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AQQ > SEC Filings for AQQ > Form 10-K on 1-Apr-2013All Recent SEC Filings

Show all filings for AMERICAN SPECTRUM REALTY INC | Request a Trial to NEW EDGAR Online Pro



Annual Report


The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of American Spectrum Realty, Inc. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements ("Notes").

Business Overview

We provide comprehensive integrated real estate solutions for our own property portfolio and the portfolios of our third party clients. We own and manage; commercial, industrial, retail, self-storage and multi-family, student housing income properties, and offer our third party clients comprehensive integrated real estate solutions, including management and transaction services based on our market expertise. We conduct our business in the continental United States.

Our business is conducted through an Operating Partnership in which we are the sole general partner and a limited partner with a total equity interest of 93% at December 31, 2012. As the sole general partner of the Operating Partnership, we have the exclusive power to manage and conduct the business of the Operating Partnership. We periodically examine our corporate structure in order to evaluate if we are positioned to take advantage of the most favorable tax treatments for ourselves, our shareholders and our clients. We evaluate the potential tax benefits and consequences of a variety of business models that include but are not limited to: joint ventures, partnerships, limited liability companies (LLC), limited liability partnerships (LLP) and real estate investment trusts (REIT) for ourselves and our investors. It is our objective to consider all applicable tax laws that legally reduce the tax consequences and maximize the tax benefits associated with real estate transactions.

The REIT structure has many specific requirements that must be met and maintained in order to qualify. As of December 31, 2012 our ownership structure does not allow us to elect REIT status.

Our primary business objective is to acquire and manage multiple tenant real estate in strategically located areas where our cost effective enhancements combined with effective leasing and management strategies, can improve the long term values and economic returns of those properties. We focus on the following fundamentals to achieve this objective:

-An opportunistic and disciplined disposition strategy that enhances investment performance and takes advantage of realized gains. We typically dispose of properties when the return from selling is higher than the projected return from holding the property,

-Organic (internally developed opportunities) and in-organic (acquisition generated opportunities) growth of our third party property management contracts and transaction service fees. We intend to focus on the acquisition of third party management contracts in 2013 coupled with;

-An opportunistic yet disciplined acquisition strategy that focuses on mid-tier multi-tenant real estate in locations that allow us to capitalize on our existing management infrastructure currently servicing our own properties and that of our third party clients.

As of December 31, 2012, the properties that we manage were as follows:

                                ASR owned      Consolidated VIE's    Third Party         Total
                                     Square              Square            Square           Square
Property type                Number  footage   Number    footage   Number  footage  Number  footage
Office                           11 1,051,148        -           -      1    29,428     12 1,080,576
Industrial/Commercial             1   105,600        8   4,610,084      -         -      9 4,715,684
Retail                            2    76,315        -           -      7   218,278      9   294,593
Residential/Multi-family          -         -        6   1,456,875      5   380,450     11 1,837,325
Self-Storage                      3   182,351        9   1,153,583      6   590,332     18 1,926,266
Land                              1         -        -           -      2         -      3         -
Total                            18 1,415,414       23   7,220,542     21 1,218,488     62 9,854,444

During the year ended December 31, 2012, we sold six properties, one of which was owned by a VIE. We also strategically defaulted on the non-recourse debt of five properties, including one of which was owned by a VIE, that were foreclosed by the lender.

During the second quarter of 2012, we repurchased all of the operating partnership units ("OP Units") issued to Evergreen Realty Group, LLC and certain of its affiliates ("Evergreen") in 2010. We had issued the OP Units to Evergreen in connection with the acquisition of assets from Evergreen on January 17, 2010. The OP Units issued to Evergreen were repurchased by the Company for one dollar as provided in the purchase and sell agreement.

Financial Operations Overview


   Rental Revenues. We derive rental revenues from tenants that occupy space in
our portfolio of consolidated properties. There are three key drivers to rental

   1. Occupancy - Rental revenues are dependent on our ability to lease spaces
to quality tenants.

                                             Weighted Average Occupancy
                                                 as of December 31,
Property Type                                   2012             2011
Office properties                                    82%              77%
Industrial properties                                76%              87%
Retail properties                                    79%              56%
Multi-family/Student Housing properties              88%              96%
Self storage properties                              86%              77%

We were able to achieve occupancy increases in our portfolio's office, self-storage and retail properties in comparison to the prior year. Our multi-family/Student Housing properties experienced a decline in occupancy, primarily due to lower occupancy at College Park Student Apartments. With regard to our industrial properties, we saw a reduction in the number of buildings in our consolidated portfolio over last year by three buildings which on average had higher occupancies. We are currently in the process of aggressively marketing all vacated spaces but cannot make any guarantees as to the speed at which we will be able to find quality tenants or what, if any, reduction in rental rates we might experience.

2. Rental rates - Market rental rates are often inversely related to vacancy rates. Increased vacancy in the market place tends to drive down rental rates. Our leases typically have one to ten year terms based on property type. As leases expire, we replace the existing leases with new leases at the current market rental rate.

                                              Weighted Average Base Rent
                                               per occupied square foot
                                                  as of December 31,
Property Type                                   2012               2011
Office properties                           $       14.82       $     15.51
Industrial properties                       $        4.04       $      4.29
Retail properties                           $       10.04       $     10.84
Multi-family/Student Housing properties     $       10.66       $      9.53
Self storage properties                     $        5.78       $      7.57

We were able to achieve higher base rents at our Multi-family/Student Housing properties in comparison to the prior year.

We experienced a decrease in the weighted average base rent of our office, industrial, retail and self-storage properties in comparison to the prior year. The decrease was primarily related to pressures on rent as a result of the economy. We do not anticipate rent rates to continue to decline in the near term for these properties and anticipate that our weighted average base rent will be consistent in the coming year with its present level. We are currently actively marketing our empty square footage but do not know if, when or at what rent rates we will be able to lease the vacant spaces.

3. Tenant retention - Retaining existing tenants is essential, as high customer retention leads to increased occupancy, less downtime between leases, and reduced leasing costs. We believe in providing superior customer service; hiring, training, retaining and empowering our employees. We strive to create an environment of open communication both internally and externally with our customers.

Of the leases that expired during 2012, we were able to retain tenants leasing approximately 55% of the expiring square footage. We continue to aggressively pursue high quality tenants for all of our vacant square footage. We can make no guarantees as to our ability to fill vacant space in a timely manner or at the same or higher rents than historically charged.

Third party management and leasing revenue. We derive these revenues from the fees charged to our third party clients for management services, tenant acquisition fees, leasing fees and loan advisory fees for arranging financing related to properties under management. When and if our third party clients elect to sell a property we manage for them, we will receive transaction fees and commissions relating to the sale of the property. Our same core skill set that influences our rental income also drives our third party client revenue. Many of the fees we charge our third party clients are linked to occupancy, rental rates and customer retention.


Property operating expenses. Property operating expenses consist primarily of property taxes, insurance, repairs and maintenance, personnel costs and building service contracts.

General and administrative expenses. General and administrative expenses consist primarily of personnel expenses for accounting, human resources, information technology and corporate administration, and professional fees, including audit and legal fees.

Depreciation and amortization expenses. Depreciation and amortization expenses consist primarily of depreciation associated with our real estate held for investment, amortization of purchased intangibles, depreciation of additional capital improvements and the amortization of lease costs associated with consolidated properties.

Interest expenses. Interest expenses consist primarily of the interest owed to creditors for debt associated with our consolidated properties.


The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, 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 reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we re-evaluate our judgments and estimates. We base our estimates and judgments on our historical experience, knowledge of current conditions and our belief of what could occur in the future considering available information, including assumptions that are believed to be reasonable under the circumstances. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these policies.

We believe the following critical accounting policies reflect our most significant estimates, judgments and assumptions used in the preparation of our consolidated financial statements:

Variable Interest Entity (VIE) accounting;
Business combinations;
Investment in real estate assets;
Assets held for sale;
Discontinued operations;
Sales of real estate assets;
Fair value measurements;
Impairment or assets; and
Income taxes.

Variable Interest Entity Accounting

Our determination of the appropriate accounting method with respect to our VIEs is based on Accounting Standards Update, or ASU, 2009-17, "Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities." This ASU incorporates Statement of Financial Accounting Standards, or SFAS, No. 167, "Amendments to FASB Interpretation No.
46(R)," issued by the Financial Accounting Standards Board, or FASB, in June 2009. The amendments in this ASU replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with a primarily qualitative approach focused on identifying which reporting entity has both (1) the power to direct the activities of a variable interest entity that most significantly impact such entity's economic performance and (2) the obligation to absorb losses or the right to receive benefits from such entity that could potentially be significant to such entity. The entity which satisfies these criteria is deemed to be the primary beneficiary of the VIE.

We analyze our interests in VIEs to determine if we are the primary beneficiary. We consider a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE's economic performance including, but not limited to, (a) sign and enter into leases; set, distribute, and implement the capital budgets, the authority to refinance or sell the property within contractually defined limits and, (b) the ability to receive fees that are significant to the property and (c) a necessity of funding any deficit cash flows.

We consolidate any VIE of which we are the primary beneficiary (see Note 5 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report). We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. If we made different judgments or utilized different estimates in these evaluations, it could result in differing conclusions as to whether or not an entity is a VIE and whether or not to consolidate such entity. We deconsolidate a VIE when we determine that we are no longer the primary beneficiary. For VIEs in which we own an insignificant interest in, we deconsolidate the VIE by eliminating the accounts from the balance sheet with a corresponding offset to the equity of the non-controlling interest. Operations are recognized through the date of deconsolidation.

Business Combinations

We apply the provisions of FASB ASC Topic 805 to all transactions or events in which we obtain control of one or more businesses, including those effected without the transfer of consideration, for example, by contract or through a lapse of minority veto rights. These provisions require the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establish the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and require expensing of most transaction and restructuring costs.

We determine and allocate the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the business combination date. The purchase price allocation process requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date. We utilize third-party valuation companies to help us determine certain fair value estimates used for assets and liabilities.

Additionally, the purchase price of the applicable property is allocated to the above or below market value of in-place leases and the value of in-place leases and related tenant relationships. The value allocable to the above or below market component of the acquired in-place leases is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) our estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to below market lease values are included in accrued and other liabilities in the accompanying consolidated balance sheets and are amortized to rental income over the remaining non-cancelable lease term plus any below market renewal options of the acquired leases with each property.

While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is generally one year from the business combination date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

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.

Depreciation is provided using the straight-line method over the estimated 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

We evaluate each of our real estate assets on a quarterly basis in order to determine the classification of each asset in our consolidated balance sheet. This evaluation requires judgment by us in considering certain criteria that must be evaluated under Topic 360: Property, Plant and Equipment, such as the estimated timeframe in which we expect to sell our real estate assets. The classification of real estate assets determines which real estate assets are to be depreciated as well as what method is used to evaluate and measure impairment. Had we evaluated our assets differently, the balance sheet classification of such assets, depreciation expense and impairment losses could have been different.

Assets Held for Sale

We classify assets as held for sale when management a) approves the action and commits to a plan to sell the asset(s); b) the asset(s) are available for immediate sale in its present condition customary for sales of those types of assets; c) an active program to locate a buyer and other actions required to complete the plan to sell the asset(s) have been initiated; d) the sale of the asset(s) is probable, and transfer of the asset(s) is expected to within one year; e) the asset(s) is being actively marketed for sale at a price that is reasonable in relation to its current fair value and; f) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. We disclose operating properties as properties held for sale in the period in which all of the required criteria are met.

Assets held for sale are recorded at the lower of cost or estimated fair value less cost to sell. If an asset's fair value less cost to sell, based on discounted future cash flows, management estimates or market comparisons, is less than its carrying amount, an impairment is recorded against the asset. Determining an asset's fair value and the related allowance to record requires us to utilize judgment and estimates.

Discontinued Operations

Topic 360 extends the reporting of a discontinued operation to a "component of an entity," and further requires that a component be classified as a discontinued operation if the operations and cash flows of the component have been or will be eliminated from the ongoing operations of the entity in the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. As defined in Topic 360, a "component of an entity" comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. Because each of our real estate assets is generally accounted for in a discrete subsidiary, many constitute a component of an entity under Topic 360, increasing the likelihood that the disposition of assets are required to be recognized and reported as operating profits and losses on discontinued operations in the periods in which they occur. The evaluation of whether the component's cash flows have been eliminated and the level of our continuing involvement require judgment by us and a different assessment could result in items not being reported as discontinued operations.

Sales of Real Estate Assets

Gains on property sales are recognized in full when real estate is sold, provided (i) the gain is determinable, that is, the collectability 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, we are not obligated to perform significant activities after the sale to earn the gain. Losses on property sales are recognized immediately.

Fair Value Measurements

Our acquisitions require the application of purchase accounting, which results in tangible and identifiable intangible assets and liabilities of the acquired entity being recorded at fair value. The difference between the purchase price and the fair value of net assets acquired is recorded as goodwill. In determining the fair values of assets and liabilities acquired in a business combination, we use a variety of valuation methods including present value, depreciated replacement cost, market values (where available) and selling prices less costs to dispose. We are responsible for determining the valuation of assets and liabilities and for the allocation of purchase price to assets acquired and liabilities assumed.

Assumptions must often be made in determining fair values, particularly where observable market values do not exist. Assumptions may include discount rates, growth rates, cost of capital, royalty rates, tax rates and remaining useful lives. These assumptions can have a significant impact on the value of identifiable assets and accordingly can impact the value of goodwill recorded. Different assumptions could result in different values being attributed to assets and liabilities. Since these values impact the amount of annual depreciation and amortization expense, different assumptions could also impact our statement of operations and could impact the results of future impairment reviews.

Impairment of Assets

Goodwill is assessed for impairment annually or more frequently if events or changes in circumstances indicate potential impairment. We may first assess qualitative factors to determine whether it is more-likely-than-not that the carrying value of a reporting unit exceeds its fair value. If this assessment indicates that it is more-likely-than-not that the carrying value of a reporting unit exceeds its fair value, a two-step quantitative assessment will be completed. The first step used to identify potential impairment involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. We use a discounted cash flow approach to estimate the fair value of our reporting units. Management judgment is required in developing the assumptions for the discounted cash flow model. These assumptions include revenue growth rates, profit margin percentages, discount rates, etc. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered to not be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated impairment. The implied fair value of goodwill is determined similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. Due to the many variables inherent in the estimation of a business's fair value and the relative size of our goodwill, if different assumptions and estimates were used, it could have an adverse effect on our impairment analysis.

Impairment indicators for our rental properties are assessed by property and include, but is not limited to, significant fluctuations in estimated net operating income, occupancy changes, rental rates and other market factors. When these indicators of impairment are present, real estate held for investment is evaluated for impairment and losses are recorded when undiscounted cash flows estimated to be generated by an asset or market comparisons are less than the asset's carrying amount. The amount of the impairment loss is calculated as the excess of the asset's carrying value over its fair value, which is determined using a discounted cash flow analysis, management estimates or market comparisons.

When we performed our impairment review, we determined that impairment existed, refer to Part II Item 8 Financial Statements and Supplementary Data Note 8 Asset Impairments for additional information regarding our impairment charges taken during the year.

Income Taxes

We account for income taxes under the liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. We have assessed, using all available positive and negative evidence, the likelihood that the deferred tax assets will be recovered from future taxable income.

An enterprise must use judgment in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists (i) the more positive evidence is necessary and (ii) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion, or all, of the deferred tax asset. Among the more significant types of evidence that we considered are: that future anticipated property sales will produce more than enough taxable income to realize the deferred tax asset; taxable income projections in future years; and whether the carry-forward period is so brief that it would limit realization of tax benefits.

. . .

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