property to be rezoned to a commercial use. In conjunction with the closing, we made a $1,174,800 principal payment on our $8,175,000 Peachtree Parkway land loan. This principal payment reduced the outstanding balance of the loan to $7,000,200, and the maturity date of the loan was extended to April 30, 2013 on substantially the same terms and conditions. At the closing, we deposited with the lender $175,000 as an interest reserve to pay the monthly interest payments through the new maturity date.

Continuing Negative Operating Cash Flow and Maturing Short-Term Debt

Our primary liquidity requirements relate to (a) our continuing negative operating cash flow and (b) our maturing short-term debt. The primary reason for our negative operating cash flow is that we have six tracts of land totaling 104 acres that do not produce revenue but incur carrying costs of interest expense and real estate taxes. These six tracts of land have a combined carrying value of $30,106,956 and are encumbered with land loans totaling $14,925,200. We have substantial equity in these tracts of land, which are an integral part of our multifamily community development and construction program. Because the performance of our retail centers and office building is insufficient to cover our operating expenses, including the carrying costs of our land, we expect to continue to generate negative operating


cash flow and to operate at a loss until we raise the equity and obtain the construction loan we need to make substantial progress in constructing and leasing up our planned Bradley Park multifamily community as described in Liquidity and Capital Resources - Business Plan below.

To address these issues, we made substantial progress during the past year in improving our liquidity and capital resources, and we intend to continue to do so. We have two pending property sales. If we close the sale of our Northridge property, the proceeds of that sale would be approximately $4,764,976, which we would use to retire our $2,000,000 loan secured by the property and use the remaining proceeds of $2,764,976 to address our liquidity and capital resources needs. If we close the sale of our remaining Peachtree Parkway land, the proceeds of that sale would be approximately $7,090,000, which we would use to retire our $7,000,200 loan secured by the property. Additionally, after the closing of the Peachtree Parkway sale our North Springs property, which has a book value of $11,000,000, would be unencumbered. We are also actively marketing our one-acre Johns Creek commercial site for sale and would use the net proceeds from the sale of that property to address our liquidity and capital resources needs.

We had total debt of $24,651,194 as of September 30, 2012. We have four loans with a total principal balance of $14,503,534 that are scheduled to mature within the next 12 months: (a) the $2,000,000 Northridge loan that matures on February 21, 2013; (b) the $2,925,000 Highway 20 loan that matures on April 8, 2013; (c) the $7,000,200 Peachtree Parkway loan that matures on April 30, 2013; and (d) the $2,578,334 Northridge Office Building loan that matures on August 10, 2013. If we are unable to renew these loans, we may repay all or part of these loans from the proceeds we expect to receive from the sale of the Northridge and Peachtree Parkway properties or the funds we are seeking to raise as described in Liquidity and Capital Resources - Business Plan below.


Results of Operations

Comparison of Three Months Ended September 30, 2012 to Three Months Ended September 30, 2011

The following table highlights our operating results for the periods presented and should be read along with the condensed consolidated financial statements and the accompanying notes included in this report.

                                                                        Three Months Ended
                                                                           September 30,
                                                                 2012                            2011                   Increase
                                                             (Unaudited)                      (Unaudited)              (Decrease)

TOTAL OPERATING REVENUES                                             $       444,026              $       320,359      $    123,667

OPERATING EXPENSES:
Property operating expenses                                                  164,107                      170,608            (6,501 )
General and administrative expenses                                          444,147                      328,444           115,703
Impairment loss on real estate assets                                      5,647,258                    7,124,264        (1,477,006 )
Gain on disposal of assets                                                  (397,591 )                          -           397,591
Depreciation and amortization                                                126,073                      130,408            (4,335 )

Total operating expenses                                                   5,983,994                    7,753,724        (1,769,730 )

LOSS FROM OPERATIONS                                                      (5,539,968 )                 (7,433,365 )      (1,893,397 )

OTHER EXPENSE                                                               (435,428 )                   (385,186 )          50,242

LOSS FROM CONTINUING OPERATIONS                                           (5,975,396 )                 (7,818,551 )      (1,843,155 )

(LOSS) FROM DISCONTINUED OPERATIONS                                                -                     (162,093 )        (162,093 )

NET LOSS                                                             $    (5,975,396 )            $    (7,980,644 )    $ (2,005,248 )

Net loss decreased $2,005,248 when compared to the 2011 period. This decrease was the result of a $123,667 increase in operating revenues, a $1,769,730 decrease in operating expenses (primarily due to a substantially lower non-cash impairment loss on real estate assets and a gain on the disposal of assets in the 2012 period when compared to the 2011 period), and a $162,093 decrease in loss from discontinued operations, offset by a $50,242 increase in other expense. We explain below the major variances between the 2012 and 2011 periods.

Total operating revenues increased by $123,667 from $320,359 in the 2011 period to $444,026 in the current period, primarily as a result of an increase in other operating revenue from the settlement of a rental amount due by a former retail tenant that defaulted on its lease.

Property operating expenses - consisting of utilities, repairs and maintenance, real estate taxes, and marketing and insurance expense - decreased by $6,501 from $170,608 in the 2011 period to $164,107 in the current period.

General and administrative expenses increased by $115,703 from $328,444 in the 2011 period to $444,147 in the current period, primarily due to higher salaries expense.

During the current period, we recorded a non-cash impairment loss of $5,647,258 on the following properties:


$2,100,000 on the North Springs land;

$984,341 on the Spectrum retail center;

$773,334 on the Bradley Park land;

$754,279 on the Bassett retail center;

$725,304 on the Northridge Office Building;

$210,000 on the Highway 20 land; and

$100,000 on the Johns Creek commercial site, which is classified as real estate assets held for sale.

During the 2011 period, we recorded a non-cash impairment loss of $7,124,264 on the following land parcels:

$2,908,457 on the Bradley Park land;

$2,892,126 on the Peachtree Parkway land, which is classified as real estate assets held for sale; and

$1,323,681 on the Highway 20 land.

Other expense increased $50,242 from $385,186 in the 2011 period to $435,428 in the current period. This increase was primarily due to a $29,482 increase in the amortization of deferred financing costs and a $19,193 increase in interest expense because (a) $81,940 of interest was capitalized in the 2011 period and all interest was expensed in the 2012 period and (b) the interest on the Northridge land loan, which we obtained in February 2012.


Comparison of Nine Months Ended September 30, 2012 to Nine Months Ended September 30, 2011

The following table highlights our operating results for the periods presented and should be read along with the condensed consolidated financial statements and the accompanying notes included in this report.

                                                    Nine Months Ended
                                                      September 30,
                                                  2012            2011           Increase
                                              (Unaudited)      (Unaudited)      (Decrease)

TOTAL OPERATING REVENUES                      $  1,076,571    $     981,276    $     95,295

OPERATING EXPENSES:
Property operating expenses                        472,659          480,825          (8,166 )
General and administrative expenses              1,201,272        1,029,119         172,153
Impairment loss on real estate assets            5,923,207        8,510,744      (2,587,537 )
Gain on disposal of assets                        (397,591 )         (4,550 )       393,041
Depreciation and amortization                      377,006          391,228         (14,222 )

Total operating expenses                         7,576,553       10,407,366      (2,830,813 )

LOSS FROM OPERATIONS                            (6,499,982 )     (9,426,090 )    (2,926,108 )

OTHER EXPENSE                                   (1,252,306 )       (990,955 )       261,351

LOSS FROM CONTINUING OPERATIONS                 (7,752,288 )    (10,417,045 )    (2,664,757 )

INCOME (LOSS) FROM DISCONTINUED OPERATIONS         128,652         (477,300 )       605,952

NET LOSS                                      $ (7,623,636 )  $ (10,894,345 )  $ (3,270,709 )

Net loss decreased $3,270,709 when compared to the 2011 period. This decrease was due to a $95,295 increase in operating revenue a $2,830,813 decrease in operating expenses (primarily due to a substantially lower non-cash impairment loss on real estate assets and a larger gain on the disposal of assets in the 2012 period when compared to the 2011 period), a $261,351 increase in other expense and a $605,952 increase in income from discontinued operations. We explain below the major variances between the 2012 and 2011 periods.

Total operating revenues increased by $95,295 from $981,276 in the 2011 period to $1,076,571 in the current period, primarily as a result of a $127,381 increase in other operating revenue from the settlement of a rental amount due by a former retail tenant that defaulted on its lease, offset by a $32,086 decrease in rental operating revenue due to slightly lower occupancy levels at our retail centers and overall lower rental rates on new leases and renewals.

Property operating expenses - consisting of utilities, repairs and maintenance, real estate taxes, and marketing and insurance expense - decreased by $8,166 from $480,825 in the 2011 period to $472,659 in the current period.

General and administrative expenses increased by $172,153 from $1,029,119 in the 2011 period to $1,201,272 in the current period, primarily due to higher salaries expense and professional service fees.

During the current period, we recorded a non-cash impairment loss of $5,923,207 on the following properties:


$2,100,000 on the North Springs land;

$984,341 on the Spectrum retail center;

$773,334 on the Bradley Park land;

$754,279 on the Bassett retail center;

$725,304 on the Northridge Office Building;

$375,949 on the Johns Creek commercial site, which is classified as real estate assets held for sale; and

$210,000 on the Highway 20 land.

During the 2011 period, we recorded a non-cash impairment loss of $8,510,744 on the following land parcels:

$2,908,457 on Bradley Park;

$2,892,126 on Peachtree Parkway, which is classified as real estate assets held for sale;

$1,386,480 on Northridge, which is classified as real estate assets held for sale; and

$1,323,681 on Highway 20.

Other expense increased $261,351 from $990,955 in the 2011 period to $1,252,306 in the current period. This increase was primarily due to a $51,790 increase in amortization of deferred financing costs and a $201,065 increase in interest expense because (a) $81,940 of interest was capitalized in the 2011 period and all interest was expensed in the 2012 period and (b) the interest on the Northridge land loan, which we obtained in February 2012.

Liquidity and Capital Resources

Overview

At September 30, 2012, we had $43,311,776 in total assets, of which $880,791 was cash and cash equivalents. In addition, we held $1,025,469 in restricted cash. Of our restricted cash at September 30, 2012, $415,297 was reserved for the payment of interest on specific outstanding loans, and $551,173 was reserved for insurance, real estate taxes, replacement reserves and tenant improvements for the retail centers. As of October 22, 2012, we held $706,286 in cash and cash equivalents and $971,406 in restricted cash. Of our restricted cash balance, $912,408 was reserved for the payment of interest and certain other costs on specific outstanding loans.

We believe that the most important uses of our capital resources will be to provide working capital to enable us to cover our negative operating cash flow as we pursue our business plan and to invest in the development of the Bradley Park multifamily apartment community to enable us to raise the required debt and equity to construct that community. We currently estimate that we will need approximately $14,695,000 in debt and equity to complete the construction of Bradley Park. Our current cash resources are inadequate to meet these needs. To address these needs, we are considering the alternatives described in Business Plan below.


Our primary liquidity requirements are related to our continuing negative operating cash flow and our maturing short-term debt. We have four loans with a current aggregate principal balance of $14,503,534 that mature within the next 12 months, as listed in the following table in their order of maturity:

                                             Principal Payments Due
Property Securing Loan       Maturity Date      Within 12 Months

Northridge                      2/21/13      $             2,000,000
Highway 20                      4/08/13                    2,925,000
Peachtree Parkway               4/30/13                    7,000,200
Northridge Office Building      8/10/13                    2,578,334

Total                                        $            14,503,534

We are currently generating negative operating cash flow, and we expect to continue to generate negative operating cash flow and to operate at a loss for the foreseeable future. The three primary reasons for our negative operating cash flow are as follows:

We own six tracts of land totaling 104 acres with an aggregate carrying value of $30,106,956 that secure land loans totaling $14,925,200. Because land does not generate revenue, a substantial portion of our negative cash flow is a result of the carrying costs (interest expense and real estate taxes) on our land.

Due to the continued weakness in the retail and office sectors, one of our retail centers and our office building are producing negative cash flow, although the other retail center is positively cash flowing.

Our general and administrative expenses were $1,357,252 for the calendar year 2011 and $1,201,272 for the nine months ended September 30, 2012; these expenses include the costs of being an SEC reporting company and having our shares listed on the NYSE MKT stock exchange (formerly NYSE Amex Equities). These costs also include accounting and related fees to our independent auditors as well as to another accounting firm required for our compliance with
Section 404(a) of the Sarbanes-Oxley Act, legal fees, listing fees, director compensation, and directors and officers insurance premiums. We estimate that these additional costs related to being a public reporting company are approximately $610,000 per year.

Short- and Long-Term Liquidity Outlook

Our operating revenues are not adequate to provide short-term (12 months) liquidity for the payment of all direct rental operating expenses, interest, and scheduled amortization of principal on our mortgage debt. We are currently using our unrestricted cash balance of $706,286 to meet our short-term liquidity requirements, including general and administrative expenses, principal reductions on our debt, and improvements at our existing properties.

As noted above, we have four loans with a total principal balance of $14,503,534 that mature within the next 12 months. We plan to renew these loans as they come due and extend their maturity dates at least 12 months or find alternative funding. We may be required to repay part of the outstanding principal of one or more of these loans in connection with that refinancing. To fund these repayments, we may use cash from one or more of the following sources: (a) our existing cash; (b) the net proceeds


from the sale of one or more of our Northridge property, our Peachtree Parkway property, or our Johns Creek commercial site; (c) contributions from a joint venture partner; or (d) equity we raise in a private offering.

Current economic conditions and the tight lending environment create uncertainty regarding whether we can extend or refinance the maturing loans as planned or find alternative funding. If we were required to use our current cash balances to pay down existing loans, those repayments and the corresponding reductions in our cash balances could adversely affect our ability to execute our plans as described further below.

We expect to meet our long-term liquidity requirements, including future developments and debt maturities, from the proceeds of construction and permanent loans, the sale of properties, or the equity we raise in a private offering.

Business Plan

Overview and Outlook

We intend to maximize shareholder value and to address our needs for liquidity and capital resources by executing our business plan. We plan to continue exiting the retail business and focusing on our core business of developing, constructing, and managing high quality multifamily apartment communities for cash flow and long-term capital appreciation. During the past year, we have significantly reduced our debt and decreased our negative cash flow and we are to continuing these efforts. As explained above in Recent Developments, we have sold part of our Peachtree Parkway property and extended our $7,000,200 Peachtree Parkway land loan to April 30, 2013. Our Northridge and Peachtree Parkway properties are under contract for sale, and we have begun actively marketing our Johns Creek commercial site for sale.

We explain below our strategies and plans for each type of property we own.

Development and Construction of Multifamily Communities

We are optimistic about the market for new apartments in the metro Atlanta submarkets where our land is located. We believe the economic climate for our business in these markets is improving for the following reasons:

Rents for the "Class A" or upscale apartment communities of the type that we build have increased appreciably during 2012, and the level of rental concessions have continued to decrease as the market has improved.

Occupancy rates for Class A apartments in Atlanta have continued to increase in 2012.

The number of new apartments constructed in Atlanta was substantially lower in 2011 than in recent years and has remained low in 2012.

Employment in metro Atlanta is expected to grow, although slowly compared to historical levels.


Nationally, home ownership rates are declining, and we believe that this trend, coupled with larger required down payments for single-family home loans, will continue to lead to higher demand for apartments generally and in our market areas.

We believe that these favorable trends will increase the availability of debt and equity capital for the construction of new apartments in our market areas, particularly for companies like ours that have weathered the recession, own tracts of land in areas we believe are well-suited for upscale apartments, and have a long history of developing, constructing, leasing up, and selling upscale multifamily communities for substantial profits. For the reasons explained in . . .

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