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AQQ > SEC Filings for AQQ > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for AMERICAN SPECTRUM REALTY INC

Form 10-Q for AMERICAN SPECTRUM REALTY INC


14-Aug-2013

Quarterly Report


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

Forward Looking Statements

This financial review presents our operating results for the three and six months ended June 30, 2013 and 2012, as well as our financial condition at June 30, 2013 and December 31, 2012. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this report and our audited consolidated financial statements and related notes in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission ("SEC") on April 1, 2013.

Except for the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Factors that could cause or contribute to these differences include those discussed in "Risk Factors" under Item 1A of Part II as those discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and elsewhere. Words such as "expect," "anticipate," "intend," "plan," "believe," "estimate" and variations of such words and similar expressions are intended to identify such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The cautionary statements made herein should be read as applying to all related forward-looking statements wherever they appear herein.


Unless expressly stated or the context otherwise requires, the terms "we," "our," "us" and "ASR" refer to American Spectrum Realty, Inc. and its consolidated subsidiaries.

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 June 30, 2013. 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 June 30 2013 the Company's ownership structure does not allow the company 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 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 June 30, 2013, 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
Commercial/Industrial/Retail     15 1,150,773        7   3,972,553      4    90,167     26 5,213,493
Self-Storage                      3   182,552        9   1,165,575     29 2,195,668     41 3,543,795
Multi-family                      -         -        2     360,389      2   269,316      4   629,705
Student housing                   -         -        3     533,446      -         -      3   533,446
Land                              1         -        -           -      2         -      3         -
Total                            19 1,333,325       21   6,031,963     37 2,555,151     77 9,920,439

In April 2013, we were assigned the management of 20 additional self-storage properties. The self-storage properties total over 1.5 million square feet across seven states.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles 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 we believe 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.


Reference is made to "Critical Accounting Policies" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC on April 1, 2013.

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 revenue;

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

                                           Weighted Average Occupancy
                                                 As of June 30,
             Property Type                  2013                2012
             Industrial properties              88%                 87%
             Office properties                  82%                 82%
             Retail properties                  90%                 79%
             Residential properties             93%                 96%
             Self storage properties            86%                 82%

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.

                                      Annualized Weighted Average Base Rent
                                             Per Occupied Square Foot
                                                  As of June 30,
       Property Type                     2013                       2012
       Industrial properties       $            4.05          $            4.14
       Office properties           $           15.30          $           15.33
       Retail properties           $           10.95          $           15.30
       Residential properties      $           13.34          $            9.22
       Self storage properties     $            6.04          $            7.49

We are currently actively marketing our empty square footage but do not know if, when or at what rental rates we will be able to lease the vacant office 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.

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.


Expenses:

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, 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.

RESULTS OF OPERATIONS

Discussion of the three months ended June 30, 2013 and 2012.

Revenues by Period

The following table sets forth revenues for the three months ended June 30, 2013
and 2012, and the change between periods (unaudited, in thousands except
percentages):

                                                   Three Months Ended
                                                        June 30,                  Dollar          Percentage
                                                  2013            2012            Change            Change
                                                             (in thousands, except percentages)
Rental revenue                                 $    11,219     $    12,378     $    (1,159 )          -9 %
Third party management and leasing revenue     $       867     $       728     $       139            19 %

The changes in revenues during the three months ended June 30, 2013 compared to the three months ended June 30, 2012 were primarily due to the following:

Rental revenue decreased by approximately $1.2 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The decrease in rental revenue was primarily due the deconsolidation of VIEs, which resulted in a reduction in rental revenue of approximately $1.4 million. Rental revenue from properties consolidated for the full three months ended June 30, 2013 and 2012 increased by approximately $0.2 million. This increase was primarily attributable to our owned properties. The weighted average occupancy of our owned properties was 84% at June 30, 2013. The weighted average occupancy of all properties consolidated increased was 88% at June 30, 2013.

Third party management and leasing revenue increased by approximately $0.1 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The increase was primarily due to an increase in third party management contracts. In April 2013, we were assigned the management of 20 additional self-storage properties. The self-storage properties total over 1.5 million square feet.


Operating Expenses by Period

The following table sets forth expenses for the three months ended June 30, 2013
and 2012, and the percentage and dollar change between periods.

                                            Three Months Ended
                                                 June 30,                 Dollar         Percentage
                                            2013           2012           Change           Change
                                                     (in thousands, except percentages)
Property operating expenses              $    4,393     $    3,162     $    1,231             39 %
Corporate general and administrative     $    2,000     $    2,439     $     (439 )          -18 %
Depreciation and amortization            $    4,258     $    4,774     $     (516 )          -11 %
Interest expense                         $    4,092     $    4,910     $     (818 )          -17 %
Impairment of real estate assets         $      269     $        -     $      269                N/A

The changes in operating expenses during the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 were primarily due to the following:

Property operating expenses increased by approximately $1.2 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The increase in property operating expenses was in large party attributable to VIE's, which accounted for approximately $0.7 of the increase. An increase in property operating expenses on our owned properties accounted for the remaining increase of approximately $0.5 million. This increase was primarily attributable to higher utilities costs, repairs and maintenance costs and insurance expense between periods.

Corporate general and administrative expenses decreased by approximately $0.4 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The decrease was primarily due to a decrease in corporate personnel costs, principally due to the relocation of our accounting department from our Irvine office to our Houston office, in addition to other cost cutting measures implemented by management.

Depreciation and amortization expense decreased by approximately $0.5 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The decrease was due the deconsolidation of VIE's during the first quarter of 2013, which accounted for the decrease. Depreciation and amortization expense for properties consolidated for the full three months ended June 30, 2013 and 2012 was unchanged.

Interest expense decreased by approximately $0.8 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. This decrease was partially due to the deconsolidation of VIE's during the first quarter of 2013, which accounted for approximately $0.5 million of the decrease. Interest expense for properties consolidated for the full three months ended June 30, 2013 and 2012 accounted for the remaining decrease of $0.3 million. This decrease was primarily due to a decrease in late penalties on debt between periods and a due to a decrease in the accrual of interest on our on $9.4 million note payable to Evergreen.

Impairment expense increased by approximately $0.3 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. This increase was due to impairment charges on purchased intangibles related to lost management contracts recorded during the second quarter of 2013.

All of our expenses are significantly influenced by the number of VIEs which are consolidated. We expect all our operating expenses to remain relatively the same over the next year for the properties consolidated as of June 30, 2013.


Other Income Statement Items by Period

The following table sets forth our other income statement items for the three
months ended June 30, 2013 and 2012, and the dollar and percentage change
between periods.

                                    Three Months Ended
                                         June 30,                  Dollar         Percentage
                                  2013             2012            Change           Change
                                               (in thousands)
  Interest income              $       3       $       40       $       (37 )          -93 %
  Discontinued operations      $    (237 )     $    1,469       $    (1,706 )         -116 %
  Non-controlling interest     $     914       $     (308 )     $     1,222           -397 %
  Other income                 $     173       $        -       $       173               N/A

The changes in other income statement items for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012 were primarily due to the following:

Net loss from discontinued operations for the three months ended June 30, 2013 represents the operating results of 11500 Northwest Freeway and 2620-2630 Fountain View, the net gain from the disposal of 11500 Northwest Freeway and related income tax benefit. Net income from discontinued operations for the three months ended June 30, 2012 represents the net gain from properties disposed of during the second quarter of 2012, the operating results of properties disposed of in 2013 and 2012, and related income tax expense.

Non-controlling interests consist of operating partnership unit holders other than us, the non-controlling interests in our partially owned properties, and the non-controlling interests in our VIEs held by others. The increase in non-controlling interest was in large part attributable to an increase in loss from our VIE's held by others between periods.

Other income for 2013 represents discounts negotiated with accounts payable creditors

Discussion of the six months ended June 30, 2013 and 2012.

Revenues by Period

The following table sets forth revenues for the six months ended June 30, 2013 and 2012, and the change between periods (unaudited, in thousands except percentages):

                                                    Six Months Ended
                                                        June 30,                  Dollar          Percentage
                                                  2013            2012            Change            Change
                                                             (in thousands, except percentages)
Rental revenue                                 $    22,738     $    25,334     $    (2,596 )          -10 %
Third party management and leasing revenue     $     1,877     $     1,622     $       255             16 %

The changes in revenues during the six months ended June 30, 2013 compared to the six months ended June 30, 2012 were primarily due to the following:

Rental revenue decreased by approximately $2.6 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The decrease in rental revenue was primarily due the deconsolidation of VIEs, which resulted in a reduction in rental revenue of approximately $2.6 million. Rental revenue from properties consolidated for the full six months ended June 30, 2013 and 2012 was unchanged. The weighted average occupancy of our owned properties was 84% at June 30, 3013. The weighted average occupancy of all properties consolidated increased was 88% June 30, 2013.

Third party management and leasing revenue increased by approximately $0.3 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The increase was primarily due to an increase in third party management contracts. In April 2013, we were assigned the management of 20 additional self-storage properties. The self-storage properties total over 1.5 million square feet.


Operating Expenses by Period

The following table sets forth expenses for the six months ended June 30, 2013
and 2012, and the percentage and dollar change between periods.

                                             Six Months Ended
                                                 June 30,                 Dollar          Percentage
                                            2013           2012           Change            Change
                                                      (in thousands, except percentages)
Property operating expenses              $    8,095     $    7,359     $       736             10 %
Corporate general and administrative     $    4,134     $    5,674     $    (1,540 )          -27 %
Depreciation and amortization            $    9,053     $    9,936     $      (883 )           -9 %
Interest expense                         $    8,103     $    9,995     $    (1,892 )          -19 %
Impairment of real estate assets         $    1,385     $      481     $       904                N/A

The changes in operating expenses during the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 were primarily due to the following:

Property operating expenses increased by approximately $0.7 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The increase was primarily attributable to an increase in property operating expenses for our owned properties. This increase was principally due to higher utilities costs, repairs and maintenance costs and insurance expense between periods.

Corporate general and administrative expenses decreased by approximately $1.5 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The decrease was primarily due to a decrease in corporate personnel costs, principally due to the relocation of our accounting department from our Irvine office to our Houston office. The decrease was also attributable to a decrease in deferred compensation expense, in addition to other cost cutting measures implemented by management.

Depreciation and amortization expense decreased by approximately $0.9 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The decrease was primarily due the deconsolidation of VIE's during the first quarter of 2013, which accounted for approximately $1.0 million of the decrease. Depreciation and amortization expense for properties consolidated for the full three months ended June 30, 2013 and 2012 increased by approximately $0.1 million.

Interest expense decreased by approximately $1.9 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. This decrease was partially due to the deconsolidation of VIE's during the first quarter of 2013, which accounted for approximately $1.0 million of the decrease. Interest expense for properties consolidated for the full six months ended June 30, 2013 and 2012 accounted for the remaining decrease of $0.9 million. This decrease was primarily due to a decrease in late penalties on debt between periods and a due to a decrease in the accrual of interest on our on $9.4 million note payable to Evergreen.

Impairment expense increased by approximately $0.9 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. This increase was due to an increase in impairment charges on purchased intangibles related to lost management contracts recorded between periods.

All of our expenses are significantly influenced by the number of VIEs which are consolidated. We expect all our operating expenses to remain relatively the same over the next year for the properties consolidated as of June 30, 2013.


Other Income Statement Items by Period

The following table sets forth our other income statement items for the six
months ended June 30, 2013 and 2012, and the dollar and percentage change
between periods.

                                    Six Months Ended
                                        June 30,                   Dollar         Percentage
                                  2013             2012            Change           Change
                                              (in thousands)
 Interest income              $        4       $       86       $       (82 )          -95 %
 Discontinued operations      $     (326 )     $    3,931       $    (4,257 )         -108 %
 Non-controlling interest     $    1,299       $    1,542       $      (243 )          -16 %
 Other income (expense)       $      173       $     (151 )     $       324               N/A

The changes in other income statement items for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 were primarily due to the following:

Net loss from discontinued operations for the six months ended June 30, 2013 represents the operating results of 11500 Northwest Freeway and 2620-2630 Fountain View, the net gain from the disposal of 11500 Northwest Freeway and related income tax benefit. Net income from discontinued operations for the six months ended June 30, 2012 represents the net gain from properties disposed of during the six months ended June 30, 2012, the operating results of properties disposed of in 2013 and 2012, and related income tax expense.

Non-controlling interests consist of operating partnership unit holders other than us, the non-controlling interests in our partially owned properties, and the non-controlling interests in our VIE's held by others. The decrease in non-controlling interest was in large part attributable to a decrease in loss attributable to our VIE's held by others between periods.

. . .

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